- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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
incorporation or organization) (I.R.S. employer identification no.)
590 Madison Avenue 10022
New York, New York (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 896-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
- - ------------------------------------- ---------------------------------------
Common Stock, $.01 par value New York Stock Exchange
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$3.375 Convertible Preferred
Stock, $.01 par value New York Stock Exchange
- - ------------------------------------- ---------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 [ ]
The number of Common Stock shares outstanding as of November 6, 1998, was
30,072,344.
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1
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements..........................................3
Consolidated Balance Sheets..................................3
Consolidated Statements of Operations........................4
Consolidated Statements of Cash Flows........................5
Notes to Unaudited Consolidated Financial Statements.........6
Review by Independent Certified Public Accountants..........19
Independent Auditors' Review Report.........................20
Item 2. Management's Discussion And Analysis of Financial
Condition and Results of Operations.......................21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................33
Item 2. Changes in Securities and Use of Proceeds....................34
Item 3. Defaults Upon Senior Securities..............................34
Item 6. Exhibits and Reports on Form 8-K.............................34
SIGNATURE
INDEX TO EXHIBITS
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 3,764,520 $ 2,718,982
Equity securities available for sale, at fair value............................ 5,247 30,257
Mortgage loans on real estate.................................................. 271,098 240,879
Policy loans................................................................... 241,586 145,108
Short term investments......................................................... 163,014 84,141
Other investments.............................................................. 42,697 95,875
------------ ------------
Total investments.......................................................... 4,488,162 3,315,242
Cash.............................................................................. 7,498 24,872
Accrued investment income......................................................... 51,804 43,312
Accounts and notes receivable..................................................... 24,879 46,655
Investments in unconsolidated affiliates.......................................... -- 183,158
Present value of insurance in force............................................... 194,379 263,889
Deferred policy acquisition costs................................................. 197,551 310,117
Costs in excess of net assets acquired and other intangibles...................... 150,478 116,544
Income taxes, primarily deferred.................................................. 18,556 --
Other assets...................................................................... 246,929 420,346
Assets of businesses held for sale................................................ 809,013 --
------------ ------------
Total assets............................................................... $ 6,189,249 $ 4,724,135
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................ $ 4,179,881 $ 3,289,925
Notes payable.................................................................. 551,289 359,755
Income taxes, primarily deferred............................................... -- 59,125
Accrued expenses and other liabilities......................................... 231,346 135,227
Liabilities of businesses held for sale........................................ 642,963 --
------------ ------------
Total liabilities.......................................................... 5,605,479 3,844,032
------------ ------------
Mandatory redeemable preferred stock:
Series C, $.01 par value, $100 initial redemption value; authorized, issued
and outstanding--at September 30, 1998, and 178,500 at December 31, 1997..... -- 19,867
Shareholders' Equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized issued and outstanding 2,300,000 at September 30, 1998, and
December 31, 1997............................................................ 110,513 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption
value; authorized issued and outstanding 2,875,000 at September 30, 1998,
and December 31, 1997........................................................ 139,157 139,157
Common stock, $.01 par value; authorized 100,000,000; issued and
outstanding 30,072,344 at September 30, 1998, and 28,860,206 at
December 31, 1997............................................................ 302 289
Additional paid-in capital..................................................... 430,354 397,590
Accumulated other comprehensive income......................................... 61,942 35,034
Retained earnings (deficit).................................................... (125,118) 211,055
Treasury shares................................................................ (32,130) (32,130)
Notes receivable secured by common stock....................................... (1,250) (1,272)
------------ ------------
Total shareholders' equity................................................. 583,770 860,236
------------ ------------
Total liabilities and shareholders' equity................................. $ 6,189,249 $ 4,724,135
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
September 30, September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness. $ 92,128 $ 65,948 $ 270,724 $ 194,668
Interest sensitive product policy charges... 31,477 22,412 90,688 68,688
Net investment income....................... 89,130 69,492 277,663 206,256
Other income................................ 8,776 8,882 30,009 20,313
Net gains from sale of investments.......... 4,171 6,234 13,059 14,767
------------- -------------- ------------- -------------
Total revenues.......................... 225,682 172,968 682,143 504,692
------------- -------------- ------------- -------------
BENEFITS AND EXPENSES:
Claims incurred............................. 81,734 51,028 240,733 146,238
Change in liability for future policy
benefits and other policy benefits........ 52,639 24,371 185,309 78,823
Amortization of present value of insurance in
force and deferred policy acquisition costs 27,546 22,744 78,485 64,298
Amortization of costs in excess of net assets
acquired and other intangibles............ 2,197 2,565 9,854 7,460
Underwriting and other administrative expenses 61,241 40,815 162,437 101,058
Interest and amortization of deferred debt
issuance costs............................ 10,669 5,902 30,945 15,719
Restructuring charges....................... 1,388 -- 7,649 19,071
Impairment provision associated with assets
of businesses held for sale............... 145,000 -- 285,485 --
------------- -------------- ------------- -------------
Total benefits and expenses............. 382,414 147,425 1,000,897 432,667
------------- -------------- ------------- -------------
Income (loss) before income taxes, equity in
earnings of unconsolidated affiliates and
extraordinary charge (156,732) 25,543 (318,754) 72,025
Income taxes (benefit).................. 3,900 8,329 (1,559) 26,783
------------- -------------- ------------- -------------
Income (loss) before equity in earnings of
unconsolidated affiliates and extraordinary
charge...................................... (160,632) 17,214 (317,195) 45,242
Equity in earnings of unconsolidated
affiliates -- 13,740 -- 16,158
------------- -------------- ------------- -------------
Income (loss) before extraordinary charge...... (160,632) 30,954 (317,195) 61,400
Extraordinary charge.................... -- -- (1,671) --
------------- -------------- ------------- -------------
Net income (loss).............................. (160,632) 30,954 (318,866) 61,400
Preferred stock dividend requirements... 4,456 4,884 13,816 14,685
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock... $ (165,088) $ 26,070 $ (332,682) $ 46,715
============= ============== ============= =============
PER SHARE INFORMATION:
Basic:
Net income (loss) applicable to common stock
before extraordinary charge............... $ (5.64) $ 0.93 $ (11.47) $ 1.66
Extraordinary charge.................... -- -- (0.06) --
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock $ (5.64) $ 0.93 (11.53) 1.66
============= ============== ============= =============
Common shares used in computing basic
earnings (loss) per share................. 29,246 28,043 29,017 28,095
============= ============== ============= =============
Diluted:
Net income (loss) applicable to common stock
before extraordinary charge............... $ (5.64) $ 0.80 $ (11.47) $ 1.57
Extraordinary charge.................... -- -- (0.06) --
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock $ (5.64) $ 0.80 $ (11.53) $ 1.57
============= ============== ============= =============
Common shares used in computing diluted
earnings (loss) per share................. 29,246 38,071 29,017 38,141
============= ============== ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before equity in earnings of unconsolidated affiliates and
extraordinary charge....................................................... $ (317,195) $ 45,242
Adjustments to reconcile income before equity in earnings of
unconsolidated affiliates and extraordinary charge to net cash
provided (used) by operating activities:
Impairment provision associated with assets of businesses held for sale.. 285,485 --
Capitalization of deferred policy acquisition costs...................... (100,629) (81,869)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net........ 82,740 71,758
Increase (decrease) in policy liabilities, accruals and other
policyholder funds..................................................... 51,246 (27,425)
Sales of trading securities.............................................. -- 29,914
Other, net............................................................... 6,144 15,466
------------- -------------
Net cash provided by operating activities............................ 7,791 53,086
------------- -------------
Cash flows from investing activities:
Cash expended in acquisitions of businesses, net of cash acquired
$8,129 in 1998............................................................. (74,642) --
Purchases of invested assets................................................. (730,063) (967,350)
Sales of invested assets..................................................... 251,426 811,831
Maturities of invested assets................................................ 671,162 201,458
Other, primarily short term investments, net................................. 93,036 38,046
------------- -------------
Net cash provided by investing activities................................ 210,919 83,985
------------- -------------
Cash flows from financing activities:
Issuance of common stock..................................................... 7 1,910
Treasury stock purchase...................................................... -- (24,089)
Additional borrowings........................................................ 203,000 240,200
Reduction in notes payable................................................... (126,681) (100,000)
Redemption of preferred stock................................................ (7) (14,706)
Dividends on preferred and common stock...................................... (16,205) (17,619)
Receipts from interest sensitive polices credited to policyholder account
balances................................................................... 284,291 156,381
Return of policyholder account balances on interest sensitive products....... (562,882) (397,126)
Other, net................................................................... 1,869 (1,166)
------------- -------------
Net cash used by financing activities.................................... (216,608) (156,215)
------------- -------------
Net increase (decrease) in cash.......................................... 2,102 (19,144)
Cash at beginning of period..................................................... 24,872 39,464
------------- -------------
Cash at end of period (including $19,476 of cash classified as assets of
businesses held for sale in 1998)............................................ $ 26,974 $ 20,320
============= =============
Supplemental disclosures:
Income taxes paid.......................................................... $ 7,230 $ 3,031
============= =============
Interest paid.............................................................. $ 24,608 $ 12,813
============= =============
Non-cash financing activities:
Redemption of Series C Preferred stock..................................... $ 22,227 $ --
============= =============
Issuance of common stock associated with the acquisition of the
Fickes and Stone Knightsbridge Interests................................. $ 8,500 $ --
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
PennCorp Financial Group, Inc. ("PennCorp," or the "Company") is an
insurance holding company. Through its wholly-owned life insurance subsidiaries;
Pennsylvania Life Insurance Company ("PLIC") and its wholly-owned subsidiary,
Penncorp Life Insurance Company (collectively referred to 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 as "AA Life"); Southwestern Financial
Corporation ("SW Financial") and its wholly-owned subsidiaries Southwestern Life
Insurance Company ("Southwestern Life"), Constitution Life Insurance Company
("Constitution"), Union Bankers Insurance Company ("Union Bankers"), and
Marquette National Life Insurance Company ("Marquette"); Security Life and Trust
Insurance Company, formerly Integon Life Insurance Corporation ("Security
Life"); Occidental Life Insurance Company of North Carolina ("OLIC"); United
Life & Annuity Insurance Company ("United Life"); and Pacific Life and Accident
Insurance Company ("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. Additionally, the Company owns KB
Management, LLC ("KB Management"), which provides management and advisory
services to the Company; Marketing One, Inc. ("Marketing One"), a third party
marketing organization; and KIVEX, Inc. ("KIVEX"), an internet service provider.
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its subsidiaries and, in the opinion of
management, contain all adjustments necessary to fairly present the financial
position as of September 30, 1998, the results of operations for the three and
nine month periods ended September 30, 1998 and 1997, and cash flows for the
nine month periods ended September 30, 1998 and 1997. All significant
intercompany accounts and transactions have been eliminated. Results of
operations for interim periods are not necessarily indicative of results for the
entire year. All dollar amounts presented hereafter, except share amounts, 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 as well
as revenues and expenses. Accounts that the Company deems to be acutely
sensitive to changes in estimates include deferred policy acquisition costs,
policy liabilities and accruals, present value of insurance in force, costs in
excess of net assets acquired, the fair value of assets and liabilities
classified as held for sale and deferred taxes. In addition, the Company must
determine the requirements for disclosure of contingent assets and liabilities
as of the date of the financial statements based upon estimates. As additional
information becomes available, or actual amounts are determinable, the recorded
estimates may be revised and reflected in operating results. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate. In all instances, actual results could differ from
estimates.
The Company has been closely monitoring the development of claims
reserve experience associated with its Career Sales Division. The methodology
previously utilized has experienced, what appears to be, a deterioration of the
adequacy of its claims reserves associated with disability income products sold
prior to the Company's ownership. During the six month period ended June 30,
1998, the Company changed its methodology in recording these reserves. As a
result of the trends and change in methodology the Company increased claims
reserves estimates for the Career Sales Division by $20,000. The effect of the
change in methodology is inseparable from the effect of the change in accounting
estimate and is accordingly reflected in operations as a change in accounting
estimate for the nine month period ended September 30, 1998. For the three month
period ended September 30, 1998, such change in methodology had no material
impact on the Company's results from operations.
For the three month period ended September 30 1998, the Company has
made a valuation determination with respect to preacquisition contingencies. The
Company reduced tax liabilities and associated costs in excess of net assets
acquired associated with the United Life acquisition by $647 as a result of the
Company resolving certain acquisition date contingencies.
6
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (Continued)
The Company is continually evaluating actuarial assumptions associated
with interest sensitive life insurance contracts in which the determination of
policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates, and premium persistency. Currently
reflected in the Company's financial statements are policy reserves and account
values associated with such contracts, which aggregated approximately $525,919
and $504,562 as of September 30, 1998, and December 31, 1997, respectively. If
developing trends were to continue, the Company would be required to record
additional reserves or reduce intangible assets, which could have a material
impact on the Company's financial position and results of operations. Management
is also assessing the potential impact of future management actions, which might
mitigate the financial impact of these trends. The Company is unable to predict
at this time the cost associated with the management action, which could be
material. Types of management actions would likely include, but are not limited
to, the redetermination of non-guaranteed charges and/or benefits under the
contracts, asset segmentation, and reinsurance. There are risks associated with
management action including potential sales disruption and the threat of
litigation. The Company is continuing to refine its actuarial estimates, likely
management action plans and associated sensitivity testing of such
interdependencies on policy reserves associated with these contracts which could
result in changes in such estimates in the future.
The financial statements should be read in conjunction with the
financial statements included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130 on January 1, 1998. This statement establishes standards for
reporting and displaying comprehensive income and its components and requires
all items to be recognized under accounting standards as comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Examples of items included in the Company's
presentation of comprehensive income, in addition to net income applicable to
common stock, are unrealized foreign currency translation gains and losses and
unrealized gains and losses on securities available for sale.
Comprehensive income (loss) for the three and nine month periods ended
September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Month Periods Ended
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss).............................................. $ (165,088) $ 26,070
Foreign currency translation adjustment........................ (3,007) 182
Unrealized gain on securities available for sale............... 25,922 10,145
------------- -------------
Comprehensive income (loss).................................... $ (142,173) $ 36,397
============= =============
Nine Month Periods Ended
1998 1997
------------- -------------
Net income (loss).............................................. $ (332,682) $ 46,715
Foreign currency translation adjustment........................ (5,389) (1,775)
Unrealized gain on securities available for sale............... 32,297 6,625
------------- -------------
Comprehensive income (loss).................................... $ (305,774) $ 51,565
============= =============
</TABLE>
2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Securities and Exchange Commission ("SEC") has approved rule
amendments to clarify and expand existing disclosure requirements for derivative
financial instruments. The amendments require enhanced disclosure of accounting
policies for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand
7
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (Continued)
existing disclosure requirements to include quantitative and qualitative
information about the Company's risks which are inherent in market risk
sensitive instruments. The required quantitative and qualitative information are
to be disclosed outside the consolidated financial statements and related notes
thereto. These rule amendments are effective for all of the Company's Form 10-K
and Form 10-Q filings beginning with the 10-K as of and for the twelve month
period ended December 31, 1998. The Company is currently evaluating the impact
of these additional disclosure requirements on its financial statements and
reports.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997 by the Financial Accounting Standards
Board (the "FASB"). This Statement requires that companies disclose segment data
on the basis that is used internally by management for evaluating segment
performance and allocating resources to segments. This Statement requires that a
company report a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets. It also requires various reconciliations of
total segment information to amounts in the consolidated financial statements.
The Company's current definition of its business segments, significant lines of
business (fixed benefit, life and accumulation products), will be expanded to
significant lines of business by divisional platform (Career Sales Division,
Payroll Sales Division and Financial Services Division). The footnote disclosure
requirements of SFAS No. 131 are effective for fiscal years beginning after
December 15, 1997.
In December 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-3. SOP 97-3
provides: (1) guidance for determining when an entity should recognize a
liability for guaranty-fund and other insurance-related assessments, (2)
guidance on how to measure the liability, (3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges, and (4)
requirements for disclosure of certain information. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. Early
adoption is encouraged. Previously issued annual financial statements are not
restated. The Company will report the effect of initially adopting this SOP in a
manner similar to the reporting of a cumulative effect of a change in accounting
principle. The Company is currently evaluating the financial impact, which is
expected to be immaterial, as well as the changes to its related disclosures
which the Company anticipates will be included in the annual financial
statements as of and for the twelve month period ended December 31, 1998.
