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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 June 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 (I.R.S. employer identification no.)
incorporation or organization)
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
- ------------------------------------- ---------------------------------------
$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 August 11, 1998, was
30,064,070.
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<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..........16
Independent Auditors' Review Report.........................17
Item 2. Management's Discussion And Analysis of
Financial Condition and Results of Operations.............18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................28
Item 4. Submission of Matters to a Vote of Security Holders..........28
Item 5. Other Information............................................29
Item 6. Exhibits and Reports on Form 8-K.............................29
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>
June 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 3,833,653 $ 2,718,982
Equity securities available for sale, at fair value............................ 28,079 30,257
Mortgage loans on real estate.................................................. 276,578 240,879
Policy loans................................................................... 244,637 145,108
Short term investments......................................................... 111,812 84,141
Other investments.............................................................. 39,628 95,875
------------ ------------
Total investments.......................................................... 4,534,387 3,315,242
Cash.............................................................................. -- 24,872
Accrued investment income......................................................... 59,037 43,312
Accounts and notes receivable..................................................... 33,322 46,655
Investments in unconsolidated affiliates.......................................... -- 183,158
Present value of insurance in force............................................... 213,342 263,889
Deferred policy acquisition costs................................................. 189,907 310,117
Costs in excess of net assets acquired and other intangibles...................... 157,835 116,544
Other assets...................................................................... 467,160 420,346
Assets of businesses held for sale................................................ 964,053 --
------------ ------------
Total assets............................................................... $ 6,619,043 $ 4,724,135
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................ $ 4,459,280 $ 3,289,925
Notes payable.................................................................. 548,453 359,755
Income taxes, primarily deferred............................................... -- 59,125
Accrued expenses and other liabilities......................................... 221,701 135,227
Liabilities of businesses held for sale........................................ 664,053 --
------------ ------------
Total liabilities.......................................................... 5,893,487 3,844,032
------------ ------------
Mandatory redeemable preferred stock:
Series C, $.01 par value, $100 initial redemption value; authorized, issued
and outstanding-- at June 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 June 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 June 30, 1998, and
December 31, 1997............................................................ 139,157 139,157
Common stock, $.01 par value; authorized 100,000,000; issued and
outstanding 29,917,907 at June 30, 1998, and 28,860,206 at December 31, 1997. 302 289
Additional paid-in capital..................................................... 431,298 397,590
Accumulated other comprehensive income......................................... 39,027 35,034
Retained earnings.............................................................. 38,619 211,055
Treasury shares................................................................ (32,130) (32,130)
Notes receivable secured by common stock....................................... (1,230) (1,272)
------------ ------------
Total shareholders' equity................................................. 725,556 860,236
------------ ------------
Total liabilities and shareholders' equity................................. $ 6,619,043 $ 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 Six Month Periods Ended
June 30, June 30,
------------------------------- ------------------------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness. $ 89,171 $ 62,243 $ 178,596 $ 128,720
Interest sensitive product policy charges... 29,122 23,050 59,211 46,276
Net investment income....................... 92,318 68,218 188,533 136,764
Other income................................ 9,912 5,391 21,233 11,431
Net gains from sale of investments.......... 7,365 4,706 8,888 8,533
------------- -------------- ------------- -------------
Total revenues.......................... 227,888 163,608 456,461 331,724
------------- -------------- ------------- -------------
BENEFITS AND EXPENSES:
Claims incurred............................. 77,043 50,555 158,999 95,210
Change in liability for future policy
benefits and other policy benefits........ 80,609 24,344 132,670 54,452
Amortization of present value of insurance
in force and deferred policy acquisition
costs..................................... 26,966 20,735 50,939 41,554
Amortization of costs in excess of net
assets acquired and other intangibles..... 3,915 2,617 7,657 4,895
Underwriting and other administrative
expenses.................................. 57,934 29,707 101,195 60,243
Interest and amortization of deferred debt
issuance costs............................ 10,356 5,430 20,273 9,817
Restructuring charges (benefits)............ (1,756) -- 6,261 19,071
Impairment provision associated with assets
of businesses held for sale............... 140,485 -- 140,485 --
------------- -------------- ------------- -------------
Total benefits and expenses............. 395,552 133,388 618,479 285,242
------------- -------------- ------------- -------------
Income (loss) before income taxes, equity in
earnings of unconsolidated affiliates and
extraordinary charge........................ (167,664) 30,220 (162,018) 46,482
Income taxes (benefit).................. (8,216) 10,897 (5,459) 18,454
------------- -------------- ------------- -------------
Income (loss) before equity in earnings of
unconsolidated affiliates and extraordinary
charge...................................... (159,448) 19,323 (156,559) 28,028
Equity in earnings of unconsolidated
affiliates........................... -- (1,240) -- 2,418
------------- -------------- ------------- -------------
Income (loss) before extraordinary charge...... (159,448) 18,083 (156,559) 30,446
Extraordinary charge.................... -- -- (1,671) --
------------- -------------- ------------- -------------
Net income (loss).............................. (159,448) 18,083 (158,230) 30,446
Preferred stock dividend requirements... 4,456 4,874 9,360 9,801
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock... $ (163,904) $ 13,209 $ (167,590) $ 20,645
============= ============== ============= =============
PER SHARE INFORMATION:
Basic:
Net income (loss) applicable to common
stock before extraordinary charge......... $ (5.60) $ 0.47 $ (5.80) $ 0.73
Extraordinary charge.................... -- -- (0.06) --
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock $ (5.60) $ 0.47 (5.86) 0.73
============= ============== ============= =============
Common shares used in computing basic
earnings (loss) per share................. 29,266 28,042 28,921 28,122
============= ============== ============= =============
Diluted:
Net income (loss) applicable to common
stock before extraordinary charge......... $ (5.60) $ 0.45 $ (5.80) $ 0.71
Extraordinary charge.................... -- -- (0.06) --
------------- -------------- ------------- -------------
Net income (loss) applicable to common stock $ (5.60) $ 0.45 $ (5.86) $ 0.71
============= ============== ============= =============
Common shares used in computing diluted
earnings (loss) per share................. 29,266 33,932 28,921 28,969
============= ============== ============= =============
</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>
Six Month Periods Ended
June 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before equity in earnings of unconsolidated affiliates and
extraordinary charge....................................................... $ (156,559) $ 28,028
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.. 140,485 --
Capitalization of deferred policy acquisition costs...................... (67,580) (56,029)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net........ 56,899 48,329
Increase (decrease) in policy liabilities, accruals and other
policyholder funds..................................................... 36,565 (855)
Sales of trading securities.............................................. -- 29,914
Other, net............................................................... (4,720) (2,677)
------------- -------------
Net cash provided by operating activities............................ 5,090 46,710
------------- -------------
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................................................. (536,101) (782,317)
Sales of invested assets..................................................... 211,370 663,906
Maturities of invested assets................................................ 373,683 123,594
Other, primarily short term investments, net................................. 105,563 16,119
------------- -------------
Net cash provided by investing activities................................ 79,873 21,302
------------- -------------
Cash flows from financing activities:
Issuance of common stock..................................................... 7 3,497
Treasury stock purchase...................................................... -- (21,440)
Additional borrowings........................................................ 200,000 160,000
Reduction in notes payable................................................... (126,316) (100,139)
Redemption of preferred stock................................................ (7) (14,706)
Dividends on preferred and common stock...................................... (11,752) (11,762)
Receipts from interest sensitive polices credited to
policyholder account balances.............................................. 186,126 106,379
Return of policyholder account balances on interest sensitive products....... (362,467) (229,378)
Other, net................................................................... 2,901 4,245
------------- -------------
Net cash used by financing activities.................................... (111,508) (103,304)
------------- -------------
Net decrease in cash..................................................... (26,545) (35,292)
Cash at beginning of period..................................................... 24,872 39,464
------------- -------------
Cash (deficit) at end of period (including $2,216 of cash classified as assets
of businesses held for sale in 1998)......................................... $ (1,673) $ 4,172
============= =============
Supplemental disclosures:
Income taxes paid.......................................................... $ 4,866 $ 2,427
============= =============
Interest paid.............................................................. $ 16,201 $ 8,061
============= =============
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"); Integon Life Insurance
Corporation ("Integon Life"); Occidental Life Insurance Company of North
Carolina ("OLIC"); United Life & Annuity Insurance Company ("United Life");
Knightsbanc Management, LLC ("Knightsbanc Management"), which provides
management and advisory services to the Company; Marketing One, Inc. ("Marketing
One"), a third party marketing organization; KIVEX, Inc. ("KIVEX"), an Internet
Service Provider; 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.
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 June 30, 1998, the results of operations for the three and six
month periods ended June 30, 1998 and 1997, and cash flows for the six month
periods ended June 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. Certain
amounts from prior periods have been reclassified to conform to the current
presentation.
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 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. For the three and six month periods 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 three and six month periods ended June 30, 1998.
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 $500,300
and $487,700 as of June 30, 1998 and December 31, 1997, respectively. Emerging
experience on these products, if preliminary trends continue, would require the
Company 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
6
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (Continued)
management actions, which would mitigate the financial impact of these trends.
Types of management actions that would be considered 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 six month periods ended
June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Month Periods Ended
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss).............................................. $ (163,904) $ 13,209
Foreign currency translation adjustment........................ (4,251) (130)
Unrealized gain on securities available for sale............... 6,148 50,789
------------- -------------
Comprehensive income (loss).................................... $ (162,007) $ 63,868
============= =============
Six Month Periods Ended
1998 1997
------------- -------------
Net income (loss).............................................. $ (167,590) $ 20,645
Foreign currency translation adjustment........................ (2,382) (1,957)
Unrealized gain (loss) on securities available for sale........ 6,375 (3,520)
------------- -------------
Comprehensive income (loss).................................... $ (163,597) $ 15,168
============= =============
</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 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
7
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (Continued)
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 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 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
On January 2, 1998, following shareholder approval at the Company's
1997 annual meeting of shareholders, the Company consummated the acquisition,
from Knightsbridge Capital Fund I, LP (the "Knightsbridge Fund") and Messrs.
Steven W. Fickes and David J. Stone, directors and executive officers of the
Company, of their respective holdings of common stock and, in the case of the
Knightsbridge 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
8
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
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 six month period ended June 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 Knightsbridge Management, Knightsbridge
Capital LLC and Knightsbridge Consultants LLC (collectively, the "Fickes and
Stone Knightsbridge Interests") for total consideration estimated to be $11,382
(not including acquisition expenses). Messrs. Fickes and Stone will each receive
consideration in the form of estimated annual interest payments, ranging from
$301 to $330, beginning April 15, 1997 and due each year thereafter through 2001
and issuance by PennCorp of 173,160 shares of the Company's Common Stock to each
of Messrs. Fickes and Stone 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 and therefore,
will not receive the annual cash payment. See Part II--Item 5 "Other
Information." The fair value of net assets acquired amounted to $(1,701)
resulting in $13,083 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.
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
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 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. The Company has decided to enter into
exclusive negotiations with one of the prospective purchasers.
9
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
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 six month periods ended June 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 six month periods ended
June 30, 1998, as the unaudited selected pro forma financial information is
materially equivalent to the results of operations for the three and six month
periods ended June 30, 1998. This 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, within
a period of time not likely to exceed one year, results in the assets and
liabilities of the Career Sales Division 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 June 30, 1997 1997
------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Total revenues.......................................................... $ 163,608 $ 236,152
Net income.............................................................. 18,083 17,104
Net income applicable to common stock................................... 13,209 12,230
Per share information:
Net income applicable to common stock-basic........................... $ 0.47 $ 0.44
Net income applicable to common stock-diluted......................... 0.45 0.42
(Unaudited)
SW Financial
As Reported Pro forma
For the six month period ended June 30, 1997 1997
------------------------------------------------------------------------ ------------- -------------
Total revenues.......................................................... $ 331,724 $ 478,875
Net income.............................................................. 30,446 30,242
Net income applicable to common stock................................... 20,645 20,458
Per share information:
Net income applicable to common stock-basic........................... $ 0.73 $ 0.73
Net income applicable to common stock-diluted......................... 0.71 0.71
</TABLE>
10
<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............................................. 766,703 799,242 623,300
Assets of businesses held for sale....................... -- -- 1,218,016
------------- ------------- -------------
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........................................ 194,352 295,641 178,520
Liabilities of businesses held for sale.................. -- -- 710,868
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 six month periods ended June 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 considers 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 Career Sales Division ((i), (ii) and (iii)
collectively, operating income). 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 the
acquisition of the: (i) SW Financial Controlling Interest, (ii) the intended
disposition of the Career Sales Division, and (iii) the restructuring charge and
period costs are material enough to make historical comparative results for
the three and six month periods ended June 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 six month periods ended June 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.
11
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND OTHER TRANSACTIONS (Continued)
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.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
(Unaudited)
Businesses Held for Sale
------------------------------------------------------------
Three Month Six Month
Period Ended Period Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
- ---------------------------------------------------- ------------- ------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues.................................. $ 52,329 $ 55,181 $ 106,374 $ 112,302
Net investment income............................ 11,334 12,269 21,826 21,650
Other income..................................... 2,961 4,487 7,113 9,349
------------- ------------- ------------- --------------
66,624 71,937 135,313 143,301
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 59,795 39,887 97,693 72,633
Insurance related expenses....................... 15,743 13,499 32,315 26,434
Other operating expenses......................... 10,040 8,697 20,644 17,470
------------- ------------- ------------- --------------
85,578 62,083 150,652 116,537
------------- ------------- ------------- --------------
Pre-tax operating income (loss) before interest $ (18,954) $ 9,854 $ (15,339) $ 26,764
============= ============= ============= ==============
Retained Business
------------------------------------------------------------
Three Month Six Month
Period Ended Period Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
- ---------------------------------------------------- ------------- ------------- ------------- --------------
(In thousands)
Revenues:
Policy revenues.................................. $ 65,964 $ 66,230 $ 131,433 $ 136,312
Net investment income............................ 80,984 86,278 166,707 177,250
Other income..................................... 6,951 6,016 14,120 12,929
------------- ------------- ------------- --------------
153,899 158,524 312,260 326,491
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 97,857 89,972 193,976 177,271
Insurance related expenses....................... 21,373 16,363 37,242 30,792
Other operating expenses......................... 40,515 22,532 67,129 47,297
------------- ------------- ------------- --------------
159,745 128,867 298,347 255,360
------------- ------------- ------------- --------------
Pre-tax operating income (loss) before interest $ (5,846) $ 29,657 $ 13,913 $ 71,131
============= ============= ============= ==============
</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 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.
12
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SOUTHWESTERN LIFE INVESTMENT (Continued)
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>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Six Month
Period Ended Period Ended
------------- -------------
June 30, 1997
--------------------------------
<S> <C> <C>
REVENUES:
Policy revenues.............................................. $ 36,118 $ 73,618
Net investment income........................................ 31,333 63,228
Other income................................................. 4,235 9,093
Net gains from sale of investments........................... 535 550
------------- -------------
Total revenues.......................................... 72,221 146,489
------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits........................................ 54,960 100,242
Amortization................................................. 5,865 11,887
Underwriting and other administrative expenses............... 8,955 19,207
Interest and amortization of deferred debt issuance costs.... 3,444 6,880
------------- -------------
Total benefits and expenses............................. 73,224 138,216
------------- -------------
Income (loss) before income taxes.............................. (1,003) 8,273
Income taxes............................................ 146 3,799
------------- -------------
Net income (loss).............................................. (1,149) 4,474
Preferred stock dividend requirements................... 744 1,472
------------- -------------
Net income (loss) applicable to common stock................... $ (1,893) $ 3,002
============= =============
</TABLE>
13
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $1,595 and $3,576, for
the three and six month periods ended June 30, 1997, respectively, directly and
indirectly associated with the initial divisional restructuring which had no
future economic benefit.
The Company estimates approximately $108 and $192 of period costs
associated with the 1997 restructuring charge were incurred during the three and
six month periods ended June 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 $266 and $268, for the
three and six month periods ended June 30, 1998, respectively, directly and
indirectly associated with the divisional restructuring.
During the six month period ended June 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 and six month period ended June 30, 1998, the
Company re-evaluated the 1998 restructuring charge and reduced certain accruals
by $1,756 as a result of the final determination regarding contract termination
fees and certain impaired assets.
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 six month period ended June 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 six month period ended June 30,
1998.
During the six month period ended June 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, in
which it has contracted with for the development and marketing of
14
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (Continued)
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 purchased 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
Integon Life and representations allegedly made by Integon 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 Integon 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 Integon Life.
Although Integon 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 Integon Life the right to change the cost of insurance rates in
accordance with the parameters set forth in the insurance contract. Integon 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.
The Pennsylvania Department of Insurance is in the process of
completing its examination of Pennsylvania Life Insurance Company ("PLIC") as of
December 31, 1996. Certain actuarial reserving issues are still under review
both by the Company and the Department of Insurance. Preliminary actuarial
findings by the Department indicate that PLIC may have incorrectly utilized
certain assumptions when calculating policy reserves associated with its long
term care insurance products sold during the early 1990's. The Company has
considered the preliminary actuarial findings and has reflected, as necessary,
the estimated impact of the changes in reserves estimates in its financial
statement prepared in accordance with generally accepted accounting principles.
The potential increase in statutory reserve estimates ranges from approximately
$11.0 to $25.0 million. Additionally, 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. Should PLIC need to substantially increase its policy benefit or
claims reserves estimates 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 are actively pursuing means to raise risk-based capital ratios.
There can be no assurance that the Company or PLIC will be successful in
obtaining such capital.
As a result of the impairment provision associated with Businesses Held
for Sale recorded during the period ended June 30, 1998, the Company was in
default with respect to certain net worth and leverage covenants associated with
its senior revolving credit facility. The Company has received a waiver from
compliance with such covenants for a period of 45 days (ending September 29,
1998). The Company is discussing, with the institutions which have made
commitments to the Company under its senior revolving credit facility, a further
extension of the waiver pending a disposition of the Career Sales Division
although there can be no assurance that such an extension will be granted.
15
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 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)
16
<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 June 30, 1998, and the
related consolidated statements of operations for the three and six month
periods ended June 30, 1998 and 1997, and consolidated statements of cash flows
for the six month periods ended June 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. 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 three and six month periods ended
June 30, 1998.
/S/KPMG PEAT MARWICK LLP
Dallas, Texas
August 17, 1998
17
<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 and (10) 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, is a low cost
provider of accumulation, life, and fixed benefit accident and sickness
insurance products throughout the United States and Canada. The Company's
products are sold through several distribution channels, including exclusive
agents, general agents, financial institutions, and payroll deduction programs,
and are targeted primarily to lower and middle-income individuals in rural and
suburban areas. These products are primarily small premium accident and sickness
insurance policies with defined fixed benefit amounts, traditional whole life
and universal life insurance with low face amounts and accumulation products
such as single premium deferred annuities.
The Company's financial condition and results of operations for the
periods covered by this and future "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are or will be affected by
several common factors, each of which is discussed below.
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 Knightsbridge Fund
(the "Controlling Parties") of certain rights, including common stock and, in
the case of the Knightsbridge 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 $73.8 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 $11.4 million. Messrs. Fickes and Stone will each
receive consideration in the form of estimated annual interest payments, ranging
from $301,000 to $330,000, beginning April 15, 1997, and due each year
thereafter through 2001 and issuance by PennCorp of 173,160 shares of the
Company's Common
18
<PAGE>
Stock to each of Messrs. Fickes and Stone on April 15, 2001. The Company issued
173,160 shares to Mr. Stone in July 1998. See Part II--Item 5 "Other
Information."
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
prospective purchasers for its Career Sales Division. If accepted, there can be
no assurance that the Company will enter into a definitive agreement with such
purchaser or that the transaction will be consummated. 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 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. The Company has decided to enter into
exclusive negotiations with one of the prospective purchasers.
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 $-- and $19.1 million, and period
costs, of $1.6 million and $3.6 million, for the three and six month periods
ended June 30, 1997, directly and indirectly associated with the initial
divisional restructuring which had no future economic benefit.
The Company estimates approximately $108,000 and $192,000 of period
costs associated with the 1997 restructuring charge were incurred during the
three and six month periods ended June 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 $266,000 and
$268,000, for the three and six month periods ended June 30, 1998, respectively,
directly and indirectly associated with divisional restructuring.
During the six month period ended June 30, 1998, the Company
re-evaluated the 1997 restructuring charge and reduced certain accruals by $3.8
million as a result of the final determination regarding the abandonment of
certain assets.
During the three and six month periods ended June 30, 1998, the Company
re-evaluated the 1998 restructuring charge and reduced the certain accruals by
$1.8 million as a result of the final determination regarding contract
termination fees and certain impaired assets.
In addition, the Company may record additional restructuring or other
charges during 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 Company's
principal businesses with which it 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
19
<PAGE>
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.
The Company's overall year 2000 compliance initiatives, includes 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 second
quarter of 1998, the Company anticipates incurring internal and external costs
of $9.1 million during the remainder of 1998 and early 1999. The Company
estimates it has incurred internal and external costs aggregating $3.1 million
and $5.4 million for the three and six month periods ended June 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 89.9% 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 85.0% 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 43.7% 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 Company's Financial Services Division
has only recently begun its year 2000 remediation efforts. Those efforts 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 39.4% 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 has recently
begun 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.
20
<PAGE>
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 six month periods ended June 30, 1998 and 1997,
respectively, the Company received approximately $36.1 million and $21.2 million
in interest payments on surplus debentures and dividends from its insurance
subsidiaries and paid approximately $31.0 million and $21.8 million in interest,
operating costs and preferred stock and common stock dividends during the six
month periods, respectively. For the remainder of 1998, the Company anticipates
receiving approximately $34.0 million in interest payments on surplus debentures
and dividends from its insurance subsidiaries. The Company anticipates cash
requirements of $18.9 million for interest, $11.8 million for preferred and
common stock dividends and $1.0 million for operating expenses. Additionally,
the Company may need approximately $12.0 million of liquidity to fund its
restructuring efforts. Additional liquidity could also be required to bolster
the statutory capital and surplus of PennLife. See Managements' Discussion and
Analysis--Regulatory Matters.
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 to be approximately $53.0 million to $63.0 million for 1999.
Anticipated cash requirements of the Company for interest payments of $38.0
million and common and preferred dividends of $23.6 million during 1999.
To fund the potential shortfall in cash sources for the remainder of
1998 and 1999, the Company anticipates liquidating non-core assets whose value
the Company expects to approximate $35.0 million. The Company has also decided
to enter into exclusive negotiations with a prospective purchaser of the Career
Sales Division, 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 has 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. For the six month periods ended June 30, 1998 and 1997,
respectively, the Company repurchased -- and 88,889 shares of common stock
resulting in a $-- and $3.5 million increase in the value of treasury shares
held.
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 six month period ended June 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
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 six month period
ended June 30, 1998.
21
<PAGE>
For the six month period ended June 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.
For the six month period ended June 30, 1997, certain employees and
agents exercised stock options and warrants resulting in the issuance of 118,341
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 $8.5 million,
respectively.
RESULTS OF OPERATIONS
For the three and six month periods ended June 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 considers 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 Career Sales Division ((i), (ii) and (iii)
collectively, operating income). 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 the
acquisition of the: (i) SW Financial Controlling Interest, (ii) the intended
disposition of the Career Sales Division, and (iii) the restructuring charge and
period charges are material enough to make historical comparative results for
the three and six month periods ended June 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 six month periods ended June 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.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
(Unaudited)
Businesses Held for Sale
------------------------------------------------------------
Three Month Six Month
Period Ended Period Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
- ---------------------------------------------------- ------------- ------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues.................................. $ 52,329 $ 55,181 $ 106,374 $ 112,302
Net investment income............................ 11,334 12,269 21,826 21,650
Other income..................................... 2,961 4,487 7,113 9,349
------------- ------------- ------------- --------------
66,624 71,937 135,313 143,301
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 59,795 39,887 97,693 72,633
Insurance related expenses....................... 15,743 13,499 32,315 26,434
Other operating expenses......................... 10,040 8,697 20,644 17,470
------------- ------------- ------------- --------------
85,578 62,083 150,652 116,537
------------- ------------- ------------- --------------
Pre-tax operating income (loss) before interest $ (18,954) $ 9,854 $ (15,339) $ 26,764
============= ============= ============= ==============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Retained Business
------------------------------------------------------------
Three Month Six Month
Period Ended Period Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
- ---------------------------------------------------- ------------- ------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues.................................. $ 65,964 $ 66,230 $ 131,433 $ 136,312
Net investment income............................ 80,984 86,278 166,707 177,250
Other income..................................... 6,951 6,016 14,120 12,929
------------- ------------- ------------- --------------
153,899 158,524 312,260 326,491
------------- ------------- ------------- --------------
Benefits and expenses:
Total policyholder benefits...................... 97,857 89,972 193,976 177,271
Insurance related expenses....................... 21,373 16,363 37,242 30,792
Other operating expenses......................... 40,515 22,532 67,129 47,297
------------- ------------- ------------- --------------
159,745 128,867 298,347 255,360
------------- ------------- ------------- --------------
Pre-tax operating income (loss) before interest $ (5,846) $ 29,657 $ 13,913 $ 71,131
============= ============= ============= ==============
</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 the management of Union Bankers with the
Career Sales Division.
