<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-11422
PENNCORP FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3543540
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
745 Fifth Avenue, Suite 500, NY, NY 10151
- ---------------------------------------- ----------
(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
------------------- -----------------------------------------
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
- --------------------------------------------------------------------------------
(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
NONE
<PAGE> 2
PAGE 2
PENNCORP FINANCIAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
PART III
Item 10. Directors and Executive Officers of the Company . . . . . . . . . . . . . . . . . 89
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . 99
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . 102
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . 108
</TABLE>
<PAGE> 3
PAGE 3
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 44 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 June 1997.
<PAGE> 4
PAGE 4
THE SOUTHWESTERN LIFE INVESTMENT
On December 14, 1995, SW Financial, a newly organized corporation
formed by the Company 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,
without giving effect to the conversion of the SW Financial convertible
debentures, the Company beneficially owns 75.4% of SW Financial's outstanding
common stock, including 100.0% of SW Financial's non-voting common stock and
21.0% of SW Financial's voting common stock. The Company also owns preferred
stock of SW Financial and its subsidiary. The Company is also a 16.3% limited
partner in Knightsbridge Fund. More specifically, in addition to its
$89,000,000 common stock investment in SW Financial, the Company also purchased
$21,000,000 initial liquidation value of SW Financial's Series A Preferred
Stock, which accrues (but does not require the payment of) dividends at the
rate of 10.0% per annum, compounded quarterly, and is mandatorily redeemable on
December 31, 2005. The Series A Preferred Stock is not redeemable at the option
of SW Financial. At maturity, the Series A Preferred Stock will be required to
be redeemed for approximately $56.0 million in cash. If SW Financial fails to
satisfy its mandatory redemption obligation, the holders of the Series A
Preferred Stock will be entitled to elect 49.0% of the members of the Board of
Directors of SW Financial and, upon receipt of regulatory approval, a majority
of the directors of SW Financial. The Series A Preferred Stock is senior
preferred stock. The holders of the Series A Preferred Stock are entitled to
class voting rights under certain circumstances, including in connection with a
merger of SW Financial or a sale of all or substantially all its assets or the
authorization or issuance of senior or pari passu preferred stock, and as
otherwise provided by law.
In addition, certain of the Company's insurance subsidiaries purchased
$10.0 million liquidation value of 5.5% Mandatorily Redeemable Preferred Stock,
par value $0.01 per share (the "5.5% Preferred Stock") of Southwestern Life
Companies ("SWLC"), the immediate parent company of Southwestern Life and Union
Bankers. The 5.5% Preferred Stock accrues dividends at a fixed rate of $5.50
per share per annum, payable in cash or, subject to certain conditions, through
the issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred
Stock is not subject to optional redemption and matures on December 31, 2005.
If SWLC fails to satisfy its mandatory redemption obligation or if dividends
payable on the 5.5% Preferred stock are in arrears for four or more quarterly
dividend periods, the holders of the 5.5% Preferred Stock will be entitled to
elect 49.0% of the members of the Board of Directors of SWLC and, upon receipt
of regulatory approval, a majority of the Board of Directors of SWLC. The 5.5%
Preferred Stock is the only preferred stock of SWLC authorized for issuance.
The holders of the 5.5% Preferred Stock are entitled to class voting rights
under certain circumstances, including in connection with a merger of SWLC or a
sale of all or substantially all its assets or the authorization or issuance of
senior or pari passu preferred stock, and as otherwise provided by law.
As part of the SW Financial Investment, the Company, the Knightsbridge Fund
and its affiliates, and SW Financial entered into a 10-year stockholders
agreement (the "Stockholders Agreement"). Pursuant to that agreement, prior to
the time when the Company converts its shares of nonvoting stock into voting
common stock (the "Conversion"), the parties have agreed that the Board of
Directors of SW Financial will consist of (i) Glenn H. Gettier (the President
of Southwestern Life and Union Bankers), so long as he is an employee of SW
Financial and its subsidiaries and is willing to serve as a director, (ii)
David J. Stone and Steven W. Fickes, so long as they are principals of the
Knightsbridge Fund and are willing to serve as directors and (iii) at least
four independent directors (as defined) reasonably acceptable to the Company
and the Knightsbridge Fund. To date, neither the Company nor the Knightsbridge
Fund has required SW Financial to nominate candidates to serve as independent
directors. In addition to the foregoing, prior to the Conversion, the Company
is entitled to send three of its designees (in addition to Messrs. Stone and
Fickes) to observe all meetings of the Board of Directors (and committees
thereof) of SW Financial and its subsidiaries.
The Stockholders Agreement further grants the Company, but not the
Knightsbridge Fund and its affiliates, certain "drag-along" rights pursuant to
which, if the Company desires to sell all or any portion of its common stock
(including common stock purchase warrants) in SW Financial, it can require the
Knightsbridge parties to sell an equivalent proportionate amount of their SW
Financial common stock and warrants. The Stockholders Agreement also grants
both the Company and the Knightsbridge parties certain "tag-along" rights
pursuant to which, subject to certain de minimis exceptions, if either party
desires to sell its common stock (including warrants) to a third party, the
other party will have the opportunity to participate on identical terms and on
a ratable basis in such sale.
In addition to the foregoing, the Stockholders Agreement grants "demand"
and "piggyback" registration rights to the Company and the Knightsbridge parties
under certain circumstances.
The voting provisions of the Stockholders Agreement and the tag-along and
drag-along rights thereunder automatically terminate upon the consummation of an
initial public offering of common stock of SW Financial pursuant to which SW
Financial receives gross proceeds of at least $50.0 million in cash.
The Company's Board, including its independent directors, authorized
the Company and the Knightsbridge Fund to pursue the acquisition of
Southwestern Life and Union Bankers after considering, among other things,
ICH's and its creditors' insistence that they would only consider potential
bids for Southwestern Life and Union Bankers that were structured to allow ICH
to satisfy its tax planning objectives. In addition, the Company's Board
expressed reluctance to increase significantly the Company's financial
leverage, which the directors believed might cause concern among insurance
regulatory authorities and which might also jeopardize the Company's ratings
from A.M. Best and Company and other rating agencies. After taking into account
the foregoing factors and considering the time that might be necessary to raise
sufficient equity capital to fund the transaction based on the Company's target
range of debt to capitalization ratios, the Company's Board authorized
management to work with the Knightsbridge Fund to devise a transaction
structure that accommodated ICH's tax objectives, timing requirements, and
mitigated the above stated concerns of the Company's Board. In addition, the
Company's Board considered the fact that there were at least four potential
avenues for the Company 's stockholders to realize value (directly or
indirectly) from the Company's investment: (i) an initial public offering of SW
Financial, (ii) a spin-off of the Company's investment in SW Financial, (iii) a
sale of SW Financial to a third party and (iv) the purchase of the SW Financial
Controlling Interest and the consolidation of SW Financial into the Company.
Based on the foregoing, the Company's Board elected to structure the Company's
investment in SW Financial in a manner that it believed enabled the Company to
share in the economic benefits of having purchased SW Financial for a purchase
price it considered attractive, while enabling the Company's Board to be
flexible with respect to its ultimate ability to realize value from its
investment.
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
the Company's Board of Directors on a means of consolidating their outside
business interests, including the Knightsbridge Fund, under the Company.
Subsequently, Messrs. Stone and Fickes and the members of the Knightsbridge
and Compensation Committees of the Company's Board developed a plan to enable
the Company 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 the Company.
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 the Company. These compensation arrangements are
described in detail under the captions "Executive Compensation -
Employment Agreements" in Item 11 hereof.
o The acquisition by the Company 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 the Company 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 the Company's 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 the Company at a Special Meeting of
Stockholders anticipated to be held in June 1997.
<PAGE> 5
PAGE 5
Further information regarding the Southwestern Life Investment appears
in Note 6 of "Notes to Consolidated Financial Statements" on page 49 hereof.
Information relating to the relationship between the Company 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 57 and 58,
respectively, hereof.
THE WASHINGTON NATIONAL TRANSACTION
On November 14, 1996, the Company and Washington National entered into
an agreement whereby Washington National will merge with the Company (the
"Merger"), the corporate existence of Washington National will cease, and the
Company will continue as the surviving corporation.
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
the Company's 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 the Company and Washington National
as of March 9, 1997, the Company 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
2,487,000 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 the Company 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 the Company 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 Company's 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
<PAGE> 6
PAGE 6
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 Company's Board of Directors reviewed the terms and conditions of
the Merger and determined that the Merger is fair to and in the best interests
of the Company 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
the Company's target market offered by Washington National; (iii) the fact that
both the Company and Washington National sell their products to the same target
market, thus providing "cross-selling" opportunities; (iv) the Company's ability
to use its existing payroll deduction capabilities and its individual product
division 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 (estimated initially at
$10,000,000 per year and diminishing over time); (vi) potential consolidation
savings (run-rate reduction of a minimum of approximately $10,000,000 on a
pre-tax basis) resulting from the Merger; (vii) the financial condition,
results of operations and cash flows of the Company 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 the Company's earnings per share; (x) the terms and conditions of the Merger
Agreement, including the requirement for the Company's stockholders' approval,
the requirement that the Company receive a $10,000,000 termination fee under
certain circumstances, and the requirement that the Company provide certain
large stockholders of Washington National with registration rights; and (xi)
results of due diligence which, included (a) concerns about the profitability
of certain of Washington National's insurance products, (b) potential credit
exposures related to Washington National's mortgage portfolio and valuation
concerns related to the Kokomo, Indiana home office building, (c) possible
litigation exposures, including a class action suit involving former employees
of Washington National, and (d) potential tax liabilities of Washington
National.
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>
<CAPTION>
PERCENTAGE OF CONSOLIDATED
INSURANCE OPERATIONS
INSURANCE PRODUCT TYPE REVENUES AS OF DECEMBER 31,
---------------------- ----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Fixed benefit . . 67.1% 48.8% 34.1%
Life . . . . . . . 32.9 43.5 46.2
Accumulation . . . -- 7.7 19.7
------ ------ ------
Total . . . . . 100.0% 100.0% 100.0%
====== ====== ======
</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
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Fixed benefit . . $179,791 $189,681 $194,475
Life(1) . . . . . 131,134 216,263 327,538
-------- -------- --------
Total . . . . . . $310,925 $405,944 $522,013
- ---------- ======== ======== ========
</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.
<PAGE> 7
PAGE 7
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
Fixed Fixed Accum- Fixed Accum-
Benefit Life Benefit Life ulation Benefit Life ulation
-------- ----- -------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
<CAPTION>
MAJOR MARKET SUB-MARKET
-------------- --------------------------------------
<S> <C>
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.
<PAGE> 8
PAGE 8
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
-------------------------------------------------------------------------------------------------------
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>
- --------------
(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
-------------------------------------------------------------------------------------------------------
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
<PAGE> 9
PAGE 9
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.
<PAGE> 10
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 revenue to the Company's
insurance operations 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 revenue to the Company's
insurance operations 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 revenue to the Company's
insurance operation 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 revenue to the Company's
insurance operation 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' capital substantially exceeded RBC
requirements. Although OLIC's and Salem Life'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 the Company and each of
its directors, individually, in the Delaware Court of Chancery. The complaint
in the Miller suit has not yet been served on the Company or the other
defendants. Both suits allege that the Southwestern Financial Investment
involved the usurpation of a corporate opportunity and a waste of the Company's
assets by Messrs. Stone and Fickes, and that the directors of the Company in
approving that transaction, failed to act in good faith and breached their
fiduciary duties, including the duty of loyalty to the Company and its
stockholders, having favored the interests of Messrs. Stone and Fickes over the
Company 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 the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company'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 plaintiffs' counsel entered into a stipulation
of settlement on March 28, 1997 (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 the Company to
purchase the Southwestern Financial Controlling Interest for $67.5 million,
reducing the price to be paid by the Company for the Southwestern Financial
Controlling Interest by approximately $2.0 million, (ii) the Company's Board of
Directors 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 Company's Board of Directors 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 Company's Board of Directors 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 Company's 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 Southwestern Financial Controlling Interest,
and (vi) the plaintiffs' counsel will be entitled to conduct confirmatory
discovery.
The Proposed Settlement is subject to approval by the Delaware
Chancery Court after notice to the Company's 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 the Company 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 the Company, and because the Proposed Settlement will have the effect
of reducing the price to be paid by the Company for the Southwestern Financial
Controlling Interest and will obviate the need to expend considerable
management and director time to litigate the action, the Company's Board of
Directors has determined that the Proposed Settlement is in the best interests
of the Company and its shareholders and confers a substantial economic benefit
on the Company. Accordingly, the Company's Board of Directors has authorized
the payment to plaintiffs' 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 the Company's 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.
<PAGE> 28
PAGE 28
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.
<PAGE> 29
PAGE 29
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.
<PAGE> 30
PAGE 30
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 years ended December 31, 1996, 1995 and 1994, cash
requirements of the Company exceeded cash made available to the Company through
payments under the surplus debentures by $2.0 million, $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.
The Company held $1,428.3 million and $503.7 million of mortgage-backed bonds
which represented 38.9% and 22.0% of total invested assets as of December 31,
1996 and 1995, respectively. The significant increase in mortgage-backed
securities for the year ended December 31, 1996, was the result of the UC Life
acquisition. The Company invests in mortgage-backed securities in order to
enhance portfolio yields and maintain a reliable cash flow stream from the
invested asset portfolio. The Company maintains sophisticated models to measure
the effective duration and option-adjusted duration of the consolidated
investment portfolio. These models are updated on a monthly basis and are
designed to allow accurate measurement of the convexity risks inherent in that
percentage of the portfolio invested in mortgage-backed securities and other
callable securities. The Company manages the portfolio convexity risk within the
context of the overall asset and liability model and the quantification of
disintermediation risk.
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.
<PAGE> 31
PAGE 31
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 $2,685.7
million and $1,423.7 million, respectively and obtained a spread on such
liabilities of 2.1% and 1.4%, 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.
<PAGE> 32
PAGE 32
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 June 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 21.0
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 33
PAGE 33
M D & A continued
Operating Ratios. Pretax operating margin improved modestly to 21.7% of
revenues during 1996 from 21.5% and 21.0% 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 $22.9 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
PennCorp Financial Group, Inc. and Subsidiaries 36
Southwestern Financial Corporation and Subsidiaries 61
</TABLE>
<PAGE> 36
PAGE 36
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> 37
PAGE 37
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> 38
PAGE 38
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> 39
PAGE 39
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> 40
PAGE 40
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 present 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> 41
PAGE 41
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> 42
PAGE 42
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> 43
PAGE 43
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> 44
PAGE 44
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> 45
PAGE 45
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> 46
PAGE 46
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> 47
PAGE 47
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> 48
PAGE 48
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> 49
PAGE 49
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 75.4% of SW Financial's
outstanding common stock, including 100% of SW Financial's non-voting common
stock, 21.0% of SW Financial's voting common stock, and preferred stock of SW
Financial. PennCorp is also a 16.3% limited partner in Knightsbridge.
As part of the SW Financial investment, PennCorp, the Knightsbridge Fund and its
affiliates and SW Financial entered into a 10-year stockholders agreement. The
agreement includes customary provisions for corporate governance (including the
right to elect or appoint members of the Board of Directors of SW Financial),
"drag-along" and "tag-along" rights and "demand" and "piggy-back" registration
rights. In addition, each issuance of preferred stock of SW Financial and its
subsidiaries held by PennCorp allows for class voting rights under certain
circumstances.
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> 50
PAGE 50
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> 51
PAGE 51
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 31 128,150 125,706 124,870
Plus reinsurance recoverables 2,242 1,372 2,050
--------------------------------------------------
Claim liability at December 31* $ 130,392 $ 127,078 $ 126,920
=========================================================================================================
</TABLE>
* Included in the balance sheet captions "future policy benefits" and "policy
and contract claims".
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 52
PAGE 52
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> 53
PAGE 53
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 $17,157 and $17,261, 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> 54
PAGE 54
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> 55
PAGE 55
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> 56
PAGE 56
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> 57
PAGE 57
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. The general partner of
Knightsbridge is Knightsbridge Capital L.L.C. ("Knightsbridge Capital"), the
members of which are David J. Stone and Steven W. Fickes. Allan D. Greenberg,
a member of the Company's Board of Directors, formerly owned a 5% interest in
Knightsbridge Capital which was purchased by Messrs. Stone and Fickes. The
general partner of Knightsbridge cannot be removed by the limited partners,
unless a court has finally determined that the general partner has committed a
willful and material breach of the limited partnership agreement. However, the
agreement provides that if either Mr. Stone or Mr. Fickes, or both, ceases to
be a member of Knightsbridge Capital or otherwise actively involved in the
management and operations of Knightsbridge, Knightsbridge may not subsequently
call additional capital from the limited partners. However, the limited
partners have consented to the Company's proposed acquisition of Messrs.
Stone's and Fickes' interests in Knightsbridge Capital.
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> 58
PAGE 58
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 incurred KM investment advisory fees
totalling $2,426 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 173,160 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 June 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> 59
PAGE 59
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 the PennCorp Financial Group,
Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J. Stone et
al, and the PennCorp Financial Group, Inc., C.A. No. 14795 (the "Miller
Complaint") were filed against the Company and each of its directors,
individually, in the Delaware Court of Chancery. The complaint in the Miller
suit has not yet been served on the Company or the other defendants. Both
suits allege that the SW Financial Investment involved the usurpation of a
corporate opportunity and a waste of the Company's assets by Messrs. Stone and
Fickes, and that the directors of the Company in approving that transaction,
failed to act in good faith and breached their fiduciary duties, including the
duty of loyalty to the Company and its stockholders, having favored the
interests of Messrs. Stone and Fickes over the Company 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 the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company's legal advisors have met or
spoken by telephone with the plaintiffs' counsel on several occasions to
discuss the terms of a potential settlement.
The defendants and the plaintiffs' counsel entered into a Stipulation and
Agreement of Compromise and Settlement dated March 28, 1997 (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 the Company to purchase the SW Financial Controlling
Interest for $67.5 million, reducing the price to be paid by the Company for
the SW Financial Controlling Interest by approximately $2.0 million, (ii) the
Company's Board of Directors 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 Company's
Board of Directors 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 Company's Board of Directors 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 Company's
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 plaintiffs' 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> 60
PAGE 60
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> 61
PAGE 61
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> 62
PAGE 62
WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT UPON FINAL COMPLETION
OF OUR AUDIT PROCEDURES.
INDEPENDENT AUDITORS' REPORT
Board of Directors
Southwestern Financial Corporation:
We have audited the accompanying consolidated balance sheet of Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides 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 Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Dallas, Texas
March 14, 1997
<PAGE> 63
PAGE 63
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1996 and 1995
(In thousands, except share information)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Investments:
Fixed maturities available for sale at fair value (cost $1,270,507 and $1,165,724) . . . . . $ 1,255,270 $ 1,169,478
Equity securities available for sale at fair value (cost $959 and $2,173) . . . . . . . . . . 1,129 2,149
Mortgage loans on real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,993 99,969
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,551 137,466
Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,895 196,370
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,308 41,308
Investment in limited partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 39,600
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,292 17,318
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,553 6,879
----------- ------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,640,991 1,710,537
Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,288 152,866
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,802 21,379
Accounts and notes receivable (net of allowance of $561 and $660) . . . . . . . . . . . . . . . 13,773 2,509
Present value of insurance in force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,333 115,831
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,095 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,079 55,500
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 2,338
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,642 26,195
Costs in excess of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,640 126,869
----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,210,550 $ 2,214,024
=========== ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits on traditional products . . . . . . . . . . . . . . . . . . . . . . . $ 584,179 $ 632,259
Universal life and investment contract liabilities . . . . . . . . . . . . . . . . . . . . . 1,088,335 1,106,447
Policy and contract claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,011 62,140
Other policyholder funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,635 20,446
----------- ------------
Total policy liabilities and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745,160 1,821,292
Federal income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,118 3,900
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,750 160,000
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,119 70,900
----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,032,147 2,056,092
----------- ------------
Mandatorily redeemable preferred stock:
Series A 10%, $.01 par value, $100 redemption value; 500,000 shares authorized, 232,890
and 210,990 issued and outstanding at December 31, 1996 and 1995, respectively. . . . . . . 23,289 21,099
5.5% preferred stock $.01 par value, $10,000 and $100 redemption value; 2,000 and
200,000 shares authorized, 1,059 and 100,260 shares issued and outstanding at
December 31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 10,590 10,026
SHAREHOLDERS' EQUITY
Common Stock, Class A, $.01 par value; 18,000,000 shares authorized;
3,500,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 35 35
Common Stock, Class B, non-voting $.01 par value; 10,000,000 shares authorized;
8,400,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 84 84
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,191 123,191
Unrealized gains (losses) on securities available for sale,
net of tax (benefit) of ($4,224) and $1,300 . . . . . . . . . . . . . . . . . . . . . . . . (8,081) 2,413
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,295 1,084
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,524 126,807
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $ 2,210,550 $ 2,214,024
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 64
PAGE 64
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the Year Ended December 31, 1996
(In thousands)
<TABLE>
<S> <C>
Revenues:
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 152,803
Interest sensitive policy product charges . . . . . . . . . . . . . . . . . . . . . . . 44,109
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,972
Net gains from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 516
Other income, including $15,811 in earnings of limited partnership . . . . . . . . . . . 27,439
----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,839
----------
Benefits and expenses:
Policyholders benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,844
Amortization of present value of insurance
in force and deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . 23,392
Amortization of costs in excess of net assets acquired . . . . . . . . . . . . . . . . . 4,229
Underwriting and other administrative expenses . . . . . . . . . . . . . . . . . . . . . 65,110
Interest and amortization of deferred debt issuance costs . . . . . . . . . . . . . . . 14,052
----------
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,627
----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,212
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,247
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,965
Preferred stock dividend requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,754)
----------
Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . $ 28,211
==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 65
PAGE 65
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON COMMON ADDITIONAL ON SECURITIES
STOCK STOCK PAID IN AVAILABLE RETAINED
CLASS A CLASS B CAPITAL FOR SALE, NET EARNINGS TOTAL
----------- ---------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . $ 35 $ 84 $ 123,191 $ 2,413 $ 1,084 $ 126,807
Net income . . . . . . . . . . . . . -- -- -- -- 30,965 30,965
Preferred dividends . . . . . . . . . -- -- -- -- (2,754) (2,754)
Unrealized loss on securities
available for sale, net . . . . . -- -- -- (10,494) -- (10,494)
----------- ---------- ---------- ----------- ----------- ---------
Balance at December 31, 1996 . . . . $ 35 $ 84 $ 123,191 $ (8,081) $ 29,295 $ 144,524
=========== ========== ========== =========== =========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 66
PAGE 66
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Year Ended December 31, 1996
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,965
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Adjustments relating to universal life and investment products:
Interest credited to account balances . . . . . . . . . . . . . . . . . . . . . . . . 56,203
Charges for mortality and administration . . . . . . . . . . . . . . . . . . . . . . . (50,689)
Capitalization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . (16,806)
Amortization of intangibles, depreciation and accretion, net . . . . . . . . . . . . . . 29,246
Decrease in policy liabilities, accruals and other policyholder funds . . . . . . . . . (54,427)
Decrease in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . (7,477)
Increase in notes and accounts receivable and accrued
investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000)
Increase in taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,218
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,945
Equity in undistributed earnings of limited partnership . . . . . . . . . . . . . . . . (15,811)
Net gains from sales of investments . . . . . . . . . . . . . . . . . . . . . . . . . . (516)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,916
----------
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . . . . . . (6,233)
----------
Cash flows from investing activities:
Sales of fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . 178,306
Maturities and other redemptions of fixed maturities available for sale . . . . . . . . . 20,893
Sales and principal repayments of mortgages, real estate and other investments . . . . . . 61,965
Distributions from limited partnership . . . . . . . . . . . . . . . . . . . . . . . . . . 53,520
Purchases of fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . (323,585)
Purchases of other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (694)
-----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . (9,595)
----------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances . . 99,409
Return of policyholders' account balances on interest sensitive products . . . . . . . . . (117,806)
Reduction of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250)
----------
Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . (18,647)
----------
Decrease in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (34,475)
Cash and short-term investments at beginning of period . . . . . . . . . . . . . . . . . . . 196,370
----------
Cash and short-term investments at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 161,895
==========
Supplemental disclosures:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,714
Non-cash financing activities:
Preferred stock issued as dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,754
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 67
PAGE 67
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
( Data with respect to December 31, 1995 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
On December 14, 1995 (the acquisition date), Southwestern Financial Corporation
(SWF or the Company), a newly organized corporation, was formed by PennCorp
Financial Group, Inc. (PennCorp) and Knightsbridge Capital Fund I, L.P.
(Knightsbridge). Its wholly-owned subsidiary, Southwestern Life Acquisition
Corp. (SLAC), was formed to acquire from I.C.H. Corporation (ICH), Southwestern
Life Insurance Company (Southwestern Life) and its wholly-owned subsidiary,
Constitution Life Insurance Company (Constitution) and its 83% owned
subsidiary, ICH Funding Corp. (ICH Funding), and Union Bankers Insurance
Company (Union Bankers) and its wholly-owned subsidiary, Marquette National
Life Insurance Company (Marquette). In addition, a wholly-owned subsidiary of
SWF acquired from ICH substantially all of the assets and liabilities of
Facilities Management Installation, Inc. (FMI), which had provided management
services to ICH's insurance companies. The acquisition was accounted for as a
purchase in accordance with generally accepted accounting principles (GAAP)
and, accordingly, the purchase price was allocated to assets and liabilities
acquired based on estimates of their fair value as of the acquisition date,
which became the new cost basis. Subsequently, the insurance companies were
reorganized such that Constitution became the parent of Southwestern Life and
Union Bankers.
SWF and its subsidiaries market and underwrite a broad range of life insurance,
annuities and accident and health products to individuals through a sales force
of independent agents. The insurance subsidiaries are licensed to write
business in 48 states, the District of Columbia and Guam. Approximately 24% of
the total direct premium of the Company's insurance subsidiaries was generated
from business written in Texas. No other states accounted for more than 10% of
the direct premium of the Company in 1996.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and ICH Funding. Minority interest in
ICH Funding, totaling $1,486 and $1,174 at December 31, 1996 and 1995,
respectively, are included in accrued expenses and other liabilities. All
significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP 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
(a) Investments
Fixed maturity 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 taxes and amount attributable to deferred policy
acquisition costs and present value of insurance in force related to
universal life and investment-type products. Mortgage-backed
securities 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
<PAGE> 68
PAGE 68
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded at cost, adjusted for amortization of premium or discount and
provision for loan losses, if necessary. Policy loans are recorded at
cost. Short-term investments purchased with maturities generally less
than three months are recorded at cost, which approximates market. All
short-term investments are considered to be cash equivalents.
Real estate, substantially all of which was acquired through
foreclosure, is recorded at the lower of fair value, minus estimated
costs to sell, or cost. If the fair value of the foreclosed real
estate minus estimated costs to sell is less than cost, a valuation
allowance is provided for the deficiency. Increases in the valuation
allowance are charged to income.
Investment in a limited partnership is reflected on the equity method.
Collateral loans are carried at their aggregate unpaid principal
balances.
The Company regularly evaluates investments based on current economic
conditions, past credit loss experience and other circumstances. A
decline in net realizable value that is other than temporary is
recognized as a realized investment loss and a reduction in the cost
basis of the investment. The Company discounts expected cash flows in
the computation of net realizable value of its investments, other than
certain mortgage-backed securities. In those circumstances where the
expected cash flows of residual interest and interest-only
mortgage-backed securities, discounted at a risk-free rate of return,
result in an amount less than the carrying value, a realized loss is
reflected in an amount sufficient to adjust the carrying value of a
given security to its fair value.
Realized investment gains and losses and declines in value which are
other than temporary, determined on the basis of specific
identification, are included in the determination of net income.
(b) Insurance Revenue Recognition
Accident and health 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.
(c) Policy Liabilities and Accruals
Liabilities for future policy benefits for traditional life products
generally have been computed on the net level premium method, based on
estimated future investment yield, mortality, and withdrawals. For
accident and health products, liabilities for future policy benefits
are established equal to the excess of the present value of future
benefits to or on behalf of policyholders over discounted net future
premiums. Estimates used are based
<PAGE> 69
PAGE 69
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the Company's experience adjusted to provide for possible adverse
deviation. These estimates are periodically reviewed and compared with
actual experience. Liabilities for 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 reported claims and
claims incurred but not reported based on experience.
(d) Accounts and Notes Receivable
Accounts and notes receivable consist primarily of agents' balances
and premium receivable from agents and policyholders. 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.
(e) 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 and certain
costs of policy issuance and underwriting. Costs deferred on accident
and health 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.
(f) 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 on
policy liability or contract rate, over the years that such profits
are anticipated to be received in proportion to the estimated gross
profits.
(g) Deferred Debt Issuance Costs
Deferred debt issuance costs, which are included in other assets,
represent costs incurred in connection with obtaining long-term debt
financing which have been capitalized and are being amortized on an
interest yield method over the terms of the respective debt. Deferred
costs totaled $3,309 and $4,110 which are net of accumulated
amortization of $801 and $0 at December 31, 1996 and 1995,
respectively.
<PAGE> 70
PAGE 70
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) 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 over 30 years. Accumulated amortization
totaled $4,229 and $0 at December 31, 1996 and 1995, respectively.
(i) Property and Equipment
These assets consist of electronic data processing equipment,
furniture, and other equipment, and are carried at cost, less
accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of these assets.
(j) Recoverability of Long-lived Assets
The Company continually monitors long-lived assets and certain
intangible assets, such as costs in excess of net assets acquired and
present value of insurance in force, for impairment. An impairment
loss is recorded in the period in which the carrying value of the
assets exceeds the fair value or expected future cash flows. Any
amounts deemed to be impaired are charged, in the period in which such
impairment was determined, as an expense against earnings. For the
period presented there was no charge to earnings for the impairment of
long-lived assets.
(k) 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 (i) temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and (ii) operating losses
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 the 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.
(l) Reinsurance
Financial reinsurance that does not transfer significant insurance
risk is accounted for as a deposit and is reflected as a component of
due from reinsurers. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsurance
policies. Balances due to, or from, reinsurers have been reflected as
assets and liabilities rather than being netted against the related
account balances.
<PAGE> 71
PAGE 71
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS
Investments in a single entity, other than obligations of the U.S. Government
or agencies thereof, totaling in excess of 10% of total shareholders equity at
December 31, 1996 and 1995 are listed below:
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
PERCENT OF PERCENT OF
CARRYING SHAREHOLDERS' CARRYING SHAREHOLDERS'
VALUE EQUITY VALUE EQUITY
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
James M. Fail and Stone Capital, Inc. (formerly
CFSB Corp.) Collateral loans . . . . . . . . . $ 21,308 14.7% $ 41,308 32.6%
Fund America Investors Corp., Ser. 93-C,
Class B Certificates . . . . . . . . . . . . . . 16,250 11.2 10,908 8.6
GSSW Limited Partnership . . . . . . . . . . . . . -- -- 39,600 31.2
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturities
available for sale at December 31, 1996 and 1995 by categories of securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1996:
Mortgage-backed securities . . . . . . . . . . . . . $ 609,593 $ 8,153 $ (7,304) $ 610,442
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies . . . . 49,598 224 (343) 49,479
Debt securities issued by states of the United States
and political subdivisions of the states . . . . 15,226 -- (388) 14,838
Debt securities issued by foreign governments 22,698 176 (870) 22,004
Corporate debt securities . . . . . . . . . . . . . 573,392 1,429 (16,314) 558,507
------------ ------------ ----------- ------------
Total fixed maturities available for sale . . . . $ 1,270,507 $ 9,982 $ (25,219) $ 1,255,270
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1995:
Mortgage-backed securities . . . . . . . . . . . . . . $ 489,810 $ 1,222 $ (615) $ 490,417
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies . . . . . 39,375 168 -- 39,543
Debt securities issued by states of the United States
and political subdivisions of the states . . . . . 15,812 -- -- 15,812
Debt securities issued by foreign governments 18,518 212 -- 18,730
Corporate debt securities . . . . . . . . . . . . . . 602,209 2,805 (38) 604,976
------------ ------------ ----------- ------------
Total fixed maturities available for sale . . . . . $ 1,165,724 $ 4,407 $ (653) $ 1,169,478
============ ============ =========== ============
</TABLE>
Included in fixed maturities available for sale at December 31, 1996 and 1995
are investments with a fair value of $78,118 and $103,284, respectively, which
are not publicly traded. Included in fixed maturities available for sale at
<PAGE> 72
PAGE 72
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
December 31, 1996 and 1995, are below investment-grade securities with
amortized costs of $40,177 and $65,475, respectively, and fair values of
$39,955 and $66,253, respectively.
The Company had non-income producing investments at December 31, 1996 with an
amortized cost and fair value as follows:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Fixed maturities . . . . . . . . . . . . . . $ 571 $ 405
Equity securities . . . . . . . . . . . . . 434 620
Mortgage loans . . . . . . . . . . . . . . . 1,141 1,141
Real estate . . . . . . . . . . . . . . . . 7,292 7,292
Other investments . . . . . . . . . . . . . 992 1,618
------------- -------------
$ 10,430 $ 11,076
============= =============
</TABLE>
At December 31, 1996 net unrealized appreciation of equity securities of $170
consisted of gross unrealized gains of $207, less unrealized losses of $37. At
December 31, 1995 net unrealized depreciation of $24 consisted of gross
unrealized gains of $21, less unrealized losses of $45.
Following is an analysis of net gains (losses) from sale of investments for the
year ended December 31, 1996:
<TABLE>
<S> <C>
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,385
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,736
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125)
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,437)
----------
$ 516
==========
</TABLE>
For the year ended December 31, 1996, net realized gains on sale of fixed
maturities consisted of gross gains of $2,923 and gross losses of $1,538.
<PAGE> 73
PAGE 73
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
Following are changes in unrealized appreciation (depreciation) on investments
for the year ended December 31, 1996:
<TABLE>
<S> <C>
Investments carried at fair value:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (18,991)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,652
----------
(17,145)
Less effect on other balance sheet accounts:
Value of business acquired and deferred acquisition costs . . . . . . . . . . . . . . 1,362
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,524
Minority interest in unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . (235)
----------
Change in unrealized investment gains and losses . . . . . . . . . . . . . . . . . . . . $ (10,494)
==========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- ------------
<S> <C> <C>
Available for sale:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . $ 25,515 $ 25,510
Due after one year through five years . . . . . . . . . . . . . . 126,895 126,285
Due after five years through ten years . . . . . . . . . . . . . . 250,592 245,188
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . 257,912 247,845
----------- ------------
660,914 644,828
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . 609,593 610,442
----------- ------------
$ 1,270,507 $ 1,255,270
=========== ============
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Investments with a fair value of $121,617 and $146,888 were on deposit with
certain regulatory authorities at December 31, 1996 and 1995, respectively.
<PAGE> 74
PAGE 74
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
Major categories of net investment income for the year ended December 31, 1996
consist of the following:
<TABLE>
<S> <C>
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . $ 87,348
Equity securities . . . . . . . . . . . . . . . . . . . . . . . 58
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . 11,156
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . 8,011
Short-term investments . . . . . . . . . . . . . . . . . . . . . 7,738
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . 2,947
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 4,236
Investments held in trust under reinsurance treaty(a) . . . . . 12,130
Other investments . . . . . . . . . . . . . . . . . . . . . . . 1,503
Investment expenses . . . . . . . . . . . . . . . . . . . . . . (6,155)
----------
$ 128,972
- -------------------- ==========
</TABLE>
(a) Investments held in trust by a reinsurer with carrying values of
$121,016 and $133,742 as of December 31, 1996 and 1995,
respectively, are included in amounts due from reinsurers (see
Note 12).
At December 31, 1996 and 1995 the Company held mortgage loans principally
involving commercial real estate with carrying values and estimated fair values
of $59,993 and $99,969, respectively, net of an allowance for losses of $1,000
at December 31, 1996. The average outstanding loan balances are approximately
$955 and $1,134 at December 31, 1996 and 1995, respectively. At December 31,
1996 mortgage loan investments were concentrated in the following states:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
CARRYING VALUE CARRYING TOTAL
-------------- --------------
<S> <C> <C>
Texas . . . . . . . . . . . . . . . . . . . $ 30,319 50.5%
Illinois . . . . . . . . . . . . . . . . . . 7,657 12.8
Oklahoma . . . . . . . . . . . . . . . . . . 5,631 9.4
Florida . . . . . . . . . . . . . . . . . . 3,161 5.3
Kansas . . . . . . . . . . . . . . . . . . . 3,105 5.2
All other . . . . . . . . . . . . . . . . . 10,120 16.8
----------- ------
Balance, end of period . . . . . . . . . . . $ 59,993 100.0%
=========== ======
</TABLE>
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP
At December 31, 1995, the limited partnership investment represented a 50%
interest in a partnership, GSSW, L.P. (GSSW) formed to acquire through auction
certain mortgage loans and real estate formerly held by failed savings and loan
associations. Effective December 31, 1996, GSSW liquidated the general partner
interests through distribution of certain assets at fair value, sold
substantially all remaining investments and utilized the proceeds to buy the
limited partnership interest not owned by the Company. As a result of these
transactions, the Company became the parent of GSSW, realized earnings on GSSW
of $13,171, received net cash distributions of $47,520 and paid PennCorp, a
shareholder, a fee of $1,000 as guarantor in GSSW's sale of assets.
<PAGE> 75
PAGE 75
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP (CONTINUED)
Following is an analysis of the investment in the GSSW limited partnership for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,600
Equity in operating earnings during year . . . . . . . . . . . . . . . . . . . . 3,640
Equity in earnings on transactions at December 31, 1996 . . . . . . . . . . . . 13,171
Distributions during year . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000)
Net distributions at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . (47,520)
----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,891
==========
</TABLE>
At December 31, 1996, the accounts of GSSW are consolidated into the
accompanying consolidated balance sheet.
5. BUSINESS SEGMENT INFORMATION
The Company's only reportable segment is life insurance. Within the life
insurance segment, the Company and its subsidiaries are principally engaged in
the sale and underwriting of individual life and health insurance, and
accumulation products, principally annuities.
Assets and related investment income are allocated based upon related insurance
reserves which are backed by such assets. Other operating expenses are
allocated to each segment based on a number of assumptions and estimates
generally in relation to the mix of related revenues. Total revenues and income
before income taxes by product for the year ended December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Total revenues:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,723
Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,391
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,427
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,298
----------
$ 353,839
==========
Income before income taxes:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,919
Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,744
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,118
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,569)
----------
$ 49,212
==========
</TABLE>
Total assets by product as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Total assets:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . $ 1,203,950 $ 1,205,746
Individual health products . . . . . . . . . . . . . . . . . . . . . . 332,118 292,942
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . 486,910 520,656
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . 187,572 194,680
------------ ------------
$ 2,210,550 $ 2,214,024
============ ============
</TABLE>
<PAGE> 76
PAGE 76
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
6. POLICY LIABILITIES AND ACCRUALS
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 interest rates
credited range from 4% to 8%. 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 has
been computed by the net level premium method based on estimated future
investment yield, mortality, and withdrawal experience. Reserve interest
assumptions are graded and range from 6.25% to 7.375%. For accident and health
products, liabilities for future policy benefits are established equal to the
excess of the present value of future benefits to or on behalf of policyholders
over future net premiums discounted at interest rates ranging primarily from
6.5% to 8.0%. The future policy benefits of traditional life products and
accident and health products are determined using mortality, morbidity and
withdrawal assumptions that reflect the experience of the Company modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations. The assumptions vary by plan, year of issue and
duration.
Policy and contract claims include provisions for reported claims in process of
settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on
the Company's prior experience.
While management believes the estimated amounts included in financial
statements for reserves and claims are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled.
Total policy liabilities and accruals consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Future policy benefits on traditional products:
Traditional life insurance contracts . . . . . . . . . . . $ 344,520 $ 352,809
Traditional annuity products . . . . . . . . . . . . . . . 105,246 114,333
Individual accident and health . . . . . . . . . . . . . . 104,071 132,091
Unearned premiums . . . . . . . . . . . . . . . . . . . . 30,342 33,026
------------- -------------
Total future policy benefits 584,179 632,259
------------- -------------
Universal life and investment contract liabilities:
Universal life and annuities . . . . . . . . . . . . . . . 1,086,632 1,099,697
Guaranteed investment contracts . . . . . . . . . . . . . 1,703 6,750
------------- -------------
Total universal and investment contract liabilities . . 1,088,335 1,106,447
------------- -------------
Policy and contract claims . . . . . . . . . . . . . . . . . 55,011 62,140
Other policyholder funds . . . . . . . . . . . . . . . . . . 17,635 20,446
------------- -------------
Total policy liabilities and accruals . . . . . . . . . $ 1,745,160 $ 1,821,292
============= =============
</TABLE>
<PAGE> 77
PAGE 77
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
6. POLICY LIABILITIES AND ACCRUALS (CONTINUED)
The following table presents information on changes in the liability for policy
and contract claims for the year ended December 31, 1996:
<TABLE>
<S> <C>
Policy and contract claims at January 1 . . . . . . . . . . . . . . . . . . . $ 62,140
Less reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . 118
-----------
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 62,022
-----------
Add claims incurred, net of reinsurance related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,496
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,646)
-----------
88,850
-----------
Deduct claims paid, net of reinsurance related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,240
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,774
-----------
96,014
-----------
Policy and contract claims, net of related reinsurance recoverables at December 31 54,858
Plus reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . 153
-----------
Policy and contract claims at December 31 . . . . . . . . . . . . . . . . . . $ 55,011
===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
liability for policy and contract claims decreased, net of reinsurance, by
$2,646 in 1996.
7. NOTES PAYABLE
The outstanding principal amounts of notes payable at December 31, 1996 and
1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revolving bank debt . . . . . . . . . . . . . . $ 95,000 $ 95,000
Bank debt with quarterly principal requirements 24,750 25,000
Convertible subordinated notes issued to ICH for
acquisition of insurance subsidiaries . . . . 40,000 40,000
----------- ----------
$ 159,750 $ 160,000
=========== ===========
</TABLE>
Interest costs under the revolving bank debt totaled $8,128 for the year ended
December 31, 1996. The interest rate of the debt is based on, at the Company's
option, either a floating rate (based on the base rate of the First National
Bank of Chicago) plus a margin of 1.75% or a Eurodollar rate (based on the
London Interbank Offered Rate or LIBOR) plus a margin of 2.75%. At December 31,
1996, the effective rate of the revolving loan was approximately 8.3%.
Interest costs under the bank term debt totaled $2,250 for the year ended
December 31, 1996. The interest rate of the term debt is based on, at the
Company's option, either a floating rate (based on the base rate of the First
National Bank of Chicago) plus a margin of 2.25% or a Eurodollar rate (based on
LIBOR) plus a margin of 3.25%. At December 31, 1996, the effective rate of the
term loans was approximately 8.8%.
<PAGE> 78
PAGE 78
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
7. NOTES PAYABLE (CONTINUED)
As part of the consideration for the acquisition of Southwestern Life, Union
Bankers, Constitution and Marquette from ICH, the Company issued to ICH a
$40,000 aggregate principal amount of SWF's 7.0% Convertible Subordinated Notes
due 2005. The notes are convertible into an aggregate 3,200,000 shares of
common stock of SWF, of which 800,000 will be Class B non-voting common stock.
In the aggregate the shares upon conversion represent approximately 21.2% of
SWF's fully diluted shares at closing before giving effect to certain warrants
outstanding. On June 15, 1997, SWF will either (i) offer to repurchase any and
all notes then outstanding at 100% of the principal amount thereof plus accrued
and unpaid interest to the repurchase date (the "Interim Repurchase Offer") or
(ii) reset the interest rate on the Convertible Notes, immediately after such
adjustment, to have a bid price equal to 100% of the principal amount. If SWF
makes the Interim Repurchase Offer, there will be no interest rate reset on any
Convertible Notes not tendered to SWF for purchase pursuant to the Interim
Repurchase Offer. The Convertible Notes are unsecured obligations and are
subordinate in right of payment to SWF's bank debt and all of the indebtedness
of SWF. Interest costs under the Convertible Notes totaled $2,800 for the year
ended December 31, 1996. The Company agreed to maintain sufficient cash and
cash equivalents to fund the interest payments on the Convertible Notes for the
first three years. At December 31, 1996 and December 31, 1995, restricted cash
and short-term investments totaled $5,959 and $8,400, respectively.
The Company has pledged the stock of certain of its insurance subsidiaries as
collateral under the bank credit facilities. In addition, the bank loans
contain a number of covenants. These prohibit the Company from paying cash
dividends on its preferred or common stock without the banks' consent. In
addition, except for transactions in the ordinary course of business, the
Company and its subsidiaries can not loan or borrow monies, acquire assets in
excess of specified limits, grant liens or generally take any other action
which would result in any material change in the Company or its subsidiaries
without prior written consent of such banks. The Company is also required to
maintain a specified minimum net worth and comply with certain financial
ratios. The Company was in compliance with all applicable covenants as of
December 31, 1996.
In conjunction with the bank debt, the Company entered into interest rate
protection agreements in the form of a series of interest rate caps in the
notional amount of $62,500 which expire May 1998. These entitle the Company to
revenue should three-month LIBOR exceed the cap rate of 7.5%. At December 31,
1996, three-month LIBOR was 5.56%.
The aggregate maturities of notes payable during each of the five years after
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,788
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,291
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,711
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,692
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . 105,268
-----------
$ 159,750
===========
</TABLE>
8. PREFERRED AND COMMON STOCK
On December 14, 1995, the Company issued 210,000 shares of Series A preferred
stock with a liquidation value of $21,000. The Series A preferred stock
accrues dividends at a rate of 10.0% per annum, compounded quarterly and is
mandatorily redeemable at December 31, 2005. Dividends on the Series A
preferred stock are payable in cash, or at SWF's option, are payable in kind.