In February 1998, the FASB adopted SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 is effective for
fiscal years beginning after December 31, 1997. Earlier application is
encouraged. Restatement of disclosures for earlier periods provided for
comparative purposes is required. SFAS No. 132 standardizes employers'
disclosures about pension and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
to facilitate financial analysis, and eliminates certain irrelevant disclosures.
The Company is currently evaluating the necessary changes to its related
disclosures.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past, the
Company has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the financial impact as well as the changes to its related
disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the Consolidated Balance Sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the Consolidated Statement of
8
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (Continued)
Operations. SFAS No. 133 is effective for all fiscal quarters of all years
beginning after June 15, 1999. The Company is evaluating SFAS No.133 and has not
determined its effect on the consolidated financial statements.
3. ACQUISITIONS AND OTHER TRANSACTIONS
Acquisition of SW Financial Controlling Interest and Knightsbridge Interests
On January 2, 1998, following shareholder approval at the Company's
1997 annual meeting of shareholders, the Company consummated the acquisition,
from KB Investment Fund I, LP (formerly Knightsbridge Capital Fund I, LP) (the
"KB Fund") and Messrs. Steven W. Fickes and David J. Stone, directors of the
Company, of their respective holdings of common stock and, in the case of the KB
Fund, common stock warrants of SW Financial (collectively, the "SW Financial
Controlling Interest") for an aggregate purchase price of $73,658 (not including
acquisition expenses). The fair value of net assets acquired amounted to $45,520
resulting in $28,138 of costs in excess of net assets acquired which will be
amortized over 30 years.
On August 5, 1997, the Company purchased $40,000 of SW Financial
Subordinated Notes (the "SW Financial Notes") from the liquidating trust for the
creditors of ICH Corporation, SW Financial's former parent. SW Financial had
issued the SW Financial Notes as part of the acquisition consideration paid to
the liquidating trust. The SW Financial Notes were purchased by the Company at
par and are included in other investments as of December 31, 1997. As part of
the acquisition of the SW Financial Controlling Interest on January 2, 1998, the
SW Financial Notes were reclassified to purchase consideration for SW Financial
by the Company.
As part of the acquisition of the SW Financial Controlling Interest,
the Company utilized funds available under its revolving credit facility to
refinance $115,015 of SW Financial notes payable at a more favorable interest
rate structure. As a result of such refinancing and the write-off of the
associated deferred financing costs, the Company realized an after-tax
extraordinary charge of $1,671 for the nine month period ended September 30,
1998.
The acquisition of the SW Financial Controlling Interest has been
accounted for as a step purchase transaction in accordance with generally
accepted accounting principles, and accordingly, preliminary fair values of
assets and liabilities acquired have been determined as of January 2, 1998. The
purchase allocation is expected to be completed by December 1998.
On January 5, 1998, following shareholder approval at the 1997 annual
meeting of shareholders, the Company consummated the acquisition of the
interests of Messrs. Fickes and Stone in KB Management, KB Fund and KB
Consultants LLC (formerly known as Knightsbridge Consultants LLC) (collectively,
the "Fickes and Stone Knightsbridge Interests") for total consideration
estimated to be $10,564 (not including acquisition expenses). Mr. Fickes will
receive consideration in the form of estimated annual interest payments, ranging
from $301 to $330, on April 15 each year through 2001 and will be issued 173,160
shares of the Company's Common Stock on April 15, 2001. Mr. Stone was issued his
173,160 shares in July 1998 which he pledged to financial institutions in
connection with his appeal of a judgment awarded against him and his spouse. The
fair value of net assets acquired amounted to $(1,701) resulting in $12,265 of
costs in excess of net assets acquired which will be amortized over seven years.
The acquisition of the Fickes and Stone Knightsbridge Interests has
been accounted for as a purchase transaction in accordance with generally
accepted accounting principles, and accordingly, preliminary fair values of
assets and liabilities acquired were recorded as of the acquisition date which
became the new accounting basis. The purchase allocation is expected to be
completed by December 1998.
9
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
Career Sales Division
On February 18, 1998, the Company announced it had engaged investment
banking firms to review strategic alternatives for maximizing shareholder value,
including the sale of the Company's Career Sales Division.
On August 13 and 14, 1998, the Company received written proposals from
two prospective purchasers for its Career Sales Division. The proposals provided
the Company with additional evidence of the value it would likely receive as a
result of a sale of Career Sales Division to a financial buyer. Based upon
internal estimates and the receipt of these proposals, the Company reduced the
carrying value of the assets held for sale by $140,500 during the three month
and six month periods ended June 30, 1998.
Since the Company announced its results for the period ended June 30,
1998, the Company has engaged in exclusive negotiations with one of the
perspective purchasers of the Career Sales Division. These negotiations and
other developments have provided the Company with additional indications of the
value of the Career Sales Division. The new information indicates that the
previously determined fair value should be adjusted. In analyzing the likely
fair value impairment, the Company considered (i) the implied value that the
current exclusive bidder for the Career Sales Division is likely to offer based
upon a leveraged buyout financing model, (ii) the valuation appraisal of the
assets held for sale generated by the application of certain assumptions
provided by the bidder, and (iii) the Company's own analysis of possible
appraisal valuations based upon differing assumptions and discount rates. For
the three month period ended June 30, 1998, the Company relied upon similar
techniques which formed the basis for the previously determined fair value of
the assets held for sale.
The Company believes that a decline in the indicated fair value of the
Career Sales Division has resulted primarily from the following factors: (a)
decline in statutory capital and surplus of the Career Sales Division (b)
decline in interest rates of high quality securities available for reinvestment
of cash generated by the assets held for sale, (c) decline in Canadian exchange
rates versus the U.S. dollar, (d) the determination of the compensation that
would be required to be paid to the Career Agency field force as part of the
transaction with the exclusive bidder, (e) capital market volatility, including
the constriction in the mezzanine financing markets, required increased credit
spreads by lending institutions and a decline in valuation multiples for
financial services companies generally, and (f) the Company's current financial
constraints and pressures.
The Company has weighted the implied fair values based upon the
hierarchy established by SFAS No. 121. Based upon the guidance of SFAS No. 121,
the Company has determined that fair value is likely at the lower end of a range
of implied values as a result of the factors noted above. The Company has
reflected such fair value of approximately $166,050 in the accompanying
financial statements, resulting in an impairment provision of $145,000.
In the third quarter of 1998, the Company made the decision to dispose
of KIVEX within a period not likely to exceed one year. As a result, the assets
and liabilities of KIVEX were considered "assets and liabilities held for sale"
and, as such, aggregated with the Career Sales Division for purposes of
presentation of the Company's consolidated balance sheet.
Selected Financial Information -- SW Financial
The following unaudited selected pro forma financial information has
been prepared to illustrate the pro forma effects of: (i) the acquisition of the
SW Financial Controlling Interest including financing thereof, and (ii) the
acquisition of the Fickes and Stone Knightsbridge Interests, including financing
thereof ((i) and (ii) collectively the SW Financial pro forma). The pro forma
statements of operations for the three and nine month periods ended September
30, 1997, gives effect to the foregoing as though each had occurred on January
1, 1997. The unaudited selected pro forma financial information does not include
the pro forma statement of operations for the three and nine month periods ended
September 30, 1998, as the unaudited selected pro forma financial information is
materially equivalent to the results of operations for the three and nine
10
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
month periods ended September 30, 1998. The unaudited selected pro forma
financial information 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, 1997, or results which may occur in the future.
The Company's decision to dispose of the Career Sales Division and
KIVEX ("Businesses Held for Sale"), within a period of time not likely to exceed
one year, results in the assets and liabilities being considered "assets and
liabilities held for sale," and as such segregated from those of the Retained
Businesses for purposes of presentation of the Company's consolidated balance
sheet. The Retained Businesses unaudited selected pro forma balance sheet
information reflects such segregation as of December 31, 1997.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) (Unaudited)
SW Financial
As Reported Pro forma
For the three month period ended September 30, 1997 1997
------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Total revenues.......................................................... $ 172,968 $ 247,091
Net income.............................................................. 17,214 34,608
Net income applicable to common stock................................... 26,070 29,724
Per share information:
Net income applicable to common stock-basic........................... $ 0.93 $ 1.06
Net income applicable to common stock-diluted......................... 0.80 0.90
(Unaudited)
SW Financial
As Reported Pro forma
For the nine month period ended September 30, 1997 1997
------------------------------------------------------------------------ ------------- -------------
Total revenues.......................................................... $ 504,692 $ 725,966
Net income.............................................................. 45,242 64,850
Net income applicable to common stock................................... 46,715 50,182
Per share information:
Net income applicable to common stock-basic........................... $ 1.66 $ 1.79
Net income applicable to common stock-diluted......................... 1.57 1.67
</TABLE>
11
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
(Unaudited)
------------------------------
Retained
SW Financial Businesses
As Reported Pro forma Pro forma
As of December 31, 1997 1997 1997
--------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Investments and cash..................................... $ 3,340,114 $ 5,326,882 $ 4,655,522
Insurance assets......................................... 617,318 840,764 470,050
Other assets............................................. 766,703 799,242 620,173
Assets of businesses held for sale....................... -- -- 1,221,143
------------- ------------- -------------
Total assets........................................... $ 4,724,135 $ 6,966,888 $ 6,966,888
============= ============= =============
Insurance liabilities.................................... $ 3,289,925 $ 5,232,139 $ 4,638,392
Long-term debt........................................... 359,755 550,505 550,505
Other liabilities........................................ 194,352 295,641 176,957
Liabilities of businesses held for sale.................. -- -- 712,431
Redeemable preferred stock............................... 19,867 19,867 19,867
Shareholders' equity..................................... 860,236 868,736 868,736
------------- ------------- -------------
Total liabilities and shareholders' equity............. $ 4,724,135 $ 6,966,888 $ 6,966,888
============= ============= =============
</TABLE>
For the three and nine month periods ended September 30, 1998 and 1997,
the Company has prepared the following unaudited selected pro forma financial
information, for both the Businesses Held for Sale and the Retained Businesses,
which excludes the impact of: (i) restructuring charges including period costs,
(ii) gains or losses on the sale of investments and associated amortization of
deferred acquisition costs and present value of insurance in force as the result
of gains or losses on the sale of investments, and (iii) the impact of the
Company's decision to dispose of the Businesses Held for Sale ((i), (ii) and
(iii) collectively, ("Operating Income (Loss)")). In addition, the 1997
unaudited selected pro forma financial information considers the impact of the:
(i) acquisition of the SW Financial Controlling Interest, including the
financing thereof, and (ii) the acquisition of the Fickes and Stone
Knightsbridge Interests, including the financing thereof.
The Company has prepared such information as it believes that: (i) the
acquisition of the SW Financial Controlling Interest, (ii) the intended
disposition of the Businesses Held for Sale and (iii) the restructuring charge
and period costs are material enough to make historical comparative results for
the three and nine month periods ended September 30, 1998 and 1997,
respectively, not meaningful as well as facilitate the subsequent discussion
parallel with how management views and evaluates the operations of the Company.
The unaudited selected pro forma financial information for the three
and nine month periods ended September 30, 1997, gives effect to the acquisition
of the SW Financial Controlling Interest and the Fickes and Stone Knightsbridge
Interests and the financing of each such acquisition as though each had occurred
on January 1, 1997.
Selected Pro Forma Financial Information -- Businesses Held for Sale and
Retained Business
The following unaudited selected pro forma financial information 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, 1997, or the results which may occur in the future.
12
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
(Unaudited)
Businesses Held for Sale
------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
(In thousands) ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Policy revenues.................................. $ 50,275 $ 54,417 $ 156,649 $ 166,719
Net investment income............................ 9,065 10,096 30,891 30,023
Other income..................................... 3,216 3,913 11,920 13,919
------------- ------------- ------------- --------------
62,556 68,426 199,460 210,661
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 36,274 27,747 133,967 93,983
Insurance related expenses....................... 14,748 18,743 47,064 48,265
Other operating expenses......................... 13,745 10,991 38,256 29,737
------------- ------------- ------------- --------------
64,767 57,481 219,287 171,985
------------- ------------- ------------- --------------
Pre-tax Operating Income (Loss) before
interest, amortization of deferred debt
issuance costs and impairment provision
associated with assets of businesses held
for sale ................................... $ (2,211) $ 10,945 $ (19,827) $ 38,676
============= ============= ============= ==============
Retained Business
------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
(In thousands) ------------- ------------- ------------- --------------
Revenues:
Policy revenues.................................. $ 73,330 $ 70,744 $ 204,763 $ 207,056
Net investment income............................ 80,065 90,798 246,772 269,771
Other income..................................... 5,560 9,642 18,089 21,914
------------- ------------- ------------- --------------
158,955 171,184 469,624 498,741
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 98,097 72,680 292,075 256,348
Insurance related expenses....................... 24,903 23,654 64,146 63,817
Other operating expenses......................... 35,352 22,817 98,804 71,514
------------- ------------- ------------- --------------
158,352 119,151 455,025 391,679
------------- ------------- ------------- --------------
Pre-tax Operating Income before interest and
amortization of deferred debt issuance costs. $ 603 $ 52,033 $ 14,599 $ 107,062
============= ============= ============= ==============
</TABLE>
4. SOUTHWESTERN LIFE INVESTMENT
Prior to the Company's acquisition of the SW Financial Controlling
Interest, through its initial direct investment of $120,000 in SW Financial (the
"Southwestern Life Investment"), the Company beneficially owned 74.8% of SW
Financial's
13
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SOUTHWESTERN LIFE INVESTMENT (Continued)
outstanding common stock, including 100% of SW Financial's non-voting common
stock, 14.3% of SW Financial's voting common stock, and 100% of SW Financial
preferred stock. PennCorp was also a 16.3% limited partner in Knightsbridge. As
a result, the Company had an economic interest in SW Financial aggregating 78.0
percent. Retained earnings of the Company include undistributed earnings of SW
Financial aggregating $40,919 as of December 31, 1997.
On January 2, 1998, the Company acquired the SW Financial Controlling
Interest (see Note 3).
Financial information for SW Financial is provided below:
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEET
December 31, 1997
-----------------
<S> <C>
ASSETS:
Invested assets............................................ $ 2,026,768
Insurance assets........................................... 114,395
Other assets............................................... 283,717
-------------
Total assets.......................................... $ 2,424,880
=============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Policy liabilities and accruals............................ $ 1,942,214
Notes payable.............................................. 154,750
Accrued expenses and other liabilities..................... 98,509
Mandatory redeemable preferred stock....................... 36,891
Shareholders equity........................................ 192,516
-------------
Total liabilities and shareholders' equity............ $ 2,424,880
=============
</TABLE>
14
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SOUTHWESTERN LIFE INVESTMENT (Continued)
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Nine Month
Period Ended Period Ended
------------- -------------
September 30, 1997
--------------------------------
<S> <C> <C>
REVENUES:
Policy revenues.............................................. $ 36,801 $ 110,419
Net investment income........................................ 31,974 95,202
Other income................................................. 3,796 12,889
Net gains from sale of investments........................... 1,247 1,797
------------- -------------
Total revenues.......................................... 73,818 220,307
------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits........................................ 25,028 125,270
Amortization................................................. 6,504 18,391
Underwriting and other administrative expenses............... 10,371 29,578
Interest and amortization of deferred debt issuance costs.... 3,452 10,332
------------- -------------
Total benefits and expenses............................. 45,355 183,571
------------- -------------
Income before income taxes..................................... 28,463 36,736
Income taxes............................................ 9,987 13,786
------------- -------------
Net income..................................................... 18,476 22,950
Preferred stock dividend requirements................... 762 2,234
------------- -------------
Net income applicable to common stock.......................... $ 17,714 $ 20,716
============= =============
</TABLE>
5. RESTRUCTURING CHARGES
In the third quarter of 1996, the Company initiated a strategic
business evaluation designed to consolidate certain of its operating locations
and corporate functions.
As a result of the initiative to implement an operating division
structure, the Company began to realign its existing companies and incurred
restructuring, of $-- and $19,071, and period costs, of $8,254 and $11,830, for
the three and nine month periods ended September 30, 1997, respectively,
directly and indirectly associated with the initial divisional restructuring
which had no future economic benefit.
The Company estimates approximately $-- and $192 of period costs
associated with the 1997 restructuring charge were incurred during the three and
nine month periods ended September 30, 1998.
