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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
Commission file number 1-11422
PENNCORP FINANCIAL GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3543540
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
745 Fifth Avenue, Suite 500, NY, NY 10151
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 832-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
$3.375 Convertible Preferred New York Stock Exchange
Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained in the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 14, 1997: $1,038,930,511.50.
The number of Common Stock shares outstanding as of March 14, 1997 was
28,462,502.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders
scheduled for May 22, 1997 is incorporated by reference into Part III
hereof.
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PENNCORP FINANCIAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters . . . . 25
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART III
Item 10. Directors and Executive Officers of the Company . . . . . . . . . . . . . . . . . 61
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . 61
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . 61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . 61
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION AND HISTORY
PennCorp Financial Group, Inc. ("PennCorp" or the "Company"),
incorporated in Delaware in 1989, is a holding company the principal
subsidiaries of which are insurance companies with operations in Raleigh, North
Carolina, Baton Rouge, Louisiana, Jacksonville, Florida, Waco, Texas and
Toronto, Canada. The Company's insurance subsidiaries market and underwrite
fixed benefit accident and sickness insurance, life insurance and accumulation
products to lower- and middle-income markets throughout the United States,
Canada, Puerto Rico and the Caribbean Basin. The Company's insurance products
are sold through several distribution channels including exclusive agents,
general agents, payroll deduction programs and through financial institutions.
PennCorp's only significant industry segment is insurance. Information relating
to the Company's U.S. and Canadian operations appears in Note 4 of "Notes to
Consolidated Financial Statements" on Page 43 hereof. For more information
regarding the Company's markets, see "Insurance" and "Marketing and
Distribution" included herein.
The following is a description of PennCorp's principal operating
units:
AA Life - Collectively, Pioneer Security Life Insurance Company
("Pioneer Security") and its subsidiaries, American-Amicable Life Insurance
Company of Texas ("American-Amicable") and Pioneer American Insurance Company
("Pioneer American"), markets and underwrites customized life insurance and
accumulation products to U.S. military personnel and federal employees through
a general agency force.
Penn Life - Collectively, Pennsylvania Life Insurance Company ("PLIC")
and PennCorp Life Insurance Company, markets and underwrites fixed benefit
accident and sickness products and, to a lesser extent, life products through a
sales force exclusive to the Company throughout the United States and Canada.
Professional - Professional Insurance Corporation provides individual
fixed benefit products utilizing a network of independent agents primarily in
the southeastern United States through employer-sponsored payroll deduction
programs.
Integon Life - Collectively, Salem Life Insurance Corporation, Integon
Life Insurance Corporation, Georgia International Life Insurance Company and
Occidental Life Insurance Company of North Carolina ("OLIC") which markets life
insurance, individual life and fixed benefit products and, to a lesser extent,
annuity products through independent general agents and marketing organizations
who sell directly to individuals throughout the United States and in several
foreign countries, principally Panama.
UC Life - United Companies Life Insurance Company principally markets
deferred annuities and variable annuities through financial institutions and
independent general agents, primarily in the southern and western United
States.
The Company's growth strategy emphasizes the acquisition of
complementary insurance operations and the utilization of the Company's several
distribution channels to further penetrate its target markets. In making
acquisitions, the Company seeks to broaden its distribution channels, increase
its product offerings and expand its geographical presence. The Company also
seeks benefits from expense reduction through the consolidation of facilities
and staff and the creation of common administrative systems. Since 1990, the
Company has acquired OLIC, Professional, AA Life, Integon Life and UC Life and
a majority economic interest in Southwestern Financial Corporation ("SW
Financial"). The merger of Washington National Corporation ("Washington
National") into the Company is pending shareholder and regulatory approvals and
is anticipated to close in late April, 1997.
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THE SOUTHWESTERN LIFE INVESTMENT
On December 14, 1995, SW Financial, a newly organized corporation
formed by PennCorp and Knightsbridge Fund Capital Fund I, L.P. ("Knightsbridge
Fund"), purchased Southwestern Life Insurance Company ("Southwestern Life") and
Union Bankers Insurance Company ("Union Bankers") and certain related assets
from I.C.H. Corporation and certain of its subsidiaries (collectively, "ICH")
(the "Southwestern Life Investment") for $260.0 million.
Through its direct investment of $120.0 million in SW Financial, the
Company beneficially owns 67.2% of SW Financial's outstanding common stock,
including 100.0% of SW Financial's non-voting common stock and 15.1% of SW
Financial's voting common stock. The Company also owns preferred stock of SW
Financial and its subsidiary. In addition, PennCorp is a 16.3% limited partner
in Knightsbridge Fund. The Company believes that the Southwestern Life
Investment represents an opportunity to benefit both financially and
strategically from an ownership interest in an insurance company with a
well-established franchise. Southwestern Life and Union Bankers market
insurance products which are complementary to those of the Company and which
are sold through similar distribution channels, although historically the
target markets of the Company and Southwestern Life and Union Bankers have been
different. Because of their parallel products, distribution systems and
administrative systems, the Company and SW Financial are evaluating a number of
possible ways in which they may mutually benefit from their relationship. Among
others, potential opportunities include expanded product offerings through
cross-licensing arrangements and increased operating efficiencies through
shared administrative functions. In 1996, the Company was successful in a
cross-marketing effort whereby Penn Life agents sell Union Bankers' products.
Total new annualized sales during 1996 by the Penn Life agents of Union Bankers
products was $1.2 million.
THE KNIGHTSBRIDGE RESTRUCTURING PLAN
In February 1996, Messrs. Stone and Fickes began discussions with
PennCorp's Board of Directors on a means of consolidating their outside
business interests, including the Knightsbridge Fund, under PennCorp.
Subsequently, Messrs. Stone and Fickes and the members of the Knightsbridge
and Compensation Committees of the PennCorp Board developed a plan to enable
PennCorp to manage the Knightsbridge Fund and to provide Messrs. Stone and
Fickes with a compensation program that offers them compensation opportunities
with economic interests aligned with stockholders generally and that provides
incentives for each to make a long-term, full-time commitment to PennCorp.
The components of the Knightsbridge restructuring plan are as follows:
o The adoption of compensation arrangements pursuant to which
Messrs. Stone and Fickes have entered into five-year employment
agreements with PennCorp. These compensation arrangements are
described in detail under the captions "Executive Compensation -
Employment Agreements - Fickes and Stone Employment Agreements" in
PennCorp's proxy statement for its July 11, 1996 annual meeting of
stockholders.
o The acquisition by PennCorp of the interests of Messrs. Stone and
Fickes in Knightsbridge Management, L.L.C. ("Knightsbridge
Management"), Knightsbridge Capital L.L.C. and Knightsbridge
Consultants L.L.C. (collectively, "The Fickes and Stone
Knightsbridge Interests").
o The acquisition by PennCorp from the Knightsbridge Fund and
Messrs. Stone and Fickes of their respective holdings of common
stock and common stock warrants of SW Financial (collectively,
"The Southwestern Financial Controlling Interest") provided that
if the Proposed Settlement (as defined in "Item 3 - Legal
Proceedings" below) is approved by the Delaware Chancery Court
after notice to PennCorp stockholders, Messrs. Stone and Fickes
will cancel their SW Financial common stock warrants for no
additional consideration). See Item 3 - Legal Proceedings on page
23 hereof.
The acquisition of The Fickes and Stone Knightsbridge Interests and
the acquisition of the Southwestern Financial Controlling Interest are being
submitted to a vote of the stockholders of PennCorp at a Special Meeting of
Stockholders anticipated to be held in late April, 1997.
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Further information regarding the Southwestern Life Investment appears
in Note 6 of "Notes to Consolidated Financial Statements" on page 48 hereof.
Information relating to the relationship between PennCorp and the Knightsbridge
Fund, the acquisition of The Fickes and Stone Knightsbridge Interests and the
Southwestern Financial Controlling Interest appear in Notes 15 and 16 of "Notes
to Consolidated Financial Statements" on pages 56 and 57, respectively, hereof.
THE WASHINGTON NATIONAL TRANSACTION
On November 14, 1996, the Company and Washington National entered into
an agreement whereby Washington National will be merged with the Company (the
"Merger"), and the Company will continue as the surviving corporation after the
Merger.
Each share of Washington National common stock, par value $5.00 per
share (the "Washington National Common Stock") (other than treasury shares held
by Washington National or shares with respect to which appraisal rights are
perfected under the Delaware General Corporation Law ("Dissenting Shares")),
outstanding at the effective time of the Merger will be converted into the
right to receive (i) $29.50 (the "Cash Price") in cash, without interest,
subject to the cash limitation referred to below and determined as described
herein, (ii) a fraction (rounded to the nearest ten- thousandth) of a share of
PennCorp common stock, par value $0.01 per share (the "PennCorp Common Stock"),
determined as described herein, or (iii) a combination of cash and shares of
PennCorp Common Stock.
Washington National stockholders will be entitled to elect (the "Cash
Election") to receive solely cash, based on the Cash Price, in exchange for all
or any part of their shares of Washington National Common Stock. However, the
number of shares of Washington National Common Stock that may be converted into
the right to receive cash in the Merger (the "Cash Election Number") is
limited. Based on information available to PennCorp and Washington National as
of March 9, 1997, PennCorp and Washington National estimate that the amount of
cash available for Cash Elections will be approximately $73,000,000 and the
maximum number of shares of Washington National Common Stock that could be
converted into the right to receive cash in the Merger will be approximately
2,474,576 shares.
Each holder of an outstanding share of Washington National Common
Stock (other than treasury shares and Dissenting Shares) not subject to a valid
Cash Election will be entitled to receive PennCorp Common Stock. The amount of
PennCorp Common Stock received per share of Washington National Common Stock
will depend on the average closing price (the "Trading Average") of the
PennCorp Common Stock on the New York Stock Exchange (the "NYSE") during the 20
trading days ending on the third trading day prior to the effective time of the
Merger. If the Trading Average is equal to or greater than $31.658 but not
greater than $38.693 per share, the number of shares of PennCorp Common Stock
received will be adjusted so that each share of Washington National Common
Stock will be exchanged for PennCorp Common Stock with a value of $29.50 (based
on the Trading Average). If the Trading Average is equal to or greater than
$28.14 but not greater than $31.658, each share of Washington National Common
Stock will be exchanged for 0.9318 shares of PennCorp Common Stock and the
value of the PennCorp Common Stock received will be between $26.22 and $29.50
(based on the Trading Average). If the Trading Average is below $28.14, the
transaction may be terminated by Washington National unless PennCorp agrees to
increase the number of shares of PennCorp Common Stock to be received by
Washington National stockholders so that each share of Washington National
Common Stock will be exchanged for PennCorp Common Stock with a value of $26.22
(based on the Trading Average). If the Trading Average is equal to or greater
than $38.693 but not greater than $42.21 per share, each share of Washington
National Common Stock will be exchanged for 0.7624 shares of PennCorp Common
Stock and the value of the PennCorp Common Stock received will be between
$29.50 and $32.18 (based on the Trading Average). If the Trading Average is
greater than $42.21, the transaction may be terminated by PennCorp unless
Washington National agrees to decrease the number of shares of PennCorp Common
Stock to be received by Washington National stockholders so that each share of
Washington National Common Stock will be exchanged for PennCorp Common Stock
with a value of $32.18 (based on the Trading Average). As of the date hereof,
neither the PennCorp Board nor the Washington National Board has determined
what action it will take if the Trading Average is below $28.14 or above
$42.21, as the case may be. However, each such action would be undertaken in
accordance with the fiduciary duty of each Board to act in the best interests
of its respective stockholders. The actual market value of the PennCorp Common
Stock received in the Merger will depend on market conditions at the time it is
received by Washington National stockholders and, therefore, may be more or
less than the values referred to above.
Washington National is an insurance holding company with two principal
subsidiaries: Washington National Insurance Company, which provides
employee-paid disability insurance and other specialty insurance products to
school employees, including teachers, administrative and custodial personnel
via payroll deduction programs, and
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United Presidential Life Insurance Company, which primarily markets and sells
universal life and certain interest- sensitive life insurance and annuity
products to individuals and small businesses.
The PennCorp Board reviewed the terms and conditions of the Merger and
determined that the Merger is fair to and in the best interests of PennCorp and
its stockholders. This recommendation is based on a number of considerations,
principally including the following: (i) current industry, economic and market
conditions; (ii) the additional distribution channels to PennCorp's target
market offered by Washington National; (iii) the complementary (i.e., non-
overlapping) nature of PennCorp's and Washington National's product offerings;
(iv) PennCorp's ability to use its existing payroll deduction capabilities to
service Washington National policyholders without a proportionate increase in
costs; (v) future statutory income expected to be received from Washington
National's closed block of annuity business; (vi) potential consolidation
savings resulting from the Merger; (vii) the financial condition, results of
operations and cash flows of PennCorp and Washington National, both on a
historical and a prospective basis; (viii) the historical market prices and
trading volumes of the PennCorp Common Stock and Washington National Common
Stock; (ix) management's expectation that the Merger will be accretive to
PennCorp's earnings per share in 1997; and (x) results of due diligence.
INSURANCE
The Company's insurance subsidiaries underwrite a variety of
individual insurance products with the primary emphasis on modest premium
policies in the accumulation, life and fixed benefit product sectors. Fixed
benefit products include indemnity insurance policies in which the benefit
amounts are fixed at the time of policy issue. Those products provide
supplemental income payments directly to the insured who is disabled and unable
to work due to accident or sickness. Life products are primarily low face
amount traditional whole life or universal life products which build cash
values that are available to the policyholder. Accumulation products include
various forms of annuity products which are utilized by policyholders primarily
as a means of tax deferred savings. The following table presents the historical
percentages of consolidated insurance operations revenues derived from these
product types:
<TABLE>
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PERCENTAGE OF CONSOLIDATED
INSURANCE OPERATIONS
INSURANCE PRODUCT TYPE REVENUES AS OF DECEMBER 31,
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1994 1995 1996
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Fixed benefit . . 67.1% 48.8% 34.1%
Life . . . . . . . 32.9 43.5 46.2
Accumulation . . . -- 7.7 19.7
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Total . . . . . 100.0% 100.0% 100.0%
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</TABLE>
The amount of annualized premium in force and policy activity by type
of business for the past three years is as follows:
<TABLE>
<CAPTION>
ANNUALIZED PREMIUM IN FORCE
INSURANCE PRODUCT TYPE AS OF DECEMBER 31,
---------------------- --------------------------
1994 1995 1996
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(Dollars in thousands)
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Fixed benefit . . $179,791 $189,681 $194,475
Life(1) . . . . . 131,134 216,263 327,538
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Total . . . . . . $310,925 $405,944 $522,013
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</TABLE>
(1) Life annualized premium in force includes target premium for interest
sensitive products. Interest sensitive policy revenue may vary from target
premium as policyholders have no obligation to pay target premium.
Additionally, interest sensitive policy revenues are determined based upon
contractual charges assessed against policyholder fund and are not
determined by policy revenues collected.
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<TABLE>
<CAPTION>
1994 1995 1996
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Fixed Fixed Accum- Fixed Accum-
Benefit Life Benefit Life ulation Benefit Life ulation
-------- ----- -------- ------ ------- --------- ------ -------
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Policies in force - January 1, . . 786,772 309,549 761,082 422,056 6,861 733,893 562,620 34,854
New issues . . . . . . . . . . . 124,459 50,743 111,999 60,097 1,691 81,547 54,157 4,834
Business acquired, net . . . . . -- 131,882 200 170,136 32,069 15,664 67,731 64,210
Policies terminated . . . . . . (150,149) (70,118) (139,388) (89,669) (5,767) (133,032) (125,811) (13,633)
--------- -------- --------- -------- ------- --------- --------- --------
Policies in force -December31,. . 761,082 422,056 733,893 562,620 34,854 698,072 558,697 90,265
========= ======== ========= ======== ======= ========= ========= ========
</TABLE>
As a result of the acquisition of Integon Life, the Company acquired a
substantial block of credit insurance policies (550,152 policies at
acquisition, 187,244 policies as of December 31, 1996). Integon Life no longer
markets such products and nearly all of Integon Life's credit insurance is
subject to a 100.0% coinsurance agreement. Such policies have been excluded
from the above table.
MARKETING AND DISTRIBUTION
The Company's insurance subsidiaries collectively are licensed to
market the Company's insurance products in all states (other than New York) and
in the District of Columbia, all provinces of Canada, Puerto Rico, Panama and
certain Caribbean countries. In addition, the Company is authorized to sell its
products at U.S. military installations in foreign countries.
The Company's broadly defined markets are reached through four primary
distribution channels: agents contracted exclusively with the Company,
independent general agents who sell on an individual basis, independent general
agents who sell through payroll deduction programs and arrangements for
distribution through various financial institutions. Those market segments are
further divided as follows:
<TABLE>
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MAJOR MARKET SUB-MARKET
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Individual Low and moderate income households
Non-English speaking households
U.S. military enlistees
Suburban and rural locales
Government Local governments and governmental agencies
U.S. federal government
Self-employed
</TABLE>
Each of the Company's market segments may be served by each of the
primary distribution channels. Additionally, though there are certain regions
in which all sales forces are active, the Company's sales forces generally
operate in geographically discrete regions.
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The following tables illustrate, by direct cash premium collected for
the year ended December 31, 1996 and relative percentages, the principal
marketing regions in which the Company collected in excess of $10.0 million of
policy revenues for the year ended December 31, 1996.
<TABLE>
<CAPTION>
DIRECT PREMIUM COLLECTED
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Jurisdiction Company Penn Life Integon Life AA Life Professional UC Life(1),(2)
-------------- ------- --------- ------------ ------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Canada . . . $ 43,064 $ 43,055 $ 2 $ 7 $ -- $ --
North Carolina 38,336 1,222 32,633 1,821 2,200 460
Florida . . . 35,977 1,928 9,848 2,578 7,757 13,866
Missouri . . 33,538 4,343 776 673 114 27,632
Georgia . . . 31,173 945 19,708 1,538 8,155 827
Louisiana . . 30,986 424 1,144 656 637 28,125
Texas . . . . 20,438 3,512 6,367 4,695 1,682 4,182
California . 20,402 8,191 5,976 3,537 85 2,613
Illinois . . 18,189 3,805 2,931 1,027 37 10,389
Ohio . . . . 14,135 4,610 2,533 1,233 335 5,424
South Carolina 13,301 881 5,977 1,084 1,642 3,717
Virginia . . 12,390 1,648 6,589 2,402 473 1,278
Alabama . . . 10,235 1,927 4,276 749 2,704 579
------- ------ ------ ---- ------ -----
Subtotal . 322,164 76,491 98,760 22,000 25,821 99,092
All Others . 138,379 48,562 43,323 24,815 6,541 15,138
-------- ------- ------- ------- ------ -------
Total . . . $460,543 $125,053 $142,083 $46,815 $32,362 $114,230
======== ======== ======== ======= ======== =========
</TABLE>
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(1) Primarily single premium deferred annuity premiums.
(2) Includes $16,811 of variable annuity premiums collected on a separate
account basis.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL DIRECT PREMIUM
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Jurisdiction Company Penn Life Integon Life AA Life Professional UC Life(1),(2)
--------------- ------- --------- ------------ ------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Canada . . . 9.4% 9.4% --% --% --% --%
North Carolina 8.3 0.2 7.1 0.4 0.5 0.1
Florida . . . 7.8 0.4 2.1 0.6 1.7 3.0
Missouri . . 7.3 0.9 0.2 0.2 -- 6.0
Georgia . . . 6.8 0.2 4.3 0.3 1.8 0.2
Louisiana . . 6.7 0.1 0.3 0.1 0.1 6.1
Texas . . . . 4.4 0.8 1.3 1.0 0.4 0.9
California . 4.4 1.8 1.3 0.8 -- 0.5
Illinois . . 3.9 0.8 0.6 0.2 -- 2.3
Ohio . . . . 3.2 1.0 0.6 0.3 0.1 1.2
South Carolina 2.9 0.2 1.3 0.2 0.4 0.8
Virginia . . 2.7 0.4 1.4 0.5 0.1 0.3
Alabama . . . 2.2 0.4 0.9 0.2 0.6 0.1
----- ----- ----- ----- ----- -----
Subtotal . 70.0 16.6 21.4 4.8 5.7 21.5
All Others . 30.0 10.6 9.4 5.4 1.3 3.3
------ ----- ----- ----- ---- -----
Total . . . 100.0% 27.2% 30.8% 10.2% 7.0% 24.8%
====== ===== ===== ===== ==== =====
</TABLE>
(1) Primarily single premium deferred annuity premiums.
(2) Includes $16,811 of variable annuity premiums collected on a separate
account basis.
Career Sales Force
Penn Life's agents constitute substantially all of the Company's
career sales force. Penn Life is organized under a regional/branch office
structure. The sales regional managers are responsible for approximately 100
sales locations in the United States and Canada. Commissions are shared among
the regional and branch office managers and the writing agent. Commissions
allocated to the branch offices are used to pay "overwrite" commissions to
agents who train new agents and to pay the expenses of the branch office. Any
commissions allocated to the branch
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offices remaining after payment of "overwrite" commissions and expenses,
essentially the branch "profit," are allocated between the senior sales
managers and the Company. The Company retained approximately $2.8 million, $2.8
million and $2.4 million during 1996, 1995 and 1994, respectively, in profit
sharing income, which is recorded as an offset to commissions. Because the
sales managers and the Company share in the profits and losses of the sales
regions, managers have a significant incentive to focus on the bottom line
results of the sales offices for which they are responsible. The Company
believes that this compensation system promotes efficient field office
administration. The Company also believes that this system enhances agent
loyalty and encourages agents to recruit and train new agents and become sales
managers.
Management believes that the expansion of the Penn Life sales force
can best be accomplished by broadening the base of sales offices participating
in the profit-sharing structure discussed above. Penn Life has opened the
following new offices and continues to evaluate additional geographic locations
which will complement the current office network.
NEW LOCATIONS
<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- --------
<S> <C> <C>
Richmond, VA Bellaire, TX Salt Lake City,
UT
Houston, TX Amarillo, TX San Antonio, TX
Newark, DE Springfield, MO Gainesville, FL
Gilbert, AZ Portland, OR
</TABLE>
The Penn Life career sales force is organized into three distinct
divisions: Instant Issue, Special Services and Individual Life. The Instant
Issue and Special Services Divisions sell fixed benefit products and the
Individual Life Division sells life products. All divisions concentrate
primarily on individual sales or sales to self-employed individuals.
Instant Issue. Instant Issue agents make "cold call" door-to-door
presentations and market small denomination policies that provide scheduled
payments in fixed amounts to insureds who, as a result of specified types of
accidents, become unable to work or who become hospitalized. The relatively
modest annual premium required to purchase this policy facilitates the initial
sale. Prior to 1996, the Instant Issue agent typically utilized a special
field-underwritten policy form that required the applicant to answer certain
questions designed to confirm that the applicant is within the Company's basic
underwriting guidelines. During 1996, the Company determined that the use of
field-underwritten policies needed to be curtailed for a significant number of
products typically sold by this sales force. To the extent similar products are
sold, the products are now primarily underwritten in the home office. Such
action was instituted by management to help curb rising loss ratios in Instant
Issue products.
Special Services. Instant Issue policyholders are a significant source
of leads for the Special Services Division. A Special Services agent visits the
policyholder's residence to collect renewal premiums on products purchased from
the Instant Issue Division. The sales agent also delivers a standardized sales
presentation on more comprehensive and higher premium policies. These policies
either provide scheduled payments to insureds who are required to be
hospitalized as the result of accident or sickness or, less frequently,
scheduled payments to insureds who are disabled and unable to work as a result
of accident or sickness.
Individual Life. Existing policyholders are the primary source of
leads for the Individual Life Division, which sells life products. The Company
has worked to restructure this division, expand its product portfolio and
aggressively recruit new agents. New product offerings include universal life
products and term life products which have been widely accepted by the Penn
Life sales force.
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PAGE 10
The Penn Life sales force is made up of approximately 1,000 agents who
produce business annually. The following table sets forth information regarding
the career sales division:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
INSTANT ISSUE
Agents under contract . . . . . . . . 800 643 682
Weekly average agents producing new business 266 213 225
Submitted annualized new business premiums $13,839 $11,685 $9,497
Annualized new business premium per agent $52.0 $54.9 $42.2
SPECIAL SERVICES
Agents under contract . . . . . . . . 570 1,001 962
Weekly average agents producing new business 309 342 393
Submitted annualized new business premiums $25,825 $29,122 $30,936
Annualized new business premium per agent $83.6 $85.2 $78.7
INDIVIDUAL LIFE
Agents under contract . . . . . . . . 150 161 197
Weekly average agents producing new business 69 75 91
Submitted annualized new business premiums $6,606 $6,969 $8,224
Annualized new business premium per agent $95.7 $92.9 $90.4
TOTAL ALL CAREER SALES DIVISIONS
Agents under contract . . . . . . . . 1,520 1,805 1,841
Weekly average agents producing new business 644 630 709
Submitted annualized new business premiums $46,270 $47,776 $48,657
Annualized new business premium per agent $71.8 $75.8 $68.6
</TABLE>
Penn Life is continually striving to develop a core group of agents with proven
ability to produce and service new business. The focus on a strong core group
of agents has allowed the Company to increase productivity over the past few
years without a related incremental increase in agent overhead expenses.
The revenue earned by the career sales distribution system by product
type is shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . $153.2 $156.0 $148.1
Life . . . . . . . . . . . . . . . . . 30.7 34.4 32.8
Accumulation . . . . . . . . . . . . . -- 0.5 1.0
------ ----- -----
Total . . . . . . . . . . . . . . . . $183.9 $190.9 $181.9
====== ====== ======
</TABLE>
The percentage of career sales division revenue to the Company's total
insurance operations revenue by product type is shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . . . 77.6% 76.7% 76.8%
Life . . . . . . . . . . . . . . . . . . 31.7 19.0 12.6
Accumulation . . . . . . . . . . . . . . -- 1.4 0.9
Total division policy revenue to
Company policy revenue . . . . . . . . 62.5 45.8 32.2
</TABLE>
<PAGE> 11
PAGE 11
Payroll Sales Division
The payroll sales division includes marketing units of Professional,
AA Life and OLIC. Each of the marketing units is divided into regions utilizing
a hierarchical approach to managing the sales representative. Additionally, AA
Life and OLIC also utilize field marketing directors and independent marketing
organizations to access potential policyholders.
The payroll sales division markets products solely through the
channels of employer-sponsored payroll deduction or government-sponsored
allotment programs. Under those programs, the agent is permitted by the
employer to meet on the employer's premises with its employees and to make both
group and individual presentations implicitly endorsed by the employer
concerning available products. If an employee elects to purchase a policy,
arrangements are made with the employer to deduct the premiums from the
employee's wages. The employer therefore is able to provide its employees with
insurance benefits without incurring any premium costs. The Company's billing
system can be integrated into the employer's payroll system without additional
cost to the employer, a feature that facilitates the Company's access to
employees of businesses that have not previously participated in payroll
deduction programs.
The following tables set forth information regarding the payroll sales
division:
<TABLE>
<CAPTION>
PAYROLL SALES DIVISION 1994 1995 1996
---------------------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C>
Agents under contract . . . . . . . . . . . 6,563 6,578 7,539
Number of annually producing agents . . . . 3,170 2,684 2,750
Annualized new business premium . . . . . . $38,080 $39,435 $39,069
Annualized new business premium per producing agent $12.0 $14.7 $14.2
</TABLE>
The revenue earned by the payroll sales division by product type is shown
below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . . . . $37.8 $38.0 $39.5
Life . . . . . . . . . . . . . . . . . . . . 44.9 82.0 84.1
Accumulation . . . . . . . . . . . . . . . . -- 5.9 8.0
----- ------ ------
Total . . . . . . . . . . . . . . . . . . . $82.7 $125.9 $131.6
===== ====== ======
</TABLE>
The percentage of the payroll sales division revenue to the Company's
total insurance operations revenue by insurance product is shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . . 19.2% 18.7% 20.5%
Life . . . . . . . . . . . . . . . . . . 46.3 45.2 32.3
Accumulation . . . . . . . . . . . . . . -- 18.5 7.2
Total division policy revenue to Company policy
revenue . . . . . . . . . . . . . . . . 28.1 30.2 23.3
</TABLE>
Individual Sales Division
The individual sales division includes marketing units of Integon Life
and OLIC. The individual sales division markets products to individual
customers through leads developed over time. This division utilizes field
marketing directors and affiliations with independent marketing organizations
to reach its customer base.
The sales agents for this division often make sales presentations on a
one-on-one basis with potential prospects. Sales representatives are often
faced with competition from other agents and/or products from other companies.
<PAGE> 12
PAGE 12
The following tables set forth information regarding the individual sales
division:
<TABLE>
<CAPTION>
INDIVIDUAL SALES DIVISION 1994 1995 1996
------------------------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C>
Agents under contract . . . . . . . . . . . 1,895 4,638 6,194
Number of annually producing agents . . . . 749 2,033 2,092
Annualized new business premium . . . . . . $6,011 $11,879 $16,926
Annualized new business premium per producing agent $8.0 $5.8 $8.1
</TABLE>
The revenue earned by the individual sales division by product is
shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . . . . $6.3 $9.4 $5.0
Life . . . . . . . . . . . . . . . . . . . . 21.3 65.0 137.5
Accumulation . . . . . . . . . . . . . . . . -- 25.9 52.7
----- ------ ------
Total . . . . . . . . . . . . . . . . . . . $27.6 $100.3 $195.2
===== ====== ======
</TABLE>
The percentage of the individual sales division revenue to the
Company's total insurance operations revenue by insurance product is shown
below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1994 1995 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed benefit . . . . . . . . . . . . . 3.2% 4.6% 2.6%
Life . . . . . . . . . . . . . . . . . . 22.0 35.8 52.7
Accumulation . . . . . . . . . . . . . . -- 80.1 47.4
Total division policy revenue to Company policy
revenue . . . . . . . . . . . . . . . . 9.4 24.0 34.6
</TABLE>
Financial Services Division
The financial services division is comprised of UC Life and Marketing
One Financial Corporation ("Marketing One"). Marketing One is one of the
nations oldest and largest third-party marketers of annuity and mutual fund
products. Founded in 1983 in Portland, Oregon, the company pioneered the
distribution of annuities through the bank distribution channel. In 1985,
Marketing One expanded its services to the securities arena. Marketing One has
assisted over 300 financial institutions, ranging in size from large regional
banks to small community banks and thrifts, with their alternative investment
programs. Services provided include training thousands of representatives,
sales managers, and administrative staff. Marketing One has annual sales in
excess of $1.0 billion.
UC Life markets single premium of annuity and securities products and
variable annuity products through independent agents, financial institutions
and financial planners.
The following tables set forth information regarding the financial
services division:
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands)
<S> <C>
FINANCIAL SERVICES DIVISION
Agents under contract . . . . . . . . . . . 2,970
Number of annually producing agents . . . . 750
Annualized new business premium . . . . . . $101,602
Annualized new business premium per producing
agent . . . . . . . . . . . . . . . . . . . $135.47
</TABLE>
<PAGE> 13
PAGE 13
The revenue earned by the financial services division by product is
shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1996
- ---------------------- ----
(Dollars in
millions)
<S> <C>
Fixed benefit . . . . . . . . . . . . $ 0.3
Life . . . . . . . . . . . . . . . . . 6.2
Accumulation . . . . . . . . . . . . . 49.5
------
Total . . . . . . . . . . . . . . . . $56.0
=====
</TABLE>
The percentage of the financial services division revenue to the
Company's total insurance operations revenue by insurance product is shown
below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1996
---------------------- ----
<S> <C>
Fixed benefit . . . . . . . . . . . . . 0.2%
Life . . . . . . . . . . . . . . . . . . 2.4
Accumulation . . . . . . . . . . . . . . 44.5
Total division policy revenue to Company policy
revenue . . . . . . . . . . . . . . . . 9.9
</TABLE>
PRODUCTS
General
The Company's products generally are small premium policies with
defined fixed benefits or low face amount life insurance policies, each of
which demonstrate stable risk characteristics. The recent acquisitions of
Integon Life and UC Life added a portfolio of accumulation products for which
the Company actively manages pricing spreads.
Product profitability is achieved through a pricing policy that is
based upon conservative actuarial assumptions which take into account the
underwriting risks associated with the product being sold, including lapse
rates, mortality, morbidity and whether the product is underwritten in the
field or by the home office, as well as the administrative expenses associated
with the business. The Company, on an ongoing basis, evaluates new products for
use by its sales forces.
The Company believes that, because of the characteristics of the
market it serves and the nature of its products, the lapse rates for its
products, although stable, tend to be higher than those experienced by other
life and health insurance companies that operate in more affluent markets. The
Company prices its products to reflect these higher lapse rates. To encourage
policyholders to maintain their coverages with the Company, fixed benefit
products generally incorporate a small fixed annual increase in benefits. Early
surrender of accumulation and life products is discouraged by either their low
rate of accumulation of cash values or by high surrender charges.
Fixed Benefit Products
Fixed benefit products are sold in large volume and are characterized
by low average annual premiums. These products provide one or more of three
principal types of benefits: (i) fixed periodic payments to an insured who
becomes disabled and unable to work because of an accident and/or sickness,
(ii) fixed periodic payments to an insured who becomes hospitalized, and (iii)
fixed single payments that vary in amount generally for specified surgical or
diagnostic procedures. Because the benefits are fixed in amount at the time of
policy issuance and are not intended to provide reimbursement for medical and
hospital expenses, payment amounts are not affected by inflation or the rising
cost of health care services. Fixed benefit products, primarily those covering
inability to work due to an accident, provide payments while the insured is
disabled and unable to work, subject to the terms and conditions of the
applicable policy. Fixed benefit products under which payments are made to
insureds who are disabled and unable to work may be purchased with coverage for
either (i) specified types of accidents, (ii) all other types of accidents, or
(iii) a combination of accident and sickness. The Company's practice is to sell
products that,
<PAGE> 14
PAGE 14
together with other similar coverages, do not provide monthly benefits in
excess of $2,000 or 75% of the insured's income, if less.
Certain fixed benefit products, primarily those covering
hospitalization due to sickness, provide payments during the period the insured
is hospitalized. Most of the Company's fixed benefit products also provide
additional fixed periodic payments to an insured who becomes hospitalized.
Payments under these products are not designed to cover the actual costs of the
insured's hospital stay, but merely to provide the insured with a means of
paying supplemental expenses during the hospitalization period. The Company's
practice is to provide hospitalization benefits of not more than $250 per day
($1,000 per day if the insured requires intensive care treatment).
The accident and sickness policies also may be purchased with riders
providing for fixed single payments that vary in amount generally for various
surgical and diagnostic procedures. The Company's practice is to sell riders
that do not provide benefit payments in excess of $5,000. If the covered
procedure is performed on an out-patient basis, the insured receives one-half
of the scheduled payment.
Life Insurance Products
Of the policy revenues attributable to life products, approximately
50.9% are related to interest sensitive life insurance policies and the
remainder are related to traditional term and whole life insurance policies.
The Company designs its interest sensitive life insurance policies to
avoid the early accumulation of cash values and to discourage early surrenders
or terminations by imposing relatively high average surrender charges. This is
done to reduce the risk of the Company's insurance subsidiaries having to
liquidate investment assets to meet a liquidity demand resulting from the
surrender of large numbers of life insurance policies. In addition to the basic
policies, policyholders also may purchase accidental death, waiver of premium
and annuity riders. The average face amount of the life insurance policies sold
in the twelve months ended December 31, 1996 was $45,000. The average face
amount of the life insurance policies in force at December 31, 1996 was
$45,000.
Accumulation Products
For life insurance policyholders seeking a convenient investment
vehicle for their excess funds, the Company offers single premium deferred
annuities, flexible premium deferred annuities and variable annuity products.
Historically, the Company had not actively marketed accumulation products.
The acquisition of UC Life provided the Company with its first
platform to actively market accumulation products. Prior to its acquisition by
PennCorp, Integon Life ceased marketing various annuity products as a result of
changes in its ratings and financial performance.
As of December 31, 1996, the Company maintained annuity reserves
aggregating $2,030.4 million at an average credited rate of interest of 5.3%.
Of the $2,030.4 million of annuity reserves, approximately 75.7% were subject
to surrender charges averaging 5.1% of the contract holder's account balance.
INSURANCE UNDERWRITING
Prior to 1996, most of the products offered by the instant issue sales
forces, primarily accident only products, were field underwritten. Beginning in
1996, for nearly all fixed benefit products, the underwriting practice of the
Company allows the home office underwriting staff to review each applicant's
written application for insurance and, if applicable, an attending physician's
report. In some circumstances, the Company will require a more complete medical
history before issuing a policy, which may be issued with exclusionary riders.
The Company's current practice is not to issue fixed benefit products to
individuals in substandard risk classes to the extent permitted by law.
In general, the Company permits simplified underwriting of life
products, unless the amount of requested coverage is greater than specified
levels between $25,000 and $100,000, depending on the age of the applicant. If
full underwriting is required, the Company reviews the policy application and
an attending physician's report and may require a paramedical examination or
complete physical examination depending on the age of the applicant and the
amount of coverage requested. If the total amount of coverage applied for plus
any coverage in force with the
<PAGE> 15
PAGE 15
Company exceeds $100,000, a prospective policyholder must submit to screening
for antibodies related to Acquired Immune Deficiency Syndrome ("AIDS"), to the
extent permitted by law. The life products are specifically designed and priced
for the mortality risks associated with the Company's simplified underwriting
procedures.
Although the increasing incidence of AIDS is expected to affect mortality
adversely for the life insurance industry as a whole, the Company believes that
the impact of AIDS on its operations should not be material due to the small
average size of the life insurance policies sold. The Company requires and
considers AIDS information to the fullest extent permitted by law in
underwriting and pricing decisions. During the twelve months ended December 31,
1996, 1995 and 1994, the Company paid approximately $3.2 million, $1.9 million
and $728,000, respectively in death benefits (representing less than 3.2% of
total death benefits paid by the Company during each such period) under
individual life policies due to deaths believed by the Company to be
AIDS-related. INVESTMENT PORTFOLIO
The Company's investment portfolio is managed with the objectives of
maintaining high credit quality and liquidity, maximizing current income within
acceptable levels of risk, minimizing market and credit risk and matching the
anticipated maturities of investments to the Company's liabilities. To achieve
these objectives, the portfolio consists primarily of United States and
Canadian government and investment-grade fixed maturity securities, which
together with high quality short-term investments accounted for approximately
79.7% and 82.8% of the Company's total invested assets at December 31, 1996 and
1995, respectively. The Company believes that the nature of its fixed benefit
products, which have no inflation risk, and its life products, which limit the
early accumulation of cash values, permit it to utilize this conservative
investment strategy.
At December 31, 1996, 58.6% of the Company's fixed maturity bonds were
rated Aa or higher by Moody's and approximately 91.4% were rated Baa or higher
by Moody's, respectively. All dollar amounts or percentages set forth in this
discussion are based on carrying value unless otherwise indicated.
Other than issues of the United States and Canadian governments and
government agencies and authorities, no single issuer represented more than
0.6% of total invested assets at December 31, 1996.
<PAGE> 16
PAGE 16
The following table summarizes the Company's investments as of
December 31, 1996:
<TABLE>
<CAPTION>
PERCENT OF
AMORTIZED MARKET CARRYING CARRYING
COST VALUE (1) VALUE VALUE
---- --------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturities held for investment:
Investment-grade corporate bonds $ 6,293 $ 6,305 $ 6,293 0.2%
Below-investment-grade corporate bonds 34,624 34,624 34,624 0.9
Non-rated corporate bonds . . . 46,413 48,830 46,413 1.3
------- ------- ------- -----
Total securities held for
investment . . . . . . . . . . 87,330 89,759 87,330 2.4
------- ------- ------- -----
Fixed maturities available for sale:
U.S. Government and agency bonds 279,534 282,685 282,685 7.8
Debt securities issued or guaranteed by
foreign governments(2) . . . . . 80,492 88,671 88,671 2.4
Municipal bonds . . . . . . . . 52,384 52,209 52,209 1.4
Investment-grade corporate bonds 984,186 1,002,709 1,002,709 27.5
Below-investment-grade corporate bonds 91,589 92,494 92,494 2.5
Non-rated corporate bonds . . . 44,671 46,067 46,067 1.3
Mandatory Redeemable Preferred Stocks 770 766 766 0.0
Mortgage-backed bonds . . . . . 1,408,124 1,428,324 1,428,324 39.2
--------- --------- --------- ------
Total securities available for
sale . . . . . . . . . . . . . 2,941,750 2,993,925 2,993,925 82.1
--------- --------- --------- ------
Trading Securities:
Equity securities . . . . . . . 1,796 2,050 2,050 0.1
Short-term investments . . . . . 29,090 29,090 29,090 0.8
------ ------ ------ ----
Total trading securities . . . 30,886 31,140 31,140 0.9
------ ------ ------ ----
Equity securities . . . . . . . . 17,511 20,867 20,867 0.6
Commercial mortgages . . . . . . 202,268 205,384 202,268 5.5
Residential mortgages . . . . . . 54,730 56,024 54,730 1.6
Real estate . . . . . . . . . . . 23,522 23,522 23,522 0.6
Policy loans . . . . . . . . . . 145,976 145,976 145,976 4.0
Short-term investments . . . . . 63,113 63,113 63,113 1.7
Other investments . . . . . . . . 23,326 23,326 23,326 0.6
------- ------- ------- -----
Total invested assets . . . . . $3,590,412 $3,653,036 $3,646,197 100.0%
========== ========== ========== ======
</TABLE>
__________
(1) Market values are obtained principally from the Company's investment
advisor.
(2) Consists principally of Canadian provincial government bonds and bonds
issued or guaranteed by the Canadian federal government (in U.S. $).
<PAGE> 17
PAGE 17
The table set forth below indicates the composition of the Company's
fixed maturity portfolio by rating as of December 31, 1996:
<TABLE>
<CAPTION>
TOTAL
HELD FOR AVAILABLE CARRYING PERCENT OF TOTAL
RATING(1) INVESTMENT FOR SALE VALUE CARRYING VALUE
------------------------- ---------- -------- ----- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Aaa . . . . . . . . . . $ -- $1,733,170 $1,733,171 56.2%
Aa . . . . . . . . . . 72,441 72,441 2.4
A . . . . . . . . . . . 3,065 584,643 587,708 19.1
Baa . . . . . . . . . . 3,228 418,425 421,653 13.7
------- -------- -------- ------
Total investment grade 6,293 2,808,679 2,814,973 91.4
------ ---------- --------- -----
Ba . . . . . . . . . . 22,562 85,666 108,228 3.5
B . . . . . . . . . . . 12,062 6,828 18,889 0.6
------- ------- ------- -----
Total below-investment
grade . . . . . . . . 34,624 92,494 127,117 4.1
------- ------- -------- -----
Nonrated . . . . . . . 42,413 92,752 139,165 4.5
------- ------- -------- -----
Total bonds . . . . . $87,330 $2,993,925 $3,081,255 100.0%
- ---------- ======= ========== ========== ======
</TABLE>
(1) Includes approximately $329.5 million of United States government and
agency bonds and approximately $88.7 million of Canadian provincial
government bonds and bonds issued or guaranteed by the Canadian federal
government (in U.S. $).
Of the bonds held by the Company, approximately 89.2% were in the
highest two NAIC designations at December 31, 1996. The following table sets
forth as of December 31, 1996, the carrying values of these securities
according to NAIC designations:
<TABLE>
<CAPTION>
TOTAL
HELD FOR AVAILABLE CARRYING PERCENT OF TOTAL
NAIC RATING INVESTMENT FOR SALE VALUE CARRYING VALUE
------------ ---------- -------- ----- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Class 1(1) $ 1,165 $2,306,852 $2,308,017 74.9%
Class 2 . . 6,050 433,066 439,116 14.3
Class 3 . . 8,912 68,511 77,423 2.4
Class 4 . . 14,706 6,804 21,510 0.7
Class 5 . . -- 10,990 10,990 0.4
Class 6 . . -- -- -- --
Nonrated 56,497 167,702 224,199 7.3
------- -------- -------- -----
Total . . $87,330 $2,993,925 $3,081,255 100.0%
- ---------- ======= ========== ========== ======
</TABLE>
(1) Includes approximately $329.5 million of United States government and
agency bonds and approximately $88.7 million of Canadian provincial
government bonds and bonds issued or guaranteed by the Canadian federal
government (in U.S. $).
<PAGE> 18
PAGE 18
The following table reflects investment results for the Company for
each of the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
End of period total invested assets(1) $822,627 $2,286,203 $3,673,504
Net investment income(2) . . 51,850 102,291 213,563
Net realized investment gains
(losses)(3) . . . . . . . . (3,556) 595 1,257
Average annual yield . . . . 7.3% 7.3% 7.7%
</TABLE>
- ---------------
(1) Consists of total investments plus cash, less amounts due to brokers for
securities committed to be purchased at end of period.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses and provision for income taxes.
(3) Amounts shown above are before income taxes, and include provisions for
impairments in value which are considered to be other than temporary.
The Company's investments must comply with the insurance laws of the
states in which its insurance subsidiaries are domiciled and in which they are
licensed as well as applicable provisions of the Company's 9 1/4% Senior
Subordinated Notes due 2003. These laws and provisions prescribe the kind,
quality and concentration of investments that may be made by the Company and/or
its insurance subsidiaries.
REINSURANCE
In keeping with industry practice, the Company reinsures portions of
its life insurance exposure with unaffiliated insurance companies under
traditional indemnity reinsurance agreements. New insurance sales are reinsured
above prescribed limits and do not require the reinsurer's prior approval under
contracts that are renewable on an annual basis. Generally, the Company enters
into indemnity reinsurance arrangements to assist in diversifying its risk and
to limit its maximum loss on risks that exceed the Company's policy retention
limits ranging from $25,000 to $300,000 per life, depending on insurer issue
age, the product type and each subsidiaries historical practice. Generally,
accidental death benefits in excess of $50,000 per life are reinsured on a bulk
basis. Indemnity reinsurance does not fully discharge the Company's obligation
to pay policy claims on the reinsured business. The ceding insurer remains
responsible for policy claims to the extent the reinsurer fails to pay such
claims. At no time during the past ten years has any present reinsurer of any
continuing block of business ceded by any of the Company's insurance company
subsidiaries failed to pay any policy claims with respect to such ceded
business. At December 31, 1996 and 1995, of the approximately $31.5 billion and
$25.9 billion of life insurance in force, approximately $5.8 billion and $3.1
billion had been ceded to reinsurers, respectively. As of December 31, 1996 the
Company's principal reinsurers are North American Reassurance Corp.,
Reassurance Company of Hanover, Cologne Life Reinsurance Co., Life Reassurance
Corp. of America, Worldwide Assurance Company, Ltd., Lincoln National Life
Insurance Company and Lincoln National Reassurance Company which collectively
have reinsured approximately 50% of the ceded business.
COMPETITION
The accident and health and life insurance industry is highly
competitive. PennCorp competes with many insurance companies and insurance
holding company systems that have substantially greater capital and surplus,
higher A.M. Best Company ("A. M. Best") ratings, larger and more diversified
product portfolios, and access to larger agency sales forces. In the United
States, there are more than 1,700 life and accident and health insurance
companies, most of which compete in the states in which PennCorp conducts
business.