The Series A preferred stock is not redeemable at the option of the Company but
<PAGE> 79
PAGE 79
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
8. PREFERRED AND COMMON STOCK (CONTINUED)
at maturity will be required to be redeemed for approximately $56 million in
cash assuming no cash dividend distributions. If the Company fails to satisfy
its mandatory redemption obligation, the holders of the Series A preferred
stock will be entitled to elect 49.0% of the members of the Board of SWF and,
upon receipt of regulatory approval, a majority of the directors of SWF. The
Series A preferred stock is senior preferred stock. The holders of the Series A
preferred stock are entitled to class voting rights under certain
circumstances, including in connection with a merger of SWF or a sale of all or
substantially all its assets or the authorization or issuance of senior or pari
passu preferred stock, and as otherwise provided by law. For the year ended
December 31, 1996, 21,900 additional shares were issued with a redemption value
of $2,190 in lieu of cash to satisfy dividend requirements.
In addition, certain of PennCorp's insurance subsidiaries purchased $10,000
liquidation value of 5.5% Mandatorily Redeemable Preferred Stock, par value
$0.01 per share (the 5.5% Preferred Stock) of SLAC, a wholly-owned subsidiary
of SWF. During 1996 SLAC was dissolved and the 5.5% Preferred Stock was
exchanged for 5.5% Preferred Stock of Southwestern Life Companies, Inc. (SLC),
also a wholly-owned subsidiary of SWF. The 5.5% Preferred Stock accrues
dividends payable in cash or, subject to certain conditions, through the
issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred Stock
is not subject to optional redemption and matures on December 31, 2005. If SLC
fails to satisfy its mandatory redemption obligation or if dividends payable on
the 5.5% Preferred Stock are in arrears for four or more quarterly dividend
periods, the holders of the 5.5% Preferred Stock will be entitled to elect
49.0% of the members of the Board of Directors of SLC and, upon receipt of
regulatory approval, a majority of the Board of Directors of SLC. The 5.5%
Preferred Stock is the only preferred stock of SLC authorized for issuance. The
holders of the 5.5% Preferred Stock are entitled to class voting rights under
certain circumstances, including in connection with a merger of SLC or a sale
of all or substantially all its assets or the authorization or issuance of
senior pari passu preferred stock, and as otherwise provided by law. For the
year ended December 31, 1996, 59 additional shares were issued with a
redemption value of $590 in lieu of cash to satisfy dividend requirements of
$564 in 1996 and $26 in 1995.
In conjunction with the acquisition of its insurance subsidiaries on December
14, 1995, SWF issued warrants to the shareholders of SWF for the purchase of up
to an additional 1,785,000 shares of Class B voting common stock at an exercise
price of $10.00 per share. The warrants are exercisable at any time until their
expiration on December 15, 2005.
9. INCOME TAXES
The Company and its non-insurance subsidiaries file a consolidated federal
income tax return. The Company's life insurance subsidiaries also file federal
income tax returns as a consolidated group.
Total income taxes for the year ended December 31, 1996 are as follows:
<TABLE>
<S> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . $ 5,302
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 12,945
----------
$ 18,247
==========
</TABLE>
<PAGE> 80
PAGE 80
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
9. INCOME TAXES (CONTINUED)
Income taxes computed using the prevailing corporate tax rate of 35% are
reconciled to the Company's actual income tax expense attributable to income
for the year ended December 31, 1996, as follows:
<TABLE>
<S> <C>
Tax expense computed at statutory rate . . . . . . . . . . $ 17,224
Amortization of costs in excess of net assets acquired . . 1,480
Change in deferred tax asset valuation allowance . . . . . (183)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (274)
-----------
$ 18,247
==========
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax assets
(liabilities) at December 31, 1996 and 1995 relate to the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred policy acquisition costs . . . . . . . . . . . . . . . . $ 10,407 $ 12,334
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . 112,408 132,330
Invested assets, subject to capital gains treatment . . . . . . . 16,895 18,669
Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . 4,224 --
----------- -----------
143,934 163,333
----------- -----------
Deferred tax liabilities:
Present value of insurance in force . . . . . . . . . . . . . . . (24,967) (40,541)
Other assets and liabilities . . . . . . . . . . . . . . . . . . . (50,280) (45,201)
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,300)
----------- -----------
(75,247) (87,042)
----------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 68,687 76,291
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . (20,608) (20,791)
----------- -----------
$ 48,079 $ 55,500
=========== ===========
</TABLE>
The valuation allowance at December 31, 1996, is attributable to deferred tax
assets principally arising from differences in the book and tax bases of
invested assets subject to capital gains treatment that existed as of the date
of acquisition of the company's insurance subsidiaries. To the extent that
income tax benefits relative to such tax assets are ultimately realized, the
reduction in the related valuation allowance would be allocated to reduce costs
in excess of net assets acquired.
In assessing the realizability of deferred tax assets, 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 net operating loss carryovers available
of $561 related to the non-life consolidated return, of which $250 expires in
2010 and $311 expires in 2011.
<PAGE> 81
PAGE 81
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs represent commissions and certain costs of
policy issuance and underwriting. Information relating to these costs for the
year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Policy acquisition costs deferred:
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,810
Underwriting and issue costs . . . . . . . . . . . . . . . . . . . . . . . . 4,996
Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . . (1,243)
Policy acquisition costs amortized . . . . . . . . . . . . . . . . . . . . . . (503)
Unrealized investment loss adjustment . . . . . . . . . . . . . . . . . . . . 35
-----------
Unamortized deferred policy acquisition costs at period end . . . . . . . . . $ 15,095
===========
</TABLE>
As 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 health, life and annuity 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
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. To the
extent that these variances indicate that future cash flows will differ from
those included in the original scheduled amortization of the value of the
insurance in force, current and future amortization may be adjusted.
Recoverability of the value of insurance in force is evaluated annually and
appropriate adjustments are then determined and reflected in the financial
statements for the applicable period.
<PAGE> 82
PAGE 82
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
(CONTINUED)
Information related to the present value of insurance in force for the year
ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,831
Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . . (22,936)
Accretion of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,415
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,304)
Unrealized investment loss adjustment . . . . . . . . . . . . . . . . . . . . 1,327
-----------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . $ 71,333
===========
</TABLE>
Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 0% to 6.6% 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
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
1997 . . . . . . . . . . . . . . . . $ 71,333 $ 15,749 $ 3,584 $ 12,165
1998 . . . . . . . . . . . . . . . . 59,168 13,043 2,978 10,065
1999 . . . . . . . . . . . . . . . . 49,103 10,317 2,491 7,826
2000 . . . . . . . . . . . . . . . . 41,277 8,314 2,110 6,204
2001 . . . . . . . . . . . . . . . . 35,073 6,977 1,802 5,175
</TABLE>
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Pursuant to the terms of the surplus debenture issued by Constitution to the
benefit of SLC, a non-insurance subsidiary of SWF, Constitution may make
principal and interest payments to the extent that Constitution's surplus,
excluding the statutory carrying value of Southwestern Life and Union Bankers,
exceeds $1,200. Constitution's surplus at December 31, 1996 was $177,510, of
which $159,074 was attributable to its ownership of Southwestern Life and Union
Bankers.
The Company's cash flow is derived principally from dividends and principal and
interest payments owed on the surplus debenture by Constitution. The principal
source of repayment of the surplus debenture is dividends from Constitution's
subsidiaries, Southwestern Life and Union Bankers. Generally, the net assets of
the insurance subsidiaries available for transfer to the Company are limited to
the greater of the subsidiary net gain from operations during the preceding
year or 10% of the subsidiary net statutory surplus as of the end of the
preceding year as determined in accordance with accounting practices prescribed
or permitted by insurance regulatory authorities. Payment of dividends in
excess of such amounts would generally require approval by the regulatory
authorities. Based upon Constitution's net gain from operations for the year
ended December 31, 1996, approximately $19,000 of dividends could be paid to
its parent without prior regulatory approval.
The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by their
respective state insurance departments. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are approved by insurance regulatory authorities;
such practices differ from state to state, and may differ from company to
company within a state, and may change in the future. Furthermore, the NAIC has
a project to codify statutory
<PAGE> 83
PAGE 83
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS (CONTINUED)
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, will likely change to some extent prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements.
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995 totaled
approximately $177,510 and $128,729, respectively. Statutory net income of the
Company's life insurance subsidiaries as reported to regulatory authorities
totaled $24,919 for the year ended December 31, 1996.
12. 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
$500 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or 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 and the related benefits incurred by such
reinsurers for the year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Direct policy revenues and amounts assessed against policyholders . . . $ 255,352
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 3,483
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,923)
-----------
Net premiums and amounts earned . . . . . . . . . . . . . . . . . . . . $ 196,912
===========
Policyholder benefits ceded . . . . . . . . . . . . . . . . . . . . . . $ 25,513
===========
</TABLE>
Effective July 1, 1996, Union Bankers entered into reinsurance agreements with
Cologne Life Reinsurance Company ("Cologne") to coinsure 80% of its Medicare
supplement business in force on July 1, 1996 and to coinsure 80% of its
Medicare policies issued on or after July 1, 1996. The Company recorded a
deferred gain on the transaction of $53,893 as of July 1, 1996, which is being
amortized into income over the life of the business. Since July 1, 1996, $6,445
of the deferred gain has been recognized and is included in other income. The
Company is not subject to any negative experience adjustments if the ceded
business is unprofitable; however, the Company may participate in a portion of
future earnings from the ceded business after Cologne recovers its initial
ceding commission plus interest at a specified rate. Union Bankers retained
administration for the ceded block of business and is reimbursed by Cologne for
administrative costs at the rate of 8.5% of ceded renewal premiums and 11.5% of
ceded first year premiums.
Southwestern Life has ceded a block of annuities under a reinsurance agreement
with Employees Reassurance Corporation (ERC). Such reinsurance is accounted for
as a financing arrangement and is not reflected in the accompanying financial
statements except for the risk fees paid to ERC. Statutory surplus provided by
this treaty totaled $8,714 and $13,074 at December 31, 1996 and 1995,
respectively. Risk fees paid to the reinsurer were 2% of the net amount of
surplus provided and totaled $222 for the year ended December 31, 1996.
<PAGE> 84
PAGE 84
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
12. REINSURANCE (CONTINUED)
Amounts due from reinsurers included amounts due from ERC of $121,016 and
$133,742 at December 31, 1996 and 1995, respectively. The underlying assets
held by ERC had carrying values of $121,016 and $133,742 and fair values of
$122,639 and $139,222 at December 31, 1996 and 1995, respectively.
13. RETIREMENT AND PROFIT SHARING PLANS
The Company has a defined contribution retirement plan (Defined Contribution
Plan) for all employees who have attained age 21 and completed a year of
service. Contributions to the 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. Salary deferral contribution accounts are at all times
fully vested, while matching contribution 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. Expenses related to this plan
for the years ended December 31, 1996 amounted to $696.
In addition, the Company has a bonus plan for certain key 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 approval of the Board of Directors
of the Company. Awards are based on the performance of the Company and the
performance of eligible participants. The Company accrued or paid $1,700 under
this plan during the year ended December 31, 1996.
The Company provides certain health care and life insurance benefits for
retired employees. Employees meeting certain age and length of service
requirements become eligible for these benefits. The Company's obligation for
accrued
<PAGE> 85
PAGE 85
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
13. RETIREMENT AND PROFIT SHARING PLANS (CONTINUED)
postretirement health and welfare benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Accrued postretirement benefits, beginning of year . . . . . . . . . . . . . $ 12,821
-----------
Recognition of components of net periodic postretirement benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834
-----------
Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . . . 1,078
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,213)
-----------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135)
-----------
Accrued postretirement benefits, end of year . . . . . . . . . . . . . . . . . $ 12,686
===========
</TABLE>
The liability for accrued postretirement benefits includes the
following at December 31, 1996:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,884
Active eligible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194
Active ineligible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 831
-----------
12,909
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . (223)
-----------
Accrued postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . $ 12,686
===========
</TABLE>
For measurement purposes, an 6.5% annual rate increase in the health care cost
trend rate was assumed for 1997; the rate was assumed to decrease gradually to
4.5% by the year 2015 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
health care benefit obligation as of December 31, 1996 by $645 and the
aggregate of the service and interest components of net periodic postretirement
health care benefit cost for 1996 by $127. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.5%.
14. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have management and services agreements with
entities affiliated with Knightsbridge, a shareholder. In connection with an
Advisory and Management Services Agreement with Knightsbridge Management,
L.L.C., the Company pays an annual fee of $1,500 plus expenses. Each insurance
subsidiary has an Investment Management Agreement with Knightsbridge
Consultants, L.L.C. For the year ended December 31, 1996, fees incurred totaled
$1,658.
The Company agreed to pay PennCorp, a shareholder, $1,000 in conjunction with
the GSSW transaction (see Note 4).
<PAGE> 86
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SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
15. OTHER COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $2,058 in
1996.
Minimum lease commitments are:
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,720
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
----------
Total minimum payments required . . . . . . . . . . . . $ 2,300
==========
</TABLE>
The Company's office lease expires November 1997. The Company is currently
negotiating a new ten year lease arrangement.
Certain lawsuits have been brought against the Company's life insurance
subsidiaries in the normal course of the insurance business involving the
settlement of various matters and 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 operation.
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. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The insurance
subsidiaries paid assessments of $1,357 in 1996. Based on information currently
available, the insurance subsidiaries have accrued $3,194 at December 31, 1996
for future assessments, net of future premium tax reductions.
16. OTHER OPERATING INFORMATION
Underwriting and other administrative expenses for the year ended December 31,
1996 are as follows:
<TABLE>
<S> <C>
Non-deferrable commission expense . . . . . . . . . . . . $ 22,437
Taxes, licenses and fees . . . . . . . . . . . . . . . . . 9,214
General and administrative expenses . . . . . . . . . . . 39,241
Expense allowance on reinsurance ceded . . . . . . . . . . (5,782)
----------
Underwriting and other administrative expenses . . . . $ 65,110
==========
</TABLE>
<PAGE> 87
PAGE 87
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
17. FINANCIAL INSTRUMENTS
The following is a summary of the carrying value and estimated fair value of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments . . . . . . . . . . $ 161,895 $ 161,895 $ 196,370 $ 196,370
Fixed maturities . . . . . . . . . . . . . . . . . . 1,255,270 1,255,270 1,169,478 1,169,478
Equity securities . . . . . . . . . . . . . . . . . 1,129 1,129 2,149 2,149
Mortgage loans . . . . . . . . . . . . . . . . . . . 59,993 59,993 99,969 99,969
Policy loans . . . . . . . . . . . . . . . . . . . . 128,551 128,551 137,466 137,466
Collateral loans . . . . . . . . . . . . . . . . . . 21,308 21,308 41,308 41,308
Investment in limited partnership . . . . . . . . . -- -- 39,600 39,600
Other investments . . . . . . . . . . . . . . . . . 5,553 5,553 6,879 6,879
Interest rate cap . . . . . . . . . . . . . . . . . 145 -- 218 --
Agent and premium receivables . . . . . . . . . . . 13,773 13,773 2,509 2,509
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . 159,750 159,750 160,000 160,000
Universal life and investment contract liabilities . 1,088,335 1,088,335 1,106,447 1,106,447
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Short-term Investments, Agent and Premium Receivables: The
carrying value of short-term investments and amounts receivable
approximate their fair value due to the short-term maturity of these
instruments.
Fixed Maturities and Equities Available for Sale: Fair values for
fixed maturities available for sale are based on quoted market prices,
where available. For fixed maturities not actively traded, fair values
are estimated using values obtained from independent pricing services
or are estimated based on expected future cash flows using a current
market rate applicable to the yield, credit quality, and maturity of
the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage and Collateral Loans: The fair values for mortgage and
collateral loans are estimated using discounted cash flow analyses,
based on interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Investment in limited partnership: Fair values of the Company's
investments in limited partnership at December 31, 1995 is based on
the estimated fair value of the partnership assets and liabilities,
assuming a liquidation of the partnership and distribution of proceeds
to the partners.
<PAGE> 88
PAGE 88
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
17. FINANCIAL INSTRUMENTS (CONTINUED)
Other Investments: The fair value of Company's investment in residual
interests in mortgage-backed securities was obtained from an
independent broker-dealer. The fair values of other miscellaneous
invested assets have not been estimated due to their relative
immateriality.
Interest rate cap: The fair value of the interest rate cap is $0 as
the current interest rate is below the cap rate.
Policy Loans: Policy loans are an integral part of life insurance
policies which the Company has in force and, in the Company's opinion,
cannot be valued separately. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy
and contract reserves.
Notes Payable: Fair values of the Company's bank obligations
approximate carrying values due to the variable interest structure.
The fair value of the Company's note payable to ICH Corporation is
based on the Company's implicit incremental borrowing rate from the
fair value of the Company's bank obligations.
Universal Life and Investment Contract Liabilities: The carrying value
and fair values for the Company's liabilities under universal life and
investment-type insurance contracts are the same as the interest rates
credited to these products are periodically adjusted by the Company to
reflect market conditions. The fair values of liabilities under all
insurance contracts are taken into consideration in the overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with
amounts due under insurance contracts.
18. SUBSEQUENT EVENT
In early 1997, PennCorp entered into an agreement to acquire all of the
outstanding SWF common stock held by Knightsbridge and certain other parties.
Assuming completion of the transaction, SWF would become a wholly-owned
subsidiary of PennCorp. The transaction is subject to the approval of the
shareholders of PennCorp.
<PAGE> 89
PAGE 89
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
Set forth below is a listing and brief biographical description of the
directors and executive officers of PennCorp Financial Group, Inc. (the
"Company").
CLASS II DIRECTORS
TERM EXPIRES IN 1997
ALLAN D. GREENBERG, Age 52
Director
Mr. Greenberg has been a director of the Company since August 1990. Mr.
Greenberg also serves as Chairman of the Board of ADG Insurance Advisors Inc.,
a private consulting firm specializing in life insurance actuarial and
acquisition services ("ADG"). From 1981 to 1988, Mr. Greenberg was Vice
President, Chief Actuary and a director of Geneve Capital Group, Inc., and from
1984 to 1988 he also served as Executive Vice President of Standard Security
Life Insurance Company of New York. Mr. Greenberg is a Fellow of the Society
of Actuaries, a Fellow of the Canadian Institute of Actuaries and a Member of
the American Academy of Actuaries. Mr. Greenberg has more than 28 years
experience in the insurance industry. ADG provides consulting services to the
Company. See "Executive Compensation - Compensation Committee Interlocks and
Insider Participation".
KENNETH ROMAN, Age 66
Director
Mr. Roman has been a director of the Company since April 1993. From 1988 to
1989, Mr. Roman served as Chairman and Chief Executive of The Ogilvy Group and,
from 1985 to 1989, as Chairman of Ogilvy & Mather Worldwide. He was Executive
Vice President of American Express from 1989 to 1991. He currently serves as a
Director of Compaq Computer Corporation, IBJ Schroder Bank & Trust Company, and
Brunswick Corporation. In addition, Mr. Roman is a Vice Chairman of The New
York Botanical Garden and Overseer of Memorial Sloan-Kettering Cancer Center.
MAURICE W. SLAYTON, Age 58
Director
Mr. Slayton has been a director of the Company since August 1990. He is
Chairman of the Board, President and Chief Executive Officer of Conning &
Company ("Conning"). Mr. Slayton has over 20 years of experience at Conning.
Since joining Conning, Mr. Slayton co-founded the asset management group and
has worked in and actively developed all aspects of Conning's business,
including industry research, securities research, management consulting,
financial advisory services, and private equity funds. Mr. Slayton also serves
on the Board of Directors for Arlberg Holding Company, Inc., The Robert Plan
Corporation, GAN National Insurance Company, GAN North American Insurance
Company, Cox Insurance Holdings, Ltd. and MedSpan, Inc. Conning provides
investment management services to certain of the Company's insurance
subsidiaries. See "Certain Transactions".
CLASS III DIRECTORS
TERM EXPIRES IN 1998
WILLIAM M. McCORMICK, Age 56
Director
Mr. McCormick has served as a director of the Company since August 1990 and
served as President and Chief Executive Officer of the Company from August 1990
to June 30, 1995. Prior to August 1990, Mr. McCormick served as Chairman of
the Board and Chief Executive Officer of Fireman's Fund Insurance Company from
1983 to 1990. From 1975 to 1983, Mr. McCormick held various management
positions with American Express Travel Related Services, Inc., American Express
Company and American Express International Banking Corporation, most recently
serving as President of American Express Travel Related Services, Inc. Mr.
McCormick has more than 20 years experience in the insurance and financial
services industries. On April 10, 1997, Mr. McCormick announced
<PAGE> 90
PAGE 90
to the Company's Board of Directors that he will tender his resignation as a
director of the Company effective at the Company's 1997 Annual Meeting of
Stockholders.
BRUCE W. SCHNITZER, Age 52
Director
Mr. Schnitzer has been a director of the Company since August 1990. Since
1985, Mr. Schnitzer has served as Chairman of the Board of Wand Partners Inc.
(or predecessor investment activities), a private investment firm located in
New York, New York. Mr. Schnitzer also serves as a director of the following
U.S. companies with publicly quoted securities: Chartwell Re Corporation (a
property and casualty insurance holding company), AMRESCO Inc. (a manager of
real estate assets) and Nestor, Inc. (a technology company). From 1983 to
1985, Mr. Schnitzer served as President and Chief Executive Officer of Marsh &
McLennan, Incorporated, an insurance brokerage firm.
DAVID C. SMITH, Age 55
Director
Mr. Smith has been a director of the Company since September 1994. Since 1993
he has been a management consultant. Mr. Smith was with KPMG Peat Marwick LLP
("Peat Marwick") from 1964 until his retirement in 1993, having served as Vice
Chairman-Tax from 1987 until 1993. He also served on the Board of Directors
and the Management Committee of Peat Marwick. Mr. Smith is a member of the
American Institute of Certified Public Accountants. He currently serves on the
Board of Governors of Citizens' Scholarship Foundation of America.
CLASS I DIRECTORS
TERM EXPIRES IN 1999
DAVID J. STONE, Age 54
Chairman of the Board,
Chief Executive Officer and Director
Mr. Stone has served as Chairman of the Board and as a director of the Company
since its formation in 1989, as Chief Executive Officer since July 1, 1995, as
President from July 1, 1995 until March 21, 1996 and as Chief Marketing Officer
from August 1990 until May 1993. Mr. Stone also serves as Chairman of the
Board and President of David J. Stone & Company, a New York based merchant
banking firm specializing in leveraged acquisitions organized in 1978. Mr.
Stone has more than 22 years experience in finance related business. During
1995 and 1996, Mr. Stone served, and currently serves, as a manager of
Knightsbridge Capital, L.L.C., which is the General Partner of Knightsbridge
Capital Fund I, L.P., ("Knightsbridge Fund") a Delaware limited partnership
whose objective is to identify, acquire equity or equity-linked interests in,
and manage a portfolio of companies engaged principally in providing life and
accident and health insurance and related services. The Company is a 16.3%
limited partner in the Knightsbridge Fund. The Company and the Knightsbridge
Fund are restructuring their business relationship. See "Certain Relationships
and Related Transactions - Certain Transactions".
STEVEN W. FICKES, Age 42
President, Chief Financial Officer and Director
Mr. Fickes has served as Chief Financial Officer and as a director of the
Company since August 1990, as President since March 21, 1996, and as Vice
Chairman of the Board from August 1990 until March 21, 1996. From 1982 to July
1988, Mr. Fickes held various positions with Tillinghast, an international
actuarial consulting firm, most recently serving as the principal in charge of
its Washington, D.C. office, and from July 1988 to August 1990 was President of
a private consulting firm. Mr. Fickes is a Fellow of the Society of Actuaries
and a member of the American Academy of Actuaries. Mr. Fickes has more than 20
years experience in the insurance industry. During 1995 and 1996, Mr. Fickes
served, and currently serves, as a manager of Knightsbridge Capital, L.L.C. The
Company and the Knightsbridge Fund are restructuring their business
relationship. See "Certain Relationships and Related Transactions - Certain
Transactions".
<PAGE> 91
PAGE 91
THOMAS A. PLAYER, Age 57
Director
Mr. Player has been a director of the Company since August 1990. From June
1974 to June 1995, Mr. Player served as a founding partner of Neely & Player,
P.C., a law firm located in Atlanta, Georgia. In June 1995, Mr. Player became a
senior partner in the law firm of Morris, Manning & Martin, an Atlanta based
commercial law firm having offices in Washington, D.C. Mr. Player is the
author of a paper for the Organization of Economic Cooperation and Development
concerning insurer reorganization. Mr. Player has over 30 years experience in
the insurance industry.
CLASS III DIRECTOR
APPOINTEES
Upon consummation of the merger with Washington National Corporation
("Washington National"), the Company will cause Ronald L. Bornhuetter and W.
Francis Brennan, who currently serve as members of the Washington National
Board of Directors, to be appointed to serve as Class III Directors of the
Company. Messrs. Bornhuetter and Brennan will hold such positions until their
successors are duly appointed or elected, which will occur at the Company's
1998 Annual Meeting of Stockholders, or until their earlier death, resignation
or removal.
Ronald L. Bornhuetter, Age 63
Class III Director Appointee
Mr. Bornhuetter has served as Chairman of the Board and Chief Executive Officer
of NAC Re Corporation, a publicly traded property/casualty reinsurer, since
1985 and as a director of Washington National from January 1992.
W. Francis Brennan, Age 60
Class III Director Appointee
Mr. Brennan was employed by UNUM Corporation for ten years, serving as
Executive Vice President from 1991 until his retirement on December 31, 1994.
Mr. Brennan has served as a member of the Washington National Board from
January 1995.
EXECUTIVE OFFICERS
In addition to Messrs. Stone and Fickes, who also serve as directors of the
Company, Charles H. Lubochinski, Elizabeth C. Malone, James P. McDermott,
Michael J. Prager and Scott D. Silverman serve as executive officers of the
Company. Such officers are elected by the Board of Directors, each to serve
until his or her successor is elected and has qualified, or until his or her
earlier resignation, removal from office or death.
CHARLES H. LUBOCHINSKI, Age 50
Senior Vice President
Mr. Lubochinski served as a Vice President of the Company from May 18, 1993
until his election as a Senior Vice President on July 11, 1996. From June 1981
to December 1990, Mr. Lubochinski served as Senior Vice President with Geneve
Corporation and affiliates, an insurance holding and financial services
company. From January 1991 to December 1993, Mr. Lubochinski was employed by
ADG as Senior Vice President. Mr. Lubochinski has more than 16 years experience
in the insurance industry.
ELIZABETH C. MALONE, Age 40
Vice President
Ms. Malone joined the Company in February 1996 and was elected a Vice President
of the Company in March 1996. From January 1994 to January 1996, Ms. Malone
was a Vice President of Legg, Mason, Wood, Walker, Inc. From September 1991 to
November 1993, Ms. Malone was Manager of Financial Analysis for the National
Association of Insurance Commissioners. During 1991, Ms. Malone was employed
by the Treasurer's Office of Alexander & Alexander Services Inc. From August
1983 to November 1990, Ms. Malone was a Senior Security
<PAGE> 92
PAGE 92
Analyst for Alex. Brown & Sons Incorporated. Ms. Malone has more than 12 years
of experience in the insurance industry.
JAMES P. McDERMOTT, Age 35
Senior Vice President
Mr. McDermott joined the Company in November 1992 as Vice President and
Controller of the Company's insurance subsidiaries. He was elected Senior Vice
President of the Company in September 1995. From January 1985 until November
1992, Mr. McDermott was employed by KPMG Peat Marwick, serving as a Senior
Manager in the firm's insurance practice prior to joining the Company. Mr.
McDermott has more than 12 years experience in the insurance industry.
MICHAEL J. PRAGER, Age 37
Senior Vice President and Senior Financial Officer
Mr. Prager joined the Company in October 1990 as Senior Vice President and
Chief Actuary of the Company's insurance subsidiaries. He was elected Senior
Vice President and Senior Financial Officer of the Company in September 1995.
From June 1989 to October 1990, Mr. Prager served as a Manager of KPMG Peat
Marwick. Mr. Prager has more than 19 years experience in the insurance
industry.
SCOTT D. SILVERMAN, Age 38
Senior Vice President, General Counsel and Secretary
Mr. Silverman joined the Company in March 1992 and was elected Vice President,
General Counsel and Secretary of the Company in January 1994. Mr. Silverman
was elected a Senior Vice President of the Company in September 1995. From
1990 to March 1992, he served as Vice President-Legal and Secretary of
Independence Holding Company and from 1988 to March 1992, he served as Vice
President, Counsel and Secretary of Standard Security Life Insurance Company of
New York, a subsidiary of Independence Holding Company. Mr. Silverman has more
than 15 years experience in the insurance industry.
SECTION 16(a) REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who beneficially own
more than 10% of the Common Stock or other equity securities of the Company, to
file with the Securities and Exchange Commission initial reports of beneficial
ownership (Form 3), reports of changes in beneficial ownership (Form 4) and
annual statements of beneficial ownership (Form 5). Executive officers,
directors and more than 10% beneficial owners are required to provide the
Company with copies of all Section 16(a) reports they file. Each of the
following officers failed to file a Form 5 on a timely basis to report a stock
option grant in 1996:
Charles H. Lubochinski
Elizabeth C. Malone
James P. McDermott
Michael J. Prager
Scott D. Silverman
<PAGE> 93
PAGE 93
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31, 1994,
1995 and 1996, the cash compensation as well as certain other compensation
paid to or earned by the Company's Chief Executive Officer, and the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") for those years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- --------------------------------------------------------------------------------------------------------------------
Restricted Securities All Other
Name and Principal Salary Bonus Stock Underlying Compensation
Position Year ($) ($) Awards($) (6) Options(#) ($)(8)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David J. Stone - 1996 687,495 860,000 -- 559,000 11,869
Chairman of the Board 1995 408,340 1,150,000 -- -- 11,784
and Chief Executive 1994 500,000 100,000 -- -- 11,802
Officer (1)
- --------------------------------------------------------------------------------------------------------------------
Steven W. Fickes - 1996 687,495 860,000 -- 559,000 11,869
President and Chief 1995 408,340 1,000,000 -- 60,000 11,784
Financial Officer (2) 1994 500,000 150,000 -- -- 11,802
- --------------------------------------------------------------------------------------------------------------------
Scott D. Silverman - 1996 187,500 150,000 -- 50,000 55,725
Senior Vice President, 1995 118,750 230,000 -- -- 9,133
General Counsel and 1994 115,000 45,000 16,250(7) 5,000 8,007
Secretary (3)
- --------------------------------------------------------------------------------------------------------------------
Michael J. Prager - 1996 187,500 150,000 -- 50,000 11,869
Senior Vice President 1995 150,000 180,000 -- -- 265,153
and Senior Financial
Officer (4)
- --------------------------------------------------------------------------------------------------------------------
James P. McDermott - 1996 187,500 150,000 -- 50,000 11,869
Senior Vice President (5) 1995 150,000 150,000 -- -- 11,784
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All compensation shown in the table for 1996 was paid pursuant to Mr.
Stone's Employment Agreement. See "Employment Agreements".
(2) All compensation shown in the table for 1996 was paid pursuant to Mr.
Fickes' Employment Agreement. See "Employment Agreements".
(3) Mr. Silverman became an executive officer of the Company in January
1994.
(4) Mr. Prager became an executive officer of the Company in September
1995. The table above reflects all of Mr. Prager's 1995
compensation.
(5) Mr. McDermott became an executive officer of the Company in September
1995. The table above reflects all of Mr. McDermott's 1995
compensation.
(6) The only Named Executive Officers who held restricted stock at the end
of 1996 were Messrs. Silverman, McDermott and Prager, who each held
250 shares with a value, as of December 31, 1996, of $9,000. Those
shares vested on April 1, 1997.
(7) Represents the fair market value, based on the closing price of the
Common Stock on the NYSE on March 31, 1994 (the last trading day
immediately prior to the date of grant), of 1,000 shares of Common
Stock granted to Mr. Silverman as part of his bonus for 1993.
(8) Except as noted below, represents (a) matching and (b) profit sharing
contributions made to the Company's 401(k) retirement and profit
sharing plan for 1996. (Mr. Stone: $4,750 and $7,119, respectively;
Mr. Fickes: $4,750 and $7,119, respectively; Mr. Silverman: $2,816 and
$7,119, respectively; Mr. Prager: $4,750 and $7,119, respectively; Mr.
McDermott $4,750 and $7,119, respectively.) In the case of Mr.
Prager, the amount reflected for 1995 also includes reimbursement of
relocation expenses of $253,369. In the case of Mr. Silverman, the
amount reflected for 1996 also includes reimbursement of relocation
expenses of $45,790.
<PAGE> 94
PAGE 94
The following table shows options and warrants granted to the Named
Executive Officers during the fiscal year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees
Name Granted in Fiscal Exercise Price Expiration Grant Date Present
(#) Year ($/Sh) Date Value ($) (3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David J. Stone (1) 250,000 17.88 28.875 04/15/01 2,463,750 (4)
- -------------------------------------------------------------------------------------------------------------------
103,000 7.37 31.762 04/15/01 906,091 (4)
- -------------------------------------------------------------------------------------------------------------------
103,000 7.37 34.939 04/15/01 800,516 (4)
- -------------------------------------------------------------------------------------------------------------------
103,000 7.37 38.404 04/15/01 700,297 (4)
- -------------------------------------------------------------------------------------------------------------------
Steven W. Fickes (1) 250,000 17.88 28.875 04/15/01 2,463,750 (4)
- -------------------------------------------------------------------------------------------------------------------
103,000 7.37 31.762 04/15/01 906,091 (4)
- -------------------------------------------------------------------------------------------------------------------
103,000 7.37 34.939 04/15/01 800,516 (4)
===================================================================================================================
103,000 7.37 38.404 04/15/01 700,297 (4)
===================================================================================================================
Scott D. Silverman (2) 25,000 1.79 30.000 07/12/01 254,775 (5)
- -------------------------------------------------------------------------------------------------------------------
8,333 0.596 31.762 07/12/01 79,297 (5)
- -------------------------------------------------------------------------------------------------------------------
8,333 0.596 34.939 07/12/01 70,114 (5)
===================================================================================================================
8,334 0.596 38.404 07/12/01 61,372 (5)
===================================================================================================================
Michael J. Prager (2) 25,000 1.79 30.000 07/12/01 254,775 (5)
===================================================================================================================
8,333 0.596 31.762 07/12/01 79,297 (5)
- -------------------------------------------------------------------------------------------------------------------
8,333 0.596 34.939 07/12/01 70,114 (5)
- -------------------------------------------------------------------------------------------------------------------
8,334 0.596 38.404 07/12/01 61,372 (5)
===================================================================================================================
James P. McDermott (2) 25,000 1.79 30.000 07/12/01 254,775 (5)
===================================================================================================================
8,333 0.596 31.762 07/12/01 79,297 (5)
===================================================================================================================
8,333 0.596 34.939 07/12/01 70,114 (5)
- -------------------------------------------------------------------------------------------------------------------
8,334 0.596 38.404 07/12/01 61,372 (5)
</TABLE>
(1) Represents option grants to Messrs. Stone and Fickes under the
Company's 1996 Stock Award and Stock Option Plan (the "1996 Stock
Plan") pursuant to the terms of their Employment Agreements. Of these
options, (i) 250,000 options have an exercise price of $28.875 per
share (fair market value based on the closing price of the Common Stock
on the NYSE on April 15, 1996, the effective date of Messrs. Stone's
and Fickes' Employment Agreements), (ii) 103,000 options have an
exercise price of $31.762 per share (110% of fair market value as of
April 15, 1996), (iii) 103,000 options have an exercise price of
$34.939 per share (121% of fair market value as of April 15, 1996), and
(iv) 103,000 options have an exercise price of $38.404 per share (133%
of fair market value as of April 15, 1996). Twenty-five percent of
each option grant shall vest on each April 15th, commencing April 15,
1997 and all such options, unless previously exercised, will expire
on April 15, 2001. For a discussion of the other terms of the options,
see "Employment Agreements".
(2) Represents option grants under the terms of the 1996 Stock Plan. Of
these options, (i) 25,000 options have an exercise price of $30 per
share (fair market value based on the closing price of the Common Stock
on the NYSE on July 12, 1996, the date of grant), (ii) 8,333 options
have an exercise price of $31.762 per share (106% of the fair market
value as of July 12, 1996), (iii) 8,333 options have an exercise price
of $34.939 per share (116% of fair market value as of July 12, 1996),
and (iv) 8,334 options have an exercise price of $38.404 per share
(128% of fair market value as of July 12, 1996). Twenty-five percent
of each option grant shall vest on each July 12th, commencing July 12,
1997 and all such options, unless previously exercised, will expire on
July 12, 2001. The 1996 Stock Plan provides that in the event of a
"change of control", the Option Committee of the Board may provide that
exercisable and/or unexercisable stock options shall become exercisable
as of the date of the change of control, and remain exercisable until a
specified date on or prior to the date the stock option expires. In
the event of the death, or termination of a participant's employment
other than for "cause", all unexercisable stock options held as of the
date of the death or termination of employment
<PAGE> 95
PAGE 95
shall be forfeited and all exercisable options held as of the date of
death or termination of employment shall remain exercisable until:
(i) ninety-days following the participant's death or termination of
employment, or (ii) the date the option expires, whichever is earlier.
In the event of the termination of a participant's employment for
"cause", all exercisable and unexercisable stock options shall be
forfeited.
(3) Based on the Black-Scholes option pricing model adapted for use in
valuing stock options. The actual value, if any, an executive may
realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no
assurance the value realized by an executive will be at or near the
value estimated by the Black-Scholes model. Assumptions used in
calculating grant date present value under the Black-Scholes model
include stock price volatility at grant date, risk-free rate of return
at grant date, annual dividend yield at grant date, option term from
grant date and closing stock price at grant date. See Notes 4 and 5
below.
(4) The following assumptions were used to calculate the Grant Date
Present Value using the Black-Scholes option pricing model: stock
price volatility at grant date of 30.12%; risk-free rate of return at
grant date of 5%; annual dividend yield of 0.64%; warrant term of five
years from grant date; and closing stock price at grant date of
$28.875 per share.
(5) The following assumptions were used to calculate the Grant Date
Present Value using the Black-Scholes option pricing model: stock
price volatility at grant date of 29.14%; risk-free rate of return at
grant date of 5.29%; annual dividend yield of 0.64%; warrant term of
five years from grant date; and closing stock price at grant date of
$30 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year-End (#) Fiscal Year-End ($) (3)
Value
Shares Acquired Realized
on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
David J. Stone -- -- 225,000 559,000 4,477,500 2,327,047
Steven W. Fickes -- -- 240,000 604,000 4,777,500 3,227,047
Scott D. Silverman -- -- 2,500 60,000 76,500 400,682
Michael J. Prager -- -- 12,500 50,000 382,500 194,157
James P. McDermott 1,683 31,657 (2) 6,459 54,358 134,864 286,459
</TABLE>
(1) None of the Named Executive Officers exercised any stock options or
warrants during 1996 other than Mr. McDermott.
(2) Based on the Fair Market Value (the average of the quoted high and low
sale prices of the Common Stock on the date specified) of the Common
Stock of $33.93 per share on December 30, 1996, as reported by the
NYSE.
(3) Based on the closing price of the Common Stock of $36 per share on
December 31, 1996, as reported by the NYSE.
<PAGE> 96
PAGE 96
EMPLOYMENT AGREEMENTS
In June 1996, each of Messrs. Stone and Fickes entered into a five-year
employment agreement with the Company. The continuation of these employment
agreements are contingent upon the consummation of the acquisition of The
Fickes and Stone Knightsbridge Interests. See "The PennCorp/Knightsbridge
Relationship" section. These agreements reflect a three-part compensation
program:
Base Salary - $750,000 per year (subject to annual review for possible
increase).
Annual Incentive Bonus - Base minimum annual target bonus opportunity of
$800,000 per year if the Company meets or exceeds pre-established performance
goals, which for 1996 was based on a targeted growth rate in annual compounded
earnings per share of 15%.
Initial Stock Option Awards
(i) 250,000 options with an exercise price of $28.875 per share;
(ii) 103,000 options with an exercise price of $31.762 per share;
(iii) 103,000 options with an exercise price of $34.939 per share;
and
(iv) 103,000 options with an exercise price of $38.404 per share.
All the initial options to be granted in accordance with the employment
agreements will vest and become exercisable, except as otherwise described in
this paragraph, in four equal installments on each April 15, commencing April
15, 1997, and will expire on April 15, 2001. In the event of the death or
disability (as defined) of the executive, all unexercisable options immediately
will vest and become exercisable and all the vested and unexercisable options
held by the executive on the date of death or termination of employment will
remain exercisable until the end of the option term or the end of the one-year
period following such death or the termination of employment, whichever is
earlier. In the event of the termination of the executive's employment by the
Company without "cause", by the employee for "good reason" or by the Company or
the executive following a "change of control" (in each case, as defined), all
unexercisable options immediately will vest and become exercisable and all
vested and unexercisable options held by the executive on the date of the
termination of employment will remain exercisable until the end of the option
term. In the event of the termination of employment by the Company for
"cause", the executive will forfeit all previously unexercised and
unexercisable stock options granted pursuant to the employment agreement. In
the event of a termination of employment by the executive other than for "good
reason", all vested and exercisable options held by the executive on the date
of such termination of employment will remain exercisable until the earlier of
the end of the option term or the end of the six-month period following the
termination of employment. The foregoing discussion addresses the consequences
of termination of employment with respect only to the options initially granted
under the employment agreement. In addition, due to a clerical error in
calculating the initial option exercise price as of April 15, 1996, the
foregoing options were incorrectly reported as having option exercise prices of
$29.50, $32.45, $35.695, and $39.325, respectively.
The employment agreements for Messrs. Stone and Fickes also provide that if
employment is terminated due to death, the executive's estate will receive any
annual salary or similar amounts (but not bonus) earned but not paid prior to
the date of death, plus any additional death benefits provided under the
Company's other benefit plans and programs. In the event of the termination of
employment due to disability, in addition to any other benefits provided under
the Company's otherwise applicable plans and programs and the right to continue
to participate in the Company's employee benefit plans until reaching age 65,
the executive will receive (i) any salary or similar amounts (not bonus) earned
but not paid prior to the date of termination of employment, plus (ii) in
periodic installments until the last day of the month in which the employee
reaches age 65, an annual amount equal to 60% of the executive's base salary in
effect on the date of the termination of employment, less the amount of any
disability benefits (other than those attributable to the executive's
contributions) provided under the Company's disability plan, plus (iii) a pro
rated bonus for the year in which termination of employment occurs based on an
amount equal to the product of the average percentage of the executive's base
salary paid to the executive as an incentive bonus for the two calendar years
immediately preceding the termination of employment. In the event of
termination of employment without cause or for good reason, in addition to
continuing to participate in the employee benefit plans of the Company until
the earlier of the end of the period for which payments are made under the
agreement or the date the executive receives equivalent coverage and benefits
from a subsequent employer, the executive will receive (i) any salary or
similar amounts (but not bonus) earned but not paid prior to the date of
termination of employment, plus (ii) a lump sum payment equal to the
executive's base salary, at the annualized rate in effect on the date of
termination of employment, for the longer of the end of the term of the
<PAGE> 97
PAGE 97
employment agreement or 24 months (unless termination of employment follows a
change in control, such amount to be discounted using a discount rate based on
the applicable long-term federal rate published by the Internal Revenue Service
(the "IRS") for the month in which termination of employment occurs), plus
(iii) an amount equal to the same percentage of the executive's base salary as
the average of the annual incentive bonuses paid to the executive for the two
calendar years immediately preceding the date of termination of employment was
as a percentage of base salary in each such year. In the event of a
termination of employment following a change of control, the executive will
receive the same benefits as for termination without cause, or if the executive
resigns without good reason, the executive will be entitled to receive only
base salary and similar amounts (but not bonus) earned but not paid prior to
the termination of employment.
The employment agreements also provide that Messrs. Stone and Fickes will not
engage in any "competitive activity" (as defined) during the term of the
agreements or, in the event of a voluntary termination of employment by the
executive, for a six-month period following the termination of employment. In
addition, during the term of the agreements or, in the event of a voluntary
termination of employment by the executive, for a one-year period following the
termination of employment, the executive will not, directly or indirectly,
solicit, negotiate with or enter into discussions with the shareholders or
representatives of any business with which the Company has engaged in
discussions to acquire, merge, or enter into a joint venture during the
12-month period immediately preceding the date of the termination of
employment. Moreover, the executive will agree not to solicit (i) the
Company's employees for 18 months following the termination of employment and
(ii) the Company's agents, brokers or policyholders for 36 months following the
termination of employment.
Upon approval by the Company's shareholders of the purchase by the Company of
The Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interest (each as hereinafter defined, see "The PennCorp - Knightsbridge
Relationship"), Messrs. Stone and Fickes have agreed to modify their employment
agreements to provide that they shall not directly or indirectly engage in
any Fund Competitive Activity (as defined) during (i) the term of employment,
or (ii) in the event of a voluntary termination of employment prior to the date
on which the aggregate Investments (as defined in the Knightsbridge Fund
Partnership Agreement) made by the Knightsbridge Fund in Portfolio Companies
(as defined in the Knightsbridge Fund Partnership Agreement) equals or exceeds
$92 million, the one-year period following the date of the executive's
termination of employment, or (iii) in the event of a voluntary termination of
employment on or after the date on which the aggregate Investments (as defined
in the Knightsbridge Fund Partnership Agreement) made by the Knightsbridge Fund
in Portfolio Companies (as defined in the Knightsbridge Fund Partnership
Agreement) equals or exceeds $92 million (the "Fully Invested Date"), the
nine-month period following the Fully Invested Date or the six-month period
following the date of the executive's termination of employment, whichever is
longer.