On January 2, 1998, and January 5, 1998, respectively, the Company
acquired the SW Financial Controlling Interest and the Fickes and Stone
Knightsbridge Interests. The acquisition allowed the Company to complete its
divisional restructuring which began in 1997. As a result, the Company incurred
restructuring, of $-- and $11,767, and period costs, of $2,238 and $2,506, for
the three and nine month periods ended September 30, 1998, respectively,
directly and indirectly associated with the divisional restructuring.
During the nine month period ended September 30, 1998, the Company
re-evaluated the 1997 restructuring charge and reduced certain accruals by
$3,750 as a result of the final determination regarding the abandonment of
certain assets.
During the three month period ended September 30, 1998, the Company
re-evaluated the 1998 restructuring charge and increased certain accruals by
approximately $1,388, as a result of the final determination regarding contract
termination
15
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING CHARGES (Continued)
fees, certain impaired assets and severance. For the nine month period ended
September 30, 1998, the net decrease in certain accruals was approximately $368.
6. REDEMPTION OF PREFERRED STOCK AND CERTAIN EQUITY TRANSACTIONS
A portion of the consideration for the acquisition of the Fickes and
Stone Knightsbridge Interests included 173,160 shares of the Company's Common
Stock due each of Messrs. Fickes and Stone on April 15, 2001. As a result of the
acquisition, common stock and additional paid in capital increased $3 and
$8,497, respectively, for the nine month period ended September 30, 1998.
Effective March 31, 1998, the Company redeemed all of the outstanding
Series C Preferred Stock into 691,528 shares of the Company's Common Stock under
provisions of the Series C Preferred Stock certificate of designation. The
result of such redemption was to increase common stock and additional paid in
capital by $7 and $22,220, respectively, as well as reduce retained earnings by
$1,913 reflecting the difference between the reported and redemption amounts of
the Series C Preferred Stock. Such difference is reflected in both the basic and
diluted earnings per share calculation for the nine month period ended September
30, 1998.
During the nine month period ended September 30, 1998, certain
employees exercised stock options and warrants resulting in the issuance of
341,216 shares of the Company's Common Stock. The result of such exercises was
to increase common stock and additional paid in capital by $3 and $2,725,
respectively.
7. COMMITMENTS AND CONTINGENCIES
In connection with the potential leveraged buyout of the Career Sales
Division, the sales force of Penn Life agreed to a reduction in the commission
rates over the life of the policy contract on new sales on and after January 1,
1998, in exchange for the opportunity to participate in the equity in the
newly-formed leveraged entity. Discussions have also been held relating to
equity incentive programs based on sales production and persistency measures.
Additionally, the Company has held discussions with a marketing organization,
which it has contracted with for the development and marketing of products
focused on the senior marketplace, concerning the issuance of equity in the
newly-formed leveraged entity based on a percentage of profits contributed by
such marketing organization. If the Company disposes of its Career Sales
Division in a form other than a leveraged buyout transaction, or decides not to
dispose of its Career Sales Division, then the Company will pursue alternatives
with the Penn Life sales force in light of the modifications to commissions
associated with new business production after January 1, 1998 and with the
marketing organization in light of the marketing contract.
The North Carolina Attorney General's Office (the "NCAG") has initiated
an inquiry concerning a certain life insurance product historically sold by
Security Life and representations allegedly made by Security Life's agents and
officers with respect to waiving insurance charges after the eighth policy year
for non-smoker insureds. The NCAG has indicated that Security Life may be
estopped to change its current practice of waiving the cost of the insurance
because of certain representations made by agents and officers of Security Life.
Although Security Life has waived the cost of insurance charges for non-smoker
policyholders who recently reached their ninth policy anniversary, this waiver
is not guaranteed under the life insurance contract. The contract specifically
allows Security Life the right to change the cost of insurance rates in
accordance with the parameters set forth in the insurance contract. Security
Life has responded to the NCAG's inquiry by denying that it is estopped from
changing the cost of insurance rates based on the alleged representations, and
continuing to reserve its contractual rights to change the cost of insurance
rates in accordance with the parameters set forth in the insurance contract.
There can be no assurances that the Company will resolve these matters on such
life insurance product on a satisfactory basis, or at all, or than any such
resolution would not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
16
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (Continued)
The Pennsylvania Department of Insurance is in the process of
completing its examination of PLIC as of December 31, 1996. The Department has
indicated that PLIC's historical method of calculating statutory claims reserves
may not provide the most accurate determination of claims reserves estimates.
PLIC is evaluating differing methods for determining its claims estimates on a
statutory basis. Such differing methods could likely produce materially
different claims reserves estimates. Based upon preliminary findings, PLIC
increased its statutory claim estimates above historical levels by approximately
$20,000 during the three month period ended September 30, 1998. See Note 1 of
Notes to Unaudited Consolidated Financial Statements. To offset the impact of
such reserve increases on PLIC's statutory capital and surplus, PLIC entered
into a financial reinsurance agreement which allows PLIC to maintain marginally
sufficient statutory capital and surplus. Should PLIC need to substantially
increase its claims reserves estimates further, it is likely that PLIC's
risk-based capital ratios would decline, without further management action, to a
level which could require that certain actions be taken by the Pennsylvania
Department of Insurance. The Company and PLIC continue to closely monitor PLIC's
risk-based capital ratios.
The Company's insurance subsidiaries are required, at least annually,
to perform cash flow and "Asset Adequacy Analysis" under differing interest rate
scenarios. Certain of the Company's insurance subsidiaries historically sold
certain interest sensitive life insurance contracts in which the determination
of policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates and premium persistency. Minor
changes in such assumptions could have a material impact on future statutory
reserve requirements. Significant increases in statutory reserves would result
in lower statutory earnings associated with impacted insurance subsidiaries,
which in turn would reduce the dividend capacity of such subsidiaries ultimately
reducing cash flow available to the Company.
The following ten class-action securities complaints (collectively, the
"Complaints") were filed in the United States District Court for the Southern
District of New York against the Company and a number of current or former
directors and officers as defendants on the dates indicated:
<TABLE>
<S> <C>
Bobby F. Brooks v. David J. Stone, et al (Case No. 98CIV6065) 8/25/98
Phyllis Olin v. PennCorp Financial Group, Inc., et al (Case No. 98CIV6167) 9/1/98
Charles Rutland v. PennCorp Financial Group, Inc., et al (Case No. 98CIV6264) 9/4/98
Trust Advisors Trading LLC v. David J. Stone, et al (Case No. 98CIV6492) 9/30/98
PTJP Partners, L.P. et al v. PennCorp Financial Group, Inc. et al (Case No. 98CIV6799) 9/23/98
JJL Partners v. PennCorp Financial Group, Inc. et al (Case No. 98CIV6985) 9/29/98
Pointers v. Cleaners & Caulkers Local 1 Pension Fund v. PennCorp Financial
Group, Inc., et al (Case No. 98CIV6926) 10/1/98
Judith Friedman v. David J. Stone, et al (Case No. 98CIV7202) 9/25/98
Harriet Inselbach v. David J. Stone, et al (Case No. 98CIV7285) 10/29/98
Harold Sachs v. PennCorp Financial Group, Inc., et al (Case No. 98CIV5998) 8/21/98
</TABLE>
Nine of the Complaints are brought on behalf of certain purchasers of
the Company's common stock; the Olin Complaint is brought on behalf of certain
purchasers of the Company's 9 1/4% Senior Subordinated Notes due 2003. The
Complaints charge the Company and certain of its officers and directors with
violations of federal securities laws. Among other things, plaintiffs' claim
that defendants issued a series of materially false and misleading statements
and omitted material facts regarding the Company's financial condition,
including the value of certain of its assets, and failed to timely disclose that
it was under investigation by the SEC.
Plaintiffs seek to recover damages in unspecified amounts on behalf of
themselves and all other purchasers of the Company's common stock during various
periods, most commonly from March 31, 1998 through April 20, 1998 (although the
alleged class periods begin as early as August 19, 1997), and, in the Olin
Complaint, purchasers of the Company's subordinated notes between November 13,
1995 and August 20, 1998.
17
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (Continued)
During a pre-trial conference on November 9, 1998, all parties agreed
to the consolidation of all of the above actions and the Court appointed lead
plaintiffs on behalf of shareholders and noteholders. The Court also approved
the selection of three law firms as co-lead counsel for shareholders and
noteholders. Pursuant to a schedule agreed to at the conference, a consolidated
and amended complaint will be filed by December 21, 1998.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings would have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
On July 30, 1998, the Securities and Exchange Commission (the "SEC")
notified the Company that it has commenced a formal investigation into possible
violations of the federal securities laws including matters relating to the
Company's restatement of its financial statements for the first nine months of
1997, and for the years ended December 31, 1994, 1995 and 1996. The Company and
its management are fully cooperating with the SEC in its investigation.
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 illustration 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.
(Remainder of Page Intentionally Left Blank)
18
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1998 and 1997, financial statements included in this
filing have been reviewed by KPMG Peat Marwick LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review is
included on the following page.
(Remainder of Page Intentionally Left Blank)
19
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated balance sheet of PennCorp
Financial Group, Inc. and subsidiaries as of September 30, 1998, and the related
consolidated statements of operations for the three and nine month periods ended
September 30, 1998 and 1997, and consolidated statements of cash flows for the
nine month periods ended September 30, 1998 and 1997. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of PennCorp Financial Group,
Inc. as of December 31, 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 19, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
financial information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1997, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
As discussed in Note 1, the Company changed its method of recording
claim reserves associated with disability income products of the Career Sales
Division during the three month period ended June 30, 1998. The effect of the
change in methodology is inseparable from the effect of the change in accounting
estimates and is accordingly reflected in operations as a change in accounting
estimate for the nine month period ended September 30, 1998.
/S/KPMG PEAT MARWICK LLP
Dallas, Texas
November 16, 1998
20
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition and Results
of Operations.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the comparable
discussion filed with the Company's annual filing with the Securities and
Exchange Commission on Form 10-K for the fiscal year ended December 31, 1997.
The following discussion should also be read in conjunction with the
unaudited consolidated financial statements and related notes of this Quarterly
Report on Form 10-Q.
CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. All statements, trend analyses
and other information contained in this report relative to markets for
PennCorp's products and trends in PennCorp's operations or financial results, as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results to
be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: (1) general economic
conditions and other factors, including prevailing interest rate levels and
stock market performance, which may affect the ability of PennCorp to sell its
products, the market value of PennCorp's investments and the lapse rate and
profitability of policies; (2) PennCorp's ability to achieve anticipated levels
of operational efficiencies and cost-saving initiatives and to meet cash
requirements based upon projected liquidity sources; (3) customer response to
new products, distribution channels and marketing initiatives; (4) mortality,
morbidity, and other factors which may affect the profitability of PennCorp's
insurance products; (5) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of PennCorp's products; (6)
increasing competition in the sale of insurance and annuities; (7) regulatory
changes or actions, including those relating to regulation of insurance products
and of insurance companies; (8) ratings assigned to PennCorp's insurance
subsidiaries by independent rating organizations such as A.M. Best Company
("A.M. Best"), which the Company believes are particularly important to the sale
of annuity and other accumulation products; (9) PennCorp's ability to
successfully complete its year 2000 remediation efforts, (10) the ultimate
realizable value of Businesses Held for Sale and (11) 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
The Company, through its three operating divisions, provides
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.
Acquisitions and Other Transactions. On December 31, 1997, PennCorp
shareholders approved the acquisition of the SW Financial Controlling Interest
through the assignment by Messrs. Fickes and Stone and the KB Fund (the
"Controlling Parties") of certain rights, including common stock and, in the
case of the KB Fund, common stock equivalents of SW Financial. The acquisition
was consummated on January 2, 1998 resulting in the Controlling Parties
receiving aggregate cash consideration of $73.7 million (not including
acquisition expenses).
In addition, PennCorp shareholders also approved the acquisition of the
interests of the Fickes and Stone Knightsbridge Interests for total
consideration estimated to be $10.6 million. Mr. Fickes will receive
consideration in the form of estimated annual interest payments, ranging from
$301,000 to $330,000, on April 15 each year through 2001 and will be
21
<PAGE>
issued 173,160 shares of the Company's Common Stock on April 15, 2001. The
Company issued 173,160 shares to Mr. Stone in July 1998.
On February 18, 1998, the Company announced it had engaged investment
banking firms Salomon Smith Barney and Fox-Pitt, Kelton Inc. to review strategic
alternatives for maximizing shareholder value, including the sale of the
Company's Career Sales Division. The Company's decision to dispose of the Career
Sales Division, within a period not likely to exceed one year, resulted in the
assets and liabilities of the Career Sales Division to be considered "assets and
liabilities of businesses held for sale," and as such were segregated from those
of the Retained Businesses for purposes of presentation of the Company's
financial information.
On August 13 and 14, 1998, the Company received written proposals from
two prospective purchasers for its Career Sales Division. The proposals provided
the Company with additional evidence of the value it would likely receive as a
result of a sale of Career Sales Division to a financial buyer. Based upon
internal estimates and the receipt of those proposals, the Company reduced the
carrying value of the assets held for sale by $140.5 million during the six
month period ended June 30, 1998.
Since the Company announced its results for the period ended June 30,
1998, the Company has engaged in exclusive negotiations with one of the
perspective purchasers of the Career Sales Division. These negotiations and
other developments have provided the Company with additional indications of the
value of the Career Sales Division. The new information indicates that the
previously determined fair value should be adjusted. In analyzing the likely
fair value impairment, the Company considered (i) the implied value that the
current exclusive bidder for the Career Sales Division is likely to offer based
upon a leveraged buyout financing model, (ii) the valuation appraisal of the
assets held for sale generated by the application of certain assumptions
provided by the bidder, and (iii) the Company's own analysis of possible
appraisal valuations based upon differing assumptions and discount rates. For
the three month period ended June 30, 1998, the Company relied upon similar
techniques which formed the basis for the previously determined fair value of
the assets held for sale.
The Company believes that a decline in the indicated fair value of the
Career Sales Division has resulted primarily from the following factors: (a)
decline in statutory capital and surplus of the Career Sales Division (b)
decline in interest rates of high quality securities available for reinvestment
of cash generated by the assets held for sale, (c) decline in Canadian exchange
rates versus the U.S. dollar, (d) the determination of the compensation that
would be required to be paid to the Career Agency field force as part of a sale
transaction with the exclusive bidder, (e) capital market volatility, including
the constriction in the mezzanine financing markets, required increased credit
spreads by lending institutions and a decline in valuation multiples for
financial services companies generally, and (f) the Company's current financial
constraints and pressures.
The Company has weighted the implied fair values based upon the
hierarchy established by SFAS No. 121. Based upon the guidance of SFAS No. 121,
the Company has determined that fair value is likely at the lower end of a range
of implied values as a result of the factors noted above. The Company has
reflected such fair value of approximately $166.1 million in the accompanying
financial statements, resulting in an impairment provision of $145.0 million
during the three month period ending September 30, 1998.
The Company is continuing to negotiate towards a definitive agreement
with the perspective purchaser for the sale of the Career Sales Division. The
exclusivity period is currently set to expire on December 19, 1998. There can be
no assurance that the Company will enter into a definitive agreement with the
prospective purchaser.
The Company is currently marketing for potential sale, Professional.
The Company is expecting final expressions of interest from a limited group of
potential strategic purchasers shortly. The Company intends to evaluate those
bids and potentially enter into a definitive agreement with a purchaser if an
acceptable bid is received. The Company's current carrying value for
Professional is $49.1 million. There can be no assurance that the Company will
receive an acceptable bid for the purchase of Professional or will enter into a
definitive agreement for the sale of Professional.
The Company is in the preliminary stages of marketing United Life for
possible sale. Confidentiality Agreements have been entered into with several
potential strategic purchasers. These can be no assurance that the Company will
receive
22
<PAGE>
an acceptable bid for the purchase of United Life or will enter into a
definitive agreement for the sale of United Life. The Company's current carrying
value for United Life is $188.8 million.
The Company sold its preferred stock position in ACO Brokerage Holdings
Corporation ("ACO"), the holding company for Acordia, Inc., to a third party
investor for $25.0 million, cash of $21.0 million which has been received by the
Company and $4.0 million of which is held in escrow subject to satisfaction of
certain conditions. No gain or loss was reported on the ACO preferred stock
sale. The Company also granted a one year option for the purchase of its common
stock position in ACO to the same investor which has not yet been exercised. The
Company is currently in the process of attempting to resolve issues relating to
the exercise of the option by the investor and is seeking to satisfy the
conditions relating to the release of the $4.0 million held in escrow. There can
be no assurance that the option will be exercised or that the conditions related
to the release of the $4.0 million escrow will be satisfied.