Private insurers and voluntary and cooperative plans, such as Blue
Cross and Blue Shield, provide insurance for meeting hospitalization and
medical expenses. Much of this insurance is sold on a group basis. The federal
and state governments also pay substantial costs of medical treatment through
Medicare and Medicaid programs. Such major medical insurance generally covers a
substantial amount of the medical (but not non-medical) expenses incurred by an
insured as a result of major illnesses. PennCorp's fixed benefit products
policies are designed to provide coverage which is supplemental to that
provided by major medical insurance and may also be used to defray non-medical
expenses.
<PAGE> 19
PAGE 19
PennCorp's supplemental insurance is not an alternative to major
medical insurance, but is sold to complement major medical insurance by
covering the gap between major medical insurance reimbursements and the total
costs of an individual's health-care expense.
Thus, the Company competes directly with other insurers offering
supplemental health insurance and believes that its current policies and
premium rates are generally competitive with those offered by other companies
selling similar types of insurance. Management believes that the Company's
product and market focuses are not widespread in the insurance industry and
that it generally does not face direct competition from major national
insurers, although the Company experiences competition from smaller, regional
insurance companies. Management also believes that few major national insurers
compete directly in the sale of fixed benefit products and life products to the
primary market sub segments to which the Company is focused.
The Company's expansion of its product line to include a higher
percentage of life and accumulation product revenue as compared to the total
revenue has resulted in a broadening of the markets in which the Company faces
competition. The sale of life insurance products, and to a greater extent, the
sale of accumulation products is very sensitive to an organizations A. M. Best
rating, its size and perceived financial strength and the competitiveness and
the financial performance of the products themselves. Like the market focus of
its fixed benefit products, the Company believes that its target market is not
widely served by many of the large, national insurers, but does face direct
competition from smaller regional and niche-market focused companies.
The Company's growth strategy emphasizes the acquisition of
complementary insurance operations. The Company competes for acquisition
candidates with other domestic and international insurance and financial
institutions, some of which have substantially greater capital and resources.
REGULATORY MATTERS
Life insurance companies are subject to regulation and supervision by
the states in which they transact business. The laws of the various states
establish regulatory agencies with broad administrative and supervisory powers
related to, among other things, granting and revoking licenses to transact
business, regulating trade practices, establishing guaranty associations,
licensing agents, approving policy forms, filing premium rates on certain
business, setting reserve requirements, determining the form and content of
required financial statements, determining the reasonableness and adequacy of
capital and surplus and prescribing the type of permitted investments and the
maximum concentrations of certain classes of investments. The Company's
insurance subsidiaries are subject to periodic examinations by state regulatory
authorities. Management does not expect the results of any on-going
examinations to have a material effect on the financial condition of the
Company.
Most states have enacted legislation regulating insurance holding
company systems, including acquisitions of control of insurance companies,
dividends, the terms of surplus debentures, the terms of transactions with
affiliates, investments in subsidiaries and other related matters. Regulatory
restrictions on investments in subsidiaries and affiliates requires the Company
to continually review and occasionally modify or restructure the insurance
subsidiaries within the insurance holding company system. The Company has
ongoing dialogues with the applicable state insurance departments regarding
this issue. The Company is registered as an insurance holding company system in
Florida, Louisiana, North Carolina, Pennsylvania and Texas, (the domiciliary
states of its insurance companies), and routinely reports to other
jurisdictions in which its insurance subsidiaries are licensed.
There continues to be substantial scrutiny of the insurance regulatory
framework, and a number of state legislatures have enacted legislative
proposals that alter, and in many cases increase, state authority to regulate
insurance companies and their holding company systems. The NAIC and state
insurance regulators also have become involved in a process of reexamining
existing laws and regulations and their application to insurance companies. In
particular, this reexamination has focused on insurance company investment and
solvency issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of internal
guidelines. The NAIC has formed committees to study and formulate regulatory
proposals on such diverse issues as the use of surplus debentures, accounting
for reinsurance transactions, assumption reinsurance, valuation of securities,
the adoption of risk-based capital rules, and the regulation of various
products offered by insurance companies.
<PAGE> 20
PAGE 20
In connection with its accreditation of states to conduct periodic
insurance company examinations, the NAIC has encouraged states to adopt model
NAIC laws on specific topics, such as holding company regulations and the
definition of extraordinary dividends. Model legislation proposed by the NAIC
to control the amount of dividends that may be paid by insurance companies
without prior regulatory approval has been adopted in most states and is being
considered by the legislatures of the other states. As of the date hereof,
Louisiana (UC Life's domiciliary state) and North Carolina (Integon Life's
domiciliary state) have adopted the NAIC's most restrictive dividend test.
Pennsylvania (Penn Life's domiciliary state), Texas (Pacific Life & Accident
Insurance Company's ("PLAIC") and AA Life's domiciliary state), and Florida
(Professional's domiciliary state) have adopted dividend tests that are
substantially similar to that of the NAIC's model legislation, though less
restrictive than that of North Carolina. Most states only allow dividends to be
paid out of unassigned funds. It is anticipated that Georgia International Life
Insurance Company, Integon Life Insurance Corporation and Professional will be
redomesticated to Texas in 1997 and the Texas dividend test will apply to these
companies thereafter.
A dividend may be paid by Integon Life if the amount of such dividend
together with all dividends made in the preceding twelve months does not exceed
the lesser of (i) ten percent (10%) of the insurer's surplus as regards
policyholders as of the preceding December 31, or (ii) the insurer's net gain
from operations, not including realized capital gains, for the twelve month
period ending the preceding December 31. Any dividend above this amount would
be considered an "extraordinary" dividend, and could not be paid until the
earlier of (i) 30 days after the North Carolina Insurance Commissioner has
received written notice of the declaration thereof and has not within such
period disapproved such payment, or (ii) the receipt of approval from the North
Carolina Insurance Commissioner.
A dividend may be paid by PLIC if the amount of such dividend together
with all dividends made in the preceding twelve months does not exceed the
greater of (i) 10% of its statutory surplus as of the end of the prior calendar
year or (ii) its net income for the prior calendar year. Any dividend above the
prescribed amount is an "extraordinary" dividend, and a Pennsylvania insurer
may not pay an "extraordinary" dividend to its stockholders until the earlier
of (i) 30 days after the Pennsylvania Insurance Commissioner has received
written notice of the declaration thereof and has not within such period
disapproved such payment, or (ii) the receipt of approval from the Pennsylvania
Insurance Commissioner.
Florida insurance law allows Professional to pay a dividend without
prior written approval of the Florida Insurance Commissioner in an amount
calculated by using one of two alternative formulas:
Alternative one -- The dividend cannot exceed the larger of: (1) the
lesser of 10% of surplus or net gain from operations; or (2) 10% of surplus
payable from unassigned funds plus 75% of unrealized capital gains; or (3) the
lesser of 10% of surplus or net gain before capital gains payable from
unassigned funds plus 75% of unrealized capital gains;
Alternative two -- The dividend cannot exceed the larger of: (1) 10%
of surplus as to policyholders derived from realized net operating profits and
net realized capital gains; or (2) the prior year's entire net operating
profits and realized net capital gains. Alternative two also requires surplus
as to policyholders equal to or exceeding 115% of minimum required statutory
surplus as to policyholders after the dividend is made.
Texas law permits PLAIC and AA Life to pay a dividend without prior
consent of the Texas Insurance Commissioner if the amount paid, together with
all other dividends paid in the preceding 12 months, does not exceed the
greater of (i) 10% of such insurer's surplus as regards to policyholders as of
the 31st day of December next preceding, or (ii) the net gain from operations
of such insurer for the 12 month period ending the 31st day of December next
preceding. Any dividend above this amount would be considered an
"extraordinary" dividend and could not be paid until (i) 30 days after the
Texas Insurance Commissioner has received notice of the declaration thereof and
has not within such period disapproved such payment, or (ii) the Texas
Insurance Commissioner shall have approved such payment within the 30 day
period
Louisiana law permits UC Life to pay a dividend without prior consent
of the Louisiana Insurance Commissioner if the amount paid, together with all
other dividends paid in the preceding 12 months, does not exceed the lesser of
(i) 10% of such insurer's surplus as regards to policyholders as of the 31st
day of December next preceding, or (ii) the insurer's net gain from operations,
not including realized capital gains, for the 12 month period ending the 31st
day of December next preceding. Any dividend above this amount would be
considered an
<PAGE> 21
PAGE 21
"extraordinary" dividend and could not be paid until the earlier of (i) 30 days
after the Louisiana Insurance Commissioner has received notice of the
declaration thereof and has not within such period disapproved such payment, or
(ii) the receipt of approval from the Louisiana Insurance Commissioner. As part
of its July, 1996 approval of the Company's acquisition of UC Life, the
Louisiana Insurance Commissioner approved a dividend plan for UC Life pursuant
to which UC Life may pay a specified amount of dividends for each of the five
years following the acquisition, beginning in 1997, amounting to the lesser of
the pro forma dividend amounts in such plan or the actual earnings of UC Life,
and conditioned on UC Life maintaining a risk-based capital of at least 300%
authorized control level.
On the basis of statutory financial statements filed with the state
insurance regulators annually, the NAIC calculates twelve financial ratios to
assist state regulators in monitoring the financial condition of insurance
companies. A "usual range" of results for each ratio is used as a benchmark.
Departure from the usual range on four or more of the ratios could lead to
inquiries from individual state insurance departments. Except for
American-Amicable, Pioneer American and Pioneer Security, the NAIC has not yet
issued the 1996 ratios. For the other companies, the Company has calculated
what it expects the ratios will be for 1996. Based on statutory financial
statements for 1996, PLAIC had more than five ratios and Pioneer Security had
three ratios outside of the usual range established by the NAIC. PLAIC and
Pioneer Security are primarily holding companies for their principal assets,
the common stock of certain of the Companies insurance subsidiaries. Integon
Life Insurance Corporation and its wholly-owned subsidiary Georgia
International Life Insurance Company each had two of the twelve ratios outside
of the usual range which were caused primarily by changes occurring as a result
of the acquisition of Integon Life by the Company. PLIC had one of the twelve
ratios outside of the usual range, while OLIC and Peninsular had seven,
Professional had none, American-Amicable had two, Pioneer American had none and
UC Life had one of the twelve ratios outside of the usual ranges. OLIC's and
Peninsular's variances were caused primarily as a result of increased
reinsurance between these two companies. In the past, variances in the
insurance companies' ratios have resulted in inquiries from insurance
departments to which the Company has responded. Some of those inquiries have
led to the writing restrictions in certain states that are discussed above. The
Company may receive inquiries from certain insurance departments concerning its
ratio results for 1996, and there can be no assurance that such insurance
departments will not take action against the insurance companies.
In December 1992, the NAIC adopted the Risk-Based Capital for Life
and/or Health Insurers Model Act (the "Model Act"). The main purpose of the
Model Act is to provide a tool for insurance regulators to evaluate the capital
of insurers with respect to the risks assumed by them and determine whether
there is a need for possible corrective action with respect to them. To date,
either the Model Act or similar legislation or regulation has been adopted in
all the domiciliary states of the Company's insurance subsidiaries.
The Model Act provides for four different levels of regulatory action
with respect to statutory financial statements for the calendar year 1994 and
thereafter, each of which may be triggered if an insurer's Total Adjusted
Capital (as defined in the Model Act) is less than a corresponding "level" of
risk-based capital ("RBC"). The "Company Action Level" is triggered if an
insurer's Total Adjusted Capital is less than 200.0% of its "Authorized Control
Level RBC" (as defined in the Model Act) or less than 250.0% of its Authorized
Control Level RBC and the insurer has a negative trend. At the Company Action
Level, the insurer must submit a comprehensive plan to the regulatory authority
which discusses proposed corrective actions to improve its capital position.
The "Regulatory Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 150.0% of its Authorized Control Level RBC. At the
Regulatory Action Level, the regulatory authority will perform a special
examination of the insurer and issue an order specifying corrective actions
that must be followed. The "Authorized Control Level" is triggered if an
insurer's Total Adjusted Capital is less than 100.0% of its Authorized Control
Level RBC, and at that level the regulatory authority is authorized (although
not mandated) to take regulatory control of the insurer. The "Mandatory Control
Level" is triggered if an insurer's Total Adjusted Capital is less than 70.0%
of its Authorized Control Level RBC, and at that level the regulatory authority
must take regulatory control of the insurer. Regulatory control may lead to
rehabilitation or liquidation of an insurer.
Calculations using the NAIC formula and the life insurance
subsidiaries' statutory financial statements as of December 31, 1996 indicate
that each of the insurance subsidiaries' (other than Salem Life) capital
substantially exceeded RBC requirements. Although OLIC's capital exceeded RBC
requirements, the excess is less substantial than that of the Company's other
insurance subsidiaries.
<PAGE> 22
PAGE 22
The State of Michigan requires insurance companies to
requalify for their insurance licenses following a change in control, and has
enacted legislation substantially increasing capital and surplus requirements
for companies filing requalification applications following a change in
control. This requalification requirement impacts the Company since it is
active in the acquisition of insurance companies. Thus far, it has had a
minimal impact on the Company as none of the insurance companies acquired that
have failed to requalify in Michigan had in excess of 4% of their total
collected premiums prior to acquisition attributable to Michigan.
Certain licenses of the Company's insurance company subsidiaries are
subject to limits on the amount of new business that may be written in various
states. Of these license restrictions, most were imposed prior to the
acquisition of the relevant insurance subsidiary by PennCorp, or relate to
events occurring prior to those acquisitions. These license restrictions have
not had a material adverse effect on the Company's results of operations and
are not expected to have a material adverse effect in the future. In some
states, a license restriction, suspension or revocation by another state may
result in reciprocal regulatory action.
The Company may be required, under the solvency or guaranty laws of
most states in which it does business, to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Recent insolvencies of insurance companies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The occurrence and amount of such
assessments have increased in recent years and generally are expected to
increase in future years. The Company paid approximately $2.6 million, $1.7
million and $1.0 million in the years ended December 31, 1996, 1995 and 1994,
respectively, as a result of such assessments. The likelihood and amount of any
other future assessments cannot be estimated and are beyond the control of the
Company.
Although the federal government does not directly regulate the
business of insurance, federal legislation and administrative policies in
several areas, including pension regulation, age and sex discrimination,
financial services regulation and federal taxation can significantly affect the
insurance business.
In addition, there were proposals under consideration since 1994 at
the federal and state levels regarding reforms to the health care system in the
United States. Although these proposals were not adopted at the federal level,
many states have adopted some form of health care reform since then. These
reforms have focused on the increasing cost of health care and insurance plans
that reimburse insured or health care providers for medical and related costs.
Because the Company's fixed benefit products provide supplemental income
payments directly to the insured and are not designed to reimburse health care
providers, the Company does not expect such reforms to have a material adverse
effect on its business.
There can be no assurance that existing insurance-related laws and
regulations will not become more restrictive in the future and thereby have a
material adverse effect on the operations of the Company and on the ability of
the insurance companies to pay dividends or on the ability of PLAIC, Pioneer
Security and Salem Life Insurance Corporation to make payments on their
respective surplus debentures. For further information related to said surplus
debentures, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Financial Condition, Liquidity and Capital Resources
- - Surplus Debentures and Dividend Restrictions" on pages 29 and 30 and Note 13
of "Notes to Consolidated Financial Statements" on page 55 hereof.
RATINGS
A.M. Best assigns fifteen letter ratings to insurance companies, with
the highest being "A++ (Superior)." A.M. Best ratings are based upon factors
relevant to policyholders and are not directed toward the protection of
investors, such as holders of the Common Stock. AA Life and UC Life carry a "A-
(Excellent)" rating from A. M. Best. An "A- (Excellent)" rating is the fourth
highest letter rating. Professional, OLIC, Integon Life Insurance Corporation
and Georgia International Life Insurance Company and PLIC carry a "B++ (Very
Good)" rating from A.M. Best. A "B++ (Very Good)" rating is the fifth highest
letter rating. A.M. Best also has a "Not Assigned" category, which contains
nine classifications for companies not assigned or not eligible for an A.M.
Best rating. The A.M. Best rating for Peninsular is "NA-9," which is a "no
rating at the company's request." This classification was requested by the
prior owner of Peninsular. The Company does not intend to seek a letter rating
at this time for Peninsular from A.M. Best as Peninsular is not currently a
direct writer of insurance products.
<PAGE> 23
PAGE 23
EMPLOYEES
At December 31, 1996, the Company had a total of 1,371 employees, of
whom 1,146 are United States home office employees, 107 are Canadian employees,
and 118 are employed in various regional and branch offices of the Company
throughout the United States and Canada. The total employees and United States
home office employees include employees of Professional, UC Life, AA Life and
Marketing One. None of the Company's employees are represented by unions. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
FACILITIES
The Company's administrative offices are located in Raleigh, North
Carolina. The Company owns and occupies a home office facility comprising
approximately 165,000 rentable square feet, in Raleigh, North Carolina. The
Company subleases a portion of its prior Raleigh home office facility which has
a lease term expiring in 1999 and requires annual lease payments of
approximately $1.1 million.
The Company leases approximately 100 offices throughout its sales
territories and has a separate Canadian business office facility that includes
office and storage space. In addition, Professional leases office space in
Jacksonville, Florida, American-Amicable owns its home office facility in Waco,
Texas and UC Life leases office space in Baton Rouge, Louisiana. The Company
believes that the current makeup of its properties is adequate for its
operations and, based on its recent experience, that it will be able to find
suitable replacement properties on acceptable terms for any properties the
Company chooses to replace or for which leases are terminated or not renewed.
ITEM 3. LEGAL PROCEEDINGS
In January 1996, stockholder derivative lawsuits styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al. and PennCorp Financial Group,
Inc., C.A. No. 14775 and Lois Miller v. David J. Stone et al. and PennCorp
Financial Group, Inc., C.A. No. 14795 were filed against PennCorp and each of
its directors, individually, in the Delaware Court of Chancery. The suits
allege that the Southwestern Financial Investment involved the usurpation of a
corporate opportunity and a waste of PennCorp's assets by Messrs. Stone and
Fickes, and that the directors of PennCorp in approving that transaction,
failed to act in good faith and breached their fiduciary duties, including the
duty of loyalty to PennCorp and its stockholders, having favored the interests
of Messrs. Stone and Fickes over PennCorp and its stockholders. These lawsuits
seek judgments against each of the defendants for the amount of damages
sustained or to be sustained by the Company as a result of the breaches of
fiduciary duty alleged in the complaint, the imposition of a constructive trust
for the benefit of the Company on profits or benefits obtained by any defendant
through the alleged breaches of fiduciary duty, attorney's fees and costs, and
such other relief as the court determines to be just, proper or equitable.
The defendants in the Tozour Case have filed a motion seeking its
dismissal on the ground that the plaintiff failed to comply with the
requirements of Delaware law before instituting a derivative suit and intend to
defend the lawsuit vigorously. Because the Company has not been served with the
Miller Complaint, no action has been taken in that case, although the Company
would also defend it vigorously. The defendants believe, however, that it would
not be in the best interests of PennCorp and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, PennCorp's legal advisors have met or
spoken by telephone with the plaintiff's counsel on several occasions to
discuss the terms of a potential settlement.
The defendants and the plaintiff's counsel are negotiating a
stipulation of settlement (the "Proposed Settlement") of the shareholder
derivative actions. The Proposed Settlement consists of the following principal
elements: (i) Messrs. Stone and Fickes will cancel the 335,564 SW Financial
common stock warrants they hold for no consideration enabling PennCorp to
purchase the Southwestern Financial Controlling Interest for $67.5 million,
reducing the price to be paid by PennCorp for the Southwestern Financial
Controlling Interest by approximately $2.0 million, (ii) that the PennCorp
Board will proceed with the purchase of The Fickes and Stone Knightsbridge Fund
Interests, having received a fairness opinion of a nationally recognized
investment banking firm with respect to the price to be paid for The Fickes and
Stone Knightsbridge Interest, (iii) the PennCorp Board will proceed with
<PAGE> 24
PAGE 24
the acquisition of the Southwestern Financial Controlling Interest, having
received a fairness opinion of a nationally recognized investment banking firm
with respect to the price to be paid for the Southwestern Financial Controlling
Interest; (iv) the PennCorp Board will submit the purchase of The Fickes and
Stone Knightsbridge Fund Interests and the Southwestern Financial Controlling
Interest to a vote of a majority of the PennCorp stockholders present at the
Stockholders Meeting and entitled to vote, and stockholders must approve both
transactions, (v) Messrs. Stone and Fickes will abstain from voting on the
proposals to approve the purchase of The Fickes and Stone Knightsbridge Fund
Interests and the Southwestern Financial Controlling Interest, and (vi) the
plaintiff's counsel will be entitled to conduct confirmatory discovery.
The Proposed Settlement is subject to approval by the Delaware
Chancery Court after notice to PennCorp stockholders. As discussed above,
Messrs. Stone and Fickes have agreed that, if the Proposed Settlement is
approved by the Delaware Chancery Court, they will cancel their SW Financial
common stock warrants, which will reduce the price to be paid by PennCorp for
the Southwestern Financial Controlling Interest by approximately $2.0 million.
Because the Knightsbridge Fund restructuring will have the effect of
eliminating potential future conflicts of interest between Messrs. Stone and
Fickes and PennCorp, and because the Proposed Settlement will have the effect
of reducing the price to be paid for the Southwestern Financial Controlling
Interest and will obviate the need to expend considerable management and
director time to litigate the action, the PennCorp Board has determined that
the Proposed Settlement is in the best interests of PennCorp and its
shareholders and confers a substantial economic benefit on PennCorp.
Accordingly, the PennCorp Board has authorized the payment to plaintiff's
counsel of legal fees and disbursements not to exceed $530,000 in connection
with the lawsuit and the related settlement negotiations, if the Proposed
Settlement is approved by the Delaware Chancery Court after notice to PennCorp
stockholders.
The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business some of which include allegations of
insufficient policy illustrations and agent misrepresentations. Although the
outcome of such actions is not presently determinable, management does not
believe that such matters, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations if resolved against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
[Remainder of page intentionally left blank.]
<PAGE> 25
PAGE 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET FOR COMMON STOCK
The shares of PennCorp Financial Group, Inc. are listed on the New York Stock
Exchange ("NYSE") under the ticker symbol "PFG." The following table sets forth
for the calendar periods indicated, the high and low sales price per share of
the Company's Common Stock as reported on the NYSE and the quarterly cash
dividends declared on the Common Stock with respect to each quarter since
January 1, 1995. The prices do not include mark-ups, mark-downs, or
commissions. As of February 28, 1997, there are approximately 179 shareholders,
including nominee holdings, throughout the United States and abroad.
The price history as provided by NYSE and dividends since the initial offering
date are presented below:
<TABLE>
<CAPTION>
SALES PRICES DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1996 HIGH LOW DECLARED
=========================================================================================================
<S> <C> <C> <C>
Fourth quarter $ 36.375 32.000 $ 0.05
Third quarter 34.125 25.750 0.05
Second quarter 33.625 26.750 0.05
First quarter 33.000 26.875 0.05
</TABLE>
<TABLE>
<CAPTION>
SALES PRICES DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1995 HIGH LOW DECLARED
=========================================================================================================
<S> <C> <C> <C>
Fourth quarter $ 29.875 23.000 $ 0.03
Third quarter 24.000 18.375 0.01
Second quarter 19.375 16.750 0.01
First quarter 17.625 13.000 0.01
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 26
PAGE 26
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED
financial data
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
REVENUES:
Policy revenues $ 348,090 $ 301,889 $ 244,422 $ 201,788 $ 184,690
Net investment income 213,563 102,291 51,850 43,114 41,302
Other income(1) 27,234 17,563 1,056 3,817 632
Net gains (losses) from the sale of investments 1,257 595 (3,556) 1,439 5,560
------------------------------------------------------------
Total revenues 590,144 422,338 293,772 250,158 232,184
------------------------------------------------------------
BENEFITS AND EXPENSES:
Claims incurred 188,727 141,876 112,650 95,232 91,904
Change in liability for future policy benefits and
other policy benefits 79,085 18,126 (9,329) (13,857) (14,971)
Insurance and other operating expenses 158,552 147,561 113,596 110,598 108,833
Interest and amortization of deferred debt issuance costs 18,979 19,780 18,274 7,461 17,621
------------------------------------------------------------
Total benefits and expenses 445,343 327,343 235,191 199,434 203,387
------------------------------------------------------------
Income before income taxes and extraordinary charge 144,801 94,995 58,581 50,724 28,797
Income taxes 45,418 31,642 21,437 18,217 10,744
------------------------------------------------------------
Net income before extraordinary charge 99,383 63,353 37,144 32,507 18,053
Extraordinary charge, net of income taxes (2,372) -- -- (3,322) (17,655)
------------------------------------------------------------
Net income 97,011 63,353 37,144 29,185 398
Preferred stock dividend requirements 14,646 6,540 1,151 -- 4,562
------------------------------------------------------------
Net income (loss) applicable to common stock $ 82,365 $ 56,813 $ 35,993 $ 29,185 $ (4,164)
============================================================
</TABLE>
(1) Includes $21.1 million and $4.7 million of undistributed earnings in
unconsolidated affiliates for the years ended 1996 and 1995, respectively.
<TABLE>
<CAPTION>
PER SHARE INFORMATION:
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary:
Net income before extraordinary charge $ 2.98 $ 2.47 $ 1.82 $ 1.71 $ 1.35
Net income before net gains (losses) from the
sale of investments and extraordinary charge $ 2.95 $ 2.45 $ 1.93 $ 1.67 $ 1.03
Extraordinary charge, net of income taxes $ (0.08) $ -- $ -- $ (0.18) $ (1.72)
Common shares used in computing primary earnings
per share 28,462 22,985 19,830 18,957 11,196
Fully diluted:
Net income before extraordinary charge $ 2.74 $ 2.36
Net income before net gains from the sale
of investments and extraordinary charge $ 2.72 2.35
Extraordinary charge, net of income taxes $ (0.07) $ --
Common shares used in computing fully diluted
earnings per share 35,229 25,566
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C> <C> <C> <C>
Investments and cash $3,830,313 $2,409,427 $ 822,778 $ 674,552 $556,960
Insurance assets 620,329 482,567 341,096 258,723 230,500
Other assets 383,091 258,012 156,080 132,767 117,103
-------------------------------------------------------------------
Total assets $4,833,733 $3,150,006 $1,319,954 $1,066,042 $904,563
===================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Insurance liabilities $3,562,108 $2,229,047 $ 798,030 $ 649,899 $611,342
Long-term debt 210,325 307,271 229,041 150,812 111,082
Other liabilities 183,437 117,175 59,107 74,854 41,568
Redeemable preferred stock 32,864 30,007 37,256 - -
Shareholders' equity 844,999 466,506 196,520 190,477 140,571
-------------------------------------------------------------------
Total liabilities and shareholders' equity $4,833,733 $3,150,006 $1,319,954 $1,066,042 $904,563
===================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 27
PAGE 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. The statements below that relate to
future plans, events or performances are forward-looking statements that
involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company's insurance subsidiaries by independent rating
organizations such as A.M. Best (which the Company believes are particularly
important to the sale of annuity and other accumulation products) and
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
PennCorp Financial Group, Inc. (the "Company", "PennCorp"), through its
operating subsidiaries, is a low cost provider of accumulation, life, and fixed
benefit accident and sickness insurance products throughout the United States
and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, general agents, financial institutions,
and payroll deduction programs, and are targeted primarily to lower and
middle-income individuals in rural and suburban areas. These products are
primarily small premium accident and sickness insurance policies with defined
fixed benefit amounts, traditional whole life and universal life insurance with
low face amounts and accumulation products such as single premium deferred
annuities.
The Company's financial condition and results of operations for the periods
covered by this and future "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are or will be affected by several common
factors, each of which is discussed below.
Strategic Review of Business Units. As a result of the tremendous growth the
Company has experienced, the diversification of the underlying business units
resulting from acquisitions over time, and the need for the Company to be able
to rapidly integrate future acquisitions, the Company began a strategic
business evaluation during the third quarter of 1996 which is now nearly
complete.
The evaluation considered each of the current operating companies and, in
anticipation of the consummation of the merger ("Washington National Merger") of
the Company and Washington National Corporation ("Washington National") and the
purchase of the Controlling Interest of Southwestern Financial Corporation ("SW
Financial"), the impact of those operating companies on the Company's current
and long-term profitability potential, the ability of the operating companies to
absorb operations related to future acquisitions and the market focus of the
operating companies.
Immediately following the consummation of the Washington National and SW
Financial transactions, the Company will establish five operating divisions:
Career Sales, Individual Sales, Financial Services, Payroll Sales and Other
Insurance. The newly reorganized divisions will include the operations of SW
Financial and Washington National.
The Company has begun to realign its existing operating companies in light of
the strategic review and anticipates a charge related to costs directly
associated with the initial divisional restructuring which will have no future
economic benefit ("restructuring costs"), including the costs of employee
termination benefits and relocation, early service contract termination, and
facility abandonment. A charge for the restructuring costs will be included in
the Company's results of operations during 1997. In addition, the Company may
incur additional restructuring costs when integration plans are implemented for
the pending Washington National and SW Financial transactions.
Acquisitions. The Company's growth strategy emphasizes the acquisition of
complementary insurance operations and the utilization of the Company's several
distribution channels to further penetrate its target markets. In making
acquisitions, the Company seeks to broaden its distribution channels, increase
its product offerings and expand its geographic presence. The Company also
seeks benefits from expense reduction through the consolidation of facilities
and staff and the conversion to common administrative systems.
Each of the operating considerations outlined above as well as the cost of
capital to the Company, expected cash flows from the target acquisition and
actuarial factors, such as future premium, mortality, morbidity, surrenders,
operating expenses and yields on assets held to back policy liabilities are
considered and weighted in determining the relative risk of financial rewards
for taking on the acquisition target. On July 22, 1996, the Company acquired
United Companies Life Insurance Company ("UC Life") from United Companies
Financial Corporation. UC Life markets fixed and variable annuity products
through independent agents and financial institution marketing channels.
On July 25, 1995, the Company consummated the acquisition of Integon Life
Insurance Corporation ("Integon Life"). Integon Life's life and annuity
products are marketed through a general agency sales force, primarily in the
Southeastern United States.
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
On August 31, 1994, the Company acquired American-Amicable Life Insurance
Company of Texas ("AA Life") through American-Amicable Holding Corporation
("AAHC"). AA Life markets life insurance products to military and civilian
employees at U.S. military installations throughout the world.
The comparability of the Company's financial position, results of operations
and cash flows for each of the periods presented have been affected by these
acquisitions. The pro forma effects of the acquisitions of UC Life, Integon
Life, and AA Life are described in Note 3 to the Company's Consolidated
Financial Statements included elsewhere herein.
Financing Activities. As a part of each of the Company's acquisitions and as
part of a long-term plan to maintain an appropriate balance in its capital
structure, PennCorp has undertaken various public and private financing
transactions. As a result, the Company's historical financial results reflect
significant variations in financing costs including preferred stock dividends
and extraordinary charges resulting from the early extinguishment of debt.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are funded primarily by its insurance
subsidiaries. The insurance subsidiaries' principal sources of cash are
premiums and investment income. The insurance subsidiaries' primary uses of
cash are policy claims, commissions, operating expenses, income taxes and
payments to the Company for principal and interest due under surplus
debentures, tax sharing payments and dividends. Both sources and uses of cash
are reasonably predictable.
Financings. On August 2, 1996, the Company issued 2,875,000 shares of $3.50
Series II Convertible Preferred Stock ("Series II Convertible Preferred Stock")
for net proceeds of $139.2 million. The cash raised through this offering,
along with borrowings under the Company's bank credit facility, were utilized
(i) to fund the cash portion of the purchase price for UC Life, aggregating
$100.4 million, (ii) to fund a capital contribution of $57.3 million to UC
Life, and (iii) to pay related expenses of the acquisition of UC Life of $9.7
million. The Company accrued or paid dividends of $4.0 million during 1996,
related to the Series II Convertible Preferred Stock.
On February 28, 1996, PennCorp completed the successful sale of 5,131,300
shares of Common Stock, netting proceeds of $155.5 million ("February Common
Stock Offering"). Proceeds from this offering were utilized to repay $80.0
million of corporate and $57.0 million of subsidiary indebtedness, and to pay
$10.0 million to SW Financial's former owner in lieu of PennCorp's obligation
to issue an equivalent number of shares of Common Stock.
In May 1996, the Company entered into a revolving credit agreement with a
syndicate of banks (the "bank credit agreement") for up to $175.0 million of
funds available at any one time to replace the $100.0 million bridge facility
utilized by the Company to make the investment in SW Financial, which was
repaid out of the proceeds of the February Common Stock Offering. During the
remainder of 1996, the Company borrowed amounts aggregating $92.0 million for
(i) the repurchase of $35.4 million in principal amount of the Company's 9 1/4%
Senior Subordinated Debenture due 2003 (the "Notes") for $37.7 million,
including interest and premium on early redemption of $2.3 million, (ii) the
refinancing of $20.0 million of indebtedness under the previously outstanding
bridge facility, (iii) the repayment of $16.5 million of amounts owed certain
subsidiaries, and (iv) $17.8 million for general corporate purposes including
the UC Life acquisition, interest payments and common and preferred stock
dividend payments. Total interest and related costs incurred under the bank
credit facility were $1.6 million during 1996.
On July 14, 1995, PennCorp issued 2,300,000 shares of the $3.375 Convertible
Preferred Stock ("Convertible Preferred Stock") for net proceeds of $110.5
million. On March 16, 1995, PennCorp issued 3,750,000 shares of Common Stock,
for net proceeds of approximately $51.2 million. The proceeds from these two
offerings were used to (i) consummate the acquisition of Integon Life, which
utilized funds totaling $33.4 million (including a capital contribution of
$15.0 million), (ii) repay $28.5 million outstanding under, and subsequently
cancel, a revolving credit facility, (iii) repurchase, for $34.6 million, all
of the Company's Series A Preferred Stock, (iv) repay $11.2 million due to
Integon Life's former parent company under a subordinated debenture, (v) pay
the $15.4 million cash portion of the purchase price of Occidental Life
Insurance Company of North Carolina ("OLIC") (which PennCorp purchased from
Pennsylvania Life Insurance Company and its wholly-owned subsidiary, Penncorp
Life Insurance Company (collectively referred to herein as "Penn Life") and
subsequently contributed to Integon Life), (vi) prepay $20.0 million principal
amount of indebtedness under the AAHC credit facility, and (vii) make payments
for general corporate purposes, including interest payments and the
cancellation of certain interest rate swap agreements. The Company paid or
accrued dividends on the Convertible Preferred Stock amounting to $7.8 million
and $3.6 million during 1996 and 1995, respectively.
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
As part of the financing for the Integon Life acquisition, PennCorp issued
Series B Preferred Stock with an initial value of $12.8 million, which accretes
at 10.4% per annum until its maturity on June 30, 1997, and Series C Preferred
Stock with an initial value (subject to offset) of $17.9 million, which
accretes at 9.3% per annum until its maturity on June 30, 1998. The Series C
Preferred Stock's estimated initial value for financial statement purposes was
approximately $16.0 million. Preferred stock dividends accreted during 1996 and
1995, on the Series B and Series C Preferred Stock amounted to $2.9
million and $1.3 million, respectively. On March 14, 1997, the Company redeemed
all the outstanding Series B Preferred Stock for $14.7 million, utilizing
proceeds available under the bank credit facility.
In addition to the Series B and Series C Preferred Stock, the Company utilized
$30.0 million in borrowings by Salem Holdings Corporation ("SHC"), the parent of
Integon Life, from a syndicate of banks in order to fund a portion of the
Integon Life acquisition. In March 1996, the Company utilized proceeds from the
February Common Stock Offering to repay $30.0 million of indebtedness
outstanding and cancel the SHC bank facility. For the years ended, December 31,
1996 and 1995, the Company incurred interest costs related to borrowings by SHC
of $451,000 and $513,000, respectively.
In order to fund the AA Life acquisition, AAHC borrowed $55.0 million under the
AAHC credit facility. The AAHC credit facility was repaid and cancelled in
March 1996. During 1996, 1995 and 1994, AAHC made principal payments of $27.0
million, $23.0 million and $5.0 million, and had accumulated interest costs of
$385,000, $3.3 million and $1.3 million under this facility, respectively.
As part of the financing of the AA Life acquisition, PennCorp issued 450,000
shares of Series A Preferred Stock with a stated dividend rate of approximately
6.0% for the first five years and approximately 8.0% thereafter, until
redemption in 2009. During 1994, and prior to its full repurchase on August 25,
1995, PennCorp incurred dividends of $1.2 million and $1.7 million,
respectively, related to the Series A Preferred Stock.
The Notes, the bank credit agreement and the Series C Preferred Stock impose
certain covenants on the Company, including covenants restricting the amount of
additional indebtedness the Company may incur, its ability to engage in future
acquisitions and certain other business transactions, and the amount of
dividends the Company may declare and pay, and requires the Company to maintain
specified financial ratios and meet specified financial tests, all of which may
impose limitations on the Company's future liquidity.
Surplus Debentures, Dividend Restrictions and Cash Flows. Cash generated by the
Company's insurance subsidiaries is made available to PennCorp principally
through periodic payments of principal and interest on surplus debentures
issued by Pacific Life and Accident Insurance Company ("PLAIC"), Salem Life
Insurance Company ("Salem Life") and Pioneer Security Life Insurance Company
("Pioneer Security") (collectively, the "Surplus Note Companies"). The amounts
outstanding under the surplus debentures totalled $367.9 million and $315.8
million as of December 31, 1996 and 1995, respectively. The surplus debentures
generally require (subject to availability of statutory capital and surplus and
in some instances, regulatory approval) principal and interest payments to be
made periodically in amounts sufficient to allow PennCorp to meet its cash
requirements.
The Surplus Note Companies rely upon dividends and tax sharing payments from
their respective insurance subsidiaries. Each of the insurance subsidiaries is
in turn subject to regulatory restrictions with respect to the maximum amount
of dividends that can be paid to the Surplus Note Companies without prior
regulatory approval. Such dividend restrictions are primarily in the form of
(i) the greater of 10% of statutory capital and surplus or statutory earnings,
or (ii) the lesser of 10% of statutory capital and surplus or statutory
earnings, depending upon applicable state laws. The Company believes that such
restrictions will not significantly impact the Company's liquidity for the
foreseeable future.
For the years ended December 31, 1996, 1995 and 1994, the Company received net
payments from the Surplus Note Companies of $31.9 million, $19.1 million and
$11.5 million, respectively. The Surplus Note Companies received $25.8 million,
$21.6 million and $900,000 in dividends and tax sharing payments from their
respective insurance subsidiaries. During 1995, and 1994, the Company's
downstream holding companies, SHC and AAHC, each had direct bank indebtedness
outstanding which restricted the amount of payments which could be made by Salem
Life and Pioneer Security for the benefit of the Company. As a result of the
repayment of such indebtedness from proceeds of the Company's February Common
Stock Offering, Salem Life and Pioneer Security may now make payments under
their respective surplus debentures for the benefit of PennCorp.
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
The primary cash requirements of the Company are interest payments, preferred
stock dividends and common stock dividends which aggregated $33.9 million,
$24.5 million and $16.5 million for the years ended December 31, 1996, 1995 and
1994, respectively. For the year ended December 31, 1996, cash made available
under the surplus debentures exceeded cash requirements by $21.2 million. For
the years ended December 31, 1995 and 1994, cash requirements of the Company
exceeded cash made available to the Company through payments under the surplus
debentures by $5.4 million and $5.0 million, respectively. During each of these
periods, the Company utilized a balance of dividends and surplus note payments
from the insurance subsidiaries and borrowings under the Company's credit
facilities to fund PennCorp's cash requirements. This balance resulted in what
management believes to be, along with other factors, an appropriate retention
of statutory capital and surplus to improve the insurance subsidiaries' A.M.
Best Company ("A.M. Best") ratings without placing an undue debt burden upon
the Company.
During 1997, the maximum dividends and corresponding surplus debenture
payments, without prior regulatory approval, are anticipated to be
approximately $27.2 million and the Company's cash requirements are anticipated
to be approximately $35.3 million. The Company intends to utilize funds
available under its revolving credit facility to fund the shortfall. For
periods beginning in 1998, under current statutory limitations, the Company
believes that it will receive sufficient cash flow from the Surplus Note
Companies and their respective subsidiaries to satisfy its cash requirements.
As a result of the Company's decision to retain capital and surplus at the
insurance subsidiary level, and with the contemplated realignment of the
insurance subsidiaries into operating divisions, the Company believes that as
of December 31, 1996, its insurance subsidiaries have excess capital and
surplus. The Company's own established targets for estimated risk-based capital
requirements indicate that the insurance divisions could make available
approximately $50.0 million to PennCorp, subject to applicable regulatory
approvals.
Investments. The Company's investment portfolio is managed with the objectives
of maintaining high credit quality and liquidity, maximizing current income
within acceptable levels of risk, minimizing market and credit risk, and
matching the anticipated maturities of investments to the Company's
liabilities. The Company believes that a conservative investment strategy fits
the nature of its insurance products which have little or no inflation risk and
limited build-up of cash accumulation values in earlier years.
The Company continuously evaluates its investment portfolio and the conditions
under which it might sell securities, including changes in interest rates,
changes in prepayment risk, liquidity needs, asset liability matching, tax
planning strategies and other economic factors. Those securities that the
Company believes would be subject to sale prior to the specified maturity date
are included in "securities available for sale," which amounted to $2,993.9
million and $1,487.0 million at December 31, 1996 and 1995, respectively. Of
those securities available for sale, 92.1% and 92.7% were rated Baa or above by
Moody's Investors Services, Inc. at December 31, 1996 and 1995, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Company sold $378.6
million, $106.6 million and $92.8 million of fixed maturity and equity
securities, and purchased $955.8 million, $217.8 million and $183.6 million of
fixed maturity and equity securities, respectively. Such sales and purchases
were often effected to improve the quality of the investment portfolio or to
avoid prepayment risks. In addition, during 1996 the Company sold one security
in its held for investment portfolio aggregating $4.9 million as a result of a
dramatic deterioration in its credit rating.
During 1995, the Company established a portfolio of "trading securities" to
provide the Company with the opportunity to undertake interest rate hedging
strategies, to participate in short-term relative value trades and to invest in
special situations with the goal of generating short-term trading profits. As a
result of trading activities, the Company recognized $1.3 million and $5.7
million of profits during 1996 and 1995, respectively.
Mortgage loans on real estate amounted to 7.0% and 1.6% of total invested
assets as of December 31, 1996 and 1995, respectively. The substantial increase
in mortgage loans was the result of the UC Life acquisition. UC Life invests in
first mortgage loans and provides a mortgage loan warehousing facility for its
former parent as a means of obtaining higher invested asset yields necessary to
support competitively priced annuity products. The Company has established a
reserve for loan loss which aggregated $11.9 million as of December 31, 1996.
As of December 31, 1996 and 1995, the Company had non-performing loans
amounting to $1.4 million and $3.5 million, respectively. The Company is in
various stages of foreclosure or sales of such loans. The Company believes its
current loan loss provision is adequate to cover any future losses related to
currently performing and non-performing loans.
Cash and short-term investments totaled $102.6 million and $444.7 million as of
December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995,
respectively, the Company held approximately $12.2 million and $3.8 million in
short-term investments needed in the settlement of investment trades early in
the following year.
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
Disintermediation risk. With the acquisition of UC Life and Integon Life, the
Company significantly expanded its interest sensitive portfolio of products
including universal life and accumulation products. The Company actively
manages the difference in interest yields on assets backing interest sensitive
liabilities and amounts credited to policyholder account balances so as to
provide a margin or "spread". For the years ended December 31, 1996 and 1995,
the Company had total interest sensitive liabilities aggregating $1,808.0
million and $702.1 million, respectively and obtained a spread on such
liabilities of 2.1% and 1.9%, respectively. As part of the ongoing management
of interest sensitive business, the Company annually undertakes "cash flow
testing" sensitivities in which Management evaluates a range of interest rate
scenarios under which credited interest rates and asset/liability durational
matching may become mismatched. The Company believes that it has sufficient
liquidity to withstand all reasonable scenarios established by Management.
Cash Flows From Operations. The periods covered by Management's Discussion and
Analysis of Financial Condition and Results of Operations indicate cash
provided by operating activities of $164.7 million, $75.7 million and $5.6
million in 1996, 1995 and 1994, respectively. The positive cash flow from
operating activities is not necessarily indicative of the Company's cash flow
as $(205.2) million, $(53.2) million and $2.1 million of cash was (used)
provided to fund cash flows for interest sensitive life and accumulation
products during 1996, 1995 and 1994, respectively, which are classified as
financing activities in accordance with generally accepted accounting
principles.
Inflation. The Company sells fixed benefit, life, and accumulation products.
Approximately 48.6% of the Company's total policy revenues for the year ended
December 31, 1996, were derived from fixed benefit products. These products
typically provide a predetermined fixed payment that will be paid under
specified conditions. Fixed benefit products are not designed to provide
reimbursement for medical and related costs incurred as a result of accidents
and sickness. Accordingly, payment amounts are not affected by the insured's
actual cost of health care services. Because of the characteristics of its
fixed benefit products, the Company believes that inflation does not have a
material effect on its operations.
Pending Merger, Acquisition and Related Transactions. On January 22, 1997, the
Company filed with the Securities and Exchange Commission ("SEC"), a
preliminary PennCorp Financial Group, Inc. and Washington National Corporation
Joint Proxy Statement and Prospectus ("Joint Proxy Statement") in which the
Company, pending final review by the SEC, will be soliciting shareholder
approval for the following transactions: (i) the Washington National Merger,
(ii) the acquisition of the Controlling Interest in SW Financial, (iii) the
acquisition of the Fickes and Stone Knightsbridge Interests, and (iv) other
items (see Note 15 and 16 of Notes to Consolidated Financial Statements
included elsewhere herein).
The Washington National Merger and the acquisition of the Controlling Interest
in SW Financial will expand the Company's individual and payroll sales division
operations with similar products, distribution channels and asset mixes.
Should the Company obtain shareholder approval for the above transactions, the
Company's reported financial information would change significantly.
The following unaudited pro forma selected financial data represents the
Company's consolidated results of operations, as if the Washington National
Merger, SW Financial transaction, UC Life acquisition and other financial
transactions occurred on January 1, 1996, and the pro forma financial position,
as if such transactions occurred as of December 31, 1996. The unaudited
selected financial data has been prepared for comparative purposes only and
does not purport to be indicative of what would have occurred had the
transactions been consummated as of January 1, 1996, or December 31, 1996,
respectively, or the results of operations or financial position which may
occur in the future.