Policy Revenues. Total policy revenues for the six month period ended
June 30, 1998, decreased 5.3% to $106.4 million compared to $112.3 million for
the six month periods ended June 30, 1997. The decline was primarily derived as
a result of a decision to limit underwriting of certain accident and health
insurance products at Union Bankers which resulted in a $4.5 million decline in
earned premium. In addition, policy revenues of PennLife declined approximately
$1.4 million as the result of lower new business production.
Total policy revenues for the three month period ended June 30, 1998,
decreased 5.3% to $52.3 million compared to $55.2 million for the three month
period ended June 30, 1997. The decline was primarily derived as a result of a
decision to limit underwriting of certain accident and health insurance products
at Union Bankers which resulted in a $2.9 million decline in earned premium.
Net Investment Income. Net investment income for the six month period
ended June 30, 1998, was $21.8 million compared to $21.7 million for the six
month period ended June 30, 1997. Net investment income increased $1.4 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 offset by a decrease in
investment income at Union Bankers associated with decreases in persistency and
lower new business production.
For the three month period ended June 30, 1998 investment income
declined $1.0 million to $11.3 million compared with $12.3 million for the three
month period ended June 30, 1997. Such decline was primarily the result of the
liquidation of higher yielding invested assets due to calls and maturities.
Other Income. Included in other income for the three and six month
periods ended June 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.
Total Policyholder Benefits. Total policyholder benefits for the six
month period ended June 30, 1998, increased 34.6% to $97.7 million compared to
$72.6 million for the comparable period ended June 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
23
<PAGE>
PennLife. Policy reserves and claims reserves increases associated with the
changes in estimates aggregated $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 PennLife. As
a result of such possible trends, the Company increased claims reserves
estimates for the Career Sales Division by $20.0 million, which is included
above in the additional policy benefit reserves. In determining the amount of
the necessary increase in policy reserve estimates associated with its long term
care products, PennLife allocated $11.2 million of previously identified
redundant policy reserves to long term care reserves, and additionally increased
policy reserves by $4.6 million.
Excluding these specific reserve increases, policy benefits for
PennLife increased approximately $10.1 million. Offsetting such increases were
lower incurred losses of $10.8 million associated with Union Bankers. Such a
decline was anticipated as a result of significant reserve strengthening,
approximately $10.0 million, during the six month period ended June 30, 1998 as
the result of adverse claims experience on PPO health insurance business.
Total policyholder benefits for the three month period ended June 30,
1998, increased 49.9% to $59.8 million compared to $39.9 million for the
comparable period ended June 30, 1997. Trends for the three month period are
comparable to the six month period as a result of such adjustments noted above
occurring predominately during the three month period ended June 30, 1998.
Insurance Related Expenses. For the six month period ended June 30,
1998, insurance related expenses (including commissions, amortization of
deferred policy acquisition costs and amortization of present value of insurance
in force) increased to $32.3 million from $26.4 million for the six month period
ended June 30, 1997. A portion of the increase is attributable to Union Bankers
experiencing higher amortization of deferred policy acquisition costs,
approximately $2.7 million, resulting from declining persistency on PPO health
insurance business. The remainder of the increase was the result of increased
commission costs for Penn Life offset by declines in commission costs for Union
Bankers. The total increase in commissions amounted to $3.2 million. Such
additional commissions were derived from changes in the compensation structure
for the Penn Life sales force which resulted in additional commission costs of
$4.5 million. The decline in Union Bankers commission costs, approximately $1.3
million, was 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.
For the three month period ended June 30, 1998, insurance related
expenses increased to $15.7 million from $13.5 million for the three month
period ended June 30, 1997, reflecting approximately $800,000 of additional
amortization of deferred policy acquisition costs as well as approximately $1.4
million of additional commission costs.
Other Operating Expenses. For the six month period ended June 30, 1998,
other operating expenses (including general operating, overhead and policy
maintenance) increased to $20.6 million from $17.5 million for the six month
period ended June 30, 1997. For the three month period ended June 30, 1998,
other operating expenses increased to $10.0 million from $8.7 million for the
three month period ended June 30, 1997. These increases are primarily
attributable to Penn Life statutory examination expenses, the establishment of a
management information technology system, and costs incurred associated with
bringing the Career Sales Division into year 2000 compliance.
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.
The Financial Services Division includes the operations of Integon Life
and United Life. Integon 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.
24
<PAGE>
Policy Revenues. Total policy revenues for the six month period ended
June 30, 1998, decreased 3.6% to $131.4 million compared to $136.3 million for
the six month periods ended June 30, 1997. The decline was primarily derived by
a decline in policy revenues of $5.6 million associated with Integon Life. In
addition, policy revenues from OLIC declined $1.1 million. Such decline was
anticipated due to the Company's decision to cease marketing products through
any "non-payroll" production sources. Offsetting the decline was an increase in
policy revenues from other Payroll Services Division companies, which increased
$2.5 million. Other Financial Services Division company's policy revenues were
nearly unchanged for the six month period.
Total policy revenues for the three month period ended June 30, 1998
were nearly unchanged at $66.0 million as compared with $66.3 million for the
three month period ended June 30, 1997. Both Financial Services and Payroll
Sales Division policy revenues were nearly unchanged with consistent trends in
individual companies as noted above.
Net Investment Income. Net investment income for the three and six
month periods ended June 30, 1998, was $81.0 million and $166.7 million compared
to $86.3 million and $177.3 million for the three and six month periods ended
June 30, 1997. The decline was primarily derived from the necessity to liquidate
invested assets for the Financial Services Division to provide cash flow for
accumulation product surrenders. During the twelve month period ended June 30,
1998 total surrenders have exceeded new deposits by approximately $329.1
million. Based upon the Company's weighted average yield of approximately 7.5%
the Company would anticipate a decline in investment income of approximately
$6.2 million and $12.3 million for the three month and six month periods ended
June 30, 1998 as compared with comparable periods ended June 30, 1997. Adding
modestly to the decline are lower new money rates which the Company is forced to
invest assets as a result of the maturity and calls of higher yielding
investments.
Other Income. The increase in other income of $1.2 million and $0.9
million for the six month and three month periods ended June 30, 1998 as
compared with comparable periods ended June 30, 1997 were derived primarily by
the Financial Services Division. Increases in other income resulted from both
Integon Life and Southwestern Life receiving funds aggregating approximately
$1.2 million from settlements on securities which had defaulted in prior years.
Total Policyholder Benefits. Total policyholder benefits for the six
month period ended June 30, 1998, increased 9.4% to $194.0 million compared to
$177.3 million for the comparable period ended June 30, 1997. The increase in
policyholder benefits resulted from an aggregate increase in death benefits for
the Financial Services and Payroll Sales Divisions aggregating $10.5 million and
$1.2 million respectively, when compared to the six month periods ended June 30,
1997. In addition, policy benefits for the Payroll Services Division increased
as a result of increases in claims reserves estimates for certain older blocks
of hospital indemnity and disability income contracts.
Total policyholder benefits for the three month period ended June 30,
1998, increased 8.8% to $97.9 million compared to $90.0 million for the
comparable period ended June 30, 1997. Trends for the comparable three month
periods are consistent with the six month periods noted above.
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 $500.3 million and
$487.7 million as of June 30, 1998 and December 31, 1997, respectively. Emerging
experience on these products, if preliminary trends continue, would require the
Company 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 would mitigate the financial impact of these trends.
Types of management actions that would be considered 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 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 six month period ended June 30,
1998, insurance related expenses (including commissions, amortization of
deferred policy acquisition costs and amortization of present value of insurance
in force) increased to $37.2 million from $30.8 million for the six month period
ended June 30, 1997. The increase is attributable to
25
<PAGE>
both the Financial Services Division and Payroll Sales Division. Financial
Services Division increases resulted from increased commissions aggregating $3.1
million as compared to the six months ended June 30, 1997, as the result of
stronger new business production. Payroll Sales Division increases were
attributed to higher amortization costs for the six month period ended June 30,
1998, as compared with June 30, 1997, which amounted to $3.6 million as the
result of growing blocks of insurance in force and persistency adjustments.
For the three month period ended June 30, 1998, insurance related
expenses increased to $21.4 million from $16.4 million for the three month
period ended June 30, 1997. The increase for the three month period is a direct
result of increased commissions and amortization noted above for the Financial
Services and Payroll Sales Divisions, respectively.
Other Operating Expenses. For the six month period ended June 30, 1998,
other operating expenses (including general operating, overhead and policy
maintenance) increased to $67.1 million from $47.3 million for the six month
period ended June 30, 1997. The increase is attributable to several factors as
follows: (i) accrual of severance and related benefits of approximately $3.7
million, (ii) additional amortization of costs in excess of net assets acquired
of approximately $1.4 million, (iii) approximately $4.7 million of remediation
costs associated with Year 2000 systems conversions and upgrades, (iv) the
write-off of agents' debit balances aggregating $2.3 million, deemed
uncollectible, (v) the write off of certain leasehold improvements and other
corporate charges aggregating $2.2 million and (vi) additional non-deferrable
expenses such as corporate overhead and friction costs associated with the
divisional realignment which are not considered restructuring costs.
For the three month period ended June 30, 1998, other operating
expenses increased to $40.5 million from $22.5 million for the three month
period ended June 30, 1997. The increase for the comparable three month period
is the result of items noted above as nearly all such costs were incurred during
the three month period ended June 30, 1998.
GENERAL CORPORATE
Interest and Amortization of Deferred Debt Issuance Costs. Interest and
amortization of deferred debt issuance costs increased to $20.3 million and
$10.3 million from $9.8 million and $5.4 million for the six and three month
periods ended June 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, and January 5, 1998, respectively.
Income Taxes. The effective tax rate (benefit) for the six and three
month periods ended June 30, 1998, was (3.4%) and (4.9%) compared to 39.7% and
36.1% for the six and three month periods ended June 30, 1997. The significant
change of the effective tax rate from June 30, 1997 to June 30, 1998 is
substantially due to the non-deductibility of most 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 three and six month period
ended June 30, 1998, the Company has recorded the tax effect of these
nonrecoverable net operating loss carryforwards of $7.7 million as an increase
to the impairment provision associated with the assets held for sale.
REGULATORY MATTERS
The Texas Department of Insurance has commenced 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 Pennsylvania Life Insurance Company ("PLIC") as of
December 31, 1996. Certain actuarial reserving issues are still under review
both by the Company and the Department of Insurance. Preliminary actuarial
findings by the Department indicate that PLIC may have incorrectly utilized
certain assumptions when calculating policy reserves associated with its long
term care insurance products sold during the early 1990's. The potential
difference in statutory reserve estimates ranges from approximately $11.0 to
$25.0 million. Additionally, 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
26
<PAGE>
determining its claims estimates on a statutory basis. Such differing methods
could likely produce materially different claims reserves estimates. Should PLIC
need to substantially increase its policy benefit or claims reserves 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 are actively
pursuing means to raise risk-based capital ratios. There can be no assurance
that the Company or PLIC will be successful in obtaining such capital.
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.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Part I, Item 3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, for information regarding the Tozour Case and
Miller Complaint. The Amended Proposed Settlement was approved by the Chancery
Court on May 12, 1998. The time period for filing an appeal has expired and the
Company paid $835,000 to plaintiff's counsel representing fees of $785,000 and
documented expenses of $50,000.
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
Integon Life and representations allegedly made by Integon 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 Integon 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 Integon Life.
Although Integon 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 Integon Life the right to change the cost of insurance rates in
accordance with the parameters set forth in the insurance contract. Integon 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 21, 1998.
1. The election of three Class III Directors, each to hold office for
a three year term expiring at the 2001 annual meeting of
shareholders and/or until such director's successor shall be
elected and qualified.
<TABLE>
<CAPTION>
VOTING
- -----------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
NUMBER OF SHARES BROKER
SHARES FOR WITHHELD NON-VOTES
<S> <C> <C> <C>
Lewis L. Glucksman 19,581,856 297,471 0
Bruce W. Schnitzer 19,580,156 299,171 0
David J. Stone 19,579,312 300,015 0
</TABLE>
2. The adoption of certain amendments to the Company's 1996 Stock Award
and Stock Option Plan.
<TABLE>
<CAPTION>
VOTING
- -----------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SHARES BROKER
SHARES FOR AGAINST ABSTAINED NON-VOTES
<S> <C> <C> <C>
17,803,104 2,040,785 35,438 0
</TABLE>
28
<PAGE>
3. To ratify the selection of KPMG Peat Marwick LLP as the Company's
independent auditors for 1998.
<TABLE>
<CAPTION>
VOTING
- -----------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SHARES BROKER
SHARES FOR AGAINST ABSTAINED NON-VOTES
<S> <C> <C> <C>
19,863,047 4,290 11,990 0
</TABLE>
Item 5. Other Information
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 six 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.
In May 1998, the Delaware Chancery Court awarded a $7.4 million (plus
pre and post judgment interest) judgment against David J. Stone, the Company's
Chairman, President and Chief Executive Officer, his spouse, Sara Stone, and DJS
Securities Limited (a company wholly owned by Mr. and Mrs. Stone) in a lawsuit
by former business partners seeking an accounting and a declaratory judgment.
While the lawsuit against Mr. and Mrs. Stone does not involve the Company, they
have pledged 1,127,285 shares of the Company's common stock to secure letters of
credit issued by financial institutions to support an appeal bond in this case.
Under certain circumstances relating to the market value of the Company's common
stock, the financial institutions may sell some or all of the shares pledged by
Mr. and Mrs. Stone. At Mr. Stone's request, the Company has accelerated the
delivery of the 173,160 shares of common stock of the Company due to Mr. Stone
in consideration for the sale of his Knightsbridge Interests to facilitate Mr.
Stone's pledge. In addition, the Company has waived certain non-competition
restrictions affecting Mr. Stone's stock to enable him to meet his pledge
obligations. In exchange for these accommodations, Mr. Stone will not receive
the annual cash payment of $330,000 relating to the sale of his Knightsbridge
Interests, unless the related shares are released from the pledge and delivered
to the Company to secure the non-competition obligation. Similarly, Mr. Stone
has relinquished 28,169 shares of common stock issued to him as an inducement to
agree to subject certain restricted shares to a noncompete agreement. These
shares may be reissued in the future if certain pledged shares are released and
redelivered to the Company. On August 18, 1998, Mr. Stone advised the Company
that, due to the decline in the market value of his shares of common stock and
his inability to provide additional collateral in his margin account, one of the
financial institutions has foreclosed on a portion of the pledged stock which,
the Company believes that institution has begun selling in the open market or
other wise. These sales and the perception that other sales of the remaining
portion of the pledged shares might occur, could adversely effect the market
price for the Company's common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to Surplus Debenture dated December 14, 1995 in the
original principal amount of $80,000,000 issued by
Constitution Life Insurance Company to Southwestern Financial
Corporation.
10.2 Amendment to Surplus Debenture dated January 1, 1996 in the
original principal amount of $40,000,000 issued by
Constitution Life Insurance Company to Southwestern Financial
Corporation.
10.3 Amendment No. 1 and Waiver dated as of June 13, 1997 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.
10.4 Amendment No. 2 and Waiver dated as of April 17, 1998 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.
29
<PAGE>
10.5 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P. McDermott.
10.6 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P. McDermott.
10.7 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D. Silverman.
10.8 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D. Silverman.
10.9 Executive Employment Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
10.10 Executive Retention Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
11.1 Computation of Earnings per Share
15.1 Independent Auditors' Report*
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
* Such exhibit is incorporated by reference to page 17 of this Form 10-Q.
30
<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: August 19, 1998
31
<PAGE>
INDEX TO EXHIBITS
Exhibit Numbers
10.1 Amendment to Surplus Debenture dated December 14, 1995 in the
original principal amount of $80,000,000 issued by
Constitution Life Insurance Company to Southwestern Financial
Corporation.
10.2 Amendment to Surplus Debenture dated January 1, 1996 in the
original principal amount of $40,000,000 issued by
Constitution Life Insurance Company to Southwestern Financial
Corporation.
10.3 Amendment No. 1 and Waiver dated as of June 13, 1997 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.
10.4 Amendment No. 2 and Waiver dated as of April 17, 1998 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.
10.5 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P. McDermott.
10.6 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P. McDermott.
10.7 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D. Silverman.
10.8 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D. Silverman.
10.9 Executive Employment Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
10.10 Executive Retention Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
11.1 Computation of Earnings per Share
15.1 Independent Auditors' Report*
27 Financial Data Schedule
* Such exhibit is incorporated by reference to page 17 of this Form 10-Q.
32
CONSTITUTION LIFE INSURANCE COMPANY
AMENDMENT TO SURPLUS DEBENTURE
This Amendment applies to the Surplus Debenture dated December 14, 1995 in the
original principal amount of $80,000,000 (the "Debenture"), issued by
Constitution Life Insurance Company, a Texas stock life insurance company, and
held by Southwestern Financial Corporation, a Delaware corporation (the
"Holder").
1. The first and second full paragraphs of the Debenture are hereby deleted in
their entirety and shall be replaced by the following:
FOR VALUE RECEIVED, Constitution Life Insurance Company, a Texas life
insurance corporation (`CLICO"), subject to the terms, conditions,
restrictions, and limitations contained herein, promises to pay to the
order of the Holder, or to any subsequent holder hereof the principal sum
of Eighty Million Dollars ($80,000,000) together with interest on the
unpaid balance thereof at a rate (the "Rate") equal to the sum of (i) two
and one-half percent (2.5%) per annum and (ii) the rate of interest
required by that certain Credit Agreement, dated as of July 24, 1996, among
PennCorp Financial Group, Inc. as borrower, The Bank of New York, as
administrative agent, and the other lenders party thereto, (together with
all amendments, renewals, extensions or refinancings thereof, the "Loan
Agreement"). In respect to the Loan (as defined in the Loan Agreement) made
to PennCorp Financial Group, Inc., it is understood that the rate of
interest with respect to the Loan may vary from time to time by operation
of law or under the terms and conditions of the Loan Agreement. Each change
in the interest rate applicable to the Loan shall cause a corresponding
change in the calculation of the Rate, effective as of the time and date of
such change in the interest rate applicable to the Loan, without any notice
to CLICO or further action by the Holder. In the event the Loan is repaid
in full prior to the full repayment of the Surplus Debenture, the Rate
shall be come 10% at that time.
Interest on this Surplus Debenture will be payable each calendar quarter on
the day in which CLICO's financial statements are finalized for the prior
calendar quarter (each, an "Interest Payment Date") and continuing until
the entire principal amount of this Surplus Debenture is paid in full. Both
principal and interest on this Surplus Debenture will be due and payable in
the following manner at the offices of the Holder.
2. Paragraph "4" of the Debenture is hereby deleted in its entirety and
replaced with the following:
4. CLICO shall pay to the Holder the amounts of principal set forth below
or such lesser amount as may be paid hereunder, together with all
accrued but unpaid interest, to the extent the Surplus of CLICO
exceeds $1.2 million as of the most recent Calculation date. Such
principal payments shall be paid for each calendar quarter set forth
below on the day in which CLICO's financial statements are finalized
for such calendar quarter (a "Principal Payment Date").
Payment Principal Amount
Date Each Date
---- ---------
4th Calendar Qtr. 1996 $1,000,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 1997 1,500,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 1998 3,100,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 1999 3,450,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2000 3,700,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2001 4,250,000
1st, 2nd & 3rd Calendar Qtrs. 2002 5,000,000
<PAGE>
3. CLICO hereby acknowledges that the Holder, referenced above is due all
rights and privileges as the successor in interest and holder in due course
of the Debenture.
4. This Amendment is a revision only, and not a novation. Except as
specifically provided herein, all of the terms and conditions of the
Debenture shall remain in full force and effect.
5. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Dated June 15, 1998 CONSTITUTION LIFE INSURANCE COMPANY
By: /s/David A. Leonard
-------------------------------
Name: David A. Leonard
Title: Senior Vice President
Accepted:
SOUTHWESTERN FINANCIAL CORPORATION
By: /s/John C. Bower
-------------------------------
Name: John C. Bower
Title: President
CONSTITUTION LIFE INSURANCE COMPANY
AMENDMENT TO SURPLUS DEBENTURE
This Amendment applies to the Surplus Debenture dated January 1, 1996 in the
original principal amount of $40,000,000 (the "Debenture"), issued by
Constitution Life Insurance Company, a Texas stock life insurance company, and
held by Southwestern Financial Corporation, a Delaware corporation (the
"Holder").
1. The first and second full paragraphs of the Debenture are hereby deleted in
their entirety and shall be replaced by the following:
FOR VALUE RECEIVED, Constitution Life Insurance Company, a Texas life
insurance corporation ("CLICO"), subject to the terms, conditions,
restrictions, and limitations contained herein, promises to pay to the
order of the Holder, or to any subsequent holder hereof the principal sum
of Forty Million Dollars ($40,000,000) together with interest on the unpaid
balance thereof at a rate (the "Rate") equal to the sum of (i) two and
one-half percent (2.5%) per annum and (ii) the rate of interest required by
that certain Credit Agreement, dated as of July 24, 1996, among PennCorp
Financial Group, Inc. as borrower, The Bank of New York, as administrative
agent, and the other lenders party thereto, (together with all amendments,
renewals, extensions or refinancings thereof, the "Loan Agreement"). In
respect to the Loan (as defined in the Loan Agreement) made to PennCorp
Financial Group, Inc., it is understood that the rate of interest with
respect to the Loan may vary from time to time by operation of law or under
the terms and conditions of the Loan Agreement. Each change in the interest
rate applicable to the Loan shall cause a corresponding change in the
calculation of the Rate, effective as of the time and date of such change
in the interest rate applicable to the Loan, without any notice to CLICO or
further action by the Holder. In the event the Loan is repaid in full prior
to the full repayment of the Surplus Debenture, the Rate shall be come 10%
at that time.
Interest on this Surplus Debenture will be payable each calendar quarter on
the day in which CLICO's financial statements are finalized for the prior
calendar quarter (each, an "Interest Payment Date") and continuing until
the entire principal amount of this Surplus Debenture is paid in full. Both
principal and interest on this Surplus Debenture will be due and payable in
the following manner at the offices of the Holder.
2. Paragraph "4" of the Debenture is hereby deleted in its entirety and
replaced with the following:
4. CLICO shall pay to the Holder the amounts of principal set forth below
or such lesser amount as may be paid hereunder, together with all
accrued but unpaid interest, to the extent the Surplus of CLICO
exceeds $1.2 million as of the most recent Calculation date. Such
principal payments shall be paid for each calendar quarter set forth
below on the day in which CLICO's financial statements are finalized
for such calendar quarter (a "Principal Payment Date").
Payment Principal Amount
Date Each Date
---- ---------
1st, 2nd, 3rd & 4th Calendar Qtrs. 1998 $ 525,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 1999 650,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2000 650,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2001 650,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2002 2,250,000
1st, 2nd, 3rd & 4th Calendar Qtrs. 2003 5,275,000
<PAGE>
3. CLICO hereby acknowledges that the Holder, referenced above is due all
rights and privileges as the successor in interest and holder in due course
of the Debenture.
4. This Amendment is a revision only, and not a novation. Except as
specifically provided herein, all of the terms and conditions of the
Debenture shall remain in full force and effect
5. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Dated June 15, 1998 CONSTITUTION LIFE INSURANCE COMPANY
By: /s/David A. Leonard
-------------------------------
Name: David A. Leonard
Title: Senior Vice President
Accepted:
SOUTHWESTERN FINANCIAL CORPORATION
By: /s/John C. Bower
-------------------------------
Name: John C. Bower
Title: President
AMENDMENT NO. 1 AND WAIVER
Dated as of June 13, 1997
to
CREDIT AGREEMENT
Dated as of March 12, 1997
PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"), the
lenders signatory to the Credit Agreement referred to below (the "Banks"), the
Managing Agents and the Co-Agents named therein (the "Agents") and THE BANK OF
NEW YORK, as administrative agent for the Banks (the "Administrative Agent"),
hereby agree as follows:
1. Credit Agreement. Reference is hereby made to the Credit Agreement dated
as of March 12, 1997 among the Company, the Banks, the Agents and the
Administrative Agent (the "Credit Agreement"). Terms used in this Amendment No.
1 and Waiver (this "Amendment and Waiver") that are defined in the Credit
Agreement and are not otherwise defined herein are used herein with the meanings
therein ascribed to them. The Credit Agreement as amended by this Amendment and
Waiver is and shall continue to be in full force and effect and is hereby in all
respects confirmed, approved and ratified.
2. Amendment. Schedule 8.08 to the Credit Agreement is hereby amended and
restated in its entirety in the form attached hereto as Annex A.