Strategic Review of Business Units and Restructuring Charges. As a
result of the tremendous growth of the Company, the diversification of the
underlying business units resulting from acquisitions over time, the Company
began a strategic business evaluation during the third quarter of 1996. The
review resulted in the Company establishing three divisional platforms, Career
Sales Division, Payroll Sales Division and Financial Services Division.
As a result, the Company began to realign its existing operating
companies and incurred restructuring, of approximately $-- and $19.1 million,
and period costs, of approximately $8.3 million and $11.8 million, for the three
and nine month periods ended September 30, 1997, respectively, directly and
indirectly associated with the initial divisional restructuring which had no
future economic benefit.
The Company estimates approximately $-- and $192,000 of period costs
associated with the 1997 restructuring charge were incurred during the three and
nine month periods ended September 30, 1998.
On January 2, 1998, and January 5, 1998, respectively, the Company
acquired the SW Financial Controlling Interest and the Fickes and Stone
Knightsbridge Interests. The acquisition allowed the Company to complete its
divisional restructuring which began in 1997. As a result, the Company incurred
restructuring, of $-- and $11.8 million, and period costs, of approximately $2.2
million and $2.5 million, for the three and nine month periods ended September
30, 1998, respectively, directly and indirectly associated with divisional
restructuring.
During the nine month period ended September 30, 1998, the Company
re-evaluated the 1997 restructuring charge and reduced certain accruals by
approximately $3.8 million as a result of the final determination regarding the
abandonment of certain assets.
During the three month period ended September 30, 1998, the Company
re-evaluated the 1998 restructuring charge and increased certain accruals by
approximately $1.4 million, as a result of the final determination regarding
contract termination fees, certain impaired assets and severance. For the nine
month period ended September 30, 1998, the net decrease in certain accruals was
approximately $368,000.
In addition, the Company will record additional restructuring or other
charges during the fourth quarter of 1998 as a result of the Company's decision
to consolidate certain operations into its Dallas location.
YEAR 2000 ISSUES
Many computer and software programs were designed to accommodate only
two digit fields to represent a given year (e.g. "98" represents 1998). It is
highly likely that such systems will not be able to accurately process data
containing date information for the year 2000 and beyond. The Company is highly
reliant upon computer systems and software as are many of the businesses with
which the Company interacts. The Company's ability to service its policyholders
and agents is dependent upon accurate and timely transaction reporting.
Transaction reporting in turn is dependent upon the Company's highly complex
interdependent computer hardware, software, telecommunications and desktop
applications. The inability of the Company or any of its integral business
partners to complete year 2000 remediation efforts associated with these highly
complex and interdependent systems could lead to a significant business
interruption. Such an interruption could result in a decline in current and
long-term profitability and business franchise value.
23
<PAGE>
The Company's overall year 2000 compliance initiatives, include the
following components: (i) assessment of all business critical systems (business
critical systems includes computer and other systems); processes and external
interfaces and dependancies; (ii) remediation or upgrading of business critical
systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and follows up periodically.
The Company has engaged certain outside vendors and focused certain
employees full time efforts to help in the full array of its year 2000
initiative. This includes systems assessment and monitoring advice, actual code
remediation, communication and consultation with critical business partners and
additional data center and testing resources. The Company originally projected
to incur internal and external costs associated with such expertise ranging from
$10.6 million to $14.5 million, which were anticipated to be incurred primarily
during 1998 and early 1999. Based upon revised projections during the third
quarter of 1998, the Company anticipates incurring internal and external costs
of $7.8 million during the remainder of 1998 and early 1999. The Company
estimates it has incurred internal and external costs aggregating $6.7 million
and $11.4 million for the three and nine month periods ended September 30, 1998.
Each of the operating divisions is primarily responsible for its
remediation efforts with corporate oversight provided as necessary. The Company
believes that the Career Sales Division has substantially completed its year
2000 assessment and remediation efforts, which will be subject to ongoing tests
for the remainder of 1998. In addition, the Career Sales Division has committed
to a strategy of utilizing third party administrative experts, who have
indicated year 2000 compliance, to handle the processing of certain components
of its health insurance business, thus eliminating the need for the upgrade or
modification of certain existing health administration systems. Currently the
Company, based upon internal assessment metrics, believes that the Career Sales
Division is 92.5% complete with respect to its year 2000 remediation efforts of
critical business systems and should be year 2000 compliant by December 31,
1998. The Payroll Sales Division has completed the remediation of its largest
administrative platforms, except for AA Life, and anticipates successful
remediation and testing of the remaining sub-systems and system interfaces
during 1998. The Company believes that the Payroll Sales Division, other than AA
Life, is 91.0% complete with its compliancy effort for critical business
systems. AA Life is in the process of upgrading its policy administration system
to a year 2000 compliant version. AA Life is relying on contracted vendor
resources in order to complete its upgrade process. Based upon similar internal
metrics analysis, AA Life has completed 65.0% of the total effort required for
its critical business systems to be year 2000 compliant and expects to be year
2000 compliant by December 31, 1998. The efforts of the Company's Financial
Services Division are dependent on the utilization of outside resources. The
Company believes that the Financial Services Division has contracted with
sufficient resources to be able to remediate its essential business systems.
Currently, the Company believes that the Financial Services Division is 62.0%
complete with remediation efforts associated with its critical business systems
and expects such systems to be year 2000 compliant by March 31, 1999.
Although the Company believes that its operating divisions, outside
vendors and most critical business partners will be sufficiently compliant that
the year 2000 issue should not cause a material disruption in the Company's
business, there can be no assurance that there will not be material disruptions
to the Company's business or an increase in the cost of the Company doing
business. Although the Company believes that the year 2000 issues should not
cause a material disruption in the Company's business, the Company is developing
various contingency plans associated with remediation tasks which the Company
believes are at a higher risk for potential failure. The Company expects the
analysis of the contingency plans and potential action steps to be completed by
December 31, 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General. The Company's liquidity requirements are funded primarily by
its insurance subsidiaries through payments of principal and interest due under
surplus debentures, management and investment management fees, tax sharing
payments, and dividends. These sources of liquidity are reasonably predictable.
During the nine month periods ended September 30, 1998 and 1997,
respectively, the Company received approximately $54.5 million and $27.1 million
in interest payments on surplus debentures and dividends from its insurance
subsidiaries and paid approximately $51.3 million and $35.7 million in interest,
operating costs and preferred stock and common stock dividends. For the
remainder of 1998, the Company anticipates receiving approximately $13.7 million
in interest payments on surplus debentures, dividends and tax sharing payments
from its insurance subsidiaries. As of
24
<PAGE>
September 30, 1998, the Company had cash on hand of approximately $8.1 million.
The Company anticipates cash requirements of $13.3 million for interest and $3.7
million for operating expenses for the remainder of 1998. The Company recently
announced it has suspended the payment of common stock dividends and dividends
on both series of its preferred stock. Additionally, the Company may need
approximately $4.6 million of liquidity to fund its restructuring efforts.
Additional liquidity could also be required to bolster the statutory capital and
surplus of PLIC. See Managements' Discussion and Analysis--Regulatory Matters.
During the three month period ended September 30, 1998, the Company
sold its preferred stock interest in ACO for approximately $25.0 million. The
Company received cash during the three month period of $21.0 million associated
with such sale. The remaining proceeds are held in escrow pending satisfaction
of certain conditions some of which are related to the purchaser's right to also
purchase the Company's ACO common stock holdings.
Related to the sale of the ACO preferred stock, the Company also
provided the purchaser of the ACO preferred stock with a one year option to
purchase the Company and its subsidiaries ACO common stock holdings. Should the
purchaser exercise its option, the Company would receive approximately $8.5
million of net proceeds and the Company's subsidiaries would receive net
proceeds of approximately $6.0 million subject to certain "claw back"
obligations of the Company.
In addition, should the KB Fund limited partners also sell their
interests in ACO common stock to the purchaser, the Company would receive, as a
result of being the KB Fund general partner, promote economics aggregating
approximately $2.8 million subject to certain claw back obligations.
Based upon year to date statutory operating results and projected
operating results for the remainder of 1998, the Company anticipates liquidity
in the form of surplus debenture interest payments and insurance company
dividends and tax sharing payments to be approximately $45.0 million to $55.0
million for 1999. Anticipated cash requirements of the Company, excluding common
and preferred stock dividends which have been suspended by the Company, for
interest payments, operating and restructuring expenses aggregate approximately
$57.0 million.
To fund the potential shortfall in cash sources for 1999, the Company,
in addition to the ACO common stock transactions, anticipates liquidating
non-core assets. The Company has also decided to enter into exclusive
negotiations with a prospective purchaser of the Career Sales Division and is
seeking to resolve issues relating to the sale of ACO common stock and satisfy
conditions relating to the release of $4.0 million held is escrow relating to
the ACO transaction, which, if consummated, would provide the Company with
material cash proceeds. In addition, the Company has available $16.0 million
under its senior revolving credit facility. See Note 7 of Notes to Unaudited
Consolidated Financial Statements.
As a result of these anticipated actions, management believes the
Company will likely have sufficient financial flexibility and projected
liquidity sources to meet all cash requirements for the remainder of 1998 and
likely for 1999. However, there can be no assurances actual liquidity sources
will develop as currently projected. In the event of a shortfall of actual
liquidity sources, the Company will explore options to generate any necessary
liquidity such as: (i) the sale of non- strategic subsidiaries, (ii) obtain
regulatory approval for extraordinary dividends from its insurance subsidiaries
(which is unlikely at the present time) and (iii) borrowing on a secured basis.
If the Company is unable to obtain sufficient liquidity to meet its projected
cash requirements, such failure could result in a default on one or more
obligations and the holders thereof would be entitled to exercise certain
remedies, including the acceleration of the maturity of the entire indebtedness
and commencing legal proceedings to collect the indebtedness. In such event, the
Company will examine and consider the range of available alternatives to the
Company at that time.
During 1997, the Company initiated a stock repurchase program in which
the Company was authorized by its Board of Directors to purchase up to 4.5
million shares of common stock in the open market, through arranged transactions
and otherwise. The Company's stock repurchase program has been suspended. The
Company is currently prohibited by its senior revolving credit facility and its
preferred stocks from repurchasing its common stock.
A portion of the consideration of the acquisition of the Fickes and
Stone Knightsbridge Interests was 173,160 shares of the Company's Common Stock
due each of Messrs. Fickes and Stone on April 15, 2001. As a result of the
acquisition, common stock and additional paid in capital increased $3,000 and
$8.5 million, respectively, for the nine month period ended September 30, 1998.
25
<PAGE>
Effective March 31, 1998, the Company redeemed all of the outstanding
Series C Preferred Stock into 691,528 shares of the Company's Common Stock under
provision of the Series C Preferred Stock certificate of designation. The result
of such redemption was to increase common stock and additional paid in capital
by $7,000 and $22.2 million, respectively, as well as reduce retained earnings
by $1.9 million reflecting the difference between the reported and redemption
amounts of the Series C Preferred Stock. Such difference is reflected in both
the basic and diluted earnings per share calculation for the nine month period
ended September 30, 1998.
For the nine month period ended September 30, 1998, certain employees
exercised stock options and warrants resulting in the issuance of 341,216 shares
of the Company's Common Stock. The result of such exercises was to increase
common stock and additional paid in capital by $3,000 and $2.7 million,
respectively.
RESULTS OF OPERATIONS
For the three and nine month periods ended September 30, 1998 and 1997,
the Company has prepared the following unaudited selected pro forma financial
information, for both the Businesses Held for Sale and the Retained Businesses,
which excludes the impact of: (i) restructuring charges including period costs,
(ii) gains or losses on the sale of investments and associated amortization of
deferred acquisition costs and present value of insurance in force as the result
of gains or losses on the sale of investments, and (iii) the impact of the
Company's decision to dispose of the Businesses Held for Sale ((i), (ii) and
(iii) collectively, "Operating Income (Loss)")). In addition, the 1997 unaudited
selected pro forma financial information considers the impact of the: (i)
acquisition of the SW Financial Controlling Interest, including the financing
thereof, and (ii) the acquisition of the Fickes and Stone Knightsbridge
Interests, including the financing thereof.
The Company has prepared such information as it believes that: (i) the
acquisition of the SW Financial Controlling Interest, (ii) the intended
disposition of the Businesses Held for Sale, and (iii) the restructuring charge
and period charges are material enough to make historical comparative results
for the three and nine month periods ended September 30, 1998 and 1997,
respectively, not meaningful as well as facilitate the subsequent discussion
parallel with how management views and evaluates the operations of the Company.
The unaudited selected pro forma financial information for the three
and nine month periods ended September 30, 1997, gives effect to the acquisition
of the SW Financial Controlling Interest and the Fickes and Stone Knightsbridge
Interests as though each had occurred on January 1, 1997.
The following unaudited selected pro forma financial information 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, 1997, or the results which may occur in the future.
26
<PAGE>
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
(Unaudited)
Businesses Held for Sale
------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
(In thousands) ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Policy revenues.................................. $ 50,275 $ 54,417 $ 156,649 $ 166,719
Net investment income............................ 9,065 10,096 30,891 30,023
Other income..................................... 3,216 3,913 11,920 13,919
------------- ------------- ------------- --------------
62,556 68,426 199,460 210,661
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 36,274 27,747 133,967 93,983
Insurance related expenses....................... 14,748 18,743 47,064 48,265
Other operating expenses......................... 13,745 10,991 38,256 29,737
------------- ------------- ------------- --------------
64,767 57,481 219,287 171,985
------------- ------------- ------------- --------------
Pre-tax Operating Income (Loss) before
interest, amortization of deferred
debt issuance costs and impairment
provision associated with assets of
businesses held for sale ...................... $ (2,211) $ 10,945 $ (19,827) $ 38,676
============= ============= ============= ==============
Retained Business
------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
(In thousands) ------------- ------------- ------------- --------------
Revenues:
Policy revenues.................................. $ 73,330 $ 70,744 $ 204,763 $ 207,056
Net investment income............................ 80,065 90,798 246,772 269,771
Other income..................................... 5,560 9,642 18,089 21,914
------------- ------------- ------------- --------------
158,955 171,184 469,624 498,741
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 98,097 72,680 292,075 256,348
Insurance related expenses....................... 24,903 23,654 64,146 63,817
Other operating expenses......................... 35,352 22,817 98,804 71,514
------------- ------------- ------------- --------------
158,352 119,151 455,025 391,679
------------- ------------- ------------- --------------
Pre-tax Operating Income before interest and
amortization of deferred debt issuance costs. $ 603 $ 52,033 $ 14,599 $ 107,062
============= ============= ============= ==============
</TABLE>
BUSINESSES HELD FOR SALE
Career Sales Division. The Career Sales Division, which includes the
operations of Penn Life, 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. With the
January 2, 1998, consummation of the acquisition of the SW Financial Controlling
Interest, the Company has integrated Union Bankers, Marquette and Constitution
with the Career Sales Division.
In the third quarter of 1998, the Company made the decision to dispose
of KIVEX within a period not likely to exceed one year. As a result, the assets
and liabilities of KIVEX were considered "assets and liabilities held for sale"
and, as such, aggregated with the Career Sales Division for purposes of
presentation of the Company's consolidated balance sheet and was included with
the Businesses Held for Sale for purpose of this Management's Discussion and
Analysis.
27
<PAGE>
Policy Revenues. Total policy revenues for the nine month period ended
September 30, 1998, decreased 6.0% to $156.6 million compared to $166.7 million
for the nine month period ended September 30, 1997. The decline was primarily
the result of a decision to limit underwriting of certain accident and health
insurance products at Penn Life and Union Bankers which resulted in an
approximately $7.6 million decline in earned premium. In addition, policy
revenues of Penn Life declined approximately $2.5 million as the result of lower
new business production.
Total policy revenues for the three month period ended September 30,
1998, decreased 7.6% to $50.3 million compared to $54.4 million for the three
month period ended September 30, 1997. The decline was primarily the result of a
decision to limit underwriting of certain accident and health insurance products
at Penn Life and Union Bankers which resulted in an approximately $3.3 million
decline in earned premium. In addition, policy revenues of Penn Life declined
approximately $1.1 million as the result of lower new business production on the
underlying blocks of business.
