- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 1-11422
PENNCORP FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of 13-3543540
incorporation or organization) (I.R.S. employer identification no.)
c/o Southwestern Financial
Services Corporation
717 North Harwood Street 75201
Dallas, Texas (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 954-7111
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1999: $14,520,796.
The number of Common Stock shares outstanding as of March 25, 1999, was
29,041,593.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders scheduled
for May 13, 1999, is incorporated by reference into Part III hereof.
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<PAGE>
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters 24
Item 6. Selected Consolidated Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk Exposures of Financial Instruments for the
Retained Businesses 43
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 114
PART III
Item 10. Directors and Executive Officers of the Registrant 114
Item 11. Executive Compensation 114
Item 12. Security Ownership of Certain Beneficial Owners
and Management 114
Item 13. Certain Relationships and Related Transactions 114
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 115
2
<PAGE>
PART I
Item 1. Business
GENERAL DESCRIPTION AND HISTORY
PennCorp Financial Group, Inc. ("PennCorp" or the "Company"),
incorporated in Delaware in 1989, is a holding company, the principal
subsidiaries of which are insurance companies with operations in Dallas and
Waco, Texas; Raleigh, North Carolina; and Toronto, Canada. The Company's
insurance subsidiaries market and underwrite life insurance, accumulation
products and fixed benefit accident and sickness insurance to lower and
middle-income markets throughout the United States and Canada. The Company's
insurance products are sold through several distribution channels including
independent general agents, exclusive agents, payroll deduction programs and
financial institutions. During 1997 the Company restructured its operating units
into three primary business units: the Financial Services Division, the Payroll
Sales Division and the Career Sales Division. Information relating to the
Company's U.S. and Canadian operations appears in Note 4 of "Notes to
Consolidated Financial Statements." For more information regarding the Company's
markets, see "Insurance" and "Marketing and Distribution" included herein.
BUSINESSES HELD FOR SALE
On February 18, 1998, the Company announced it had engaged the
investment banking firms Salomon Smith Barney, Inc. and Fox-Pitt, Kelton Inc. to
review strategic alternatives for maximizing shareholder value, including the
sale of the Company's Career Sales Division and certain other non-strategic
subsidiaries.
The Career Sales Division is comprised in part of the operations of
Pennsylvania Life Insurance Company ("PLIC") and PennCorp Life Insurance Company
(together with PLIC, "Penn Life"). 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 acquisition in January 1998 of Southwestern Financial
Corporation and its subsidiaries ("SW Financial"), the Company has integrated
Union Bankers Insurance Company ("Union Bankers"), Constitution Life Insurance
Company ("Constitution") and Marquette National Life Insurance Company
("Marquette") into the Career Sales Division. See "Acquisition of SW Financial
Controlling Interest and KB Interests." Peninsular Life Insurance Company
("Peninsular") is also part of the Career Sales Division.
On December 31, 1998, the Company entered into a definitive agreement
to sell the Career Sales Division and related assets to Universal American
Financial Corp. ("Universal American"). The purchase price of $175.0 million is
subject to adjustment based on the capital and surplus of the Career Sales
Division at the closing date. The purchase price consists of $136.0 million in
cash and $39.0 million initial principal amount, subject to adjustment, of
subordinated notes of Universal American. The subordinated notes will bear
interest at a rate of 8.0% per annum and will mature ten years from date of
issuance. The accreted value of the notes will be subject to offset in the event
of adverse development (or subject to increase in the event of positive
development) in the disability income reserves of PLIC and may be offset for
other indemnification claims under the purchase and sale agreement. In addition,
the Company is required under terms of the purchase and sale agreement to
deliver the Career Sales Division and related assets with certain minimum levels
of statutory capital and surplus, pay certain ongoing costs and other expenses
which the Company anticipates will result in its receiving net cash proceeds of
approximately $70.0 to $78.0 million. For additional information concerning the
disability insurance reserves of PLIC, see Note 8 of Notes to Consolidated
Financial Statements.
Also on December 31, 1998, the Company signed a definitive agreement to
sell Professional Insurance Company ("Professional"). Professional, which
previously was included in the Payroll Sales Division, provides individual fixed
benefit and life products utilizing a network of independent agents primarily in
the southeastern United States through employer-sponsored payroll deduction
programs. Pursuant to the purchase and sale agreement, Professional will be sold
to GE Financial Assurance Holdings, Inc. ("GEFAH") for $47.5 million in cash.
The purchase price is subject to adjustment based on Professional's capital and
surplus at the closing date. In addition, GEFAH will pay interest on the
purchase price from December 31, 1998 to the date of closing. The Company
currently estimates receiving net cash proceeds for the Professional sale of
approximately $40.0 million to $41.5 million.
On February 21, 1999, the Company signed a definitive agreement to sell
United Life & Annuity Insurance Company ("United Life") and its wholly-owned
subsidiary, United Variable Services, Inc., to ING America Insurance Holdings,
Inc. ("ING"). United Life, which previously was included in the Financial
Services Division, principally markets fixed and variable annuities through
financial institutions and independent general agents, primarily in the southern
and
3
<PAGE>
western United States. The sale of United Life to ING also includes the sale of
UC Mortgage Corp. ("UC"), Cyberlink Development, Inc. ("Cyberlink") and certain
assets of Marketing One, Inc. ("Marketing One"). The aggregate purchase price
consists of $152.0 million and a dividend payable by United Life at closing,
which the Company estimates will be approximately $2.1 million. The purchase
consideration may be reduced as a result of the Company's obligation to purchase
certain mortgages from United Life at closing. Additionally, a portion of the
purchase price may be escrowed at closing to fund the Company's obligation to
purchase additional mortgages from United Life after closing. United Life,
including its subsidiary United Variable Services, Inc., UC, Cyberlink and
certain assets of Marketing One are referred to herein collectively as the
"United Life Assets." The Company anticipates receiving net cash proceeds from
the sale of the United Life Assets of approximately $140.0 million.
In the third quarter of 1998, the Company made the decision to sell
KIVEX, Inc. ("KIVEX"), an internet service provider. The Company has engaged the
investment banking firm of ING Barings Furman Selz in this regard and is
currently soliciting interest from prospective purchasers. To date, the Company
has not entered into a definitive agreement to sell KIVEX. In addition, the
Company has made the decision to sell Marketing One, excluding those assets
included with the sale of United Life.
As a result of the Company's agreements to sell the Career Sales
Division, Professional and the United Life Assets and the Company's intent to
sell KIVEX and Marketing One within a period not likely to exceed one year, the
assets and liabilities relating to the Career Sales Division, Professional, the
United Life Assets, KIVEX and Marketing One have been reported as "Assets of
Businesses Held for Sale" and "Liabilities of Businesses Held for Sale" in the
Company's audited Consolidated Balance Sheets included elsewhere herein. Because
these assets and liabilities have been aggregated for purposes of presentation
in the Company's financial statements, the Company has similarly separately
aggregated such assets and liabilities for purposes of much of the textual
disclosures contained herein. For this purpose, the assets and liabilities
relating to the Career Sales Division, Professional, the United Life Assets,
KIVEX and Marketing One are collectively referred to herein as the "Businesses
Held for Sale."
Consummation of the Career Sales Division, Professional and United Life
Assets sales transactions is subject to regulatory approvals and other closing
conditions. Please refer to the reports on Form 8-K filed on January 11, 1999
and March 11, 1999 for more information on these sale transactions. Included as
Exhibits 2.1 and 2.2 on the Form 10-K are the definitive purchase and sale
agreements for the Career Sales Division and Professional, respectively. There
can be no assurances that the Career Sales Division, Professional or the United
Life Assets sales will be consummated or that the cash proceeds will be in the
amount anticipated by the Company.
RETAINED BUSINESS
After giving effect to the sale of the United Life Assets, the
Financial Services Division is comprised of Security Life and Trust Insurance
Company (formerly Integon Life Insurance Corporation) ("Security Life") and
Southwestern Life Insurance Company ("Southwestern Life"). Security Life markets
life insurance and, to a lesser extent, annuity products through independent
general agents who sell directly to individuals primarily in the southeastern
United States. Since its acquisition on January 2, 1998, Southwestern Life has
been integrated and managed as part of the Financial Services Division.
Southwestern Life markets life insurance and, to a lesser extent, annuity
products through independent general agents who sell directly to individuals
primarily in the southwestern United States.
After giving effect to the sale of Professional, the Payroll Sales
Division includes the operations of AA Life and Occidental Life Insurance
Company of North Carolina ("OLIC"). AA Life, comprised of Pioneer Security Life
Insurance Company ("Pioneer Security") and its subsidiaries, American-Amicable
Life Insurance Company of Texas ("American-Amicable") and Pioneer American
Insurance Company ("Pioneer American"), markets and underwrites customized life
insurance and accumulation products to U.S. military personnel and government
employees through a general agency force. OLIC provides individual fixed benefit
and life products utilizing a network of independent agents primarily in the
southeastern United States through employer-sponsored payroll deduction
programs.
For purposes of the Company's separate disclosure of the Businesses
Held for Sale as described above, Security Life, Southwestern Life, OLIC, AA
Life and other non-life insurance corporate entities are collectively referred
to herein as the "Retained Businesses."
4
<PAGE>
ACQUISITION OF SW FINANCIAL CONTROLLING INTEREST AND KB INTERESTS
On January 2, 1998, following shareholder approval at the Company's
1997 annual meeting of shareholders, the Company consummated the acquisition,
from KB Investment Fund I, LP (formerly Knightsbridge Capital Fund I, LP) (the
"KB Fund") and Messrs. Steven W. Fickes, a former director, and David J. Stone,
a director of the Company, of their respective holdings of common stock and, in
the case of the KB Fund, common stock warrants of SW Financial (collectively,
the "SW Financial Controlling Interest") for an aggregate purchase price of
$73.7 million (not including acquisition expenses).
On January 5, 1998, following shareholder approval at the 1997 annual
meeting of shareholders, the Company consummated the acquisition of the
interests of Messrs. Fickes and Stone in KB Management, KB Fund and KB
Consultants LLC (formerly known as Knightsbridge Consultants LLC) (collectively,
the "Fickes and Stone Knightsbridge Interests") for total consideration
estimated to be $10.6 million (not including acquisition expenses). Mr. Fickes
will receive consideration in the form of estimated annual interest payments,
ranging from $301,000 to $330,000, on April 15 each year through 2001 and will
be issued 173,160 shares of the Company's Common Stock on April 15, 2001. The
Company issued 173,160 shares to Mr. Stone in July 1998.
Further information regarding the SW Financial investment appears in
Note 6 of "Notes to Consolidated Financial Statements." Information relating to
the relationship between the Company and the KB Fund, the acquisition of the
Fickes and Stone Knightsbridge Interests and the Southwestern Financial
Controlling Interest appear in Notes 3, 18 and 19 of "Notes to Consolidated
Financial Statements," and in Item 13 hereof.
PRODUCTS
General
The Company's insurance subsidiaries underwrite a variety of insurance
products with the primary emphasis on modest premium policies in the life,
accumulation and fixed benefit product sectors. Life products are primarily low
face amount traditional whole life or universal life products which build cash
values that are available to the policyholder. Accumulation products include
various forms of annuity products which are utilized by policyholders primarily
as a means of tax deferred savings. Fixed benefit products include indemnity
insurance policies in which the benefit amounts are fixed at the time of policy
issue. Those products provide supplemental income payments directly to the
insured who is disabled and unable to work due to accident or sickness.
Product profitability is achieved through a pricing policy that is
based upon what the Company believes to be conservative actuarial assumptions,
which take into account the underwriting risks associated with the product being
sold, including lapse rates, mortality, morbidity and whether the product is
underwritten in the field or by the home office, as well as the administrative
expenses associated with the business. The Company, on an ongoing basis,
evaluates new products for use by its sales forces.
The Company believes that, because of the characteristics of the market
it serves and the nature of its products, the lapse rates for its products,
although stable, tend to be higher than those experienced by other life and
health insurance companies that operate in more affluent markets. The Company
prices its products to reflect these higher lapse rates. To encourage
policyholders to maintain their coverages with the Company, fixed benefit
products generally incorporate a small fixed annual increase in benefits. Early
surrender of accumulation and life products is discouraged by either their low
rate of accumulation of cash values or by high surrender charges.
5
<PAGE>
The following table presents the historical percentages of consolidated
insurance operations revenues derived from these product types:
<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED
INSURANCE OPERATIONS
REVENUES FOR THE YEARS ENDED
DECEMBER 31,
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998(1)
------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fixed benefit.......................................... 34.1% 29.8% 30.4% 3.9%
Life................................................... 46.2 43.1 48.7 79.7
Accumulation........................................... 19.7 27.1 20.9 16.4
------- ------- ------- -------
Total................................................ 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
---------------
(1) Pro forma 1998 ratios and amounts exclude the results of Businesses
Held for Sale as if Businesses Held for Sale were sold January 1,
1998. Such pro forma information is provided for comparative purposes
only and does not purport to be indicative of what would have occurred
had the consummation of the sales transactions occurred as of January
1, 1998, or results of the Retained Businesses which may occur in the
future.
</TABLE>
The amount of annualized premium in force and policy activity by type
of business for the past three years is as follows:
<TABLE>
<CAPTION>
ANNUALIZED PREMIUM IN FORCE
AS OF DECEMBER 31,
($ in thousands)
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998(1)
------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fixed benefit.......................................... $ 194,475 $ 184,214 $ 209,495 $ 13,966
Life(2)................................................ 217,538 219,180 496,712 355,089
--------- --------- --------- ---------
Total................................................ $ 412,013 $ 403,394 $ 706,207 $ 369,055
========= ========= ========= =========
---------------
(1) Pro forma 1998 ratios and amounts exclude the results of Businesses
Held for Sale as if Businesses Held for Sale were sold January 1,
1998. Such pro forma information is provided for comparative purposes
only and does not purport to be indicative of what would have occurred
had the consummation of the sales transactions occurred as of January
1, 1998, or results of the Retained Businesses which may occur in the
future.
(2) Life annualized premium in force includes target premium for interest
sensitive products. Interest sensitive policy revenue may vary from
target premium as policyholders have no obligation to pay target
premium. Additionally, interest sensitive policy revenues are
determined based upon contractual charges assessed against
policyholder funds and are not determined by policy revenues
collected.
</TABLE>
The following discussion of the Company's principal products relates to
the Retained Businesses.
Life Insurance Products
Traditional Whole Life. The Company's whole life policies are permanent
insurance products that combine life insurance protection with a savings
component or cash value that gradually increases in amount. Typically, a
guaranteed fixed premium, which is higher than for comparable term coverage when
the policyholder is younger, but less than comparable term coverage as the
policyholder grows older, is paid over a period of years. A policyholder may
borrow against the policy's accumulated cash value, but the amount of any
outstanding loans decreases the death benefit under the policy. A policyholder
may surrender a policy and receive the accumulated cash value. As of December
31, 1998, for the Retained Businesses, there were approximately 221,000 whole
life policies in force with $2,289.1 million in face amount of insurance and
$441.0 million in future policy benefit reserves.
Universal and Interest-Sensitive Life. The universal and
interest-sensitive life products offered by the Company provide whole life
insurance with adjustable rates of return related to current interest rates.
Universal life products permit policyholders to vary the frequency and size of
their premium payments, although policy benefits may also vary.
6
<PAGE>
The majority of sales of individual life insurance products, measured
by premium volume, has been derived from universal and interest-sensitive life
insurance products. The Company's universal and interest-sensitive life products
provide advantages generally not available to its traditional whole life and
term life policyholders, such as flexibility in available coverages and
flexibility in the amount and timing of premium payments. In addition, the
Company's universal and interest-sensitive life products can, in some respects,
provide higher returns and greater cash values to policyholders as compared with
traditional whole life insurance products. The Company's universal life and
interest-sensitive life insurance products are marketed to individuals directly
and through qualified retirement plans, deferred compensation plans, and
employer sponsored payroll deduction plans. As of December 31, 1998, for the
Retained Businesses, there were approximately 228,000 universal and
interest-sensitive life policies in force with $14,143.0 million in face amount
of insurance and $1,304.5 million in account value.
Term Life. Term life products offer pure insurance protection for a
specified period of time, typically one, five or ten years. The Company offers a
variety of term life products that include some or all of the following
features: current and guaranteed premium rates that are level for a specified
number of years; preferred smoker, preferred nonsmoker, nonsmoker, and smoker
underwriting classes; and conversion to permanent insurance allowed to age 65
with premium credit. As of December 31, 1998, for the Retained Businesses, there
were approximately 118,000 term life policies in force with $6,006.7 million in
face amount of insurance and $45.4 million in future policy benefit reserves.
Total sales of individual life insurance by the Retained Businesses
were approximately $50.2 million, $46.8 million and $43.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
Accumulation Products
The Company's accumulation products include single premium deferred
annuities, flexible premium deferred annuities and variable annuity products.
The principal annuity products marketed by the Company's retained insurance
subsidiaries consist of flexible premium deferred annuities ("FPDAs") and single
premium deferred annuities ("SPDAs").
As of December 31, 1998, the guaranteed minimum crediting rates of the
Company's deferred annuity products for the Retained Businesses were as follows:
<TABLE>
<CAPTION>
Guaranteed Minimum Funds Under
Crediting Rate Management
($ in millions)
---------------
<S> <C>
3.00%................................. $ 49.5
3.50%................................. 2.4
4.00%................................. 467.2
4.50%................................. 88.2
5.00%................................. --
6.00%................................. 20.5
No guaranteed minimum............... 6.6
-------------
$ 634.4
=============
</TABLE>
At December 31, 1998, annuity liabilities were composed of $136.1
million of SPDA liabilities and $498.3 million of FPDA liabilities and $185.5
million of other annuity liabilities, for a total of $819.9 million of annuity
liabilities. Of such liabilities $319.0 million were subject to surrender
charges averaging 5.6% as of December 31, 1998.
Total sales of annuities by the Retained Businesses were approximately
$31.8 million, $33.2 million and $20.8 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Fixed Benefit Products
Fixed benefit products are sold in large volume and are characterized
by low average annual premiums. These products provide one or more of three
principal types of benefits: (i) fixed periodic payments to an insured who
becomes disabled and unable to work because of an accident and/or sickness, (ii)
fixed periodic payments to an insured who becomes hospitalized, and (iii) fixed
single payments that vary in amount generally for specified surgical or
diagnostic procedures. Because the benefits are fixed in amount at the time of
policy issuance and are not intended to provide reimbursement for medical and
hospital expenses, payment amounts are not affected by inflation or the rising
cost of health care services. Fixed
7
<PAGE>
benefit products, primarily those covering inability to work due to an accident,
provide payments while the insured is disabled and unable to work, subject to
the terms and conditions of the applicable policy. Fixed benefit products under
which payments are made to insureds who are disabled and unable to work may be
purchased with coverage for either (i) specified types of accidents, (ii) all
other types of accidents, or (iii) a combination of accident and sickness. The
Company's practice is to sell products that together with other similar
coverages, do not provide monthly benefits in excess of $2,000 or 50% of the
insured's income, if less.
Certain fixed benefit products, primarily those covering
hospitalization due to sickness, provide payments during the period the insured
is hospitalized. Most of the Company's fixed benefit products also provide
additional fixed periodic payments to an insured who becomes hospitalized.
Payments under these products are not designed to cover the actual costs of the
insured's hospital stay, but merely to provide the insured with a means of
paying supplemental expenses during the hospitalization period. The Company's
practice is to provide hospitalization benefits of not more than $250 per day
($1,000 if the insured requires intensive care treatment).
The accident and sickness policies also may be purchased with riders
providing for fixed single payments that vary in amount generally for various
surgical and diagnostic procedures. The Company's practice is to sell riders
that do not provide benefit payments in excess of $5,000. If the covered
procedure is performed on an out-patient basis, the insured receives one-half of
the scheduled payment.
Historically, most of the Company's sales of fixed benefit products are
produced by Businesses Held for Sale. Total sales of fixed benefit products by
the Retained Businesses were approximately $3.7 million, $3.8 million and $4.7
million for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, Southwestern Life began marketing long-term care products
which are marketed to retirees, older self-employed individuals and other
persons in middle income levels. The Company believes that the market for
long-term care insurance products is attractive because of the general aging of
the United States population and the lack of savings resources to cover
prolonged illnesses or convalescent care. As of December 31, 1998, there were
701 long-term care policies in force representing $1.0 million in annualized
premiums and $.3 million in reserves. Total sales of long-term care products by
Southwestern Life during 1998 were approximately $1.0 million.
The following table provides certain information with respect to
various categories of insurance business in force for the Company's insurance
subsidiaries:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- --------------------------- --------------------------
Fixed Accum- Fixed Accum- Fixed Accum-
Benefit Life ulation Benefit Life ulation Benefit Life ulation
------- ---- ------- ------- ---- ------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Policies in force - January 1...... 733,893 562,620 34,854 698,072 558,697 90,265 654,936 506,913 69,769
New issues...................... 81,547 54,157 4,834 84,286 62,449 5,012 89,218 72,080 8,715
Business acquired, net.......... 15,664 67,731 64,210 -- -- -- 112,098 301,537 35,511
Policies terminated............. (133,032) (125,811) (13,633) (127,422) (114,233) (25,508) (159,234) (100,598) (27,383)
-------- -------- ------- -------- -------- -------- -------- -------- -------
Policies in force - December 31. 698,072 558,697 90,265 654,936 506,913 69,769 697,018 779,932 86,612
======== ======== ======= ======== ======== ======== ======== ======== =======
</TABLE>
MARKETING AND DISTRIBUTION
The Company's insurance subsidiaries collectively are licensed to
market the Company's insurance products in all states (other than New York) and
in the District of Columbia, all provinces of Canada and in Puerto Rico, Guam
and certain Caribbean countries. In addition, the Company is authorized to sell
its products at U.S. military installations in foreign countries.
The Company markets and distributes its products through four primary
distribution channels: agents contracted exclusively with the Company,
independent general agents who sell on an individual basis, independent general
agents who sell through payroll deduction programs and arrangements for
distribution through various financial institutions.
8
<PAGE>
These market segments are further divided as follows:
Major Market Sub-Market
------------ ----------
Individual Low and moderate income households
U.S. military enlistees
Suburban and rural locales
Self-employed individuals
Government Employees of local governments and governmental agencies
Employees of U.S. federal government
Each of the Company's market segments may be served by each of the
primary distribution channels. Additionally, though there are certain regions in
which all sales forces are active, the Company's sales forces generally operate
in geographically discrete regions.
The following tables illustrate, by direct cash premium collected, (as
reported to regulatory authorities) and relative percentages, the principal
marketing regions in which the Businesses Held for Sale and Retained Businesses
collected in excess of $10.0 million of policy revenues for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Businesses Held for Sale Direct Premium Collected
Jurisdiction Amount Percentage
------------ ------ ----------
($ in thousands)
<S> <C> <C>
Canada.................... $ 60,094 11.7%
Texas..................... 43,178 8.4
Indiana................... 38,434 7.5
Florida................... 38,328 7.5
Louisiana................. 36,905 7.2
Georgia................... 27,875 5.4
Ohio...................... 25,273 4.9
California................ 24,051 4.7
Wisconsin................. 21,628 4.2
Pennsylvania.............. 16,848 3.3
Missouri.................. 16,628 3.2
North Carolina............ 16,017 3.1
Oklahoma.................. 13,411 2.6
Virginia.................. 12,346 2.4
Illinois.................. 12,051 2.4
-------- ------
Subtotal................ 403,067 78.5
All Others................ 110,226 21.5
-------- ------
Total................... $513,293 100.0%
======== ======
Retained Businesses Direct Premium Collected
Jurisdiction Amount Percentage
------------ ------ ----------
($ in thousands)
Texas..................... $ 58,512 20.2%
North Carolina............ 34,829 12.0
Georgia................... 26,095 9.0
California................ 19,408 6.7
Florida................... 13,702 4.7
Virginia.................. 11,991 4.1
-------- ------
Subtotal................ 164,537 56.7
All Others................ 125,489 43.3
-------- ------
Total................... $290,026 100.0%
======== ======
</TABLE>
9
<PAGE>
Financial Services Division
The Financial Services Division includes marketing units of Security
Life, United Life and Southwestern Life. The Financial Services Division markets
products to individual customers through leads developed over time. This
division utilizes field marketing directors, affiliations with independent
marketing organizations, financial institutions and financial planners to reach
its customer base.
The sales agents for this division often make sales presentations on a
one-on-one basis with potential prospects. Sales representatives are often faced
with competition from other agents and/or products from other companies.
The following tables set forth information regarding the Financial
Services Division. United Life is excluded on a pro forma basis for 1998 as it
is included in Businesses Held for Sale.
<TABLE>
<CAPTION>
Pro forma
FINANCIAL SERVICES DIVISION 1996 1997 1998 1998
------------------------------------------------------- --------- --------- --------- ---------
($ in thousands)
<S> <C> <C> <C> <C>
Agents under contract.................................. 9,164 7,730 19,254 16,607
Number of agents annually producing new business....... 2,842 2,206 4,894 4,353
Submitted annualized new business premiums............. $ 118,528 $ 139,483 $ 160,258 $ 72,465
Annualized new business premium per agent.............. $ 41.7 $ 63.2 $ 32.7 $ 16.6
</TABLE>
The revenue earned by the Financial Services Division by product type
is shown below:
<TABLE>
<CAPTION>
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998
------------------------------------------------------- --------- --------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Life................................................... $ 143.7 $ 127.9 $ 249.3 $ 239.6
Accumulation........................................... 102.2 166.9 167.8 65.7
Fixed benefit.......................................... 5.3 0.3 2.7 2.4
--------- --------- --------- ---------
Total................................................ $ 251.2 $ 295.1 $ 419.8 $ 307.7
========= ========= ========= =========
</TABLE>
The percentage of the Financial Services Division revenue to the
Company's total insurance operations revenue by insurance product is shown
below:
<TABLE>
<CAPTION>
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998
------------------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Life................................................... 55.1% 46.3% 60.2% 69.1%
Accumulation........................................... 91.9 95.0 94.2 92.0
Fixed benefit.......................................... 2.8 0.2 1.0 14.3
Total division revenue to the Company's
total insurance operations revenue................. 44.5 45.9 49.5 70.7
</TABLE>
Payroll Sales Division
The Payroll Sales Division includes marketing units of Professional, AA
Life and OLIC. Each of the marketing units is divided into regions utilizing a
hierarchical approach to managing the sales representative. Additionally, AA
Life and OLIC also utilize field marketing directors and independent marketing
organizations to access potential policyholders.
The Payroll Sales Division markets products solely through the channels
of employer-sponsored payroll deduction or government-sponsored allotment
programs. Under those programs, the agent is permitted by the employer to meet
on the employer's premises with its employees and to make both group and
individual presentations implicitly endorsed by the employer concerning
available products. If an employee elects to purchase a policy, arrangements are
made with the employer to deduct the premiums from the employee's wages. The
employer therefore is able to provide its employees with insurance benefits
without incurring any premium costs. The Company's billing system can be
integrated into the employer's payroll
10
<PAGE>
system without additional cost to the employer, a feature that facilitates the
Company's access to employees of businesses that have not previously
participated in payroll deduction programs.
The following tables set forth information regarding the Payroll Sales
Division. Professional is excluded on a pro forma basis for 1998 as it is
included in Businesses Held for Sale:
<TABLE>
<CAPTION>
Pro forma
PAYROLL SALES DIVISION 1996 1997 1998 1998
----------------------------------------------------- --------- --------- --------- ---------
($ in thousands)
<S> <C> <C> <C> <C>
Agents under contract................................ 7,539 6,784 6,941 3,638
Number of agents annually producing new business..... 2,750 2,955 1,926 783
Submitted annualized new business premiums........... $ 39,069 $ 42,527 $ 44,100 $ 26,944
Annualized new business premium per agent............ $ 14.2 $ 14.4 $ 22.9 $ 34.4
</TABLE>
The revenue earned by the Payroll Sales Division by product type is
shown below:
<TABLE>
<CAPTION>
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998
----------------------------------------------------- --------- --------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Life................................................. $ 84.1 $ 116.4 $ 112.6 $ 107.0
Fixed benefit........................................ 39.5 48.9 48.0 14.6
Accumulation......................................... 8.0 7.2 5.9 5.7
--------- --------- --------- ---------
Total.............................................. $ 131.6 $ 172.5 $ 166.5 $ 127.3
========= ========= ========= =========
</TABLE>
The percentage of the Payroll Sales Division revenue to the Company's
total insurance operations revenue by insurance product is shown below:
<TABLE>
<CAPTION>
Pro forma
INSURANCE PRODUCT TYPE 1996 1997 1998 1998
----------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Life................................................... 32.3% 42.2% 27.2% 30.9%
Fixed benefit.......................................... 20.5 25.5 18.6 85.7
Accumulation........................................... 7.2 4.1 3.3 8.0
Total division revenue to the Company's
total insurance operations revenue................ 23.3 26.8 19.5 29.3
</TABLE>
Career Sales Division
Penn Life's agents constitute substantially all of the sales force for
the Career Sales Division. The regional sales managers are responsible for
approximately 100 sales locations in the United States and Canada. Commissions
are shared among the regional and branch office managers and the writing agent.
Commissions allocated to the branch offices are used to pay "overwrite"
commissions to agents who train new agents and to pay the expenses of the branch
office. Any commissions allocated to the branch offices remaining after payment
of "overwrite" commissions and expenses, essentially the branch "profit," are
allocated among the senior sales managers (and the Company for Canadian Sales
Offices). Prior to 1998, the Company shared in the profits for all U.S. and
Canadian Sales Offices. The Company retained approximately $1.5 million, $2.6
million and $2.3 million during 1998, 1997 and 1996, respectively, in profit
sharing income, which is recorded as an offset to commissions. During 1997 the
Company worked closely with the U.S. based career sales force to develop and
implement a new compensation structure which resulted in the Company giving up
its rights to a portion of the profit participation associated with the branch
compensation structures. As a result, career sales force agents receive a lower
base commission structure on new business and fully absorb all field office
costs. The new compensation structure allows for bonuses to be paid to agents
based upon improving persistency and new sales growth. Additional consideration
has been granted to the field force in connection with the acquisition of the
Career Sales Division by Universal American. See Note 19 of "Notes to
Consolidated Financial Statements."
11
<PAGE>
The Penn Life career sales force is a network of regional managers who
operate branch offices. Each office includes agents which focus on three
different marketing strategies: New Call, Special Services and Individual Life.
The target market for all products is primarily self-employed individuals, with
plans to expand into the senior market.
New Call. New Call agents make "cold call" door-to-door presentations
and market small denomination policies that provide scheduled payments in fixed
amounts to insureds who, as a result of specified types of accidents, become
unable to work or who become hospitalized.
Special Services. New Call policyholders are a significant source of
leads for the Special Services Division. A Special Services agent visits the
policyholder's residence to collect renewal premiums on products purchased for
the New Call representatives. The sales agent also delivers a standardized sales
presentation on more comprehensive policies. These policies either provide
scheduled payments to insureds who are disabled and unable to work as a result
of accident or sickness or scheduled payments to insureds who are required to be
hospitalized as the result of accident or sickness.
Individual Life. Existing policyholders are the primary source of leads
for the Individual Life representatives, which sell life products. The Company
has worked to restructure this division, expand its product portfolio and
aggressively recruit new agents. New product offerings include universal life,
term life and final expense products which have been widely accepted by the Penn
Life sales force.
With the addition of Union Bankers, Constitution and Marquette, the
Career Sales Division will have the opportunity to expand into the brokerage
market offering senior care products.
The following tables set forth information regarding the Career Sales
Division:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
ACCIDENT & HEALTH
Agents under contract........................................... 1,644 1,400 4,173
Weekly average agents producing new business.................... 618 581 491
Submitted annualized new business premiums...................... $ 40,433 $ 41,224 $ 46,770
Annualized new business premium per agent....................... $ 65.4 $ 71.0 $ 95.3
INDIVIDUAL LIFE
Agents under contract........................................... 197 182 119
Weekly average agents producing new business.................... 91 78 41
Submitted annualized new business premiums...................... $ 8,224 $ 7,006 $ 3,706
Annualized new business premium per agent....................... $ 90.4 $ 89.8 $ 90.4
TOTAL ALL CAREER SALES DIVISIONS
Agents under contract........................................... 1,841 1,582 4,292
Weekly average agents producing new business.................... 709 659 532
Submitted annualized new business premiums...................... $ 48,657 $ 48,230 $ 50,476
Annualized new business premium per agent....................... $ 68.6 $ 73.2 $ 94.9
</TABLE>
The revenue earned by the career sales distribution system by product
type is shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1996 1997 1998
------------------------------------------------------------------ --------- --------- -------
($ in millions)
<S> <C> <C> <C>
Fixed benefit..................................................... $ 148.1 $ 142.3 $ 207.3
Life.............................................................. 32.8 31.6 52.0
Accumulation...................................................... 1.0 1.6 4.4
--------- --------- ---------
Total........................................................... $ 181.9 $ 175.5 $ 263.7
========= ========= =========
</TABLE>
12
<PAGE>
The percentage of Career Sales Division revenue to the Company's total
insurance operations revenue by product type is shown below:
<TABLE>
<CAPTION>
INSURANCE PRODUCT TYPE 1996 1997 1998
------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Fixed benefit..................................................... 76.8% 74.3% 80.4%
Life.............................................................. 12.6 11.5 12.6
Accumulation...................................................... 0.9 0.9 2.5
Total division revenue to the Company's
total insurance operations revenue............................ 32.2 27.3 31.0
</TABLE>
INSURANCE UNDERWRITING
In general, the Company permits simplified underwriting of life
products, unless the amount of requested coverage is greater than specified
levels between $25,000 and $100,000, depending on the age of the applicant. If
full underwriting is required, the Company reviews the policy application and an
attending physician's report and may require a paramedical examination or
complete physical examination depending on the age of the applicant and the
amount of coverage requested. If the total amount of coverage applied for plus
any coverage in force with the Company exceeds $100,000, a prospective
policyholder must submit a screening for antibodies related to Acquired Immune
Deficiency Syndrome ("AIDS") , to the extent permitted by law. The life products
are specifically designed and priced for the mortality risks associated with the
Company's simplified underwriting procedures.
Although the increasing incidence of AIDS is expected to affect
mortality adversely for the life insurance industry as a whole, the Company
believes that the impact of AIDS on its operations should not be material due to
the small average size of the life insurance policies sold. The Company requires
and considers AIDS information to the fullest extent permitted by law in
underwriting and pricing decisions. During the twelve months ended December 31,
1998, 1997 and 1996, the Company estimated it paid approximately $1.2 million,
$2.1 million and $3.2 million, respectively in death benefits (representing less
than 1% of total death benefits paid by the Company during each such period)
under individual life policies due to deaths believed by the Company to be
AIDS-related.
The Company has identified a block of approximately 290 policies with a
total face amount of approximately $30.0 million which it suspects could have
been issued on applications containing material misrepresentations, particularly
concerning the treatment for or the diagnosis of AIDS or HIV. The Company is
investigating each one of these policies and taking steps to rescind any
contestable policy where material misrepresentations are found. The Company is
also reviewing its underwriting guidelines to prevent a recurrence of this
situation and reviewing its current cost of insurance charges to determine if
current charges are sufficient to cover potentially higher mortality associated
with such policies.
INVESTMENT PORTFOLIO
The Company's investment portfolio, which as of December 31, 1998
excludes invested assets of its Businesses Held for Sale, is managed with the
objectives of maintaining high credit quality and liquidity, maximizing current
income within acceptable levels of risk, minimizing market and credit risk and
matching the anticipated maturities of investments to the Company's liabilities.
To achieve these objectives, the portfolio consists primarily of United States
and Canadian government and investment-grade fixed maturity securities, which
together with high quality short-term investments accounted for approximately
84.6% of the Company's total invested assets at December 31, 1998. The Company
believes that the nature of its fixed benefit products, which have minimal
inflation risk, and its life products, which limit the early accumulation of
cash values, permit it to utilize this conservative investment strategy.
At December 31, 1998, 54.1% of the Company's fixed maturity bonds were
rated AA or higher by Standard & Poor's and approximately 93.0% were rated BBB
or higher by Standard & Poor's, respectively. All dollar amounts or percentages
set forth in this discussion are based on carrying value unless otherwise
indicated.
Other than issues of the United States and Canadian governments and
government agencies and authorities, no single issuer represented more than 0.5%
of total invested assets at December 31, 1998.
13
<PAGE>
The following table summarizes the Company's investments (excluding
investments of Businesses Held for Sale) as of December 31, 1998:
<TABLE>
<CAPTION>
Percent of
Total
Amortized Fair Carrying Carrying
Cost Value(1) Value Value
---- -------- ----- -----
($ in thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Government and agency bonds............ $ 189,766 $ 202,700 $ 202,700 6.8%
Debt securities issued or guaranteed by
foreign governments(2).................... 25,701 27,178 27,178 1.0
Municipal bonds............................. 45,271 42,127 42,127 1.4
Corporate bonds............................. 1,099,513 1,129,023 1,129,023 38.2
Mortgage-backed bonds....................... 1,164,739 1,188,686 1,188,686 40.2
----------- ----------- ----------- ------
Total fixed maturity securities
available for sale..................... 2,524,990 2,589,714 2,589,714 87.6
Equity securities available for sale........ 2,008 2,035 2,035 0.1
Commercial mortgages........................ 36,382 38,865 36,382 1.3
Residential mortgages....................... 500 500 500 --
Real estate................................. 15,904 8,644 8,644 0.3
Policy loans................................ 207,490 207,490 207,490 7.0
Short-term investments...................... 92,727 92,727 92,727 3.1
Other investments........................... 17,480 18,762 18,762 0.6
----------- ----------- ----------- ------
Total invested assets..................... $ 2,897,481 $ 2,958,737 $ 2,956,254 100.0%
=========== =========== =========== =====
--------------
(1) Fair values are obtained principally from the Company's
investment advisors.
(2) Consists principally of Canadian provincial government bonds and
bonds issued or guaranteed by the Canadian federal government (in
U.S. dollars).
</TABLE>
The table set forth below indicates the composition of the Company's
fixed maturity portfolio (excluding Businesses Held for Sale) by rating as of
December 31, 1998:
<TABLE>
<CAPTION>
Percent of
Total Total
Carrying Carrying
Rating Value Value
------ ----- -----
($ in thousands)
<S> <C> <C>
AAA(1)............................................. $ 1,264,089 48.8%
AA................................................. 137,090 5.3
A.................................................. 548,493 21.2
BBB................................................ 458,551 17.7
----------- -----
Total investment grade........................... 2,408,223 93.0
----------- -----
BB................................................. 103,508 4.0
B or below......................................... 59,744 2.3
----------- -----
Total below-investment grade..................... 163,252 6.3
----------- -----
Nonrated........................................... 18,239 0.7
----------- -----
Total fixed maturities........................... $ 2,589,714 100.0%
=========== =====
- --------------
(1) Includes approximately $202.7 million of United States government and
agency bonds and approximately $27.2 million of Canadian provincial
government bonds and bonds issued or guaranteed by the Canadian federal
government (in U.S. dollars).
</TABLE>
14
<PAGE>
The following table reflects investment results for the Company for
each of the periods indicated. The pro forma amounts for 1998 exclude the
Businesses Held for Sale.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
Pro forma
1996 1997 1998 1998
----------- ----------- ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
End of period total invested assets(1)............... $ 3,673,504 $ 3,339,979 $ 4,930,535 $ 2,956,254
Net investment income(2)............................. 210,734 273,237 369,052 215,909
Net realized investment gains(3)..................... 1,257 17,487 14,068 4,956
Average annual yield................................. 7.5% 7.6% 7.2% 7.0%
--------------
(1) Consists of total investments plus cash, less amounts due to brokers
for securities committed to be purchased at end of period. For 1998,
invested assets of Businesses Held for Sale have been included in end
of period total invested assets. In the pro forma 1998, net investment
income and realized investment gains of Businesses Held for Sale have
been excluded.
(2) Net investment income is net of investment expenses, excludes capital
gains or losses and is before income taxes.
(3) Amounts shown above are before income taxes, and include provisions for
impairments in value which are considered to be other than temporary.
</TABLE>
The Company's investments must comply with the insurance laws of the
states in which its insurance subsidiaries are domiciled and in which they are
licensed as well as applicable provisions of the Company's 9 1/4% Senior
Subordinated Notes due 2003. These laws and provisions prescribe the kind,
quality and concentration of investments that may be made by the Company and/or
its insurance subsidiaries.
REINSURANCE
In keeping with industry practice, the Company reinsures portions of
its life insurance exposure with unaffiliated insurance companies under
traditional indemnity reinsurance agreements. Some new insurance sales are
reinsured above prescribed limits and others are reinsured as a percentage of
each dollar of coverage up to prescribed limits; these do not require the
reinsurer's prior approval under contracts that are renewable on an annual
basis. Generally, the Company enters into indemnity reinsurance arrangements to
assist in diversifying its risk and to limit its maximum loss on risks that
exceed the Company's policy retention limits ranging from $25,000 to $500,000
per life, depending on insured issue age, the product type and each insurance
company's historical practice. Generally, accidental death benefits in excess of
$50,000 per life are reinsured on a bulk basis. Indemnity reinsurance does not
fully discharge the Company's obligation to pay policy claims on the reinsured
business. The ceding insurer remains responsible for policy claims to the extent
the reinsurer fails to pay such claims. On September 30, 1998, Penn Life entered
into a financial reinsurance agreement which provided Penn Life with
approximately $20.0 million of statutory surplus. See Note 20 of Notes to
Consolidated Financial Statements for additional information regarding such
agreement.
The Retained Businesses are currently in the process of reviewing
existing reinsurance programs. This review is expected to be completed in 1999
and may effect retention limits, the cost of its reinsurance coverage and other
aspects of its reinsurance programs.
At no time during the past ten years has any present reinsurer of any
continuing block of business ceded by any of the Company's insurance company
subsidiaries failed to pay any policy claims with respect to such ceded
business. At December 31, 1998 and 1997, of the approximately $36.5 billion and
$24.6 billion of life insurance in force, approximately $6.4 billion and $4.4
billion had been ceded to reinsurers, respectively. As of December 31, 1998 the
Company's principal reinsurers are Transamerica Occidental Life Insurance
Company, Reassurance Company of Hanover, Cologne Life Reinsurance Co., Life
Reassurance Corp. of America, RGA Reinsurance Company, Lincoln National Life
Insurance Company, Swiss Re Life & Health Insurance Company and Allianz Life
Insurance Company, which collectively have reinsured approximately 72.2% of the
ceded business.
15
<PAGE>
YEAR 2000 ISSUES
Many computer and software programs were designed to accommodate only
two digit fields to represent a given year (e.g. "98" represents 1998). It is
highly likely that such systems will not be able to accurately process data
containing date information for the year 2000 and beyond. The Company is highly
reliant upon computer systems and software as are many of the businesses with
which the Company interacts. The Company's ability to service its policyholders
and agents is dependent upon accurate and timely transaction processing.
Transaction processing in turn is dependent upon the Company's highly complex
interdependent computer hardware, software, telecommunications and desktop
applications. The inability of the Company or any of its integral business
partners to complete year 2000 remediation efforts associated with these highly
complex and interdependent systems could lead to a significant business
interruption. Such an interruption could result in a decline in current and
long-term profitability and business franchise value.
The Company's overall year 2000 compliance initiatives, include the
following components: (i) assessment of all business critical systems (business
critical systems includes computer and other systems), processes and external
interfaces and dependancies; (ii) remediation or upgrading of business critical
systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and follows up periodically. Of those
parties that have responded, the Company's most significant third party vendors
and business partners have indicated that they have a plan for year 2000
compliance or believe that they are currently year 2000 compliant.
The Company has engaged 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 fourth quarter of
1998, the Company anticipates incurring internal and external costs of $5.0
million during 1999. The Company estimates it has incurred internal and external
costs aggregating $13.4 million and $1.9 million for the years ended December
31, 1998 and 1997, respectively.
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 1999. 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. 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 1999. The
Company believes that the Payroll Sales Division, other than AA Life, is 95.0%
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 90.0% of the total effort required for its critical business
systems to be year 2000 compliant. The efforts of the Company's Financial
Services Division are highly 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 85.0%
complete with remediation efforts associated with its critical business systems.
The Company believes that all of its divisions will have completed their
remediation efforts by May 1999, but each division will continue to perform
testing throughout 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 developed
various contingency plans associated with remediation tasks which the Company
believes are at a higher risk for potential failure.
The Company has provided certain assurances to each respective
purchaser of the Businesses Held for Sale with respect to each entity's ability
to process date-sensitive information for the year 2000 and beyond. Although the
Company believes that it will be able to meet the year 2000 representations and
warranties provided to the respective purchasers, there
16
<PAGE>
can be no assurances. Failure of the Company to meet such representations and
warranties could result in a decision by the purchaser not to consummate the
transaction and/or indemnification claims for breach of contract.
COMPETITION
The accident and health and life insurance industry is highly
competitive. PennCorp competes with many insurance companies and insurance
holding company systems that have substantially greater capital and surplus,
higher A.M. Best Company ("A.M. Best") ratings, larger and more diversified
product portfolios, and access to larger agency sales forces. In the United
States, there are more than 1,700 life and accident and health insurance
companies, most of which compete in the states in which PennCorp conducts
business.
The Company's expansion of its product line to include a higher
percentage of life and accumulation product revenue as compared to total revenue
has resulted in a broadening of the markets in which the Company faces
competition. The sale of life insurance products, and to a greater extent, the
sale of accumulation products is very sensitive to an organization's A.M. Best
rating, its size and perceived financial strength and the competitiveness and
the financial performance of the products themselves. Like the market focus of
its fixed benefit products, the Company believes that its target market is not
widely served by many of the large, national insurers, but does face direct
competition from smaller regional and niche-market focused companies.
During 1998, each of the Company's insurance subsidiaries received
downgrades in their respective A.M. Best rating, primarily as a result of
concerns regarding the financial strength of the Company. The Company believes
that as a result of the rating action, certain insurance subsidiaries have noted
slight declines in new business production and modest increases in policyholder
surrenders. Certain of the Company's insurance subsidiaries market insurance
products that are highly sensitive to competitive factors including financial
strength and ratings. Over time, the Company believes that the rating decline of
its insurance subsidiaries will negatively impact their ability to market
certain products and to retain some customers and distribution channels. For
additional information on ratings see Business-Ratings included elsewhere
herein.
REGULATORY MATTERS
Life insurance companies are subject to regulation and supervision by
the states in which they transact business. The laws of the various states
establish regulatory agencies with broad administrative and supervisory powers
related to, among other things, granting and revoking licenses to transact
business, regulating trade practices, establishing guaranty associations,
licensing agents, approving policy forms, filing premium rates on certain
business, setting reserve requirements, determining the form and content of
required financial statements, determining the reasonableness and adequacy of
capital and surplus and prescribing the type of permitted investments and the
maximum concentrations of certain classes of investments.
The Company's insurance subsidiaries are subject to periodic
examinations by state regulatory authorities. Current examinations are described
below:
Business Held for Sale
The Texas Department of Insurance is conducting its regularly scheduled
triennial examinations of Constitution, Marquette, Professional and
Union Bankers, which are Texas domestic insurers.
The Pennsylvania Department of Insurance is in the process of
completing its examination of PLIC as of December 31, 1996. The
Department has indicated that PLIC's historical method of calculating
statutory claims reserves may not provide the most accurate
determination of claims reserve estimates. PLIC is evaluating differing
methods for determining its claims estimates on a statutory basis. Such
differing methods could likely produce materially different claims
reserves estimates. Based upon preliminary findings, PLIC increased its
statutory claim estimates above historical levels by approximately $20
million during the year ended December 31, 1998. To offset the impact
of such reserve increases on PLIC's statutory capital and surplus, PLIC
entered into a financial reinsurance agreement, which allows PLIC to
maintain marginally sufficient statutory capital and surplus. Should
PLIC need to substantially increase its claims reserves estimates
further it is likely that PLIC's risk-based capital ("RBC") 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 continue to closely monitor PLIC's
risk-based capital ratios.
17
<PAGE>
For the years ended December 31, 1998 and 1999, PLIC has received a
permitted statutory accounting practice allowing PLIC to utilize its
own experience and other modification factors in the determination of
statutory disability income claims reserves. If PLIC were to utilize
the model regulation for the determination of disability income claims
reserves, management estimates that the amount of additional statutory
claims reserves necessary to be recorded would be approximately $16.2
million. If PLIC were to record such additional reserves on a statutory
basis, its risk based capital would be reduced significantly which in
turn could lead to regulatory action. For the year ended December 31,
1999, PLIC will be required, in the event of the non-completion of the
Career Sales Division divestiture, to increase its disability claims
reserves by approximately $5.3 million and receive capital
contributions of at least $5.3 million to offset such reserve
increases.
Retained Business
The Texas Department of Insurance is conducting its regularly scheduled
triennial examinations of American-Amicable, OLIC, Pacific Life and
Accident Insurance Company ("PLAIC"), Pioneer American, Pioneer
Security, Security Life and Southwestern Life, which are Texas domestic
insurers.
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. Most states have enacted
legislation regulating insurance holding company systems, including acquisitions
of control of insurance companies, dividends, the terms of surplus debentures,
the terms of transactions with affiliates, investments in subsidiaries and other
related matters. Regulatory restrictions on investments in subsidiaries and
affiliates require the Company to continually review and occasionally modify or
restructure the insurance subsidiaries within the insurance holding company
system. Additionally, the Company has entered into an agreement with the Texas
Department of Insurance dated September 22, 1998 which establishes procedures
resulting in greater oversight of the Company and its insurance subsidiaries by
the Texas Department of Insurance. The Company is registered as an insurance
holding company system in North Carolina, Pennsylvania and Texas (the
domiciliary states of its insurance companies), and routinely reports to other
jurisdictions in which its insurance subsidiaries are licensed.
There continues to be substantial scrutiny of the insurance regulatory
framework, and a number of state legislatures have enacted legislative proposals
that alter, and in many cases increase, state authority to regulate insurance
companies and their holding company systems. The National Association of
Insurance Commissioners ("NAIC") and state insurance regulators also have become
involved in a process of re-examining existing laws and regulations and their
application to insurance companies. In particular, this re-examination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the development
of new laws and the implementation of internal guidelines. The NAIC has formed
committees to study and formulate regulatory proposals on such diverse issues as
the use of surplus debentures, accounting for reinsurance transactions,
assumption reinsurance, valuation of securities, the adoption of RBC rules, the
codification of Statutory Accounting Principles, and the regulation of various
products offered by insurance companies.
In connection with its accreditation of states, the NAIC has encouraged
states to adopt model NAIC laws on specific topics, such as holding company
regulations and the definition of extraordinary dividends. Model legislation
proposed by the NAIC to control the amount of dividends that may be paid by
insurance companies without prior regulatory approval has been adopted in most
states and is being considered by the legislatures of the other states. North
Carolina, Pennsylvania and Texas, the states of domicile for the Company's
insurance subsidiaries, have adopted dividend tests that are substantially
similar to that of the NAIC's model legislation. Most states only allow
dividends to be paid out of unassigned funds. State laws affecting dividends by
the Businesses Held for Sale and Retained Businesses are described below.