3. Waivers. (a) The Banks hereby waive the existing Defaults under Section
9(e) of the Credit Agreement arising from the Company's failure to deliver the
financial statements and Financial Officer's certificates required to be
delivered to the Banks pursuant to the terms of clause (a) and the last
paragraph of Section 8.01 with respect to the fiscal quarter of the Company
ending March 31, 1997 within 45 days after the end of such fiscal quarter,
provided that such financial statements and certificates are delivered to the
Administrative Agent (with a copy for each of the Banks) no later than July 10,
1997.
(b) The Banks hereby waive compliance with the terms of Section 8.20 of the
Credit Agreement solely to the extent necessary to permit the Company to make
Investments in Southwestern Financial Corporation in order to effect the
acquisition by the Company, or the redemption by Southwestern Financial
Corporation, of the Southwestern Subordinated Notes, provided that the aggregate
amount of all such Investments shall not exceed approximately $40,000,000;
provided, further, that the foregoing waiver shall be effective only so long as
no Event of Default (other than an Event of Default which would not be an Event
of Default after giving effect hereto) shall have occurred and be continuing
both immediately before and after the making of any such Investment.
4. Effective Date. The amendment and waivers provided for herein shall be
effective as of the date first written above, but shall not become effective as
of such date until this Amendment and Waiver has been executed by the Company,
the Majority Banks and the Administrative Agent.
5. Governing Law. This Amendment and Waiver shall be governed by, and
construed in accordance with, the law of the State of New York (without giving
effect to its choice of law principles).
6. Counterparts. This Amendment and Waiver may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment and Waiver
by signing any such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 and
Waiver to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /s/Scott D. Silverman
---------------------------------------
Name: Scott D. Silverman
Title: Senior Vice President, General
Counsel and Secretary
THE BANK OF NEW YORK, as
Administrative Agent and as a Bank
By: /s/Lizanne J. Eberle
----------------------------------------
Name: Lizanne J. Eberle
Title: Vice President
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By: /s/Peter Platten
----------------------------------------
Name: Peter Platten
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as a Managing Agent and as a Bank
By: /s/Eric Kearney
----------------------------------------
Name: Eric Kearney
Title: AVP
NATIONSBANK, N.A., as a Managing
Agent and as a Bank
By: /s/Gregory A. Saib
----------------------------------------
Name: Gregory A. Saib
Title: Officer
<PAGE>
FLEET NATIONAL BANK, as a Co-Agent
and as a Bank
By: /s/Jeffrey A. Simpson
----------------------------------------
Name: Jeffrey A. Simpson
Title: Vice President
MELLON BANK, N.A., as a Co-Agent
and as a Bank
By:
Name:
Title:
BANK OF MONTREAL, as a Co-Agent
and as a Bank
By:
Name:
Title:
CIBC INC., as a Co-Agent and as a Bank
By: /s/Gerald J. Girardi
----------------------------------------
Name: Gerald J. Girardi
Title: Director, CIBC Wood Gundy
Securities Corp, as Agent
DRESDNER BANK AG, NEW YORK BRANCH &
GRAND CAYMAN BRANCH, as a Co-Agent and as a Bank
By: /s/Thomas J. Nadramia
----------------------------------------
Name: Thomas J. Nadramia
Title: Vice President
By: /s/Brigitte Sacin
----------------------------------------
Name: Brigitte Sacin
Title: Assistant Treasurer
<PAGE>
SUNTRUST BANK, NATIONAL ASSOCIATION
By:
Name:
Title:
BANK ONE, TEXAS N.A.
By: /s/D. Keith Thompson
----------------------------------------
Name: D. Keith Thompson
Title: Vice President
CORESTATES BANK, N.A.
By:
Name:
Title:
FIRST UNION NATIONAL BANK
By: /s/Gail M. Golightly
----------------------------------------
Name: Gail M. Golightly
Title: Senior Vice President
LTCB TRUST COMPANY
By: /s/Neborne Huboton
----------------------------------------
Name: Neborne Huboton
Title: SVP
ING (U.S.) CAPITAL CORPORATION
By: /s/T.D. Prangley
----------------------------------------
Name: T.D. Prangley
Title: Vice President
<PAGE>
Annex A
Schedule 8.08
SCHEDULE OF EXISTING INDEBTEDNESS
1. PENNCORP
Master Lease Agreement between Hayorth Leasing and PennCorp Financial
Inc. dated February 1, 1996.
2. WASHINGTON NATIONAL
(A) $5,000,000 plus amounts needed to (1) redeem outstanding Preferred
Stock; (2) cancel and cash out employee options and restricted stock;
(3) purchase common and preferred stock of Washington National held by
Washington National retirement plans, all as contemplated by the
Merger Agreement.
(B) Lease obligations relating to premises located at 300 Tower
Parkway, Lincolnshire, Illinois 60069.
3. SOUTHWESTERN
(A) Southwestern Credit Agreement
(B) Southwestern Subordinated Notes
EXECUTION COPY
AMENDMENT NO. 2 AND WAIVER
Dated as of April 17, 1998
to
CREDIT AGREEMENT
Dated as of March 12, 1997
PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"), the
lenders signatory to the Credit Agreement referred to below (the "Banks"), the
Managing Agents and the Co-Agents named therein (the "Agents") and THE BANK OF
NEW YORK, as administrative agent for the Banks (the "Administrative Agent"),
hereby agree as follows:
1. Credit Agreement. Reference is hereby made to the Credit Agreement dated
as of March 12, 1997, as amended by Amendment No. 1 and Waiver, dated as of June
13, 1997, among the Company, the Banks, the Agents and the Administrative Agent
(as so amended, the "Credit Agreement"). Terms used in this Amendment No. 2 and
Waiver (this "Amendment and Waiver") that are defined in the Credit Agreement
and are not otherwise defined herein are used herein with the meanings therein
ascribed to them. The Credit Agreement as amended by this Amendment and Waiver
is and shall continue to be in full force and effect and is hereby in all
respects confirmed, approved and ratified.
2. Amendments. (a) The definition of "Applicable Margin" set forth in
Section 1.01 of the Credit Agreement is hereby amended by inserting the
following words immediately before the period at the end thereof:
"; provided, further, that the Applicable Margin set forth above for each
Tier shall be increased by 0.125% at any time on or after April 17, 1998
that the Leverage Ratio exceeds 35%".
(b) Section 1.01 of the Credit Agreement is hereby amended by inserting the
following definitions therein in the correct alphabetical order:
" `Forward Purchase Contract' shall mean a contract entered into
between the Company and a Forward Purchase Contract Broker that provides
(i) for purchases by such Forward Purchase Contract Broker of shares of the
common stock of the Company, (ii) for resale of such common stock so
purchased by such Forward Purchase Contract Broker to, at the option of the
Company, the Company or any other Person or Persons, and (iii) that
increases and decreases in the value of such common stock purchased by such
Forward Purchase Contract Broker from the date so purchased to the date so
resold shall be for the account of the Company; provided that (1) the
aggregate purchase price paid for all common stock of the Company purchased
by Forward Purchase Contract Brokers pursuant to Forward Purchase Contracts
shall not exceed $125,000,000 and (2) each Forward Purchase Contract shall
terminate no later than eight (8) months after the effective date thereof.
`Forward Purchase Contract Broker' means any securities broker or
dealer that is a party to a Forward Purchase Contract."
(c) The definition of "Indebtedness" set forth in Section 1.01 of the
Credit Agreement is hereby amended by inserting the following sentence at the
end thereof:
"For purposes of this definition, the Company shall be deemed to have
Indebtedness at any time in respect of its obligations arising under each
Forward Purchase Contract in effect at such time in an amount equal to the
greater of (i) the Company's maximum aggregate liability at such time
(whether contingent or non-contingent) in respect of its obligations to
reimburse any Persons in respect of drawings made under letters of credit
or other Guarantees issued in connection with such Forward Purchase
Contract in favor of the Forward Purchase Contract Broker party thereto and
(ii) the excess, if any, of (x) the sum of the aggregate purchase price of
all shares of the Company's common stock purchased by such Forward Purchase
Contract Broker pursuant to such Forward Purchase Contract and all fees and
other carrying costs payable by the Company or any of its Subsidiaries to
such Forward Purchase Contract Broker pursuant to such Forward Purchase
Contract over (y) the sum of (A) the aggregate sales price of all common
stock of the Company sold by such Forward Purchase Contract Broker pursuant
to such Forward Purchase Contract and (B) the product of the aggregate
number of shares of the Company's common stock held at such time by such
Forward Purchase Contract Broker pursuant to such Forward Purchase Contract
multiplied by 90% of the average of the opening and closing prices of the
Company's common stock on the New York Stock Exchange on the day of
calculation."
<PAGE>
(d) Section 8.13 of the Credit Agreement is hereby amended by deleting the
figure "$50,000,000" therein and inserting in lieu thereof the figure
"$75,000,000".
3. Waivers. (a) The Banks hereby waive compliance with the last sentence of
Section 8.06 of the Credit Agreement solely to the extent necessary to permit
the sale by the Company or one or more of its Subsidiaries of all of the assets
or capital stock of Pennsylvania Life Insurance Company ("Penn Life"), Union
Bankers Insurance Company ("Union Bankers") and one or more of the Subsidiaries
of the Company listed on Schedule 1 hereto (together with Penn Life and Union
Bankers, the "Specified Companies"); provided that the foregoing waiver shall
not apply to any sale of the capital stock or other ownership interests of any
Subsidiary of the Company not listed on Schedule 1; provided, further, that the
Company and its Subsidiaries receive aggregate gross consideration for such sale
of not less than $425,000,000 (of which not less than $325,000,000 shall be in
the form of cash or cash equivalents); provided, further, that neither the
Company nor any or its Subsidiaries (other than the Specified Companies) shall
have conveyed, sold, leased, transferred or otherwise disposed (including by way
of dividends or other distributions) of any of its assets or business (other
than (i) immaterial dispositions in the ordinary course of business and (ii)
dividends and other distributions of assets to any Specified Company to the
extent such assets are transferred by way of dividend, distribution or other
payment to the Company or any of its Subsidiaries that is not a Specified
Company prior to the sale of such Specified Company) to, merged or consolidated
with, or made any Investment (other than immaterial Investments in the ordinary
course of business) in any Specified Company at any time from and including the
date hereof through and including the date of the sale of such Specified Company
by the Company and its Subsidiaries; provided, further, that, on the first
Business Day immediately following the date upon which either (i) Occidental
Life Insurance Company of North Carolina ("Occidental") and Professional
Insurance Corporation ("Professional") or (ii) Penn Life and Union Bankers cease
to be Subsidiaries of the Company, (x) the aggregate amount of the Commitments
under the Credit Agreement shall be automatically reduced (subject to Sections
2.04 and 4.02 of the Credit Agreement) by an amount equal to $75,000,000 (and
any notice required to be given pursuant to Section 2.04(i) and Section 4.05
regarding such reduction shall be deemed to have been given hereby) and (y) the
aggregate amount of all Loans outstanding under the Credit Agreement shall not
exceed the Commitments as so reduced; provided, further, that the parties hereto
acknowledge that the assets or capital stock of the Specified Companies so sold
and to which this waiver applies shall not be considered in determining
compliance with Section 8.06(b) in connection with any future sale, lease,
transfer or other disposition of Property by the Company or any of its
Subsidiaries.
(b) The Banks hereby waive compliance with Section 8.10 of the Credit
Agreement for the period (the "Waiver Period") from (x) the date hereof to (y)
the earlier of (i) December 31, 1998 and (ii) the first Business Day immediately
following the date upon which either (a) Occidental and Professional or (b) Penn
Life and Union Bankers cease to be Subsidiaries of the Company; provided that,
notwithstanding the foregoing, during such Waiver Period the Company shall not
permit the Leverage Ratio to exceed 42.5% at any time.
4. Fees. The Company agrees to pay, on April 17, 1998, a fee to each Bank
that executes this Amendment and Waiver on or before April 17, 1998, such fee to
be in an amount for each such Bank equal to 0.125% of such Bank's Commitment on
April 17, 1998. Such fees, once paid, shall not be refundable in whole or in
part.
5. Effective Date. The amendments and waivers provided for herein shall be
effective as of the date first written above, but shall not become effective as
of such date until this Amendment and Waiver has been executed by the Company,
the Majority Banks and the Administrative Agent.
6. Governing Law. This Amendment and Waiver shall be governed by, and
construed in accordance with, the law of the State of New York (without giving
effect to its choice of law principles).
7. Counterparts. This Amendment and Waiver may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment and Waiver
by signing any such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 and
Waiver to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /s/James P. McDermott
-------------------------------------
Name: James P. McDermott
Title: SVP
THE BANK OF NEW YORK, as
Administrative Agent and as a Bank
By: /s/Michael E. Murray
-------------------------------------
Name: Michael E. Murray
Title: Assistant Vice President
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By:
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
as a Managing Agent and as a Bank
By: /s/Erin Kaese
-------------------------------------
Name: Erin Kaese
Title: AVP
<PAGE>
NATIONSBANK, N.A., as a Managing Agent
and as a Bank
By: /s/J. Patrick Brockette
-------------------------------------
Name: J. Patrick Brockette
Title: Vice President
FLEET NATIONAL BANK, as a Co-Agent
and as a Bank
By: /s/J.A. Simpson by Carla Balesano
-------------------------------------
Name: Jeffrey A. Simpson
Title: Vice President
MELLON BANK, N.A., as a Co-Agent
and as a Bank
By:
Name:
Title:
BANK OF MONTREAL, as a Co-Agent
and as a Bank
By: /s/Daniel Neubert
-------------------------------------
Name: Daniel Neubert
Title:
CIBC INC., as a Co-Agent and as a Bank
By: /s/Gerald Girardi
-------------------------------------
Name: Gerald Girardi
Title: Executive Director
CIBC Oppenheimer Corp., as Agent
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH &
GRAND CAYMAN BRANCH, as a Co-Agent and as a Bank
By: /s/J. Curtin Beaudouin /s/Robert P. Donohue
------------------------------------------------
Name: J. Curtin Beaudouin Robert P. Donohue
Title: First Vice President Vice President
SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION
By: /s/Darryl J. Weaver
-------------------------------------
Name: Darryl J. Weaver
Title: First Vice President
BANK ONE, TEXAS N.A.
By: /s/Robert Humphreys
-------------------------------------
Name: Robert Humphreys
Title: Vice President
CORESTATES BANK, N.A.
By: /s/Verna R. Prentice
-------------------------------------
Name: Verna R. Prentice
Title: Vice Prsident
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By: /s/Gail M. Golightly
-------------------------------------
Name: Gail M. Golightly
Title: Senior Vice President
LTCB TRUST COMPANY
By:
Name:
Title:
ING (U.S.) CAPITAL CORPORATION
By: /s/T.D. Prangley
-------------------------------------
Name: T.D. Prangley
Title: Vice President
<PAGE>
Schedule 1
Specified Companies
Constitution Life Insurance Company
Marquette National Life Insurance Company
Pennsylvania Life Insurance Company Canada
Peninsular Life Insurance Company
PennCorp Life Insurance Company
California Sales Agency, Inc.
Kivex, Inc.
Mississippi Region Associates, Inc.
PennCorp Canada Marketing, Inc.
PennCorp Financial, Inc.
Midwest Region, Inc.
Midwest Region, Inc. of Colorado
Safe Drivers Agency Limited
Southeastern Region Associates, Inc.
United Silver Spring Associates, Inc.
Execution Copy
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 22nd day of May, 1998 (the "Effective Date"), by and
between PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"),
and James P. McDermott (the "Executive").
IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period commencing on
the Effective Date and ending on the 21st day of May, 2000 (the "Agreement
Term"). Concurrently with the execution of this Agreement, the parties hereto
are entering into an Executive Retention Agreement attached hereto as Exhibit A
(the "Retention Agreement"). All capitalized terms that are used but not defined
herein shall have the respective meanings ascribed to such terms in the
Retention Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed
by Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Throughout the Agreement Term, Executive shall
serve as Executive Vice President and the Chief Financial Officer of Company and
be responsible for the general management of the financial affairs of Company,
and serve as a member of Company's Operating Committee.
(b) Performance of Duties. Throughout the Agreement Term,
Executive shall faithfully and diligently
<PAGE>
perform Executive's duties in conformity with the directions of the Executive
Committee of the Board of Directors of Company ("Board"), consistent with his
position as an Executive Vice President and the Chief Financial Officer of
Company and as a member of Company's Operating Committee.
(c) Place of Performance. During the Agreement Term, Executive
shall be based at Company's principal executive offices in Bethesda, Maryland.
Company shall not request or require Executive to relocate his principal place
of employment outside of an 18 mile radius of Bethesda, Maryland.
3. Compensation and Benefits.
(a) Base Salary. Company agrees to pay to Executive a base
salary at the annual rate of $400,000, as increased from time to time by the
Board ("Base Salary"), payable in installments consistent with the Company's
payroll practices. For the remaining period of the Agreement Term beginning on
December 1, 1999 ("Remaining Term") the Base Salary shall be automatically
adjusted by multiplying the annual Base Salary in effect for the immediately
preceding month by a fraction, the numerator of which is the Consumer Price
Index for All Urban Consumers for the U.S. City Average published by the
Department of Labor ("CPI-U") as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
(b) Annual Incentive Award. Provided that Executive is still
employed by Company on the last day of each Bonus Period (as defined below), no
later than the April 15th following the end of each of the 1998 and 1999 Bonus
Periods and the 15th day after the end of the last Bonus Period, Company shall
pay a cash bonus to Executive for such Bonus Period equal to the Guaranteed
Bonus, plus any Target Bonus and Supplemental Bonus, that is payable for
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<PAGE>
such Bonus Period (together, "Incentive Bonuses"); provided, however, that all
Incentive Bonus amounts for the last Bonus Period (which is less than 12 full
months) shall be multiplied by the Pro-Rata Factor (as defined below). For
purposes of this Section 3(b):
(i) the "Guaranteed Bonus" shall be $200,000;
(ii) the "Target Bonus" shall be $200,000, and
shall be payable if the performance criteria set forth in Exhibit I
are achieved; and
(iii) the "Supplemental Bonus" shall be $200,000,
and shall be payable if the performance criteria set forth in Exhibit
II are achieved.
At the beginning of the Remaining Term, the Incentive Bonus amounts set forth
above shall be automatically adjusted for the then current Bonus Period by
multiplying the Incentive Bonus amounts set forth above by a fraction, the
numerator of which is the CPI-U as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
A "Bonus Period" shall be each of the following periods: (i)
the full 1998 calendar year (which is also Company's fiscal year); (ii) the full
1999 calendar year; and (iii) the period beginning January 1, 2000 and ending on
the date of expiration of the Agreement Term.
The "Pro-Rata Factor" for the last Bonus Period (which is less
than 12 full months) shall mean a fraction, the numerator of which is the number
of calendar days in such Bonus Period, and the denominator of which is 365.
(c) Long-Term Incentive Award. As soon as practicable after
the Effective Date, Company shall grant to
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<PAGE>
Executive a phantom stock award ("Stock Award") that entitles Executive to
receive, at the end of the Agreement Term, an amount equal to the excess of (i)
the Fair Market Value (as defined below) of 450,000 shares of Common Stock of
Company ("Stock") as of the Stock Award Termination Date (as defined below),
over (ii) the Fair Market Value of the Stock as of the date of execution of this
Agreement (as defined below). The Stock Award shall be payable at the Stock
Award Settlement Date (as defined below) in cash or shares of Stock (subject to
applicable tax withholding and, only if the Stock Award is to be paid in shares
of Stock, subject to stockholder approval no later than the 1999 annual meeting
of stockholders of Company), as elected by Executive; provided, however, that
the Stock Award shall be forfeited if Executive has voluntarily terminated his
employment with Company without Good Reason, or Company has terminated
Executive's employment with Company for Cause, before the end of the Agreement
Term.
The number of shares of Stock subject to the Stock Award shall
be adjusted appropriately to reflect each change (if any) in the outstanding
Stock by reason of a stock dividend or distribution, recapitalization, merger,
consolidation, reorganization, stock split, reverse stock split, share
combination, share exchange, or any other change in capital structure of or by
the Company.
The "Stock Award Termination Date" shall mean the earliest of
(A) the last day of the Agreement Term, (B) the date of a Change in Control
after which shares of the Stock are or will be no longer traded on the New York
Stock Exchange (a "Trading-Ending Change in Control"), or (C) the date
immediately preceding the date, upon or after the termination of Executive's
employment under this Agreement other than by Company for Cause or by Executive
without Good Reason, on which Company receives written notice from Executive of
final valuation of the Stock Award (the "Valuation Notice Date").
4
<PAGE>
Fair Market Value" shall mean:
(i) "as of the date of execution of this Agreement,"
the price for a share of Stock paid by Securitas Capital, LLC and Risk
Capital Reinsurance in a pending private placement of Stock by Company
or if, for any reason, that placement is not consummated, the price
agreed upon by Company and Executive; and
(ii) on the last day of the Agreement Term or on the
Valuation Notice Date, the average of the closing prices of a share of
Stock, as reported on the New York Stock Exchange for the ten trading
days ending on the last day of the Agreement Term or on the Valuation
Notice Date, as the case may be (or if such day is not a trading day,
on the preceding trading day).
In the event of a Trading-Ending Change in Control, however, instead of the
definition in the preceding clause (ii), "Fair Market Value" shall mean the
highest per share consideration (as cash or, if not as cash, the cash or fair
market value thereof) received for a share of Stock in the Trading-Ending Change
in Control transaction.
The "Stock Award Settlement Date" means, as applicable, the
last day of the Agreement Term, the date of a Trading-Ending Change in Control,
or 15 days after the Valuation Notice Date.
(d) Expiration Payments and Benefits. At the expiration
of the Agreement Term (regardless of any then existing circumstance addressed by
the Retention Agreement that may be inconsistent herewith), if Executive has not
voluntarily terminated his employment with Company without Good Reason and
Company has not terminated Executive's employment with Company for Cause,
Executive shall, in addition to the compensation provided elsewhere in this
5
<PAGE>
Agreement, be entitled to the payments and benefits provided in Section 3.1 of
the Retention Agreement, which shall be determined and paid as if Executive's
employment with Company had been terminated by Executive for Good Reason or by
Company without Cause, regardless of whether any such termination has occurred
("Expiration Pay"); provided, however, that no Expiration Pay shall be provided
or payable hereunder if Executive has otherwise become entitled to and has
received (i.e., under Section 8(b) of this Agreement or the terms of the
Retention Agreement) the payments and benefits provided in Section 3.1 of the
Retention Agreement.
If Executive is still employed at the end of the Agreement
Term, or upon any termination of employment other than a termination by Company
for Cause or by Executive without Good Reason, the outstanding principal
balance, together with any accrued and unpaid interest thereon, that is owed to
Company by Executive under the three loans to Executive in the form of
Promissory Notes dated September 8, 1998, January 27, 1995 and March 5, 1998,
shall be forgiven and waived by Company, and Company shall deliver to Executive
the original Promissory Notes marked "paid" (or with another mark indicating
evidence of payment in full), and Executive shall receive an additional payment
from Company in an amount such that, after payment by Executive of all taxes
imposed upon Executive as a result of such loan forgiveness (and such additional
payment), Executive will retain a net after-tax benefit that is equal to the
amount of such loan forgiveness.
4. Employee Benefit Programs.
During the Agreement Term, but not after an earlier
termination of employment (except as stated in the Retention Agreement),
Executive shall be entitled to participate in all employee pension and welfare
benefit plans and programs made available to the senior-level executives of
Company or to its employees generally, as such
6
<PAGE>
plans or programs may be in effect from time to time, including, without
limitation, pension, profit sharing, savings and other retirement plans or
programs, medical, dental, hospitalization, short-term and long-term disability
and life insurance plans, accidental death and dismemberment protection, travel
accident insurance, and any plans that supplement the above-listed types of
plans or programs, whether funded or unfunded.
5. Reimbursement of Business and Other Expenses.
Executive is authorized to incur reasonable travel and
business expenses that are consistent with his position and incurred in carrying
out his duties and responsibilities under this Agreement, and Company shall
promptly reimburse him for all such travel and business expenses incurred in
connection with carrying out the business of the Company, subject to reasonable
documentation in accordance with the reasonable policies of Company.
6. Perquisites.
During the Agreement Term, Executive shall be entitled to
participate in all of Company's executive fringe benefits in accordance with the
terms and conditions of such arrangements as are in effect from time to time for
the senior-level executives of Company. Executive is also entitled to
reimbursement from Company of up to $5,000 for each of calendar years 1998,
1999, and 2000 (without proration) for tax, financial planning, and other
professional services.