Net Investment Income. Net investment income for the nine month period
ended September 30, 1998, was $30.9 million compared to $30.0 million for the
nine month period ended September 30, 1997. Net investment income increased
approximately $1.9 million as a result of assets and liabilities associated with
a block of annuities which were reinsured to the Businesses Held for Sale from
the Retained Businesses. The reinsurance transfer increased invested assets by
approximately $75.1 million resulting in additional investment income. This was
primarily offset by a decrease in investment income of approximately $1.1
million at Union Bankers as a result of fewer total invested assets which in
turn resulted from decreases in persistency and lower new business production on
the underlying blocks of business.
For the three month period ended September 30, 1998, investment income
declined approximately $1.0 million to $9.1 million compared with $10.1 million
for the three month period ended September 30, 1997. During the third quarter of
1998 the reinsurance agreement between the Businesses Held for Sale and the
Retained Businesses was cancelled in anticipation of the pending sale of the
Career Sales Division, thus reducing the additional investment income associated
with the transfer of invested assets to approximately $300,000. Such increase
was primarily offset by a decrease of approximately $1.3 million at Penn Life
and Union Bankers as the result of the liquidation of higher yielding invested
assets due to calls and maturities of such assets during the three month period
ended September 30, 1998.
Other Income. Included in other income for the three and nine month
periods ended September 30, 1998, and 1997, respectively, are revenues derived
primarily from a deferred gain associated with a third party medicare
reinsurance contract. The decrease in other income is attributable to the
decline in the underlying premium in force subject to the reinsurance
arrangement, over time, which results in lower amortization of the gain.
Partially offsetting the decrease in amortization of the deferred gain is the
increasing revenues of KIVEX, reflecting the expansion of the organization into
eleven new cities during 1998 and the associated additional revenues as new
buildings and tenants are added to the network portfolio.
Total Policyholder Benefits. Total policyholder benefits for the nine
month period ended September 30, 1998, increased 42.5% to $134.0 million
compared to $94.0 million for the comparable period ended September 30, 1997.
The increase was primarily the result of specific increases in reserve estimates
associated with long term care products and certain claims reserves held by Penn
Life. Policy reserves and claims reserves increases associated with the changes
in estimates aggregated approximately $24.6 million. The Company had been
closely monitoring the development of claims reserve experience associated with
its Career Sales Division. The Company has recently experienced, what appears to
be, a deterioration of the adequacy of its claims reserves associated with
disability income products sold prior to the Company's ownership of Penn Life.
As a result of such possible trends, the Company increased claims reserves
estimates for the Career Sales Division by approximately $20.0 million, which is
included above in the additional policy benefit reserves. See Notes 1 and 7 of
Notes to Unaudited Consolidated Financial Statements. In determining the amount
of the necessary increase in policy reserve estimates associated with its long
term care products, Penn Life allocated approximately $11.2 million of
previously identified redundant policy reserves to long term care reserves, and
additionally increased policy reserves by approximately $4.6 million.
Total policyholder benefits for the three month period ended September
30, 1998, increased 30.7% to $36.3 million compared to $27.7 million for the
comparable period ended September 30, 1997. Trends for the three month period
primarily reflect the growth in the long-term care and certain other claims
reserves at Penn Life.
Insurance Related Expenses. For the nine month period ended September
30, 1998, insurance related expenses (including commissions, amortization of
deferred policy acquisition costs and amortization of present value of insurance
in force) decreased to $47.1 million from $48.3 million for the nine month
period ended September 30, 1997.
28
<PAGE>
The decrease was principally the result of the impairment provision
associated with assets of businesses held for sale. The present value of
insurance in force asset of both Penn Life and Union Bankers was written down by
an aggregate of approximately $52.2 million from the historical accounting basis
as of June 30, 1998, which decreased the associated amortization of present
value of insurance in force by approximately $4.3 million.
Also contributing to the decrease were reduced net commission costs for
Penn Life as the result of reduced new business production when compared with
the nine month period ended September 30, 1997. The total decrease in net
commission costs amounted to approximately $1.5 million. Union Bankers
commission costs declined approximately $1.1 million as the result of lower new
business production as compared to the same period in 1997 related to the
decision to limit the underwriting of certain accident and health insurance
products.
Offsetting the decreases in amortization of present value of insurance
in force and net commission costs is an increase of approximately $1.4 million
of amortization of deferred policy acquisition costs attributable to increased
deferrals of commission costs, the increased deferrals begin to amortize
immediately reflecting the periodic premium payments of the underlying policies
in force, associated with the changes in the compensation structure at Penn Life
as well as declining persistency. Union Bankers also experienced higher
amortization of deferred policy acquisition costs, approximately $3.9 million,
resulting from declining persistency on PPO health insurance business.
Trends for the three month periods are consistent with those noted for
the nine month period. For the three month period ended September 30, 1998,
insurance related expenses decreased to approximately $14.7 million from
approximately $18.7 million for the three month period ended September 30, 1997.
The reduction resulted from approximately $3.2 million reduction in amortization
of present value of insurance in force, approximately $3.5 million reduction in
commission costs. Offsetting such declines was an increase of approximately $2.3
million of additional amortization of deferred policy acquisition costs.
Other Operating Expenses. For the nine month period ended September 30,
1998, other operating expenses (including general operating, overhead and policy
maintenance) increased to $38.3 million from $29.7 million for the nine month
period ended September 30, 1997. For the three month period ended September 30,
1998, other operating expenses increased to $13.7 million from $11.0 million for
the three month period ended September 30, 1997.
With the inclusion of KIVEX as a business held for sale, the increase
in other operating expenses reflects the inclusion of the costs associated with
this business. During the nine month period ended September 30, 1998, KIVEX
implemented sales and fulfillment operations in eleven new cities (Charlotte,
Dallas, Boston, Philadelphia, Richmond, Miami, New York, Chicago, Seattle, San
Francisco and San Diego). Increased expenses associated with these new
operations, as well as expansion of operations in current cities, were
approximately $4.8 million and $2.7 million for the nine month and three month
periods ended September 30, 1998, respectively.
Offsetting the increase in other operating expenses related to KIVEX is
the impairment provision associated with assets of businesses held for sale. The
costs in excess of net assets acquired asset of both Penn Life and Union Bankers
was written down approximately $100.1 million from the historical accounting
basis as of June 30, 1998, which decreased the associated amortization of costs
in excess of net assets acquired by approximately $1.5 million for the three and
nine month period ended September 30, 1998.
The remaining increases are primarily attributable to Penn Life
statutory examination expenses, the establishment of a management information
technology system, and costs incurred associated with the transfer of the
operations of Union Banker's to third party administrators as well as the Career
Sales Division year 2000 compliance efforts.
RETAINED BUSINESSES
Payroll Sales Division and Financial Services Division. The Payroll
Sales Division includes the operations of AA Life, Professional and OLIC. AA
Life markets and underwrites customized life insurance and accumulation products
to U.S. military personnel and federal employees through a general agency force.
Professional and OLIC provide individual fixed benefit and life products
utilizing a network of independent agents primarily in the southeastern United
States through employer-sponsored payroll deduction programs.
29
<PAGE>
The Financial Services Division includes the operations of Security
Life and United Life. Security Life markets life insurance and, to a lesser
extent annuity products, through independent general agents who sell directly to
individuals primarily in the southeastern United States. United Life principally
markets fixed and variable annuities through financial institutions and
independent general agents, primarily in the southern and western United States.
With the January 2, 1998, consummation of the acquisition of the SW Financial
Controlling Interest, the Company has integrated Southwestern Life with the
Financial Services Division.
Policy Revenues. Total policy revenues for the nine month period ended
September 30, 1998, decreased 1.1% to $204.8 million compared to $207.1 million
for the nine month period ended September 30, 1997. The decline was primarily as
a result of a decline in the Payroll Services Division policy revenues
associated with OLIC. Such decline was anticipated due to the Company's decision
to cease marketing products through any "non-payroll" production sources. The
Financial Services Division's policy revenues were nearly unchanged for the nine
month period ended September 30, 1998.
Total policy revenues for the three month period ended September 30,
1998, increased 3.7% to $73.3 million as compared with $70.7 million for the
three month period ended September 30, 1997. The increase was primarily the
result of strong new business production in the Financial Services Division. The
Payroll Sales Division policy revenues were nearly unchanged for the comparable
three month period.
Net Investment Income. For the nine and three month periods ended
September 30, 1998, average invested assets decreased approximately $161.0
million and $249.5 million, respectively, compared to the nine and three month
periods ended September 30, 1997. The decline was primarily the result of the
need to liquidate invested assets for the Financial Services Division to provide
cash flow for accumulation product surrenders. In addition, weighted average
yields for the nine and three month periods have declined to 7.3% and 7.2%,
respectively, compared to average yields for the nine and three month periods
ended September 30, 1997 of 7.7% and 7.8%, respectively. The decline reflects a
decrease in higher yielding but less liquid asset classes such as real estate,
mortgages and collateral loans, lower new money rates available to the Company
to invest as a result of extensive maturities and calls of higher yielding
investments and higher investment expenses as a result of the decision to
utilize outside investment managers.
Other Income. The decrease in other income of $3.8 million and $4.1
million for the nine month and three month periods ended September 30, 1998, as
compared with similar periods ended September 30, 1997, was primarily the result
of a decline in KB Management income. The Company recognizes fee income, net of
operating expenses and funding requirements, derived from the various capital
transactions performed by KB Management on behalf of the Company and the KB
Fund. During 1997 there were several capital transactions associated with the
fund and the Company recognized its share of the net fee income. There have been
no capital transactions performed by KB Management during 1998. Other income
derived by both Financial Services and Payroll Sales Division was nearly
unchanged during the comparable periods.
Total Policyholder Benefits. Total policyholder benefits for the nine
month period ended September 30, 1998, increased 13.9% to $292.1 million
compared to $256.3 million for the comparable period ended September 30, 1997.
During the third quarter of 1997, policyholder benefits were reduced
approximately $18.1 million related to the reduction in certain deficiency
reserves on a block of interest sensitive business in the Financial Services
Division. During the period ended September 30, 1997, management began
implementing a plan intended to reduce the anticipated losses on these policies.
Such actions included contractually allowable reductions in credited rates and
increases in cost of insurance and expense charges. In addition, the increase in
policyholder benefits for the period ended September 30, 1998 when compared to
1997, resulted from an aggregate increase in death benefits for the Financial
Services Division of approximately $14.7 million when compared to the nine month
period ended September 30, 1997. Policy benefits for the Payroll Services
Division also increased primarily as a result of increases in claims reserves
estimates for certain older blocks of hospital indemnity and disability income
contracts as death benefits were nearly unchanged.
Total policyholder benefits for the three month period ended September
30, 1998, increased 35.0% to $98.1 million compared to $72.7 million for the
comparable period ended September 30, 1997. Trends for the three month period
were consistent with those noted for the nine month period as 1997 reflects a
decrease in deficiency reserves of approximately $18.1 million, death benefits
for the Financial Services Division were approximately $4.2 million higher
during 1998 and policyholder benefits for the Payroll Division increased during
1998 as a result of increases in claims reserves estimates for certain older
blocks of hospital indemnity and disability income contracts.
30
<PAGE>
The Company is continually evaluating actuarial assumptions associated
with interest sensitive life insurance contracts in which the determination of
policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates, and premium persistency. Currently
reflected in the Company's financial statements are policy reserves and account
values associated with such contracts, which aggregated approximately $525.9 and
$504.6 as of September 30, 1998, and December 31, 1997, respectively. If
developing trends were to continue, the Company would be required to record
additional reserves or reduce intangible assets, which could have a material
impact on the Company's financial position and results of operations. Management
is also assessing the potential impact of future management actions, which might
mitigate the financial impact of these trends. The Company is unable to predict
at this time the cost associated with the management action, which could be
material. Types of management actions would likely include, but are not limited
to, the redetermination of non-guaranteed charges and/or benefits under the
contracts, asset segmentation, and reinsurance. There are risks associated with
management action including potential sales disruption and the threat of
litigation. The Company is continuing to refine its actuarial estimates, likely
management action plans and associated sensitivity testing of such
interdependencies on policy reserves associated with these contracts which could
result in changes in such estimates in the future.
Insurance Related Expenses. For the nine month period ended September
30, 1998, insurance related expenses (including commissions, amortization of
deferred policy acquisition costs and amortization of preset value of insurance
in force) increased to $64.1 million from $63.8 million for the nine month
period ended September 30, 1997. Commissions increased $2.0 million primarily
from increased new business production in the Financial Services Division. In
addition, amortization of deferred policy acquisition costs increased $10.3
million compared with the prior year as a result of growing blocks of insurance
in force and persistency adjustments. These increases were substantially offset
by $12.0 decrease in amortization of present value of insurance in force. Most
of the decrease was related to the Financial Services Division and resulted from
unlocking future assumptions regarding the profitability of certain interest
sensitive life insurance products and from lower amortization from aging blocks
of purchase business.
For the three month period ended September 30, 1998, insurance related
expenses increased to $24.9 million from $23.7 million for the three month
period ended September 30, 1997. The increase for the three month period is a
result of increased amortization of deferred policy acquisition costs of $1.8
million for the Payroll Sales Division primarily due to persistency adjustments.
Other Operating Expenses. For the nine month period ended September 30,
1998, other operating expenses (including general operating, overhead and policy
maintenance) increased to $98.8 million from $71.5 million for the nine month
period ended September 30, 1997. The increase is attributable to several factors
as follows: (i) accrual of severance and related benefits of approximately $7.5
million, (ii) additional amortization of costs in excess of net assets acquired
of approximately $2.0 million, (iii) approximately $11.4 million of remediation
costs associated with Year 2000 systems conversions and upgrades, (iv) the
write-off of agents' debit balances aggregating approximately $2.3 million,
deemed uncollectible, (v) the write off of certain leasehold improvements and
other corporate charges aggregating approximately $2.2 million and (vi)
additional non-deferrable expenses such as consulting fees, corporate overhead
and friction costs associated with the divisional realignment which are not
considered restructuring costs.
For the three month period ended September 30, 1998, other operating
expenses increased to $35.4 million from $22.9 million for the three month
period ended September 30, 1997. The increase for the comparable three month
period is the result of several of the factors noted above, specifically (i)
accrual of severance and related benefits of approximately $3.8 million, (ii)
approximately $6.7 million of remediation costs associated with Year 2000
systems conversions and upgrades, (iii) additional non-deferrable expenses such
as consulting fees, corporate overhead and friction costs associated with the
divisional realignment which are not considered restructuring costs.
GENERAL CORPORATE
Interest and Amortization of Deferred Debt Issuance Costs. Interest and
amortization of deferred debt issuance costs increased to $30.9 million and
$10.7 million from $28.4 million and $10.4 million for the nine and three month
periods ended September 30, 1998, and 1997, respectively. The increase interest
and amortization of deferred debt issuance costs was directly related to the
additional weighted average borrowings outstanding as the result of the
acquisition of the SW Financial Controlling Interest, including the refinancing
of SW Financial notes payable at a more favorable interest rate structure under
the Company's senior revolving credit facility, as well as the Fickes and Stone
Knightsbridge Interests on January 2, 1998,
31
<PAGE>
and January 5, 1998, respectively. In addition, the Company's weighted average
borrowing costs has recently increased approximately 175 basis points as the
direct result of its current financial position.
Income Taxes. The effective tax rate (benefit) for the nine and three
month periods ended September 30, 1998, was (.5%) and 2.5% compared to 37.2% and
32.6% for the nine and three month periods ended September 30, 1997. The
significant change of the effective tax rate from September 30, 1997, to
September 30, 1998, is substantially due to the non-deductibility of the
reduction of the carrying value of the assets associated with the Businesses
Held for Sale.
In connection with the proposed sale of the Career Sales division, the
Company has identified certain net operating loss carryforwards approximating
$21.9 million that will not be realizable. For the nine month period ended
September 30, 1998, the Company has recorded the tax effect of these
unrecoverable net operating loss carryforwards of approximately $7.7 million as
an increase to the impairment provision associated with the assets held for
sale.
REGULATORY MATTERS
The Texas Department of Insurance is conducting its regularly scheduled
triennial examinations of eleven of the Company's insurance subsidiaries, which
are Texas domestic insurers.
The Pennsylvania Department of Insurance is in the process of
completing its examination of PLIC as of December 31, 1996. The Department has
indicated that PLIC's historical method of calculating statutory claims reserves
may not provide the most accurate determination of claims reserves estimates.