Business Held for Sale
Pursuant to the laws of Pennsylvania (PLIC's and Peninsular's
domiciliary state), a dividend may be paid by PLIC and Peninsular if
the amount of such dividend together with all dividends made in the
preceding twelve months does not exceed the greater of: (i) 10% of its
statutory surplus as of the end of the prior calendar year or (ii) its
net income for the prior calendar year. Any dividend above the
prescribed amount
18
<PAGE>
is an "extraordinary" dividend, and a Pennsylvania insurer may not pay
an "extraordinary" dividend to its stockholders until the earlier of:
(i) 30 days after the Pennsylvania Insurance Commissioner has received
written notice of the declaration thereof and has not within such
period disapproved such payment, or (ii) the receipt of approval from
the Pennsylvania Insurance Commissioner.
Texas law permits its domestic insurers which include Constitution,
Marquette, Professional, Union Bankers and United Life (effective
December 18, 1998, United Life was redomesticated to Texas from
Louisiana) to pay a dividend without prior consent of the Texas
Insurance Commissioner if the amount paid, together with all other
dividends paid in the preceding 12 months, does not exceed the greater
of: (i) 10% of its statutory surplus as of the end of the prior
calendar year or (ii) its net income for the prior calendar year. Any
dividend above this amount would be considered an "extraordinary"
dividend and could not be paid until the earlier of: (i) 30 days after
the Texas Insurance Commissioner has received notice of the declaration
thereof and has not within such period disapproved such payment, or
(ii) the Texas Insurance Commissioner shall have approved such payment
within the 30 day period.
Retained Business
Texas law permits AA Life, OLIC, Pioneer American, Pioneer Security,
Pacific Life, Security Life and Southwestern Life to pay a dividend
without prior consent of the Texas Insurance Commissioner if the amount
paid, together with all other dividends paid in the preceding 12
months, does not exceed the greater of: (i) 10% of its statutory
surplus as of the end of the prior calendar year or (ii) its net income
for the prior calendar year. Any dividend above this amount would be
considered an "extraordinary" dividend and could not be paid until the
earlier of: (i) 30 days after the Texas Insurance Commissioner has
received notice of the declaration thereof and has not within such
period disapproved such payment, or (ii) the Texas Insurance
Commissioner shall have approved such payment within the 30 day period.
On the basis of 1998 statutory financial statements filed with the
state insurance regulators, the NAIC calculates twelve financial ratios to
assist state regulators in monitoring the financial condition of insurance
companies. A "usual range" of results for each ratio is used as a benchmark.
Departure from the usual range on four or more of the ratios could lead to
inquiries from individual state insurance departments. The Company's businesses
experienced the departures from the usual ranges on the following ratios:
Business Held for Sale
PLIC had three of the twelve ratios outside of the usual range. PLIC's
variances were caused primarily as a result of examination adjustments
required by the Pennsylvania Department of Insurance. Remedial action
was taken by the Company in 1997 and 1998. Constitution had six ratios
outside the usual ranges primarily attributable to realized losses on
sales of investments and the recapture of a reinsurance contract with
an affiliate. Union Bankers had four ratios outside the usual ranges,
primarily resulting from a loss on an affiliated investment and effects
from the amortization of a deferred gain on a reinsurance contract.
Marquette had two ratios outside the usual ranges primarily resulting
from the recapture of a reinsurance contract. Professional had two
ratios outside the usual range. Professional's variances were caused
primarily as a result of statutory losses. Peninsular also had two
ratios outside the range. Peninsular's variances were caused primarily
as a result of increased reinsurance between OLIC and Peninsular.
United Life had one of the twelve ratios outside of the usual ranges as
a result of reserve changes in its life business. United Life is
primarily an annuity insurer and the life business is a small component
of its operations.
Retained Business
OLIC had four of the twelve ratios outside the usual ranges. OLIC's
variances were caused primarily as a result of increased reinsurance
between OLIC and Peninsular. PLAIC had three ratios and Pioneer
Security had two ratios outside of the usual range established by the
NAIC. PLAIC and Pioneer Security are primarily holding companies for
their principal assets, being the common stock of certain of the
Company's insurance subsidiaries. Security Life had one ratio outside
the usual range as a result of an increase in policy surrenders.
American-Amicable, Pioneer American and Southwestern Life had none of
the twelve ratios outside of the usual ranges.
19
<PAGE>
In the past, variances in the insurance companies' ratios have resulted
in inquiries from insurance departments to which the Company has responded. The
Company may receive inquiries from certain insurance departments concerning its
ratio results for 1998, and there can be no assurance that such insurance
departments will not take action against the insurance companies.
In December 1992, the NAIC adopted the RBC for Life and/or Health
Insurers Model Act (the "Model Act"). The main purpose of the Model Act is to
provide a tool for insurance regulators to evaluate the capital of insurers with
respect to the risks assumed by them and determine whether there is a need for
possible corrective action with respect to them. To date, either the Model Act
or similar legislation or regulation has been adopted in all the domiciliary
states of the Company's insurance subsidiaries.
The Model Act provides for four different levels of regulatory action
with respect to statutory financial statements for the calendar year 1994 and
thereafter, each of which may be triggered if an insurer's Total Adjusted
Capital (as defined in the Model Act) is less than a corresponding "level" of
RBC. The "Company Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 200.0% of its "Authorized Control Level RBC" (as defined in
the Model Act) or less than 250.0% of its Authorized Control Level RBC and the
insurer has a negative trend. At the Company Action Level, the insurer must
submit a comprehensive plan to the regulatory authority, which discusses
proposed corrective actions to improve its capital position. The "Regulatory
Action Level" is triggered if an insurer's Total Adjusted Capital is less than
150.0% of its Authorized Control Level RBC. At the Regulatory Action Level, the
regulatory authority will perform a special examination of the insurer and issue
an order specifying corrective actions that must be followed. The "Authorized
Control Level" is triggered if an insurer's Total Adjusted Capital is less than
100.0% of its Authorized Control Level RBC, and at that level the regulatory
authority is authorized (although not mandated) to take regulatory control of
the insurer. The "Mandatory Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 70.0% of its Authorized Control Level RBC, and at
that level the regulatory authority must take regulatory control of the insurer.
Regulatory control may lead to rehabilitation or liquidation of an insurer.
Calculations using the NAIC formula and the life insurance
subsidiaries' statutory financial statements as of December 31, 1998, indicate
that each of the insurance subsidiaries' capital exceeded RBC requirements,
except for PLIC (see Note 20 of Notes to Consolidated Financial Statements).
Certain licenses of the Company's insurance company subsidiaries are
subject to limits on the amount of new business that may be written in various
states. Of these license restrictions, most were imposed prior to the
acquisition of the relevant insurance subsidiary by PennCorp, or relate to
events occurring prior to those acquisitions. These license restrictions have
not had a material adverse effect on the Company's results of operations and are
not expected to have a material adverse effect in the future. In some states, a
license restriction, suspension or revocation by another state may result in
reciprocal regulatory action.
The Company may be required, under the solvency or guaranty laws of
most states in which it does business, to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Recent insolvencies of insurance companies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The Company paid approximately $300,000,
$2.5 million and $2.6 million for the years ended December 31, 1998, 1997 and
1996, respectively, as a result of such assessments.
On March 16, 1998, the NAIC approved the codification of statutory
accounting practices. The codification will constitute the only source of
"prescribed" statutory accounting practices and is subject to adoption by the
Department of Insurance of the state of domicile. The Statements of Statutory
Accounting Principles established under the codification are generally effective
January 1, 2001. The Company has not determined the impact the adoption of the
codification will have on unassigned surplus of each insurance subsidiary.
Although the federal government does not directly regulate the business
of insurance, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation can significantly affect the insurance business.
In addition, there were proposals under consideration since 1994 at the
federal and state levels regarding reforms to the health care system in the
United States. Although these proposals were not adopted at the federal level,
many states have adopted some form of health care reform since then. These
reforms have focused on the increasing cost of health care and insurance plans
that reimburse insureds or health care providers for medical and related costs.
Because the Company's
20
<PAGE>
fixed benefit products provide supplemental income payments directly to the
insured and are not designed to reimburse health care providers, the Company
does not expect such reforms to have a material adverse effect on its business.
There can be no assurance that existing insurance-related laws and
regulations will not become more restrictive in the future and thereby have a
material adverse effect on the operations of the Company and on the ability of
the insurance companies to pay dividends. Additionally, there can be no
assurance that existing insurance-related laws and regulations will not have a
material adverse effect on the ability of Constitution to make payments on its
respective surplus debentures. For further information related to said surplus
debentures, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Financial Condition, Liquidity and Capital
Resources--Surplus Debentures and Dividend Restrictions" and Note 14 of "Notes
to Consolidated Financial Statements." Furthermore, there can be no assurance
that existing insurance-related laws and regulations will not have a material
adverse effect on the ability of PLAIC and Pioneer Security to make payments on
their respective surplus debentures. For further information related to said
surplus debenture, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Financial Condition, Liquidity and Capital
Resources--Surplus Debentures and Dividend Restrictions" and Note 14 of "Notes
to Consolidated Financial Statements."
The Company is continually evaluating actuarial assumptions associated
with interest sensitive life insurance contracts in which the determination of
policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates, and premium persistency. Currently
reflected in the Company's financial statements are policy reserves and account
values associated with such contracts, which aggregated approximately $525.4
million and $504.6 million as of December 31, 1998 and 1997, respectively. If
developing trends were to continue, the Company would be required to record
additional reserves or reduce intangible assets, which could have a material
impact on the Company's financial position and results of operations. Management
is also assessing the potential impact of future management actions, which might
mitigate the financial impact of these trends. Types of management actions would
likely include, but are not limited to, the redetermination of non-guaranteed
charges and/or benefits under the contracts, asset segmentation, and
reinsurance. There are risks associated with management action including
potential sales disruption and the threat of litigation.
In January 1999, Security Life initiated management action in the form
of a new exchange program for certain policyholders of Security Life. The
program is being offered to all policyholders who had certain policy forms in
force as of January 1, 1998. The program allows the policyholder the following
options in exchange for terminating his or her policy and executing a release:
(i) refund of 115% of all premiums paid for the policy prior to January 1, 1999
and 100% of premiums paid thereafter; (ii) exchange the policy, without proof of
insurability, for the same face amount in a universal life policy, or a new term
universal life policy. The policyholder also has the choice of not accepting the
exchange program and keeping the current policy in force.
The exchange program is not expected to have a material effect on the
Company's financial position or results of operations. However, statutory
surplus of Security Life could be reduced by approximately $12.5 million on a
pre-tax basis if every eligible policyholder elects the exchange option.
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.
RATINGS
A.M. Best Company ("A.M. Best") assigns fifteen letter ratings to
insurance companies, with the highest being "A++ (Superior)." A.M. Best ratings
are based upon factors relevant to policyholders and are not directed toward the
protection of investors, such as holders of the Common Stock. All of the
Company's life insurance subsidiaries, except Peninsular and Marquette, carry a
"B+ (Very Good)" rating from A. M. Best. A "B+ (Very Good)" rating is the sixth
highest letter rating. These ratings reflect a downgrade during 1998 from A-
(two letter ratings) for United Life and AA Life, and from B++ (one letter
rating) for Southwestern Life, Security Life, OLIC, Professional, PLIC, Union
Bankers and Constitution. A.M. Best also has a "Not Assigned" category, which
contains nine classifications for companies not assigned or not eligible for an
A.M. Best rating. The A.M. Best rating for Peninsular is "NA-9," which is a "no
rating at the company's request." This classification was requested by the prior
owner of Peninsular. The Company does not intend to seek a letter rating at this
time for Peninsular from A.M. Best as Peninsular is not currently a direct
writer of insurance products. The A.M. Best rating for Marquette is "NA-3,"
which is "inapplicable" as the Company is not currently a direct writer of
insurance products and has limited activity. The purchase and sale contract for
the Career Sales Division requires PLIC, Union Bankers and Constitution to
maintain or be assured of an A.M. Best rating of at least B+ as of the closing
date.
21
<PAGE>
EMPLOYEES
At December 31, 1998, the Company had 1,247 full time employees. None
of the Company's employees were represented by any union.
Item 2. Properties
FACILITIES
The Company's primary administrative offices are located in New York,
New York; Dallas, Texas; and Raleigh, North Carolina. The Company owns and
occupies a home office facility comprising approximately 165,000 rentable square
feet, in Raleigh, North Carolina. The Company subleases a portion of its prior
Raleigh home office facility which has a lease term expiring in 1999 and
requires annual lease payments of approximately $1.1 million.
The Company leases approximately 100 offices throughout its sales
territories and has a separate Canadian business office facility that includes
office and storage space. Southwestern Financial Services Corporation ("SFSC")
leases approximately 125,000 square feet in Dallas, Texas at an annual cost of
$1.8 million. American-Amicable owns its home office facility in Waco, Texas.
The Company believes that the current makeup of its properties is adequate for
its operations and, based on its recent experience, that it will be able to find
suitable replacement properties on acceptable terms for properties the Company
chooses to replace or for which leases are terminated or not renewed.
Item 3. Legal Proceedings
On August 25, 1998, the first of ten class-action complaints were filed
in the United States District Court for the Southern District of New York
against the Company and certain of its current or former directors and officers.
During a pre-trial conference on November 9, 1998, all parties agreed
to the consolidation of all of the actions and the Court appointed lead
plaintiffs on behalf of shareholders and noteholders. The Court also approved
the selection of three law firms as co-lead counsel for shareholders and
noteholders. Pursuant to a schedule agreed to at the conference, a consolidated
and amended complaint was filed on January 22, 1999. A First Consolidated
Amended Class Action Complaint naming, as defendants, the Company, David J.
Stone, formerly Chairman and Chief Executive Officer, and Steven W. Fickes,
formerly President and Chief Financial Officer was filed on March 15, 1999 (the
"Complaint").
The Complaint alleges that defendants violated the Securities Exchange
Act of 1934. Among other things, plaintiffs' claim that defendants issued a
series of materially false and misleading statements and omitted material facts
regarding the Company's financial condition, including the value of certain of
its assets, and failed to timely disclose that it was under investigation by the
Securities and Exchange Commission (the "SEC").
Plaintiffs seek to recover damages in unspecified amounts on behalf of
themselves and all other purchasers of the Company's common stock and purchasers
of the Company's subordinated notes during the period of February 8, 1996
through November 16, 1998.
During a conference on March 19, 1999, defendants sought and were
granted permission to file a motion to dismiss the Complaint. Although there are
not assurances that the motion to dismiss will be granted, management believes
that there are meritorious defenses to the action that will be raised in
connection with the motion, including whether the Complaint adequately pleads
scienter (i.e., intent to defraud) as required under the Private Securities
Litigation Reform Act of 1995.
The Company has notified its primary and excess carriers of directors
and officers liability insurance of the existence of the claims set forth in the
Complaint, and the total potential insurance available is $15 million of primary
and $10 million of excess coverage, respectively, for securities claims. The
primary insurance coverage requires the Company to bear 25% of all expenses and
any losses in excess of the $1 million retention amount. The primary and excess
carriers have reserved their rights under the policies with respect to coverage
of the claims set forth in the Complaint.
The Company expects that this litigation will not affect its ability to
operate through December 31, 1999. While it is not feasible to predict or
determine the final outcome of these proceedings or to estimate the amounts or
potential range of loss with respect to these matters, management believes that
if there is an adverse outcome with respect to such proceedings it would have a
material adverse impact on the Company and affect its ability to operate as is
currently intended.
22
<PAGE>
On July 30, 1998, the SEC notified the Company that it has commenced a
formal investigation into possible violations of the federal securities laws
including matters relating to the Company's restatement of its financial
statements for the first nine months of 1997, and for the years ended December
31, 1994, 1995 and 1996. The Company and its management are fully cooperating
with the SEC in its investigation.
The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business, some of which include allegations of
insufficient policy illustration and agent misrepresentations. Although the
outcome of such actions is not presently determinable, management does not
believe that such matters, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations if resolved against the Company.
In May 1998, the North Carolina Attorney General's Office (the "NCAG")
initiated an inquiry concerning certain life insurance products historically
sold by Security Life and representations allegedly made by Security Life's
agents and officers with respect to not changing insurance charges after the
eighth policy year for non-smoker insureds. The NCAG indicated that Security
Life may be estopped to change its current practice of not charging the cost of
the insurance because of certain representations made by agents and officers of
Security Life. Although Security Life has not charged the cost of insurance
charges for non-smoker policyholders who recently reached their ninth policy
year, this practice is not guaranteed under the life insurance contracts. The
contracts specifically allow Security Life the right to change the cost of
insurance rates in accordance with the parameters set forth in the insurance
contracts. Security Life has responded to the NCAG's inquiry by denying that it
is estopped from changing the cost of insurance rates based on the alleged
representations, and continuing to reserve its contractual rights to change the
cost of insurance rates in accordance with the parameters set forth in the
insurance contracts. In June 1998, the NCAG informed Security Life that it could
not adjudicate this matter and left it mutually unresolved. No further
communications from the NCAG have been received to date. The Company has
initiated an exchange program which enables policyholders of such life insurance
products to terminate their policies and obtain either (i) the refund of all
premiums paid and other consideration or (ii) another Security Life product. See
Item 1. Business -- Regulatory Matters. There can be no assurances that the
exchange program will be successful or that the Company will resolve these
matters on such life insurance product on a satisfactory basis, or at all, or
that any such resolution would not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
MARKET FOR COMMON STOCK
The shares of Common Stock of the Company are listed on the New York
Stock Exchange ("NYSE") under the ticker symbol "PFG." The following table sets
forth for the calendar periods indicated, the high and low sales price per share
of the Company's Common Stock as reported on the NYSE and the quarterly cash
dividends declared on the Common Stock with respect to each quarter since
January 1, 1997. The prices do not include mark-ups, mark-downs, or commissions.
As of February 28, 1999, there are approximately 260 shareholders of record
throughout the United States and abroad.
The price history as provided by NYSE and dividends for the years ended
December 31, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
SALES PRICE DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1998 HIGH LOW DECLARED
------------------------------------ -------- -------- ----------
<S> <C> <C> <C>
Fourth quarter..................................... $ 2.250 $ 0.500 $ --
Third quarter...................................... 20.750 1.750 --
Second quarter..................................... 28.688 20.125 0.05
First quarter...................................... 35.938 27.813 0.05
SALES PRICE DIVIDEND
FOR THE YEAR ENDED DECEMBER 31, 1997 HIGH LOW DECLARED
------------------------------------ -------- -------- ----------
Fourth quarter...................................... $ 35.875 $ 30.188 $ 0.05
Third quarter....................................... 40.375 29.500 0.05
Second quarter...................................... 38.500 30.125 0.05
First quarter....................................... 39.000 32.000 0.05
</TABLE>
(Remainder of Page Intentionally Left Blank)
24
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Policy revenues.............................. $ 459,158 $ 345,566 $ 348,090 $ 301,889 $ 244,422
Net investment income........................ 369,052 273,237 210,734 102,291 51,850
Other income(1).............................. 37,717 46,476 43,703 21,794 1,056
Net gains (losses) from the sale
of investments............................. 14,068 17,487 1,257 3,770 (3,556)
---------- ---------- ---------- ---------- ---------
Total revenues........................... 879,995 682,766 603,784 429,744 293,772
---------- ---------- ---------- ---------- ---------
Benefits and expenses:
Claims incurred.............................. 308,432 202,472 188,727 141,876 112,650
Change in liability for future policy benefits
and other policy benefits.................. 233,330 121,817 83,184 20,047 (9,329)
Insurance and other operating expenses....... 376,941 264,607 181,678 164,126 111,524
Interest and amortization of deferred
debt issuance costs....................... 42,960 23,355 18,579 19,520 18,274
Impairment provision associated with assets
of Businesses Held for Sale................ 342,960 -- -- -- --
---------- ---------- ---------- ---------- ---------
Total benefits and expenses.............. 1,304,623 612,251 472,168 345,569 233,119
---------- ---------- ---------- ---------- ---------
Income (loss) before income taxes and
extraordinary charge........................... (424,628) 70,515 131,616 84,175 60,653
Income taxes (benefits)...................... (3,369) 20,375 40,957 27,829 22,163
---------- ---------- ---------- ---------- ---------
Income (loss) before extraordinary charge....... (421,259) 50,140 90,659 56,346 38,490
Extraordinary charge, net of income taxes.... (1,671) -- (2,372) -- --
---------- ---------- ---------- ---------- ---------
Net Income (loss)............................... (422,930) 50,140 88,287 56,346 38,490
Preferred stock dividend requirements........ 18,273 19,533 14,646 6,540 1,151
---------- ---------- ---------- ---------- ---------
Net income (loss) applicable to common stock.... $ (441,203) $ 30,607 $ 73,641 $ 49,806 $ 37,339
========== ========== ========== ========== =========
(1) Includes $19.0 million, $21.0 million and $4.7 million of equity in earnings of unconsolidated
affiliates for the years ended 1997, 1996 and 1995, respectively.
Per Share Information:
Basic:
Net income (loss) applicable to common stock
before extraordinary charge................ $ (15.17) $ 1.09 $ 2.79 $ 2.26 $ 1.95
Net income (loss) applicable to common stock
before net gains (losses) from the sale of
investments, restructuring costs and
impairment provision associated with assets
of Businesses Held for Sale and extraordinary
charge(2).................................. $ (3.36) $ 1.16 $ 2.76 $ 2.26 $ 2.07
Extraordinary charge, net of income taxes.... $ (0.06) $ -- $ (0.09) $ -- $ --
Common shares used in computing basic earnings
per share.................................. 29,091 28,016 27,208 22,048 19,112
Diluted:
Net income (loss) applicable to common stock
before extraordinary charge............... $ (15.17) $ 1.07 $ 2.49 $ 2.12 $ 1.88
Net income (loss) applicable to common stock
before net gains (losses) from the sale of
investments, restructuring costs and
impairment provision associated with assets
of Businesses Held for Sale and
extraordinary charge (2)................... $ (3.36) $ 1.13 $ 2.47 $ 2.12 $ 2.00
Extraordinary charge, net of income taxes.... $ (0.06) $ -- $ (0.07) $ -- $ --
Common shares used in computing diluted
earnings per share......................... 29,091 28,645 35,273 25,216 19,851
Cash dividends declared......................... $ 0.10 $ 0.20 $ 0.20 $ 0.06 $ 0.04
As of December 31,
Assets:
Investments and cash............................ $2,956,254 $3,340,114 $3,694,609 $2,288,979 $ 822,778
Insurance assets................................ 347,728 617,318 639,798 499,668 342,547
Other assets.................................... 305,615 766,703 474,916 354,271 144,244
Assets of Businesses Held for Sale.............. 2,421,804 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total assets................................. $6,031,401 $4,724,135 $4,809,323 $3,142,918 $1,309,569
========== ========== ========== ========== ==========
Liabilities and shareholders' equity:
Insurance liabilities........................... $2,867,038 $3,289,925 $3,566,455 $2,221,161 $ 788,223
Notes payable................................... 550,923 359,755 210,325 307,271 229,041
Other liabilities............................... 110,945 194,352 170,302 125,351 58,903
Liabilities of Businesses Held for Sale......... 2,066,554 -- -- -- --
Redeemable preferred stock...................... -- 19,867 32,864 30,007 37,256
Shareholders' equity............................ 435,941 860,236 829,377 459,128 196,146
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity... $6,031,401 $4,724,135 $4,809,323 $3,142,918 $1,309,569
========== ========== ========== ========== ==========
(2) During 1995, the Company incurred restructuring charges aggregating $3.9 million.
</TABLE>
25
<PAGE>
Item 7. 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" reviews the consolidated financial condition of the
Company as of December 31, 1998 and 1997, the consolidated results of operations
for the three years ended December 31, 1998, and where appropriate, factors that
may affect future financial performance.
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and related notes of this Annual
Report on Form 10-K.
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 insurance products; (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, which the Company believes are particularly important to the sale of
annuity and other accumulation products; (9) PennCorp's ability to successfully
complete its year 2000 remediation efforts, (10) the ultimate realizable value
and sales proceeds to be received from the Businesses Held for Sale and (11)
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
The Company, through its three operating divisions, provides
accumulation, life, and fixed benefit accident and sickness insurance products
throughout the United States and Canada. The Company's products are sold through
several distribution channels, including independent general agents, exclusive
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.
Planned Dispositions. 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."
On December 31, 1998, the Company entered into an agreement to sell the
Career Sales Division and related assets to Universal American. The purchase
price of $175.0 million is subject to adjustment based on the capital and
surplus of the Career Sales Division at the closing date. The purchase price
consists of $136.0 million in cash, subject to adjustment and $39.0 million
initial principal amount of subordinated notes of Universal American. The
subordinated notes bear interest at a rate of 8.0% per annum and mature ten
years from date of issuance. The accreted value of the notes will be subject to
offset in the event of adverse development (or subject to increase in the event
of positive development) in the disability income reserves of PLIC and may be
offset for other indemnification claims under the purchase and sale agreement.
In
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<PAGE>
addition, the Company is required under terms of the purchase and sale agreement
to deliver the Career Sales Division and related assets with certain minimum
levels of statutory capital and surplus, pay certain ongoing costs and other
expenses which the Company anticipates will result in its receiving net cash
proceeds of approximately $70.0 to $78.0 million.
In addition, on December 31, 1998, the Company entered into an
agreement to sell Professional to GEFAH for $47.5 million in cash plus interest
through the closing date. The purchase price is subject to an adjustment based
on Professional's capital and surplus at the closing date. The Company currently
estimates receiving net cash proceeds for the Professional Sale of approximately
$40.0 million to $41.5 million.
On February 21, 1999, the Company signed a definitive agreement to sell
the United Life Assets. The purchase price consists of $152.0 million and a
dividend payable by United Life at closing, which the Company estimates will be
approximately $2.1 million. The purchase consideration may be reduced as a
result of the Company's obligation to purchase certain mortgages from United
Life at closing. Additionally, a portion of the purchase price may be escrowed
at closing to fund the Company's obligation to purchase additional mortgages
from United Life after closing. The Company anticipates receiving net cash
proceeds from the sale of the Untied Life Assets of approximately $140.0
million.
The purchase and sale agreements for the Career Sales Division,
Professional and United Life Assets are subject to regulatory approvals and
other closing conditions.
In the third quarter of 1998, the Company made the decision to dispose
of KIVEX, an internet service provider. The Company has engaged the investment
banking firm of ING Barings Furman Selz in this regard and is currently
soliciting interest from prospective purchasers. To date, the Company has not
entered into a definitive agreement to sell KIVEX. In addition, the Company has
made the decision to sell Marketing One, excluding those assets included with
the sale of United Life.
The Company's decision to dispose of the Career Sales Division,
Professional, KIVEX, United Life Assets and Marketing One, within a period not
likely to exceed one year resulted in the assets and liabilities of the Career
Sales Division, Professional, KIVEX, United Life Assets and Marketing One to be
considered "assets and liabilities held for sale," and as such were segregated
from those of the Retained Businesses for purposes of presentation of the
Company's financial information.
The Company has recently engaged Wasserstein, Perella & Co.
("Wasserstein Perella") to review the Company's capital structure and its
recapitalization and restructuring alternatives. Wasserstein Perella is
presently evaluating the Company's business plan alternatives and capital
structure and will advise and assist it with developing strategies, tactics and
timetables to effectuate financing, refinancing, sale, recapitalization or
restructuring transactions, as appropriate. These transactions may take the form
of: (i) a restructuring or recapitalization of the Company's equity (including
preferred or preference shares), debt securities or other indebtedness or
obligations, including an exchange transaction or otherwise; (ii) a sale of the
Company or any subsidiary; and (iii) a sale or placement of the Company's equity
or debt securities or obligations with one or more lenders or investors or any
loan or financing, or rights offering. There can be no assurance: (i) the
Company will be successful in developing and implementing one or more of these
transactions; (ii) the form the transactions will ultimately take; or (iii) the
timing to complete the process.
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 KB Fund the SW Financial Controlling
Interest for an aggregate purchase price of $73.7 million (not including
acquisition expenses).
On January 5, 1998, following shareholder approval at the 1997 annual
meeting of shareholders, the Company consummated the acquisition of the
interests of Fickes and Stone Knightsbridge Interests for total consideration
estimated to be $10.6 million (not including acquisition expenses). Mr. Fickes
will receive consideration in the form of estimated annual interest payments,
ranging from $301,000 to $330,000, on April 15 each year through 2001 and will
be issued 173,160 shares of the Company's Common Stock on April 15, 2001. The
Company issued 173,160 shares to Mr. Stone in July 1998.
Restructuring and Other Costs. As a result of the tremendous growth of
the Company and 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 in 1997.
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<PAGE>
As a result, the Company began to realign its existing operating
companies and incurred restructuring costs aggregating approximately $19.1
million during the year ended December 31, 1997, directly and indirectly
associated with the initial divisional restructuring which had no future
economic benefit ("restructuring costs").
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 acquisitions allowed the Company to complete its
divisional restructuring which began in 1997. As a result, the Company incurred
restructuring costs aggregating approximately $11.8 million for the year ended
December 31, 1998, directly and indirectly associated with divisional
restructuring.
In addition, the Company recorded in the fourth quarter of 1998,
additional restructuring costs aggregating approximately $9.2 million as a
result of the decision to consolidate or merge substantially all of its
corporate functions into the Company's Dallas location.
The restructuring costs recognized the following for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
($ in millions)
<S> <C> <C>
Severance and related benefits incurred due to staff reduction.. $ 10.1 $ 5.4
Estimated holding costs of vacated facilities................... 2.2 6.2
Write-off of certain fixed assets and other impaired assets..... 4.0 1.5
Estimated contract termination costs............................ 4.7 --
Write-off of investment in certain foreign operations which
will be closed................................................ -- 6.0
------------- -------------
Total restructuring costs.................................. $ 21.0 $ 19.1
============= =============
</TABLE>
During the years ended December 31, 1998 and 1997, the Company
re-evaluated the restructuring costs and reduced the remaining accruals by
approximately $6.1 million and $2.3 million, respectively, as a result of the
final determination of certain obligations.
The Company incurred approximately $6.3 million and $4.7 million of
pre-tax incremental costs ("period costs") associated with the corporate
restructuring for the years ended December 31, 1998 and 1997, respectively. Such
costs are included in the Company's Results of Operations as underwriting and
other administrative expenses.
On August 30, 1997 the merger agreement between Washington National
Corporation ("Washington National") and the Company terminated. The Company
incurred legal, accounting and financial advisory fees associated with the
merger. In addition, the Company had begun to provide certain resources to
Washington National including personnel to perform policy administration and
claims processing function on Washington National's behalf. The aggregate
advisory and administration costs incurred by the Company during 1997 were
approximately $7.6 million.
Impairment Provision Associated with Assets of Businesses Held for
Sale. For the year ended December 31, 1998 the Company recorded an impairment
provision aggregating $343.0 million. In accordance with SFAS No. 121, the
Company recorded the impairment provision in order to reflect the difference in
the Company's accounting basis in the Businesses Held for Sale and the fair
value of the consideration that the Company would likely receive for such
businesses. The fair value of the consideration likely to be received has been
primarily based upon the terms of definitive sales agreements. The impaired
provisions for the Career Sales Division, Professional and the United Life
Assets were $328.6 million, $3.3 million and $11.1 million, respectively.
YEAR 2000 ISSUES
Many computer and software programs were designed to accommodate only
two digit fields to represent a given year (e.g. "98" represents 1998). It is
highly likely that such systems will not be able to accurately process data
containing date information for the year 2000 and beyond. The Company is highly
reliant upon computer systems and software as are many of the businesses with
which the Company interacts. The Company's ability to service its policyholders
and agents is dependent upon accurate and timely transaction processing.
Transaction processing 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
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<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, include the
following components: (i) assessment of all business critical systems (business
critical systems includes computer and other systems), processes and external
interfaces and dependancies; (ii) remediation or upgrading of business critical
systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning. As a part of the process, the Company has written
letters and corresponded with its outside vendors and critical business partners
concerning year 2000 compliance efforts and follows up periodically. Of those
parties that have responded, the Company's most significant third party vendors
and business partners have indicated that they have a plan for year 2000
compliance or believe that they are currently year 2000 compliant.
The Company has engaged 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 fourth quarter of
1998, the Company anticipates incurring internal and external costs of $5.0
million during 1999. The Company estimates it has incurred internal and external
costs aggregating $13.4 million and $1.9 million for the years ended December
31, 1998 and 1997, respectively.
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 1999. 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. 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 1999. The
Company believes that the Payroll Sales Division, other than AA Life, is 95.0%
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 90.0% of the total effort required for its critical business
systems to be year 2000 compliant. The efforts of the Company's Financial
Services Division are highly 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 85.0%
complete with remediation efforts associated with its critical business systems.
The Company believes that all of its divisions will have completed their
remediation efforts by May 1999, but each division will continue to perform
testing throughout 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 developed
various contingency plans associated with remediation tasks which the Company
believes are at a higher risk for potential failure.
The Company has provided certain assurances to each respective
purchaser of the Businesses Held for Sale with respect to each entity's ability
to process date-sensitive information for the year 2000 and beyond. Although the
Company believes that it will be able to meet the year 2000 representations and
warranties provided to the respective purchasers, there can be no assurances.
Failure of the Company to meet such representations and warranties could result
in a decision by the purchaser not to consummate the transaction and/or
indemnification claims for breach of contract.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Parent Company
General. PennCorp ("parent company") is a legal entity, separate and
distinct from its subsidiaries and has no material business operations. The
parent company needs cash for: (i) principal and interest on debt; (ii)
dividends on
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<PAGE>
preferred and common stock; (iii) holding company administrative expenses; (iv)
income taxes and (v) investments in subsidiaries. In September 1998, the Company
suspended payment of preferred and common stock dividends. The primary sources
of cash to meet these obligations include statutorily permitted payments from
life insurance subsidiaries, including: (i) surplus debenture interest and
principal payments, (ii) dividend payments; and (iii) tax sharing payments. The
parent company may also obtain cash through the sale of subsidiaries or other
assets.
The following table shows the cash sources and uses of the parent
company on a projected basis for 1999 and on an actual basis for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended December 31,
Projected
1999 1998 1997 1996
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Cash sources:
Cash from subsidiaries........................ $ 283,670 $ 73,521 $ 34,839 $ 143,244
Other investment income....................... -- 2,865 3,547 2,428
Sale of equity securities..................... -- 30,500 -- --
Issuance of preferred and common stock........ -- 3 -- 294,607
Additional borrowings......................... -- 203,000 250,000 230,000
Other, net.................................... 5,630 1,303 3,243 2,705
------------- ------------- ------------- -------------
Total sources........................... 289,300 311,192 291,629 672,984
------------- ------------- ------------- -------------
Cash uses:
Acquisition of businesses..................... -- 73,858 -- --
Interest paid on debt......................... 39,727 37,849 20,946 16,921
Operating expenses, including
restructuring charges....................... 19,882 36,217 24,362 1,136
Purchase of treasury shares................... -- -- 28,760 --
Reduction of notes payable.................... 237,000 126,015 100,000 273,353
Capital contributions to subsidiaries......... 1,500 7,853 14,889 208,708
Purchase of equity securities................. -- 5,000 20,000 --
Purchase of SW Financial note................. -- -- 40,000 --
Issuance of surplus note to subsidiary........ -- -- -- 155,000
Redemption of preferred stock................. -- -- 14,705 --
Dividends on preferred and common stock....... -- 16,210 23,460 17,480
Other, net.................................... 1,550 -- 2,142 --
------------- ------------- ------------- -------------
Total uses.............................. 299,659 303,002 289,264 672,598
------------- ------------- ------------- -------------
Increase (decrease) in cash and short-term
investments................................... (10,359) 8,190 2,365 386
Cash and short-term investments at beginning
of year....................................... 12,654 4,464 2,099 1,713
------------- ------------- ------------- -------------
Cash and short-term investments at end of year $ 2,295 $ 12,654 $ 4,464 $ 2,099
============= ============= ============= =============
</TABLE>
Cash Sources
Cash from Subsidiaries. Cash generated by the Company's insurance
subsidiaries is made available to PennCorp principally through periodic payments
of principal and interest on surplus debentures issued by PLAIC, Constitution
and Pioneer Security (collectively, the "Surplus Note Companies"). With respect
to Constitution and Pioneer Security, the surplus debenture payments are made to
non-insurance intermediate holding companies and paid to the Company in the form
of dividends and tax sharing payments. The amounts outstanding under the surplus
debentures totaled $453.1 million and $358.3 million as of December 31, 1998 and
1997, respectively. The surplus debentures generally require (subject to
availability of statutory capital and surplus and in some instances, regulatory
approval) principal and interest payments to be made periodically in amounts
sufficient to allow PennCorp to meet its cash requirements.
The Surplus Note Companies rely upon dividends and tax sharing payments
from their respective insurance subsidiaries. Each of the insurance subsidiaries
is in turn subject to regulatory restrictions with respect to the maximum amount
of dividends that can be paid to the Surplus Note Companies within a twelve
month period without prior regulatory
30
<PAGE>
approval. Such dividend restrictions are generally the greater of 10% of
statutory capital and surplus or statutory earnings. See Business-Regulatory
Matters for additional discussions of dividend restrictions.
For the years ended December 31, 1998, 1997 and 1996, the Company
received surplus debenture interest and principal payments from PLAIC of $26.2
million, $16.4 million and $132.0 million, respectively, and received dividends
and tax sharing payments of $47.3 million, $18.4 million and $11.3 million,
respectively. The Surplus Note Companies received $69.5 million, $32.1 million
and $25.8 million in dividends and tax sharing payments from their respective
insurance subsidiaries.
Other Investment Income. During each of the years in the three year
period ended December 31, 1998, the Company received other investment income
from short-term invested assets held by the parent company.
Sales of Equity Securities. During 1998 the parent company liquidated
its common and preferred stock holdings in ACO Brokerage Holding Corp. ("ACO"),
the parent company of Acordia Inc. Total proceeds received from the sale of the
preferred and common stock aggregated $30.5 million. The Company had acquired
the preferred stock interests in ACO for $20.0 million during 1997 and the
common stock interests in January 1998 for $5.0 million as part of the Company's
and the KB Capital Fund I investment in ACO. See Note 18 to Notes to Financial
Statements for additional information regarding the Company's investment in ACO.
Issuance of Preferred and Common Stock. In August 1996 the Company
issued 2,875,000 shares of $3.50 Series II Convertible Preferred Stock ("Series
II Convertible Preferred Stock") for net proceeds of $139.2 million. In
addition, in February 1996 PennCorp completed the sale of 5,131,000 shares of
Common Stock, netting proceeds of $155.5 million ("February 1996 Common Stock
Offering"). See Cash Uses below for the use of proceeds from the Series II
Convertible Preferred Stock and February 1996 Common Stock Offerings.
Additional Borrowings. During each of the years in the three year
period the Company borrowed under then existing bank credit facilities to
primarily fund acquisitions or repay existing indebtedness. See Cash Uses below
for the use of proceeds from the additional borrowings.
Cash Uses
Acquisition of Businesses. During 1998, the Company acquired the
Controlling Interest in SW Financial for $73.7 million in cash and the Fickes
and Stone Knightsbridge Interests for $10.6 million of which $200,000 of the
consideration was paid in cash. To fund such acquisitions the Company utilized
borrowing under its existing credit facility. For additional information on the
acquisition of the Controlling Interest in SW Financial and the Fickes and Stone
Knightsbridge Interests, see Note 3 of Notes to Consolidated Financial
Statements. During 1996, the Company acquired United Life for $110.1 million and
contributed additional capital to United Life of approximately $57.3 million.
The Company effectuated the acquisition and capital contribution by providing
funds to PLAIC in the form of a surplus note aggregating $155.0 million from
proceeds raised under the Series II Convertible Preferred Offering. For
additional information on the acquisition of United Life see Note 3 of Notes to
Consolidated Financial Statements.
Interest Paid on Indebtedness. During the three year period, the
Company utilized varying amounts of leverage in its capital structure. For the
years ended December 31, 1998, 1997 and 1996, the average indebtedness
outstanding aggregated $452.6 million, $281.6 million and $257.0 million,
respectively. The Company's weighted average costs of borrowings increased
significantly during 1998 as a result of the Company's increased leverage ratio
and projected weakness in future liquidity. The Company anticipates higher
interest costs to continue for the year ended 1999. For additional information
regarding indebtedness, see Note 9 of Notes to Consolidated Financial Statements
and Results of Operations-Interest and Amortization of Deferred Debt Costs.
Operating Expenses Including Restructuring Charges. During 1998 and
1997 the parent company directly and indirectly, through charges from its
subsidiaries, incurred significant operating and restructuring charges. Total
restructuring charges paid by the parent company during 1998 and 1997 aggregated
$9.1 million and $11.5 million, respectively. During 1999, the parent company
anticipates funding $5.0 million of restructuring charges. During 1998, the
parent company also incurred legal, accounting and investment banking fees
associated with asset dispositions aggregating $1.5 million. Operating expenses
also include costs aggregating $1.8 million associated with shareholder
litigation and the SEC's investigation into the Company's historical accounting
practices. The Company anticipates incurring additional amounts of such costs
during 1999.
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Purchase of Treasury Shares. During 1997 the Company utilized proceeds
from its existing credit facility to repurchase approximately 819,000 shares of
Common Stock for $28.8 million in accordance with an agreement with the former
owner of United Life.
Reduction in Notes Payable. In conjunction with the Company's 1998
acquisition of the SW Financial Controlling interest, the Company borrowed under
its existing $450 million revolving bank credit facility (the "Bank Credit
Facility") to repay indebtedness of SW Financial aggregating $115.0 million upon
acquisition. In addition, during 1998 the Company used existing liquidity to
repay $11.0 million of indebtedness under the company's Bank Credit Facility.
During 1997, the Company utilized proceeds from the Bank Credit Facility to
retire indebtedness aggregating $100.0 million outstanding under a prior bank
credit agreement. The Company utilized proceeds from its February 1996 Common
Stock Offering to repay approximately $137.0 million of subsidiary indebtedness.
Also during 1996, the Company entered into a new $175 million credit facility
and utilized $100.0 million to repay a bridge loan facility entered into to
effectuate the SW Financial investment in December 1995 and repurchase $35.4
million of principal amount of the Company's 9 1/4% Senior Subordinated
Debenture due 2003 (the "Notes").
Capital Contributions to Subsidiaries. For the years ended December 31,
1998, 1997 and 1996, the Company made capital contributions to subsidiaries
totaling $7.9 million, $14.9 million and $208.7 million, respectively. During
1998, 1997 and 1996, these contributions were primarily made to certain non-life
insurance subsidiaries, principally KIVEX, to fund expansion and for other
corporate purposes. During 1996, the Company contributed $100.0 million to PLAIC
in connection with the acquisition of United Life.
Purchase of Equity Securities. In conjunction with the acquisition of
the Fickes and Stone Knightsbridge Interests, the Company acquired Fickes' and
Stone's interest in the ACO Brokerage Common Stock for $5.0 million. During
1997, the Company invested $20.0 million in ACO Preferred Stock.
Purchase of SW Financial Note. During 1997, the Company acquired all of
the issued and outstanding convertible subordinated indebtedness of SW Financial
aggregating $40.0 million. Such indebtedness was previously held by the
creditors of ICH Corporation.
Issuance of Surplus Notes to Subsidiaries. The Company issued a $155.0
million surplus note to PLAIC in order to provide funding to PLAIC for the
purchase and capital contributions necessary to effectuate the United Life
acquisition.
Redemption of Preferred Stock. In March 1997 the Company utilized
proceeds available under its then existing credit facility to redeem all of the
outstanding Series B Preferred Stock for $14.7 million.
Dividends of Preferred and Common Stock. During 1998, 1997 and 1996 the
Company paid common and preferred stock dividends aggregating $16.2 million,
$23.5 million and $17.5 million, respectively. The increase in amounts paid
during 1997 as compared to 1996 was the result of the $3.50 Series II
Convertible Preferred Stock being outstanding for the entire year. The drop in
dividend payments during 1998 was due to the Company's decision to halt common
and preferred stock dividend payments as a result of impending liquidity
concerns.
Projected Cash Sources and Uses in 1999
During 1999, the Company anticipates receiving approximately $25.2
million in the form of principal and interest payments or dividends and tax
sharing payments for the Surplus Note Companies as a result of the ordinary
dividend flow from the Surplus Notes Companies insurance subsidiaries. In
addition, the Company anticipates receiving principal payments under the surplus
debentures as a result of the sales of the Career Sales Division, Professional
and the United Life Assets by the Surplus Note Companies. Total cash proceeds
anticipated by the Company from such sales aggregates approximately $258.5
million. The Company anticipates utilizing $237.0 million to repay indebtedness
and the remainder of such proceeds to fund interest costs and operating expenses
of the parent company. Consummation of the Career Sales Division, Professional
and the United Life Assets sales transactions is subject to regulatory approvals
and other material closing conditions. Please refer to the reports on Form 8-K
filed on January 11, 1999 and March 11, 1999 for more information on these sale
transactions. Included as Exhibits 2.1 and 2.2 on the Form 10-K are the
definitive purchase and sale agreements for the Career Sales Division and
Professional, respectively. There can be no assurances that the Career Sales
Division, Professional or the United Life Assets sales will be consummated or
that the cash proceeds will be in the amount anticipated by the Company.
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<PAGE>
The Company's ability to receive principal and interest payments above
$25.2 million under the surplus notes is contingent upon the Company's ability
to consummate each of the sales transactions of the Businesses Held for Sale
currently under contract. The Company has currently estimated net cash proceeds
after required debt reduction under the Company's Bank Credit Facility of $21.1
million. Such liquidity is necessary for the Company to fund interest payments
under the Bank Credit Facility and the notes and to fund operating expenses of
the Company. Though the Company has the obligation to consummate the sales of
the Businesses Held for Sale and to prepay the loans to certain covenanted
levels, the Company may not have the requisite ability to effectuate the sale as
a result of the restrictive covenants contained in the Amended Bank Credit
Facility. The accessibility of the cash proceeds of the Businesses Held for Sale
are the subject of regulatory approval. While certain regulatory filings with
respect to the sale of the Businesses Held for Sale have been made, not all
filings have been so made and the final structure by which such proceeds will be
upstreamed to the Company have not yet been finalized. The Amended Credit
Agreement provides that the Company and its subsidiaries are limited from
entering into certain mergers, consolidations, amalgamations, liquidations,
winding up or dissolutions, incurring certain indebtedness and liabilities,
making disposition, prepaying certain indebtedness, declaring dividends, or
issuing, redeeming, purchasing, retiring, exchanging or converting capital
securities, in each case with very limited or scheduled exceptions. While the
Company believes it has scheduled or otherwise provided for a great majority of
the possible combinations it will take to effectively upstream the cash proceeds
of the sales of the Businesses Held for Sale, it is not possible to foresee all
combinations. Accordingly, the mechanism to upstream to the Company the
necessary cash to pay the covenanted prepayment under the Amended Credit
Agreement may be subject to the approval of the majority banks which, if not
given, would result in an event of default under the Amended Bank Credit
Agreement. Should the sale transactions not close within specified time periods,
the Company may face difficulty in meeting its existing and estimated cash
obligations and would be in default of certain covenants under the Bank Credit
Facility.
The net proceeds available to the Company from the asset sales may vary
significantly from current estimates as a result of (i) minimum levels of
statutory capital and surplus required to be delivered at closing for certain
insurance subsidiaries, (ii) amounts to be held in escrow, (iii) valuation of
certain consideration to be received by the Company, (iv) the timing of the
closing and (v) various indemnification obligations included in each purchase
and sale agreement. Specifically, the purchase and sale agreement for the Career
Sales Division requires the purchaser to be satisfied with disability claims
reserve liabilities and other active life reserves. The Company has engaged an
actuarial consulting firm to provide analysis to the purchaser regarding such
reserves. The Company is aware of potential deficiencies aggregating
approximately $16.2 million in the statutory determination of disability claims
reserves that will likely impact the total consideration the Company is to
receive. The Company and the purchaser have not engaged in discussions to
resolve the disability claims reserve issue. In addition, the purchase and sale
agreement for the United Life Assets requires the Company to purchase certain
residential mortgage loans from United Life, should the loans not meet specified
criteria under the purchase and sale agreement or should United Life not be able
to provide clear title to the loans. The residential loans are part of a
servicing agreement with United Companies Financial Corporation, the "servicer,"
which has recently filed for bankruptcy. The servicer currently maintains within
its control all applicable loan documents. Should the Company be unable to
obtain satisfactory control of all of the applicable documents, the Company's
anticipated net proceeds from the United Life Asset sale could be reduced by
approximately $12.6 million. Such reduction would have a material impact on the
liquidity of the Company.
In addition to the above proceeds, there exists $7.0 million of unused
commitments under the Company's existing credit facility that are available only
for the purpose of payments of interests, should the Company not have sufficient
liquidity from other sources. Upon consummation of the Career Sales Division
divestiture the commitment will be reduced to $5.0 million.
As a result of these anticipated actions, management believes the
Company will likely have sufficient financial flexibility and projected
liquidity sources to meet all cash requirements for 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 and (ii) obtain regulatory approval for extraordinary
dividends from its insurance subsidiaries (which is unlikely at the present
time). 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.
Subsidiaries, Principally Insurance Operations
The insurance subsidiaries' principal sources of cash are premiums and
investment income. The insurance subsidiaries' primary uses of cash are policy
claims, commissions, operating expenses, income taxes and payments to the
33
<PAGE>
Company for principal and interest due under surplus debentures, tax sharing
payments and dividends. Both sources and uses of cash are reasonably
predictable.
Cash Flow from Operating Activities. Cash flow from operating
activities, excluding the parent company, were $34.2 million, $74.6 million and
$135.4 million, respectively, for the years ended December 31, 1998, 1997 and
1996. The decreasing trend in cash flow from operating activities for the years
ended December 31, 1998, 1997 and 1996, is primarily attributable to the
accounting treatment for KB Management. During the years ended December 31, 1997
and 1996, the Company maintained a 45% economic interest in KB Management. As of
January 2, 1998, the Company purchased the remaining interest in KB Management
(see Note 3 of Notes to Consolidated Financial Statements). From the formation
of KB Management in 1995, KB Management provided certain management and
acquisition services to the Company. From its formation through the year ended
December 31, 1996, the transaction and management fees derived by KB management
were sufficient to offset the majority of the administrative costs which in turn
minimized the costs associated with the Company's 45% economic interest in KB
Management. During 1997, KB Management operating and administrative expenses
grew disproportionately to the ability of KB Management to engage and consummate
acquisitions and other business transactions which would generate fee income and
the Company recognized a net loss related to its 45% economic interest. With
acquisition of the remaining interest in KB Management on January 2, 1998, the
net loss derived by KB Management for the year ended December 31, 1998, was
effectively recognized as a 100% economic interest by the Company. Supplemental
factors to the decreasing trend in cash flow from operating activities were
increasing costs associated with: (i) Year 2000 remediation at all of the
insurance subsidiaries, (ii) the strategic business evaluations and associated
restructuring of the Company and (iii) the accelerating expansion and transition
of KIVEX from a regional to a national internet service provider.
During 1995, the Company established a portfolio of "trading
securities" to provide the Company with the opportunity to undertake interest
rate hedging strategies, to participate in short-term relative value trades and
to invest in special situations with the goal of generating short-term trading
profits. As of December 31, 1997, the Company held no investments in its trading
portfolio.