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
<TABLE>
<CAPTION>
(Amounts in millions, except share information)
Pro forma Actual
FOR THE YEAR ENDED DECEMBER 31, 1996 1996
====================================================================================================================
<S> <C> <C>
Total revenues $ 1,256.5 $ 590.1
Income before income taxes, undistributed earnings in unconsolidated affiliates,
discontinued operations and extraordinary charge 214.7 144.8
Net income before discontinued operations and extraordinary charge
applicable to common stock 114.8 99.4
Fully diluted net income before discontinued operations and extraordinary charge
per share applicable to common stock 2.82 2.74
AS OF DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 9,735.4 $ 4,833.7
Insurance and other liabilities 8,106.8 3,745.5
Long-term debt 488.5 210.3
Mandatory redeemable preferred stock 18.1 32.9
Total shareholders' equity 1,122.0 845.0
</TABLE>
In anticipation of the Washington National Merger and the acquisition of the
Controlling Interest in SW Financial, the Company recently consummated a
five-year, $450 million revolving credit facility ("revolver") with a syndicate
of banks and terminated the Bank Credit Agreement. The revolver provides the
Company with sufficient capacity, (i) to pay the cash portion of the Washington
National Merger consideration, (ii) to pay the consideration due to the
controlling shareholders of SW Financial, (iii) to provide amounts needed to
refinance existing indebtedness at SW Financial, and (iv) to provide liquidity
for other general corporate purposes.
Borrowings under the revolver will carry variable rates of interest plus a
margin which varies with the Company's implied senior unsecured indebtedness
rating. Based upon PennCorp's current ratings, the revolver would reduce the
Company's current borrowing rates under the formerly outstanding bank facility
by approximately 35 basis points and would reduce the cost of indebtedness
outstanding at SW Financial by nearly 300 basis points.
The Company anticipates, pending regulatory and shareholder approval,
consummating the Washington National Merger, the acquisition of the Controlling
Interest in SW Financial, and the acquisition of the Fickes and Stone
Knightsbridge Interests in late April 1997.
New Accounting Pronouncements. The Financial Accounting Standard Board ("FASB")
has released for comment an Exposure Draft of a proposed Statement of Financial
Accounting Standards, "Consolidated Financial Statements: Policy and
Procedures" (the "Proposed Statement"). The Proposed Statement provides new
guidelines with respect to the circumstances under which entities must report
financial information on a consolidated basis. The Proposed Statement, if
issued, would be effective for fiscal years beginning after December 15, 1996.
Although the Company cannot predict if, and in what form, the Proposed
Statement will be issued, the Company believes that the Proposed Statement
could require consolidation of Southwestern Life and Union Bankers and certain
other transactions of the Company and Knightsbridge.
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," replacing Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share." SFAS No. 128 replaces "primary"
and "fully diluted" earnings per share ("EPS") under APB Opinion No. 15 with
"basic" and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of options, warrants and other convertible securities. Dilutive EPS
reflects the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted EPS. However, under SFAS No. 128, the
Company would use the average market price for its stock during the reporting
period to determine the cost of options as opposed to the greater of the
closing price at the end of the period or the average market price during the
period, as currently required by APB Opinion No. 15. SFAS No. 128 is effective
for years ending after December 15, 1997.
RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the historical
financial statements of the Company and related notes thereto contained
elsewhere herein. Significant financial information, percentage changes and
ratios (excluding realized gains and losses on sale of investments and equity
in undistributed earnings of unconsolidated affiliates) are shown in the
following table:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RATIOS TO REVENUES
Total policy benefits 47.1% 38.4% 34.7%
Insurance expenses 15.4 19.1 20.7
Other operating expenses 12.5 16.3 17.5
Interest and amortization of deferred debt issuance costs 3.3 4.7 6.1
Pretax operating margin 21.7 21.5 20.9
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
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M D & A continued
Operating Ratios. Pretax operating margin improved modestly to 21.7% of
revenues during 1996 from 21.5% and 20.9% in 1995 and 1994, respectively. The
slight improvement was primarily due to declines in all operating ratios except
for policy benefits, which nearly offset the other improvements. As the mix of
insurance products shifts toward life and accumulation products versus fixed
benefit products, management believes the 1996 ratios will be indicative of
future ratios.
The ratio of total policy benefits to revenues increased during 1996 to 47.1%
from 38.4% and 34.7% in 1995 and 1994, respectively. The increase in total
policy benefits to revenues during 1996 was primarily attributable to the
continued increase in life products, relative to fixed benefit products, since
benefits for life insurance products are typically greater, as a percentage of
premium, than benefits for fixed benefit products. Additionally, accumulation
products, such as deferred annuities, are priced to allow for the vast
majority of interest earned on assets backing policy reserves to be credited to
the policyholder account balance resulting in a faster growth in policy benefits
than policy benefits for fixed benefit products. Also, during 1996, the Company
experienced higher than expected mortality and morbidity costs for Penn Life and
OLIC, which collectively resulted in an approximately 2.0% increase in the
claims incurred ratio for the Company as a whole. The increase in total policy
benefits during 1995, as compared to 1994 was the result of the shift in product
mix, from fixed benefit accident and sickness insurance, to accumulation and
life insurance products as claims incurred ratios remained consistent between
periods.
Insurance expenses dropped during 1996 to 15.4% of revenues from 19.1% and
20.7% during 1995 and 1994, respectively. The reduction in all periods resulted
primarily from increased premium volume and persistency resulting in less
amortization of insurance assets (primarily the present value of insurance in
force) as a percentage of revenues. In addition, for the year ended December
31, 1996, certain interest sensitive blocks of business had significantly less
amortization of deferred policy acquisition costs and present value of
insurance in force, as compared to 1995 and 1994, due to reduced short-term
profit margins from adverse mortality. The Company believes that the reduced
profit margins will not impact the long-term profitability. However, should
such mortality experience continue, the ultimate recoverability of deferred
policy acquisition costs and present value of insurance in force could be
adversely affected.
Other operating expenses declined as a percentage of revenues to 12.5% during
1996, from 16.3% and 17.5% during 1995 and 1994, respectively. This downward
trend was due to the acquisitions of UC Life and Integon Life, which are
administered by the Company at overhead expense rates less than the business in
force prior to their respective acquisitions. Despite the growing revenue base,
the Company's total underlying expense infrastructure has increased only
moderately. In addition, expense costs have shifted from overhead and
maintenance expenses to those more closely related to the production of new
business.
Interest costs fell to 3.3% of revenues during 1996, from 4.7% during 1995, and
6.1% during 1994. The Company's financings for each of its acquisitions have
impacted these ratios. During 1996, the Company utilized common and preferred
stock offerings to finance acquisition activities rather than debt. The
weighted average interest cost for outstanding indebtedness dropped to 8.8% for
the year ended December 31, 1996, from 9.0% and 9.3% for the years ended
December 31, 1995, and 1994, respectively. The reduction in such interest costs
was the result of the Company replacing subsidiary indebtedness with borrowings
by the Company which carry substantially lower interest rates.
Policy Revenues. Policy revenues increased to $348.1 million in 1996 from
$301.9 and $244.4 million in 1995 and 1994, respectively. Fixed benefit policy
revenues decreased by 3.1% and 1.2% to $169.3 million and $174.7 million during
1996 and 1995, respectively, after increasing by 15.9% during 1994 to $176.9
million. Increases in fixed benefit policy revenues during 1994 resulted
primarily from the acquisition of Professional. During 1996 and 1995, the
Company's operating focus was concentrated primarily on increasing life policy
revenues to achieve a balance of life policy revenues with those of fixed
benefit products. In addition, during 1996 the Company effectively ceased
marketing its "instant issue" fixed benefit products and as a result of higher
than anticipated loss ratios which resulted in a $4.9 million decline in fixed
benefit policy revenues.
Life policy revenues increased 43.9%, 75.0% and 37.2% to $170.0 million, $118.1
million and $67.5 million for the years ended 1996, 1995 and 1994,
respectively. The acquisition of UCLife in July 1996, and Integon Life in July
1995, added $72.4 million and $22.2 million of life policy revenues during 1996
and 1995, respectively. The inclusion of AA Life for the full year 1995
increased life policy revenue by $29.1 million while AA Life provided an
additional $13.7 million of life policy revenues during 1994. Partially
offsetting some of these increases were declines in Penn Life's policy revenues
from closed blocks of business of $1.1 million, $750,000 and $1.0 million
during 1996, 1995 and 1994, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 34
PAGE 34
M D & A continued
Net Investment Income. The effects of a larger invested asset base and improved
average portfolio yields to 7.6% in 1996 from 7.3% during 1995 and 1994, have
resulted in net investment income increasing 108.8%, 97.1% and 20.3% in 1996,
1995 and 1994, to $213.6 million, $102.3 million and $51.9 million,
respectively. The acquisitions of UCLife, which added invested assets of
$1,484.4 million in July 1996, Integon Life, which added invested assets of
$1,336.9 million in July 1995, and AA Life, which added invested assets of
$204.3 million in August 1994, contributed to the increase in investment
income. During 1996, UCLife added $50.0 million of investment income and
Integon Life incrementally added $59.7 million as a result of being included
for the entire year. During 1995, Integon Life and AA Life incrementally added
$40.1 million and $9.7 million to investment income, respectively. During
1994, AA Life and Professional provided additional investment income to the
Company of $4.8 million and $2.5 million, respectively.
Claims Incurred. Claims incurred increased 33.0%, 25.9% and 18.3% during 1996,
1995 and 1994, to $188.7 million, $141.9 million and $112.7 million,
respectively. The increase in claims during 1996 was due to the addition of
UCLife, $3.3 million, the inclusion of Integon Life for the full year, $35.1
million, and adverse mortality experience at OLIC and Penn Life of $4.2 million
and $2.6 million, respectively, when compared to the previously reported
period.The Company believes that the modest increase in claims at OLIC and Penn
Life are a statistical aboration and do not appear to be the result of poor
underwriting or anti-selection. The Company is continuing to closely monitor
the claims activity in each insurance subsidiary. During 1995, the increase in
claims incurred attributable to Integon Life and AA Life, was $22.8 million and
$10.3 million, respectively. During 1994, the impact of the AA Life acquisition
and the inclusion of Professional for the entire year increased claims incurred
by $18.2 million.
Insurance Related Expenses. Insurance related expenses (including commissions,
amortization of deferred policy acquisition costs and amortization of the
present value of insurance in force) increased 9.7%, 29.2% and 4.3% to $87.4
million, $79.7 million and $61.7 million during 1996, 1995 and 1994,
respectively. During each of the periods the amortization of the present value
of insurance in force increased slightly as a result of acquisitions. During
1996, and 1995, the Company utilized deferral methods comparable to those
utilized in 1994 and thus the increase in amortization of deferred policy
acquisition costs was the result of the growth of the blocks of new business
issued since the acquisition of each subsidiary and related deferred costs. The
increased insurance related expenses were also the result of somewhat higher
commissions which totaled $34.7 million, $31.9 million and $30.7 million during
1996, 1995 and 1994, respectively.
Other Operating Expenses. Other operating expenses (including general
operating, overhead and policy maintenance expenses) increased during 1996 to
$71.2 million compared to $67.9 million during 1995 and $51.9 million during
1994. Excluding the impact of the UCLife acquisition in 1996 and the inclusion
of Integon Life and AA Life for the full year period 1996 and 1995,
respectively, and a non-recurring restructuring charge of $3.9 million in 1995,
primarily related to the relocation of the Company's operating facility, other
operating expenses decreased by $7.2 million or 14.8% during 1996 to $41.3
million for the Company's other insurance subsidiaries compared to $48.5 and
$46.0 million during 1995 and 1994, respectively.
Also included in other operating expense is the amortization of costs in excess
of net assets acquired which aggregated $8.0 million, $6.6 million and $5.2
million for 1996, 1995 and 1994, respectively.
Income Taxes. The effective tax rates for the years ended December 31, 1996,
1995 and 1994, were 36.7%, 35.1% and 36.6%, respectively. The 1996 effective
rate is higher than the statutory rate of 35% primarily due to non-deductible
amortization of costs in excess of net assets acquired. The decline of the
effective tax rate for 1995 as compared to 1996 and 1994 is due to previously
non-deductible operating losses becoming available to reduce tax on operating
earnings. Effective tax rates in 1994 are higher than the statutory rate
principally due to foreign taxes and non-deductible amortization of costs in
excess of net assets acquired.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 35
PAGE 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
PennCorp Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennCorp Financial
Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
February 28, 1997
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 36
PAGE 36
CONSOLIDATED STATEMENTS
of income
<TABLE>
<CAPTION>
(Amounts in thousands, except per share information) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 256,859 $ 239,010 $ 214,674
Interest sensitive policy product charges 91,231 62,879 29,748
Net investment income 213,563 102,291 51,850
Other income 6,132 12,845 1,056
Net gains (losses) from the sale of investments 1,257 595 (3,556)
-------------------------------------------
Total revenues 569,042 417,620 293,772
-------------------------------------------
BENEFITS AND EXPENSES:
Claims incurred 188,727 141,876 112,650
Change in liability for future policy benefits and other
policy benefits 79,085 18,126 (9,329)
Amortization of present value of insurance in force and
deferred policy acquisition costs 52,877 47,732 30,948
Amortization of costs in excess of net assets acquired 7,990 6,557 5,241
Underwriting and other administrative expenses 97,685 93,272 77,407
Interest and amortization of deferred debt issuance costs 18,979 19,780 18,274
-------------------------------------------
Total benefits and expenses 445,343 327,343 235,191
-------------------------------------------
Income before income taxes, undistributed earnings in unconsolidated
affiliates and extraordinary charge 123,699 90,277 58,581
Income taxes 45,418 31,642 21,437
-------------------------------------------
Net income before undistributed earnings in unconsolidated affiliates and
extraordinary charge 78,281 58,635 37,144
Undistributed earnings in unconsolidated affiliates 21,102 4,718 -
-------------------------------------------
Net income before extraordinary charge 99,383 63,353 37,144
Extraordinary charge (net of income taxes of $1,277, $- and $-) (2,372) - -
-------------------------------------------
Net income 97,011 63,353 37,144
Preferred stock dividend requirements 14,646 6,540 1,151
-------------------------------------------
Net income applicable to common stock $ 82,365 $ 56,813 $ 35,993
======================================================================================================================
PER SHARE INFORMATION:
Primary:
Net income applicable to common stock before extraordinary charge $ 2.98 $ 2.47 $ 1.82
Extraordinary charge, net of income taxes (0.08) - -
-------------------------------------------
Net income applicable to common stock $ 2.90 $ 2.47 $ 1.82
Common shares used in computing primary earnings per share 28,462 22,985 19,830
Fully diluted:
Net income applicable to common stock before extraordinary charge $ 2.74 $ 2.36
Extraordinary charge, net of income taxes (0.07) -
--------------------------
Net income applicable to common stock $ 2.67 $ 2.36
Common shares used in computing fully diluted earnings per share 35,229 25,566
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 37
PAGE 37
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands, except share information) AS OF DECEMBER 31,
1996 1995
==============================================================================================================================
<S> <C> <C>
ASSETS:
Investments:
Fixed maturity securities:
Held for investment, at amortized cost (fair value $89,759 in 1996 and $51,354 in 1995) $ 87,330 $ 51,366
Available for sale, at fair value (amortized cost $2,941,750 in 1996 and $1,414,187 in 1995) 2,993,925 1,486,985
Equity securities available for sale, at fair value (cost $17,511 in 1996 and $13,707 in 1995) 20,867 15,172
Trading securities, at fair value 31,140 86,104
Mortgage loans on real estate, net of allowance of $11,945 in 1996 and $- in 1995 256,998 36,563
Policy loans 145,976 125,179
Short term investments 63,113 416,953
Other investments 46,848 43,937
--------------------------
Total investments 3,646,197 2,262,259
Cash 39,464 27,778
Accrued investment income 48,643 30,992
Accounts and notes receivable, net of allowance of $6,528 in 1996 and $8,388 in 1995 47,307 34,842
Investments in unconsolidated affiliates 144,652 119,390
Present value of insurance in force 351,973 288,664
Deferred policy acquisition costs 268,356 193,903
Costs in excess of net assets acquired 148,174 121,795
Other assets 138,967 70,383
--------------------------
Total assets $ 4,833,733 $ 3,150,006
==============================================================================================================================
LIABILITIES:
Policy liabilities and accruals:
Future policy benefits $ 3,476,801 $ 2,153,607
Policy and contract claims 44,878 36,429
Other policyholder funds 40,429 39,011
--------------------------
Total policy liabilities and accruals 3,562,108 2,229,047
Income taxes payable, primarily deferred 65,036 24,977
Notes payable 210,325 307,271
Accrued expenses and other liabilities 118,401 92,198
--------------------------
Total liabilities 3,955,870 2,653,493
--------------------------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 initial redemption value; authorized, issued and
outstanding 127,500 in 1996 and 1995 14,689 13,307
Series C, $.01 par value, $100 initial redemption value; authorized, issued and
outstanding 178,500 in 1996 and 1995 18,175 16,700
SHAREHOLDERS' EQUITY:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,300,000 in 1996 and 1995 110,513 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,875,000 in 1996 139,157 --
Common stock, $.01 par value; authorized 50,000,000; issued and outstanding
28,647,714 in 1996 and 22,879,708 in 1995 286 229
Additional paid-in capital 393,156 220,482
Unrealized foreign currency translation losses (14,969) (15,539)
Unrealized gains on securities available for sale 19,582 30,353
Retained earnings 202,144 125,375
Treasury shares (189,750 in 1996 and 1995) (3,370) (3,370)
Notes receivable secured by common stock (1,500) (1,537)
--------------------------
Total shareholders' equity 844,999 466,506
--------------------------
Total liabilities and shareholders' equity $ 4,833,733 $ 3,150,006
==============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 38
PAGE 38
CONSOLIDATED STATEMENTS
of changes in shareholders' equity
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
======================================================================================================================
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK:
Balance at beginning of year $ 110,513 $ - $ -
Issuance of convertible preferred stock 139,157 110,513 -
-------------------------------------------
Balance at end of year 249,670 110,513 -
-------------------------------------------
COMMON STOCK:
Balance at beginning of year 229 191 191
Issuance of common stock 56 38 -
Exercise of stock options 1 - -
-------------------------------------------
Balance at end of year 286 229 191
-------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 220,482 169,310 169,301
Issuance of common stock 170,393 51,172 -
Exercise of stock options 2,281 - -
Treasury stock awarded to employees, net of unearned award - - 9
-------------------------------------------
Balance at end of year 393,156 220,482 169,310
-------------------------------------------
UNREALIZED FOREIGN CURRENCY TRANSLATION LOSSES:
Balance at beginning of year (15,539) (17,882) (13,118)
Change in unrealized foreign currency translation losses during
the year, net of income taxes 570 2,343 (4,764)
-------------------------------------------
Balance at end of year (14,969) (15,539) (17,882)
-------------------------------------------
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE:
Balance at beginning of year 30,353 (24,454) -
Cumulative effect of accounting change, net of income taxes - - 9,328
Equity in unrealized losses of unconsolidated affiliate (6,045) - -
Change in unrealized gains (losses) on securities available for
sale during the year, net of income taxes (4,726) 54,807 (33,782)
-------------------------------------------
Balance at end of year 19,582 30,353 (24,454)
-------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 125,375 69,856 34,730
Net income 97,011 63,353 37,144
Dividends on common stock (5,630) (1,327) (765)
Amortization of discount and dividends on preferred stock (14,646) (6,540) (1,151)
Treasury stock awarded to employees, net of unearned award - - (102)
Earned portion of treasury stock awarded to employees 34 33 -
-------------------------------------------
Balance at end of year 202,144 125,375 69,856
-------------------------------------------
TREASURY SHARES:
Balance at beginning of year (3,370) (386) (280)
Purchases of treasury shares - (2,984) (232)
Treasury shares awarded to employees, net of unearned award - - 126
-------------------------------------------
Balance at end of year (3,370) (3,370) (386)
-------------------------------------------
NOTES RECEIVABLE SECURED BY COMMON STOCK: (1,500) (1,537) (115)
-------------------------------------------
Total shareholders' equity $ 844,999 $ 466,506 $ 196,520
======================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 39
PAGE 39
CONSOLIDATED STATEMENTS
of cash flows
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
==============================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before undistributed earnings in unconsolidated affiliates and
extraordinary charge $ 78,281 $ 58,635 $ 37,144
Adjustments to reconcile net income before undistributed earnings in unconsolidated
affiliates and extraordinary charge to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs (99,545) (83,795) (58,919)
Amortization of value of business in force, deferred policy acquisition costs,
intangibles, depreciation and accretion, net 59,337 50,428 38,935
Increase (decrease) in policy liabilities and accruals and other policyholder funds 73,202 12,417
(29,894)
Purchases of trading securities -- (1,031) --
Sales of trading securities 56,004 47,145 --
Other, net (2,585) (8,126) 18,302
-----------------------------------
Net cash provided by operating activities 164,694 75,673 5,568
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash expended in acquisition of businesses, net of cash acquired
of $-, $- and $12,931 (99,596) (18,363) (89,137)
Purchases of fixed maturity securities held for investment (27,000) (15,950) (472)
Purchases of fixed maturity securities available for sale (920,430) (188,388) (174,872)
Purchases of equity securities (8,398) (13,415) (8,294)
Purchase of affiliate -- (107,366) --
Maturities of fixed maturity securities held for investment 42,351 6,214 18,098
Maturities of fixed maturity securities available for sale 81,538 27,198 41,370
Sales of fixed maturity securities held for investment 4,910 -- --
Sales of fixed maturity securities available for sale 368,331 99,804 83,182
Sales of equity securities 5,328 6,818 9,574
Decrease (increase) in short-term investments, net
(including changes in amounts due to broker) 412,687 39,392 (20,269)
Acquisitions and originations of mortgage loans (112,473) -- --
Sales of mortgage loans 151,972 -- --
Principal collected on mortgage loans 21,657 -- --
Other, net 4,521 (3,288) (3,553)
-----------------------------------
Net cash used in investing activities (74,602) (167,344) (144,373)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable 230,000 130,783 83,500
Issuance of common stock 155,450 51,210 --
Issuance of preferred stock 139,157 110,513 33,034
Purchases of treasury stock -- (2,984) (232)
Reduction of notes payable (330,624) (91,507) (5,271)
Redemption of preferred stock -- (33,415) --
Receipts from interest sensitive products credited to policyholders' account balances 160,403 91,175
47,497
Return of policyholders' account balances on interest sensitive products (365,554) (144,413) (45,426)
Repurchase agreement, net (52,839) -- --
Other, primarily dividends, net (14,399) (4,950) --
-----------------------------------
Net cash provided (used) by financing activities (78,406) 106,412 113,102
-----------------------------------
Net increase (decrease) in cash 11,686 14,741 (25,703)
CASH AT BEGINNING OF YEAR 27,778 13,037 38,740
-----------------------------------
CASH AT END OF YEAR $ 39,464 $ 27,778 $ 13,037
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Income taxes paid (refunded) $ (4,992) $ 787 $ 2,474
Interest paid 18,185 20,001 15,443
NON-CASH FINANCING ACTIVITIES:
Debt assumed with acquisition -- 38,214 --
Securities issued in conjunction with acquisition 14,999 28,750 --
Amounts due on acquisition of affiliate -- 11,114 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 40
PAGE 40
NOTES TO CONSOLIDATED
financial statements
(1) BASIS OF PRESENTATION
PennCorp Financial Group, Inc. (the "Company", "PennCorp") is an insurance
holding company. The Company commenced operations with the acquisition of
Pennsylvania Life Insurance Company ("PLIC") and Executive Fund Life Insurance
Company (which was merged into PLIC effective July 1, 1996) and Pacific Life
and Accident Insurance Company ("PLAIC") on August 23, 1990. Through its
wholly-owned life insurance subsidiaries, PLIC and its wholly-owned subsidiary,
Penncorp Life Insurance Company (collectively referred to herein as "Penn
Life"), Peninsular Life Insurance Company ("Peninsular"), Professional
Insurance Corporation ("Professional"), Pioneer Security Life Insurance Company
("Pioneer Security") and its wholly-owned subsidiaries American-Amicable Life
Insurance Company of Texas and Pioneer American Insurance Company (Pioneer
Security and its subsidiaries collectively referred to herein as "AA Life"),
Salem Life Insurance Corporation ("Salem Life") and its wholly-owned
subsidiaries Integon Life Insurance Corporation ("ILIC") and Georgia
International Life Insurance Company and Occidental Life Insurance Company of
North Carolina ("OLIC") (Salem Life and its wholly-owned subsidiaries
collectively referred to herein as "Integon Life"), United Companies Life
Insurance Company ("UC Life"), and PLAIC, the Company offers a broad range of
accident and sickness, life, and accumulation insurance products to individuals
through a sales force that is contractually exclusive to certain of the
Company's subsidiaries and through general agents.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. All dollar amounts presented
hereafter, except share information, are stated in thousands.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Accounts that the
Company deems to be acutely sensitive to changes in estimates include deferred
policy acquisition costs, future policy benefits, policy and contract claims
and present value of insurance in force. In addition, the Company must
determine requirements for disclosure of contingent assets and liabilities as
of the date of the financial statements based upon estimates. In all instances,
actual results could differ from estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities classified as held for investment are recorded at cost,
adjusted for amortization of premium or discount, as the Company has the intent
and ability to hold them to maturity. Fixed maturities and equity securities
classified as available for sale are recorded at fair value, as they may be
sold in response to changes in interest rates, prepayment risk, liquidity
needs, the need or desire to increase income or capital and other economic
factors. Changes in unrealized gains and losses related to securities available
for sale are recorded as a separate component of shareholders' equity, net of
applicable income taxes. Securities classified as trading securities are
reported at fair value with realized gains and losses and changes in unrealized
gains and losses included in the determination of net income as a component of
other income. The classification of securities as held for investment,
available for sale or trading is generally determined at the date of purchase.
The Company carries certain equity investments in affiliates on the equity
basis of accounting as a result of its percentage ownership and lack of voting
control. Mortgage-backed securities held for investment or available for sale
are amortized using the interest method including anticipated prepayments at
the date of purchase. Significant changes in estimated cash flows from original
assumptions are reflected in the period of such change. Mortgage loans on real
estate are recorded at cost, adjusted for amortization of premium or discount
and provision for loan loss, if necessary. Policy loans, short-term
investments, and other investments are recorded at cost, which approximates
market.
Realized investment gains and losses and declines in value which are other than
temporary, determined on the basis of specific identification, are included in
net income.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was issued by the Financial Accounting
Standards Board in May 1993. Since December 1991, the Company has utilized
concepts considered in SFAS No. 115 regarding the classification of investments
in debt securities. The implementation of SFAS No. 115 has resulted in the
Company reflecting certain invested assets at fair value rather than lower of
aggregate cost or market as was the previous accounting practice. As of January
1, 1994 the adoption of SFAS No. 115 resulted in an increase in the value
reflected in the financial statements for the fixed maturity securities
available for sale of approximately $14,351 and an increase in shareholders'
equity of $9,328, net of deferred tax.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 41
PAGE 41
Notes to Consolidated Financial Statements, continued
In November 1995, the Financial Accounting Standards Board ("FASB") announced
that for the year ended December 31, 1995, companies that are subject to the
reporting requirements of SFAS No. 115 would have a one-time opportunity to
reclassify securities currently classified as held for investment without the
risk of tainting the accounting for investments on a historical basis. The
Company has evaluated the securities contained in this portfolio and has
determined under which conditions it may dispose of such securities. In light
of this review, the Company has reclassified approximately $61,410 of
securities which were previously classified as held for investment to available
for sale. The result of such reclassification was to increase shareholders'
equity by $1,198, net of applicable deferred income taxes.
INSURANCE REVENUE RECOGNITION
Accident and sickness insurance premiums are recognized as revenue ratably over
the time period to which premiums relate. Revenues from traditional life
insurance policies represent premiums which are recognized as earned when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the lives of the policies. This association is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral and amortization of policy acquisition costs.
Revenues for interest sensitive products such as universal life and annuity
contracts represent charges assessed against the policyholders' account balance
for the cost of insurance, surrenders and policy administration. Benefits
charged to expenses include benefit claims incurred during the period in excess
of policy account balances and interest credited to policy account balances.
POLICY LIABILITIES
Liabilities for future policy benefits generally have been computed on the net
level premium method, based on estimated future investment yield, mortality,
morbidity and withdrawals. Estimates used are based on experience adjusted to
provide for possible adverse deviation. These estimates are periodically
reviewed and compared with actual experience. Future policy benefits for
interest sensitive products include the balance that accrues to the benefit of
the policyholders and amounts that have been assessed to compensate the life
insurance subsidiaries for services to be provided in the future.
Policy and contract claims represent estimates of both reported claims and
claims incurred but not reported based on experience.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist primarily of agents' balances and
premiums receivable from agents and policyholders in the United States and
Canada. Agents' balances are partially secured by commissions due to agents in
the future and premiums receivable are secured by policy liabilities. An
allowance for doubtful accounts is established, based upon specific
identification and general provision, for amounts which the Company estimates
will not ultimately be collected.
DEFERRED POLICY ACQUISITION COSTS
Estimated costs of acquiring new business which vary with, and are primarily
related to, the production of new business, have been deferred to the extent
that such costs are deemed recoverable from future revenues. Such estimated
costs include commissions, certain costs of policy issuance, underwriting and
certain variable agency expenses. Costs deferred on accident and sickness and
traditional life policies are amortized, with interest, over the anticipated
premium-paying period of the related policies in proportion to the ratio of
annual premium revenue to expected total premium revenue to be received over
the life of the policies. Expected premium revenue is estimated by using the
same mortality, morbidity and withdrawal assumptions used in computing
liabilities for future policy benefits. For interest sensitive products and
limited pay life products, policy acquisition costs are amortized in relation
to the emergence of anticipated gross profits over the life of the policies.
PRESENT VALUE OF INSURANCE IN FORCE
The present value of insurance in force represents the anticipated gross
profits to be realized from future revenues on insurance in force at the date
such insurance was purchased, discounted to provide an appropriate rate of
return and amortized, with interest based upon the policy liability or contract
rate, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits. Accumulated amortization was
$151,173 and $122,851 as of December 31, 1996 and 1995, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 42
PAGE 42
Notes to Consolidated Financial Statements, continued
NET INCOME PER COMMON SHARE
Net income per common share is determined after recognition of preferred stock
dividends and accretion of discount on preferred stock and is based on the
weighted average number of common shares outstanding during the year after
giving consideration to the dilutive effect of stock options and stock
warrants. Fully diluted net income per share assumes the conversion of
convertible preferred stock.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", in 1996. This statement provides a choice for
the accounting of employee stock compensation plans. A company may elect to use
a new fair-value methodology, under which compensation cost is measured and
recognized in results of operations, or continue to account for these plans
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Note 12 of the
Consolidated Financial Statements contains a summary of the pro forma effects
to reported net income applicable to common stock and earnings per share for
1996 and 1995, if the Company had elected to account for employee stock
compensation plans utilizing the fair value methodology prescribed by
SFAS No. 123.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of the fair value of net assets acquired are amortized on a
straight-line basis primarily over 20 years. Accumulated amortization was
$32,434 and $26,484 as of December 31, 1996 and 1995, respectively.
The Company continually monitors the value of costs in excess of net assets
acquired based upon estimates of future earnings. Any amounts deemed to be
impaired are charged, in the period in which such impairment was determined, as
an expense against earnings. For the periods presented there was no charge to
earnings for the impairment of costs in excess of net assets acquired.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
The financial statement accounts of the Canadian operations, which are
denominated in Canadian dollars, are translated into U.S. dollars as follows:
(i) Canadian currency assets and liabilities are translated at the rates of
exchange as of the balance sheet dates and the related unrealized translation
adjustments are included as a separate component of shareholders' equity, and
(ii) revenues, expenses and cash flows, expressed in Canadian dollars, are
translated using a weighted average of exchange rates for each of the periods
presented.
REINSURANCE
Financial reinsurance that does not transfer significant insurance risk is
accounted for as deposits. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured policies.
Balances due to, or from, reinsurers have been reflected as assets and
liabilities rather than being netted against the related account balances.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) ACQUISITIONS
On July 22, 1996, the Company consummated the acquisition of UC Life for a
total purchase price of $110,056 including expenses incurred of $9,706 and
earnings through the date of consummation of the acquisition of $3,608. The
fair value of net assets acquired amounted to $76,008 resulting in $34,048
costs in excess of net assets acquired.
The UC Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 43
PAGE 43
Notes to Consolidated Financial Statements, continued
On July 25, 1995, the Company consummated the acquisition of Integon Life for a
total purchase price of $48,596 including acquisition expenses of approximately
$3,200. The fair value of net assets acquired amounted to $2,974 resulting in
$45,622 of costs in excess of net assets acquired.
The acquisition of Integon Life was initiated on January 20, 1995, when the
Company and its subsidiaries entered into a series of related agreements to
acquire all of the issued and outstanding capital stock of Salem Holdings
Corporation (formerly Integon Life Corporation), including the purchase for
$15,000 in cash, of a 49% limited partnership interest in the ultimate limited
partner that controlled Integon Life. Prior to the consummation of the
acquisition, the Company's 49% equity interest in the net income of Integon
Life, which aggregated $3,808, was reported on the equity method of accounting
as undistributed earnings in unconsolidated affiliates for the period from
January 20, 1995, to July 25, 1995.
The Integon Life acquisition has been accounted for as a purchase transaction
in accordance with generally accepted accounting principles, and accordingly,
assets and liabilities acquired have been recorded as a step purchase with fair
values determined as of January 20, 1995 and July 25, 1995, which became the
new cost basis.
On August 31, 1994, the Company consummated the acquisition of AA Life for a
total cash purchase price of $103,392 including acquisition expenses of $1,865.
The fair value of net assets acquired was $86,880 resulting in $16,512 of costs
in excess of net assets acquired.
The AA Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis. .
The results of operations of the acquired companies are included in the
accompanying financial statements since the respective acquisition dates.
The following unaudited pro forma data represents the Company's consolidated
results of operations as if (i) the Integon Life and AA Life acquisition
occurred as of January 1, 1994, and (ii) the UC Life acquisition occurred as of
January 1, 1995. This unaudited pro forma data has been prepared for
comparative purposes only and does not purport to be indicative of what would
have occurred had the acquisitions been made as of January 1, 1995 and 1994, or
results which may occur in the future.
<TABLE>
<CAPTION>
(Amounts in thousands, except per share information)
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Total revenues $ 639,076 $ 635,508 $ 484,181
Income before income taxes, undistributed earnings in
unconsolidated affiliates and extraordinary charge 131,683 118,742 51,779
Net income applicable to common stock 82,884 54,077 30,417
Per share information:
Net income applicable to common stock - primary 2.79 1.84 1.21
Net income applicable to common stock - fully diluted 2.59 1.81
</TABLE>
(4) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company's only reportable industry segment is life insurance, and its only
significant foreign operations are conducted in Canada. Within the life
insurance segment the Company's significant lines of business include fixed
benefit, life and accumulation products. Assets and related investment income
are allocated based upon related insurance liabilities which are backed by such
assets. Other operating expenses are allocated in relation to the mix of
related revenues.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 44
PAGE 44
Notes to Consolidated Financial Statements, continued
The components of operations for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
TOTAL REVENUES:
Insurance operations
U.S.
Fixed benefit products $ 147,226 $ 162,747 $ 159,644
Life products 253,959 174,934 91,322
Accumulation products 111,146 32,378 -
Canada
Fixed benefit products 45,695 40,596 37,641
Life products 6,690 6,430 5,618
Non-insurance operations, corporate and eliminations 4,326 535 (453)
--------------------------------------------------
$ 569,042 $ 417,620 $ 293,772
=========================================================================================================
INCOME BEFORE INCOME TAXES, UNDISTRIBUTED EARNINGS
IN UNCONSOLIDATED AFFILIATES AND EXTRAORDINARY
CHARGE:
Insurance operations
U.S.
Fixed benefit products $ 39,664 $ 52,148 $ 18,735
Life products 52,363 26,245 40,908
Accumulation products 33,289 14,423 -
Canada
Fixed benefit products 15,435 15,568 13,007
Life products 642 2,451 1,391
Non-insurance operations, corporate and eliminations (17,694) (20,558) (15,460)
--------------------------------------------------
$ 123,699 $ 90,277 $ 58,581
=========================================================================================================
</TABLE>
Total assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
TOTAL ASSETS:
Insurance operations
U.S.
Fixed benefit products $ 479,900 $ 453,087
Life products 1,686,611 1,497,654
Accumulation products 2,349,905 945,100
Canada
Fixed benefit products 139,887 120,011
Life products 43,613 39,357
Non-insurance operations, corporate and eliminations 133,817 94,797
-------------------------------
$ 4,833,733 $ 3,150,006
=========================================================================================================
</TABLE>
(5) INVESTMENTS
The following investments, other than obligations of the U.S. Government or
agencies thereof, individually exceeded 10% of total shareholders' equity as of
December 31:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian government obligations $ 80,492 $ 88,671 $ 61,245 $ 66,374
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 45
PAGE 45
Notes to Consolidated Financial Statements, continued
The amortized cost and fair value of investments in fixed maturities held for
investment as of December 31 were as follows:
<TABLE>
<CAPTION>
1996
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $ 34,546 $ 2,307 $ - $ 36,853
Corporate securities 52,784 124 2 52,906
---------------------------------------------------------
$ 87,330 $ 2,431 $ 2 $ 89,759
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate securities $ 51,366 $ - $ 12 $ 51,354
=========================================================================================================
</TABLE>
The amortized cost and fair value of investments in fixed maturities available
for sale as of December 31 were as follows:
<TABLE>
<CAPTION>
1996
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $1,408,124 $ 25,710 $ 5,510 $1,428,324
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 326,484 5,783 2,760 329,507
Debt securities issued by foreign governments 80,492 8,179 - 88,671
Corporate securities 1,126,650 29,940 9,167 1,147,423
---------------------------------------------------------
$2,941,750 $ 69,612 $ 17,437 $2,993,925
=========================================================================================================
</TABLE>
<TABLE>
1995
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $ 484,945 $ 23,288 $ 1,880 $ 506,353
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 363,305 18,207 980 380,532
Debt securities issued by foreign governments 61,245 5,210 81 66,374
Corporate securities 504,692 33,486 4,452 533,726
---------------------------------------------------------
$1,414,187 $ 80,191 $ 7,393 $1,486,985
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 46
PAGE 46
Notes to Consolidated Financial Statements, continued
The amortized cost and fair value of fixed maturities held for investment as of
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
=========================================================================================================
<S> <C> <C>
Due in one year or less $ 5,223 $ 5,223
Due after 1 through 5 years 16,793 16,854
Due after 5 through 10 years 30,768 30,829
Mortgage-backed securities, principally
obligations of U.S. Government agencies 34,546 36,853
-------------------------------
$ 87,330 $ 89,759
=========================================================================================================
</TABLE>
The amortized cost and fair value of fixed maturities available for sale as of
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
=========================================================================================================
<S> <C> <C>
Due in one year or less $ 126,527 $ 127,588
Due after 1 through 5 years 340,267 348,026
Due after 5 through 10 years 781,999 798,307
Due after 10 years 284,833 291,680
Mortgage-backed securities, principally
obligations of U.S. Government agencies 1,408,124 1,428,324
-------------------------------
$ 2,941,750 $ 2,993,925
=========================================================================================================
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Included in fixed maturities held for investment as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost and fair
value of $34,624 and $39,281, respectively. Included in fixed maturities held
for investment as of December 31, 1996, are unrated securities with an
amortized cost of $46,413 and a fair value of $48,831.
Included in fixed maturities available for sale as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost of $91,590
and $30,556 and a fair value of $92,494 and $33,541, respectively. Included in
fixed maturities available for sale as of December 31, 1996, are unrated
securities with an amortized cost of $92,315 and a fair value of $92,752.
As of December 31, 1996, net unrealized appreciation in equity securities
available for sale of $3,356 consisted of gross unrealized gains of $4,047,
less gross unrealized losses of $691. As of December 31, 1995, net unrealized
appreciation in equity securities available for sale of $1,465 consisted of
gross unrealized gains of $2,031, less gross unrealized losses of $566.
Fair values for fixed maturity securities were provided by independent pricing
services using market quotations, prices provided by market makers, or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The fair values for equity securities
were determined using market quotations from principal public exchange markets.
The Company's commercial and residential mortgage portfolios had carrying
values $256,998 and $36,563, respectively, and, fair values of approximately
$261,408 and $37,190, respectively, as of December 31, 1996 and 1995. The fair
values for mortgage loans on real estate are estimated using the quoted market
prices for securities collateralized by similar mortgage loans, adjusted for
the differences in loan characteristics. For mortgage loans on real estate
where quoted market prices are not available, the fair values are estimated
using discounted cash flow analysis and interest rates for loans with similar
credit ratings.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 47
PAGE 47
Notes to Consolidated Financial Statements, continued
As of December 31, 1996, commercial and residential mortgage loan investments
were concentrated in the following states:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
CARRYING VALUE CARRYING VALUE
=========================================================================================
<S> <C> <C>
Georgia $ 42,412 16.5%
Florida 40,234 15.7
Colorado 31,434 12.3
Virginia 17,892 6.7
Tennessee 15,828 6.2
Alabama 15,142 5.9
Louisiana 13,912 5.5
All other 80,144 31.2
-----------------------
$256,998 100.0%
=========================================================================================
</TABLE>
Investments with a carrying value of $62,767 and $49,036 were on deposit with
certain regulatory authorities as of December 31, 1996 and 1995, respectively.
Realized, and changes in unrealized gains and losses, on investments for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
==========================================================================================================
<S> <C> <C> <C>
REALIZED GAINS (LOSSES) ON DISPOSITIONS OF INVESTMENTS:
Securities held for investment:
Gross gains from sales $ - $ - $ -
Gross losses from sales (28) - -
Net gains (losses) from redemptions (105) 1 (2,186)
- ----------------------------------------------------------------------------------------------------------
(133) 1 (2,186)
Securities available for sale:
Gross gains from sales 2,562 3,009 182
Gross losses from sales (1,800) (2,616) (1,572)
Net gains (losses) from redemptions (166) 201 20
- ----------------------------------------------------------------------------------------------------------
596 594 (1,370)
Mortgage loans 794 - -
Net realized gains (losses) $ 1,257 $ 595 $ (3,556)
==========================================================================================================
CHANGES IN UNREALIZED GAINS (LOSSES):
Securities held for investment $ 2,441 $ 3,575 $ (9,639)
Securities available for sale (18,732) 111,732 (52,408)
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized gains (losses) $ (16,291) $ 115,307 $ (62,047)
==========================================================================================================
TRADING PORTFOLIO:
Net gains from sales $ 4,930 $ 1,830
Net change in unrealized gains (losses) (3,626) 3,880
- -------------------------------------------------------------------------------------
Total trading gains $ 1,304 $ 5,710
=====================================================================================
</TABLE>
Major categories of net investment income for the years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
==========================================================================================================
<S> <C> <C> <C>
Fixed maturity securities $ 170,871 $ 70,715 $ 44,759
Mortgage loans on real estate 13,693 2,783 1,702
Policy loans 8,409 5,240 2,725
Short term investments 12,966 16,891 1,641
Other investments 13,100 10,168 2,291
- ----------------------------------------------------------------------------------------------------------
Gross investment income 219,039 105,797 53,118
Less: investment expenses 5,476 3,506 1,268
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 213,563 $ 102,291 $ 51,850
==========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 48
PAGE 48
Notes to Consolidated Financial Statements, continued
The Company had non-income producing fixed maturity investments with an
amortized cost of $17,115 and $10,184 as of December 31, 1996 and 1995,
respectively.
(6) SOUTHWESTERN LIFE INVESTMENT
On December 14, 1995, Southwestern Financial Corporation ("SW Financial"), a
newly organized corporation formed by the Company and Knightsbridge Capital
Fund I, L.P. ("Knightsbridge", see Notes 15 and 16) purchased Southwestern Life
Insurance Company, Union Bankers Insurance Company and certain other related
assets from I.C.H. Corporation for $260,000.
Through its direct investment of $120,000 in SW Financial (the "Southwestern
Life Investment"), the Company beneficially owns 67.2% of SW Financial's
outstanding common stock, including 100% of SW Financial's non-voting common
stock, 15.1% of SW Financial's voting common stock, and preferred stock of SW
Financial and its subsidiary. PennCorp is also a 16.3% limited partner in
Knightsbridge.
The consolidated condensed results of operations and financial position of SW
Financial are provided below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31,1996 DECEMBER 14-31, 1995
====================================================================================================================
<S> <C> <C>
REVENUES:
Policy revenues $ 196,912 $ 12,668
Net investment income 128,972 6,015
Other income (including limited partnership distributions of 15,811 in 1996) 27,439 320
Net gains from the sale of investments 516 --
-------------------------
Total revenues 353,839 19,003
-------------------------
BENEFITS AND EXPENSES:
Claims incurred 234,773 14,736
Change in liability for future policy benefits and
other policy benefits (36,929) (2,318)
Insurance and other operating expenses 92,731 3,617
Interest and amortization of deferred debt issuance costs 14,052 664
-------------------------
Total benefits and expenses 304,627 16,699
-------------------------
Income before income taxes and extraordinary charge 49,212 2,304
Income taxes 18,247 882
-------------------------
Net income 30,965 1,422
Preferred stock dividend requirements 2,754 205
-------------------------
Net income applicable to common stock $ 28,211 $ 1,217
==========================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 1995
=========================================================================================================
<S> <C> <C>
ASSETS:
Invested assets $ 1,640,991 $ 1,710,537
Insurance assets 107,230 115,831
Other assets 462,329 387,656
-------------------------------
Total assets $ 2,210,550 $ 2,214,024
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Insurance liabilities $ 1,745,160 $ 1,821,292
Long-term debt 159,750 160,000
Other liabilities 127,237 74,826
Redeemable preferred stock 33,879 31,099
Shareholders' equity 144,524 126,807
-------------------------------
Total liabilities and shareholders' equity $ 2,210,550 $ 2,214,024
===============================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 49
PAGE 49
Notes to Consolidated Financial Statements, continued
(7) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs represent commissions, certain costs of
policy issuance, including underwriting and certain variable agency costs.
Information relating to these costs for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
=======================================================================================================
<S> <C> <C> <C>
Policy acquisition costs deferred:
Commissions $ 48,502 $ 49,191 $ 31,591
Underwriting and issue costs 51,043 34,604 27,328
-----------------------------------------------
99,545 83,795 58,919
Policy acquisition costs amortized (24,556) (22,234) (11,141)
Unrealized investment loss adjustment (461) (1,007) -
Foreign currency translation adjustment (75) 486 (751)
-----------------------------------------------
Balance as of December 31 $ 268,356 $ 193,903 $ 132,863
=======================================================================================================
</TABLE>
As a part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with the
type of business acquired and actuarial factors described in the following
paragraph, cost of capital available to the Company to fund the acquisition,
compatibility with other Company activities that may favorably affect future
profits, and the complexity of the acquired company.
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur and will
affect the present value of insurance in force interest rates for products
subject to SFAS No. 97. To the extent that these variances indicate that future
cash flows will differ from those included in the original scheduled
amortization of the present value of the insurance in force, future
amortization may be adjusted. Recoverability of the present value of insurance
in force is evaluated annually and appropriate adjustments are then determined
and reflected in the financial statements for the applicable period.