DIRECTORS' FEES
Directors of the Company are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the Board of Directors or committees thereof. In addition, each
director of the Company who is not also an officer or salaried employee of the
Company (a "Non-Employee Director") receives an annual fee of $25,000 and a fee
of $2,000 for each meeting of the Board of Directors at which such director is
present. Each Non-Employee Director who is a member of a committee of the
Board of Directors also receives a fee of $1,000 for each meeting of such
committee at which such director is present. Committee chairmen receive an
additional annual fee of $5,000.
In addition to the foregoing, the Warrant Plan grants each Non-Employer
Director (other than Messrs. Greenberg and McCormick) a ten-year warrant to
purchase up to 3,000 shares of Common Stock upon his election to the Board of
Directors. The exercise price of such warrants with respect to each share of
underlying Common Stock is equal to the fair market value of the Common Stock on
the date of grant. Each warrant vests and becomes exercisable in three equal
annual installments commencing on the first anniversary date after the date of
the grant provided that the Non-Employee Director is serving as a director of
the Company on such anniversary date. On November 5, 1992, each of Messrs.
Schnitzer, Slayton and Player were granted warrants to purchase up to 3,000
shares of Common Stock at an exercise price of $14.19 per share. On April 1,
1993, Mr. Roman received a warrant to purchase up to 3,000 shares of Common
Stock at an exercise price of $19.06 per share. On September 1, 1994, Mr.
Smith received a warrant to purchase up to 3,000 shares of Common Stock at an
exercise price of
<PAGE> 98
PAGE 98
$15.63 per share. Due to the annual grants to Non-Employee Directors under the
1996 Stock Plan, no further awards will be made under the Warrant Plan.
On November 5, 1992, Mr. Greenberg received a warrant to purchase up to 225,000
shares of Common Stock under the Warrant Plan. Each of Messrs. Stone, Fickes
and McCormick received identical warrants. These warrants are now fully
vested. The exercise price for the warrants is $16.10 per share of Common
Stock.
In 1996, each of Messrs. Player, Roman, Schnitzer, Slayton and Smith were
awarded 1,000 shares of Common Stock under the 1996 Stock Plan (plus cash to
cover tax liabilities). The 1996 Stock Plan provides for the grant of 1,000
shares of stock to all future Non-Employee Directors elected to the Board of
Directors and, in addition, provides for an annual grant of 1,000 shares of
Common Stock to each then serving Non-Employee Director. Additionally, the
1996 Stock Plan generally enables Non-Employee Directors to receive a portion
of their annual fees in Common Stock. Certain directors elected to receive
Common Stock in lieu of a portion of their annual fee for 1997.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Roman, Schnitzer, Smith and
Greenberg. Mr. Greenberg became a member of the Compensation Committee on
September 21, 1995. In 1996, ADG, of which Mr. Greenberg is Chairman, earned
aggregate consulting fees, including reimbursement of actual out of pocket
expenses, of $250,000 for services in connection with the Company's acquisition
activities.
[Remainder of page intentionally left blank]
<PAGE> 99
PAGE 99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as otherwise noted below, the following table sets forth, as of March
14, 1997, the ownership of the outstanding shares of Common Stock held by
persons known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, by all directors of the Company, by the
Named Executive Officers, and by the executive officers and directors of the
Company as a group, and the percentage of the Common Stock represented thereby.
Except as otherwise noted below, the Company believes that each director, Named
Executive Officer, executive officer and over 5% stockholder shown below has
sole voting and sole investment power with respect to all shares beneficially
owned by them.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Ownership
Name and Address of Beneficial Owner Percent of Class
==============================================================================================================
<S> <C> <C>
The Mutuelles AXA (1)
100-101 Terrasse Boieldieu 3,849,351 13.2
92042 Paris La Defense France
- --------------------------------------------------------------------------------------------------------------
American Express Company (2)
World Financial Center 2,887,000 10.2
200 Vesey Street
New York, New York 10285
- --------------------------------------------------------------------------------------------------------------
Massachusetts Financial Services Company (3)
500 Boylston Street 2,476,185 8.7
Boston, Massachusetts 02116
- --------------------------------------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. (4)
World Financial Center, North Tower 2,060,860 7.2
250 Vesey Street
New York, New York 10281
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Name of Beneficial Owner Percent of Class
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steven W. Fickes (5) 590,810 2.1
==============================================================================================================
Allan D. Greenberg (6) 403,753 1.4
- --------------------------------------------------------------------------------------------------------------
William M. McCormick (7) 858,129 3.0
==============================================================================================================
James P. McDermott (8) 8,392 *
- --------------------------------------------------------------------------------------------------------------
Thomas A. Player (9) 9,128 *
- --------------------------------------------------------------------------------------------------------------
Michael J. Prager (10) 14,550 *
- --------------------------------------------------------------------------------------------------------------
Kenneth Roman (11) 8,460 *
- --------------------------------------------------------------------------------------------------------------
Bruce W. Schnitzer (12) 45,203 *
- --------------------------------------------------------------------------------------------------------------
Scott D. Silverman (13) 3,500 *
- --------------------------------------------------------------------------------------------------------------
Maurice W. Slayton (14) 7,383 *
- --------------------------------------------------------------------------------------------------------------
David C. Smith (15) 10,460 *
==============================================================================================================
David J. Stone (16) 1,169,577 4.1
- --------------------------------------------------------------------------------------------------------------
All directors and executive officers as a group (17) 3,146,345 11.05
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents less than 1%.
(1) The Mutuelles AXA (consisting of AXA Assurances I.A.R.D. Mutuelle;
AXA Assurances Vie Mutuelle; Alpha Assurances I.A.R.D. Mutuelle; Alpha
Assurances Vie Mutuelle; and AXA Courtage Assurance Mutuelle (formerly
known as Uni Europe Assurance Mutuelle), as a group) and AXA, parent
holding company for AXA Equity & Law PLC (U.K.). Each of the
Mutuelles AXA and AXA disclaim beneficial ownership of the shares
shown above. The principal business office of (i) Alpha Assurances
I.A.R.D. Mutuelle and Alpha Assurances Vie Mutuelle is 100- 101
Terrasse Boieldieu 92042 Paris La Defense France; (ii) AXA Assurances
I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle is 21, rue de
Chateaudun 75009 Paris France; (iii) AXA Courtage Assurance Mutuelle
is 26, rue Louis le Grand 75002 Paris France; and (iv) AXA is 23,
avenue Matignon 75008 Paris France. The Equitable Companies
Incorporated is a parent holding company for The Equitable Life
Assurance Society of the United States, an insurance company, a
registered investment adviser and broker-dealer, Alliance Capital
Management L.P., a registered investment adviser, Donaldson, Lufkin &
Jenrette Securities Corporation,
<PAGE> 100
PAGE 100
a registered investment adviser and broker-dealer and Wood, Struthers
& Winthrop Management Corporation, a registered investment adviser.
The principal business office of The Equitable Companies Incorporated
is 787 Seventh Avenue, New York, New York 10019. Each of the
foregoing subsidiaries of The Equitable Companies Incorporated
operates under independent management and makes independent decisions.
As of December 31, 1996, based on Amendment No. 7 to Schedule 13G
filed with the Securities and Exchange Commission (the "Commission")
on February 12, 1997 by the Mutuelles AXA and The Equitable Companies
Incorporated, (i) AXA Equity and Law PLC had sole voting and
dispositive power over 150,700 shares of Common Stock; (ii) The
Equitable Life Assurance Society of the United States had sole voting
and dispositive power over 70,926 shares of Common Stock including
45,126 shares of Common Stock issuable upon the conversion of the
Company's $3.375 Convertible Preferred Stock (iii) Alliance Capital
Management, L.P. had sole voting power over 3,130,147 shares of
Common Stock and sole dispositive power over 3,538,355 shares of
Common Stock including 521,453 shares of Common Stock issuable upon
the conversion of the Company's $3.375 Convertible Preferred Stock;
(iv) Donaldson, Lufkin & Jenrette Securities Corporation had sole
voting and dispositive power over 22,120 shares of Common Stock
issuable upon the conversion of the Company's $3.375 Convertible
Preferred Stock and shared dispositive power over 10,250 shares of
Common Stock; and (v) Wood, Struthers & Winthrop Management
Corporation had sole voting power over 23,000 shares of Common Stock
and sole dispositive power over 57,000 shares of Common Stock. The
shares held by Alliance Capital Management, L.P. and Wood, Struthers &
Winthrop Management Corp. were acquired solely for investment purposes
on behalf of client discretionary investment advisory accounts. The
shares held by AXA Equity & Law PLC, The Equitable Life Assurance
Society of the United States and Donaldson, Lufkin & Jenrette
Securities Corporation were acquired solely for investment purposes.
(2) American Express Company ("AEC") is the parent holding company of
American Express Financial Corporation ("AEFC"), which is a registered
investment adviser. AEC disclaims beneficial ownership of the shares
of Common Stock shown in the table above. The principal business
office of AEC is 200 Vesey Street, World Financial Center, New York,
New York 10285. The principal business office of AEFC is IDS Tower
10, Minneapolis, Minnesota 55440. The following information is based
solely on Amendment No. 3 to Schedule 13G dated December 31, 1996
filed by AEC and AEFC with the Commission. As of December 31, 1996
AEC and AEFC had shared voting power over 1,148,900 shares of Common
Stock and shared dispositive power over 2,887,000 shares of Common
Stock. AEC reported the combined holdings of these entities for the
purpose of administrative convenience.
(3) The following information is based solely on Schedule 13G dated
February 12, 1997, filed with the Commission by Massachusetts
Financial Services Company ("MFS"). The principal business office of
MFS is 500 Boylston Street, Boston, Massachusetts 02116. As of
December 31, 1996, MFS had sole voting power over 2,429,685 shares of
Common Stock and sole dispositive power over 2,476,185 shares of
Common Stock.
(4) Merrill Lynch & Co., Inc. ("ML&Co.") is the parent holding company of
Merrill Lynch Group, Inc., ("ML Group"), Princeton Services, Inc.
("PSI") and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"). PSI is the general partner of Merrill Lynch Asset
Management, L.P., a registered investment adviser, (d/b/a Merrill
Lynch Asset Management ("MLAM"). MLAM provides investment advisement
to Merrill Lynch Capital Fund, Inc., a registered investment company,
("MLCF"). The principal business offices of (i) ML&Co. is World
Financial Center, North Tower, 250 Vesey Street, New York, New York
10281; (ii) ML Group is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281; (iii) PSI is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536; (iv) MLAM is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536; and (v) MLCF is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. ML&Co may be deemed to be the
beneficial owner of certain of the shares shown on the chart above by
virtue of its control of its wholly-owned subsidiaries ML Group and
MLPF&S. ML Group may be deemed to be the beneficial owner of the
shares shown on the chart above by virtue of its control of its
wholly-owned subsidiary PSI. PSI may be deemed to be the beneficial
owner of the shares shown on the chart above by virtue of its being
the general partner of MLAM. MLAM may be deemed to be the beneficial
owner of the shares shown above by virtue of its acting as an
investment adviser to MLCF. MLCF is the beneficial owner of the
shares shown above. ML&Co., ML Group, and PSI disclaim beneficial
ownership of the shares of Common Stock shown
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above. As of December 31, 1996, based on a Schedule 13G filed with
the Commission on February 12, 1997 by ML&Co., (i) ML&Co. had shared
voting and dispositive power over 2,060,860 shares of Common Stock;
(ii) ML Group had shared voting and dispositive power over 2,060,000
shares of Common Stock; (iii) PSI had shared voting and dispositive
power over 2,060,000 shares of Common Stock; (iv) MLAM had shared
voting and dispositive power over 2,060,000 shares of Common Stock;
and (v) MLCF had shared voting and dispositive power over 2,000,000.
(5) Consists of (i) 184,226 shares of Common Stock owned of record by Mr.
Fickes, (ii) 225,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant, (iii) 30,000
shares of Common Stock that may be purchased pursuant to a presently
exercisable Warrant, (iv) 139,750 shares of Common Stock that may be
purchased pursuant to presently exercisable stock options awarded to
Mr. Fickes pursuant to his Employment Agreement effective April 15,
1996, (the continuation of the Employment Agreement is contingent upon
the consummation of the acquisition of The Fickes and Stone
Knightsbridge Interests), (v) 11,106 shares of Common Stock held of
record by Mr. Fickes' wife and (vi) 728 shares of Common Stock held
of record by Mr. Fickes' children. Mr. Fickes disclaims beneficial
ownership of Common Stock not held of record by him.
(6) Consists of (i) 168,753 shares of Common Stock owned of record by Mr.
Greenberg, (ii) 225,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant and (iii)
10,000 shares of Common Stock owned of record by a trust for the
benefit of Mr. Greenberg's minor children over which Mr. Greenberg's
wife has sole voting power. Mr. Greenberg disclaims beneficial
ownership of Common Stock not held of record by him.
(7) Consists of (i) 570,760 shares of Common Stock subject to a presently
exercisable warrant held by a living trust of which Mr. McCormick is
the sole beneficiary and trustee (the "McCormick Living Trust"), (ii)
225,000 shares of Common Stock that may be purchased pursuant to a
presently exercisable Management Warrant, (iii) 10,000 shares of
Common Stock owned by Mr. McCormick, (iv) 31,967 shares of Common
Stock held by the McCormick Living Trust, (v) 5,550 shares of Common
Stock held of record by Mr. McCormick's minor children over which Mr.
McCormick has voting power, (vi) 10,000 shares of Common Stock owned
of record by an irrevocable trust for the benefit of Mr. McCormick's
minor children and over which Mr. McCormick has no voting or
investment control and (vii) 4,852 shares of Common Stock owned by Mr.
McCormick's wife. Other than the shares of Common Stock held by Mr.
McCormick's minor children over which Mr. McCormick has voting control
and the warrants and shares of Common Stock owned by Mr. McCormick and
by the McCormick Living Trust, Mr. McCormick disclaims beneficial
ownership of Common Stock not held of record by him.
(8) Consists of (i) 1,933 shares of Common Stock owned of record by Mr.
McDermott and (ii) 6,459 shares of Common Stock remaining from a
presently exercisable employee stock option awarded to Mr. McDermott
on November 17, 1992.
(9) Consists of (i) 6,128 shares of Common Stock owned of record by Mr.
Player and (ii) 3,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant.
(10) Consists of (i) 2,050 shares of Common Stock owned of record by Mr.
Prager, and (ii) 12,500 shares of Common Stock subject to a presently
exercisable employee stock option awarded to Mr. Prager on April 3,
1992.
(11) Consists of (i) 5,460 shares of Common Stock owned of record by Mr.
Roman and (ii) 3,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant.
(12) Consists of (i) 23,497 shares of Common Stock owned of record by Mr.
Schnitzer, (ii) 18,706 shares owned of record by Magical Corporation,
of which Mr. Schnitzer is the sole owner and (iii) 3,000 shares of
Common Stock that may be purchased pursuant to a presently exercisable
Management Warrant.
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(13) Consists of (i) 1,000 shares of Common Stock owned of record by Mr.
Silverman and (ii) 2,500 shares of Common Stock subject to a presently
exercisable employee stock option awarded to Mr. Silverman on April 3,
1992.
(14) Consists of (i) 4,383 shares of Common Stock owned of record by Mr.
Slayton and (ii) 3,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant.
(15) Consists of 7,460 shares of Common Stock owned of record by Mr. Smith
and (ii) 3,000 shares of Common Stock that may be purchased pursuant
to a presently exercisable Management Warrant.
(16) Consists of (i) 470,647 shares of Common Stock held of record by Mr.
Stone, (ii) 225,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant, (iii) 139,750
shares of Common Stock that may be purchased pursuant to presently
exercisable stock options awarded to Mr. Stone pursuant to his
Employment Agreement effective April 15, 1996, (the continuation of the
Employment Agreement is contingent upon the consummation of the
acquisition of The Fickes and Stone Knightsbridge Interests), (iv)
320,805 shares of Common Stock held of record by Mr. Stone's wife and
(v) 13,375 shares of Common Stock held of record by Mr. Stone's adult
children. Mr. Stone disclaims beneficial ownership of Common Stock
not held of record by him.
(17) Assumes the exercise of warrants to purchase shares 1,826,719 of
Common Stock. See Notes (5-16).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Mr. Slayton, a director of the Company, is the Chairman of the Board, President
and Chief Executive Officer of Conning & Company ("Conning") and of Conning
Corporation, the parent of Conning. Conning provides portfolio management and
related services for a portion of the investment assets of the Company's
insurance subsidiaries. In 1996, Conning earned aggregate fees, including
reimbursement of actual out of pocket expenses, in the approximate amount of
$895,000 for investment management services.
The PennCorp/Knightsbridge Relationship
General. In 1995, with the authorization of the Company's Board, David J. Stone
and Steven W. Fickes, the Company's two most senior officers, organized the
Knightsbridge Fund to raise capital, to be managed by them and to make equity
and equity-linked investments in companies engaged primarily in the life
insurance industry. The Knightsbridge Fund, whose limited partners include
affiliates of 10 leading domestic and international banking organizations, has
received subscriptions for approximately $92,000,000 in limited partnership
interests, including a $15,000,000 subscription from the Company. The general
partner of the Knightsbridge Fund is Knightsbridge Capital L.L.C.
("Knightsbridge Capital"), the members of which are Messrs. Stone and Fickes.
Allan D. Greenberg, a member of the Company's Board, formerly owned a 5%
interest in Knightsbridge Capital. Messrs. Stone and Fickes have purchased Mr.
Greenberg's interest in Knightsbridge Capital in connection with the
restructuring of the relationship between the Company and the Knightbridge
Fund.
During the second half of 1995, the Company's Board and Messrs. Stone and
Fickes, on behalf of the Knightsbridge Fund, discussed the formation of a joint
venture to pursue life insurance acquisitions and investments. The Company's
Board and Messrs. Stone and Fickes concluded that the formation of a joint
venture to combine Company's and the Knightsbridge Fund's resources on a
transaction-by-transaction basis could increase the opportunities of each to
invest in a broader range of transactions. As part of that joint venture
arrangement, the Company received a right of first refusal on all insurance
transactions considered by the Knightsbridge Fund. In September 1995, the
Company's Board appointed a special committee of the Company's Board composed of
Thomas A. Player, Kenneth Roman, David C. Smith, Maurice W. Slayton and Bruce
W. Schnitzer (the "Knightsbridge Committee"), one of the responsibilities of
which was to evaluate all transactions submitted to the Company by the
Knightsbridge Fund and to determine whether a particular transaction would be
pursued solely by the Company, pursued jointly with the Knightsbridge Fund, or
not pursued by the Company, in which case the Knightsbridge Fund would be
permitted to pursue the transaction for its own account. The
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Knightsbridge Fund and the Company determined to use Knightsbridge Management
L.L.C. ("Knightsbridge Management"), the manager of the Knightsbridge Fund, as
their joint venture vehicle and to provide merchant banking services on all
insurance acquisitions involving the companies acquired or invested in by the
Knightsbridge Fund or the Company.
On December 14, 1995, pursuant to a joint transaction approved by the Company's
Board, SW Financial, a newly organized corporation formed by the Company, the
Knightsbridge Fund and Messrs. Stone and Fickes, purchased (the "SW Financial
Investment") 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")
for $260,000,000. The Company and its subsidiaries invested an aggregate of
$120,000,000 in cash to purchase voting common stock, nonvoting common stock,
common stock warrants and preferred stock of SW Financial and preferred stock
of one of SW Financial's subsidiaries. SW Financial used the proceeds from the
Company's investment, together with a $23,000,000 investment by the
Knightsbridge Fund and a $7,000,000 investment by Messrs. Stone and Fickes,
$120,000,000 in borrowings under a $125,000,000 credit facility arranged by SW
Financial and the issuance to ICH of $40,000,000 principal amount of SW
Financial's convertible debentures, to fund the purchase price for Southwestern
Life and Union Bankers. The balance of the proceeds raised by SW Financial were
used to make a $30,000,000 capital contribution to Southwestern Life and Union
Bankers, to pay transaction fees and expenses of $10,000,000, to fund an
$8,000,000 interest reserve for the SW Financial convertible debentures and to
provide $2,000,000 of working capital. Immediately after the consummation of
the SW Financial Investment, and without giving effect to the conversion of the
SW Financial convertible debentures, the Company beneficially owned 75.4%, and
the Knightsbridge Fund and Messrs. Stone and Fickes, collectively, beneficially
owned 33.5%, of SW Financial's outstanding common stock.
In December 1995, Knightsbridge Management received a fee of $3,900,000 from SW
Financial upon completion of the acquisition of Southwestern Life and Union
Bankers. Based on their respective fully diluted equity investments in SW
Financial (calculated without regard to SW Financial's convertible debentures,
which were issued to a third party), the Company's funding obligation to
Knightsbridge Management for 1996 was reduced by $1,300,000 (50.0% of the
Company's share of the $3,900,000 fee obligation based on its two-thirds
interest in the SW Financial Investment) and the Limited Partners' 1996
management fee to Knightsbridge Management was reduced, in the aggregate, by
$650,000 (50.0% of the Knightsbridge Fund's share of the $3,900,000 fee
obligation based on its one-third interest in the SW Financial Investment). In
addition, the Company recorded $530,000 of income in 1995 related to its 45.0%
interest in Knightsbridge Management's 1995 net distributable income.
For the years ended December 31, 1996 and 1995, the Company paid or accrued
$2,548,000 and $3,900,000 in transaction fees to Knightsbridge Management
related to the United Companies Life Insurance Company ("UC Life") and SW
Financial transactions, respectively. During 1996, certain of the Company's
affiliates and subsidiaries paid management fees to Knightsbridge Management
amounting to $2,190,000 which have been contingently expensed pending the
shareholder vote on the acquisition of The Fickes and Stone Knightsbridge
Interests (as hereinafter defined). SW Financial and UC Life incurred
Knightsbridge Management investment advisory fees totaling $2,426,000 and $0
during 1996 and 1995, respectively. In addition, the Company received a
$1,000,000 stand-by commitment fee from SW Financial for contingent financing
on a real estate transaction. SW Financial did not draw upon the commitment.
In January 1996, the Knightsbridge Fund entered into an agreement to purchase
United Companies Life Insurance Company ("UC Life") from United Companies
Financial Corporation. As part of the Knightsbridge restructuring transactions
which are described herein, the Company purchased the right to consummate the
UC Life acquisition from the Knightsbridge Fund partners for approximately
$7,575,000 in cash (or approximately $6,375,000 after giving effect to the
Company's portion of that payment), which was the only right of the
Knightsbridge Fund with respect to UC Life. Neither Mr. Stone nor Mr. Fickes
nor their respective affiliates received, nor will they receive after giving
effect to the consummation of the acquisition of The Fickes and Stone
Knightsbridge Interests by the Company, any portion of that payment. The
Company completed the UC Life acquisition on July 24, 1996. Knightsbridge
Management accrued a fee of $2,548,000 from the Company in connection with the
consummation of that transaction.
On January 11, 1996, a stockholder derivative lawsuit styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al. and PennCorp Financial Group,
Inc., C.A. No. 14775, was filed against the Company and each of its
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directors, individually, in the Court of Chancery for the State of Delaware. On
January 25, 1996, a second shareholder derivative suit, styled Lois Miller v.
David J. Stone et al. and PennCorp Financial Group, Inc., C.A. No. 14795, was
filed against the Company and each of its directors, individually, in the
Delaware Chancery Court. The complaint in that suit has not yet been served on
the Company or the other defendants. The suits allege that the SW Financial
Investment involved the usurpation of a corporate opportunity and a waste of
the Company's assets by Messrs. Stone and Fickes, and that the directors of the
Company in approving that transaction, failed to act in good faith and breached
their fiduciary duties, including the duty of loyalty to the Company and its
stockholders, having favored the interests of Messrs. Stone and Fickes over the
Company and its stockholders. The Tozour and Miller 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 complaints, 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, attorneys' fees and costs, and such other
relief as the court determines to be just, proper or equitable. Parties to the
lawsuits have executed a Stipulation and Agreement of Compromise and Settlement
which contains the terms and conditions described below.
In February 1996, Messrs. Stone and Fickes began discussions with the Company's
Board on a means of consolidating their outside business interests, including
the Knightsbridge Fund, under the Company. Subsequently, Messrs. Stone and
Fickes and the members of the Knightsbridge and Compensation Committees of the
Company's Board developed a plan to enable the Company 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 the Company. On June 7, 1996 Messrs.
Stone and Fickes entered into five-year employment agreements with the Company.
The continuation of those employment agreements, including the stock options
granted thereunder, is contingent upon the consummation of the acquisition of
The Fickes and Stone Knightsbridge Interests. In addition to the employment
agreements, the other components of the Knightsbridge restructuring plan
include: (i) the acquisition by the Company of the interests of Messrs. Stone
and Fickes (collectively, "The Fickes and Stone Knightsbridge Interests") in
Knightsbridge Management, Knightsbridge Capital, and Knightsbridge Consultants
L.L.C., the asset management subsidiary of Knightsbridge Management
("Knightsbridge Consultants"); and (ii) the acquisition by the Company from the
Knightsbridge Fund and Messrs. Stone and Fickes of their respective holdings of
common stock and common stock warrants of SW Financial, provided that if the
proposed litigation settlement is approved, Messrs. Stone and Fickes will
cancel their SW Financial common stock warrants for no additional
consideration.
Acquisition of The Fickes and Stone Knightsbridge Interests. The Company
proposes to acquire The Fickes and Stone Knightsbridge Interests in exchange
for the Company's agreement to make annual cash payments, currently estimated
to be approximately $330,000, to each of Messrs. Stone and Fickes on the
closing of the purchase of The Fickes and Stone Knightsbridge Interests and on
each April 15 thereafter, commencing April 15, 1998 and ending on April 15,
2001, and to deliver to each of Messrs. Stone and Fickes 173,160 shares of
Common Stock (subject to adjustment for stock splits, reverse stock splits and
similar transactions) on April 15, 2001 (subject to acceleration upon a change
of control, as defined). The total number of shares to be delivered to each of
Messrs. Stone and Fickes has been calculated by dividing $5,000,000 (the value
agreed to by the Company's Board and each of Messrs. Stone and Fickes for the
sale of their respective portions of The Fickes and Stone Knightsbridge
Interests) by $28.875 per share, the closing price of the Company's Common
Stock on the NYSE on April 15, 1996, the date on which the Knightsbridge
Committee and Messrs. Stone and Fickes reached agreement on the general terms
of the acquisition of The Fickes and Stone Knightsbridge Interests and the
effective date of the Fickes and Stone employment agreements. The actual amount
of the annual cash payment will be based on a theoretical rate of interest
equal to the IRS's mid-term rate at the time of the consummation of the
acquisition of The Fickes and Stone Knightsbridge Interests on a notional
amount of $5,000,000. In addition, Messrs. Stone and Fickes (i) will retain
their right to receive, under the circumstances specified in the Knightsbridge
Fund's limited partnership agreement, their portion of the general partner's
20% share of the profits earned by the limited partners of the Knightsbridge
Fund on the Fund's $23,000,000 investment in SW Financial and (ii) will
withdraw the balance in their capital accounts in Knightsbridge Management as
of December 31, 1995 and, in addition, will receive at the closing of the
acquisition of The Fickes and Stone Knightsbridge Interests an amount in cash
(currently estimated to be approximately $150,000 in the aggregate) not to
exceed their share of Knightsbridge Management's net distributable income from
January 1, 1996 through April 15, 1996. The acquisition of The Fickes and
Stone Knightsbridge Interests shall be submitted for approval by the
shareholders of the Company at a Special Meeting currently expected to be held
in June 1997.
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As part of the Knightsbridge restructuring and at the request of the Company's
Board, Portsmouth Group, L.L.C. ("Portsmouth"), which owns a viatical
settlement company, has agreed to repurchase the common equity interests in
Portsmouth held by Messrs. Stone and Fickes and other executive officers of the
Company, which were originally purchased for approximately $2,150,000. The
investments in Portsmouth made by Messrs. Stone and Fickes were part of their
co-investment requirement as the general partners of the Knightsbridge Fund.
(Other than the SW Financial Investment, the Portsmouth investment is the only
other investment made by the Knightsbridge Fund to date). Following the
repurchase of the common equity interests of Messrs. Stone and Fickes and other
Company executive officers in Portsmouth, the Knightsbridge Fund will own all
of the outstanding common equity of Portsmouth. Additionally, as part of an
agreement between Portsmouth, Messrs. Fickes and Stone, and the Company in
connection with the release of Messrs. Fickes and Stone from their
co-investment obligations under the Knightsbridge Fund, SW Financial has
agreed, subject to required regulatory approvals, if any, and negotiation of
definitive documentation and receipt of advice with respect to appropriate
arms' length terms, to make up to a $10,000,000 preferred equity investment in
Portsmouth. Up to $3,000,000 of the proceeds (the exact amount to be determined
following a valuation of Portsmouth) from the investment by SW Financial will
be used by Portsmouth to purchase the common equity of Messrs. Stone, Fickes
and the executive officers. The balance will be used by Portsmouth to fund its
growth in the viatical settlement business. Following the consummation of the
Knightsbridge restructuring, Messrs. Stone and Fickes will have no further
economic interests in the Knightsbridge Fund.
By acquiring The Fickes and Stone Knightsbridge Interests, the Company will
receive the entire annual management fee paid by the limited partners of the
Knightsbridge Fund (presently $1.4 million per year, subject to certain
offsets) to Knightsbridge Management, transactional fees on investments made by
the Knightsbridge Fund and all the fees for oversight and investment management
services provided to businesses in which the Knightsbridge Fund invests. In
addition, the Company will acquire control of the general partner of the
Knightsbridge Fund and, therefore, will control all future investment decisions
by that Fund. The Company's Board believes that control of the Knightsbridge
Fund will be an asset to the Company because it will provide management with an
alternative source of available capital and the flexibility to diversify its
risk in making strategic investments in, and/or acquisitions of, life insurance
and related companies that do not necessarily complement the core strengths of
the Company. As the general partner of the Knightsbridge Fund, the Company will
co-invest, in addition to its 16.3% limited partnership investment, $5,000,000
per Knightsbridge Fund transaction. Accordingly, as the general partner of the
Knightsbridge Fund, so long as the limited partners achieve at least a 15%
cumulative rate of return on their invested capital in all future transactions,
the Company will be entitled to 20% of all profits earned by the limited
partners. On September 19, 1996, Smith Barney Inc. ("Smith Barney") delivered
to the Company's Board orally and in writing its opinion that, as of April 15,
1996, the consideration determined to be paid by the Company to acquire The
Fickes and Stone Knightsbridge Interests was fair to the Company and its
stockholders (other than Messrs. Stone and Fickes) from a financial point of
view.
Acquisition of the SW Financial Controlling Interest. As part of the proposed
Knightsbridge restructuring, the Company's Board began negotiating to purchase
from the Knightsbridge Fund and Messrs. Stone and Fickes the SW Financial
Controlling Interest. The Company's Board made this decision after taking into
account the improvement in the Company's leverage ratio following its
successful $165,000,000 common stock offering in February 1996, which lessened
the Company's Board's concerns that insurance regulatory authorities and rating
agencies would respond unfavorably to an increase in the Company's leverage
ratio. Additionally, as previously announced, the Company is in the process of
reorganizing, consolidating and integrating its insurance operations into four
divisions -- Career Division, Payroll Division, Financial Services Division and
Individual Division. The Company's Board considers the acquisition of the SW
Financial Controlling Interest to be an important step in enabling the Company
to establish its Individual Division and to integrate the management and
operations of United Presidential with that of SW Financial. The Company's
Board created a special committee (the "Special Committee"), consisting of
Thomas A. Player, Bruce W. Schnitzer and Maurice W. Slayton, to negotiate a
purchase price for the SW Financial Controlling Interest with Messrs. Stone and
Fickes, acting on behalf of the Knightsbridge Fund. The Special Committee
engaged Smith Barney as its financial adviser to assist it in the valuation
process. The Knightsbridge Fund engaged Fox-Pitt, Kelton Inc. as its financial
adviser.
Based on the advice of Smith Barney and after negotiations with Messrs. Stone
and Fickes on behalf of the Knightsbridge Fund, the Company's Board authorized
the Company to acquire the SW Financial Controlling Interest, along with any
and all existing rights to future fees or other income which could have been
derived from SW Financial or its subsidiaries, from the Knightsbridge Fund and
Messrs. Stone and Fickes for approximately
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$69,537,000 in cash (not including expenses and including a pro rata share of
SW Financial's after-tax income through closing). However, if the proposed
litigation settlement described below is approved, Messrs. Stone and Fickes
will cancel their SW Financial common stock warrants for no additional
consideration, which will enable the Company to purchase the SW Financial
Controlling Interest for $67,500,000 (not including expenses and including a
pro rata share of SW Financial's after-tax income through closing). If the
proposed litigation settlement is approved, Messrs. Stone and Fickes will share
$19,252,000 (or approximately 28.5%) of the $67,500,000 purchase price for the
SW Financial Controlling Interest based on their initial $7,000,000 investment
in SW Financial and their 20% share of the profit earned by the Knightsbridge
Fund limited partners on their $23,000,000 investment in SW Financial. Of the
approximately $19,252,000 Messrs. Stone and Fickes will receive if the proposed
litigation settlement is approved, approximately $12,880,000 will be paid to
them by the Company in respect of their personal investments in SW Financial
and approximately $6,372,000 will be paid to them by the Knightsbridge Fund in
accordance with its agreement of limited partnership. If the proposed
litigation settlement is not approved, Messrs. Stone and Fickes will share
$21,905,000 (or approximately 31.5%) of the $69,537,000 purchase price for the
SW Financial Controlling Interest. Of the approximately $21,905,000 Messrs.
Stone and Fickes will receive if the proposed litigation settlement is not
approved, approximately $15,687,000 will be paid to them by the Company in
respect of their personal investments in SW Financial and approximately
$6,218,000 will be paid to them by the Knightsbridge Fund in accordance with
its agreement of limited partnership. From these amounts, Messrs. Stone and
Fickes will pay Mr. Greenberg $738,963 if the proposed settlement is approved
and $732,392 if it is not approved.
On January 15, 1997, Smith Barney delivered orally its opinion (and
subsequently confirmed in writing on January 22, 1997) that the consideration
to be paid by the Company for the SW Financial Controlling Interest was fair to
the Company and its stockholders (other than Messrs. Stone and Fickes) from a
financial point of view. The acquisition of the SW Financial Controlling
Interest shall be submitted for approval by the shareholders of the Company at
a Special Meeting currently expected to be held in June 1997.
Proposed Settlement of Shareholder Litigation. As discussed above, on January
11 and January 25, 1996, shareholder derivative suits relating to the SW
Financial Investment were initiated against the Company and the members of the
Company's Board. 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 defendants have not been served
with the Miller complaint, no action has been taken in that case, although the
defendants would also defend it vigorously. The defendants believe, however,
that it would not be in the best interests of the Company and its shareholders
to expend considerable management and director time and to incur substantial
legal expenses to litigate these actions. Consequently, the Company's legal
advisers have met or spoken by telephone on several occasions with the
plaintiffs' counsel to discuss the terms of a potential settlement.
The defendants and the plaintiffs' counsel entered into a Stipulation and
Agreement of Compromise and Settlement on March 28, 1997 (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 the Company to purchase the SW Financial Controlling
Interest for $67,500,000, reducing the price to be paid by the Company for the
SW Financial Controlling Interest by approximately $2,037,000, (ii) the
Company's 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 Company's 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 Company's 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 Company's stockholders present at the shareholder meeting and
entitled to vote, and shareholders must approve both transactions, (v) Messrs.
Stone and Fickes will abstain from voting on the proposals to approve the
purchases of The Fickes and Stone Knightsbridge Interests and the SW Financial
Controlling Interest, and (vi) the plaintiffs' counsel will be entitled to
conduct confirmatory discovery.
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The Proposed Settlement is subject to approval by the Delaware Chancery Court
(the "Chancery Court") after notice to the Company stockholders. As discussed
above, Messrs. Stone and Fickes have agreed that if the Proposed Settlement is
approved by the Chancery Court, they will cancel their SW Financial common
stock warrants, which will reduce the price to be paid by the Company for the
SW Financial Controlling Interest by approximately $2,037,000. Because the
Knightsbridge restructuring will have the effect of eliminating potential
future conflicts of interest between Messrs. Stone and Fickes and the Company,
and because the Proposed Settlement will have the effect of reducing the price
to be paid for the SW Financial Controlling Interest and will obviate the need
to expend considerable management and director time to litigate the actions,
the Company's Board has determined that the Proposed Settlement is in the best
interests of the Company and its shareholders and confers a substantial economic
benefit on the Company. Accordingly, the Company's Board has authorized the
payment to plaintiffs' counsel of legal fees and disbursements not to exceed
$530,000 in connection with the lawsuits and the related settlement
negotiations, if the Proposed Settlement is approved by the Delaware Chancery
Court after notice to the Company's stockholders.
If the Company's stockholders approve the purchase of The Fickes and Stone
Knightsbridge Interests and the SW Financial Controlling Interest on the terms
contained herein, the Company intends to consummate those transactions, whether
or not the Proposed Settlement is approved. However, if the Company's
stockholders do not approve both of those transactions, there will not be a
settlement of the shareholder derivative litigations on the terms discussed
herein, and Messrs. Stone and Fickes and the Knightsbridge Committee will
reconvene their negotiations on the definitive terms of the Knightsbridge
relationship. The Proposed Settlement is conditioned upon, among other things,
the Company's stockholders' approval of the purchase by the Company of The
Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interest and court approval after notice to the Company's stockholders.
[Remainder of page left intentionally blank]
<PAGE> 108
PAGE 108
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents
1. 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. (7)
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. (5)
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. (3)
3.1 Restated By-Laws of PennCorp Financial Group, Inc.
(13)
3.3 Second Restated Certificate of Incorporation of
PennCorp Financial Group, Inc. as amended. (8)
4.1 Certificate of Designation of Series C Preferred
Stock. (6)
4.2 Corrected Certificate of Designation of $3.375
Convertible Preferred Stock. (6)
4.3 Certificate of Designation of $3.50 Series II
Convertible Preferred Stock (4)
4.4 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. (12)
<PAGE> 109
PAGE 109
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. (11)
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.
(10)
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. (2)
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. (2)
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. (6)
-----------------------------------------------------
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.6 Employment Agreement, dated as of August 19, 1990,
between PennCorp Financial Group, Inc. and William M.
McCormick. (14)
10.7 PennCorp Financial, Inc. Retirement and Savings Plan.
(14)
10.8 PennCorp Financial, Inc. Executive Officer Incentive
Plan. (14)
10.9 PennCorp Financial Group, Inc. 1992 Stock Option
Plan. (14)
10.10 PennCorp Financial Group, Inc. Senior Management
Warrant Award Program. (14)
10.11 Form of Restricted Stock Agreement By and Between
PennCorp Financial Group, Inc. and certain
participants, effective as of April 1, 1994. (10)
10.12 Employment Agreement between PennCorp Financial
Group, Inc. and David J. Stone entered into June 7,
1996. (2)
10.13 Employment Agreement between PennCorp Financial
Group, Inc. and Steven W. Fickes entered into June 7,
1996. (2)
10.14 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and David J. Stone
dated April 28, 1997. (1)
10.15 Amendment Number One to Employment Agreement between
PennCorp
<PAGE> 110
PAGE 110
Financial Group, Inc. and Steven W. Fickes dated
April 28, 1997. (1)
10.16 PennCorp Financial Group, Inc. 1996 Stock Award and
Stock Option Plan (2)
10.17 PennCorp Financial Group, Inc. 1996 Senior Executive
Annual Incentive Award Plan (2)
10.18 Real Estate Purchase and Sale Agreement between
Peoples Security Life Insurance Company and PennCorp
Financial Group, Inc., dated March 24, 1995. (9)
10.19 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. (7)
10.20 Conversion, Standstill and Registration Rights
Agreement between United Companies Financial
Corporation and PennCorp Financial Group, Inc. dated
as of July 24, 1996. (2)
10.21 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 Incorporated. (2)
10.22 Stockholders Agreement dated December 14, 1995
between Southwestern Financial Corporation and the
Security holders listed on the signature pages
thereof. (7)
10.23 Credit Agreement dated March 12, 1997 by and among
PennCorp Financial Group, Inc. and The Chase
Manhattan Bank, The First National Bank of Chicago,
and Nationsbank, NA., as Managing Agents, Fleet
National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc., and Dresdner Bank AG, New York Branch and
Grand Cayman Branch as Co-Agents and The Bank of New
York, as Administrative Agent.(1)
<PAGE> 111
PAGE 111
11 Computations of earnings per share. (2)
12.1 Computation of ratio of earnings to fixed charges.
(2)
12.2 Computation of ratio of EBITDA to interest expense.
(2)
21 List of subsidiaries of the Registrant. (2)
22 Consent of Independent Auditors (1)
99.1 Consent to be named director nominee of PennCorp
Financial Group, Inc. by Ronald L. Bornheutter dated
as of April 30, 1997. (1)
99.2 Consent to be named director nominee of PennCorp
Financial Group, Inc. by W. Francis Brennan dated as
of April 30, 1997. (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 of PennCorp
Financial Group, Inc.
(3) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, which 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.
(4) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. which was filed with the Securities and
Exchange Commission on October 10, 1996.
(5) Such exhibit is incorporated by reference to the Form 8-K dated
July 24, 1996 which 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
<PAGE> 112
PAGE 112
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
Financial Group, Inc.
(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 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> 113
PAGE 113
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PennCorp Financial Group, Inc.
(Registrant)
Dated: April 30, 1997 By: /s/ Scott D. Silverman
-----------------------------------
Scott D. Silverman
Senior Vice President, General
Counsel and Secretary
<PAGE> 114
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
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. (7)
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. (5)
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. (3)
3.1 Restated By-Laws of PennCorp Financial Group, Inc.
(13)
3.3 Second Restated Certificate of Incorporation of
PennCorp Financial Group, Inc. as amended. (8)
4.1 Certificate of Designation of Series C Preferred
Stock. (6)
4.2 Corrected Certificate of Designation of $3.375
Convertible Preferred Stock. (6)
4.3 Certificate of Designation of $3.50 Series II
Convertible Preferred Stock (4)
4.4 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. (12)
<PAGE> 115
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. (11)
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.
(10)
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. (2)
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. (2)
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. (6)
-----------------------------------------------------
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.6 Employment Agreement, dated as of August 19, 1990,
between PennCorp Financial Group, Inc. and William M.
McCormick. (14)
10.7 PennCorp Financial, Inc. Retirement and Savings Plan.
(14)
10.8 PennCorp Financial, Inc. Executive Officer Incentive
Plan. (14)
10.9 PennCorp Financial Group, Inc. 1992 Stock Option
Plan. (14)
10.10 PennCorp Financial Group, Inc. Senior Management
Warrant Award Program. (14)
10.11 Form of Restricted Stock Agreement By and Between
PennCorp Financial Group, Inc. and certain
participants, effective as of April 1, 1994. (10)
10.12 Employment Agreement between PennCorp Financial
Group, Inc. and David J. Stone entered into June 7,
1996. (2)
10.13 Employment Agreement between PennCorp Financial
Group, Inc. and Steven W. Fickes entered into June 7,
1996. (2)
10.14 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and David J. Stone
dated April 28, 1997. (1)
10.15 Amendment Number One to Employment Agreement between
PennCorp
<PAGE> 116
Financial Group, Inc. and Steven W. Fickes dated
April 28, 1997. (1)
10.16 PennCorp Financial Group, Inc. 1996 Stock Award and
Stock Option Plan (2)
10.17 PennCorp Financial Group, Inc. 1996 Senior Executive
Annual Incentive Award Plan (2)
10.18 Real Estate Purchase and Sale Agreement between
Peoples Security Life Insurance Company and PennCorp
Financial Group, Inc., dated March 24, 1995. (9)
10.19 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. (7)
10.20 Conversion, Standstill and Registration Rights
Agreement between United Companies Financial
Corporation and PennCorp Financial Group, Inc. dated
as of July 24, 1996. (2)
10.21 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 Incorporated. (2)
10.22 Stockholders Agreement dated December 14, 1995
between Southwestern Financial Corporation and the
Security holders listed on the signature pages
thereof. (7)
10.23 Credit Agreement dated March 12, 1997 by and among
PennCorp Financial Group, Inc. and The Chase
Manhattan Bank, The First National Bank of Chicago,
and Nationsbank, NA., as Managing Agents, Fleet
National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc., and Dresdner Bank AG, New York Branch and
Grand Cayman Branch as Co-Agents and The Bank of New
York, as Administrative Agent.(1)
<PAGE> 117
11 Computations of earnings per share. (2)
12.1 Computation of ratio of earnings to fixed charges.
(2)
12.2 Computation of ratio of EBITDA to interest expense.
(2)
21 List of subsidiaries of the Registrant. (2)
22 Consent of Independent Auditors (1)
99.1 Consent to be named director nominee of PennCorp
Financial Group, Inc. by Ronald L. Bornheutter dated
as of April 30, 1997. (1)
99.2 Consent to be named director nominee of PennCorp
Financial Group, Inc. by W. Francis Brennan dated as
of April 30, 1997. (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 of PennCorp
Financial Group, Inc.
(3) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, which 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.
(4) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. which was filed with the Securities and
Exchange Commission on October 10, 1996.
(5) Such exhibit is incorporated by reference to the Form 8-K dated
July 24, 1996 which 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
<PAGE> 118
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
Financial Group, Inc.