Cash Flow from Investing Activities. The Company's investment portfolio
is managed with the objectives of maintaining high credited quality and
liquidity, maximizing current income within acceptable levels of risk,
minimizing market and credit risk, and matching the anticipated maturities of
investments to the Company's liabilities. The Company believes a conservative
investment strategy fits the nature of its insurance products which have little
or no inflation risk and limited build-up of cash accumulation values in earlier
years.
The Company continuously evaluates its investment portfolio and the
conditions under which it might sell securities, including changes in interest
rates, changes in prepayment risk, liquidity needs, asset liability matching,
tax planning strategies and other economic factors. Those securities that the
Company believes would be subject to sale prior to the specified maturity date
are included in "securities available for sale," which amounted to $2,589.7
million, $2,719.0 million and $2,993.9 million at December 31, 1998, 1997 and
1996, respectively. Of those securities available for sale, 93.0%, 92.5% and
92.1% were rated BBB or above by Standard & Poor's at December 31, 1998, 1997
and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company
sold $1,019.9 million, $801.1 million and $373.7 million of fixed maturity and
equity securities, and purchased $1,054.7 million, $1,021.5 million and $955.8
million of fixed maturity and equity securities, respectively. Such sales and
purchases were primarily effected in order to meet cash flow demands associated
with policyholder surrenders that in the aggregate increasingly exceeded
policyholder deposits as well as improve the quality of the investment portfolio
or avoid prepayment risks.
As a result of the Company's decision to exit the private placement
bond sector, the Company transferred all of its remaining assets in the fixed
maturities held for investment portfolio to its fixed maturities available for
sale portfolio as of April 1, 1997. During 1996, the Company sold one security
in its held for investment portfolio aggregating $4.9 million as a result of a
dramatic deterioration in its credit rating.
Mortgage loans on real estate amounted to 1.2%, 7.2% and 7.2% of total
invested assets as of December 31, 1998, 1997 and 1996, respectively. United
Life is the Company's only subsidiary which actively originates new mortgage
loans. United Life invests in first mortgage loans and provides a mortgage loan
warehousing facility for its former parent as a means of obtaining higher
invested asset yields necessary to support competitively priced annuity
products.
Cash Flow from Financing Activities. Cash used by financing activities,
excluding the parent company, were $391.4 million, $325.9 million and $62.0
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
majority
34
<PAGE>
of the cash outflow is attributable to policyholder surrenders exceeding
deposits by $354.1 million in 1998, $275.7 million in 1997 and $205.2 million in
1996.
RESULTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996, the Company has
prepared the following unaudited selected pro forma financial information for
the Company's remaining operating divisions, the Financial Services Division
(excluding the United Life Assets) and the Payroll Sales Division (excluding
Professional) and Businesses Held for Sale (Career Sales Division, Professional,
the United Life Assets, KIVEX and Marketing One). The pro forma financial
information by operating division is defined as pre-tax income (loss) excluding
the impact of: (i) restructuring costs, (ii) gains or losses on the sale of
investments and (iii) the impact of the Company's decision to dispose of the
Businesses Held for Sale ((i), (ii) and (iii) collectively, "Operating Income
(Loss)"). In addition, the 1997 and 1996 unaudited selected pro forma financial
information considers the impact of the: (i) acquisition of the SW Financial
Controlling Interest, including the financing thereof, and (ii) the acquisition
of the Fickes and Stone Knightsbridge Interests, including the financing
thereof.
The Company has prepared such information as it believes that: (i) the
acquisition of the SW Financial Controlling Interest, (ii) the intended
disposition of the Businesses Held for Sale and (iii) the restructuring costs
are material enough to make historical comparative results not meaningful. In
addition, the Company believes that the pro forma financial information will
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 years
ended December 31, 1997 and 1996, 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, 1996.
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, 1996, or the results which may occur in the future.
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Financial Services Division:
Operating income............................................. $ 23,206 $ 75,555 $ 79,438
Net investment gains......................................... 1,503 6,848 2,055
Restructuring costs.......................................... (3,803) -- --
------------- ------------- -------------
20,906 82,403 81,493
------------- ------------- -------------
Payroll Sales Division:
Operating income (loss)...................................... (2,728) 23,960 22,796
Net investment gains (losses)................................ (36) 2,654 (176)
Restructuring costs.......................................... -- -- --
------------- ------------- -------------
(2,764) 26,614 22,620
------------- ------------- -------------
Businesses Held for Sale:
Operating income (loss)...................................... (18,323) 45,371 89,879
Net investment gains (losses)................................ 9,068 9,827 (1,690)
Restructuring costs.......................................... (2,643) -- --
Impairment valuation......................................... (342,960) -- --
------------- ------------- -------------
(354,858) 55,198 88,189
------------- ------------- -------------
Corporate:
Interest and amortization of deferred debt interest cost..... (42,960) (38,653) (36,130)
Corporate expenses, eliminations and other................... (40,054) (23,842) (267)
Net investment gains......................................... 3,533 1 8
Restructuring costs.......................................... (8,431) (16,771) --
------------- ------------- -------------
(87,912) (79,265) (36,389)
------------- ------------- -------------
Income (loss) before income taxes and extraordinary charge..... $ (424,628) $ 84,950 $ 155,913
============= ============= =============
</TABLE>
35
<PAGE>
RETAINED BUSINESS--FINANCIAL SERVICES DIVISION
The Financial Services Division includes the operations of Southwestern
Life and Security Life. Southwestern Life and Security Life market life
insurance and, to a lesser extent annuity products, through independent general
agents who sell directly to individuals primarily in the southwestern and
southeastern United States.
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Revenues:
Policy revenues................................................ $ 129,242 $ 138,006 $ 138,957
Net investment income.......................................... 183,618 201,483 204,392
Other income................................................... 3,677 1,052 16,521
------------- ------------- -------------
316,537 340,541 359,870
------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits.................................... 215,414 195,119 218,647
Insurance related expenses..................................... 29,592 32,940 24,510
Other operating expenses....................................... 48,325 36,927 37,275
------------- ------------- -------------
293,331 264,986 280,432
------------- ------------- -------------
Pre-tax operating income..................................... $ 23,206 $ 75,555 $ 79,438
============= ============= =============
</TABLE>
Policy Revenues. Policy revenues include: (i) premiums received on
traditional life products (ii) mortality and administrative fees earned on
universal life insurance and annuities and (iii) surrender charges on terminated
universal life and annuity products. In accordance with GAAP, premiums on
universal life and annuity products are accounted for as deposits to insurance
liabilities.
Premiums, net of reinsurance, by major product line for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Life premiums collected:
Universal life (first year).................................. $ 18,459 $ 11,800 $ 10,538
Universal life (renewal)..................................... 83,419 92,150 97,695
Traditional life (first year)................................ 7,821 4,333 3,876
Traditional life (renewal)................................... 34,636 36,646 33,899
------------- ------------- -------------
Life premiums collected, net of reinsurance................ 144,335 144,929 146,008
------------- ------------- -------------
Annuity premiums collected:
Traditional fixed (first year)............................... 9,205 24,761 16,098
Traditional fixed (renewal).................................. 1,947 2,718 3,099
------------- ------------- -------------
Annuity premiums collected, net of reinsurance............. 11,152 27,479 19,197
------------- ------------- -------------
Fixed benefit premiums collected:
Long-term care premiums (all first year)..................... 455 -- --
Accident and Health (all renewal)............................ 12 300 249
------------- ------------- -------------
Fixed benefit premiums collected, net of reinsurance....... 467 300 249
------------- ------------- -------------
Premiums collected, net of reinsurance......................... 155,954 172,708 165,454
Less premiums on universal life and annuities which are
recorded as additions to insurance liabilities and other
premium adjustments.......................................... (113,662) (129,393) (122,298)
------------- ------------- -------------
Premiums on products with mortality or morbidity risk.......... 42,292 43,315 43,156
Fees and surrender charges on interest sensitive products...... 86,950 94,691 95,801
------------- ------------- -------------
Policy revenues................................................ $ 129,242 $ 138,006 $ 138,957
============= ============= =============
</TABLE>
36
<PAGE>
Policy revenues decreased 6.4% during 1998 to $129.2 million compared
with 1997. Policy revenues in 1997 decreased less than 1% compared with 1996.
Life premiums collected, net of reinsurance, were $144.3 million in 1998
compared with $144.9 million in 1997 and $146.0 million in 1996. First year
universal life premiums increased 56.4% in 1998 to $18.5 million and first year
traditional life increased 80.5% to $7.8 million. Most of the increase in
production was attributable to Southwestern Life. The Company expects the A.M.
Best downgrades, which occurred during the third quarter of 1998 to negatively
impact 1999 new business production levels relative to 1998. New life sales were
also strong at Security Life in the first half, of 1998 but declined in the
third and fourth quarters reflecting the impact of ratings downgrades and
management changes in Security Life's marketing management. The increase in
first year life premiums was mostly offset by decreases in life renewal
premiums, which declined 8.3% in 1998 from 1997 compared to a decrease of 2.1%
in 1997 compared with 1996. This reflects ratings downgrades and the impact of
certain management actions instituted by Southwestern Life in the third quarter
of 1997. Additional management actions are planned or are being considered with
respect to certain interest sensitive life insurance contracts. Such plans, if
implemented, would likely result in reduced renewal premiums in 1999 and
subsequent years. See Managements' Discussion and Analysis of Financial
Condition and Results of Operations-Total Policyholder Benefits, included
herein. Annuity premiums have declined 59.4% to $11,152 in 1998 compared to
1997. The sales decline is attributable to a shift in the overall annuity market
to sales of variable products (which the Financial Services Division does not
offer) from fixed products due to historically low interest rates and consumer
interest in equities. Annuity sales are also typically more sensitive to Company
ratings than other insurance products. Annuity sales are likely to continue to
decline unless market conditions for fixed annuities become more favorable and
ratings of Southwestern Life and Security Life improve.
Net Investment Income. Net investment income decreased 8.9% to $183.6
million in 1998 due to a decrease in invested assets and reduced yields on
investments. Average invested assets declined approximately $110.3 million in
1998 compared with 1997 and decreased $1.7 million from 1997 compared to 1996.
Most of this decrease resulted from the need to liquidate invested assets to
provide cash to fund surrenders of annuities issued by Security Life, which
totaled $179.0 million in 1998. Most of these annuities had reached the end of
their surrender fee period. A continued decline in the invested asset base and
related investment income is anticipated as surrenders are expected to remain
high over the next few years as more annuities in force reach the end of the
surrender fee periods. The decrease in invested assets due to surrenders was
partially offset by premiums on new and existing life policies and investment
income collected, less commissions and operating expenses. Weighted average
yields on invested assets have decreased to 7.1% in 1998 compared to 7.4% in
1997 and 7.5% in 1996. The decline reflects a decrease in higher yielding but
less liquid asset classes such as mortgages, real estate and collateral loans.
Also impacting investments yields were lower new money rates available to the
Company to invest as a result of extensive maturities and calls of higher
yielding investments and slightly higher investment expenses as a result of the
decision in 1997 to utilize outside investment managers.
Other Income. Other income increased $2.6 million in 1998 compared to
1997. During 1998, the Company received approximately $1.0 million resulting
from a settlement received associated with securities owned in the past. Most of
the remaining differences between the years reflect changes in consideration
received on supplemental contracts. Supplemental contract revenue is derived
from annuity contracts which have reached the annuitization period.
Consideration from supplemental contracts recognized as other income is offset
by policyholder benefits, resulting in no net effect on the Company's results of
operations.
Total Policyholder Benefits. The following table shows the components
of total policyholder benefits for the year ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Death benefits................................................. $ 87,578 $ 77,980 $ 77,648
Other insurance policy benefits and change in
future policy benefits....................................... 127,836 117,139 140,999
------------- ------------- -------------
Total policyholder benefits.................................... $ 215,414 $ 195,119 $ 218,647
============= ============= =============
</TABLE>
During 1998, policyholder benefits increased 10.4% to $215.4 million
compared with 1997. Death benefits increased $9.6 million or 12.3% compared with
1997. Most of this increase was due to higher incidence of mortality at
Southwestern Life during the first half of 1998 compared to prior periods. Death
benefits may vary significantly from period to period. Change in future policy
benefits and other benefits increased 9.1% to $127.8 million in 1998. During
1997, future policy benefits were reduced approximately $23.9 million related to
the adjustment of certain deficiency reserves on a block of
37
<PAGE>
Southwestern Life interest sensitive business. During 1997, management began
implementing a plan intended to reduce the anticipated losses associated with
these policies. Such actions included contractually allowable reductions in
credited rates and increases in cost of insurance and expense charges.
The Company is continually evaluating actuarial assumptions associated
with interest sensitive life insurance contracts in which the determination of
policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates, and premium persistency. Currently
reflected in the Company's financial statements are policy reserves and account
values associated with such contracts, which aggregated approximately $525.4
million and $504.6 million as of December 31, 1998 and 1997, respectively. If
developing trends were to continue, the Company would be required to record
additional reserves or reduce intangible assets, which could have a material
impact on the Company's financial position and results of operations. Management
is also assessing the potential impact of future management actions, which might
mitigate the financial impact of these trends. Types of management actions would
likely include, but are not limited to, the redetermination of non-guaranteed
charges and/or benefits under the contracts, asset segmentation, and
reinsurance. There are risks associated with management action including
potential sales disruption and the threat of litigation.
In January 1999, Security Life initiated management action in the form
of a new exchange program for certain policyholders of Security Life. The
program is being offered to all policyholders who had certain policy forms in
force as of January 1, 1998. The program allows the policyholder the following
options in exchange for terminating his or her policy and executing a release:
(i) refund of 115% of all premiums paid for the policy prior to January 1, 1999
and 100% of premiums paid thereafter; (ii) exchange the policy, without proof of
insurability, for the same face amount in a universal life policy, or a new term
universal life policy. The policyholder also has the choice of not accepting the
exchange program and keeping the current policy in force.
The exchange program is not expected to have a material effect on the
Company's financial position or results of operations. However, statutory
surplus of Security Life could be reduced by approximately $12.5 million on a
pre-tax basis if every eligible policyholder elects the exchange option.
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 1998, insurance related expenses
(including commissions, amortization of deferred policy acquisition costs and
amortization of present value of insurance in force) decreased to $29.6 million
in 1998 from $32.9 million in 1997. Insurance related expenses increased $8.4
million in 1997 compared to 1996. Amortization of deferred policy acquisition
costs increased $7.2 million in 1998 compared to 1997 and increased $4.8 million
in 1997 compared with 1996. These increases principally reflect the growing
block of policies in force, which have been sold subsequent to the Company's
acquisitions of Security Life and Southwestern Life. Also included in the $7.2
million increase in amortization is approximately $3.2 million of 1998 deferred
costs for Security Life which was written off as unrecoverable from future
profits as a result of shifts in the mix of products sold during the year.
Amortization of present value of future profits decreased $10.8 million to $12.9
million in 1998. This decrease resulted from unlocking assumptions regarding the
future profitability of certain interest sensitive life insurance products at
Southwestern Life and from lower amortization associated with blocks of
pre-purchase business. Amortization of present value of future profits increased
$5.3 million in 1997 compared to 1996. This increase resulted from unlocking
assumptions regarding future profitability of certain interest sensitive life
insurance products of Security Life.
Other Operating Expenses. For 1998, other operating expenses (including
general operating, overhead and policy maintenance) increased $11.4 million from
1997. Other operating expenses were consistent between 1997 and 1996. The 1998
increase is attributable to several factors: (i) Security Life established an
allowance for uncollectible agents' debit balances aggregating approximately
$2.3 million, (ii) approximately $4.9 million of remediation costs associated
with Year 2000 systems conversions and upgrades and (iii) additional
non-deferrable expenses such as consulting fees, appraisal costs and other costs
associated with the divisional realignment which are not considered
restructuring costs.
RETAINED BUSINESS--PAYROLL SALES DIVISION
The Payroll Sales Division includes the operations of AA Life and OLIC.
AA Life markets and underwrites customized life insurance and accumulation
products to U.S. military personnel and federal employees through a general
agency force. OLIC provides individual fixed benefit and life products utilizing
a network of independent agents primarily in the southeastern United States
through employer-sponsored payroll deduction programs.
38
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- ---------
($ in thousands)
<S> <C> <C> <C>
Revenues:
Policy revenues................................................ $ 89,991 $ 89,698 $ 83,722
Net investment income.......................................... 39,046 38,161 36,023
Other income (loss)............................................ (1,967) 4,454 (85)
------------- ------------- -------------
127,070 132,313 119,660
------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits.................................... 64,457 64,622 63,642
Insurance related expenses..................................... 42,131 29,377 18,843
Other operating expenses....................................... 23,210 14,354 14,379
------------- ------------- -------------
129,798 108,353 96,864
------------- ------------- -------------
Pre-tax operating income (loss).............................. $ (2,728) $ 23,960 $ 22,796
============= ============= =============
</TABLE>
Policy Revenues. Premiums received, net of reinsurance, by major product
line for the years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Life premiums collected:
Universal life (first year).................................. $ 1,336 $ 5,248 $ 8,153
Universal life (renewal)..................................... 33,045 30,808 27,168
Traditional life (first year)................................ 17,708 16,139 13,461
Traditional life (renewal)................................... 30,899 30,138 22,787
------------- ------------- -------------
Life premiums collected, net of reinsurance................ 82,988 82,333 71,569
------------- ------------- -------------
Annuity premiums collected:
Traditional fixed (first year)............................... 331 2,526 5,517
Traditional fixed (renewal).................................. 1,259 1,495 1,448
------------- ------------- -------------
Annuity premiums collected, net of reinsurance............. 1,590 4,021 6,965
------------- ------------- -------------
Fixed benefit premiums collected:
Accident and Health (first year)............................. 2,361 3,583 3,149
Accident and Health (renewal)................................ 10,356 9,720 9,220
------------- ------------- -------------
Fixed benefit premiums collected, net of reinsurance....... 12,717 13,303 12,369
------------- ------------- -------------
Premiums collected, net of reinsurance......................... 97,295 99,657 90,903
Less premiums on universal life and annuities which are
recorded as additions to insurance liabilities and other
premium adjustments.......................................... (37,031) (45,084) (43,050)
------------- ------------- -------------
Premiums on products with mortality or morbidity risk.......... 60,264 54,573 47,853
Fees and surrender charges on interest sensitive products...... 29,727 35,125 35,869
------------- ------------- -------------
Policy revenues................................................ $ 89,991 $ 89,698 $ 83,722
============= ============= =============
</TABLE>
Total policy revenues were consistent between 1998 and 1997. Policy
revenues increased $4.3 million for AA Life in 1998 but were offset by a
decrease of $ 4.1 million for OLIC. OLIC's decline was anticipated as a result
of the Company's decision to cease marketing products through any "non-payroll"
production sources during 1997. Policy revenues increased in 1997 compared to
1996 primarily as a result of new business sales for AA Life.
Net Investment Income. Net investment income increased 2.3% in 1998
from 1997 to $39.0 million and increased 5.9% in 1997 compared to 1996. The
increase in net investment income was primarily the result of an increase in the
average invested assets which increased approximately $14.9 million in 1998
compared to 1997 and increased $16.6 million in 1997 compared to 1996. The
increases in invested assets is primarily attributed to modest increases in
business in force at AA Life.
39
<PAGE>
Other Income. Other income decreased $6.4 million from 1997 and
resulted in a loss of $2.0 million in 1998 compared to income of $4.5 million in
1997. Included in other income in 1998 is a loss on the sale of OLIC's Guam book
of business totaling $2.6 million. In 1997, OLIC recorded a gain of $4.4 million
on the sale of its Panamanian business.
Total Policyholder Benefits. The following table shows the components
of total policyholder benefits for the year ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Death benefits................................................. $ 23,435 $ 23,282 $ 25,213
Fixed benefit claims incurred.................................. 7,929 10,114 7,427
Other insurance policy benefits and change in
future policy benefits....................................... 33,093 31,226 31,002
------------- ------------- -------------
Total policyholder benefits.................................... $ 64,457 $ 64,622 $ 63,642
============= ============= =============
</TABLE>
Policyholder benefits totaled $64.5 million in 1998, which was little
changed compared to 1997 or 1996.
Insurance Related Expenses. Insurance related expenses (including
commissions, amortization of deferred policy acquisition costs and amortization
of present value of insurance in force) increased $12.8 million in 1998 compared
to 1997. During 1998, OLIC accelerated amortization of deferred acquisition
costs by $10.7 million primarily as a result of refinements in persistency
assumptions and unlocking of the estimates of future profits. Amortization of
deferred policy acquisition costs at AA Life increased $2.7 million in 1998
compared to 1997 primarily reflecting the growing block of in force policies
sold since the Company's acquisition of AA Life. These increases were partially
offset by lower commissions in 1998 compared to 1997 primarily resulting from
OLIC's decision to cease writing certain products in 1997. Insurance related
expenses increased $10.5 million to $29.4 million in 1997 compared to 1996.
Amortization of deferred policy acquisition costs increased $8.5 million
primarily as a result of refinements to amortization schedules for AA Life to
reflect the unlocking of assumptions regarding future profitability and as a
result of the growing block of policies in force, which had been sold subsequent
to the Company acquisition of AA Life. In addition, amortization of present
value of insurance in force for OLIC also increased from 1996 to 1997 primarily
as a result of unlocking of assumptions regarding future profitability.
Other Operating Expenses. Other operating expenses (including general
operating, overhead and policy maintenance) increased $8.9 million from 1997
after remaining flat from 1996 to 1997. The increase is attributable to several
factors, including: (i) approximately $3.6 million of remediation costs
associated with Year 2000 systems conversions and upgrades, (ii) approximately
$2.0 million of acquisition costs at OLIC which were expensed in 1998 as
unrecoverable from future profits and (iii) additional non-deferrable expenses
such as consulting fees, appraisals and other costs associated with divisional
realignment which are not considered restructuring costs.
BUSINESSES HELD FOR SALE
Businesses Held for Sale include the operations of the Career Sales
Division, KIVEX, Professional, the United Life Assets and Marketing One. The
Career Sales Division, which includes the operations of Penn Life, markets and
underwrites fixed benefit accident and sickness products and, to a lesser
extent, life products through a sales force exclusive to the Company throughout
the United States and Canada. With the January 2, 1998, consummation of the
acquisition of the SW Financial Controlling Interest, the Company has integrated
Union Bankers, Marquette and Constitution with the Career Sales Division. KIVEX
is an internet service provider. Professional provides individual fixed benefit
and life products utilizing a network of independent agents primarily in the
southeastern United States through employer-sponsored payroll deduction
programs. United Life principally markets fixed and variable annuities through
financial institutions and independent general agents, primarily in the southern
and western United States.
40
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SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Revenues:
Policy revenues................................................ $ 239,925 $ 263,680 $ 327,455
Net investment income.......................................... 147,201 154,087 160,767
Other income................................................... 33,931 38,181 34,460
------------- ------------- -------------
421,057 455,948 522,682
------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits.................................... 261,639 230,818 235,846
Insurance related expenses..................................... 86,718 93,359 103,288
Other operating expenses....................................... 91,023 86,400 93,669
------------- ------------- -------------
439,380 410,577 432,803
------------- ------------- -------------
Pre-tax operating income (loss).............................. $ (18,323) $ 45,371 $ 89,879
============= ============= =============
</TABLE>
Policy Revenues. Policy revenues declined 9.0% or $23.8 million to
$239.9 million in 1998 compared to 1997. This followed a 19.5% or $63.8 million
decline in 1997 compared to 1996. The decline in 1998 of $21.4 million is
primarily attributable to Union Bankers which discontinued sales of major
medical health products and its life insurance products and increased its
utilization of reinsurance. Union Bankers also accounts for nearly all of the
$52.0 million of the decrease in policy revenues in 1997 compared to 1996. The
remainder of the decrease is attributable to Penn Life which experienced
decreases in policy revenues of $3.8 million (2.6%) in 1998 compared to 1997 and
a decrease of $6.4 million (4.3%) in 1997 compared to 1996 principally as a
result of lower first year sales.
Net Investment Income. Net investment income decreased $6.9 million
(4.5%) in 1998 compared to 1997 and decreased $6.7 million (4.2%) in 1997
compared to 1996. The decrease is primarily attributable to United Life, where
net investment income decreased $11.4 million in 1998 compared to 1997 and
decreased $5.3 million in 1997 compared to 1996. United Life has experienced
high surrenders of fixed annuities in 1998 and 1997 reflecting low reinvestment
rates available as annuities reached the end of their surrender fee period.
Surrenders at United Life totaled $253.2 million in 1998 and $255.6 million in
1997. Such surrenders resulted in a liquidation of approximately $168.9 million
and $104.0 million of invested assets during 1998 and 1997, respectively, which
caused the declines in investment income. Partially offsetting the decline at
United Life are small increases for other companies, the largest of which
related to investment income earned by Marquette during 1998 from an assumed
reinsurance contract. This contract was terminated as of September 30, 1998.
Other Income. Other income decreased $4.3 million (11.1%) to $33.9
million in 1998 compared to 1997. Other income increased $3.7 million in 1997
compared to 1996. The substantial decrease in other income in 1998 compared to
1997 is attributable to a decline in the amortization of Union Bankers' deferred
gain associated with a third party Medicare reinsurance contract. The decrease
in amortization is attributable to a decline in the underlying premium in force
subject to the reinsurance arrangement, over time, which results in lower
amortization of the gain. Also contributing to the decline in other income was
reduced revenues for Marketing One resulting from the cancellation of a number
of marketing relationships. These decreases are partially offset by increases in
revenue from KIVEX and increased fee income for United Life. The increase in
other income from 1997 compared to 1996 is principally attributable to Union
Bankers' amortization of deferred gain. The amortization was higher in 1997 due
to a full year amortization of the gain and higher than expected lapses of its
Medicare policies. The deferred gain was primarily generated as a result of a
June 1996 agreement.
Total Policyholder Benefits. Policyholder benefits increased $30.8
million (13.4%) in 1998 compared to 1997. The policyholder benefits of Penn life
increased $43.0 million in 1998 compared to 1997. The increase was primarily the
result of specific increases in reserve estimates associated with long term care
products and certain claims reserves held by Penn Life. Policy reserves and
claims reserves increases associated with the changes in estimates aggregated
approximately $32.6 million. The Company had been closely monitoring the
development of claims reserve experience associated with its Career Sales
Division. The Company 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 of Penn Life. As a result of such possible
trends, the Company increased claims reserves estimates for the Career Sales
Division by approximately $25.0 million, which is included above in the
additional policy benefit reserves. See Notes 2 and 8 of Notes to Consolidated
Financial Statements. In determining the amount of the necessary increase in
policy reserve estimates associated with its long term care products, Penn Life
allocated approximately $11.2 million of previously identified redundant policy
reserves to long term care reserves, and additionally increased policy reserves
by approximately $7.6 million. This was partially offset by decreases of $16.9
million
41
<PAGE>
in Union Bankers policyholder benefits, reflecting less business in force as a
result of the decision to cease sales of major medical and life business, the
cession of the remaining 20% of the Medicare business and the runoff of existing
business.
Insurance Related Expenses. Insurance related expenses (including
commissions, amortization of deferred policy acquisition costs and amortization
of present value of insurance in force) decreased $6.6 million to $86.7 million
in 1998 compared to 1997. This followed an $9.9 million (9.6%) decrease in 1997
compared to 1996. Amortization of present value of insurance in force decreased
$11.6 million principally as a result of the Company recording an impairment
provision associated with assets of Businesses Held for Sale resulting in the
elimination of substantially all insurance assets subject to amortization.
Specifically, Penn Life and Union Bankers wrote off $98.1 million of present
value of insurance in force which reduced amortization. This was partially
offset by an increase in amortization of deferred policy acquisition costs of
$5.3 million, which included (i) an increase at Professional of $1.8 million in
1998 compared to 1997 as a result of higher than expected lapses on fixed
benefit products, (ii) an increase of $1.7 million for United Life as a result
of unlocking future assumptions regarding the profitability of certain annuity
products and (iii) an increase at Union Bankers of $1.9 million as a result of
higher lapses. Non-deferrable commissions decreased approximately $1.0 million
at Union Bankers principally due to the decision to stop writing new major
medical and life business. Most of the decrease in 1997 compared to 1996 relates
to a $14.5 million decrease in non-deferrable commissions at Union Bankers,
reflecting the Medicare reinsurance contract which ceded 80% of its Medicare
business including new sales, higher lapses, and the decision to stop selling
major medical and life policies. The Medicare reinsurance contract also resulted
in lower amortization of deferred policy acquisition costs and present value of
insurance in force at Union Bankers. However, this was more than offset by
increases in amortization of deferred policy acquisition costs and present value
of insurance in force at United Life and Professional primarily as a result of
higher than expected lapses.
Other Operating Expenses. Other operating expenses (including general
operating, overhead and policy maintenance) increased $4.6 million (5.4%) in
1998 compared to 1997. KIVEX's operating expenses increased $7.4 million
reflecting costs associated with its expansion into new cities. In addition, the
companies included in Businesses Held for Sale experienced increased costs as a
result of additional non-deferrable expenses such as consulting, overhead and
other costs associated with the divisional realignment, which are not considered
restructuring costs. Offsetting the increases in operating expenses is reduced
amortization of costs in excess of net assets acquired associated with the
assets of the Businesses Held for Sale. During 1998, a total of $114.5 million
of costs in excess of net assets acquired were written off as part of the
impairment provision, which decreased amortization by approximately $2.8 million
in 1998 compared to 1997. Other operating expenses decreased $7.3 million (7.8%)
in 1997 compared to 1996. Union Bankers' expenses decreased $6.6 million
principally as a result of receiving an expense allowance on the Medicare
reinsurance contract for a full year in 1997 and only a partial year in 1996.
GENERAL CORPORATE
Interest and Amortization of Deferred Debt Issuance Costs. Interest and
amortization of deferred debt issuance costs increased $4.3 million in 1998
compared to 1997. This is the result of higher weighted average borrowing costs
and additional costs associated with credit facility fees and costs incurred to
amend the credit agreement. These are a direct result of the Company's current
financial position.
Corporate Expenses. Corporate expenses, eliminations and other costs
were $40.1 million, $23.9 million, and $0.3 million for the years ended December
31, 1998, 1997 and 1996, respectively. The increase is directly attributable to
two factors as follows: (i) the economics of KB Management, and (ii) strategic
business evaluation and associated restructuring of the Company.
During the years ended December 31, 1997 and 1996, the Company
maintained a 45% economic interest in KB Management. As of January 2, 1998, the
Company purchased the remaining interest in KB Management (see Note 3 of Notes
to Consolidated Financial Statements). From the formation of KB Management in
1995, KB Management provided certain management and acquisition services to the
Company. From its formation through the year ended December 31, 1996, the
transaction and management fees derived by KB management were sufficient to
offset the majority of the administrative costs which in turn minimized the
costs associated with the Company's 45% economic interest in KB Management.
During 1997, KB Management operating and administrative expenses grew
disproportionately to the ability of KB Management to engage and consummate
acquisitions and other business transactions which would generate fee income and
the Company recognized a net loss related to its 45% economic interest. With
acquisition of the remaining interest in KB Management on January 2, 1998, the
net loss derived by KB Management for the year ended December 31, 1998, was
effectively recognized as a 100% economic interest by the Company.
42
<PAGE>
The strategic business evaluation and associated restructuring of the
Company begun in the early part of 1997 (see Note 21 of Notes to Consolidated
Financial Statements) was primarily funded by the Company on behalf of the
subsidiaries. As a result, a significant portion of the associated pre-tax
incremental costs ("period costs") were funded by the Company. Period costs
recognized by the Company increased to $5.7 million for the year ended December
31, 1998, from $1.8 million for the year ended December 31, 1997. Included in
expenses for the year ended December 31, 1998 were $6.8 million associated with
severance and other employment agreements and a $3.0 million write-off
associated with a small marketing entity which was shut down in anticipation of
the sale of Professional and not considered restructuring.
In addition, during the year ended December 31, 1997, the Company
incurred $7.6 million of one time pre-tax transaction costs associated with the
termination of the Washington National merger agreement.
Income Taxes. The effective tax rates (benefit) for the years ended
December 31, 1998, 1997 and 1996, were (0.8)%, 39.5% and 37.0%, respectively.
The significant change in the effective tax rate between 1998 and 1997 is
substantially due to the non-deductibility of the reduction in carrying value of
the assets associated with Businesses Held for Sale and an increase in the tax
valuation allowance, primarily representing unrecoverable net operating loss
carryforwards at certain non- life companies. The 1997 and 1996 effective rates
are higher than the statutory rate of 35% primarily due to non-deductible
amortization of costs in excess of net assets acquired and foreign taxes in
excess of foreign taxes utilized.
The 1996 consolidated life return of Constitution and its subsidiaries
is currently under examination by the Internal Revenue Service. Tax years prior
to 1996 are closed by statute to examination for the Constitution consolidated
life insurance company tax group. The ultimate effect of the current examination
is not known at this time.
Net Investment Gains (Losses). The Company maintains an investment
portfolio that focuses on maximizing investment income, without exposure to
unwarranted interest rate and credit risk. The Company actively manages asset
duration and liquidity risks. As a result of this strategy, the Company
routinely sells positions in securities no longer meeting its criteria. Sales of
securities resulted in the Company realizing gains, on a pro forma basis, of
$14.1 million, $19.3 million and $0.2 million, during 1998, 1997 and 1996,
respectively. During 1998 and 1997, the Company liquidated securities available
for sale in order to meet cash flow demands associated with policyholder
surrenders that in the aggregate exceeded policyholder deposits by $354.1
million and $275.7 million, respectively. During 1997, the Company liquidated
most of its equity holdings and private placement bond holdings.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk Exposures of
Financial Instruments for the Retained Businesses
The Company analyzes and reviews the risks arising from market
exposures of financial instruments. From an overall perspective, the Company's
investment portfolio is managed with the objectives of maintaining high credit
quality and liquidity, maximizing current income within acceptable levels of
risk, minimizing market and credit risk, and matching the anticipated maturities
of investments to the Company's liabilities. The Company believes that a
conservative investment strategy fits the nature of its insurance products,
which have minimal inflation risk.
By aggregating and monitoring the potential impact of market risk, the
Company attempts to optimize its risk adjusted earnings. In addition, these
risks are reviewed and managed individually by operating entity using analysis
prepared by the Company's actuaries. The exposures of financial instruments to
market risks, and the related risk management process, are most relevant to the
life insurance and annuity product lines. These product lines require most of
the invested assets to support accumulation and investment oriented insurance
products.
The Company has material exposures to market risks including interest
rate risk and default risk. Additional market exposures exist in the Company's
other insurance products and in its debt structure. The primary sources of
interest rate risk include (i) a sustained decrease in interest rates, and (ii)
to a lesser extent, near term increases in interest rates. As of December 31,
1998, the Company is not utilizing derivatives in its asset liability matching
process. Each of these market risks is discussed in detail below. All of the
subsequent amounts and percentages exclude investments of Businesses Held for
Sale unless noted otherwise and include Southwestern Life for 1997.
INTEREST RATE RISK
Accumulation and Investment Oriented Insurance Products. General
account assets supporting accumulation and investment oriented insurance
products total $2,076.3 million or 70.2% and $2,253.7 million or 69.6% of total
invested assets at December 31, 1998 and 1997, respectively. These insurance
products include single premium and flexible premium fixed
43
<PAGE>
deferred annuities and interest sensitive life, primarily universal life. Fixed
maturity and equity securities are carried at fair value. Mortgage loans on real
estate are recorded at cost, adjusted by provision for loan loss, if necessary.
Policy loans are recorded at cost. Short-term investments, considered as cash
equivalents, are recorded at amortized cost. Policy liabilities are generally
carried at policyholder account values with an adjustment, when the policyholder
account values are deemed inadequate. With respect to these products, the
Company seeks to earn a stable and profitable spread between investment income
and interest credited to policyholder account values. As of December 31, 1998,
the weighted average interest spread on interest sensitive insurance liabilities
was 2.03%. If the Company has adverse experience on investments that cannot be
passed onto its customers, its spreads are reduced. Alternately, the Company may
seek to maintain spreads which may result in non-competitive credited interest
rates to customers. This strategy could result in adverse surrender experience
and cause the Company to liquidate a portion of its portfolio to fund excess
cash surrender benefits. As a result of flexibility in adjusting crediting rate
levels and protection afforded by policy surrender charges, the Company does not
view the near term risk to spreads over the next twelve months to be material.
Fixed Deferred Annuities. Assets of $634.4 million and $822.5 million
as of December 31, 1998 and 1997, respectively, support a large category of
accumulation and investment oriented insurance products, fixed deferred
annuities. For these products, the Company may adjust renewal crediting rates
monthly, or in some cases less frequently, subject to guaranteed minimums
ranging from 3% to 6%. Generally, an annuity insurance policyholder has the
right to surrender a contract at account value less a surrender charge. Due to
the Company's ability to change crediting rates to track investment experience,
the interest rate risk of the underlying assets is assumed to be a good match
for the interest rate risk inherent in deferred annuity liabilities. This
assumption, however, may not be appropriate for either substantial increases or
decreases in interest rates.
Universal Life. Assets of $1,441.9 million and $1,431.2 million at
December 31, 1998 and 1997, respectively, support the largest category of
accumulation and investment oriented insurance products, universal and other
interest sensitive life products. For these contracts, the Company has the right
to adjust renewal-crediting rates subject to guaranteed minimums from 3.5% to
6.0%. Similar to annuities, universal life insurance policyholders have the
right to surrender their contracts at account value less a surrender charge.
Generally, the surrender charge protection ranges over a longer period of years
than those applicable to annuity policies, and in some cases may be much larger
in size relative to account values being surrendered. The Company limits
interest rate risk by analyzing projected liability cash flows and structuring
investment portfolios with similar cash flow characteristics.
Other Annuities. Assets aggregating $185.5 million and $191.6 million
as of December 31, 1998 and 1997, respectively, support immediate annuities,
traditional fixed benefit annuities, deposit funds and supplementary contracts.
Generally, the cash flows expected on these liabilities do not vary with
fluctuations in market interest rates and imputed rates of interest are not
adjustable by the Company. Accordingly, spreads will tend to fall below
expectations if experience is adverse relative to the assumptions used to price
these products at issue. The Company attempts to limit its exposure to these
products by being conservative in pricing, thereby limiting sales and lessening
the possibility of adverse experience. Many of these contracts are not
surrenderable at the option of the policyholder.
Other General Account Insurance Products. The Company had $566.9
million and $597.5 million of assets as of December 31, 1998 and 1997,
respectively, supporting general account products, including traditional and
term life insurance, accidental and health insurance, and long-term care
insurance. For these products, the liability cash flows have actuarial
uncertainty. However, their amounts and timing do not vary significantly with
changes in interest rates.
Decreasing Interest Rates. With the exception of 1996, interest rates
have generally been declining since 1994. Under scenarios in which interest
rates fall and remain at levels significantly lower than rates prevailing at
December 31, 1998, minimum guarantees for annuity and universal life policies
will cause the spread between the portfolio yield and the interest rate credited
to policyholders to narrow. The earned rate on the annuity and universal life
insurance portfolios averaged 7.3% for the year ended December 31, 1998,
providing some cushion for further decline in earned interest rates before there
is insufficient margin to cover minimum guaranteed interest rates plus the
required spread for profitability. The maturity structure and call provisions of
the related investment portfolios also protect the imbedded interest rate
cushion for a period of time. However, spreads are at risk if interest rates
fall below current levels and remain lower for a sustained period of time. The
Company believes that the portfolios supporting its accumulation and investment
oriented insurance products have a prudent degree of call protection.
The Company held $1,188.7 million and $1,152.5 million of
mortgage-backed bonds which represented 40.2% and 35.6% of total invested assets
as of December 31, 1998 and 1997, respectively. The Company invests in
mortgage-backed securities in order to enhance portfolio yields and maintain a
reliable cash flow stream from the invested asset portfolio. The
44
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Company maintains sophisticated models to measure the effective duration and
option-adjusted duration of the consolidated investment portfolio. These models
are designed to allow accurate measurement of the convexity risks inherent in
that percentage of the portfolio invested in mortgage-backed securities and
other callable securities. The Company manages the portfolio convexity risk
within the context of the overall asset and liability model and the
quantification of disintermediation risk. Due to the combination of recent lower
interest rates and increased efficiency by mortgage holders in exercising their
prepayment options, the riskiness of these securities has increased without a
compensating adjustment to risk premiums. Accordingly, the Company may consider
reducing its exposure to the mortgage-backed bonds in future years, reducing its
ability to enhance yield with these types of securities.
Increasing Interest Rates. For both annuities and universal life
insurance, an increase in interest rates in the near term poses risks of either
deteriorating spreads or excess surrender activity. The portfolios supporting
these products have fixed assets with maturities ranging from one to twenty
years or more. Accordingly, the earned rate on each portfolio will not increase
as fast as market yields increase. Prepayments on mortgage-backed bonds will
likely slow as well, causing the earned rate to fall behind the market yield
even further. If the Company sets its renewal crediting rates at the desired
spread level, the difference between its renewal crediting rates and competitors
new money rates may be wide enough to cause increased surrender activity.
Alternatively, if the Company set its renewal crediting rates at the competitive
level, its spread will narrow. The Company's actuaries evaluate these risks by
simulating asset and liability cash flows for numerous interest rate scenarios.
Nevertheless, the potential impact of a near term increase in interest rates may
be adverse thereby exceeding corporate risk tolerance levels. The risk of
increasing interest rates is reduced to the extent renewal premiums are
collected on periodic premium paying products.
RISK MANAGEMENT
The Company seeks to invest its available funds in a manner that will
maximize its investment return and fund future obligations to policyholders,
subject to appropriate risk considerations. The Company seeks to meet this
objective through investments that (i) have similar characteristics to the
liabilities they support; (ii) are diversified among industries, issuers and
geographic locations; and (iii) make up a predominantly investment-grade fixed
maturity securities portfolio. The Company's products incorporate surrender
charges, or other features to encourage persistency. Approximately 73.3% of the
total insurance liabilities at December 31, 1998, had surrender penalties or
other restrictions and approximately 7.1% are not subject to surrender.
The Company seeks to maximize the total return on its investment
through active investment management. Accordingly, management has determined the
entire portfolio of fixed maturity securities is available to be sold in
response to (i) changes in market interest rates; (ii) changes in relative
values of individual securities and asset sectors; (iii) changes in prepayment
risks; (iv) changes in credit quality outlook for certain securities; (v)
liquidity needs; and (vi) other factors.
The Company uses computer models to perform simulations of the cash
flows generated from existing business under various interest rate scenarios.
These simulations enable management to measure the potential gain or loss in
fair value of interest-rate sensitive financial instruments. In this analysis,
the fair value is measured as the present value of the projected statutory
earnings under a given interest rate scenario, discounted at the earned rates in
that scenario. It is standard industry practice to base fair value of insurance
businesses on statutory earnings. The two scenarios compare one with no change
in interest rates and one with an instantaneous parallel decrease in treasury
yields.
Selected fixed-income assets in the amount necessary to equal
liabilities are modeled individually. These assets include corporate bonds,
asset and mortgage-backed securities, and mortgage loans on real estate. All
significant insurance liabilities are grouped and modeled in representative
liability cells. The options embedded in the securities and their underlying
collateral are modeled directly, with the incidence of prepayments based on the
type of collateral and the level of interest rates in the scenarios tested.
Defaults are modeled based on published credit ratings. The policyholder options
to borrow or surrender are modeled, with exercise of the options determined by
product design and the level of rates which competitors would offer in the
tested scenarios. Other policyholder behavior is estimated from anticipated and
recent actual experience.
Although the traditional insurance liabilities could be excluded from
this analysis, they contain loan provisions which are interest sensitive in
nature. In addition, the risk of asset and liability mismatch in a decreasing
interest rate environment can become significant. In order to capture these
risks, the traditional insurance product liabilities were included.
45
<PAGE>
If treasury yields were to decrease by 100 basis points from their
December 31, 1998 levels, the fair value of these insurance businesses, as
defined above, would be $54.4 million less than the fair value assuming no
change from the December 31, 1998 levels.
The calculations involved in these computer simulations incorporate
numerous assumptions, require significant estimates, and assume an immediate
change in interest rates without any management of the investment portfolio in
reaction to such change. Consequently, potential changes in value of financial
instruments indicated by the simulations will likely be different from the
actual changes experienced under given interest rate scenarios, and the
difference may be material. Because the Company actively manages its investments
and liabilities, the actual change in fair value could be less than estimated
above.
DEBT STRUCTURE
Borrowed capital at December 31, 1998 includes outstanding principal of
$114.6 million of unsecured 9 1/4% Senior Subordinated Notes due 2003 and $434.0
million of a revolving Bank Credit Facility maturing in 2000. The senior
subordinated notes carry fixed rates. Based on the interest rate exposure and
prevalent rules at December 31, 1998, a relative 300 basis point decrease in
interest rates would increase the fair value of fixed rate borrowed capital by
approximately $5.1 million. Interest expense on the revolving Bank Credit
Facility, which contains floating rate debt, will fluctuate as prevailing
interest rates change. At December 31, 1998, a relative 100 basis point increase
in interest rates would increase interest expense on a pre-tax basis by
approximately $4.3 million.
INVESTMENTS AND RISK OF DEFAULT
The Company continuously evaluates its investment portfolio and the
conditions under which it might sell securities, including changes in interest
rates, changes in prepayment risks, liquidity needs, asset liability matching,
tax planning strategies and other economic factors. These securities that the
Company believes would be subject to sale prior to the specified maturity date
are included in "securities available for sale," which amounted to $2,589.7
million and $2,719.0 million at December 31, 1998 and 1997, respectively. Of
those securities available for sale, 93.0 % and 92.5% were rated BBB or above by
Standard & Poor's at December 31, 1998 and 1997, respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company,
inclusive of Businesses Held for Sale, sold $1,019.9 million, $801.1 million and
$373.7 million of fixed maturity and equity securities, and purchased $1,054.7
million, $1,021.5 million and $955.8 million of fixed maturity and equity
securities, respectively. Such sales and purchases were often effected to
improve the quality of the investment portfolio or to avoid prepayment risks. As
a result of the Company's decision to exit the private placement bond sector,
the Company transferred all of its remaining assets in the fixed maturities held
for investment portfolio to its fixed maturities available for sale portfolio as
of April 1, 1997. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, the Company marked all assets subject to the transfer to fair
value resulting in an increase in shareholders' equity, net of applicable income
taxes, of approximately $1.8 million. During 1996, the Company sold one security
in its held for investment portfolio aggregating $4.9 million as a result of a
dramatic deterioration in its credit rating.
During 1997 and 1996, the Company had a portfolio of "trading
securities" to provide the Company with the opportunity to undertake interest
rate hedging strategies, to participate in short-term relative value trades and
to invest in special situations with the goal of generating short-term trading
profits. As a result of trading activities, the Company, inclusive of Businesses
Held for Sale, recognized $1.1 million and $1.3 million of profits during 1997
and 1996, respectively. As of December 31, 1998 and 1997, the Company held no
investments in its trading portfolio.
Mortgage loans on real estate amounted to 1.2% and 1.8% of total
invested assets as of December 31, 1998 and 1997, respectively. The Company has
established a reserve for loan loss, which aggregated $4.3 million as of
December 31, 1998. As of December 31, 1998 and 1997, the Company had
non-performing loans amounting to $5.0 million and $0.7 million, respectively.
The Company is in various stages of foreclosure or sales of such loans. The
Company believes its current loan loss provision is adequate to cover any future
losses related to currently performing and non-performing loans.
In assessing the risk that the rate of default losses may exceed
pricing expectations, the Company considers the entire investment portfolio. The
Company manages the risk of adverse default experience on these investments by
applying disciplined credit evaluation and underwriting standards, prudently
limiting allocations to lower quality, higher yielding investments, and
diversifying exposures by issuer, industry and region. The Company remains
exposed to occasional cyclical economic downturns, which may result in default
rates significantly higher than historical averages.
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Item 8. Financial Statements and Supplementary Data
Page
Management's Responsibility for Financial Statements...................... 48
PennCorp Financial Group, Inc. and Subsidiaries........................... 49
Southwestern Financial Corporation and Subsidiaries....................... 90
47
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation and
fair presentation of the consolidated financial statements, financial data and
other information in this annual report. They have been prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and include amounts based on the best estimates and judgment of management. The
Company's management is also responsible for the accuracy and consistency of
other financial information included in this annual report.
In recognition of its responsibility for the integrity and objectivity
of data in the financial statements, the Company maintains a system of internal
control over financial reporting which is designed to provide reasonable, but
not absolute, assurance with respect to the reliability of the Company's
financial statements. The concept of reasonable assurance is based on the notion
that the cost of the internal control system should not exceed the benefits
derived.
Internal auditors monitor and assess the effectiveness of the internal
control system and report their findings to management and the Board of
Directors throughout the year. The Company's independent auditors are engaged to
express an opinion on the financial statements and with the coordinated support
of the internal auditors, review the financial records and related data and test
the internal control system over financial reporting.
The Audit Committee of the Board of Directors, which is composed of
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The committee meets
periodically with representatives of management, as well as the independent and
internal auditors, to review matters of a material nature related to financial
reporting and the planning, results and recommendations of audits. The
independent and internal auditors have free access to the Audit Committee,
without management present, to discuss any matter they believe should be brought
to the attention of the committee. The committee is also responsible for making
recommendations to the Board of Directors concerning the selection of the
independent auditors.
Keith A. Maib James P. McDermott
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of PennCorp Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income (loss),
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 8, the Company changed its method of recording claim
reserves associated with disability income products of the Career Sales Division
during the year ended December 31, 1998. The effect of the change in methodology
is inseparable from the effect of the change in accounting estimates and is
accordingly reflected in operations as a change in accounting estimate for the
year ended December 31, 1998.