Information related to the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Balance as of January 1 $ 288,664 $ 208,233 $ 172,887
Addition due to acquisition 79,077 132,949 56,000
Accretion of interest 27,530 22,135 16,853
Amortization (55,851) (47,633) (36,661)
Unrealized investment gain (loss) adjustment 12,582 (27,425) -
Foreign currency translation adjustment (29) 405 (846)
--------------------------------------------------
Balance as of December 31 $ 351,973 $ 288,664 $ 208,233
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 50
PAGE 50
Notes to Consolidated Financial Statements, continued
Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 3.5% to 14.5%, for
the next five years of the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
BEGINNING GROSS ACCRETION NET
BALANCE AMORTIZATION OF INTEREST AMORTIZATION
=========================================================================================================
<C> <C> <C> <C> <C>
1997 $ 351,973 $ 63,796 $ 25,354 $ 38,442
1998 313,531 55,640 22,937 32,703
1999 280,828 50,205 20,674 29,531
2000 251,297 45,077 18,622 26,455
2001 224,842 39,166 16,746 22,420
</TABLE>
(8) FUTURE POLICY BENEFITS
The liability for future policy benefits consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life products
and annuity products, the liability for future policy benefits is equal to the
accumulated fund value. Fund values are equal to the excess premium received
and interest credited to the fund value less deductions for mortality costs and
expense charges. Current declared interest rates credited range from 4.0% to
6.75 percent. Mortality costs and expense charges are established by the
Company based upon its experience and cost structure.
For traditional life products, the liability for future policy benefits is
based primarily upon Commissioners' Standard Ordinary Tables with interest
rates ranging from 2.5% to 6.0 percent. Fixed products establish a liability
for future policy benefits equal to the excess of the present value of future
benefits to or on behalf of the policyholder over the future net premium
discounted at interest rates ranging primarily from 4.5% to 8.0 percent.
Traditional life products' and fixed benefit products' future policy benefits
are determined using Company experience as to mortality, morbidity and lapses
with a provision for adverse deviation. The Company may vary assumptions by
year of policy issue.
The following table presents information on changes in the liability for
accident and sickness claims for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Claim liability at January 1 $ 127,078 $ 126,920 $ 136,043
Less reinsurance recoverables 1,372 2,050 2,750
--------------------------------------------------
Net balance at January 1 125,706 124,870 133,293
--------------------------------------------------
Addition due to acquisition 1,079 1,095 -
--------------------------------------------------
Add claims incurred during the year related to:
Current year 63,673 62,106 76,686
Prior years (6,816) (2,855) (579)
--------------------------------------------------
Total incurred 56,857 59,251 76,107
--------------------------------------------------
Less claims paid during the year related to:
Current year 19,057 20,346 32,828
Prior years 36,435 39,164 51,702
--------------------------------------------------
Total paid 55,492 59,510 84,530
--------------------------------------------------
Net balance at December 31 128,149 125,706 124,870
Plus reinsurance recoverables 2,242 1,372 2,050
--------------------------------------------------
Claim liability at December 31* $ 130,391 $ 127,078 $ 126,920
=========================================================================================================
</TABLE>
* Included in the balance sheet captions "future policy benefits" and "policy
and contract claims".
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 51
PAGE 51
Notes to Consolidated Financial Statements, continued
(9) NOTES PAYABLE
The outstanding principal amounts of the notes payable consist of the following
as of December 31:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
Unsecured 9 1/4% Senior Subordinated Notes due 2003 (a) $ 114,646 $ 150,000
Bank Debt due in 1996 (b) - 100,000
Bank Debt with annual principal requirement (c) - 57,000
Revolving bank credit facility (d) 92,000 -
Unsecured 9% Notes payable due December 31, 1996 - 271
Other 3,679 -
-------------------------------
$ 210,325 $ 307,271
=========================================================================================================
</TABLE>
(a) Interest costs under the Notes totaled $13,545, $14,463 and $15,206 during
1996, 1995 and 1994, respectively. At December 31, 1996, the effective rate for
the Notes was approximately 9.6 percent.
(b) Interest costs under the $100,000 credit facility totaled $1,701 and
$362 in 1996 and 1995, respectively. The effective rate of interest charged on
amounts outstanding during 1996 was 7.2 percent.
(c) Interest costs under the $57,000 in bank debt totaled $836 and $3,839 in
1996 and 1995, respectively. The effective rate of interest charged on amounts
outstanding during 1996 was 8.1 percent.
(d) Interest costs under the $175,000 revolving credit facility totaled $1,558
in 1996. The effective rate of interest charged was 6.0% during 1996 on a
weighted average outstanding balance of $25,861.
The fair value of amounts outstanding as notes payable for the years ended
December 31, 1996 and 1995, amounted to $215,341 and $311,771, respectively.
All recorded amounts other than the Senior Subordinated Notes approximate
market as they carry variable rates of interest which adjust at least every 90
days. The fair value of the Senior Subordinated Notes is determined based upon
quotes from market makers.
The aggregate maturities of notes payable during each of the five years after
December 31, 1996, are as follows: 1997, $570; 1998, $617; 1999, $668; 2000,
$724; 2001, $92,951.
All of the Company's debt obligations contain financial and operating
covenants. The Company and its subsidiaries were in compliance with all
applicable covenants as of December 31, 1996.
The Company realized an after-tax extraordinary charge of $2,372 for the year
ended December 31, 1996. The charge represents (i) the write-off of $816 of
deferred financing costs related to the retirement of certain indebtedness of
the Company and its subsidiaries, and (ii) the write-off of $1,556 of deferred
financing, swap cancellation and other costs related to the repurchase of
approximately $35,354 in principal amount of the Senior Subordinated Notes.
(10) INCOME TAXES
The Company and a number of its non-insurance subsidiaries file a consolidated
federal income tax return with a July 31 year end, which differs from its
financial year end. Marketing One and its subsidiaries file a consolidated
federal income tax return with a December 31 year end. The AA Life, PLAIC, and
Salem Life groups each file a consolidated federal life insurance company
income tax return on a calendar year basis with their life insurance
subsidiaries.
Total income taxes for the years December 31, 1996, 1995, and 1994 were
allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Income from operations $ 45,418 $ 31,642 $ 21,437
Extraordinary item (1,277) - -
Shareholders' equity (1,864) 28,493 (13,015)
--------------------------------------------------
$ 42,277 $ 60,135 $ 8,422
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 52
PAGE 52
Notes to Consolidated Financial Statements, continued
The provisions for income tax expense (benefit) attributable to income before
extraordinary charge for the years ended December 31, 1996, 1995 and 1994, are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Current U.S. $ (1,285) $ (1,311) $ 1,174
Current foreign 2,319 4,519 2,210
Deferred U.S. 39,943 26,329 17,310
Deferred foreign 4,441 2,105 661
Charge in lieu of tax - - 82
--------------------------------------------------
Income tax expense $ 45,418 $ 31,642 $ 21,437
=========================================================================================================
</TABLE>
Taxes computed using the federal statutory rate of 35% in 1996, 1995 and 1994,
are reconciled to the Company's actual income tax expense attributable to
income before extraordinary charge as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Tax expense computed at statutory rate $ 43,294 $ 31,597 $ 20,504
Dividends received deduction (860) (85) (8)
Amortization of costs in excess of net assets acquired 2,796 2,295 1,834
Change in valuation allowance (1,265) (5,102) (2,388)
Foreign taxes net of U.S. tax benefit 1,507 2,937 1,413
Other (54) - 82
--------------------------------------------------
Income tax expense $ 45,418 $ 31,642 $ 21,437
=========================================================================================================
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax liabilities
at December 31, 1996 and 1995, relate to the following:
<TABLE>
<CAPTION>
1996 1995
==========================================================================================================
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred policy acquisition costs $ - $ 72,676 $ - $ 47,635
Present value of insurance and force - 95,252 - 99,905
Future policy benefits 65,999 - 85,266 -
Net operating losses 38,557 - 35,524 -
Foreign and alternative minimum tax credits 21,252 - 16,030 -
Unrealized gain on investment securities - 13,650 - 15,478
Other 23,048 14,830 35,545 19,801
---------------------------------------------------------
148,856 196,408 172,365 182,819
Valuation allowance (15,892) - (17,157) -
---------------------------------------------------------
$ 132,964 $ 196,408 $ 155,208 $ 182,819
=========================================================================================================
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995
was $15,892 and $17,157, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 and 1995, was a decrease of
$1,265 and of $104, respectively. If recognized as a tax benefit, a portion of
the valuation allowance totaling $7,349 would be allocated to reduce costs in
excess of net assets acquired.
In assessing the realization of deferred taxes, management considers whether it
is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
on the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon those considerations,
management believes it is more likely than not that the Company will realize
the benefits of these deductible differences, net of the existing valuation
allowance at December 31, 1996.
At December 31, 1996, the Company has life consolidated net operating loss
carryforwards of approximately $100,009 for tax return purposes. In addition,
OLIC and Peninsular have available, on a separate return basis, acquired net
operating loss
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 53
PAGE 53
Notes to Consolidated Financial Statements, continued
carryforwards of approximately $10,153. The utilization of acquired net
operating loss carryforwards is limited in any one year to the lesser of (i)
the life insurance group's consolidated taxable income or (ii) the subsidiary's
taxable income computed on a separate return basis.
The approximate net operating loss carryforwards for income tax purposes expire
as follows:
<TABLE>
<CAPTION>
LIFE LIFE
CONSOLIDATED SEPARATE
EXPIRATION DATE RETURN RETURN
=========================================================================================================
<C> <C> <C>
2004 $ - $ 5,072
2005 533 4,981
2006 - -
2007 15,967 -
2008 38,047 100
2009 9,985 -
2010 - -
2011 35,477 -
-------------------------------
$ 100,009 $ 10,153
=========================================================================================================
</TABLE>
Under provisions of the Life Insurance Company Tax Act of 1959, certain special
deductions were allowed to life insurance companies for federal income tax
purposes. These special deductions were repealed by the Tax Reform Act of 1984,
and the untaxed balances were frozen at their December 31, 1983 levels. These
balances, aggregate approximately $42,301 for the Company's life insurance
subsidiaries, and are subject to taxation if certain levels of premium income
or life insurance reserves are not maintained, or if the life insurance
companies make excess distributions to shareholders. It is not expected that a
tax would become due on any such balance and no deferred income taxes have been
provided. However, if such tax were to become payable, it would amount to
approximately $14,805.
(11) PREFERRED STOCK
The Company issued 2,875,000 shares of $50 redemption value $3.50 Series II
Convertible Preferred Stock (the "Series II Convertible Preferred Stock") on
August 2, 1996. The Series II Convertible Preferred Stock is convertible at the
option of the holder, unless previously redeemed, into 1.4327 shares of common
stock for each share, subject to adjustment in certain events. Dividends
accrued and unpaid as of December 31, 1996, were $1,677. The carrying value of
the Series II Convertible Preferred Stock approximates market due to the
short-term nature of the instrument.
On July 25, 1995, the Company issued 127,500 shares of 10% Series B Preferred
Stock and 178,500 shares of 9% Series C Preferred Stock to fund a portion of
the Integon Life purchase price. The Series B Preferred Stock and the Series C
Preferred Stock are mandatorily redeemable on or before June 30, 1997 and June
30, 1998, respectively. The redemption price of the Series C Preferred Stock is
subject to certain offsets related to the Integon Life stock purchase
agreement. Dividends accrued and unpaid were $1,939 and $557 on the Series B
Preferred Stock and $2,175 and $700 on the Series C Preferred Stock,
respectively, as of December 31, 1996 and 1995.
The Company issued 2,300,000 shares of $50 redemption value $3.375 Convertible
Preferred Stock (the "Convertible Preferred Stock") on July 14, 1995. The
Convertible Preferred Stock is convertible at the option of the holder, unless
previously redeemed, into 2.2124 shares of common stock for each share, subject
to adjustment in certain events. Dividends accrued and unpaid as of December
31, 1996 and 1995 were $1,660. The carrying value of the Convertible Preferred
Stock approximates market due to the short-term nature of the instrument.
In conjunction with the acquisition of AA Life in August 1994, the Company
issued 450,000 shares of nonvoting Series A Preferred Stock, $0.01 per share
par value and $100 per share redemption value. The Series A Preferred Stock was
redeemed on August 25, 1995, from the proceeds received from the issuance of
the Convertible Preferred Stock. During 1995, and 1994, the Company paid or
accrued dividends amounting to $1,725 and $1,151, respectively.
(12) STOCK OPTIONS AND WARRANTS
The Company has established two management stock option plans, the 1992 Stock
Option Plan which set aside up to 475,635 shares for grant and the 1996 Stock
Option Plan which set aside up to 2,800,000 shares for grant. Options granted
under the 1992 Stock Option Plan are deemed to be in four equal units which are
earned over four years from the
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 54
PAGE 54
Notes to Consolidated Financial Statements, continued
date of grant and are exercisable during a one-year period immediately
following the fourth anniversary of the date of grant. The 1996 Stock Option
Plan allows for awards of stock or options subject to such terms, conditions,
and restrictions, and/or limitations, if any, as the Stock Option Committee of
the Board of Directors deems appropriate.
The Company has also established a senior management stock award plan ("Warrant
Plan"). The Warrant Plan allows for grants to senior executive officers of
PennCorp and Directors of PennCorp who are not executive officers of the
Company. Grant prices are determined based on the average price of the shares
traded on the date of grant. Warrants granted under the Warrant Plan are
determined by the Compensation Committee and are exercisable at such times and
in such amounts as the Compensation Committee shall determine, but no warrant
granted under the Warrant Plan will be exercisable more than ten years after
the date of grant. Upon change of control (as defined) of PennCorp, all
outstanding warrants become immediately vested and exercisable, and any
warrants that remain unexercised shall be canceled and replacement warrants
shall be issued by the surviving entity.
As part of an employment agreement effective August 1990, the Company issued to
a former officer of the Company, warrants to purchase up to 570,760 shares of
the common stock of the Company at any time up to 10 years from the date of the
agreement. The warrants are exercisable at a price of $4.00 per share which was
fair value on the date of grant.
The Company has established a U.S. Sales Manager incentive stock option plan in
which the senior sales manager of one of the Company's insurance subsidiaries
may earn stock options in the amount of 275,000 shares over a five-year period,
subject to achieving certain performance goals, in addition to an initial grant
of 100,000 options. Such options are vested immediately as earned, except for
the initial 100,000 which vest in September 1999, and option prices range from
$15 per share, for the initial 100,000 options, to the fair value of the common
stock of the Company on the date of grant for those shares subject to
performance goals.
The following table summarizes data relating to stock options and warrants
activity and associated weighted average option exercise price information for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Number of shares subject to option/warrant:
Outstanding at beginning of year 2,329,754 $ 10.86 2,261,981 $ 9.61 2,221,034 $ 8.78
Granted 44,000 $ 31.09 110,000 $ 17.64 137,000 $ 15.84
Expired/canceled (59,000) $ 13.82 (42,227) $ 13.43 (96,053) $ 13.24
Exercised (147,867) $ 5.40 --- $ --- --- $ ---
------------------------------------------------------------------
Outstanding at end of year 2,166,887 $ 11.56 2,329,754 $ 10.86 2,261,981 $ 9.61
================================================================================================================
Exercisable at end of year 2,105,438 $ 11.00 --- $ --- --- $ ---
================================================================================================================
Available for future grant at end of year 2,792,000 144,063 262,024
================================================================================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options and warrants as of December 31, 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
OPTIONS/WARRANTS OUTSTANDING OPTIONS/WARRANTS EXERCISABLE
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$4.00 - $5.40 893,887 5.8 4.51 893,887 4.51
$14.00 - $19.58 1,229,000 6.2 15.96 1,211,551 15.78
$27.25 - $32.43 44,000 8.4 31.70 --- ---
- ----------------------------------------------------------------------------------------------------------
2,166,887 2,105,438
==========================================================================================================
</TABLE>
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option and
warrant plans and, accordingly, does not recognize compensation cost. If the
Company had elected to recognize compensation cost based on the fair value of
the options and warrants as of the grant date as prescribed by SFAS No. 123,
the reduction in net income applicable to common stock and earnings per share
would have been immaterial.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 55
PAGE 55
Notes to Consolidated Financial Statements, continued
(13) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Cash generated by the Company's insurance subsidiaries is made available to
PennCorp principally through periodic payments of principal and interest on
surplus debentures issued by PLAIC, Salem Life and Pioneer Security,
(collectively, the "Surplus Note Companies"). The amounts outstanding under the
surplus debentures totalled $367.9 million and $315.8 million as of December
31, 1996 and 1995, respectively. Surplus debentures generally require (subject
to availability of statutory capital and surplus and in some instances,
regulatory approval) principal and interest payments to be made periodically in
amounts sufficient to allow PennCorp to meet its cash requirements.
The Company's cash flow is derived principally from dividends and principal and
interest payments on the surplus debentures issued by the insurance
subsidiaries.
Dividend payments of the Company's insurance subsidiaries are limited by, or
subject to the approval of the insurance regulatory authority of each
subsidiary's state of domicile. Such dividend requirements and approval
processes vary significantly from state to state. In 1997, the insurance
subsidiaries will be able to pay a maximum of $27,165 in dividends to the
Company without prior regulatory approval. In 1997, the insurance subsidiaries,
subject to availability of cash and statutory capital and surplus, could pay a
maximum of $50,730 on surplus note payments to the Company.
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995, totaled
$305,126 and $167,753, respectively. Shareholders' equity of the Company's life
insurance subsidiaries included in the consolidated balance sheet totaled
$592,304 and $410,228 at December 31, 1996 and 1995, respectively. Statutory
net income (loss) of the Company's life insurance subsidiaries as reported to
regulatory authorities totaled $(21,330), $18,581 and $20,156 for the years
ended December 31, 1996, 1995 and 1994, respectively. Surplus note interest
expense of $51,254, $24,170 and $11,527 for the years ended December 31, 1996,
1995, and 1994, respectively, is included in statutory net income (loss).
The Company's Canadian branch and Canadian subsidiary report to Canadian
regulatory authorities based upon Canadian statutory accounting principles that
vary in some respects from U.S. statutory accounting principles. Consolidated
Canadian net assets based upon Canadian statutory accounting principles were
$51,567 and $43,186 as of December 31, 1996 and 1995, respectively.
Remittances to PLIC from the Canadian operations totaled $-, $2,485 and $5,761
for the years ended December 31, 1996, 1995 and 1994, respectively.
(14) RETIREMENT AND PROFIT SHARING PLANS
On October 1, 1990, the Company established a defined contribution retirement
plan (the "Defined Contribution Plan") for all employees of the Company who
have attained age 21, and for certain agents whose commission earnings
represent more than 50% of their income from the Company. Contributions to the
Defined Contribution Plan are made pursuant to salary deferral elections by
participants in an amount equal to 1% to 15% of their annual compensation. In
addition, the Company makes matching contributions in an amount equal to 50% of
each participant's salary deferral to a maximum of 3% of annual compensation.
The Defined Contribution Plan also provides for a discretionary employer profit
sharing contribution, which is determined annually by the Board of Directors
for the succeeding plan year. Profit sharing contributions are credited to
participant's accounts on the basis of their respective compensation in
accordance with a formula that provides a higher percentage contribution for
compensation in excess of the federal Social Security wage base. Salary
deferral contribution accounts are at all times fully vested, while matching
contribution accounts vest ratably from one to two years of service, and profit
sharing contribution accounts vest ratably from one to five years of service.
All participant accounts are fully vested at death, disability or attainment of
age 65. Payment of vested benefits under the Defined Contribution Plan may be
elected by a participant in a variety of forms of payment. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes. Expenses related to this plan for the years ended
December 31, 1996, 1995 and 1994, amounted to $1,520, $1,335 and $1,105,
respectively.
The Company has an established bonus plan for insurance subsidiary officers.
The amount available to pay awards for any year is determined by a committee of
senior executives of the Company and is subject to the review and
recommendation of the Compensation Committee and approval of the Board of
Directors of the Company. Awards are based primarily on the income growth of
the Company and the performance of eligible participants. The Company accrued
or paid $1,144, $691 and $180 under this plan during the years ended December
31, 1996, 1995 and 1994, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 56
PAGE 56
Notes to Consolidated Financial Statements, continued
If the Company meets established performance goals, the Company's two most
senior officers are eligible to receive annual cash bonuses based primarily on
annual growth rates in fully diluted earning per share. Bonus awards range from
0% to 200% of a predetermined target annually. During 1996, the Company did not
accrue for such bonuses as the employment arrangements containing the bonus
plan are contingent upon the purchase by the Company of the Fickes and Stone
Knightsbridge Interests (see Notes 15 and 16 below).
Prior to its acquisition by the Company, Integon provided postretirement life
and health benefits for employees who retired at age 55 or later and agents who
retired at age 65 or later with 10 or more years of service. A closed group of
agent retirees under age 65 was also eligible for benefits. Spouses, surviving
spouses and dependent children were eligible for life and health benefits.
Retired employees under age 65 are covered by a health maintenance organization
under which benefits are generally paid at 100% after various copayments.
Retired agents or employees outside the service area are covered by a
self-funded indemnity plan which has a deductible with 20%-30% coinsurance.
Retirees contribute toward their own benefits and contributions are required
for spouses and dependent children. Under the plan, health benefits for
retirees are the same as before retirement, except amounts paid by Medicare are
excluded from consideration.
The plan was terminated as of the date of acquisition.
Postretirement benefits are accrued (but not funded) for eligible retirees. The
components of the accumulated postretirement benefit obligation as of December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
Retirees $ 5,279 $ 5,253
Fully eligible active plan participants - 1,778
Other active plan participants - 658
-------------------------------
Accrued postretirement benefit obligation $ 5,279 $ 7,689
=========================================================================================================
</TABLE>
For the year ended December 31, 1996, the postretirement benefit liability was
calculated assuming an annual trend rate in health care inflation of 8% in 1997
grading down to 5.5% in 2000 and after. If the health care cost trend rate
assumption increased by 1%, the accumulated postretirement benefit obligation
as of December 31, 1996, would increase $198 or 3.8%.
(15) RELATED PARTY TRANSACTIONS
During 1995, two of the Company's officers and directors, Messrs. Stone and
Fickes, formed a fund, Knightsbridge Capital Fund I, L.P., ("Knightsbridge")
for the purpose of making equity and equity linked investments in companies
engaged primarily in the life insurance industry. Knightsbridge has received
subscriptions for approximately $92,000 in limited partnership interests,
including a $15,000 subscription from the Company.
In the second half of 1995, the Company and Knightsbridge determined that a
joint venture strategy was in the best interest of both parties. As part of
that joint venture, Knightsbridge provides PennCorp with a right of first
refusal with respect to all insurance transactions considered by Knightsbridge.
The joint venture entity formed for this purpose is Knightsbridge Management,
L.L.C. ("KM"). PennCorp participates in 45% of the net distributable income of
KM.
The Company has established an independent committee of the Board of Directors
to oversee the relationship between PennCorp and Knightsbridge. KM has the
primary responsibility for negotiating the terms of, and arranging the
financing for PennCorp or PennCorp/Knightsbridge shared transactions. Certain
of those individuals involved in the daily operations of KM are also officers
of the Company.
KM receives management fees from all of its limited partners, including the
Company, for the management of Knightsbridge. KM also receives payment in kind
consideration in lieu of additional management fees from PennCorp for providing
corporate and financial management services to the Company. Fees received by KM
from the Knightsbridge limited partners including PennCorp, as well as the
management fees paid in kind by the Company are subject to offset in future
periods based upon a portion of transaction fees generated by KM.
In February 1996, the PennCorp Board of Directors (the "PennCorp Board") and the
principals of Knightsbridge began discussions on consolidating Messrs. Stone's
and Fickes' outside interests under PennCorp. Such discussions culminated in a
restructuring of the Knightsbridge relationship including the following
completed and pending transactions (see Note 16) (i) Messrs. Stone and Fickes
entered into five-year employment agreements, (ii) the proposed acquisition of
the Fickes and Stone Knightsbridge Interests, (iii) the proposed acquisition of
the Fickes and Stone interests in SW Financial, subject to certain
contingencies, and (iv) the purchase by the Company, from the limited partners
of Knightsbridge, the right to acquire UC Life for $7,500.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 57
PAGE 57
Notes to Consolidated Financial Statements, continued
For the years ended December 31, 1996 and 1995, PennCorp paid or accrued $2,548
and $3,900 in transaction fees to KM related to the UC Life and SW Financial
transactions, respectively. During 1996, certain of the Company's affiliates
and subsidiaries paid management fees to KM amounting to $2,190 which have been
contingently expensed in the accompanying financial statements pending the
shareholder vote on the acquisition of the Fickes and Stone Knightsbridge
Interests. SW Financial and UC Life paid KM investment advisory fees totalling
$1,813 and $- during 1996 and 1995, respectively. In addition, PennCorp
received a $1,000 stand-by commitment fee from SW Financial for contingent
financing on a real estate transaction. SW Financial did not draw upon the
commitment.
As required by the joint venture agreement, all bonuses paid to officers of KM
who are also officers of PennCorp must be approved by the Compensation
Committee of the Board of Directors of PennCorp. During 1995, the Company paid
or accrued for KM incentive bonuses to certain individuals who are officers of
PennCorp and KM of approximately $2,400.
In August 1995, the Company sold its preferred and common stock position in a
company which has historically provided investment management services to the
PennCorp insurance subsidiaries and for which a senior executive officer of the
investment management firm is a member of the PennCorp Board of Directors. Fees
paid for such investment management services amounted to $895, $738 and $789
during 1996, 1995 and 1994, respectively.
Certain individuals, who are shareholders, directors and officers of PennCorp,
and affiliates of these individuals, provide services to the Company. During
1996 and 1995, payments aggregating $250 and $210, respectively, were made to
these individuals and their affiliates for services provided in connection with
the Company's acquisition activity. During 1994, fees amounting to $813 were
paid in connection with the establishment of PennCorp's Canadian subsidiary,
the acquisition of AA Life, and certain reinsurance transactions.
(16) OTHER COMMITMENTS AND CONTINGENCIES
On January 22, 1997, the Company filed with the Securities and Exchange
Commission ("SEC"), a preliminary PennCorp Financial Group, Inc. and Washington
National Corporation Joint Proxy Statement and Prospectus ("Joint Proxy
Statement") in which the Company, pending final review by the SEC, will be
soliciting shareholder approval for the following transactions: (i) the
Washington National Merger, (ii) the acquisition of the Controlling Interest in
SW Financial, (iii) the acquisition of the Fickes and Stone Knightsbridge
Interests, and (iv) other items.
Under the terms of the amended and restated Washington National Merger
agreement, Washington National shareholders will receive the right to receive
$29.50 per share of consideration in the form of cash, PennCorp Common Stock,
or a combination of cash and PennCorp Common Stock. The aggregate consideration
to be received by the Washington National shareholders will be approximately
$377,000, of which no more than $100,000 will be payable in cash.
PennCorp will receive its right to acquire the Controlling Interest in SW
Financial through the assignment by Fickes and Stone and Knightsbridge ("the
Controlling Parties") of certain rights including common stock and common stock
equivalents of SW Financial. The Controlling Parties will receive aggregate
cash consideration ranging from $67,500 to $69,600 (not including expenses)
depending upon the outcome of certain contingencies.
In addition, PennCorp has proposed to acquire the Fickes and Stone
Knightsbridge Interests for total consideration estimated to be $10,000. Fickes
and Stone will each receive consideration in the form of estimated annual
payments of $330 due April 15, 1997, each year through 2001 and the by issuance
by PennCorp of 169,491 shares of PennCorp Common Stock to each of Fickes and
Stone on April 15, 2001.
It is anticipated that PennCorp common shareholders will vote on the above
transactions in April 1997, and, subject to shareholder approval, the Company
intends to consummate such transactions as expeditiously as possible.
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $8,416,
$8,489 and $7,172 in 1996, 1995 and 1994, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 58
PAGE 58
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Minimum lease commitments are:
<C> <C>
1997 $ 8,806
1998 4,269
1999 2,852
2000 1,716
2001 796
2002 and thereafter 177
------------
Total minimum payments required* $ 18,616
=========================================================================================================
</TABLE>
* Total minimum lease payments have not been reduced by minimum sublease
rentals of $947 due in the future under noncancelable subleases.
In January 1996, stockholder derivative lawsuits styled Tozour Energy Systems
Retirement Plan v. David J. Stone et al, and PennCorp Financial Group, Inc.,
C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J. Stone et al, and
PennCorp Financial Group, Inc., C.A. No. 14795 (the "Miller Complaint") were
filed against PennCorp and each of its directors, individually, in the Delaware
Court of Chancery. The suits allege that the SW Financial Investment involved
the usurpation of a corporate opportunity and a waste of PennCorp's assets by
Messrs. Stone and Fickes, and that the directors of PennCorp in approving that
transaction, failed to act in good faith and breached their fiduciary duties,
including the duty of loyalty to PennCorp and its stockholders, having favored
the interests of Messrs. Stone and Fickes over PennCorp and its stockholders.
These lawsuits seek judgments against each of the defendants for the amount of
damages sustained, or to be sustained, by the Company as a result of the
breaches of fiduciary duty alleged in the complaint, the imposition of a
constructive trust for the benefit of the Company on profits or benefits
obtained by any defendant through the alleged breaches of fiduciary duty,
attorney's fees and costs, and such other relief as the court determines to be
just, proper or equitable.
The defendants in the Tozour Case have filed a motion seeking its dismissal on
the ground that the plaintiff failed to comply with the requirements of Delaware
law before instituting a derivative suit and intend to defend the lawsuit
vigorously. Because the Company has not been served with the Miller Complaint,
no action has been taken in that case, although the Company would also defend it
vigorously. The defendants believe, however, that it would not be in the best
interests of PennCorp and its shareholders to expend considerable management and
director time and to incur substantial expenses to litigate the actions.
Consequently, PennCorp's legal advisors have met or spoken by telephone with the
plaintiff's counsel on several occasions to discuss the terms of a potential
settlement.
The defendants and the plaintiff's counsel are negotiating a stipulation of
settlement (the "Proposed Settlement") of the shareholder derivative actions.
The Proposed Settlement consists of the following principal elements: (i)
Messrs. Stone and Fickes will cancel the 335,564 SW Financial common stock
warrants they hold for no consideration enabling PennCorp to purchase the SW
Financial Controlling Interest for $67.5 million, reducing the price to be paid
by PennCorp for the SW Financial Controlling Interest by approximately $2.0
million, (ii) that the PennCorp Board will proceed with the purchase of The
Fickes and Stone Knightsbridge Interests, having received a fairness opinion of
a nationally recognized investment banking firm with respect to the price to be
paid for The Fickes and Stone Knightsbridge Interests, (iii) the PennCorp Board
will proceed with the acquisition of the SW Financial Controlling Interest,
having received a fairness opinion of a nationally recognized investment banking
firm with respect to the price to be paid for the SW Financial Controlling
Interest; (iv) the PennCorp Board will submit the purchase of The Fickes and
Stone Knightsbridge Interests and the SW Financial Controlling Interest to a
vote of a majority of the PennCorp stockholders present at the Stockholders
Meeting and entitled to vote, and stockholders must approve both transactions,
(v) Messrs. Stone and Fickes will abstain from voting on the proposals to
approve the purchase of The Fickes and Stone Knightsbridge Interests and the SW
Financial Controlling Interest, and (vi) the plaintiff's counsel will be
entitled to conduct confirmatory discovery.
Certain other lawsuits have been brought against the Company's life insurance
and non-life subsidiaries in the normal course of business involving the
settlement of various matters seeking compensatory and in some cases punitive
damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
Effective January 1, 1996, the Company outsourced the vast majority of its data
center operations and administrative systems programming to a third party
vendor. The processing agreement extends through December 2002 and requires the
Company or its insurance subsidiaries to make payments ranging from
approximately $8,399 to $9,248 during each of the contract years. The contract
has standard provisions for early cancellation, including breakage fees. As
part of the outsourcing agreement, the Company has agreed to provide a line of
credit which may be drawn upon during the first two years, with repayment in
nearly equal monthly installments over the remainder of the contract.
The Company has agreed to provide guarantees of indebtedness of certain
officers and directors up to a maximum of $10,000.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 59
PAGE 59
Notes to Consolidated Financial Statements, continued
The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. Assessments from guaranty associations, which
have not been material, are recorded as assessments when received.
The Company has guaranteed approximately $12,800 in mortgage loans sold to
third parties.
(17) REINSURANCE
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$300 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.
The Company cedes varying amounts of certain accident and sickness policies up
to a maximum cession of $240, as well as varying portions of certain disability
income policies on a facultative basis.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The effect of
reinsurance on policy revenues earned is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Direct policy revenues and amounts
assessed against policyholders $ 358,825 $ 310,693 $ 250,167
Reinsurance assumed 1,320 2,307 765
Reinsurance ceded 12,055 11,111 6,510
--------------------------------------------------
Net premiums and amounts earned $ 348,090 $ 301,889 $ 244,422
=========================================================================================================
</TABLE>
Fees incurred for financial reinsurance were approximately, $265 in 1996, $339
in 1995, and $515 in 1994.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 60
PAGE 60
UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the two
years ended December 31, 1996 and 1995:
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
1996 QUARTER-ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
==========================================================================================================
<S> <C> <C> <C> <C>
Total revenues $132,178 $137,424 $148,370 $ 172,172
Net income before extraordinary charge $ 20,154 $ 25,917 $ 22,564 $ 30,748
Net income applicable to common stock $ 16,647 $ 23,208 $ 18,006 $ 24,504
=======================================================
Net income per share of common stock - primary $ 0.66 $ 0.80 $ 0.61 $ 0.84
=======================================================
Net income per share of common stock -
fully diluted $ 0.60 $ 0.73 $ 0.58 $ 0.76
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER-ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
==========================================================================================================
<S> <C> <C> <C> <C>
Total revenues $ 88,694 $ 88,730 $120,112 $ 124,802
Net income before extraordinary charge $ 11,966 $ 15,022 $ 20,698 $ 15,667
Net income applicable to common stock $ 11,100 $ 15,022 $ 18,740 $ 12,810
========================================================
Net income per share of common stock - primary $ 0.54 $ 0.60 $ 0.79 $ 0.54
========================================================
Net income per share of common stock -
fully diluted $ - $ - $ 0.73 $ 0.51
==========================================================================================================
</TABLE>
<PAGE> 61
PAGE 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is incorporated by reference to
"Election of Directors" and "Executive Officers" in the Company's Proxy
Statement for its 1997 Annual Meeting of the Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to
"Director-Fees", "Executive Compensation and Other Information", and
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement for its 1997 Annual Meeting of Shareholders, except that the
information required by paragraphs (k) and (l) of Item 402 of Regulation S-K
and set forth in such Proxy Statement is specifically not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference to
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents
1. The financial statements of PennCorp Financial Group,
Inc. and Subsidiaries set forth on pages 35 through 60, and the Independent
Auditors' Report set forth on page 35 hereof are in response to the
information required by this Item.
2. An index to the financial statement schedules
required to be filed by Item 8 of this Report on Form 10-K is set forth
immediately before the attached financial statement schedules on page 75 of
this filing.
3. Exhibits
2.1 Purchase Agreement among I.C.H. Corporation
SWL Holding Corporation, Care Financial
Corporation, Facilities Management
Installation, Inc. and Southwestern
Financial Corporation, Southwestern Financial
Services Corporation and PennCorp Financial
Group, Inc., dated as of December 1, 1995 and
Addendum to Purchase Agreement dated as of
December 14, 1995. (6)
2.2 Amended and Restated Stock Purchase
Agreement between United Companies Financial
Corporation and Pacific Life and Accident
Insurance Company dated as of July 24, 1996.
(4)
<PAGE> 62
PAGE 62
2.3 Amended and Restated Agreement and Plan of
Merger dated as of November 25, 1996 by and
between PennCorp Financial Group, Inc. and
Washington National Corporation. (2)
3.1 Restated By-Laws of PennCorp Financial Group,
Inc. (12)
3.2 Second Restated Certificate of Incorporation
of PennCorp Financial Group, Inc. as
amended. (7)
4.1 Certificate of Elimination for Series A
Cumulative Preferred Stock. (5)
4.2 Certificate of Designation of Series B
Preferred Stock. (5)
4.3 Certificate of Designation of Series C
Preferred Stock. (5)
4.4 Corrected Certificate of Designation of
$3.375 Convertible Preferred Stock. (5)
4.5 Certificate of Designation of $3.50
Series II Convertible Preferred Stock (3)
4.6 Indenture between PennCorp Financial Group,
Inc. and The Bank of New York, as trustee,
with respect to 9 1/4% Senior Subordinate
Notes due 2003. (11)
10.1 Surplus Debenture Number Four in the
original principal amount of $162,539,890,
issued by Pacific Life and Accident
Insurance Company to PennCorp Financial
Group, Inc., dated January 1, 1994. (10)
10.2 Surplus Debenture Number Five in the
original principal amount of $17,606,203,
issued by Pacific Life and Accident
Insurance Company to PennCorp Financial
Group, Inc., dated September 29, 1994. (9)
10.3 Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by
Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc.,
dated July 24, 1996. (1)
10.4 10% Promissory Note in the original
principal amount of $30,661,996, issued by
American-Holdings Corporation to
Pennsylvania Life Insurance Company, dated
July 1, 1996. (1)
10.5 Certificate of Contribution in the original
principal amount of $54,332,790 issued by
Integon Financial Life Insurance
Corporation to Integon Life Corporation,
dated July 25, 1995. (5)
<PAGE> 63
PAGE 63
MANAGEMENT COMPENSATION RELATED
AGREEMENTS
10.6 Employment Agreement, dated as of August
19, 1990, between PennCorp Financial Group,
Inc. and William M. McCormick. (13)
10.7 PennCorp Financial, Inc. Retirement and
Savings Plan. (13)
10.8 PennCorp Financial, Inc. Executive Officer
Incentive Plan. (13)
10.9 PennCorp Financial Group, Inc. 1992 Stock
Option Plan. (13)
10.10 PennCorp Financial Group, Inc. Senior
Management Warrant Award Program. (13)
10.11 Form of Restricted Stock Agreement By and
Between PennCorp Financial Group, Inc. and
certain participants, effective as of April
1, 1994. (9)
10.12 Employment Agreement between PennCorp
Financial Group, Inc. and David J. Stone
entered into June 7, 1996. (1)
10.13 Employment Agreement between PennCorp
Financial Group, Inc. and Steven W. Fickes
entered into June 7, 1996. (1)
10.14 PennCorp Financial Group, Inc. 1996 Stock
Award and Stock Option Plan (1)
10.15 PennCorp Financial Group, Inc. 1996 Senior
Executive Annual Incentive Award Plan (1)
10.16 Real Estate Purchase and Sale Agreement
between Peoples Security Life Insurance
Company and PennCorp Financial Group, Inc.,
dated March 24, 1995. (8)
10.17 Registration Rights Agreement dated as of
December 14, 1995, between PennCorp
Financial Group, Inc., I.C.H. Corporation,
SWL Holding Corporation and Care Financial
Corporation. (6)
10.18 Conversion, Standstill and Registration
Rights Agreement between United Companies
Financial Corporation and PennCorp
Financial Group, Inc. dated as of July 24,
1996. (1)
10.19 Registration Rights Agreement dated as of
August 2, 1996, by and among PennCorp
Financial Group, Inc., Smith Barney
Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch,
Pierce, Fenner & Smith Incorporate. (1)
10.20 Stockholders Agreement dated December
14, 1995 between Southwestern Financial
Corporation and the Security holders
listed on the signature pages thereof. (6)
<PAGE> 64
PAGE 64
11 Computations of earnings per share. (1)
12 Computation of ratio of earnings to fixed
charges. (1)
21 List of subsidiaries of the Registrant. (1)
22 Auditors consent. (1)
27 Financial Data Schedule. (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on December 4, 1996,
providing a copy of the Amended and Restated Agreement and Plan of
Merger with Washington National Corporation.
(3) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. filed with the Securities and Exchange
Commission on October 10, 1996.
(4) Such exhibit is incorporated by reference to the Form 8-K dated July
24, 1996 was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on August 8, 1996 relating to the
financial statements and pro forma financial information of the United
Companies Life Insurance Company.
(5) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1995 of PennCorp Financial
Group, Inc.
(6) Such exhibit is incorporated by reference to the Form 8-K dated
December 14, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on December 28, 1995
related to its investment in Southwestern Financial Corporation.
(7) Such exhibit is incorporated by reference to the Form 8-A dated July
11, 1995 which was filed by PennCorp Financial Group, Inc. with the
Securities and Exchange Commission on July 12, 1995.
(8) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended June 30, 1995 of PennCorp
Financial Group, Inc.
(9) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended September 30, 1994 of PennCorp
Financial Group, Inc.
(10) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended June 30, 1994 of PennCorp
Financial Group, Inc.
(11) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1993 of PennCorp Financial
Group, Inc.
(12) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1992 of PennCorp Financial
Group, Inc.
(13) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33-50530) of PennCorp
Financial Group, Inc. filed on August 6, 1992.
(b) Reports on Form 8-K.
A report on Form 8-K/A (Amendment No. 1) dated
January 29, 1996 was filed with the Securities and Exchange
Commission on February 21, 1996 related to the Company's
economic participation in Southwestern Financial Corporation
providing the audited combined financial statements as of
December 31, 1994 and 1993 and for each of the years in the
three-year period ended December 31, 1994
<PAGE> 65
PAGE 65
and unaudited combined financial statements as of September
30, 1995 and for the nine-month period ended September 30,
1995 for the insurance operations of I.C.H. Corporation
acquired by Southwestern Financial Corporation, the Notes
thereto and the Independent Auditors' Report with respect
thereto, and the unaudited pro forma statements of operations
of the Company for the year ended December 31, 1994 and for
the nine-months ended September 30, 1995, and the unaudited
pro forma balance sheet of the Company as of September 30,
1995 and the Notes thereto, reflecting the consummation of the
investment by the Company in Southwestern Financial
Corporation.
A report on Form 8-K, dated July 17, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial
Group, Inc. on July 17, 1996, relating to its acquisition of
United Companies Life Insurance Company.
A report on Form 8-K, dated August 5, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial
Group, Inc. on August 5, 1996, relating to the press release
announcing the pricing of its $3.50 Series II Convertible
Preferred Stock.
A report on Form 8-K, dated July 24, 1996 was filed with the
Securities and Exchange Commission by PennCorp Financial
Group, Inc. on August 8, 1996 relating to the financial
statements and pro forma financial information of the United
Companies Life Insurance Company.
A report on Form 8-K, dated November 15, 1996, was filed with
the Securities and Exchange Commission by PennCorp Financial
Group, Inc. on November 15, 1996, relating to the press
release announcing the signing of a definitive Merger
Agreement with Washington National Corporation.
A report on Form 8-K, dated November 25, 1996, was filed with
the Securities and Exchange Commission by PennCorp Financial
Group, Inc. on December 4, 1996, providing a copy of the
Amended and Restated Agreement and Plan of Merger with
Washington National Corporation.
<PAGE> 66
PAGE 66
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, PennCorp Financial Group, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PennCorp Financial Group, Inc.
(Registrant)
By: /s/ David J. Stone
------------------------------------
David J. Stone
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
March 24 , 1997
------------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Steven W. Fickes /s/ Allan D. Greenberg
- ------------------------------------------- -------------------------------------------
Steven W. Fickes Allan D. Greenberg
President, Chief Financial Officer and Director
Director (Principal Financial and
Accounting Officer)
March 24 , 1997 March 24 , 1997
- ------------------------------------------- -------------------------------------------
Date Date
/s/ William M. McCormick /s/ Thomas A. Player
- ------------------------------------------- -------------------------------------------
William M. McCormick Thomas A. Player
Director Director
March 24 , 1997 March 24 , 1997
- ------------------------------------------- -------------------------------------------
Date Date
/s/ Kenneth Roman /s/ Bruce W. Schnitzer
- ------------------------------------------- -------------------------------------------
Kenneth Roman Bruce W. Schnitzer
Director Director
March 24 , 1997 March 24 , 1997
- ------------------------------------------- -------------------------------------------
Date Date
/s/ Maurice W. Slayton /s/ David C. Smith
- ------------------------------------------- -------------------------------------------
Maurice W. Slayton David C. Smith
Director Director
March 24 , 1997 March 24, 1997
- ------------------------------------------- -------------------------------------------
Date Date
/s/ David J. Stone
----------------------------------------------
David J. Stone
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
March 24 , 1997
----------------------------------------------
Date
</TABLE>
<PAGE> 67
PAGE 67
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements:
Reference is made to data appearing on pages 35 through 60, and to the
Independent Auditors' Report appearing on page 35 hereof.
<TABLE>
<CAPTION>
Schedules: * Page
- ---------- ----
<S> <C>
Independent Auditors' Report - Financial Statement Schedules ...........
Schedule I Summary of Investments - Other than Investments
in Related Parties..................................... 68
Schedule II Condensed Financial Information of Registrant.......... 69
Schedule III Supplementary Insurance Information.................... 72
Schedule IV Reinsurance............................................ 73
Schedule V Valuation and Qualifying Accounts...................... 74
</TABLE>
* All other schedules have been omitted as they are not applicable or not
required, or the information is given in the financial statements, notes hereto
or in other schedules.
<PAGE> 68
Page 68
SCHEDULE I
PENNCORP FINANCIAL GROUP, INC.
Summary of Investments - Other Than Investments in Related Parties
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Amount At
Which Shown
Market In The
Type of Investment Cost Value Balance Sheet
- ----------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Fixed Maturities held for investment:
Bonds:
United States Government agencies and authorities $ -- $ -- $ --
States, municipals and political subdivisions -- -- --
Foreign governments -- -- --
Other Special Revenue -- -- --
Public Utilities -- -- --
All other corporate bonds 87,330 89,759 87,330
Redeemable preferred stock -- -- --
---------- ---------- ----------
Total fixed maturities held for investment $ 87,330 $ 89,759 $ 87,330
---------- ---------- ----------
Fixed maturities held for sale:
Bonds:
United States Government agencies and authorities 915,300 928,640 928,640
States, municipals and political subdivisions 77,661 78,285 78,285
Foreign governments 80,491 88,670 88,670
Other Special Revenue 720,208 729,204 729,204
Public Utilities 101,858 105,253 105,253
All other corporate bonds 1,045,462 1,063,107 1,063,107
Redeemable preferred stock 770 766 766
---------- ---------- ----------
Total fixed maturities held for sale $2,941,750 $2,993,925 $2,993,925
---------- ---------- ----------
Fixed maturities trading:
Bonds:
Other Special Revenue 31,021 31,140 31,140
Equity securities 17,511 20,867 20,867
Mortgage loans and real estate 280,520 284,929 280,520
Policy Loans 145,976 145,976 145,976
Short term investments 63,113 63,113 63,113
Other investments 23,326 23,326 23,326
---------- ---------- ----------
Total investments $3,590,547 $3,653,035 $3,646,197
========== ========== ==========
</TABLE>
<PAGE> 69
PAGE 70 OF 83
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PENNCORP FINANCIAL GROUP, INC.