<PAGE> 1
EXHIBIT 10.14
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
Amendment Number One ("Amendment No. 1"), made and entered into as of the 28th
day of April, 1997 by and between PennCorp Financial Group, Inc., a Delaware
corporation (together with its successors and assigns permitted under the
Agreement (as hereinafter defined), the "Company"), and David J. Stone (the
"Executive").
WHEREAS, the Company and the Executive are parties to an Employment Agreement
made and entered into as of the 7th day of June, 1996 (the "Agreement"); and
WHEREAS, due to a clerical error, the Exercise Price Per Share for each
tranche of the option granted to the Executive as stated in Section 6 of the
Agreement is incorrect; and
WHEREAS, the Company and the Executive wish to amend the Agreement to reflect
the correct Exercise Price Per Share of each tranche of the option granted to
the Executive;
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. Section 6 of the Agreement is hereby deleted in its entirety and the
following inserted in its place instead:
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>
1 250,000 $28.875
2 103,000 $31.762
3 103,000 $34.939
4 103,000 $38.404
</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.
2. All terms used in this Amendment No. 1 shall have the same meaning as
in the Agreement.
3. Except as modified in this Amendment No. 1, all other terms and
provisions of the Agreement remain in full force and effect and
unchanged.
4. This Amendment No. 1 may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as of
the date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: By:
--------------------------------------- ---------------------------
Scott D. Silverman David J. Stone
Senior Vice President, General Counsel
and Secretary
By:
---------------------------------------
Kenneth Roman
Chairman Compensation
Committee
<PAGE> 1
EXHIBIT 10.15
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
Amendment Number One ("Amendment No. 1"), made and entered into as of the 28th
day of April, 1997 by and between PennCorp Financial Group, Inc., a Delaware
corporation (together with its successors and assigns permitted under the
Agreement (as hereinafter defined), the "Company"), and Steven W. Fickes (the
"Executive").
WHEREAS, the Company and the Executive are parties to an Employment Agreement
made and entered into as of the 7th day of June, 1996 (the "Agreement"); and
WHEREAS, due to a clerical error, the Exercise Price Per Share for each
tranche of the option granted to the Executive as stated in Section 6 of the
Agreement is incorrect; and
WHEREAS, the Company and the Executive wish to amend the Agreement to reflect
the correct Exercise Price Per Share of each tranche of the option granted to
the Executive;
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. Section 6 of the Agreement is hereby deleted in its entirety and the
following inserted in its place instead:
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>
1 250,000 28.875
2 103,000 31.762
3 103,000 34.939
4 103,000 38.404
</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.
2. All terms used in this Amendment No. 1 shall have the same meaning as
in the Agreement.
3. Except as modified in this Amendment No. 1, all other terms and
provisions of the Agreement remain in full force and effect and
unchanged.
4. This Amendment No. 1 may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as of
the date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: By:
-------------------------------------------- ------------------------
Scott D. Silverman Steven W. Fickes
Senior Vice President, General Counsel
and Secretary
By:
--------------------------------------------
Kenneth Roman
Chairman Compensation
Committee
<PAGE> 1
EXHIBIT 10.23
EXECUTION COPY
================================================================================
PENNCORP FINANCIAL GROUP, INC.
_____________________
CREDIT AGREEMENT
Dated as of March 12, 1997
_____________________
THE CHASE MANHATTAN BANK
THE FIRST NATIONAL BANK OF CHICAGO
NATIONSBANK, N.A.
as Managing Agents
FLEET NATIONAL BANK
MELLON BANK, N.A.
BANK OF MONTREAL
CIBC INC.
DRESDNER BANK AG, NEW YORK BRANCH & GRAND CAYMAN BRANCH
as Co-Agents
-and-
THE BANK OF NEW YORK
as Administrative Agent
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions and Accounting Matters . . . . . . . . . . . . . 1
1.01 Certain Defined Terms . . . . . . . . . . . . . . . . 1
1.02 Accounting Terms and Determinations. . . . . . . . . . 21
1.03 Types of Loans . . . . . . . . . . . . . . . . . . . . 22
Section 2. Commitments. . . . . . . . . . . . . . . . . . . . . . . . . 22
2.01 Loans . . . . . . . . . . . . . . . . . . . . . . . . 22
2.02 Borrowing . . . . . . . . . . . . . . . . . . . . . . 23
2.03 Non-Receipt of Funds from a Bank . . . . . . . . . . . 25
2.04 Changes of Commitments . . . . . . . . . . . . . . . . 26
2.05 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.06 Lending Offices . . . . . . . . . . . . . . . . . . . 27
2.07 Several Obligations; Remedies
Independent. . . . . . . . . . . . . . . . . . . . 27
2.08 Notes. . . . . . . . . . . . . . . . . . . . . . . . . 27
2.09 Conversions or Continuations of Loans. . . . . . . . 28
Section 3. Payments of Principal and Interest;
Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . 28
3.01 Repayments . . . . . . . . . . . . . . . . . . . . . . 28
3.02 Interest . . . . . . . . . . . . . . . . . . . . . . . 29
3.03 Prepayments. . . . . . . . . . . . . . . . . . . . . . 30
Section 4. Payments; Pro Rata Treatment; Computations;
Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.01 Payments . . . . . . . . . . . . . . . . . . . . . . . 31
4.02 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 31
4.03 Computations. . . . . . . . . . . . . . . . . . . . 32
4.04 Minimum Amounts . . . . . . . . . . . . . . . . . . . 32
4.05 Certain Notices. . . . . . . . . . . . . . . . . . . 32
4.06 Non-Receipt of Funds from the
Company . . . . . . . . . . . . . . . . . . . . . . . 33
4.07 Sharing of Payments, Etc. . . . . . . . . . . . . . . 34
4.08 No Reductions . . . . . . . . . . . . . . . . . . . . 35
4.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5. Yield Protection and Illegality. . . . . . . . . . . . . . . 36
5.01 Additional Costs, Etc. . . . . . . . . . . . . . . . . 36
5.02 Limitation on Types of Loans . . . . . . . . . . . . . 39
5.03 Illegality . . . . . . . . . . . . . . . . . . . . . . 39
5.04 Treatment of Certain Loans. . . . . . . . . . . . . 40
5.05 Compensation. . . . . . . . . . . . . . . . . . . . 40
5.06 Replacement of Bank . . . . . . . . . . . . . . . . . 41
Section 6. Conditions Precedent. . . . . . . . . . . . . . . . . . . . 41
6.01 Initial Borrowing . . . . . . . . . . . . . . . . . . 41
6.02 All Borrowings . . . . . . . . . . . . . . . . . . . . 44
Section 7. Representations and Warranties. . . . . . . . . . . . . . 44
7.01 Corporate Existence. . . . . . . . . . . . . . . . . . 45
7.02 Financial Condition. . . . . . . . . . . . . . . . . 45
7.03 Litigation. . . . . . . . . . . . . . . . . . . . . 45
7.04 No Breach . . . . . . . . . . . . . . . . . . . . . . 46
7.05 Corporate Action . . . . . . . . . . . . . . . . . . . 46
7.06 Approvals . . . . . . . . . . . . . . . . . . . . . . 46
7.07 Use of Loans . . . . . . . . . . . . . . . . . . . . . 47
7.08 ERISA. . . . . . . . . . . . . . . . . . . . . . . . 47
7.09 Taxes. . . . . . . . . . . . . . . . . . . . . . . . 47
7.10 Investment Company Act. . . . . . . . . . . . . . . 48
7.11 Public Utility Holding Company Act. . . . . . . . . 48
7.12 Environmental Matters. . . . . . . . . . . . . . . . 48
7.13 Subsidiaries, Etc. . . . . . . . . . . . . . . . . . 49
7.14 Material Agreements and Burdensome
Provisions. . . . . . . . . . . . . . . . . . . . 49
7.15 Assets. . . . . . . . . . . . . . . . . . . . . . . 49
7.16 Compliance with Applicable Law. . . . . . . . . . . 50
7.17 Liens. . . . . . . . . . . . . . . . . . . . . . . . . 50
7.18 Tax Sharing Agreements . . . . . . . . . . . . . . . . 50
7.19 No Material Adverse Effect . . . . . . . . . . . . . . 50
7.20 Additional Adverse Facts . . . . . . . . . . . . . . . 50
7.21 Accuracy of Information . . . . . . . . . . . . . . . 51
7.22 Restrictive Covenants . . . . . . . . . . . . . . . . 51
7.23 Security Interest . . . . . . . . . . . . . . . . . . 51
Section 8. Covenants of the Company . . . . . . . . . . . . . . . . . . 51
8.01 Financial Statements. . . . . . . . . . . . . . . . 51
8.02 Communication with Accountants. . . . . . . . . . . 55
8.03 Litigation. . . . . . . . . . . . . . . . . . . . . 56
8.04 Corporate Existence, Etc. . . . . . . . . . . . . . 56
8.05 Insurance. . . . . . . . . . . . . . . . . . . . . . 57
8.06 Prohibition of Fundamental Changes. . . . . . . . . 57
8.07 Limitation on Liens. . . . . . . . . . . . . . . . . 58
8.08 Indebtedness. . . . . . . . . . . . . . . . . . . . 59
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
8.09 Dividends . . . . . . . . . . . . . . . . . . . . . . 59
8.10 Leverage Ratio . . . . . . . . . . . . . . . . . . . . 60
8.11 Interest Coverage Ratio. . . . . . . . . . . . . . . 60
8.12 Minimum Total Adjusted Capital . . . . . . . . . . . . 60
8.13 Consolidated Net Worth . . . . . . . . . . . . . . . . 60
8.14 Lines of Business . . . . . . . . . . . . . . . . . . 60
8.15 Transactions with Affiliates. . . . . . . . . . . . 61
8.16 Use of Proceeds . . . . . . . . . . . . . . . . . . . 61
8.17 Tax Sharing Agreements . . . . . . . . . . . . . . . . 61
8.18 Modifications of Certain Documents. . . . . . . . . . 61
8.19 Limitation on Restrictive Covenants . . . . . . . . . 62
8.20 Surplus Notes . . . . . . . . . . . . . . . . . . . . 62
8.21 Security . . . . . . . . . . . . . . . . . . . . . . . 62
Section 9. Events of Default . . . . . . . . . . . . . . . . . . . . . 62
Section 10. The Administrative Agent . . . . . . . . . . . . . . . . . . 66
10.01 Appointment, Powers and Immunities . . . . . . . . . 66
10.02 Reliance by the Administrative Agent . . . . . . . . 66
10.03 Defaults . . . . . . . . . . . . . . . . . . . . . . 67
10.04 Rights as a Bank . . . . . . . . . . . . . . . . . . 67
10.05 Indemnification . . . . . . . . . . . . . . . . . . . 67
10.06 Non-Reliance on Administrative Agent and Other Banks 68
10.07 Failure to Act . . . . . . . . . . . . . . . . . . . 68
10.08 Resignation of the Administrative Agent . . . . . . . 68
10.09 Execution and Amendment of Loan Documents on Behalf
of the Banks . . . . . . . . . . . . . . . . . . . . 69
10.10 Consents under Loan Documents . . . . . . . . . . . . 69
Section 11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 69
11.01 Waiver . . . . . . . . . . . . . . . . . . . . . . . 69
11.02 Notices . . . . . . . . . . . . . . . . . . . . . . . 69
11.03 Expenses, Etc. . . . . . . . . . . . . . . . . . . . 70
11.04 Amendments, Etc. . . . . . . . . . . . . . . . . . . 71
11.05 Successors and Assigns . . . . . . . . . . . . . . . 72
11.06 Assignments and Participations . . . . . . . . . . . 72
11.07 Survival . . . . . . . . . . . . . . . . . . . . . . 74
11.08 Captions . . . . . . . . . . . . . . . . . . . . . . 74
11.09 Counterparts . . . . . . . . . . . . . . . . . . . . 74
11.10 Governing Law; Submission to Jurisdiction . . . . . . 74
11.11 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . 75
11.12 Confidentiality . . . . . . . . . . . . . . . . . . . 75
11.13 Amounts Payable Due Upon Request for Payment . . . . 76
11.14 Remedies of the Essence . . . . . . . . . . . . . . . 76
11.15 Rights Cumulative . . . . . . . . . . . . . . . . . . 76
11.16 LIMITATION OF LIABILITY . . . . . . . . . . . . . . . 76
11.17 Reference Banks . . . . . . . . . . . . . . . . . . . 76
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
11.18 Schedules . . . . . . . . . . . . . . . . . . . . . . 77
11.19 Severability of Provisions . . . . . . . . . . . . . 77
11.20 Entire Agreement . . . . . . . . . . . . . . . . . . 77
</TABLE>
Schedule 2.02(b)(i) - Request for Bid Rate Loans
Schedule 2.02(b)(ii) - Form of Bid Rate Loan Offer
Schedule 7.03 - Litigation
Schedule 7.04 - Consents and Approvals
Schedule 7.08(a) - ERISA Obligations, Non-Compliances and Liabilities
Schedule 7.08(b) - Unrecognized Retiree Welfare Liabilities
Schedule 7.12 - Environmental Matters
Schedule 7.13 - Subsidiaries and Investments
Schedule 7.14 - Material Agreements
Schedule 7.21 - Restrictive Covenants
Schedule 8.07 - Liens
Schedule 8.08 - Existing Indebtedness
EXHIBIT A - Form of RC Note
EXHIBIT B - Form of Bid Rate Note
EXHIBIT C - Form of Confidentiality Agreement
iv
<PAGE> 6
CREDIT AGREEMENT (the "Agreement") dated as of March 12, 1997,
among: PENNCORP FINANCIAL GROUP, INC., a corporation duly organized and
validly existing under the laws of the State of Delaware, each of the Banks
that is a signatory hereto, THE CHASE MANHATTAN BANK, THE FIRST NATIONAL BANK
OF CHICAGO and NATIONSBANK, N.A., as Managing Agents, FLEET NATIONAL BANK,
MELLON BANK, N.A., BANK OF MONTREAL, CIBC INC. and DRESDNER BANK AG, NEW YORK
BRANCH & GRAND CAYMAN BRANCH, as Co-Agents, and THE BANK OF NEW YORK, as
Administrative Agent.
WHEREAS, the Company has requested that the Banks make revolving
credit loans to it from time to time in an aggregate principal amount at any
one time outstanding not exceeding $450,000,000, to be used for general
corporate purposes, including, but not limited to, the refinancing of existing
Indebtedness (as hereinafter defined) of the Company and the acquisition, to
the extent permitted by the terms of this Agreement, of Washington National and
Southwestern (each as defined herein), and the Banks are prepared to make such
loans upon the terms hereof.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
"Adjusted Surplus" shall mean, for any Insurance Company, on any
date, the sum (determined in accordance with SAP) of the following amounts: (a)
the Surplus for such Insurance Company on such date and (b) the aggregate of
the AVR for such Insurance Company and each of its Subsidiaries on such date
and (c) the aggregate principal amount of all surplus debentures or surplus
notes included as liabilities on the Statutory Statements of such Insurance
Company, if any, as at the last day of the fiscal quarter of such Insurance
Company ending on or most recently ended prior to such date.
"Administrative Agent" shall mean BNY, as administrative agent
for the Banks under the Loan Documents, and any successor Administrative Agent
appointed pursuant to Section 10.08.
"Affiliate" shall mean, for any Person, (a) any other Person
which directly or indirectly controls, or is under common control with, or is
controlled by, such Person and, if such Person is an individual, any member of
the immediate family (including parents, spouse and children) of such
individual and any trust whose principal beneficiary is such individual or one
or more members of such immediate family and any Person who is controlled by
any such member or trust and (b) any officer or director of such Person. As
used in this
<PAGE> 7
definition, "control" (including, with its correlative meanings, "controlled
by" and "under common control with") shall mean possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise), provided that, in any event, any Person
which owns directly or indirectly 10% or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation or 10% or more of the partnership or other ownership interests of
any other Person (other than as a limited partner of such other Person) will be
deemed to control such corporation or other Person. Notwithstanding the
foregoing, the Company and its Wholly-Owned Subsidiaries shall not be deemed to
be Affiliates of each other.
"Agreement Date" shall mean the date first written above.
"Applicable Insurance Regulatory Authority" shall mean, for any
Insurance Company, the insurance commission or similar administrative authority
or agency of the State or Province, as the case may be, in which such Insurance
Company is domiciled.
"Applicable Law" shall mean, anything in Section 11.10 to the
contrary notwithstanding, (a) all applicable common law and principles of
equity and (b) all applicable provisions of all (i) constitutions, statutes,
rules, regulations and orders of governmental bodies, (ii) all authorizations,
consents, approvals, licenses, or exemptions from or of, all registrations or
filings with and all reports or notices to, any governmental unit, and (c)
orders, decisions, judgments and decrees of all courts (whether at law or in
equity or admiralty) and binding orders, decisions, judgments and decrees of
all arbitrators, provided that for the purposes of Section 8.09(ii)(B), no
order of any governmental body or order, decision, judgment or decree of any
court or arbitrator shall constitute Applicable Law unless (A) either (x) the
time to appeal, seek review or rehearing, or petition for certiorari has
expired and no timely-filed appeal or petition for review, rehearing, remand or
certiorari is pending or (y) any appeal taken or petition for certiorari filed
has been resolved by the highest court to which the order, decision, judgment
or decree could be appealed or from which review, rehearing or certiorari could
be sought and (B) in either case, such final order, decision, judgment or
decree shall not have been reversed, discharged, satisfied, stayed, annulled or
rescinded within 60 days of the entry thereof.
"Applicable Lending Office" shall mean (i) for each Bank and for
each type of Loan, the "Lending Office" of such Bank (or of an affiliate of
such Bank) designated for such type of Loan on the signature pages hereof or,
in the case of a Bank that becomes a Bank pursuant to an assignment, the office
of such Bank set forth in the notice of assignment given to the Company or (ii)
such other office of such Bank (or of an affiliate of such Bank) as such Bank
may from time to time specify to the Administrative Agent and the Company as
the office by which its Loans of such type are to be made and maintained.
<PAGE> 8
"Applicable Margin" shall mean, for any day, the percentage set
forth below based on the Tier with the highest debt rating applicable on such
day, as follows:
<TABLE>
<CAPTION>
Tier Applicable Margin
---- -----------------
<S> <C>
Tier I 0.200%
Tier II 0.225%
Tier III 0.250%
Tier IV 0.300%
Tier V 0.500%
Tier VI 0.700%;
</TABLE>
provided that if two Tiers would be applicable on any day and (i) such Tiers
are more than one Tier apart or (ii) Tier VI is one of the applicable Tiers as
a result of the Company's Indebtedness not being rated by one of D&P and S&P,
the Applicable Margin for such day shall be the percentage set forth above for
the Tier that is one Tier below the higher of such two Tiers (it being
understood that Tier I is the highest Tier).
"AVR" shall mean, for any Insurance Company, on any date, the sum
of (a) the asset valuation reserve (determined in accordance with SAP) of such
Insurance Company (which amount is shown, in the case of U.S.-domiciled
Insurance Companies, on the most recent annual Statutory Statement of each
Insurance Company at page 3, line 24.1, column 1) and (b) the interest
maintenance reserve (determined in accordance with SAP) of such Insurance
Company (which amount is shown, in the case of U.S.-domiciled Insurance
Companies, on the most recent annual Statutory Statement of each Insurance
Company at page 3, line 11.4, column 1), in each case as at the last day of the
fiscal quarter ending on or most recently ended prior to such date, or any
similar asset valuation reserve and interest maintenance reserve substituted
for AVR pursuant to Applicable Law from time to time in accordance with SAP, or
any other direct allocation of Surplus made in accordance with SAP.
"Bank" means (a) BNY, in its capacity as a Bank, and each Person
listed on the signature pages hereof following BNY and (b) any Person (other
than the Borrower or any of its Affiliates) that becomes, after the Agreement
Date, a Bank pursuant to the provisions of Section 11.06, including as a result
of the Borrower's election under Section 5.06.
"Bankruptcy Code" shall mean Title 11 of the United States Code
or any successor statutes, as such title or statutes may be amended from time
to time.
"Base Rate" shall mean, for any day, a rate per annum equal to
the higher of (a) the Federal Funds Rate in effect on such day plus 1/2 of 1%
per annum and (b) the Prime Rate in effect on such day. Each change in any
interest rate provided for herein based upon the Base Rate resulting from a
change in the Base Rate shall take effect at the time of such change in the
Base Rate.
"Base Rate Loans" shall mean RC Loans which bear interest at
rates based upon the Base Rate.
-3-
<PAGE> 9
"Best" shall mean A.M. Best & Company.
"Bid Rate Loan" shall mean a loan provided for by Section
2.01(b).
"Bid Rate Note" shall mean a promissory note in the form of
Exhibit B.
"BNY" shall mean The Bank of New York.
"Business Day" shall mean any day on which commercial banks are
not authorized or required to close in New York City, N.Y. and, if such day
relates to a borrowing of, a payment or prepayment of principal of or interest
on, or a Conversion of or into, or an Interest Period for, a Eurodollar Loan or
a notice by the Company with respect to any such borrowing, payment,
prepayment, Conversion or Interest Period, which is also a day on which
dealings in Dollar deposits are carried out in the London interbank market and
on which commercial banks are open for domestic and international business
(including dealings in Dollar deposits) in London, England.
"Capital Lease Obligations" shall mean, for any Person, the
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real and/or personal property which
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board) and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP (including such
Statement No. 13).
"Certificate of Incorporation" shall mean the Second Restated
Certificate of Incorporation of the Company.
"Change of Control", with respect to the Company, shall be deemed
to have occurred if at any time (i) Messrs. Stone and Fickes (or any
replacement for any thereof reasonably acceptable to the Majority Banks) shall
cease to be members of the Board of Directors of the Company, (ii) the majority
of the Board of Directors of the Company consists of individuals other than
Incumbent Directors or (iii) any Person, or group of Persons acting together,
shall at any time have or acquire beneficial ownership of, or the right to
exercise voting power with respect to, 20% or more of the Common Stock of the
Company outstanding at such time, provided that no change of control shall be
deemed to have occurred under this clause (iii) upon the acquisition by any
Person, or group of Persons acting together, of the beneficial ownership of, or
the right to exercise voting power with respect to, not more than 25% of the
Common Stock of the Company outstanding at such time so long as such Person or
group of Persons (A) has acquired and holds such ownership or such right in the
ordinary course of his or its business and not with the purpose or the effect
of changing or influencing the control of the Company and not in connection
with, or as a participant in, any transaction having such purpose or effect and
(B) has filed (and remains eligible to file) a Schedule 13G with the Securities
and Exchange Commission pursuant to Rule 13d-1 promulgated by the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, and
such filing remains effective.
-4-
<PAGE> 10
"Charges" shall mean all Federal, State, county, city, municipal,
local, foreign or other governmental (including, without limitation, PBGC)
taxes, levies, assessments, charges, liens, claims, encumbrances upon or
relating to (a) the Company's employees, payroll, income or gross receipts
(excluding any premium taxes on gross receipts), (b) the Company's ownership or
use of any of their respective assets, or (c) any other aspect of the Company's
business, in each case including any and all interest and penalties.
"Closing Date" shall mean the date on which the initial Loan is
made under this Agreement.
"Co-Agents" shall mean Fleet National Bank, Mellon Bank, N.A.,
Bank of Montreal, CIBC Inc. and Dresdner Bank AG, New York Branch & Grand
Cayman Branch.
"Code" shall mean the Internal Revenue Code of 1986, as amended
and in effect on the Agreement Date, and any and all final and temporary
Treasury regulations issued thereunder that are in effect on the Agreement
Date.
"Collateral" shall mean (i) the Pledged Securities, (ii) all cash
and marketable securities of the Company and (iii) all notes (including Surplus
Notes) and receivables payable to the Company and each other holder of a
Surplus Note by a Surplus Note Company, in each case, whether owned on or
acquired after the Security Date.
"Commitment" shall mean (i) the amount set opposite each Bank's
name on the signature pages hereof under the caption "Commitment" or, in the
case of a Bank that becomes a Bank pursuant to an assignment, the amount of the
assignor's Commitment assigned to such Bank (in either case as the same may be
terminated or reduced at any time or from time to time pursuant to Section
2.04, canceled pursuant to Section 9 or increased or reduced at any time or
from time to time pursuant to assignments made in accordance with Section
11.06) or (ii) as the context may require, the obligation of each Bank to make
RC Loans in an aggregate unpaid principal amount not exceeding such amount.
The original aggregate amount of the Commitments is $450,000,000.
"Common Stock" shall mean (i) the shares of common stock of the
Company issued and outstanding on the Agreement Date, having the terms and
conditions set forth in the Certificate of Incorporation, (ii) any share of
common stock of the Company issued thereafter and (iii) any security
convertible into, or exchangeable for, or any option, warrant or other right to
acquire, any share of common stock of the Company.
"Company" shall mean PennCorp Financial Group, Inc., a Delaware
corporation.
"Company Action Level Risk Based Capital" shall have the meaning
ascribed thereto in the Model Act.
"Consolidated Subsidiary" shall mean, as to any Person, each
subsidiary of such Person (whether now existing or hereafter created or
acquired) the financial statements of which shall be (or should have been)
consolidated with the financial statements of such Person in accordance with
GAAP.
-5-
<PAGE> 11
"Continue", "Continuation" and "Continued" shall refer to the
continuation pursuant to Section 2.09 of a Eurodollar Loan from one Interest
Period to the next Interest Period.
"Contract" shall mean (i) any agreement (whether bilateral or
unilateral or executory or non-executory and whether a Person entitled to
rights thereunder is so entitled directly or as a third-party beneficiary),
including an indenture, lease or license, (ii) any deed or other instrument of
conveyance, (iii) any certificate of incorporation or charter and (iv) any by-
law.
"Convert", "Conversion" and "Converted" shall refer to conversion
pursuant to Section 2.09 of Base Rate Loans into Eurodollar Loans or of
Eurodollar Loans into Base Rate Loans or Eurodollar Loans of another type,
which may be accompanied by the transfer by a Bank (at its sole discretion) of
a Loan from one Applicable Lending Office to another.
"D&P" shall mean Duff & Phelps Credit Rating Co.
"D&P Senior Debt Rating" shall mean (a) if the Company's long-
term unsecured senior debt is rated by D&P, the rating given by D&P to such
long-term unsecured senior debt and (b) if no such long-term unsecured senior
debt is rated by D&P, (i) the implied long-term unsecured senior debt rating
given by D&P to the Company or (ii) if such implied rating is not given by D&P,
the next higher rating above the rating given by D&P to the Subordinated Notes
(it being understood that AAA+ is the highest rating given by D&P).
"Default" shall mean an Event of Default or an event which with
notice or lapse of time or both would, unless cured or waived, become an Event
of Default.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
which is a member of the same controlled group of corporations (within the
meaning of section 414(b) of the Code) as the Company or is under common
control (within the meaning of section 414(c), (m) or (o) of the Code) with the
Company.
"Eurodollar Base Rate" shall mean, with respect to any Eurodollar
Loan for any Interest Period therefor, the arithmetic mean, as determined by
the Administrative Agent, of the rate per annum (rounded upwards, if necessary,
to the nearest 1/16 of 1%) quoted by each Reference Bank at approximately 11:00
a.m. London time (or as soon thereafter as practicable) on the date two
Business Days prior to the first day of such Interest Period for the offering
by such Reference Bank to leading banks in the London interbank market of
Dollar deposits having a term comparable to such Interest Period and in an
amount comparable to the principal amount of the Eurodollar Loan to be made by
such Reference Bank for such Interest Period. If any Reference Bank is not
participating in any Eurodollar Loan during any Interest Period therefor, the
Eurodollar Base Rate for such Loan for such
-6-
<PAGE> 12
Interest Period shall be determined by reference to the amount of the Loan
which such Reference Bank would have made or had outstanding had it been
participating in such Loan during such Interest Period. If any Reference Bank
does not timely furnish such information for determination of any Eurodollar
Base Rate, the Administrative Agent shall determine such Eurodollar Base Rate
on the basis of information timely furnished by the remaining Reference Banks.
"Eurodollar Loans" shall mean RC Loans the interest rates on
which are determined on the basis of rates referred to in the definition of
"Eurodollar Base Rate" in this Section 1.01.
"Eurodollar Rate" shall mean, for any Eurodollar Loan for any
Interest Period therefor, a rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to
the Eurodollar Base Rate for such Loan for such Interest Period divided by the
remainder of 1 minus the Reserve Requirement for such Loan for such Interest
Period.
"Event of Default" shall have the meaning assigned to such term
in Section 9.
"Excluded Tax" shall mean and include (a) any tax imposed upon or
measured by the net income or net revenues of a Bank or the Administrative
Agent, as the case may be, by the jurisdiction under the laws of which such
Bank or the Administrative Agent, as the case may be, is organized or doing
business, or any political subdivision thereof, and any tax imposed upon or
measured by the net income or net revenues of such Bank or the Administrative
Agent as the case may be, by the jurisdiction in which the Applicable Lending
Office of such Bank or the Administrative Agent, is located, or any political
subdivision thereof; (b) any tax (or portion thereof) that would not have been
imposed if the only connection between a Bank or the Administrative Agent, as
the case may be, and the jurisdiction imposing such tax were the activities of
such Bank or the Administrative Agent pursuant to or in respect of this
Agreement and any related documents, including, without limitation, entering
into, lending money, or extending credit pursuant to, receiving payments under,
or enforcing this Agreement or any related documents, and the activities of
such Bank or the Administrative Agent pursuant to or in respect of this
Agreement or any related documents and (c) any withholding tax collected or
enforced by any governmental authority (including, without limitation, any
withholding tax imposed under Section 1441 et seq. of the Code) empowered to
collect or enforce such tax with respect to any payments to the Banks or the
Administrative Agent, as the case may be, provided, however, that any such
withholding tax will not constitute an Excluded Tax unless (A) a reasonable
request has been made to the Bank or the Administrative Agent by the Company or
the Administrative Agent, as appropriate, to provide a Certificate of Exemption
to the Company or the Administrative Agent and (B) in the event that a
Certificate of Exemption is provided by the Bank or the Administrative Agent,
within fifteen (15) days of such request, the Company reasonably complies with
such Certificate of Exemption; and provided, further, that (i) the definition
of Excluded Tax shall not include any increase in the amount or rate of such
withholding tax resulting from any change in the applicable law or regulations
imposing such withholding tax that take effect after the Agreement Date; (ii)
such Excluded Taxes shall not include any tax payable by the Administrative
Agent or any Bank as a result of payments made by the
-7-
<PAGE> 13
Company (whether to a taxing authority or to the Administrative Agent or such
Bank) pursuant to Section 4.09; and (iii) any dispute between or among any or
all of the Company, the Administrative Agent and the Banks as to the amount of
any such Excluded Tax payable pursuant hereto shall be resolved by the Majority
Banks in their sole discretion, subject to the determination of the amount of
any such Excluded Tax by the applicable taxing authority, provided, however,
that this clause (iii) shall not apply to the definition of an Excluded Tax.
"Existing Credit Agreement" shall mean the Credit Agreement,
dated as of May 22, 1996, among the Company, the lenders signatory thereto and
BNY, as administrative agent.
"Existing Indebtedness" shall mean any Indebtedness of any
Subsidiary outstanding on the Agreement Date to the extent set forth on
Schedule 8.08.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (a) if the day for which such rate is
to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as
so published on the next succeeding Business Day, and (b) if such rate is not
so published for any day, the Federal Funds Rate for such day shall be the
average of quotations per such day on such transactions received by BNY from
three Federal funds brokers of recognized standing selected by such Bank.
"Financial Officer" means a senior financial officer having a
title of, and performing duties at a level, no less than vice president or a
chief financial officer.
"Foreign Bank" shall mean any Bank organized under the laws of a
jurisdiction other than the United States or any state or other political
subdivision thereof.
"GAAP" shall mean generally accepted accounting principles
applied on a basis consistent with those which, in accordance with the last
sentence of Section 1.02(a), are (except as otherwise expressly stated herein)
to be used in making the calculations for purposes of determining compliance
with the terms of this Agreement.
"Guarantee" shall mean a guarantee, an endorsement, a contingent
agreement to purchase or to furnish funds for the payment or maintenance of, or
otherwise to be or become contingently liable under or with respect to, the
Indebtedness, other obligations, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other distributions upon
the stock of any corporation, or an agreement to purchase, sell or lease (as
lessee or lessor) property, products, materials, supplies or services primarily
for the purpose of enabling a debtor to make payment of his, her or its
obligations or an agreement to assure a creditor against loss, and including,
without limitation, causing a bank to open a letter of credit for the benefit
of another Person, but excluding endorsements for collection or
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<PAGE> 14
deposit in the ordinary course of business. The terms "Guarantee" and
"Guaranteed" used as a verb shall have a correlative meaning.
"Income from Subsidiaries" shall mean, with respect to the
Company for any period, the sum of the amounts (determined in accordance with
GAAP for such period) of the Company's interest income from subsidiaries and
its equity in undistributed earnings of subsidiaries, as shown on the most
recent statements of earnings for such period for PennCorp Financial Group,
Inc. (Parent Company Only).
"Incumbent Director" shall mean (i) any member of the Board of
Directors of the Company as of the Agreement Date and (ii) any individual
becoming a member of the Board of Directors of the Company after the Agreement
Date whose election or nomination for election was supported by 75% of the
members of the Board of Directors of the Company who then comprised the
Incumbent Directors.
"Indebtedness" shall mean, for any Person (in each case, whether
such obligation is with full or limited recourse but excluding any obligations
constituting reinsurance): (a) Indebtedness created, issued or incurred by
such Person for borrowed money (whether by loan or the issuance and sale of
debt securities, including surplus debentures or notes whether or not
characterized as liabilities for the purposes of GAAP or SAP); (b) obligations
of such Person to pay the deferred purchase or acquisition price of property or
services if the deferred purchase price is due more than 90 days from the date
the obligation is incurred or is evidenced by a note or similar written
instrument, other than (i) amounts due to brokers relating to securities
transactions entered into in the ordinary course of business, (ii) trade
accounts payable (other than for borrowed money) arising, and accrued expenses
incurred, in the ordinary course of business so long as such trade accounts
payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered and (iii) amounts due under
long-term contracts entered into by the Company or any of its Subsidiaries in
the ordinary course of business for the outsourcing of operational services;
(c) Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
a Lien on the property of such Person, whether or not the respective
indebtedness so secured has been assumed by such Person; (d) any obligation of
such Person evidenced by a bond, debenture, note or other similar instrument;
(e) any Mandatorily Redeemable Stock of such Person owned by any Person other
than such Person or a Wholly-Owned Subsidiary of such Person that has no
Indebtedness other than the Loans and Indebtedness owing to the Company or
another such Subsidiary (the amount of such Mandatorily Redeemable Stock to be
determined for this purpose as the amount payable upon redemption of such
Mandatorily Redeemable Stock); (f) any obligation of such Person to purchase
securities or other property that arises out of or in connection with the sale
of the same or substantially similar securities or property (excluding Mortgage
Rolls having a duration of less than 35 days); (g) any non-contingent
obligation of such Person to reimburse any other Person in respect of amounts
paid under a letter of credit or other Guarantee issued by such other Person to
the extent that such reimbursement obligation remains outstanding after it
becomes non-contingent; (h) Capital Lease Obligations of such Person; (i)
Indebtedness of others Guaranteed by such Person; and (j) any obligation with
respect to an interest rate or currency swap or similar obligation obligating
such Person to make payments, whether periodically or upon the happening of a
contingency, except that
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<PAGE> 15
if any agreement relating to such obligation provides for the netting of
amounts payable by and to such Person thereunder or if any such agreement
provides for the simultaneous payment of amounts by and to such Person, then in
each such case, the amount of such obligation shall be the net amount thereof.
The amount of any Indebtedness secured by a Lien on any property or assets
owned or held by a Person which is nonrecourse to that Person shall be equal to
the lesser of (x) the outstanding principal amount of the Indebtedness or (y)
the fair market value of the property or asset encumbered, as determined by
such Person in good faith.
"Indenture" shall mean the Indenture, dated as of December 23,
1993, between the Company and BNY, as trustee, pursuant to which the
Subordinated Notes were issued.
"Information" shall mean data, certificates, reports, statements
(including financial statements), opinions of counsel delivered to the
Administrative Agent and the Banks pursuant to the provisions of the Loan
Documents, documents and other information, in each case delivered by the
Company (or, in the case of any such being delivered in writing by any third
party at the request of the Company) to the Administrative Agent or any Bank.
"Insurance Company" shall mean any Subsidiary of the Company
which is engaged primarily in the underwriting of insurance.
"Interest Coverage Ratio" shall mean, as of any date,
A + B
-----
C + D
where
A is equal to the earnings of the Insurance Companies
(determined on a consolidated basis, without duplication, in
accordance with SAP and (x) for the purposes of the covenant set
forth in Section 8.11(a), before adjustment for capital gains or
losses (as such amount is shown, in the case of U.S.-domiciled
Insurance Companies, on the most recent Statutory Statement of
each Insurance Company at page 4, line 29, column 1 or wherever
such reference is then being made) and (y) for purposes of the
covenant set forth in Section 8.11(b), after adjustment for
capital gains or losses (as such amount is shown, in the case of
U.S.-domiciled Insurance Companies, on the most recent Statutory
Statement of each Insurance Company at page 4, line 33, column 1
or wherever such reference is then being made)) for the period of
four full consecutive fiscal quarters ending on or most recently
ended prior to such date, plus, to the extent deducted from
earnings in accordance with SAP, all interest payments under the
Surplus Notes made by the Surplus Note Companies during such
period, minus, to the extent not already deducted in calculating
such earnings, the aggregate amount of taxes paid in cash by the
Insurance Companies during such period.
B is equal to the amount of Net Income of the Company
(before Interest Expense, taxes, depreciation, amortization,
Income from Subsidiaries and other
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<PAGE> 16
non-cash charges) and its non-Insurance Company Subsidiaries for
the period of four full consecutive fiscal quarters immediately
following such date, as such amount is reasonably estimated by
the Company, provided that such estimated amount shall not be
greater than 100% of the actual amount of such Net Income (before
interest, taxes, depreciation, amortization, Income from
Subsidiaries and other non-cash charges) received by the Company
and its non-Insurance Company Subsidiaries for the period of four
full consecutive fiscal quarters immediately preceding such date.
C is equal to the amount of estimated Charges payable by
the Company for the period of four full consecutive fiscal
quarters immediately following such date; and
D is equal to the amounts payable by the Company in
respect of Interest Expense for borrowed money of the Company for
the period of four full consecutive fiscal quarters immediately
following such date.
"Interest Expense" shall mean, for the Company, for any period,
the sum (determined in accordance with GAAP) of the following: (a) all
interest in respect of Indebtedness accrued or capitalized during such period
or, in the case of any future period, which would accrue or be capitalized
during such period (whether or not actually paid during such period) and (b)
the net amounts payable (or minus the net amounts receivable) under Interest
Rate Protection Agreements accrued during such period (whether or not actually
paid or received during such period). In determining Interest Expense for
purposes of the definition of Interest Coverage Ratio, interest for any period
shall be deemed to accrue on an amount of Indebtedness equal to the aggregate
Indebtedness outstanding on the last day of the immediately preceding fiscal
quarter, as if such amount were outstanding during the period for which
Interest Expense is being determined, after giving effect to any scheduled
repayments, and interest on a floating rate basis for any current or future
period shall be deemed to accrue at a rate per annum equal to the higher of (i)
the rate of interest in effect on the last day of the immediately preceding
fiscal quarter or (ii) the average rate of interest in effect during the
immediately preceding fiscal quarter.
"Interest Period" shall mean (a) with respect to any Bid Rate
Loan, a period commencing on the date of the making of such Loan and ending on
the maturity date specified therefor in accordance with Section 2.02(b) and (b)
with respect to any Eurodollar Loan, each period commencing on the date such
Eurodollar Loan is made or Converted from a Base Rate Loan or a Eurodollar Loan
of another type or the last day of the next preceding Interest Period for such
Eurodollar Loan and ending on the numerically corresponding day in the first,
second, third, or sixth calendar month thereafter, as the Company may select as
provided in Section 4.05, except that each Interest Period which commences on
the last Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar
month. Notwithstanding the foregoing: (a) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, in the case of an Interest Period for Eurodollar
Loans, if such next succeeding Business Day falls in the next succeeding
calendar month, on the next preceding Business Day) and (b) no Interest Period
for any Eurodollar
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<PAGE> 17
Loan shall have a duration of less than one month and, if the Interest Period
for any Eurodollar Loan would otherwise be a shorter period, such Loans shall
not be available hereunder.
"Interest Rate Protection Agreement" shall mean any interest rate
swap, cap or collar agreement or similar arrangement between any Person and a
financial institution providing for the transfer or mitigation of interest rate
risks either generally or under specific contingencies.
"Investment" in any Person shall mean: (a) the acquisition
(whether for cash, property, services or securities or otherwise) of any
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such Person; and (b) any deposit with, or
advance, loan or other extension of credit to, such Person or Guarantee of, or
other contingent obligation with respect to, Indebtedness or other Liability of
such Person and (without duplication) any amount committed to be advanced, lent
or extended to such Person, excluding in each case receivables arising out of
Reinsurance Transactions. The amount of any Investment held by each Insurance
Company shall be the "admitted assets" amount (determined in accordance with
SAP, and which amount is shown, in the case of U.S.-domiciled Insurance
Companies, on the most recent annual Statutory Statement of such Insurance
Company at page 2, line 25, column 4 or wherever such reference is then being
made).
"IRIS Tests" shall mean the ratios and other financial
measurements developed by the NAIC under its Insurance Regulatory Information
System, or in lieu thereof, any successor thereto, replacement thereof or
substitute implemented by the NAIC.
"Knightsbridge Companies" shall mean each of Knightsbridge
Capital Fund I, L.P., Knightsbridge Capital, L.L.C., Knightsbridge Management,
L.L.C., Knightsbridge Consultants, L.L.C. and their respective Subsidiaries.
"LaFranco Penn Life" shall mean LaFranco Penn Life Compania De
Seguros De Vida S.A.
"Leverage Ratio" shall mean, at any time, the ratio of (a) the
aggregate outstanding principal amount of all Indebtedness of the Company and
its Consolidated Subsidiaries at such time determined on a consolidated basis
to (b) the sum of (i) the aggregate outstanding principal amount of such
Indebtedness at such time and (ii) Net Worth of the Company and its
Consolidated Subsidiaries at such time.
"Liability" of any Person shall mean (in each case, whether with
full or limited recourse) any indebtedness, liability, obligation, covenant or
duty of or binding upon, or any term or condition to be observed by or binding
upon, such Person or any of its assets, of any kind, nature or description,
direct or indirect, absolute or contingent, due or not due, contractual or
tortious, liquidated or unliquidated, whether arising under any Contract,
Applicable Law, or otherwise, whether now existing or hereafter arising, and
whether for the payment of money or the performance or non-performance of any
act.
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<PAGE> 18
"Lien" shall mean, with respect to any Property or asset (or any
income or profits therefrom) of any Person (in each case whether the same is
consensual or nonconsensual or arises by Contract, operation of law, legal
process or otherwise), (i) any mortgage, lien, pledge, Charge, attachment, levy
or other security interest or encumbrance of any kind thereupon or in respect
thereof or (ii) any other arrangement, express or implied, under which the same
is subordinated, transferred, sequestered or otherwise identified so as to
subject the same to, or make the same available for, the payment or performance
of any Liability in priority to the payment of the ordinary, unsecured
creditors of such Person. For the purposes of this Agreement, a Person shall
be deemed to own subject to a Lien any asset that it has acquired or holds
subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement relating to such
asset.
"Loan Documents" shall mean (i) this Agreement and the Notes and,
from and after the execution and delivery thereof by each Securing Party, the
Security Agreements and (ii) all other agreements, documents and instruments
with, for the benefit of or in favor of the Administrative Agent or any Bank,
relating to, arising out of, delivered pursuant to or in any way connected with
(A) any agreement, document or instrument referred to in clause (i) or (B) any
of the transactions contemplated by any agreement, document or instrument
referred to in clause (i).
"Loans" shall mean RC Loans and Bid Rate Loans provided for by
Section 2.01.
"Majority Banks" shall mean Banks having at least 51% of the
aggregate amount of the Commitments; provided that, if the Commitments shall
have terminated, Majority Banks shall mean Banks holding at least 51% of the
aggregate unpaid principal amount of the Loans.
"Managing Agents" shall mean The Chase Manhattan Bank, The First
National Bank of Chicago and NationsBank, N.A.
"Mandatorily Redeemable Stock" shall mean, with respect to any
Person, any share of such Person's capital stock to the extent that it is (i)
redeemable, payable or required to be purchased or otherwise retired or
extinguished, or convertible into any Indebtedness or other Liability of such
Person prior to the Maturity Date other than solely at the option of such
Person (unless by its terms, such capital stock may not be redeemed, paid,
required to be purchased or otherwise retired or extinguished, or converted
into any Indebtedness or other Liability of such Person until after payment in
full of all amounts payable hereunder) or (ii) convertible into stock of the
type described in clause (i).
"Margin Stock" shall mean margin stock within the meaning of
Regulations U and X.
"Market Capitalization" shall mean, as of any date, without
duplication, the sum of (x) the product of the average share price of the
common stock of the Company on such date multiplied by the number of shares
(other than treasury shares) of such common stock issued and outstanding on
such date, (y) for each issuance or series of Preferred Stock (including
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<PAGE> 19
mandatorily redeemable preferred stock) of the Company, the product of the
average share price of such issuance or series of Preferred Stock multiplied by
the number of shares (other than treasury shares) of such issuance or series of
Preferred Stock outstanding on such date and (z) the aggregate book value of
all indebtedness for borrowed money of the Company and its Subsidiaries as of
such date. For purposes of this definition, the "average share price" of any
capital stock of the Company as of any date shall mean the average of the
highest and lowest trading prices of such capital stock on such date, or if
such capital stock was not traded on such date, on the most recent date on
which such capital stock was traded.