7. Vacation.
Executive shall be entitled to 6 weeks' paid vacation each
calendar year, which vacation shall be earned on a pro-rata basis for each day
during the calendar year that Executive is employed by Company. In the event
7
<PAGE>
that Executive does not use all of his vacation time during an applicable
calendar year, he shall be entitled to carry forward such unused vacation time;
provided, however, that only four weeks of unused vacation time (including all
previously carried forward unused vacation time) may be carried forward from any
one calendar year to the next calendar year. Company shall pay Executive any
earned and unused vacation at the end of the Agreement Term or, if earlier, upon
the termination of Executive's employment.
8. Termination of Employment. (a) Executive may terminate his
employment with Company for any (or no) reason, and any termination of
employment by Executive shall not be deemed a breach of this Agreement. Company
may also terminate Executive's employment with Company prior to the expiration
of the Agreement Term.
(b) If Executive terminates his employment with Company for
Good Reason, or if Company terminates Executive's employment with Company
without Cause, Executive shall be entitled to any payments and benefits provided
pursuant to the terms of the Retention Agreement in addition to (but without
duplication) any amounts to be paid or provided to Executive under the terms of
this Agreement. If Executive terminates his employment with Company without Good
Reason, or if Company terminates Executive's employment for Cause, then Company
shall pay to Executive, within 30 days of the date of such termination, only (i)
the Base Salary and any earned and unused vacation accrued through the date of
such termination, and (ii) any expenses that have not been reimbursed in
accordance with Section 5 herein.
(c) In the event of any termination of employment under this
Section 8, Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due to Executive under this Agreement
on account of any remuneration attributable to any subsequent
8
<PAGE>
employment (including, without limitation, any self- employment) that he may
obtain.
9. Confidentiality; Assignment of Rights.
(a) During the Agreement Term and thereafter, Executive shall
not disclose to anyone or make use of any trade secret or proprietary or
confidential information of Company, including such trade secret or proprietary
or confidential information of any customer or other entity to which Company
owes an obligation not to disclose such information, which he acquires during
the Agreement Term, including but not limited to records kept in the ordinary
course of business, except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of Company or (ii) when
required to do so by a court of law, by any governmental agency or authority
having supervisory authority over the business of Company or by any governmental
agency or authority or administrative or legislative body (including a committee
thereof) with apparent jurisdiction to order him to divulge, disclose or make
accessible such information.
(b) Executive hereby sells, assigns and transfers to Company
all of his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "Rights") which during his
employment by Company are made or conceived by him, alone or with others
and which are within or arise out of any general field of Company's business or
arise out of any work he performs or information he receives regarding the
business of Company while employed by Company. During his employment by Company,
Executive shall fully disclose to Company as promptly as available all
information known or possessed by him concerning the rights referred to in the
preceding sentence, and upon request by Company and without any further
remuneration in any form to him by Company, but at the expense of Company,
execute all applications for patents
9
<PAGE>
and for copyright registration, assignments thereof and other instruments and do
all things which Company may deem necessary to vest and maintain in it the
entire right, title and interest in and to all such Rights.
10. Noncompetition; Nonsolicitation.
(a) Executive covenants and agrees that he shall not directly
or indirectly engage in a Competitive Activity (as defined below) while employed
by Company hereunder.
"Competitive Activity" shall mean any activity engaged in by
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with Company. For this purpose, an
activity "which is competitive with Company" shall mean a business that is
primarily involved in the acquisition of life insurance companies.
(b) Executive covenants and agrees that he shall not directly
or indirectly solicit Company's or any of its subsidiaries' (i) employees during
the 18-month period following the date of the termination of his employment by
Company hereunder and (ii) agents, brokers and/or policyholders during the
Agreement Term.
(c) The parties acknowledge that in the event of a breach of
Sections 10(a) or (b) above, Company shall not have an adequate remedy at law.
Accordingly, in the event of any breach of Sections 10(a) or (b) above, Company
shall be entitled to such equitable and injunctive relief as may be available to
restrain Executive and any business, firm, partnership, individual, corporation
or entity participating in the breach from the violation of the provisions of
Sections 10(a) or (b) above. Nothing in this Agreement shall be construed as
prohibiting Company from pursuing any
10
<PAGE>
other remedies available at law or in equity for breach of Sections 10(a) or
10(b) above, including the recovery of damages.
11. Indemnification.
(a) Company agrees that if Executive is or becomes a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether brought by or in the right of the Company or otherwise
("Proceeding"), by reason of the fact that (whether before or after the
Effective Date) he is or was a director, officer or employee of Company or is or
was serving at the request of Company as a director, officer, member, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including (without limitation) service with respect to employee
benefit plans, whether or not the basis of such Proceeding is Executive's
alleged action in an official capacity while serving as a director, officer,
member, employee or agent, Executive shall be indemnified and held harmless by
Company to the fullest extent legally permitted or authorized by Company's
certificate or articles of incorporation or bylaws (or other applicable
governing documents) or resolutions of the Board (or other applicable governing
body) or the stockholders of Company or, if greater, by the laws of the State of
Delaware or any other applicable state of organization or formation, against all
cost, expense, liability and loss (including, without limitation, attorneys'
fees, judgments, costs of appeal, fines, ERISA excise taxes or penalties and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
Executive in connection therewith, and such indemnification shall continue as to
Executive even if he has ceased to be a director, member, employee or agent of
Company or other entity and shall inure to the benefit of Executive's heirs,
executors and administrators. In this Section 11, (i) each
11
<PAGE>
reference to "Company" (other than for the purpose of any notice) shall include,
without limitation, all entities that are subsidiaries and affiliates of
Company, and (ii) all obligations of Company shall be joint and several as to
all entities included in such definition of "Company." Company shall pay or
provide such indemnification to Executive in connection with a Proceeding within
60 days after written request by Executive for that indemnification. During that
60-day period, Executive shall have an opportunity to be heard and to present
evidence in connection with the consideration by the board of directors,
independent legal counsel, or stockholders, as the case may be, of any findings
required by applicable law in connection with that indemnification request.
Company shall also advance to Executive all reasonable costs and expenses
incurred by him (including, without limitation, all reasonable fees and costs of
counsel selected by Executive, and all other indemnifiable liabilities covered
by this paragraph (a)) in connection with a Proceeding within 30 days after
written request by Executive for such advance. Such request shall include an
undertaking by Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses. In the event Company does not properly indemnify or advance
expenses to Executive in accordance with the terms of this paragraph (a)
(including, without limitation, the time period set forth above), Executive
shall be entitled to bring an action or proceeding against Company in any state
or federal court in Montgomery County, Maryland, in accordance with Section 19
hereof, or before a panel of arbitrators in accordance with Section 20 hereof,
to enforce Company's indemnification or expense-advancement obligations, and (in
either case) Executive shall be reimbursed by Company for the reasonable costs
and expenses (including, without limitation, reasonable attorneys fees and
costs) of any successful enforcement of Company's indemnification or
expense-advancement obligations.
12
<PAGE>
(b) Neither the failure of Company (including, without
limitation, its board of directors, independent legal counsel or stockholders)
to have made any determination that indemnification of Executive is proper
because he has met the applicable standard of conduct, nor a determination by
Company (including, without limitation, its board of directors, independent
legal counsel or stockholders) that Executive has not met such applicable
standard of conduct, shall create a presumption that Executive has not met the
applicable standard of conduct or shall be a defense to any action or proceeding
to enforce Company's indemnification or expense-advancement obligations. Company
shall have the burden of proof in establishing that Executive has not met the
applicable standard of conduct. The termination of any Proceeding by judgment,
court order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Executive did not
meet the applicable standard of conduct. Where Executive is entitled to
indemnification under this Section 11 for a portion of the indemnifiable
liabilities described in paragraph (a) of this Section 11, but not for the total
amount of liabilities of that kind, Company shall nevertheless indemnify
Executive for such portion of the indemnifiable liabilities to which Executive
is entitled.
(c) Executive's rights provided in this Section 11 shall not
be exclusive of any other rights of indemnification or advancement of expenses
(or any similar rights) that Executive may have against Company or under any
liability insurance covering Executive.
(d) Company agrees to continue and maintain one or more
directors' and officers' liability insurance policies that cover Executive (with
reputable and financially sound insurers) at a level that is commercially
reasonable (in light of Company's business and the risks of litigation or
claims) and not less than the level of
13
<PAGE>
coverage provided as of the Effective Date, and otherwise to the fullest extent
Company provides such coverage for any of its other executive officers.
(e) Without limiting the generality of Section 17 hereof, the
rights of indemnity and advancement of expenses in favor of Executive in this
Section 11 shall continue and survive any expiration or termination of this
Agreement or Executive's ceasing to be a director, officer, or employee of
Company.
12. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors, heirs (in the case of Executive)
and permitted assigns. No rights or obligations of Company under this Agreement
may be assigned or transferred by Company (including, without limitation, by
merger, consolidation, or other operation of law) except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which Company is not the continuing or surviving entity, or the sale or
liquidation of all or substantially all of the assets of Company, to one or more
entities that have the financial and other ability to perform Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of Company
and such assignee or transferee assumes the liabilities, obligations and duties
of Company under this Agreement, either contractually or as a matter of
law. No rights or obligations of Executive under this Agreement may be assigned
or transferred by Executive other than his rights to compensation and benefits,
which may be transferred only by will or operation of law, except as provided in
Section 18 below.
14
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13. Representation.
Company represents and warrants that it is fully authorized
and empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. Executive represents that he knows of no
agreement between him and any other person, firm or organization that would be
violated by the performance of his obligations under this Agreement.
14. Entire Agreement.
This Agreement and the Retention Agreement contain the entire
understanding and agreement between the parties concerning the subject matter
hereof and supersede all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the parties with
respect thereto. Nothing in this Agreement impairs or otherwise adversely
affects any of Executive's rights to or under any stock option or restricted
stock agreements with Company (or any of its subsidiaries or affiliates) in
effect on the Effective Date.
15. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of Company (other than Executive), as the case may be.
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16. Severability.
In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable
for any reason, in whole or in part, the remaining provisions of this Agreement
shall be unaffected thereby and shall remain in full force and effect to the
fullest extent permitted by law.
17. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term to the extent necessary to the intended preservation of such
rights and obligations.
18. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
19. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Maryland without reference to
principles of conflict of laws. Jurisdiction and venue of any action or
proceeding relating to this Agreement shall be exclusively in state or federal
courts in Montgomery County, Maryland.
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20. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement (other than injunctive or equitable relief sought to enforce Sections
9 or 10 hereof, or any enforcement of Executive's rights under Section 11, which
may (if Executive so elects) be brought in any court having jurisdiction in
accordance with this Agreement) shall, at the election of Executive or Company,
be resolved by binding arbitration in accordance with the terms and procedures
provided in Section 5.1 of the Retention Agreement.
21. Notices.
Any notice given to a party shall be in writing and shall be
deemed to have been given when delivered personally or by courier, or upon
receipt if sent by certified or registered mail, postage prepaid, return receipt
requested, duly addressed to the party concerned at the address indicated below
or to such changed address as such party may subsequently give such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
If to Executive: James P. McDermott
3 Bethesda Metro Center
Bethesda, Maryland 20814
22. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed
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to control or affect the meaning or construction of any provision of this
Agreement.
23. Counterparts.
This Agreement may be executed in two or more counterparts.
18
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IN WITNESS WHEREOF, the undersigned have executed this
Agreement on this 23rd day of July, 1998.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/James P. McDermott
-------------------------------------
James P. McDermott
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Execution Copy
Executive Retention Agreement
THIS AGREEMENT is entered into as of this 22nd day of May,
1998 ("Effective Date"), by and between PENNCORP FINANCIAL GROUP, INC., a
Delaware corporation ("Company") and James P. McDermott ("Executive").
A. The Board of Directors of the Company desires to assure
that key executives will devote their undivided time and attention to the
Company without regard to concerns about an involuntary loss of employment
without cause, and to assure the continuity and cooperation of management in the
event of a change in ownership and the continued attention of Executive to his
duties without any distraction arising out of the circumstances surrounding a
change or potential change in ownership.
B. The Company and Executive desire to enter into an executive
retention arrangement to protect Executive against an involuntary termination of
employment without cause, to recognize the additional efforts of Executive that
may be necessary to assist in and prepare for any potential change in ownership,
and to encourage Executive to diligently perform his duties and responsibilities
to ensure a smooth transition for any such change in ownership.
C. The Company and Executive have entered an Executive
Employment Agreement dated to be effective as of the Effective Date (the
"Employment Agreement"), which refers to and otherwise contemplates this
Agreement.
For good and valuable consideration, including the mutual
covenants herein, the parties hereto agree as follows:
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1. Definitions. The following terms shall have
the following meanings for purposes of this Agreement.
"Annual Pay" means:
(1) for any termination of employment on or prior to the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement, $1,000,000; and
(2) for any termination of employment after the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement and prior to the expiration of the Agreement Term (as
defined in the Employment Agreement), the sum of:
(i) the annual rate of Base Salary (as defined in the
Employment Agreement) payable to the Executive immediately before the
termination, plus
(ii) an amount equal to the product of the annual rate of Base
Salary times a percentage determined as follows -
(A) for a termination occurring during the 1999 calendar year
and after the first anniversary of Executive's employment
under the Employment Agreement, the percentage equal to the
percentage of the annual rate of Base Salary that was paid (or
payable) to Executive as the Incentive Bonuses (as defined in
the Employment Agreement) for the Bonus Period (as defined in
the Employment Agreement) ended on December 31, 1998, and
(B) for a termination occurring during the 2000 calendar year,
the percentage equal to the percentage of the annual rate of
Base Salary that
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is the average of the Incentive Bonuses for the Bonus Period
ended on December 31, 1998, and the Incentive Bonuses for
the Bonus Period ended December 31, 1999.
"Cause" means:
(1) for any termination prior to the earlier of a Change in
Control or a Potential Change in Control, (i) a material and demonstrable
adverse change after the Effective Date in the Executive's performance of his
duties and responsibilities in effect as of the Effective Date, other than any
changes in performance by reason of sickness or disability of the Executive and
any changes in Executive's duties and responsibilities made after the Effective
Date, (ii) willful misconduct or gross negligence in the performance of, or
willful neglect of, the Executive's duties, which has caused demonstrable and
serious injury (monetary or otherwise) to the Company, (iii) conviction (after
exhaustion or expiration of all rights of appeal) of
the Executive of a criminal violation involving fraud, embezzlement or theft in
connection with his duties or in the course of his employment with the Company,
(iv) conviction (after exhaustion or expiration of all rights of appeal) of, or
plea of nolo contendere to, a felony (excluding a traffic violation) by the
Executive or (v) Executive's willful inattention to or willful lack of diligence
in attempting to achieve, as part of the performance of his duties under the
Employment Agreement, his performance goals set forth in Exhibit I and Exhibit
II to the Employment Agreement; and
(2) for any termination on or after a Change in Control or
Potential Change in Control, the Executive's (i) conviction (after exhaustion or
expiration of all rights of appeal) of a criminal violation involving fraud,
embezzlement or theft in connection with his duties or in the course of his
employment with the Company, (ii)
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conviction (after exhaustion or expiration of all rights of appeal) of, or plea
of nolo contendere to, a felony (excluding a traffic violation).
No act or omission shall be considered "willful" if the Executive believed in
good faith that such acts or omissions were in, or at least not opposed to, the
best interests of the Company.
No act or omission shall constitute Cause unless the Board of Directors of the
Company provides to the Executive (a) written notice clearly and fully
describing the particular acts or omissions which the Board reasonably believes
in good faith constitutes Cause and (b) an opportunity, within 30 days following
his receipt of such notice, to meet in person with the Board of Directors to
explain or defend the alleged acts or omissions relied upon by the Board and, to
the extent practicable, to cure such acts or omissions. Executive shall further
have the right to contest a determination of Cause by the Company by requesting
arbitration on an expedited basis in accordance with the terms of Section 5.1
hereof.
"Change in Control" means (1) any "person" (as such term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes the "beneficial owner" (as determined pursuant to Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities; or (2) during any period of
two (2) consecutive years (not including any period prior to the execution of
this Agreement), individuals who at the beginning of such period constitute the
members of the Company's Board of Directors (the "Board") and any new director,
whose election to the Board or nomination for election to the Board by the
Company's stockholders was approved by a vote of at least two-thirds
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(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of the
Board; or (3) the Company shall merge with or consolidate into any other
corporation, other than a merger or consolidation which would result in the
holders of the voting securities of the Company outstanding immediately prior
thereto holding immediately thereafter securities representing more than sixty
percent (60%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or (4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets or such a plan is
commenced.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Good Reason" means any of the following events occurring,
without Executive's prior written consent specifically referring to this
Agreement:
(1) (A) any reduction in the amount of Executive's annual
salary, guaranteed incentive compensation or aggregate
incentive compensation opportunities (which reduction may also
occur pursuant to any assignment of performance goals and
corresponding awards which are inconsistent with prior
performance goals and awards), (B) any significant reduction
in the aggregate value of Executive's benefits as such
benefits may be increased from time to time (unless such
reduction is pursuant to a general change in benefits
applicable to all similarly situated employees of the Company
and its affiliates) or (C) any
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material and willful breach by the Company of any provision
of this agreement or any written employment agreement with
Executive;
(2) (A) assignment to Executive of any duties inconsistent
with his status as Chief Financial Officer of the Company
and as a member of the Company's Operating Committee, (B)
the removal of Executive from his position as Chief
Financial Officer of the Company or as a member of the
Company's Operating Committee, (C) the failure to retain
Executive as the Chief Financial Officer and as a member of
the Operating Committee of any successor to the Company
(whether by merger, consolidation or sale or disposition of
all or substantially all of the assets of the Company) or
any entity which directly or indirectly owns twenty five
percent (25%) or more of any class of securities of the
Company or any successor to the Company (whether by merger,
consolidation or sale or disposition of all or substantially
all of the assets of the Company) or (D) any significant
change in the nature or status of Executive's duties or
responsibilities;
(3) a significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or
duties attached to the Executive's positions with the
Company;
(4) (A) transfer of Executive's principal place of
employment to a location more than 18 miles away from
Bethesda, Maryland or (B) Executive is required to travel
outside of the continental United States more than four
times during any calendar year or for more than 10 days in
the aggregate in any calendar year;
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(5) failure by the Company to obtain the assumption agreement
referred to in Section 12 of the Employment Agreement or
Section 8 of this Agreement prior to the effectiveness of any
succession referred to therein, unless the purchaser,
successor or assignee referred to therein is bound to perform
this Agreement by operation of law; or
(6) the Executive receives notice from any party to an
agreement (or its representative) which contemplates a Change
in Control that, on or after
such Change in Control, an event will occur that will
constitute Good Reason as described in (1) through (5) above.
Notwithstanding the above, (i) the occurrence of any of the events described in
(1) through (5) above will not constitute Good Reason unless the Executive gives
the Company written notice, within 90 calendar days after the Executive knew or
should have known of the occurrence of any of the events described in (1)
through (5) above, that such event constitutes Good Reason, and the Company
thereafter fails to cure the event within the earlier of (x) the closing for a
Change in Control or (y) thirty (30) days after receipt of such notice, and (ii)
the receipt of notice described in (6) above will not constitute Good Reason
until a Change in Control actually occurs and will otherwise not constitute Good
Reason if the Executive is provided reasonable assurances by the Company prior
to such Change in Control that an event described in (1) through (5) above is
not contemplated on or after a Change in Control; provided, however, that any
such assurances shall not impair or otherwise affect any of Executive's rights
upon the occurrence of any Change in Control described in (1) through (5) above
or if there is any termination of Executive's employment by Company other than
for Cause or by Executive with Good Reason.
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"Potential Change in Control" means the occurrence of active
discussions between the Company and a potential purchaser of the Company that
contemplates a transaction which would result in a Change in Control, but only
if a Change in Control results within twelve months following such occurrence.
2. Term. The term of this Agreement commences on
the Effective Date and expires upon the earliest to occur of
the following:
(a) the expiration of the Agreement Term,
(b) the Executive's death, or
(c) the Executive's disability (within the meaning of the
long-term disability plan in effect for and
applicable to the Executive).
Any obligations of the Company under this Agreement or the Employment Agreement
that arise, become effective, or accrue on, as of or before the expiration of
the Agreement Term or that arise, become effective, or accrue upon the death or
disability of the Executive (even if, in any case, they are performable after
the end of the Agreement or the death or disability of the Executive), however,
shall survive the expiration or termination of this Agreement.
3. Involuntary Termination Payment and Benefits
3.1 Involuntary Termination. In the event either (i)
Executive's employment with the Company or its successor is terminated by
Executive for Good Reason, (ii) the Executive's employment with the Company or
its successor is terminated by the Company or its successor without Cause, or
(iii) Executive's employment with the Company or its successor is terminated by
reason of his death
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or disability, Executive shall be entitled to the following payments and other
benefits:
a. An amount equal to the sum of (i) Executive's accrued and
unpaid Base Salary and earned but unused vacation and personal
days as of the date of termination of employment and any
expenses that have not yet been reimbursed by Company under
the Employment Agreement; plus (ii) his accrued and unpaid
Incentive Bonuses, if any, for the prior Bonus Period, plus
(iii) a pro rated portion of the annual Incentive Bonuses for
the Special Bonus Period (as defined below) in which the
Executive's termination occurs. For purpose of clause (iii),
(A) the proration shall be calculated by applying the Pro Rata
Factor (as defined in the Employment Agreement); (B) the
"Special Bonus Period" shall mean (1) the Effective Date
through the first anniversary of Executive's employment under
the Employment Agreement, (2) the date following the first
anniversary of Executive's employment under the Employment
Agreement through December 31, 1999, and (3) January 1, 2000
through the last day of the Agreement Term; and (C) the annual
Incentive Bonuses for each Special Bonus Period shall be (1)
for the first Special Bonus period, an amount equal to
$600,000 less any amount already paid to Executive as the
Incentive Bonus(es) for the 1998 calendar year, (2) for the
second Special Bonus period, an amount equal to the amount of
the Incentive Bonus(es) paid (or payable) to Executive for the
1998 calendar year, and (3)for the third Special Bonus Period,
an amount equal to the average of the Incentive Bonus(es)
paid (or payable) to Executive for the 1998 calendar year and
the 1999 calendar year.
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The amount described in clause (i) above shall be paid on the
date of the termination of Executive's employment, and the
amount or amounts described in clauses (ii) and (iii) above
shall be paid on the earlier of the date of the Executive's
termination of employment or the respective date that
Incentive Bonuses are otherwise payable under the Employment
Agreement.
b. Subject to Section 3.2 below, (i) in the case of
termination by Executive for Good Reason or by Company without
Cause, an amount equal to three times Executive's Annual Pay
or (ii) in the case of a termination for death or disability,
an amount equal to one and one-half times Executive's Annual
Pay (as the case may be, "Termination Pay"). Termination Pay
shall be paid on the earlier of (i) within ten (10) days after
the Company's delivery of written notice to the Executive of
termination of his employment without Cause or because of his
disability, (ii) within thirty (30) days after the Executive's
delivery of written notice to the Company of his resignation
for Good Reason (unless cured), (iii) the date on which a
Change in Control occurs or (iv) within thirty (30) days after
the Executive's death (the "Payment Date").
c. Notwithstanding the language of any other agreement or
document to the contrary, all unexercisable options to
purchase shares of stock of the Company or of any entity
affiliated with the Company that are held by the Executive
shall become fully vested and immediately exercisable (and
shall remain exercisable until the expiration of the full term
of those options).
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d. All restricted stock of the Company and any other
equity-based rights (including, without limitation, phantom
stock) held by the Executive shall become fully vested and all
restrictions thereon shall lapse.
e. A lump sum payment on the Payment Date equal to the
Executive's unvested accrued benefit under any tax-qualified
retirement plan sponsored by the Company.
f. Executive and his eligible dependents shall be entitled,
for a period of three (3) years following the date of
termination of employment, to continued coverage, at the cost
of the Company, under the Company's group health, dental and
life insurance plans as in effect from time to time (but not
any other welfare benefit plans or any retirement plans);
provided that coverage under any particular benefit plan shall
expire with respect to the period after Executive becomes
covered under another employer's plan providing for a similar
type of benefit. In the event the Company is unable to provide
such coverage on account of any limitations under the terms of
any applicable contract with an insurance carrier or third
party administrator, the Company shall pay Executive an amount
equal to the cost of such coverage.
Except as provided in Section 3.2 below, the foregoing
payments and benefits shall be in addition to and not in lieu of any payments or
benefits to which Executive and his dependents may otherwise be entitled to
under the Company's compensation and employee benefit plans, policies or
practices. Nothing herein shall be deemed to restrict the right of the Company
from amending or terminating any such plan in a manner generally applicable to
similarly
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situated active employees of the Company and its affiliates, in which event
Executive shall be entitled to participate on the same basis (but at the cost of
the Company) as similarly situated active executives of the Company and its
affiliates; provided, however, that no such amendment or termination shall
impair or otherwise affect the Executive's rights or remedies under this
Agreement or the Employment Agreement.