KPMG LLP
Dallas, Texas
March 31, 1999
49
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness......................... $ 337,685 $ 254,020 $ 256,859
Interest sensitive policy product charges........................... 121,473 91,546 91,231
Net investment income............................................... 369,052 273,237 210,734
Other income........................................................ 37,717 27,504 22,666
Net gains from the sale of investments.............................. 14,068 17,487 1,257
----------- ----------- -----------
Total revenues.................................................... 879,995 663,794 582,747
----------- ----------- -----------
BENEFITS AND EXPENSES:
Claims incurred..................................................... 308,432 202,472 188,727
Change in liability for future policy benefits and other
policy benefits................................................... 233,330 121,817 83,184
Amortization of present value of insurance in force and
deferred policy acquisition costs................................. 117,446 92,046 56,470
Amortization of costs in excess of net assets acquired and
other intangibles................................................. 15,121 9,545 8,648
Underwriting and other administrative expenses...................... 229,497 146,245 116,560
Interest and amortization of deferred debt issuance costs........... 42,960 23,355 18,579
Restructuring charge................................................ 14,877 16,771 --
Impairment provision associated with assets of Businesses
Held for Sale..................................................... 342,960 -- --
----------- ----------- -----------
Total benefits and expenses....................................... 1,304,623 612,251 472,168
----------- ----------- -----------
Income (loss) before income taxes, equity in earnings of
unconsolidated affiliates and extraordinary charge.................. (424,628) 51,543 110,579
Income taxes (benefits)........................................... (3,369) 20,375 40,957
----------- ----------- -----------
Income (loss) before equity in earnings of unconsolidated affiliates
and extraordinary charge............................................ (421,259) 31,168 69,622
Equity in earnings of unconsolidated affiliates................... -- 18,972 21,037
----------- ----------- -----------
Income (loss) before extraordinary charge.............................. (421,259) 50,140 90,659
Extraordinary charge (net of income taxes of $900, $--and $1,277). (1,671) -- (2,372)
----------- ----------- -----------
Net income (loss)...................................................... (422,930) 50,140 88,287
Preferred stock dividend requirements............................. 18,273 19,533 14,646
----------- ----------- -----------
Net income (loss) applicable to common stock........................... $ (441,203) $ 30,607 $ 73,641
=========== =========== ===========
PER SHARE INFORMATION:
Basic:
Net income (loss) applicable to common stock before
extraordinary charge............................................... $ (15.17) $ 1.09 $ 2.79
Extraordinary charge, net of income taxes......................... (0.06) -- (0.09)
----------- ----------- -----------
Net income (loss) applicable to common stock........................ $ (15.23) $ 1.09 $ 2.70
=========== =========== ===========
Common shares used in computing basic earnings (loss) per share........ 29,091 28,016 27,208
=========== =========== ===========
Diluted:
Net income (loss) applicable to common stock before
extraordinary charge............................................... $ (15.17) $ 1.07 $ 2.49
Extraordinary charge, net of income taxes......................... (0.06) -- (0.07)
----------- ----------- -----------
Net income (loss) applicable to common stock........................ $ (15.23) $ 1.07 $ 2.42
=========== =========== ===========
Common shares used in computing diluted earnings (loss) per share...... 29,091 28,645 35,273
=========== =========== ===========
COMPREHENSIVE INCOME (LOSS) INFORMATION:
Net income (loss)................................................... $ (422,930) $ 50,140 $ 88,287
Change in unrealized foreign currency translation gains (losses),
net of income taxes............................................... (6,089) (5,641) 568
Change in unrealized gains (losses) on securities available for
sale of unconsolidated affiliate during the year.................. -- 24,277 (6,045)
Change in unrealized holding gains (losses) arising during the
year on securities available for sale, net of income taxes
(benefits) of ($4,818), $6,490 and ($1,828)....................... 5,602 27,185 (3,648)
Reclassification adjustments for gains included in net income (loss) (14,552) (15,890) (596)
----------- ----------- -----------
Total comprehensive income (loss) applicable to common stock.... $ (437,969) $ 80,071 $ 78,566
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
50
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
As of December 31,
ASSETS: 1998 1997
----------- -----------
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $2,524,990 in 1998 and $2,618,515 in 1997)....................... $ 2,589,714 $ 2,718,982
Equity securities available for sale, at fair value
(cost $2,008 in 1998 and $30,084 in 1997)........................................ 2,035 30,257
Mortgage loans on real estate, net of allowance of $4,295 in 1998 and
$6,041 in 1997................................................................... 36,882 240,879
Policy loans....................................................................... 207,490 145,108
Cash and short-term investments.................................................... 92,727 109,013
Other investments.................................................................. 27,406 95,875
----------- -----------
Total investments ............................................................... 2,956,254 3,340,114
Accrued investment income............................................................. 37,291 43,312
Accounts and notes receivable, net of allowance of $6,201 in 1998 and $9,025 in 1997.. 14,319 46,655
Investment in unconsolidated affiliate................................................ -- 183,158
Present value of insurance in force................................................... 170,729 263,889
Deferred policy acquisition costs..................................................... 139,708 310,117
Costs in excess of net assets acquired................................................ 108,070 116,544
Income taxes, primarily deferred...................................................... 46,944 --
Other assets.......................................................................... 136, 282 420,346
Assets of Businesses Held for Sale.................................................... 2,421,804 --
----------- -----------
Total assets .................................................................... $ 6,031,401 $ 4,724,135
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals....................................................... $ 2,867,038 $ 3,289,925
Notes payable......................................................................... 550,923 359,755
Income taxes, primarily deferred...................................................... -- 59,125
Accrued expenses and other liabilities................................................ 110,945 135,227
Liabilities of Businesses Held for Sale............................................... 2,066,554 --
----------- -----------
Total liabilities................................................................ 5,595,460 3,844,032
----------- -----------
Mandatory redeemable preferred stock:
Series C, $.01 par value, $100 initial redemption value; authorized, issued and
outstanding-- in 1998 and 178,500 in 1997........................................ -- 19,867
Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,300,000 in 1998 and 1997.................................. 112,454 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized issued and outstanding 2,875,000 in 1998 and 1997....................... 141,673 139,157
Common stock, $.01 par value; authorized 100,000,000; issued and
outstanding 30,072,344 in 1998 and 28,860,206 in 1997.............................. 301 289
Additional paid-in capital............................................................ 430,321 397,590
Accumulated other comprehensive income, net of income taxes........................... 19,995 35,034
Retained earnings (deficit)........................................................... (234,921) 211,055
Treasury shares (1,105,369 in 1998 and 1,009,589 in 1997)............................. (32,391) (32,130)
Notes receivable and other assets secured by common stock............................. (1,491) (1,272)
----------- -----------
Total shareholders' equity....................................................... 435,941 860,236
----------- -----------
Total liabilities and shareholders' equity ...................................... $ 6,031,401 $ 4,724,135
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
51
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
For the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Convertible preferred stock:
Balance at beginning of year........................................ $ 249,670 $ 249,670 $ 110,513
Issuance of convertible preferred stock............................. -- -- 139,157
Accrual of dividends in arrears..................................... 4,457 -- --
----------- ----------- -----------
Balance at end of year............................................ 254,127 249,670 249,670
----------- ----------- -----------
Common stock:
Balance at beginning of year........................................ 289 286 229
Issuance of common stock............................................ 10 1 56
Exercise of stock options........................................... 2 2 1
----------- ----------- -----------
Balance at end of year............................................ 301 289 286
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year........................................ 397,590 393,156 220,482
Issuance of common stock............................................ 30,717 1,697 170,393
Exercise of stock options........................................... 2,014 2,737 2,281
----------- ----------- -----------
Balance at end of year.......................................... 430,321 397,590 393,156
----------- ----------- -----------
Accumulated other comprehensive income:
Unrealized foreign currency translation losses:
Balance at beginning of year...................................... (20,602) (14,961) (15,529)
Change in unrealized foreign currency translation gains (losses)
during the year, net of income taxes............................ (6,089) (5,641) 568
----------- ----------- -----------
Balance at end of year........................................ (26,691) (20,602) (14,961)
----------- ------------ -----------
Unrealized gains on securities available for sale:
Balance at beginning of year...................................... 55,636 20,064 30,353
Change in equity in unrealized gains (losses) on securities
available for sale of unconsolidated affiliate during the year.. -- 24,277 (6,045)
Change in unrealized holding gains (losses) on securities
available for sale during the year, net of income taxes......... 5,602 27,185 (3,648)
Reclassification adjustments for gains included in net
income (loss)................................................... (14,552) (15,890) (596)
---------- ---------- ----------
Balance at end of year........................................ 46,686 55,636 20,064
----------- ----------- -----------
Total other comprehensive income.............................. 19,995 35,034 5,103
----------- ----------- -----------
Retained earnings (deficit):
Balance at beginning of year........................................ 211,055 186,032 117,987
Net income (loss)................................................... (422,930) 50,140 88,287
Dividends on common stock........................................... (2,860) (5,618) (5,630)
Accretion of dividends on preferred stock........................... (18,273) (19,533) (14,646)
Redemption of Series C preferred stock.............................. (1,913) -- --
Earned portion of treasury stock awarded to employees............... -- 34 34
----------- ----------- -----------
Balance at end of year.......................................... (234,921) 211,055 186,032
----------- ----------- -----------
Treasury shares:
Balance at beginning of year........................................ (32,130) (3,370) (3,370)
Purchases of treasury stock......................................... (261) (28,760) --
----------- ----------- -----------
Balance at end of year.......................................... (32,391) (32,130) (3,370)
----------- ----------- -----------
Notes receivable and other assets secured by common stock:............. (1,491) (1,272) (1,500)
----------- ----------- -----------
Total shareholders' equity...................................... $ 435,941 $ 860,236 $ 829,377
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
52
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) before equity in earnings of unconsolidated affiliates and
extraordinary charge..................................................... $(421,259) $ 31,168 $ 69,622
Adjustments to reconcile income (loss) before equity in earnings of
unconsolidated affiliates and extraordinary charge to net cash provided
by operating activities:
Impairment provision associated with assets of Businesses Held for Sale 342,960 -- --
Capitalization of deferred policy acquisition costs.................... (128,592) (109,482) (98,140)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net...... 123,310 91,902 63,588
Increase (decrease) in policy liabilities and accruals and other
policyholder funds................................................... 72,083 (1,644) 77,549
Sales of trading securities............................................ -- 29,914 56,004
Other, net............................................................. 4,288 11,425 (16,476)
-------- -------- ---------
Net cash provided (used) by operating activities..................... (7,210) 53,283 152,147
-------- -------- ---------
Cash flows from investing activities:
Cash and short-term investments acquired in acquisition of businesses,
net of cash expended of $82,771, $--and $--in 1998, 1997 and 1996....... 91,492 -- (99,596)
Purchases of fixed maturity securities held for investment................. -- -- (27,000)
Purchases of fixed maturity securities available for sale.................. (1,049,341) (993,768) (920,430)
Purchases of equity securities available for sale.......................... (5,391) (27,776) (8,398)
Maturities of fixed maturity securities held for investment................ -- -- 42,351
Maturities of fixed maturity securities available for sale................. 304,122 439,938 81,538
Sales of fixed maturity securities held for investment..................... -- -- 4,910
Sales of fixed maturity securities available for sale...................... 987,788 777,960 368,331
Sales of equity securities available for sale.............................. 32,062 23,121 5,328
Acquisitions and originations of mortgage loans............................ (36,965) (44,375) (112,473)
Sales of mortgage loans.................................................... 20,867 13,643 151,972
Principal collected on mortgage loans...................................... 50,794 54,145 21,657
Other, net................................................................. 21,203 (49,712) 75,915
-------- -------- ---------
Net cash provided (used) by investing activities..................... 416,631 193,176 (415,895)
-------- -------- ---------
Cash flows from financing activities:
Additional borrowings...................................................... 203,000 250,000 177,161
Issuance of common stock................................................... 3 -- 155,450
Issuance of preferred stock................................................ -- -- 139,157
Purchases of treasury stock................................................ -- (28,760) --
Reduction of notes payable................................................. (126,839) (100,570) (330,624)
Redemption of preferred stock.............................................. -- (14,705) --
Receipts from interest sensitive products credited to policyholders'
account balances.......................................................... 251,627 186,166 160,403
Return of policyholders' account balances on interest sensitive products... (605,757) (461,888) (365,554)
Cash transferred on reinsurance ceded to an affiliate...................... -- (50,000) --
Other, primarily dividends, net............................................ (16,210) (20,266) (14,399)
-------- -------- ---------
Net cash used by financing activities................................ (294,176) (240,023) (78,406)
-------- -------- ---------
Net increase (decrease) in cash...................................... 115,245 6,436 (342,154)
Cash and short-term investments at beginning of year.......................... 109,013 102,577 444,731
-------- -------- ---------
Cash and short-term investments at end of year (including $131,531 of cash
and short-term investments classified as assets of Businesses Held for
Sale in 1998).............................................................. $224,258 $109,013 $ 102,577
======== ======== =========
Supplemental disclosures:
Income taxes paid (refunded)............................................... $ 5,814 $ (1,554) $ (4,992)
Interest paid.............................................................. 38,017 20,946 18,185
Non-cash financing activities:
Redemption of Series C Preferred Stock..................................... $ 22,227 $ -- $ --
Securities issued in conjunction with acquisition.......................... -- -- 14,999
Debt assumed with acquisition.............................................. 115,015 -- --
Issuance of common stock associated with the acquisition of the Fickes
and Stone Knightsbridge Interests........................................ 8,500 -- --
Other ..................................................................... 261 1,281 948
</TABLE>
See accompanying Notes to Consolidated Financial Statements
53
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
PennCorp Financial Group, Inc. ("PennCorp," or the "Company") is an
insurance holding company. Through its wholly-owned life insurance subsidiaries;
Pennsylvania Life Insurance Company ("PLIC") and its wholly-owned subsidiary,
PennCorp Life Insurance Company (collectively referred to as "Penn Life");
Peninsular Life Insurance Company ("Peninsular"); Professional Insurance
Corporation ("Professional"); Pioneer Security Life Insurance Company ("Pioneer
Security") and its wholly-owned subsidiaries American-Amicable Life Insurance
Company of Texas and Pioneer American Insurance Company (Pioneer Security and
its subsidiaries collectively referred to as "AA Life"); Southwestern Financial
Corporation ("SW Financial") and its wholly-owned subsidiaries Southwestern Life
Insurance Company ("Southwestern Life"), Constitution Life Insurance Company
("Constitution"), Union Bankers Insurance Company ("Union Bankers"), and
Marquette National Life Insurance Company ("Marquette"); Security Life and Trust
Insurance Company, formerly Integon Life Insurance Corporation ("Security
Life"); Occidental Life Insurance Company of North Carolina ("OLIC"); United
Life & Annuity Insurance Company ("United Life"); and Pacific Life and Accident
Insurance Company ("PLAIC"), the Company offers a broad range of accident and
sickness, life, and accumulation insurance products to individuals through a
sales force that is contractually exclusive to certain of the Company's
subsidiaries and through general agents. Additionally, the Company owns KB
Management, LLC ("KB Management"), which provides management and advisory
services to the Company; Marketing One, Inc. ("Marketing One"), a third party
marketing organization; KIVEX, Inc. ("KIVEX"), an internet service provider, UC
Mortgage Corp. ("UC") and Cyberlink Development, Inc. ("Cyberlink").
As a result of the Company's announcement of its decision to sell the
Career Sales Division (the Career Sales Division is comprised of the operations
of Penn Life, Peninsular, Union Bankers, Constitution and Marquette), KIVEX,
Professional, United Life, UC, Cyberlink and Marketing One within a period not
likely to exceed one year (see Note 3 and 16 of Notes to Consolidated Financial
Statements), the assets and liabilities of the Career Sales Division, KIVEX,
Professional, United Life, UC, Cyberlink and Marketing One (collectively the
"Businesses Held for Sale") were reported as "Assets of Businesses Held for
Sale" and "Liabilities of Businesses Held for Sale" at December 31, 1998.
The Retained Businesses includes the Payroll Sales Division (the
Payroll Sales Division is comprised of AA Life and OLIC) and the Financial
Services Division (the Financial Services Division is comprised of Southwestern
Life and Security Life).
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. All dollar amounts presented hereafter,
except share amounts, are stated in thousands.
The financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). These principles are established
primarily by the Financial Accounting Standards Board ("FASB") and the American
Institute of Certified Public Accountants ("AICPA"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as well as revenues and expenses. Accounts that the Company deems to
be acutely sensitive to changes in estimates include deferred policy acquisition
costs, policy liabilities and accruals, present value of insurance in force,
costs in excess of net assets acquired, the fair value of assets and liabilities
classified as held for sale and deferred taxes. In addition, the Company must
determine the requirements for disclosure of contingent assets and liabilities
as of the date of the financial statements based upon estimates. As additional
information becomes available, or actual amounts are determinable, the recorded
estimates may be revised and reflected in operating results. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate. In all instances, actual results could differ from
estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Fixed maturities and equity securities classified as available for sale
are recorded at fair value, as they may be sold in response to changes in
interest rates, prepayment risk, liquidity needs, the need or desire to increase
income, capital or other economic factors. Changes in unrealized gains and
losses related to securities available for sale are recorded as accumulated
other comprehensive income, a separate component of shareholders' equity, net of
applicable income taxes and amount attributable to deferred policy acquisition
costs and present value of insurance in force related to universal life and
54
<PAGE>
accumulation products. Securities classified as trading securities are reported
at fair value with realized gains and losses and changes in unrealized gains and
losses included in the determination of net income as a component of other
income. During 1997 and 1996, the Company carried a certain equity investment in
an affiliate on the equity basis of accounting as a result of its percentage
ownership and lack of voting control. Mortgage-backed fixed maturity securities
held for investment or available for sale are amortized using the interest
method including anticipated prepayments at the date of purchase. Significant
changes in estimated cash flows from original assumptions are reflected in the
period of such change. Mortgage loans on real estate are recorded at cost,
adjusted for amortization of premium or discount and provision for loan loss, if
necessary. Policy loans, short-term investments, and other investments are
recorded at cost.
As a result of the Company's decision to exit the private placement
bond sector, the Company transferred all of its remaining assets in the fixed
maturities held for investment portfolio aggregating $49,384 to its fixed
maturities available for sale portfolio as of April 1, 1997. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, the Company marked
all assets subject to the transfer to fair value resulting in a net increase in
shareholders' equity, net of applicable income taxes, of $1,800.
The Company regularly evaluates the carrying value of its investments
based on current economic conditions, past credit loss experience and other
circumstances. A decline in net realizable value that is other than temporary is
recognized as a realized investment loss and a reduction in the cost basis of
the investment. The Company discounts expected cash flows in the computation of
net realizable value of its investments, other than certain mortgage-backed
securities. In those circumstances where the expected cash flows of residual
interest and interest only mortgage-backed securities, discounted at a risk-free
rate of return, result in an amount less than the carrying value, a realized
loss is reflected in an amount sufficient to adjust the carrying value of a
given security to its estimated fair value.
Realized investment gains and losses and declines in value which are
other than temporary, determined on the basis of specific identification, are
included in net income.
Accounts and Notes Receivable
Accounts and notes receivable consist primarily of agents' balances and
premiums receivable from agents and policyholders. Agents' balances are
partially secured by commissions due to agents in the future and premiums
receivable are secured by policy liabilities. An allowance for doubtful accounts
is established, based upon specific identification and general provision, for
amounts which the Company estimates will not ultimately be collected. During
1998 and 1997, the Company wrote off receivables totaling $1,960 and $6,605,
respectively.
Intangible Assets
During 1996, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Assets to be Disposed of." This accounting standard modified the methodology
companies utilize to evaluate the carrying value of certain assets by requiring,
among other things, companies evaluate assets at the lowest level at which
identifiable cash flows can be determined.
The Company continually monitors the recoverability of the carrying
value of intangible assets using the methodology prescribed in SFAS No. 121. The
Company also reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amounts of these assets may not be recoverable. Recoverability of these assets
is determined by comparing the forecast undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount, including
associated intangible assets, of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, intangible assets are
written down initially, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based upon discounted cash
flows or appraised values, depending on the nature of the associated assets.
During 1998, the Company recognized an aggregate $342,960 non-cash
charge related to the fair value of consideration to be received upon
disposition of certain operating companies which are aggregated for purposes of
presentation of the Company's financial information as "assets and liabilities
of Businesses Held for Sale."
In accordance with SFAS No. 121, the Company recorded the impairment
provision in order to reflect the difference in the Company's accounting basis
in the Businesses Held for Sale and the fair value of the consideration that the
Company would likely receive for such businesses. The fair value of the
consideration likely to be received has been primarily based upon the terms of
definitive sales agreements.
55
<PAGE>
Deferred Policy Acquisition Costs
Estimated costs of acquiring new business which vary with, and are
primarily related to, the production of new business, have been deferred to the
extent that such costs are deemed recoverable from future revenues. Such
estimated costs include commissions, certain costs of policy issuance,
underwriting, certain variable agency and marketing expenses and other costs
directly associated with these functions to the extent such costs are determined
to vary with and are primarily related to the production of new business. Costs
deferred associated with accident and sickness and traditional life policies are
amortized, with interest, over the anticipated premium-paying period of the
related policies in proportion to the ratio of annual premium revenue to
expected total premium revenue to be received over the life of the policies.
Expected premium revenue is estimated by using the same mortality, morbidity and
withdrawal assumptions used in computing liabilities for future policy benefits.
For interest sensitive products and limited pay life products, policy
acquisition costs are amortized in relation to the emergence of anticipated
gross profits over the life of the policies.
Present Value of Insurance In Force
The present value of insurance in force represents the anticipated
gross profits to be realized from future revenues on insurance in force at the
date such insurance was purchased, discounted to provide an appropriate rate of
return and amortized, with interest based upon the policy liability or contract
rate, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits. Accumulated amortization was $96,273
and $192,049 as of December 31, 1998 and 1997, respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of the fair value of net assets acquired are primarily
amortized on a straight-line basis ranging from 5 to 30 years. Accumulated
amortization was $31,024 and $44,606 as of December 31, 1998 and 1997,
respectively. Unamortized costs in excess of net assets acquired in the amount
of $22,792 were transferred to assets of Businesses Held for Sale in 1998 and
$114,514 was written off in connection with the impairment provision.
For each of the periods presented, the Company has made certain
valuation determinations with respect to pre-acquisition contingencies or
allocations. For the year ended December 31, 1998, the Company made a valuation
determination with respect to preacquisition contingencies. The Company reduced
tax liabilities and associated costs in excess of net assets acquired associated
with the SW Financial and United Life acquisitions by $6,407 and $647,
respectively, as a result of the Company resolving certain acquisition date
contingencies.
For the year ended December 31, 1997, the Company determined the
following with respect to certain material acquisition contingencies or
allocations: (i) the Company increased deferred tax assets and reduced
associated costs in excess of net assets acquired associated with the Security
Life acquisition by $19,600 as a result of the Company resolving certain
acquisition date tax contingencies, (ii) the Company reduced both deferred tax
liabilities and associated costs in excess of net assets acquired associated
with the Marketing One acquisition by $1,100 as a result of the Company
resolving certain acquisition date tax contingencies, and (iii) the Company
reduced costs in excess of net assets acquired and increased certain mortgage
loan values by $1,100, associated with the acquisition of United Life, as a
result of final appraisals becoming available.
For the year ended December 31, 1996, the Company determined the
following with respect to certain material acquisition contingencies or
allocations: (i) the Company incurred additional costs associated with the
acquisition of United Life of $2,500, which resulted in a corresponding increase
to costs in excess of net assets acquired, (ii) the Company decreased real
estate and mortgage loan loss valuations of Security Life by $6,800, which
resulted in a decrease in costs in excess of net assets acquired of $4,400 and
deferred tax assets of $2,400, and (iii) the Company increased certain policy
reserves of Security Life aggregating $10,000, which resulted in a corresponding
increase to costs in excess of net assets acquired of $10,000.
Policy Liabilities
Future policy benefits for traditional life insurance products
generally have been computed on the net level premium method, based on estimated
future investment yield, mortality, morbidity and withdrawals. Estimates used
are based on experience adjusted to provide for possible adverse deviation.
These estimates are periodically reviewed and compared with actual experience.
Future policy benefits for interest sensitive products include the balance that
accrues to the benefit of the
56
<PAGE>
policyholders and amounts that have been assessed to compensate the life
insurance subsidiaries for services to be provided in the future.
Policy and contract claims represent estimates of both reported claims
and claims incurred but not reported based on experience. The Company has been
closely monitoring the development of claims reserve experience for Penn Life.
The methodology previously utilized has experienced, what appears to be, a
deterioration of the adequacy of its claims reserves associated with disability
income products sold prior to the Company's ownership. During 1998, the Company
changed its methodology in recording these reserves. 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 1998.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases as well as operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
In assessing the realization of deferred taxes, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
Treasury Shares
Shares purchased are recorded at cost as a reduction of shareholders'
equity. Shares abandoned by the associated shareholders are recorded at no cost.
Insurance Revenue Recognition
Accident and sickness insurance premiums are recognized as revenue
ratably over the time period to which premiums relate. Revenues from traditional
life insurance policies represent premiums which are recognized as earned when
due. Benefits and expenses are associated with earned premiums so as to result
in recognition of profits over the lives of the policies. This association is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral and amortization of policy acquisition costs.
Revenues for interest sensitive products such as universal life and
annuity contracts represent charges assessed against the policyholders' account
balance for the cost of insurance, surrenders and policy administration.
Benefits charged to expenses include benefit claims incurred during the period
in excess of policy account balances and interest credited to policy account
balances.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed in accordance with SFAS
No. 128, "Earnings Per Share." Basic earnings (loss) per share excludes dilution
and is computed by dividing income (loss) applicable to common shareholders by
weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share represents the potential dilution that could occur if
all convertible securities, warrants and stock options were exercised and
converted into common stock, if the effect of doing so is dilutive. The diluted
earnings per share calculation assumes that the proceeds received upon the
conversion of all dilutive options and warrants are used to repurchase the
Company's common shares at the average market price of such shares during the
period.
The Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," in 1996. This statement provides a
choice for the accounting of employee stock compensation plans. A company may
elect to use a new fair-value methodology, under which compensation cost is
measured and recognized in results of operations, or continue to account for
these plans under Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Note 13 of the Notes to
Consolidated Financial
57
<PAGE>
Statements contains a summary of the pro forma effects to reported net income
applicable to common stock and earnings per share for 1998, 1997 and 1996, as if
the Company had elected to account for employee stock compensation plans
utilizing the fair value methodology prescribed by SFAS No. 123.
Business Combinations
Business combinations accounted for as a purchase result in the
allocation of the purchase consideration to the fair values of the assets and
liabilities acquired establishing such fair values as the new accounting bases.
Purchase consideration in excess of the fair value of net assets acquired is
allocated to "costs in excess of net assets acquired." Should the fair value of
the net assets acquired exceed the purchase consideration, such excess is
utilized to reduce certain intangible assets, primarily "present value of
insurance in force." Allocation of purchase price is performed in the period in
which the purchase is consummated and may be preliminary. Adjustments resulting
from completion of the purchase allocation process affect the value of the
assets and liabilities acquired.
Foreign Currency Translation
The financial statement accounts of the Company's Canadian operations,
which are denominated in Canadian dollars, are translated into U.S. dollars as
follows: (i) Canadian currency assets and liabilities are translated at the
rates of exchange as of the balance sheet dates and the related unrealized
translation adjustments are included as accumulated other comprehensive income,
a separate component of shareholders' equity, and (ii) revenues, expenses and
cash flows, expressed in Canadian dollars, are translated using a weighted
average of exchange rates for each of the periods presented.
Reinsurance
Financial reinsurance that does not transfer significant insurance risk
is accounted for as deposits. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured policies.
Balances due to, or from, reinsurers have been reflected as assets and
liabilities rather than being netted against the related account balances.
Realized gains on retroactive reinsurance arrangements are deferred and
amortized into net income over the estimated duration of the reinsured business.
Accounting Pronouncements Not Yet Adopted
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 currently evaluating SFAS No.133 and has not determined
its effect on the consolidated financial statements.
In December 1997, the 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. The
Company's present accounting methodology for guaranty fund and other reinsurance
assessments substantially conforms to the requirements of this SOP.
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 completing its evaluation of the financial impact as well as the
changes to its related disclosures.
58
<PAGE>
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) ACQUISITIONS AND DISPOSITIONS
Acquisitions of SW Financial Controlling Interest, Knightsbridge Interests and
United Life
On January 2, 1998, following shareholder approval at the Company's
1997 annual meeting of shareholders, the Company consummated the acquisition,
from KB Investment Fund I, LP (formerly Knightsbridge Capital Fund I, LP) (the
"KB Fund") and Messrs. Steven W. Fickes, a former director and David J. Stone, a
director of the Company, of their respective holdings of common stock and, in
the case of the KB Fund, common stock warrants of SW Financial (collectively,
the "SW Financial Controlling Interest") for an aggregate purchase price of
$73,658 (not including acquisition expenses). The fair value of net assets
acquired amounted to $45,520 resulting in $28,138 of costs in excess of net
assets acquired which will be amortized over 30 years. As part of the
acquisition of the SW Financial Controlling Interest on January 2, 1998, SW
Financial Subordinated Notes in the amount of $40,000 previously purchased by
the Company were reclassified to purchase consideration for SW Financial. 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, fair values of assets and liabilities acquired have
been determined as of January 2, 1998.
On January 5, 1998, following shareholder approval at the 1997 annual
meeting of shareholders, the Company consummated the acquisition of the
interests of Messrs. Fickes and Stone in KB Management, KB Fund and KB
Consultants LLC (formerly known as Knightsbridge Consultants LLC) (collectively,
the "Fickes and Stone Knightsbridge Interests") for total consideration
estimated to be $10,564 (not including acquisition expenses). Mr. Fickes will
receive consideration in the form of estimated annual interest payments, ranging
from $301 to $330, on April 15 each year through 2001 and will be issued 173,160
shares of the Company's Common Stock on April 15, 2001. Mr. Stone was issued his
173,160 shares in July 1998 which he pledged to financial institutions in
connection with his appeal of a judgment awarded against him and his spouse. The
fair value of net assets acquired amounted to ($1,701) resulting in $12,294 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 Company acquired United Life in 1996 for a total purchase price of
$110,056 including expenses incurred of $9,706 and earnings through the date of
consummation of the acquisition of $3,608. The United Life acquisition has been
accounted for as a purchase transaction in accordance with generally accepted
accounting principles, the fair value of net assets acquired amounted to $82,580
(as adjusted) resulting in $27,476 (as adjusted) of costs in excess of net
assets acquired which will be amortized over 20 years.
Businesses Held for Sale
On February 18, 1998, the Company announced it had engaged the
investment banking firms Salomon Smith Barney, Inc. and Fox-Pitt, Kelton Inc. to
review strategic alternatives for maximizing shareholder value, including the
sale of the Company's Career Sales Division and certain other non-strategic
subsidiaries.
The Career Sales Division is comprised in part of the operations of
Penn Life. With the acquisition in January 1998 of SW Financial, the Company has
integrated Union Bankers, Constitution and Marquette into the Career Sales
Division.
On December 31, 1998, the Company entered into a definitive agreement
to sell the Career Sales Division and related assets to Universal American
Financial Corp. ("Universal American"). The purchase price of $175,000 is
subject to adjustment based on the capital and surplus of the Career Sales
Division at the closing date. The purchase price consists of $136,000 in cash
and $39,000 initial principal amount, subject to adjustment, of subordinated
notes of Universal American. The subordinated notes will bear interest at a rate
of 8.0% per annum and will mature ten years from date of issuance. The accreted
value of the notes will be subject to offset in the event of adverse development
(or subject to increase in the event of positive development) in the disability
income reserves of PLIC and may be offset for other indemnification claims under
the purchase and sale agreement. In addition, the Company is required under
terms of the purchase and sale agreement to deliver the Career Sales Division
and related assets with certain minimum levels of statutory capital and surplus,
pay certain ongoing costs and other expenses which will result in the Company
receiving net cash proceeds of approximately $70,000
59
<PAGE>
to $78,000. For additional information concerning the disability insurance
reserves of PLIC, see Note 8 of Notes to Consolidated Financial Statements.
Also on December 31, 1998, the Company signed a definitive agreement to
sell Professional. Professional, which previously was included in the Payroll
Sales Division, provides individual fixed benefit and life products utilizing a
network of independent agents primarily in the southeastern United States
through employer-sponsored payroll deduction programs. Pursuant to the purchase
and sale agreement, Professional will be sold to GE Financial Assurance
Holdings, Inc. ("GEFAH") for $47,500 in cash. The purchase price is subject to
adjustment based on Professional's capital and surplus at the closing date. In
addition, GEFAH will pay interest on the purchase price from December 31, 1998
to the date of settlement. The Company currently estimates receiving net cash
proceeds for the Professional sale of approximately $40,000 to $41,500.
On February 21, 1999, the Company signed a definitive agreement to sell
United Life and its wholly-owned subsidiary, United Variable Services, Inc., to
ING America Insurance Holdings, Inc. ("ING"). United Life, which previously was
included in the Financial Services Division, principally markets fixed and
variable annuities through financial institutions and independent general
agents, primarily in the southern and western United States. The sale of United
Life to ING also includes the sale of UC, Cyberlink and certain assets of
Marketing One. The aggregate purchase price consists of $152,000 and a dividend
payable by United Life at closing, which the Company estimates will be
approximately $2,100. The purchase consideration may be reduced as a result of
the Company's obligation to purchase certain mortgages from United Life at
closing. Additionally, a portion of the purchase price may be escrowed at
closing to fund the Company's obligation to purchase additional mortgages from
United Life after closing. United Life, including its subsidiary United Variable
Services, Inc., UC, Cyberlink and certain assets of Marketing One are referred
to herein collectively as the "United Life Assets." The Company anticipates
receiving net cash proceeds from the sale of the United Life Assets of
approximately $140,000.
In the third quarter of 1998, the Company made the decision to sell
KIVEX, an internet service provider. The Company has engaged the investment
banking firm of ING Barings Furman Selz in this regard and is currently
soliciting interest from prospective purchasers. To date, the Company has not
entered into a definitive agreement to sell KIVEX. In addition, the Company has
made the decision to sell Marketing One, excluding those assets included with
the sale of United Life.
Separate selected pro forma financial information is presented in Note
17 to illustrate the effects of the purchase of the SW Financial Controlling
Interests and the Fickes and Stone Knightsbridge Interest as well as the sale of
Businesses Held for Sale for the years ended December 31, 1998 and 1997.
(4) BUSINESS SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires that companies disclose
segment data on a basis that is used internally by management for evaluating
segment performance and allocating resources to segments. The Company defines
its operating divisions based on the distribution channels of its products. The
Company has three reportable operating segments: (i) Financial Services
Division, which is based in Dallas, Texas, and markets life insurance and fixed
annuities through independent general agents; (ii) Payroll Sales Division, which
is based in Waco, Texas, and markets and underwrites customized life insurance
and accumulation products to U.S. military personnel and federal employees
through a general agency force and provides individual fixed benefit and life
products through employer-sponsored payroll deduction programs; and (iii)
Businesses Held for Sale.
The Company's Chief Executive Officer evaluates performance of each
segment based on profit or loss from operations excluding (i) restructuring
costs, (ii) net gains on the sale of investments, (iii) impairment valuation
associated with Businesses Held for Sale, (iv) interest expense, (v) income
taxes and (vi) equity in earnings of unconsolidated subsidiaries. The accounting
policies of segments are the same as those described in the summary of
significant accounting policies (see Note 2 of Notes to Consolidated Financial
Statements). Segment data for 1997 and 1996 have been restated to conform to the
1998 presentation.
60
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and policy product charges:
Financial Services Division.............................. $ 129,242 $ 69,830 $ 71,758
Payroll Sales Division................................... 89,991 89,699 83,747
Businesses Held for Sale (United States)................. 194,995 141,834 149,808
Businesses Held for Sale (Canada)........................ 44,930 44,203 42,777
----------- ----------- -----------
$ 459,158 $ 345,566 $ 348,090
=========== =========== ===========
Net investment income:
Financial Services Division.............................. $ 183,618 $ 90,787 $ 94,185
Payroll Sales Division................................... 39,046 38,161 36,023
Businesses Held for Sale................................. 147,201 138,355 75,860
Corporate................................................ (813) 5,934 4,666
----------- ----------- -----------
$ 369,052 $ 273,237 $ 210,734
=========== =========== ===========
Operating profit (loss):
Financial Services Division.............................. $ 23,206 $ 27,756 $ 39,156
Payroll Sales Division................................... (2,728) 23,960 22,796
Businesses Held for Sale................................. (18,323) 37,479 63,840
----------- ----------- -----------
$ 2,155 $ 89,195 $ 125,792
=========== =========== ===========
Amortization of present value of insurance in force and
deferred policy acquisition costs:
Financial Services Division.............................. $ 26,122 $ 19,468 $ 9,996
Payroll Sales Division................................... 37,977 24,271 13,078
Businesses Held for Sale................................. 53,347 48,307 33,396
----------- ----------- -----------
$ 117,446 $ 92,046 $ 56,470
=========== =========== ===========
Total assets:
Financial Services Division.............................. $ 2,823,007 $ 1,386,751 $ 1,529,821
Payroll Sales Division................................... 695,777 751,261 732,871
Businesses Held for Sale (United States)................. 2,294,945 2,129,751 2,219,771
Businesses Held for Sale (Canada)........................ 126,859 181,768 183,500
----------- ----------- -----------
$ 5,940,588 $ 4,449,531 $ 4,665,963
=========== =========== ===========
</TABLE>
(Remainder of Page Intentionally Left Blank)
61
<PAGE>
Reconciliations of segment data to the Company's consolidated data are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total revenues:
Segments--premiums and policy product charge............. $ 459,158 $ 345,566 $ 348,090
Segments--net investment income.......................... 369,052 273,237 210,734
Other income............................................. 37,717 27,504 22,666
Net gain from sale of investments........................ 14,068 17,487 1,257
----------- ----------- -----------
$ 879,995 $ 663,794 $ 582,747
=========== =========== ===========
Income (loss) before taxes, equity in earnings of
unconsolidated affiliates and extraordinary charge:
Segments................................................. $ 2,155 $ 89,195 $ 125,792
Corporate expenses and eliminations...................... (40,054) (15,013) 2,109
Impairment provision associated with
assets of Businesses Held for Sale..................... (342,960) -- --
Interest and amortization of deferred debt
issuance costs......................................... (42,960) (23,355) (18,579)
Net gains on the sale of investments..................... 14,068 17,487 1,257
Restructuring costs...................................... (14,877) (16,771) --
----------- ----------- -----------
$ (424,628) $ 51,543 $ 110,579
=========== =========== ===========
Total assets:
Segments................................................. $ 5,940,588 $ 4,449,531 $ 4,665,963
Corporate and other...................................... 90,813 274,604 143,360
----------- ----------- -----------
$ 6,031,401 $ 4,724,135 $ 4,809,323
=========== =========== ===========
</TABLE>
(5) INVESTMENTS
The amortized cost and fair value of investments in fixed maturities
available for sale were as follows as of December 31:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies....... $ 1,164,739 $ 33,930 $ 9,983 $ 1,188,686
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies..... 235,037 15,849 6,059 244,827
Debt securities issued by foreign governments... 25,701 1,477 -- 27,178
Corporate securities............................ 1,099,513 41,723 12,213 1,129,023
----------- ----------- ----------- -----------
$ 2,524,990 $ 92,979 $ 28,255 $ 2,589,714
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies....... $ 1,242,805 $ 46,157 $ 1,313 $ 1,287,649
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies..... 135,255 7,551 120 142,686
Debt securities issued by foreign governments... 66,635 7,188 12 73,811
Corporate securities............................ 1,173,820 49,164 8,148 1,214,836
----------- ----------- ----------- -----------
$ 2,618,515 $ 110,060 $ 9,593 $ 2,718,982
=========== =========== =========== ===========
</TABLE>
62
<PAGE>
The amortized cost and fair value of fixed maturities available for
sale as of December 31, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less ............................... $ 57,449 $ 57,946
Due after 1 through 5 years ........................... 404,727 413,521
Due after 5 through 10 years .......................... 439,041 453,840
Due after 10 years .................................... 459,034 475,721
Mortgage-backed securities, principally
obligations of U.S. Government agencies............. 1,164,739 1,188,686
------------- -------------
$ 2,524,990 $ 2,589,714
============= =============
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Included in fixed maturities available for sale as of December 31, 1998
and 1997, are below investment-grade securities with an amortized cost of
$177,263 and $165,511 and a fair value of $163,252 and $167,518, respectively.
Included in fixed maturities available for sale as of December 31, 1998, are
unrated securities with an amortized cost of $18,211 and a fair value of
$18,239. Included in fixed maturities available for sale as of December 31, 1997
are unrated securities with an amortized cost and a fair value of $26,563.
As of December 31, 1998, net unrealized appreciation in equity
securities available for sale of $27 consisted of gross unrealized gains of $27.
As of December 31, 1997, net unrealized appreciation in equity securities
available for sale of $173 consisted of gross unrealized gains of $242, less
gross unrealized losses of $69.
The Company's commercial and residential mortgage portfolios had net
carrying values $36,882 and $240,879, respectively, and, fair values of
approximately $38,865 and $248,052, respectively, as of December 31, 1998 and
1997.
As of December 31, 1998, commercial and residential mortgage loan
investments were concentrated in the following states:
<TABLE>
<CAPTION>
Percent of Total
Carrying Value Carrying Value
-------------- ----------------
<S> <C> <C>
Texas............................................... $ 17,885 48.5%
North Carolina...................................... 7,730 21.0
Kansas.............................................. 2,250 6.1
Illinois............................................ 1,926 5.2
Nevada.............................................. 1,805 4.9
Alabama............................................. 1,604 4.3
All other (less than 4% individually)............... 3,682 10.0
---------- -----
$ 36,882 100.0%
========== =====
</TABLE>
Investments with a carrying value of $146,385 and $68,219 were on
deposit with certain regulatory authorities as of December 31, 1998 and 1997,
respectively.
63
<PAGE>
Realized, and changes in unrealized gains and losses on investments
were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Realized gains (losses) on dispositions of investments:
Securities held for investment:
Gross gains from sales........................................ $ -- $ -- $ --
Gross losses from sales....................................... -- -- (28)
Net gains (losses) from redemptions........................... -- -- (105)
----------- ----------- -----------
-- -- (133)
Securities available for sale:
Gross gains from sales........................................ 20,509 22,076 2,562
Gross losses from sales....................................... (5,960) (6,186) (1,800)
Net gains (losses) from redemptions........................... 3 -- (166)
----------- ----------- -----------
14,552 15,890 596
----------- ----------- -----------
Mortgage loans.................................................. (6,545) (284) 794
Other investments............................................... 6,061 1,881 --
----------- ----------- -----------
Net realized gains.......................................... $ 14,068 $ 17,487 $ 1,257
=========== =========== ===========
Change in unrealized gains (losses):
Securities held for investment.................................. $ -- $ (2,429) $ 2,441
=========== =========== ===========
Securities available for sale................................... $ (27,038) $ 44,627 $ (18,250)
Securities available for sale of unconsolidated affiliate....... -- 24,277 (6,045)
Less effect on other balance sheet accounts:
Value of business acquired, deferred acquisition costs and other,
principally unearned revenue on interest sensitive products. 13,270 (26,842) 12,178
Deferred income taxes (benefits).............................. 4,818 (6,490) 1,828
----------- ----------- -----------
Net change in unrealized gains.............................. $ (8,950) $ 35,572 $ (10,289)
=========== =========== ===========
Trading portfolio:
Net gains (losses) from sales................................... $ -- $ (142) $ 4,930
Net change in unrealized gains (losses)......................... -- 1,258 (3,626)
----------- ----------- -----------
Total net trading gains .................................... -- $ 1,116 $ 1,304
=========== =========== ===========
</TABLE>
Major categories of net investment income consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturity securities......................................... $ 310,798 $ 231,867 $ 169,847
Mortgage loans on real estate .................................... 27,773 26,498 11,888
Policy loans ..................................................... 16,235 9,037 8,409
Short-term investments ........................................... 9,016 6,366 12,966
Other investments................................................. 13,553 9,177 13,100
----------- ----------- -----------
Gross investment income ........................................ 377,375 282,945 216,210
Less: investment expenses......................................... 8,323 9,708 5,476
----------- ----------- -----------
Net investment income .......................................... $ 369,052 $ 273,237 $ 210,734
=========== =========== ===========
</TABLE>
64
<PAGE>
The Retained Businesses had non-income producing investments at
December 31, 1998 with an amortized cost and fair value as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Fixed maturities.................................................. $ 6,762 $ 605
Mortgage loans.................................................... 5,018 5,018
Other investments................................................. 6,630 6,630
---------- -----------
$ 18,410 $ 12,253
========== ===========
</TABLE>
(6) SOUTHWESTERN LIFE INVESTMENT
On December 14, 1995, SW Financial (see Notes 18 and 19 of the Notes to
Consolidated Financial Statements) purchased SW Life, Union Bankers and certain
other related assets from I.C.H. Corporation for $260,000.
Through its initial direct investment of $120,000 in SW Financial (the
"Southwestern Life Investment"), the Company beneficially owned, at December 31,
1997 and 1996, 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 is also a 16.3%
limited partner in KB Fund. As a result, the Company had an economic interest in
SW Financial aggregating 78.0 percent. Retained earnings of the Company included
undistributed earnings of SW Financial aggregating $40,919 and $21,947 as of
December 31, 1997 and 1996, respectively.
On August 5, 1997, the Company purchased $40,000 of 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 were included in other investments as
of December 31, 1997. Interest due under the SW Financial Notes is currently set
at 7.0%, per annum.
On January 2, 1998, the Company acquired the SW Financial Controlling
Interest (see Note 3 of the Notes to Consolidated Financial Statements).
(Remainder of Page Intentionally Left Blank)
65
<PAGE>
The Company accounted for its investment in SW Financial utilizing the
equity method for the years ended December 31, 1997 and 1996. The consolidated
condensed results of operations for the years ended December 31, 1997 and 1996
and financial position of SW Financial at December 31, 1997, are provided below:
<TABLE>
<CAPTION>
For the years ended
December 31,
1997 1996
---------- -----------
<S> <C> <C>
Revenues:
Policy revenues..................................................... $ 145,818 $ 196,912
Net investment income............................................... 126,427 128,692
Other income (including limited partnership
distributions of $15,811 in 1996)................................. 16,039 27,439
Net gains from the sale of investments.............................. 1,841 516
---------- -----------
Total revenues............................................... 290,125 353,559
---------- -----------
Benefits and expenses:
Claims incurred..................................................... 201,385 211,460
Change in liability for future policy benefits and
other policy benefits............................................. (35,103) (13,616)
Insurance and other operating expenses.............................. 66,319 92,632
Interest and amortization of deferred debt issuance costs........... 13,773 14,052
---------- -----------
Total benefits and expenses.................................... 246,374 304,528
---------- -----------
Income before income taxes.......................................... 43,751 49,031
Income taxes...................................................... 16,416 18,149
---------- -----------
Net income ......................................................... 27,335 30,882
Preferred stock dividend requirements............................. 3,012 2,754
---------- -----------
Net income applicable to common stock............................... $ 24,323 $ 28,128
========== ===========
December 31,
1997
----
Assets:
Invested assets..................................................................... $ 2,026,768
Insurance assets.................................................................... 114,395
Other assets........................................................................ 283,717
-----------
Total assets........................................................................ $ 2,424,880
===========
Liabilities and Shareholders' Equity:
Insurance liabilities............................................................... $ 1,942,214
Long-term debt...................................................................... 154,750
Other liabilities................................................................... 98,509
Redeemable preferred stock.......................................................... 36,891
Shareholders' equity................................................................ 192,516
-----------
Total liabilities and shareholders' equity ....................................... $ 2,424,880
===========
</TABLE>
66
<PAGE>
(7) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
Information relating to deferred policy acquisition costs is as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance as of January 1......................................... $ 310,117 $ 252,428 $ 185,570
Policy acquisition costs deferred:
Commissions................................................... 86,441 59,238 49,775
Underwriting and issue costs ................................. 42,151 50,244 48,365
Addition due to acquisition, including $171 of unrealized loss 30,606 -- --
----------- ---------- ----------
469,315 361,910 283,710
Policy acquisition costs amortized ............................. (79,291) (44,323) (30,744)
Unrealized investment loss adjustment .......................... (1,213) (2,344) (461)
Foreign currency translation adjustment ........................ (1,038) (1,482) (77)
Reduction due to sale of blocks of business..................... (4,129) (3,644) --
SFAS No. 121 impairment for Businesses Held for Sale............ (191,595) -- --
Amounts transferred to assets of Businesses Held for Sale....... (52,341) -- --
----------- ----------- -----------
Balance as of December 31..................................... $ 139,708 $ 310,117 $ 252,428
=========== =========== ===========
</TABLE>
As a part of the purchase accounting for the Company's acquisitions, a
present value of insurance in force is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows and the rate of
return the Company believes it must earn in order to accept the risks inherent
in realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
The discount rate used to determine such values is the rate of return
required in order to invest in the business being acquired. In selecting the
rate of return, the Company considered the magnitude of the risks associated
with the type of business acquired and actuarial factors described in the
following paragraph, cost of capital available to the Company to fund the
acquisition, compatibility with other Company activities that may favorably
affect future profits, and the complexity of the acquired company.
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur and will
affect the present value of insurance in force amortization rates for insurance
products accounted for under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from Sales of Investments." To the extent that these variances indicate
that future cash flows will differ from those included in the original scheduled
amortization of the present value of insurance in force, future amortization may
be adjusted. Recoverability of the present value of insurance in force is
evaluated annually and appropriate adjustments are then determined and reflected
in the financial statements for the applicable period.
67
<PAGE>
Information related to the present value of insurance in force is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance as of January 1 .......................................... $ 263,889 $ 339,010 $ 283,106
Addition due to acquisition, including $1,235 of unrealized loss.. 58,564 -- 69,077
Accretion of interest ............................................ 4,693 20,371 27,205
Amortization ..................................................... (42,848) (68,094) (52,931)
Transfer to unconsolidated affiliate pursuant to
reinsurance transaction......................................... -- (2,291) --
SFAS No. 121 impairment for Business Held for Sale................ (98,164) -- --
Unrealized investment gain (loss) adjustment ..................... 14,025 (24,444) 12,582
Foreign currency translation adjustment .......................... (333) (663) (29)
Amounts transferred to assets of Businesses Held for Sale......... (25,987) -- --
Reduction due to sale of block of business and other.............. (3,110) -- --
----------- ----------- -----------
Balance as of December 31 ...................................... $ 170,729 $ 263,889 $ 339,010
=========== =========== ===========
</TABLE>
Expected gross amortization of the present value of insurance in force,
based upon current assumptions and accretion of interest at a policy liability
or contract rate ranging from 3.5 to 14.5 percent, for the next five years is as
follows:
<TABLE>
<CAPTION>
Beginning Gross Accretion Net
Balance Amortization of Interest Amortization
------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1999.......................................... $ 170,729 $ 27,757 $ 8,827 $ 18,930
2000.......................................... 151,799 25,078 7,951 17,127
2001.......................................... 134,672 22,372 7,187 15,185
2002.......................................... 119,487 20,347 6,477 13,870
2003.......................................... 105,617 18,653 5,821 12,832
</TABLE>
(8) FUTURE POLICY BENEFITS
The liability for future policy benefits consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life and annuity
products, the liability for future policy benefits is equal to the accumulated
fund value. Fund values are equal to the premium received and interest credited
to the fund value less deductions for mortality costs and expense charges.
Current declared interest rates credited range from 4.0 to 6.75 percent.
Mortality costs and expense charges are established by the Company based upon
its experience and cost structure and in accordance with policy terms.
For traditional life products, the liability for future policy benefits
is based primarily upon Commissioners' Standard Ordinary Tables with interest
rates ranging from 2.5 to 6.0 percent. Fixed benefit products establish a
liability for future policy benefits equal to the excess of the present value of
future benefits to or on behalf of the policyholder over the future net premium
discounted at interest rates ranging primarily from 4.5 to 8.0 percent.
Traditional life products and fixed benefit products future policy benefits may
also be determined using Company experience as to mortality, morbidity and
lapses with a provision for adverse deviation. The Company may vary assumptions
by year of policy issue.
The Company is continually evaluating actuarial assumptions associated
with interest sensitive life insurance contracts in which the determination of
policy reserves is highly sensitive to assumptions such as withdrawal rates,
investment earnings rates, mortality rates, and premium persistency. Currently
reflected in the Company's financial statements are policy reserves and account
values associated with such contracts, which aggregated approximately $525,445
and $504,562 as of December 31, 1998 and 1997, respectively. If developing
trends were to continue, the Company would be required to record additional
reserves or reduce intangible assets, which could have a material impact on the
Company's financial position and results of operations. Management is also
assessing the potential impact of future management actions, which might
mitigate the financial impact of these trends. Type of management actions would
likely include, but 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 treat 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.