(Parent company only)
CONDENSED STATEMENTS OF EARNINGS
For the years ended December 31,
<PAGE> 70
Page 69
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Interest income from subsidiaries $ 35,525 $ 27,680 $ 9,773
Other interest income 2,428 638 30
Other income 423 3,985 288
-------- -------- --------
Total revenue 38,376 32,303 10,091
-------- -------- --------
Operating expenses:
General and administrative expenses 2,493 2,257 784
Interest and amortization of deferred debt issuance costs 17,920 15,938 16,756
-------- -------- --------
Total operating expenses 20,413 18,195 17,540
-------- -------- --------
Income (loss) before income taxes, equity in undistributed
earnings of subsidiaries and extraordinary charge 17,963 14,108 (7,449)
Income tax expense (benefit) 251 4,139 (2,507)
-------- -------- --------
Net income (loss) before equity in undistributed earnings of
subsidiaries and extraordinary charge 17,712 9,969 (4,942)
Equity in undistributed earnings of subsidiary 81,029 53,384 42,086
-------- -------- --------
Net income before extraordinary charge 98,741 63,353 37,144
Extraordinary charge, net of tax benefit of ($932, $ - ,$ - ) (1,730) -- --
-------- -------- --------
Net Income $ 97,011 $ 63,353 $ 37,144
======== ======== ========
</TABLE>
<PAGE> 71
Page 70
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Investments:
Investment in subsidiaries $ 846,568 $ 568,114
Notes receivable from subsidiaries 235,146 183,364
----------- -----------
Total investments 1,081,714 751,478
Cash and short term investments 2,099 1,713
Accured investment income due from subsidiaries 3,918 18,808
Deferred debt issuance costs 2,482 3,824
Furniture and fixtures 463 499
Other assets 10,728 5,217
----------- -----------
$ 1,101,404 $ 781,539
=========== ===========
LIABILITIES
Notes payable 206,646 250,000
Due to subsidiaries 12,778 13,322
Accrued expenses and other liabilities 4,117 21,704
----------- -----------
Total liabilities 223,541 285,026
----------- -----------
Mandatory redeemable preferred stock, Series B 14,689 13,307
Mandatory redeemable preferred stock, Series C 18,175 16,700
SHAREHOLDERS' EQUITY
$3.375 Convertible preferred stock 110,513 110,513
$3.50 Series II convertible preferred stock 139,157 --
Common stock 286 229
Additional paid in capital 393,156 220,482
Treasury stock (3,370) (3,370)
Retained earnings 202,144 125,375
Unrealized foreign currency translation adjustment (14,969) (15,539)
Unrealized gains on securities available for sale 19,582 30,353
Notes receivable from officers and employees for stock purchases (1,500) (1,537)
----------- -----------
Total shareholders' equity 844,999 466,506
----------- -----------
Total liabilities and shareholders' equity $ 1,101,404 $ 781,539
=========== ===========
</TABLE>
<PAGE> 72
Page 71
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 97,011 $ 63,353 $ 37,144
Adjustments to reconcile net earnings to net cash provided (used) in
operating activities:
Amortization of intangibles and depreciation 1,238 1,121 786
Equity in undistributed earnings of subsidiaries (81,029) (53,385) (42,086)
Increase (decrease) in liabilities and due to subs (544) 7,898 (24,532)
Other 79 (23,753) (733)
--------- --------- ---------
Net cash provided (used) by operations 16,755 (4,766) (29,421)
--------- --------- ---------
Cash flows from investing activities:
Cash expended in acquisition of business -- (18,363) (47,343)
Purchase of affiliate -- (115,454) --
Cash provided from sale of business -- -- 27,107
Issuance of surplus note to subsidiary (155,000) -- (19,732)
Principle payment on surplus note 100,000 -- --
Dividend received from subsidiary 11,283 1,603 1,200
Capital contribution to subsidiary (208,708) (54,399) (15,601)
Other -- -- 1,004
--------- --------- ---------
Net cash used by investing activities (252,425) (186,613) (53,365)
--------- --------- ---------
Cash flows from financing activities:
Issuance of notes payable 230,000 101,500 30,000
Issuance of common stock 155,450 51,210 --
Issuance of preferred stock 139,157 110,513 33,034
Purchase of treasury stock -- (2,984) (232)
Reduction of notes payable (273,353) (30,000) (1,500)
Redemption of preferred stock -- (33,415) --
Dividends paid (15,198) (4,950) (765)
Cost of debt refinancing -- -- (159)
--------- --------- ---------
Net cash provided by financing activities 236,056 191,874 60,378
--------- --------- ---------
Increase (decrease) in cash 386 495 (22,408)
Cash at beginning of year 1,713 1,218 23,626
========= ========= =========
Cash at end of year $ 2,099 $ 1,713 $ 1,218
========= ========= =========
Supplemental Disclosure:
Interest paid $ 16,921 $ 15,308 $ 14,310
========= ========= =========
Taxes paid $ 200 -- --
========= ========= =========
Non-cash financing activities:
Securities issued in conjunction with acquisition $ 14,999 $ 28,750 --
========= ========= =========
Note transferred in purchase of affiliate -- $ 28,538 --
========= ========= =========
</TABLE>
<PAGE> 73
PAGE 74 OF 83
SCHEDULE III
PENNCORP FINANCIAL GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
Years ended December 31,
<PAGE> 74
Page 72
SCHEDULE III
PENNCORP FINANCIAL GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Future policy Benefits, Amortization
Deferred benefits, Other policy claims,losses, of deferred
policy losses,claims claims and Net and policy Other
acquisition and loss benefits Premium investment settlement acquisition operating
Segment costs expenses payable revenue income expenses costs expenses
- ------------- ----------- ------------- ------------ ---------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
Fixed benefit $ 80,215 $ 308,944 $ 2,080 $ 176,950 $ 22,018 $ 89,377 $ 7,392 $ 54,754
Life 52,648 451,363 35,643 67,472 29,832 13,944 3,749 22,653
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 132,863 $ 760,307 $ 37,723 $ 244,422 $ 51,850 $ 103,321 $ 11,141 $ 77,407
========== ========== ========== ========== ========== ========== ========== ==========
1995
Fixed benefit $ 98,152 $ 294,863 $ 3,179 $ 174,708 $ 21,887 $ 62,644 $ 13,323 $ 47,961
Life 84,016 1,093,922 4,453 119,062 54,399 77,468 7,483 42,867
Accumulation 11,735 801,251 31,379 8,119 26,005 19,890 1,428 2,444
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 193,903 $2,190,036 $ 39,011 $ 301,889 $ 102,291 $ 160,002 $ 22,234 $ 93,272
========== ========== ========== ========== ========== ========== ========== ==========
1996
Fixed benefit $ 135,111 $ 278,820 $ 2,787 $ 169,311 $ 22,730 $ 61,648 $ 14,384 $ 49,364
Life 111,693 1,212,497 4,599 169,974 89,277 135,412 9,947 42,167
Accumulation 21,552 2,030,362 33,043 8,805 101,556 70,752 225 6,154
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 268,356 $3,521,679 $ 40,429 $ 348,090 $ 213,563 $ 267,812 $ 24,556 $ 97,685
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 75
PAGE 76 OF 83
SCHEDULE IV
PENNCORP FINANCIAL GROUP, INC.
REINSURANCE
Years ended December 31,
<PAGE> 76
Page 73
SCHEDULE IV
PENNCORP FINANCIAL GROUP, INC.
REINSURANCE
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other assumed
Amount companies companies Net amount to net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force $13,460,398 $ 1,079,869 $ 436,615 $12,817,144
=========== =========== =========== ===========
Premiums:
Accident and health insurance $ 177,512 $ 562 $ 0 $ 176,950 0.0%
Life insurance/accumulation 72,655 5,948 765 67,472 1.1%
----------- ----------- ----------- -----------
$ 250,167 $ 6,510 $ 765 $ 244,422
=========== =========== =========== ===========
Year ended December 31, 1995:
Life insurance in force $25,913,359 $ 3,621,309 $ 404,852 $22,696,902
=========== =========== =========== ===========
Premiums:
Accident and health insurance $ 175,517 $ 1,036 $ 227 $ 174,708 0.1%
Life insurance/accumulation 135,176 10,075 2,080 127,181 1.6%
----------- ----------- ----------- -----------
$ 310,693 $ 11,111 $ 2,307 $ 301,889
=========== =========== =========== ===========
Year ended December 31, 1996:
Life insurance in force $31,498,035 $ 5,884,609 $ 1,779,439 $27,392,865
=========== =========== =========== ===========
Premiums:
Accident and health insurance $ 169,727 $ 416 $ 0 $ 169,311 0.0%
Life insurance/accumulation 189,098 11,639 1,320 178,779 0.7%
----------- ----------- ----------- -----------
$ 358,825 $ 12,055 $ 1,320 $ 348,090
=========== =========== =========== ===========
</TABLE>
<PAGE> 77
PAGE 78 OF 83
SCHEDULE V
PENNCORP FINANCIAL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31,
<PAGE> 78
Page 74
SCHEDULE V
PENNCORP FINANCIAL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charge to Charge to Balance at
beginning cost and to other end of
of period expenses accounts Deductions period
- -------------------------------- ---------- ---------------- ---------------- --------------- ----------------
1996:
<S> <C> <C> <C> <C> <C>
Mortgage loans on real estate 12,661 (a) 716 11,945
Allowance for bond losses 189 (a) 189
Unearned loan charges 266 (a) 266
Accounts and notes receivable 8,388 4,082 5,942 6,528
1995:
Mortgage loan on real estate 2,314 (b) 2,314 -
Accounts and notes receivable 8,392 615 619 8,388
1994:
Mortgage loan on real estate - -
Accounts and notes receivable 8,182 873 663 8,392
</TABLE>
(a) Amount recorded as a purchase GAAP adjustment in conjunction with the
acquisition of UC Life.
(b) Amount recorded as a purchase GAAP adjustment in
conjunction with the acquisition of Integon Life.
<PAGE> 79
PAGE 75
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
2.1 Purchase Agreement among I.C.H. Corporation, SWL Holding
Corporation, Care Financial Corporation, Facilities Management
Installation, Inc. and Southwestern Financial Corporation,
Southwestern Financial Services Corporation and PennCorp
Financial Group, Inc., dated as of December 1, 1995 and Addendum
to Purchase Agreement dated as of December 14, 1995. (6)
2.2 Amended and Restated Stock Purchase Agreement between United
Companies Financial Corporation and Pacific Life and Accident
Insurance Company dated as of July 24, 1996. (4)
2.3 Amended and Restated Agreement and Plan of Merger dated as of
November 25, 1996 by and between PennCorp Financial Group, Inc.
and Washington National Corporation. (2)
3.1 Restated By-Laws of PennCorp Financial Group, Inc. (12)
3.2 Second Restated Certificate of Incorporation of PennCorp
Financial Group, Inc. as amended. (7)
4.1 Certificate of Elimination for Series A Cumulative Preferred
Stock. (5)
4.2 Certificate of Designation of Series B Preferred Stock. (5)
4.3 Certificate of Designation of Series C Preferred Stock. (5)
4.4 Corrected Certificate of Designation of $3.375 Convertible
Preferred Stock. (5)
4.5 Certificate of Designation of $3.50 Series II Convertible
Preferred Stock (3)
4.6 Indenture between PennCorp Financial Group, Inc. and The Bank of
New York, as trustee, with respect to 9 1/4% Senior Subordinate
Notes due 2003. (11)
10.1 Surplus Debenture Number Four in the original principal amount
of $162,539,890, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated January 1,
1994. (10)
10.2 Surplus Debenture Number Five in the original principal amount
of $17,606,203, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated September 29,
1994. (9)
</TABLE>
<PAGE> 80
PAGE 76
<TABLE>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
10.3 Surplus Debenture Number Six in the original principal amount of
$55,000,000, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated July 24, 1996.
(1)
10.4 10% Promissory Note in the original principal amount of
$30,661,996, issued by American-Holdings Corporation to
Pennsylvania Life Insurance Company, dated July 1, 1996. (1)
10.5 Certificate of Contribution in the original principal amount of
$54,332,790 issued by Integon Financial Life Insurance
Corporation to Integon Life Corporation, dated July 25, 1995.
(5)
</TABLE>
----------------------------------------------------------------
MANAGEMENT COMPENSATION RELATED
AGREEMENTS
<TABLE>
<S> <C>
10.6 Employment Agreement, dated as of August 19, 1990, between
PennCorp Financial Group, Inc. and William M. McCormick. (13)
10.7 PennCorp Financial, Inc. Retirement and Savings Plan. (13)
10.8 PennCorp Financial, Inc. Executive Officer Incentive Plan. (13)
10.9 PennCorp Financial Group, Inc. 1992 Stock Option Plan. (13)
10.10 PennCorp Financial Group, Inc. Senior Management Warrant Award
Program. (13)
10.11 Form of Restricted Stock Agreement By and Between PennCorp
Financial Group, Inc. and certain participants, effective as of
April 1, 1994. (9)
10.12 Employment Agreement between PennCorp Financial Group, Inc. and
David J. Stone entered into June 7, 1996. (1)
10.13 Employment Agreement between PennCorp Financial Group, Inc. and
Steven W. Fickes entered into June 7, 1996. (1)
10.14 PennCorp Financial Group, Inc. 1996 Stock Award and Stock Option
Plan (1)
10.15 PennCorp Financial Group, Inc. 1996 Senior Executive Annual
Incentive Award Plan (1)
----------------------------------------------------------------
10.16 Real Estate Purchase and Sale Agreement between Peoples Security
Life Insurance Company and PennCorp Financial Group, Inc., dated
March 24, 1995. (8)
</TABLE>
<PAGE> 81
PAGE 77
<TABLE>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
10.17 Registration Rights Agreement dated as of December 14, 1995,
between PennCorp Financial Group, Inc., I.C.H. Corporation, SWL
Holding Corporation and Care Financial Corporation. (6)
10.18 Conversion, Standstill and Registration Rights Agreement between
United Companies Financial Corporation and PennCorp Financial
Group, Inc. dated as of July 24, 1996. (1)
10.19 Registration Rights Agreement dated as of August 2, 1996, by and
among PennCorp Financial Group, Inc., Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill
Lynch, Pierce, Fenner & Smith Incorporate. (1)
10.20 Stockholders Agreement dated December 14, 1995 between
Southwestern Financial Corporation and the Security holders
listed on the signature pages thereof. (6)
11 Computations of earnings per share. (1)
12 Computation of ratio of earnings to fixed charges. (1)
21 List of subsidiaries of the Registrant. (1)
22 Auditors consent. (1)
27 Financial Data Schedule (1)
</TABLE>
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on December 4, 1996,
providing a copy of the Amended and Restated Agreement and Plan of
Merger with Washington National Corporation.
(3) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. filed with the Securities and Exchange
Commission on October 10, 1996.
(4) Such exhibit is incorporated by reference to the Form 8-K dated July
24, 1996 was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on August 8, 1996 relating to the
financial statements and pro forma financial information of the United
Companies Life Insurance Company.
(5) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1995 of PennCorp Financial
Group, Inc.
(6) Such exhibit is incorporated by reference to the Form 8-K dated
December 14, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on December 28, 1995
related to its investment in Southwestern Financial Corporation.
(7) Such exhibit is incorporated by reference to the Form 8-A dated July
11, 1995 which was filed by PennCorp Financial Group, Inc. with the
Securities and Exchange Commission on July 12, 1995.
<PAGE> 82
PAGE 78
(8) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended June 30, 1995 of PennCorp
Financial Group, Inc.
(9) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended September 30, 1994 of PennCorp
Financial Group, Inc.
(10) Such exhibit is incorporated by reference to the Quarterly Report on
Form 10-Q for the three months ended June 30, 1994 of PennCorp
Financial Group, Inc.
(11) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1993 of PennCorp Financial
Group, Inc.
(12) Such exhibit is incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1992 of PennCorp Financial
Group, Inc.
(13) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33-50530) of PennCorp
Financial Group, Inc. filed on August 6, 1992.
<PAGE> 1
EXHIBIT 10.3
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
SURPLUS DEBENTURE NO. 6
$55,000,000 July 24, 1996
FOR VALUE RECEIVED, Pacific Life and Accident Insurance Company, a Texas life
insurance corporation ("Pacific"), subject to the terms, conditions,
restrictions, and limitations contained herein, promises to pay to the order of
PennCorp Financial Group, Inc. Corporation, a Delaware corporation
("PennCorp"), or to any subsequent holder hereof (the "Holder"), the principal
sum of Fifty-Five Million Dollars ($55,000,000) together with interest on the
unpaid balance thereof at a rate (the "Rate") equal to the sum of (i) two and
one-half percent (2.5%) per annum and (ii) the rate of interest required by
that certain Credit Agreement, dated as of July, 1996, among PennCorp as
borrower, ING Capital (U.S.) Corporation, as administrative agent, and the
other lenders party thereto, (together will all amendments, renewals,
extensions or refinancings thereof, the "Loan Agreement"). In respect to the
Loan (as defined in the Loan Agreement) made to PennCorp, it is understood that
the rate of interest with respect to the Loan may vary from time to time by
operation of law or under the terms and conditions of the Loan Agreement. Each
change in the interest rate applicable to the Loan shall cause a corresponding
change in the calculation of the Rate, effective as of the time and date of
such change in the interest rate applicable to the Loan, without any notice to
Pacific or further action by the Holder. In the event the Loan is repaid in
full prior to the full repayment of the Surplus Debenture, the Rate shall
become 10% at that time.
Interest on this Surplus Debenture will be payable on March 31, June 30,
September 30 and December 31 of each year (each, an "Interest Payment Date"),
commencing on March 31, 1997 and continuing until the entire principal
amount of this Surplus Debenture is paid in full. Both principal of and
interest on this Surplus Debenture will be due and payable in the following
manner at the offices of the Holder.
1. On or before each Interest Payment Date, Pacific will calculate the
Surplus of Pacific (as hereinafter defined) as of the most recent date
practicable, but in no event prior to the end of the immediately
preceding calendar quarter (each such date being hereinafter referred
to as a "Calculation Date").
2. On each Interest Payment Date, Pacific will pay the Holder the amount
of accrued but unpaid interest on the unpaid principal balance of this
Surplus Debenture to the extent the Surplus of Pacific exceeds $1.2
million as of the Calculation Date immediately prior to such Interest
Payment Date.
3. If, as of any Calculation Date, the Surplus of Pacific does not exceed
$1.2 million by an amount sufficient to pay all accrued but unpaid
interest on this Surplus Debenture, the remaining accrued but unpaid
interest (together with interest thereon at the Rate) shall be
1
<PAGE> 2
payable on the next Interest Payment Date to the extent the Surplus of
Pacific exceeds $1.2 million as of the Calculation Date immediately
prior to such next Interest Payment Date.
4. Pacific will pay to the Holder on the dates set forth below
(a"Principal Payment Date") the amounts of principal set forth below
or such lesser amount as may be paid hereunder, together with all
accrued but unpaid interest, to the extent the Surplus of Pacific
exceeds $1.2 million as of the most recent Calculation Date:
<TABLE>
<CAPTION>
Payment Date Principal Amount Each Date
------------ --------------------------
<S> <C>
March 31, 1997 $ 6,000,000
September 30, 1997 6,000,000
March 31, 1998 6,000,000
September 30, 1998 6,000,000
March 31, 1999 2,500,000
September 30, 1999 2,500,000
March 31, 2000 2,500,000
September 30, 2000 2,500,000
March 31, 2001 2,500,000
September 30, 2001 2,500,000
March 31, 2002 2,500,000
September 30, 2002 2,500,000
March 31, 2003 3,000,000
September 30, 2003 8,000,000
</TABLE>
5. If on a Principal Payment Date, the Surplus of PLAIC does not exceed
$1.2 million by an amount sufficient to pay to the Holder the
principal amount due, together with all accrued but unpaid interest on
this Surplus Debenture, the remaining unpaid portion of such principal
amount and such interest (together with interest thereon at the Rate)
shall be payable thereafter at such time or from time to time as the
Surplus of PLAIC exceeds $1.2 million.
6. For purposes of this Surplus Debenture, the term "Surplus of PLAIC"
shall mean the remainder obtained after subtracting the carrying value
of the insurance subsidiaries of PLAIC from the sum of:
a. "common capital stock" of PLAIC;
b. "gross paid-in and contributed surplus" of PLAIC;
c. "unassigned surplus" of PLAIC;
d. "special surplus" of PLAIC;
2
<PAGE> 3
e. any amounts required to be carried as liabilities
with respect to outstanding surplus debentures issued
by PLAIC; and
f. surplus evidenced by surplus debentures of PLAIC
which is not included in clauses a-e of this
paragraph 6.
The items listed in clauses a-f of this paragraph 6 will be calculated
in accordance with the accounting practices required or permitted by
the Texas Department of Insurance ("Texas Department") for inclusion
in the Annual Statement of PLAIC filed with the Texas Department as of
December 31 of each year.
7. The obligation of PLAIC to pay this Surplus Debenture will not
otherwise be or constitute a liability of PLAIC or a claim against any
of its assets except in the event of the liquidation of PLAIC, and in
no event will this Surplus Debenture be considered or treated as a
current or fixed liability or obligation of PLAIC under the Texas
insurance laws and the regulations thereunder except to the extent
that a payment of principal or interest becomes due and payable
hereunder or to the extent otherwise required by Texas law.
8. In the event of the liquidation of PLAIC, this Surplus Debenture will
become immediately due and payable and will be superior to and in
preference of the rights and claims of the shareholders of PLAIC;
provided, however, that to the extent required by applicable law, all
obligations, rights and claims hereunder are expressly subordinated to
the claims of (a) policyholders, insureds, and beneficiaries under
insurance contracts or policies issued by PLAIC and (b) any
supervisor, conservator or receiver of PLAIC appointed by the
Commissioner of Insurance of the State of Texas.
9. All payments made hereunder will be credited first to accrued but
unpaid interest, if any, and the balance of such payment will be
credited to the principal amount hereof.
10. As a condition to the consolidation or merger of PLAIC into another
corporation or the sale of all or substantially all of PLAIC's assets
to any other corporation, the corporation into which PLAIC is
consolidated or merged or to which the assets of PLAIC are transferred
shall unconditionally assume the liability of PLAIC hereunder.
11. By acceptance and as a part of the consideration for the issuance
hereof, the Holder expressly acknowledges that it has been informed
and has knowledge that this Surplus Debenture has not been registered
under the Securities Act of 1933, as amended, or the securities laws
of any state and that PLAIC has issued this Surplus Debenture for
investment purposes and not with a view toward a public distribution
hereof and that this Surplus Debenture may not be sold or otherwise
transferred in the absence of an effective registration statement with
respect hereto or an exemption from registration under the Securities
Act of 1933, as amended, or any other applicable securities laws.
3
<PAGE> 4
12. If this Surplus Debenture is collected through judicial proceedings,
PLAIC agrees, subject to conditions and restrictions contained herein,
to pay all reasonable legal fees and disbursements incurred by the
Holder in connection with such collection.
13. This Surplus Debenture may be prepaid in whole or in part at any time
or from time to time without premium or penalty to the extent that the
Surplus of PLAIC exceeds $1.2 million on the most recent Calculation
Date before the date of any proposed prepayment.
14. This Surplus Debenture will be governed by and construed in accordance
with the laws of the State of Texas.
15. It being the intention of the parties hereto to conform strictly to
the applicable usury laws of the State of Texas, all agreements
between PLAIC and PennCorp whether now or hereafter arising and
whether written or oral, are here expressly limited so that in no
event, whether by reason of acceleration of the maturity of any amount
owed hereunder or otherwise, shall the amount paid or agreed to be
paid to PennCorp for the use, forbearance or retention of money
hereunder or otherwise exceed the maximum amount permissible under
applicable law (the "Maximum Lawful Amount"). If fulfillment of any
provision hereof, at the time performance of such provision shall be
due, shall cause the amount of interest applicable to this Surplus
Debenture to exceed the Maximum Lawful Amount, then, ipso facto, the
obligation to be fulfilled shall be reduced to the extent necessary to
cause the amount of interest applicable to this Surplus Debenture not
to exceed the Maximum Lawful Amount; and if the holder of this Surplus
Debenture shall ever receive anything of value deemed interest under
applicable law that would cause the interest applicable to this
Surplus Debenture to exceed the Maximum Lawful Rate, an amount equal
to the portion of such interest in excess of the Maximum Lawful Rate
shall be applied to the reduction of the principal amount owing
hereunder and not to the payment of interest, or if such excessive
interest exceeds the unpaid principal amount hereof, such excess shall
be promptly refunded to PLAIC by the holder hereof. All sums paid or
agreed to be paid to the holder of this Surplus Debenture for the use,
forbearance or retention of the indebtedness of PLAIC shall, to the
extent permitted by applicable law, be amortized, prorated, allocated
and spread throughout the full term of such indebtedness until payment
in full so that interest on account of such indebtedness is uniform
throughout the full term thereof. The provisions of this paragraph
shall control agreements between PLAIC and the holder of this Surplus
Debenture.
16. PennCorp may assign its rights hereunder to any person or entity
without the consent of PLAIC. This Surplus Debenture will inure to
the benefit of PLAIC and its successors and assignees.
Notwithstanding the above, this Surplus Debenture is registered as to
both principal and any stated interest with PLAIC and transfer of the
Surplus Debenture may be effected only by surrender of the old
instrument and either the reissuance by PLAIC of a new instrument to
the new holder or the issuance by PLAIC of a new instrument to the new
holder. No transfer of any ownership interest in this Surplus
Debenture shall be made unless such transfer is permitted under Texas
insurance law and PLAIC and PennCorp shall comply
4
<PAGE> 5
with all regulatory and legal limitations and requirements in
connection with any transfer of this Surplus Debenture.
17. To the extent required by Texas law, PLAIC will notify the Texas
Department of the payment of principal and interest under this Surplus
Debenture.
IN WITNESS WHEREOF, PLAIC has caused this Surplus Debenture to be duly executed
as of July 24, 1996.
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
By: /s/ ROSS A. MARAZZO
---------------------------------------
Name: Ross A. Marazzo
---------------------------------------
Title: Vice President, Regulatory and
Corporate Compliance
5
<PAGE> 1
EXHIBIT 10.4
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), NOR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED, OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (A) A REGISTRATION
STATEMENT THAT IS EFFECTIVE UNDER THE ACT OR (B) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT.
10% Discount Note
Due 2021
Certificate No. 6 Principal Amount: $30,644,630
American-Amicable Holdings Corporation, a Delaware corporation
(the "Company"), which term includes any successor entity, for value received
promises to pay to PennCorp Financial Group, Inc., a Delaware corporation (the
"Holder"), or registered assigns, the principal sum of $30,644,630 on December
31, 2021, and to pay interest quarterly on each March 31, June 30, September 30
and December 31 (each an "Interest Payment Date"), commencing June 30, 1996 on
said principal sum from the most recent Interest Payment Date to which interest
on this Security has been paid or duly provided for unless the date hereof is a
date to which interest on this Security is paid or duly provided for, in which
case from the date of this Security.
Payments of the principal of and interest on this Security
will be paid to the Holder at the principal executive offices of the Company in
New York, New York, in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private debts.
At the option of the Company, such payments may be made by check mailed to the
Holder at its address shown on the records of the Company. Interest will be
calculated on the basis of a 360-day year of twelve 30-day months.
<PAGE> 2
1.
REDEMPTION
1.1 Optional Redemption; Prices. The Company at its
option may, at any time, redeem all, or from time to time any part, of this
Security upon payment of 100% of the outstanding principal amount of this
Security plus accrued interest to the date fixed for redemption.
1.2 Notice of Redemption. Notice of redemption to the
Holder shall be given by giving notice of such redemption at least 30 days and
not more than 60 days prior to the date fixed for redemption to the Holder.
The notice of redemption to the Holder shall specify the
principal amount of this Security, as applicable, to be redeemed, the date
fixed for redemption, the redemption price, the place of payment, that payment
will be made upon presentation and surrender of this Security, that such
redemption is pursuant to the right of optional redemption provided herein,
that interest accrued, if any, to the date fixed for redemption will be paid as
specified in said notice and that on and after said date any interest thereon
or on the portions thereof to be redeemed will cease to accrue. In case this
Security is to be redeemed in part only the notice of redemption shall state
the portion of the principal amount thereof to be redeemed and shall state that
on and after the date fixed for redemption, upon surrender of this Security, a
new Security in the principal amount equal to the unredeemed portion thereof
will be issued.
1.3 Payment of Security Called for Redemption. If notice
of redemption has been given as above provided, this Security or portions
thereof specified in such notice shall become due and payable on the date and
at the place stated in such notice at the applicable redemption price, together
with any interest accrued to the date fixed for redemption, if any, and on and
after said date (unless the Company shall default in the payment of this
Security at the redemption price, together with interest accrued to said date,
if any) interest on this Security or portions thereof so called for redemption
shall cease to accrue. On presentation and surrender of this Security at the
place of payment specified in said notice, this Security or the specified
portions thereof shall be paid and redeemed by the Company at the applicable
redemption price, together with any interest accrued thereon to the date fixed
for redemption.
If this Security or portions thereof called for redemption
shall not be so paid upon surrender thereof for redemption, the principal
shall, until paid, bear interest from the date fixed for redemption at the rate
borne by this Security.
2
<PAGE> 3
Upon presentation of this Security redeemed in part only, the
Company shall execute and deliver to or on the order of the Holder, a new
Security in a principal amount equal to the unredeemed portion of this Security
so presented.
1.4 Mandatory Sinking Fund. As and for a mandatory
sinking fund for the retirement of this Security, the Company will, except as
hereinafter provided, redeem on each March 31, June 30, September 30 and
December 31 of each year, commencing March 31, 2002, 1.25% of the principal
amount of this Security outstanding as of the immediately preceding January 1,
plus accrued interest, if any, to the redemption date at a redemption price
equal to 100% of the principal amount to be so redeemed. In lieu of making all
or any part of any mandatory sinking fund payment in cash, the Company may, at
its option, credit against such payment any portion of this Security previously
redeemed (other than pursuant to a mandatory sinking fund payment) or repaid or
retired. Each redemption of this Security pursuant to a mandatory sinking fund
payment shall be effected in a manner substantially similar to the manner in
which an optional redemption of this Security is made pursuant to Sections 1.2
and 1.3 hereof.
2.
OTHER INDEBTEDNESS
The Company, for itself and its successors, agrees that it
shall not, for so long as principal or interest on this Security remains
outstanding, incur any Indebtedness which expressly ranks senior in right of
payment of principal and interest on this Security.
3.
REMEDIES
3.1 Events of Default. "Event of Default," wherever used
herein, means any one of the following events:
(a) default in the payment of any interest upon this
Security when it becomes due and payable, and continuance of such
default for a period of 30 days; or
(b) default in the payment of the principal of, or
premium, if any, on this Security, or any portion thereof, as and when
the same shall become due and payable, either at maturity upon any
redemption or otherwise; or
(c) failure by the Company or any of its Subsidiaries to
make any payment or payments in respect of Indebtedness of the Company
or any of its Subsidiaries having a principal amount of $2 million or
more, individually or in the aggregate, when such
3
<PAGE> 4
payment is due and payable (after giving effect to any applicable
grace period set forth in the documents governing such Indebtedness);
or
(d) the occurrence of any event that results in the
acceleration of any Indebtedness of the Company or any of its
Subsidiaries having a principal amount of $1 million or more,
individually or in the aggregate, when such payment is due and payable
(after giving effect to any applicable grace period set forth in the
documents governing such Indebtedness); or
(e) a final nonappealable judgment or judgments involving
liability for the payment of money in excess of $2 million in the
aggregate are entered by a court or courts of competent jurisdiction
against the Company or any Subsidiary and such judgment or judgments
have not been discharged, satisfied, stayed, annulled or rescinded
within 60 days of being entered; or
(f) the entry by a court of competent jurisdiction of any
order or decree under any Bankruptcy Law (as defined below) (i) for
relief against the Company or any Subsidiary in an involuntary case or
proceeding, (ii) appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the
Company or any Subsidiary or any substantial part of their respective
properties, or (iii) ordering the liquidation of the Company's or any
Subsidiary's affairs, and the continuance of any order or decree
unstayed and in effect for a period of 60 consecutive days; or
(g) the commencement by the Company or any Subsidiary of
a voluntary case or proceeding under any applicable Bankruptcy Law, or
the consent by the Company or any Subsidiary to the entry of a decree
or order for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any applicable Bankruptcy Law, or
the consent by the Company or any Material Subsidiary to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company of any substantial part of its properties, or the making by it
of a general assignment for the benefit of creditors.
For the purposes of this Section 3.1, "Bankruptcy Law" means
Title 11, United States Code, or any similar federal or state law for the
relief of debtors.
3.2 Acceleration of Maturity; Rescission. If an Event of
Default (other than an Event of Default specified in Section 3.1(f) or 3.1(g)
relating to the Company) occurs and is continuing, the Holder by notice to the
Company may declare the principal of, premium, if any, and accrued and unpaid
interest on, this Security to be due and payable immediately. If an Event of
Default specified in Section 3.1(f) or 3.1(g) relating to the Company occurs
and is continuing, the principal of, premium, if any, and accrued and unpaid
interest on, this Security shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the
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<PAGE> 5
Holder. The Holder may rescind and annul any such acceleration and its
consequences if (a) all existing Events of Default, other than the non-payment
of the principal of this Security that has become due solely by such
declaration of acceleration have been cured or waived, (b) to the extent the
payment of such interest is lawful, interest on overdue principal, which has
become due otherwise than by such declaration of acceleration, has been paid,
and (c) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
3.3 Rights and Remedies Cumulative. No right or remedy
herein conferred upon or reserved to the Holder is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
3.4 Delay or Omission Not Waiver. No delay or omission of
the Holder to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or any acquiescence therein. Every right and remedy given by this
ARTICLE III or by law to the Holder may be exercised from time to time, and as
often as may be deemed expedient, by the Holder.
4.
DEFINITIONS
4.1 Definitions.
(a) "Business Day" means each Monday, Tuesday, Wednesday,
Thursday, and Friday that is not a day on which banking institutions in
New York, New York are authorized or obligated by or pursuant to law,
regulation or executive order to close.
(b) "Capitalized Lease Obligations" of any Person means
the obligations of such Person to pay rent or other amounts under a
lease of property, real or personal, that is required to be capitalized
for financial reporting purposes in accordance with GAAP, and the
amount of such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.
(c) "Event of Default" has the meaning specified in
Section 3.1.
(d) "GAAP" means generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
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<PAGE> 6
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect from time to time.
(e) "Guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, in
any manner, of any part or all of such obligation, and (ii) an
agreement, direct or indirect, contingent or otherwise, the practical
effect of which is to assure the payment or performance (or payment of
damages in the event of nonperformance) of any part or all of such
obligation, including, without limiting the foregoing, any credit
support and the payment of amounts drawn down by letters of credit.
(f) "Indebtedness" of any Person at any date means,
without duplication, (i) all indebtedness of such Person for borrowed
money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) all
obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (iii) all obligations of such Person in
respect of letters of credit (other than standby letters of credit
incurred by such Person in the ordinary course of business) or other
similar instruments (or reimbursement obligations wit respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, except trade payables and
accrued expenses incurred in the ordinary course of business, (v) all
Capitalized Lease Obligations of such Person, (vi) all Indebtedness of
others secured by a Lien an any assets of such Person, whether or not
such Indebtedness is assumed by such Person, and (vii) all Indebtedness
of others Guaranteed by such Person to the extent of such Guarantee.
The amount of Indebtedness of any Person at any date shall be the
outstanding principal amount at such date of all unconditional
obligations described above, as such amounts would be reflected on a
balance sheet prepared in accordance with GAAP, the maximum liability
at such date of such Person for any contingent obligations described
above and, in the case of clause (vi), the lesser of (A) the fair value
(as determined in good faith by the Company's Board of Directors) of
any asset subject to a Lien securing the Indebtedness of others on the
date that the Lien attaches and (B) the principal amount of the
Indebtedness secured as such amount would be reflected on a balance
sheet prepared in accordance with GAAP.
(g) "Lien" means, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or other similar encumbrance of
any kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law (including any conditional
sale or other title retention agreement, and any lease in the nature
thereof, any option or other agreement to sell, and any filing of or
agreement to give, any financing statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction).
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<PAGE> 7
(h) "Officer's Certificate" means a certificate signed by
the Chairman of the Board of Directors, any Vice Chairman of the Board
of Directors, the President or any Vice President and delivered to the
Holder.
(i) "Person" or "person" means any individual,
corporation, partnership, joint venture, unincorporated association,
joint stock company, trust, unincorporated organization or government
or other agency or political subdivision thereof or other entity of any
kind.
(j) "Security" means this 10% Discount Note Due 2021.
(k) "Subsidiary" of any Person means (i) any corporation
of which at least a majority of the aggregate voting power of all
classes of common equity generally entitled to vote in the election of
directors is owned by such Person directly or through one or more of
the Subsidiaries of such Person, and (ii) any entity other than a
corporation in which such Person, directly or indirectly, owns at least
a majority of the common equity generally entitled to vote in the
election of directors or other similar Persons that will control the
management and policies of such entity.
5.
MISCELLANEOUS
5.1 Effect of Headings. The ARTICLE and Section headings
herein are for convenience only and shall not affect the construction hereof.
5.2 Successors and Assigns. All covenants and agreements
in this Security by the Company shall bind its successors and assigns, whether
so expressed or not.
5.3 Separability Clause. In case any provision in this
Security shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
5.4 GOVERNING LAW. THIS SECURITY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAW
OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
5.5 No Recourse Against Others. A past, present or future
director, officer, employee or shareholder, as such, of the Company shall not
have any liability for any obligations of the Company under this Security for
any claim based on, in respect of or by reason of, such
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<PAGE> 8
obligations or their creation. The Holder, by accepting this Security, waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of this Security.
5.6 Notices. Any notice or other communication given
pursuant to this Security must be in writing and (a) delivered personally, (b)
sent by telefacsimile or other facsimile transmission, (c) delivered by
overnight express, or (d) sent by registered or certified mail, postage
prepaid, as follows:
(x) If to the Company:
American-Amicable Holdings Corporation
745 Fifth Avenue, Suite 500
New York, New York 10151
Attention: Chief Financial Officer
Facsimile Number: (212) 758-5442
(y) If to the Holder:
PennCorp Financial Group, Inc.
745 Fifth Avenue, Suite 500
New York, New York 10151
Attention: Chief Financial Officer
Facsimile Number: (212) 758-5442
All notices and communications required or permitted under this Security that
are addressed as provided in this Section, will (a) if delivered personally or
by overnight express, be deemed given upon delivery; (b) if delivered by
telefacsimile or similar facsimile transmission, be deemed given when
electronically confirmed; and (c) if sent by registered or certified mail, be
deemed given when received. The Company or the Holder from time to time may
change its address for the purpose of notices to such Person by giving a
similar notice specifying a new address, but no such notice will be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
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<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Security to be
executed on the 1st day of July, 1996, on its behalf by a duly authorized
officer.
AMERICAN-AMICABLE HOLDINGS CORPORATION
By: /s/ SCOTT D. SILVERMAN
------------------------------------
Name: Scott D. Silverman
Title: Senior Vice President,
Secretary and General Counsel
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<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the 7th day of June, 1996 by and
between PennCorp Financial Group, Inc., a Delaware corporation (together with
its successors and assigns permitted under this Agreement, the "Company"), and
David J. Stone (the "Executive").
WITNESSETH:
WHEREAS, the Executive is the Chairman of the Board and Chief Executive
Officer of the Company; and
WHEREAS, the Company desires to continue to employ the Executive and to
enter into an employment agreement embodying the terms of such employment (the
"Agreement"); and
WHEREAS, the Executive desires to enter into the Agreement and to accept
such employment, subject to the terms and provisions of the Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
(a) "Annual Incentive Plan" shall mean the Company's 1996 Senior Executive
Annual Incentive Award Plan.
(b) "Approved Medical Doctor" shall mean a medical doctor selected by the
Company and the Executive for the purposes of determining Disability. In the
event that the Company and the Executive cannot agree on a medical doctor, then
each Party shall select a medical doctor and the two medical doctors shall
select a third medical doctor who shall be the Approved Medical Doctor.
(c) "Base Salary" shall mean the salary provided for in Section 4 below or
any increased salary granted to the Executive pursuant to Section 4.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Cause" shall mean:
(1) the Executive (i) is convicted of or (ii) pleads guilty or nolo
contendere to (a) a felony or (b) a crime against the Company that causes
or is reasonably likely to cause material economic harm to the Company; or
(2) the Executive engages in conduct that constitutes willful gross
neglect or willful gross misconduct in carrying out his duties under the
Agreement, resulting, in either case, in material economic harm to the
Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(g) "Company Target" shall mean any entity with which the Company has
actively engaged in discussions to acquire, merge or enter into any joint
venture during the 12-month period ending on the date of the Executive's
termination of employment.
(h) A "Change in Control" shall mean the first to occur of the following
events:
(1) any "person" (as such term is used in Sections 3(a)(9) and 13(d)
of the Exchange Act) becomes a "beneficial owner" (as such term is used in
Rule 13d-3 under the Exchange Act) of more than 25 percent of the Voting
Stock of the Company;
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<PAGE> 2
(2) the majority of the Board consists of individuals other than
Incumbent Directors;
(3) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets;
(4) all or substantially all of the assets or business of the Company
are disposed of pursuant to a merger, consolidation or other transaction,
unless (i) the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting
Stock of the Company, at least 60 percent of the Voting Stock or other
ownership interests of the entity or entities, if any, that succeed to the
business of the Company and (ii) the successor entity (or entities) has
assumed all obligations under the Agreement; or
(5) the Company combines with another company and is the surviving
corporation; provided, however, that immediately after the combination, the
shareholders of the Company immediately prior to the combination hold,
directly or indirectly, less than 60 percent of the Voting Stock of the
combined company (there being excluded from the number of shares held by
such shareholders, but not from the Voting Stock of the combined company,
any shares received by affiliates (as such term is defined in Rule 12b-2 of
the Exchange Act) of such other company in exchange for stock of such other
company).
(i) "Competitive Activity" shall mean any activity engaged in by the
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with the Company. For this
purpose, an activity which is competitive with the Company shall mean a business
that is primarily involved in the acquisition of life insurance companies.
Notwithstanding anything to the contrary in this Section 1(i), an activity shall
not be deemed to be a Competitive Activity solely as a result of the Executive's
being employed by or otherwise associated with a business of which a unit is in
competition with the Company or any Subsidiary but as to which unit the
Executive does not have direct or indirect responsibilities.
(j) "Disability" shall mean the Executive's inability to substantially
perform his duties and responsibilities under the Agreement for a period of 180
days during any 240-day period as determined by an Approved Medical Doctor.
(k) "Effective Date" shall mean April 15, 1996.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, including regulations thereunder and successor
provisions and regulations thereto.
(m) "Good Reason" shall mean the occurrence of any of the following events
within the 60-day period preceding the termination of employment by the
Executive:
(1) a reduction in the Executive's Base Salary or any material failure
by the Company to honor its obligations under Sections 7, 8, 9 or 10
hereof, in any such case, without the Executive's prior written consent;
(2) a material change in the Executive's position, duties or
responsibilities with respect to his employment by the Company under the
Agreement without the Executive's prior written consent;
(3) the failure to elect or reelect the Executive to any of the
positions described in Section 3 below (including his position as a member
of the Board) or the removal of him from any such position (other than a
removal resulting from the termination of the Executive's employment for
Cause pursuant to Section 11(c) below);
(4) a reduction in the Executive's annual target bonus opportunity
below $800,000 or any material change in the Executive's participation in
the Annual Incentive Plan without the Executive's prior written consent;
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<PAGE> 3
(5) an actual change by the Board in the Executive's principal work
location by more than 25 miles and more than 25 miles from the Executive's
principal place of abode as of the date hereof without the Executive's
prior written consent;
(6) the failure of the Company to obtain the assumption in writing of
its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company within 45 days after a
merger, consolidation, sale or similar transaction; or
(7) a Change in Control.
(n) "Incumbent Directors" shall mean the members of the Board as of the
Effective Date; provided, however, that any person becoming a director
subsequent to such date whose election or nomination for election was supported
by 75 percent of the directors who then comprised the Incumbent Directors shall
be considered to be an Incumbent Director.
(o) "Stock" shall mean the Common Stock of the Company.
(p) "Stock Plan" shall mean the Company's 1996 Stock Award and Stock Option
Plan.
(q) "Subsidiary" of the Company shall mean any corporation of which the
Company owns, directly or indirectly, more than 50 percent of the Voting Stock
or any other business entity in which the Company directly or indirectly has an
ownership interest of more than 50 percent.
(r) "Term of Employment" shall mean the period specified in Section 2
below.
(s) "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2. Term of Employment.
The Company hereby employs the Executive, and the Executive hereby accepts
such employment, for the period commencing on the Effective Date and ending on
the fifth anniversary of the Effective Date, subject to earlier termination of
the Term of Employment in accordance with the terms of the Agreement; provided,
however, this Agreement shall become null and void ab initio and of no further
force and effect unless (i) prior to January 1, 1997 (or such other date to
which the Executive and the Company may agree), the Company and the Executive
(or affiliates of the Executive) enter into a definitive agreement (the
"Knightsbridge Agreement") providing for the sale (the "Sale") by the Executive
(or such affiliates) to the Company of the interests of the Executive (or such
affiliates) in Knightsbridge Capital Fund I, L.P. ("Knightsbridge") and
Knightsbridge Management, L.L.C., (ii) the stockholders of the Company approve
the Sale no later than at the Company's 1997 annual meeting of stockholders, and
(iii) the Company's stockholders approve the Annual Incentive Plan and the Stock
Plan at the Company's 1996 annual meeting of stockholders.
3. Position, Duties and Responsibilities.
(a) On the Effective Date and continuing for the remainder of the Term of
Employment, the Executive shall be employed as the Chief Executive Officer of
the Company and be responsible for the general management of the affairs of the
Company. The Executive, in carrying out his duties under the Agreement, shall
report to the Board.
(b) It is the intention of the Parties that as of the Effective Date and
continuing for the remainder of the Term of Employment, the Executive shall
serve as a member of the Board and of the Executive Committee thereof.
(c) Notwithstanding anything herein to the contrary, nothing shall preclude
the Executive from:
(1) serving on the boards of directors of other corporations if the
Board consents in writing to such service; provided, however, that
consent by the Board is not required for serving on the boards of
directors of corporations in which Knightsbridge had an investment
at the time at which the Executive originally undertook such
position and so long as all directors' fees and any other
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compensation paid by such corporation in respect of the Executive's
services as a member of such board while he is an employee of the
Company are paid to the Company;
(2) serving on the boards of a reasonable number of trade associations
and/or charitable organizations;
(3) engaging in charitable activities and community affairs; and
(4) managing his personal investments and affairs.
4. Base Salary.
The Executive shall be paid an annualized Base Salary, payable in
accordance with the regular payroll practices of the Company, of $750,000. The
Base Salary shall be reviewed no less frequently than annually for increase in
the discretion of the Board and/or the Compensation Committee thereof.
5. Annual Incentive Award.
Provided that the Annual Incentive Plan is approved by the Company's
shareholders, the Executive shall participate in the Annual Incentive Plan and
shall have a minimum annual target bonus opportunity under such Plan of $800,000
and a maximum bonus opportunity of 2 times such minimum. Payment of annual
incentive awards shall be made at the same time that other senior level
executives of the Company receive their incentive awards unless otherwise agreed
to by the Executive.