"Material Lien" shall mean any Lien on any Property of the
Company or its Subsidiaries (or any income or profits therefrom) having a book
value of $1,000,000 or more.
"Maturity Date" shall mean the date which is the fifth
anniversary of the Agreement Date.
"Maximum Permissible Rate" shall mean, with respect to interest
payable on any amount, the rate of interest on such amount that, if exceeded,
could, under Applicable Law, result in (i) civil or criminal penalties being
imposed on the payee or (ii) the payee's being unable to enforce payment of
(or, if collected, to retain) all or any part of such amount or the interest
payable thereon.
"Model Act" shall mean the Risk-Based Capital for Life and/or
Health Insurers Model Act and the rules, regulations and procedures prescribed
from time to time by the NAIC with respect thereto, in each case as amended,
modified or supplemented from time to time by the NAIC.
"Mortgage Roll" shall mean a transaction in which a financial
institution or insurance company sells a mortgage-backed security to a dealer
and simultaneously agrees to repurchase an essentially similar security at a
predetermined price on a designated future date.
"Multiemployer Plan" shall mean a multiemployer plan defined as
such in section 3(37) of ERISA to which the Company or any ERISA Affiliate is
obligated to make, or has made or has been obligated to make within the
preceding six years, contributions and which is covered by Title IV of ERISA.
"NAIC" shall mean the National Association of Insurance
Commissioners or any successor thereto.
"Net Income" shall mean, for any Person, for any period, the
consolidated net income of such Person and its Consolidated Subsidiaries,
determined in accordance with GAAP for such period.
"Net Worth" shall mean, for the Company and its Consolidated
Subsidiaries, on any date, the sum (determined on a consolidated basis without
duplication in accordance with GAAP) of the following:
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<PAGE> 20
(a) total shareholders' equity, plus
(b) to the extent not included in total shareholders'
equity, Preferred Stock other than Mandatorily Redeemable Stock,
each as reflected on the most recent consolidated balance sheet of the Company
and its Consolidated Subsidiaries prepared in accordance with GAAP, provided
that, for purposes of calculating "Net Worth", there shall be excluded from
total shareholders' equity unrealized gains and losses on securities available
for sale as reflected on such consolidated balance sheet.
"Notes" shall mean the RC Notes and Bid Rate Notes provided for
by Section 2.08.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"PennCorp Services" shall mean PennCorp Financial Services, Inc.,
a Delaware corporation and a direct Wholly-Owned Subsidiary of the Company.
"Permitted Restrictive Covenant" shall mean (i) any covenant or
restriction contained in any Loan Document, (ii) any covenant or restriction
binding upon any Person at the time such Person becomes a Subsidiary of the
Company if the same is not created in contemplation thereof, (iii) any covenant
or restriction of the type contained in Section 8.07 that is contained in any
Contract evidencing or providing for the creation of or concerning purchase
money Indebtedness; provided, however, that any such covenant or restriction
shall be limited in effect to the property in respect of which such purchase
money Indebtedness was incurred, (iv) any covenant or restriction in effect on
the Agreement Date, or (v) any covenant or restriction that (A) is not more
burdensome than an existing Permitted Restrictive Covenant that is a Permitted
Restrictive Covenant by virtue of clause (ii), (iii), (iv) or (v), (B) is
contained in a Contract constituting a renewal, extension or replacement of the
Contract in which such existing Permitted Restrictive Covenant is contained and
(C) is binding only on the Person or Persons bound by such existing Permitted
Restrictive Covenant.
"Person" shall mean any individual, sole proprietorship,
corporation, partnership, limited liability company, trust, unincorporated
organization, voluntary association, joint venture, mutual company, joint stock
company, estate, union, employee organization, government or any agency or
political subdivision thereof and, for the purpose of the definition of "ERISA
Affiliate," any trade or business.
"PIC" shall mean Professional Insurance Corporation, a Florida
corporation, which for the purposes of this Agreement shall be deemed to be a
Wholly-Owned Subsidiary of the Company.
"Plan" shall mean an employee benefit or other plan established
or maintained by the Company, any of its Subsidiaries or any ERISA Affiliate
and which is covered by Title IV of ERISA, other than a Multiemployer Plan.
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<PAGE> 21
"Pledged Securities" shall mean the capital stock of each direct
Subsidiary of the Company.
"Post-Default Rate" shall mean, for any day, a rate per annum
equal to 2% above the Base Rate.
"Preferred Stock" shall mean (a) any class of shares of the
Company ranking prior to at least one other class of capital stock of the
Company as to the payment of dividends or the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and (b) any securities convertible into, or exchangeable for, or options,
warrants or other rights to acquire any shares referred to in clause (a).
"Prime Rate" shall mean the prime commercial lending rate of The
Bank of New York, as publicly announced to be in effect from time to time. The
Prime Rate shall be adjusted automatically on the effective date of any change
in such prime commercial lending rate. The Prime Rate is not necessarily The
Bank of New York's lowest rate of interest.
"Principal Office" shall mean the principal office of the
Administrative Agent and BNY, presently located at One Wall Street, New York,
New York 10286.
"Property" shall mean property of all kinds, whether real,
personal or mixed, tangible or intangible (including, without limitation, all
rights relating thereto), and whether owned on, or acquired on or after, the
Agreement Date.
"Quarterly Dates" shall mean the first Business Day of January,
April, July and October in each year.
"RC Borrowing" shall mean a borrowing resulting in the making of
RC Loans hereunder.
"RC Loan" shall mean a revolving credit loan provided for by
Section 2.01(a).
"RC Note" shall mean a promissory note in the form of Exhibit A.
"Reference Banks" shall mean BNY, The Chase Manhattan Bank, The
First National Bank of Chicago and NationsBank, N.A. (or the Applicable Lending
Office of any of them).
"Regulations D, U and X" shall mean, respectively, Regulations D,
U and X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be amended or supplemented from time to time.
"Regulatory Change" shall mean with respect to any Bank, any law,
regulation, interpretation, directive, request or guideline (whether or not
having the force of law and whether or not the failure to comply therewith
would be unlawful), whether Federal, State or foreign, or any change therein or
in the administration or enforcement thereof, that becomes effective or is
implemented or first required or expected to be complied with after the
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<PAGE> 22
Agreement Date, whether the same is (i) the result of an enactment by a
government or any agency or political subdivision thereof, a determination of a
court or regulatory authority, or otherwise or (ii) enacted, adopted, issued or
proposed before or after the Agreement Date, including any such that imposes,
increases or modifies any tax, reserve requirement, insurance charge, special
deposit requirement, assessment or capital adequacy requirement, but excluding
any such that imposes, increases or modifies any income or franchise tax
imposed upon a Bank by any jurisdiction (or any political subdivision thereof)
in which such Bank or any of its Applicable Lending Offices is located.
"Reinsurance Agreement" shall mean any agreement, contract,
treaty or other arrangement (other than Reinsurance Transactions) whereby other
insurers assume insurance from any Insurance Company.
"Reinsurance Transactions" shall mean all transactions
consummated by any Insurance Company after the Agreement Date with any Person
other than another Insurance Company involving the reinsurance of any insurance
policy then in force, other than reinsurance entered into in the ordinary
course of business.
"Reserve Requirement" shall mean, for any Interest Period for any
Eurodollar Loan, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change against (a) any category of liabilities which
includes deposits by reference to which the Eurodollar Base Rate is to be
determined as provided in the definition of "Eurodollar Base Rate" in this
Section 1.01 or (b) any category of extensions of credit or other assets which
includes Eurodollar Loans. The Eurodollar Rate shall be adjusted automatically
on and as of the effective date of any change in the applicable Reserve
Requirement.
"S&P" shall mean Standard & Poor's Ratings Group.
"S&P Senior Debt Rating" shall mean (a) if the Company's long-
term unsecured senior debt is rated by S&P, the rating given by S&P to such
long-term unsecured senior debt and (b) if no such long-term unsecured senior
debt is rated by S&P, the implied long-term unsecured senior debt rating given
by S&P to the Company.
"Safe Drivers Agency Limited" shall mean Safe Drivers Agency
Limited, an English corporation and a Subsidiary of the Company.
"SAP" shall mean, for any Insurance Company, the statutory
accounting procedures or practices prescribed or permitted by the Applicable
Insurance Regulatory Authority applied on a basis consistent with those which,
in accordance with the last sentence of Section 1.02(a), are to be used in
making the calculations for purposes of determining compliance with certain
terms of this Agreement.
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<PAGE> 23
"Securing Parties" shall have the meaning ascribed to such term
in Section 8.19.
"Securities Act" shall mean the Securities Act of 1933, as
amended (or any successor statute), and the rules and regulations promulgated
thereunder.
"Security Agreements" shall have the meaning ascribed to such
term in Section 8.19.
"Security Date" shall have the meaning ascribed to such term in
Section 8.19.
"Security Interest" shall mean the Liens created, or purported to
be created, by the Security Agreements.
"Significant Subsidiary" shall mean, at any date: any Subsidiary
which at the time of determination (i) constitutes a "significant subsidiary"
as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and
Exchange Commission as in effect on the Agreement Date, or (ii) in the case of
any Subsidiaries which are Insurance Companies, has Adjusted Surplus (without
giving effect to any operating loss occurring within the period of 12
consecutive months ending on the date of the Company's most recent quarterly
consolidated balance sheet) which, as of the date of the Company's most recent
quarterly consolidated balance sheet, constituted at least 10% of the aggregate
Adjusted Surplus, without duplication, of all Subsidiaries which are Insurance
Companies as adjusted to eliminate equity investments in Subsidiaries which are
Insurance Companies; each as reflected on the most recent quarterly balance
sheet of the Subsidiaries which are Insurance Companies, as computed in
accordance with SAP.
"Southwestern" shall mean Southwestern Financial Corporation, a
Delaware corporation.
"Southwestern Credit Agreement" shall mean the Credit Agreement,
dated as of December 13, 1995, by and among Southwestern, the financial
institutions signatory thereto and The First National Bank of Chicago, First
Union National Bank of North Carolina, and Internationale Nederlanden (U.S.)
Capital Corporation, as arrangers.
"Southwestern Indenture" shall mean the Indenture, dated as of
December 14, 1995, between the Southwestern and U.S. Trust Company of Texas,
N.A., as trustee, pursuant to which the Southwestern Subordinated Notes were
issued.
"Southwestern Subordinated Notes" shall mean the Convertible
Subordinated Reset Notes due 2005 representing Indebtedness of Southwestern
issued pursuant to the Southwestern Indenture in the aggregate original
principal amount of $40,000,000.
"Statutory Statement" shall mean, for any Insurance Company, for
any fiscal year of such Insurance Company, the most recent annual statement
required to be filed with the Applicable Insurance Regulatory Authority and,
for any fiscal quarter of such Insurance Company, the quarterly statement
required by Section 8.01(c), which quarterly statement shall be prepared in
accordance with statutory accounting practices.
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<PAGE> 24
"Subordinated Notes" shall mean the 9.25% Senior Subordinated
Notes due 2003 representing Indebtedness of the Company issued pursuant to the
Indenture in the aggregate original principal amount of $150,000,000.
"Subsidiary" shall mean, for any Person, any other Person (i)
securities of which having ordinary voting power to elect a majority of the
board of directors (or other Persons having similar functions) (irrespective of
whether or not at the time stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) are at the time, directly or indirectly, owned or controlled
by such Person, or by one or more of its Subsidiaries, or by such Person and
one or more of its Subsidiaries, or (ii) other ownership interests of which
ordinarily constituting a majority voting interest, including any partnership
in which such Person and/or one or more Subsidiaries of such Person shall have
an interest (whether in the form of voting or participation in profits or
capital contribution) of more than 50% are, at the time, owned or controlled,
directly or indirectly, by such Person, it being understood that none of the
Knightsbridge Companies shall be a Subsidiary of the Company. "Wholly-Owned
Subsidiary" shall mean (a) any such corporation of which all of such shares,
other than directors' qualifying shares, are so owned or controlled, directly
or indirectly and (b) any such partnership in which such Person and its
Affiliates shall have 100% of such interests, provided that for the purposes of
this Agreement, PIC shall be deemed to be a Wholly-Owned Subsidiary of the
Company.
"Surplus" shall mean, for any Insurance Company, on any date, the
amount (determined in accordance with SAP) of such Insurance Company's surplus
(which amount is shown, in the case of U.S.-domiciled Insurance Companies, at
the Agreement Date on the most recent Statutory Statement of each Insurance
Company at page 3, line 37, column 1) as at the last day of the fiscal quarter
of such Insurance Company ending on or most recently ended prior to such date.
"Surplus Note" shall mean any surplus promissory note issued by
an Insurance Company to the Company or any Subsidiary of the Company none of
the ownership interests in which is either directly or indirectly owned by an
Insurance Company.
"Surplus Note Company" shall mean each payor under a Surplus
Note.
"Tax" shall mean any federal, state or foreign income, profits,
franchise, sales, use, occupation, property, excise, payroll, withholding,
employment, estimated and other taxes, levies, imposts, duties, licenses and
registration fees and charges of any nature whatsoever imposed upon a Person or
upon its assets, revenues, income or profits, including interest, penalties and
other additions to such items, but does not include any Excluded Tax.
"Tier" shall mean any of Tier I, Tier II, Tier III, Tier IV, Tier
V and Tier VI.
"Tier I" shall apply for so long as the Company's S&P Senior Debt
Rating is A- or better or the Company's D&P Senior Debt Rating is A- or better.
-19-
<PAGE> 25
"Tier II" shall apply for so long as the Company's S&P Senior
Debt Rating is BBB+ or the Company's D&P Senior Debt Rating is BBB+.
"Tier III" shall apply for so long as the Company's S&P Senior
Debt Rating is BBB or the Company's D&P Senior Debt Rating is BBB.
"Tier IV" shall apply for so long as the Company's S&P Senior
Debt Rating is BBB- or the Company's D&P Senior Debt Rating is BBB-.
"Tier V" shall apply for so long as the Company's S&P Senior Debt
Rating is BB+ or the Company's D&P Senior Debt Rating is BB+.
"Tier VI" shall apply for so long as the Company's S&P Senior
Debt Rating is less than BB+ and the Company's D&P Senior Debt Rating is less
than BB+ and for so long as the Company's Indebtedness is not rated by either
or both of S&P and D&P.
"Total Adjusted Capital" shall have the meaning ascribed thereto
in the Model Act.
"Unrecognized Retiree Welfare Liability" shall mean, with respect
to plans, agreements or arrangements sponsored or maintained by the Company or
its Affiliates that provide retiree medical benefits or other postretirement
benefits other than pensions, the amount of the transition obligation,
determined in accordance with Paragraph 110 of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS No. 106), that has not been recognized as
an expense in the consolidated financial statements of the Company and its
Affiliates.
"Washington National" shall mean Washington National Corporation,
a Delaware corporation.
1.02 Accounting Terms and Determinations.
(a) Except as otherwise expressly provided herein, all
accounting terms used herein shall be interpreted, and all financial statements
and certificates and reports as to financial matters required to be delivered
to the Banks hereunder shall (unless otherwise disclosed to the Banks in
writing at the time of delivery thereof in the manner described in subsection
(b) below) be prepared, in accordance with (in the case of the Company and its
Subsidiaries on a consolidated basis) generally accepted accounting principles
or (in the case of the Insurance Companies) statutory accounting practices, as
the case may be, applied on a basis consistent with that used in the
preparation of the latest corresponding financial statements furnished to the
Banks hereunder (which, for the first financial statements furnished pursuant
to Section 8.01, shall mean the financial statements referred to in Section
7.02). If any changes in accounting principles from those in effect on the
Agreement Date are adopted which result in a change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this
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<PAGE> 26
Agreement shall (except as otherwise expressly provided herein) be made by
application of (in the case of the Company and its Subsidiaries on a
consolidated basis) generally accepted accounting principles or (in the case of
the Insurance Companies) statutory accounting practices, as the case may be,
applied on a basis consistent with that used in the preparation of the annual
or quarterly financial statements furnished to the Banks pursuant to Section
8.01 unless (i) the Company shall have objected to determining such compliance
on such basis at the time of delivery of such financial statements or (ii) the
Majority Banks shall so object in writing within 30 days after delivery of such
financial statements, in either of which events such calculations shall be made
on a basis consistent with those used in the preparation of the latest
financial statements as to which such objection shall not have been made
(which, if objection is made in respect of the first financial statements
delivered under Section 8.01, shall mean the financial statements referred to
in Section 7.02).
(b) To the extent not otherwise provided in the annual or
quarterly financial statements delivered pursuant to Section 8.01 or in the
notes attached thereto, the Company shall deliver to the Banks at the same time
as the delivery of any annual or quarterly financial statement under Section
8.01 a description in reasonable detail of any material variation between the
application of accounting principles or practices employed in the preparation
of such statement and the application of accounting principles employed in the
preparation of the next preceding annual or quarterly financial statements as
to which no objection has been made in accordance with the last sentence of
subsection (a) above, and reasonable estimates of the difference between such
statements arising as a consequence thereof.
(c) To enable the ready and consistent determination of
compliance with the covenants set forth in Section 8, the Company will not
change the last day of its fiscal year from December 31 of each year, or the
last days of the first three fiscal quarters in each of its fiscal years from
March 31, June 30 and September 30 of each year, respectively.
1.03 Types of Loans. Loans hereunder are distinguished by
"type". The "type" of a Loan refers to whether such Loan is a Bid Rate Loan,
an RC Loan, a Base Rate Loan or a Eurodollar Loan, each of which constitutes a
"type" of Loan. Each Eurodollar Loan or Bid Rate Loan having an Interest
Period different from that of any other Eurodollar Loan or Bid Rate Loan, as
the case may be, shall also be a different "type" of Loan.
Section 2. Commitments.
2.01 Loans.
(a) RC Loans. Upon the terms and subject to the conditions of
this Agreement, each Bank severally and not jointly agrees to make, at any time
and from time to time during the period from the Agreement Date to, but not
including, the Maturity Date, one or more RC Loans to the Company in an
aggregate unpaid principal amount, together with the aggregate amount of such
Bank's pro rata shares (determined in accordance with Section 2.02(b)(vii)) of
all Bid Rate Loans then outstanding, not exceeding such Bank's Commitment at
such time. Subject to the terms and conditions of this Agreement, the RC Loans
may, at the option of the Company, be made as Base Rate or Eurodollar Loans, or
any combination
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<PAGE> 27
thereof, and the Company may Convert RC Loans of one type into RC Loans of
another type or Continue Eurodollar Loans (as provided in Section 2.09);
provided that no more than 10 Eurodollar Loans may be outstanding from each
Bank at any one time. Subject to the conditions set forth in Section 6 and to
the other terms and conditions of this Agreement, the Company may borrow and
reborrow RC Loans under Section 2.02 and prepay RC Loans under Section 3.03(a).
(b) Bid Rate Loans. Upon the terms and subject to the
conditions of this Agreement, in response to each request for Bid Rate Loans,
each Bank may, but shall not be obligated to, submit one or more offers to make
Bid Rate Loans as provided in Section 2.02(b); provided that the aggregate
unpaid principal amount of all Bid Rate Loans and all RC Loans shall not exceed
at any time the aggregate amount of the Commitments at such time.
2.02 Borrowing.
(a) RC Loans. The Company shall give the Administrative Agent
(which shall promptly notify the Banks) notice of each RC Borrowing hereunder
as provided in Section 4.05. Not later than 1:00 p.m. (New York City time) on
the date specified for the RC Borrowing hereunder, each Bank shall make
available the amount of the RC Loan to be made by it on such date to the
Administrative Agent in immediately available funds. The amount so received by
the Administrative Agent shall, subject to the terms and conditions of this
Agreement, be made available to the Company not later than 2:00 p.m. (New York
City time) on the date specified for the RC Borrowing, by depositing the same,
in immediately available funds, in an account of the Company maintained with
BNY at its Principal Office designated by the Company.
(b) Bid Rate Loans. With respect to Bid Rate Loans:
(i) (A) The Company shall give the Administrative Agent
a request (which shall be irrevocable) for Bid Rate Loans no later than
10:00 a.m. (New York time) on the Business Day prior to the requested
date for the making of the requested Bid Rate Loans.
(B) Each such request shall be submitted in the
form of Schedule 2.02(b)(i) and shall specify (1) the requested date for
the making of the requested Bid Rate Loans, (2) the aggregate principal
amount of each of the requested Bid Rate Loans and (3) the maturity
dates (each of which shall be a Business Day (x) no earlier than 7 days
and no later than 180 days after the requested date for the making of
the requested Bid Rate Loans and (y) no later than the Maturity Date) of
the requested Bid Rate Loans.
(C) Upon receipt of a timely request for Bid Rate
Loans on a Business Day, the Administrative Agent shall notify each Bank
of the contents thereof no later than 3:00 p.m. (New York time) on such
Business Day.
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<PAGE> 28
(ii) (A) Each Bank may, in its sole and absolute
discretion, submit one or more offers to make each type of requested Bid
Rate Loan in response to a request for Bid Rate Loans. Offers shall be
irrevocable (but Loans to be made pursuant thereto shall be subject to
Section 6), except with the written consent of the Administrative Agent
given on the written instructions of the Company, and may not be
modified, except to correct a manifest error that has not been
reasonably relied upon by the Company.
(B) Offers shall (1) be submitted in the form of
Schedule 2.02(b)(ii), (2) identify the Bank making such offer, (3)
identify the request for Bid Rate Loans to which such offer relates, (4)
specify the rate of interest per annum that such Bank is willing to
offer in response to such request, (5) specify the principal amount, or
the maximum and minimum (subject to the second to last sentence of
Section 2.02(b)(iii)(A)) principal amounts, of the requested types of
Bid Rate Loans such Bank is willing to make at such rates, which
amounts, singly or in the aggregate, may exceed such Bank's Commitment
at such time and (6) be submitted by telecopier, to the Administrative
Agent no later than 10:00 a.m. (New York time) on the requested date for
the making of the requested Bid Rate Loans, except that offers for
requested Bid Rate Loans submitted by the Administrative Agent (or any
Affiliate of the Administrative Agent), in its capacity as a Bank, may,
and may only, be submitted to the Company not later than one half hour
prior to the deadline applicable to the other Banks. No offer submitted
by a Bank may contain qualifying, conditional or similar language or
contain proposed terms other than those specified in this paragraph
(ii).
(C) No later than 10:30 a.m. (New York time) on
the requested date for the making of the requested Bid Rate Loans, the
Administrative Agent shall notify the Company of the contents of (i) all
offers received by the Administrative Agent on or prior to 10:00 a.m.
(New York time) on such day from the other Banks and (ii) any offer
submitted by the Administrative Agent, in its capacity as a Bank, on
such day not later than one half hour prior to the deadline applicable
to the other Banks.
(iii) (A) Not later than 11:00 a.m. (New York time) on
the requested date for the making of the requested Bid Rate Loans, the
Company shall notify the Administrative Agent (which notice shall be
irrevocable except, with respect to notices that have not yet been
reasonably relied upon by any Bank, in the case of manifest error) of
the offers, if any, of which it has received notice from the
Administrative Agent that the Company is accepting. Each offer that the
Company has not notified the Administrative Agent by such time that it
is accepting shall be deemed to have been rejected. The Company may
accept or reject any offer in whole or in part; provided that (1) the
aggregate principal amount of offers accepted with respect to each
requested type of Bid Rate Loan may not exceed the principal amount
specified for such type in the request therefor, (2) the aggregate
principal amount of any offer by any Bank accepted with respect to a
requested type of Bid Rate Loan may not exceed the maximum, nor be less
than the minimum (except in the circumstance described in the following
sentence), aggregate principal amount thereof specified in such Bank's
offer with respect to such type of Bid Rate Loan and (3) offers may be
accepted only on the basis of ascending rates of interest. If identical
offers are made by two or more Banks
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<PAGE> 29
with respect to the same type of requested Bid Rate Loans for a greater
aggregate principal amount than the amount accepted by the Company, the
principal amount accepted shall be allocated by the Administrative Agent
among such Banks as nearly as possible (but in such multiples as the
Administrative Agent may deem appropriate) in proportion to the
aggregate principal amount of such offers. Such determination by the
Administrative Agent shall be conclusive in the absence of manifest
error.
(B) Upon receipt of any notice from the Company
accepting any offer or offers, the Administrative Agent shall promptly
notify each of the Banks that also submitted offers in response to the
applicable request whether its offers were accepted or rejected and, if
any of such Bank's offers were accepted, shall identify such offers and
the respective amounts thereof accepted.
(iv) (A) Not later than 1:00 p.m. (New York time) on the
date for the making of the requested Bid Rate Loans, each Bank shall
make the amount of the Bid Rate Loan or Loans to be made by such Bank
available to the Administrative Agent, in Dollars in funds immediately
available to the Administrative Agent at its Principal Office.
(B) Unless otherwise specified in the applicable
request, Bid Rate Loans shall be disbursed by the Administrative Agent
not later than 3:00 p.m. (New York time) on the date specified therefor
and shall be applied as follows in the following order: first, to repay
Bid Rate Loans maturing or matured as of such date, second, to prepay RC
Loans with respect to which a notice of prepayment shall have been duly
given in accordance with Section 3.03 and third, by credit to an account
of the Company at the Administrative Agent's Principal Office or in such
other manner as may have been specified to and as shall be acceptable to
the Administrative Agent, in each case in Dollars in funds immediately
available to the Company or the appropriate Bank, as the case may be.
(v) If (A)(1) the Company shall, on the requested day for
the making of the requested Bid Rate Loans, fail to accept offers, in an
aggregate amount sufficient to repay a Bid Rate Loan or Loans maturing
or matured as of such day, or (2) if bids submitted in response to a
request for Bid Rate Loans are in an aggregate amount insufficient to
pay a Bid Rate Loan or Loans maturing or matured as of the requested day
for the making of such requested Bid Rate Loans and (B) Bid Rate Loans
maturing on such day shall not otherwise be repaid on such day, the
Company shall, unless it provides written notice to the Administrative
Agent to the contrary by 11:00 a.m. (New York time) on such day, be
deemed to have duly requested Base Rate Loans to be made on such date in
an amount sufficient to repay the balance of such maturing and matured
Bid Rate Loan or Loans.
(vi) The parties may, by agreement among the Company, the
Administrative Agent and each of the Banks, adopt in writing alternative
procedures (including alternative time schedules) for requesting,
offering and consummating Bid Rate Loans.
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<PAGE> 30
(vii) Each Bid Rate Loan shall be deemed a utilization of
the Commitment of each Bank in an amount equal to such Bank's pro rata
share (determined in accordance with its Commitment) of the aggregate
outstanding amounts of Bid Rate Loans, whether or not such Bank shall
have made any Bid Rate Loan, and notwithstanding the amount of any Bid
Rate Loan made by such Bank.
2.03 Non-Receipt of Funds from a Bank. Unless the
Administrative Agent shall have received notice from a Bank prior to 12:00 noon
(New York City time) on the requested date for the making of any Loans that
such Bank will not make available to the Administrative Agent the Loans
requested to be made by such Bank on such date, the Administrative Agent may
assume that such Bank has made such Loans available to the Administrative Agent
on such date in accordance with Section 2.02 and the Administrative Agent in
its sole discretion may, in reliance upon such assumption, make available to
the Company on such date a corresponding amount on behalf of such Bank. If and
to the extent such Bank shall not have so made available to the Administrative
Agent the Loans requested to be made by such Bank on such date and the
Administrative Agent shall have so made available to the Company a
corresponding amount on behalf of such Bank, such Bank shall, on demand, pay to
the Administrative Agent such corresponding amount together with interest
thereon, for each day from the date such amount shall have been so made
available by the Administrative Agent to the Company until the date such amount
shall have been repaid to the Administrative Agent, at the Federal Funds Rate
until (and including) the third Business Day after demand is made and
thereafter at the Base Rate. If such Bank does not pay such corresponding
amount promptly upon the Administrative Agent's demand therefor, the
Administrative Agent shall promptly notify the Company and the Company shall
immediately repay such corresponding amount to the Administrative Agent
together with accrued interest thereon (but without premium, penalty or
compensation payable pursuant to Section 5.05).
2.04 Changes of Commitments. The Company shall have the right
to terminate or reduce the aggregate amount of the Commitments at any time or
from time to time, provided that: (i) the Company shall give notice of each
such termination or reduction as provided in Section 4.05, (ii) each partial
reduction shall be in an aggregate principal amount of at least $3,000,000 and
in integral multiples of $1,000,000 in excess thereof and (iii) the Company may
not reduce the Commitments to an amount less than the aggregate amount of Loans
outstanding.
2.05 Fees. The Company shall pay to the Administrative Agent
for the pro rata account of each Bank, a non-refundable facility fee on the
daily amount of such Bank's Commitment (whether or not used) for each day from
the Agreement Date through the Maturity Date at a rate per annum corresponding
to the Tier with the highest debt rating applicable on such day, as set forth
below:
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<PAGE> 31
<TABLE>
<CAPTION>
Tier Facility Fee
---- ------------
<S> <C>
Tier I 0.100%
Tier II 0.125%
Tier III 0.125%
Tier IV 0.175%
Tier V 0.250%
Tier VI 0.300%;
</TABLE>
provided that if two Tiers would be applicable on any day and (i) such Tiers
are more than one Tier apart or (ii) Tier VI is one of the applicable Tiers as
a result of the Company's Indebtedness not being rated by one of D&P and S&P,
the applicable rate per annum for such day shall be the rate per annum set
forth above for the Tier that is one Tier below the higher of such two Tiers
(it being understood that Tier I is the highest Tier). Such facility fee shall
be payable in arrears on each Quarterly Date, on the Maturity Date and (without
duplication) on the date of any reduction or termination of such Commitment (to
the extent accrued and unpaid on the amount of the reduction).
2.06 Lending Offices. Each type of Loan made by each Bank shall
be made and maintained at such Bank's Applicable Lending Office for Loans of
such type.
2.07 Several Obligations; Remedies Independent. The failure of
any Bank to make the Loan to be made by it on the date specified therefor shall
not relieve any other Bank of its obligation to make its Loan on such date, but
neither any Bank nor the Administrative Agent shall be responsible for the
failure of any other Bank to make the Loan to be made by such other Bank.
Subject to the last paragraph of Section 9, the amounts payable by the Company
at any time hereunder and under the Notes to each Bank shall be a separate and
independent debt and each Bank shall be entitled to protect and enforce its
rights arising out of this Agreement and the Notes held by it, and it shall not
be necessary for any other Bank or the Administrative Agent to consent to, or
be joined as an additional party in, any proceedings for such purposes.
2.08 Notes.
(a) The RC Loans and Bid Rate Loans made by each Bank and the
Company's obligation to repay such Loans with interest in accordance with this
Agreement shall be evidenced by this Agreement, the records of such Bank and
promissory notes of the Company in substantially the form of Exhibit A and
Exhibit B hereto, respectively, each dated the Closing Date of the initial Loan
hereunder and otherwise duly completed. The type (and amount thereof),
interest rate and Interest Period (if applicable) of each RC Loan and Bid Rate
Loan, made by each Bank to the Company, and each payment made on account of the
principal thereof, shall be recorded by such Bank on its books and, prior to
any transfer of the applicable Note held by it, endorsed by such Bank on the
schedule attached to such Note or any continuation thereof, but failure to do
so shall not affect the rights or obligations of such Bank or the Company under
this Agreement. The records of each Bank shall be prima facie evidence of such
Bank's Loans and accrued interest thereon and of all payments made in respect
thereof, absent manifest error.
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<PAGE> 32
(b) No Bank shall be entitled to have its Notes subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Bank's
Commitment, Loans and Notes pursuant to Section 11.06(b) or Section 11.06(c).
2.09 Conversions or Continuations of Loans. (a) Subject to
Section 4.04, the Company shall have the right to Convert all or part of the
principal amount of RC Loans of one type into RC Loans of another type or
Continue Eurodollar Loans, at any time or from time to time, provided that (i)
the Company shall give the Administrative Agent notice of each such Conversion
or Continuation as provided in Section 4.05 and (ii) Eurodollar Loans may be
Converted only on the last day of an Interest Period therefor.
(b) Notwithstanding anything to the contrary contained in
paragraph (a) of this Section 2.09, during a Default, the Administrative Agent
may notify the Company that RC Loans may only be Converted into or Continued as
RC Loans of certain specified types and, from and including the third Business
Day following the Company's receipt of such notice, until no Default shall
continue to exist, RC Loans may not be Converted into or Continued as RC Loans
of any type other than one or more of such specified types.
(c) RC Loans may not be converted into Bid Rate Loans and Bid
Rate Loans may not be converted into RC Loans or continued from one Interest
Period to another Interest Period.
Section 3. Payments of Principal and Interest; Prepayments.
3.01 Repayments.
(a) Subject to Section 3.01(b), the RC Loans made by a Bank
outstanding on the Maturity Date shall mature and become due and payable, and
shall be repaid in full by the Company, on the Maturity Date. Such repayment
shall be in an amount equal to the amount of such Bank's RC Loans then
outstanding, together with accrued and unpaid interest thereon and all other
debts, obligations and liabilities of the Company to such Bank and, if such
Bank is BNY, to the Administrative Agent, under or arising out of the Loan
Documents and outstanding on the Maturity Date.
(b) Bid Rate Loans shall mature and become due and payable, and
shall be repaid in full by the Company, on the earlier of (i) the respective
maturity dates thereof specified in accordance with Section 2.02(b)(i)(B) and
(ii) the Maturity Date.
(c) On the date of any termination of all of the Commitments
pursuant to Section 2.04, the Company shall repay all outstanding Loans,
together with accrued and unpaid interest thereon, and all other outstanding
debts, obligations and liabilities owing by the Company to the Banks and the
Administrative Agent under or arising out of the Loan Documents.
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<PAGE> 33
3.02 Interest.
(a) RC Loans. The Company hereby promises to pay to the
Administrative Agent for account of each Bank interest on the unpaid principal
amount of each RC Loan made by such Bank for the period from and including the
funding date of such RC Loan to but excluding the date on which such RC Loan
shall be paid in full, at the following rates per annum:
(i) during any period such RC Loan is a Base Rate Loan,
the Base Rate (as in effect from time to time); and
(ii) during any period such RC Loan is a Eurodollar Loan,
for each Interest Period relating thereto, the Eurodollar Rate for such
Eurodollar Loan for such Interest Period plus the Applicable Margin.
(b) Bid Rate Loans. Each Bid Rate Loan shall bear interest on
the outstanding principal amount thereof at the rate determined in accordance
with Section 2.02(b).
(c) Notwithstanding the foregoing, the Company hereby promises
to pay to the Administrative Agent, for the account of each Bank, interest to
the maximum extent permitted by Applicable Law at the applicable Post-Default
Rate on any payment of principal of or interest on any Loan or Note or of any
other amount owing under this Agreement, that shall not be paid in full when
due (whether at stated maturity, by reason of notice of prepayment or
acceleration or otherwise), (i) in the case of any such amounts whose due date
is specified in the document providing for the payment of such amounts, for the
period from and including the due date thereof to but excluding the date on
which the same is paid in full (whether before or after judgment) and (ii) in
all other cases, for the period from and including the third Business Day
following the Company's receipt of notice from the Administrative Agent that
any such amounts are due and payable, to but excluding the date on which the
same is paid in full (whether before or after judgment).
(d) Accrued interest on each Loan shall be payable (i) in the
case of a Base Rate Loan, quarterly in arrears on the Quarterly Dates, (ii) in
the case of a Eurodollar Loan, on the last day of each Interest Period therefor
and, if such Interest Period is longer than three months, at three-month
intervals following the first day of such Interest Period, (iii) in the case of
a Bid Rate Loan on the last day of such Loan's Interest Period, and, if such
Interest Period is longer than 90 days, on the date which is 90 days after the
first day of such Interest Period and (iv) in the case of any Loan, when such
Loan shall be due (whether at maturity, by reason of notice of prepayment or
acceleration or otherwise) or Converted to a Loan of another type (but only on
the principal amount so due or Converted), except that interest payable at the
Post-Default Rate shall be payable from time to time on demand. Promptly after
the determination of any interest rate provided for herein or any change
therein, the Administrative Agent shall give notice thereof to the Banks to
which such interest is payable and to the Company, provided that the failure by
the Administrative Agent to give such notice shall not affect the Company's
obligations hereunder.
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<PAGE> 34
(e) Nothing contained in the Loan Documents shall require the
Company at any time to pay interest at a rate exceeding the Maximum Permissible
Rate. If interest payable by the Company on any date would exceed the Maximum
Permissible Rate, such interest payment shall automatically be reduced to such
maximum permitted amount (the "Maximum Rate"). Notwithstanding the foregoing,
if for any period of time interest payable pursuant to the Loan Documents or
any letter, agreement or other document providing for the payment of fees or
other amounts by the Company to the Administrative Agent or the Banks in
connection with the Loan Documents, is calculated at the Maximum Rate rather
than the applicable rate under this Agreement, and thereafter such applicable
rate becomes less than the Maximum Rate, the rate of interest payable on such
amounts shall remain at the Maximum Rate until each Bank shall have received
the amount of interest which such Bank would have received during such period
had the rate of interest not been limited to the Maximum Rate during such
period. Any interest actually received for any period in excess of such
maximum amount permitted for such period shall be deemed to have been applied
as a prepayment of the Loans.
3.03 Prepayments.
(a) Optional Prepayments. Subject to Sections 4.04 and 4.05,
upon notice to the Administrative Agent, the Company may, at any time and from
time to time, prepay the RC Loans in whole or in part. Amounts to be prepaid
pursuant to this Section 3.03(a) shall irrevocably be due and payable on the
date specified in the applicable notice of prepayment and shall be applied to
RC Loans in accordance with the instructions of the Company set forth in the
applicable notice of prepayment. Bid Rate Loans may not be prepaid in whole or
in part.
(b) Payments Required Upon Prepayments. Each prepayment of RC
Loans made pursuant to this Section 3.03 shall be without premium or penalty,
except that (i) any prepayment of Eurodollar Loans shall be subject to the
provisions of Section 5.05 and (ii) accrued but unpaid interest shall be
payable on the amount prepaid in accordance with Section 3.02.
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
4.01 Payments.
(a) Except to the extent otherwise provided herein, all
payments of principal, interest and fees to be made by the Company under this
Agreement and the Notes and any other amounts payable by the Company to the
Administrative Agent and the Banks under the Loan Documents shall be made in
Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at account number 803-3297-689
maintained by the Administrative Agent with BNY at its Principal Office, or at
such other address as the Administrative Agent may designate by notice to the
Company not later than 1:00 p.m. (New York City time) on the date on which such
payment shall become due (each such payment made after such time on such due
date to be deemed to have been made on the next succeeding Business Day).
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<PAGE> 35
(b) Any Bank for whose account any such payment is to be made,
may (but shall not be obligated to) debit the amount of any such payment which
is not made by the Company by such time to any ordinary deposit account of the
Company with such Bank (with notice to the Company) with the Company remaining
liable for any deficiency, and the Company hereby expressly so authorizes the
Administrative Agent and each Bank.
(c) The Company shall, at the time of making each payment under
this Agreement or any Note for the account of any Bank, specify to the
Administrative Agent (which will so notify such Bank) the Loans or other
amounts payable by the Company hereunder to which such payment is to be applied
(and in the event that the Company fails to so specify, or if an Event of
Default has occurred and is continuing, such Bank may apply such payment
received by it from the Administrative Agent to such amounts then due and owing
to such Bank hereunder as such Bank may determine), but in all cases such
payments shall be applied to avoid, to the extent reasonably possible, charges
under Section 5.05.
(d) Except as otherwise specifically provided in this
Agreement, each payment received by the Administrative Agent under this
Agreement, any Note or any other Loan Document for account of any Bank shall be
paid by the Administrative Agent promptly to such Bank, in immediately
available funds.
(e) If the due date of any payment under this Agreement, any
Note or any other Loan Document would otherwise fall on a day which is not a
Business Day, such date shall be the next succeeding Business Day unless, in
the case of a payment of the principal of Eurodollar Loans, such extension
would cause payment to be made in the next calendar month, in which case such
date shall be the next preceding Business Day. If the date on which any
payment hereunder, under any Note or under any of the other Loan Documents is
due is extended (whether by operation of any Loan Document or any Note,
Applicable Law or otherwise) such payment shall bear interest for such extended
time at the rate of interest applicable hereunder.
4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein: (a) each borrowing from the Banks under Section 2.01(a) shall
be made from the Banks, each payment of facility fees under Section 2.05 shall
be made for account of the Banks, and each termination or reduction of the
amount of the Commitments under Section 2.04 shall be applied to the
Commitments of the Banks, pro rata according to the amounts of their respective
Commitments; (b) the making, Conversion and Continuation of RC Loans of a
particular type (other than Conversions provided for by Section 5.04) shall be
made pro rata among the Banks according to the amounts of their respective
Commitments and the then current Interest Period for each RC Loan of such type
shall be coterminous; (c) each payment or prepayment of principal of RC Loans
by the Company shall be made for account of the Banks pro rata in accordance
with the respective unpaid principal amounts of the RC Loans held by the Banks;
and (d) each payment of interest on RC Loans by the Company shall be made for
account of the Banks pro rata in accordance with the amounts of interest due
and payable to the respective Banks.
4.03 Computations. Interest on Base Rate Loans calculated on
the basis of the Federal Funds Rate, interest on Eurodollar Loans, interest on
Bid Rate Loans, and fees set
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forth herein shall be computed on the basis of a year of 360 days and actual
days elapsed (including the first day but excluding the last day) occurring in
the period for which payable and interest on Base Rate Loans calculated on the
basis of the Prime Rate shall be computed on the basis of a year of 365 or 366
days, as the case may be, and actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
4.04 Minimum Amounts. Except for borrowings, Conversions,
Continuations or prepayments made pursuant to Sections 5.04, each borrowing,
Conversion, Continuation and prepayment of principal of RC Loans shall be in an
aggregate principal amount of at least $3,000,000 (or in the case of a
prepayment of principal of RC Loans, any lesser amount equal to the amount of
RC Loans or the amount of RC Loans of a specified type outstanding or, in the
case of each borrowing, in any lesser amount equal to the unused Commitments)
and in integral multiples of $1,000,000 in excess thereof (Conversions or
prepayments of or into RC Loans of different types or, in the case of
Eurodollar Loans, having different Interest Periods at the same time hereunder
to be deemed separate borrowings, Conversions and prepayments for purposes of
the foregoing, one for each type or Interest Period). Anything in this
Agreement to the contrary notwithstanding, the aggregate principal amount of
Eurodollar Loans of each type having the same Interest Period shall be greater
than or equal to the lesser of (i) $3,000,000 and (ii) the aggregate amount of
the Commitments available at such time and, if any Eurodollar Loans would
otherwise be in a lesser principal amount for any period, such Eurodollar Loans
shall be Converted to Base Rate Loans at the beginning of such period.
4.05 Certain Notices. Notices by the Company to the
Administrative Agent of terminations or reductions of the Commitments, of
borrowings, Conversions, Continuations and prepayments of RC Loans, and of the
type of RC Loans and of the duration of Interest Periods shall be irrevocable
and shall be effective only if received by the Administrative Agent not later
than noon New York time on the number of Business Days specified below prior to
the date of the relevant termination, reduction, borrowing, Conversion,
Continuation or prepayment or prior to the first day of the relevant Interest
Period:
<TABLE>
<CAPTION>
Number of Business
Days' Prior Notice
------------------
<S> <C>
Termination or reduction
of the Commitments 3
Borrowing or prepayment of,
or Conversions into,
Base Rate Loans 1
Borrowing or prepayment of,
Conversions into, Continuations
of, or duration of Interest
Period for, Eurodollar Loans 3
</TABLE>
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<PAGE> 37
Each such notice of termination or reduction shall specify the amount of the
Commitments to be terminated or reduced. Each such notice of borrowing,
Conversion, Continuation or prepayment shall specify the RC Loans to be
borrowed, Converted, Continued or prepaid and the amount (subject to Section
4.04) and type of each RC Loan to be borrowed, Converted, Continued or prepaid
and the date of borrowing, Conversion, Continuation or prepayment (which shall
be a Business Day). Each such notice of the duration of an Interest Period
shall specify the RC Loans to which such Interest Period is to relate. The
Administrative Agent shall promptly notify the Banks of the contents of each
such notice. In the event that the Company fails to select the type of RC
Loan, or the duration of any Interest Period, for any Eurodollar Loan within
the time period and otherwise as provided in this Section 4.05, such RC Loan
(if outstanding as a Eurodollar Loan) will be automatically Converted into a
Base Rate Loan on the last day of the then current Interest Period for such RC
Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then
outstanding) will be made as, a Base Rate Loan.
4.06 Non-Receipt of Funds from the Company. Unless the
Administrative Agent shall have received notice from the Company prior to the
date on which any payment is due to the Banks under the Loan Documents that the
Company will not make such payment in full, the Administrative Agent may assume
that the Company has made such payment in full to the Administrative Agent on
such date and the Administrative Agent in its sole discretion may, in reliance
upon such assumption, cause to be distributed to each Bank on such due date a
corresponding amount with respect to the amount then due such Bank. If and to
the extent the Company shall not have so made such payment in full to the
Administrative Agent and the Administrative Agent shall have so distributed to
any Bank a corresponding amount, such Bank shall, on demand, repay to the
Administrative Agent the amount so distributed together with interest thereon,
for each day from the date such amount is distributed to such Bank until the
date such Bank repays such amount to the Administrative Agent, at the Federal
Funds Rate until (and including) the third Business Day after demand is made
and thereafter at the Base Rate.