PLIC is evaluating differing methods for determining its claims estimates on a
statutory basis. Such differing methods could likely produce materially
different claims reserves estimates. Based upon preliminary findings, PLIC
increased its statutory claim estimates above historical levels by approximately
$20,000 during the three month period ended September 30, 1998. To offset the
impact of such reserve increases on PLIC's statutory capital and surplus, PLIC
entered into a financial reinsurance agreement which allows PLIC to maintain
marginally sufficient statutory capital and surplus. Should PLIC need to
substantially increase its claims reserves estimates further it is likely that
PLIC's risk-based capital ratios would decline, without further management
action, to a level which could require certain actions be taken by the
Pennsylvania Department of Insurance. The Company and PLIC continues to closely
monitor PLIC's risk-based capital ratios.
The Company's insurance subsidiaries are required, at least annually,
to perform cash flow and "Asset Adequacy Analysis" under differing interest rate
scenarios. Certain of the Company's insurance subsidiaries historically sold
certain interest sensitive life insurance contracts in which the determination
of policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates and premium persistency. Minor
changes in such assumptions could have a material impact on future statutory
reserve requirements. Significant increases in statutory reserves would result
in lower statutory earnings associated with impacted insurance subsidiaries,
which in turn would reduce the dividend capacity of such subsidiaries ultimately
reducing cash flow available to the Company.
32
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The following ten class-action securities complaints (collectively, the
"Complaints") were filed in the United States District Court for the Southern
District of New York against the Company and a number of current or former
directors and officers as defendants on the dates indicated:
<TABLE>
<S> <C>
Bobby F. Brooks v. David J. Stone, et al (Case No. 98CIV6065) 8/25/98
Phyllis Olin v. PennCorp Financial Group, Inc., et al (Case No. 98CIV6167) 9/1/98
Charles Rutland v. PennCorp Financial Group, Inc., et al (Case No. 98CIV6264) 9/4/98
Trust Advisors Trading LLC v. David J. Stone, et al (Case No. 98CIV6492) 9/30/98
PTJP Partners, L.P. et al v. PennCorp Financial Group, Inc. et al (Case No. 98CIV6799) 9/23/98
JJL Partners v. PennCorp Financial Group, Inc. et al (Case No. 98CIV6985) 9/29/98
Pointers v. Cleaners & Caulkers Local 1 Pension Fund v. PennCorp Financial
Group, Inc., et al (Case No. 98CIV6926) 10/1/98
Judith Friedman v. David J. Stone, et al (Case No. 98CIV7202) 9/25/98
Harriet Inselbach v. David J. Stone, et al (Case No. 98CIV7285) 10/29/98
Harold Sachs v. PennCorp Financial Group, Inc., et al (Case No. 98CIV5998) 8/21/98
</TABLE>
Nine of the Complaints are brought on behalf of certain purchasers of
the Company's common stock; the Olin Complaint is brought on behalf of certain
purchasers of the Company's 9 1/4% Senior Subordinated Notes due 2003. The
Complaints charge the Company and certain of its officers and directors with
violations of federal securities laws. Among other things, plaintiffs' claim
that defendants issued a series of materially false and misleading statements
and omitted material facts regarding the Company's financial condition,
including the value of certain of its assets, and failed to timely disclose that
it was under investigation by the SEC.
Plaintiffs seek to recover damages in unspecified amounts on behalf of
themselves and all other purchasers of the Company's common stock during various
periods, most commonly from March 31, 1998 through April 20, 1998 (although the
alleged class periods begin as early as August 19, 1997), and, in the Olin
Complaint, purchasers of the Company's subordinated notes between November 13,
1995 and August 20, 1998.
During a pre-trial conference on November 9, 1998, all parties agreed
to the consolidation of all of the above actions and the Court appointed lead
plaintiffs on behalf of shareholders and noteholders. The Court also approved
the selection of three law firms as co-lead counsel for shareholders and
noteholders. Pursuant to a schedule agreed to at the conference, a consolidated
and amended complaint will be filed by December 21, 1998.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings would have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
On July 30, 1998, the Securities and Exchange Commission (the "SEC")
notified the Company that it has commenced a formal investigation into possible
violations of the federal securities laws including matters relating to the
Company's restatement of its financial statements for the first nine months of
1997, and for the years ended December 31, 1994, 1995 and 1996. The Company and
its management are fully cooperating with the SEC in its investigation.
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 illustration 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.
The North Carolina Attorney General's Office (the "NCAG") has initiated
an inquiry concerning a certain life insurance product historically sold by
Security Life and representations allegedly made by Security Life's agents and
officers
33
<PAGE>
with respect to waiving insurance charges after the eighth policy year for
non-smoker insureds. The NCAG has indicated that Security Life may be estopped
to change its current practice of waiving the cost of the insurance because of
certain representations made by agents and officers of Security Life. Although
Security Life has waived the cost of insurance charges for non-smoker
policyholders who recently reached their ninth policy anniversary, this waiver
is not guaranteed under the life insurance contract. The contract specifically
allows Security Life the right to change the cost of insurance rates in
accordance with the parameters set forth in the insurance contract. Security
Life has responded to the NCAG's inquiry by denying that it is estopped from
changing the cost of insurance rates based on the alleged representations, and
continuing to reserve its contractual rights to change the cost of insurance
rates in accordance with the parameters set forth in the insurance contract.
There can be no assurances that the Company will resolve these matters on such
life insurance product on a satisfactory basis, or at all, or that any such
resolution would not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds.
In connection with an amendment to the Company's senior credit facility
in September 1998, the Company has suspended the payment of cash dividends on
its outstanding $3.375 Convertible Preferred Stock, $3.50 Series II Convertible
Preferred Stock and Common Stock. Under the terms of the two series of
convertible preferred stock, if dividends are in arrears for six or more
quarterly dividend periods (whether or not consecutive), the holders of the
convertible preferred stock, voting as a single class, will have the right to
elect two directors of the Company. In addition, for so long as there are
dividend arrearages on the convertible preferred stock, the Company will be
prohibited from paying dividends on the Common Stock or purchasing, redeeming or
otherwise acquiring Common Stock.
Item 3. Defaults Upon Senior Securities
As described in Item 2 above, in September 1998, the Company announced
that it has suspended the payment of dividends on its outstanding convertible
preferred stocks. As of November 16, 1998, accrued and unpaid dividends on the
$3.375 Convertible Preferred Stock amounted to $1.7 million and accrued and
unpaid dividends on the $3.350 Series II Convertible Preferred stock amount to
$1.7 million. These dividend arrearages do not currently entitle the holders of
the convertible preferred stock to elect additional directors to the Company's
board of directors nor take any other action in respect of these arrearages.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment Agreement dated July 29, 1998 to Executive Retention
Agreement by and between Michael Prager and PennCorp Financial
Group, Inc.
10.2 Agreement dated September 22, 1998 by PennCorp Financial
Group, Inc. and certain subsidiaries signatory to the
Agreement and the Texas Department of Insurance.
10.3 Accommodation Agreement entered into as of July 6, 1998 by and
between PennCorp Financial Group, Inc., and David J. Stone.
10.4 Amendment Number 3 to Employment Agreement made the 10th day
of November, 1998 and effective as of the 21st day of August,
1998 by and between PennCorp Financial Group, Inc. and David
J. Stone.
11.1 Computation of Earnings per Share
15.1 Independent Auditors' Report*
27 Financial Data Schedule
34
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K dated September 15, 1998 was filed with the
Securities and Exchange Commission by PennCorp Financial Group, Inc. on
September 15, 1998, providing Amendment No. 3 to Credit Agreement dated as of
March 12, 1997 by and among PennCorp Financial Group, Inc., the lendors
signatory to the Credit Agreement and The Bank of New York.
* Such exhibit is incorporated by reference to page 20 of this Form 10-Q.
35
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
By:/s/James P. McDermott
------------------------
James P. McDermott
Executive Vice President and Chief
Financial Officer (Authorized officer
and principal accounting and financial
officer of the Registrant)
Date: November 16, 1998
36
<PAGE>
INDEX TO EXHIBITS
Exhibit Numbers
10.1 Amendment Agreement dated July 29, 1998 to Executive Retention
Agreement by and between Michael Prager and PennCorp Financial
Group, Inc.
10.2 Agreement dated September 22, 1998 by PennCorp Financial
Group, Inc. and certain subsidiaries signatory to the
Agreement and the Texas Department of Insurance.
10.3 Accommodation Agreement entered into as of July 6, 1998 by and
between PennCorp Financial Group, Inc., and David J. Stone.
10.4 Amendment Number 3 to Employment Agreement made the 10th day
of November, 1998 and effective as of the 21st day of August,
1998 by and between PennCorp Financial Group, Inc. and David
J. Stone.
11.1 Computation of Earnings per Share
15.1 Independent Auditors' Report*
27 Financial Data Schedule
* Such exhibit is incorporated by reference to page 20 of this Form 10-Q.
37
<PAGE>
EXHIBIT 11.1
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic net income (loss) applicable to common stock:
Net income (loss) applicable to common stock.. $ (165,088) $ 26,070 $ (332,682) $ 46,715
Redemption Premium on Series C
Preferred Stock............................. -- -- (1,913) --
------------- ------------- ------------- -------------
$ (165,088) $ 26,070 $ (334,595) $ 46,715
============= ============= ============= =============
Diluted net income (loss) applicable to common stock:
Net income (loss) applicable to common stock.. $ (165,088) $ 26,070 $ (332,682) $ 46,715
Redemption Premium on Series C
Preferred Stock............................. -- -- (1,913) --
Common stock equivalents:
Convertible preferred stock dividend
requirements......................... -- 4,456 -- 13,368
------------- ------------- ------------- -------------
$ (165,088) $ 30,526 $ (334,595) $ 60,083
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic:
Shares outstanding beginning of period........ 28,860 28,648 28,860 28,648
Incremental shares applicable to Stock
Warrants/Stock Options...................... 357 167 357 134
Acquisition of Fickes and Stone Knightsbridge
Interests................................... 347 -- 347 --
Redemption of Series C Preferred Stock........ 692 -- 463 --
Treasury shares............................... (1,010) (772) (1,010) (687)
------------- ------------- ------------- -------------
29,246 28,043 29,017 28,095
============= ============= ============= =============
Diluted:
Shares outstanding beginning of period........ 28,860 28,648 28,860 28,648
Incremental shares applicable to Stock
Warrants/Stock Options...................... 357 988 357 973
Acquisition of Fickes and Stone Knightsbridge
Interests................................... 347 -- 347 --
Treasury shares............................... (1,010) (772) (1,010) (687)
Redemption of Series C Preferred Stock........ 692 -- 463 --
Conversion of 2,300 shares of $3.375
Convertible Preferred Stock at a rate of
2.213 common shares to 1 preferred share.... -- 5,088 -- 5,088
Conversion of 2,875 shares of $3.50 Series II
Convertible Preferred Stock at a rate of
1.4327 common shares to 1 preferred share... -- 4,119 -- 4,119
------------- ------------- ------------- -------------
29,246 38,071 29,017 38,141
============= ============= ============= =============
</TABLE>
38
Exhibit 10.1
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT made as of the 29th day of July, 1998, by and between
Michael Prager ("Employee") and PennCorp Financial Group, Inc., a Delaware
corporation ("Company"):
WHEREAS, Employee has served as Senior Vice President, Senior Financial
Officer and Chief Actuary of the Company; and
WHEREAS, Employee and Company are parties to the Executive Retention
Agreement, entered into on November __, 1997 (the "Agreement"); and
WHEREAS, Employee's employment with Company has been terminated by Company
without Cause (within the meaning provided in the Agreement); and
WHEREAS, Employee and Company mutually acknowledge and agree that Employee
will receive the payments and benefits provided for under Sections 3.1 and 3.3
of the Agreement by reason of the Company's termination of Employee's employment
with Company without Cause; and
WHEREAS, Company and Employee desire to provide for the consequences of
such termination, to settle all claims, if any, between Employee and Company,
its affiliates, directors, officers and employees for all matters relating to or
arising out of such employment and the termination thereof and to provide for
the continuing relationship between the parties during the period set forth
below.
NOW THEREFORE, for good and valuable consideration, receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. (a). Employee's employment with the Company will terminate as of the
close of business on Wednesday, July 29, 1998.
(b). Employee represents and warrants to the Company that during the
course of his employment with the Company (i) he has not committed any act of
fraud, willful misconduct or gross negligence and (ii) to the best of his
knowledge and belief no person under his general supervision committed any act
of fraud, willful misconduct or gross negligence.
2. Company shall pay Employee 25% of the amounts specified in Paragraphs
"a" and "b" of Section 3.1 and Section 3.3 (as amended by Paragraph 5 hereof) of
the Agreement on or before July 31, 1998, 25% on August 17, 1998, and the final
50% on or before March 31, 1999; provided that the Company has substantially
performed and met its obligations hereunder, the Company shall not be bound to
make the 50% payment on March 31, 1999 unless Employee has substantially
performed all his obligations under
- 1 -
<PAGE>
this Amendment Agreement; and pay (i) upon submission of an expense report to
the Company, accrued and unpaid reasonable business expenses incurred by
Employee prior to the Termination Date, in accordance with Company's policy and
(ii) Employee's retirement and welfare benefits accrued, vested and unpaid prior
to the Termination Date. For purposes of determining the amount due Employee
pursuant to paragraph "b" of Section 3.1 and Section 3.3 of the Agreement,
Employee's annual base salary rate during 1996 and 1997 was $225,000 and during
1998 was $250,000; and Employee's annual incentive bonus for 1996 and 1997 was
$150,000 and $118,000, respectively.
3. In exchange for the Company's undertakings in this Amendment Agreement,
Employee for himself and for his heirs, executors, administrators and assigns
(hereinafter referred to collectively as "Releasors"), forever releases and
discharges Company and any of its subsidiaries, divisions, affiliates or related
business entities, successors and assigns and any of its or their past or
present shareholders, directors, officers, attorneys, agents, trustees,
administrators, employees or assigns (whether acting as agents for Company or in
their individual capacities) (hereinafter referred to collectively as
"Releasees"), for any and all claims, demands, causes of action, fees and
liabilities of any kind whatsoever, whether known or unknown, which Releasors
ever had, now have or may have against Releasees for any reason from the
beginning of time through the date hereof except for Company's undertakings in
this Amendment Agreement. In the event that Company does not timely pay the
amounts that are owed pursuant to the provisions set forth in Paragraph 2
herein, the release provided for in this Paragraph 3 shall be rendered
unenforceable.
4. In exchange for Employee's undertakings in this Amendment Agreement, the
Company for itself and its subsidiaries, divisions, affiliates or related
business entities, successors and assigns and any of its or their past or
present shareholders, directors, officers, attorneys, agents, trustees,
administrators, employees or assigns (hereinafter referred to collectively as
"Employee's Releasees"), forever releases and discharges Employee and his heirs,
executors, administrators and assigns from any and all claims, demands, causes
of action, fees and liabilities of any kind whatsoever, whether known or
unknown, which Employee's Releasees ever had, now have or may have against
Employee for any reason from the beginning of time through the date hereof;
provided, however, that this Amendment Agreement shall not release claims for
breach of the representations set forth in Paragraph 1 of this Amendment
Agreement or for fraud, gross negligence or willful misconduct.
5. Sections 1. (except for the definitions of "Annual Pay" and "Code"), 2.,
3.2, 3.4 and 9. of the Agreement are terminated as no longer applicable;
Paragraphs "a" and "b" of Section 3.1 and Section 3.3 of the Agreement are
incorporated in and modified by the provisions of this Amendment Agreement; and
the definitions of "Annual Pay" and "Code" in Section 1, Paragraphs "c", "d" and
"f" of Section 3.1 and Sections 4. through 11. of the Agreement are incorporated
herein without modification.
(a). In lieu of the full time employment during a Transition Period as
provided in Section 3.3 of the Agreement, Employee shall render consulting
services on a
- 2 -
<PAGE>
full-time (generally, a 40 hour week) basis to Company commencing on the
Termination Date and ending 61 calendar days thereafter (such period shall be
referred to as the "Transition Period"). During the Transition Period, Company
shall pay Employee at the rate of $5,000 per week. During the Transition Period,
Employee shall be assigned such duties and responsibilities as the Chairman of
the Executive Committee reasonably and in good faith requests and Employee,
having been a Senior Vice President and Chief Actuary of the Company over many
years, has the knowledge, experience and qualifications to perform, including,
but not limited to, the orderly transfer of his duties to his successor, and
special projects (e.g., participating in the selling of one or more of the
Company's subsidiaries and representing Company in connection with examinations
by Departments of Insurance and other governmental or regulatory agencies.