6. Long-Term Incentive Award.
Provided that the Stock Plan is approved by the Company's shareholders, the
Executive shall participate in the Stock Plan and shall be granted under the
Stock Plan, as of the Effective Date, an option to purchase 559,000 shares of
Stock. The option shall be divided into four tranches as set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF EXERCISE PRICE
TRANCHE STOCK UNDERLYING TRANCHE PER SHARE
- ------- ------------------------ --------------
<S> <C> <C> <C>
1...................... 250,000 $29.50
2...................... 103,000 $32.45
3...................... 103,000 $ 35.695
4...................... 103,000 $ 39.325
</TABLE>
Twenty-five percent of each tranche shall become exercisable (vest) on the
first four anniversaries of the Effective Date and the option shall expire on
the fifth anniversary of the Effective Date.
7. Employee Benefit Programs.
a. During the Term of Employment, the Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the senior-level executives of the Company or to its employees
generally, as such plans or programs may be in effect from time to time,
including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded.
b. In addition, the Company shall immediately cause one of its life
insurance subsidiaries acceptable to the Executive to issue the Executive a life
insurance policy having a death benefit equal to $5,000,000 (the "Policy") with
the beneficiary as designated by the Executive. Amounts due under the policy
will be payable in accordance with the terms thereof notwithstanding any other
provision of this Agreement. The Company shall incur the first $15,000 of the
annual cost of the Policy, and the Executive shall pay the portion of the annual
cost of the Policy that exceeds $15,000 (if any).
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<PAGE> 5
8. Reimbursement of Business and Other Expenses.
The Executive is authorized to incur reasonable expenses in carrying out
his duties and responsibilities under the Agreement and the Company shall
promptly reimburse him for all business expenses incurred in connection with
carrying out the business of the Company, subject to documentation in accordance
with the Company's policy.
9. Perquisites.
a. During the Term of Employment, the Executive shall be entitled to
participate in any of the Company's executive fringe benefits in accordance with
the terms and conditions of such arrangements as are in effect from time to time
for the senior-level executives of the Company.
b. In addition, the Company shall:
(1) provide the Executive with a luxury automobile and pay the
reasonable expenses of such automobile; and
(2) reimburse the Executive for any expenses incurred by the Executive
relating to personal financial and/or tax counselling; provided, however,
that such reimbursement shall not exceed $10,000 per year.
10. Vacation.
The Executive shall be entitled to 6 weeks paid vacation each year. In the
event that the Executive does not use all of his vacation time during an
applicable calendar year, he shall be entitled to carry forward such unused
vacation time; provided, however, that only four weeks of unused vacation time
(including all previously carried forward unused vacation time) may be carried
forward from any one calendar year to the next calendar year.
11. Termination of Employment.
a. Termination of Employment Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries as
the case may be, shall be entitled to:
(1) Base Salary earned but not paid prior to the date of death;
(2) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of death become immediately
exercisable;
(3) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of death remain
exercisable until the end of the earlier of (i) the one-year period
following the date of death or (ii) the date the option would otherwise
expire;
(4) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(5) other or additional benefits in accordance with applicable plans
and programs of the Company.
b. Termination of Employment Due to Disability. In the event the
Executive's employment is terminated due to his Disability, he shall be entitled
to the following (but in no event less than the benefits due him under the then
current disability program of the Company):
(1) Base Salary earned but not paid prior to the date of the
termination of employment;
(2) an amount equal to the sum of 60% percent of Base Salary, at the
annual rate in effect on the date of the termination of employment, for a
period ending on the last day of the month in which he becomes 65, less the
amount of any disability benefits provided to the Executive by the Company
(other than benefits attributable to the Executive's own contributions)
under any disability plan;
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<PAGE> 6
(3) an amount equal to the product of (a) the average percentage of
Base Salary paid to the Executive as annual incentive bonuses for the two
calendar years immediately preceding the year of the termination of
employment multiplied by (b) the Base Salary in effect on the date of the
Executive's termination of employment multiplied by (c) a fraction, the
numerator of which is the number of days in the current calendar year prior
to the date of the termination of employment and the denominator of which
is 365;
(4) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of the termination of employment
become immediately exercisable;
(5) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of the termination of
employment remain exercisable until the end of the earlier of (i) the
one-year period following the date of the termination of employment or (ii)
the date the option otherwise expires;
(6) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(7) continued participation in medical, dental, hospitalization and
life insurance coverage and in all other employee plans and programs in
which he was participating on the date of the termination of employment
until he attains age 65 as if he were an employee; and
(8) other or additional benefits in accordance with applicable plans
and programs of the Company.
If the Executive is precluded from continuing his participation in any
employee benefit plan or program as provided in Section 11(b)(7) above, he shall
be provided the after-tax economic equivalent of the benefits provided under the
plan or program in which he is unable to participate. The economic equivalent of
any benefit foregone shall be deemed to be the competitive cost that would
reasonably be incurred by the Executive in obtaining such benefit himself on an
individual basis.
In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 24 below.
(c) Termination of Employment by the Company for Cause.
(1) A termination of employment for Cause shall not take effect unless
the provisions of this Section 11(c)(1) are complied with. The Executive
shall be given written notice by the Board of the intention to terminate
him for Cause, and such notice:
i) to state in reasonable detail the particular act or acts or
failure or failures to act that constitute the grounds on which the
proposed termination of employment for Cause is based, and
ii) to be given within six months of the Board learning of such act
or acts or failure or failures to act.
Unless the termination of employment for Cause is pursuant to Section
1(e)(1) hereof, the Executive shall have 20 days after the date that such
written notice has been given to the Executive in which to cure such
conduct, to the extent such cure is possible. If he fails to cure such
conduct or such termination of employment for Cause is pursuant to Section
1(e)(1) hereof, the Executive shall then be entitled to a hearing before
the Board. Such hearing shall be held within 20 days of such notice to the
Executive, provided he requests such hearing within 10 days of the written
notice from the Board of the intention to terminate him for Cause. If,
within 5 days following such hearing, the Executive is furnished written
notice by the Board confirming that, in its judgment, grounds for Cause on
the basis of the original notice exist, he shall thereupon be terminated
for Cause.
(2) In the event the Company terminates the Executive's employment for
Cause, he shall be entitled to:
i) Base Salary earned but not paid prior to the date of the
termination of employment;
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ii) any amounts earned, accrued or owing to the Executive but not
yet paid under Section 7, 8, or 9 above; and
iii) other or additional benefits in accordance with applicable
plans or programs of the Company.
(3) In addition, in the event of a termination of employment for
Cause, the Executive shall immediately forfeit all stock options granted
under Section 6 above and held by the Executive on the date of the
termination of employment.
(4) Notwithstanding anything herein to the contrary, if following a
termination of the Executive's employment by the Company for Cause based
upon the conviction of the Executive for a felony or any crime against the
Company such conviction is overturned in a final determination on appeal,
the Executive shall be entitled to the payments and the economic equivalent
of the benefits the Executive would have received under Section 11(d)
hereof if his employment had been terminated by the Company without Cause.
(d) Termination of Employment by the Company Without Cause. In the event
the Executive's employment is terminated without Cause, other than due to
Disability or death, the Executive shall be entitled to:
(1) Base Salary earned but not paid prior to the date of the
termination of employment;
(2) Base Salary, at the annualized rate in effect on the date of the
termination of the Executive's employment for the longer of (i) the end of
the Term of Employment or (ii) 24 months, payable as a lump sum using as a
discount rate the long-term applicable federal rate compounded annually as
published by the Internal Revenue Service for the month in which the
termination of employment occurs;
(3) an amount equal to the product of (a) the average percentage of
Base Salary paid to the Executive as annual incentive bonuses for the two
calendar years immediately preceding the year of the termination of
employment multiplied by (b) the Base Salary in effect on the date of the
Executive's termination of employment;
(4) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of the termination of employment
become immediately exercisable;
(5) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of the termination of
employment remain exercisable until the date the option would otherwise
expire;
(6) the Company continue its payment of the Policy's annual premium
pursuant to Section 7 above;
(7) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(8) continued participation in all medical, dental, hospitalization
and life insurance coverage and in other employee benefit plans or programs
in which he was participating on the date of the termination of employment
until the earlier of:
i) the end of the period in respect of which a lump-sum severance
payment is made;
ii) the date, or dates, he receives equivalent coverage and
benefits under the plans and programs of a subsequent employer (such
coverage and benefits to be determined on a coverage-by-coverage, or
benefit-by-benefit, basis);
provided, however, that (i) if the Executive is precluded from continuing
his participation in any employee benefit plan or program as provided in
Section 11(d)(8)(A) above, he shall be provided with the after-tax economic
equivalent of the benefits provided under the plan or program in which he
is unable to participate for the period specified in this Section 11(d)(8),
(ii) the economic equivalent of
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any benefit foregone shall be deemed to be the competitive cost that would
reasonably be incurred by the Executive in obtaining such benefit himself
on an individual basis, and (iii) payment of such after-tax economic
equivalent shall be made quarterly in advance; and
(9) other or additional benefits in accordance with applicable plans
and programs of the Company.
e. Termination of Employment by the Executive For Good Reason. The
Executive may terminate his employment for Good Reason. Upon a termination of
employment for Good Reason, the Executive shall be entitled to the payments and
benefits provided in Section 11(d) above; provided, however, that if the
Executive terminates his employment for Good Reason based on a reduction in Base
Salary as provided in Section 1(l)(1) above, then the Base Salary to be used
pursuant to Section 11(d)(2) above for the determination of the lump sum payment
shall be the Base Salary in effect immediately prior to such reduction.
f. Termination of Employment Following a Change in Control. If, following a
Change in Control, the Executive's employment is terminated by the Company
without Cause or by the Executive for Good Reason, the Executive shall be
entitled to the payments and benefits provided in Section 11(d); provided,
however, that the amount calculated under Section 11(d)(2) shall be payable as a
lump sum without discounting. Also, immediately following a Change in Control,
all amounts, entitlements or benefits in which the Executive is not yet vested
shall become fully vested except to the extent such vesting would be
inconsistent with the terms of the relevant plan; provided, however, that this
sentence shall be inapplicable to the options granted under Section 6 above.
g. Voluntary Termination of Employment by the Executive. In the event of a
termination of employment by the Executive on his own initiative, other than a
termination of employment due to death or Disability or a termination of
employment for Good Reason, the Executive shall have the same entitlements as
provided in Section 11(c)(2) above for a termination of employment for Cause,
except that all exercisable stock options granted under Section 6 above and held
by the Executive on the date of the termination of employment shall remain
exercisable until the earlier of (i) the end of the six-month period following
the date of the termination of employment or (ii) the date the option would
expire. A termination of employment under this Section 11(g) shall be effective
upon 30 days prior written notice to the Company and shall not be deemed a
breach of this Agreement.
h. Payment Following a Change in Control. In the event that the termination
of the Executive's employment follows a Change in Control and the aggregate of
all payments or benefits made or provided to the Executive under Section 11(f)
above and under all other plans and programs of the Company (the "Aggregate
Payment") is determined to constitute a "parachute payment" (as such term is
defined in Code Section 280G(b)(2)), the Company shall pay to the Executive,
prior to the time any excise tax imposed by Code Section 4999 ("Excise Tax") is
payable with respect to such Aggregate Payment, an additional amount which,
after the imposition of all income and excise taxes thereon, is equal to the
Excise Tax on the Aggregate Payment. The determination of whether the Aggregate
Payment constitutes a parachute payment and, if so, the amount to be paid to the
Executive and the time of payment pursuant to this Section 11(h) shall be made
by an independent auditor (the "Auditor") jointly selected by the Company and
the Executive and paid by the Company. The Auditor shall be a nationally
recognized United States public accounting firm which has not, during the two
years preceding the date of its selection, acted in any way on behalf of the
Company or any affiliate thereof. If the Executive and the Company cannot agree
on the firm to serve as the Auditor, then the Executive and the Company shall
each select one accounting firm and those two firms shall jointly select the
accounting firm to serve as the Auditor.
i. No Mitigation; No Offset. In the event of any termination of employment
under this Section 11, the Executive shall be under no obligation to seek other
employment and there shall be no offset against amounts due the Executive under
this Agreement on account of any remuneration attributable to any subsequent
employment that he may obtain except as specifically provided in this Section
11.
j. Nature of Payments. Any amounts due under this Section 11 are in the
nature of severance payments considered to be reasonable by the Company and are
not in the nature of a penalty.
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12. Confidentiality: Assignment of Rights.
a. During the Term of Employment and thereafter, the Executive shall not
disclose to anyone or make use of any trade secret or proprietary or
confidential information of the Company, including such trade secret or
proprietary or confidential information of any customer or other entity to which
the Company owes an obligation not to disclose such information, which he
acquires during the Term of Employment, including but not limited to records
kept in the ordinary course of business (collectively, the "Confidential
Information"), except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of the Company, (ii) when
required to do so by a court of law, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) with apparent jurisdiction
to order him to divulge, disclose or make accessible such information or (iii)
any such disclosure after such Confidential Information has become public
knowledge (other than by acts of the Executive or his representatives in
violation of this Agreement).
b. The Executive hereby sells, assigns and transfers to the Company all of
his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "rights") which during the
Term of Employment are made or conceived by him, alone or with others and which
are within or arise out of any general field of the Company's business or arise
out of any work he performs or information he receives regarding the business of
the Company while employed by the Company. The Executive shall fully disclose to
the Company as promptly as available all information known or possessed by him
concerning the rights referred to in the preceding sentence, and upon request by
the Company and without any further remuneration in any form to him by the
Company, but at the expense of the Company, execute all applications for patents
and for copyright registration, assignments thereof and other instruments and do
all things which the Company may deem necessary to vest and maintain in it the
entire right, title and interest in and to all such rights.
13. Noncompetition; Nonsolicitation.
a. The Executive covenants and agrees that he shall not directly or
indirectly engage in a Competitive Activity during (i) the Term of Employment
and (ii) in the event of a voluntary termination of employment described in
Section 11(g) above, the six-month period following the date of the termination
of employment. In addition, the Executive shall not directly or indirectly
solicit, negotiate with or enter into discussion with the shareholders or
representatives of any Company Target during (i) the Term of Employment and (ii)
in the event of a voluntary termination of employment pursuant to Section 11(g)
above, the one-year period following the date of the termination of employment.
The Executive covenants and agrees that he shall not directly or indirectly
solicit the Company's (or any subsidiary's) (i) employees during the 18-month
period following the date of termination of employment or (ii) agents, brokers
and/or policyholders during the 36-month period following the date of
termination of employment.
b. The Parties acknowledge that in the event of a breach or threatened
breach of Section 13(a) above, the Company shall not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Section
13(a) above, the Company shall be entitled to such equitable and injunctive
relief as may be available to restrain the Executive and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of Section 13(a) above.
Nothing in this Agreement shall be construed as prohibiting the Company from
pursuing any other remedies available at law or in equity for breach or
threatened breach of Section 13(a) above, including the recovery of damages.
c. The Company and the Executive intend that the Knightsbridge Agreement
will provide, among other things, for the potential forfeiture by the Executive
of the consideration paid to him thereunder in the event of a breach by the
Executive of any of the provisions of Section 13(a) above.
14. Indemnification.
a. The Company agrees that if the Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that he is or was a director, officer or employee of the Company or is or
was serving at the request of
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the Company as a director, officer, member, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether or not the basis of such
Proceeding is the Executive's alleged action in an official capacity while
serving as a director, officer, member, employee or agent, the Executive shall
be indemnified and held harmless by the Company to the fullest extent legally
permitted or authorized by the Company's certificate of incorporation or bylaws
or resolutions of the Company's Board of Directors or, if greater, by the laws
of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, and such
indemnification shall continue as to the Executive even if he has ceased to be a
director, member, employee or agent of the Company or other entity and shall
inure to the benefit of the Executive's heirs, executors and administrators. The
Company shall advance to the Executive all reasonable costs and expenses
incurred by him in connection with a Proceeding within 20 days after receipt by
the Company of a written request for such advance accompanied by such supporting
documentation as the Company may reasonably request. Such request shall include
an undertaking by the Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses.
b. Neither the failure of the Company (including its board of directors,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of any proceeding concerning payment of amounts claimed by the
Executive under Section 14(a) above that indemnification of the Executive is
proper because he has met the applicable standard of conduct, nor a
determination by the Company (including its board of directors, independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.
c. The Company agrees to continue and maintain a directors and officers'
liability insurance policy covering the Executive to the extent the Company
provides such coverage for its other executive officers.
15. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence of this
Agreement shall not prohibit or restrict the Executive's entitlement to full
participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
16. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company; provided, however, that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 21 below. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
17. Representation.
The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement
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between it and any other person, firm or organization. The Executive represents
that he knows of no agreement between him and any other person, firm or
organization that would be violated by the performance of his obligations under
this Agreement.
18. Amendment or Waiver.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.
19. Severability.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
20. Survivorship.
The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
21. Beneficiaries/References.
The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
22. Governing Law/Jurisdiction.
Except as provided in Section 14 above, this Agreement shall be governed by
and construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement shall, at
the election of the Executive or the Company, be resolved by binding
arbitration, to be held in New York City in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Costs of the arbitration or litigation, including, without limitation,
reasonable attorneys' fees of both Parties, shall be borne by the Party who does
not prevail. Pending the resolution of any arbitration or court proceeding, the
Company shall continue payment of all amounts due the Executive under this
Agreement and all benefits to which the Executive is entitled at the time the
dispute arises.
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24. Notices.
Any notice given to a Party shall be in writing and shall be deemed to have
been given when delivered personally or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently give such notice of:
<TABLE>
<S> <C>
If to the Company: PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, NY 10151
Attention: General Counsel
With a copy to: Jeremy W. Dickens, Esq.
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas 75201-6950
If to the Executive: David J. Stone
745 Fifth Avenue
New York, NY 10151
</TABLE>
25. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
-------------------------------
Scott D. Silverman
Senior Vice President,
General Counsel
By: /s/ KENNETH ROMAN
-------------------------------
Kenneth Roman
Chairman Compensation
Committee
/s/ DAVID J. STONE
-------------------------------
David J. Stone
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EXHIBIT 10.13
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the 7th day of June, 1996 by and
between PennCorp Financial Group, Inc., a Delaware corporation (together with
its successors and assigns permitted under this Agreement, the "Company"), and
Steven W. Fickes (the "Executive").
WITNESSETH:
WHEREAS, the Executive is the President and Chief Financial Officer of the
Company; and
WHEREAS, the Company desires to continue to employ the Executive and to
enter into an employment agreement embodying the terms of such employment (the
"Agreement"); and
WHEREAS, the Executive desires to enter into the Agreement and to accept
such employment, subject to the terms and provisions of the Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
(a) "Annual Incentive Plan" shall mean the Company's 1996 Senior Executive
Annual Incentive Award Plan.
(b) "Approved Medical Doctor" shall mean a medical doctor selected by the
Company and the Executive for the purposes of determining Disability. In the
event that the Company and the Executive cannot agree on a medical doctor, then
each Party shall select a medical doctor and the two medical doctors shall
select a third medical doctor who shall be the Approved Medical Doctor.
(c) "Base Salary" shall mean the salary provided for in Section 4 below or
any increased salary granted to the Executive pursuant to Section 4.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Cause" shall mean:
(1) the Executive (i) is convicted of or (ii) pleads guilty or nolo
contendere to (a) a felony or (b) a crime against the Company that causes
or is reasonably likely to cause material economic harm to the Company; or
(2) the Executive engages in conduct that constitutes willful gross
neglect or willful gross misconduct in carrying out his duties under the
Agreement, resulting, in either case, in material economic harm to the
Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(g) "Company Target" shall mean any entity with which the Company has
actively engaged in discussions to acquire, merge or enter into any joint
venture during the 12-month period ending on the date of the Executive's
termination of employment.
(h) A "Change in Control" shall mean the first to occur of the following
events:
(1) any "person" (as such term is used in Sections 3(a)(9) and 13(d)
of the Exchange Act) becomes a "beneficial owner" (as such term is used in
Rule 13d-3 under the Exchange Act) of more than 25 percent of the Voting
Stock of the Company;
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(2) the majority of the Board consists of individuals other than
Incumbent Directors;
(3) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets;
(4) all or substantially all of the assets or business of the Company
are disposed of pursuant to a merger, consolidation or other transaction,
unless (i) the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting
Stock of the Company, at least 60 percent of the Voting Stock or other
ownership interests of the entity or entities, if any, that succeed to the
business of the Company and (ii) the successor entity (or entities) has
assumed all obligations under the Agreement; or
(5) the Company combines with another company and is the surviving
corporation; provided, however, that immediately after the combination, the
shareholders of the Company immediately prior to the combination hold,
directly or indirectly, less than 60 percent of the Voting Stock of the
combined company (there being excluded from the number of shares held by
such shareholders, but not from the Voting Stock of the combined company,
any shares received by affiliates (as such term is defined in Rule 12b-2 of
the Exchange Act) of such other company in exchange for stock of such other
company).
(i) "Competitive Activity" shall mean any activity engaged in by the
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with the Company. For this
purpose, an activity which is competitive with the Company shall mean a business
that is primarily involved in the acquisition of life insurance companies.
Notwithstanding anything to the contrary in this Section 1(i), an activity shall
not be deemed to be a Competitive Activity solely as a result of the Executive's
being employed by or otherwise associated with a business of which a unit is in
competition with the Company or any Subsidiary but as to which unit the
Executive does not have direct or indirect responsibilities.
(j) "Disability" shall mean the Executive's inability to substantially
perform his duties and responsibilities under the Agreement for a period of 180
days during any 240-day period as determined by an Approved Medical Doctor.
(k) "Effective Date" shall mean April 15, 1996.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, including regulations thereunder and successor
provisions and regulations thereto.
(m) "Good Reason" shall mean the occurrence of any of the following events
within the 60-day period preceding the termination of employment by the
Executive:
(1) a reduction in the Executive's Base Salary or any material failure
by the Company to honor its obligations under Sections 7, 8, 9 or 10
hereof, in any such case, without the Executive's prior written consent;
(2) a material change in the Executive's position, duties or
responsibilities with respect to his employment by the Company under the
Agreement without the Executive's prior written consent;
(3) the failure to elect or reelect the Executive to any of the
positions described in Section 3 below (including his position as a member
of the Board) or the removal of him from any such position (other than a
removal resulting from the termination of the Executive's employment for
Cause pursuant to Section 11(c) below);
(4) a reduction in the Executive's annual target bonus opportunity
below $800,000 or any material change in the Executive's participation in
the Annual Incentive Plan without the Executive's prior written consent;
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(5) an actual change by the Board in the Executive's principal work
location by more than 25 miles and more than 25 miles from the Executive's
principal place of abode as of the date hereof without the Executive's
prior written consent;
(6) the failure of the Company to obtain the assumption in writing of
its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company within 45 days after a
merger, consolidation, sale or similar transaction;
(7) David J. Stone shall cease to serve as the Chief Executive Officer
of the Company, unless the Executive shall approve his successor; or
(8) a Change in Control.
(n) "Incumbent Directors" shall mean the members of the Board as of the
Effective Date; provided, however, that any person becoming a director
subsequent to such date whose election or nomination for election was supported
by 75 percent of the directors who then comprised the Incumbent Directors shall
be considered to be an Incumbent Director.
(o) "Stock" shall mean the Common Stock of the Company.
(p) "Stock Plan" shall mean the Company's 1996 Stock Award and Stock Option
Plan.
(q) "Subsidiary" of the Company shall mean any corporation of which the
Company owns, directly or indirectly, more than 50 percent of the Voting Stock
or any other business entity in which the Company directly or indirectly has an
ownership interest of more than 50 percent.
(r) "Term of Employment" shall mean the period specified in Section 2
below.
(s) "Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2. Term of Employment.
The Company hereby employs the Executive, and the Executive hereby accepts
such employment, for the period commencing on the Effective Date and ending on
the fifth anniversary of the Effective Date, subject to earlier termination of
the Term of Employment in accordance with the terms of the Agreement; provided,
however, this Agreement shall become null and void ab initio and of no further
force and effect unless (i) prior to January 1, 1997 (or such other date to
which the Executive and the Company may agree), the Company and the Executive
(or affiliates of the Executive) enter into a definitive agreement (the
"Knightsbridge Agreement") providing for the sale (the "Sale") by the Executive
(or such affiliates) to the Company of the interests of the Executive (or such
affiliates) in Knightsbridge Capital Fund I, L.P. ("Knightsbridge") and
Knightsbridge Management, L.L.C., (ii) the stockholders of the Company approve
the Sale no later than at the Company's 1997 annual meeting of stockholders, and
(iii) the Company's stockholders approve the Annual Incentive Plan and the Stock
Plan at the Company's 1996 annual meeting of stockholders.
3. Position, Duties and Responsibilities.
(a) On the Effective Date and continuing for the remainder of the Term of
Employment, the Executive shall be employed as the President and Chief Financial
Officer of the Company and be responsible for the management of the financial
affairs of the Company and such other functions as shall be determined by the
Chief Executive Officer of the Company. The Executive, in carrying out his
duties under the Agreement, shall report to the Chief Executive Officer of the
Company and to the Board.
(b) It is the intention of the Parties that as of the Effective Date and
continuing for the remainder of the Term of Employment, the Executive shall
serve as a member of the Board and of the Executive Committee thereof.
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(c) Notwithstanding anything herein to the contrary, nothing shall preclude
the Executive from:
(1) serving on the boards of directors of other corporations if the
Board consents in writing to such service; provided, however, that consent
by the Board is not required for serving on the boards of directors of
corporations in which Knightsbridge had an investment at the time at which
the Executive originally undertook such position and so long as all
directors' fees and any other compensation paid by such corporation in
respect of the Executive's services as a member of such board while he is
an employee of the Company are paid to the Company;
(2) serving on the boards of a reasonable number of trade associations
and/or charitable organizations;
(3) engaging in charitable activities and community affairs; and
(4) managing his personal investments and affairs.
4. Base Salary.
The Executive shall be paid an annualized Base Salary, payable in
accordance with the regular payroll practices of the Company, of $750,000. The
Base Salary shall be reviewed no less frequently than annually for increase in
the discretion of the Board and/or the Compensation Committee thereof.
5. Annual Incentive Award.
Provided that the Annual Incentive Plan is approved by the Company's
shareholders, the Executive shall participate in the Annual Incentive Plan and
shall have a minimum annual target bonus opportunity under such Plan of $800,000
and a maximum bonus opportunity of 2 times such minimum. Payment of annual
incentive awards shall be made at the same time that other senior level
executives of the Company receive their incentive awards unless otherwise agreed
to by the Executive.
6. Long-Term Incentive Award.
Provided that the Stock Plan is approved by the Company's shareholders, the
Executive shall participate in the Stock Plan and shall be granted under the
Stock Plan, as of the Effective Date, an option to purchase 559,000 shares of
Stock. The option shall be divided into four tranches as set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF EXERCISE PRICE
TRANCHE STOCK UNDERLYING TRANCHE PER SHARE
- ------- ------------------------ --------------
<S> <C> <C> <C>
1......................... 250,000 $ 29.50
2......................... 103,000 $ 32.45
3......................... 103,000 $ 35.695
4......................... 103,000 $ 39.325
</TABLE>
Twenty-five percent of each tranche shall become exercisable (vest) on the first
four anniversaries of the Effective Date and the option shall expire on the
fifth anniversary of the Effective Date.
7. Employee Benefit Programs.
(a) During the Term of Employment, the Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the senior-level executives of the Company or to its employees
generally, as such plans or programs may be in effect from time to time,
including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded.
(b) In addition, the Company shall immediately cause one of its life
insurance subsidiaries acceptable to the Executive to issue the Executive a life
insurance policy having a death benefit equal to $5,000,000 (the "Policy") with
the beneficiary as designated by the Executive. Amounts due under the policy
will be payable
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<PAGE> 5
in accordance with the terms thereof notwithstanding any other provision of this
Agreement. The Company shall incur the first $10,000 of the annual cost of the
Policy, and the Executive shall pay the portion of the annual cost of the Policy
that exceeds $10,000 (if any).
8. Reimbursement of Business and Other Expenses.
The Executive is authorized to incur reasonable expenses in carrying out
his duties and responsibilities under the Agreement and the Company shall
promptly reimburse him for all business expenses incurred in connection with
carrying out the business of the Company, subject to documentation in accordance
with the Company's policy.
9. Perquisites.
(a) During the Term of Employment, the Executive shall be entitled to
participate in any of the Company's executive fringe benefits in accordance with
the terms and conditions of such arrangements as are in effect from time to time
for the senior-level executives of the Company.
(b) In addition, the Company shall:
(1) provide the Executive with a luxury automobile and pay the
reasonable expenses of such automobile; and
(2) reimburse the Executive for any expenses incurred by the Executive
relating to personal financial and/or tax counselling; provided, however,
that such reimbursement shall not exceed $10,000 per year.
10. Vacation.
The Executive shall be entitled to 6 weeks paid vacation each year. In the
event that the Executive does not use all of his vacation time during an
applicable calendar year, he shall be entitled to carry forward such unused
vacation time; provided, however, that only four weeks of unused vacation time
(including all previously carried forward unused vacation time) may be carried
forward from any one calendar year to the next calendar year.
11. Termination of Employment.
(a) Termination of Employment Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries as
the case may be, shall be entitled to:
(1) Base Salary earned but not paid prior to the date of death;
(2) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of death become immediately
exercisable;
(3) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of death remain
exercisable until the end of the earlier of (i) the one-year period
following the date of death or (ii) the date the option would otherwise
expire;
(4) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(5) other or additional benefits in accordance with applicable plans
and programs of the Company.
(b) Termination of Employment Due to Disability. In the event the
Executive's employment is terminated due to his Disability, he shall be entitled
to the following (but in no event less than the benefits due him under the then
current disability program of the Company):
(1) Base Salary earned but not paid prior to the date of the
termination of employment;
(2) an amount equal to the sum of 60% percent of Base Salary, at the
annual rate in effect on the date of the termination of employment, for a
period ending on the last day of the month in which he
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<PAGE> 6
becomes 65, less the amount of any disability benefits provided to the
Executive by the Company (other than benefits attributable to the
Executive's own contributions) under any disability plan;
(3) an amount equal to the product of (a) the average percentage of
Base Salary paid to the Executive as annual incentive bonuses for the two
calendar years immediately preceding the year of the termination of
employment multiplied by (b) the Base Salary in effect on the date of the
Executive's termination of employment multiplied by (c) a fraction, the
numerator of which is the number of days in the current calendar year prior
to the date of the termination of employment and the denominator of which
is 365;
(4) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of the termination of employment
become immediately exercisable;
(5) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of the termination of
employment remain exercisable until the end of the earlier of (i) the
one-year period following the date of the termination of employment or (ii)
the date the option otherwise expires;
(6) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(7) continued participation in medical, dental, hospitalization and
life insurance coverage and in all other employee plans and programs in
which he was participating on the date of the termination of employment
until he attains age 65 as if he were an employee; and
(8) other or additional benefits in accordance with applicable plans
and programs of the Company.
If the Executive is precluded from continuing his participation in any
employee benefit plan or program as provided in Section 11(b)(7) above, he shall
be provided the after-tax economic equivalent of the benefits provided under the
plan or program in which he is unable to participate. The economic equivalent of
any benefit foregone shall be deemed to be the competitive cost that would
reasonably be incurred by the Executive in obtaining such benefit himself on an
individual basis.
In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 24 below.
(c) Termination of Employment by the Company for Cause.
(1) A termination of employment for Cause shall not take effect unless
the provisions of this Section 11(c)(1) are complied with. The Executive
shall be given written notice by the Board of the intention to terminate
him for Cause, and such notice:
(A) to state in reasonable detail the particular act or acts or
failure or failures to act that constitute the grounds on which the
proposed termination of employment for Cause is based, and
(B) to be given within six months of the Board learning of such act
or acts or failure or failures to act.
Unless the termination of employment for Cause is pursuant to Section
1(e)(1) hereof, the Executive shall have 20 days after the date that such
written notice has been given to the Executive in which to cure such
conduct, to the extent such cure is possible. If he fails to cure such
conduct or such termination of employment for Cause is pursuant to Section
1(e)(1) hereof, the Executive shall then be entitled to a hearing before
the Board. Such hearing shall be held within 20 days of such notice to the
Executive, provided he requests such hearing within 10 days of the written
notice from the Board of the intention to terminate him for Cause. If,
within 5 days following such hearing, the Executive is furnished written
notice by the Board confirming that, in its judgment, grounds for Cause on
the basis of the original notice exist, he shall thereupon be terminated
for Cause.
6
<PAGE> 7
(2) In the event the Company terminates the Executive's employment for
Cause, he shall be entitled to:
(A) Base Salary earned but not paid prior to the date of the
termination of employment;
(B) any amounts earned, accrued or owing to the Executive but not
yet paid under Section 7, 8, or 9 above; and
(C) other or additional benefits in accordance with applicable
plans or programs of the Company.
(3) In addition, in the event of a termination of employment for
Cause, the Executive shall immediately forfeit all stock options granted
under Section 6 above and held by the Executive on the date of the
termination of employment.
(4) Notwithstanding anything herein to the contrary, if following a
termination of the Executive's employment by the Company for Cause based
upon the conviction of the Executive for a felony or any crime against the
Company such conviction is overturned in a final determination on appeal,
the Executive shall be entitled to the payments and the economic equivalent
of the benefits the Executive would have received under Section 11(d)
hereof if his employment had been terminated by the Company without Cause.
(d) Termination of Employment by the Company Without Cause. In the event
the Executive's employment is terminated without Cause, other than due to
Disability or death, the Executive shall be entitled to:
(1) Base Salary earned but not paid prior to the date of the
termination of employment;
(2) Base Salary, at the annualized rate in effect on the date of the
termination of the Executive's employment for the longer of (i) the end of
the Term of Employment or (ii) 24 months, payable as a lump sum using as a
discount rate the long-term applicable federal rate compounded annually as
published by the Internal Revenue Service for the month in which the
termination of employment occurs;
(3) an amount equal to the product of (a) the average percentage of
Base Salary paid to the Executive as annual incentive bonuses for the two
calendar years immediately preceding the year of the termination of
employment multiplied by (b) the Base Salary in effect on the date of the
Executive's termination of employment;
(4) have all unexercisable stock options granted under Section 6 above
and held by the Executive on the date of the termination of employment
become immediately exercisable;
(5) have all exercisable and unexercisable stock options granted under
Section 6 above and held by the Executive on the date of the termination of
employment remain exercisable until the date the option would otherwise
expire;
(6) the Company continue its payment of the Policy's annual premium
pursuant to Section 7 above;
(7) any amounts earned, accrued or owing to the Executive but not yet
paid under Section 7, 8, or 9 above; and
(8) continued participation in all medical, dental, hospitalization
and life insurance coverage and in other employee benefit plans or programs
in which he was participating on the date of the termination of employment
until the earlier of:
(A) the end of the period in respect of which a lump-sum severance
payment is made;
(B) the date, or dates, he receives equivalent coverage and
benefits under the plans and programs of a subsequent employer (such
coverage and benefits to be determined on a coverage-by-coverage, or
benefit-by-benefit, basis);
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<PAGE> 8
provided, however, that (i) if the Executive is precluded from continuing
his participation in any employee benefit plan or program as provided in
Section 11(d)(8)(A) above, he shall be provided with the after-tax economic
equivalent of the benefits provided under the plan or program in which he
is unable to participate for the period specified in this Section 11(d)(8),
(ii) the economic equivalent of any benefit foregone shall be deemed to be
the competitive cost that would reasonably be incurred by the Executive in
obtaining such benefit himself on an individual basis, and (iii) payment of
such after-tax economic equivalent shall be made quarterly in advance; and
(9) other or additional benefits in accordance with applicable plans
and programs of the Company.
(e) Termination of Employment by the Executive For Good Reason. The
Executive may terminate his employment for Good Reason. Upon a termination of
employment for Good Reason, the Executive shall be entitled to the payments and
benefits provided in Section 11(d) above; provided, however, that if the
Executive terminates his employment for Good Reason based on a reduction in Base
Salary as provided in Section 1(l)(1) above, then the Base Salary to be used
pursuant to Section 11(d)(2) above for the determination of the lump sum payment
shall be the Base Salary in effect immediately prior to such reduction.
(f) Termination of Employment Following a Change in Control. If, following
a Change in Control, the Executive's employment is terminated by the Company
without Cause or by the Executive for Good Reason, the Executive shall be
entitled to the payments and benefits provided in Section 11(d); provided,
however, that the amount calculated under Section 11(d)(2) shall be payable as a
lump sum without discounting. Also, immediately following a Change in Control,
all amounts, entitlements or benefits in which the Executive is not yet vested
shall become fully vested except to the extent such vesting would be
inconsistent with the terms of the relevant plan; provided, however, that this
sentence shall be inapplicable to the options granted under Section 6 above.
(g) Voluntary Termination of Employment by the Executive. In the event of a
termination of employment by the Executive on his own initiative, other than a
termination of employment due to death or Disability or a termination of
employment for Good Reason, the Executive shall have the same entitlements as
provided in Section 11(c)(2) above for a termination of employment for Cause,
except that all exercisable stock options granted under Section 6 above and held
by the Executive on the date of the termination of employment shall remain
exercisable until the earlier of (i) the end of the six-month period following
the date of the termination of employment or (ii) the date the option would
expire. A termination of employment under this Section 11(g) shall be effective
upon 30 days prior written notice to the Company and shall not be deemed a
breach of this Agreement.
(h) Payment Following a Change in Control. In the event that the
termination of the Executive's employment follows a Change in Control and the
aggregate of all payments or benefits made or provided to the Executive under
Section 11(f) above and under all other plans and programs of the Company (the
"Aggregate Payment") is determined to constitute a "parachute payment" (as such
term is defined in Code Section 280G(b)(2)), the Company shall pay to the
Executive, prior to the time any excise tax imposed by Code Section 4999
("Excise Tax") is payable with respect to such Aggregate Payment, an additional
amount which, after the imposition of all income and excise taxes thereon, is
equal to the Excise Tax on the Aggregate Payment. The determination of whether
the Aggregate Payment constitutes a parachute payment and, if so, the amount to
be paid to the Executive and the time of payment pursuant to this Section 11(h)
shall be made by an independent auditor (the "Auditor") jointly selected by the
Company and the Executive and paid by the Company. The Auditor shall be a
nationally recognized United States public accounting firm which has not, during
the two years preceding the date of its selection, acted in any way on behalf of
the Company or any affiliate thereof. If the Executive and the Company cannot
agree on the firm to serve as the Auditor, then the Executive and the Company
shall each select one accounting firm and those two firms shall jointly select
the accounting firm to serve as the Auditor.
(i) No Mitigation; No Offset. In the event of any termination of employment
under this Section 11, the Executive shall be under no obligation to seek other
employment and there shall be no offset against amounts
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<PAGE> 9
due the Executive under this Agreement on account of any remuneration
attributable to any subsequent employment that he may obtain except as
specifically provided in this Section 11.
(j) Nature of Payments. Any amounts due under this Section 11 are in the
nature of severance payments considered to be reasonable by the Company and are
not in the nature of a penalty.
12. Confidentiality: Assignment of Rights.
(a) During the Term of Employment and thereafter, the Executive shall not
disclose to anyone or make use of any trade secret or proprietary or
confidential information of the Company, including such trade secret or
proprietary or confidential information of any customer or other entity to which
the Company owes an obligation not to disclose such information, which he
acquires during the Term of Employment, including but not limited to records
kept in the ordinary course of business (collectively, the "Confidential
Information"), except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of the Company, (ii) when
required to do so by a court of law, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) with apparent jurisdiction
to order him to divulge, disclose or make accessible such information or (iii)
any such disclosure after such Confidential Information has become public
knowledge (other than by acts of the Executive or his representatives in
violation of this Agreement).
(b) The Executive hereby sells, assigns and transfers to the Company all of
his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "rights") which during the
Term of Employment are made or conceived by him, alone or with others and which
are within or arise out of any general field of the Company's business or arise
out of any work he performs or information he receives regarding the business of
the Company while employed by the Company. The Executive shall fully disclose to
the Company as promptly as available all information known or possessed by him
concerning the rights referred to in the preceding sentence, and upon request by
the Company and without any further remuneration in any form to him by the
Company, but at the expense of the Company, execute all applications for patents
and for copyright registration, assignments thereof and other instruments and do
all things which the Company may deem necessary to vest and maintain in it the
entire right, title and interest in and to all such rights.
13. Noncompetition; Nonsolicitation.
(a) The Executive covenants and agrees that he shall not directly or
indirectly engage in a Competitive Activity during (i) the Term of Employment
and (ii) in the event of a voluntary termination of employment described in
Section 11(g) above, the six-month period following the date of the termination
of employment. In addition, the Executive shall not directly or indirectly
solicit, negotiate with or enter into discussion with the shareholders or
representatives of any Company Target during (i) the Term of Employment and (ii)
in the event of a voluntary termination of employment pursuant to Section 11(g)
above, the one-year period following the date of the termination of employment.
The Executive covenants and agrees that he shall not directly or indirectly
solicit the Company's (or any subsidiary's) (i) employees during the 18-month
period following the date of termination of employment or (ii) agents, brokers
and/or policyholders during the 36-month period following the date of
termination of employment.
(b) The Parties acknowledge that in the event of a breach or threatened
breach of Section 13(a) above, the Company shall not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Section
13(a) above, the Company shall be entitled to such equitable and injunctive
relief as may be available to restrain the Executive and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of Section 13(a) above.
Nothing in this Agreement shall be construed as prohibiting the Company from
pursuing any other remedies available at law or in equity for breach or
threatened breach of Section 13(a) above, including the recovery of damages.
(c) The Company and the Executive intend that the Knightsbridge Agreement
will provide, among other things, for the potential forfeiture by the Executive
of the consideration paid to him thereunder in the event of a breach by the
Executive of any of the provisions of Section 13(a) above.
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<PAGE> 10
14. Indemnification.
(a) The Company agrees that if the Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that he is or was a director, officer or employee of the Company or is or
was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is the Executive's alleged action in
an official capacity while serving as a director, officer, member, employee or
agent, the Executive shall be indemnified and held harmless by the Company to
the fullest extent legally permitted or authorized by the Company's certificate
of incorporation or bylaws or resolutions of the Company's Board of Directors
or, if greater, by the laws of the State of Delaware, against all cost, expense,
liability and loss (including, without limitation, attorney's fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even if
he has ceased to be a director, member, employee or agent of the Company or
other entity and shall inure to the benefit of the Executive's heirs, executors
and administrators. The Company shall advance to the Executive all reasonable
costs and expenses incurred by him in connection with a Proceeding within 20
days after receipt by the Company of a written request for such advance
accompanied by such supporting documentation as the Company may reasonably
request. Such request shall include an undertaking by the Executive to repay the
amount of such advance if it shall ultimately be determined that he is not
entitled to be indemnified against such costs and expenses.
(b) Neither the failure of the Company (including its board of directors,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of any proceeding concerning payment of amounts claimed by the
Executive under Section 14(a) above that indemnification of the Executive is
proper because he has met the applicable standard of conduct, nor a
determination by the Company (including its board of directors, independent
legal counsel or stockholders) that the Executive has not met such applicable
standard of conduct, shall create a presumption that the Executive has not met
the applicable standard of conduct.
(c) The Company agrees to continue and maintain a directors and officers'
liability insurance policy covering the Executive to the extent the Company
provides such coverage for its other executive officers.
15. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence of this
Agreement shall not prohibit or restrict the Executive's entitlement to full
participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
16. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company; provided, however, that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 21 below. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended
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<PAGE> 11
to confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
17. Representation.
The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. The Executive represents that he knows
of no agreement between him and any other person, firm or organization that
would be violated by the performance of his obligations under this Agreement.
18. Amendment or Waiver.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.
19. Severability.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
20. Survivorship.
The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
21. Beneficiaries/References.
The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
22. Governing Law/Jurisdiction.
Except as provided in Section 14 above, this Agreement shall be governed by
and construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement shall, at
the election of the Executive or the Company, be resolved by binding
arbitration, to be held in New York City in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Costs of the arbitration or litigation, including, without limitation,
reasonable attorneys' fees of both Parties, shall be borne by the Party who does
not prevail. Pending the resolution of any arbitration or court proceeding, the
Company shall continue payment of all amounts due the Executive under this
Agreement and all benefits to which the Executive is entitled at the time the
dispute arises.
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<PAGE> 12
24. Notices.
Any notice given to a Party shall be in writing and shall be deemed to have
been given when delivered personally or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently give such notice of:
<TABLE>
<S> <C>
If to the Company: PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, NY 10151
Attention: General Counsel
With a copy to: Jeremy W. Dickens, Esq.
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas 75201-6950
If to the Executive: Steven W. Fickes
3 Metro Center
Suite 1600
Bethesda, MD 20817
</TABLE>
25. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
-------------------------------
Scott D. Silverman
Senior Vice President,
General Counsel
By: /s/ KENNETH ROMAN
-------------------------------
Kenneth Roman
Chairman Compensation
Committee
/s/ STEVEN W. FICKES
-------------------------------
Steven W. Fickes
12
<PAGE> 1
EXHIBIT 10.14
PENNCORP FINANCIAL GROUP, INC.
1996 STOCK AWARD AND STOCK OPTION PLAN
1. DEFINITIONS
The following terms shall have the following meanings unless the context
indicates otherwise:
1.1 "Award" shall mean either a Stock Award or a Stock Option.
1.2 "Board" shall mean the Board of Directors of the Company.
1.3 "Cause" shall mean the Participant:
(A) is convicted of a felony;
(B) engages in conduct that constitutes gross neglect or gross
misconduct in carrying out his or her duties as an Employee;
(C) engages in fraud, embezzlement, theft or dishonesty against the
Company or any Subsidiary;
(D) commits a willful or grossly negligent material violation of
law in connection with or in the course of the Participant's duties or
employment with the Company or any Subsidiary; or
(E) commits a willful or grossly negligent breach of any stated
material employment policy of the Company.
1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
1.5 "Committee" shall mean the Stock Award and Stock Option Committee
of the Board, or such other Board committee as may be designated by the
Board to administer the Plan; provided, however, that such committee shall
be comprised solely of not less than two Nonemployee Directors each of whom
qualifies as (i) a "disinterested person" (as such term is used in Rule
16b-3 under the Exchange Act) and (ii) an "outside director" (as such term
is used in Treasury Regulation Section 1.162-27(e)(3)).
1.6 "Common Stock" shall mean the common stock, $.01 par value per
share, of the Company.
1.7 "Company" shall mean PennCorp Financial Group, Inc., a Delaware
corporation.
1.8 "Disability" shall mean a disability as determined under the
Company's then existing long-term disability plan or program.
1.9 "Employee" shall mean a salaried employee of the Company or any
Subsidiary as described in Treasury Regulation Section 1.421-7(h).
1.10 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including regulations thereunder and
successor provisions and regulations thereto.
1.11 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, including regulations thereunder and successor
provisions and regulations thereto.
1.12 "Executive Committee" shall mean the Executive Committee of the
Board.
1.13 "Fair Market Value" shall mean:
(A) the closing price of the Common Stock on the date of
calculation (or on the last preceding trading date if Common Stock was
not traded on the date of calculation) if Common Stock is readily
tradeable on a national securities exchange or other market system; or
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(B) an amount determined in good faith by the Committee as the fair
market value of the Common Stock on the date of determination
if Common Stock is not readily tradeable on a national
securities exchange or other market system.
1.14 "ISO" shall mean an "incentive stock option" as such term is used
in Code Section 422.
1.15 "Nonemployee Director" shall mean a member of the Board who is
not an Employee.