4.07 Sharing of Payments, Etc.
(a) The Administrative Agent and each Bank are hereby authorized
by the Company, at any time and from time to time, without notice, (a) during
any Event of Default, to set-off against, and to appropriate and apply to the
payment of, the Liabilities of the Company under the Loan Documents (whether
owing to such Person or to any other Person that is the Administrative Agent or
a Bank and whether matured or unmatured, fixed or contingent or liquidated or
unliquidated) any and all Liabilities owing by such Person or any of its
Affiliates to the Company (whether payable in Dollars or any other currency,
whether matured or unmatured and, in the case of Liabilities that are deposits,
whether general or special, time or demand and however evidenced and whether
maintained at a branch or office located within or without the United States),
with the Company remaining liable for any deficiency and (b) during any Event
of Default, to suspend the payment and performance of such Liabilities owing by
such Person or its Affiliates and, in the case of Liabilities that are
deposits, to return as unpaid for insufficient funds any and all checks and
other items drawn against such deposits.
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<PAGE> 38
(b) (i) Each Bank agrees that, if, for any reason, including as
a result of (A) the exercise of any right of counterclaim, set-off, banker's
lien or similar right, (B) its claim in any applicable bankruptcy, insolvency
or other similar law being deemed secured by a debt owed by it to the Company,
including but not limited to a claim deemed secured under Section 506 of the
Bankruptcy Code or under any similar section of any other law, domestic or
foreign, relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, or (C) the allocation of payments by the
Administrative Agent or the Company in a manner contrary to the provisions of
Section 4.02, such Bank shall receive payment of a proportion of the aggregate
amount due and payable to it hereunder as principal, interest or facility fees
that is greater than the proportion received by any other Bank in respect of
the aggregate of such amounts due and payable to such other Bank hereunder,
then the Bank receiving such proportionately greater payment shall purchase
participations (which it shall be deemed to have done simultaneously upon the
receipt of such payment) in the rights of the other Banks hereunder so that all
such recoveries with respect to such amounts due and payable hereunder (net of
costs of collection) shall be pro rata; provided, however, that no such
participation shall be deemed to have been so purchased in any Bid Rate Loans
of any of the other Banks; and provided further that if all or part of such
proportionately greater payment received by the purchasing Bank is thereafter
recovered by or on behalf of the Company from such Bank, such purchases shall
be rescinded and the purchase prices paid for such participations shall be
returned to such Bank to the extent of such recovery, but without interest
(unless the purchasing Bank is required to pay interest on the amount recovered
to the Person recovering such amount, in which case the selling Bank shall be
required to pay interest at a like rate).
(c) The Company expressly consents to the foregoing arrangements
and agrees that any holder of a participation in any rights hereunder so
purchased or acquired pursuant to Section 4.07(b) shall, with respect to such
participation, be entitled to all of the rights of a Bank under Sections
4.07(a), 5.01 and 11.03, and the definition of "Applicable Margin" in Section
1.01 and may exercise all rights of set-off, bankers' lien, counterclaim or
similar rights with respect to such participation as fully as if such Bank were
a direct holder of Loans in the amount of such participation.
(d) Nothing contained herein shall require any Bank to exercise
any such right or shall affect the right of any Bank to exercise, and retain
the benefits of exercising, any such right with respect to any other
Indebtedness or obligation of the Company.
(e) If, under any applicable bankruptcy, insolvency or other
similar law, any Bank receives a secured claim in lieu of a set-off to which
this Section 4.07 applies, such Bank shall, to the extent practicable, exercise
its rights in respect of such secured claim in a manner consistent with the
rights of the Banks entitled under this Section 4.07 to share in the benefits
of any recovery on such secured claim.
4.08 No Reductions. All payments due to the Administrative
Agent or any Bank under the Loan Documents, and all other terms, conditions,
covenants and agreements to be observed and performed by the Company
thereunder, shall be made, observed or performed by the Company without any
reduction or deduction whatsoever, including any reduction or deduction for any
set-off, recoupment, counterclaim (whether sounding in tort, contract or
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<PAGE> 39
otherwise) or Tax, except for any withholding or deduction for Taxes required
to be withheld or deducted under Applicable Law.
4.09 Taxes. (a) Except as otherwise provided herein, if any
Tax is required to be withheld or deducted from, or is otherwise payable by the
Company in connection with, any payment due to the Administrative Agent or any
Bank under the Loan Documents, the Company (i) shall, if required, withhold or
deduct the amount of such Tax from such payment and, in any case, pay such Tax
to the appropriate taxing authority in accordance with Applicable Law and (ii)
shall pay to the Administrative Agent or such Bank, as applicable, (A) such
additional amounts as may be necessary so that the net amount received by the
Administrative Agent or such Bank with respect to such payment, after
withholding or deducting all Taxes required to be withheld or deducted, is
equal to the full amount payable under the Loan Documents and (B) an amount
equal to all Taxes payable by the Administrative Agent or such Bank as a result
of payments made by the Company (whether to a taxing authority or to the
Administrative Agent or such Bank) pursuant to this Section 4.09. If any Tax
is withheld or deducted from, or is otherwise payable by the Company in
connection with, any payment due to the Administrative Agent or any Bank under
the Loan Documents, the Company shall, within 30 days after the date of such
payment, furnish to the Administrative Agent or such Bank, as applicable, the
original or a certified copy of a receipt for such Tax from the applicable
taxing authority.
(b) Each Foreign Bank as to which payments to be made under this
Agreement or under the Notes are exempt from United States withholding tax or
are subject to United States withholding tax at a reduced rate under an
applicable statute or tax treaty shall, no later than thirty (30) days after
executing this Agreement, provide to the Company and the Administrative Agent
(1) a properly completed and executed Internal Revenue Service Form 4224 or
Form 1001 or other applicable form, certificate or document prescribed by the
Internal Revenue Service of the United States certifying as to such Foreign
Bank's entitlement to such exemption or reduced withholding rate with respect
to payments to be made to such Foreign Bank under this Agreement and under the
Notes (a "Certificate of Exemption") or (2) a letter from any such Foreign Bank
stating that it is not entitled to any such exemption or reduced rate of
withholding (a "Letter of Non-Exemption"). Prior to becoming a Bank under this
Agreement and within thirty (30) days after a reasonable written request of the
Company or Administrative Agent from time to time thereafter, each Foreign Bank
that becomes a Bank under this Agreement after the Agreement Date shall provide
a Certificate of Exemption or Letter of Non-Exemption to the Company and
Administrative Agent.
(c) If a Foreign Bank is entitled to an exemption from United
States withholding tax with respect to payments to be made to such Foreign Bank
under this Agreement or the Notes (or to a reduced rate of withholding) and
does not provide a Certificate of Exemption to the Company and Administrative
Agent within the time period set forth in the preceding paragraph, then the
Company shall withhold Taxes from payments to such Foreign Bank at the
applicable statutory rates and, notwithstanding any provisions to the contrary
in Section 4.09(a), shall not be required to pay any additional amounts as a
result of such withholding; provided, however, that all such withholding shall
cease upon delivery by such Foreign Bank of a Certificate of Exemption to the
Company and the Administrative Agent.
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<PAGE> 40
(d) Before making any demand for an additional payment under
Section 4.09(a), each Bank shall use reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to designate a different
Applicable Lending Office if such designation would avoid the need for or
reduce the amount of any payments that the Company must make under Section
4.09(a) and would not, in the sole opinion of such Bank, be disadvantageous to
such Bank, except that such Bank shall have no obligation to designate an
Applicable Lending Office located in the United States of America; provided,
however, that if such Bank shall not designate a different lending office as
provided above, the Company may, on ten (10) Business Days' prior written
notice to the Administrative Agent and such Bank, cause such Bank to (and such
Bank shall, upon payment in full by the assignee Bank of all amounts
outstanding in respect of such Bank's Loan, including accrued interest thereon,
all amounts payable pursuant to Section 5.05 and all other amounts due and
payable to such Bank hereunder) assign (against payment of principal, accrued
and unpaid interest and other amounts due to such Bank) all of its rights and
obligations under this Agreement and related documents to a bank or other
entity selected by the Company and approved by the Administrative Agent, which
approval shall not be unreasonably withheld.
Section 5. Yield Protection and Illegality.
5.01 Additional Costs, Etc.
(a) The Company shall pay directly to the Administrative Agent
for the account of each Bank from time to time such amounts as such Bank may
determine in good faith to be necessary to compensate it for any costs which
such Bank determines are attributable to its making or maintaining any
Eurodollar Loans or Bid Rate Loans or its obligation to make any Eurodollar
Loans or Bid Rate Loans hereunder, or any reduction in any amount receivable by
such Bank hereunder in respect of any of such Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"Additional Costs"), resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts payable
to such Bank under this Agreement or its Notes in respect of any of such
Loans (other than taxes imposed on or measured by the overall net income
of such Bank or of its Applicable Lending Office for any of such Loans
by the jurisdiction in which such Bank has its principal office or such
Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements (other than the Reserve Requirement utilized in the
determination of the Eurodollar Rate for such Loan) relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, such Bank (including any of such Loans or any deposits
referred to in the definition of "Eurodollar Base Rate" in Section
1.01), or any commitment of such Bank (including the Commitment of such
Bank hereunder); or
(iii) imposes any other condition affecting this
Agreement or either of its Notes (or any of such extensions of credit or
liabilities) or its Commitment.
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<PAGE> 41
If any Bank requests compensation from the Company under this Section 5.01(a),
the Company may, by notice to the Administrative Agent (who shall promptly send
a copy of such notice to such Bank), suspend the obligation of such Bank to
make or Continue Loans of the type with respect to which such compensation is
requested, or to Convert RC Loans of any other type into RC Loans of such type,
until the Regulatory Change giving rise to such request ceases to be in effect
(in which case the provisions of Section 5.04 shall be applicable).
(b) Without limiting the effect of the provisions of paragraph
(a) of this Section 5.01, in the event that, by reason of any Regulatory
Change, any Bank either (i) incurs Additional Costs based on or measured by the
excess above a specified level of the amount of a category of deposits or other
liabilities of such Bank which includes deposits by reference to which the
interest rate on Eurodollar Loans is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Bank which
includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount
of such a category of liabilities or assets which it may hold, then, if such
Bank so elects by notice to the Company (with a copy to the Administrative
Agent), the obligation of such Bank to make or Continue, or to Convert RC Loans
of any other type into, RC Loans of such type hereunder shall be suspended
until such Regulatory Change ceases to be in effect (in which case the
provisions of Section 5.04 shall be applicable).
(c) A Bank's Bid Rate Loans of any type shall bear interest at
the Base Rate commencing, in the case of clause (i) below, on the last day such
Bank may lawfully continue to maintain Bid Rate Loans of that type, and in the
case of clause (ii) below, on the day determined by such Bank to be the last
Business Day before the effective date of the applicable restriction, if:
(i) at any time such Bank determines in good faith that any
Regulatory Change enacted after the date of the making of such Bid Rate
Loans makes it unlawful for such Bank or its Applicable Lending Office
to maintain any Bid Rate Loan of that type, or to comply with its
obligations hereunder in respect thereof; or
(ii) such Bank determines in good faith that, by reason of any
Regulatory Change enacted after the date of the making of such Bid Rate
Loans, such Bank or its Applicable Lending Office is restricted,
directly or indirectly, in the amount that it may hold of (A) a category
of liabilities that includes deposits by reference to which, or on the
basis of which, the interest rate applicable to Bid Rate Loans of that
type is directly or indirectly determined, or (B) the category of assets
that includes Bid Rate Loans of that type.
Each Bank shall notify the Company and the Administrative Agent of the
existence or occurrence or any condition or circumstance specified in clauses
(c)(i) and (c)(ii) above applicable to such Bank's Bid Rate Loans as promptly
as practicable, but in any event not later than the earlier of (i) the date
that is 60 days after such Bank obtains actual knowledge of such condition or
circumstance and (ii) the date that is 10 days after such Bank decides that its
Bid Rate Loans shall bear interest at the Base Rate as provided in this Section
5.01(c) in connection with such condition or circumstance; provided that such
Bank's Bid Rate Loans
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shall bear interest at the Base Rate as provided in this Section 5.01(c)
notwithstanding the failure of such Bank to give any such notice.
(d) Without limiting the effect of the foregoing provisions of
this Section 5.01 (but without duplication), the Company shall pay directly to
the Administrative Agent for the account of each Bank from time to time on
request such amounts as such Bank may determine to be necessary to compensate
such Bank for any costs which it determines are attributable to the maintenance
by such Bank (or any Applicable Lending Office), pursuant to any law or
regulation or any interpretation, directive or guideline (whether or not having
the force of law and whether or not the failure to comply therewith would be
unlawful) of any court or governmental or monetary authority following any
Regulatory Change, of capital in respect of its Commitment or Loans (such
compensation to include, without limitation, an amount equal to any reduction
of the rate of return on assets or equity of such Bank (or any Applicable
Lending Office) to a level below that which such Bank (or any Applicable
Lending Office) could have achieved but for such law, regulation,
interpretation, directive or guideline).
(e) Each Bank will notify the Company through the
Administrative Agent of any event occurring after the Agreement Date of this
Agreement that will entitle such Bank to compensation under paragraph (a) or
(d) of this Section 5.01 as promptly as practicable, but in any event within 60
days after such Bank obtains actual knowledge thereof; provided, however, that
if any Bank fails to give such notice within 60 days after it obtains actual
knowledge of such an event, such Bank shall, with respect to compensation
payable pursuant to this Section 5.01 in respect of any costs resulting from
such event, only be entitled to payment under this Section 5.01 for costs
incurred from and after the date 60 days prior to the date that such Bank does
give such notice; and provided, further, that each Bank will designate a
different Applicable Lending Office for the Loans of such Bank affected by such
event if such designation will avoid the need for, or reduce the amount of,
such compensation, will be consistent with the internal policy of such Bank and
applicable legal and regulatory restrictions and will not, in the sole opinion
of such Bank, be disadvantageous to such Bank, except that such Bank shall have
no obligation to designate an Applicable Lending Office located in the United
States of America. Each Bank will furnish to the Company through the
Administrative Agent a certificate, signed by an officer with knowledge of and
responsibility for such matters, and setting out in reasonable detail the
basis, calculation and amount of each request by such Bank for compensation
under paragraph (a) or (d) of this Section 5.01. Determinations and
allocations by any Bank for purposes of this Section 5.01 of the effect of any
Regulatory Change pursuant to paragraph (a), (b), (c) or (d) of this Section
5.01, on its costs or rate of return of maintaining Loans or its obligation to
make Loans, or on amounts receivable by it in respect of Loans, and of the
amounts required to compensate such Bank under this Section 5.01, shall be
conclusive, provided that such determinations and allocations are made on a
reasonable basis.
(f) If circumstances set forth in this Section 5.01 subsequently
change so that any affected Bank shall determine that it is no longer so
affected, such Bank will promptly notify the Company and the Administrative
Agent, upon receipt of such notice, the obligations of
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such Bank to make or Continue Eurodollar Loans as, or to Convert RC Loans of
any type into, Eurodollar Loans shall be reinstated.
5.02 Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Base Rate for any Interest Period:
(a) the Administrative Agent determines in good faith, which
determination shall be conclusive, that quotations of interest rates for
the relevant deposits referred to in the definition of "Eurodollar Base
Rate" in Section 1.01 are not being provided in the relevant amounts or
for the relevant maturities for purposes of determining rates of
interest for Eurodollar Loans as provided herein; or
(b) the Majority Banks determine in good faith, which
determination shall be conclusive, and notify the Administrative Agent
that the relevant rates of interest referred to in the definition of
"Eurodollar Base Rate" in Section 1.01 upon the basis of which the rate
of interest for Eurodollar Loans for such Interest Period is to be
determined are not likely adequately to cover the cost to such Banks of
making or maintaining such type of RC Loans for such Interest Period;
then the Administrative Agent shall give the Company and each Bank prompt
notice thereof, and so long as such condition remains in effect, the Banks
shall be under no obligation to make additional RC Loans of such type, to
Continue RC Loans of such type or to Convert RC Loans of any other type into RC
Loans of such type and the Company shall, on the last day(s) of the then
current Interest Period(s) for the outstanding RC Loans of such type, either
prepay such RC Loans or Convert such RC Loans into another type of RC Loan in
accordance with Section 2.09.
5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to honor its obligation to make or maintain Eurodollar Loans
hereunder, then such Bank shall promptly notify the Company thereof (with a
copy to the Administrative Agent) and such Bank's obligation to make or
Continue, or to Convert RC Loans of any other type into, Eurodollar Loans shall
be suspended until such time as such Bank may again make and maintain
Eurodollar Loans (in which case the provisions of Section 5.04 shall be
applicable).
5.04 Treatment of Certain Loans. If the obligation of any Bank
to make or Continue, or to Convert RC Loans of any other type into, Eurodollar
Loans shall be suspended pursuant to Section 5.01 or 5.03, such Bank's
Eurodollar Loans shall be automatically Converted into Base Rate Loans on the
last day(s) of the then current Interest Period(s) for such Eurodollar Loans
(or, in the case of a Conversion required by Section 5.01(b) or 5.03, on such
earlier date as such Bank may specify to the Company with a copy to the
Administrative Agent), provided that if any Conversion is made at the request
of a Bank that is not otherwise required pursuant to the terms of this
Agreement and that is not (as such Bank shall, in its sole discretion,
determine) necessary as the result of any Regulatory Change, no prepayment fee
or premium shall be payable hereunder and no compensation pursuant to Section
5.05 shall be payable, and, unless and until such Bank
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<PAGE> 44
gives notice as provided below that the circumstances specified in Section 5.01
or 5.03 which gave rise to such Conversion no longer exist:
(a) to the extent that such Bank's Eurodollar Loans have been so
Converted, all payments and prepayments of principal which would
otherwise be applied to such Bank's Eurodollar Loans shall be applied
instead to its Base Rate Loans; and
(b) all Loans which would otherwise be made or Continued by such
Bank as Eurodollar Loans shall be made or Continued instead as Base Rate
Loans and all Loans of such Bank which would otherwise be Converted into
Eurodollar Loans shall remain as Base Rate Loans.
If such Bank gives notice to the Company (with a copy to the Administrative
Agent) that the circumstances specified in Section 5.01 or 5.03 which gave rise
to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 5.04
no longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist) at a time when Eurodollar Loans are outstanding, such Bank's
Base Rate Loans shall be automatically Converted, on the first day(s) of the
next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to
the extent necessary so that, after giving effect thereto, all RC Loans held by
the Banks holding Eurodollar Loans and by such Bank are held pro rata (as to
principal amounts, types and Interest Periods) in accordance with their
respective Commitments.
5.05 Compensation. The Company shall pay to the Administrative
Agent for account of each Bank, upon the request of such Bank through the
Administrative Agent, such amount or amounts as shall be sufficient (in the
reasonable opinion of such Bank) to compensate it for any loss, cost or expense
which such Bank determines is attributable to:
(a) any payment, prepayment or Conversion of a Eurodollar Loan
or Bid Rate Loan made by such Bank for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 9) on a
date other than the last day of the Interest Period for such Loan
(except as provided in Section 2.03 or 5.04); or
(b) any failure by the Company for any reason (including,
without limitation, the failure of any of the conditions precedent
specified in Section 6 to be satisfied) to borrow or to Convert a
Eurodollar Loan or a Bid Rate Loan from such Bank or to make any payment
of principal thereof or interest thereon on the due date for such
borrowing, conversion or payment.
Without limiting the effect of the preceding sentence, (i) such compensation
shall include an amount equal to the excess, if any, of (x) the amount of
interest which otherwise would have accrued on the principal amount so paid,
prepaid or Converted or not borrowed for the period from the date of such
payment, prepayment, Conversion or failure to borrow to the last day of the
then current Interest Period for such Loan (if such Loan is a Eurodollar Loan)
(or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Loan provided for herein over (y) the
interest component of the amount such Bank would have bid in the London
interbank market (if such Loan is a Eurodollar Loan) for
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Dollar deposits of leading banks in amounts comparable to such principal amount
and with maturities comparable to such period (as reasonably determined by such
Bank) and (ii) such Bank shall use reasonable efforts to avoid the need for, or
reduce the amount of, such compensation in excess of the amount referred to in
the foregoing clause (i).
5.06 Replacement of Bank. If (i) the Company becomes obligated
to pay additional amounts described in Sections 4.09, 5.01, 5.02 or 5.03 as a
result of any condition described in such Sections and payment of such amount
is demanded by any Bank or any Person who purchases a participation as set
forth in Section 11.06(e), (ii) any Loan of any Bank becomes subject to the
actions specified in Section 5.04 or (iii) any Bank fails to fulfill its
obligations under this Agreement to make any Loan, then unless a Default shall
have occurred and be continuing or such Bank or such participant has
theretofore taken steps that will promptly remove or cure the conditions
creating the cause for such obligation to pay such additional amounts, or has
revoked such election, as the case may be, the Company may, on ten Business
Days' prior written notice to the Administrative Agent, who shall promptly send
a copy of such notice to each Bank, cause such Bank or such participant to (and
such Bank or such participant shall, upon payment in full of all amounts
outstanding in respect of such Bank's Loans or such participant's
participation, as appropriate, including accrued interest thereon, all amounts
payable pursuant to Section 5.05, and all other amounts due and payable to such
Bank or such participant hereunder) assign pursuant to Section 11.06 all of its
rights and obligations under this Agreement to a Bank or other entity selected
by the Company and reasonably acceptable to the Administrative Agent.
Section 6. Conditions Precedent.
6.01 Initial Borrowing. The obligation of each Bank to make its
initial Loan hereunder is subject to the following conditions precedent, each
of which shall have been fulfilled to the satisfaction of such Bank:
(a) Corporate Action. (i) The Administrative Agent shall have
received, with a copy for each Bank, copies, certified by the Secretary
of State of the applicable jurisdiction as of a recent date, of (A) the
Certificate of Incorporation of the Company, and (B) good standing
certificates issued by the respective jurisdictions of organization of
the Company and each Significant Subsidiary, and
(ii) the Administrative Agent shall have received, with a
copy for each Bank, copies, certified by a senior officer of the Company
as of the Closing Date, of (A) the By-Laws of the Company and (B) all
corporate action taken by the Company approving each of the Loan
Documents, the transactions contemplated hereby and thereby and each
borrowing hereunder (including, without limitation, a certificate
setting forth the resolutions of the Board of Directors of the Company
adopted in respect of the transactions contemplated by such Loan
Documents).
(b) Incumbency. The Administrative Agent shall have received,
with a copy for each Bank, a certificate of a senior officer of the
Company dated the Closing Date and addressed to the Administrative Agent
and each Bank, in respect of each of the officers
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(i) who is authorized to sign on its behalf the Loan Documents and (ii)
who will, until replaced by another officer or officers duly authorized
for that purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection with
such Loan Documents and the transactions contemplated thereby (and the
Administrative Agent and each Bank may conclusively rely on such
certificate until it receives notice in writing from the Company to the
contrary).
(c) Officer's Certificate. The Administrative Agent shall have
received, with a signed copy for each Bank, a certificate of a senior
officer of the Company dated the Closing Date and addressed to the
Administrative Agent and each Bank, to the effect set forth in clauses
(b) and (c) of Section 6.02.
(d) Opinion of Counsel to the Company. The Administrative Agent
shall have received, with a signed copy for each Bank, (i) an opinion of
Weil, Gotshal & Manges LLP, counsel to the Company, addressed to the
Administrative Agent and each Bank and (ii) an opinion of Scott D.
Silverman, counsel to the Company, addressed to the Administrative Agent
and each Bank, in each case dated the Closing Date and addressing such
matters as requested by, and in form and substance acceptable to, the
Banks.
(e) Notes. The Administrative Agent shall have received the
Notes, duly completed and executed.
(f) Regulatory Matters. The Administrative Agent shall have
received, with a signed copy for each Bank, a certificate of a senior
officer of the Company, dated the Closing Date and addressed to the
Administrative Agent and each Bank, confirming that the Company and its
Subsidiaries have received all required authorizations and consents from
all Applicable Insurance Regulatory Authorities in connection with the
execution, delivery and performance in accordance with their respective
terms by the Company of each of the Loan Documents to which it is a
party and the consummation of the transactions contemplated hereby and
thereby.
(g) Insurance. The Administrative Agent shall have received,
with a signed copy for each Bank, a certificate of a senior officer of
the Company, dated the Closing Date and addressed to the Administrative
Agent and the Banks (i) having attached thereto a list of all the
material insurance policies maintained by the Company and its
Subsidiaries and (ii) confirming (A) that each such policy is in full
force and effect on and as of such date and (B) that the list accurately
reflects the coverage and amount of each such policy.
(h) No Material Adverse Effect. The Administrative Agent shall
have received, with a signed copy for each Bank, a certificate of a
senior officer of the Company dated the Closing Date and addressed to
the Administrative Agent and each Bank stating that the consummation of
the transactions described herein and in the other Loan Documents shall
not have a material adverse effect on the consolidated financial
condition, operations or business of the Company and its Subsidiaries,
taken as a whole, or on the
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<PAGE> 47
legal, valid, binding or enforceable nature of the Loan Documents or the
ability of the Company to perform its obligations thereunder.
(i) Other Documents. Such other documents, including such other
required authentications, consents, approvals, licenses or exemptions
from or of, or registrations or filings with, or reports or notices to,
any governmental or regulatory authority or agency, as the
Administrative Agent or counsel to the Administrative Agent may
reasonably request.
(j) Fees and Expenses. The Company shall have (i) paid when due
all fees required to have been paid, on or prior to the Closing Date, to
the Administrative Agent and each Bank hereunder, under any of the other
Loan Documents or under any other document, agreement or letter referred
to herein or therein or relating hereto or thereto and (ii) paid the
then estimated amount of all reasonable costs and expenses of the
Administrative Agent (including but not limited to, the reasonable fees,
costs and expenses of Winthrop, Stimson, Putnam & Roberts, counsel to
the Administrative Agent, and of any accountants and any other
consultants engaged by it in such capacities) incurred in connection
with the negotiation, execution and delivery of the Loan Documents and
with the preparation, negotiation and closing of the transactions
contemplated hereby and thereby.
(k) Existing Credit Agreement. Arrangements satisfactory to the
Administrative Agent shall have been made for the payment in full of all
amounts owing by the Company under, and the termination of the
commitments under, the Existing Credit Agreement.
6.02 All Borrowings. The obligation of each Bank to make each
Loan requested to be made by it, including the initial Loan, is subject to the
determination of such Bank that each of the following conditions precedent have
been fulfilled:
(a) the Administrative Agent shall have received a notice of
borrowing with respect to such Loan complying with the requirements of
Sections 2.02 and 4.05.
(b) each of the representations and warranties made by the
Company in Section 7, and by the Company in each of the other Loan
Documents, shall be true, complete and correct at and as of the time
such Loan is to be made with the same force and effect as if made at and
as of such time (except to the extent that any such representation or
warranty expressly relates to a specific earlier date), both with and
without giving effect to such Loan and all other Loans to be made at
such time, to the other transactions contemplated thereby and to the
application of the proceeds thereof;
(c) no Default shall have occurred and be continuing at the time
such Loan is to be made or would result from the making of such Loan and
all other Loans to be made at such time, from the other transactions
contemplated hereby or from the application of the proceeds thereof;
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<PAGE> 48
(d) following the funding of the requested Loan, the aggregate
principal amount of Loans outstanding hereunder shall not exceed the
limitations set forth in Section 2.01;
(e) such Loan will not contravene any Applicable Law; and
(f) if, following the funding of the requested Loan, the
aggregate amount of all Loans outstanding hereunder would exceed
$300,000,000, then, upon the application of the proceeds of such Loan,
each of the following shall have occurred:
(i) Southwestern and each of its Subsidiaries shall have
become not less than 80%-owned and controlled Subsidiaries of the
Company;
(ii) arrangements satisfactory to the Administrative
Agent shall have been made for the payment in full of all amounts
owing by Southwestern under, and the termination of the
commitments under, the Southwestern Credit Agreement; and
(iii) since September 30, 1996, there shall have been no
material adverse change in the consolidated financial condition,
operations or business of Southwestern and its Subsidiaries,
taken as a whole, from that set forth in the consolidated balance
sheet of Southwestern and its Subsidiaries as at that date
heretofore furnished to the Banks.
The notice of borrowing by the Company hereunder shall constitute a
certification by the Company that the conditions specified in clauses (b), (c)
and (d) have been fulfilled (both as of the date of such notice and as of the
time of such borrowing).
Section 7. Representations and Warranties. The Company
represents and warrants to the Banks that
7.01 Corporate Existence. Each of the Company and its
Significant Subsidiaries (a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation;
(b) has all requisite corporate power, and has all material governmental
licenses, authorization, consents and approvals necessary to own its assets and
carry on its business as now being or as proposed to be conducted; and (c) is
qualified to do business and in good standing as a foreign corporation in all
jurisdictions in which the character of its assets or the nature of the
business conducted by it makes such qualification necessary and where failure
to so qualify has had or could reasonably be expected to have a material
adverse effect on the consolidated financial condition, operations or business
of the Company and its Subsidiaries, taken as a whole or on the legal, valid,
binding or enforceable nature of the Loan Documents or the ability of the
Company to perform its obligations thereunder.
7.02 Financial Condition. (a) The audited consolidated balance
sheets of the Company and its Subsidiaries as of December 31, 1995, and the
unaudited consolidated balance sheets of the Company and its Subsidiaries as of
September 30, 1996, in each case heretofore furnished to each of the Banks, are
each complete and correct in all material
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respects and fairly present the consolidated financial condition of the Company
and its Subsidiaries as at said respective dates, and the consolidated results
of operations, retained earnings and, as applicable, changes in financial
position or cash flows of the Company and its Subsidiaries for the respective
periods to which such statements relate, all in accordance with generally
accepted accounting principles. Neither the Company nor any of its
Subsidiaries had on said respective dates any material liability, contingent or
otherwise, liabilities for taxes, unusual forward or long-term commitments or
unrealized or anticipated losses from any unfavorable commitments except as
referred to or reflected or provided for in said consolidated balance sheets as
at said respective dates. Since December 31, 1995 and since September 30,
1996, there has been no material adverse change in the consolidated financial
condition, operations or business of the Company and its Subsidiaries, taken as
a whole, from that set forth in the respective consolidated balance sheets as
at said dates.
(b) The Statutory Statements (including the notes thereto) of
each Insurance Company for the year ended at December 31, 1995 and for the
nine-month period ended at September 30, 1996, in each case prepared in
accordance with statutory accounting practices and filed with the Applicable
Insurance Regulatory Authority, fairly present the financial condition of such
Insurance Company as at said dates and its results of operations for the fiscal
year ended at December 31, 1995 and for the nine-month period ended September
30, 1996, respectively, in accordance with statutory accounting practices as
required or prescribed by any Applicable Insurance Regulatory Authority. Since
December 31, 1995 and since September 30, 1996, there has been no material
adverse change in the financial condition, operations or business of the
Insurance Companies, taken as a whole, from that set forth in the respective
Statutory Statements as at said dates.
7.03 Litigation. Except as set forth on Schedule 7.03, there
are no legal or arbitral proceedings or any proceedings by or before any
governmental or regulatory authority or agency, now pending or threatened (nor,
to the knowledge of the Company and its Significant Subsidiaries, is there any
basis therefor) against or, to the best knowledge of the Company, in any other
way relating to or affecting, the Company or any of its Significant
Subsidiaries, any of their respective businesses or properties or any of the
Loan Documents which could reasonably be expected to have a material adverse
effect on the consolidated financial condition, operations or business of the
Company and its Subsidiaries, taken as a whole or on the legal, valid, binding
or enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder.
7.04 No Breach. Except for any consents listed on Schedule
7.04, none of the execution, delivery and performance in accordance with their
respective terms by the Company of the Loan Documents, each borrowing
hereunder, the consummation of the transactions contemplated herein and therein
or compliance with the terms and provisions hereof and thereof does or (absent
any change in any Applicable Law or applicable Contract) will violate, conflict
with, result in a breach of, require any consent under, constitute a default
under, or result in or require the creation or imposition of any Lien (other
than the Security Interest) upon, any of the Property of the Company or any of
its Subsidiaries under (i) any Contract to which the Company or any of its
Subsidiaries is a party or by which the Company, any of its Subsidiaries or any
of their respective properties or assets may be bound or (ii) any Applicable
Law, except for any such consent made or obtained on or prior to the
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<PAGE> 50
Closing Date on which the initial Loan is made hereunder, or the lack of which,
singly or in the aggregate, could not reasonably be expected to have a material
adverse effect on the consolidated financial condition, operations or business
of the Company and its Subsidiaries, taken as a whole or on the legal, valid,
binding or enforceable nature of the Loan Documents or the ability of the
Company to perform its obligations thereunder.
7.05 Corporate Action. The Company has all necessary corporate
power and authority to execute, deliver and perform its obligations under each
of the Loan Documents and to borrow hereunder in the amount of the unused
Commitments; the execution, delivery and performance by the Company of each of
the Loan Documents and each borrowing hereunder in the amount of the unused
Commitments have been duly authorized by all necessary corporate action on its
part, including any necessary stockholder action; and this Agreement has been
duly and validly executed and delivered by the Company and constitutes, and
each of the other Loan Documents when delivered (in the case of the Notes, for
value) will have been duly and validly executed and delivered by the Company
and will constitute, its legal, valid and binding obligation, enforceable in
accordance with their terms.
7.06 Approvals. The execution, delivery and performance in
accordance with their respective terms by the Company of each of the Loan
Documents and each borrowing hereunder, whether or not in the amount of the
unused Commitments do not and (absent any change in any Applicable Law or
applicable Contract) will not require any authorization, consent, approval,
license or exemption from or of, any registration or filing with, or any report
or notice to, any governmental or regulatory authority or agency, other than
(i) those that, as of the Closing Date, have been made or obtained, as
appropriate, are final and not subject to review on appeal or to collateral
attack, are in full force and effect and are listed on Schedule 7.04 and copies
of which have been supplied to the Banks and (ii) all UCC and other filings and
recordings in respect of creation and perfection of the Security Interest
required by Section 8.19.
7.07 Use of Loans. Neither the Company nor any of its
Subsidiaries is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose, whether immediate, incidental
or ultimate, of buying or carrying Margin Stock and no part of the proceeds of
any Loan hereunder will be used to buy or carry any Margin Stock. If requested
by the Administrative Agent (or by any Bank through the Administrative Agent),
the Company will furnish to the Administrative Agent, with a copy for each
Bank, a statement to the foregoing effect in conformity with the requirements
of FR Form U-1 referred to in Regulation U.
7.08 ERISA. (a) As of the Agreement Date and except as
disclosed on Schedule 7.08(a), the Company and the ERISA Affiliates have
fulfilled their respective obligations under the minimum funding standards of
ERISA and the Code with respect to each Plan and are in compliance in all
material respects with the presently applicable provisions of ERISA and the
Code, and have not incurred any Liability to the PBGC or any Plan or
Multiemployer Plan (other than to make contributions in the ordinary course of
business).
(b) As of the Agreement Date and except as disclosed on Schedule
7.08(b), neither the Company nor any of its Affiliates who are included in the
Company's consolidated
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financial statements sponsor or maintain a plan, agreement or arrangement which
could give rise to an Unrecognized Retiree Welfare Liability.
7.09 Taxes. (a) Except as disclosed to the Banks through the
Administrative Agent in writing prior to the Agreement Date, all material
United States Federal, state, local and foreign tax reports, estimates and
returns ("Returns") that are required to be filed by or on behalf of each of
the Company, each Insurance Company, PennCorp Services and their respective
Subsidiaries have been timely filed when due, all such Returns are true,
correct and complete in all material respects, and all Taxes, fees or other
charges due pursuant to such Returns or pursuant to any assessment received in
respect of such returns have been paid. The charges, accruals and reserves on
the books of each of the Company, each Insurance Company, PennCorp Services and
their respective Subsidiaries as of the Agreement Date in respect of all Taxes
and other governmental charges for which any Subsidiary of the Company may be
liable are, in the opinion of the Company, adequate. Except as disclosed to
the Banks through the Administrative Agent in writing prior to the Agreement
Date, no material audits or other administrative proceedings or court
proceedings are presently pending with regard to any Taxes or Returns of
PennCorp Services, each Insurance Company, the Company and their respective
Subsidiaries, nor has any of the above taxpayers waived any applicable statute
of limitations with respect to any Taxes or Returns.
(b) Neither the Company nor any of its non-Insurance Company
Subsidiaries is a corporation exempt from taxation under section 501 of the
Code, a life insurance company subject to taxation under section 801(a) of the
Code, a foreign corporation (other than Safe Drivers Agency Limited, PennCorp
Life Insurance Company and LaFranco Penn Life), a corporation with respect to
which an election under section 936 of the Code is in effect, a regulated
investment company or a real estate investment trust subject to tax under
subchapter M of chapter 1 of the Code or a DISC (as defined in section 992(a)
(1) of the Code).
(c) Each of the Subsidiaries which is an Insurance Company
(other than PennCorp Life Insurance Company and LaFranco Penn Life) is a life
insurance company subject to taxation under section 801(a) of the Code. No
Insurance Company is a corporation exempt from taxation under section 501 of
the Code, a foreign corporation (other than PennCorp Life Insurance Company and
LaFranco Penn Life), a corporation with respect to which an election under
section 936 of the Code is in effect, a regulated investment company or a real
estate investment trust subject to tax under subchapter M of chapter 1 of the
Code or a DISC (as defined in section 992(a) (1) of the Code).
(d) To the best knowledge of the Company and its Significant
Subsidiaries, since December 31, 1995 and since September 30, 1996, there has
been no change in the financial condition, operations or business of the
Company or any of its Subsidiaries, in any Applicable Law that applies or could
reasonably be expected to apply to the Company or any of its Subsidiaries, or
in any other fact or circumstance relating to or affecting the Company or any
of its Subsidiaries which has had, or could reasonably be expected to have a
material adverse effect on the position, status or Liability of the Company and
its Subsidiaries, collectively, or the Company and the Significant Subsidiaries
individually, with respect to Tax matters, on the consolidated financial
condition, operations or business of the Company
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and its Subsidiaries taken as a whole to the extent any thereof relate to Tax
matters affecting the Company and its Subsidiaries taken as a whole, on the
amount of any Tax payable by the Company or any of its Subsidiaries or the
timing of the payment of any such Tax, or, to the extent that they may be
affected by changes relating to Tax matters, on the legal, valid, binding and
enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder.
7.10 Investment Company Act. The Company is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
7.11 Public Utility Holding Company Act. The Company is not a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
7.12 Environmental Matters. Except as disclosed in Schedule
7.12 and except for any environmental investigation, study, audit, test, review
or other analysis which has not resulted and could not reasonably be expected
to result in the imposition of any material Liability on the Company or its
Subsidiaries, there have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted by or which are in the possession of
the Company or any of its Subsidiaries in relation to any property or facility
now or previously owned or leased by the Company or any of its Subsidiaries
which have not been made available to the Banks through the Administrative
Agent.
7.13 Subsidiaries, Etc. Set forth on Schedule 7.13 is a
complete and correct list, as of the Agreement Date, of all Subsidiaries of the
Company (and the respective jurisdiction of incorporation of each such
Subsidiary) and of all Investments held by the Company or any of its
Subsidiaries (including the percentage ownership represented by such
Investment) in any Affiliate and of all controlling interests held by the
Company or any of its Subsidiaries in any joint venture or any partnership. As
of the Agreement Date, the Company owns, free and clear of Liens, warrants,
options or rights of others of any kind whatsoever, all outstanding shares of
such Subsidiaries, other than directors' qualifying shares (and each such
Subsidiary owns, free and clear of Liens, warrants, options or rights of others
of any kind whatsoever, all shares of its Subsidiaries listed on Schedule 7.13
as owned by such Subsidiary (other than directors' qualifying shares)) and all
such shares are duly authorized, validly issued, fully paid and non-assessable
and the Company (or the respective Subsidiary) also owns, free and clear of
Liens, warrants, options or rights of others of any kind whatsoever, all such
Investments except as disclosed on Schedule 7.13 and except for Liens permitted
by Section 8.07. From and after the Agreement Date, the Company or another
Subsidiary, as the case may be, has the unrestricted right to vote and to
receive dividends and distributions payable on or with respect to all shares
listed on Schedule 7.13 as owned by the Company or such Subsidiary. Except as
set forth on Schedule 7.13, no Subsidiary of the Company or any of its
Subsidiaries has issued any securities convertible into shares of its capital
stock.
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7.14 Material Agreements and Burdensome Provisions. Except as
disclosed on Schedule 7.14:
(a) neither the Company nor any of its Significant Subsidiaries
is a party to or bound by any Contract, subject to any corporate restriction or
bound by any Applicable Law that has had or could reasonably be expected to
have a material adverse effect on the consolidated financial condition,
operations or business of the Company and its Subsidiaries, taken as a whole or
on the legal, valid, binding or enforceable nature of the Loan Documents or the
ability of the Company to perform its obligations thereunder; and
(b) neither the Company nor any of its Significant Subsidiaries
is in default under any Contract in any manner that could materially and
adversely affect the consolidated financial condition, operations or business
of the Company and its Subsidiaries, taken as a whole, or the legal, valid,
binding or enforceable nature of the Loan Documents, or the ability of the
Company to perform its obligations thereunder.
7.15 Assets. Each of the Company and its Subsidiaries owns and
has good title to (or, if subject to a lease, has or will have valid leasehold
interest in) all of its properties and assets, free and clear of all Liens or
other encumbrances of any nature other than Liens expressly permitted by
Section 8.07, except where such failure to have good title or a valid leasehold
interest has not had or could not reasonably be expected to have a material
adverse effect on the consolidated financial condition, operations or business
of the Company and its Subsidiaries, taken as a whole or on the legal, valid,
binding or enforceable nature of the Loan Documents, or the ability of the
Company to perform its obligations thereunder.
7.16 Compliance with Applicable Law. Except as disclosed to the
Banks through the Administrative Agent in writing, each of the Company and its
Subsidiaries is in compliance with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its respective business and
the ownership of its property (including, without limitation, applicable
statutes, regulations, orders and restrictions relating to environmental
standards and controls), except such non-compliance as has not had and could
not reasonably be expected to have, in the aggregate, a material adverse effect
on the consolidated financial condition, operations or business of the Company
and its Subsidiaries, taken as a whole or on the legal, valid, binding or
enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder.
7.17 Liens. (a) Schedule 8.07 lists, as of the Agreement Date,
all of the Material Liens on Property of the Company or its Subsidiaries (or
any income or profits therefrom).
(b) The book value of all Liens on Property of the Company or
its Subsidiaries (or any income or profits therefrom) which are not Material
Liens does not exceed $10,000,000.
7.18 No Material Adverse Effect. The consummation of the
transactions described herein and in the other Loan Documents has not had and
could not reasonably be expected to have a material adverse effect on the
consolidated financial condition, operations or business of the Company and its
Subsidiaries, taken as a whole or on the legal, valid, binding or
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<PAGE> 54
enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder.
7.19 Additional Adverse Facts. Except as disclosed to the Banks
through the Administrative Agent in writing on or prior to the Agreement Date
or as disclosed in the notes to the financial statements submitted by the
Company to the Banks on or prior to the Agreement Date, no fact or circumstance
is known to the Company, as of the Agreement Date, that, either alone or in
conjunction with all other such facts and circumstances, has had or could
reasonably be expected to have (so far as the Company and its Subsidiaries can
foresee) a material adverse effect on the consolidated financial condition,
operations or business of the Company and its Subsidiaries taken as a whole or
on the legal, valid, binding or enforceable nature of the Loan Documents or the
ability of the Company to perform its obligations thereunder.
7.20 Accuracy of Information. All Information furnished to the
Administrative Agent and each Bank by or on behalf of the Company prior to the
Agreement Date in connection with or pursuant to the Loan Documents and the
relationships established thereunder, at the time the same was so furnished,
but in the case of Information dated as of a prior date, as of such date, (i)
in the case of any Information prepared in the ordinary course of business, was
complete and correct in all material respects in the light of the purpose for
which the same was prepared, and, in the case of any Information the
preparation of which was requested by any Bank, was complete and correct in all
material respects to the extent necessary to give such Bank true and accurate
knowledge of the subject matter thereof, (ii) did not contain any untrue
statement of a material fact, and (iii) did not omit to state a material fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.
7.21 Restrictive Covenants. Except for Liens permitted under
Section 8.07, except for Permitted Restrictive Covenants existing on the
Agreement Date and except as disclosed on Schedule 7.21 or on any notice from
the Company to the Administrative Agent entitled "Schedule 7.21 Update"
(provided that such Schedule 7.21 Update shall only include Permitted
Restrictive Covenants) and except for consensual agreements entered into with
any Applicable Insurance Regulatory Authority, neither the Company nor any of
its Subsidiaries is a party to or bound by any consensual agreement (a)
limiting the ability (whether by covenant, event of default, subordination or
otherwise) of any Subsidiary to (i) pay dividends or make any other
distributions on shares of its capital stock held by the Company or any other
Subsidiary, (ii) pay any obligation owed to the Company or any other
Subsidiary, (iii) make any loans or advances to or investments in the Company
or in any other Subsidiary, (iv) transfer any of its property or assets to the
Company or any other Subsidiary, or (b) creating any Lien upon the property or
assets of the Company or any of its Subsidiaries whether now owned or hereafter
acquired or upon any income or profits therefrom.
7.22 Security Interest. When the Administrative Agent has taken
possession on behalf of the Banks of the certificates representing the Pledged
Securities and the other instruments and documents as the Majority Banks shall
have requested pursuant to Section 8.19 and appropriate UCC financing
statements have been filed, the security interest created by the Security
Agreements, when executed and delivered, will constitute a fully perfected
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and first priority security interest in all right, title and interest of the
Securing Parties in the Collateral.