68
<PAGE>
Total future policy benefits consist of the following as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Future policy benefits on traditional products:
Traditional life insurance contracts.............................. $ 671,637 $ 527,078
Health............................................................ 10,824 40,628
Unearned premiums................................................. 730 13,359
---------- -----------
683,191 581,065
Interest sensitive products:
Universal life.................................................... 1,441,912 1,968,548
Annuities......................................................... 634,370 527,507
---------- -----------
2,076,282 2,496,055
Policy and contract claims:
Health............................................................ 13,073 119,157
Life and other.................................................... 25,245 24,177
Other policyholder funds.......................................... 69,247 69,471
---------- -----------
Total future policy benefits................................... $2,867,038 $ 3,289,925
========== ===========
</TABLE>
The following table presents information on changes in the liability
for health claims for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Claim liability as of January 1.......................... $ 125,005 $ 130,392 $ 127,078
Less reinsurance recoverables.......................... 5,848 2,242 1,372
----------- ----------- -----------
Net balance as of January 1......................... 119,157 128,150 125,706
----------- ----------- -----------
Addition due to acquisition.............................. 26,229 -- 1,079
----------- ----------- -----------
Add claims incurred during the year related to:
Current year........................................... 116,170 60,727 63,673
Prior years............................................ 31,545 6,344 (6,816)
----------- ----------- -----------
Total claims incurred............................... 147,715 67,071 56,857
----------- ----------- -----------
Less claims paid during the year related to:
Current year........................................... 57,370 28,268 19,057
Prior years............................................ 65,736 47,796 36,435
----------- ----------- -----------
Total claims paid................................... 123,106 76,064 55,492
----------- ----------- -----------
Less reduction for liabilities of Business Held for Sale. 156,922 -- --
----------- ----------- -----------
Net balance as of December 31............................ 13,073 119,157 128,150
Plus reinsurance recoverables.......................... 1,390 5,848 2,242
----------- ----------- -----------
Claim liability as of December 31................... $ 14,463 $ 125,005 $ 130,392
=========== =========== ===========
</TABLE>
As a result of changes in methodology (described below) and estimates
of insured events in prior years, the liability for health policy and contract
claims increased net of reinsurance by $31,545 in 1998 and $6,344 in 1997 and
decreased, net of reinsurance by $6,816 in 1996.
The Company has been closely monitoring the development of claims
reserve experience associated with its Career Sales Division. The methodology
previously utilized has experienced, what appears to be, a deterioration of the
adequacy of its claims reserves associated with disability income products sold
prior to the Company's ownership. During 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 $25,000. 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 year ended December 31,
1998.
69
<PAGE>
(9) NOTES PAYABLE
The outstanding principal amounts of the notes payable consist of the
following as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Unsecured 9 1/4% Senior Subordinated Notes due 2003(a)................ $ 114,646 $ 114,646
Revolving Bank Credit Facility maturing 2002(b)....................... 434,000 242,000
Other................................................................. 2,277 3,109
---------- -----------
$ 550,923 $ 359,755
========== ===========
</TABLE>
--------------
(a) Interest costs under the Unsecured 9 1/4% Senior Subordinated Notes
due 2003 (the "Notes") totaled $10,622, $11,461 and $13,545 during
1998, 1997 and 1996, respectively. As of December 31, 1998, the
effective rate for the Notes was approximately 9 1/4%.
(b) Interest costs under the $450,000 revolving credit facility totaled
$30,680 and $9,188 during 1998 and 1997. The effective rate of
interest as of December 31, 1998 was approximately 8.4%, including
facility fees of 0.75% as of December 31, 1998. During 1997 and 1996,
the Company had a $175,000 revolving credit facility for which it
incurred interest costs of $1,855 and $1,558, respectively.
The aggregate maturities of notes payable during each of the five years
after December 31, 1998, are as follows: 1999, $726; 2000, $728; 2001, $434,666;
2002, $157; and 2003, $114,646.
Covenants and Liquidity. The Notes and the revolving bank credit
agreement (the "Bank Credit Facility") impose certain covenants on the Company,
including covenants restricting the amount of additional indebtedness the
Company may incur, limit its ability to engage in future acquisitions and
certain other business transactions, and the amount of dividends the Company may
declare and pay (see Note 12 of Notes to Consolidated Financial Statements), and
requires the Company to maintain specified financial ratios and meet specified
financial tests. At December 31, 1998, the Company and its subsidiaries were
either in compliance with or had received waivers from all applicable covenants.
On March 30, 1999, the Company entered into an amendment (the
"amendment") to its existing Bank Credit Facility. The amendment provides for
additional covenants and revises certain financial covenants to the Bank Credit
Agreement. In addition, the amendment changes the maturity date of the Bank
Credit Facility to May 2000. Significant additional covenants include the
requirement for the Company to repay indebtedness at specified dates and amounts
throughout 1999, based upon anticipated dates and cash proceeds to be received
from the consummation of the Career Sales Division, Professional and the United
Life Asset sales. The timing and required debt reduction follows:
Date Amount
---- ------
April 30, 1999 $ 40,000
May 31, 1999 127,000
June 30, 1999 70,000
The Company's ability to meet the debt reduction covenants of the Bank
Credit Facility is dependent on being able to consummate the sales of Career
Sales Division, Professional and the United Life Assets (see Note 3 to Notes to
Consolidated Financial Statements) to generate sufficient cash proceeds. Failure
to consummate such transactions could result in action from ratings agencies,
state regulatory agencies, and/or creditors. Based upon current conditions and
circumstances, management intends and believes the Company has the ability to
consummate such sales to generate sufficient cash proceeds to meet the
covenants.
The amendment requires the Company to work with the bank group on
aggregating cash at the parent company level, provide information on asset sale
transactions, obtain the bank's consent to the potential sale of KIVEX and meet
certain cash flow payment requirements from the Surplus Note Companies on
specified dates. In addition, the amendment eliminates the Company's ability to
pay dividends on its common and preferred stock and severely limits ability of
the Company to effectuate the sale of capital securities or to borrow funds
available under the Bank Credit Facility. With respect to borrowings, the
Company may only borrow funds, up to $7,000, for the payment of interest under
the Bank Credit Facility and the Notes subject to certain restrictions. Upon
consummation of the Career Sales Division divestiture, the commitment will be
reduced to $5,000. Finally, the amendment modifies pricing spreads, fees and
other costs associated with the Bank
70
<PAGE>
Credit Facility. Total annualized interest and associated costs with the Bank
Credit Facility are expected to exceed LIBOR based borrowing rates by
approximately 400 basis points.
Projected Cash Sources and Uses in 1999. During 1999, the Company
anticipates receiving approximately $25,200 in the form of principal and
interest payments or dividends and tax sharing payments for the Surplus Note
Companies as a result of the ordinary dividend flow from the Surplus Notes
Companies insurance subsidiaries. In addition, the Company anticipates receiving
principal payments under the surplus debentures as a result of the sales of the
Career Sales Division, Professional and the United Life Assets by the Surplus
Note Companies. Total cash proceeds anticipated by the Company from such sales
aggregates approximately $258,500. The Company anticipates utilizing $237,000 to
repay indebtedness and the remainder of such proceeds to fund interest costs and
operating expenses of the parent company.
The Company's ability to receive principal and interest payments above
$25,200 under the surplus notes is contingent upon the Company's ability to
consummate each of the sales transactions of the Businesses Held for Sale
currently under contract. The Company has currently estimated net cash proceeds
after required debt reduction under the Company's Bank Credit Facility of
$21,100. Such liquidity is necessary for the Company to fund interest payments
under the Bank Credit Facility and the notes and to fund operating expenses of
the Company. Though the Company has the obligation to consummate the sales of
the Businesses Held for Sale and to prepay the loans to certain covenanted
levels, the Company may not have the requisite ability to effectuate the sale as
a result of the restrictive covenants contained in the Amended Bank Credit
Facility. The accessibility of the cash proceeds of the Businesses Held for Sale
are the subject of regulatory approval. While certain regulatory filings with
respect to the sale of the Businesses Held for Sale have been made, not all
filings have been so made and the final structure by which such proceeds will be
upstreamed to the Company have not yet been finalized. The Amended Credit
Agreement provides that the Company and its subsidiaries are limited from
entering into certain mergers, consolidations, amalgamations, liquidations,
winding up or dissolutions, incurring certain indebtedness and liabilities,
making disposition, prepaying certain indebtedness, declaring dividends, or
issuing, redeeming, purchasing, retiring, exchanging or converting capital
securities, in each case with very limited or scheduled exceptions. While the
Company believes it has scheduled or otherwise provided for a great majority of
the possible combinations it will take to effectively upstream the cash proceeds
of the sales of the Businesses Held for Sale, it is not possible to foresee all
combinations. Accordingly, the mechanism to upstream to the Company the
necessary cash to pay the covenanted prepayment under the Amended Credit
Agreement may be subject to the approval of the majority banks which, if not
given, would result in an event of default under the Amended Bank Credit
Agreement. Should the sale transactions not close within specified time periods,
the Company may face difficulty in meeting its existing and estimated cash
obligations and would be in default of certain covenants under the Bank Credit
Facility.
The net proceeds available to the Company from the asset sales may vary
significantly from current estimates as a result of (i) minimum levels of
statutory capital and surplus required to be delivered at closing for certain
insurance subsidiaries, (ii) amounts to be held in escrow, (iii) valuation of
certain consideration to be received by the Company, (iv) the timing of the
closing and (v) various indemnification obligations included in each purchase
and sale agreement. Specifically, the purchase and sale agreement for the Career
Sales Division requires the purchaser to be satisfied with disability claims
reserve liabilities and other active life reserves. The Company has engaged an
actuarial consulting firm to provide analysis to the purchaser regarding such
reserves. The Company is aware of potential deficiencies aggregating
approximately $16,200 in the statutory determination of disability claims
reserves that will likely impact the total consideration the Company is to
receive. The Company and the purchaser have not engaged in discussions to
resolve the disability claims reserve issue. In addition, the purchase and sale
agreement for the United Life Assets requires the Company to purchase certain
residential mortgage loans from United Life, should the loans not meet specified
criteria under the purchase and sale agreement or should United Life not be able
to provide clear title to the loans. The residential loans are part of a
servicing agreement with United Companies Financial Corporation, the "servicer,"
which has recently filed for bankruptcy. The servicer currently maintains within
its control all applicable loan documents. Should the Company be unable to
obtain satisfactory control of all of the applicable documents, the Company's
anticipated net proceeds from the United Life Asset sale could be reduced by
approximately $12,600. Such reduction would have a material impact on the
liquidity of the Company.
As a result of these anticipated actions, management believes the Company
will likely have sufficient financial flexibility and projected liquidity
sources to meet all cash requirements for 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
71
<PAGE>
the indebtedness. In such event, the Company will examine and consider the range
of available alternatives to the Company at that time.
Extraordinary Charges. For the year ended December 31, 1998, the
Company realized an after-tax extraordinary charge of $1,671 which represents
the write-off of the deferred financing costs associated with the refinance of a
SW Financial existing note that the Company assumed as a part of the acquisition
of SW Financial Controlling Interest.
For the year ended December 31, 1996, the Company realized an after-tax
extraordinary charge of $2,372. The charge represents (i) the write-off of $816
of deferred financing costs related to the retirement of certain indebtedness of
the Company and its subsidiaries, and (ii) the write-off of $1,556 of deferred
financing, swap cancellation and other costs related to the repurchase of
approximately $35,354 in principal amount of the Notes.
(10) INCOME TAXES (BENEFITS)
The Company and a number of its non-insurance subsidiaries file a
consolidated federal income tax return. Marketing One and its subsidiaries file
a consolidated federal income tax return. The life insurance subsidiaries file
federal income tax returns with either PLAIC, or Pioneer Security, or
Constitution as the parent of the particular consolidated life insurance company
tax group.
Total income taxes (benefits) were allocated as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes, equity in earnings of
unconsolidated affiliates and extraordinary charge............ $ (3,369) $ 20,375 $ 40,957
Extraordinary charge............................................ (900) -- (1,277)
----------- ----------- -----------
$ (4,269) $ 20,375 $ 39,680
=========== =========== ===========
</TABLE>
The provisions for income tax expense (benefit) attributable to income
(loss) before income taxes, equity in earnings of unconsolidated affiliates and
extraordinary charge are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current U.S....................................................... $ (12,031) $ 3,775 $ (1,285)
Current foreign................................................... 778 3,598 2,319
Deferred U.S...................................................... 10,108 10,984 35,482
Deferred foreign.................................................. (2,224) 2,018 4,441
----------- ----------- -----------
Income tax expense (benefit).................................... $ (3,369) $ 20,375 $ 40,957
=========== =========== ===========
</TABLE>
Taxes (benefits) computed using the federal statutory rate of 35% are
reconciled to the Company's actual income tax expense (benefit) attributable to
income (loss) before extraordinary charge as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense (benefit) computed at statutory rate.................. $ (148,620) $ 18,040 $ 38,702
Dividends received deduction...................................... (268) (1,450) (977)
Amortization of costs in excess of net assets acquired............ 3,678 3,341 3,040
Impairment on assets held for sale................................ 116,886 -- --
Change in valuation allowance..................................... 23,492 (525) (1,265)
Foreign taxes net of U.S. tax benefit............................. (181) 263 1,507
Other............................................................. 1,644 706 (50)
----------- ----------- -----------
Income tax expense (benefit).................................... $ (3,369) $ 20,375 $ 40,957
=========== =========== ===========
</TABLE>
72
<PAGE>
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to the deferred tax
assets and liabilities relate to the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Deferred policy acquisition costs.............. $ -- $ 21,536 $ -- $ 90,151
Present value of insurance in force............ -- 55,248 -- 74,192
Future policy benefits......................... 106,212 -- 62,131 --
Net operating losses........................... 41,081 -- 38,584 --
Foreign and alternative minimum tax credits.... -- -- 22,851 --
Unrealized gain on investment securities....... -- 16,890 -- 20,140
Other.......................................... 35,762 -- 19,133 1,593
---------- ---------- ---------- ----------
183,055 93,674 142,699 186,076
Valuation allowance............................ (44,784) -- (10,367) --
---------- ---------- ---------- ----------
$ 138,271 $ 93,674 $ 132,332 $ 186,076
========== ========== ========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998
and 1997, was $44,784 and $10,367, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1997, was an
increase (decrease) of $23,492 and ($5,525) (including $5,000 that was used in
1997 to reduce costs in excess of net assets acquired), respectively. The 1998
increase in valuation allowance is largely attributable to deferred tax assets
resulting from net operating losses generated by the Company's non-life members.
During 1997, an additional $14,635 increase to the deferred tax asset was used
to reduce costs in excess of net assets acquired related to the Security Life
acquisition as acquisition date tax contingencies were resolved.
In assessing the realization of deferred taxes, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon those
considerations, management has established a valuation allowance for all net
deferred tax assets associated with the non-life insurance members of its group.
Management believes it is more likely than not that the Company will realize the
remaining benefits of these deductible differences, net of the existing
valuation allowance as of December 31, 1998.
The Company's recording of an impairment provision associated with the
Businesses Held for Sale results in a reduction in deferred tax liabilities of
$95,137 related to such assets.
As of December 31, 1998, the Company has life consolidated net
operating loss carryforwards of approximately $97,362 for tax return purposes,
of which $47,813 relates to Retained Businesses, which, if not utilized will
begin to expire in 2005. The Company has life consolidated capital loss
carryforwards of approximately $7,516 of which, $5,792 relates to Retained
Businesses, which, if not utilized, will expire in 2001. In addition, OLIC and
Peninsular have available, on a separate return basis, acquired net operating
loss carryforwards of approximately $10,417. The utilization of acquired net
operating loss carryforwards is limited in any one year to the lesser of (i) the
life insurance group's consolidated taxable income or (ii) the subsidiary's
taxable income computed on a separate return basis. The acquired net operating
loss carryforwards will expire in 2004 and 2005.
As of December 31, 1998, the Company has non-life consolidated net
operating loss carryforwards of approximately $60,860 for tax purposes which, if
not utilized, will begin to expire in 2012.
Under provisions of the Life Insurance Company Tax Act of 1959, certain
special deductions were allowed to life insurance companies for federal income
tax purposes. These special deductions were repealed by the Tax Reform Act of
1984, and the untaxed balances were frozen at their December 31, 1983 levels.
These balances aggregate approximately $42,301 for the Company's life insurance
subsidiaries and are subject to taxation if certain levels of premium income or
life insurance reserves are not maintained, or if the life insurance companies
make excess distributions to shareholders. In addition, on February 1, 1999, the
Clinton administration released its Fiscal Year 2000 Budget which included a
revenue raising provision that would require life insurance companies to include
the balance of these special deductions in income
73
<PAGE>
over a ten year period as of the beginning of the first taxable year starting
after the date of enactment. At this time, it is uncertain whether this
provision will be included in any legislation proposed by Congress, and if
included, whether such provision would be enacted into law. As it is not
currently considered likely that a tax would become due on any such balances, no
deferred income taxes have been provided. However, if such tax were to become
payable, it would amount to approximately $14,805.
The 1996 consolidated life return of Constitution and its subsidiaries
is currently under examination by the Internal Revenue Service. Tax years prior
to 1996 are closed by statute to examination for the Constitution consolidated
life insurance company tax group. The ultimate effect of the current examination
is not known at this time.
(11) COMPUTATION OF EARNINGS (LOSS) PER SHARE
The following is a reconciliation of net income (loss) applicable to
common stock as well as common stock used to compute basic and diluted earnings
(loss) per share for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income (loss) applicable to common stock:
Basic net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge............................................ $ (439,532) $ 30,607 $ 76,013
Redemption of Series C Preferred Stock........................ (1,913) -- --
----------- ----------- -----------
(441,445) 30,607 76,013
Extraordinary charge.......................................... (1,671) -- (2,372)
----------- ----------- -----------
$ (443,116) $ 30,607 $ 73,641
=========== =========== ===========
Diluted net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge............................................ $ (439,532) $ 30,607 $ 76,013
Redemption of Series C Preferred Stock........................ (1,913) -- --
----------- ----------- -----------
(441,445) 30,607 76,013
Common stock equivalents:
Convertible preferred stock dividend requirements........... -- -- 11,788
----------- ----------- -----------
(441,445) 30,607 87,801
Extraordinary charge.......................................... (1,671) -- (2,372)
----------- ----------- -----------
$ (443,116) $ 30,607 $ 85,429
=========== =========== ===========
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Common stock used to compute basic and diluted earnings (loss) per share:
Basic:
Shares outstanding beginning of period............................ 28,860 28,648 22,880
Common stock issuance:
Issuance of 5,131 common shares on March 5, 1996................ -- -- 4,232
Acquisition of United Life (483,839 common shares).............. -- -- 212
Incremental shares applicable to Stock Warrants/Stock Options..... 374 143 74
Acquisition of the Fickes and Stone Knightsbridge Interests....... 346 -- --
Redemption of Series C Preferred Stock............................ 521 -- --
Treasury shares................................................... (1,010) (775) (190)
----------- ----------- -----------
29,091 28,016 27,208
=========== =========== ===========
Diluted:
Shares outstanding beginning of period............................ 28,860 28,648 22,880
Common stock issuance:
Issuance of 5,131 common shares on March 5, 1996................ -- -- 4,232
Acquisition of United Life (483,839 common shares).............. -- -- 212
Incremental shares applicable to Stock Warrants/Stock Options..... 374 772 1,347
Acquisition of the Fickes and Stone Knightsbridge Interests....... 346 -- --
Redemption of Series C Preferred Stock............................ 521 -- --
Treasury shares................................................... (1,010) (775) (190)
Conversion of $3.375 Convertible Preferred Stock at a rate of
2.2123 common shares to 1 preferred share....................... -- -- 5,088
Conversion of $3.50 Series II Convertible Preferred Stock at a
rate of 1.4327 common shares to 1 preferred share............... -- -- 1,704
----------- ----------- -----------
29,091 28,645 35,273
=========== =========== ===========
</TABLE>
(12) COMMON AND PREFERRED STOCK
At December 31, 1998 the Company had 100,000,000 shares of $.01 par
value common stock authorized and 30,072,344 shares issued and outstanding. The
common stock has no preemptive or other subscription rights and there are no
conversion rights, redemption or sinking fund provisions with respect to such
shares.
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 year ended December 31, 1998. Common shares due
Mr. Stone were issued as of December 31, 1998.
During the year ended December 31, 1998, certain employees exercised
stock options and warrants resulting in the issuance of 616,572 shares of the
Company's Common Stock. The result of such exercises was to increase common
stock and additional paid in capital by $2 and $2,014, respectively.
During the year ended December 31, 1998, 83,260 stock options were
exercised and issued to certain employees as discounted restricted common stock
of the Company with vesting periods of three and four years. During the year
ended December 31, 1998, the Company recognized $2,751 of deferred compensation
associated with the issuance of this common stock and $2,267 of compensation
expense. As of December 31, 1998, the balance of deferred compensation was $484
and was recorded as an offset to shareholders' equity.
Associated with the restructuring and the consolidation of all
corporate functions into the Company's Dallas location, certain employees were
severed. For the year ended December 31, 1998, two notes receivable secured by
7,500 shares of common stock were discharged and 88,280 shares of common stock
were abandoned as a result of the severance. The result was to increase treasury
stock, and decrease notes receivable secured by common stock, by $261.
The Company issued 2,875,000 shares of $50 redemption value
(liquidation preference, $50 plus accrued and unpaid dividends) $3.50 Series II
Convertible Preferred Stock (the "Series II Convertible Preferred Stock") on
August 2, 1996. The Series II Convertible Preferred Stock is convertible at the
option of the holder, unless previously redeemed, into 1.4327
75
<PAGE>
shares of common stock for each share, subject to adjustment in certain events.
As of December 31, 1998, the estimated fair value of the Series II Convertible
Preferred Stock, based upon market-maker quotes, was $23,431 or $8.15 per share.
On July 25, 1995, the Company issued 127,500 shares of 10% Series B
Preferred Stock and 178,500 shares of 9% Series C Preferred Stock to fund a
portion of the Security Life purchase price. The Series B Preferred Stock and
the Series C Preferred Stock were mandatorily redeemable on or before June 30,
1997 and June 30, 1998, respectively. On March 15, 1997, the Company redeemed
all of the previously outstanding Series B preferred stock at its stated
redemption value of $14,705. 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 year ended
December 31, 1998.
The Company issued 2,300,000 shares of $50 redemption value
(liquidation preference, $50 plus accrued and unpaid dividends) $3.375
Convertible Preferred Stock (the "Convertible Preferred Stock") on July 14,
1995. The Convertible Preferred Stock is convertible at the option of the
holder, unless previously redeemed, into 2.2124 shares of common stock for each
share, subject to adjustment in certain events. As of December 31, 1998, the
estimated fair value of the Convertible Preferred Stock, based upon active
market quotes, was $20,125 or $8.75 per share.
As of December 31, 1998 and 1997, accrued and unpaid dividends on the
$3.375 Convertible Preferred Stock amounted to $3,558 and $1,617, respectively.
As of December 31, 1998 and 1997, accrued and unpaid dividends on the $3.50
Convertible Preferred Stock amounted to $4,193 and $1,677, respectively.
The Company has suspended the payment of cash dividends on its
outstanding $3.375 Convertible Preferred Stock, $3.50 Series II Convertible
Preferred Stock and Common Stock. Under the amended terms of the Company's Bank
Credit Facility the Company may not pay dividends on its Common Stock or
Preferred Stock issues. Under the terms of the two series of convertible
preferred stock, if dividends are in arrears for six or more quarterly dividend
periods (whether or not consecutive), the holders of the convertible preferred
stock, voting as a single class, will have the right to elect two directors of
the Company. In addition, for as long as there are dividend arrearages on the
convertible preferred stock, the Company will be prohibited from paying
dividends on the Common Stock or purchasing, redeeming or otherwise acquiring
Common Stock.
(13) STOCK OPTIONS AND WARRANTS
The Company has established two management stock option plans, the 1992
Stock Option Plan which set aside up to 475,635 shares for grant and the 1996
Stock Option Plan which set aside up to 2,800,000 shares for grant. Options
granted under the 1992 Stock Option Plan are deemed to be in four equal units
which are earned over four years from the date of grant and are exercisable
during a one-year period immediately following the fourth anniversary of the
date of grant. The 1996 Stock Option Plan allows for awards of stock or options
subject to such terms, conditions, and restrictions, and/or limitations, if any,
as the Stock Option Committee of the Board of Directors deems appropriate.
The Company has also established a senior management warrant award plan
("Warrant Plan"). The Warrant Plan allows for grants to senior executive
officers of PennCorp and Directors of PennCorp who are not executive officers of
the Company. Grant prices are determined based on the average price of the
shares traded on the date of grant. Warrants granted under the Warrant Plan are
determined by the Compensation Committee and are exercisable at such times and
in such amounts as the Compensation Committee shall determine, but no warrant
granted under the Warrant Plan will be exercisable more than ten years after the
date of grant. Upon change of control (as defined) of PennCorp, all outstanding
warrants become immediately vested and exercisable, and any warrants that remain
unexercised shall be canceled and replacement warrants shall be issued by the
surviving entity.
As part of agreements effective July 1998, the Company issued to the
Chairman of the Board of Directors as well as the three senior officers of the
Company, 1,550,000 stock appreciation rights at $3.88 per share. The stock
appreciation rights provide compensation to each individual in an amount equal
to the excess of the fair value of each stock appreciation right over the fair
value of each stock appreciation right at the date of grant. Compensation, if
any, is payable in either shares of common stock of the Company or cash, at the
election of the recipient. As of December 31, 1998, there has been no
compensation expense accrued associated with these stock appreciation rights.
76
<PAGE>
As part of an employment agreement effective August 1990, the Company
issued to a former officer of the Company, warrants to purchase up to 570,760
shares of the common stock of the Company at any time up to 10 years from the
date of the agreement. The warrants are exercisable at a price of $4.00 per
share which was fair value on the date of grant and as such no compensation is
recorded.
The Company has established a U.S. Sales Manager incentive stock option
plan in which the senior sales manager of one of the Company's insurance
subsidiaries may earn stock options in the amount of 275,000 shares over a
five-year period, subject to achieving certain performance goals, in addition to
an initial grant of 100,000 options. Such options are vested immediately as
earned, except for the initial 100,000 which vest in September 1999, and option
prices range from $15 per share, for the initial 100,000 options, to the fair
value of the common stock of the Company on the date of grant for those shares
subject to performance goals and as such no compensation expense is recorded.
The following table summarizes data relating to stock options and
warrants activity and associated weighted average option exercise price
information for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Number of shares subject to option/warrant:
Outstanding at beginning of year..... 3,344,477 $ 21.73 1,984,049 $ 11.56 2,148,599 $ 10.86
Granted.............................. 1,244,072 $ 29.93 1,565,500 $ 32.34 44,000 $ 31.09
Expired/cancelled.................... (542,500) $ 30.11 (46,303) $ 11.41 (59,000) $ 13.82
Exercised............................ (616,572) $ 14.36 (158,769) $ 7.97 (149,550) $ 5.40
---------- ---------- ---------
Outstanding at end of year ........ 3,429,477 $ 24.70 3,344,477 $ 21.73 1,984,049 $ 11.56
========== ========== =========
Exercisable at end of year.............. 2,649,446 $ 22.47 2,037,067 $ 15.38 1,808,207 $ 11.40
========== ========== =========
Available for future grant at end of year 726,292 1,488,460 2,792,000
========== ========== =========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options and warrants as of December 31, 1998:
<TABLE>
<CAPTION>
Options/Warrants Outstanding Options/Warrants Exercisable
-------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 4.00- $ 4.00 570,760 1.64 $ 4.00 570,760 $ 4.00
$15.00- $23.50 647,500 3.80 $ 16.59 587,500 $ 15.96
$27.25- $38.40 2,211,217 1.67 $ 31.45 1,490,561 $ 32.11
----------- -----------
3,429,477 2,648,821
=========== ===========
</TABLE>
(Remainder of Page Intentionally Left Blank)
77
<PAGE>
As allowed under the provisions of SFAS No. 123, the Company utilizes
APB Opinion No. 25 and related Interpretations in accounting for its stock
option and warrant plans and, accordingly, does not recognize compensation cost
based on fair value as a component of net income applicable to common stock. If
the Company had elected to recognize compensation cost based on the fair value
of the options and warrants as of the grant date, estimated utilizing the Black-
Scholes multiple options approach prescribed by SFAS No. 123, the Company's net
income (loss) applicable to common stock as well as earnings (loss) per share
would have been reduced by the pro forma amounts indicated in the following
table:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income (loss) applicable to common stock:
Basic net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge (as reported)............................. $ (439,532) $ 30,607 $ 76,013
Redemption of Series C Preferred Stock....................... (1,913) -- --
----------- ----------- -----------
(441,445) -- 76,013
Extraordinary charge......................................... (1,671) -- (2,372)
----------- ----------- -----------
Net income (loss) applicable to common
stock (as reported)..................................... (443,116) 30,607 73,641
Pro forma compensation expense, net of tax benefits.......... (3,316) (10,229) (287)
----------- ----------- -----------
Net income (loss) applicable to common stock (pro forma) $ (446,432) $ 20,378 $ 73,354
=========== =========== ===========
Diluted net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge (as reported)............................ $ (439,532) $ 30,607 $ 76,013
Redemption of Series C Preferred Stock....................... (1,913) -- --
----------- ----------- -----------
(441,445) 30,607 76,013
Common stock equivalents:
Convertible preferred stock dividend requirements......... -- -- 11,788
----------- ----------- -----------
(441,445) 30,607 87,801
Extraordinary charge......................................... (1,671) -- (2,372)
----------- ----------- -----------
Net income (loss) applicable to common
stock (as reported)..................................... (443,116) 30,607 85,429
Pro forma compensation expense, net of tax benefits.......... (3,316) (10,229) (287)
----------- ----------- -----------
Net income (loss) applicable to common stock (pro forma) $ (446,432) $ 20,378 $ 85,142
=========== =========== ===========
Per share information:
Basic net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge (as reported)............................. $ (15.17) $ 1.09 $ 2.79
Extraordinary charge......................................... (0.06) -- (0.09)
----------- ----------- -----------
Net income (loss) applicable to common
stock (as reported)..................................... (15.23) 1.09 2.70
Pro forma compensation expense............................... (0.11) (0.37) (0.01)
----------- ----------- -----------
Net income (loss) applicable to common stock (pro forma) $ (15.34) $ 0.72 $ 2.69
=========== =========== ===========
Common shares used in computing basic earnings (loss) per share.... 29,091 28,016 27,208
=========== =========== ===========
Diluted net income (loss) applicable to common stock:
Net income (loss) applicable to common stock before
extraordinary charge (as reported)............................. $ (15.17) $ 1.07 $ 2.16
Common stock equivalents:
Convertible preferred stock dividend requirements......... -- -- 0.33
Extraordinary charge......................................... (0.06) -- (0.07)
----------- ----------- -----------
Net income (loss) applicable to common
stock (as reported)..................................... (15.23) 1.07 2.42
Pro forma compensation expense............................... (0.11) (0.36) (0.01)
----------- ----------- -----------
Net income (loss) applicable to common stock (pro forma) $ (15.34) $ 0.71 $ 2.41
=========== =========== ===========
Common shares used in computing diluted earnings (loss) per share 29,091 28,645 35,273
=========== =========== ===========
</TABLE>
78
<PAGE>
The fair value of each option and warrant grant used to determine the
pro forma amounts indicated in the previous table is estimated on the date of
grant using the following weighted average assumptions for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average risk-free interest rate.......................... 6.06% 6.34% 6.62%
Weighted average dividend yields.................................. --% --% --%
Volatility factors................................................ 0.83 .61 .61
Weighted average expected life (years)............................ 1.90 4.50 5.00
Weighted average fair value per share............................. $ 15.02 $ 15.67 $ 18.57
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options having no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
As employee stock options and warrants have characteristics significantly
different from those of traded options, and because changes in subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of employee stock options and warrants. As SFAS No. 123 is effective
only for awards granted after January 1, 1995, the pro forma disclosures
provided above may not be representative of the effects on reported net income
for future years.
(14) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Cash generated by the Company's insurance subsidiaries is made
available to PennCorp principally through periodic payments of principal and
interest on surplus debentures issued by PLAIC, Constitution and Pioneer
Security (collectively, the "Surplus Note Companies"). The amounts outstanding
under the surplus debentures totaled $453,118 and $358,346 as of December 31,
1998 and 1997, respectively. These surplus debentures generally require (subject
to availability of statutory capital and surplus and in some instances,
regulatory approval) principal and interest payments to be made quarterly.
Dividend payments by the Company's insurance subsidiaries are limited
by, or subject to the approval of the insurance regulatory authority of each
subsidiary's state of domicile. Such dividend requirements and approval
processes vary significantly from state to state. In 1999, the Company's
retained insurance subsidiaries, subject to availability of cash, statutory
capital and surplus and regulatory approval, will be able to pay a maximum of
$25,848 in dividends to the Surplus Note Companies (including SW Financial).
Statutory capital and surplus of the Company's life insurance
subsidiaries as reported to regulatory authorities at December 31, 1998 and
1997, totaled $399,766 and $299,062, respectively. Statutory net income (loss)
of the Company's life insurance subsidiaries as reported to regulatory
authorities totaled ($44,563), $18,776 and ($28,600) for the years ended
December 31, 1998, 1997 and 1996, respectively. Surplus note interest expense of
$40,531, $34,758 and $51,254 for the years ended December 31, 1998, 1997 and
1996, respectively, is included in statutory net income (loss).
For the years ended December 31, 1998 and 1999 PLIC has received a
permitted statutory accounting practice allowing PLIC to utilize its own
experience and other modification factors in the determination of statutory
disability income claims reserves. If PLIC were to utilize the model regulation
for the determination of disability income claims reserves, management estimates
that the amount of additional statutory claims reserves necessary to be recorded
would be approximately $16,200. If PLIC were to record such additional reserves
on a statutory basis, its risk based capital would be reduced significantly
which in turn could lead to regulatory action. For the year ended December 31,
1999, PLIC will be required, in the event of the non-completion of the Career
Sales Division divestiture, to increase its disability claims reserves by
approximately $5,300 and receive capital contributions of at least $5,300 to
offset such reserve increases.
In December 1992, the NAIC adopted the RBC for Life and/or Health
Insurers Model Act (the "Model Act"). The main purpose of the Model Act is to
provide a tool for insurance regulators to evaluate the capital of insurers with
respect to the risks assumed by them and determine whether there is a need for
possible corrective action with respect to them. To date, either the Model Act
or similar legislation or regulation has been adopted in all the domiciliary
states of the Company's insurance subsidiaries.
Calculations using the NAIC formula and the life insurance
subsidiaries' statutory financial statements as of December 31, 1998, indicate
that each of the insurance subsidiaries' capital exceeded RBC requirements,
except for PLIC (see Note 20 of Notes to Consolidated Financial Statements).
79
<PAGE>
(15) RETIREMENT AND PROFIT SHARING PLANS
During 1998, the Company implemented SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits." This accounting
standard revised the disclosure requirements for pensions and other
postretirement benefit plans, but does not change the measurement or financial
statement recognition of such plans.
On October 1, 1990, the Company established the PennCorp Financial,
Inc. Retirement and Savings Plan, a defined contribution retirement plan, for
eligible employees. This plan and the Marketing One Incorporated 401(k) Profit
Sharing Plan merged with the Southwestern Financial Services Corporation Savings
Investment Plan effective January 1, 1998 and the name of the plan was changed
to the PennCorp Financial Group, Inc. Retirement and Savings Plan ("the PennCorp
Plan"). Employees are eligible to participate in the plan after six months of
employment in which they are credited with 500 hours of service. Participants
may contribute from 1 to 15% of pre-tax compensation and/or from 1 to 10% of
after tax compensation. Each employer participating in the plan matches each
pay-period, 50% of pre-tax contributions up to 6% of compensation. If approved
by the Board of Directors, each employer may make a discretionary profit sharing
contribution annually on behalf of employees eligible to participate in the plan
based on their compensation for the prior plan year. Employee contributions are
fully vested at all times. The employer matching contributions made for
employees who participated in the PennCorp Plan prior to January 1, 1998 vest at
the rate of 50% per calendar year of service. The employer matching
contributions made for all other participants and the employer discretionary
contribution vests at the rate of 20% per year of service. All participants are
fully vested at death, disability or attainment of age 65. The assets of each
account are invested at the direction of the participant. Eleven funds with
various investment objectives are available to the participants. Distributions
are normally made in a lump sum. Participants of the PennCorp Plan prior to
January 1, 1998 may elect to receive an annuity in various forms of payment.
Expenses related to this plan for years ended December 31, 1998, 1997 and 1996
amounted to $3,341, $1,483 and $1,520.
The Company has an established bonus plan for insurance subsidiary
officers. The amount available to pay awards for any year is determined by a
committee of senior executives of the Company and is subject to the review and
recommendation of the Compensation Committee and approval of the Board of
Directors of the Company. Awards are based primarily on the achievement of
specified operating objectives and the performance of eligible participants. The
Company accrued or paid $3,390, $1,417 and $1,144 under this plan during the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company and, through its wholly-owned subsidiary, SW Financial (as
a result of the acquisition of the SW Financial Controlling Interest, see Note 3
of Notes to Consolidated Financial Statements), provide certain postretirement
benefits to eligible retirees. The plans provide certain health care and life
insurance benefits for retired employees. Employees meeting certain age and
length of service requirements become eligible for these benefits. The Company's
obligation for accrued postretirement benefits is unfunded. Following is an
analysis of the accumulated benefit obligation and the liability for accrued
postretirement benefits for the year ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Benefit obligation at beginning of year........................... $ 10,380 $ 11,059
Service cost...................................................... 184 --
Interest cost..................................................... 1,533 789
Plan participants' contributions.................................. 364 65
Actuarial (gain) loss............................................. 1,975 (478)
Acquisition....................................................... 14,827 --
Benefit paid...................................................... (2,661) (1,055)
---------- -----------
Benefit obligation at end of year.............................. $ 26,602 $ 10,380
========== ===========
</TABLE>
The liability for accrued benefit obligation includes the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Accumulated benefit obligation.................................... $ 26,602 $ 10,380
Unrecognized prior service cost................................... 162 216
Unrecognized transition obligation................................ (5,185) (4,202)
Unrecognized actuarial loss....................................... 827 3,502
---------- -----------
Benefit obligation at end of year.............................. $ 22,406 $ 9,896
========== ===========
</TABLE>
80
<PAGE>
Components of net periodic benefit cost include the following for the
year ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Service cost...................................................... $ 130 $ --
Interest cost..................................................... 1,533 789
Amortization of transition obligation............................. 657 288
Recognized net actuarial loss..................................... (108) (147)
---------- -----------
Net periodic benefit cost...................................... $ 2,212 $ 930
========== ===========
</TABLE>
At December 31, 1998, the accumulated benefit obligation and the
liability for accrued postretirement benefits included $4,717 and $933,
respectively, related to Businesses Held for Sale.
For measurement purposes, an annual rate increase ranging from 5.5% to
7% in the health care cost trend rate was assumed for 1998; the rate was assumed
to decrease gradually to 4% by year 2015 and remain at that level thereafter.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation ranged from 6.5% to 7.5%. The health care cost
trend rate assumption has a significant effect on the amounts reported. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
One One
Percentage Percentage
Point Point
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components............. $ 121 $ (104)
Effect on postretirement benefit obligation......................... 1,544 (1,331)
</TABLE>
(16) ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
As a result of the Company's announcement of its decision to sell the
Career Sales Division, KIVEX, Professional, United Life, UC, Cyberlink and
Marketing One within a period not likely to exceed one year, the assets and
liabilities of the Career Sales Division, KIVEX, Professional, United Life, UC,
Cyberlink and Marketing One were reported as "Assets of Businesses Held for
Sale" and "Liabilities of Businesses Held for Sale" at December 31, 1998 in the
accompanying consolidated balance sheet (see Note 3 of Notes to Consolidated
Financial Statements). The assets and liabilities of Businesses Held for Sale at
December 31, 1998 were as follows:
Invested assets................................................... $ 1,974,280
Insurance assets.................................................. 329,950
Other assets...................................................... 117,574
-----------
Total assets.................................................... $ 2,421,804
===========
Insurance liabilities............................................. $ 1,853,163
Other liabilities................................................. 213,391
-----------
Total liabilities............................................... $ 2,066,554
===========
For the year ended December 31, 1998 the Company recorded the
impairment provision aggregating $342,960. In accordance with SFAS No. 121, the
Company recorded an impairment provision in order to reflect the difference in
the Company's accounting basis in the Businesses Held for Sale and the fair
value of the consideration that the Company would be likely to receive for such
businesses. The fair value of the consideration likely to be received is based
primarily upon the terms of definitive sales agreements. The impairment
provisions for the Career Sales Division, Professional and the United Life
Assets were $328,584, $3,263 and $11,113, respectively. The Company will
continue to evaluate the terms and conditions of the definitive agreements
relative to its accounting basis in the Businesses Held for Sale and, as a
result, may need to reflect additional impairment provisions prior to ultimate
disposition of the Businesses Held for Sale.
81
<PAGE>
(17) PRO FORMA FINANCIAL INFORMATION
The following unaudited selected pro forma financial information has
been prepared to illustrate the pro forma effects of the purchase of the SW
Financial Controlling Interest as well as the Fickes and Stone Knightsbridge
Interests and the sales of Career Sales Division, KIVEX, Professional, United
Life, UC, Cyberlink and Marketing One. The pro forma statements of operations
for the years ended December 31, 1998 and 1997 give effect to such purchases and
sales as if they had occurred on January 1, 1997. The unaudited selected pro
forma financial information has been prepared for comparative purposes only and
does not purport to be indicative of what would have occurred had such purchases
and sales been made as of January 1, 1997, or results which may occur in the
future.
<TABLE>
<CAPTION>
(Unaudited)
As Reported Pro Forma
1998 1998
---------- -----------
(In thousands, except
per share amounts)
<S> <C> <C>
Total revenues...................................................... $ 879,995 $ 449,868
Income (loss) before extraordinary charge........................... (421,259) (66,328)
Income (loss) before extraordinary charge applicable to common stock (439,532) (84,601)
Per share information:
Net income (loss) before extraordinary charge applicable
to common stock-basic.......................................... $ (15.17) $ (2.97)
Net income (loss) before extraordinary charge applicable
to common stock-diluted........................................ (15.17) (2.97)
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
As Reported Pro Forma
1997 1997
---------- ----------
(In thousands, except
per share amounts)
<S> <C> <C>
Total revenues...................................................... $ 663,794 $ 490,564
Income (loss) before extraordinary charge........................... 50,140 (16,863)
Income (loss) before extraordinary charge applicable to common stock 30,607 (36,396)
Per share information:
Net income (loss) before extraordinary charge applicable to
common stock-basic............................................. $ 1.09 $ (1.30)
Net income (loss) before extraordinary charge applicable to
common stock-diluted........................................... 1.07 (1.27)
</TABLE>
(18) RELATED PARTY TRANSACTIONS
Related party transactions described herein include those transactions
not included elsewhere in the Notes to Consolidated Financial Statements.
On September 1, 1997, the Company, through its insurance subsidiaries,
purchased $25,000 of ACO Acquisition Corp. (subsequently re-named Acordia, Inc.
("Acordia") subordinated indebtedness and the Company purchased $20,000 of ACO
Brokerage Holdings Corporation ("ACO"), an affiliate of Acordia, preferred
stock. The Acordia subordinated notes pay interest on a current basis at 12.5%,
per annum, payable in semi-annual installments. Acordia was 28.6% owned by KB
Investment Fund I, LP (formerly Knightsbridge Capital Fund I, L.P.) (the "KB
Fund"). PennCorp received fees aggregating $1,100 in 1997 from Acordia for its
underwriting and participation in the subordinated notes and preferred stock
offering. Knightsbridge Management, L.L.C. ("KM") received sponsor fees and
other fees aggregating $1,714 in 1997 from Acordia for its role in consummating
the Acordia acquisition.
During 1998 the Company liquidated its common and preferred stock
holdings in ACO. Total proceeds received from the sale of the preferred and
common stock aggregated $30,500. The Company- had acquired the common stock
interest in January 1998 for $5,000 as part of the Company's and the KB Capital
Fund I investment in ACO.
82
<PAGE>
The Company owns 66,555 shares of redeemable preferred stock of
Portsmouth Financial Group, Inc. ("Portsmouth") with a carrying value of $6,656.
Southwestern Life may, subject to regulatory approvals, make up to a $10,000
preferred equity investment in Portsmouth. The preferred stock pays dividends of
18.0% of which 12% is in cash with the remainder in the form of additional
preferred stock. The shares are mandatorily redeemable in June 30, 2002.
Portsmouth underwrites, acquires and holds to receipts of benefits, life
insurance contacts covering individuals facing terminal illnesses.
Portsmouth is owned by KB Fund and its affiliates.
As of December 31, 1998, the Company invested a total of $12,641 in
transactions sponsored by Wand Partners L.L.C. ("Wand Partners") in which a
director of the Company is a managing member. The Company has committed to
invest up to an additional $11,393 in future transactions sponsored by Wand
Partners.
For the years ended December 31, 1997 and 1996, PennCorp paid or
accrued $2,385 and $2,548 in transaction fees and expenses to KM related to the
Washington National, United Life and SW Financial transactions, respectively.
During 1997 and 1996, certain of the Company's affiliates and subsidiaries paid
management fees to KM amounting to $5,325 and $3,333, respectively. SW Financial
and United Life incurred KM investment advisory fees totaling $4,358 and $2,426
during 1997 and 1996, respectively. In addition during 1996, PennCorp received a
$1,000 stand-by commitment fee from SW Financial for contingent financing on a
real estate transaction. SW Financial did not draw upon the commitment which has
expired.
During 1998 and 1997, the Company's insurance subsidiaries paid
management and commitment fees aggregating $718 and $444, respectively, to
investment funds managed by a member of the Board of Directors.
Certain individuals, who are shareholders and directors of PennCorp,
and affiliates of these individuals, provide services to the Company. During
1997 and 1996, payments aggregating $250 and $250, respectively, were made to
these individuals and their affiliates for services provided in connection with
the Company's acquisition activity.
(19) OTHER COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $5,299,
$5,178 and $8,416 in 1998, 1997 and 1996, respectively.
Minimum lease commitments for the Retained Businesses are:
1999.............................................................. $ 3,821
2000.............................................................. 2,690
2001.............................................................. 2,676
2002.............................................................. 2,521
2003.............................................................. 2,375
2004 and thereafter............................................... 2,242
-----------
Total minimum payments required................................ $ 16,325
===========
In January 1996, stockholder derivative lawsuits styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al and the PennCorp Financial
Group, Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J.
Stone et al, and the PennCorp Financial Group, Inc., C. A. No. 14795 (the
"Miller Complaint") were filed against the Company and each of its directors,
individually, in the Delaware Court of Chancery. The complaint in the Miller
suit was never served on the Company or the other defendants. Both suits allege
that the SW Financial Investment involved the usurpation of a corporate
opportunity and a waste of the Company's assets by Messrs. Stone and Fickes, and
that the directors of the Company in approving that transaction, failed to act
in good faith and breached their fiduciary duties, including the duty of loyalty
to the Company and its stockholders, having favored the interests of Messrs.
Stone and Fickes over the Company and its stockholders. These lawsuits sought
judgments against each of the defendants for the amount of damages sustained, or
to be sustained, by the Company as a result of the breaches of fiduciary duty
alleged in the complaint, the imposition of a constructive trust for the benefit
of the Company on profits or benefits obtained by any defendant through the
alleged breaches of fiduciary duty, attorney's fees and costs, and such other
relief as the court determines to be just, proper or equitable.
The defendants and the plaintiffs' counsel entered into a stipulation
of settlement on March 28, 1997 (the "Original Proposed Settlement"). The
Original Proposed Settlement consisted of the following principal elements: (i)
Messrs. Stone and Fickes will cancel the 335,564 SW Financial common stock
warrants they hold for no consideration enabling PennCorp
83
<PAGE>
to purchase the SW Financial Controlling Interest for $67,500, reducing the
price to be paid by PennCorp for the SW Financial Controlling Interest by
approximately $2,000, (ii) the PennCorp Board will proceed with the purchase of
The Fickes and Stone Knightsbridge Interests, having received a fairness opinion
of a nationally recognized investment banking firm with respect to the price to
be paid for The Fickes and Stone Knightsbridge Interests, (iii) the PennCorp
Board will proceed with the acquisition of the SW Financial Controlling
Interest, having received a fairness opinion of a nationally recognized
investment banking firm with respect to the price to be paid for the SW
Financial Controlling Interest, (iv) the PennCorp Board will submit the
purchases of The Fickes and Stone Knightsbridge Interests and the SW Financial
Controlling Interest to a shareholder vote of a majority of the PennCorp
stockholders present at a meeting and entitled to vote, and stockholders must
approve both transactions, (v) Messrs. Stone and Fickes will abstain from voting
on the proposals to approve the purchase of The Fickes and Stone Knightsbridge
Interests and the SW Financial Controlling Interest, and (vi) the plaintiffs'
counsel will be entitled to conduct confirmatory discovery.
On December 1, 1997, the defendants and the plaintiffs' counsel agreed
in principle to amend the Original Proposed Settlement (as so amended, the
"Amended Proposed Settlement") following the PennCorp Board's conclusion that it
would be appropriate to increase the amount paid to the KB Fund for the SW
Financial Controlling Interest to compensate the limited partners for, among
other things, the unexpected and substantial delay in the consummation of the
purchase of the SW Financial Controlling Interest. The terms of the Amended
Proposed Settlement are identical to the terms of the Original Proposed
Settlement, except that the Amended Proposed Settlement provides that the
Company will acquire the SW Financial Controlling Interest for $73,658, and will
provide a one-time "price protection" payment associated with a disposition of
the SW Financial Controlling Interest by PennCorp during the 12-month period
ending November 25, 1998. The Amended Proposed Settlement also requires Messrs.
Stone and Fickes to grant PennCorp a price protection right in the event of a
sale of their Portsmouth investment.
The Amended Proposed Settlement was subject to approval by the Chancery
Court after notice to PennCorp stockholders. As discussed above, Messrs. Stone
and Fickes agreed that, if the Amended Proposed Settlement was approved by the
Chancery Court, they would cancel their SW Financial common stock warrants and
they would not participate in the increased consideration (other than the
possible price protection right) for the SW Financial Controlling Interest to
the extent it relates to their $7,000 personal investment in SW Financial, which
together would reduce the price to be paid by PennCorp for the SW Financial
Controlling Interest by approximately $3,667. Because the Knightsbridge
restructuring would have the effect of substantially eliminating potential
future conflicts of interest between Messrs. Stone and Fickes and PennCorp, and
because the Amended Proposed Settlement would have the effect of reducing the
price paid for the SW Financial Controlling Interest and would obviate the need
to expend considerable management and director time to litigate the actions, the
PennCorp Board determined that the Amended Proposed Settlement was in the best
interests of PennCorp and its shareholders and conferred a substantial economic
benefit on PennCorp. Accordingly, the PennCorp Board authorized the payment to
plaintiffs' counsel of legal fees of $785 and documented expenses not to exceed
$50 in connection with the lawsuits and the related settlement negotiations.