3.2 Offset for Other Severance Pay. There shall be no
duplication of severance pay in any manner, in that Executive shall not be
entitled to Termination Pay hereunder for more than one position with the
Company. Further, Termination Pay shall be in lieu of any other payments in the
nature of severance pay which Executive has received or will receive from the
Company (excluding phantom stock awards payable under the Employment Agreement
or any other amounts payable under Section 3.1 hereof). If Executive is entitled
to Termination Pay, any other arrangement providing severance payments (except
for phantom stock awards under the Employment Agreement and amounts under
Section 3.1 hereof) shall be deemed to be amended to eliminate any obligation
for such payments to be provided thereunder to Executive. If Executive is
entitled to any payment in lieu of notice of termination of employment under
Federal, state or local law, including but not limited to the Worker Adjustment
and Retraining Notification Act, the Termination Pay to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment in lieu of notice.
3.3 Transition Services. If Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason in
connection with or at the time of a Purchase (as defined below) and the
purchaser under the Purchase specifically requests the continued services of
Executive after the closing of the Purchase, then, notwithstanding the
termination without Cause or for
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Good Reason -- which shall be deemed to have occurred for all purposes of the
Employment Agreement and this Agreement -- Executive will perform the requested
transition services to the extent set forth below in this Section. In this
Section, "Purchase" means a purchase of all or substantially all of the equity
securities or assets of the Company that is negotiated with the Board of
Directors of the Company by or on behalf of a purchaser. Executive will perform
those transition services for up to (i) six months following the closing of the
Purchase, or (ii) the expiration of the Agreement Term as defined in the
Employment Agreement, whichever is earlier (the "Transition Period").
Executive's rendering those services will be conditioned, however, upon his
receipt of (A) all payments and benefits due to Executive under the Employment
Agreement and this Agreement, including (without limitation) all amounts due
because of the termination without Cause or for Good Reason, and (B)
compensation and benefits for his services during the Transition Period that are
no less than the compensation and benefits to which he was entitled from the
Company under the Employment Agreement and this Agreement before the Transition
Period. Neither Executive's performance of the transition services described in
this Section nor any other provisions of this Section shall be deemed to impair
or affect any of the rights or remedies of Executive under the Employment
Agreement or this Agreement as a result of a Change in Control or a termination
without Cause or for Good Reason.
3.4. No Mitigation. The Executive shall not be obligated to
seek or secure new employment or to become self-employed after termination of
his employment with Company, but shall be obligated to report promptly to the
Company any actual employment obtained during the period for which employee
benefits continue pursuant to Section 3.1. Except as expressly stated in Section
3.1.f of this Agreement, there shall be no offset against any amounts due to
Executive under this Agreement on account of any
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remuneration or benefits attributable to any subsequent employment (including,
without limitation, any self- employment) that he may obtain.
4. Excise Taxes.
a. Anything in this Agreement to the contrary
notwithstanding and except as set forth below, if it is determined that any
payment or distribution by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 4) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are
incurred by Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then Executive shall be entitled to receive an additional
payment ("Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this
paragraph "a", if it is determined that Executive is entitled to a Gross-Up
Payment, but that Executive, after taking into account the Payments and Gross-Up
Payment, would not receive a net after-tax benefit of at least $25,000 (taking
into account both income taxes and any Excise Tax) as compared to the net
after-tax proceeds to Executive resulting from an elimination of the Gross-Up
Payment and a reduction of the Payments, in the aggregate, to an amount (the
"Reduced Amount") such that the receipt of Payments would not give rise to any
Excise Tax, then no Gross-Up Payment shall be made to Executive and the
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Payments, in the aggregate, shall be reduced to the Reduced Amount.
b. Subject to the provisions of paragraph "c" of this Section
4, all determinations required to be made under this Section 4, including
(without limitation) whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be used in arriving at
such determination, shall be made by a certified public accounting firm selected
by the Company and reasonably acceptable to Executive (the "Accounting Firm"),
which shall be retained to provide detailed supporting calculations both to the
Company and Executive within 15 business days of the receipt of notice from
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be paid solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4,
shall be paid by the Company to Executive within five (5) days of the receipt of
the Accounting Firm's determination. Any determination by the Accounting Firm
shall be binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph "c" of
this Section 4 and Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
c. Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
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as practicable but no later than ten (10) business days after Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid or appealed.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies Executive in writing prior to the expiration of
such period that it desires to contest such claim, Executive shall:
(a) give the Company any information reasonably
requested by the Company relating to such
claim,
(b) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney selected by the
Company and reasonably acceptable to
Executive,
(c) cooperate with the Company in good faith in order to
effectively contest such claim, and
(d) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including,
without limitation, interest and penalties with respect thereto) imposed as a
result of
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such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph "c", the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or to contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax or income tax (including, without limitation, interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder, and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
d. If, after the receipt by Executive of an amount advanced by
the Company pursuant to paragraph "c" of this Section 4, Executive becomes
entitled to receive any refund with respect to such claim, Executive shall
(subject to the Company's complying with the requirements of paragraph "c" of
this Section 4) promptly pay to the Company
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the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If after the receipt by Executive of an amount
advanced by the Company pursuant to paragraph "c" of this Section 4, a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
5. Claims.
5.1 Arbitration of Claims. Company and Executive agree to
settle by arbitration any dispute or controversy arising in connection with this
Agreement, whether or not such dispute involves a plan subject to the Employee
Retirement Income Security of 1974, as amended ("ERISA"). Such arbitration shall
be conducted on an expedited basis in accordance with the Commercial Arbitration
Rules of the American Arbitration Association before a panel of three
arbitrators, selected by the American Arbitration Association, sitting in
Bethesda, Maryland. The award of the arbitrators shall be final and
nonappealable, and judgment may be entered on the award of the arbitrators in
any court having proper jurisdiction. All expenses of such arbitration shall be
borne by the Company in accordance with Section 5.2 hereof.
5.2 Payment of Legal Fees and Costs. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Company, Executive or others of any action taken
pursuant to the terms of this Agreement or the Employment Agreement, or of
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the validity or enforceability of, or liability under, any provision of this
Agreement or the Employment Agreement, or any guarantee of performance thereof
(including, without limitation, as a result of any contest by Executive about
the amount of payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code.
5.3 Agent for Service of Legal Process. Service of legal
process with respect to a claim under this Agreement or the Employment Agreement
shall be made upon the General Counsel of the Company.
6. Tax Withholding. All payments to the Executive under this
Agreement will be subject to the withholding of all applicable employment and
income taxes.
7. Severability. In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect.
8. Assignability; Successors. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, heirs (in the case of Executive) and permitted assigns. No rights or
obligations of Company under this Agreement may be assigned or transferred by
Company (including, without limitation, by merger, consolidation or other
operation of law), except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which Company is not the
continuing or surviving entity, or the sale or liquidation of all or
substantially all of the assets of Company, to one or more entities that have
the financial and other ability to perform Company's obligations under this
Agreement; provided, however, that the assignee
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or transferee is the successor to all or substantially all of the assets of
Company and such assignee or transferee assumes the liabilities, obligations,
and duties of Company under this Agreement, either contractually or as a manner
of law. The Company will require any successor to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no succession had taken place.
9. Entire Agreement. Except for compensation and employee
benefit plans or programs maintained by the Company from time to time and the
Employment Agreement, this Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes any
prior Executive Retention Agreement between the Company and Executive. Nothing
in this Agreement impairs or otherwise adversely affects any of Executive's
rights to or under any stock option or restricted stock agreements with the
Company (or any of its subsidiaries or affiliates) in effect on the Effective
Date.
10. Notices. Any notice given to a party shall be in writing
and shall be deemed to have been given when delivered personally or by courier,
or upon receipt if sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the party concerned at the address
indicated below or to such changed address as such party may subsequently give
such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
If to Executive: James P. McDermott
3 Bethesda Metro Center
Bethesda, Maryland 20814
20
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11. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of Company (other than Executive), as the case may be.
12. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term or any expiration or termination of this Agreement, in each
case to the extent necessary to the intended preservation of such rights and
obligations.
13. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
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14. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Maryland without reference to
principles of conflict of laws. Jurisdiction and venue of any action or
proceeding relating to this Agreement (to the extent permitted) shall be
exclusively in state or federal courts in Montgomery County, Maryland.
15. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
16. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the Executive and the Company have
executed this Agreement as of the date and year first above written.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/James P. McDermott
-------------------------------------
James P. McDermott
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Execution Copy
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 22nd day of May, 1998 (the "Effective Date"), by and
between PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"),
and Scott D. Silverman (the "Executive").
IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period commencing on
the Effective Date and ending on the 21st day of May, 2000 (the "Agreement
Term"). Concurrently with the execution of this Agreement, the parties hereto
are entering into an Executive Retention Agreement attached hereto as Exhibit A
(the "Retention Agreement"). All capitalized terms that are used but not defined
herein shall have the respective meanings ascribed to such terms in the
Retention Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed
by Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Throughout the Agreement Term, Executive shall
serve as Executive Vice President, Chief Administrative Officer and General
Counsel of Company and be responsible for the general management of the
administrative affairs of Company, and serve as a member of Company's Operating
Committee.
<PAGE>
(b) Performance of Duties. Throughout the Agreement Term,
Executive shall faithfully and diligently perform Executive's duties in
conformity with the directions of the Executive Committee of the Board of
Directors of Company ("Board"), consistent with his position as an Executive
Vice President, Chief Administrative Officer and General Counsel of Company and
as a member of Company's Operating Committee.
(c) Place of Performance. During the Agreement
Term, Executive shall be based at Company's principal executive offices in
Bethesda, Maryland. Company shall not request or require Executive to relocate
his principal place of employment outside of an 18 mile radius of Bethesda,
Maryland.
3. Compensation and Benefits.
(a) Base Salary. Company agrees to pay to Executive a base
salary at the annual rate of $400,000, as increased from time to time by the
Board ("Base Salary"), payable in installments consistent with the Company's
payroll practices. For the remaining period of the Agreement Term beginning on
December 1, 1999 ("Remaining Term") the Base Salary shall be automatically
adjusted by multiplying the annual Base Salary in effect for the immediately
preceding month by a fraction, the numerator of which is the Consumer Price
Index for All Urban Consumers for the U.S. City Average published by the
Department of Labor ("CPI-U") as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
(b) Annual Incentive Award. Provided that Executive is still
employed by Company on the last day of each Bonus Period (as defined below), no
later than the April 15th following the end of each of the 1998 and 1999 Bonus
Periods and the 15th day after the end of the last
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Bonus Period, Company shall pay a cash bonus to Executive for such Bonus Period
equal to the Guaranteed Bonus, plus any Target Bonus and Supplemental Bonus,
that is payable for such Bonus Period (together, "Incentive Bonuses"); provided,
however, that all Incentive Bonus amounts for the last Bonus Period (which is
less than 12 full months) shall be multiplied by the Pro-Rata Factor (as defined
below). For purposes of this Section 3(b):
(i) the "Guaranteed Bonus" shall be $200,000;
(ii) the "Target Bonus" shall be $200,000,
and shall be payable if the performance criteria set forth
in Exhibit I are achieved; and
(iii) the "Supplemental Bonus" shall be
$200,000, and shall be payable if the performance criteria
set forth in Exhibit II are achieved.
At the beginning of the Remaining Term, the Incentive Bonus amounts set forth
above shall be automatically adjusted for the then current Bonus Period by
multiplying the Incentive Bonus amounts set forth above by a fraction, the
numerator of which is the CPI-U as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
A "Bonus Period" shall be each of the following periods: (i)
the full 1998 calendar year (which is also Company's fiscal year); (ii) the full
1999 calendar year; and (iii) the period beginning January 1, 2000 and ending on
the date of expiration of the Agreement Term.
The "Pro-Rata Factor" for the last Bonus Period (which is less
than 12 full months) shall mean a fraction, the numerator of which is the number
of calendar days in such Bonus Period, and the denominator of which is 365.
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(c) Long-Term Incentive Award. As soon as practicable after
the Effective Date, Company shall grant to Executive a phantom stock award
("Stock Award") that entitles Executive to receive, at the end of the Agreement
Term, an amount equal to the excess of (i) the Fair Market Value (as defined
below) of 450,000 shares of Common Stock of Company ("Stock") as of the Stock
Award Termination Date (as defined below), over (ii) the Fair Market Value of
the Stock as of the date of execution of this Agreement (as defined below). The
Stock Award shall be payable at the Stock Award Settlement Date (as defined
below) in cash or shares of Stock (subject to applicable tax withholding and,
only if the Stock Award is to be paid in shares of Stock, subject to stockholder
approval no later than the 1999 annual meeting of stockholders of Company), as
elected by Executive; provided, however, that the Stock Award shall be forfeited
if Executive has voluntarily terminated his employment with Company without Good
Reason, or Company has terminated Executive's employment with Company for Cause,
before the end of the Agreement Term.
The number of shares of Stock subject to the Stock Award shall
be adjusted appropriately to reflect each change (if any) in the outstanding
Stock by reason of a stock dividend or distribution, recapitalization, merger,
consolidation, reorganization, stock split, reverse stock split, share
combination, share exchange, or any other change in capital structure of or by
the Company.
The "Stock Award Termination Date" shall mean the earliest of
(A) the last day of the Agreement Term, (B) the date of a Change in Control
after which shares of the Stock are or will be no longer traded on the New York
Stock Exchange (a "Trading-Ending Change in Control"), or (C) the date
immediately preceding the date, upon or after the termination of Executive's
employment under this Agreement other than by Company for Cause or by Executive
without Good Reason, on which Company receives written notice from
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<PAGE>
Executive of final valuation of the Stock Award (the "Valuation Notice Date").
Fair Market Value" shall mean:
(i) "as of the date of execution of this Agreement,"
the price for a share of Stock paid by Securitas Capital, LLC and Risk
Capital Reinsurance in a pending private placement of Stock by Company
or if, for any reason, that placement is not consummated, the price
agreed upon by Company and Executive; and
(ii) on the last day of the Agreement Term or on the
Valuation Notice Date, the average of the closing prices of a share of
Stock, as reported on the New York Stock Exchange for the ten trading
days ending on the last day of the Agreement Term or on the Valuation
Notice Date, as the case may be (or if such day is not a trading day,
on the preceding trading day).
In the event of a Trading-Ending Change in Control, however, instead of the
definition in the preceding clause (ii), "Fair Market Value" shall mean the
highest per share consideration (as cash or, if not as cash, the cash or fair
market value thereof) received for a share of Stock in the Trading-Ending Change
in Control transaction.
The "Stock Award Settlement Date" means, as applicable, the
last day of the Agreement Term, the date of a Trading-Ending Change in Control,
or 15 days after the Valuation Notice Date.
(d) Expiration Payments and Benefits. At the expiration of the
Agreement Term (regardless of any then existing circumstance addressed by the
Retention Agreement that may be inconsistent herewith), if Executive has not
voluntarily terminated his employment with Company without
5
<PAGE>
Good Reason and Company has not terminated Executive's employment with Company
for Cause, Executive shall, in addition to the compensation provided elsewhere
in this Agreement, be entitled to the payments and benefits provided in Section
3.1 of the Retention Agreement, which shall be determined and paid as if
Executive's employment with Company had been terminated by Executive for Good
Reason or by Company without Cause, regardless of whether any such termination
has occurred ("Expiration Pay"); provided, however, that no Expiration Pay shall
be provided or payable hereunder if Executive has otherwise become entitled to
and has received (i.e., under Section 8(b) of this Agreement or the terms of the
Retention Agreement) the payments and benefits provided in Section 3.1 of the
Retention Agreement.
If Executive is still employed at the end of the Agreement
Term, or upon any termination of employment other than a termination by Company
for Cause or by Executive without Good Reason, the outstanding principal
balance, together with any accrued and unpaid interest thereon, that is owed to
Company by Executive under the three loans to Executive in the form of
Promissory Notes dated September 8, 1998, September 30, 1997 and March 5, 1998,
shall be forgiven and waived by Company, and Company shall deliver to Executive
the original Promissory Notes marked "paid" (or with another mark indicating
evidence of payment in full), and Executive shall receive an additional payment
from Company in an amount such that, after payment by Executive of all taxes
imposed upon Executive as a result of such loan forgiveness (and such additional
payment), Executive will retain a net after-tax benefit that is equal to the
amount of such loan forgiveness.
4. Employee Benefit Programs.
During the Agreement Term, but not after an earlier
termination of employment (except as stated in the Retention Agreement),
Executive shall be entitled to
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<PAGE>
participate in all employee pension and welfare benefit plans and programs made
available to the senior-level executives of Company or to its employees
generally, as such plans or programs may be in effect from time to time,
including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any plans that
supplement the above-listed types of plans or programs, whether funded or
unfunded.
5. Reimbursement of Business and Other Expenses.
Executive is authorized to incur reasonable travel and
business expenses that are consistent with his position and incurred in carrying
out his duties and responsibilities under this Agreement, and Company shall
promptly reimburse him for all such travel and business expenses incurred in
connection with carrying out the business of the Company, subject to reasonable
documentation in accordance with the reasonable policies of Company.
6. Perquisites.
During the Agreement Term, Executive shall be entitled to
participate in all of Company's executive fringe benefits in accordance with the
terms and conditions of such arrangements as are in effect from time to time for
the senior-level executives of Company. Executive is also entitled to
reimbursement from Company of up to $5,000 for each of calendar years 1998,
1999, and 2000 (without proration) for tax, financial planning, and other
professional services.
7
<PAGE>
7. Vacation.
Executive shall be entitled to 6 weeks' paid vacation each
calendar year, which vacation shall be earned on a pro-rata basis for each day
during the calendar year that Executive is employed by Company. In the event
that Executive does not use all of his vacation time during an applicable
calendar year, he shall be entitled to carry forward such unused vacation time;
provided, however, that only four weeks of unused vacation time (including all
previously carried forward unused vacation time) may be carried forward from any
one calendar year to the next calendar year. Company shall pay Executive any
earned and unused vacation at the end of the Agreement Term or, if earlier, upon
the termination of Executive's employment.
8. Termination of Employment. (a) Executive may terminate his
employment with Company for any (or no) reason, and any termination of
employment by Executive shall not be deemed a breach of this Agreement. Company
may also terminate Executive's employment with Company prior to the expiration
of the Agreement Term.
(b) If Executive terminates his employment with
Company for Good Reason, or if Company terminates Executive's employment with
Company without Cause, Executive shall be entitled to any payments and benefits
provided pursuant to the terms of the Retention Agreement in addition to (but
without duplication) any amounts to be paid or provided to Executive under the
terms of this Agreement. If Executive terminates his employment with Company
without Good Reason, or if Company terminates Executive's employment for Cause,
then Company shall pay to Executive, within 30 days of the date of such
termination, only (i) the Base Salary and any earned and unused vacation accrued
through the date of such termination, and (ii) any expenses that have not been
reimbursed in accordance with Section 5 herein.
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<PAGE>
(c) In the event of any termination of employment under this
Section 8, Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due to Executive under this Agreement
on account of any remuneration attributable to any subsequent employment
(including, without limitation, any self- employment) that he may obtain.
9. Confidentiality; Assignment of Rights.
(a) During the Agreement Term and thereafter, Executive shall
not disclose to anyone or make use of any trade secret or proprietary or
confidential information of Company, including such trade secret or proprietary
or confidential information of any customer or other entity to which Company
owes an obligation not to disclose such information, which he acquires during
the Agreement Term, including but not limited to records kept in the ordinary
course of business, except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of Company or (ii) when
required to do so by a court of law, by any governmental agency or authority
having supervisory authority over the business of Company or by any governmental
agency or authority or administrative or legislative body (including a committee
thereof) with apparent jurisdiction to order him to divulge, disclose or make
accessible such information.
(b) Executive hereby sells, assigns and transfers to Company
all of his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "Rights") which during his
employment by Company are made or conceived by him, alone or with others and
which are within or arise out of any general field of Company's business or
arise out of any work he performs or information he receives regarding the
business of Company while employed by Company. During his employment by Company,
Executive shall fully disclose to Company as
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<PAGE>
promptly as available all information known or possessed by him concerning the
rights referred to in the preceding sentence, and upon request by Company and
without any further remuneration in any form to him by Company, but at the
expense of Company, execute all applications for patents and for copyright
registration, assignments thereof and other instruments and do all things which
Company may deem necessary to vest and maintain in it the entire right, title
and interest in and to all such Rights.
10. Noncompetition; Nonsolicitation.
(a) Executive covenants and agrees that he shall not directly
or indirectly engage in a Competitive Activity (as defined below) while employed
by Company hereunder.
"Competitive Activity" shall mean any activity engaged in by
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with Company. For this purpose, an
activity "which is competitive with Company" shall mean a business that is
primarily involved in the acquisition of life insurance companies.
(b) Executive covenants and agrees that he shall not directly
or indirectly solicit Company's or any of its subsidiaries' (i) employees during
the 18-month period following the date of the termination of his employment by
Company hereunder and (ii) agents, brokers and/or policyholders during the
Agreement Term.
(c) The parties acknowledge that in the event of a breach of
Sections 10(a) or (b) above, Company shall not have an adequate remedy at law.
Accordingly, in the event of any breach of Sections 10(a) or (b) above, Company
shall be entitled to such equitable and injunctive relief as may
10
<PAGE>
be available to restrain Executive and any business, firm, partnership,
individual, corporation or entity participating in the breach from the violation
of the provisions of Sections 10(a) or (b) above. Nothing in this Agreement
shall be construed as prohibiting Company from pursuing any other remedies
available at law or in equity for breach of Sections 10(a) or 10(b) above,
including the recovery of damages.
11. Indemnification.
(a) Company agrees that if Executive is or becomes a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether brought by or in the right of the Company or otherwise
("Proceeding"), by reason of the fact that (whether before or after the
Effective Date) he is or was a director, officer or employee of Company or is or
was serving at the request of Company as a director, officer, member, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including (without limitation) service with respect to employee
benefit plans, whether or not the basis of such Proceeding is Executive's
alleged action in an official capacity while serving as a director, officer,
member, employee or agent, Executive shall be indemnified and held harmless by
Company to the fullest extent legally permitted or authorized by Company's
certificate or articles of incorporation or bylaws (or other applicable
governing documents) or resolutions of the Board (or other applicable governing
body) or the stockholders of Company or, if greater, by the laws of the State of
Delaware or any other applicable state of organization or formation, against all
cost, expense, liability and loss (including, without limitation, attorneys'
fees, judgments, costs of appeal, fines, ERISA excise taxes or penalties and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
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<PAGE>
Executive in connection therewith, and such indemnification shall continue as to
Executive even if he has ceased to be a director, member, employee or agent of
Company or other entity and shall inure to the benefit of Executive's heirs,
executors and administrators. In this Section 11, (i) each reference to
"Company" (other than for the purpose of any notice) shall include, without
limitation, all entities that are subsidiaries and affiliates of Company, and
(ii) all obligations of Company shall be joint and several as to all entities
included in such definition of "Company." Company shall pay or provide such
indemnification to Executive in connection with a Proceeding within 60 days
after written request by Executive for that indemnification. During that 60-day
period, Executive shall have an opportunity to be heard and to present evidence
in connection with the consideration by the board of directors, independent
legal counsel, or stockholders, as the case may be, of any findings required by
applicable law in connection with that indemnification request. Company shall
also advance to Executive all reasonable costs and expenses incurred by him
(including, without limitation, all reasonable fees and costs of counsel
selected by Executive, and all other indemnifiable liabilities covered by this
paragraph (a)) in connection with a Proceeding within 30 days after written
request by Executive for such advance. Such request shall include an undertaking
by Executive to repay the amount of such advance if it shall ultimately be
determined that he is not entitled to be indemnified against such costs and
expenses. In the event Company does not properly indemnify or advance expenses
to Executive in accordance with the terms of this paragraph (a) (including,
without limitation, the time period set forth above), Executive shall be
entitled to bring an action or proceeding against Company in any state or
federal court in Montgomery County, Maryland, in accordance with Section 19
hereof, or before a panel of arbitrators in accordance with Section 20 hereof,
to enforce Company's indemnification or expense-advancement obligations, and (in
either case) Executive shall be
12
<PAGE>
reimbursed by Company for the reasonable costs and expenses (including, without
limitation, reasonable attorneys fees and costs) of any successful enforcement
of Company's indemnification or expense-advancement obligations.
(b) Neither the failure of Company (including, without
limitation, its board of directors, independent legal counsel or stockholders)
to have made any determination that indemnification of Executive is proper
because he has met the applicable standard of conduct, nor a determination by
Company (including, without limitation, its board of directors, independent
legal counsel or stockholders) that Executive has not met such applicable
standard of conduct, shall create a presumption that Executive has not met the
applicable standard of conduct or shall be a defense to any action or proceeding
to enforce Company's indemnification or expense-advancement obligations. Company
shall have the burden of proof in establishing that Executive has not met the
applicable standard of conduct. The termination of any Proceeding by judgment,
court order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Executive did not
meet the applicable standard of conduct. Where Executive is entitled to
indemnification under this Section 11 for a portion of the indemnifiable
liabilities described in paragraph (a) of this Section 11, but not for the total
amount of liabilities of that kind, Company shall nevertheless indemnify
Executive for such portion of the indemnifiable liabilities to which Executive
is entitled.