Section 8. Covenants of the Company. The Company agrees that,
so long as any of the Commitments are in effect and until payment in full of
all Loans hereunder, all interest thereon and all other amounts payable by the
Company hereunder:
8.01 Financial Statements. The Company shall deliver to the
Administrative Agent with a copy for each of the Banks:
(a) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of the Company, unaudited consolidated statements of income,
retained earnings and changes in financial position (or statement of
cash flow, as the case may be) of the Company and its Subsidiaries,
together with unaudited statements of income and cash flow of the
Company, for such period and for the period from the beginning of the
respective fiscal year to the end of such period, setting forth in each
case in comparative form the corresponding consolidated figures and
figures of the Company as at the end of the corresponding period in the
preceding fiscal year of the Company, and the related unaudited
consolidated balance sheet of the Company and its Subsidiaries and
balance sheet of the Company as at the end of such period, setting forth
in comparative form the corresponding consolidated figures and figures
of the Company for the preceding fiscal year of the Company, accompanied
by a certificate of a Financial Officer of the Company stating that said
financial statements fairly present in all material respects the
consolidated financial condition and results of operations, as the case
may be, of the Company and its Subsidiaries, and, in the case of the
financial statements of the Company, the financial condition and results
of operations, as the case may be, of the Company, all in accordance
with generally accepted accounting principles, consistently applied, as
at the end of, and for, such period (subject only to normal year-end
audit adjustments);
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of the Company, (i) audited consolidated
statements of income, retained earnings and changes in financial
position (or statement of cash flow, as the case may be) of the Company
and its Subsidiaries, together with unaudited statements of income and
cash flow of the Company, for such year and the related audited
consolidated balance sheet of the Company and its Subsidiaries and
unaudited balance sheet of the Company, each as at the end of such year,
setting forth in each case in comparative form the corresponding
consolidated figures and figures of the Company for the preceding fiscal
year of the Company, (ii) an opinion thereon of independent certified
public accountants of recognized national standing, which opinion shall
state that said consolidated financial statements (but not the financial
statements of the Company) fairly present in all material respects the
consolidated financial condition and results of operations of the
Company and its Subsidiaries in accordance with generally accepted
accounting principles, as at the end of, and for, such fiscal year,
accompanied by a certificate of such accountants stating that, in making
the examination necessary for their opinion, they obtained no knowledge,
except as specifically stated, of any Default and (iii) a certificate of
a
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Financial Officer of the Company stating (A) that said financial
statements of the Company (other than the consolidated financial
statements) fairly present in all material respects the financial
condition and results of operations, as the case may be, of the Company
in accordance with generally accepted accounting principles,
consistently applied, as at the end of, and for, such fiscal year and
(B) that, in making the examination necessary for such certificate, such
Financial Officer obtained no knowledge, except as specifically stated,
of any Default;
(c) as soon as available and in any event at the time the
Statutory Statements of the Insurance Companies are filed with the
appropriate regulatory authorities, summary Statutory Statements
(prepared in accordance with statutory accounting practices required or
permitted by the Applicable Insurance Regulatory Authorities) of the
Insurance Companies by group (comparable from fiscal quarter to fiscal
quarter) in form acceptable to the Administrative Agent for each fiscal
quarter, accompanied by a certificate of a Financial Officer of the
Company which certificate shall state that such financial statements
present the financial condition of such Insurance Companies in
accordance with statutory accounting practices required or permitted by
the Applicable Insurance Regulatory Authorities;
(d) as soon as available and in any event at the time the same
are filed with the appropriate regulatory authorities, the unaudited and
audited annual Statutory Statement of such Insurance Company (prepared
in accordance with statutory accounting practices required or permitted
by the Applicable Insurance Regulatory Authority) for such year and as
filed with the Insurance Department of the applicable State, accompanied
by (i) a certificate of a treasurer or senior financial officer of such
Insurance Company stating that said Statutory Statement presents the
financial condition of such Insurance Company in accordance with
statutory accounting practices required or permitted by the Applicable
Insurance Regulatory Authority and (ii) a certificate of the valuation
actuary of such Insurance Company, affirming the adequacy of reserves
taken by such Insurance Company in respect of future policyholder
benefits as at the end of such fiscal year;
(e) concurrently with the filing thereof, copies of all
registration statements and regular periodic reports, if any, which the
Company shall have filed with the Securities and Exchange Commission (or
any successor thereto);
(f) promptly upon the mailing thereof to the shareholders of the
Company generally and to the extent not previously provided to the
Administrative Agent and the Banks, copies of all financial statements,
reports and proxy statements so mailed;
(g) promptly after the Company knows or has reason to know that
any Default or Event of Default has occurred, a notice describing such
Default in reasonable detail and stating that it is a "Notice of
Default", and together with such notice or as soon thereafter as
possible, a description of the action that the Company has taken and
proposes to take with respect thereto;
(h) as soon as received by the Company or any Subsidiary, (i) a
copy of the final report to each Insurance Company from NAIC for each
fiscal year as to such Insurance
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Company's compliance or noncompliance with each of the IRIS Tests and
(ii) a copy of Best's rating analysis for such Insurance Company for
such fiscal year;
(i) as soon as received, a copy of any notice of termination or
cancellation of any Reinsurance Agreement or arrangement (other than
those entered in the ordinary course of business) to which any of the
Insurance Companies is a party to the extent such termination or
cancellation could reasonably be expected to have a material adverse
effect on the consolidated financial condition, operations or business
of the Company and its Subsidiaries, taken as a whole or on the legal,
valid, binding or enforceable nature of the Loan Documents or the
ability of the Company to perform its obligations thereunder;
(j) copies of all material reports, filings and other materials
sent to governmental authorities (including any Applicable Insurance
Regulatory Authority) by the Company or any of the Insurance Companies
not later than seven (7) days after such filings are made, including,
without limitation, filings which seek approval of governmental
authorities (including any Applicable Insurance Regulatory Authority)
with respect to transactions among any of the Insurance Companies or any
of their respective Affiliates;
(k) immediately, notice of actual or threatened suspension,
termination or revocation of any license (including, without limitation,
any license or certificate of authority from any Applicable Insurance
Regulatory Authority), permit or authorization to transact insurance and
reinsurance business of the Company or any Significant Subsidiary by any
governmental authority (including any Applicable Insurance Regulatory
Authority), including any request by any governmental authority, which
commits the Company or such Significant Subsidiary to take or refrain
from taking any action or which otherwise affects the authority of the
Company or such Significant Subsidiary to conduct its business, except
where any such suspension, termination or revocation, singly or in the
aggregate, has not had and could not in the aggregate reasonably be
expected to have a material adverse effect on the consolidated financial
condition, operations or business of the Company and its Subsidiaries,
taken as a whole or on the legal, valid, binding or enforceable nature
of the Loan Documents or the ability of the Company to perform its
obligations thereunder;
(l) as soon as possible, and in any event within ten days after
the Company knows or has reason to know that any of the events or
conditions specified below with respect to any Plan or Multiemployer
Plan have occurred or exist, a statement signed by a Financial Officer
of the Company setting forth details respecting such event or condition
and the action, if any, which the Company or its ERISA Affiliate
proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Company or an
ERISA Affiliate with respect to such event or condition):
(i) any reportable event, as defined in section 4043(c)
of ERISA, with respect to a Plan, as to which PBGC has not by
regulation waived the requirement of section 4043(a) of ERISA
that it be notified within 30 days of the occurrence of such
event;
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(ii) the filing under section 4041 of ERISA of a notice
of intent to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under
section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan, or the receipt by the
Company or any ERISA Affiliate of a notice from a Multiemployer
Plan that such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal by the Company
or any ERISA Affiliate under section 4201 or 4204 of ERISA from a
Multiemployer Plan, or the receipt by the Company or any ERISA
Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to section 4241 or 4245 of
ERISA or that it intends to terminate or has terminated under
section 4041A of ERISA;
(v) the institution of a proceeding by a "fiduciary"
(within the meaning of Section 3(21) of ERISA) of any
Multiemployer Plan against the Company or any ERISA Affiliate to
enforce section 515 of ERISA, which proceeding is not dismissed
within 30 days; and
(vi) the increase of benefits under any existing plan,
agreement or arrangement, or the establishment of or contribution
to any new plan, agreement or arrangement, in each case by the
Company or any of its Affiliates who are included in the Company's
consolidated financial statements, and which in each case would
have the effect of increasing the Unrecognized Retiree Welfare
Liability in a manner reasonably expected to result in a material
Liability; and
(m) from time to time such other information regarding the
business, affairs or financial condition of the Company or any of its
Subsidiaries (including, without limitation, any Plan or Multiemployer
Plan and any reports or other information required to be filed under
ERISA) as the Administrative Agent or any Bank may reasonably request.
The Company will furnish to the Administrative Agent, with a copy for each
Bank, at the time it furnishes each set of financial statements pursuant to
paragraph (a) or (b) above, a certificate of a Financial Officer of the Company
(i) to the effect that no Default has occurred and is continuing (or, if any
Default has occurred and is continuing, describing the same in reasonable
detail and describing the action that the Company has taken and proposes to
take with respect thereto) and (ii) setting forth in reasonable detail the
computations necessary to determine whether the Company is in compliance with
Sections 8.08 through 8.13 (inclusive) as of the end of the respective
quarterly fiscal period or fiscal year.
8.02 Communication with Accountants. The Company authorizes the
Administrative Agent (on behalf of the Banks) to communicate directly with its
independent certified public accountants with respect to matters concerning the
Company and its Subsidiaries with respect to which they have been hired by the
Company, after written notice
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to the Company and providing the Company with the opportunity to be present
(either physically or by telephone) during any such interaction and authorizes
those accountants to disclose to the Banks through the Administrative Agent
(subject to the foregoing) any and all financial statements and other
supporting financial documents and schedules, including copies of any
management letter with respect to the business, financial condition, and other
affairs of the Company and any of its Subsidiaries; provided, however, that the
Administrative Agent shall not be required to notify the Company prior to any
discussions with such accountants or provide for the Company to participate in
such meetings after the occurrence and during the continuance of an Event of
Default.
8.03 Litigation. The Company will promptly give the
Administrative Agent with a copy for each Bank notice of all pending or overtly
threatened legal or arbitral proceedings, and of all pending or overtly
threatened proceedings by or before any governmental or regulatory authority or
agency, and any material development in respect of such legal or other
proceedings, affecting the Company or any of its Significant Subsidiaries,
except proceedings or developments which could not reasonably be expected to
have a material adverse effect on the consolidated financial condition,
operations or business of the Company and its Subsidiaries, taken as a whole or
on the legal, valid, binding or enforceable nature of the Loan Documents or the
ability of the Company to perform its obligations thereunder.
8.04 Corporate Existence, Etc. The Company will, and will cause
each of its Significant Subsidiaries to: (a) preserve and maintain its
corporate existence and all of its material rights, privileges, licenses,
permits and franchises (provided that nothing in this Section 8.04 shall
prohibit any transaction expressly permitted under Section 8.06), unless, in
the reasonable business judgment of the Company or such Subsidiary, as the case
may be, it is in its best economic interest not to preserve and maintain such
rights or franchises and such failure to preserve and maintain such rights or
franchises could not reasonably be expected to have a material adverse effect
on the consolidated financial condition, operations or business of the Company
and its Subsidiaries, taken as a whole or on the legal, valid, binding or
enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder; (b) comply with Applicable Law (including
any Applicable Law relating to any employee benefit plan) if failure to comply
with such requirements could reasonably be expected to have a material adverse
effect on the consolidated financial condition, operations or business of the
Company and its Subsidiaries, taken as a whole or on the legal, valid, binding
or enforceable nature of the Loan Documents or the ability of the Company to
perform its obligations thereunder; (c) pay and discharge when due all material
taxes, assessments and governmental charges or levies imposed on it or on its
income or profits or on any of its Property, except for any such tax,
assessment, charge or levy the payment of which is being contested in good
faith and by proper proceedings and against which adequate reserves are being
maintained; provided that the Company and each of its Subsidiaries shall have
the right to pay any such obligation and in good faith contest, by proper legal
actions or proceedings, the validity or amount of such claims; (d) take all
actions, and obtain all authorizations, consents, approvals, licenses and
exemptions from or of, make all registrations or filings with, or reports or
notices to, any governmental unit, required so that the obligations of the
Company and its Significant Subsidiaries under the Loan Documents will at all
times be legal, valid, binding and enforceable in accordance with their
respective terms; (e) maintain all of its material
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Properties used or useful in its business in good working order and condition,
ordinary wear and tear excepted; (f) keep adequate records and books of account
in which complete entries will be made in accordance with generally accepted
accounting principles or statutory accounting practices, as the case may be,
reflecting all of its financial transactions; and (g) upon reasonable notice,
permit representatives of the Administrative Agent or, after the occurrence and
during the continuance of a Default and provided that all Banks wishing to take
any of the actions set forth in this clause (g) use reasonable efforts to take
such actions collectively, as arranged by the Administrative Agent, any Bank,
during normal business hours, to examine, copy and make extracts from its books
and records, to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by the Administrative
Agent or such Bank (as the case may be).
8.05 Insurance. The Company will, and will cause each of its
Significant Subsidiaries to, keep insured by financially sound and reputable
insurers all property of a character usually insured by corporations engaged in
the same or similar business similarly situated against loss or damage of the
kinds and in the amounts customarily insured against by such corporations and
carry such other insurance as is usually carried by such corporations.
8.06 Prohibition of Fundamental Changes. The Company will not,
nor will it permit any of its Significant Subsidiaries to, enter into any
transaction of merger, consolidation or amalgamation (other than as a form of
acquisition permitted by the immediately succeeding sentence or as a form of
disposition permitted by the second immediately succeeding sentence), or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution). The Company will not, and will not permit any of its
Subsidiaries to, acquire (including by way of merger, consolidation or
amalgamation) any business or Property from, or capital stock (other than the
common stock or common stock equivalents of the Company) of, or be a party to
any acquisition of, any Person except for (i) purchases or acquisitions of any
Person or any property of any Person provided that the aggregate purchase price
of any such purchase or acquisition, or group of related purchases or
acquisitions, shall not exceed 30% of the Net Worth of the Company and its
Consolidated Subsidiaries immediately prior to such purchase or acquisition and
(ii) the acquisition by the Company of Washington National for an aggregate
purchase price of approximately $400,000,000; provided that such purchase price
shall not include cash consideration in excess of $150,000,000; provided,
further, that no Event of Default shall have occurred and be continuing both
immediately before and immediately after the consummation of such acquisition.
The Company will not, and will not permit any of its Subsidiaries to, convey,
sell, lease, transfer or otherwise dispose of (including by way of merger,
consolidation or amalgamation), in one transaction or a series of transactions,
any part of its business or Properties, whether now owned or hereafter acquired
(including, without limitation, receivables and leasehold interests); provided
that the Company and its Subsidiaries may sell or dispose of any Property in
the ordinary course of business and the following:
(a) any Subsidiary of the Company may be transferred to or
merged or consolidated with or into the Company or any Wholly-Owned
Subsidiary of the Company so long as
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(i) the Company or such Wholly-Owned Subsidiary is the
continuing or surviving corporation in the case of a merger;
(ii) no Subsidiary that is an Insurance Company shall be
merged or consolidated with or into any Subsidiary that is not an
Insurance Company; and
(iii) no Subsidiary shall be transferred to or merged or
consolidated with or into any other Subsidiary if such transfer, merger
or consolidation would materially adversely affect the ability of the
Company to obtain cash, whether through dividend payments, payments on
the Surplus Notes or otherwise, from its Subsidiaries; and
(b) the Company or any Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its Property (upon voluntary
liquidation or otherwise and whether through Reinsurance Agreements or
otherwise) to any other Person solely to the extent that the fair market
value of the Property so disposed of, together with the aggregate fair
market value of all other Property of the Company or any Subsidiary
disposed of within the previous 12 months (or, if shorter, the period
from the Agreement Date to the date of such disposition), shall not
exceed 15% of the Market Capitalization of the Company determined as of
the day before the announcement of such disposition.
8.07 Limitation on Liens. The Company will not, and will not
permit any of its Subsidiaries to, create, incur, assume or suffer to exist any
Lien upon any of its Property, whether now owned or hereafter acquired, except:
(a) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good
faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Company or such Subsidiary,
as the case may be, in accordance with GAAP or SAP, as the case may be;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business;
(c) pledges or deposits under worker's compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and
encumbrances consisting of zoning restrictions, easements, licenses,
restrictions on the use of property or minor imperfections in title
thereto which are not material in amount, and which, in the aggregate,
do not in any case materially detract from the value of the
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property subject thereto or interfere with the ordinary conduct of the
business of the Company or any of its Subsidiaries;
(f) Liens upon real or tangible personal property acquired in
the ordinary course of business after the Agreement Date (by purchase,
construction or otherwise) by the Company or any of its Subsidiaries,
each of which Liens either (A) existed on such Property before the time
of its acquisition and was not created in anticipation thereof, or (B)
was created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost
(including the cost of construction) of the respective Property;
provided that no such Lien shall extend to or cover any Property of the
Company or such Subsidiary other than the respective Property so
acquired and improvements thereon; and provided, further, that the
principal amount of Indebtedness (other than non-recourse Indebtedness)
secured by any such Lien shall at no time exceed 75% of the fair market
value (as determined in good faith by a Financial Officer of the Company
and certified by such Person to the Administrative Agent, with copy for
each Bank) of the respective property at the time it was acquired (by
purchase, construction or otherwise);
(g) Liens arising out of Reinsurance Transactions not
prohibited by this Agreement;
(h) Material Liens existing on the Agreement Date and listed
on Schedule 8.07 and any Liens existing on the Agreement Date other than
Material Liens;
(i) any extension,renewal or replacement of the foregoing,
provided, however, that the Liens permitted hereunder shall not be
spread to cover any additional Indebtedness or Property (other than a
substitution of like Property); and
(j) the Security Interest.
8.08 Indebtedness. The Company will not permit any of its
Subsidiaries to create, incur or suffer to exist any Indebtedness except:
(a) Indebtedness evidenced by the Surplus Notes and other
Indebtedness of Subsidiaries of the Company to the Company or to another
Subsidiary;
(b) Indebtedness of the Company's Subsidiaries which is incurred
in the ordinary course of operations in an aggregate amount at any time,
together with all Indebtedness of the Company's Subsidiaries outstanding
at such time incurred pursuant to clause (c) of this Section 8.08, up to
but not exceeding an amount equal to 5% of the Net Worth of the Company
and its Consolidated Subsidiaries at such time, and any extension,
renewal or replacement thereof which does not increase the principal
amount of such Indebtedness and which is incurred on terms no less
favorable to the Banks;
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(c) non-recourse (subject to customary exclusions and
qualifications, including those for waste, failure to maintain
insurance, environmental liabilities and other similar exclusions)
purchase money Indebtedness of the Company's Subsidiaries in an
aggregate amount at any time, together with all Indebtedness of the
Company's Subsidiaries outstanding at such time incurred pursuant to
clause (b) of this Section 8.08, up to but not exceeding an amount equal
to 5% of the Net Worth of the Company and its Consolidated Subsidiaries
at such time;
(d) Indebtedness under the Southwestern Subordinated Notes on
terms and conditions satisfactory to the Administrative Agent;
(e) Indebtedness under this Agreement; and
(f) Existing Indebtedness.
8.09 Dividends. The Company shall, to the extent permitted by
Applicable Law, cause each Subsidiary to declare and pay dividends on such
Subsidiary's capital stock or make payments under its Surplus Notes, if any,
such that the aggregate amount received by the Company from dividends or
Surplus Note payments is sufficient to enable the Company to pay (i) the amount
of principal of Indebtedness of the Company, interest in respect of
Indebtedness of the Company accrued or capitalized and Charges of the Company
at the time such amounts are due and payable minus (ii) an amount equal to the
sum of (A) all cash or marketable securities held by the Company at the time of
such declaration, (B) all payments required by Applicable Law or applicable
Contract to be paid by any Subsidiary of the Company to the Company at the time
such amounts are due and payable, including but not limited to payments
required under the tax sharing agreements, (C) the aggregate amount of cash and
marketable securities held by each direct Subsidiary of the Company available
to be paid as dividends to the Company by each such Subsidiary which could be
paid at the time such amounts are due and payable under the Surplus Notes
without obtaining any regulatory approval and (D) to the extent that borrowings
hereunder are used to pay interest in respect of Indebtedness, the amount of
any borrowings that are so used.
8.10 Leverage Ratio. The Company will not permit the Leverage
Ratio to exceed 35% at any time, provided that the Leverage Ratio may increase
to a percentage not in excess of 40% for a period not to exceed 90 consecutive
days occurring within any period of 12 consecutive months so long as such
increase does not result from a loss affecting Net Worth, provided further,
however, that, notwithstanding the foregoing proviso, the Company will not
permit the Leverage Ratio to exceed 35% (i) at any time if the Net Income of
the Company for the period of the two consecutive fiscal quarters immediately
preceding such time is less than zero or (ii) at any time unless (A) prior to
such time the Company shall have consummated the acquisition of Washington
National or (B) the Net Worth of the Company and its Consolidated Subsidiaries
equals or exceeds $1,000,000,000 at such time. For purposes hereof, Net Income
shall be calculated before taxes, realized capital gains and losses and any
non-recurring charges.
8.11 Interest Coverage Ratio. The Company will not permit the
Interest Coverage Ratio as of the last day of each fiscal quarter to be less
than (a) 2.0 to 1.0 where component
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"A" of the definition of Interest Coverage Ratio is determined before
adjustment for capital gains or losses as set forth in such definition and (b)
1.0 to 1.0 where component "A" of the definition of Interest Coverage Ratio is
determined after adjustment for capital gains or losses as set forth in such
definition.
8.12 Minimum Total Adjusted Capital. (a) The Company will not
permit the Total Adjusted Capital of each U.S.-domiciled Insurance Company that
is a Significant Subsidiary at any time to be less than 175% of the Company
Action Level Risk Based Capital for such Insurance Company.
(b) The Company will not permit the Total Adjusted Capital of
each U.S.-domiciled Insurance Company that is not a Significant Subsidiary at
any time to be less than 100% of the Company Action Level Risk Based Capital
for such Insurance Company.
8.13 Consolidated Net Worth. The Company will not permit the
Net Worth of the Company and its Consolidated Subsidiaries at any time to be
less than the greater of (a) $650,000,000 and (b) an amount equal to (i)
$650,000,000, plus (ii) 75% of the aggregate Net Income of the Company (but not
less than zero) for each fiscal quarter ending during the period beginning with
the Agreement Date and ending on the date of determination under this Section
8.13, plus (iii) 75% of the net proceeds of all issuances of capital stock by
the Company after the Agreement Date minus (iv) 100% of the net purchase price
of all repurchases by the Company of its capital stock after the Agreement
Date, provided that the aggregate amount so subtracted (A) in respect of all
such repurchases shall not exceed $100,000,000 and (B) in respect of all such
repurchases made within any period of 12 consecutive months shall not exceed
$50,000,000.
8.14 Lines of Business. Neither the Company nor any of its
Subsidiaries shall (a) engage in any line or lines of business activity other
than the businesses in which they are engaged on the Agreement Date and
businesses reasonably related thereto, (b) expand directly into any new markets
in which they do not currently engage in business, other than into any state in
the United States, any province of Canada or, in connection with providing
insurance to any U.S. military personnel or their families, any other country
in which such personnel are located or (c) expand into product lines which are
substantially different from, or which are not reasonably related and
supplemental to, those in which the Company or its Subsidiaries are presently
engaged.
8.15 Transactions with Affiliates. The Company will not, nor
will it permit any of its Subsidiaries to, directly or indirectly, effect any
transaction with any Affiliate on a basis less favorable than would at the time
be obtainable for a comparable transaction in an arms-length dealing with an
unrelated third party.
8.16 Use of Proceeds. The Company will use the proceeds of the
Loans solely for general corporate purposes, including, but not limited to, the
repayment of all existing Indebtedness of the Company under the Existing Credit
Agreement and, to the extent permitted by the terms of this Agreement, the
acquisition of Washington National and Southwestern. All Loans shall be used
by the Company only for legal and proper corporate
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purposes (duly authorized by its Board of Directors) which are consistent with
all Applicable Laws.
8.17 Modifications of Certain Documents.
(a) The Company shall not enter into or consent to any
amendment, supplement or other modification of the instruments and agreements
governing any Indebtedness that adversely affects the interests of the Banks as
senior creditors with respect to the Subordinated Notes or the interests of the
Banks under this Agreement or any other Loan Document in any respect.
(b) The Company shall not enter into or consent to any
amendment, supplement or other modification of any of the terms of (i) the
Certificate of Incorporation of the Company or (ii) the certificate or articles
of incorporation of any of its Subsidiaries in a manner adverse to the
interests of the Banks hereunder.
8.18 Limitation on Restrictive Covenants. The Company shall
not, and shall not permit any Subsidiary to, directly or indirectly, permit to
exist, at any time, any consensual agreement limiting the ability (whether by
covenant, event of default, subordination or otherwise) of any Subsidiary to
(i) pay dividends or make any other distributions on shares of its capital
stock held by the Company or any other Subsidiary, (ii) pay any obligation owed
to the Company or any other Subsidiary, (iii) make any loans or advances to or
investments in the Company or in any other Subsidiary, (iv) transfer any of its
property or assets to the Company or any other Subsidiary, or (v) create any
Lien upon the property or assets of the Company or any of its Subsidiaries
whether now owned or hereafter acquired or upon any income or profits
therefrom, except that this Section 8.18 shall not apply to Permitted
Restrictive Covenants.
8.19 Security. On the 10th day (the "Security Date") after the
first date upon which the Company's S&P Senior Debt Rating is less than BB+ and
the Company's D&P Senior Debt Rating is less than BB+, the Company shall, and
shall cause each holder of a Surplus Note (the Company and each such holder
being collectively referred to as the "Securing Parties") to, execute and
deliver one or more security agreements, in form and substance satisfactory to
the Majority Banks (collectively, the "Security Agreements"), together with
such other instruments and other documents as the Majority Banks may request,
the possession of which is necessary or appropriate in the determination of the
Majority Banks to create or perfect a security interest in favor of the Banks,
effective on the Security Date, in the Collateral under Applicable Law,
including but not limited to the certificates representing the Pledged
Securities, together with undated stock powers for such certificates duly
executed in blank, duly executed UCC-1 financing statements and an opinion of
counsel for the Securing Parties with respect to the foregoing in form and
substance satisfactory to the Majority Banks; provided that, unless a Default
shall have occurred and be continuing, promptly after the first date upon which
the Company's S&P Senior Debt Rating is BB+ or better or the Company's D&P
Senior Debt Rating is BB+ or better, the Administrative Agent, on behalf of
itself and the Banks, shall, at the Company's expense, execute and deliver to
the Company such instruments of release, UCC termination statements and other
documents (including the certificates representing the Pledged Securities and
the
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stock powers relating thereto) as the Company may reasonably request in order
to release the security interests provided for by this Section 8.19.
8.20 Knightsbridge Companies. The Company shall not, and shall
not permit any Subsidiary to, make at any time any Investment in any of the
Knightsbridge Companies if (a) the fair market value of such Investment and all
other then outstanding Investments, taken together, held by the Company and its
Subsidiaries in the Knightsbridge Companies would exceed 20% of the Net Worth
of the Company and its Consolidated Subsidiaries at such time or (b) in the
case of any Investment by the Company or any of its non-Insurance Company
Subsidiaries, the fair market value of such Investment and all other then
outstanding Investments, taken together, held by the Company and its non-
Insurance Company Subsidiaries in the Knightsbridge Companies would exceed 10%
of the Net Worth of the Company and its Consolidated Subsidiaries at such time;
provided, however, that this Section 8.20 shall not prohibit Investments by the
Company and its Subsidiaries in the Knightsbridge Companies in an aggregate
amount not in excess of $40,000,000 pursuant to the limited partnership
agreement of Knightsbridge Capital Fund I, L.P. in respect of the obligations
of the Company or any of its Subsidiaries (i) as a limited partner of
Knightsbridge Capital Fund I, L.P. or (ii) as a member of the general partner
of Knightsbridge Capital Fund I, L.P.
Section 9. Events of Default. If one or more of the following
events (herein called "Events of Default") shall occur and be continuing,
whatever the reason for such event and whether it shall be voluntary or
involuntary or within or without the control of the Company or any Subsidiary,
or be effected by operation of law or pursuant to any judgment or order of any
court or any order, rule or regulation of any governmental or non-governmental
body:
(a) The Company shall fail to pay any principal of any Loan or
Note when and as due (whether at maturity, by reason of notice of prepayment or
acceleration or otherwise) and in accordance with the terms of this Agreement
and the Notes; or the Company shall fail to pay any interest on any Loan or
Note or any other amount payable to the Administrative Agent or the Banks by it
hereunder, under the other Loan Documents or under any letter, agreement or
other document providing for the payment of fees by the Company to the
Administrative Agent or the Banks in connection with any of the Loan Documents,
when and as due (whether at maturity, by reason of notice of prepayment or
acceleration or otherwise) and in accordance with the terms of such agreement
or documents and such failure shall continue unremedied for three Business
Days; or
(b) The Company or any of its Subsidiaries shall default
(beyond any applicable period of grace) in the payment when due and in
accordance with its terms of any principal of or interest on any of its other
Indebtedness aggregating $10,000,000 or more; or any event specified in any
note, agreement, indenture or other document evidencing or relating to any such
Indebtedness shall occur, if the effect of such event is to permit (with the
giving of notice, the lapse of time or both) any holder or holders thereof (or
a trustee or agent on behalf of such holder or holders) to cause such
Indebtedness to become due, or be prepaid in full (whether by redemption,
purchase or otherwise) prior to its stated maturity, or to cause the maturity
of any such Indebtedness to be accelerated (whether or not automatically); or
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(c) A default shall be continuing under any Contract (other
than a Contract relating to Indebtedness to which clause (b) of this Section 9
is applicable) binding upon the Company or any Subsidiary, except a default
that, together with all other such defaults, has not had and could not
reasonably be expected to have a material adverse effect on the consolidated
financial position, operations or business of the Company and its Subsidiaries
taken as a whole or on the legal, valid, binding or enforceable nature of the
Loan Documents or the ability of the Company to perform its obligations
thereunder; or
(d) Any representation, warranty or certification made or
deemed made by the Company in any Loan Document (or in any modification or
supplement thereto), or any certificate furnished by, at the request of or on
behalf of the Company or any Subsidiary to the Administrative Agent or any Bank
pursuant to the provisions thereof shall prove to have been false or misleading
as of the time made or furnished in any material respect; or
(e) The Company shall default in the performance of any of its
obligations under any of Sections 8.01(g), 8.04(a) (insofar as such Section
requires the preservation of the corporate existence of the Company), 8.04(d),
8.04(g), 8.06 through 8.13 (inclusive), 8.16, 8.17, 8.19 or 8.20; or the
Company shall default in the performance of any of its other obligations in
this Agreement or any other Loan Document and such default shall continue
unremedied for a period of thirty Business Days after notice thereof to the
Company by the Administrative Agent (or by any Bank through the Administrative
Agent); or
(f) The Company or any of its Subsidiaries shall admit in
writing its inability to pay, generally be unable to pay, or generally not be
paying its debts as such debts become due; or
(g) The Company or any of its Subsidiaries shall (i) apply for
or consent to or fail to controvert in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or the like of itself or of all or a substantial part of its
property, domestic or foreign, (ii) make a general assignment for the benefit
of its creditors, (iii) commence a voluntary case under the Federal bankruptcy
laws (as now or hereafter in effect), (iv) file a petition seeking to take
advantage of any other law, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or readjustment of debts
or supervision, conservation or rehabilitation, (v) fail to controvert in a
timely and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under such bankruptcy laws or other laws, or
(vi) take any corporate action for the purpose of effecting any of the
foregoing; or
(h) A proceeding or case shall be commenced against the Company
or any of its Subsidiaries, without the application or consent of any of them,
in any court of competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, or the composition or readjustment
of its debts or supervision, conservation or rehabilitation, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of the
Company or such Subsidiary or of all or any substantial part of the assets,
domestic or foreign, of the Company or any of its Subsidiaries, or (iii) any
other or similar relief in respect of the Company or such Subsidiary under the
federal bankruptcy laws (as now or hereafter in effect) or under any other
laws, domestic or foreign, relating to bankruptcy, insolvency,
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reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed or unstayed, or an order,
judgment or decree approving or ordering any of the foregoing shall be entered
and continue unstayed and in effect, for a period of 60 or more days; or an
order granting the relief requested in such case or proceeding against the
Company or such Subsidiary (including an order for relief under such federal
bankruptcy laws) shall be entered; or
(i) A final judgment or judgments or order or orders for the
payment of money in excess of $10,000,000 in the aggregate (net of any
insurance or other indemnification obligations with respect to such liability
owing from a Person reasonably acceptable to the Administrative Agent and which
has provided written confirmation of its obligations reasonably satisfactory to
the Administrative Agent) shall be rendered by a court or courts against the
Company and/or any of its Subsidiaries and either (i) the same shall not be
discharged (or provision shall not be made for such discharge by way of
insurance or otherwise), or a stay of execution thereof shall not be procured,
within 60 days from the date of entry thereof and the Company or the relevant
Subsidiary shall not, within said period of 60 days, or such longer period
during which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal, or (ii)
enforcement proceedings shall have been commenced upon such judgment or order;
or
(j) A judgment or order for other than the payment of money
shall be entered against the Company or any Subsidiary which judgment or order
could, in the reasonable judgment of the Majority Banks, together with all
other such judgments or orders, reasonably be expected to have a material
adverse effect on the consolidated financial position, operations or business
of the Company and its Subsidiaries taken as a whole or on the legal, valid,
binding or enforceable nature of the Loan Documents or the ability of the
Company to perform its obligations thereunder; or
(k) An event or condition specified in Section 8.01(l) shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a result
of such event or condition, together with all other such events or conditions,
the Company or any ERISA Affiliate shall incur or in the reasonable opinion of
the Majority Banks shall be likely to incur a Liability to a Plan, a
Multiemployer Plan or PBGC (or any combination of the foregoing) which is, in
the reasonable determination of the Majority Banks, material in relation to the
consolidated financial condition, operations or business of the Company and its
Subsidiaries, taken as a whole, or the legal, valid and binding nature of the
Loan Documents or on the ability of the Company to perform its obligations
thereunder; or
(l) A Change in Control shall be deemed to have occurred; or
(m) The Company or any of its Affiliates asserts, or the Company
or any of its Affiliates or any other Person institutes any proceedings seeking
to establish, that any provision of the Loan Documents is invalid, not binding
or unenforceable; or
(n) The subordination provisions contained in any of the
instruments and agreements governing the Subordinated Notes shall cease, for
any reason, to be in full force
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and effect, or any Person shall so assert to the Company in writing and the
Company shall not promptly contest such assertion;
THEREUPON: (1) in the case of an Event of Default other than one referred to
in clause (g) or (h) of this Section 9, the Administrative Agent may and, upon
request of the Majority Banks, shall, by notice to the Company, terminate the
Commitments in whole or, from time to time, in part and/or declare in whole or,
from time to time, in part the principal amount then outstanding of, and the
accrued interest on, the Loans and the Notes and all other amounts payable by
the Company hereunder, under the Notes or under any other Loan Document
(including, without limitation, any amounts payable under Section 5.05) to be
forthwith due and payable, whereupon such amounts shall be immediately due and
payable without presentment, demand, protest, notice or other formalities of
any kind (other than the notice provided for in this clause (1)) all of which
are hereby expressly waived by the Company; and (2) in the case of the
occurrence of an Event of Default referred to in clause (g) or (h) of this
Section 9 with respect to the Company, the Commitments shall automatically and
without any notice to the Company terminate and the principal amount then
outstanding of, and the accrued interest on, the Loans and the Notes and all
other amounts payable by the Company hereunder, under the Notes or under any
other Loan Document (including, without limitation, any amounts payable under
Section 5.05) shall automatically and without any notice to the Company become
immediately due and payable without presentment, demand, protest, notice or
other formalities of any kind, all of which are hereby expressly waived by the
Company.
Section 10. The Administrative Agent.
10.01 Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes BNY, and BNY hereby agrees, to act as the
administrative agent for such Bank hereunder and under the other Loan Documents
with such powers as are specifically delegated to the Administrative Agent by
the terms of this Agreement and of the other Loan Documents, together with such
other powers as are reasonably incidental thereto. The Administrative Agent
(which term as used in this sentence and in Section 10.05 and the first
sentence of Section 10.06 shall include reference to its affiliates and to its
own and its affiliates' officers, directors, employees and agents): (a) shall
have no duties or responsibilities except those expressly set forth in this
Agreement and in the other Loan Documents, which duties shall be purely
ministerial, and shall not by reason of this Agreement or any other Loan
Document be a trustee or other fiduciary for any Bank; (b) shall not be
responsible to the Banks for any recitals, statements, representations or
warranties contained in this Agreement or in any other Loan Document, or in any
certificate or other document referred to or provided for in, or received by it
under, this Agreement or any other Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document or any certificate or other document referred to or
provided for herein or therein or received by any of them under this Agreement
or any other Loan Document or for any failure by the Company or any other
Person to perform any of its obligations hereunder or thereunder; (c) shall not
be required to initiate or conduct any litigation or collection proceedings
hereunder or under any other Loan Document; (d) shall not be responsible for
any action taken or
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omitted to be taken by it hereunder or under any other Loan Document or under
any other document or instrument referred to or provided for herein or therein
or in connection herewith or therewith, except for their own gross negligence
or willful misconduct and (e) shall not be required under any circumstances to
take any action that, in its judgment, (i) is contrary to any provision of this
Agreement, any other Loan Document or any certificate or other document
referred to or provided for in or received by it or the Banks under this
Agreement or any other Loan Document, (ii) is contrary to Applicable Law or
(iii) would expose it to any Liability or expense against which it has not been
indemnified to its satisfaction. The Administrative Agent may employ agents
and attorneys-in-fact and shall not be responsible for the negligence or
misconduct of any such agents or attorneys-in-fact selected by it in good
faith. The Administrative Agent may deem and treat the payee of any Note as
the holder thereof for all purposes hereof unless and until a written notice of
the assignment or transfer thereof shall have been filed with the
Administrative Agent, together (to the extent required by Section 11.06) with
the written consent of the Company to such assignment or transfer.
10.02 Reliance by the Administrative Agent. The Administrative
Agent shall be entitled to rely upon any certification, notice or other
communication (including any thereof by telephone, telex, telecopier, telegram
or cable) believed by it to be genuine and correct and to have been signed,
sent or given by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Administrative Agent. As to any matters not expressly provided
for by this Agreement or any other Loan Document, the Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions signed by the Majority
Banks, and such instructions of the Majority Banks and any action taken or
failure to act pursuant thereto shall be binding on all of the Banks.
10.03 Defaults. The Administrative Agent shall not be deemed to
have knowledge or notice of the occurrence of a Default (other than the non-
payment to it of principal of or interest on Loans or of facility fees) unless
the Administrative Agent has received notice from a Bank or the Company
specifying such Default and stating that such notice is a "Notice of Default".
In the event that the Administrative Agent receives such a notice of the
occurrence of a Default, the Administrative Agent shall give prompt notice
thereof to the Banks (and shall give each Bank prompt notice of each such non-
payment). In the event of any Default, the Administrative Agent shall (subject
to Section 10.07) (a) in the case of a Default that constitutes an Event of
Default, take either or both of the actions referred to in clause (1) of the
last paragraph of Section 9 if so directed by the Majority Banks and (b) in the
case of any Default, take such other action with respect to such Default as
shall be reasonably directed by the Majority Banks, provided that, unless and
until the Administrative Agent shall have received such directions, in the
event of any Default, the Administrative Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Default as it shall deem advisable in the best interests of the Banks.
10.04 Rights as a Bank. Each Person acting as the
Administrative Agent that is also a Bank shall, in its capacity as a Bank
hereunder, have the same rights and powers hereunder and under the other Loan
Documents as any other Bank and may exercise the
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same as though it were not acting as the Administrative Agent, and the term
"Bank" or "Banks" shall, unless the context otherwise indicates, include such
Person in its individual capacity. Each Person acting as the Administrative
Agent and the affiliates of any of them may (without having to account therefor
to any Bank) accept deposits from, lend money to and generally engage in any
kind of banking, trust or other business with the Company (and any of its
Subsidiaries or Affiliates) as if it were not acting as the Administrative
Agent, and each such Person and the affiliates of each of them may accept fees
and other consideration from the Company (and any of its Subsidiaries or
Affiliates) for services in connection with this Agreement or the other Loan
Documents or otherwise without having to account for the same to the Banks.
10.05 Indemnification. The Banks agree to indemnify the
Administrative Agent (to the extent not reimbursed under Section 11.03, but
without limiting the obligations of the Company under said Section 11.03)
ratably in accordance with the respective principal amounts of the Loans
outstanding made by the Banks (or, if no Loans are at the time outstanding,
ratably in accordance with their respective Commitments), for any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind and nature whatsoever which
may be imposed on, incurred by or asserted against the Administrative Agent in
any way relating to or arising out of this Agreement or any other Loan Document
or any other documents contemplated by or referred to herein or therein or the
transactions contemplated hereby or thereby (including, without limitation, the
costs and expenses which the Company is obligated to pay under Section 11.03,
but excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or
of any such other documents, provided that no Bank shall be liable for any of
the foregoing to the extent they arise from the gross negligence or willful
misconduct of the party to be indemnified.
10.06 Non-Reliance on Administrative Agent and Other Banks.
Each Bank agrees that it has made and will continue to make, independently and
without reliance on the Administrative Agent or any other Bank, and based on
such documents and information as it has deemed appropriate, its own credit
analysis of the Company and its Subsidiaries and its own decision to enter into
this Agreement and the other documents to which it is a party executed in
connection herewith and that it will, independently and without reliance upon
the Administrative Agent or any other Bank, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
analysis and decisions in taking or not taking action under this Agreement or
any of the other Loan Documents. The Administrative Agent shall not be
required to keep itself informed as to the performance or observance by the
Company of this Agreement or any of the other Loan Documents or any other
document referred to or provided for herein or therein or to inspect the
properties or books of the Company or any of its Subsidiaries. Except for
notices, reports and other documents and information expressly required to be
furnished to the Banks by the Administrative Agent hereunder and under the
other Loan Documents, the Administrative Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of the Company or any
of its Subsidiaries (or any of their affiliates) or the Loan Documents which
may come into the possession of the Administrative Agent or any of its
affiliates.
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10.07 Failure to Act. Except for action expressly required of
the Administrative Agent hereunder and under the other Loan Documents, the
Administrative Agent shall in all cases be fully justified in failing or
refusing to act hereunder and thereunder unless it shall receive further
assurances to its satisfaction from the Banks of their indemnification
obligations under Section 10.05 against any and all Liability and expense which
may be incurred by it by reason of taking or continuing to take any such
action.
10.08 Resignation of the Administrative Agent. Subject to the
appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by giving notice thereof
to the Banks and the Company. Upon receipt of any such notice of resignation,
the Majority Banks shall have the right, subject to the approval of the
Company, which approval shall not to be unreasonably withheld, to appoint a
successor Administrative Agent. If no successor Administrative Agent shall
have been so appointed by the Majority Banks and shall have accepted such
appointment within 30 days after the retiring Administrative Agent's giving of
notice of resignation, then the retiring Administrative Agent may, on behalf of
the Banks and subject to the approval of the Company, which approval shall not
be unreasonably withheld, appoint a successor Administrative Agent, which shall
be a bank which has an office in New York, New York with a combined capital and
surplus of at least $500,000,000. Upon the acceptance by any Person of its
appointment as a successor Administrative Agent, such Person shall thereupon
succeed to and become vested with all the rights, powers, privileges, duties
and obligations of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder and under the other Loan Documents. After any retiring
Administrative Agent's resignation as Administrative Agent, the provisions of
this Section 10 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the
Administrative Agent.
10.09 Execution and Amendment of Loan Documents on Behalf of the
Banks. Each Bank hereby authorizes the Administrative Agent to execute and
deliver, in the name of and on behalf of such Bank, any Loan Document or any
other agreement, document or instrument referred to or provided for herein or
therein or relating to any such agreement, document or instrument which
requires execution by or on behalf of such Bank.
10.10 Consents under Loan Documents. Subject to Section 11.04
and 11.06(a) and except as otherwise expressly provided in this Agreement,
without the prior written consent of the Majority Banks, the Administrative
Agent will not consent to any amendment, modification, supplement or waiver
under any of the Loan Documents, provided that the Administrative Agent shall
not be required to consent to any such amendment, modification, supplement or
waiver that affects its rights or duties.
Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Administrative
Agent or any Bank to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege under this Agreement,
any Note or any other Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or
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privilege under this Agreement, any Note or any other Loan Document preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. The remedies provided herein are cumulative and not exclusive of
any remedies provided by law.
11.02 Notices.
(a) All notices and other communications provided for herein or
in any other Loan Document (including, without limitation, any modifications
of, or waivers or consents under, this Agreement) shall be given or made by
telex, telecopy, telegraph, cable or in writing and telexed, telecopied,
telegraphed, cabled, mailed or delivered to the intended recipient at the
"Address for Notices" specified below its name on the signature pages hereof;
or, as to any party, at such other address as shall be designated by such party
in a notice to each other party. Except as otherwise provided in this
Agreement or in any other Loan Document, all such communications shall be
deemed to have been duly given when transmitted by telex and the appropriate
answer-back is received, when transmitted by telecopier and received at such
telecopier number, when delivered to the telegraph or cable office or
personally delivered or, in the case of a mailed notice, upon receipt, in each
case given or addressed as aforesaid.
(b) Any requirement under Applicable Law of reasonable notice
by the Administrative Agent or any Bank to the Company of any event in
connection with, or in any way related to, the Loan Documents or the exercise
by the Administrative Agent or any Bank of any of their rights thereunder shall
be met if notice of such event is given to the Company in the manner prescribed
above at least 10 days before (A) the date of such event or (B) the date after
which such event will occur.