1.16 "Nonqualified Stock Option" shall mean a Stock Option that does
not qualify as an ISO.
1.17 "Participant" shall mean any Employee to whom an Award has been
granted by the Committee under the Plan.
1.18 "Pecuniary Interest" shall mean "pecuniary interest" as such term
is used in Rule 16a-1(a)(2)(i) under the Exchange Act.
1.19 "Plan" shall mean the PennCorp Financial Group, Inc. 1996 Stock
Award and Stock Option Plan.
1.20 "Retirement" shall mean a termination of employment from the
Company or any Subsidiary which constitutes a retirement under any
defined-benefit pension plan or defined-contribution pension plan
maintained by the Company or any Subsidiary which is either a tax-qualified
plan under Code Section 401(a) or is identified in writing by the Committee
as a defined-benefit pension plan or defined-contribution benefit plan.
1.21 "SEC" shall mean the Securities and Exchange Commission.
1.22 "Stock Award" shall mean the grant of Common Stock by the Company
to a Participant pursuant to Section 8 below or the grant of Common Stock
by the Company to a Nonemployee Director pursuant to Sections 10 and/or 11
below.
1.23 "Stock Award Agreement" shall mean a written agreement between
the Company and the Participant that establishes the terms, conditions,
restrictions and/or limitations applicable to a Stock Award in addition to
those established by the Plan and by the Committee's exercise of its
administrative powers.
1.24 "Stock Option" shall mean the grant by the Company of an option
to purchase Common Stock to a Participant pursuant to Section 9 below.
1.25 "Stock Option Agreement" shall mean a written agreement between
the Company and the Participant that establishes the terms, conditions,
restrictions and/or limitations applicable to a Stock Option in addition to
those established by the Plan and by the Committee's exercise of its
administrative powers.
1.26 "Subsidiary" shall mean a corporation of which the Company
directly or indirectly owns more than 50 percent of the Voting Stock or any
other business entity in which the Company directly or indirectly has an
ownership interest of more than 50 percent.
1.27 "Treasury Regulations" shall mean the regulations promulgated
under the Code by the United States Department of Treasury, as amended from
time to time.
1.28 "Voting Stock" shall mean capital stock of any class or classes
having general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2. PURPOSE
The purpose of the Plan is:
(a) to provide incentives which will attract, retain and motivate key
officers, Employees and Nonemployee Directors whose present and potential
contributions are important to the success of the Company and its
Subsidiaries;
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(b) to align the interests of key officers, Employees and Nonemployee
Directors with that of shareholders by providing incentives to such key
officers, Employees and Nonemployee Directors to enhance the performance of
the Common Stock through equity ownership in the Company; and
(c) to ensure that compensation paid under the Plan (other than
compensation attributable to ISOs) will be fully deductible for federal
income tax purposes.
3. TERM OF PLAN
The Plan shall be effective as of January 1, 1996, subject to approval by
the Company's shareholders at the 1996 annual meeting of shareholders. The Plan
shall terminate at the close of business on December 31, 2005, unless terminated
earlier by the Board pursuant to Section 16.
4. ADMINISTRATION
(a) The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such actions in
connection with the Plan and any Awards granted hereunder as it deems necessary
or advisable. All determinations and interpretations made by the Committee shall
be binding and conclusive on all Participants and their legal representatives.
No member of the Board, no member of the Committee and no Employee shall be
liable for any act or failure to act hereunder, except in circumstances
involving his or her bad faith, gross negligence or willful misconduct, or for
any act or failure to act hereunder by any other Board or Committee member or
Employee or by any agent to whom duties in connection with the administration of
the Plan have been delegated. The Company shall indemnify members of the
Committee and any agent of the Committee against any and all liabilities or
expenses to which they may be subjected by reason of any act or failure to act
with respect to their duties on behalf of the Plan, except in circumstances
involving such person's bad faith, gross negligence or willful misconduct.
(b) The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee, or any person to whom it has delegated duties as aforesaid, may
employ one or more persons to render advice with respect to any responsibility
the Committee or such person may have under the Plan. The Committee may employ
such legal or other counsel, consultants and agents as it deems desirable for
the administration of the Plan and may rely upon any opinion or computation
received from any such counsel, consultant or agent. Expenses incurred by the
Committee in the engagement of such counsel, consultant or agent shall be paid
by the Company or the Subsidiary whose Employees have benefitted from the Plan,
as determined by the Committee.
5. ELIGIBILITY
Participants shall consist of such officers and Employees of the Company
and its Subsidiaries as the Committee in its sole discretion determines to be
significantly responsible for the success and future growth and profitability of
the Company and whom the Committee may designate from time to time to receive
Awards under the Plan. In addition, all Nonemployee Directors of the Company
shall participate in the Plan, but only to the extent provided in Sections 10
and 11 below. Designation of a Participant in any year shall not require the
Committee to designate such person as a Participant in any other year or, once
designated, to receive the same type or amount of Award as granted to the
Participant in any other year.
6. SHARES SUBJECT TO PLAN
(a) Available Shares. The aggregate number of shares of Common Stock which
shall be available for grants of Awards under the Plan during its term shall be
2,800,000. Such shares of Common Stock available for issuance under the Plan may
be either authorized but unissued shares, shares of issued stock held in the
Company's treasury, or both, at the discretion of the Company, and subject to
any adjustments made in accordance with Section 6(c) below. Shares of Common
Stock underlying Stock Awards or Stock Options which terminate by expiration,
forfeiture, cancellation or otherwise without the issuance of such shares shall
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again be available for grants of Stock Awards and Stock Options under the Plan,
to the extent permitted by Rule 16b-3 under the Exchange Act. The number of
shares of Common Stock available for issuance under the Plan shall not be
reduced to reflect any dividends or dividend equivalents that are reinvested
into additional shares of Common Stock.
(b) Maximum Aggregate Number of Shares Underlying Stock Awards and Stock
Options Granted Under the Plan to Any Single Participant. The maximum aggregate
number of shares of Common Stock underlying Stock Awards that may be granted to
any single Participant during the life of the Plan shall be 1,500,000, subject
to adjustment as provided in Section 6(c) below. The maximum aggregate number of
shares of Common Stock underlying Stock Options that may be granted to any
single Participant during the life of the Plan shall be 1,500,000, subject to
adjustment as provided in Section 6(c) below. For purposes of the preceding
sentence, shares of Common Stock underlying Stock Options that are cancelled
shall continue to be counted in determining the maximum aggregate number of
shares of Common Stock that may be granted to any single Participant.
(c) Adjustment to Shares. If there is any change in the number of
outstanding shares of Common Stock through the declaration of stock dividends,
stock splits or the like, the number of shares of Common Stock underlying Stock
Awards and the number of shares of Common Stock underlying Stock Options and the
exercise prices of such Stock Options shall be automatically adjusted. If there
is any change in the number of outstanding shares of Common Stock through any
change in the capital account of the Company, or through a merger,
consolidation, separation (including a spinoff or other distribution of stock or
property), reorganization (whether or not such reorganization comes within the
meaning of such term in Code Section 368(a)) or partial or complete liquidation,
the Committee shall make appropriate adjustments in the number of shares of
Common Stock which may be issued under the Plan and to any single Participant,
and any adjustments and/or modifications to outstanding Stock Awards and Stock
Options as it deems appropriate. In the event of any other change in the capital
structure of the Company or in the Common Stock, the Committee shall also be
authorized to make such appropriate adjustments in the number of shares of
Common Stock available for issuance under the Plan and to any single
Participant, and any adjustments and/or modifications to outstanding Stock
Awards and Stock Options as it deems appropriate; provided, however, that (i)
each such adjustment with respect to an ISO shall comply with the rules of Code
Section 424(a) (or any successor provision) and (ii) in no event shall any
adjustment be made which would render any ISO granted hereunder other than an
ISO. In addition, the number of shares of Common Stock available for issuance
under the Plan shall be automatically adjusted to the extent necessary to
reflect any dividend equivalents paid in the form of Common Stock.
7. PERFORMANCE-BASED COMPENSATION
The Committee may condition the grant of any Award under the Plan to the
achievement of preestablished performance goals, and the Committee may subject
the vesting of any Award under the Plan to the achievement of preestablished
performance goals, in order to comply with the requirements of Code Section
162(m). In addition, the Committee may take whatever other actions shall be
necessary in order to qualify compensation attributable to Awards as
"performance-based compensation" under Code Section 162(m). Performance goals
shall be based on (i) any one or combination of the following financial measures
or (ii) growth in any one or combination of the following financial measures:
(a) revenue;
(b) cash flow;
(c) EBITDA;
(d) net income;
(e) earnings per share;
(f) return on assets; and/or
(g) return on equity.
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8. STOCK AWARDS
(a) Terms and Conditions. The Committee is authorized to grant Stock Awards
to Employees, subject to such terms, conditions, restrictions and/or
limitations, if any, as the Committee deems appropriate, including, but not
limited to, restrictions on transferability and continued employment; provided,
however, that such terms, conditions, restrictions and/or limitations are not
inconsistent with the Plan. The Committee may require the Participant to deliver
a duly signed stock power, endorsed in blank, relating to the Common Stock
underlying such Stock Award, and may also require that the stock certificates
evidencing such shares be held in custody or bear restrictive legends until the
restrictions thereon, if any, shall have lapsed. The Committee may accelerate
the date a Stock Award becomes transferable under such circumstances as it deems
appropriate.
(b) Limited Rights as Shareholders. During the period in which any shares
of Common Stock are subject to the restrictions imposed under Section 8(a)
above, a Participant to whom such restricted shares have been awarded shall not
have the right (i) to vote such shares and (ii) to receive dividends thereon.
(c) Stock Award Agreement. Any Stock Award granted under the Plan shall be
evidenced by a Stock Award Agreement which shall be signed by the Company and
the Participant.
9. STOCK OPTIONS
(a) Terms and Conditions. The Committee is authorized to grant Stock
Options to Employees. Stock Options may be ISOs or Nonqualified Stock Options,
or a combination of both. The Committee shall, in its sole discretion but after
having taken into account the recommendations of the Executive Committee with
respect to the granting of Stock Options to Employees (other than to an Employee
who is a member of the Executive Committee), determine the Employees who will
receive Stock Options and the number of shares of Common Stock underlying each
Stock Option. In addition, the Committee shall determine the following terms and
conditions:
(1) Exercise Price. The Committee, in its sole discretion, shall
determine the exercise price of the Stock Option; provided, however, that
the exercise price of any Stock Option shall not be less than 100 percent
of Fair Market Value on the date of grant.
(2) Expiration Date. The Committee, in its sole discretion, shall
determine the expiration date of the Stock Option; provided, however, that
no ISO shall be exercised after the 10th anniversary of the date of grant.
(3) Exercisability. The Committee, in its sole discretion, shall
determine a vesting schedule upon which the Stock Option shall become
exercisable and remain exercisable; provided, however, that if the
Committee does not determine such vesting schedule, which shall be included
in the Stock Option Agreement pursuant to Section 9(c) below, the Stock
Option shall become exercisable and remain exercisable in accordance with
the vesting schedule set forth below:
(A) 33 1/3 percent of the Stock Option shall become exercisable on
the first anniversary of the date of grant and remain exercisable until
the Stock Option expires;
(B) 33 1/3 percent of the Stock Option shall become exercisable on
the second anniversary of the date of grant and remain exercisable until
the Stock Option expires; and
(C) 33 1/3 percent of the Stock Option shall become exercisable on
the third anniversary of the date of grant and remain exercisable until
the Stock Option expires.
(b) Restrictions Relating to ISOs. In addition to being subject to the
terms and conditions of Section 9(a) above, ISOs shall comply with all other
requirements under Code Section 422. Accordingly, ISOs may be granted only to
Participants who are Employees of the Company or one of its "subsidiary
corporations" (as defined in Code Section 424(f)) on the date of grant. The
aggregate market value (determined as of the time the option is granted) of the
Common Stock with respect to which ISOs are exercisable for the first time by a
Participant during any calendar year (under all option plans of the Company
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and of any "parent corporation" (as defined in Code Section 424(e)) or any
"subsidiary corporation" (as defined in Code Section 424(f)) shall not exceed
$100,000. For purposes of the preceding sentence, (i) ISOs shall be taken into
account in the order in which they are granted and (ii) ISOs granted before 1987
shall not be taken into account. ISOs shall not be transferable by the
Participant otherwise than by will or the laws of descent and distribution and
shall be exercisable, during the Participant's lifetime, only by such
Participant. The Committee shall not grant ISOs to any Employee who, at the time
the ISO is granted, owns stock possessing (after the application of the
attribution rules of Code Section 424(d)) more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any "parent
corporation" (as defined in Code Section 424(e)) or any "subsidiary corporation"
(as defined in Code Section 424(f)) unless the exercise price of the ISO is
fixed at not less than 110 percent of the Fair Market Value of the Common Stock
on the date of grant and the exercise of such ISO is prohibited by its terms
after the fifth anniversary of the ISO's date of grant. In addition, no ISO
shall be issued to a Participant in tandem with a Nonqualified Stock Option
issued to such Participant.
(c) Stock Options Agreements. Any Stock Option granted under the Plan shall
be evidenced by a Stock Option Agreement which shall be signed by the Company
and the Participant.
(d) Additional Terms and Conditions. The Committee may, by way of the Stock
Option Agreements or otherwise, establish such other terms, conditions,
restrictions and/or limitations, if any, of any Stock Option, provided they are
not inconsistent with the Plan.
(e) Exercise. Upon exercise, the exercise price of a Stock Option may be
paid in cash, shares of Common Stock, a combination of the foregoing, or such
other consideration as the Committee may deem appropriate. The Committee shall
establish appropriate methods for accepting Common Stock, whether restricted or
unrestricted, and may impose such conditions as it deems appropriate on the use
of such Common Stock to exercise a Stock Option. The Committee may permit a
Participant to satisfy any amounts required to be withheld under applicable
federal, state and local tax laws, in effect from time to time, by electing to
have the Company withhold a portion of the shares of Common Stock to be
delivered for the payment of such taxes.
10. NONEMPLOYEE DIRECTOR FORMULA STOCK AWARDS
(a) Initial Grants. On the date the Plan is approved by the Company's
shareholders, the following five Nonemployee Directors shall each automatically
be granted a Stock Award of 1,000 shares of Common Stock, which shall be fully
transferable and subject to no restrictions:
(1) Thomas A. Player;
(2) Kenneth Roman;
(3) Bruce W. Schnitzer;
(4) Maurice W. Slayton; and
(5) David C. Smith.
(b) Election Grants. Each Nonemployee Director who (i) becomes a member of
the Board for the first time after the date on which the Plan is approved by the
Company's shareholders and (ii) does not, at the time he or she first becomes a
member of the Board, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, have or share a direct or indirect
Pecuniary Interest in more than 100,000 shares of Common Stock, shall be
automatically granted a Stock Award of 1,000 shares of Common Stock, which shall
be fully transferable and subject to no restrictions.
(c) Annual Grants. Each Nonemployee Director who (i) does not, on the date
of each annual meeting of the Company's shareholders that occurs after January
1, 1997, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, have or share a direct or indirect
Pecuniary Interest in more than 100,000 shares of Common Stock and (ii) has not
received a grant pursuant to Section 10(b) above during the 12-month period
ending on the date of the applicable annual meeting of the Company's
shareholders, shall automatically be granted on the date of such annual meeting
of shareholders a
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Stock Award of 1,000 shares of Common Stock, which shall be fully transferable
and subject to no restrictions.
11. NONEMPLOYEE DIRECTOR ANNUAL RETAINER FEES PAID IN STOCK
(a) A Nonemployee Director who does not, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise, have or
share a direct or indirect Pecuniary Interest in more than 100,000 shares of
Common Stock, may elect to forgo 50 percent of the cash compensation
attributable to the Nonemployee Director's annual retainer fees and to receive
in lieu thereof a Stock Award as determined pursuant to Section 11(b) below. Any
such election shall be in writing and must be made at least six months before
the services are rendered giving rise to such compensation. Such election may
not be revoked or changed thereafter except as to compensation for services
rendered at least six months after any such election to revoke or change is made
in writing.
(b) A Nonemployee Director whose cash compensation attributable to his or
her annual retainer fees is reduced pursuant to Section 11(a) above shall
receive a Stock Award of which the number of shares of Common Stock underlying
such Stock Award shall be determined by dividing (x) amount of the cash
compensation so reduced by (y) the product of (A) the Fair Market Value of the
Common Stock on the last business day of the month in which the cash
compensation would have been paid in the absence of such reduction multiplied by
(B) 90 percent. For purposes of determining the number of shares of Common Stock
underlying Stock Awards under this Section 11(b), fractional shares shall be
disregarded.
12. AWARDS SUBJECT TO FOREIGN LAWS
The Committee may grant Awards to individual Participants who are subject
to the tax laws of nations other than the United States, which Awards may have
terms and conditions as determined by the Committee as necessary to comply with
applicable foreign laws. The Committee may take any action which it deems
advisable to obtain approval of such Awards by the appropriate foreign
governmental entity; provided, however, that no such Awards may be granted
pursuant to this Section 12 and no action may be taken which would result in a
violation of the Exchange Act, the Code or any other applicable law.
13. CHANGE IN CONTROL OR OWNERSHIP
(a) Subject to the provisions contained in Sections 13(b) and 13(c) below,
in the event there is a change in control or a change in ownership of the
Company, the Committee may, in its sole discretion, provide that:
(1) any or all nontransferable Stock Awards held by any Participant on
the date of the change in control or change of ownership shall become
immediately transferable as of the date of such change in control or change
in ownership and shall remain transferable after such date;
(2) any or all unexercisable Stock Options held by the Participant on
the date of the change in control or change of ownership shall immediately
become exercisable as of the date of the change of control or change of
ownership and to remain exercisable until a date that occurs on or prior to
the date the Stock Option expires; and/or
(3) any or all exercisable Stock Options held by the Participant on
the date of the change in control or change of ownership shall remain
exercisable until a date that occurs on or prior to the date the Stock
Option expires.
(b) Six-Month Holding Period. Notwithstanding anything herein to the
contrary, the provisions contained in Section 13(a) above shall be inapplicable
to an Award granted within six months before the occurrence of such change in
control or change in ownership if the Participant who holds such Award is
subject to the reporting requirements of Section 16(a) of the Exchange Act and
no exception from liability under Section 16(b) of the Exchange Act is otherwise
available to such Participant.
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(c) ISOs. Notwithstanding anything herein to the contrary, the provisions
contained in Section 13(a) above shall not be applied to an ISO if the
application of such provision would render any ISO granted hereunder other than
an ISO, including, but not limited to extending the exercise period of an ISO in
the event of a Participant's termination of employment.
14. TERMINATION OF EMPLOYMENT
(a) Death of Participant; Termination of Participant's Employment Other
Than For Cause. In the event of the death of the Participant, or if the
Participant's employment is terminated due to Disability or Retirement, by the
Company or any Subsidiary without Cause, or by the Participant for any reason:
(1) all nontransferable Stock Awards held by the Participant on the
date of death or termination of employment, as the case may be, shall be
immediately forfeited by the Participant;
(2) all unexercisable Stock Options held by the Participant on the
date of death or termination of employment, as the case may be, shall be
immediately forfeited by the Participant; and
(3) all exercisable Stock Options held by the Participant on the date
of death or termination of employment, as the case may be, shall remain
exercisable until the earlier of (i) the end of the 90-day period following
the Participant's death or termination of employment, as the case may be,
or (ii) the date the Stock Option expires.
(b) Termination of Participant's Employment by the Company or Any
Subsidiary for Cause. In the event the Participant's employment is terminated by
the Company or any Subsidiary for Cause:
(1) all nontransferable Stock Awards held by the Participant at the
time of termination of employment shall be immediately forfeited by the
Participant; and
(2) all exercisable and unexercisable Stock Options held by the
Participant at the time of termination of employment shall be immediately
forfeited by the Participant.
(c) Committee Discretion. Notwithstanding anything herein to the contrary
but subject to the provisions contained in Section 14(d) below, in the event of
a termination of a Participant's employment for any reason, the Committee may,
in its sole discretion, provide that:
(1) any or all nontransferable Stock Awards held by the Participant on
the date of termination of employment to become immediately transferable as
of such date and to remain transferable after such date;
(2) any or all unexercisable Stock Options held by the Participant on
the date of termination of employment to become exercisable and to remain
exercisable until a date that occurs on or prior to the date the Stock
Option expires; and/or
(3) any or all exercisable Stock Options held by the Participant on
the date of termination of employment to remain exercisable until a date
that occurs on or prior to the date the Stock Option expires.
In addition, the Option Committee shall have discretion to adopt a
different definition of Cause, Retirement or Disability in connection with any
particular Award under the Plan.
(d) ISOs. Notwithstanding anything herein to the contrary, (i) the
provisions contained in Section 14(c) above shall not be applied to an ISO if
the application of such provision would render any ISO granted hereunder other
than an ISO and (ii) for purposes of extending the exercise period of an ISO in
the event of a termination due to Disability pursuant to Section 14(a)(3) above,
the Participant's disability shall also satisfy the requirement of "permanent
and total disability" as defined in Code Section 22(e)(3).
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15. OTHER TERMS AND CONDITIONS
Any Award made under the Plan may also be subject to such other provisions
(whether or not applicable to the Award awarded to any other Participant) as the
Committee determines to be appropriate, including, without limitation:
(a) for the installment purchase of Common Stock under Stock Options;
(b) to assist the Participant in financing the acquisition of Common
Stock;
(c) for the forfeiture of, or restrictions on resale or other
disposition of, Common Stock acquired under any form of Award;
(d) for the payment of the value of Awards to Participants in the
event of a change in control or a change in ownership of the Company; or
(e) to comply with federal and state securities laws, or
understandings or conditions as to the Participant's employment in addition
to those specifically provided for under the Plan.
16. AMENDMENT AND TERMINATION
(a) The Board may amend the Plan from time to time or suspend or terminate
the Plan at any time; provided, however, that Section 10 above, relating to
Nonemployee Director formula awards, shall not be amended more than once every
six months, other than to comport with changes in the Code or ERISA. In
addition, no amendment of the Plan shall, without approval of the shareholders
of the Company, (i) materially increase the benefits accruing to Participants
under the Plan, (ii) increase the number of securities which may be issued under
the Plan, (iii) materially modify the requirements as to eligibility for
participation in the Plan, (iv) modify the specified employees or class of
employees eligible to receive Stock Options, or (v) increase the maximum
aggregate number of shares of Common Stock underlying Stock Awards and/or Stock
Options that may be granted to any single Participant during the life of the
Plan. Termination or amendment of the Plan by the Board shall not adversely
affect any Stock Award Agreement and/or Stock Option Agreement without the
Participant's prior written consent.
(b) Notwithstanding anything contained in the Plan to the contrary, the
Board may amend the Plan without shareholder approval in order to comply with
the amendments to Rule 16b-3 under the Exchange Act adopted by the SEC on May
31, 1996.
(c) Subject to the terms and conditions of the Plan, the Company may amend
or modify any Stock Award Agreement or any Stock Option Agreement by mutual
agreement between the Company and the Participant or such other persons as may
then have an interest therein.
17. WITHHOLDING TAXES
The Company, or the applicable Subsidiary, may require a Participant who
vests in a Stock Award or who exercises a Nonqualified Stock Option granted
hereunder, or disposes of shares acquired pursuant to the exercise of an ISO in
a disqualifying disposition (within the meaning of Code Section 421(b)), to
reimburse the corporation which employs such Participant for any taxes required
by any governmental regulatory authority to be withheld or otherwise deducted
and paid by such corporation in respect of the issuance or disposition of such
shares. In lieu thereof, the corporation which employs such Participant shall
have the right to withhold the amount of such taxes from any other sums due or
to become due from such corporation to the Participant upon such terms and
conditions as the Committee shall prescribe. The corporation that employs such
Participant may, in its discretion, hold the stock certificate to which such
Participant is otherwise entitled upon the vesting of a Stock Award or the
exercise of a Nonqualified Stock Option as security for the payment of such
withholding tax liability, until cash sufficient to pay that liability has been
accumulated. In addition, at any time that the Company becomes subject to a
withholding obligation under applicable law with respect to the vesting of a
Stock Award or the exercise of a Nonqualified Stock Option (the "Tax Date"),
except as set forth below, a holder of a Stock Award or Nonqualified Stock
Option may elect to satisfy, in whole or in part, the holder's related personal
tax liabilities (an "Election") by (a) directing the Company to withhold from
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shares of Common Stock issuable in the related vesting or exercise either a
specified number of shares or shares having a specified value (in each case not
in excess of the related personal tax liabilities), (b) tendering shares of
Common Stock previously issued pursuant to the exercise of a Nonqualified Stock
Option or other shares of Common Stock owned by the holder or (c) combining any
or all of the foregoing Elections in any fashion. An Election shall be
irrevocable. The withheld shares and other shares of Common Stock tendered in
payment shall be valued at their Fair Market Value on the Tax Date. The
Committee may disapprove of any Election, suspend or terminate the right to make
Elections or provide that the right to make Elections shall not apply to
particular shares or exercises. The Committee may impose any additional
conditions or restrictions on the right to make an Election as it shall deem
appropriate. The Committee may prescribe such rules as it determines with
respect to Participants subject to the reporting requirements of Section 16(a)
of the Exchange Act to effect such tax withholding in compliance with the rules
established by the SEC under Section 16 of the Exchange Act and the positions of
the staff of the SEC thereunder expressed in no-action letters exempting such
tax withholding from liability under Section 16(b) of the Exchange Act.
18. NONTRANSFERABILITY AND NONASSIGNABILITY
No nontransferable Stock Award nor Stock Option granted under the Plan
shall be subject in any manner to alienation, anticipation, sale, assignment,
pledge, or encumbrance. Stock Options granted under the Plan shall not be
transferable otherwise than by will or the laws of descent and distribution.
Stock Options shall be exercisable, during the Participant's lifetime, only by
the Participant. In the event of the death of a Participant, each Stock Option
theretofore granted to him or her shall be exercisable during such period after
his or her death as the Committee shall, in its sole discretion, determine,
subject to the Plan and then only by the executor or administrator of the estate
of the deceased Participant or the person or persons to whom the deceased
Participant's rights under the Stock Option shall pass by will or the laws of
descent and distribution.
19. UNFUNDED PLAN
Participants shall have no right, title, or interest whatsoever in or to
any investments which the Company may make to aid it in meeting its obligations
under the Plan. Nothing contained in the Plan, and no action taken pursuant to
its provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship between the Company and any Participant, beneficiary,
legal representative or any other person. To the extent that any person acquires
a right to receive payments from the Company under the Plan, such right shall be
no greater than the right of an unsecured general creditor of the Company. Any
and all payments to be made hereunder shall be paid from the general funds of
the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
expressly set forth in the Plan. The Plan is not intended to be subject to
ERISA.
20. NO FRACTIONAL SHARES
No fractional shares of Common Stock shall be issued or delivered pursuant
to the Plan or any Award. The Committee shall determine whether cash, or Awards,
or other property shall be issued or paid in lieu of fractional shares or
whether such fractional shares or any rights thereto shall be forfeited or
otherwise eliminated.
21. GOVERNING LAW
The Plan and all Awards granted hereunder and actions taken in connection
herewith shall be governed and construed in accordance with the laws of the
State of New York without reference to principles of conflict of laws and except
as superseded by applicable federal law.
22. COMPLIANCE WITH RULE 16B-3
With respect to persons subject to Section 16 of the Exchange Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 (or its successors) promulgated under the
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<PAGE> 11
Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.
23. REGULATORY APPROVALS AND LISTINGS
Notwithstanding anything herein to the contrary, the Company shall have no
obligation to issue or deliver certificates of Common Stock evidencing Stock
Awards or Stock Options resulting in the payment of Common Stock prior to (i)
the obtaining of any approval from any governmental agency which the Company
shall, in its sole discretion, determine to be necessary or advisable, (ii) the
admission of such shares to listing on the stock exchange on which the Common
Stock may be listed, and (iii) the completion of any registration or other
qualification of said shares under any state or Federal law or ruling of any
governmental body which the Company shall, in its sole discretion, determine to
be necessary or advisable.
24. NO RIGHT TO CONTINUED EMPLOYMENT OR GRANTS
A Participant's right, if any, to continue to serve the Company or any
Subsidiary as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a Participant under the Plan.
The Company or the Subsidiary reserves the right to terminate any Employee at
any time. In addition, other than as provided in Section 10 above, the adoption
of this Plan shall not be deemed to give any Employee or any other individual
any right to be selected as a Participant or to be granted an Award.
25. NO GUARANTEE OF TAX CONSEQUENCES
No person connected with the Plan in any capacity, including, but not
limited to, the Company and its Subsidiaries and their directors, officers,
agents and employees makes any representation, commitment, or guarantee that any
tax treatment, including, but not limited to, federal, state and local income,
estate and gift tax treatment, will be applicable with respect to amounts
deferred under the Plan, or paid to or for the benefit of a Participant under
the Plan, or that such tax treatment will apply to or be available to a
Participant on account of participation in the Plan.
26. OTHER BENEFITS
No Award granted under the Plan shall be considered compensation for
purposes of computing benefits under any retirement plan of the Company nor
affect any benefits or compensation under any other benefit or compensation plan
of the Company now or subsequently in effect.
11
<PAGE> 1
EXHIBIT 10.15
PENNCORP FINANCIAL GROUP, INC.
1996 SENIOR EXECUTIVE ANNUAL INCENTIVE AWARD PLAN
I. PLAN OBJECTIVES
The objectives of the 1996 Executive Annual Incentive Award Plan (the
"Plan") are to advance the interests of PennCorp Financial Group, Inc. (the
"Company") and its shareholders by providing key executives with incentive
opportunities that:
- provide compensation opportunities which are competitive with those of
comparable institutions
- focus these executives' attention on the accomplishment of specifically
identified Company goals
- recognize different levels and types of individual contributions by
providing for adjustment of the incentive payout on the basis of
individual performance
II. DEFINITIONS
"Annual Incentive Award" or "Award" means the compensation payable under
the Plan to a Participant by the Committee pursuant to such terms, conditions,
restrictions and limitations established by the Committee and the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board, or such other
committee designated by the Board to administer the Plan, provided that the
Committee shall consist of three or more persons each of whom is an "outside
director" within the meaning of Section 162(m) and a "disinterested person"
within the meaning of Rule 16b-3 under the Exchange Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Plan" means the PennCorp Financial Group, Inc. 1996 Senior Executive
Annual Incentive Award Plan.
"Performance Goals" shall be defined as the performance criterion or
criteria established by the Committee, pursuant to Section V hereof, for the
purpose of determining Awards under the Plan.
"Performance Period" means the consecutive 12 month period that constitutes
the Company's fiscal year, unless otherwise specified by the Committee.
"Section 162(m)" means Section 162(m) of the Code and the regulations
promulgated thereunder.
III. ADMINISTRATION OF THE PLAN
The plan will be administered by the Committee. The Committee is authorized
to interpret the Plan and to establish and amend rules and regulations necessary
for Plan administration. Decisions of the Committee shall be binding on all
persons claiming rights under the Plan.
IV. ELIGIBILITY
Participants will be selected by the Committee annually not later than 90
days after the approval of the Plan at the 1996 Annual Meeting of Stockholders
and thereafter not later than 90 days after the commencement of Performance
Periods commencing on and after January 1, 1997. The Chief Executive Officer and
the President of the Company are hereby designated as the initial Participants
under the Plan.
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<PAGE> 2
Notwithstanding the foregoing, at any time during a Performance Period the
Committee may designate new Participants or remove Participants, in its sole
discretion. Participation in the Plan in any prior year or years shall not give
one the right to be a Participant in any subsequent year.
V. PERFORMANCE GOALS AND MEASURES
Performance Goals shall be established by the Committee not later than 90
days after commencement of the Performance Period relating to a specific Award
(or, in the case of the Performance Period covering the 1996 fiscal year, not
later than June 11, 1996, the date of the Proxy Statement relating to the 1996
annual meeting of shareholders). The Performance Goals may be identical for all
Participants or, at the discretion of the Committee, may be different to reflect
more appropriate measures of performance. The criterion or criteria used in
establishing Performance Goals may, at the discretion of the Committee, include
a targeted growth rate in annual compounded earnings per share or any other
appropriate measure such as revenue, cash flow, EBITDA, net income, return on
assets or return on equity. The Performance Goals established by the Committee
shall include a threshold level below which no Award will be payable and a
maximum Award level for each Participant. The determination of attainment of the
Performance Goals shall be determined in accordance with generally accepted
accounting principles and certified in writing by the Committee.
The Committee shall be authorized to make adjustments in the method of
calculating attainment of Performance Goals in recognition of: (i) extraordinary
or non-recurring items, (ii) changes in tax laws, (iii) changes in generally
accepted accounting principles or changes in accounting policies, (iv) charges
related to restructured or discontinued operations, (v) dispositions or
acquisitions of businesses or business units, (vi) restatement of prior period
financial results, and (vii) any other unusual, non-recurring gain or loss that
is separately identified and quantified in the Company's financial statements.
Notwithstanding the foregoing, the Committee may, at its sole discretion, (x)
reduce the Awards under the Plan to offset any results not anticipated when the
Performance Goals were established or (y) increase or reduce the Awards under
the Plan, but in neither event by more than 25%, to reflect the Committee's
evaluation of the individual performance of any Participant under the Plan;
provided that no such adjustment shall be made if such adjustment would affect
the tax deductibility of the Award under Section 162(m) of the Code.
VI. AWARDS
Awards under the Plan shall be paid in cash as soon as practicable
following the close of that Performance Period.
At the first meeting of the Committee after the expiration of the
Performance Period, the Committee shall review the prior year's performance in
relation to the Performance Goals and determine the level of achievement of the
Performance Goals. Payment of Annual Incentive Awards to Participants under the
Plan shall occur only after the Committee has certified in writing that the
Performance Goals have been achieved for the relevant Performance Period. The
maximum Annual Incentive Award that may be granted to a Participant under the
Plan for any Performance Period shall be twice the Participant's target bonus
opportunity.
VII. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION OF THE PLAN
The Board may amend, modify, suspend or terminate this Plan for any purpose
except that no amendment or alteration shall be effective prior to approval by
the Company's shareholders to the extent such approval is then required pursuant
to Section 162(m) or otherwise required as a matter of law. Further, no
amendment to the Plan shall be effective that would (i) increase the maximum
amount that can be paid to a Participant under the Plan in a Performance Period;
(ii) change the performance criterion or criteria set forth in Section V hereof
for payment of Awards; or (iii) modify the eligibility requirement for
Participants in the Plan unless first approved by the Company's shareholders.
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<PAGE> 3
VIII. EFFECTIVE DATE OF THE PLAN
This Plan shall be effective as of January 1, 1996. Notwithstanding the
foregoing, the adoption of this Plan is expressly conditioned upon the approval
by the Company's shareholders at the annual meeting of the Company's
shareholders held in 1996. If the shareholders of the Company shall fail to
approve this Plan, this Plan shall terminate and cease to be of any further
force or effect. Subject to earlier termination pursuant to Section VII, the
Plan shall remain in effect through the conclusion of the 2001 fiscal year of
the Company. After termination of the Plan, no future Awards may be granted.
IX. INTERPRETATION
The Plan is designed to comply with Section 162(m) of the Code, and all
provisions hereof shall be construed in manner consistent with that intent.
X. GOVERNING LAW
The Plan and all determinations made and actions taken pursuant thereto
shall be governed by the laws of the State of New York and applicable federal
law and construed in accordance therewith.
3
<PAGE> 1
EXHIBIT 10.18
CONVERSION, STANDSTILL AND REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT dated as of July 24, 1996 between United
Companies Financial Corporation, a Louisiana corporation ("UCFC") and PennCorp
Financial Group, Inc., a Delaware corporation ("PennCorp").
Preliminary Statement
UCFC and PennCorp (as assignee of UC Life Holding Corp.) are
parties to that certain Amended and Restated Stock Purchase Agreement dated as
of January 30, 1996 (as amended or restated from time to time, the
"Agreement"). Pursuant to the Agreement, PennCorp is today issuing to UCFC a
convertible promissory note in the principal amount of $14,999,000 (the
"Note").
NOW, THEREFORE, in consideration of the premises and the
mutual agreements set forth herein, UCFC and PennCorp hereby agree as follows:
1. UCFC shall, immediately upon receipt of the Note, and
pursuant to the procedures set forth therein, convert the Note into 483,839
shares of common stock, par value $0.01 per share, of PennCorp (the "Common
Stock"), and PennCorp shall deliver or cause to be delivered one or more
certificates for such 483,839 shares of Common Stock (the "Shares"), registered
in the name of UCFC, and in such denominations as UCFC shall have provided in
writing to PennCorp.
2. The certificates evidencing the Shares shall bear a
legend substantially identical to the following:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. IN
ADDITION, TRANSFER OF THIS SECURITY IS RESTRICTED AS SET FORTH
IN THAT CERTAIN CONVERSION, STANDSTILL AND REGIS-
<PAGE> 2
TRATION RIGHTS AGREEMENT DATED JULY 24, 1996 BETWEEN PENNCORP
FINANCIAL GROUP, INC. AND UNITED COMPANIES FINANCIAL
CORPORATION, A COPY OF WHICH IS AVAILABLE FROM THE SECRETARY
OF PENNCORP FINANCIAL GROUP, INC."
Upon a sale of any of the Shares under the Shelf Registration Statement (as
defined below) as permitted by this Agreement, PennCorp agrees to instruct its
stock transfer agent to issue certificate(s) evidencing the number of Shares
being sold without the foregoing legend.
Except for sales of the Shares pursuant to the Shelf Registration Statement,
the Shares shall not be transferable unless and until PennCorp has received
such opinions of counsel as to compliance with all applicable federal and state
securities laws, and other certificate and documentation, as it may reasonably
request.
3. PennCorp represents and warrants to UCFC that the
Shares, upon issuance upon conversion of the Note as contemplated by Paragraph
1 above, will be (a) duly authorized, validly issued, fully paid and
nonassessable and (b) free and clear of all liens, claims and encumbrances
other than those created by any action or inaction of UCFC. PennCorp shall use
commercially reasonable efforts to cause the Shares to be listed on the New
York Stock Exchange, subject to notice of issuance, as promptly as practicable,
but in no event later than the end of the Lock-Up Period (as hereinafter
defined). PennCorp further represents and warrants to UCFC that as of July 23,
1996 it had issued and outstanding 28,099,745 shares of Common Stock.
4. PennCorp and UCFC each represent and warrant to the
other that (a) it has the corporate power and authority to enter into and
perform its obligations under this Agreement, (b) this Agreement has been duly
and validly authorized by all necessary action, corporate or otherwise, (c)
this Agreement has been duly executed and delivered by it, and (d) this
Agreement constitutes the valid and legally binding obligation of it,
enforceable against it in accordance with its terms, except that (i) the
enforceability hereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or hereinafter in
effect relating to creditors' rights generally and (ii) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and to the discretion of the court before which proceedings
therefor may be brought.
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<PAGE> 3
5. UCFC agrees that it will not sell, offer to sell,
contract to sell or otherwise transfer or dispose of any of the Shares (or any
securities convertible into or exercisable or exchangeable for the Shares), or
grant any options or warrants to purchase the Shares, pursuant to which the
sale or transaction will occur during the period of 180 days after the date of
original issuance of the Shares (the "Lock-Up Period") without the prior
written consent of PennCorp.
6. For so long as UCFC shall own at least 1% of
PennCorp's outstanding Common Stock, or, if shorter, until the first
anniversary of the date hereof, UCFC will not, and will cause each of its
subsidiaries not to, singly or as part of a partnership, limited partnership,
syndicate or other group (as those terms are used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) (the "Securities Exchange Act"),
directly or indirectly, without the approval of the Board of Directors of
PennCorp:
(a) acquire, offer to acquire, or agree to acquire, by
purchase, gift or otherwise, any Voting Securities (as hereinafter defined)
except pursuant to a stock split, stock dividend, rights offering,
recapitalization, reclassification or similar transaction; provided, however,
that nothing in this clause (a) shall prevent UCFC from acquiring any Voting
Securities (i) solely for the purposes of hedging the Shares, (ii) solely for
the purpose of covering short positions or (iii) so long as after any such
acquisition, UCFC owns less than or equal to 2% of the outstanding Common
Stock;
(b) make, or in any way participate in, any solicitation
of proxies to vote, solicit any consent or communicate with or seek to advise
or influence any person or entity with respect to the voting of, any Voting
Securities or become a participant in an election contest (as such terms are
defined or used in Rule 14a-11 under the Securities Exchange Act) with respect
to the Company;
(c) form, join or encourage the formation of, any person
(within the meaning of Section 13(d)(3) of the Securities Exchange Act) with
respect to any Voting Securities;
(d) deposit any Voting Securities into a voting trust or
subject any Voting Securities to any arrangement or agreement with respect to
the voting thereof;
(e) initiate, propose or otherwise solicit stockholders
for the approval of one or more stockholder proposals with respect to PennCorp
as described in Rule 14a-8 under the Securities Exchange Act, or induce or
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<PAGE> 4
attempt to induce any other person to initiate any stockholder proposal;
(f) vote any Voting Securities in favor of the election
to the Board of Directors of PennCorp of, or otherwise seek to elect to the
Board of Directors of PennCorp, any person not recommended by the Board of
Directors of PennCorp;
(g) call or seek to have called any meeting of the
stockholders of PennCorp;
(h) act to seek to control, disrupt or influence the
management, policies or affairs of PennCorp;
(i) sell or otherwise transfer in any manner any Voting
Securities to any person (within the meaning of Section 13(d)(3) of the
Securities Exchange Act) who has filed prior thereto a disclosure with the
Commission under the Securities Exchange Act stating that such person owns more
than ten percent (10%) of any class of Voting Securities or who, to UCFC's
actual knowledge, owns more than ten percent (10%) of any class of Voting
Securities; or who, without the approval of the Board of Directors of PennCorp,
has publicly proposed a business combination or similar transaction with, or a
change of control of, PennCorp or who has publicly proposed a tender offer for
Voting Securities or who has discussed the possibility of proposing a business
combination or similar transaction with, or a change in control of, PennCorp
with UCFC or any of its affiliates;
(j) solicit, seek to effect, negotiate with or provide
any information to any other party with respect to, or make any statement or
proposal, whether written or oral, to the Board of Directors of PennCorp or any
director or officer of PennCorp or otherwise make any public announcement or
proposal whatsoever with respect to, any form of business combination
transaction involving PennCorp, including, without limitation, a merger,
exchange offer or liquidation of PennCorp's assets, or any restructuring,
recapitalization or similar transaction with respect to PennCorp; or
(k) instigate or encourage any third party to do any of
the foregoing.
7. For purposes of Paragraph 6 above, "Voting
Securities" shall mean any securities of PennCorp entitled to vote or take
action by written consent, or securities convertible into or exchangeable or
exercisable for such securities.
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<PAGE> 5
8.(a) PennCorp shall cause to be filed with the Securities and
Exchange Commission (the "Commission") on or prior to 120 days after the date
hereof, a shelf registration statement pursuant to Rule 415 under the
Securities Act (as may then be amended) (the "Shelf Registration Statement") on
Form S-1 or Form S-3, as determined by PennCorp, to cover resales of Transfer
Restricted Securities (as hereinafter defined). UCFC shall have provided the
information required pursuant to Section 8(b) hereof. PennCorp shall use its
reasonable best efforts to cause such Shelf Registration Statement to be
declared effective by the Commission on or prior to 180 days after the Closing
Date. PennCorp shall use its commercially reasonable efforts to keep such
Shelf Registration Statement continuously effective for a period ending two
years from the effective date thereof or such shorter period that will
terminate when each of the Transfer Restricted Securities covered by the Shelf
Registration Statement shall cease to be a Transfer Restricted Security.
If there shall occur any event that would cause the Shelf
Registration Statement (i) to contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or (ii) to be not effective and
usable for resale of Transfer Restricted Securities during the period that such
Shelf Registration Statement is required to be effective and usable, PennCorp
shall as promptly as practicable file an amendment to the Shelf Registration
Statement, in the case of clause (i), correcting any such misstatement or
omission, and in the case of either clause (i) or (ii), use its reasonable best
efforts to cause such amendment to be declared effective and such Shelf
Registration Statement to become usable as soon as practicable thereafter, and
the foregoing two year period during which such Shelf Registration Statement is
to be kept effective shall be extended by a period equal to the period it was
not effective.
Notwithstanding anything to the contrary in this Section 8,
PennCorp may prohibit offers and sales of Transfer Restricted Securities
pursuant to the Shelf Registration Statement at any time if (A)(i) it is in
possession of material non-public information, (ii) the Board of Directors of
PennCorp determines (based on advice of counsel) that such prohibition is
necessary in order to avoid a requirement to disclose such material non-public
information and (iii) the Board of Directors of PennCorp determines in good
faith that disclosure of such material non-public information would not be in
the best interests of PennCorp and its shareholders or (B) PennCorp has made a
public announcement relating to an acquisition or business combination
transaction including PennCorp and/or one or
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<PAGE> 6
more of its subsidiaries (i) that is material to PennCorp and its subsidiaries
taken as a whole and (ii) the Board of Directors of PennCorp determines in good
faith that offers and sales of Transfer Restricted Securities pursuant to the
Shelf Registration Statement prior to the consummation of such transaction (or
such earlier date as the Board of Directors shall determine) is not in the best
interests of PennCorp and its shareholders or (C) (i) disclosure is required in
the Shelf Registration Statement of financial information of any person or
entity other than PennCorp or its subsidiaries and affiliates pursuant to
Article 3 or Article 11 of Regulation S-X under the Securities Act and (ii) any
of such required financial information (including related audit reports and
consents of independent accountants) is not available to PennCorp after use of
commercially reasonable efforts to obtain such financial information) (the
period during which any such prohibition of offers and sales of Transfer
Restricted Securities pursuant to the Shelf Registration Statement is in effect
pursuant to clause (A) or (B) of this subparagraph (a) is referred to herein as
a "Suspension Period"). A Suspension Period shall commence on and include the
date on which PennCorp provides written notice to UCFC that offers and sales of
Transfer Restricted Securities cannot be made thereunder in accordance with
this Section 8 and shall end on the date on which UCFC is advised in writing by
PennCorp that offers and sales of Transfer Restricted Securities pursuant to
the Shelf Registration Statement and use of the prospectus constituting a part
of the Shelf Registration Statement may be resumed; provided, however, that the
aggregate number of days in all Suspension Periods during any calendar year
shall not exceed 90.
(b) UCFC may not include any of its Transfer Restricted
Securities in any Shelf Registration Statement pursuant to this Agreement
unless UCFC furnishes to PennCorp in writing, within 10 business days after
receipt of a request therefor, such public information concerning UCFC as
PennCorp may reasonably request for use in connection with any Shelf
Registration Statement or prospectus or preliminary prospectus included
therein.
(c) All expenses incident to PennCorp's performance of or
compliance with its obligations to register and list the Shares, and maintain
the effectiveness thereof, as set forth in this Agreement will be borne by UCFC
(and, if applicable, reimbursed to PennCorp promptly following receipt by UCFC
of appropriate documentation); provided, however, that UCFC's obligation to pay
expenses pursuant to this Section 8(c) shall not exceed 50% of the first
$50,000 of expenses, with all other expenses being borne by PennCorp. Such
expenses shall include, without limitation, (i) all registration and filing
fees (including
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<PAGE> 7
those of the Commission and the National Association of Securities Dealers,
Inc.)), (ii) fees and expenses of compliance with all applicable state
securities or "blue sky" laws, (iii) printing and engraving expenses, (iv) fees
and disbursements of counsel and independent accountants for PennCorp, (v)
listing fees on any applicable stock exchange or trading system, and (vi)
rating agency fees.