During the Transition Period, Employee shall be provided with the office,
secretarial support and other facilities provided to Employee at the time of the
execution of this Amendment Agreement.
(b). In lieu of the casual employment during a Consulting Period as
provided in Section 3.3 of the Agreement, Employee shall render consulting
services on a casual basis to Company commencing on the day after the end of the
Transition Period and ending one year thereafter (such period being referred to
as the "Consulting Period"). Employee's duties during the Consulting Period are
to be reasonably reachable by the Chairman of the Executive Committee or current
Chair of the Operating Committee by telephone, facsimile and letter; to respond
reasonably promptly when contacted; and when reasonably convenient to meet with
one or more representatives of the Company, to discuss matters of the Company
with which he was, is, or becomes, familiar, and which lie within his areas of
responsibility during the years of his employment with the Company. Employee
will not be paid additional compensation during the Consulting Period other than
amounts called for in Section 3.3 of the Agreement (which amounts are included
in the payments set forth in subparagraph a of Paragraph 2, hereof); provided
his reasonable out-of-pocket expenses for complying with his duties shall be
reimbursed by the Company against and upon presentation of vouchers therefore.
Employee shall have the right to obtain new employment during the Consulting
Period, Employee's consulting services hereunder shall be secondary to any new
employment and Employee shall not be obligated in any way to disclose any
propriety or non-public information regarding his then current employer.
(c). During the Transition Period and the Consulting Period, Employee
shall have no decision-making authority. Employee shall be promptly reimbursed
for all out-of-pocket expenses incurred by Employee during the Transition Period
and the Consulting Period, subject to documentation in accordance with policies
of the Company. Employee shall not be liable to Company for any damages arising
from any act or omission of Employee during the Transition Period and the
Consulting Period except acts or omissions which would constitute fraud, gross
negligence or willful misconduct.
6. (a). Employee agrees following execution of this Amendment Agreement not
to disparage or induce or encourage others to disparage the Company, its
- 3 -
<PAGE>
services, its products or any of its current or former affiliates, members,
officers, directors, employees or agents.
(b). Company (and its subsidiaries and affiliates and employees
and directors of such entities) agree following execution of this Amendment
Agreement not to disparage or induce or encourage others to disparage Employee
or his reputation as an actuarial professional.
7. Employee shall not be obligated to secure new employment or take any
other action by way of mitigation of the amounts payable to him under the
provisions of this Amendment Agreement and the Agreement. Amounts payable to
Employee hereunder and thereunder shall not be reduced by any compensation he
may receive from a subsequent employer.
8. With respect to the $310,380 non-recourse Promissory Note, dated
September 8, 1997, from Employee to Company (the "1997 Note"), because the
termination of Employee's employment with Company was not voluntary, the
principal on the 1997 Note, together with accrued interest thereon shall
continue to be due and payable on the earlier of (a) September 8, 2002, (b) the
date on which the stock which secures the 1997 Note is sold or otherwise
disposed of by Employee, (c) the date on which an Event of Default under the
Stock Pledge Agreement, dated September 8, 1997, or (d) the date on which
Employee and company mutually agree, in a writing duly signed by both.
9. Employee acknowledges that Employee is required to return to Company and
retain no copies at the end of the Transition Period all documents and
information ever compiled by, or furnished to Employee regarding Company's
business affairs, including without limitation, any memos, electronic discs or
drives, letters and reports and all material of whatever and description related
to any of Company's business affairs. The Company shall take reasonable best
efforts to maintain documents and information returned to the Company by the
Employee pursuant to this Paragraph with the Company's records over normal
retention periods (at least three years). Employee may keep the following
Company items currently in his possession: the laptop computer and software
contained therein to the extent permitted under the license from such software,
the fax machine currently located in Employee's home, and the laser printer
currently located in his office.
10. Employee acknowledges that in the course of Employee's employment with
Company Employee has received information concerning Company which is not
publicly available or which constitutes trade secrets or is otherwise
confidential in nature (collectively called "Confidential Information").
(a). Employee covenants and agrees that, except with the express
written permission of the Company or as required by law or in response to
inquiries from any governmental authority (which he shall not hereafter directly
or indirectly initiate), he will not disclose or discuss Confidential
Information of the Company or disseminate
- 4 -
<PAGE>
any opinions relating to that Confidential Information. Employee agrees that all
Confidential Information shall remain the sole and absolute property of the
Company. Employee represents that he has not in the past disclosed Confidential
Information, except on those occasions where he may have been required to do so
in the course of performing his duties to the Company, to any person, entity or
government authority without the prior permission or approval o the Company.
Except as provided herein, Employee agrees not to use, disclose, disseminate,
publish, reproduce or otherwise make available such Confidential Information to
any person, firm, corporation or other entity.
"Confidential Information" shall mean all documents, materials, knowledge,
or information of any nature whatsoever disclosed to or developed by Employee or
to which he had access as a result of his employment with the Company, and which
was not publicly available information. Such Confidential Information shall
include but not be limited to technical and business information and strategies,
relating to inventions, research and development, engineering, products,
designs, manufacturing methods, systems, improvements, trade secrets, formulas,
processes, marketing, merchandising, selling, licensing, servicing, customer
lists, records, financial, accounting or actuarial information, manuals or the
Company strategic plans or operational objectives.
(b). If Employee receives any inquiry or service of process from any
person, entity or governmental authority which on its face requires him to
disclose Confidential Information, Employee shall promptly and before disclosure
give notice of same to the Company.
(c). Company agrees that it shall promptly disclose to Employee any
subpoena or written inquiry relating directly to matters within the employment,
including the Transition Period, duties or responsibilities of Employee.
(d). Company and Employee will use their best efforts to cooperate,
when possible, in responding to any subpoena or inquiry relating directly to
matters within the employment duties or responsibilities of Employee.
(e). Employee shall continue to comply with all applicable laws
relating to trade secrets, confidential information or unfair competition.
11. Employee agrees that the covenant set forth in Paragraph 10 was a
material inducement for the Company to enter into this Agreement and that any
breach of such covenant would cause the Company irreparable injury and damage.
Employee further agrees that in the event of such a breach, the damages would be
difficult to ascertain and, therefore, if said breach is established, in
addition to any other right or remedy which the Court may award (including, but
not limited to damages and attorneys' fees), Company shall be entitled to obtain
an award of appropriate injunctive relief without the positing of any bond or
security, enjoining or restraining any violation or threatened violation of such
covenants, and Employee hereby consents to the issuance of such an injunction.
- 5 -
<PAGE>
12. Employee shall not for a period of two years commencing on the
Termination Date, without the consent of Company, solicit or cause any entity of
which he is affiliated to solicit any person who was a full-time employee or
agent of Company or any of its subsidiaries or affiliates on the Termination
Date or within 12 months prior to the Termination Date.
13. Company shall indemnify Employee (and Employee's legal representatives
or other successors), against all liabilities, costs, charges and expenses
whatsoever incurred or sustained by Employee (or Employee's legal
representatives or other successors) in connection with any threatened, pending
or completed action, suit or proceeding to which Employee (and Employee's legal
representatives or other successors) may be made a party or may be threatened to
be made a party by reason of Employee being or having been a director, officer,
employee, consultant or agent of the Company or any of its subsidiaries or
having served as the request of the company or any of its subsidiaries as a
director, officer, employee, consultant or agent of another corporation,
partnership, joint venture, trust or other enterprise to the fullest extent
permitted under the Company's by-laws as in effect on the date hereof; provided,
however, that the Employee shall not be entitled to indemnification for any
conduct constituting willful misconduct, gross negligence or fraud as determined
by a court having jurisdiction to hear and determine actions for
indemnification, or for claims by the Company against Employee for breach of the
representations in Paragraph 1 of this Amendment Agreement.
14. Company's rights and obligations under this Amendment Agreement and the
Agreement shall inure to, and be binding upon any successor to the business or
to substantially all the assets of Company, whether by merger, purchase of stock
or assets or otherwise, and such successor shall expressly assume such
obligations.
15. Employee acknowledges that: (i) he has carefully read this Amendment
Agreement in its entirety; (ii) he has had an opportunity to consider fully the
terms of this Amendment Agreement; (iii) he has been advised by an attorney of
his choosing in connection with this Amendment Agreement; (iv) he fully
understands the significance of all the terms and conditions of this Amendment
Agreement; (v) he has discussed it with his independent legal counsel, or has
had a reasonable opportunity to do so; (vi) he has had answered to his
satisfaction any questions he has asked with regard to the meaning and
significance of any of the provisions of this Amendment Agreement; and (vii) he
is signing this Amendment Agreement voluntarily and of his own free will and
assents to all the terms and conditions contained herein.
16. This Amendment Agreement may be executed in one or more counterparts,
each of which together shall constitute one and the same agreement.
- 6 -
<PAGE>
WHEREFORE, the parties hereto have caused this Amendment Agreement and to
be signed as of the day and date first written above.
/s/ Michael Prager
------------------
Michael Prager
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott D. Silverman
--------------------------
Scott D. Silverman
- 7 -
Exhibit 10.2
PENNCORP FINANCIAL GROUP, INC.
- - --------------------------------------------------------------------------------
590 MADISON AVENUE, NEW YORK, NY 10022-3526 * 212-896-2700 * 212-896-2755 FAX
September 22, 1998
The Honorable Elton Bomer
Commissioner of Insurance
Texas Department of Insurance
P. O. Box 149104
Austin, Texas 78714
RE: Agreement of PennCorp Group, Inc. and Its Subsidiaries
Dear Mr. Bomer:
This Agreement is made by PennCorp Financial Group, Inc. ("PENNCORP") of
Delaware and its subsidiaries named below. In consideration of foregoing
contemplated regulatory action by the Texas Department of Insurance (the
"Department") and other consideration, the sufficiency of which is acknowledged,
PENNCORP and its subsidiaries named below agree to the following conditions
until terminated by the Department.
1. That PENNCORP, Constitution Life Insurance Company, Union Bankers Insurance
Company, Southwestern Life Insurance Company, Marquette National Life
Insurance Company, Pioneer Security Life Insurance Company, Security Life
and Trust Insurance Company, Occidental Life Insurance Company of North
Carolina, American-Amicable Life Insurance Company of Texas, Pioneer
American Insurance Company, Pacific Life and Accident Insurance Company,
Pennsylvania Life Insurance Company, Professional Insurance Company, United
Life & Annuity Insurance Company, and Peninsular Life Insurance Company
shall provide, for each of these subsidiaries named in this subparagraph 1,
the Department with separate quarterly projections for the fourth quarter
of 1998 and for all of 1999 and 2000 which include balance sheets, income
statements and cash flow statements. Moreover, individual earned surplus
calculations for these quarters must be included, as well as specific
dividend inflows and outflows, and specific payments (principal and
interest) on surplus debentures. These projections are due as follows: by
September 28, 1998 for the fourth quarter of 1998; by November 23, 1998,
for all four quarters of 1999; and by November 23, 1998 for all four
quarters of 2000.
The Department recognizes that some of these projections have already been
provided, but for ease in presentation and review, the Department
respectively requests the separate grouping of projections for each
subsidiary.
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 2
2. That PENNCORP and each subsidiary named in subparagraph 1 above
(hereinafter collectively referred to as the "SUBS") shall specifically
describe all service and management fees paid or to be paid with details on
how the agreements related to the respective fees work and how they are
related to each other. In addition, PENNCORP and the SUBS shall provide the
Department with a quarterly accounting of all such costs and fees and the
status of any consolidating actions. Finally, the SUBS agree to provide
specific details of the accounting for agents' balances and all
non-admitted assets.
3. That PENNCORP shall provide the Department with GAAP consolidating
worksheets on a quarterly basis of all direct subsidiaries and indirect
subsidiaries for the time frames described in subparagraph 1 above as to
the projections requested. In addition, PENNCORP and the SUBS shall provide
to the Department copies of all audited financial statements (beginning in
1996 and forward) of American-Amicable Holdings Corporation, and Marketing
One Financial Corporation. In addition, PENNCORP and the SUBS shall provide
to the Department the SVO valuation of Marketing One Financial Corporation
as of December 31, 1998.
4. That PENNCORP and the SUBS shall provide variance reports, which compare
actual experience to the projections specified above in subparagraph 1,
including explanations for any variance of 5%, whether positive or
negative. These variance reports are due within forty-five (45) days of the
close of the respective quarter.
5. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any changes in any ratings, whether they are by A.M. Best, Moody's, etc.
In addition, PENNCORP and the SUBS shall provide a summary of all existing
ratings and immediately provide the Department with all 10Q and annual
reports filed hereafter with the SEC.
6. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any class action lawsuits, any shareholders' derivative lawsuits, any
director and/or officer lawsuits, and any other lawsuit other than those
lawsuits in the ordinary course of business within five (5) working days of
receipt of any such lawsuit. In addition, PENNCORP and the SUBS shall
provide the Department with quarterly status reports on all such lawsuits.
7. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any findings issued by the SEC or formal actions undertaken by the SEC.
Monthly updates of these items shall also be provided to the Department or
more frequently if requested by the Department.
8. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any suspension of trading by any stock exchange and/or market.
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 3
9. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any agreements to sell any of the SUBS or all or substantially all of
the assets of the SUBS with a general summary of the terms of the sale,
including the purchase price and any adjustment provisions. In addition,
PENNCORP and the SUBS shall provide to the Department any finalized written
agreement to sell any of the SUBS, and monthly status reports to the
Department of all potential sales of any subsidiary of PENNCORP, whether or
not an insurance subsidiary.
10. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any transaction involving a sale of the preferred and/or common stock of
Acordia or Kivex.
11. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any material change in any bank financing (whether new or a
refinancing), including the $450 million revolving line of credit with the
Bank of New York (and the participating banks). This agreement also
includes any preferred stock transactions.
12. That PENNCORP and the SUBS shall provide to the Department immediate notice
of any changes in any director or officer of PENNCORP or the SUBS.
13. That PENNCORP and the SUBS shall provide to the Department monthly status
reports on any office closings, including the Bethesda, Maryland and New
York, New York offices, and on the progress of the movement of operations
to Dallas, Texas.
14. That PENNCORP and the SUBS shall provide to the Department with monthly
status reports on their Year 2000 compliance/remedial actions and plan.
15. That PENNCORP and the SUBS shall provide to the Department thirty days
prior notice of any proposed (that is, before consummation) new transaction
between PENNCORP and any of its subsidiaries (including the non-insurance
ones) that involve reinsurance, the sale of assets, management or service
agreements, loans, forgiveness of debt, or dividends in an amount in the
aggregate (that is, all like transactions in a single year are added
together for this purpose) of $250,000.00 or above in any single year.
Prior approval by the Department of any such transaction involving the
insurance subsidiaries is required, except that the approval of the
Department is not required relating to the proposed payment of any dividend
or payment on any surplus debenture unless required by Texas statute.
16. That PENNCORP shall provide to the Department immediate notice of any
proposed (that is, before consummation) transaction, other than
transactions in the ordinary course of business, in an amount in the
aggregate (that is, all like transactions in a single year are added
together for this purpose) of $500,000.00 or above in any single year
between: (i)
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 4
PENNCORP or any of its subsidiaries (including the non-insurance ones), and
(ii) any non- affiliated entity.
17. That all life, accident and health insurance company SUBS shall immediately
notify the Department when their premium writings, net of reinsurance,
exceed the limitation of 28 Texas Administrative Code ss.8.3(14). For
purposes of this calculation, investments in affiliates must be excluded
from the respective PHS.
18. That all life, accident and health insurance company SUBS shall
individually and immediately notify the Department of any significant
increase in surrenders, and thereafter provide to the Department daily
surrender reports that include policy counts and dollar amounts
corresponding to the surrenders.
19. That PENNCORP and its SUBS will make diligent efforts to maintain the risk
based capital requirements of each of the SUBS at one hundred and fifty
percent (150%) of the company action level using the formulas required by
the NAIC's risk based capital requirements. Notwithstanding the foregoing,
the risk-based capital threshold will be 100% for Professional Insurance
Company, Pennsylvania Life Insurance Company, and Pacific Life and Accident
Insurance Company. On a quarterly basis such calculations for each of the
SUBS shall be submitted to the Department.
20. That PENNCORP management shall meet monthly in Austin, Texas with the
Financial Program staff of the Department unless otherwise agreed to by the
Department.