11.03 Expenses, Etc. Whether or not any Loans are made
hereunder, the Company shall:
(a) pay or reimburse the Administrative Agent and each Bank for
all transfer, documentary, stamp and similar taxes, and all recording
and filing fees and taxes, payable in connection with, arising out of,
or in any way related to, the execution, delivery and performance of the
Loan Documents or the making of the Loans, and all other costs and
charges incurred in connection with any filing, registration, recording
or perfection of any security interest contemplated by this Agreement or
any other Loan Document or any other document referred to herein or
therein;
(b) pay or reimburse the Administrative Agent for all
reasonable costs and expenses (including reasonable fees and
disbursements of Winthrop, Stimson, Putnam & Roberts, counsel to the
Administrative Agent, and of any appraisers, accountants and other
experts employed or retained by the Administrative Agent) incurred by
the Administrative Agent in connection with, arising out of, or in any
way related to (i) the negotiation, preparation, execution and delivery
of (A) this Agreement and the other Loan Documents, (B) whether or not
executed, any waiver, amendment, modification or consent thereunder or
thereto, (C) the syndication, whether before or after the Agreement
Date, of this Agreement, (ii) the administration of and any operations
under the Loan Documents, (iii) consulting with respect to any matter in
any way arising out of, related to, or connected with, the Loan
Documents, including (A) the protection,
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preservation, exercise or enforcement of any of the rights of the
Administrative Agent or the Banks in, under or related to the Loan
Documents or (B) the performance of any of the obligations of the
Administrative Agent or the Banks under or related to the Loan Documents
or (iv) protecting, preserving, exercising or enforcing any of the
rights of the Administrative Agent or the Banks in, under or related to
the Loan Documents;
(c) after the occurrence and during the continuation of a
Default, pay or reimburse each Bank for all costs and expenses
(including fees and disbursements of one legal counsel and other experts
employed or retained by the Banks) incurred by such Bank in connection
with, arising out of, or in any way related to (i) consulting with
respect to (A) the protection, preservation, exercise or enforcement of
any of its rights in, under or related to or the Loan Documents or (B)
the performance of any of its obligations under or related to the Loan
Documents or (ii) protecting, preserving, exercising or enforcing any of
its rights in, under or related to or the Loan Documents.
The Company hereby agrees to indemnify the Administrative Agent,
each Bank and their respective directors, officers, employees and agents from,
and hold each of them harmless against, any and all losses, liabilities,
claims, damages or expenses incurred by any of them arising out of or by reason
of any investigation or litigation or other proceedings (including any
threatened investigation or litigation or other proceedings) arising out of or
relating to the entry into of this Agreement or any of the other Loan Documents
(or any amendment or other modification hereto or thereto) or any actual or
proposed use by the Company or any of its Subsidiaries of the proceeds of any
of the Loans, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified); provided, however, that no
indemnitee shall have the right to be indemnified hereunder (i) to the extent
that such claims directly relate to or arise solely out of any breach by such
indemnitee of its obligations under the Loan Documents, or (ii) to the extent
that such claims directly relate to or arise solely out of the relationship
between (A) an assignor Bank and an assignee Bank under this Agreement (unless
such assignee Bank became such pursuant to an assignment made at the request of
the Company as permitted hereunder) or (B) a Bank and a participant of such
Bank under this Agreement.
11.04 Amendments, Etc. Except as otherwise expressly provided
in this Agreement or the other Loan Documents, any provision of this Agreement
or the other Loan Documents may be amended or modified only by an instrument in
writing signed by the Company, the Administrative Agent and the Majority Banks,
or by the Company and the Administrative Agent acting with the consent of the
Majority Banks, and any provision of this Agreement or the other Loan Documents
may be waived by the Majority Banks or by the Administrative Agent acting with
the consent of the Majority Banks; provided that no amendment, modification or
waiver shall, unless by an instrument signed by all of the Banks or by the
Administrative Agent acting with the consent of all of the Banks: (i) change
the amount or change the term, or change the time or waive any requirement for
the reduction or termination, of the Commitments, (ii) change the date fixed
for the payment of principal of or interest on any RC Loan or any fee or other
amount (other than any Bid Rate Loan)
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<PAGE> 75
payable hereunder, under the other Loan Documents or under any letter,
agreement or other document providing for the payment of fees by the Company to
the Administrative Agent or the Banks in connection with any of the Loan
Documents, (iii) change the amount of any payment of principal of any RC Loan,
the rate at which interest is payable on any RC Loan or any fee is payable or
the amount of any other payment (other than with respect to any Bid Rate Loan)
to be made hereunder, under the other Loan Documents or under any letter,
agreement or other document providing for the payment of other amounts by the
Company to the Administrative Agent or the Banks in connection with any of the
Loan Documents, (iv) alter the terms of this Section 11.04 or any provision of
this Agreement requiring the consent or other action of all the Banks, (v)
amend the definition of the term "Majority Banks", (vi) waive or change any of
the conditions precedent set forth in Section 6 or (vii) release any
Collateral, if any; provided, further that no amendment, modification or
waiver shall (i) change the date fixed for the payment of principal of or
interest on any Bid Rate Loan or (ii) change the amount of any payment of
principal of any Bid Rate Loan or the rate at which interest is payable on any
Bid Rate Loan, unless by an instrument signed by the Bank which has made such
Bid Rate Loan or by the Administrative Agent acting with the consent of such
Bank; and provided, further, that any amendment of Section 10 and any other
amendment, modification or waiver that affects the rights and duties of the
Administrative Agent shall require the consent of the Administrative Agent.
Unless otherwise specified in such waiver, a waiver of any right
under the Loan Documents shall be effective only in the specific instance and
for the specific purpose for which given. No election not to exercise, failure
to exercise or delay in exercising any right, nor any course of dealing or
performance, shall operate as a waiver of any right of the Administrative Agent
or any Bank under the Loan Documents or Applicable Law, nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right of the Administrative Agent or any
Bank under the Loan Documents or Applicable Law.
11.05 Successors and Assigns. This Agreement and the other Loan
Documents shall be binding upon and inure to the benefit of the parties thereto
and their respective successors and permitted assigns.
11.06 Assignments and Participations.
(a) The Company may not assign its rights or obligations
hereunder, under the Notes or under the other Loan Documents without the prior
consent of all of the Administrative Agent and each Bank and no assignment of
any such obligation shall release the Company therefrom unless the
Administrative Agent and each Bank shall have consented to such release in a
writing specifically referring to the obligation from which the Company is to
be released.
(b) No Bank may assign any of its Loans or Notes in whole or in
part unless (i) it shall have received the prior consent (which consent shall
not be unreasonably withheld) of the Company and the Administrative Agent and
(ii) any such partial assignment shall be in an amount equal to $10,000,000 or
any integral multiple of $1,000,000 in excess thereof. Upon the effectiveness
of any assignment consented to by the Company and the Administrative
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<PAGE> 76
Agent, the assignee shall have, to the extent of such assignment (unless
otherwise provided in such assignment with the consent of the Administrative
Agent), the obligations, rights and benefits of a Bank hereunder holding the
Loan (or portions thereof) assigned to it (in addition to the Loan, if any,
theretofore held by such assignee) and the assigning Bank shall, to the extent
of such assignment, be released from such obligations. The assignor Bank
shall, upon the effectiveness of any assignment of any of its Loans or Note,
pay to the Administrative Agent a transfer fee in an amount equal to $3,500
(without duplication of any fees paid pursuant to clause (c) below).
(c) No Bank may assign any of its Commitment unless (i) it
shall have received the prior consent (which consent shall not be unreasonably
withheld) of the Company and the Administrative Agent and (ii) any such partial
assignment shall be in an amount equal to $10,000,000 or any integral multiple
of $1,000,000 in excess thereof. Upon the effectiveness of any assignment
consented to by the Company and the Administrative Agent, the assignee shall
have, to the extent of such assignment (unless otherwise provided in such
assignment with the consent of the Company and the Administrative Agent), the
obligations, rights and benefits of a Bank hereunder holding the Commitment (or
portions thereof) assigned to it (in addition to the Commitment, if any,
theretofore held by such assignee) and the assigning Bank shall, to the extent
of such assignment, be released from the commitment (or portions thereof) so
assigned. The assignor Bank shall, upon the effectiveness of any assignment of
any of its Commitment, pay to the Administrative Agent a transfer fee in an
amount equal to $3,500 (without duplication of any fees paid pursuant to clause
(b) above).
(d) Any other provision of this Agreement to the contrary
notwithstanding (except with respect to any assignment made in accordance with
subsection (g) hereof), the right to the principal of, and interest on, a Loan
may be assigned only through (i) the surrender of the Note applicable thereto
to the Company and the reissuance of such Note by the Company to the new holder
or the surrender of such Note to the new holder or the surrender of such Note
to the Company and the issuance of a new Note applicable thereto by the Company
to the new holder (the "Issuance System"), or (ii) through a book entry system
maintained by the Company or Administrative Agent (the "Book Entry System").
If any assignments are made pursuant to the Book Entry System, the Company or
the Administrative Agent shall maintain a registry which reflects and
identifies the owners of interests in the Loans. Any assignment by a Bank of
an interest in a Loan shall be conditioned upon and shall not be effective
until such Bank notifies the Company or the Administrative Agent, who will in
turn notify the Company, of the identity of the Bank's assignee and the
interest in principal and interest assigned to such assignee in order for the
assignment to be accomplished in compliance with either the Issuance System or
Book Entry System. After any such Bank gives such notice to the Company or the
Administrative Agent, the assignment will be accomplished in accordance with
either the Issuance System or the Book Entry System.
(e) A Bank may, without the consent of the Company or the
Administrative Agent, sell or agree to sell one or more other Persons a
participation in all or any part of any Loan held by it or Loans made or to be
made by it, or its Commitment or any other interest in the Loan Documents, in
which event, except as otherwise provided in Section 4.07(c), each such
participant shall not have any other rights or benefits under this Agreement or
any other Loan Document (the participant's rights against such Bank in respect
of such
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<PAGE> 77
participation to be those set forth in the agreement (the "Participation
Agreement") executed by such Bank in favor of the participant). All amounts
payable by the Company to any Bank under Section 5 shall be determined as if
such Bank had not sold or agreed to sell any participations in such Loan and as
if such Bank were funding all of such Loan in the same way that it is funding
the portion of such Loan in which no participations have been sold. In no
event shall a Bank that sells a participation be obligated to the participant
under the Participation Agreement to take or refrain from taking any action
hereunder or under such Bank's Notes except that such Bank may agree in the
Participation Agreement that it will not, without the consent of the
participant, agree to (i) the increase or extension of the term, or the
extension of the time or waiver of any requirement for the reduction or
termination, of such Bank's Commitment, (ii) the extension of any date fixed
for the payment of principal of or interest on the related Loan or Loans or any
portion of any fees payable to the participant, (iii) the reduction of any
payment of principal thereof or (iv) the reduction of the rate at which either
interest is payable thereon or (if the participant is entitled to any part
thereof) a facility fee is payable hereunder to a level below the rate at which
the participant is entitled to receive interest or facility fee (as the case
may be) in respect of such participation.
(f) Notwithstanding anything set forth above, no assignee or
holder of a participation shall be entitled to any amounts that would otherwise
be payable to it with respect to its assignment or participation under Section
4.08 or Section 4.09 unless (i) such amounts are payable in respect of
Regulatory Changes that are enacted, adopted or issued after the date the
applicable assignment or participation agreement was executed or (ii) such
amounts would have been payable to the Bank that made such assignment or
granted such participation if such assignment had not been made or such
participation granted.
(g) Notwithstanding anything herein to the contrary, any Bank
may at any time, without the consent of the Company, the Administrative Agent
or any Bank, without payment of any transfer fees and without restrictions as
to amount or otherwise (i) assign any of its Loans, Notes or Commitments in
whole or in part to an Affiliate of such Bank or to another Bank and (ii)
pledge and assign as collateral all or any portion of its rights under the Loan
Documents to a Federal Reserve Bank, provided that no such pledge or assignment
pursuant to clause (ii) shall release the transferor Bank from its obligations
hereunder.
(h) A Bank may furnish any information concerning the Company
or any of its Subsidiaries in the possession of such Bank from time to time to
assignees and participants (including prospective assignees and participants)
subject, however, to the provisions of Section 11.12.
11.07 Survival. Except as otherwise expressly provided therein,
the rights and obligations of the Company, the Administrative Agent, the Banks,
their respective affiliates and their respective directors, officers, employees
and agents, including but not limited to any such set forth in Sections 10.05
and 11.03, shall survive the repayment of the Loans and the termination of the
Commitments. In addition, each representation and warranty made, or deemed to
be made by a notice of borrowing of Loans, hereunder shall survive the making
of such Loans and no Bank shall be deemed to have waived, by reason of making
any such Loan, any Default which may arise by reason of such representation or
warranty proving to have been false or misleading, notwithstanding that the
Administrative Agent or such Bank
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<PAGE> 78
may have had notice or knowledge or reason to know that such representation or
warranty was false or misleading at the time such Loans were made.
11.08 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
11.09 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
11.10 Governing Law; Submission to Jurisdiction. This Agreement
and the other Loan Documents shall be governed by, and construed in accordance
with, the law of the State of New York (without giving effect to its choice of
law principles). The Company hereby submits to the nonexclusive jurisdiction
of the United States District Court for the Southern District of New York and
of any New York state court sitting in New York City for the purposes of all
legal proceedings arising out of or relating to this Agreement, the other Loan
Documents or the transactions contemplated hereby or thereby. The Company
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such proceeding
brought in such a court and any claim that any such proceeding brought in such
a court has been brought in an inconvenient forum. The Company hereby waives
personal service of process and consents that service of process upon it may be
made by certified or registered mail, return receipt requested, at its address
specified or determined in accordance with the provisions of Section 11.02, and
service so made shall be deemed completed on the third Business Day after such
service is deposited in the mail. Nothing herein shall affect the right of the
Administrative Agent, any Bank, any affiliate of any of them and any director,
officer, employee or agent of any of them to serve process in any other manner
permitted by law or shall limit the right of the Administrative Agent, any
Bank, any affiliate of any of them and any director, officer, employee or agent
of any of them to bring proceedings against the Company in the courts of any
other jurisdiction. Any judicial proceeding by the Company against the
Administrative Agent or any Bank arising out of or relating to this Agreement,
the other Loan Documents or the transactions contemplated hereby or thereby
shall be brought only in a court located in, in the case of the Administrative
Agent, the City and State of New York and, in the case of a Bank, the
jurisdiction in which such Bank's principal United States office is located.
11.11 WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE
ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
11.12 Confidentiality. The Administrative Agent and each Bank
agrees (on behalf of itself and each of its Affiliates, Subsidiaries,
directors, officers, employees and representatives) to use reasonable
precautions to keep confidential, in accordance with their customary procedures
for handling confidential information of this nature and in accordance
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<PAGE> 79
with safe and sound banking practices, any non-public information supplied to
it by the Company pursuant to this Agreement or the other Loan Documents (and
not otherwise known to such party) which is identified by the Company as being
confidential at the time the same is delivered to the Administrative Agent or
any Bank (or the Affiliates or Subsidiaries of any of them), provided that
nothing herein shall limit the disclosure of any such information (a) to the
extent required by Applicable Law, statute, rule, regulation or judicial
process, (b) to counsel for any of the Administrative Agent or any Bank, (c) to
bank examiners, auditors, accountants or other regulatory or administrative
bodies to whose jurisdiction such Bank may be subject, (d) to the
Administrative Agent or any other Bank, (e) in connection with any litigation
to which any one or more of the Banks is a party, (f) to the extent required
for the purpose of protecting, preserving, exercising or enforcing any of the
rights of the Administrative Agent or the Banks in, under or related to the
Loan Documents, performing any of the obligations of the Administrative Agent
or the Banks under or related to the Loan Documents and consulting with respect
to any of the foregoing matters, (g) to any Affiliate or Subsidiary of any Bank
so long as such Bank causes such Affiliate or Subsidiary to adhere to the
provisions of this Section 11.12 as though it were legally bound thereby, or
(h) to any assignee or participant (or prospective assignee or participant) so
long as such assignee or participant (or prospective assignee or participant)
first executes and delivers to the respective Bank a Confidentiality Agreement
in substantially the form of Exhibit C hereto; provided, further, that, unless
specifically prohibited by Applicable Law or court order, each Bank shall,
prior to disclosure thereof, notify the Company of any request for disclosure
of any such non-public information (i) by any governmental agency or
representative thereof (other than any such request in connection with an
examination of the financial condition of such Bank by such governmental
agency) or (ii) pursuant to legal process; and provided finally that in no
event shall the Administrative Agent or any Bank be obligated or required to
return any materials furnished by the Company. The obligations of each Bank
and the Administrative Agent under this Section 11.12 shall supersede and
replace the obligations of such Bank or the Administrative Agent, as the case
may be, under any other document, agreement or instrument in respect of this
financing which imposed on any Bank or the Administrative Agent obligations
similar to those imposed by this Section 11.12 and which was signed and
delivered by such Bank or the Administrative Agent to the Company prior to the
Agreement Date.
11.13 Amounts Payable Due Upon Request for Payment. All amounts
payable by the Company under Section 4.09, Section 5, Section 11.03 and under
the other provisions of the Loan Documents shall, except as otherwise expressly
provided, be immediately due upon request for the payment thereof.
11.14 Remedies of the Essence. The various rights and remedies
of the Administrative Agent and the Banks under the Loan Documents are of the
essence of those agreements, and the Administrative Agent and the Banks shall
be entitled to obtain a decree requiring specific performance of each such
right and remedy.
11.15 Rights Cumulative. Each of the rights and remedies of the
Administrative Agent and the Banks under the Loan Documents shall be in
addition to all of their other rights and remedies under the Loan Documents and
Applicable Law, and nothing in the Loan Documents shall be construed as
limiting any such rights or remedies.
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<PAGE> 80
11.16 LIMITATION OF LIABILITY. NONE OF THE ADMINISTRATIVE
AGENT, THE BANKS, THEIR RESPECTIVE AFFILIATES OR THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND
THE COMPANY HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR, ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES SUFFERED BY THE COMPANY IN CONNECTION WITH
ANY CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THE LOAN
DOCUMENTS OR THE RELATIONSHIPS ESTABLISHED THEREUNDER OR THE TRANSACTIONS
CONTEMPLATED THEREBY, WHETHER SUCH CLAIM ARISES OR IS ASSERTED BEFORE OR AFTER
THE AGREEMENT DATE OR BEFORE OR AFTER THE MATURITY DATE.
11.17 Reference Banks. Each Reference Bank shall furnish to the
Administrative Agent timely information for the purpose of determining the
Eurodollar Base Rate. If any Reference Bank shall notify the Administrative
Agent that thenceforth it shall not be able to furnish such information in a
timely manner or shall assign all of its Loans or Commitment to a Person that
is not an Affiliate of such Reference Bank, the Administrative Agent shall,
with the consent of the Majority Banks and after consultation with the Company,
appoint another Bank as a Reference Bank in place of such Reference Bank.
11.18 Schedules. Any Schedule to this Agreement may disclose on
the Agreement Date, in addition to the relevant information with respect to the
Company and its Subsidiaries as of the Agreement Date, relevant information
with respect to any Person that may become a Subsidiary of the Company after
the Agreement Date.
11.19 Severability of Provisions. Any provision of the Loan
Documents that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions thereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by Applicable Law, the Company hereby
waives any provision of Applicable Law that renders any provision of the Loan
Documents prohibited or unenforceable in any respect.
11.20 Entire Agreement. This Agreement, the Notes and the other
Loan Documents embody the entire agreement among the Company, the
Administrative Agent and the Banks relating to the subject matter hereof and
supersede all prior agreements, representations and understandings, if any,
relating to the subject matter hereof.
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<PAGE> 81
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
---------------------------------
Name: Scott D. Silverman
Title: Senior Vice President
General Counsel and Secretary
Address for Notices:
PennCorp Financial Group, Inc.
745 Fifth Avenue, Suite 500
New York, New York 10151
Telecopier No.: (212) 758-5442
Telephone No.: (212) 832-0700
Attention: Chief Financial Officer
With a copy to:
PennCorp Financial, Inc.
3 Bethesda Metro Court, Suite 1600
Bethesda, Maryland 20814
Telecopier No.: (301) 657-4770
Telephone No.: (301) 656-1777
Attention: Scott Silverman
Credit Agreement
<PAGE> 82
Commitment THE BANK OF NEW YORK, as
- ---------- Administrative Agent and
as a Bank
$47,000,000
By: /s/ BENJAMIN L. BALKIND
-----------------------------------
Name: Benjamin L. Balkind
Title: Vice President
Lending Office for all Loans:
The Bank of New York
One Wall Street
New York, New York 10286
Address for Notices:
The Bank of New York
One Wall Street
New York, New York 10286
Telecopier No.: (212) 809-9520
Telephone No.: (212) 635-6460
Attention: Michael Barry
With a copy to:
William Fahey
Telecopier No.: (212) 635-6365
Telephone No.: (212) 635-4690
Credit Agreement
<PAGE> 83
Commitment THE CHASE MANHATTAN BANK, as a
- ---------- Managing Agent and as a Bank
$42,000,000
By: /s/ PETER PLATTEN
-----------------------------------
Name: Peter Platten
Title: Vice President
Lending Office for all Loans:
One Chase Manhattan Plaza
New York, New York 10081
Attn: Frank Forlenza
Phone: (212) 552-7942
Fax: (212) 552-7490
Address for Notices:
One Chase Manhattan Plaza
New York, New York 10081
Telecopier No.: (212) 552-5231
Telephone No.: (212) 552-3972
Attention: Peter Platten
Credit Agreement
<PAGE> 84
Commitment THE FIRST NATIONAL BANK OF CHICAGO,
- ---------- as a Managing Agent and as a Bank
$42,000,000
By: /s/ PHILIP H. BRITT
-----------------------------------
Name: Philip H. Britt
Title: Senior Vice President
Lending Office for all Loans:
The First National Bank of Chicago
One First National Plaza,
Mail Suite 0085
Chicago, Illinois 60670
Address for Notices:
The First National Bank of Chicago
One First National Plaza,
Mail Suite 0085
Chicago, Illinois 60670
Telecopier No.: (312) 732-4033
Telephone No.: (312) 732-4131
Attention: Philip H. Britt
Credit Agreement
<PAGE> 85
Commitment NATIONSBANK, N.A., as a Managing Agent
- ---------- and as a Bank
$42,000,000
By: /s/ GREGORY A. SEIB
-----------------------------------
Name: Gregory A. Seib
Title: Senior Bank Debt Specialist
Lending Office for all Loans:
NationsBank, N.A.
600 Peachtree Street, NE 21st Floor
Atlanta, Georgia 30308-2213
Address for Notices:
NationsBank, N.A.
600 Peachtree Street, NE 21st Floor
Atlanta, Georgia 30308-2213
Telecopier No.: (404) 607-6318
Telephone No.: (404) 607-4092
Attention: Greg Seib
Credit Agreement
<PAGE> 86
Commitment FLEET NATIONAL BANK, as a Co-Agent
- ---------- and as a Bank
$36,000,000
By: /s/ JEFFERY A. SIMPSON
-----------------------------------
Name: Jeffery A. Simpson
Title: Vice President
Lending Office for all Loans:
Fleet Bank
777 Main Street, CTMO-0250
Hartford, Connecticut 06115
Address for Notices:
Fleet Bank
777 Main Street, CTMO-0250
Hartford, Connecticut 06115
Telecopier No.: (860) 986-1264
Telephone No.: (860) 986-4139
Attention: Thomas McKinlay
Senior Vice President
Credit Agreement
<PAGE> 87
Commitment MELLON BANK, N.A., as a Co-Agent and
- ---------- as a Bank
$36,000,000
By: /s/ SUSAN M. WHITEWOOD
-----------------------------------
Name: Susan M. Whitewood
Title: Asst. Vice President
Lending Office for all Loans:
Mellon Bank, N.A.
One Mellon Bank Center - Room 370
Pittsburgh, Pennsylvania 15258
Address for Notices:
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Telecopier No.: (412) 234-8087
Telephone No.: (412) 234-7922
Attention: Euclid B. Noble
Credit Agreement
<PAGE> 88
Commitment BANK OF MONTREAL, as a Co-Agent and as
- ---------- a Bank
$30,000,000
By: /s/ K. D. STREIFF
-----------------------------------
Name: K. D. Streiff
Title: Director
Lending Office for all Loans:
Bank of Montreal
115 South LaSalle Street, 12th Floor
Chicago, IL 60603
Address for Notices:
Bank of Montreal
115 South LaSalle Street, 12th Floor
Chicago, IL 60603
Telecopier No.: (312) 845-2199
Telephone No.: (312) 750-5909
Attention: Robert C. Meyer
Credit Agreement
<PAGE> 89
Commitment CIBC INC., as a Co-Agent and as a Bank
- ----------
$30,000,000
By: /s/ GERALD J. GIRARDI
-----------------------------------
Name: Gerald J. Girardi
Title: Director, CIBC Wood Gund
Securities Corp., as Agent
Lending Office for all Loans:
Canadian Imperial Bank of Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
Telecopier No.: (770) 319-4950
Telephone No.: (770) 319-4829
Attention: Kim Perrone
Address for Notices:
Canadian Imperial Bank of Commerce
425 Lexington Avenue, 8th Floor
New York, New York 10017
Telecopier No.: (212) 856-3613
Telephone No.: (212) 856-3649
Attention: Gerald J. Girardi
Credit Agreement
<PAGE> 90
Commitment DRESDNER BANK AG, NEW YORK BRANCH
- ---------- & GRAND CAYMAN BRANCH, as a Co-Agent
and as a Bank
$30,000,000
By: /s/ JOHN S. RUNNION
-----------------------------------
Name: John S. Runnion
Title: Vice President
By: /s/ DENISE M. ROHDE
-----------------------------------
Name: Denise M. Rohde
Title: Assistant Treasurer
Lending Office for all Loans:
Dresdner Bank
75 Wall Street
New York, New York 10005-2889
Address for Notices:
Dresdner Bank
75 Wall Street
New York, New York 10005-2889
Telecopier No.: (212) 429-2524
Telephone No.: (212) 429-2286
Attention: Anthony Valencourt
Credit Agreement
<PAGE> 91
Commitment SUNTRUST BANK, NATIONAL ASSOCIATION
- ----------
$20,000,000
By: /s/ DARRYL J. WEAVER
-----------------------------------
Name: Darryl J. Weaver
Title: First Vice President and
Manager Insurance and
Financial Services
Lending Office for all Loans:
SunTrust Bank, Central Florida, N.A.
200 South Orange Avenue
Mail Code 1043
Orlando, Florida 32804
Address for Notices:
SunTrust Bank, Central Florida, N.A.
200 South Orange Avenue
Mail Code 1043
Orlando, Florida 32804
Telecopier No.: (407) 237-4890
Telephone No.: (407) 237-6894
Attention: Darryl J. Weaver
Credit Agreement
<PAGE> 92
Commitment BANK ONE, TEXAS N.A.
- ----------
$20,000,000
By: /s/ JAMES MILLER
-----------------------------------
Name: James Miller
Title: Vice President
Lending Office for all Loans:
Bank One, Texas N.A.
Bank One Center, 4th Floor
1717 Main Street
Dallas, Texas 75201
Address for Notices:
Bank One, Texas N.A.
Bank One Center, 4th Floor
1717 Main Street
Dallas, Texas 75201
Telecopier No.: (214) 290-2332
Telephone No.: (214) 290-2309
Attention: Jim Miller
Credit Agreement
<PAGE> 93
Commitment CORESTATES BANK, N.A.
- ----------
$20,000,000
By: /s/ KATHLEEN M. PETRELLI
-----------------------------------
Name: Kathleen M. Petrelli
Title: Vice President
Lending Office for all Loans:
CoreStates Bank N.A.
1339 Chestnut Street
Philadelphia, PA 19107
FC 1-8-8-4
Address for Notices:
CoreStates Bank N.A.
1339 Chestnut Street
Philadelphia, PA 19107
FC 1-8-8-4
Telecopier No.: (215) 786-4114
Telephone No.: (215) 973-3632
Attention: Kathleen M. Petrelli, VP
Credit Agreement
<PAGE> 94
Commitment FIRST UNION NATIONAL BANK OF NORTH
- ---------- CAROLINA
$20,000,000
By: /s/ GAIL M. GOLIGHTLY
-----------------------------------
Name: Gail M. Golightly
Title: Senior Vice President
Lending Office for all Loans:
First Union National Bank of North
Carolina
One First Union Center
Charlotte, North Carolina 28288-0735
Address for Notices:
First Union National Bank of North
Carolina
One First Union Center
Charlotte, North Carolina 28288-0735
Telecopier No.: (704) 383-9144
Telephone No.: (704) 383-3789
Attention: Jay Bullock
Credit Agreement
<PAGE> 95
Commitment LTCB TRUST COMPANY
- ----------
$20,000,000
By: /s/ RENE O. LEBLANC
-----------------------------------
Name: Rene O. LeBlanc
Title: Senior Vice President
Lending Office for all Loans:
LTCB Trust Company
165 Broadway
New York, New York 10006
Address for Notices:
LTCB Trust Company
165 Broadway
New York, New York 10006
Telecopier No.: (212) 608-3081
Telephone No.: (212) 335-4854
Attention: Winston Brown
Credit Agreement
<PAGE> 96
Commitment ING (U.S.) CAPITAL CORPORATION
- ----------
$15,000,000
By: /s/ THOMAS D. PRANGLEY
-----------------------------------
Name: Thomas D. Prangley
Title: Vice President
Lending Office for all Loans:
ING (U.S.) Capital Corporation
135 East 57th Street
New York, New York 10022-2101
Address for Notices:
ING (U.S.) Capital Corporation
135 East 57th Street
New York, New York 10022-2101
Telecopier No.: (212) 593-3362/371-9125
Telephone No.: (212) 409-0943
Attention: Thomas Prangley
Credit Agreement
<PAGE> 97
Schedule 2.02(b)(i)
REQUEST FOR BID RATE LOANS
[Name and address
of the Administrative Agent]
Date:
Ladies and Gentlemen:
Reference is made to the Credit Agreement, dated as of ________,
1997, among Penncorp Financial Group, Inc., the Banks listed on the signature
pages thereof, The Chase Manhattan Bank, The First National Bank of Chicago and
NationsBank, N.A., as Managing Agents, Fleet National Bank, Mellon Bank, N.A.,
Bank of Montreal, CIBC Inc. and Dresdner Bank AG, New York Branch & Grand
Cayman Branch, as Co-Agents, and The Bank of New York, as Administrative Agent
(the "Credit Agreement").
Pursuant to Section 2.02(b)(i) of the Credit Agreement, the
Company hereby requests to have the following Bid Rate Loans made to it on the
date and upon the terms specified below:
(a) The date on which the requested Bid Rate Loan shall be made
is ____________; and
(b) The principal amount of the requested Bid Rate Loan is
$____________; and
(c) The maturity date for the requested Bid Rate Loan shall be
____________.
The undersigned represents and warrants that (a) the borrowing
requested hereby complies with the requirements of the Credit Agreement and (b)
[except to the extent set forth on Annex A hereto,(1) (i) each Loan Document
representation and warranty is true and correct at and as of the date hereof
and (except to the extent the undersigned gives notice to the Banks to the
contrary prior to 5:00 p.m. on the Business Day before the requested date for
the making of the Bid Rate Loans) will be true and correct at and as of the
time the Bid Rate Loans are made, in each case both with and without giving
effect to the Bid Rate Loans and the application of the proceeds thereof, and
(ii) no Default has occurred and is continuing as of the date hereof or would
result from the making of the Bid Rate Loans or from the application of the
proceeds thereof if the Bid Rate Loans were made on the date hereof, and
(except to the extent the undersigned gives notice to the Banks to the contrary
prior to 5:00 p.m. on the Business Day before the requested date for the making
of the Bid Rate Loans) no Default will have occurred and be continuing at the
time the Bid Rate Loans
<PAGE> 98
are to be made or would result from the making of the Bid Rate Loans or from
the application of the proceeds thereof.
PENNCORP FINANCIAL GROUP, INC.
By ,
--------------------------------
Name:
Title:
- ---------------
1. If the representation and warranty in either clause (b)(i) or (b)(ii)
would be incorrect, include the material in brackets and set forth the
reasons such representation and warranty would be incorrect on an
attachment labeled Annex A.
<PAGE> 99
Schedule 2.02(b)(ii)
FORM OF BID RATE LOAN OFFER
[Name and address
of Administrative Agent]
Date:
Ladies and Gentlemen:
Reference is made to the Credit Agreement, dated as of _________,
1997, among Penncorp Financial Group, Inc., the Banks listed on the signature
pages thereof, The Chase Manhattan Bank, The First National Bank of Chicago and
NationsBank, N.A., as Managing Agents, Fleet National Bank, Mellon Bank, N.A.,
Bank of Montreal, CIBC Inc. and Dresdner Bank AG, New York Branch & Grand
Cayman Branch, as Co-Agents, and The Bank of New York, as Administrative Agent
(the "Credit Agreement"). In response to your request for Bid Rate Loans dated
___________, 19__, the undersigned hereby offers to make the following Bid Rate
Loan(s) in the amount(s) and at the rate(s) set forth below for the indicated
Bid Rate maturity dates.
<TABLE>
<CAPTION>
BID RATE MATURITY DATES
---------------------------------------- --------------------------------------- ---------------------------------------
BID RATE LOANS
Amount1/ Interest Rate2/ Amount1/ Interest Rate2/ Amount1/ Interest Rate2/
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
[Max: ]/1 [Max: ]/1 [Max: ]/1
[Min: ]/1 [Min: ]/1 [Min: ]/1
------------- --------------- ------------- --------------- ------------- ---------------
[Max: ]/1 [Max: ]/1 [Max: ]/1
[Min: ]/1 [Min: ]/1 [Min: ]/1
------------- --------------- ------------- --------------- ------------- ---------------
[Max: ]/1 [Max: ]/1 [Max: ]/1
[Min: ]/1 [Min: ]/1 [Min: ]/1
------------- --------------- ------------- --------------- ------------- ---------------
</TABLE>
provided that the aggregate principal amount of Bid Rate Loans for which the
above offers may be accepted shall not exceed [$ ]. /3
<PAGE> 100
We agree that the offer(s) set forth above, subject to the
satisfaction of the conditions set forth in Section 6.02 of the Credit
Agreement, irrevocably obligate the undersigned to make the Bid Rate Loan(s)
for which such offers are accepted, in whole or in part.
[NAME OF BANK]
By
---------------------------
Name:
Title:
- ---------------
1. (a) Principal amount offered for each Bid Rate maturity date may not
exceed principal amount requested.
(b) Not more than three offers may be made with respect to each Bid Rate
maturity date.
(c) The Bank may specify maximum and minimum amounts that may be
accepted.
2. Specify rate of interest per annum and state it as a decimal to the
nearest 1/10,000 of 1%.
3. Include and specify aggregate limitation if the sum of individual offers
exceeds the amount the Bank is willing to lend.
<PAGE> 101
Schedule 7.03
SCHEDULE OF LITIGATION
<PAGE> 102
Schedule 7.04
SCHEDULE OF CONSENTS
<PAGE> 103
Schedule 7.08(a)
SCHEDULE OF ERISA OBLIGATIONS, NON-COMPLIANCES AND LIABILITIES
<PAGE> 104
Schedule 7.08(b)
SCHEDULE OF UNRECOGNIZED RETIREE WELFARE LIABILITIES
<PAGE> 105
Schedule 7.12
SCHEDULE OF ENVIRONMENTAL MATTERS
<PAGE> 106
Schedule 7.13
SCHEDULE OF SUBSIDIARIES AND INVESTMENTS
<PAGE> 107
Schedule 7.14
SCHEDULE OF MATERIAL AGREEMENTS AND BURDENSOME PROVISIONS
<PAGE> 108
Schedule 7.21
SCHEDULE OF RESTRICTIVE COVENANTS
<PAGE> 109
Schedule 8.07
SCHEDULE OF LIENS
<PAGE> 110
Schedule 8.08
SCHEDULE OF EXISTING INDEBTEDNESS
<PAGE> 111
EXHIBIT A
PENNCORP FINANCIAL GROUP, INC.
RC NOTE
_______________, 19__
FOR VALUE RECEIVED, PENNCORP FINANCIAL GROUP, INC. (the
"Company") hereby promises to pay to the order of __________ (the "Bank") the
principal amount of the RC Loans of the Bank outstanding, on the dates and in
the amounts specified in Section 3.01(a) of the Credit Agreement referred to
below, and to pay interest on the principal amount of each Loan on the dates
and at the rates specified in Sections 3.02(a) of such Credit Agreement. All
payments due the Bank hereunder shall be made to the Bank at the place, in the
type of money and funds and in the manner specified in Section 4.01 of such
Credit Agreement.
Each holder hereof is authorized to endorse on the grid attached
hereto, or on a continuation thereof, each Loan of the Bank and each payment,
with respect thereto.
Presentment, demand, protest, notice of dishonor and notice of
intent to accelerate are hereby waived by the undersigned.
This RC Note evidences RC Loans made under, and is entitled to
the benefits of, the Credit Agreement, dated as of __________, 1997, among the
Company, Penncorp Finance Group, Inc., the Banks listed on the signature pages
thereof, The Chase Manhattan Bank, The First National Bank of Chicago and
NationsBank, N.A., as Managing Agents, Fleet National Bank, Mellon Bank, N.A.,
Bank of Montreal, CIBC Inc. and Dresdner Bank AG, New York Branch & Grand
Cayman Branch, as Co-Agents, and The Bank of New York, as Administrative Agent,
as the same may be amended from time to time. Reference is made to such Credit
Agreement, as so amended, for provisions relating to the prepayment and the
acceleration of the maturity hereof.
This RC Note shall be construed in accordance with and governed
by the internal law of the State of New York (without giving effect to its
choice of law principles).
PENNCORP FINANCIAL GROUP, INC.
By
----------------------------------
Name:
Title:
<PAGE> 112
GRID
RC NOTE
<TABLE>
<CAPTION>
Amount of Amount of Notation
Date RC Loan Principal Repaid Made By
---- --------- ---------------- --------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 113
EXHIBIT B
PENNCORP FINANCIAL GROUP, INC.
BID RATE NOTE
_______________, 19__
FOR VALUE RECEIVED, PENNCORP FINANCIAL GROUP, INC. (the
"Company") hereby promises to pay to the order of __________ (the "Bank") the
principal amount of the Bid Rate Loans of the Bank outstanding, on the dates
and in the amounts specified in Sections 2.02(b) and 3.01(b) of the Credit
Agreement referred to below, and to pay interest on the principal amount of
each Bid Rate Loan on the dates and at the rates specified in Sections 2.02(b)
and 3.02(b) of such Credit Agreement. All payments due the Bank hereunder
shall be made to the Bank at the place, in the type of money and funds and in
the manner specified in Section 4.01 of such Credit Agreement.
Each holder hereof is authorized to endorse on the grid attached
hereto, or on a continuation thereof, each Bid Rate Loan of the Bank and each
payment, with respect thereto.
Presentment, demand, protest, notice of dishonor and notice of
intent to accelerate are hereby waived by the undersigned.
This Bid Rate Note evidences Bid Rate Loans made under, and is
entitled to the benefits of, the Credit Agreement, dated as of __________,
1997, among the Company, the Banks listed on the signature pages thereof, The
Chase Manhattan Bank, The First National Bank of Chicago and NationsBank, N.A.,
as Managing Agents, Fleet National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc. and Dresdner Bank AG, New York Branch & Grand Cayman Branch, as Co-
Agents, and The Bank of New York, as Administrative Agent, as the same may be
amended from time to time. Reference is made to such Credit Agreement, as so
amended, for provisions relating to the acceleration of the maturity hereof.
This Bid Rate Note shall be construed in accordance with and
governed by the internal law of the State of New York (without giving effect to
its choice of law principles).
PENNCORP FINANCIAL GROUP, INC.
By
----------------------------------
Name:
Title:
<PAGE> 114
GRID
BID RATE NOTE
<TABLE>
<CAPTION>
Amount of Amount of Notation
Date Bid Rate Loan Principal Repaid Made By
---- ------------- ---------------- --------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 115
EXHIBIT C
[Form of Confidentiality Agreement]
[Date]
CONFIDENTIALITY AGREEMENT
[Insert Name and
Address of Prospective
Participant or Assignee]
Re: Credit Agreement dated as of ___________, 1997 among PennCorp Financial
Group, Inc., the Banks listed on the signature pages thereof, The Chase
Manhattan Bank, The First National Bank of Chicago and NationsBank,
N.A., as Managing Agents, Fleet National Bank, Mellon Bank, N.A., Bank
of Montreal, CIBC Inc. and Dresdner Bank AG, New York Branch & Grand
Cayman Branch, as Co-Agents, and The Bank of New York, as Administrative
Agent
Dear ____________:
As a Bank party to the above-referenced Credit Agreement (as the same
may be amended or modified from time to time, the "Credit Agreement"), we have
agreed with PennCorp Financial Group, Inc. (the "Company") pursuant to Section
11.12 of the Credit Agreement to use reasonable precautions to keep
confidential, except as otherwise provided therein, in accordance with our
customary procedures for handling confidential information of that nature and
in accordance with safe and sound banking practices, all non-public information
supplied to us by the Company pursuant to the Credit Agreement or the other
Loan Documents (and not otherwise known to us) which is identified by the
Company as being confidential at the time the same is delivered to us or to our
Affiliates or Subsidiaries pursuant to the Credit Agreement. Terms used but
not defined in this Confidentiality Agreement shall have the meanings ascribed
thereto in the Credit Agreement.
As provided in said Section 11.12, we are permitted to provide you,
as a prospective [holder of a participation in the Loans (as defined in the
Credit Agreement)] [assignee Bank], with certain of such non-public information
subject to the execution and delivery by you, prior to receiving such non-
public information, of a Confidentiality Agreement in this form. Such
information will not be made available to you until your execution and return
to us of this Confidentiality Agreement.
Accordingly, in consideration of the foregoing, you agree (on behalf
of yourself and each of your Affiliates, Subsidiaries, directors, officers,
employees and representatives) that (a) such information will not be used by
you except in connection
<PAGE> 116
with the proposed [participation] [assignment] mentioned above and (b) you
shall use reasonable precautions, in accordance with your customary procedures
for handling confidential information of this nature and in accordance with
safe and sound banking practices, to keep such information confidential,
provided that nothing herein shall limit the disclosure of any such information
(i) to the extent required by Applicable Law, statute, rule, regulation or
judicial process, (ii) to your counsel or to counsel for any of the Banks or
the Agents, (iii) to bank examiners, auditors, accountants or other regulatory
or administrative bodies to whose jurisdiction you may be subject, (iv) to the
Agents or any other Bank, (v) in connection with any litigation to which you or
any one or more of the Banks is a party, (vi) to the extent required for the
purpose of protecting, preserving, exercising or enforcing any of your rights
or the rights of the Banks or the Agents in, under or related to the Loan
Documents, performing any of your obligations or the obligations of the Banks
or the Agents under or related to the Loan Documents and consulting with
respect to any of the foregoing matters, or (vii) to any of your Affiliates or
Subsidiaries or to any Affiliate or Subsidiary of any Bank so long as you or
such Bank, as appropriate, cause(s) such Affiliate or Subsidiary to adhere to
the provisions of Section 11.12 of the Credit Agreement as though it were
legally bound thereby; provided, further, that, unless specifically prohibited
by Applicable Law or court order, you agree, prior to disclosure thereof, to
notify the Company of any request for disclosure of any such non-public
information (A) by any governmental agency or representative thereof (other
than any such request in connection with an examination of your financial
condition by such governmental agency) or (B) pursuant to legal process; and
provided finally that in no event shall you be obligated or required to return
any materials furnished to you pursuant to this Confidentiality Agreement.
Would you please indicate your agreement to the foregoing by signing
at the place provided below on the enclosed copy of this Confidentiality
Agreement.
Very truly yours,
[Insert Name of Bank]
By:
---------------------------
Name:
Title:
The foregoing is agreed to
as of the date of this letter.
[Insert name of prospective
participant or assignee]
By:
-------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 22
INDEPENDENT AUDITOR'S 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 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/A of PennCorp Financial Group, Inc.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
April 30, 1997
<PAGE> 1
EXHIBIT 99.1
CONSENT OF RONALD L. BORNHEUTTER
I, Ronald L. Bornhuetter, hereby agree to serve as a director of PennCorp
Financial Group, Inc., a Delaware Corporation ("PennCorp"), following the
merger (the "Merger") of Washington National Corporation, a Delaware
corporation, with and into PennCorp and consent to the use of my name in
Amendment No. 1 to PennCorp's Annual Report on Form 10-K/A, and in any further
amendments thereto or other filings with the Securities and Exchange
Commission, as the same appears therein under the caption "CLASS III DIRECTOR
APPOINTEES" with respect to my becoming a director of PennCorp following the
Merger.
/s/ Ronald L. Bornheutter
----------------------------
Ronald L. Bornheutter
Date: April 30, 1997
<PAGE> 1
EXHIBIT 99.2
CONSENT OF W. FRANCIS BRENNAN
I, W. Francis Brennan, hereby agree to serve as a director of PennCorp
Financial Group, Inc., a Delaware Corporation ("PennCorp"), following the
merger (the "Merger") of Washington National Corporation, a Delaware
corporation, with and into PennCorp and consent to the use of my name in
Amendment No. 1 to PennCorp's Annual Report on Form 10-K/A, and in any further
amendments thereto or other filings with the Securities and Exchange
Commission, as the same appears therein under the caption "CLASS III DIRECTOR
APPOINTEES" with respect to my becoming a director of PennCorp following the
Merger.
/s/ W. Francis Brennan
--------------------------
W. Francis Brennan
Date: April 30, 1997