The Amended Proposed Settlement was approved by the Chancery Court on
May 12, 1998. The time period for filing an appeal had expired and the Company
paid $835 to plaintiffs counsel representing fees of $785 and documented
expenses of $50.
On August 25, 1998, the first of ten class-action complaints were filed
in the United States District Court for the Southern District of New York
against the Company and certain of its current or former directors and officers.
During a pre-trial conference on November 9, 1998, all parties agreed
to the consolidation of all of the actions and the Court appointed lead
plaintiffs on behalf of shareholders and noteholders. The Court also approved
the selection of three law firms as co-lead counsel for shareholders and
noteholders. Pursuant to a schedule agreed to at the conference, a consolidated
and amended complaint was filed on January 22, 1999. A First Consolidated
Amended Class Action Complaint naming, as defendants, the Company, David J.
Stone, formerly Chairman and Chief Executive Officer, and Steven W. Fickes,
formerly President and Chief Financial Officer was filed on March 15, 1999 (the
"Complaint").
The Complaint alleges that defendants violated the Securities Exchange
Act of 1934. Among other things, plaintiffs' claim that defendants issued a
series of materially false and misleading statements and omitted material facts
regarding the Company's financial condition, including the value of certain of
its assets, and failed to timely disclose that it was under investigation by the
Securities and Exchange Commission (the "SEC").
84
<PAGE>
Plaintiffs seek to recover damages in unspecified amounts on behalf of
themselves and all other purchasers of the Company's common stock and purchasers
of the Company's subordinated notes during the period of February 8, 1996
through November 16, 1998.
During a conference on March 19, 1999, defendants sought and were
granted permission to file a motion to dismiss the Complaint. Although there are
not assurances that the motion to dismiss will be granted, management believes
that there are meritorious defenses to the action that will be raised in
connection with the motion, including whether the Complaint adequately pleads
scienter (i.e., intent to defraud) as required under the Private Securities
Litigation Reform Act of 1995.
The Company has notified its primary and excess carriers of directors
and officers liability insurance of the existence of the claims set forth in the
Complaint, and the total potential insurance available is $15,000 of primary and
$10,000 of excess coverage, respectively, for securities claims. The primary
insurance coverage requires the Company to bear 25% of all expenses and any
losses in excess of the $1,000 retention amount. The primary and excess carriers
have reserved their rights under the policies with respect to coverage of the
claims set forth in the Complaint.
The Company expects that this litigation will not affect its ability to
operate through December 31, 1999. While it is not feasible to predict or
determine the final outcome of these proceedings or to estimate the amounts or
potential range of loss with respect to these matters, management believes that
if there is an adverse outcome with respect to such proceedings it would have a
material adverse impact on the Company and affect its ability to operate as is
currently intended.
On July 30, 1998, the SEC notified the Company that it has commenced a
formal investigation into possible violations of the federal securities laws
including matters relating to the Company's restatement of its financial
statements for the first nine months of 1997, and for the years ended December
31, 1994, 1995 and 1996. The Company and its management are fully cooperating
with the SEC in its investigation.
The Company is a party to various other 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.
In May 1998, the North Carolina Attorney General's Office (the "NCAG")
initiated an inquiry concerning certain life insurance products historically
sold by Security Life and representations allegedly made by Security Life's
agents and officers with respect to not changing insurance charges after the
eighth policy year for non-smoker insureds. The NCAG indicated that Security
Life may be estopped to change its current practice of not charging the cost of
the insurance because of certain representations made by agents and officers of
Security Life. Although Security Life has not charged the cost of insurance
charges for non-smoker policyholders who recently reached their ninth policy
year, this practice is not guaranteed under the life insurance contracts. The
contracts specifically allow Security Life the right to change the cost of
insurance rates in accordance with the parameters set forth in the insurance
contracts. Security Life has responded to the NCAG's inquiry by denying that it
is estopped from changing the cost of insurance rates based on the alleged
representations, and continuing to reserve its contractual rights to change the
cost of insurance rates in accordance with the parameters set forth in the
insurance contracts. In June 1998, the NCAG informed Security Life that it could
not adjudicate this matter and left it mutually unresolved. No further
communications from the NCAG have been received to date. The Company has
initiated an exchange program which enables policyholders of such life insurance
products to terminate their policies and obtain either (i) the refund of all
premiums paid and other consideration or (ii) another Security Life product. See
Item 1. Business -- Regulatory Matters. There can be no assurances that the
exchange program will be successful or that the Company will resolve these
matters on such life insurance product on a satisfactory basis, or at all, or
that any such resolution would not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
In connection with a 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 a
newly-formed leveraged entity. Discussions have also been held relating to
equity incentive programs based on sales production and persistency measures.
Additionally, the Company has held discussions with a marketing organization,
which it has contracted with for the development and marketing of products
focused on the senior marketplace, concerning the issuance of equity in the
newly-formed leveraged entity based on a percentage of profits contributed by
such marketing organization. In connection with the Company's definitive
agreement to sell the Career Sales Division and related assets to Universal
American, the sales force of Penn Life and the marketing organization will
receive equity in Universal American and will participate in certain equity
incentive programs of Universal
85
<PAGE>
American. A portion of the proceeds to be received by the Company from Universal
American for the sale of the Career Sales Division will be used to fund the
equity of Universal American to be issued to the sales force of Penn Life and to
make certain other payments to the sales force in exchange for a release
relating to the potential leveraged buyout. If the Company does not consummate
its transaction with Universal American, then it 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 life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. Assessments from guaranty associations, which have
not been material, are recorded as assessments when received.
In May 1998, the three senior executive of the Company entered into two
year employment agreements with the Company which have various annual bonus and
termination provisions. For the year ended December 31, 1998, the Company has
accrued compensation expense of $1,800 and $3,036 for the annual bonus and
termination provisions, respectively, of these employment agreements.
Termination provisions are payable upon the expiration of the employment
agreement or termination by the officer for "good reason" as defined in the
employment agreement.
Many computer and software programs were designed to accommodate only two
digit fields to represent a given year (e.g. "98" represents 1998). It is highly
likely that such systems will not be able to accurately process data containing
date information for the year 2000 and beyond. The Company is highly reliant
upon computer systems and software as are many of the businesses with which the
Company interacts. The Company's ability to service its policyholders and agents
is dependent upon accurate and timely transaction processing. Transaction
processing in turn is dependent upon the Company's highly complex interdependent
computer hardware, software, telecommunications and desktop applications. The
inability of the Company or any of its integral business partners to complete
year 2000 remediation efforts associated with these highly complex and
interdependent systems could lead to a significant business interruption. Such
an interruption could result in a decline in current and long-term profitability
and business franchise value.
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 developed various
contingency plans associated with remediation tasks which the Company believes
are at a higher risk for potential failure.
The Company has provided certain assurances to each respective purchaser of
the Businesses Held for Sale with respect to each entity's ability to process
date-sensitive information for the year 2000 and beyond. Although the Company
believes that it will be able to meet the year 2000 representations and
warranties provided to the respective purchasers, there can be no assurances.
Failure of the Company to meet such representations and warranties could result
in a decision by the purchaser not to consummate the transaction and/or
indemnification claims for breach of contract.
The Company has outstanding commitments to invest up to $7,600 in various
unaffiliated limited partnership funds and other investments.
The Company has a contingent obligation for mortgage loans previously sold
aggregating $5,905 as a result of the Company acting as a servicing conduit.
(20) REINSURANCE
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$500 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis. The Company cedes varying
amounts of certain accident and sickness policies up to a maximum cession of
$800, as well as varying portions of certain disability income policies on a
facultative basis.
On September 30, 1998, PLIC entered into a financial reinsurance agreement
with an unaffiliated reinsurer to coinsure certain in force individual life and
health business written or acquired by PLIC prior to January 1, 1998. Such
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<PAGE>
reinsurance provided PLIC with approximately $20,000 of additional statutory
capital and surplus allowing it to maintain its RBC at the "Company Action
Level" for the year ended December 31, 1998.
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The Company
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The effect of reinsurance on
policy revenues earned is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Direct policy revenues and amounts assessed
against policyholders........................................... $ 586,317 $ 375,538 $ 358,825
Reinsurance assumed............................................... 6,018 2,527 1,320
Reinsurance ceded................................................. (133,177) (32,499) (12,055)
----------- ----------- -----------
Net premiums and amounts earned................................. $ 459,158 $ 345,566 $ 348,090
=========== =========== ===========
Policyholder benefits ceded....................................... $ 109,079 $ 33,612 $ 35,868
=========== =========== ===========
</TABLE>
Fees incurred for financial reinsurance were approximately, $675 in
1998, $145 in 1997, and $265 in 1996.
(21) RESTRUCTURING AND OTHER COSTS
As a result of the tremendous growth of the Company and the
diversification of the underlying business units resulting from acquisition over
time, the Company began a strategic business evaluation in 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 in 1997.
As a result, the Company began to realign its existing operating
companies and incurred restructuring costs aggregating approximately $19,071
during the year ended December 31, 1997, directly and indirectly associated with
the initial divisional restructuring which had no future economic benefit
("restructuring costs").
On January 2, 1998, and January 5, 1998, respectively, the Company
acquired the SW Financial Controlling Interest and the Fickes and Stone
Knightsbridge Interest. The acquisition allowed the Company to complete its
divisional restructuring which began in 1997. As a result, the Company incurred
restructuring costs aggregating approximately $11,767 for the year ended
December 31, 1998, directly and indirectly associated with the divisional
restructuring.
In addition, the Company recorded in the fourth quarter of 1998
additional restructuring costs aggregating approximately $9,274 as a result of
the Company's decision to consolidate or merge substantially all of its
corporate functions into the Company's Dallas location.
The restructuring costs recognized the following for the year ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Severance and related benefits incurred due to staff reduction...... $ 10,090 $ 5,355
Estimated holding costs of vacated facilities....................... 2,205 6,166
Write-off of certain fixed assets and other impaired assets......... 4,085 1,526
Estimated contract termination costs................................ 4,661 24
Write-off of investment in certain foreign operations
which will be closed.............................................. -- 6,000
---------- -----------
Total restructuring costs...................................... $ 21,041 $ 19,071
========== ===========
</TABLE>
During the years ended December 31, 1998 and 1997, the Company
re-evaluated the restructuring costs and reduced the remaining accruals by
approximately $6,164 and $2,300, respectively, as a result of the final
determination of certain obligations.
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<PAGE>
The Company incurred approximately $6,296 and $4,652 of pre-tax
incremental costs ("period costs") associated with the corporate restructuring
for the years ended December 31, 1998 and 1997, respectively. Such costs are
included in the Company's Results of Operations as underwriting and other
administrative expenses.
On August 30, 1997, the merger agreement between Washington National
Corporation ("Washington National") and the Company terminated. The Company
incurred legal, accounting and financial advisory fees associated with the
merger. In addition, the Company had began to provide certain resources to
Washington National including personnel to perform policy administration and
claims processing function on Washington National's behalf. The aggregate
advisory and administrative costs incurred by the Company during 1997 were
$7,646.
(22) FINANCIAL INSTRUMENTS
The following is a summary of the carrying value and fair value of the
Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments.......................... $ 92,727 $ 92,727 $ 109,013 $ 109,013
Fixed maturities......................................... 2,589,714 2,589,714 2,718,982 2,718,982
Equity securities........................................ 2,035 2,035 30,257 30,257
Mortgage loans........................................... 36,882 38,865 240,879 248,052
Policy loans............................................. 207,490 207,490 145,108 145,108
Other investments........................................ 27,406 27,406 95,875 95,875
Accounts and notes receivable............................ 14,319 14,319 46,655 46,655
Liabilities:
Notes payable............................................ 550,923 497,039 359,755 364,914
Universal life and investment contract liabilities....... 2,063,823 1,756,762 2,496,055 2,092,348
</TABLE>
The following methods and assumptions are used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Short-term Investments, Accounts and Notes Receivable: The
carrying value approximates their fair value due to the short-term
maturity of these instruments.
Fixed Maturities Available for Sale and Equity Securities: The fair
values for fixed maturities available for sale are based on quoted
market prices, where available. For fixed maturities not actively
traded, fair values are estimated using values obtained from
independent pricing services or are estimated based on expected future
cash flows using current market rate applicable to the yield, credit
quality and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage Loans: The fair values are estimated using discounted cash
flow analyses, based on interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the
calculations.
Policy Loans: Policy loans are an integral part of life insurance
policies which the Company has in force and, in the Company's opinion,
cannot be valued separately. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy
and contract reserves.
Other Investments: Other investments consist primarily of limited
partnerships and joint ventures. These are evaluated periodically.
Carrying value represents the underlying equity of the limited
partnerships or joint ventures of their cost which approximates fair
value.
Notes Payable: The carrying value for outstanding notes receivable
other than the senior subordinated notes approximates the fair value as
they carry variable interest rates of interest which adjust at least
every 90 days. The fair value of the senior subordinated notes is
determined based upon quotes from market makers.
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<PAGE>
Universal Life and Investment Contract Liabilities: The fair value of
accumulation products approximates their cash surrender value.
(23) SUBSEQUENT EVENTS
On March 22, 1999, the Company received regulatory approval for the
sale of Professional. The Company anticipates the transaction, subject to
certain closing conditions, will be finalized on or about March 31, 1999.
(24) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998 Quarter-ended March 31 June 30 September 30 December 31
- --------------------------------------------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues..................................... $ 232,651 $ 227,888 $ 225,682 $ 193,774
Net income (loss) applicable to common stock....... $ (3,686) $ (163,904) $ (165,088) $ (108,525)
Net income (loss) per share of common
stock - basic................................... $ (0.20) $ (5.60) $ (5.64) $ (3.71)
Net income (loss) per share of common
stock - diluted................................. $ (0.20) $ (5.60) $ (5.64) $ (3.71)
1997 Quarter-ended March 31 June 30 September 30 December 31
- --------------------------------------------------- ------------- ------------- ------------ -------------
Total revenues..................................... $ 168,116 $ 163,608 $ 172,968 $ 159,102
Net income (loss) applicable to common stock....... $ 7,436 $ 13,209 $ 26,070 $ (16,108)
Net income (loss) per share of common
stock - basic................................... $ 0.26 $ 0.47 $ 0.93 $ (0.58)
Net income (loss) per share of common
stock - diluted................................. $ 0.25 $ 0.45 $ 0.80 $ (0.58)
</TABLE>
The Company's fourth quarter 1998 reported loss primarily resulted from
an additional impairment provision associated with assets of Businesses Held for
Sale totaling $57,475. In addition, the Company unlocked certain actuarial
assumptions on interest sensitive blocks of business resulting in additional
amortization of deferred policy acquisition costs and present value of insurance
in force amounting to approximately $16,250 and incurred restructuring costs of
$7,228.
The Company's fourth quarter 1997 reported loss was primarily a result
of reserve strengthening aggregating $12,373 associated with the Businesses Held
for Sale and certain non-recurring charges including transaction costs, period
restructuring costs and other costs aggregating $5,222, associated with the
Retained Businesses. In addition, the Company unlocked certain actuarial
assumptions on interest sensitive blocks of business resulting in additional
amortization of deferred policy acquisition costs and present value of insurance
in force amounting to $6,944.
89
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Southwestern Financial Corporation:
We have audited the accompanying consolidated balance sheets of
Southwestern Financial Corporation and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of income, shareholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwestern
Financial Corporation and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 19, 1998
90
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31,1997 and 1996
(In thousands, except share information)
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale at fair value (cost $1,643,769
and $1,270,507)............................................................. $ 1,677,508 $ 1,255,270
Equity securities available for sale at fair value (cost $688 and $959)........ 1,079 1,129
Mortgage loans on real estate, net of allowance of $680 in 1997 and
$1,000 in 1996.............................................................. 51,070 59,993
Policy loans................................................................... 123,041 128,551
Short-term investments......................................................... 157,140 135,203
Collateral loans............................................................... -- 21,308
Real estate.................................................................... 1,893 7,649
Other investments.............................................................. 8,461 5,553
------------ -------------
Total investments............................................................ 2,020,192 1,614,656
Cash.............................................................................. 6,576 26,692
Due from reinsurers............................................................... 109,051 259,288
Accrued investment income......................................................... 25,224 20,802
Accounts and notes receivable, net of allowance of $181 and $561.................. 5,507 13,773
Present value of insurance in force............................................... 58,565 71,333
Deferred policy acquisition costs................................................. 30,606 15,095
Deferred income taxes, net........................................................ 34,746 47,954
Other assets...................................................................... 19,025 18,549
Costs in excess of net assets acquired............................................ 115,388 119,760
------------ -------------
Total assets................................................................. $ 2,424,880 $ 2,207,902
============ =============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits on traditional products................................. $ 554,998 $ 584,179
Universal life and investment contract liabilities............................. 1,315,496 1,088,335
Policy and contract claims .................................................... 57,517 55,011
Other policyholder funds....................................................... 14,203 17,635
------------ -------------
Total policy liabilities and accruals........................................ 1,942,214 1,745,160
Federal income taxes payable...................................................... 1,298 9,118
Notes payable..................................................................... 154,750 159,750
Accrued expenses and other liabilities............................................ 97,211 118,119
------------ -------------
Total liabilities............................................................ 2,195,473 2,032,147
------------ -------------
Mandatorily redeemable preferred stock:
Series A 10%, $.01 par value, $100 redemption value; 500,000 shares
authorized, 257,070 and 232,890 issued and outstanding at
December 31, 1997 and 1996, respectively.................................... 25,707 23,289
5.5% preferred stock $.01 par value, $10,000 redemption value; 2,000 shares
authorized, 1,118 and 1,059 shares issued and outstanding at
December 31, 1997 and 1996, respectively..................................... 11,184 10,590
SHAREHOLDERS' EQUITY
Common Stock, Class A, $.01 par value; 18,000,000 shares authorized;
3,500,000 shares issued and outstanding........................................ 35 35
Common Stock, Class B, non-voting $.01 par value; 10,000,000 shares authorized;
8,400,000 shares issued and outstanding........................................ 84 84
Additional paid in capital........................................................ 116,992 120,626
Unrealized gains (losses) on securities available for sale,
net of tax (benefit) of $11,776 and ($4,224)................................... 21,870 (8,081)
Retained earnings................................................................. 53,535 29,212
------------ -------------
Total shareholders' equity................................................... 192,516 141,876
------------ -------------
Total liabilities and shareholders' equity................................... $ 2,424,880 $ 2,207,902
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
91
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the Years Ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Premiums....................................................................... $ 103,138 $ 152,803
Interest sensitive policy product charges...................................... 42,680 44,109
Net investment income.......................................................... 126,427 128,692
Net gains from sale of investments............................................. 1,841 516
Other income, including $15,811 in earnings of limited partnership in 1996..... 16,039 27,439
------------ -------------
Total revenues............................................................... 290,125 353,559
------------ -------------
Benefits and expenses:
Policyholder benefits incurred................................................. 201,385 234,773
Change in liability for future policy benefits and other policy benefits....... (35,103) (36,929)
Amortization of present value of insurance
in force and deferred policy acquisition costs............................... 21,589 23,392
Amortization of costs in excess of net assets acquired......................... 4,130 4,130
Underwriting and other administrative expenses................................. 40,600 65,110
Interest and amortization of deferred debt issuance costs...................... 13,773 14,052
------------ -------------
Total benefits and expenses.................................................. 246,374 304,528
------------ -------------
Income before income taxes........................................................ 43,751 49,031
Income taxes................................................................. 16,416 18,149
------------ -------------
Net income........................................................................ 27,335 30,882
Preferred stock dividend requirements........................................ 3,012 2,754
------------ -------------
Net income available to common shareholders....................................... $ 24,323 $ 28,128
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
92
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the Years Ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Common Additional on Securities
Stock Stock Paid in Available Retained
Class A Class B Capital for Sale, Net Earnings Total
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... $ 35 $ 84 $ 120,626 $ 2,413 $ 1,084 $ 124,242
Net income....................... -- -- -- -- 30,882 30,882
Preferred dividends.............. -- -- -- -- (2,754) (2,754)
Unrealized loss on securities
available for sale, net....... -- -- -- (10,494) -- (10,494)
----------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1996..... 35 84 120,626 (8,081) 29,212 141,876
Net income....................... -- -- -- 27,335 27,335
Preferred dividends.............. -- -- -- (3,012) (3,012)
Deemed dividend to eliminate
effects of reinsurance contract
with affiliate................ -- -- (3,634) 4,161 -- 527
Unrealized gain on securities
available for sale, net....... -- -- -- 25,790 -- 25,790
----------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1997..... $ 35 $ 84 $ 116,992 $ 21,870 $ 53,535 $ 192,516
=========== =========== =========== =========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
93
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Years Ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 27,335 $ 30,882
Adjustments to reconcile net income to net cash used by operating activities:
Adjustments relating to universal life and investment products:
Interest credited to account balances...................................... 55,135 56,203
Charges for mortality and administration................................... (50,687) (50,689)
Capitalization of deferred policy acquisition costs.......................... (24,808) (16,806)
Amortization of intangibles, depreciation and accretion, net................. 26,545 29,427
Decrease in policy liabilities, accruals and other policyholder funds........ (24,319) (54,427)
Decrease in accrued expenses and other liabilities........................... (19,673) (7,477)
Decrease (increase) in notes and accounts receivable and
accrued investment income.................................................. 3,844 (3,000)
(Decrease) increase in taxes payable......................................... (7,820) 5,218
Deferred income taxes........................................................ (836) 12,847
Equity in undistributed earnings of limited partnership...................... -- (15,811)
Net gains from sales of investments.......................................... (1,841) (516)
Other, net................................................................... 5,330 7,916
---------- ----------
Net cash used by operating activities...................................... (11,795) (6,233)
---------- ----------
Cash flows from investing activities:
Sales of fixed maturities available for sale................................... 201,402 52,085
Maturities and other redemptions of fixed maturities available for sale........ 129,600 147,114
Sales of mortgages, real estate and other investments.......................... 7,512 57,278
Principal collected on mortgage loans and collateral loans..................... 28,030 4,687
Change in short-term investments, net.......................................... (21,929) 19,369
Distributions from limited partnership......................................... -- 53,520
Purchases of fixed maturities available for sale............................... (419,525) (323,585)
Purchases of other investments................................................. (764) (694)
---------- ----------
Net cash (used) provided by investing activities........................... (75,674) 9,774
---------- ----------
Cash flows from financing activities:
Receipts from interest sensitive products credited to
policyholders' account balances.............................................. 103,243 99,409
Return of policyholders' account balances on interest sensitive products....... (102,112) (117,806)
Cash provided by reinsurance recapture......................................... 21,222 --
Cash provided by assumed reinsurance with affiliate............................ 50,000 --
Reduction of notes payable..................................................... (5,000) (250)
---------- ----------
Net cash provided (used) by financing activities........................... 67,353 (18,647)
---------- ----------
Decrease in cash.................................................................. (20,116) (15,106)
Cash at beginning of year......................................................... 26,692 41,798
---------- ----------
Cash at end of year............................................................... $ 6,576 $ 26,692
========== ==========
Supplemental disclosures:
Income taxes paid.............................................................. $ 25,072 $ 84
Interest paid.................................................................. 12,305 12,714
Non-cash financing activities:
Preferred stock issued as dividends............................................ 3,012 2,754
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
94
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In thousands)
1. Basis of Presentation
On December 14, 1995 (the acquisition date), Southwestern Financial Corporation
(SWF or the Company), a newly organized corporation, was formed by PennCorp
Financial Group, Inc. (PennCorp) and Knightsbridge Capital Fund I, L.P.
(Knightsbridge). A wholly-owned subsidiary of SWF acquired from I.C.H.
Corporation (ICH), Southwestern Life Insurance Company (Southwestern Life) and
its wholly-owned subsidiary, Constitution Life Insurance Company (Constitution)
and its 83% owned subsidiary, ICH Funding Corp. (ICH Funding), and Union Bankers
Insurance Company (Union Bankers) and its wholly-owned subsidiary, Marquette
National Life Insurance Company (Marquette). In addition, a wholly-owned
subsidiary of SWF acquired from ICH substantially all of the assets and
liabilities of Facilities Management Installation, Inc. (FMI), which had
provided management services to ICH's insurance companies. The acquisition was
accounted for as a purchase in accordance with generally accepted accounting
principles (GAAP) and, accordingly, the purchase price was allocated to assets
and liabilities acquired based on estimates of their fair value as of the
acquisition date, which became the new cost basis. Subsequently, the insurance
companies were reorganized such that Constitution became the parent of
Southwestern Life and Union Bankers. Effective January 2, 1998, PennCorp
acquired Knightsbridge's interest in SWF and SWF became a wholly-owned
subsidiary of PennCorp. (See Note 16).
In August 1997, the Company acquired from ICH the remaining 17% interest in ICH
Funding and certain other assets and released ICH from indemnification
obligations relative to certain tax, litigation and other matters. Minority
interest in ICH Funding, totaling $1,486 at December 31, 1996 is included in
accrued expenses and other liabilities as of December 31, 1996.
SWF and its subsidiaries market and underwrite a broad range of life insurance,
annuities and accident and health products to individuals through a sales force
of independent agents. The insurance subsidiaries are licensed to write business
in 48 states, the District of Columbia and Guam. Approximately 27.4% of the
total direct premium of the Company's insurance subsidiaries was generated from
business written in Texas. No other states accounted for more than 10% of the
direct premium of the Company in 1997.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Accounts that the Company deems to be acutely sensitive to
changes in estimates include deferred policy acquisition costs, future policy
benefits, policy and contract claims and present value of insurance in force. In
addition, the Company must determine requirements for disclosure of contingent
assets and liabilities as of the date of the financial statements based upon
estimates. In all instances, actual results could differ from estimates.
2. Summary of Significant Accounting Policies
(a) Investments
Fixed maturity and equity securities classified as available for sale are
recorded at fair value, as they may be sold in response to changes in
interest rates, prepayment risk, liquidity needs, the need or desire to
increase income or capital and other economic factors. Changes in
unrealized gains and losses related to securities available for sale are
recorded as a separate component of shareholders' equity, net of applicable
taxes and amount attributable to deferred policy acquisition costs and
present value of insurance in force related to universal life and
investment-type products. Mortgage-backed securities are amortized using
the interest method including anticipated prepayments at the date of
purchase. Significant changes in estimated cash flows from original
assumptions are reflected in the period of such change. Mortgage loans on
real estate are recorded at cost, adjusted for the provision for loan
losses, if necessary. Policy loans are recorded at cost. Short-term
investments purchased with maturities generally less than three months are
recorded at cost, which approximates market. All short-term investments are
considered to be cash equivalents.
95
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
Real estate, substantially all of which was acquired through foreclosure,
is recorded at the lower of fair value, minus estimated costs to sell, or
cost. If the fair value of the foreclosed real estate minus estimated costs
to sell is less than cost, a valuation allowance is provided for the
deficiency. Increases in the valuation allowance are charged to income.
Collateral loans are carried at their aggregate unpaid principal balances.
The Company regularly evaluates the carrying value of their investments
based on current economic conditions, past credit loss experience and other
circumstances. A decline in net realizable value that is other than
temporary is recognized as a realized investment loss and a reduction in
the cost basis of the investment. The Company discounts expected cash flows
in the computation of net realizable value of its investments, other than
certain mortgage-backed securities. In those circumstances where the
expected cash flows of residual interest and interest-only mortgage-backed
securities, discounted at a risk-free rate of return, result in an amount
less than the carrying value, a realized loss is reflected in an amount
sufficient to adjust the carrying value of a given security to its fair
value.
Realized investment gains and losses and declines in value which are other
than temporary, determined on the basis of specific identification, are
included in the determination of net income.
(b) Insurance Revenue Recognition
Accident and health insurance premiums are recognized as revenue ratably
over the time period to which premiums relate. Revenues from traditional
life insurance policies represent premiums which are recognized as earned
when due. Benefits and expenses are associated with earned premiums so as
to result in recognition of profits over the lives of the policies. This
association is accomplished by means of the provision for liabilities for
future policy benefits and the deferral and amortization of policy
acquisition costs.
Revenues for interest sensitive products such as universal life and annuity
contracts represent charges assessed against the policyholders' account
balance for the cost of insurance, surrenders and policy administration.
Benefits charged to expenses include benefit claims incurred during the
period in excess of policy account balances and interest credited to policy
account balances.
(c) Policy Liabilities and Accruals
Liabilities for future policy benefits for traditional life products
generally have been computed on the net level premium method, based on
estimated future investment yield, mortality, and withdrawals. For accident
and health products, liabilities for future policy benefits are established
equal to the excess of the present value of future benefits to or on behalf
of policyholders over discounted net future premiums. Estimates used are
based on the Company's experience adjusted to provide for possible adverse
deviation. These estimates are periodically reviewed and compared with
actual experience. Liabilities for future policy benefits for interest
sensitive products include the balance that accrues to the benefit of the
policyholders and amounts that have been assessed to compensate the life
insurance subsidiaries for services to be provided in the future.
Policy and contract claims represent estimates of reported claims and
claims incurred but not reported based on experience.
(d) Accounts and Notes Receivable
Accounts and notes receivable consist primarily of agents' balances and
premium receivable from agents and policyholders. Agents' balances are
partially secured by commissions due to agents in the future and premiums
96
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
receivable are secured by policy liabilities. An allowance for doubtful
accounts is established, based upon specific identification and general
provision, for amounts which the Company estimates will not ultimately be
collected.
(e) Deferred Policy Acquisition Costs
Estimated costs of acquiring new business which vary with, and are
primarily related to, the production of new business, have been deferred to
the extent that such costs are deemed recoverable from future revenues.
Such estimated costs include commissions and certain costs of policy
issuance and underwriting. Costs deferred on accident and health and
traditional life policies are amortized, with interest, over the
anticipated premium-paying period of the related policies in proportion to
the ratio of annual premium revenue to expected total premium revenue to be
received over the life of the policies. Expected premium revenue is
estimated by using the same mortality, morbidity and withdrawal assumptions
used in computing liabilities for future policy benefits. For interest
sensitive products and limited pay life products, policy acquisition costs
are amortized in relation to the emergence of anticipated gross profits
over the life of the policies.
(f) Present Value of Insurance In Force
The present value of insurance in force represents the anticipated gross
profits to be realized from future revenues on insurance in force at the
date such insurance was purchased, discounted to provide an appropriate
rate of return and amortized, with interest, based on credited rate, over
the years that such profits are anticipated to be received in proportion to
the estimated gross profits. Accumulated amortization was $35,386 and
$22,889 as of December 31, 1997 and 1996, respectively.
(g) Deferred Debt Issuance Costs
Deferred debt issuance costs, which are included in other assets, represent
costs incurred in connection with obtaining long-term debt financing which
have been capitalized and are being amortized on an interest yield method
over the terms of the respective debt. Deferred costs totaled $2,530 and
$3,309 which are net of accumulated amortization of $1,580 and $801 at
December 31, 1997 and 1996, respectively.
(h) Costs in Excess of Net Assets Acquired
Costs in excess of the fair value of net assets acquired are amortized on a
straight-line basis over 30 years. Accumulated amortization totaled $8,260
and $4,130 at December 31, 1997 and 1996, respectively.
(i) Recoverability of Long-lived Assets
The Company continually monitors long-lived assets and certain intangible
assets, such as costs in excess of net assets acquired and present value of
insurance in force, for impairment. An impairment loss is recorded in the
period in which the carrying value of the assets exceeds the fair value or
expected future cash flows. Any amounts deemed to be impaired are charged,
in the period in which such impairment was determined, as an expense
against earnings. For the period presented there was no charge to earnings
for the impairment of long-lived assets.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to (i) temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and (ii) operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
the temporary differences are expected to be recovered or settled. The
effect
97
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Reinsurance
Financial reinsurance that does not transfer significant insurance risk is
accounted for as a deposit and is reflected as a component of due from
reinsurers. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsurance policies.
Balances due to, or from, reinsurers have been reflected as assets and
liabilities rather than reducing the related account balances.
3. Investments
Investments in a single entity, other than obligations of the U.S. Government or
agencies thereof, totaling in excess of 10% of total shareholders equity at
December 31, 1997 and 1996 are listed below:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Percent of Percent of
Carrying Shareholders' Carrying Shareholders'
Value Equity Value Equity
----- ------ ----- ------
<S> <C> <C> <C> <C>
Fund America Investors Corp., Ser. 93-C,
Class B Certificates................................ $ 19,271 10.0% $ 16,250 11.2%
James M. Fail and Stone Capital, Inc.
Collateral loans.................................... -- -- 21,308 14.7
</TABLE>
The amortized cost and fair value of investments in fixed maturities available
for sale at December 31, 1997 and 1996 by categories of securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
December 31, 1997:
Mortgage-backed securities........................ $ 820,837 $ 22,791 $ (1,434) $ 842,194
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies....... 27,492 91 (12) 27,571
Debt securities issued by states of the United States
and political subdivisions of the states....... 22,469 365 (130) 22,704
Debt securities issued by foreign governments..... 20,525 821 -- 21,346
Corporate debt securities......................... 752,446 14,664 (3,417) 763,693
------------ ------------ ------------ -------------
Total fixed maturities available for sale....... $ 1,643,769 $ 38,732 $ (4,993) $ 1,677,508
============ ============ ============ =============
</TABLE>
98
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
December 31, 1996:
Mortgage-backed securities........................ $ 609,593 $ 8,153 $ (7,304) $ 610,442
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies....... 49,598 224 (343) 49,479
Debt securities issued by states of the United States
and political subdivisions of the states....... 15,226 -- (388) 14,838
Debt securities issued by foreign governments..... 22,698 176 (870) 22,004
Corporate debt securities......................... 573,392 1,429 (16,314) 558,507
------------ ------------ ------------ -------------
Total fixed maturities available for sale....... $ 1,270,507 $ 9,982 $ (25,219) $ 1,255,270
============ ============ ============ =============
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1997, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Available for sale:
Due in one year or less................................................ $ 28,929 $ 28,921
Due after one year through five years.................................. 234,776 236,677
Due after five years through ten years................................. 272,127 275,248
Due after ten years.................................................... 287,100 294,468
------------ ------------
822,932 835,314
Mortgage-backed securities............................................. 820,837 842,194
------------ ------------
$ 1,643,769 $ 1,677,508
============ ============
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Investments with a fair value of $119,695 and $121,617 were on deposit with
certain regulatory authorities at December 31, 1997 and 1996, respectively.
Included in fixed maturities available for sale at December 31, 1997 and 1996,
are below investment-grade securities with amortized costs of $71,467 and
$40,177, respectively, and fair values of $74,227 and $39,955, respectively.
Included in fixed maturities available for sale as of December 31, 1997, are
unrated securities with an amortized cost and fair value of $11,811.
During 1997, the Company purchased $7,650 of subordinated indebtedness of ACO
Acquisition Corp., which was subsequently re-named Acordia, Inc. (Acordia). The
Acordia subordinated notes pay interest on a current basis at 12.5% per annum,
payable in semi-annual installment. Acordia is an insurance broker specializing
in the marketing of commercial property and casualty programs. Acordia is 28.6%
owned by Knightsbridge.
In addition, during 1997, the Company acquired 41,605 shares of redeemable
preferred stock of Portsmouth Financial Group, Inc. (Portsmouth) for $4,161. The
preferred stock pays dividends of 18.0% of which 12.5% is in cash with the
remainder in the form of additional preferred stock. The shares are mandatorily
redeemable on June 30, 2002. Portsmouth underwrites, acquires, and holds to
receipt of benefits, life insurance contracts covering individuals facing
terminal illnesses. Portsmouth is owned by Knightsbridge and its affiliates. The
Company has agreed, subject to required regulatory approvals to make up to a
$10,000 preferred equity investment in Portsmouth.
99
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (Continued)
The Company had non-income producing investments at December 31, 1997 with an
amortized cost and fair value as follows:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
------------- -------------
<S> <C> <C>
Fixed maturities................................ $ 487 $ 66
Equity securities............................... 688 1,079
Other investments............................... 5,778 5,791
------------- -------------
$ 6,953 $ 6,936
============= =============
</TABLE>
At December 31, 1997 net unrealized appreciation of equity securities of
$391 consisted of gross unrealized gains of $415, less unrealized losses of $24.
At December 31, 1996 net unrealized appreciation of $170 consisted of gross
unrealized gains of $207, less unrealized losses of $37.
Following is an analysis of net gains (losses) from sale of investments for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Fixed maturities................................ $ 553 $ 1,385
Equity securities............................... -- (43)
Other investments............................... 1,146 1,736
Real estate..................................... 134 (125)
Mortgage loans.................................. -- (2,437)
Short-term investments.......................... 8 --
------------- -------------
$ 1,841 $ 516
============= =============
</TABLE>
For the year ended December 31, 1997, net realized gains on sale of fixed
maturities consisted of gross gains of $2,779 and gross losses of $2,226. For
the year ended December 31, 1996, net realized gains on sale of fixed maturities
consisted of gross gains of $2,923 and gross losses of $1,538.
Following are changes in unrealized appreciation (depreciation) on investments
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Investments carried at fair value:
Fixed maturities.................................................. $ 48,976 $ (18,991)
Equity securities................................................. 221 194
Other investments................................................. (713) 1,652
------------ -------------
48,484 (17,145)
Eliminate effects from reinsurance contract with affiliate........... (4,161) --
Less effect on other balance sheet accounts:
Value of business acquired and deferred acquisition costs......... (2,768) 1,362
Deferred income taxes............................................. (16,000) 5,524
Minority interest in unrealized losses............................ 235 (235)
------------ -------------
Change in unrealized investment gains and losses..................... $ 25,790 $ (10,494)
============ =============
</TABLE>
100
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (Continued)
Major categories of net investment income for the years ended December 31, 1997
and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Fixed maturities........................................ $ 98,906 $ 87,348
Equity securities....................................... -- 58
Mortgage loans.......................................... 5,490 11,156
Policy loans............................................ 7,621 8,011
Short-term investments.................................. 4,442 7,738
Collateral loans........................................ 2,218 2,947
Real estate............................................. 441 3,956
Investments held in trust under reinsurance treaty(a)... 9,617 12,130
Other investments....................................... 1,250 1,503
Investment expenses..................................... (3,558) (6,155)
------------ -------------
$ 126,427 $ 128,692
============ =============
- -------------------
(a) Investments held in trust by a reinsurer with carrying values of $121,016
as of December 31, 1996, are included in amounts due from reinsurers. This
contract was recaptured during 1997 (see Note 10).
</TABLE>
At December 31, 1997 and 1996 the Company held mortgage loans principally
involving commercial real estate with carrying values of $51,070 and $59,993,
respectively, net of an allowance for losses of $680 and $1,000 at December 31,
1997 and 1996, respectively. Estimated fair values of mortgage loans totaled
$51,816 and $59,993 at December 31, 1997 and 1996, respectively. The average
outstanding loan balances were approximately $1,027 and $955 at December 31,
1997 and 1996, respectively. At December 31, 1997 mortgage loan investments were
concentrated in the following states:
<TABLE>
<CAPTION>
Percent of Total
Carrying Value Carrying Total
-------------- --------------
<S> <C> <C>
Texas........................................................... $ 23,832 46.7%
Illinois........................................................ 7,029 13.7
Oklahoma........................................................ 4,915 9.6
Florida......................................................... 3,180 6.3
Kansas.......................................................... 2,527 4.9
All other....................................................... 9,587 18.8
---------- -----
Balance, end of period.......................................... $ 51,070 100.0%
========== =====
</TABLE>
During 1996, the Company had a limited partnership investment representing
a 50% interest in a partnership, GSSW, L.P. (GSSW) formed to acquire through
auction certain mortgage loans and real estate formerly held by failed savings
and loan associations. Effective December 31, 1996, GSSW liquidated the general
partner interests through distribution of certain assets at fair value, sold
substantially all remaining investments and utilized the proceeds to buy the
limited partnership interest not owned by the Company. As a result of these
transactions, the Company became the parent of GSSW, realized earnings on GSSW
of $13,171, received net cash distributions of $47,520 and paid PennCorp, a
shareholder, a fee of $1,000 as guarantor in GSSW's sale of assets.
101
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (Continued)
Following is an analysis of the investment in the GSSW limited partnership for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Balance, beginning of period.................................. $ 39,600
Equity in operating earnings during year...................... 3,640
Equity in earnings on transactions at December 31, 1996....... 13,171
Distributions during year..................................... (6,000)
Net distributions at December 31, 1996........................ (47,520)
-----------
Balance, December 31, 1996.................................... $ 2,891
===========
</TABLE>
At December 31, 1997 and 1996, the accounts of GSSW are consolidated into the
accompanying consolidated balance sheet.
4. Policy Liabilities and Accruals
For interest sensitive life products and annuity products, the liability for
future policy benefits is equal to the accumulated fund value. Fund values are
equal to the excess premium received and interest credited to the fund value
less deductions for mortality costs and expense charges. Current interest rates
credited range from 4% to 8%. Mortality costs and expense charges are
established by the Company based upon its experience and cost structure.
For traditional life products, the liability for future policy benefits has been
computed by the net level premium method based on estimated future investment
yield, mortality, and withdrawal experience. Reserve interest assumptions are
graded and range from 6.25% to 7.375%. For accident and health products,
liabilities for future policy benefits are established equal to the excess of
the present value of future benefits to or on behalf of policyholders over
future net premiums discounted at interest rates ranging primarily from 6.5% to
8.0%. The future policy benefits of traditional life products and accident and
health products are determined using mortality, morbidity and withdrawal
assumptions that reflect the experience of the Company modified as necessary to
reflect anticipated trends and to include provisions for possible unfavorable
deviations. The assumptions vary by plan, year of issue and duration.
The Company has carefully monitored a block of interest sensitive life policies
where overall financial performance was not satisfactory. During the third
quarter of 1997, management implemented certain corrective actions. These
actions included reduction in credited interest rates, increased monthly expense
charges and cost of insurance increases on selected policy forms. As a result,
reserves on this block were reduced approximately $17,000.
Policy and contract claims include provisions for reported claims in process of
settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on the
Company's prior experience.
While management believes the estimated amounts included in financial statements
for policy liabilities and accruals are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled. In addition,
the Company is involved in certain litigation regarding policyholder benefits.
The Company intends to vigorously defend its position relative to these claims;
however, if unsuccessful, the level of reserves currently provided could be
adversely effected.
102
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Policy Liabilities and Accruals (Continued)
Total policy liabilities and accruals consist of the following as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Future policy benefits on traditional products:
Traditional life insurance contracts.......................... $ 335,283 $ 344,520
Traditional annuity products.................................. 105,663 105,246
Individual accident and health................................ 87,152 104,071
Unearned premiums............................................. 26,900 30,342
------------- -------------
Total future policy benefits 554,998 584,179
------------- -------------
Universal life and investment contract liabilities:
Universal life and annuities.................................. 1,315,333 1,086,632
Guaranteed investment contracts............................... 163 1,703
------------- -------------
Total universal and investment contract liabilities........ 1,315,496 1,088,335
------------- -------------
Policy and contract claims...................................... 57,517 55,011
Other policyholder funds........................................ 14,203 17,635
------------- -------------
Total policy liabilities and accruals...................... $ 1,942,214 $ 1,745,160
============= =============
</TABLE>
The following table presents information on changes in the liability for policy
and contract claims for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Policy and contract claims at January 1......................... $ 55,011 $ 62,140
Less reinsurance recoverables................................... 153 118
------------- -------------
Net balance at January 1...................................... 54,858 62,022
------------- -------------
Add claims incurred, net of reinsurance related to:
Current year.................................................. 81,168 91,496
Prior years................................................... (6,012) (2,646)
------------- -------------
75,156 88,850
------------- -------------
Deduct claims paid, net of reinsurance related to:
Current year.................................................. 58,658 52,240
Prior years................................................... 13,839 43,774
------------- -------------
72,497 96,014
------------- -------------
Policy and contract claims, net of related reinsurance
recoverables at December 31.................................. 57,517 54,858
Plus reinsurance recoverables................................... -- 153
------------- -------------
Policy and contract claims at December 31....................... $ 57,517 $ 55,011
============= =============
</TABLE>
As a result of changes in estimates of insured events in prior years, the
liability for policy and contract claims decreased, net of reinsurance, by
$6,012 in 1997 and $2,646 in 1996.
103
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Notes Payable
The outstanding principal amounts of notes payable at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revolving bank debt............................................. $ 90,250 $ 95,000
Bank debt with quarterly principal requirements................. 24,500 24,750
7.0% convertible subordinated note.............................. 40,000 40,000
------------- -------------
$ 154,750 $ 159,750
============= =============
</TABLE>
Interest costs under the revolving bank debt totaled $7,860 and $8,128 for the
years ended December 31, 1997 and 1996, respectively. The interest rate of the
debt is based on, at the Company's option, either a floating rate (based on the
base rate of the First National Bank of Chicago) plus a margin of 1.75% or a
Eurodollar rate (based on the London Interbank Offered Rate or LIBOR) plus a
margin of 2.75%. At December 31, 1997, the effective rate of the revolving loan
was approximately 9.13%. The revolving bank debt was repaid on January 2, 1998.
Interest costs under the bank term debt totaled $2,229 and $2,250 for the years
ended December 31, 1997 and 1996, respectively. The interest rate of the term
debt is based on, at the Company's option, either a floating rate (based on the
base rate of the First National Bank of Chicago) plus a margin of 2.25% or a
Eurodollar rate (based on LIBOR) plus a margin of 3.25%. At December 31, 1997,
the effective rate of the term loans was approximately 9.63%. The bank term debt
was repaid on January 2, 1998.
As part of the consideration for the acquisition of Southwestern Life, Union
Bankers, Constitution and Marquette from ICH, the Company issued to ICH a
$40,000 aggregate principal amount of SWF's 7.0% Convertible Subordinated Notes
due 2005. The notes are convertible into an aggregate 3,200,000 shares of common
stock of SWF, of which 800,000 will be Class B non-voting common stock. In the
aggregate the shares upon conversion represent approximately 21.2% of SWF's
fully diluted shares at closing before giving effect to certain warrants
outstanding. During 1997, PennCorp acquired the notes from the liquidating trust
for the creditors of ICH for $40,000 plus accrued interest. The Convertible
Notes are unsecured obligations and are subordinate in right of payment to SWF's
bank debt and all of the indebtedness of SWF. Interest costs under the
Convertible Notes totaled $2,800 for the years ended December 31, 1997 and 1996.
The Company agreed to maintain sufficient cash and cash equivalents to fund the
interest payments on the Convertible Notes for the first three years. At
December 31, 1997 and December 31, 1996, restricted cash and short-term
investments totaled $3,339 and $5,959, respectively.
In conjunction with the bank debt, the Company entered into interest rate
protection agreements in the form of a series of interest rate caps in the
notional amount of $62,500 which expire May 1998. These entitle the Company to
revenue should three-month LIBOR exceed the cap rate of 7.5%. At December 31,
1997, three-month LIBOR was 5.81%.
6. Preferred and Common Stock
On December 14, 1995, the Company issued 210,000 shares of Series A preferred
stock with a liquidation value of $21,000 to PennCorp and one of its
subsidiaries. The Series A preferred stock accrues dividends at a rate of 10.0%
per annum, compounded quarterly and is mandatorily redeemable at December 31,
2005. Dividends on the Series A preferred stock are payable in cash, or at SWF's
option, are payable in kind. The Series A preferred stock is not redeemable at
the option of the Company but at maturity will be required to be redeemed for
approximately $56 million in cash assuming no cash dividend distributions. If
the Company fails to satisfy its mandatory redemption obligation, the holders of
the Series A preferred stock
104
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Preferred and Common Stock (Continued)
will be entitled to elect 49.0% of the members of the Board of SWF and, upon
receipt of regulatory approval, a majority of the directors of SWF. The Series A
preferred stock is senior preferred stock. The holders of the Series A preferred
stock are entitled to class voting rights under certain circumstances, including
in connection with a merger of SWF or a sale of all or substantially all its
assets or the authorization or issuance of senior or pari passu preferred stock,
and as otherwise provided by law. For the years ended December 31, 1997 and
1996, 24,180 and 21,900 additional shares were issued with a redemption value of
$2,418 and $2,190, respectively in lieu of cash to satisfy dividend
requirements.
In addition, certain of PennCorp's insurance subsidiaries purchased $10,000
liquidation value of 5.5% Mandatorily Redeemable Preferred Stock, par value
$0.01 per share (the 5.5% Preferred Stock) of Southwestern Life Acquisition
Corporation, a wholly-owned subsidiary of SWF. During 1996 SLAC was dissolved
and the 5.5% Preferred Stock was exchanged for 5.5% Preferred Stock of
Southwestern Life Companies, Inc. (SLC), also a wholly-owned subsidiary of SWF.
The 5.5% Preferred Stock accrues dividends payable in cash or, subject to
certain conditions, through the issuance of additional shares of 5.5% Preferred
Stock. The 5.5% Preferred Stock is not subject to optional redemption and
matures on December 31, 2005. If SLC fails to satisfy its mandatory redemption
obligation or if dividends payable on the 5.5% Preferred Stock are in arrears
for four or more quarterly dividend periods, the holders of the 5.5% Preferred
Stock will be entitled to elect 49.0% of the members of the Board of Directors
of SLC and, upon receipt of regulatory approval, a majority of the Board of
Directors of SLC. The 5.5% Preferred Stock is the only preferred stock of SLC
authorized for issuance. The holders of the 5.5% Preferred Stock are entitled to
class voting rights under certain circumstances, including in connection with a
merger of SLC or a sale of all or substantially all its assets or the
authorization or issuance of senior pari passu preferred stock, and as otherwise
provided by law. For the years ended December 31, 1997 and 1996, 59 and 59
additional shares were issued with a redemption value of $594 and $590,
respectively in lieu of cash to satisfy dividend requirements.
7. Income Taxes
The Company and its non-insurance subsidiaries file a consolidated federal
income tax return. The Company's life insurance subsidiaries also file a
consolidated federal income tax return.
Total income taxes for the years ended December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current........................................................ $ 17,252 $ 5,302
Deferred....................................................... (836) 12,847
------------- -------------
$ 16,416 $ 18,149
============= =============
</TABLE>
Income taxes computed using the prevailing corporate tax rate of 35% are
reconciled to the Company's actual income tax expense attributable to income for
the years ended December 31, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Tax expense computed at statutory rate.......................... $ 15,313 $ 17,161
Amortization of costs in excess of net assets acquired.......... 1,445 1,445
Change in deferred tax asset valuation allowance................ 364 (183)
Other........................................................... (706) (274)
------------- -------------
$ 16,416 $ 18,149
============= =============
</TABLE>
105
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes (Continued)
Temporary differences, including $1,956 in 1997 of deferred tax assets
transferred in association with a reinsurance contract with an affiliate,
between the financial statement carrying amounts and tax bases of assets and
liabilities that give rise to the deferred tax assets (liabilities) at December
31, 1997 and 1996 relate to the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred policy acquisition costs............................. $ 9,548 $ 10,407
Future policy benefits........................................ 73,660 112,408
Invested assets, subject to capital gains treatment........... 24,907 16,770
Net unrealized loss........................................... -- 4,224
------------- -------------
108,115 143,809
------------- -------------
Deferred tax liabilities:
Present value of insurance in force........................... (20,498) (24,967)
Other assets and liabilities.................................. (20,123) (50,280)
Net unrealized gain........................................... (11,776) --
------------- -------------
(52,397) (75,247)
------------- -------------
Net deferred tax asset........................................ 55,718 68,562
Valuation allowance........................................... (20,972) (20,608)
------------- -------------
$ 34,746 $ 47,954
============= =============
</TABLE>
The valuation allowances at December 31, 1997 and 1996, are attributable to
deferred tax assets principally arising from differences in the book and tax
bases of invested assets subject to capital gains treatment that existed as of
the date of acquisition of the company's insurance subsidiaries. To the extent
that income tax benefits relative to such tax assets are ultimately realized,
the reduction in the related valuation allowance would be allocated to reduce
costs in excess of net assets acquired.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1997.