(c) Executive's rights provided in this Section 11 shall not
be exclusive of any other rights of indemnification or advancement of expenses
(or any similar rights) that Executive may have against Company or under any
liability insurance covering Executive.
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(d) Company agrees to continue and maintain one or more
directors' and officers' liability insurance policies that cover Executive (with
reputable and financially sound insurers) at a level that is commercially
reasonable (in light of Company's business and the risks of litigation or
claims) and not less than the level of coverage provided as of the Effective
Date, and otherwise to the fullest extent Company provides such coverage for any
of its other executive officers.
(e) Without limiting the generality of Section 17 hereof, the
rights of indemnity and advancement of expenses in favor of Executive in this
Section 11 shall continue and survive any expiration or termination of this
Agreement or Executive's ceasing to be a director, officer, or employee of
Company.
12. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors, heirs (in the case of Executive)
and permitted assigns. No rights or obligations of Company under this Agreement
may be assigned or transferred by Company (including, without limitation, by
merger, consolidation, or other operation of law) except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which Company is not the continuing or surviving entity, or the sale or
liquidation of all or substantially all of the assets of Company, to one or more
entities that have the financial and other ability to perform Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of Company
and such assignee or transferee assumes the liabilities, obligations and duties
of Company under this Agreement, either contractually or as a matter of law. No
rights or obligations of Executive under this Agreement may be assigned or
transferred by Executive other
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than his rights to compensation and benefits, which may be transferred only by
will or operation of law, except as provided in Section 18 below.
13. Representation.
Company represents and warrants that it is fully authorized
and empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. Executive represents that he knows of no
agreement between him and any other person, firm or organization that would be
violated by the performance of his obligations under this Agreement.
14. Entire Agreement.
This Agreement and the Retention Agreement contain the entire
understanding and agreement between the parties concerning the subject matter
hereof and supersede all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the parties with
respect thereto. Nothing in this Agreement impairs or otherwise adversely
affects any of Executive's rights to or under any stock option or restricted
stock agreements with Company (or any of its subsidiaries or affiliates) in
effect on the Effective Date.
15. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any
15
<PAGE>
waiver must be in writing and signed by Executive or an authorized officer of
Company (other than Executive), as the case may be.
16. Severability.
In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable
for any reason, in whole or in part, the remaining provisions of this Agreement
shall be unaffected thereby and shall remain in full force and effect to the
fullest extent permitted by law.
17. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term to the extent necessary to the intended preservation of such
rights and obligations.
18. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
19. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Maryland without reference to
principles of conflict of laws.
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Jurisdiction and venue of any action or proceeding relating to this Agreement
shall be exclusively in state or federal courts in Montgomery County, Maryland.
20. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement (other than injunctive or equitable relief sought to enforce Sections
9 or 10 hereof, or any enforcement of Executive's rights under Section 11, which
may (if Executive so elects) be brought in any court having jurisdiction in
accordance with this Agreement) shall, at the election of Executive or Company,
be resolved by binding arbitration in accordance with the terms and procedures
provided in Section 5.1 of the Retention Agreement.
21. Notices.
Any notice given to a party shall be in writing and shall be
deemed to have been given when delivered personally or by courier, or upon
receipt if sent by certified or registered mail, postage prepaid, return receipt
requested, duly addressed to the party concerned at the address indicated below
or to such changed address as such party may subsequently give such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
If to Executive: Scott D. Silverman
3 Bethesda Metro Center
Bethesda, Maryland 20814
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22. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
23. Counterparts.
This Agreement may be executed in two or more counterparts.
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IN WITNESS WHEREOF, the undersigned have executed this
Agreement on this 23rd day of July, 1998.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/Scott D. Silverman
-------------------------------------
Scott D. Silverman
Execution Copy
Executive Retention Agreement
THIS AGREEMENT is entered into as of this 22nd day of May,
1998 ("Effective Date"), by and between PENNCORP FINANCIAL GROUP, INC., a
Delaware corporation ("Company") and Scott D. Silverman ("Executive").
A. The Board of Directors of the Company desires to assure
that key executives will devote their undivided time and attention to the
Company without regard to concerns about an involuntary loss of employment
without cause, and to assure the continuity and cooperation of management in the
event of a change in ownership and the continued attention of Executive to his
duties without any distraction arising out of the circumstances surrounding a
change or potential change in ownership.
B. The Company and Executive desire to enter into an executive
retention arrangement to protect Executive against an involuntary termination of
employment without cause, to recognize the additional efforts of Executive that
may be necessary to assist in and prepare for any potential change in ownership,
and to encourage Executive to diligently perform his duties and responsibilities
to ensure a smooth transition for any such change in ownership.
C. The Company and Executive have entered an Executive
Employment Agreement dated to be effective as of the Effective Date (the
"Employment Agreement"), which refers to and otherwise contemplates this
Agreement.
For good and valuable consideration, including the mutual
covenants herein, the parties hereto agree as follows:
<PAGE>
1. Definitions. The following terms shall have
the following meanings for purposes of this Agreement.
"Annual Pay" means:
(1) for any termination of employment on or prior to the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement, $1,000,000; and
(2) for any termination of employment after the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement and prior to the expiration of the Agreement Term (as
defined in the Employment Agreement), the sum of:
(i) the annual rate of Base Salary (as defined in the
Employment Agreement) payable to the Executive immediately before the
termination, plus
(ii) an amount equal to the product of the annual rate of Base
Salary times a percentage determined as follows -
(A) for a termination occurring during the 1999 calendar year
and after the first anniversary of Executive's employment
under the Employment Agreement, the percentage equal to the
percentage of the annual rate of Base Salary that was paid (or
payable) to Executive as the Incentive Bonuses (as defined in
the Employment Agreement) for the Bonus Period (as defined in
the Employment Agreement) ended on December 31, 1998, and
(B) for a termination occurring during the 2000 calendar year,
the percentage equal to the percentage of the annual rate of
Base Salary that
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is the average of the Incentive Bonuses for the Bonus Period
ended on December 31, 1998, and the Incentive Bonuses for
the Bonus Period ended December 31, 1999.
"Cause" means:
(1) for any termination prior to the earlier of a Change in
Control or a Potential Change in Control, (i) a material and demonstrable
adverse change after the Effective Date in the Executive's performance of his
duties and responsibilities in effect as of the Effective Date, other than any
changes in performance by reason of sickness or disability of the Executive and
any changes in Executive's duties and responsibilities made after the Effective
Date, (ii) willful misconduct or gross negligence in the performance of, or
willful neglect of, the Executive's duties, which has caused demonstrable and
serious injury (monetary or otherwise) to the Company, (iii) conviction (after
exhaustion or expiration of all rights of appeal) of the Executive of a criminal
violation involving fraud, embezzlement or theft in connection with his duties
or in the course of his employment with the Company, (iv) conviction (after
exhaustion or expiration of all rights of appeal) of, or plea of nolo contendere
to, a felony (excluding a traffic violation) by the Executive or (v) Executive's
willful inattention to or willful lack of diligence in attempting to achieve, as
part of the performance of his duties under the Employment Agreement, his
performance goals set forth in Exhibit I and Exhibit II to the Employment
Agreement; and
(2) for any termination on or after a Change in Control or
Potential Change in Control, the Executive's (i) conviction (after exhaustion or
expiration of all rights of appeal) of a criminal violation involving fraud,
embezzlement or theft in connection with his duties or in the course of his
employment with the Company, (ii)
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conviction (after exhaustion or expiration of all rights of appeal) of, or plea
of nolo contendere to, a felony (excluding a traffic violation).
No act or omission shall be considered "willful" if the Executive believed in
good faith that such acts or omissions were in, or at least not opposed to, the
best interests of the Company.
No act or omission shall constitute Cause unless the Board of Directors of the
Company provides to the Executive (a) written notice clearly and fully
describing the particular acts or omissions which the Board reasonably believes
in good faith constitutes Cause and (b) an opportunity, within 30 days following
his receipt of such notice, to meet in person with the Board of Directors to
explain or defend the alleged acts or omissions relied upon by the Board and, to
the extent practicable, to cure such acts or omissions. Executive shall further
have the right to contest a determination of Cause by the Company by requesting
arbitration on an expedited basis in accordance with the terms of Section 5.1
hereof.
"Change in Control" means (1) any "person" (as such term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes the "beneficial owner" (as determined pursuant to Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities; or (2) during any period of
two (2) consecutive years (not including any period prior to the execution of
this Agreement), individuals who at the beginning of such period constitute the
members of the Company's Board of Directors (the "Board") and any new director,
whose election to the Board or nomination for election to the Board by the
Company's stockholders was approved by a vote of at least two-thirds
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<PAGE>
(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of the
Board; or (3) the Company shall merge with or consolidate into any other
corporation, other than a merger or consolidation which would result in the
holders of the voting securities of the Company outstanding immediately prior
thereto holding immediately thereafter securities representing more than sixty
percent (60%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or (4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets or such a plan is
commenced.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Good Reason" means any of the following events occurring,
without Executive's prior written consent specifically referring to this
Agreement:
(1) (A) any reduction in the amount of Executive's annual
salary, guaranteed incentive compensation or aggregate
incentive compensation opportunities (which reduction may also
occur pursuant to any assignment of performance goals and
corresponding awards which are inconsistent with prior
performance goals and awards), (B) any significant reduction
in the aggregate value of Executive's benefits as such
benefits may be increased from time to time (unless such
reduction is pursuant to a general change in benefits
applicable to all similarly situated employees of the Company
and its affiliates) or (C) any
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material and willful breach by the Company of any provision
of this agreement or any written employment agreement with
Executive;
(2) (A) assignment to Executive of any duties inconsistent
with his status as Chief Administrative Officer and General
Counsel of the Company, and as a member of the Company's
Operating Committee, (B) the removal of Executive from his
position as Chief Administrative Officer and General Counsel
of the Company or as a member of the Company's Operating
Committee, (C) the failure to retain Executive as the Chief
Administrative Officer, General Counsel and as a member of
the Operating Committee of any successor to the Company
(whether by merger, consolidation or sale or disposition of
all or substantially all of the assets of the Company) or
any entity which directly or indirectly owns twenty five
percent (25%) or more of any class of securities of the
Company or any successor to the Company (whether by merger,
consolidation or sale or disposition of all or substantially
all of the assets of the Company) or (D) any significant
change in the nature or status of Executive's duties or
responsibilities;
(3) a significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or
duties attached to the Executive's positions with the
Company;
(4) (A) transfer of Executive's principal place of
employment to a location more than 18 miles away from
Bethesda, Maryland or (B) Executive is required to travel
outside of the continental United States more than four
times during any
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<PAGE>
calendar year or for more than 10 days in the aggregate in
any calendar year;
(5) failure by the Company to obtain the assumption
agreement referred to in Section 12 of the Employment
Agreement or Section 8 of this Agreement prior to the
effectiveness of any succession referred to therein, unless
the purchaser, successor or assignee referred to therein is
bound to perform this Agreement by operation of law; or
(6) the Executive receives notice from any party to an
agreement (or its representative) which contemplates a
Change in Control that, on or after such Change in Control,
an event will occur that will constitute Good Reason as
described in (1) through (5) above.
Notwithstanding the above, (i) the occurrence of any of the events described in
(1) through (5) above will not constitute Good Reason unless the Executive gives
the Company written notice, within 90 calendar days after the Executive knew or
should have known of the occurrence of any of the events described in (1)
through (5) above, that such event constitutes Good Reason, and the Company
thereafter fails to cure the event within the earlier of (x) the closing for a
Change in Control or (y) thirty (30) days after receipt of such notice, and (ii)
the receipt of notice described in (6) above will not constitute Good Reason
until a Change in Control actually occurs and will otherwise not constitute Good
Reason if the Executive is provided reasonable assurances by the Company prior
to such Change in Control that an event described in (1) through (5) above is
not contemplated on or after a Change in Control; provided, however, that any
such assurances shall not impair or otherwise affect any of Executive's rights
upon the occurrence of any Change in Control described in (1) through
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<PAGE>
(5) above or if there is any termination of Executive's employment by Company
other than for Cause or by Executive with Good Reason.
"Potential Change in Control" means the occurrence of active
discussions between the Company and a potential purchaser of the Company that
contemplates a transaction which would result in a Change in Control, but only
if a Change in Control results within twelve months following such occurrence.
2. Term. The term of this Agreement commences on
the Effective Date and expires upon the earliest to occur of
the following:
(a) the expiration of the Agreement Term,
(b) the Executive's death, or
(c) the Executive's disability (within the meaning of the
long-term disability plan in effect for and
applicable to the Executive).
Any obligations of the Company under this Agreement or the Employment Agreement
that arise, become effective, or accrue on, as of, or before the expiration of
the Agreement Term or that arise, become effective, or accrue upon the death or
disability of the Executive (even if, in any case, they are performable after
the end of the Agreement or the death or disability of the Executive), however,
shall survive the expiration or termination of this Agreement.
3. Involuntary Termination Payment and Benefits
3.1 Involuntary Termination. In the event either (i)
Executive's employment with the Company or its successor is terminated by
Executive for Good Reason, (ii) the Executive's employment with the Company or
its successor is
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<PAGE>
terminated by the Company or its successor without Cause, or (iii) Executive's
employment with the Company or its successor is terminated by reason of his
death or disability, Executive shall be entitled to the following payments and
other benefits:
a. An amount equal to the sum of (i) Executive's accrued and
unpaid Base Salary and earned but unused vacation and
personal days as of the date of termination of employment
and any expenses that have not yet been reimbursed by
Company under the Employment Agreement; plus (ii) his
accrued and unpaid Incentive Bonuses, if any, for the prior
Bonus Period, plus (iii) a pro rated portion of the annual
Incentive Bonuses for the Special Bonus Period (as defined
below) in which the Executive's termination occurs. For
purpose of clause (iii), (A) the proration shall be
calculated by applying the Pro Rata Factor (as defined in
the Employment Agreement); (B) the "Special Bonus Period"
shall mean (1) the Effective Date through the first
anniversary of Executive's employment under the Employment
Agreement, (2) the date following the first anniversary of
Executive's employment under the Employment Agreement
through December 31, 1999, and (3) January 1, 2000 through
the last day of the Agreement Term; and (C) the annual
Incentive Bonuses for each Special Bonus Period shall be (1)
for the first Special Bonus period, an amount equal to
$600,000 less any amount already paid to Executive as the
Incentive Bonus(es) for the 1998 calendar year, (2) for the
second Special Bonus period, an amount equal to the amount
of the Incentive Bonus(es) paid (or payable) to Executive
for the 1998 calendar year, and (3) for the third Special
Bonus Period, an amount equal to the average of the
Incentive
9
<PAGE>
Bonus(es) paid (or payable) to Executive for the 1998
calendar year and the 1999 calendar year.
The amount described in clause (i) above shall be paid on
the date of the termination of Executive's employment, and
the amount or amounts described in clauses (ii) and (iii)
above shall be paid on the earlier of the date of the
Executive's termination of employment or the respective date
that Incentive Bonuses are otherwise payable under the
Employment Agreement.
b. Subject to Section 3.2 below, (i) in the case of
termination by Executive for Good Reason or by Company
without Cause, an amount equal to three times Executive's
Annual Pay or (ii) in the case of a termination for death or
disability, an amount equal to one and one-half times
Executive's Annual Pay (as the case may be, "Termination
Pay"). Termination Pay shall be paid on the earlier of (i)
within ten (10) days after the Company's delivery of written
notice to the Executive of termination of his employment
without Cause or because of his disability, (ii) within
thirty (30) days after the Executive's delivery of written
notice to the Company of his resignation for Good Reason
(unless cured), (iii) the date on which a Change in Control
occurs or (iv) within thirty (30) days after the Executive's
death (the "Payment Date").
c. Notwithstanding the language of any other agreement or
document to the contrary, all unexercisable options to
purchase shares of stock of the Company or of any entity
affiliated with the Company that are held by the Executive
shall become fully vested and immediately exercisable
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<PAGE>
(and shall remain exercisable until the expiration of the
full term of those options).
d. All restricted stock of the Company and any other
equity-based rights (including, without limitation, phantom
stock) held by the Executive shall become fully vested and
all restrictions thereon shall lapse.
e. A lump sum payment on the Payment Date equal to the
Executive's unvested accrued benefit under any tax-qualified
retirement plan sponsored by the Company.
f. Executive and his eligible dependents shall be entitled,
for a period of three (3) years following the date of
termination of employment, to continued coverage, at the
cost of the Company, under the Company's group health,
dental and life insurance plans as in effect from time to
time (but not any other welfare benefit plans or any
retirement plans); provided that coverage under any
particular benefit plan shall expire with respect to the
period after Executive becomes covered under another
employer's plan providing for a similar type of benefit. In
the event the Company is unable to provide such coverage on
account of any limitations under the terms of any applicable
contract with an insurance carrier or third party
administrator, the Company shall pay Executive an amount
equal to the cost of such coverage.
Except as provided in Section 3.2 below, the foregoing
payments and benefits shall be in addition to and not in lieu of any payments or
benefits to which Executive and his dependents may otherwise be entitled to
under the Company's compensation and employee benefit plans, policies
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<PAGE>
or practices. Nothing herein shall be deemed to restrict the right of the
Company from amending or terminating any such plan in a manner generally
applicable to similarly situated active employees of the Company and its
affiliates, in which event Executive shall be entitled to participate on the
same basis (but at the cost of the Company) as similarly situated active
executives of the Company and its affiliates; provided, however, that no such
amendment or termination shall impair or otherwise affect the Executive's rights
or remedies under this Agreement or the Employment Agreement.
3.2 Offset for Other Severance Pay. There shall be no
duplication of severance pay in any manner, in that Executive shall not be
entitled to Termination Pay hereunder for more than one position with the
Company. Further, Termination Pay shall be in lieu of any other payments in the
nature of severance pay which Executive has received or will receive from the
Company (excluding phantom stock awards payable under the Employment Agreement
or any other amounts payable under Section 3.1 hereof). If Executive is entitled
to Termination Pay, any other arrangement providing severance payments (except
for phantom stock awards under the Employment Agreement and amounts under
Section 3.1 hereof) shall be deemed to be amended to eliminate any obligation
for such payments to be provided thereunder to Executive. If Executive is
entitled to any payment in lieu of notice of termination of employment under
Federal, state or local law, including but not limited to the Worker Adjustment
and Retraining Notification Act, the Termination Pay to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment in lieu of notice.
3.3 Transition Services. If Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason in
connection with or at the time of a Purchase (as defined below) and the
purchaser
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<PAGE>
under the Purchase specifically requests the continued services of Executive
after the closing of the Purchase, then, notwithstanding the termination without
Cause or for Good Reason -- which shall be deemed to have occurred for all
purposes of the Employment Agreement and this Agreement -- Executive will
perform the requested transition services to the extent set forth below in this
Section. In this Section, "Purchase" means a purchase of all or substantially
all of the equity securities or assets of the Company that is negotiated with
the Board of Directors of the Company by or on behalf of a purchaser. Executive
will perform those transition services for up to (i) six months following the
closing of the Purchase, or (ii) the expiration of the Agreement Term as defined
in the Employment Agreement, whichever is earlier (the "Transition Period").
Executive's rendering those services will be conditioned, however, upon his
receipt of (A) all payments and benefits due to Executive under the Employment
Agreement and this Agreement, including (without limitation) all amounts due
because of the termination without Cause or for Good Reason, and (B)
compensation and benefits for his services during the Transition Period that are
no less than the compensation and benefits to which he was entitled from the
Company under the Employment Agreement and this Agreement before the Transition
Period. Neither Executive's performance of the transition services described in
this Section nor any other provisions of this Section shall be deemed to impair
or affect any of the rights or remedies of Executive under the Employment
Agreement or this Agreement as a result of a Change in Control or a termination
without Cause or for Good Reason.
3.4. No Mitigation. The Executive shall not be obligated to
seek or secure new employment or to become self-employed after termination of
his employment with Company, but shall be obligated to report promptly to the
Company any actual employment obtained during the period for which employee
benefits continue pursuant to Section 3.1.
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<PAGE>
Except as expressly stated in Section 3.1.f of this Agreement, there shall be no
offset against any amounts due to Executive under this Agreement on account of
any remuneration or benefits attributable to any subsequent employment
(including, without limitation, any self- employment) that he may obtain.
4. Excise Taxes.
a. Anything in this Agreement to the contrary
notwithstanding and except as set forth below, if it is determined that any
payment or distribution by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 4) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are
incurred by Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then Executive shall be entitled to receive an additional
payment ("Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this
paragraph "a", if it is determined that Executive is entitled to a Gross-Up
Payment, but that Executive, after taking into account the Payments and Gross-Up
Payment, would not receive a net after-tax benefit of at least $25,000 (taking
into account both income taxes and any Excise Tax) as compared to the net
after-tax proceeds to Executive resulting from an elimination of the Gross-Up
Payment and a reduction of the Payments, in the
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<PAGE>
aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments
would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
b. Subject to the provisions of paragraph "c" of this Section
4, all determinations required to be made under this Section 4, including
(without limitation) whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be used in arriving at
such determination, shall be made by a certified public accounting firm selected
by the Company and reasonably acceptable to Executive (the "Accounting Firm"),
which shall be retained to provide detailed supporting calculations both to the
Company and Executive within 15 business days of the receipt of notice from
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be paid solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4,
shall be paid by the Company to Executive within five (5) days of the receipt of
the Accounting Firm's determination. Any determination by the Accounting Firm
shall be binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph "c" of
this Section 4 and Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
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<PAGE>
c. Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten (10) business days after Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid or appealed.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies Executive in writing prior to the expiration of
such period that it desires to contest such claim, Executive shall:
(a) give the Company any information reasonably
requested by the Company relating to such
claim,
(b) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney selected by the
Company and reasonably acceptable to
Executive,
(c) cooperate with the Company in good faith in order to
effectively contest such claim, and
(d) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties)
incurred in
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connection with such contest and shall indemnify and hold Executive harmless, on
an after-tax basis, for any Excise Tax or income tax (including, without
limitation, interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph "c", the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or to contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax or income tax (including, without limitation, interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder, and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
d. If, after the receipt by Executive of an amount advanced by
the Company pursuant to paragraph "c" of
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this Section 4, Executive becomes entitled to receive any refund with respect to
such claim, Executive shall (subject to the Company's complying with the
requirements of paragraph "c" of this Section 4) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If after the receipt by Executive of an amount
advanced by the Company pursuant to paragraph "c" of this Section 4, a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
5. Claims.
5.1 Arbitration of Claims. Company and Executive agree to
settle by arbitration any dispute or controversy arising in connection with this
Agreement, whether or not such dispute involves a plan subject to the Employee
Retirement Income Security of 1974, as amended ("ERISA"). Such arbitration shall
be conducted on an expedited basis in accordance with the Commercial Arbitration
Rules of the American Arbitration Association before a panel of three
arbitrators, selected by the American Arbitration Association, sitting in
Bethesda, Maryland. The award of the arbitrators shall be final and
nonappealable, and judgment may be entered on the award of the arbitrators in
any court having proper jurisdiction. All expenses of such arbitration shall be
borne by the Company in accordance with Section 5.2 hereof.
5.2 Payment of Legal Fees and Costs. The Company agrees to
pay as incurred, to the full extent permitted by law, all legal fees and
expenses which
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Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, Executive or others of any action taken
pursuant to the terms of this Agreement or the Employment Agreement, or of the
validity or enforceability of, or liability under, any provision of this
Agreement or the Employment Agreement, or any guarantee of performance thereof
(including, without limitation, as a result of any contest by Executive about
the amount of payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code.
5.3 Agent for Service of Legal Process. Service of legal
process with respect to a claim under this Agreement or the Employment Agreement
shall be made upon the Chief Executive Officer of the Company.
6. Tax Withholding. All payments to the Executive under this
Agreement will be subject to the withholding of all applicable employment and
income taxes.
7. Severability. In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect.
8. Assignability; Successors. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, heirs (in the case of Executive) and permitted assigns. No rights or
obligations of Company under this Agreement may be assigned or transferred by
Company (including, without limitation, by merger, consolidation or other
operation of law), except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which Company is not the
continuing or surviving entity, or the
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sale or liquidation of all or substantially all of the assets of Company, to one
or more entities that have the financial and other ability to perform Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of Company
and such assignee or transferee assumes the liabilities, obligations, and duties
of Company under this Agreement, either contractually or as a manner of law. The
Company will require any successor to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no succession had taken place.
9. Entire Agreement. Except for compensation and employee
benefit plans or programs maintained by the Company from time to time and the
Employment Agreement, this Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes any
prior Executive Retention Agreement between the Company and Executive. Nothing
in this Agreement impairs or otherwise adversely affects any of Executive's
rights to or under any stock option or restricted stock agreements with the
Company (or any of its subsidiaries or affiliates) in effect on the Effective
Date.