21. That PENNCORP shall provide the Department with notice at the same time
that it provides such notice to its Directors before occurrence of any
Board of Directors or any Board's Executive Committee Meetings, whether in
ordinary course or specially called, so that the Department may decide if
it desires to send a representative. Provided, however, if a special
meeting is an emergency one, then PENNCORP shall attempt to provide that
notice, if practical, within two (2) business days before its occurrence
but in no event later than at the time notice is provided to the Directors.
Provided, further, PENNCORP reserves the right to meet in executive session
with legal counsel for the purpose of maintaining and preserving privileges
and protections relating to attorney/client communications and work
products pertaining to legal matters such as class action lawsuits, etc.
22. That PENNCORP will promptly provide a proper and finalized resolution from
its Board of Directors agreeing to the conditions contained in this
Agreement, and shall transmit the resolution to the Department.
Four (4) copies of the information, reports and materials required by this
Letter Agreement should be mailed to Kenneth Elliott, Mail Code 303-1A, P.O. Box
149104, Austin, Texas 78714- 9104.
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 5
This agreement automatically terminates as to any subsidiary of PennCorp upon
the sale of such subsidiary.
Nothing herein shall constitute a limitation of the Commissioner of Insurance to
take other or further action pursuant to the Texas Insurance Code or the rules
and regulations promulgated pursuant to the Texas Insurance Code.
By the signatures below for each respective company, PENNCORP and each of the
subsidiaries named below agree to the conditions delineated herein, and the
undersigned represent that he/she has the authority to bind PENNCORP and/or the
respective subsidiary to this Agreement.
Sincerely,
PennCorp Financial Group, Inc.
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, EVP, Chief Administrative Officer
General Counsel and Secretary
(please type name and title)
Constitution Life Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
Union Bankers Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 6
Southwestern Life Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
Marquette National Life Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
Pioneer Security Life Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President and
Assistant Secretary
(please type name and title)
Security Life and Trust Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
Occidental Life Insurance Company of North Carolina
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President and
Assistant Secretary
(please type name and title)
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 7
American-Amicable Life Insurance Company of Texas
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President and
Assistant Secretary
(please type name and title)
Pioneer American Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President and
Assistant Secretary
(please type name and title)
Pacific Life and Accident Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President,
General Counsel and Assistant Secretary
(please type name and title)
Pennsylvania Life Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President,
General Counsel and Assistant Secretary
(please type name and title)
Professional Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President
and Assistant Secretary
(please type name and title)
<PAGE>
The Honorable Elton Bomer
September 22, 1998
Page 8
United Life & Annuity Insurance Company
By: /s/ Arthur Evans
- - --------------------------
Arthur Evans, VP - Investments
(please type name and title)
Peninsular Life Insurance Company
By: /s/ Scott D. Silverman
- - --------------------------
Scott D. Silverman, Senior Vice President
General Counsel and Assistant Secretary
(please type name and title)
Exhibit 10.3
ACCOMMODATION AGREEMENT
THIS ACCOMMODATION AGREEMENT is entered into as of July 6, 1998 between
PennCorp Financial Group, Inc., a Delaware corporation (the "Company"), and
David J. Stone ("Stone").
RECITALS
WHEREAS, in connection with an extension of credit (the "Credit
Transaction") to David J. Stone and Sara G. Stone, the Stones propose to pledge
(i) 841,450 shares of common stock of the Company owned by them (the
"Unrestricted Common Shares"), (ii) 112,675 shares of common stock (the
"Restricted Common Shares") issued to Mr. Stone and (iii) 173,160 shares of
common stock (the "Transfer Agreement Shares") to be issued to Mr. Stone
pursuant to that certain Transfer Agreement among the Company, Mr. Stone and a
third party;
WHEREAS, the Restricted Common Shares are held by PennCorp to secure Mr.
Stone's obligations in respect of the noncompetition covenant contained in his
restricted stock award agreement;
WHEREAS, the Transfer Agreement Shares are not required to be issued to Mr.
Stone prior to April 15, 2001 and are subject to offset in the event of a breach
by Mr. Stone of the noncompetition provisions of his employment agreement with
the Company; and
WHEREAS, the Board of Directors of the Company, has determined that it is
in the best interests of the Company and its shareholders to facilitate the
pledge of the Restricted Common Shares and the Transfer Agreement Shares to the
financial or other institution participating in the Credit Transaction;
NOW, THEREFORE, subject to the terms and conditions stated herein and for
other good and valuable consideration, the adequacy of which is hereby
acknowledged, the Company and Mr. Stone hereby agree as follows:
1
<PAGE>
1. Establishment of Collateral Arrangements. The Company hereby consents to
the pledge of the Restricted Common Shares and the Transfer Agreement Shares in
connection with the Credit Transaction. The Company hereby waives any
restriction on the Restricted Common Shares and the Transfer Agreement Shares
arising out of the noncompetition provisions of Mr. Stone's employment agreement
and noncompetition provisions of the restricted stock agreement for so long as
and to extent that the Restricted Common Shares and the Transfer Agreement
Shares are pledged as collateral for the Credit Transaction; provided, however,
that (A) Mr. Stone shall use his reasonable best efforts to use substantially
all the net cash proceeds from the sale of the New York City residence of Mr.
and Mrs. Stone (after the payment of all debts and liabilities relating thereto)
to replace, and obtain a corresponding release as collateral of, as many of the
Restricted Common Shares and the Transfer Agreement Shares as is practicable and
(B) Mr. Stone shall obtain the agreement of the financial or other institutions
participating in the Credit Transaction that if such institutions foreclose upon
the collateral for the Credit Transaction, (x) they shall first use all cash
collateral posted by Mr. and Mrs. Stone before they shall sell any of the shares
of common stock pledged for the Credit Transaction, (y) such institutions shall
sell all the shares of Unrestricted Common Shares before they shall seek to sell
any of the Restricted Common Shares and (z) they shall sell all the Restricted
Common Shares before they shall seek to sell any of the Transfer Agreement
Shares.
2. Certain Matters Relating to the Transfer Agreement Shares. Mr. Stone and
the Company acknowledge that the Transfer Agreement shares are not required, by
the terms of the Transfer Agreement, to be delivered to Mr. Stone until April
15, 2001. However, Mr. Stone has advised the Company that, after diligent
effort, Mr. Stone cannot obtain the agreement of one or more of the
participating financial institutions to accept the agreement of the Company to
issue and deliver the Transfer Agreement Shares to the participating
institutions upon a default by Mr. Stone under the terms of the Credit
Transaction. As a result, the Company has agreed that it shall issue and deliver
to Mr. Stone all the Transfer Agreement Shares, which Mr. Stone shall thereupon
pledge in connection with the Credit Transaction. In consideration for the
foregoing accommodation by the Company, Mr. Stone and the Company agree that,
subject to paragraph 4 below, the annual fee to
2
<PAGE>
be paid to Mr. Stone under the Transfer Agreement shall automatically, and
without further action by Mr. Stone or the Company, cease to be payable by the
Company. The reduction in the fee shall be effective as of the date of the
issuance of any such shares to the participating financial institutions, with
any such reduction for a period of less than a full year to be made pro rata for
the year in which the reduction occurs based on a year of 365 days.
3. Certain Matters Related to the Restricted Common Shares. The parties
acknowledge that, pursuant to that certain Agreement, dated as of March 31,
1997, between the Company and Mr. Stone (the "Restricted Stock Agreement"), the
Company issued the Restricted Common Shares to Mr. Stone. As an inducement to
Mr. Stone to subject to the Restricted Common Shares to certain noncompetition
provisions contained in the Agreement, the Company issued to Mr. Stone an
additional 28,169 shares of restricted common stock (the "Discount Shares"). The
Company and Mr. Stone agree that because the Company has waived the
noncompetition restrictions of the Restricted Stock Agreement as they relate to
the Restricted Common Shares, Mr. Stone shall redeliver the Discount Shares to
the Company for cancellation, subject to possible reissuance pursuant to
paragraph 4 below.
4. Release of Collateral. In the event that one or more of the
participating institutions shall release any of the Restricted Common Shares or
the Transfer Agreement Shares as collateral (whether as a result of a
substitution of collateral by Mr. Stone or otherwise), such shares of stock
shall be redelivered by Mr. Stone to PennCorp and shall continue to secure Mr.
Stone's performance of his noncompetition obligations. In the event that any
Portion of the Restricted Common Shares are released as collateral for the
Credit Transaction and redelivered to the Company, the Company shall issue to
Mr. Stone a pro rata portion (based on the ratio of the number of redelivered
Restricted Common Shares to the total number of Restricted Common Shares) of the
Discount Shares. In the event that any portion of the Transfer Agreement Shares
are released as collateral for the Credit Transaction and redelivered to the
Company, a pro rata portion of the annual fee otherwise payable under the
Transfer Agreement (based on the ratio of the number of Transfer Agreement
Shares redelivered to the Company to the total number of Transfer Agreement
Shares) shall be reinstated effective as of the date of the redelivery of the
Transfer Agreement Shares to the Company,
3
<PAGE>
with any such reinstatement for a period of less than a full year to be made pro
rata for the year in which the reinstatement occurs based on a year of 365 days.
5. Notices, Etc. All notices, requests, demands and other communications
required or permitted hereunder shall be made n writing by hand-delivery,
first-class mail (registered or return receipt requested), telex, telecopier or
air courier guaranteeing overnight delivery:
If to PennCorp Financial Group, Inc.
PennCorp Financial Group, Inc.
590 Madison Avenue
New York, NY 10022
Telephone: (212) 896-2710
Telecopy: (212) 896-2755
If to Mr. Stone
590 Madison Avenue
New York, NY 10022
Telephone: (212) 896-2710
Telecopy: (212) 896-2755
6. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, applicable to contracts
executed in and to be performed entirely within that state.
7. Counterparts. This Assignment Agreement may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amended Assignment
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott D. Silverman
-----------------------------------
Name: Scott D. Silverman
Title: Executive Vice President,
General Counsel and Chief
Administrative Officer
/s/ David J. Stone
---------------------------------------
David J. Stone
5
Exhibit 10.4
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT
This Amendment No. 3 to Employment Agreement ("Amendment No. 3") is made
this 10th day of November, 1998, and effective as of the 21st day of August,
1998, between PennCorp Financial Group, Inc., a Delaware corporation (together
with its successors and permitted assigns under the Employment Agreement, as
defined herein, the "Company"), and David J. Stone (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive and the Company are parties to an
Employment Agreement (herein so called), dated as of June 7, 1996, as amended;
WHEREAS, the Executive and the Company have entered into a
letter agreement dated October 16, 1998, pertaining to the Employment Agreement
and Executive's employment with the Company; and
WHEREAS, the Company desires to amend, and the Executive is
willing to amend, the provisions of the Employment Agreement relating to the
duties of the Executive during his employment with the Company;
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 agree
as follows:
1. Definitions. Capitalized terms used herein
that are not otherwise defined herein shall have the meaning
given such terms in the Employment Agreement.
2. Amendment to Definitions. Clause (m) of
Section 1 of the Employment Agreement shall be amended to
read in its entirety as follows:
(m) "Good Reason" shall mean the occurrence of any of
the following events within the 60-day period preceding the
termination of employment by the Executive:
(1) a reduction in the Executive's Base Salary or any
material failure by the Company to honor its obligations under
Sections 7, 8, 9 or 10
<PAGE>
hereof, in any such case, without the Executive's prior
written consent;
(2) a material change in the Executive's duties or
responsibilities with respect to his employment by the Company
under the Agreement without the Executive's prior written
consent;
(3) an actual change by the Board in the Executive's
principal work location by more than 25 miles and more than 25
miles from the Executive's principal place of abode as of the
date hereof without the Executive's prior written consent;
(4) the failure of the Company to obtain the
assumption in writing of its obligation to perform this
Agreement by any successor to all or substantially all of the
assets of the Company within 45 days after a merger,
consolidation, sale or similar transaction; or
(5) a Change in Control.
3. Amendment to Section 3 of the Employment Agreement. Clause
(a) of Section 3 of the Employment Agreement shall be amended to read in its
entirety as follows:
3. Position, Duties and Responsibilities.
(a) Until the end of the Term of Employment, the
Executive shall be employed by the Company and perform senior
level services pertaining to the disposition of subsidiaries,
divisions or other assets of the Company, shall provide
general strategic policy and business advice to the Board and
shall perform such other senior level services as the parties
shall mutually agree. Executive shall report only to the Board
and/or its Chairman, but shall coordinate and cooperate with
the Chief Executive Officer of the Company.
4. Clause (b) of Section 3 of the Employment Agreement is
deleted in its entirety.
5. Section 5 of the Employment Agreement shall be amended to
read in its entirety as follows:
5. Reserved.
2
<PAGE>
6. Section 13 of the Employment Agreement is amended to add a
new paragraph (d) at the end of Section 13 to read as follows:
Subject to Sections 12 and 13 of the Employment Agreement,
Executive may manage his personal affairs and may establish an
investment fund to be operated by him in the future, provided that such
activities shall not interfere with or impair (i) Executive's
performance of his duties and responsibilities with respect to the
Company, or (ii) the operation of the KB Investment Fund I, L.P.
(formerly known as the Knightsbridge Capital Fund I, L.P.) and the
existing financial commitments of the limited partners to the KB Fund
(including, but not limited to, encouraging the release of such
commitments or attempts by limited partners to obtain a release of such
commitments). Executive shall not actually operate an investment fund
established by him or, without the permission of the Company which
shall not be unreasonably withheld, be associated with an investment
fund that is "funded" and that is not engaged in Fund Competitive
Activity, in either case while employed hereunder. Executive hereby
acknowledges and agrees that nothing herein shall be construed as
waiving the rights of the Company or releasing Executive from his
obligations under paragraph (b) of Section 13 of the Employment
Agreement, as set forth in Amendment No. 2 to the Employment Agreement
dated January 5, 1998.
7. No Waiver by Company. Executive hereby acknowledges and
agrees that the Company has not waived and by execution of this Amendment No. 3
does not waive any rights or claims, if any, that the Company may have against
Executive with respect to Executive's employment with the Company or otherwise
involving the Company or any of its subsidiaries. Without limiting the
generality of the foregoing, the Company hereby expressly reserves any and all
of its rights or claims, if any, against Executive.
8. Limited Waiver by Executive. Company hereby acknowledges
and agrees that Executive has not waived and by execution of this Amendment No.
3 does not waive any rights or claims, if any, that Executive may have against
the Company or otherwise involving the Company or any of its subsidiaries,
except Executive agrees that he does not have and hereby waives any claim to
resign for Good Reason under the Employment Agreement as a result of the events
that transpired on or about August 21, 1998 or as a result of changes documented
by this Amendment No. 3.
3
<PAGE>
9. No Further Modifications. Except as expressly amended by
this Amendment No. 3 and other prior amendments to the Employment Agreement, the
Employment Agreement shall continue in full force and effect in accordance with
its terms.
10. Governing Law. This Amendment No. 3 shall be governed
by and construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
11. Headings. The headings of the sections contained in this
Amendment No. 3 are for convenience only and shall not be deemed to control or
affect the meaning or construction of any provision of this Agreement.
12. Counterparts. This Agreement may be executed in two or
more counterparts.
IN WITNESS WHEREOF, the undersigned have executed
this Amendment No. 3 on the day and year written above.
PENNCORP FINANCIAL GROUP, INC.
By:/s/Scott D. Silverman
------------------------
Scott D. Silverman, Executive
Vice President, Chief
Administrative Officer and
General Counsel
By:/s/Kenneth Roman
------------------------
Kenneth Roman, Chairman
Compensation Committee
/s/David J. Stone
------------------------
David J. Stone
4
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended September 30, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 3,764,520
<DEBT-CARRYING-VALUE> 3,764,520
<DEBT-MARKET-VALUE> 3,764,520
<EQUITIES> 5,247
<MORTGAGE> 271,098
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,488,162
<CASH> 7,498
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 197,551
<TOTAL-ASSETS> 6,189,249
<POLICY-LOSSES> 4,179,881
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 551,289
0
249,670
<COMMON> 302
<OTHER-SE> 333,798
<TOTAL-LIABILITY-AND-EQUITY> 6,189,249
123,605
<INVESTMENT-INCOME> 89,130
<INVESTMENT-GAINS> 4,171
<OTHER-INCOME> 8,776
<BENEFITS> 134,373
<UNDERWRITING-AMORTIZATION> 29,743
<UNDERWRITING-OTHER> 218,298
<INCOME-PRETAX> (156,732)
<INCOME-TAX> 3,900
<INCOME-CONTINUING> (160,632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165,088)
<EPS-PRIMARY> (5.64)
<EPS-DILUTED> (5.64)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