8. Deferred Policy Acquisition Costs and Present Value of Insurance in Force
Deferred policy acquisition costs represent commissions and certain costs of
policy issuance and underwriting. Information relating to these costs for the
years ended December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Balance at beginning of period.................................. $ 15,095 $ --
Policy acquisition costs deferred:
Commissions................................................... 17,443 11,810
Underwriting and issue costs.................................. 7,366 4,996
Released by 80% coinsurance of Medicare business (see Note 10) -- (1,243)
Policy acquisition costs amortized.............................. (9,092) (503)
Unrealized investment (gain) loss adjustment.................... (206) 35
------------- -------------
Unamortized deferred policy acquisition costs at period end..... $ 30,606 $ 15,095
============= =============
</TABLE>
106
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Deferred Policy Acquisition Costs and Present Value of Insurance in Force
(Continued)
As part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
The methods used by the Company to value the health, life and annuity products
purchased are consistent with the valuation methods used most commonly to value
blocks of insurance business. It is also consistent with the basic methodology
generally used to value insurance assets. The method used by the Company
includes identifying the future cash flows from the acquired business, the risks
inherent in realizing those cash flows, the rate of return the Company believes
it must earn in order to accept the risks inherent in realizing the cash flows,
and determining the value of the insurance asset by discounting the expected
future cash flows by the discount rate the Company requires.
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with
actuarial factors described in the following paragraph, cost of capital
available to the Company to fund the acquisition, compatibility with other
Company activities that may favorably affect future profits, and the complexity
of the acquired company.
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur. To the
extent that these variances indicate that future cash flows will differ from
those included in the original scheduled amortization of the value of the
insurance in force, current and future amortization may be adjusted.
Recoverability of the value of insurance in force is evaluated annually and
appropriate adjustments are then determined and reflected in the financial
statements for the applicable period.
Information related to the present value of insurance in force for the years
ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Balance at beginning of year.................................... $ 71,333 $ 115,831
Released by 80% coinsurance of Medicare business (see Note 10) -- (22,936)
Accretion of interest........................................... 3,806 4,415
Amortization.................................................... (16,303) (27,304)
Transferred on assumed reinsurance contract with affiliate...... 2,291 --
Unrealized investment (gain) loss adjustment.................... (2,562) 1,327
------------- -------------
Balance at end of year........................................ $ 58,565 $ 71,333
============= =============
</TABLE>
Expected amortization, based upon current assumptions and accretion of interest
at a policy liability or contract rate ranging from 5.5% to 6.6% for the next
five years of the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
Beginning Gross Accretion Net
Balance Amortization of Interest Amortization
------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1998................................... $ 58,565 $ 12,805 $ 3,226 $ 9,579
1999................................... 48,986 7,806 2,719 5,087
2000................................... 43,899 8,374 2,315 6,059
2001................................... 37,840 6,957 1,989 4,968
2002................................... 32,872 5,673 1,724 3,949
</TABLE>
107
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting and Dividend Restrictions
Pursuant to the terms of the surplus debenture issued by Constitution to the
benefit of SLC, a non-insurance subsidiary of SWF, Constitution may make
principal and interest payments to the extent that Constitution's surplus,
excluding the statutory carrying value of Southwestern Life and Union Bankers,
exceeds $1,200. Constitution's surplus at December 31, 1997 was $174,715, of
which $161,098 was attributable to its ownership of Southwestern Life and Union
Bankers.
The Company's cash flow is derived principally from dividends and principal and
interest payments owed on the surplus debenture by Constitution. The principal
source of repayment of the surplus debenture is dividends from Constitution's
subsidiaries, Southwestern Life and Union Bankers. Generally, the net assets of
the insurance subsidiaries available for transfer to the Company are limited to
the greater of the subsidiary net gain from operations during the preceding year
or 10% of the subsidiary net statutory surplus as of the end of the preceding
year as determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities. Payment of dividends in excess of
such amounts would generally require approval by the regulatory authorities.
Based upon Constitution's earned surplus at December 31, 1997, no dividends can
be paid to its parent without prior regulatory approval.
The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by their respective
state insurance departments. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the National Association of Insurance Commissioners (NAIC).
Permitted statutory accounting practices encompass all accounting practices that
are approved by insurance regulatory authorities; such practices differ from
state to state, and may differ from company to company within a state, and may
change in the future. Furthermore, the NAIC has a project to codify statutory
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, will likely change to some extent prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements.
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1997 and 1996 totaled
approximately $174,715 and $177,510, respectively. Statutory net income (loss)
of the Company's life insurance subsidiaries as reported to regulatory
authorities totaled ($2,521) and $24,919 for the years ended December 31, 1997
and 1996.
10. Reinsurance
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$500 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The Company
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The effect of reinsurance on
policy revenues earned and the related benefits incurred by such reinsurers for
the years ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Direct policy revenues and amounts assessed against policyholders... $ 252,656 $ 255,352
Reinsurance assumed................................................. 1,182 3,483
Reinsurance ceded................................................... (108,020) (61,923)
------------- -------------
Net premiums and amounts earned..................................... $ 145,818 $ 196,912
============= =============
Policyholder benefits ceded......................................... $ 78,767 $ 25,513
============= =============
</TABLE>
108
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Reinsurance (Continued)
Effective July 1, 1996, Union Bankers entered into reinsurance agreements with
Cologne Life Reinsurance Company ("Cologne") to coinsure 80% of its Medicare
supplement business in force on July 1, 1996 and to coinsure 80% of its Medicare
policies issued on or after July 1, 1996. The Company recorded a deferred gain
on the transaction of $53,893 as of July 1, 1996, which is being amortized into
income over the life of the business. For the year ended December 31, 1997 and
for the period from July 1, 1996 to December 31, 1996 $14,222 and $6,445,
respectively of the deferred gain has been recognized and is included in other
income. The Company is not subject to any negative experience adjustments if the
ceded business is unprofitable; however, the Company may participate in a
portion of future earnings from the ceded business after Cologne recovers its
initial ceding commission plus interest at a specified rate. Union Bankers
retained administration for the ceded block of business and is reimbursed by
Cologne for administrative costs at the rate of 8.5% of ceded renewal premiums
and 11.5% of ceded first year premiums.
Southwestern Life previously ceded a block of annuities under a reinsurance
agreement with Employees Reassurance Corporation (ERC). Such reinsurance,
accounted for as a financing arrangement, is not reflected in the accompanying
financial statements except for the risk fees paid to ERC. The reinsurance
agreement was terminated as of November 30, 1997.Statutory surplus provided by
this treaty totaled $8,714 at December 31, 1996. Risk fees paid to the reinsurer
were 2% of the net amount of surplus provided, but not less than a minimum fee
of $40 per quarter, and totaled $110 and $222 for the years ended December 31,
1997 and 1996, respectively. Amounts due from reinsurers included amounts due
from ERC of $121,016 at December 31, 1996. The underlying assets held by ERC had
carrying values of $121,016 and fair values of $122,639 at December 31, 1996.
At December 31, 1997, Southwestern Life entered into a reinsurance agreement
with Integon Life Insurance Corporation (Integon), an indirect wholly-owned
subsidiary of PennCorp, to coinsure certain annuities which had GAAP policy
liabilities of $256,673. Cash of $50,000 and securities were transferred at a
cost basis of $198,793 which had fair values equal to statutory policy
liabilities of $255,195. The present value of insurance in force which Integon
had recorded on these policies was estimated to be $2,291. Because Southwestern
Life and Integon are affiliates, the historical GAAP book value of the
securities and the present value of insurance in force at Integon was retained
by Southwestern Life. Rather than record a loss of $3,634, which is net of taxes
of $1,956, on a GAAP basis, Southwestern Life recorded a "deemed dividend" of
this amount as a direct charge to its paid in capital. In addition, the change
in unrealized investment gain (loss) associated with the transferred securities
is recorded as an adjustment to prior unrealized gains.
11. Retirement and Profit Sharing Plans
The Company has a defined contribution retirement plan (Defined Contribution
Plan) for all employees who have attained age 21 and completed a year of
service. Contributions to the Plan are made pursuant to salary deferral
elections by participants in an amount equal to 1% to 15% of their annual
compensation. In addition, the Company makes matching contributions in an amount
equal to 50% of each participant's salary deferral to a maximum of 3% of annual
compensation. The Defined Contribution Plan also provides for a discretionary
employer profit sharing contribution, which is determined annually by the Board
of Directors for the succeeding plan year. Profit sharing contributions are
credited to participant's accounts on the basis of their respective
compensation. Salary deferral contribution accounts are at all times fully
vested, while matching contribution and profit sharing contribution accounts
vest ratably from one to five years of service. All participant accounts are
fully vested at death, disability or attainment of age 65. Payment of vested
benefits under the Defined Contribution Plan may be elected by a participant in
a variety of forms of payment. Expenses related to this plan for the years ended
December 31, 1997 and 1996 amounted to $936 and $696, respectively.
In addition, the Company has a bonus plan for certain key officers. The amount
available to pay awards for any year is determined by a committee of senior
executives of the Company and is subject to approval of the Board of Directors
of the Company. Awards are based on the performance of the Company and the
performance of eligible participants. The Company accrued or paid $1,350 and
$1,700 under this plan during the years ended December 31, 1997 and 1996,
respectively.
The Company provides certain health care and life insurance benefits for retired
employees. Employees meeting certain age and length of service requirements
become eligible for these benefits. The Company's obligation for accrued
postretirement
109
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Retirement and Profit Sharing Plans (Continued)
health and welfare benefits is unfunded. Following is an analysis of the change
in the liability for accrued postretirement benefits for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Accrued postretirement benefits, beginning of year ................. $ 12,686 $ 12,821
------------- -------------
Recognition of components of net periodic postretirement benefit cost:
Service cost ..................................................... 269 244
Interest cost..................................................... 930 834
------------- -------------
Net periodic postretirement benefit cost.......................... 1,199 1,078
Benefit payments.................................................... (1,290) (1,213)
------------- -------------
Net change.......................................................... (91) (135)
------------- -------------
Accrued postretirement benefits, end of year........................ $ 12,595 $ 12,686
============= =============
The liability for accrued postretirement benefits includes the following at
December 31, 1997 and 1996:
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 11,167 $ 10,884
Active eligible................................................... 1,076 1,194
Active ineligible................................................. 944 831
------------- -------------
13,187 12,909
Unrecognized actuarial loss......................................... (592) (223)
------------- -------------
Accrued postretirement benefits..................................... $ 12,595 $ 12,686
============= =============
</TABLE>
For measurement purposes, an 5.5% annual rate increase in the health care cost
trend rate was assumed for 1998; the rate was assumed to decrease gradually to
4.0% by the year 2015 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
health care benefit obligation as of December 31, 1997 by $767 and the aggregate
of the service and interest components of net periodic postretirement health
care benefit cost for 1997 by $127. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.0%.
12. Related Party Transactions
Related party transactions described herein include those transactions not
included elsewhere in the Notes to Consolidated Financial Statements.
The Company and its subsidiaries have management and services agreements with
entities affiliated with Knightsbridge, a shareholder. In connection with an
Advisory and Management Services Agreement with Knightsbridge Management,
L.L.C., the Company pays an annual fee of $1,500 plus expenses. Each insurance
subsidiary has an Investment Management Agreement with Knightsbridge
Consultants, L.L.C. For the years ended December 31, 1997 and 1996, fees
incurred totaled $1,871 and $1,658, respectively.
The Company agreed to pay PennCorp, a shareholder, $1,000 in conjunction with
the GSSW transaction in 1996 (see Note 3). The Company paid interest of $1,400
in 1997 in conjunction with PennCorp's acquisition of the Company's 7.0%
convertible subordinated note.
The Company provides services for a wholly-owned subsidiary of PennCorp. The
Company charges the subsidiary for its direct costs and a share of overhead
costs based upon time and utilization studies. These costs totaled approximately
$5,178 during 1997.
110
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Other Commitments and Contingencies
The Company and its subsidiaries are obligated under operating leases, primarily
for office space. Rent expense was $2,169 in 1997 and $2,058 in 1996. There was
no significant sublease income in 1997 or 1996.
<TABLE>
<CAPTION>
Minimum lease commitments are:
<S> <C>
1998.......................................................... $ 2,381
1999.......................................................... 2,685
2000.......................................................... 2,666
2001.......................................................... 2,652
2002.......................................................... 2,497
2003 and thereafter........................................... 10,704
-----------
Total minimum payments required............................. $ 23,585
===========
</TABLE>
Certain lawsuits have been brought against the Company's life insurance
subsidiaries in the normal course of the insurance business involving the
settlement of various matters and seeking compensatory and in some cases
punitive damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operation.
The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. The insurance
subsidiaries paid assessments of $980 in 1997 and $1,357 in 1996. Based on
information currently available, the insurance subsidiaries have accrued $3,194
at December 31, 1997 for future assessments, net of future premium tax
reductions.
14. Other Operating Information
Underwriting and other administrative expenses for the years ended December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Non-deferrable commission expense........................... $ 19,746 $ 30,768
Commission allowances on reinsurance ceded.................. (12,696) (8,331)
Taxes, licenses and fees.................................... 7,492 9,214
General and administrative expenses......................... 34,467 39,241
Expense allowance on reinsurance ceded...................... (8,409) (5,782)
------------- -------------
Underwriting and other administrative expenses............ $ 40,600 $ 65,110
============= =============
</TABLE>
111
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Financial Instruments
The following is a summary of the carrying value and fair value of the Company's
financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments.......................... $ 163,716 $ 163,716 $ 161,895 $ 161,895
Fixed maturities......................................... 1,677,508 1,677,508 1,255,270 1,255,270
Equity securities........................................ 1,079 1,079 1,129 1,129
Mortgage loans........................................... 51,070 51,816 59,993 59,993
Policy loans............................................. 123,041 123,041 128,551 128,551
Collateral loans......................................... -- -- 21,308 21,308
Other investments........................................ 8,461 8,461 5,553 5,553
Interest rate cap........................................ 41 -- 145 --
Agent and premium receivables............................ 5,508 5,508 13,773 13,773
Liabilities:
Notes payable............................................ 154,750 154,750 159,750 159,750
Universal life and investment contract liabilities....... 1,315,496 1,315,496 1,088,335 1,088,335
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Short-term Investments, Agent and Premium Receivables: The
carrying value of short-term investments and amounts receivable approximate
their fair value due to the short-term maturity of these instruments.
Fixed Maturities and Equities Available for Sale: Fair values for fixed
maturities available for sale are based on quoted market prices, where
available. For fixed maturities not actively traded, fair values are
estimated using values obtained from independent pricing services or are
estimated based on expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices.
Mortgage and Collateral Loans: The fair values for mortgage and collateral
loans are estimated using discounted cash flow analyses, based on interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
Other Investments: The fair value of Company's investment in residual
interests in mortgage-backed securities was obtained from an independent
broker-dealer. The fair values of other miscellaneous invested assets have
not been estimated due to their relative immateriality.
Interest rate cap: The fair value of the interest rate cap is $0 as the
current interest rate is below the cap rate.
Policy Loans: Policy loans are an integral part of life insurance policies
which the Company has in force and, in the Company's opinion, cannot be
valued separately. These loans typically carry an interest rate that is
tied to the crediting rate applied to the related policy and contract
reserves.
Notes Payable: Fair values of the Company's bank obligations approximate
carrying values due to the variable interest structure. The fair value of
the Company's convertible note payable is not valued at December 31, 1997
as it was owned by PennCorp and canceled in February 1998.
112
<PAGE>
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Financial Instruments (Continued)
Universal Life and Investment Contract Liabilities: The carrying value and
fair values for the Company's liabilities under universal life and
investment-type insurance contracts are the same as the interest rates
credited to these products are periodically adjusted by the Company to
reflect market conditions. The fair values of liabilities under all
insurance contracts are taken into consideration in the overall management
of interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
16. Subsequent Event
On January 2, 1998, PennCorp acquired all of the outstanding common stock held
by Knightsbridge and certain other parties for aggregate cash consideration
ranging from $73,777 to $77,444 (excluding anticipated acquisition expenses)
depending upon the outcome of certain contingencies. As a result, SWF became a
wholly-owned subsidiary of PennCorp. After the acquisition of the common stock,
PennCorp repaid SWF's bank revolving debt in the amount of $90,250 and its bank
term debt in the amount of $24,500. Consequently, the Company will realize an
extraordinary charge in 1998 for the writeoff of deferred costs of $2,571
associated with these loans. In addition, PennCorp canceled the $40,000 SWF note
it acquired from ICH.
On February 18, 1998, PennCorp announced that it had engaged investment banking
firms to review strategic alternatives for maximizing shareholder value,
including the sale of certain divisions, which include Union Bankers,
Constitution, Marquette and affiliated service providing companies ("SW
Financial businesses held for sale"). As of and for the year ended December 31,
1997, the total assets, net liabilities, total revenues and net loss of the SW
Financial businesses held for sale aggregated $530,866, $49,697, $109,387 and
$5,201, respectively.
113
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item is incorporated by reference to
"Election of Directors" and "Executive Officers" in the Company's Proxy
Statement for its 1998 Annual Meeting of the Shareholders.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference to
"Director-Fees," "Executive Compensation and Other Information" and
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement for its 1998 Annual Meeting of Shareholder, except that the
information required by paragraphs (k) and (l) of Item 402 of Regulation S-K and
set forth in such Proxy Statement is specifically not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference to
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
(Remainder of Page Intentionally Left Blank)
114
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents
1. The financial statements of PennCorp Financial Group, Inc. and
Subsidiaries set forth on pages 50 through 89, and the Independent
Auditors' Report set forth on page 49 hereof are in response to the
information required by this Item.
2. An index to the financial statement schedules required to be filed by
Item 8 of this Report on Form 10-K is set forth immediately before the
attached financial statement schedules on page 122 of this filing.
3. Exhibits
2.1 Purchase Agreement dated as of December 31, 1998 among Universal
American Financial Corp., PennCorp Financial Group, Inc., Pacific
Life and Accident Insurance Company, Pennsylvania Life Insurance
Company, Southwestern Financial Corporation, Constitution Life
Insurance Company and PennCorp Financial Services, Inc. (23)
2.2 Stock Purchase Agreement dated as of December 31, 1998 between GE
Financial Assurance Holdings, Inc. and Pacific Life and Accident
Insurance Company. (23)
2.3 Agreement dated as of December 31, 1998 between GE Financial
Assurance Holdings, Inc. and PennCorp Financial Group, Inc. (23)
3.1 Restated By-Laws of PennCorp Financial Group, Inc. (9)
3.2 Third Restated Certificate of Incorporation of PennCorp Financial
Group, Inc. (17)
4.1 Certificate of Designation of Series C Preferred Stock. (4)
4.2 Corrected Certificate of Designation of $3.375 Convertible
Preferred Stock. (4)
4.3 Certificate of Designation of $3.50 Series II Convertible
Preferred Stock. (3)
4.4 Indenture between PennCorp Financial Group, Inc. and The Bank of
New York, as trustee, with respect to 9 1/4% Senior Subordinate
Notes due 2003. (8)
10.1 Surplus Debenture Number Four in the original principal amount of
$162,539,890, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated January 1, 1994.
(7)
10.2 Surplus Debenture Number Five in the original principal amount of
$17,606,203, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated September 29,
1994. (12)
10.3 Surplus Debenture Number Six in the original principal amount of
$55,000,000, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., dated July 24, 1996.
(11)
10.4 10% Promissory Note in the original principal amount of
$30,661,996, issued by American- Amicable Holdings Corporation to
Pennsylvania Life Insurance Company, dated July 1, 1996. (11)
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.5 PennCorp Financial, Inc. Retirement and Savings Plan. (10)
115
<PAGE>
10.6 PennCorp Financial Group, Inc. Retirement and Savings Plan.
(1)
10.7 PennCorp Financial Group, Inc. 1992 Stock Option Plan. (10)
10.8 PennCorp Financial Group, Inc. Senior Management Warrant
Award Program. (10)
10.9 Form of Restricted Stock Agreement by and between PennCorp
Financial Group, Inc. and certain participants, effective as
of April 1, 1994. (6)
10.10 Employment Agreement between PennCorp Financial Group, Inc.
and David J. Stone entered into June 7, 1996. (11)
10.11 Employment Agreement between PennCorp Financial Group, Inc.
and Steven W. Fickes entered into June 7, 1996. (11)
10.12 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and David J. Stone dated
April 28, 1997. (12)
10.13 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and Steven W. Fickes dated
April 28, 1997. (12)
10.14 Amendment No. 2 to Employment Agreement between PennCorp
Financial Group, Inc. and David J. Stone entered into
January 5, 1998. (18)
10.15 Amendment No. 2 to Employment Agreement between PennCorp
Financial Group, Inc. and Steven W. Fickes entered into
January 5, 1998. (18)
10.16 Amendment No. 3 to Employment Agreement dated the 10th day
of November, 1998 and effective as of the 21st day of
August, 1998 by and between PennCorp Financial Group, Inc.
and David J. Stone. (21)
10.17 Executive Retention Agreement between Charles Lubochinski
and PennCorp Financial Group, Inc. (18)
10.18 Schedule of similar Executive Retention Agreements. (18)
10.19 PennCorp Financial Group, Inc. 1996 Stock Award and Stock
Option Plan. (11)
10.20 Amendment Number One to PennCorp Financial Group, Inc. 1996
Stock Award and Stock Option Plan. (17)
10.21 Amendment Number Two to PennCorp Financial Group, Inc. 1996
Stock Award and Stock Option Plan. (1)
10.22 PennCorp Financial Group, Inc. 1996 Senior Executive Annual
Incentive Award Plan. (11)
10.23 Amendment Agreement dated July 29, 1998 to Executive
Retention Agreement by and between Michael Prager and
PennCorp Financial Group, Inc. (21)
10.24 Accommodation Agreement entered into as of July 6, 1998 by
and between PennCorp Financial Group, Inc. and David J.
Stone. (21)
10.25 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P.
McDermott. (19)
10.26 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and James P.
McDermott. (19)
116
<PAGE>
10.27 Executive Employment Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D.
Silverman. (19)
10.28 Executive Retention Agreement dated May 22, 1998 by and
between PennCorp Financial Group, Inc. and Scott D.
Silverman. (19)
10.29 Executive Employment Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
(19)
10.30 Executive Retention Agreement dated July 1, 1998 by and
between PennCorp Financial Group, Inc. and Keith A. Maib.
(19)
10.31 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and James P. McDermott. (1)
10.32 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Scott D. Silverman (1)
10.33 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Charles Lubochinski (1)
10.34 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Michael Prager (1)
10.35 Conversion, Standstill and Registration Rights Agreement
between United Companies Financial Corporation and PennCorp
Financial Group, Inc. dated as of July 24, 1996. (11)
10.36 Registration Rights Agreement dated as of August 2, 1996,
by and among PennCorp Financial Group, Inc., Smith Barney
Inc., Donaldson, Lufkin & Jenrette Securities Corporation
and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (11)
10.37 Credit Agreement dated March 12, 1997 by and among PennCorp
Financial Group, Inc. and The Chase Manhattan Bank, The
First National Bank of Chicago, and NationsBank, NA., as
Managing Agents, Fleet National Bank, Mellon Bank, N.A.,
Bank of Montreal, CIBC Inc., and Dresdner Bank AG, New York
Branch and Grand Cayman Branch as Co-Agents and The Bank of
New York, as Administrative Agent. (13)
10.38 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., lenders signatory to the
Credit Agreement and The Bank of New York. (19)
10.39 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., lenders signatory to the
Credit Agreement and The Bank of New York. (19)
10.40 Waiver dated as of August 14, 1998 to Credit Agreement
dated as of March 12, 1997 by and among PennCorp Financial
Group, Inc., lenders signatory to the Credit Agreement and
The Bank of New York. (1)
10.41 Amendment No. 3 dated as of September 11, 1998 to Credit
Agreement dated as of March 12, 1997 by and among PennCorp
Financial Group, Inc., lenders signatory to the Credit
Agreement and The Bank of New York. (20)
117
<PAGE>
10.42 Amendment No. 4 and Waiver dated as of November 16, 1998 to
Credit Agreement dated as of March 12, 1997 by and among
PennCorp Financial Group, Inc., lenders signatory to the
Credit Agreement and The Bank of New York. (22)
10.43 Amendment No. 5 dated as of December 31, 1998 to Credit
Agreement dated as of March 12, 1997 by and among PennCorp
Financial Group, Inc., lenders signatory to the Credit
Agreement and The Bank of New York. (23)
10.44 United Life Consent Agreement dated as of March 5, 1999 by
and among PennCorp Financial Group, Inc., lenders signatory
to the Credit Agreement dated as of March 12, 1997 and The
Bank of New York. (24)
10.45 Revision Agreement, dated as of May 30, 1997, by and among
United Companies Financial Corporation, PennCorp Financial
Group, Inc., Pacific Life and Accident Insurance Company and
each additional party set forth on the signature pages
thereto. (14)
10.46 Amendment to Surplus Debenture in the original principal
amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
dated May 17, 1996. (14)
10.47 Second Amendment to Surplus Debenture in the original
principal amount of $73,000,000 issued by Pioneer Security
Life Insurance Company to American-Amicable Holdings
Corporation, effective January 1, 1997. (14)
10.48 Third Amendment to Surplus Debenture in the original
principal amount of $73,000,000 issued by Pioneer Security
Life Insurance Company to American-Amicable Holdings
Corporation, effective May 14, 1997. (14)
10.49 Amendment to Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group,
Inc., effective January 1, 1997. (14)
10.50 Second Amendment to Surplus Debenture Number Four in the
original principal amount of $162,539,890, issued by Pacific
Life and Accident Insurance Company to PennCorp Financial
Group, Inc., effective May 14, 1997. (14)
10.51 Amendment to Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group,
Inc., effective January 1, 1997. (14)
10.52 Second Amendment to Surplus Debenture Number Five in the
original principal amount of $17,606,203, issued by Pacific
Life and Accident Insurance Company to PennCorp Financial
Group, Inc., effective May 14, 1997. (14)
10.53 Amendment to Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group,
Inc., effective January 1, 1997. (14)
10.54 Second Amendment to Surplus Debenture Number Six in the
original principal amount of $55,000,000, issued by Pacific
Life and Accident Insurance Company to PennCorp Financial
Group, Inc., effective May 14, 1997. (14)
10.55 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. (19)
118
<PAGE>
10.56 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. (19)
10.57 Note Purchase, Release and Settlement Agreement, dated July
13, 1997, executed by Lone Star Liquidating Trust, PennCorp
Financial Group, Inc. and Southwestern Financial Corporation
. (15)
10.58 Amended and Restated Assignment Agreement dated as of
January 2, 1998 by and between PennCorp Financial Group,
Inc. and Knightsbridge Capital Fund I, L.P. (16)
10.59 Amended and Restated Assignment Agreement dated as of
January 2, 1998 by and between PennCorp Financial Group,
Inc., David J. Stone, Steven W. Fickes, the Steven Wayne
Fickes, Jr. Trust dated December 21, 1995 and the Kathryn
Elizabeth Fickes Trust dated December 21, 1995. (16)
10.60 Agreement dated September 22, 1998 by PennCorp Financial
Group, Inc. and certain subsidiaries signatory to the
Agreement and the Texas Department of Insurance. (21)
12 Computation of ratio of earnings to fixed charges. (1)
21 List of subsidiaries of the Registrant. (1)
23.1 Auditors consent. (1)
23.2 Auditors consent. (1)
27 Financial Data Schedule. (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K dated November
25, 1996, which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on December 4, 1996, providing a copy of the
Amended and Restated Agreement and Plan of Merger with Washington National
Corporation.
(3) Such exhibit is incorporated by reference to the Registration Statement on
Form S-3 (Registration No. 333- 13285) of PennCorp Financial Group, Inc.
filed with the Securities and Exchange Commission on October 10, 1996.
(4) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 of PennCorp Financial Group,
Inc.
(5) Such exhibit is incorporated by reference to the Form 8-A dated July 11,
1995 which was filed by PennCorp Financial Group, Inc. with the Securities
and Exchange Commission on July 12, 1995.
(6) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1994 of PennCorp Financial
Group, Inc.
(7) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1994 of PennCorp Financial Group,
Inc.
(8) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 of PennCorp Financial Group,
Inc.
(9) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 of PennCorp Financial Group,
Inc.
(10) Such exhibit is incorporated by reference to the Registration Statement on
Form S-1 (Registration No. 33-50530) of PennCorp Financial Group, Inc.
filed on August 6, 1992.
120
<PAGE>
(11) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 of PennCorp Financial Group,
Inc.
(12) Such exhibit is incorporated by reference to Amendment Number 2 to the
Annual Report on Form 10-K for fiscal year ended December 31, 1996 of
PennCorp Financial Group, Inc.
(13) Such exhibit is incorporated by reference to the Amendment Number 1 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of
PennCorp Financial Group, Inc.
(14) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1997 of PennCorp Financial Group,
Inc.
(15) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1997 of PennCorp Financial
Group, Inc.
(16) Such exhibit is incorporated by reference to the Form 8-K dated January 13,
1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on January 13, 1998 relating to the
acquisition of common stock and common stock warrants of Southwestern
Financial Corporation not previously owned by PennCorp Financial Group,
Inc.
(17) Such exhibit is incorporated by reference to the Registration Statement on
Form S-8 (Registration No. 333-48629) of PennCorp Financial Group, Inc.
filed on March 24, 1998.
(18) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 of PennCorp Financial Group,
Inc.
(19) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1998 of PennCorp Financial Group,
Inc.
(20) Such exhibit is incorporated by reference to the Form 8-K dated September
15, 1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on September 15, 1998 relating to Amendment
No. 3 to Credit Agreement.
(21) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1998 of PennCorp Financial
Group, Inc.
(22) Such exhibit is incorporated by reference to the Form 8-K dated November
17, 1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on November 17, 1998 relating to Amendment
No. 4 and Waiver of Credit Agreement.
(23) Such exhibit is incorporated by reference to the Form 8-K dated January 11,
1999 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on January 11, 1999 relating to the
acquisition of Pennsylvania Life Insurance Company, Union Bankers Insurance
Company and related entities, the acquisition of Professional Insurance
Company, and Amendment No. 5 to Credit Agreement.
(24) Such exhibit is incorporated by reference to the Form 8-K dated March 11,
1999 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on March 11, 1999 relating to the United
Life Consent Agreement by and among PennCorp Financial Group, Inc. lenders
signatory to the Credit Agreement dated as of March 12, 1997 and The Bank
of New York.
(b) Reports on Form 8-K.
A report on Form 8-K, dated November 17, 1998, was filed with the
Securities and Exchange Commission by PennCorp Financial Group, Inc. on
November 17, 1998, providing Amendment No. 4 and Waiver to Credit Agreement
dated as of March 12, 1997 by and among PennCorp Financial Group, Inc., the
lenders signatory to the Credit Agreement and The Bank of New York.
120
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, PennCorp Financial Group, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PENNCORP FINANCIAL GROUP, INC.
(Registrant)
By: /s/ Keith A. Maib
-------------------------
Keith A. Maib
President and Chief Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Keith A. Maib /s/ Thomas A. Player
- ----------------- --------------------
Keith A. Maib Thomas A. Player
Director Director
Date: March 31, 1999 Date: March 31, 1999
/s/ Kenneth Roman /s/ Bruce W. Schnitzer
- ----------------- ----------------------
Kenneth Roman Bruce W. Schnitzer
Director Director
Date: March 31, 1999 Date: March 31, 1999
/s/ David J. Stone /s/ David C. Smith
- ------------------ ----------------------
David J. Stone David C. Smith
Director Chairman of the Board and Director
Date: March 31, 1999 Date: March 31, 1999
/s/ Allan D. Greenberg
- ----------------------
Allan D. Greenberg
Director
Date: March 31, 1999
121
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements:
Reference is made to data appearing on pages 50 through 89, and to the
Independent Auditors' Report appearing on page 49 hereof.
Schedules:* Page
Independent Auditors' Report - Financial Statement Schedules...... Ex. 23
Schedule II Condensed Financial Information of Registrant... 123
Schedule III Supplementary Insurance Information............. 126
Schedule IV Reinsurance..................................... 127
Schedule V Valuation and Qualifying Accounts............... 128
* All other schedules have been omitted as they are not applicable or not
required, or the information is given in the financial statements, notes
hereto or in other schedules.
122
<PAGE>
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME (LOSS) For
the years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Interest income from subsidiaries................................. $ 19,663 $ 21,173 $ 35,525
Other interest income............................................. 2,865 3,547 2,428
Net gains from sale of investments................................ 577 -- --
Other income...................................................... 589 249 423
----------- ----------- -----------
Total revenue................................................. 23,694 24,969 38,376
----------- ----------- -----------
Operating expenses:
General and administrative expenses............................... 19,429 36,939 2,493
Interest and amortization of deferred debt issuance costs......... 42,730 23,103 17,920
Restructuring charges............................................. 4,529 -- --
Impairment provision associated with assets of
Businesses Held for Sale........................................ 9,000 -- --
----------- ----------- -----------
Total operating expenses...................................... 75,688 60,042 20,413
----------- ----------- -----------
Income (loss) before income taxes (benefits), equity in earnings of
subsidiaries and extraordinary charge............................. (51,994) (35,073) 17,963
Income tax expense (benefit).................................... (3,132) (8,689) 251
----------- ----------- -----------
Income (loss) before equity in earnings of subsidiaries
and extraordinary charge.......................................... (48,862) (26,384) 17,712
Equity in earnings (losses) of subsidiaries..................... (374,068) 76,524 72,305
----------- ----------- -----------
Income (loss) before extraordinary charge............................ (422,930) 50,140 90,017
Extraordinary charge, net of income taxes of $--, $--and $932 -- -- (1,730)
----------- ----------- -----------
Net income (loss).................................................... $ (422,930) $ 50,140 $ 88,287
=========== =========== ===========
</TABLE>
See accompanying independent auditors' report.
123
<PAGE>
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
As of December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Investments:
Investment in subsidiaries..................................................... $ 730,436 $ 932,931
Notes receivable from subsidiaries............................................. 257,442 275,146
Equity securities available for sale........................................... -- 22,948
Other.......................................................................... -- 1,075
----------- -----------
Total investments............................................................ 987,878 1,232,100
Cash and short term investments.................................................. 12,654 4,464
Accrued investment income due from subsidiaries.................................. -- 8,697
Deferred debt issuance costs..................................................... 4,896 2,219
Other assets..................................................................... 1,145 6,849
----------- -----------
Total assets................................................................. $ 1,006,573 $ 1,254,329
=========== ===========
LIABILITIES
Notes payable.................................................................... $ 548,646 $ 356,646
Due to subsidiaries.............................................................. -- 8,404
Accrued expenses and other liabilities........................................... 21,986 9,176
----------- -----------
Total liabilities............................................................ 570,632 374,226
----------- -----------
Mandatory redeemable preferred stock, Series C................................... -- 19,867
SHAREHOLDERS' EQUITY
$3.375 Convertible preferred stock............................................... 112,454 110,513
$3.50 Series II convertible preferred stock...................................... 141,673 139,157
Common stock..................................................................... 301 289
Additional paid in capital....................................................... 430,321 397,590
Accumulated other comprehensive income........................................... 19,995 35,034
Retained earnings (deficit)...................................................... (234,921) 211,055
Treasury shares.................................................................. (32,391) (32,130)
Notes receivable and other assets secured by common stock........................ (1,491) (1,272)
----------- -----------
Total shareholders' equity................................................... 435,941 860,236
----------- -----------
Total liabilities and shareholders' equity................................... $ 1,006,573 $ 1,254,329
=========== ===========
</TABLE>
See accompanying independent auditors' report.
124
<PAGE>
SCHEDULE II
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS For
the years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ (422,930) $ 50,140 $ 88,287
Adjustments to reconcile net income (loss) to net cash
provided (used) in operating activities:
Amortization of intangibles and depreciation.................. 1,966 1,389 1,238
Impairment provision associated with assets of
Businesses Held for Sale.................................... 9,000 -- --
Equity in earnings (loss) of subsidiaries..................... 374,068 (76,524) (72,305)
Increase (decrease) in liabilities and due to subs............ (6,164) 12,870 (544)
Other, net.................................................... 2,644 (9,227) 79
----------- ----------- -----------
Net cash provided (used) by operations...................... (41,416) (21,352) 16,755
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of businesses......................................... (73,858) -- --
Purchase of equity security....................................... (5,000) (20,000) --
Sale of equity security........................................... 30,500 -- --
Issuance of surplus note to subsidiary............................ -- -- (155,000)
Principal payment on surplus note................................. -- -- 100,000
Dividend received from subsidiary................................. 44,327 14,677 11,283
Capital contribution to subsidiary................................ (7,853) (14,889) (208,708)
Other, net........................................................ 712 (42,142) --
----------- ----------- -----------
Net cash used by investing activities......................... (11,172) (62,354) (252,425)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of notes payable......................................... 203,000 250,000 230,000
Issuance of common stock.......................................... 3 -- 155,450
Issuance of preferred stock....................................... -- -- 139,157
Purchase of treasury stock........................................ -- (28,760) --
Reduction of notes payable........................................ (126,015) (100,000) (273,353)
Redemption of preferred stock..................................... -- (14,705) --
Other, primarily dividends, net................................... (16,210) (20,464) (15,198)
----------- ----------- -----------
Net cash provided by financing activities..................... 60,778 86,071 236,056
----------- ----------- -----------
Net increase in cash................................................. 8,190 2,365 386
Cash and short-term investments at beginning of year................. 4,464 2,099 1,713
----------- ----------- -----------
Cash and short-term investments at end of year....................... $ 12,654 $ 4,464 $ 2,099
=========== =========== ===========
Supplemental Disclosure:
Interest paid..................................................... $ 37,849 $ 20,946 $ 16,921
Taxes paid (refunded)............................................. (213) -- 200
Non-cash financing activities:
Redemption of Series C Preferred Stock............................ 22,227 -- --
Debt assumed with acquisition..................................... 115,015 -- --
Securities issued in conjunction with acquisition................. -- -- 14,999
Issuance of common stock associated with the acquisition of the
Fickes and Stone Knightsbridge Interests........................ 8,500 -- --
Other ............................................................ 261 1,281 948
</TABLE>
See accompanying independent auditors' report.
125
<PAGE>
SCHEDULE III
PENNCORP FINANCIAL GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Future
Policy Amorti-
Benefits Benefits, zation of
Deferred Losses, Claims, Deferred
Policy Claims Net Losses & Policy Other
Acquisition & Loss Premium Investment Settlement Acquisition Operating
Costs Expenses Revenue Income Expenses Costs Expenses
----- -------- ------- ------ -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Fixed benefit....... $ -- $ 24,190 $ 216,219 $ 25,826 $ 160,135 $ 27,251 $ 107,772
Life................ 136,420 2,086,957 234,540 174,249 267,074 49,265 98,906
Accumulation........ 3,288 755,891 8,399 168,977 114,553 2,775 22,819
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............ $ 139,708 $ 2,867,038 $ 459,158 $ 369,052 $ 541,762 $ 79,291 $ 229,497
=========== =========== =========== =========== =========== =========== ===========
1997
Fixed benefit....... $ 160,974 $ 175,524 $ 168,974 $ 19,206 $ 54,630 $ 19,386 $ 73,488
Life................ 122,376 1,342,563 169,518 94,442 164,878 24,154 59,879
Accumulation........ 26,767 1,771,838 7,074 159,589 104,781 783 12,878
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............ $ 310,117 $ 3,289,925 $ 345,566 $ 273,237 $ 324,289 $ 44,323 $ 146,245
=========== =========== =========== =========== =========== =========== ===========
1996
Fixed benefit....... $ 127,091 $ 294,068 $ 169,311 $ 22,730 $ 63,663 $ 16,446 $ 55,161
Life................ 105,063 1,212,374 169,974 88,220 137,867 12,010 48,706
Accumulation........ 20,274 2,060,013 8,805 99,784 70,381 2,288 12,693
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............ $ 252,428 $ 3,566,455 $ 348,090 $ 210,734 $ 271,911 $ 30,744 $ 116,560
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying independent auditors' report
126
<PAGE>
SCHEDULE IV
PENNCORP FINANCIAL GROUP, INC.
REINSURANCE
For the years ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed Of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force......... $ 35,350,735 $ 5,501,096 $ 1,325,067 $ 31,174,706
============= ============ ============ =============
Premiums:
Accident and health insurance... $ 310,477 $ 96,770 $ 2,047 $ 215,754 0.9%
Life insurance/accumulation..... 275,840 36,407 3,971 243,404 1.6%
------------- ------------ ------------ -------------
$ 586,317 $ 133,177 $ 6,018 $ 459,158
============= ============ ============ =============
Year ended December 31, 1997:
Life insurance in force......... $ 24,618,960 $ 4,366,266 $ 1,251,538 $ 21,504,232
============= ============ ============ =============
Premiums:
Accident and health insurance... $ 172,511 $ 2,537 $ -- $ 169,974 --%
Life insurance/accumulation..... 203,027 29,962 2,527 175,592 1.4%
------------- ------------ ------------ -------------
$ 375,538 $ 32,499 $ 2,527 $ 345,566
============= ============ ============ =============
Year ended December 31, 1996:
Life insurance in force......... $ 31,498,035 $ 5,884,609 $ 1,779,439 $ 27,392,865
============= ============ ============ =============
Premiums:
Accident and health insurance... $ 169,727 $ 416 $ -- $ 169,311 --%
Life insurance/accumulation..... 189,098 11,639 1,320 178,779 0.7%
------------- ------------ ------------ -------------
$ 358,825 $ 12,055 $ 1,320 $ 348,090
============= ============ ============ =============
</TABLE>
See accompanying independent auditors' report.
127
<PAGE>
SCHEDULE V
PENNCORP FINANCIAL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS For
the years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Balance at Charge to Charge to Balance at
Beginning Cost and to Other End of
Of Period Expenses Accounts Deductions Period
--------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
1998:
Mortgage loans on real estate......... $ 6,721(b) $ 11,425 $ -- $ 13,851(c) $ 4,295
Allowance for bond losses............. -- -- -- -- --
Unearned loan charges................. 1,569 -- -- 1,569(c) --
Accounts and notes receivable......... 9,205(b) 4,449 -- 7,453(c) 6,201
1997:
Mortgage loans on real estate......... $ 4,211 $ 2,106 $ -- $ 276 $ 6,041
Allowance for bond losses............. 189 -- -- 189 --
Unearned loan charges................. 266 1,806 -- 503 1,569
Accounts and notes receivable......... 6,528 9,102 -- 6,605 9,025
1996:
Mortgage loans on real estate......... $ 4,211(a) $ -- $ -- $ -- $ 4,211
Allowance for bond losses............. 189(a) -- -- -- 189
Unearned loan charges................. 266(a) -- -- -- 266
Accounts and notes receivable......... 8,388 4,082 -- 5,942 6,528
- --------------
(a) Amount recorded as a purchase GAAP adjustment in conjunction with the
acquisition of United Life.
(b) Includes amounts recorded as a purchase GAAP adjustment in conjunction with
the acquisition of SW Financial.
(c) Includes amounts transferred to assets of Businesses Held for Sale.
</TABLE>
See accompanying independent auditors' report.
128
<PAGE>
INDEX TO EXHIBITS
2.1 Purchase Agreement dated as of December 31, 1998 among Universal
American Financial Corp., PennCorp Financial Group, Inc., Pacific Life
and Accident Insurance Company, Pennsylvania Life Insurance Company,
Southwestern Financial Corporation, Constitution Life Insurance
Company and PennCorp Financial Services, Inc. (23)
2.2 Stock Purchase Agreement dated as of December 31, 1998 between GE
Financial Assurance Holdings, Inc. and Pacific Life and Accident
Insurance Company. (23)
2.3 Agreement dated as of December 31, 1998 between GE Financial Assurance
Holdings, Inc. and PennCorp Financial Group, Inc. (23)
3.1 Restated By-Laws of PennCorp Financial Group, Inc. (9)
3.2 Third Restated Certificate of Incorporation of PennCorp Financial
Group, Inc. (17)
4.1 Certificate of Designation of Series C Preferred Stock. (4)
4.2 Corrected Certificate of Designation of $3.375 Convertible Preferred
Stock. (4)
4.3 Certificate of Designation of $3.50 Series II Convertible Preferred
Stock. (3)
4.4 Indenture between PennCorp Financial Group, Inc. and The Bank of New
York, as trustee, with respect to 9 1/4% Senior Subordinate Notes due
2003. (8)
10.1 Surplus Debenture Number Four in the original principal amount of
$162,539,890, issued by Pacific Life and Accident Insurance Company to
PennCorp Financial Group, Inc., dated January 1, 1994. (7)
10.2 Surplus Debenture Number Five in the original principal amount of
$17,606,203, issued by Pacific Life and Accident Insurance Company to
PennCorp Financial Group, Inc., dated September 29, 1994. (12)
10.3 Surplus Debenture Number Six in the original principal amount of
$55,000,000, issued by Pacific Life and Accident Insurance Company to
PennCorp Financial Group, Inc., dated July 24, 1996. (11)
10.4 10% Promissory Note in the original principal amount of $30,661,996,
issued by American-Amicable Holdings Corporation to Pennsylvania Life
Insurance Company, dated July 1, 1996. (11)
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.5 PennCorp Financial, Inc. Retirement and Savings Plan. (10)
10.6 PennCorp Financial Group, Inc. Retirement and Savings Plan. (1)
10.7 PennCorp Financial Group, Inc. 1992 Stock Option Plan. (10)
10.8 PennCorp Financial Group, Inc. Senior Management Warrant Award
Program. (10)
10.9 Form of Restricted Stock Agreement by and between PennCorp
Financial Group, Inc. and certain participants, effective as of
April 1, 1994. (6)
10.10 Employment Agreement between PennCorp Financial Group, Inc. and
David J. Stone entered into June 7, 1996. (11)
10.11 Employment Agreement between PennCorp Financial Group, Inc. and
Steven W. Fickes entered into June 7, 1996. (11)
129
<PAGE>
10.12 Amendment Number One to Employment Agreement between PennCorp
Financial Group, Inc. and David J. Stone dated April 28, 1997.
(12)
10.13 Amendment Number One to Employment Agreement between PennCorp
Financial Group, Inc. and Steven W. Fickes dated April 28, 1997.
(12)
10.14 Amendment No. 2 to Employment Agreement between PennCorp
Financial Group, Inc. and David J. Stone entered into January 5,
1998. (18)
10.15 Amendment No. 2 to Employment Agreement between PennCorp
Financial Group, Inc. and Steven W. Fickes entered into January
5, 1998. (18)
10.16 Amendment No. 3 to Employment Agreement dated the 10th day of
November, 1998 and effective as of the 21st day of August, 1998
by and between PennCorp Financial Group, Inc. and David J. Stone.
(21)
10.17 Executive Retention Agreement between Charles Lubochinski and
PennCorp Financial Group, Inc. (18)
10.18 Schedule of similar Executive Retention Agreements. (18)
10.19 PennCorp Financial Group, Inc. 1996 Stock Award and Stock Option
Plan. (11)
10.20 Amendment Number One to PennCorp Financial Group, Inc. 1996
Stock Award and Stock Option Plan. (17)
10.21 Amendment Number Two to PennCorp Financial Group, Inc. 1996
Stock Award and Stock Option Plan. (1)
10.22 PennCorp Financial Group, Inc. 1996 Senior Executive Annual
Incentive Award Plan. (11)
10.23 Amendment Agreement dated July 29, 1998 to Executive Retention
Agreement by and between Michael Prager and PennCorp Financial
Group, Inc. (21)
10.24 Accommodation Agreement entered into as of July 6, 1998 by and
between PennCorp Financial Group, Inc. and David J. Stone. (21)
10.25 Executive Employment Agreement dated May 22, 1998 by and between
PennCorp Financial Group, Inc. and James P. McDermott. (19)
10.26 Executive Retention Agreement dated May 22, 1998 by and between
PennCorp Financial Group, Inc. and James P. McDermott. (19)
10.27 Executive Employment Agreement dated May 22, 1998 by and between
PennCorp Financial Group, Inc. and Scott D. Silverman. (19)
10.28 Executive Retention Agreement dated May 22, 1998 by and between
PennCorp Financial Group, Inc. and Scott D. Silverman. (19)
10.29 Executive Employment Agreement dated July 1, 1998 by and between
PennCorp Financial Group, Inc. and Keith A. Maib. (19)
10.30 Executive Retention Agreement dated July 1, 1998 by and between
PennCorp Financial Group, Inc. and Keith A. Maib. (19)
10.31 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and James P. McDermott. (1)
130
<PAGE>
10.32 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Scott D. Silverman (1)
10.33 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Charles Lubochinski (1)
10.34 Letter Agreement dated May 21, 1998 for Option to Purchase
Shares of ACO Brokerage Holdings Corporation by and between
PennCorp Financial Group, Inc. and Michael Prager (1)
10.35 Conversion, Standstill and Registration Rights Agreement between
United Companies Financial Corporation and PennCorp Financial Group,
Inc. dated as of July 24, 1996. (11)
10.36 Registration Rights Agreement dated as of August 2, 1996, by and among
PennCorp Financial Group, Inc., Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated. (11)
10.37 Credit Agreement dated March 12, 1997 by and among PennCorp Financial
Group, Inc. and The Chase Manhattan Bank, The First National Bank of
Chicago, and NationsBank, NA., as Managing Agents, Fleet National
Bank, Mellon Bank, N.A., Bank of Montreal, CIBC Inc., and Dresdner
Bank AG, New York Branch and Grand Cayman Branch as Co-Agents and The
Bank of New York, as Administrative Agent. (13)
10.38 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., lenders signatory to the Credit Agreement and The Bank of
New York. (19)
10.39 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., lenders signatory to the Credit Agreement and The Bank of
New York. (19)
10.40 Waiver dated as of August 14, 1998 to Credit Agreement dated as of
March 12, 1997 by and among PennCorp Financial Group, Inc., lenders
signatory to the Credit Agreement and The Bank of New York. (1)
10.41 Amendment No. 3 dated as of September 11, 1998 to Credit Agreement
dated as of March 12, 1997 by and among PennCorp Financial Group,
Inc., lenders signatory to the Credit Agreement and The Bank of New
York. (20)
10.42 Amendment No. 4 and Waiver dated as of November 16, 1998 to Credit
Agreement dated as of March 12, 1997 by and among PennCorp Financial
Group, Inc., lenders signatory to the Credit Agreement and The Bank of
New York. (22)
10.43 Amendment No. 5 dated as of December 31, 1998 to Credit Agreement
dated as of March 12, 1997 by and among PennCorp Financial Group,
Inc., lenders signatory to the Credit Agreement and The Bank of New
York. (23)
10.44 United Life Consent Agreement dated as of March 5, 1999 by and among
PennCorp Financial Group, Inc., lenders signatory to the Credit
Agreement dated as of March 12, 1997 and The Bank of New York. (24)
10.45 Revision Agreement, dated as of May 30, 1997, by and among United
Companies Financial Corporation, PennCorp Financial Group, Inc.,
Pacific Life and Accident Insurance Company and each additional party
set forth on the signature pages thereto. (14)
10.46 Amendment to Surplus Debenture in the original principal amount of
$73,000,000 issued by Pioneer Security Life Insurance Company to
American-Amicable Holdings Corporation, dated May 17, 1996. (14)
10.47 Second Amendment to Surplus Debenture in the original principal
amount of $73,000,000 issued by Pioneer Security Life Insurance
Company to American-Amicable Holdings Corporation, effective January
1, 1997. (14)
131
<PAGE>
10.48 Third Amendment to Surplus Debenture in the original principal amount
of $73,000,000 issued by Pioneer Security Life Insurance Company to
American-Amicable Holdings Corporation, effective May 14, 1997. (14)
10.49 Amendment to Surplus Debenture Number Four in the original principal
amount of $162,539,890, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., effective January 1, 1997.