10. Notices. Any notice given to a party shall be in writing
and shall be deemed to have been given when delivered personally or by courier,
or upon receipt if sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the party concerned at the address
indicated below or to such changed address as such party may subsequently give
such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
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If to Executive: Scott D. Silverman
3 Bethesda Metro Center
Bethesda, Maryland 20814
11. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of Company (other than Executive), as the case may be.
12. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term or any expiration or termination of this Agreement, in each
case to the extent necessary to the intended preservation of such rights and
obligations.
13. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In
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the event of Executive's death or a judicial determination of his incompetence,
reference in this Agreement to Executive shall be deemed, where appropriate, to
refer to his beneficiary, estate or other legal representative.
14. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Maryland without reference to
principles of conflict of laws. Jurisdiction and venue of any action or
proceeding relating to this Agreement (to the extent permitted) shall be
exclusively in state or federal courts in Montgomery County, Maryland.
15. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
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16. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the Executive and the Company have
executed this Agreement as of the date and year first above written.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/Scott D. Silverman
-------------------------------------
Scott D. Silverman
Execution Copy
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 1st day of July, 1998 (the "Effective Date"), by and
between PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"),
and Keith A. Maib (the "Executive").
IN CONSIDERATION of the mutual covenants and agreements
hereinafter set forth, Company and Executive agree as follows:
1. Agreement Term.
The term of this Agreement shall be the period commencing on
the Effective Date and ending on the 21st day of May, 2000 (the "Agreement
Term"). Concurrently with the execution of this Agreement, the parties hereto
are entering into an Executive Retention Agreement attached hereto as Exhibit A
(the "Retention Agreement"). All capitalized terms that are used but not defined
herein shall have the respective meanings ascribed to such terms in the
Retention Agreement.
2. Employment.
(a) Employment by the Company. Executive agrees to be employed
by Company for the Agreement Term upon the terms and subject to the conditions
set forth in this Agreement. Throughout the Agreement Term, Executive shall
serve as Executive Vice President and the Chief Operating Officer of Company and
be responsible for the general management of the operations of Company, and
serve as Chairman of Company's Operating Committee. Executive shall be elected
or appointed as a member of the Board of Directors of Company ("Board") and
shall continue to serve as such for the balance of the Agreement Term.
<PAGE>
(b) Performance of Duties. Throughout the Agreement Term,
Executive shall faithfully and diligently perform Executive's duties in
conformity with the directions of the Executive Committee of the Board,
consistent with his position as an Executive Vice President and the Chief
Operating Officer of Company and as Chairman of Company's Operating Committee.
(c) Place of Performance. During the Agreement Term, Executive
shall be based at Company's executive offices in Dallas, Texas. Company shall
not request or require Executive to relocate his principal place of employment
outside of an 18 mile radius of Dallas, Texas.
3. Compensation and Benefits.
(a) Base Salary. Company agrees to pay to Executive a base
salary at the annual rate of $400,000, as increased from time to time by the
Board ("Base Salary"), payable in installments consistent with the Company's
payroll practices. For the remaining period of the Agreement Term beginning on
December 1, 1999 ("Remaining Term") the Base Salary shall be automatically
adjusted by multiplying the annual Base Salary in effect for the immediately
preceding month by a fraction, the numerator of which is the Consumer Price
Index for All Urban Consumers for the U.S. City Average published by the
Department of Labor ("CPI-U") as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
(b) Annual Incentive Award. Provided that Executive is still
employed by Company on the last day of each Bonus Period (as defined below), no
later than the April 15th following the end of each of the 1998 and 1999 Bonus
Periods and the 15th day after the end of the last Bonus Period, Company shall
pay a cash bonus to Executive
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for such Bonus Period equal to the Guaranteed Bonus, plus any Target Bonus and
Supplemental Bonus, that is payable for such Bonus Period (together, "Incentive
Bonuses"); provided, however, that all Incentive Bonus amounts for the last
Bonus Period (which is less than 12 full months) shall be multiplied by the
Pro-Rata Factor (as defined below). For purposes of this Section 3(b):
(i) the "Guaranteed Bonus" shall be $200,000;
(ii) the "Target Bonus" shall be $200,000, and
shall be payable if the performance criteria set forth in Exhibit I
are achieved; and
(iii) the "Supplemental Bonus" shall be $200,000,
and shall be payable if the performance criteria set forth in Exhibit
II are achieved.
At the beginning of the Remaining Term, the Incentive Bonus amounts set forth
above shall be automatically adjusted for the then current Bonus Period by
multiplying the Incentive Bonus amounts set forth above by a fraction, the
numerator of which is the CPI-U as of November 30, 1999, and the denominator of
which is the CPI-U as of the end of the calendar month preceding the Effective
Date.
A "Bonus Period" shall be each of the following periods: (i)
the full 1998 calendar year (which is also Company's fiscal year); (ii) the full
1999 calendar year; and (iii) the period beginning January 1, 2000 and ending on
the date of expiration of the Agreement Term.
The "Pro-Rata Factor" for the last Bonus Period (which is less
than 12 full months) shall mean a fraction, the numerator of which is the number
of calendar days in such Bonus Period, and the denominator of which is 365.
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(c) Long-Term Incentive Award. As soon as practicable after
the Effective Date, Company shall grant to Executive a phantom stock award
("Stock Award") that entitles Executive to receive, at the end of the Agreement
Term, an amount equal to the excess of (i) the Fair Market Value (as defined
below) of 450,000 shares of Common Stock of Company ("Stock") as of the Stock
Award Termination Date (as defined below), over (ii) the Fair Market Value of
the Stock as of the date of execution of this Agreement (as defined below). The
Stock Award shall be payable at the Stock Award Settlement Date (as defined
below) in cash or shares of Stock (subject to applicable tax withholding and,
only if the Stock Award is to be paid in shares of Stock, subject to stockholder
approval no later than the 1999 annual meeting of stockholders of Company), as
elected by Executive; provided, however, that the Stock Award shall be forfeited
if Executive has voluntarily terminated his employment with Company without Good
Reason, or Company has terminated Executive's employment with Company for Cause,
before the end of the Agreement Term.
The number of shares of Stock subject to the Stock Award Shall
be adjusted appropriately to reflect each change (if any) in the outstanding
Stock by reason of a stock dividend or distribution, recapitalization, merger,
consolidation, reorganization, stock split, reverse stock split, share
combination, share exchange, or any other change in capital structure of or by
the Company.
The "Stock Award Termination Date" shall mean the earliest of
(A) the last day of the Agreement Term, (B) the date of a Change in Control
after which shares of the Stock are or will be no longer traded on the New York
Stock Exchange (a "Trading-Ending Change in Control"), or (C) the date
immediately preceding the date, upon or after the termination of Executive's
employment under this Agreement other than by Company for Cause or by Executive
without Good Reason, on which Company receives written notice from
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Executive of final valuation of the Stock Award (the "Valuation Notice Date").
"Fair Market Value" shall mean:
(i) "as of the date of execution of this Agreement," the
price for a share of Stock paid by Securitas Capital, LLC and Risk
Capital Reinsurance in a pending private placement of Stock by Company
or if, for any reason, that placement is not consummated, the price
agreed upon by Company and Executive; and
(ii) on the last day of the Agreement Term or on the
Valuation Notice Date, the average of the closing prices of a share of
Stock, as reported on the New York Stock Exchange for the ten trading
days ending on the last day of the Agreement Term or on the Valuation
Notice Date, as the case may be (or if such day is not a trading day,
on the preceding trading day).
In the event of a Trading-Ending Change in Control, however, instead of the
definition in the preceding clause (ii), "Fair Market Value" shall mean the
highest per share consideration (as cash or, if not as cash, the cash or fair
market value thereof) received for a share of Stock in the Trading-Ending Change
in Control transaction.
The "Stock Award Settlement Date" means, as applicable, the
last day of the Agreement Term, the date of a Trading-Ending Change in Control,
or 15 days after the Valuation Notice Date.
(d) Expiration Payments and Benefits. At the expiration of the
Agreement Term (regardless of any then existing circumstance addressed by the
Retention Agreement that may be inconsistent herewith), if Executive has not
voluntarily terminated his employment with Company without
5
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Good Reason and Company has not terminated Executive's employment with Company
for Cause, Executive shall, in addition to the compensation provided elsewhere
in this Agreement, be entitled to the payments and benefits provided in Section
3.1 of the Retention Agreement, which shall be determined and paid as if
Executive's employment with Company had been terminated by Executive for Good
Reason or by Company without Cause, regardless of whether any such termination
has occurred ("Expiration Pay"); provided, however, that no Expiration Pay shall
be provided or payable hereunder if Executive has otherwise become entitled to
and has received (i.e., under Section 8(b) of this Agreement or the terms of the
Retention Agreement) the payments and benefits provided in Section 3.1 of the
Retention Agreement.
(e) Relocation. Executive shall establish a residence in the
general area of Dallas, Texas. Company shall assure that Executive suffers no
financial loss on the reasonable, arm's-length sale of Executive's current
residence in Indiana (the "Residence"), and in any event, if elected by
Executive by notice to Company given at any time after July 15, 1998, Company
shall purchase the Residence, within 15 days after Executive's notice to
Company, for the greater of (i) the average of the current appraisals of the
fair market value of the Residence determined by two qualified and licensed
residential real estate appraisers in the Indianapolis, Indiana area, one of
which is selected by Company and the other of which is selected by Executive, or
(ii) $480,000, which is Executive's estimated cost basis in the Residence.
Executive shall also receive the maximum level of relocation
benefits provided under the Company's relocation policy in effect on the
Effective Date, provided such benefits are not duplicative of any benefits
otherwise provided under this Section 3(e). In addition to the benefits (but
without duplication), or notwithstanding any limitations, in such relocation
policy, (i) Executive shall
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be paid by Company, within five days after execution of this Agreement, a
$40,000 cash allowance to Executive for the incidental expenses of his
relocation to the Dallas, Texas area, (ii) Company shall pay, or Executive shall
be reimbursed for, the cost of shipping or relocating three vehicles to the
Dallas, Texas area, (iii) the limitations or exclusions set forth in paragraph
(e) of such policy shall not apply, and (iv) Executive shall be reimbursed for
up to four "points" paid for, or incurred as mortgage loan origination and
discount fees, by Executive on the purchase of a residence in the Dallas, Texas
area.
From the Effective Date until the last day of the sixth full
calendar month following the Effective Date (or the date Executive's relocation
to the Dallas, Texas area is completed, if earlier), Company shall (i) provide a
temporary housing reimbursement (not to exceed $2,500 per month) for living
quarters in the Dallas, Texas area, (ii) reimburse Executive for reasonable
expenses incurred by Executive and his family while in the Dallas, Texas area
and (iii) reimburse Executive for reasonable expenses incurred for travel
between the Dallas, Texas area and the Residence, provided in each case that
Executive complies with the reasonable policies of Company relating to
submission of expense reports, receipts or similar documentation of such
expenses.
Executive shall receive an additional payment from Company in
an amount such that after payment by Executive of all taxes imposed upon
Executive as a result of the relocation payments, allowances and reimbursements
provided in this Section 3(e), Executive will retain a net after-tax benefit
that is equal to the amount of such payments, allowances and reimbursements.
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4. Employee Benefit Programs.
During the Agreement Term, but not after an earlier
termination of employment (except as stated in the Retention Agreement),
Executive shall be entitled to participate in all employee pension and welfare
benefit plans and programs made available to the senior-level executives of
Company or to its employees generally, as such plans or programs may be in
effect from time to time, including, without limitation, pension, profit
sharing, savings and other retirement plans or programs, medical, dental,
hospitalization, short-term and long-term disability and life insurance plans,
accidental death and dismemberment protection, travel accident insurance, and
any plans that supplement the above-listed types of plans or programs, whether
funded or unfunded. Company shall, to the extent possible without penalty for a
failure to provide similar treatment to other employees of Company, waive the
waiting or grace period applicable under any such plan or program before
Executive's participation therein can begin. To the extent that such waiver is
not possible, Company shall so inform Executive and shall reimburse Executive's
cost of continuing his existing coverage, or his participation in corresponding
plans or programs, from his previous employer, to the extent such coverage is
available from his previous employer.
5. Reimbursement of Business and Other Expenses.
Executive is authorized to incur reasonable travel and
business expenses that are consistent with his position and incurred in carrying
out his duties and responsibilities under this Agreement, and Company shall
promptly reimburse him for all such travel and business expenses incurred in
connection with carrying out the business of the Company, subject to reasonable
documentation in accordance with the reasonable policies of Company.
8
<PAGE>
6. Perquisites.
During the Agreement Term, Executive shall be entitled to
participate in all of Company's executive fringe benefits in accordance with the
terms and conditions of such arrangements as are in effect from time to time for
the senior-level executives of Company. Executive is also entitled to
reimbursement from Company of up to $5,000 for each of calendar years 1998,
1999, and 2000 (without proration) for tax, financial planning, and other
professional services.
7. Vacation.
Executive shall be entitled to 6 weeks' paid vacation each
calendar year, which vacation shall be earned on a pro-rata basis for each day
during the calendar year that Executive is employed by Company. In the event
that Executive does not use all of his vacation time during an applicable
calendar year, he shall be entitled to carry forward such unused vacation time;
provided, however, that only four weeks of unused vacation time (including all
previously carried forward unused vacation time) may be carried forward from any
one calendar year to the next calendar year. Company shall pay Executive any
earned and unused vacation at the end of the Agreement Term or, if earlier, upon
the termination of Executive's employment.
8. Termination of Employment. (a) Executive may terminate his
employment with Company for any (or no) reason, and any termination of
employment by Executive shall not be deemed a breach of this Agreement. Company
may also terminate Executive's employment with Company prior to the expiration
of the Agreement Term.
(b) If Executive terminates his employment with Company for
Good Reason, or if Company terminates Executive's employment with Company
without Cause, Executive
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shall be entitled to any payments and benefits provided pursuant to the terms of
the Retention Agreement in addition to (but without duplication) any amounts to
be paid or provided to Executive under the terms of this Agreement. If Executive
terminates his employment with Company without Good Reason, or if Company
terminates Executive's employment for Cause, then Company shall pay to
Executive, within 30 days of the date of such termination, only (i) the Base
Salary and any earned and unused vacation accrued through the date of such
termination, and (ii) any expenses that have not been reimbursed in accordance
with Section 5 herein.
(c) In the event of any termination of employment under this
Section 8, Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due to Executive under this Agreement
on account of any remuneration attributable to any subsequent employment
(including, without limitation, any self- employment) that he may obtain.
9. Confidentiality; Assignment of Rights.
(a) During the Agreement Term and thereafter, Executive shall
not disclose to anyone or make use of any trade secret or proprietary or
confidential information of Company, including such trade secret or proprietary
or confidential information of any customer or other entity to which Company
owes an obligation not to disclose such information, which he acquires during
the Agreement Term, including but not limited to records kept in the ordinary
course of business, except (i) as such disclosure or use may be required or
appropriate in connection with his work as an employee of Company or (ii) when
required to do so by a court of law, by any governmental agency or authority
having supervisory authority over the business of Company or by any governmental
agency or authority or administrative or legislative body (including a committee
thereof) with
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apparent jurisdiction to order him to divulge, disclose or make accessible such
information.
(b) Executive hereby sells, assigns and transfers to Company
all of his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "Rights") which during his
employment by Company are made or conceived by him, alone or with others and
which are within or arise out of any general field of Company's business or
arise out of any work he performs or information he receives regarding the
business of Company while employed by Company. During his employment by Company,
Executive shall fully disclose to Company as promptly as available all
information known or possessed by him concerning the rights referred to in the
preceding sentence, and upon request by Company and without any further
remuneration in any form to him by Company, but at the expense of Company,
execute all applications for patents and for copyright registration, assignments
thereof and other instruments and do all things which Company may deem necessary
to vest and maintain in it the entire right, title and interest in and to all
such Rights.
10. Noncompetition; Nonsolicitation.
(a) Executive covenants and agrees that he shall not directly
or indirectly engage in a Competitive Activity (as defined below) while employed
by Company hereunder.
"Competitive Activity" shall mean any activity engaged in by
Executive, whether as an employee, consultant, principal, agent, officer,
director, partner or shareholder (except as a less than one percent shareholder
of a publicly traded company or a less than five percent shareholder of a
privately held company), which is competitive with Company. For this purpose, an
activity "which is competitive with Company" shall mean a business that is
primarily involved in the acquisition of life insurance companies.
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(b) Executive covenants and agrees that he shall not directly
or indirectly solicit Company's or any of its subsidiaries' (i) employees during
the 18-month period following the date of the termination of his employment by
Company hereunder and (ii) agents, brokers and/or policyholders during the
Agreement Term.
(c) The parties acknowledge that in the event of a breach of
Sections 10(a) or (b) above, Company shall not have an adequate remedy at law.
Accordingly, in the event of any breach of Sections 10(a) or (b) above, Company
shall be entitled to such equitable and injunctive relief as may be available to
restrain Executive and any business, firm, partnership, individual, corporation
or entity participating in the breach from the violation of the provisions of
Sections 10(a) or (b) above. Nothing in this Agreement shall be construed as
prohibiting Company from pursuing any other remedies available at law or in
equity for breach of Sections 10(a) or 10(b) above, including the recovery of
damages.
11. Indemnification.
(a) Company agrees that if Executive is or becomes a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether brought by or in the right of the Company or otherwise
("Proceeding"), by reason of the fact that (whether before or after the
Effective Date) he is or was a director, officer or employee of Company or is or
was serving at the request of Company as a director, officer, member, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including (without limitation) service with respect to employee
benefit plans, whether or not the basis of such Proceeding is Executive's
alleged action in an official capacity while serving as a director, officer,
member,
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employee or agent, Executive shall be indemnified and held harmless by Company
to the fullest extent legally permitted or authorized by Company's certificate
or articles of incorporation or bylaws (or other applicable governing documents)
or resolutions of the Board (or other applicable governing body) or the
stockholders of Company or, if greater, by the laws of the State of Delaware or
any other applicable state of organization or formation, against all cost,
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, costs of appeal, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by Executive
in connection therewith, and such indemnification shall continue as to Executive
even if he has ceased to be a director, member, employee or agent of Company or
other entity and shall inure to the benefit of Executive's heirs, executors and
administrators. In this Section 11, (i) each reference to "Company" (other than
for the purpose of any notice) shall include, without limitation, all entities
that are subsidiaries and affiliates of Company, and (ii) all obligations of
Company shall be joint and several as to all entities included in such
definition of "Company." Company shall pay or provide such indemnification to
Executive in connection with a Proceeding within 60 days after written request
by Executive for that indemnification. During that 60-day period, Executive
shall have an opportunity to be heard and to present evidence in connection with
the consideration by the board of directors, independent legal counsel, or
stockholders, as the case may be, of any findings required by applicable law in
connection with that indemnification request. Company shall also advance to
Executive all reasonable costs and expenses incurred by him (including, without
limitation, all reasonable fees and costs of counsel selected by Executive, and
all other indemnifiable liabilities covered by this paragraph (a)) in connection
with a Proceeding within 30 days after written request by Executive for such
advance. Such request shall include an undertaking by Executive to repay the
amount of
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such advance if it shall ultimately be determined that he is not entitled to be
indemnified against such costs and expenses. In the event Company does not
properly indemnify or advance expenses to Executive in accordance with the terms
of this paragraph (a) (including, without limitation, the time period set forth
above), Executive shall be entitled to bring an action or proceeding against
Company in any state or federal court in Dallas County, Texas, in accordance
with Section 19 hereof, or before a panel of arbitrators in accordance with
Section 20 hereof, to enforce Company's indemnification or expense-advancement
obligations, and (in either case) Executive shall be reimbursed by Company for
the reasonable costs and expenses (including, without limitation, reasonable
attorneys fees and costs) of any successful enforcement of Company's
indemnification or expense-advancement obligations.
(b) Neither the failure of Company (including, without
limitation, its board of directors, independent legal counsel or stockholders)
to have made any determination that indemnification of Executive is proper
because he has met the applicable standard of conduct, nor a determination by
Company (including, without limitation, its board of directors, independent
legal counsel or stockholders) that Executive has not met such applicable
standard of conduct, shall create a presumption that Executive has not met the
applicable standard of conduct or shall be a defense to any action or proceeding
to enforce Company's indemnification or expense-advancement obligations. Company
shall have the burden of proof in establishing that Executive has not met the
applicable standard of conduct. The termination of any Proceeding by judgment,
court order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Executive did not
meet the applicable standard of conduct. Where Executive is entitled to
indemnification under this Section 11 for a portion of the indemnifiable
liabilities described in paragraph (a) of
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this Section 11, but not for the total amount of liabilities of that kind,
Company shall nevertheless indemnify Executive for such portion of the
indemnifiable liabilities to which Executive is entitled.
(c) Executive's rights provided in this Section 11 shall not
be exclusive of any other rights of indemnification or advancement of expenses
(or any similar rights) that Executive may have against Company or under any
liability insurance covering Executive.
(d) Company agrees to continue and maintain one or more
directors' and officers' liability insurance policies that cover Executive (with
reputable and financially sound insurers) at a level that is commercially
reasonable (in light of Company's business and the risks of litigation or
claims) and not less than the level of coverage provided as of the Effective
Date, and otherwise to the fullest extent Company provides such coverage for any
of its other executive officers.
(e) Without limiting the generality of Section 17 hereof, the
rights of indemnity and advancement of expenses in favor of Executive in this
Section 11 shall continue and survive any expiration or termination of this
Agreement or Executive's ceasing to be a director, officer, or employee of
Company.
12. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors, heirs (in the case of Executive)
and permitted assigns. No rights or obligations of Company under this Agreement
may be assigned or transferred by Company (including, without limitation, by
merger, consolidation, or other operation of law) except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in
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which Company is not the continuing or surviving entity, or the sale or
liquidation of all or substantially all of the assets of Company, to one or more
entities that have the financial and other ability to perform Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of Company
and such assignee or transferee assumes the liabilities, obligations and duties
of Company under this Agreement, either contractually or as a matter of law. No
rights or obligations of Executive under this Agreement may be assigned or
transferred by Executive other than his rights to compensation and benefits,
which may be transferred only by will or operation of law, except as provided in
Section 18 below.
13. Representation.
Company represents and warrants that it is fully authorized
and empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. Executive represents that he knows of no
agreement between him and any other person, firm or organization that would be
violated by the performance of his obligations under this Agreement.
14. Entire Agreement.
This Agreement and the Retention Agreement contain the entire
understanding and agreement between the parties concerning the subject matter
hereof and supersede all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the parties with
respect thereto. Nothing in this Agreement impairs or otherwise adversely
affects any of Executive's rights to or under any stock option or restricted
stock agreements with Company (or any of its subsidiaries or affiliates) in
effect on the Effective Date.
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15. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of Company (other than Executive), as the case may be.
16. Severability.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
17. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term to the extent necessary to the intended preservation of such
rights and obligations.
18. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In
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the event of Executive's death or a judicial determination of his incompetence,
reference in this Agreement to Executive shall be deemed, where appropriate, to
refer to his beneficiary, estate or other legal representative.
19. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Texas without reference to principles
of conflict of laws. Jurisdiction and venue of any action or proceeding relating
to this Agreement shall be exclusively in state or federal courts in Dallas
County, Texas.
20. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement (other than injunctive or equitable relief sought to enforce Sections
9 or 10 hereof, or any enforcement of Executive's rights under Section 11, which
may (if Executive so elects) be brought in any court having jurisdiction in
accordance with this Agreement) shall, at the election of Executive or Company,
be resolved by binding arbitration in accordance with the terms and procedures
provided in Section 5.1 of the Retention Agreement.
21. Notices.
Any notice given to a party shall be in writing and shall be
deemed to have been given when delivered personally or by courier, or upon
receipt if sent by certified or registered mail, postage prepaid, return receipt
requested, duly addressed to the party concerned at the address indicated below
or to such changed address as such party may subsequently give such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
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If to Executive: Keith A. Maib
2513 Beacon Crest Drive
Plano, Texas 75093
22. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
23. Counterparts.
This Agreement may be executed in two or more counterparts.
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IN WITNESS WHEREOF, the undersigned have executed this
Agreement on this 23rd day of July, 1998.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/Keith A. Maib
-------------------------------------
Keith A. Maib
Execution Copy
Executive Retention Agreement
THIS AGREEMENT is entered into as of this 1st day of July,
1998 ("Effective Date"), by and between PENNCORP FINANCIAL GROUP, INC., a
Delaware corporation ("Company") and Keith A. Maib ("Executive").
A. The Board of Directors of the Company desires to assure
that key executives will devote their undivided time and attention to the
Company without regard to concerns about an involuntary loss of employment
without cause, and to assure the continuity and cooperation of management in the
event of a change in ownership and the continued attention of Executive to his
duties without any distraction arising out of the circumstances surrounding a
change or potential change in ownership.