(d) For purposes of this Section 8, "Transfer Restricted
Securities" shall mean each Share, until each such Share (A) has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement covering it, (B) is distributed to the
public pursuant to Rule 144, (C) is sold or is available to be sold pursuant to
Rule 144(k) (or any similar provisions then in force) under the Securities Act
or otherwise or (D) is sold pursuant to Rule 904 of Regulation S under the
Securities Act.
9. If, after the end of the Lock-Up Period and on or prior to
the first anniversary of the date hereof (the "Payment Period"), UCFC desires
to sell any or all of the Shares in one or more transactions, then in each case
UCFC shall promptly so notify PennCorp, and request PennCorp's assistance in
such sale, and PennCorp shall provide such assistance. As consideration for
such assistance, UCFC shall pay to PennCorp, with respect to each such sale
consummated during the Payment Period, promptly following the consummation of
any such sale, $600,000 (or, if less than all of the Shares are sold, then a
percentage of $600,000 calculated by multiplying $600,000 by a fraction, the
numerator of which is the number of Shares so sold, and the denominator of
which is 483,839, appropriately adjusted for stock splits, stock dividends, and
other similar transactions) (such $600,000, or any portion thereof, the
"Specified Fee"); provided, however, that no portion of the Specified Fee shall
be paid unless the net amount received by UCFC in any such sale (net of
brokerage commissions, fees and expenses contemplated by Section 8(c) hereof)
and other direct selling expenses, and net of the Specified Fee) is greater
than $31.00 per Share.
10.(a) All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier or air
courier guaranteeing overnight delivery:
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<PAGE> 8
If to UCFC:
United Companies Financial Corporation
P.O. Box 1591 (70821)
4041 Essen Lane
Baton Rouge, Louisiana 70809
Telephone: (504) 924-6007 (ext. 2282)
Telecopy: (504) 924-4324
Attention: Dale E. Redman
If to PennCorp:
c/o PennCorp Financial, Inc.
3 Bethesda Metro Center
Suite 1600
Bethesda, Maryland 20814
Telephone: (301) 656-1777
Telecopy: (301) 657-4770
Attention: General Counsel
11. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, applicable to contracts
executed in and to be performed entirely within that state.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
UNITED COMPANIES FINANCIAL
CORPORATION
By: /s/ DALE E. REDMAN
--------------------------------------------
Name: Dale E. Redman
Title:Executive Vice President
and Chief Financial
Officer
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT SILVERMAN
--------------------------------------------
Name: Scott Silverman
Title:Senior Vice President,
General Counsel and
Secretary
9
<PAGE> 1
EXHIBIT 10.19
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of August 2, 1996
relating to up to
2,875,000 shares of $ 3.50 Series II
Convertible Preferred Securities
by and among
PennCorp Financial Group, Inc.
and
Smith Barney Inc.,
Donaldson, Lufkin & Jenrette
Securities Corporation
and
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
================================================================================
<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made
and entered into as of August 2, 1996 by and between PennCorp Financial Group,
Inc., a Delaware corporation (the "Company"), and Smith Barney Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and (the "Initial Purchasers"), who will purchase 2,500,000
shares (the "Firm Shares") of $3.50 Series II Convertible Preferred Securities
with a liquidation preference of $50.00 per shares (the "Preferred Stock") of
the Company pursuant to the Purchase Agreement dated August 2, 1996 (the
"Purchase Agreement") between the Company and the Initial Purchasers. The
Initial Purchasers may also purchase, upon the terms and conditions set forth
in the Purchase Agreement, up to an additional 375,000 shares (the "Additional
Shares") of Preferred Stock. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." In order to induce the
Initial Purchasers to enter into the Purchase Agreement, the Company has agreed
to provide the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the obligations of the Initial
Purchasers set forth in the Purchase Agreement. All defined terms used but not
defined herein shall have the meanings ascribed to them in the Purchase
Agreement (as defined herein).
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings:
Act: The Securities Act of 1933, as amended.
Closing Date: The date on which the Shares are first sold by
the Company to the Initial Purchasers pursuant to the Purchase Agreement.
Commission: The Securities and Exchange Commission.
Common Stock: The Common Stock, par value $.01 per share, of
the Company.
Damages Payment Date: With respect to the Shares or the
Common Stock, as applicable, each Dividend Payment Date.
Dividend Payment Date: The record date for each dividend
payment with respect to the Shares or the Common Stock, as applicable, fixed by
the Board of Directors.
Effectiveness Date: The date on which the Shelf Registration
Statement is declared effective by the Commission under the Act.
Effectiveness Target Date: As defined in Section 4.
Exchange Act: The Securities Exchange Act of 1934, as
amended.
Exempt Resales: Offers and sales of the Shares purchased by
the Purchasers pursuant to the Purchase Agreement on the terms and in the
manner set forth in the Offering Memorandum and Section 2 of the Underwriting
Agreement (i) to persons whom the Initial Purchasers reasonably believe to be
qualified institutional buyers as defined under Rule 144A under the Act, as
such rule may be amended from time to time ("Rule 144A"), in transactions under
Rule 144A, (ii) to a limited number of "accredited investors" (as defined in
Rule 501(a)(1), (2), (3), or (7) under the Act that are institutional investors
and (iii) to certain persons in offshore transactions in reliance upon
Regulation S under the Act.
Holders: As defined in Section 2(b) hereof.
<PAGE> 3
Latest Issuance Date: The latest date on which any of the
Shares are originally issued by the Company pursuant to the terms of the
Purchase Agreement.
NASD: The National Association of Securities Dealers, Inc.
Offering Memorandum: The Offering Memorandum, dated August 2,
1996, and all supplements thereto, relating to the Shares and prepared by the
Company pursuant to the Purchase Agreement.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Preliminary Prospectus: As defined in Section 3(f).
Prospectus: The prospectus included in the Shelf Registration
Statement, as amended or supplemented by any Prospectus Supplement with respect
to the terms of the offering of any portion of the Transfer Restricted
Securities (as defined herein) covered by the Shelf Registration Statement and
by all other amendments and supplements to such prospectus, including any
prospectus included in any post-effective amendments to the Shelf Registration
Statement, and all material which may be incorporated by reference into such
prospectus.
Prospectus Supplement: As defined in Section 5(b).
Record Holder: (i) With respect to any Damages Payment Date
relating to the Shares constituting Transfer Restricted Securities, each Person
who is registered on the books of the Transfer Agent as the holder of Shares on
the record date with respect to the Dividend Payment Date on which such Damages
Payment Date shall occur and (ii) with respect to any Damages Payment Date
relating to the Common Stock constituting Transfer Restricted Securities, each
Person who is a holder of record of such Common Stock on the record date with
respect to the Dividend Payment Date on which such Damages Payment Date shall
occur.
Registration Expenses: As defined in Section 6(a).
Shares: The Firm Shares and the Additional Shares,
collectively.
Shelf Registration Statement: As defined in Section 3(a)
hereof.
Suspension Period: As defined in Section 3(a).
Transfer Restricted Securities: Each Share and share of
Common Stock of the Company issuable upon conversion of a Share, until each
such Share or share (i) has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement
covering it, (ii) is distributed to the public pursuant to Rule 144 or (iii)
sold or transferred pursuant to Rule 144(k) (or any similar provisions then in
force) under the Securities Act or otherwise.
Underwriter: Any underwriter, placement agent, selling
broker, dealer manager, qualified independent underwriter or similar securities
industry professional.
Underwritten Registration or Underwritten Offering: An
offering in which securities of the Company are sold to an Underwriter or with
the assistance of such Underwriter for reoffering to the public on a firm
commitment basis.
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<PAGE> 4
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities
entitled to the benefits of this Agreement are the Transfer Restricted
Securities.
(b) Holders of Transfer Restricted Securities. A Person
is deemed to be a holder of Transfer Restricted Securities (each, a "Holder")
whenever such Person owns Transfer Restricted Securities.
SECTION 3. SHELF REGISTRATION
(a) The Company shall cause to be filed with the Commission
on or prior to 60 days after the Closing Date, a shelf registration statement
pursuant to Rule 415 under the Act (as may then be amended) (the "Shelf
Registration Statement") on Form S-1 or Form S-3, if the use of such form is
then available and as determined by the Company, to cover resales of Transfer
Restricted Securities by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Holders of such Transfer Restricted Securities
shall have provided the representations required pursuant to Section 3(f)
hereof. The Company shall use its commercially reasonable efforts to cause
such Shelf Registration Statement to be declared effective by the Commission on
or prior to 150 days after the Closing Date. The Company shall use its
commercially reasonable efforts to keep such Shelf Registration Statement
continuously effective for a period ending three years from the effective date
thereof or such shorter period that will terminate when each of the Transfer
Restricted Securities covered by the Shelf Registration Statement shall cease
to be a Transfer Restricted Security. The Company further agrees to use its
commercially reasonable efforts to cause the Shelf Registration Statement to be
effective and usable for resale of the Transfer Restricted Securities during
the period that such Shelf Registration Statement is required to be effective
and usable.
Subject to the immediately following paragraph, upon the
occurrence of any event that would cause the Shelf Registration Statement (i)
to contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made or (ii)
to be not effective and usable for resale of Transfer Restricted Securities
during the period that such Shelf Registration Statement is required to be
effective and usable, the Company shall as promptly as practicable file an
amendment to the Shelf Registration Statement, in the case of clause (i),
correcting any such misstatement or omission, and in the case of either clause
(i) or (ii), use its commercially reasonable efforts to cause such amendment to
be declared effective and such Shelf Registration Statement to become usable as
soon as practicable thereafter.
Notwithstanding anything to the contrary in this Section 3,
subject to compliance with Sections 4 and 5(b), if applicable, the Company may
prohibit offers and sales of Transfer Restricted Securities pursuant to the
Shelf Registration Statement at any time if (A) (i) it is in possession of
material non-public information, (ii) the Board of Directors of the Company
determines (based on advice of counsel) that such prohibition is necessary in
order to avoid a requirement to disclose such material non-public information
and (iii) the Board of Directors of the Company determines in good faith that
disclosure of such material non-public information would not be in the best
interests of the Company and its shareholders or (B) the Company has made a
public announcement relating to an acquisition or business combination
transaction including the Company and/or one or more of its subsidiaries (i)
that is material to the Company and its subsidiaries taken as a whole and (ii)
the Board of Directors of the Company determines in good faith that offers and
sales of Transfer Restricted Securities pursuant to the Shelf Registration
Statement prior to the consummation of such transaction (or such earlier date
as the Board of Directors shall determine) is not in the best interests of the
Company and its shareholders or that it would be impracticable at the time to
obtain any financial statements relating to such acquisition or business
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<PAGE> 5
combination transaction that would be required to be set forth in the Shelf
Registration Statement (the period during which any such prohibition of offers
and sales of Transfer Restricted Securities pursuant to the Shelf Registration
Statement is in effect pursuant to clause (A) or (B) of this subparagraph (a)
is referred to herein as a "Suspension Period"). A Suspension Period shall
commence on and include the date on which the Company provides written notice
to Holders of Transfer Restricted Securities covered by the Shelf Registration
Statement that offers and sales of Transfer Restricted Securities cannot be
made thereunder in accordance with this Section 3 and shall end on the date on
which each Holder of Transfer Restricted Securities covered by the Shelf
Registration Statement either receives copies of a Prospectus Supplement
contemplated by Section 5(b) or is advised in writing by the Company that
offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement and use of the Prospectus may be resumed; provided,
however, that the Suspension Period shall in no event be longer than 60 days in
the aggregate in any of the one-year periods ending on the first, second or
third anniversaries of the Closing Date, or longer than 30 days in the
aggregate in any calendar quarter within any one-year period.
(b) None of the Company nor any of its security holders
(other than the Holders of Transfer Restricted Securities in such capacity and
other shareholders having registration rights permitting them to participate
therein, as disclosed in the Offering Memorandum) shall have the right to
include any of the Company's securities in the Shelf Registration Statement.
(c) If the Holders of a majority of the Transfer
Restricted Securities outstanding as of the Closing Date so elect (with holders
of Common Stock constituting Transfer Restricted Securities being deemed to be
Holders of the number of Shares converted by them into such Common Stock for
purposes of such calculation), an offering of Transfer Restricted Securities
pursuant to the Shelf Registration Statement may be effected in the form of an
Underwritten Offering; provided, however, that notwithstanding anything
contained in this Agreement to the contrary, the Company shall not be required
to undertake more than one such Underwritten Offering during any consecutive
12-month period. The Holders of the Transfer Restricted Securities to be
registered shall pay all underwriting discounts and commissions of such
Underwriters and the fees and expenses of any counsel for the Holders.
(d) If any of the Transfer Restricted Securities covered
by the Shelf Registration Statement are to be sold in an Underwritten Offering,
the Underwriter(s) that will administer the offering will be selected by the
Company and shall be a nationally recognized investment bank(s) reasonably
satisfactory to the Holders of a majority of the outstanding Transfer
Restricted Securities (with holders of Common Stock constituting Transfer
Restricted Securities being deemed to be Holders of the number of Shares
converted by them into such Common Stock for purposes of such calculation);
provided, however, that such Underwriter(s) shall be reasonably satisfactory to
the Company.
(e) No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless such Holder furnishes to the
Company in writing, within 10 business days after receipt of a request
therefor, such information as the Company may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus (a "Preliminary Prospectus") included therein, including the
identity of the beneficial owner for whom any Holder may be acting as nominee.
SECTION 4. LIQUIDATED DAMAGES
(a) If (i) the Shelf Registration Statement is not filed
with the Commission on or prior to 60 days after the Closing Date, (ii) the
Shelf Registration Statement has not been declared effective by the Commission
within 150 days after the Closing Date (the "Effectiveness Target Date"), or
(iii) the Shelf Registration Statement is filed and declared effective but
shall thereafter cease to be effective (without being succeeded immediately by
an additional registration statement filed and declared effective) or usable
for resale for a period of time (including any Suspension Period) which shall
exceed 60 days in the
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<PAGE> 6
aggregate in any of the one-year periods ending on the first, second or third
anniversaries of the Closing Date, or which shall exceed 30 days in the
aggregate in any calendar quarter within any of such one-year periods (each
such event referred to in clauses (i) through (iii), a "Registration Default"),
the Company will pay liquidated damages to each Holder of Transfer Restricted
Securities who has complied with such Holder's obligations under this
Agreement. The amount of liquidated damages payable during any period during
which a Registration Default shall have occurred and be continuing is that
amount which is equal to $0.05 per week per $1,000.00 in liquidation preference
of Preferred Stock, or $0.05 per week per 28.6533 shares of Common Stock
(subject to adjustment in the event of stock splits, stock recombinations,
stock dividends and the like) constituting Transfer Restricted Securities, for
each 90 day period or part thereof until the applicable registration statement
covering such Transfer Restricted Securities is filed and the applicable
registration statement is declared effective, or the Shelf Registration
Statement again becomes effective or usable, as the case may be, up to a
maximum amount of liquidated damages of $0.50 per week per $1,000.00 in
liquidation preference of Preferred Stock or $0.50 per week per 28.6533 shares
of Common Stock (subject to adjustment as set forth above) constituting
Transfer Restricted Securities. All accrued liquidated damages shall be paid
to Record Holders by wire transfer of immediately available funds or by federal
funds check by the Company on the next succeeding Damages Payment Date.
Following the cure of a Registration Default, liquidated damages will cease to
accrue with respect to such Registration Default.
All of the Company's obligations set forth in the preceding
paragraph which are outstanding with respect to any Transfer Restricted
Security shall cease at the time such security ceases to be a Transfer
Restricted Security.
The parties hereto agree that the liquidated damages provided
in this Section 4 constitute a reasonable estimate of the damages that will be
incurred by Holders of Transfer Restricted Securities by reason of the failure
of the Shelf Registration Statement to be filed, declared effective or to
remain effective, as the case may be.
SECTION 5. REGISTRATION PROCEDURES
In connection with the Shelf Registration Statement, the
Company will use its commercially reasonable efforts to effect such
registration to permit the sale of the Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution or
disposition thereof, and pursuant thereto the Company will as expeditiously as
possible after the Closing Date:
(a) on or prior to the date 60 days after the Closing
Date, prepare and file with the Commission a Shelf Registration Statement
relating to the registration on Form S-1 or Form S-3, if the use of such form
is then available and as determined by the Company, for the sale of the
Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements
required to be included or incorporated by reference therein; cooperate and
assist in any filings required to be made with the NASD and use its
commercially reasonable efforts to cause such Shelf Registration Statement to
become effective and approved by such governmental agencies or authorities as
may be necessary to enable the selling Holders to consummate the disposition of
such Transfer Restricted Securities in the manner specified in the Shelf
Registration Statement; provided, however, that before filing a Shelf
Registration Statement or any Prospectus, or any amendments or supplements
thereto, the Company will furnish to the Initial Purchasers and the
Underwriter(s), if any, copies of all such documents proposed to be filed
(except that the Company shall not be required to furnish any exhibits to such
documents including those incorporated by reference, unless so requested by an
Intitial Purchaser or Underwriter in writing), and the Company will not file
any Shelf Registration Statement or amendment thereto or any Prospectus or any
supplement thereto to which (i) the Underwriter(s), if any, shall reasonably
object or (ii) if there are no Underwriters, the Holders of a majority of the
outstanding Transfer Restricted Securities shall reasonably object (with
holders of Common Stock constituting Transfer
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<PAGE> 7
Restricted Securities being deemed to be Holders of the number of Shares
converted by them into such Common Stock for purposes of such calculation), in
each such case within five business days after the receipt thereof by the
Underwriter(s) or Initial Purchaser(s). A Holder or Underwriter, if any, shall
be deemed to have reasonably objected to such filing if the Shelf Registration
Statement, amendment, Prospectus or supplement, as applicable, as proposed to
be filed contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading which misstatement or omission is specifically
identified to the Company in writing within such five business days;
(b) prepare and file with the Commission such amendments
and post-effective amendments to the Shelf Registration Statement as may be
necessary to keep the Shelf Registration Statement effective for the applicable
period set forth in Section 3(a) hereof; cause the Prospectus to be
supplemented by any required supplement thereto (a "Prospectus Supplement"),
and as so supplemented to be filed pursuant to Rule 424(b) under the Act, and
to comply fully with the applicable provisions of Rules 424(b) under the Act in
a timely manner; and comply with the provisions of the Act with respect to the
disposition of all securities covered by such Shelf Registration Statement
during the applicable period in accordance with the intended method or methods
of distribution by the sellers thereof set forth in such Shelf Registration
Statement, Prospectus or Prospectus Supplement;
(c) if requested by the Holders of Transfer Restricted
Securities, or, if the Transfer Restricted Securities are being sold in an
Underwritten Offering, the Underwriter(s) of such Underwritten Offering,
promptly incorporate in the Prospectus, any Prospectus Supplement or
post-effective amendment to the Shelf Registration Statement such information
as the Underwriters and/or the Holders of Transfer Restricted Securities being
sold agree should be included therein relating to the plan of distribution of
the Transfer Restricted Securities, including, without limitation, information
with respect to the number of Shares and/or the number of shares of Common
Stock being sold by the Holders, the purchase price being paid therefor and any
other terms with respect to the offering of the Transfer Restricted Securities
to be sold in such offering; and make all required filings of such Prospectus,
Prospectus Supplement or post-effective amendment as soon as practicable after
the Company is notified of the matters to be incorporated in such Prospectus,
Prospectus Supplement or post-effective amendment;
(d) advise the Underwriter(s), if any, and selling
Holders promptly and, if requested by such Persons, confirm such advice in
writing, (i) when the Prospectus or any Prospectus Supplement or post-effective
amendment to the Shelf Registration Statement has been filed, and, with respect
to the Shelf Registration Statement or any post-effective amendment thereto,
when the same has become effective, (ii) of any request by the Commission for
an amendment of or supplement to the Shelf Registration Statement, any
Preliminary Prospectus, or the Prospectus or for additional information, (iii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Shelf Registration Statement or of the suspension of
qualification of the Transfer Restricted Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iv) if at
any time the representations and warranties of the Company contemplated by
paragraph (m)(i) below cease to be true and correct in all material respects,
and (v) or of the happening of any event, including the filing of any
information, documents or reports pursuant to the Exchange Act, that makes any
statement made in the Shelf Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions
to or changes in the Registration Statement or the Prospectus (as then amended
or supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectus (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Shelf Registration Statement, or any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption from qualification of the Transfer Restricted
Securities under state securities or Blue Sky laws, the Company shall use its
commercially reasonable efforts to obtain the withdrawal or lifting of such
order at the earliest possible time.
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<PAGE> 8
(e) promptly following the filing of any document that is
to be incorporated by reference into the Shelf Registration Statement or the
Prospectus subsequent to the initial filing of the Shelf Registration
Statement, provide copies of such document (excluding exhibits, unless
requested by a Holder in writing) to the Holders;
(f) furnish to each Holder and each of the
Underwriter(s), if any, without charge, at least one copy of the Shelf
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference therein
and all exhibits (excluding exhibits to documents incorporated by reference
therein unless requested by such Holder or Underwriter);
(g) deliver to each selling Holder and each of the
Underwriter(s), if any, without charge, as many copies of any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto as such
Persons may reasonably request; the Company consents to the use of any
Preliminary Prospectus and the Prospectus and any amendments or supplements
thereto by each of the selling Holders and each of the Underwriter(s), if any,
in connection with the public offering and the sale of the Transfer Restricted
Securities covered by any Preliminary Prospectus and the Prospectus or any
amendments or supplements thereto in the manner specified therein;
(h) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the Underwriter(s), if any, and
their respective counsel in connection with the registration and qualification
of the Transfer Restricted Securities under the securities or Blue Sky laws of
such jurisdictions as the selling Holders or Underwriter(s) may reasonably
request and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdiction of the Transfer Restricted
Securities in the manner specified in the Shelf Registration Statement;
provided, however, that the Company shall not be required (i) to register or
qualify as a foreign corporation where it is not now so qualified or (ii) to
take any action that would subject it to the service of process in suits, other
than as to matters and transactions relating to the Shelf Registration
Statement, in any jurisdiction where it is not now so subject;
(i) cooperate with the selling Holders and the
Underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Transfer Restricted Securities to be sold and not
bearing any restrictive legends; and enable such Transfer Restricted Securities
to be in such denominations and registered in such names as the Holders or the
Underwriter(s), if any, may request at least two business days prior to any
sale of Transfer Restricted Securities;
(j) use its commercially reasonable efforts to cause the
Transfer Restricted Securities covered by the Shelf Registration Statement to
be registered with or approved by such other governmental agencies or
authorities as may be reasonably necessary to enable the seller or sellers
thereof or the Underwriter(s), if any, to consummate the disposition of such
Transfer Restricted Securities, subject to the provisos contained in clause (h)
above;
(k) if any fact or event contemplated by clause (d)(v)
above shall exist or have occurred, prepare a post-effective amendment or
supplement to the Shelf Registration Statement or related Prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of Transfer Restricted
Securities, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein not misleading, in light of the circumstances under which they are
made;
(l) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Shelf Registration
Statement and provide the transfer agent for the Common Stock with printed
certificates for the Transfer Restricted Securities which are in a form
eligible for deposit with The Depository Trust Company;
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<PAGE> 9
(m) enter into such agreements (including an underwriting
agreement reasonably acceptable to the Company) and take all such other actions
in connection therewith as may reasonably be required in order to expedite or
facilitate the disposition of the Transfer Restricted Securities pursuant to
the Shelf Registration Agreement, in connection with an Underwritten
Registration, and (i) make such representations and warranties to the Holders
and the Underwriter(s), in form, substance and scope as they may reasonably
request and as are customarily made by issuers to Underwriters in primary
Underwritten Offerings and covering matters, including, but not limited to,
those set forth in the Purchase Agreement; (ii) obtain opinions of counsel for
the Company and updates thereof in customary form and covering matters
reasonably requested by the Underwriter(s) of the type customarily covered in
legal opinions to Underwriters in connection with primary Underwritten
Offerings addressed to the Underwriter requesting the same and covering the
matters as may be reasonably requested by such Holders and Underwriters; (iii)
obtain "cold comfort" letters and updates thereof from the Company's
independent certified public accountants, and the independent certified public
accountants of any other corporation or person ("Other Companies") with respect
to which audited financial statements are required to be included or
incorporated by reference in the Shelf Registration Statement, addressed to the
Underwriters requesting the same, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters to
Underwriters in connection with primary Underwritten Offerings; and (iv)
deliver such documents and certificates as may be reasonably requested by the
Holders of the Transfer Restricted Securities being sold or the Underwriter(s)
of such Underwritten Offering to evidence compliance with clause (i) above and
with any customary conditions contained in the underwriting agreement entered
into by the Company pursuant to this clause (m). The above shall be done at or
prior to each closing under such underwriting agreement, as and to the extent
required thereunder;
(n) make available at reasonable times and in a
reasonable manner for inspection by a representative of the Holders of the
Transfer Restricted Securities, any Underwriter participating in any
disposition pursuant to such Shelf Registration Statement and any attorney or
accountant retained by such selling Holders or any of the Underwriters all
relevant financial and other records, pertinent corporate documents and
properties of the Company and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
Underwriter, attorney or accountant in connection with such Shelf Registration
Statement prior to its effectiveness; provided, however, that such
representatives, attorneys or accountants shall agree to keep confidential
(which agreement shall be confirmed in writing in advance to the Company if the
Company shall so request) all information, records or documents made available
to such persons which are not otherwise available to the general public unless
disclosure of such records, information or documents is required by court or
administrative order (of which the Company shall have been given prior notice
and an opportunity to defend) after the exhaustion of all appeals therefrom,
and to use such information obtained pursuant to this provision only in
connection with the transaction for which such information was obtained, and
not for any other purpose;
(o) otherwise use its commercially reasonable efforts to
comply with all applicable rules and regulations of the Commission, and make
generally available to its security holders, as soon as practicable, a
consolidated earnings statement, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act, for the twelve-month period
(i) commencing at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to Underwriters in a firm commitment Underwritten Offering
or (ii) if not sold to Underwriters in such an offering, beginning with the
first month of the Company's first fiscal quarter commencing after the
effective date of the Shelf Registration Statement;
(p) use its commercially reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of the Shelf Registration
Statement at the earliest practicable time;
(q) cause all Common Stock issuable upon conversion of
the Preferred Stock to be accepted for listing, subject to official notice of
issuance, on each securities exchange or quotation system on which similar
securities issued by the Company are then listed; and
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<PAGE> 10
(r) cooperate and assist in any filings required to be
made with the NASD and in the performance of any due diligence investigation by
any Underwriter (including any "qualified independent underwriter" that is
required to be retained in accordance with the rules and regulations of the
NASD).
Each Holder whose securities are covered by any Shelf
Registration Statement agrees to furnish promptly to the Company all
information required to be disclosed in order to make the information
previously furnished to the Company by such Holder not materially misleading or
necessary to cause such Shelf Registration Statement not to omit a material
fact with respect to such Holder necessary in order to make the statements
therein not misleading.
Each Holder agrees by acquisition of such Transfer Restricted
Securities that, upon receipt of any notice from the Company of the existence
of any fact of the kind described in Section 5(d)(v) hereof, such Holder will
forthwith discontinue disposition of Transfer Restricted Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings with respect to the
Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period regarding the
effectiveness of the Shelf Registration Statement set forth in Section 3(a)
hereof shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to Section 5(d)(v)
hereof to and including the date when each selling Holder covered by such Shelf
Registration Statement shall have received the copies of the supplemented or
amended Prospectus contemplated by Section 5(k) hereof or shall have received
the Advice.
SECTION 6. REGISTRATION EXPENSES
(a) Except as set forth in Section 6(b) hereof, all
expenses incident to the Company's performance of or compliance with this
Agreement (the "Registration Expenses") will be borne by the Company,
regardless of whether a Shelf Registration Statement becomes effective,
including without limitation:
(i) all registration and filing fees and expenses
(including filings made with the NASD);
(ii) reasonable fees and expenses of compliance with federal
securities or state blue sky laws;
(iii) expenses of printing (including, without limitation,
expenses of printing or engraving certificates for the Transfer
Restricted Securities in a form eligible for deposit with Depository
Trust Company and of printing the Prospectus and any Preliminary
Prospectus), messenger and delivery services and telephone;
(iv) fees and disbursements of counsel for the Company;
(v) fees and disbursements of all independent certified
public accountants of the Company (including the expenses of any
special audit and "cold comfort" letters required by or incidental to
the preparation and filing of a Shelf Registration Statement and
Prospectus and the disposition of Transfer Restricted Securities); and
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(vi) fees and expenses of listing the Transfer Restricted
Securities on any securities exchange or quotation system in
accordance with Section 5(r) hereof.
The Company will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, rating agency fees and the fees and expenses of any Person, including
special experts, retained by the Company.
(b) The Holders of Transfer Restricted Securities shall
bear the expense of any broker's commission or Underwriter's discount or
commission and the fees and expenses of any counsel for the Holders. In
addition, each Holder of Transfer Restricted Securities shall pay all
Registration Expenses to the extent required by applicable law.
Notwithstanding anything herein to the contrary, the Company shall not be
responsible for fees and expenses of counsel to any Underwriter(s), whether in
connection with the Shelf Registration Statement, NASD matters or otherwise,
except to the extent specifically agreed in any underwriting agreement for an
Underwritten Offering.
SECTION 7. INDEMNIFICATION
(a) (i) The Company agrees to indemnify and hold harmless
(i) each of the Initial Purchasers, (ii) each Holder, and (iii) each person, if
any, who controls any of the Initial Purchasers or any Holder within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as a
Non-Company Indemnitee), from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or in the Shelf
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein (in the case of any Preliminary Prospectus or the
Prospectus, in light of the circumstances in which such statements were made)
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
any Non-Company Indemnitee furnished in writing to the Company by or on behalf
of such Non-Company Indemnitee expressly for use in connection therewith;
provided, however, that the indemnification contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of
any Non-Company Indemnitee on account of any such loss, claim, damage,
liability or expense arising from the sale of the Transfer Restricted
Securities by such Non-Company Indemnitee to any person, at or prior to the
written confirmation of such sale, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus; provided that the
Company has delivered the Prospectus to such Non-Company Indemnitee in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
(b) If any action, suit or proceeding shall be brought
against any Non-Company Indemnitee, such Non- Company Indemnitee shall promptly
notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. Such Non-Company Indemnitee shall have the right to employ separate
counsel in any such action, suit or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Non-Company Indemnitee unless (i) the indemnifying parties have
agreed in writing to pay such fees and expenses, (ii) the indemnifying parties
have failed to assume the defense and employ counsel, or (iii) the named
parties to any such action, suit or proceeding (including any impleaded
parties) include both such Non-Company Indemnitee and the indemnifying parties
and such Non-Company Indemnitee shall have been
10
<PAGE> 12
advised by its counsel that representation of such indemnified party and any
indemnifying parties by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
parties shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Non-Company Indemnitee). It is understood,
however, that the indemnifying parties shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Non-Company Indemnitees not having actual or
potential differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed on a monthly basis. The indemnifying parties shall not be
liable for any settlement of any such action, suit or proceeding effected
without their written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Non-Company Indemnitee, to the extent provided in paragraph (a) hereof, from
and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Holder agrees to indemnify and hold harmless (i) the
Company, (ii) each of the Initial Purchasers, (iii) each other Holder, (iv) any
person controlling (within the meaning of Section 15 of the Act or Section 20
of the Exchange Act) the Company, the Initial Purchasers and each other Holder
and (v) the respective directors, officers, employees, representatives, and
agents of each of the parties referred to in clauses (i), (ii), (iii) and (iv),
to the same extent as the foregoing indemnity from the Company to each
Non-Company Indemnitee set forth in paragraph (a) hereof, but only with respect
to information relating to such Holder furnished in writing by or on behalf of
such Holder expressly for use in the Registration Statement, the Prospectus or
any Preliminary Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Holder pursuant to this paragraph (c), such Holder shall
have the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Holder shall
not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Holder's expense), and the Company, its directors, any such
officer, and any such controlling person, shall have the rights and duties
given to the Holders by paragraph (b) above. The foregoing indemnity agreement
shall be in addition to any liability which the Holders may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unenforceable although available by its terms to an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then an indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party, on the one hand, and the
indemnified party, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as other relevant equitable considerations. The relative
fault of the indemnifying party, on the one hand, and the indemnified party, on
the other hand, shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party, on the one hand, or the indemnified party,
on the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) The Company, each of the Initial Purchasers and each
Holder of Transfer Restricted Securities agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation or by any other method of allocation that does not take account
of the
11
<PAGE> 13
equitable considerations referred to in paragraph (d) above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 7, no Holder shall be required
to contribute any amount in excess of the amount by which the total amount
received by such Holder with respect to the sale of Transfer Restricted
Securities exceeds the sum of (A) the amount paid by such Holder for such
Shares plus (B) the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 7 are several in proportion to the respective principal amount of
Shares held by each of the Holders hereunder and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified party
on a monthly basis. The indemnity and contribution agreements contained in
this Section 7 and any representations and warranties of the Company set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Initial
Purchaser or any person controlling any Initial Purchaser, any Holder, the
Company, its directors or officers or any person controlling the Company, and
(ii) any termination of this Agreement. A successor to any Initial Purchaser,
or any person controlling any Initial Purchaser, or to any Holder, or to the
Company, its directors or officers, or any person controlling the Company,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 7.
SECTION 8. RULE 144A
The Company hereby agrees with each Holder, for so long as any
of the Shares or shares of Common Stock that are Transfer Restricted Securities
remain outstanding and during any such period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act, to make available to any
Initial Purchaser or any beneficial owner of the Shares or shares of such
Common Stock in connection with any sale thereof and any prospective purchaser
of such Shares or Common Stock from such Initial Purchaser or beneficial owner,
the information required by Rule 144A(d)(4) under the Act in order to permit
resales of such Transfer Restricted Securities pursuant to Rule 144A.
SECTION 9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Offering
hereunder unless such Holder (a) agrees to sell such Holder's Transfer
Restricted Securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements, (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements and (c) furnishes the Company in writing information
in accordance with Section 3(f) and agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement and
any person controlling the Company within
12
<PAGE> 14
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
extent contemplated by Section 7(c).
SECTION 10. MISCELLANEOUS
(a) Remedies. Each Holder of Transfer Restricted
Securities, in addition to being entitled to exercise all rights provided
herein, and as provided in the Purchase Agreement and granted by law, including
recovery of damages, will be entitled to specific performance of such Holder's
rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Agreement and hereby agrees to waive the defense in
any action for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on
or after the date of this Agreement enter into any agreement with respect to
its securities that is inconsistent with the rights granted to the Holders of
Transfer Restricted Securities in this Agreement or otherwise conflicts in any
material respect with the provisions hereof. The rights granted to the Holders
of Transfer Restricted Securities hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Company's
securities under any other agreements.
(c) Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given unless the Company has obtained the written
consent of Holders of a majority of the outstanding Transfer Restricted
Securities affected by such amendment, modification, supplement, waiver or
departure (with holders of Common Stock constituting Transfer Restricted
Securities being deemed to be Holders of the number of Shares converted by them
into such Common Stock for purposes of such calculation). Notwithstanding the
foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of Holders of Transfer Restricted Securities
whose securities are being sold pursuant to such Shelf Registration Statement
and that does not directly or indirectly affect the rights of other Holders of
Transfer Restricted Securities shall be valid only with the written consent of
Holders of at least 66-2/3% of the Transfer Restricted Securities being sold,
in each case calculated in accordance with the provisions of Section 3(c).
(d) Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested), telex,
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder of Transfer Restricted
Securities, at the address set forth on the records of the Transfer
Agent, with a copy to the Registrar; and
(ii) if to the Company or an Initial Purchaser,
initially at its address set forth in the Purchase Agreement and
thereafter at such other address, notice of which is given in
accordance with the provisions of this Section.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and
on the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
(e) Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of the
parties, including, without limitation, and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of
13
<PAGE> 15
a Holder of Transfer Restricted Securities unless and to the extent such
successor or assign acquired Transfer Restricted Securities from such Holder;
and provided, further, that nothing herein shall be deemed to permit any
assignment, transfer or any disposition of Transfer Restricted Securities in
violation of the terms of the Purchase Agreement or applicable law. If any
transferee of any Holder shall acquire Transfer Restricted Securities, in any
manner, whether by operation of law or otherwise, such Transfer Restricted
Securities shall be held subject to all of the terms of this Agreement and by
taking and holding such Transfer Restricted Securities such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
(f) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW RULES THEREOF.
(i) Severability. In the event that any one or more of
the provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
(j) Entire Agreement. This Agreement together with the
other Operative Documents (as defined in the Purchase Agreement) is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the
Company with respect to the securities sold pursuant to the Purchase Agreement.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
14
<PAGE> 16
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the Initial Purchasers.
Very truly yours,
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
-----------------------------------
Name: Scott D. Silverman
Title: Senior Vice President,
Secretary and General Counsel
Confirmed as of the date first
above mentioned.
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
by: SMITH BARNEY INC.
By: /s/ MICHAEL A.F. ROBERTS
-----------------------------------------
Name: Michael A.F. Roberts
Title: Managing Director
15
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary:
Shares outstanding beginning of period 22,880 19,130 19,130
Issuance of 3,750 shares on March 16, 1995 -- 3,010 --
Issuance of 5,131 shares on March 5, 1996 4,232 -- --
Issuance of convertable debentures on July 24, 1996 212 -- --
Issuance of shares under the Company's April 1992
Stock Option Plan 227 -- --
Incremental shares applicable to:
Warrants issued pursuant to August 1990 employment
aggreement 498 457 433
Options granted pursuant to the Company's Stock
Option Plan 95 266 275
Warrants issued pursuant to a Senior Management
Stock Warrent Plan 508 215 10
Treasury shares (190) (93) (18)
======= ======= =======
28,462 22,985 19,830
======= ======= =======
Fully diluted:
Shares outstanding beginning of period 22,880 19,130 n/a
Issuance of 3,750 shares on March 16, 1995 -- 3,010
Issuance of 5,131 shares on March 5, 1996 4,232 --
Issuance of convertable debentures on July 24, 1996 212 --
Issuance of shares under the Company's April 1992
Stock Option Plan 114 --
Incremental shares applicable to:
Warrants issued pursuant to August 1990 employment
aggreement 507 457
Options granted pursuant to the Company's Stock
Option Plan 108 266
Warrants issued pursuant to a Senior Management
Stock Warrent Plan 574 215
Treasury shares (190) (93)
Conversion of 2,300 shares of Convertable Preferred
Stock at $22.60 on July 25, 1995 at a rate of 2.2123
shares of common for 1 preferred share 5,088 2,581
Conversion of 2,875 shares of Series II Convertable
Preferred Stock at $34.90 on August 7, 1996 at a rate of
1.4327 shares of common to 1 preferred share 1,704 --
======= ======= =======
35,229 25,566 n/a
======= ======= =======
35,229
0
</TABLE>
<PAGE> 1
EXHIBIT 12
PENNCORP FINANCIAL GROUP, INC.
STATEMENT RE RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes, undistributed earnings in
unconsolidated affiliates and extraordinary charge ... $123,699 $ 90,277 $ 58,581
Adjustments to earnings:
Fixed charges ......................................... 21,333 23,236 20,650
Interest capitalized .................................. -- -- --
Preferred stock dividend requirements
of majority owned subsidiaries ..................... -- -- --
-------- -------- --------
Total earnings and fixed charges ........................... $145,032 $113,513 $ 79,231
======== ======== ========
Fixed charges:
Interest expensed ..................................... $ 17,741 $ 18,729 $ 17,404
Amortization of deferred debt costs and
original issue discount .......................... 1,238 1,051 870
Rental expense ........................................ 2,354 3,456 2,376
-------- -------- --------
Total fixed charges ........................................ $ 21,333 $ 23,236 $ 20,650
======== ======== ========
Preferred Stock Requirements:
Preferred stock dividends .............................. $ 14,646 $ 6,540 $ 1,151
Gross up for taxes ..................................... 7,710 3,174 582
-------- -------- --------
Total preferred stock requirements ......................... $ 22,356 $ 9,714 $ 1,733
======== ======== ========
Ratio of earnings to fixed charges ......................... 6.80x 4.89x 3.84x
======== ======== ========
Combined ratio of earnings to fixed charges
and preferred stock dividend requirements ................ 3.32x 3.45x 3.54x
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
PENNCORP FINANCIAL GROUP, INC.
As of: December 31, 1996
<TABLE>
<S> <C>
PENNCORP FINANCIAL GROUP, INC. (DELAWARE)
PENNCORP SOUTHWEST, INC. (DELAWARE)
SOUTHWESTERN FINANCIAL CORPORATION (DELAWARE)
SOUTHWESTERN FINANCIAL SERVICES CORPORATION (DELAWARE)
SOUTHWESTERN LIFE COMPANIES, INC. (DELAWARE)
CONSTITUTION LIFE INSURANCE COMPANY (TEXAS)
SOUTHWESTERN LIFE INSURANCE COMPANY (TEXAS)
UNION BANKERS INSURANCE COMPANY (TEXAS)
MARQUETTE NATIONAL LIFE INSURANCE COMPANY (TEXAS)
PENNCORP FINANCIAL SERVICES, INC. (DELAWARE)
KIVEX, INC. (DELAWARE)
UC MORTGAGE CORPORATION (DELAWARE)
AMERICAN-AMICABLE HOLDINGS CORPORATION (DELAWARE)
PIONEER SECURITY LIFE INSURANCE COMPANY(TEXAS)
AMERICAN-AMICABLE LIFE INSURANCE COMPANY OF TEXAS (TEXAS)
ALICO MANAGEMENT COMPANY (TEXAS)
PIONEER AMERICAN INSURANCE COMPANY (TEXAS)
ILC CAPITAL ACQUISITION CORP. (DELAWARE)
SALEM HOLDINGS CORPORATION (DELAWARE)
SALEM LIFE INSURANCE CORPORATION (NORTH CAROLINA)
OCCIDENTAL LIFE INSURANCE COMPANY OF NORTH CAROLINA (NORTH CAROLINA)
INTEGON LIFE INSURANCE CORPORATION (NORTH CAROLINA)
THE NETWORK AGENCY, INC. (OHIO)
INTEGON LIFE NETWORK CORPORATION (NORTH CAROLINA)
GEORGIA INTERNATIONAL LIFE INSURANCE COMPANY (NORTH CAROLINA)
PIEDMONT LIFE INSURANCE COMPANY (GEORGIA)
GROUP CONSULTANTS, INC. (GEORGIA)
PENNCORP FINANCIAL, INC. (DELAWARE)
CALIFORNIA SALES AGENCY, INC. (CALIFORNIA)
MIDWEST REGION, INC. (IOWA)
MIDWEST REGION, INC. OF COLORADO (COLORADO)
MISSISSIPPI REGION ASSOCIATES, INC. (ALABAMA)
SAFE DRIVERS AGENCY UNLIMITED (UNITED KINGDOM)
SOUTHEASTERN REGION ASSOCIATES, INC. (ALABAMA)
UNITED SILVER SPRING ASSOCIATES, INC. (CALIFORNIA)
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY (TEXAS)
PROFESSIONAL INSURANCE CORPORATION (FLORIDA)
UNITED COMPANIES LIFE INSURANCE COMPANY (LOUISIANA)
UNITED VARIABLE SERVICES, INC. (LOUISIANA)
PENNSYLVANIA LIFE INSURANCE COMPANY (PENNSYLVANIA)
PENINSULAR LIFE INSURANCE COMPANY (NORTH CAROLINA)
MARKETING ONE FINANCIAL CORPORATION (DELAWARE)
PREMIER ONE, INC. (NORTH CAROLINA)
MARKETING ONE, INC. (NEVADA)
ALTERNATIVE INVESTMENTS, INC. (INDIANA)
FINESSE INVESTMENTS, INC. (HAWAII)
FINESSE INVESTMENTS, INC. (MONTANA)
MARKETING ONE INVESTMENT SERVICES CORPORATION (TEXAS)
MARKETING ONE OF ALABAMA, INC. (ALABAMA)
MARKETING ONE OF PUERTO RICO, INC. (PUERTO RICO)
MARKETING ONE SECURITIES, INC. (CALIFORNIA)
TAX SAVERS AGENCY, INC. (OHIO)
PENNCORP LIFE INSURANCE COMPANY (CANADA)
PENNCORP CANADA MARKETING, INC. (CANADA)
PENNCORP OCCIDENTAL, CORP. (DELAWARE)
PENN LA FRANCO CORPORATION (BRITISH VIRGIN ISLANDS)
LA FRANCO PENN LIFE COMPANIA DE SEGUROS DE VIDA S.A. (ARGENTINA)
</TABLE>
<PAGE> 1
EXHIBIT 22
INDEPENDENT AUDITORS' CONSENT
The Shareholders and Board of Directors
PennCorp Financial Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-2930 and 333-2928) on Form S-8 of PennCorp Financial Group, Inc. of our
report dated February 28, 1997, relating to the consolidated balance sheets of
PennCorp Financial Group, Inc. and subsidiaries as of December 31, 1996, and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for the each of the years in the three-year period ended
December 31, 1996, and all related schedules, which report appears in the
December 31, 1996 annual report on Form 10-K of PennCorp Financial Group, Inc.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,993,925
<DEBT-CARRYING-VALUE> 87,330
<DEBT-MARKET-VALUE> 89,759
<EQUITIES> 20,867
<MORTGAGE> 256,998
<REAL-ESTATE> 23,522
<TOTAL-INVEST> 3,646,197
<CASH> 39,464
<RECOVER-REINSURE> 64,773
<DEFERRED-ACQUISITION> 268,356
<TOTAL-ASSETS> 4,833,733
<POLICY-LOSSES> 3,461,356
<UNEARNED-PREMIUMS> 15,445
<POLICY-OTHER> 44,878
<POLICY-HOLDER-FUNDS> 40,429
<NOTES-PAYABLE> 210,325
32,864
249,670
<COMMON> 286
<OTHER-SE> 595,043
<TOTAL-LIABILITY-AND-EQUITY> 4,833,733
348,090
<INVESTMENT-INCOME> 213,563
<INVESTMENT-GAINS> 1,257
<OTHER-INCOME> 6,132
<BENEFITS> 267,312
<UNDERWRITING-AMORTIZATION> 52,877
<UNDERWRITING-OTHER> 97,685
<INCOME-PRETAX> 123,699
<INCOME-TAX> 45,418
<INCOME-CONTINUING> 99,383
<DISCONTINUED> 0
<EXTRAORDINARY> 2,372
<CHANGES> 0
<NET-INCOME> 82,365
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 2.67
<RESERVE-OPEN> 125,706
<PROVISION-CURRENT> 63,673
<PROVISION-PRIOR> (6,816)
<PAYMENTS-CURRENT> 19,057
<PAYMENTS-PRIOR> 36,435
<RESERVE-CLOSE> 128,149
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