B. The Company and Executive desire to enter into an executive
retention arrangement to protect Executive against an involuntary termination of
employment without cause, to recognize the additional efforts of Executive that
may be necessary to assist in and prepare for any potential change in ownership,
and to encourage Executive to diligently perform his duties and responsibilities
to ensure a smooth transition for any such change in ownership.
C. The Company and Executive have entered an Executive
Employment Agreement dated to be effective as of the Effective Date (the
"Employment Agreement"), which refers to and otherwise contemplates this
Agreement.
For good and valuable consideration, including the mutual
covenants herein, the parties hereto agree as follows:
<PAGE>
1. Definitions. The following terms shall have
the following meanings for purposes of this Agreement.
"Annual Pay" means:
(1) for any termination of employment on or prior to the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement, $1,000,000; and
(2) for any termination of employment after the first
anniversary of Executive's employment with the Company pursuant to the terms of
the Employment Agreement and prior to the expiration of the Agreement Term (as
defined in the Employment Agreement), the sum of:
(i) the annual rate of Base Salary (as defined in the
Employment Agreement) payable to the Executive immediately before the
termination, plus
(ii) an amount equal to the product of the annual rate of Base
Salary times a percentage determined as follows -
(A) for a termination occurring during the 1999 calendar year
and after the first anniversary of Executive's employment
under the Employment Agreement, the percentage equal to the
percentage of the annual rate of Base Salary that was paid (or
payable) to Executive as the Incentive Bonuses (as defined in
the Employment Agreement) for the Bonus Period (as defined in
the Employment Agreement) ended on December 31, 1998, and
(B) for a termination occurring during the 2000 calendar year,
the percentage equal to the percentage of the annual rate of
Base Salary that
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is the average of the Incentive Bonuses for the Bonus Period
ended on December 31, 1998, and the Incentive Bonuses for the
Bonus Period ended December 31, 1999.
"Cause" means:
(1) for any termination prior to the earlier of a Change in
Control or a Potential Change in Control, (i) a material and demonstrable
adverse change after the Effective Date in the Executive's performance of his
duties and responsibilities in effect as of the Effective Date, other than any
changes in performance by reason of sickness or disability of the Executive and
any changes in Executive's duties and responsibilities made after the Effective
Date, (ii) willful misconduct or gross negligence in the performance of, or
willful neglect of, the Executive's duties, which has caused demonstrable and
serious injury (monetary or otherwise) to the Company, (iii) conviction (after
exhaustion or expiration of all rights of appeal) of the Executive of a criminal
violation involving fraud, embezzlement or theft in connection with his duties
or in the course of his employment with the Company, (iv) conviction (after
exhaustion or expiration of all rights of appeal) of, or plea of nolo contendere
to, a felony (excluding a traffic violation) by the Executive or (v) Executive's
willful inattention to or willful lack of diligence in attempting to achieve, as
part of the performance of his duties under the Employment Agreement, his
performance goals set forth in Exhibit I and Exhibit II to the Employment
Agreement; and
(2) for any termination on or after a Change in Control or
Potential Change in Control, the Executive's (i) conviction (after exhaustion or
expiration of all rights of appeal) of a criminal violation involving fraud,
embezzlement or theft in connection with his duties or in the course of his
employment with the Company, (ii)
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conviction (after exhaustion or expiration of all rights of appeal) of, or plea
of nolo contendere to, a felony (excluding a traffic violation).
No act or omission shall be considered "willful" if the Executive believed in
good faith that such acts or omissions were in, or at least not opposed to, the
best interests of the Company.
No act or omission shall constitute Cause unless the Board of Directors of the
Company provides to the Executive (a) written notice clearly and fully
describing the particular acts or omissions which the Board reasonably believes
in good faith constitutes Cause and (b) an opportunity, within 30 days following
his receipt of such notice, to meet in person with the Board of Directors to
explain or defend the alleged acts or omissions relied upon by the Board and, to
the extent practicable, to cure such acts or omissions. Executive shall further
have the right to contest a determination of Cause by the Company by requesting
arbitration on an expedited basis in accordance with the terms of Section 5.1
hereof.
"Change in Control" means (1) any "person" (as such term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes the "beneficial owner" (as determined pursuant to Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities; or (2) during any period of
two (2) consecutive years (not including any period prior to the execution of
this Agreement), individuals who at the beginning of such period constitute the
members of the Company's Board of Directors (the "Board") and any new director,
whose election to the Board or nomination for election to the Board by the
Company's stockholders was approved by a vote of at least two-thirds
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(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of the
Board; or (3) the Company shall merge with or consolidate into any other
corporation, other than a merger or consolidation which would result in the
holders of the voting securities of the Company outstanding immediately prior
thereto holding immediately thereafter securities representing more than sixty
percent (60%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or (4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets or such a plan is
commenced.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Good Reason" means any of the following events occurring,
without Executive's prior written consent specifically referring to this
Agreement:
(1) (A) any reduction in the amount of Executive's annual
salary, guaranteed incentive compensation or aggregate
incentive compensation opportunities (which reduction may also
occur pursuant to any assignment of performance goals and
corresponding awards which are inconsistent with prior
performance goals and awards), (B) any significant reduction
in the aggregate value of Executive's benefits as such
benefits may be increased from time to time (unless such
reduction is pursuant to a general change in benefits
applicable to all similarly situated employees of the Company
and its affiliates) or (C) any
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material and willful breach by the Company of any provision of
this agreement or any written employment agreement with
Executive;
(2) (A) assignment to Executive of any duties inconsistent
with his status as Chief Operating Officer of the Company, as
Chairman of the Company's Operating Committee and as a member
of the Board of Directors of the Company, (B) the removal of
Executive from his position as Chief Operating Officer of the
Company, as Chairman of the Company's Operating Committee or
as a member of the Board of Directors of the Company, (C) the
failure to retain Executive as the Chief Operating Officer, as
the Chairman of the Operating Committee and as a member of the
Board of Directors of any successor to the Company (whether by
merger, consolidation or sale or disposition of all or
substantially all of the assets of the Company) or any entity
which directly or indirectly owns twenty five percent (25%) or
more of any class of securities of the Company or any
successor to the Company (whether by merger, consolidation or
sale or disposition of all or substantially all of the assets
of the Company) or (D) any significant change in the nature or
status of Executive's duties or responsibilities;
(3) a significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties
attached to the Executive's position with the Company;
(4) (A) transfer of Executive's principal place of employment
to a location more than 18 miles away from Dallas, Texas or
(B) Executive is required to travel outside of the continental
United States more than four times during any
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calendar year or for more than 10 days in the aggregate in any
calendar year;
(5) failure by the Company to obtain the assumption agreement
referred to in Section 12 of the Employment Agreement or
Section 8 of this Agreement prior to the effectiveness of any
succession referred to therein, unless the purchaser,
successor or assignee referred to therein is bound to perform
this Agreement by operation of law; or
(6) the Executive receives notice from any party to an
agreement (or its representative) which contemplates a Change
in Control that, on or after such Change in Control, an event
will occur that will constitute Good Reason as described in
(1) through (5) above.
Notwithstanding the above, (i) the occurrence of any of the events described in
(1) through (5) above will not constitute Good Reason unless the Executive gives
the Company written notice, within 90 calendar days after the Executive knew or
should have known of the occurrence of any of the events described in (1)
through (5) above, that such event constitutes Good Reason, and the Company
thereafter fails to cure the event within the earlier of (x) the closing for a
Change in Control or (y) thirty (30) days after receipt of such notice, and (ii)
the receipt of notice described in (6) above will not constitute Good Reason
until a Change in Control actually occurs and will otherwise not constitute Good
Reason if the Executive is provided reasonable assurances by the Company prior
to such Change in Control that an event described in (1) through (5) above is
not contemplated on or after a Change in Control; provided, however, that any
such assurances shall not impair or otherwise affect any of Executive's rights
upon the occurrence of any Change in Control described in (1) through
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(5) above or if there is any termination of Executive's employment by Company
other than for Cause or by Executive with Good Reason.
"Potential Change in Control" means the occurrence of active
discussions between the Company and a potential purchaser of the Company that
contemplates a transaction which would result in a Change in Control, but only
if a Change in Control results within twelve months following such occurrence.
2. Term. The term of this Agreement commences on
the Effective Date and expires upon the earliest to occur of
the following:
(a) the expiration of the Agreement Term,
(b) the Executive's death, or
(c) the Executive's disability (within the meaning of the
long-term disability plan in effect for and
applicable to the Executive).
Any obligations of the Company under this Agreement or the Employment Agreement
that arise, become effective, or accrue on, as of or before the expiration of
the Agreement Term or that arise, become effective, or accrue upon the death or
disability of the Executive (even if, in any case, they are performable after
the end of the Agreement or the death or disability of the Executive), however,
shall survive the expiration or termination of this Agreement.
3. Involuntary Termination Payment and Benefits
3.1 Involuntary Termination. In the event either (i)
Executive's employment with the Company or its successor is terminated by
Executive for Good Reason, (ii) the Executive's employment with the Company or
its successor is
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terminated by the Company or its successor without Cause, or (iii) Executive's
employment with the Company or its successor is terminated by reason of his
death or disability, Executive shall be entitled to the following payments and
other benefits:
a. An amount equal to the sum of (i) Executive's accrued and
unpaid Base Salary and earned but unused vacation and personal
days as of the date of termination of employment and any
expenses that have not yet been reimbursed by Company under
the Employment Agreement; plus (ii) his accrued and unpaid
Incentive Bonuses, if any, for the prior Bonus Period, plus
(iii) a pro rated portion of the annual Incentive Bonuses for
the Special Bonus Period (as defined below) in which the
Executive's termination occurs. For purpose of clause (iii),
(A) the proration shall be calculated by applying the Pro Rata
Factor (as defined in the Employment Agreement); (B) the
"Special Bonus Period" shall mean (1) the Effective Date
through the first anniversary of Executive's employment under
the Employment Agreement, (2) the date following the first
anniversary of Executive's employment under the Employment
Agreement through December 31, 1999, and (3) January 1, 2000
through the last day of the Agreement Term; and (C) the annual
Incentive Bonuses for each Special Bonus Period shall be (1)
for the first Special Bonus period, an amount equal to
$600,000 less any amount already paid to Executive as the
Incentive Bonus(es) for the 1998 calendar year, (2) for the
second Special Bonus period, an amount equal to the amount of
the Incentive Bonus(es) paid (or payable) to Executive for the
1998 calendar year, and (3) for the third Special Bonus
Period, an amount equal to the average of the Incentive
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Bonus(es) paid (or payable) to Executive for the 1998 calendar
year and the 1999 calendar year.
The amount described in clause (i) above shall be paid on the
date of the termination of Executive's employment, and the
amount or amounts described in clauses (ii) and (iii) above
shall be paid on the earlier of the date of the Executive's
termination of employment or the respective date that
Incentive Bonuses are otherwise payable under the Employment
Agreement.
b. Subject to Section 3.2 below, (i) in the case of
termination by Executive for Good Reason or by Company without
Cause, an amount equal to three times Executive's Annual Pay
or (ii) in the case of a termination for death or disability,
an amount equal to one and one-half times Executive's Annual
Pay (as the case may be, "Termination Pay"). Termination Pay
shall be paid on the earlier of (i) within ten (10) days after
the Company's delivery of written notice to the Executive of
termination of his employment without Cause or because of his
disability, (ii) within thirty (30) days after the Executive's
delivery of written notice to the Company of his resignation
for Good Reason (unless cured), (iii) the date on which a
Change in Control occurs or (iv) within thirty (30) days after
the Executive's death (the "Payment Date").
c. Notwithstanding the language of any other agreement or
document to the contrary, all unexercisable options to
purchase shares of stock of the Company or of any entity
affiliated with the Company that are held by the Executive
shall become fully vested and immediately exercisable
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(and shall remain exercisable until the expiration of the full
term of those options).
d. All restricted stock of the Company and any other
equity-based rights (including, without limitation, phantom
stock) held by the Executive shall become fully vested and all
restrictions thereon shall lapse.
e. A lump sum payment on the Payment Date equal to the
Executive's unvested accrued benefit under any tax-qualified
retirement plan sponsored by the Company.
f. Executive and his eligible dependents shall be entitled,
for a period of three (3) years following the date of
termination of employment, to continued coverage, at the cost
of the Company, under the Company's group health, dental and
life insurance plans as in effect from time to time (but not
any other welfare benefit plans or any retirement plans);
provided that coverage under any particular benefit plan shall
expire with respect to the period after Executive becomes
covered under another employer's plan providing for a similar
type of benefit. In the event the Company is unable to provide
such coverage on account of any limitations under the terms of
any applicable contract with an insurance carrier or third
party administrator, the Company shall pay Executive an amount
equal to the cost of such coverage.
Except as provided in Section 3.2 below, the foregoing
payments and benefits shall be in addition to and not in lieu of any payments or
benefits to which Executive and his dependents may otherwise be entitled to
under the Company's compensation and employee benefit plans, policies
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or practices. Nothing herein shall be deemed to restrict the right of the
Company from amending or terminating any such plan in a manner generally
applicable to similarly situated active employees of the Company and its
affiliates, in which event Executive shall be entitled to participate on the
same basis (but at the cost of the Company) as similarly situated active
executives of the Company and its affiliates; provided, however, that no such
amendment or termination shall impair or otherwise affect the Executive's rights
or remedies under this Agreement or the Employment Agreement.
3.2 Offset for Other Severance Pay. There shall be no
duplication of severance pay in any manner, in that Executive shall not be
entitled to Termination Pay hereunder for more than one position with the
Company. Further, Termination Pay shall be in lieu of any other payments in the
nature of severance pay which Executive has received or will receive from the
Company (excluding phantom stock awards payable under the Employment Agreement
or any other amounts payable under Section 3.1 hereof). If Executive is entitled
to Termination Pay, any other arrangement providing severance payments (except
for phantom stock awards under the Employment Agreement and amounts under
Section 3.1 hereof) shall be deemed to be amended to eliminate any obligation
for such payments to be provided thereunder to Executive. If Executive is
entitled to any payment in lieu of notice of termination of employment under
Federal, state or local law, including but not limited to the Worker Adjustment
and Retraining Notification Act, the Termination Pay to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment in lieu of notice.
3.3 Transition Services. If Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason in
connection with or at the time of a Purchase (as defined below) and the
purchaser
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under the Purchase specifically requests the continued services of Executive
after the closing of the Purchase, then, notwithstanding the termination without
Cause or for Good Reason -- which shall be deemed to have occurred for all
purposes of the Employment Agreement and this Agreement -- Executive will
perform the requested transition services to the extent set forth below in this
Section. In this Section, "Purchase" means a purchase of all or substantially
all of the equity securities or assets of the Company that is negotiated with
the Board of Directors of the Company by or on behalf of a purchaser. Executive
will perform those transition services for up to (i) six months following the
closing of the Purchase, or (ii) the expiration of the Agreement Term as defined
in the Employment Agreement, whichever is earlier (the "Transition Period").
Executive's rendering those services will be conditioned, however, upon his
receipt of (A) all payments and benefits due to Executive under the Employment
Agreement and this Agreement, including (without limitation) all amounts due
because of the termination without Cause or for Good Reason, and (B)
compensation and benefits for his services during the Transition Period that are
no less than the compensation and benefits to which he was entitled from the
Company under the Employment Agreement and this Agreement before the Transition
Period. Neither Executive's performance of the transition services described in
this Section nor any other provisions of this Section shall be deemed to impair
or affect any of the rights or remedies of Executive under the Employment
Agreement or this Agreement as a result of a Change in Control or a termination
without Cause or for Good Reason.
3.4. No Mitigation. The Executive shall not be obligated to
seek or secure new employment or to become self-employed after termination of
his employment with Company, but shall be obligated to report promptly to the
Company any actual employment obtained during the period for which employee
benefits continue pursuant to Section 3.1.
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Except as expressly stated in Section 3.1.f of this Agreement, there shall be no
offset against any amounts due to Executive under this Agreement on account of
any remuneration or benefits attributable to any subsequent employment
(including, without limitation, any self- employment) that he may obtain.
4. Excise Taxes.
a. Anything in this Agreement to the contrary
notwithstanding and except as set forth below, if it is determined that any
payment or distribution by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 4) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties are
incurred by Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then Executive shall be entitled to receive an additional
payment ("Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this
paragraph "a", if it is determined that Executive is entitled to a Gross-Up
Payment, but that Executive, after taking into account the Payments and Gross-Up
Payment, would not receive a net after-tax benefit of at least $25,000 (taking
into account both income taxes and any Excise Tax) as compared to the net
after-tax proceeds to Executive resulting from an elimination of the Gross-Up
Payment and a reduction of the Payments, in the
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aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments
would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
b. Subject to the provisions of paragraph "c" of this Section
4, all determinations required to be made under this Section 4, including
(without limitation) whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be used in arriving at
such determination, shall be made by a certified public accounting firm selected
by the Company and reasonably acceptable to Executive (the "Accounting Firm"),
which shall be retained to provide detailed supporting calculations both to the
Company and Executive within 15 business days of the receipt of notice from
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be paid solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4,
shall be paid by the Company to Executive within five (5) days of the receipt of
the Accounting Firm's determination. Any determination by the Accounting Firm
shall be binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph "c" of
this Section 4 and Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
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c. Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten (10) business days after Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid or appealed.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies Executive in writing prior to the expiration of
such period that it desires to contest such claim, Executive shall:
(a) give the Company any information reasonably
requested by the Company relating to such
claim,
(b) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney selected by the
Company and reasonably acceptable to
Executive,
(c) cooperate with the Company in good faith in order to
effectively contest such claim, and
(d) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties)
incurred in
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connection with such contest and shall indemnify and hold Executive harmless, on
an after-tax basis, for any Excise Tax or income tax (including, without
limitation, interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph "c", the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or to contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax or income tax (including, without limitation, interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder, and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
d. If, after the receipt by Executive of an amount advanced by
the Company pursuant to paragraph "c" of
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this Section 4, Executive becomes entitled to receive any refund with respect to
such claim, Executive shall (subject to the Company's complying with the
requirements of paragraph "c" of this Section 4) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If after the receipt by Executive of an amount
advanced by the Company pursuant to paragraph "c" of this Section 4, a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
5. Claims.
5.1 Arbitration of Claims. Company and Executive agree to
settle by arbitration any dispute or controversy arising in connection with this
Agreement, whether or not such dispute involves a plan subject to the Employee
Retirement Income Security of 1974, as amended ("ERISA"). Such arbitration shall
be conducted on an expedited basis in accordance with the Commercial Arbitration
Rules of the American Arbitration Association before a panel of three
arbitrators, selected by the American Arbitration Association, sitting in
Dallas, Texas. The award of the arbitrators shall be final and nonappealable,
and judgment may be entered on the award of the arbitrators in any court having
proper jurisdiction. All expenses of such arbitration shall be borne by the
Company in accordance with Section 5.2 hereof.
5.2 Payment of Legal Fees and Costs. The Company agrees to
pay as incurred, to the full extent permitted by law, all legal fees and
expenses which
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Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, Executive or others of any action taken
pursuant to the terms of this Agreement or the Employment Agreement, or of the
validity or enforceability of, or liability under, any provision of this
Agreement or the Employment Agreement, or any guarantee of performance thereof
(including, without limitation, as a result of any contest by Executive about
the amount of payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code.
5.3 Agent for Service of Legal Process. Service of legal
process with respect to a claim under this Agreement or the Employment Agreement
shall be made upon the General Counsel of the Company.
6. Tax Withholding. All payments to the Executive under this
Agreement will be subject to the withholding of all applicable employment and
income taxes.
7. Severability. In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect.
8. Assignability; Successors. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, heirs (in the case of Executive) and permitted assigns. No rights or
obligations of Company under this Agreement may be assigned or transferred by
Company (including, without limitation, by merger, consolidation or other
operation of law), except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which Company is not the
continuing or surviving entity, or the
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sale or liquidation of all or substantially all of the assets of Company, to one
or more entities that have the financial and other ability to perform Company's
obligations under this Agreement; provided, however, that the assignee or
transferee is the successor to all or substantially all of the assets of Company
and such assignee or transferee assumes the liabilities, obligations, and duties
of Company under this Agreement, either contractually or as a manner of law. The
Company will require any successor to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no succession had taken place.
9. Entire Agreement. Except for compensation and employee
benefit plans or programs maintained by the Company from time to time and the
Employment Agreement, this Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof. Nothing in this
Agreement impairs or otherwise adversely affects any of Executive's rights to or
under any stock option or restricted stock agreements with the Company (or any
of its subsidiaries or affiliates) in effect on the Effective Date.
10. Notices. Any notice given to a party shall be in writing
and shall be deemed to have been given when delivered personally or by courier,
or upon receipt if sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the party concerned at the address
indicated below or to such changed address as such party may subsequently give
such notice of:
If to Company: PennCorp Financial Group, Inc.
590 Madison Avenue
New York, New York 10022
Attention: Chief Executive Officer
20
<PAGE>
If to Executive: Keith A. Maib
2513 Beacon Crest Drive
Plano, Texas 75093
11. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of Company (other than Executive). No waiver by either party of any
breach by the other party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by Executive or an
authorized officer of Company (other than Executive), as the case may be.
12. Survivorship.
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment or the expiration of
the Agreement Term or any expiration or termination of this Agreement, in each
case to the extent necessary to the intended preservation of such rights and
obligations.
13. Beneficiaries/References.
Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death or
incompetence by giving Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to
21
<PAGE>
Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
14. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of Texas without reference to principles
of conflict of laws. Jurisdiction and venue of any action or proceeding relating
to this Agreement (to the extent permitted) shall be exclusively in state or
federal courts in Dallas County, Texas.
15. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
16. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the Executive and the Company have
executed this Agreement as of the date and year first above written.
PENNCORP FINANCIAL GROUP, INC.
/s/David Stone
-------------------------------------
Name: David Stone
Title: Chairman, President and CEO
/s/Keith A. Maib
-------------------------------------
Keith A. Maib
EXHIBIT 11.1
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended Six Month Periods Ended
June 30, June 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.. $ (163,904) $ 13,209 $ (167,590) $ 20,645
Redemption Premium on Series C
Preferred Stock............................. -- -- (1,913) --
------------- ------------- ------------- -------------
$ (163,904) $ 13,209 $ (169,503) $ 20,645
============= ============= ============= =============
Diluted net income (loss) applicable to common stock:
Net income (loss) applicable to common stock.. $ (163,904) $ 13,209 $ (167,590) $ 20,645
Redemption Premium on Series C
Preferred Stock............................. -- -- (1,913) --
Common stock equivalents:
Convertible preferred stock dividend
requirements......................... -- 1,941 -- --
------------- ------------- ------------- -------------
$ (163,904) $ 15,150 $ (169,503) $ 20,645
============= ============= ============= =============
Three Month Periods Ended Six Month Periods Ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Basic:
Shares outstanding beginning of period........ 28,860 28,648 28,860 28,648
Incremental shares applicable to Stock
Warrants/Stock Options...................... 377 157 376 118
Acquisition of Fickes and Stone Knightsbridge
Interests................................... 347 -- 347 --
Redemption of Series C Preferred Stock........ 692 -- 348 --
Treasury shares............................... (1,010) (763) (1,010) (644)
------------- ------------- ------------- -------------
29,266 28,042 28,921 28,122
============= ============= ============= =============
Diluted:
Shares outstanding beginning of period........ 28,860 28,648 28,860 28,648
Incremental shares applicable to Stock
Warrants/Stock Options...................... 377 959 376 965
Acquisition of Fickes and Stone Knightsbridge
Interests................................... 347 -- 347 --
Treasury shares............................... (1,010) (763) (1,010) (644)
Redemption of Series C Preferred Stock........ 692 -- 348 --
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 -- --
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... -- -- -- --
------------- ------------- ------------- -------------
29,266 33,932 28,921 28,969
============= ============= ============= =============
</TABLE>
<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 June 30, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 3,833,653
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 28,079
<MORTGAGE> 276,578
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,534,387
<CASH> (3,889)
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 189,907
<TOTAL-ASSETS> 6,619,043
<POLICY-LOSSES> 4,459,280
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 548,453
0
249,670
<COMMON> 302
<OTHER-SE> 475,584
<TOTAL-LIABILITY-AND-EQUITY> 6,619,043
237,807
<INVESTMENT-INCOME> 188,533
<INVESTMENT-GAINS> 8,888
<OTHER-INCOME> 21,233
<BENEFITS> 291,669
<UNDERWRITING-AMORTIZATION> 58,596
<UNDERWRITING-OTHER> 268,214
<INCOME-PRETAX> (162,018)
<INCOME-TAX> (5,459)
<INCOME-CONTINUING> (156,559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167,590)
<EPS-PRIMARY> (5.86)
<EPS-DILUTED> (5.86)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