(14)
10.50 Second Amendment to Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific Life and Accident
Insurance Company to PennCorp Financial Group, Inc., effective May 14,
1997. (14)
10.51 Amendment to Surplus Debenture Number Five in the original principal
amount of $17,606,203, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., effective January 1, 1997.
(14)
10.52 Second Amendment to Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific Life and Accident
Insurance Company to PennCorp Financial Group, Inc., effective May 14,
1997. (14)
10.53 Amendment to Surplus Debenture Number Six in the original principal
amount of $55,000,000, issued by Pacific Life and Accident Insurance
Company to PennCorp Financial Group, Inc., effective January 1, 1997.
(14)
10.54 Second Amendment to Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific Life and Accident
Insurance Company to PennCorp Financial Group, Inc., effective May 14,
1997. (14)
10.55 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. (19)
10.56 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. (19)
10.57 Note Purchase, Release and Settlement Agreement, dated July 13, 1997,
executed by Lone Star Liquidating Trust, PennCorp Financial Group,
Inc. and Southwestern Financial Corporation . (15)
10.58 Amended and Restated Assignment Agreement dated as of January 2, 1998
by and between PennCorp Financial Group, Inc. and Knightsbridge
Capital Fund I, L.P. (16)
10.59 Amended and Restated Assignment Agreement dated as of January 2, 1998
by and between PennCorp Financial Group, Inc., David J. Stone, Steven
W. Fickes, the Steven Wayne Fickes, Jr. Trust dated December 21, 1995
and the Kathryn Elizabeth Fickes Trust dated December 21, 1995. (16)
10.60 Agreement dated September 22, 1998 by PennCorp Financial Group, Inc.
and certain subsidiaries signatory to the Agreement and the Texas
Department of Insurance. (21)
12 Computation of ratio of earnings to fixed charges. (1)
21 List of subsidiaries of the Registrant. (1)
23.1 Auditors consent. (1)
23.2 Auditors consent. (1)
27 Financial Data Schedule. (1)
(1) Filed herewith.
132
<PAGE>
(2) Such exhibit is incorporated by reference to the Form 8-K dated November
25, 1996, which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on December 4, 1996, providing a copy of the
Amended and Restated Agreement and Plan of Merger with Washington National
Corporation.
(3) Such exhibit is incorporated by reference to the Registration Statement on
Form S-3 (Registration No. 333- 13285) of PennCorp Financial Group, Inc.
filed with the Securities and Exchange Commission on October 10, 1996.
(4) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 of PennCorp Financial Group,
Inc.
(5) Such exhibit is incorporated by reference to the Form 8-A dated July 11,
1995 which was filed by PennCorp Financial Group, Inc. with the Securities
and Exchange Commission on July 12, 1995.
(6) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1994 of PennCorp Financial
Group, Inc.
(7) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1994 of PennCorp Financial Group,
Inc.
(8) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 of PennCorp Financial Group,
Inc.
(9) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 of PennCorp Financial Group,
Inc.
(10) Such exhibit is incorporated by reference to the Registration Statement on
Form S-1 (Registration No. 33-50530) of PennCorp Financial Group, Inc.
filed on August 6, 1992.
(11) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 of PennCorp Financial Group,
Inc.
(12) Such exhibit is incorporated by reference to Amendment Number 2 to the
Annual Report on Form 10-K for fiscal year ended December 31, 1996 of
PennCorp Financial Group, Inc.
(13) Such exhibit is incorporated by reference to the Amendment Number 1 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of
PennCorp Financial Group, Inc.
(14) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1997 of PennCorp Financial Group,
Inc.
(15) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1997 of PennCorp Financial
Group, Inc.
(16) Such exhibit is incorporated by reference to the Form 8-K dated January 13,
1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on January 13, 1998 relating to the
acquisition of common stock and common stock warrants of Southwestern
Financial Corporation not previously owned by PennCorp Financial Group,
Inc.
(17) Such exhibit is incorporated by reference to the Registration Statement on
Form S-8 (Registration No. 333-48629) of PennCorp Financial Group, Inc.
filed on March 24, 1998.
(18) Such exhibit is incorporated by reference to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 of PennCorp Financial Group,
Inc.
(19) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended June 30, 1998 of PennCorp Financial Group,
Inc.
133
<PAGE>
(20) Such exhibit is incorporated by reference to the Form 8-K dated September
15, 1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on September 15, 1998 relating to Amendment
No. 3 to Credit Agreement.
(21) Such exhibit is incorporated by reference to the Quarterly Report on Form
10-Q for the three months ended September 30, 1998 of PennCorp Financial
Group, Inc.
(22) Such exhibit is incorporated by reference to the Form 8-K dated November
17, 1998 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on November 17, 1998 relating to Amendment
No. 4 and Waiver of Credit Agreement.
(23) Such exhibit is incorporated by reference to the Form 8-K dated January 11,
1999 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on January 11, 1999 relating to the
acquisition of Pennsylvania Life Insurance Company, Union Bankers Insurance
Company and related entities, the acquisition of Professional Insurance
Company, and Amendment No. 5 to Credit Agreement.
(24) Such exhibit is incorporated by reference to the Form 8-K dated March 11,
1999 which was filed with the Securities and Exchange Commission by
PennCorp Financial Group, Inc. on March 11, 1999 relating to the United
Life Consent Agreement by and among PennCorp Financial Group, Inc. lenders
signatory to the Credit Agreement dated as of March 12, 1997 and The Bank
of New York.
134
EXHIBIT 10.6
PENNCORP FINANCIAL GROUP, INC.
RETIREMENT AND SAVINGS PLAN
(January 1, 1998 Restatement)
Fidelity Management Trust Company, its affiliates and employees may not provide
you with legal or tax advice in connection with the execution of this document.
It should be reviewed by your attorney and/or accountant prior to execution.
CORPORATEplan for RETIREMENT (SM)
VOLUME SUBMITTER
PLAN DOCUMENT SYSTEMS (TM)
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1 - Plan Definitions
1.2 - Interpretation
ARTICLE II
SERVICE
2.1 - Definitions
2.2 - Crediting of Hours of Service
2.3 - Hours of Service Equivalencies
2.4 - Limitations on Crediting of Hours of Service
2.5 - Department of Labor Rules
2.6 - Periods of Eligibility Service
2.7 - Crediting of Continuous Service
2.8 - Vesting Service
2.9 - Crediting of Service on Transfer or Amendment
ARTICLE III
ELIGIBILITY
3.1 - Eligibility
3.2 - Transfers of Employment
3.3 - Reemployment
3.4 - Notification Concerning New Eligible Employees
3.5 - Effect and Duration
ARTICLE IV
TAX-DEFERRED CONTRIBUTIONS
4.1 - Tax-Deferred Contributions
4.2 - Amount of Tax-Deferred Contributions
4.3 - Changes in Reduction Authorization
4.4 - Suspension of Tax-Deferred Contributions
4.5 - Resumption of Tax-Deferred Contributions
4.6 - Delivery of Tax-Deferred Contributions
4.7 - Vesting of Tax-Deferred Contributions
ARTICLE V
AFTER-TAX AND ROLLOVER CONTRIBUTIONS
5.1 - After-Tax Contributions
5.2 - Amount of After-Tax Contributions by Payroll Withholding
5.3 - Changes in Payroll Withholding Authorization
5.4 - Suspension of After-Tax Contributions by Payroll Withholding
5.5 - Resumption of After-Tax Contributions by Payroll Withholding
5.6 - Rollover Contributions
5.7 - Delivery of After-Tax Contributions
5.8 - Vesting of After-Tax Contributions and Rollover Contributions
(i)
<PAGE>
ARTICLE VI
EMPLOYER CONTRIBUTIONS
6.1 - Contribution Period
6.2 - Profit-Sharing Contributions
6.3 - Allocation of Profit-Sharing Contributions
6.4 - Qualified Nonelective Contributions
6.5 - Allocation of Qualified Nonelective Contributions
6.6 - Matching Contributions
6.7 - Allocation of Matching Contributions
6.8 - Verification of Amount of Employer Contributions by the Sponsor
6.9 - Payment of Employer Contributions
6.10 - Eligibility to Participate in Allocation
6.11 - Vesting of Employer Contributions
6.12 - Election of Former Vesting Schedule
6.13 - Forfeitures to Reduce Employer Contributions
ARTICLE VII
LIMITATIONS ON CONTRIBUTIONS
7.1 - Definitions
7.2 - Code Section 402(g) Limit
7.3 - Distribution of Excess Deferrals
7.4 - Limitation on Tax-Deferred Contributions of Highly Compensated
Employees
7.5 - Distribution of Excess Tax-Deferred Contributions
7.6 - Limitation on Matching Contributions and After-Tax Contributions
of Highly Compensated Employees
7.7 - Forfeiture or Distribution of Excess Contributions
7.8 - Multiple Use Limitation
7.9 - Determination of Income or Loss
7.10 - Code Section 415 Limitations on Crediting of Contributions
and Forfeitures
7.11 - Coverage Under Other Qualified Defined Contribution Plan
7.12 - Coverage Under Qualified Defined Benefit Plan
7.13 - Scope of Limitations
ARTICLE VIII
TRUST FUNDS AND SEPARATE ACCOUNTS
8.1 - General Fund
8.2 - Investment Funds
8.3 - Loan Investment Fund
8.4 - Income on Trust
8.5 - Separate Accounts
8.6 - Sub-Accounts
ARTICLE IX
LIFE INSURANCE CONTRACTS
9.1 - No Life Insurance Contracts
(ii)
<PAGE>
ARTICLE X
DEPOSIT AND INVESTMENT OF CONTRIBUTIONS
10.1 - Future Contribution Investment Elections
10.2 - Deposit of Contributions
10.3 - Election to Transfer Between Funds
10.4 - Investments by the Participant
ARTICLE XI
CREDITING AND VALUING SEPARATE ACCOUNTS
11.1 - Crediting Separate Accounts
11.2 - Valuing Separate Accounts
11.3 - Plan Valuation Procedures
11.4 - Finality of Determinations
11.5 - Notification
ARTICLE XII
LOANS
12.1 - Application for Loan
12.2 - Reduction of Account Upon Distribution
12.3 - Requirements to Prevent a Taxable Distribution
12.4 - Administration of Loan Investment Fund
12.5 - Default
12.6 - Special Rules Applicable to Loans
12.7 - Loans Granted Prior to Amendment
ARTICLE XIII
WITHDRAWALS WHILE EMPLOYED
13.1 - Withdrawals of After-Tax Contributions
13.2 - Withdrawals of Rollover Contributions
13.3 - Withdrawals of Employer Contributions
13.4 - Withdrawals of Tax-Deferred Contributions
13.5 - Limitations on Withdrawals Other than Hardship Withdrawals
13.6 - Conditions and Limitations on Hardship Withdrawals
13.7 - Order of Withdrawal from a Participant's Sub-Accounts
ARTICLE XIV
TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
14.1 - Termination of Employment and Settlement Date
14.2 - Separate Accounting for Non-Vested Amounts
14.3 - Disposition of Non-Vested Amounts
14.4 - Recrediting of Forfeited Amounts
ARTICLE XV
DISTRIBUTIONS
15.1 - Distributions to Participants
15.2 - Distributions to Beneficiaries
15.3 - Cash Outs and Participant Consent
(iii)
<PAGE>
15.4 - Required Commencement of Distribution
15.5 - Reemployment of a Participant
15.6 - Restrictions on Alienation
15.7 - Facility of Payment
15.8 - Inability to Locate Payee
15.9 - Distribution Pursuant to Qualified Domestic Relations Orders
ARTICLE XVI
FORM OF PAYMENT
16.1 - Normal Form of Payment
16.2 - Optional Form of Payment
16.3 - Change of Option Election
16.4 - Direct Rollover
16.5 - Notice Regarding Forms of Payment
16.6 - Reemployment
ARTICLE XVII
BENEFICIARIES
17.1 - Designation of Beneficiary
17.2 - Spousal Consent Requirements
ARTICLE XVIII
ADMINISTRATION
18.1 - Authority of the Sponsor
18.2 - Action of the Sponsor
18.3 - Claims Review Procedure
18.4 - Qualified Domestic Relations Orders
18.5 - Indemnification
18.6 - Actions Binding
ARTICLE XIX
AMENDMENT AND TERMINATION
19.1 - Amendment
19.2 - Limitation on Amendment
19.3 - Termination
19.4 - Reorganization
19.5 - Withdrawal of an Employer
ARTICLE XX
ADOPTION BY OTHER ENTITIES
20.1 - Adoption by Related Companies
20.2 - Effective Plan Provisions
ARTICLE XXI
MISCELLANEOUS PROVISIONS
21.1 - No Commitment as to Employment
21.2 - Benefits
(iv)
<PAGE>
21.3 - No Guarantees
21.4 - Expenses
21.5 - Precedent
21.6 - Duty to Furnish Information
21.7 - Withholding
21.8 - Merger, Consolidation, or Transfer of Plan Assets
21.9 - Back Pay Awards
21.10 - Condition on Employer Contributions
21.11 - Return of Contributions to an Employer
21.12 - Validity of Plan
21.13 - Trust Agreement
21.14 - Parties Bound
21.15 - Application of Certain Plan Provisions
21.16 - Leased Employees
21.17 - Transferred Funds
21.18 - Special Provisions Pertaining to the Merger of the Marketing One
Incorporated 401(k) Profit sharing Plan and Trust and the PennCorp
Financial, Inc. Retirement and Savings Plan into the Plan
ARTICLE XXII
TOP-HEAVY PROVISIONS
22.1 - Definitions
22.2 - Applicability
22.3 - Minimum Employer Contribution
22.4 - Adjustments to Section 415 Limitations
22.5 - Accelerated Vesting
ARTICLE XXIII
EFFECTIVE DATE
23.1 - Effective Date of Amendment and Restatement
ADDENDUM
(v)
<PAGE>
PREAMBLE
The PennCorp Financial Group, Inc. Retirement and Savings Plan (formerly the
Southwestern Financial Services Corporation Savings Investment Plan), originally
effective as of January 1, 1996, is hereby amended and restated in its entirety
effective January 1, 1998. Effective January 1, 1998, the Marketing One
Incorporated 401(k) Profit Sharing Plan and Trust and the PennCorp Financial,
Inc. Retirement and Savings Plan shall be merged into the Plan. The Plan, as
amended and restated hereby, is intended to qualify as a profit-sharing plan
under Section 401(a) of the Code, and includes a cash or deferred arrangement
that is intended to qualify under Section 401(k) of the Code. The Plan is
maintained for the exclusive benefit of eligible employees and their
beneficiaries.
Notwithstanding any other provision of the Plan to the contrary, a Participant's
vested interest in his Separate Account under the Plan on and after the
effective date of this amendment and restatement shall be not less than his
vested interest in his account on the day immediately preceding the effective
date. In addition, notwithstanding any other provision of the Plan to the
contrary, the forms of payment and other Plan provisions that were available
under the Plan immediately prior to the later of the effective date of this
amendment and restatement or the date this amendment and restatement is adopted
and that may not be eliminated under Section 411(d)(6) of the Code shall
continue to be available to Participants who had an account under the Plan on
the day immediately preceding the later of the effective date or the date this
amendment and restatement is adopted.
1
<PAGE>
ARTICLE I
DEFINITIONS
1.1 - Plan Definitions
As used herein, the following words and phrases have the meanings hereinafter
set forth, unless a different meaning is plainly required by the context:
The "Administrator" means the Sponsor unless the Sponsor designates another
person or persons to act as such.
An "After-Tax Contribution" means any after-tax employee contribution made by a
Participant as may be permitted under Article V.
The "Beneficiary" of a Participant means the person or persons entitled under
the provisions of the Plan to receive distribution hereunder in the event the
Participant dies before receiving distribution of his entire interest under the
Plan.
The "Code" means the Internal Revenue Code of 1986, as amended from time to
time. Reference to a section of the Code includes such section and any
comparable section or sections of any future legislation that amends,
supplements, or supersedes such section.
The "Compensation" of a Participant for any period means the wages as defined in
Section 3401(a) of the Code, determined without regard to any rules that limit
compensation included in wages based on the nature or location of the employment
or services performed, and all other payments made to him for such period for
services as an Employee for which his Employer is required to furnish the
Participant a written statement under Sections 6041(d), 6051(a)(3), and 6052 of
the Code, and excluding reimbursements or other expense allowances, fringe
benefits, moving expenses, deferred compensation, and welfare benefits, but
determined prior to any exclusions for amounts deferred under Section 125,
402(e)(3), 402(h)(1)(B), 403(b), or 457(b) of the Code or for certain
contributions described in Section 414(h)(2) of the Code that are picked up by
the employing unit and treated as employer contributions.
Notwithstanding the foregoing, Compensation shall not include the value of any
qualified or non-qualified stock option granted to the Participant by his
Employer to the extent such value is includible in the Participant's taxable
income.
2
<PAGE>
In no event, however, shall the Compensation of a Participant taken into account
under the Plan for any Plan Year exceed (1) $200,000 for Plan Years beginning
prior to January 1, 1994, or (2) $150,000 for Plan Years beginning on or after
January 1, 1994 (subject to adjustment annually as provided in Section
401(a)(17)(B) and Section 415(d) of the Code; provided, however, that the dollar
increase in effect on January 1 of any calendar year, if any, is effective for
Plan Years beginning in such calendar year). If the Compensation of a
Participant is determined over a period of time that contains fewer than 12
calendar months, then the annual compensation limitation described above shall
be adjusted with respect to that Participant by multiplying the annual
compensation limitation in effect for the Plan Year by a fraction the numerator
of which is the number of full months in the period and the denominator of which
is 12; provided, however, that no proration is required for a Participant who is
covered under the Plan for less than one full Plan Year if the formula for
allocations is based on Compensation for a period of at least 12 months. In
determining the Compensation, for purposes of applying the annual compensation
limitation described above, of a Participant who is a five percent owner or
among the ten Highly Compensated Employees receiving the greatest Compensation
for the Plan Year, the Compensation of the Participant's spouse and of his
lineal descendants who have not attained age 19 as of the close of the Plan Year
shall be included as Compensation of the Participant for the Plan Year. If as a
result of applying the family aggregation rule described in the preceding
sentence the annual compensation limitation would be exceeded, the limitation
shall be prorated among the affected family members in proportion to each
member's Compensation as determined prior to application of the family
aggregation rules.
A "Contribution Period" means the period specified in Article VI for which
Employer Contributions shall be made.
An "Eligible Employee" means any Employee who has met the eligibility
requirements of Article III to have Tax-Deferred Contributions made to the Plan
on his behalf.
The "Eligibility Service" of an employee means the period or periods of service
credited to him under the provisions of Article II for purposes of determining
his eligibility to participate in the Plan as may be required under Article III
or Article VI.
An "Employee" means any employee of an Employer other than a Pennsylvania Life
Insurance Company Regional Manager or an employee who is covered by a collective
bargaining agreement that does not specifically provide for coverage under the
Plan.
3
<PAGE>
An "Employer" means the Sponsor and any entity which has adopted the Plan as may
be provided under Article XX, including Southwestern Financial Services
Corporation, Marketing One, Inc. and affiliated companies, and PennCorp
Financial Group, Inc. affiliated companies.
An "Employer Contribution" means the amount, if any, that an Employer
contributes to the Plan as may be provided under Article VI or Article XXII.
An "Enrollment Date" means the first day of each calendar month of the Plan
Year.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time. Reference to a section of ERISA includes such section and any
comparable section or sections of any future legislation that amends,
supplements, or supersedes such section.
The "General Fund" means a Trust Fund maintained by the Trustee as required to
hold and administer any assets of the Trust that are not allocated among any
separate Investment Funds as may be provided in the Plan or the Trust Agreement.
No General Fund shall be maintained if all assets of the Trust are allocated
among separate Investment Funds.
A "Highly Compensated Employee" means an Employee or former Employee who is a
highly compensated active employee or highly compensated former employee as
defined hereunder.
A "highly compensated active employee" includes any Employee who performs
services for an Employer during the determination year and who (i) was a five
percent owner at any time during the determination year or the look back year,
(ii) received compensation from an Employer during the look back year in excess
of $75,000 (subject to adjustment annually at the same time and in the same
manner as under Section 415(d) of the Code), (iii) was in the top paid group of
employees for the look back year and received compensation from an Employer
during the look back year in excess of $50,000 (subject to adjustment annually
at the same time and in the same manner as under Section 415(d) of the Code),
(iv) was an officer of an Employer during the look back year and received
compensation during that year in excess of 50 percent of the dollar limitation
in effect for that year under Section 415(b)(1)(A) of the Code or, if no officer
received compensation in excess of that amount for the look back year or the
determination year, received the greatest compensation for the look back year of
any officer, or (v) was one of the 100 employees paid the greatest compensation
by an Employer for the
4
<PAGE>
determination year and would be described in (ii), (iii), or (iv) above if the
term "determination year" were substituted for "look back year".
A "highly compensated former employee" includes any Employee who separated from
service from an Employer and all Related Companies (or is deemed to have
separated from service from an Employer and all Related Companies) prior to the
determination year, performed no services for an Employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the date the
Employee attains age 55.
The determination of who is a Highly Compensated Employee hereunder, including
determinations as to the number and identity of employees in the top paid group,
the 100 employees receiving the greatest compensation from an Employer, the
number of employees treated as officers, and the compensation considered, shall
be made in accordance with the provisions of Section 414(q) of the Code and
regulations issued thereunder. For purposes of this definition, the following
terms have the following meanings:
(a) The "determination year" means the Plan Year or, if the Administrator makes
the election provided in paragraph (b) below, the period of time, if any,
which extends beyond the look back year and ends on the last day of the
Plan Year for which testing is being performed (the "lag period"). If the
lag period is less than 12 months long, the dollar amounts specified in
(ii), (iii), and (iv) above shall be prorated based upon the number of
months in the lag period.
(b) The "look back year" means the 12-month period immediately preceding the
determination year; provided, however, that the Administrator may elect
instead to treat the calendar year ending with or within the determination
year as the "look back year".
An "Hour of Service" with respect to a person means each hour, if any, that may
be credited to him in accordance with the provisions of Article II.
An "Investment Fund" means any separate investment Trust Fund maintained by the
Trustee as may be provided in the Plan or the Trust Agreement or any separate
investment fund maintained by the Trustee, to the extent that there are
Participant Sub-Accounts under such funds, to which assets of the Trust may be
allocated and separately invested.
5
<PAGE>
A "Matching Contribution" means any Employer Contribution made to the Plan on
account of a Participant's Tax-Deferred Contributions as provided in Article VI.
The "Normal Retirement Date" of an employee means the date he attains age 65.
Notwithstanding the foregoing, the Normal Retirement Date of Southwestern
Financial Services Participants who attained age 60 on or before December 31,
1995, means the date he attained age 60.
A "Participant" means any person who has a Separate Account in the Trust.
The "Plan" means PennCorp Financial Group, Inc. Retirement and Savings Plan, as
from time to time in effect.
A "Plan Year" means the 12-consecutive-month period ending on December 31.
A "Predecessor Employer" means Facilities Management Installation, Inc.,
Southwestern Life Insurance Company, and Union Bankers Insurance Company.
A "Profit-Sharing Contribution" means any Employer Contribution made to the Plan
as provided in Article VI, other than Matching Contributions and Qualified
Nonelective Contributions.
A "Qualified Nonelective Contribution" means any Employer Contribution made to
the Plan as provided in Article VI that may be taken into account to satisfy the
limitations on contributions by Highly Compensated Employees under Article VII.
A "Related Company" means any corporation or business, other than an Employer,
which would be aggregated with an Employer for a relevant purpose under Section
414 of the Code.
A "Rollover Contribution" means any rollover contribution to the Plan made by a
Participant as may be permitted under Article V.
A "Separate Account" means the account maintained by the Trustee in the name of
a Participant that reflects his interest in the Trust and any Sub-Accounts
maintained thereunder, as provided in Article VIII.
The "Settlement Date" of a Participant means the date on which a Participant's
interest under the Plan becomes distributable in accordance with Article XV.
6
<PAGE>
The "Sponsor" means PennCorp Financial Group, Inc., and any successor thereto.
A "Sub-Account" means any of the individual sub-accounts of a Participant's
Separate Account that is maintained as provided in Article VIII.
A "Tax-Deferred Contribution" means the amount contributed to the Plan on a
Participant's behalf by his Employer in accordance with his reduction
authorization executed pursuant to Article IV.
The "Trust" means the trust maintained by the Trustee under the Trust Agreement.
The "Trust Agreement" means the agreement entered into between the Sponsor and
the Trustee relating to the holding, investment, and reinvestment of the assets
of the Plan, together with all amendments thereto.
The "Trustee" means the trustee or any successor trustee which at the time shall
be designated, qualified, and acting under the Trust Agreement. The Sponsor may
designate a person or persons other than the Trustee to perform any
responsibility of the Trustee under the Plan, other than trustee
responsibilities as defined in Section 405(c)(3) of ERISA, and the Trustee shall
not be liable for the performance of such person in carrying out such
responsibility except as otherwise provided by ERISA. The term Trustee shall
include any delegate of the Trustee as may be provided in the Trust Agreement.
A "Trust Fund" means any fund maintained under the Trust by the Trustee.
A "Valuation Date" means the date or dates designated by the Sponsor and
communicated in writing to the Trustee for the purpose of valuing the General
Fund and each Investment Fund and adjusting Separate Accounts and Sub-Accounts
hereunder, which dates need not be uniform with respect to the General Fund,
each Investment Fund, Separate Account, or Sub-Account; provided, however, that
the General Fund and each Investment Fund shall be valued and each Separate
Account and Sub-Account shall be adjusted no less often than once annually.
The "Vesting Service" of an employee means the period or periods of service
credited to him under the provisions of Article II for purposes of determining
his vested interest in his Employer Contributions Sub-Account, if Employer
Contributions are provided for under either Article VI or Article XXII.
7
<PAGE>
1.2 - Interpretation
Where required by the context, the noun, verb, adjective, and adverb forms of
each defined term shall include any of its other forms. Wherever used herein,
the masculine pronoun shall include the feminine, the singular shall include the
plural, and the plural shall include the singular.
8
<PAGE>
ARTICLE II
SERVICE
2.1 - Definitions
For purposes of this Article, the following terms shall have the following
meanings:
(a) A "break in service" means any computation period during which a person
completes less than 501 Hours of Service except that no person shall incur
a break in service solely by reason of temporary absence from work not
exceeding 12 months resulting from illness, layoff, or other cause if
authorized in advance by an Employer or a Related Company pursuant to its
uniform leave policy, if his employment shall not otherwise be terminated
during the period of such absence.
(b) A "computation period" for purposes of determining an employee's periods of
Eligibility Service means (i) the 6-consecutive-month period beginning on
the first date he completes an Hour of Service, and (ii) each
6-consecutive-month period thereafter.
(c) The "continuous service" of an employee means the service credited to him
in accordance with the provisions of Section 2.7 of the Plan.
(d) The "employment commencement date" of an employee means the date he first
completes an Hour of Service.
(e) A "maternity/paternity absence" means a person's absence from employment
with an Employer or a Related Company because of the person's pregnancy,
the birth of the person's child, the placement of a child with the person
in connection with the person's adoption of the child, or the caring for
the person's child immediately following the child's birth or adoption. A
person's absence from employment will not be considered a
maternity/paternity absence unless the person furnishes the Administrator
such timely information as may reasonably be required to establish that the
absence was for one of the purposes enumerated in this paragraph and to
establish the number of days of absence attributable to such purpose.
(f) The "reemployment commencement date" of an employee means the first date
following a severance date on which he again completes an Hour of Service.
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(g) The "severance date" of an employee means the earlier of (i) the date on
which he retires, dies, or his employment with an Employer and all Related
Companies is otherwise terminated, or (ii) the first anniversary of the
first date of a period during which he is absent from work with an Employer
and all Related Companies for any other reason; provided, however, that if
he terminates employment with or is absent from work with an Employer and
all Related Companies on account of service with the armed forces of the
United States, he shall not incur a severance date if he is eligible for
reemployment rights under the Uniformed Services Employment and
Reemployment Rights Act of 1994 and he returns to work with an Employer or
a Related Company within the period during which he retains such
reemployment rights.
2.2 - Crediting of Hours of Service
A person shall be credited with an Hour of Service for:
(a) each hour for which he is paid, or entitled to payment, for the performance
of duties for an Employer, a Predecessor Employer, or a Related Company
during the applicable computation period; provided, however, that hours
compensated at a premium rate shall be treated as straight-time hours;
(b) subject to the provisions of Section 2.4, each hour for which he is paid,
or entitled to payment, by an Employer, a Predecessor Employer, or a
Related Company on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), lay-off, jury duty, military duty, or leave of absence;
(c) each hour for which he would have been scheduled to work for an Employer, a
Predecessor Employer, or a Related Company during the period that he is
absent from work because of service with the armed forces of the United
States provided he is eligible for reemployment rights under the Uniformed
Services Employment and Reemployment Rights Act of 1994 and returns to work
with an Employer or a Related Company within the period during which he
retains such reemployment rights; and
(d) each hour for which back pay, irrespective of mitigation of damages, is
either awarded or agreed to by an Employer, a Predecessor Employer, or a
Related Company; provided, however, that the same Hour of Service shall not
be
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credited both under paragraph (a) or (b) or (c) of this Section, as the
case may be, and under this paragraph (d); and provided, further, that the
crediting of Hours of Service for back pay awarded or agreed to with
respect to periods described in such paragraph (b) shall be subject to the
limitations set forth therein and in Section 2.4.
Notwithstanding the foregoing and solely for purposes of determining whether a
person who is on a maternity/paternity absence beginning on or after the first
day of the first Plan Year that commences on or after January 1, 1985, has
incurred a break in service, Hours of Service shall include those hours with
which such person would otherwise have been credited but for such
maternity/paternity absence, or shall include eight Hours of Service for each
day of maternity/paternity absence if the actual hours to be credited cannot be
determined; except that not more than 501 hours are to be credited by reason of
any maternity/paternity absence. Any hours included as Hours of Service pursuant
to the immediately preceding sentence shall be credited to the computation
period in which the absence from employment begins, if such person otherwise
would incur a break in service in such computation period, or, in any other
case, to the immediately following computation period.
2.3 - Hours of Service Equivalencies
Notwithstanding any other provision of the Plan to the contrary, an Employer may
elect to credit Hours of Service to its employees in accordance with one of the
following equivalencies, and if an Employer does not maintain records that
accurately reflect actual hours of service, such Employer shall credit Hours of
Service to its employees in accordance with one of the following equivalencies:
(a) If the Employer maintains its records on the basis of days worked, an
employee shall be credited with 10 Hours of Service for each day on which
he performs an Hour of Service.
(b) If the Employer maintains its records on the basis of weeks worked, an
employee shall be credited with 45 Hours of Service for each week in which
he performs an Hour of Service.
(c) If the Employer maintains its records on the basis of semi-monthly payroll
periods, an employee shall be credited with 95 Hours of Service for each
semi-monthly payroll period in which he performs an Hour of Service.
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(d) If the Employer maintains its records on the basis of months worked, an
employee shall be credited with 190 Hours of Service for each month in
which he performs an Hour of Service.
2.4 - Limitations on Crediting of Hours of Service
In the application of the provisions of paragraph (b) of Section 2.2, the
following shall apply:
(a) An hour for which a person is directly or indirectly paid, or entitled to
payment, on account of a period during which no duties are performed shall
not be credited to him if such payment is made or due under a plan
maintained solely for the purpose of complying with applicable workers'
compensation, unemployment compensation, or disability insurance laws.
(b) Hours of Service shall not be credited with respect to a payment which
solely reimburses a person for medical or medically-related expenses
incurred by him.
(c) For purposes of such paragraph (b), a payment shall be deemed to be made by
or due from an Employer, a Predecessor Employer, or a Related Company (i)
regardless of whether such payment is made by or due from such employer
directly or indirectly, through (among others) a trust fund or insurer to
which any such employer contributes or pays premiums, and (ii) regardless
of whether contributions made or due to such trust fund, insurer, or other
entity are for the benefit of particular persons or are on behalf of a
group of persons in the aggregate.
(d) No more than 501 Hours of Service shall be credited under such paragraph
(b) to a person on account of any single continuous period during which he
performs no duties (whether or not such period occurs in a single
computation period), unless no duties are performed due to service with the
armed forces of the United States for which the person retains reemployment
rights as provided in paragraph (c) of Section 2.2.
2.5 - Department of Labor Rules
The rules set forth in paragraphs (b) and (c) of Department of Labor Regulations
ss.2530.200b-2, which relate to determining Hours of Service attributable to
reasons other than the performance of duties and crediting Hours of Service to
computation periods, are hereby incorporated into the Plan by reference.
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2.6 - Periods of Eligibility Service
An employee shall be credited with a period of Eligibility Service for each
computation period in which he completes at least 500 Hours of Service.
2.7 - Crediting of Continuous Service
A person shall be credited with continuous service for the aggregate of the
periods of time between his employment commencement date or any reemployment
commencement date and the severance date that next follows such employment
commencement date or reemployment commencement date; provided, however, that an
employee who has a reemployment commencement date within the
12-consecutive-month period following the earlier of the first date of his
absence or his severance date shall be credited with continuous service for the
period between such severance date and reemployment commencement date.
2.8 - Vesting Service
Years of Vesting Service shall be determined in accordance with the following
provisions:
(a) An employee shall be credited with years of Vesting Service equal to his
period of continuous service.
(b) Notwithstanding the provisions of paragraph (a), continuous service
completed by an employee prior to a severance date shall not be included in
determining the employee's years of Vesting Service unless the employee had
a nonforfeitable right to any portion of his Separate Account, excluding
that portion of his Separate Account that is attributable to After-Tax or
Rollover Contributions, as of the severance date, or the period of time
between the severance date and his reemployment commencement date is less
than the greater of five years or his period of continuous service
determined as of the severance date; provided, however, that solely for
purposes of applying this paragraph, if a person is on a
maternity/paternity absence beyond the first anniversary of the first day
of such absence, his severance date shall be the second anniversary of the
first day of such maternity/paternity absence.
2.9 - Crediting of Service on Transfer or Amendment
Notwithstanding any other provision of the Plan to the contrary, if an Employee
is transferred from employment covered under a
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qualified plan maintained by an Employer or a Related Company for which
eligibility service is credited based on elapsed time in accordance with
Treasury Regulations ss.1.410(a)-7 to employment covered under the Plan or,
prior to amendment, the Plan provided for crediting of Eligibility Service on
the basis of elapsed time, an affected Employee shall be credited with
Eligibility Service hereunder equal to:
(a) the number of one year periods of service credited to the Employee under
the elapsed time method before the transfer date or the effective date of
the amendment, plus
(b) his service under the Hours of Service method provided hereunder for the
computation period in which the transfer or the effective date of the
amendment occurs applying one of the equivalencies set forth in Section 2.3
to any fractional part of a year credited to the Employee under the elapsed
time method as of the transfer date or the effective date of the amendment;
provided, however that the same equivalency shall be used for all similarly
situated Employees, plus
(c) the service credited to such Employee under the Hours of Service method
provided hereunder for computation periods beginning after the computation
period in which the transfer or the effective date of the amendment occurs.
In addition, notwithstanding any other provision of the Plan to the contrary, if
an Employee is transferred from employment covered under a qualified plan
maintained by an Employer or a Related Company for which vesting service is
credited based on Hours of Service and computation periods in accordance with
Department of Labor Regulations ss.2530.200 through 2530.203 to employment
covered under the Plan or, prior to amendment, the Plan provided for crediting
of service on the basis of Hours of Service and computation periods, an affected
Employee shall be credited with Vesting Service hereunder equal to:
(a) the Employee's years of service credited to him under the Hours of Service
method before the computation period in which the transfer or the effective
date of the amendment occurs, plus
(b) the greater of (i) the period of service that would be credited to the
Employee under the elapsed time method provided hereunder for his
employment during the entire computation period in which the transfer or
the effective date of the amendment occurs or (ii) the service taken into
account under the Hours of Service method for such
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<PAGE>
computation period as of the transfer date or the effective date of the
amendment, plus
(c) the service credited to such Employee under the elapsed time method
provided hereunder for the period of time beginning on the day after the
last day of the computation period in which the transfer or the effective
date of the amendment occurs.
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<PAGE>
ARTICLE III
ELIGIBILITY
3.1 - Eligibility
Each Employee who was an Eligible Employee immediately prior to the effective
date of this amendment and restatement shall continue to be an Eligible
Employee. Each Employee who became employed by the Sponsor on or after October
1, 1997 but before January 1, 1998 shall become an Eligible Employee on January
1, 1998. Each other Employee shall become an Eligible Employee as of the
Enrollment Date coinciding with or next following the date on which he has
completed one period of Eligibility Service.
3.2 - Transfers of Employment
If a person is transferred directly from employment with an Employer or with a
Related Company in a capacity other than as an Employee to employment as an
Employee, he shall become an Eligible Employee as of the date he is so
transferred if prior to an Enrollment Date coinciding with or preceding such
transfer date he has met the eligibility requirements of Section 3.1. Otherwise,
the eligibility of a person who is so transferred to elect to have Tax-Deferred
Contributions made to the Plan on his behalf or to make After-Tax Contributions
to the Plan shall be determined in accordance with Section 3.1.
3.3 - Reemployment
If a person who terminated employment with an Employer and all Related Companies
is reemployed as an Employee and if he had been an Eligible Employee prior to
his termination of employment, he shall again become an Eligible Employee on the
date he is reemployed. Otherwise, the eligibility of a person who terminated
employment with an Employer and all Related Companies and who is reemployed by
an Employer or a Related Company to elect to have Tax-Deferred Contributions
made to the Plan on his behalf or to make After-Tax Contributions to the Plan
shall be determined in accordance with Section 3.1 or 3.2.
3.4 - Notification Concerning New Eligible Employees
Each Employer shall notify the Administrator as soon as practicable of Employees
becoming Eligible Employees as of any date.
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3.5 - Effect and Duration
Upon becoming an Eligible Employee, an Employee shall be entitled to elect to
have Tax-Deferred Contributions made to the Plan on his behalf and to make
After-Tax Contributions to the Plan and shall be bound by all the terms and
conditions of the Plan and the Trust Agreement. A person shall continue as an
Eligible Employee eligible to have Tax-Deferred Contributions made to the Plan
on his behalf and to make After-Tax Contributions to the Plan only so long as he
continues in employment as an Employee.
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ARTICLE IV
TAX-DEFERRED CONTRIBUTIONS
4.1 - Tax-Deferred Contributions
Effective as of the date he becomes an Eligible Employee, or any subsequent
Enrollment Date, each Eligible Employee may elect in writing in accordance with
rules prescribed by the Administrator to have Tax-Deferred Contributions made to
the Plan on his behalf by his Employer as hereinafter provided. An Eligible
Employee's written election shall include his authorization for his Employer to
reduce his Compensation and to make Tax-Deferred Contributions on his behalf and
his election as to the investment of his contributions in accordance with
Article X. Tax-Deferred Contributions on behalf of an Eligible Employee shall
commence with the first payment of Compensation made on or after the date on
which his election is effective.
4.2 - Amount of Tax-Deferred Contributions
The amount of Tax-Deferred Contributions to be made to the Plan on behalf of an
Eligible Employee by his Employer shall be an integral percentage of his
Compensation of not less than 1 percent nor more than 15 percent. In the event
an Eligible Employee elects to have his Employer make Tax-Deferred Contributions
on his behalf, his Compensation shall be reduced for each payroll period by the
percentage he elects to have contributed on his behalf to the Plan in accordance
with the terms of his currently effective reduction authorization.
Subject to the overall percentage limitations specified above, an Employer may
allow an Eligible Employee to authorize a special reduction in that portion of
his Compensation that is attributable to any Employer paid cash bonuses made for
such Eligible Employee for the Plan Year in an amount up to 100 percent of such
bonuses. The Employer may designate the bonuses for which the special reduction
authorization is available; provided, however, that such designation shall be
made on a uniform and non-discriminatory basis.
4.3 - Changes in Reduction Authorization
An Eligible Employee may change the percentage of his future Compensation that
his Employer contributes on his behalf as Tax-Deferred Contributions at such
time or times during the Plan Year as the Administrator may prescribe by filing
an amended reduction authorization with his Employer such number of days prior
to the date such change is to become effective as the Administrator shall
prescribe. An Eligible Employee who changes
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his reduction authorization shall be limited to selecting a percentage of his
Compensation that is otherwise permitted hereunder. Tax-Deferred Contributions
shall be made on behalf of such Eligible Employee by his Employer pursuant to
his amended reduction authorization filed in accordance with this Section
commencing with Compensation paid to the Eligible Employee on or after the date
such filing is effective, until otherwise altered or terminated in accordance
with the Plan.
4.4 - Suspension of Tax-Deferred Contributions
An Eligible Employee on whose behalf Tax-Deferred Contributions are being made
may have such contributions suspended at any time by giving such number of days
advance written notice to his Employer as the Administrator shall prescribe. Any
such voluntary suspension shall take effect commencing with Compensation paid to
such Eligible Employee on or after the expiration of the required notice period
and shall remain in effect until Tax-Deferred Contributions are resumed as
hereinafter set forth.
4.5 - Resumption of Tax-Deferred Contributions
An Eligible Employee who has voluntarily suspended his Tax-Deferred
Contributions may have such contributions resumed at such time or times during
the Plan Year as the Administrator may prescribe, by filing a new reduction
authorization with his Employer such number of days prior to the date as of
which such contributions are to be resumed as the Administrator shall prescribe.
4.6 - Delivery of Tax-Deferred Contributions
As soon after the date an amount would otherwise be paid to an Employee as it
can reasonably be separated from Employer assets, each Employer shall cause to
be delivered to the Trustee in cash all Tax-Deferred Contributions attributable
to such amounts.
4.7 - Vesting of Tax-Deferred Contributions
A Participant's vested interest in his Tax-Deferred Contributions Sub-Account
shall be at all times 100 percent.
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ARTICLE V
AFTER-TAX AND ROLLOVER CONTRIBUTIONS
5.1 - After-Tax Contributions
An Eligible Employee may elect in writing in accordance with rules prescribed by
the Administrator to make After-Tax Contributions to the Plan. After-Tax
Contributions may be made either by payroll withholding and/or by delivery of a
cash amount to an Eligible Employee's Employer, as determined by the
Administrator. If the Eligible Employee does not already have an investment
election on file with the Administrator, his election to make After-Tax
Contributions to the Plan shall include his election as to the investment of his
contributions in accordance with Article X. An Eligible Employee's election to
make After-Tax Contributions by payroll withholding may be made effective as of
any Enrollment Date occurring on or after the date on which he becomes an
Eligible Employee. After-Tax Contributions by payroll withholding shall commence
with the first payment of Compensation made on or after the Enrollment Date on
which the Eligible Employee's election is effective.
5.2 - Amount of After-Tax Contributions by Payroll Withholding
The amount of After-Tax Contributions made by an Eligible Employee by payroll
withholding shall be an integral percentage of his Compensation of not less than
1 percent nor more than 10 percent.
5.3 - Changes in Payroll Withholding Authorization
An Eligible Employee may change the percentage of his future Compensation that
he contributes to the Plan as After-Tax Contributions by payroll withholding at
such time or times during the Plan Year as the Administrator may prescribe by
filing an amended payroll withholding authorization with his Employer such
number of days prior to the date such change is to become effective as the
Administrator shall prescribe. An Eligible Employee who changes his payroll
withholding authorization shall be limited to selecting a percentage of his
Compensation that is otherwise permitted under Section 5.2. After-Tax
Contributions shall be made pursuant to an Eligible Employee's amended payroll
withholding authorization filed in accordance with this Section commencing with
Compensation paid to the Eligible Employee on or after the date such filing is
effective, until otherwise altered or terminated in accordance with the Plan.
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5.4 - Suspension of After-Tax Contributions by Payroll Withholding
An Eligible Employee who is making After-Tax Contributions by payroll
withholding may have such contributions suspended at any time by giving such
number of days advance written notice to his Employer as the Administrator shall
prescribe. Any such voluntary suspension shall take effect commencing with
Compensation paid to such Eligible Employee on or after the expiration of the
required notice period and shall remain in effect until After-Tax Contributions
are resumed as hereinafter set forth.
5.5 - Resumption of After-Tax Contributions by Payroll Withholding
An Eligible Employee who has voluntarily suspended his After-Tax Contributions
made by payroll withholding in accordance with Section 5.4 may have such
contributions resumed at such time or times during the Plan Year as the
Administrator may prescribe by filing a new payroll withholding authorization
with his Employer such number of days prior to the date as of which such
contributions are to be resumed as the Administrator shall prescribe.
5.6 - Rollover Contributions
An Employee who was a participant in a plan qualified under Section 401 or 403
of the Code and who receives a cash distribution from such plan that he elects
either (i) to roll over immediately to a qualified retirement plan or (ii) to
roll over into a conduit IRA from which he receives a later cash distribution,
may elect to make a Rollover Contribution to the Plan if he is entitled under
Section 402(c), Section 403(a)(4), or Section 408(d)(3)(A) of the Code to roll
over such distribution to another qualified retirement plan. The Administrator
may require an Employee to provide it with such information as it deems
necessary or desirable to show that he is entitled to roll over such
distribution to another qualified retirement plan. An Employee shall make a
Rollover Contribution to the Plan by delivering, or causing to be delivered, to
the Trustee the cash that constitutes the Rollover Contribution amount within 60
days of receipt of the distribution from the plan or from the conduit IRA in the
manner prescribed by the Administrator. If the Employee does not already have an
investment election on file with the Administrator, the Employee shall also
deliver to the Administrator his election as to the investment of his
contributions in accordance with Article X.
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5.7 - Delivery of After-Tax Contributions
As soon after the date an amount would otherwise be paid to an Employee as it
can reasonably be separated from Employer assets or as soon as reasonably
practicable after an amount has been delivered to an Employer by an Employee,
the Employer shall cause to be delivered to the Trustee in cash the After-Tax
Contributions attributable to such amount.
5.8 - Vesting of After-Tax Contributions and Rollover Contributions
A Participant's vested interest in his After-Tax Contributions Sub-Account and
his Rollover Contributions Sub-Account shall be at all times 100 percent.
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ARTICLE VI
EMPLOYER CONTRIBUTIONS
6.1 - Contribution Period
The Contribution Period for Matching Contributions under the Plan shall be each
payroll period. The Contribution Period for Qualified Nonelective Contributions
under the Plan shall be each Plan Year. The Contribution Period for
Profit-Sharing Contributions under the Plan shall be each Plan Year.
6.2 - Profit-Sharing Contributions
Each Employer may, in its discretion, make a Profit-Sharing Contribution to the
Plan for the Contribution Period in an amount determined by the Employer.
6.3 - Allocation of Profit-Sharing Contributions
Any Profit-Sharing Contribution made by an Employer for a Contribution Period
shall be allocated among its Employees during the Contribution Period who are
eligible to participate in the allocation of Profit-Sharing Contributions for
the Contribution Period, as determined under this Article. The allocable share
of each such Employee shall be in the ratio which his Compensation from the
Employer for the Contribution Period bears to the aggregate of such Compensation
for all such Employees. Notwithstanding any other provision of the Plan to the
contrary, Compensation with respect to any period ending prior to the date on
which an Employee first became eligible to participate in the allocation of
Profit-Sharing Contributions shall be disregarded in determining the amount of
the Employee's allocable share.
6.4 - Qualified Nonelective Contributions
Each Employer may, in its discretion, make a Qualified Nonelective Contribution
to the Plan for the Contribution Period in an amount determined by the Sponsor.
6.5 - Allocation of Qualified Nonelective Contributions
Any Qualified Nonelective Contribution made by an Employer for the Contribution
Period shall be allocated among its Employees during the Contribution Period who
are eligible to participate in the allocation of Qualified Nonelective
Contributions for the Contribution Period, as determined under this Article,
other than any such Employee who is a Highly Compensated Employee. The allocable
share of each such Employee shall be either (i) in the ratio which his
Compensation from the Employer for the
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Contribution Period bears to the aggregate of such Compensation for all such
Employees or (ii) a flat dollar amount, as determined by the Sponsor for the
Contribution Period. Notwithstanding any other provision of the Plan to the
contrary, Compensation with respect to any period ending prior to the date on
which an Employee first became eligible to participate in the allocation of
Qualified Nonelective Contributions shall be disregarded in determining the
amount of the Employee's allocable share.
6.6 - Matching Contributions
Each Employer shall make a Matching Contribution to the Plan for each
Contribution Period in an amount equal to 50 percent of the aggregate "eligible
Tax-Deferred Contributions" for the Contribution Period made on behalf of its
Employees during the Contribution Period who are eligible to participate in the
allocation of Matching Contributions for the Contribution Period, as determined
under this Article. In addition, each Employer may make a further Matching
Contribution to the Plan for the Contribution Period in an amount equal to a
percentage, determined by the Sponsor, in its discretion, of all or a portion
(as determined by the Sponsor) of the Tax-Deferred Contributions made on behalf
of such Employees for the Contribution Period. For purposes of this Article,
"eligible Tax-Deferred Contributions" with respect to an Employee mean the
Tax-Deferred Contributions made on his behalf for the Contribution Period in an
amount up to, but not exceeding, the "match level". For purposes of this
Article, the "match level" means 6 percent of an Employee's Compensation for the
Contribution Period, excluding Compensation with respect to any period ending
prior to the date on which the Employee became eligible to participate in the
allocation of Matching Contributions.
6.7 - Allocation of Matching Contributions
Any Matching Contribution made by an Employer for the Contribution Period shall
be allocated among its Employees during the Contribution Period who are eligible
to participate in the allocation of Matching Contributions for the Contribution
Period, as determined under this Article. The allocable share of each such
Employee shall be an amount equal to 50 percent of the "eligible Tax-Deferred
Contributions" made on his behalf for the Contribution Period. If an Employer
makes a further discretionary Matching Contribution for the Contribution Period,
the allocable share of each such Employee in the further Matching Contribution
shall be an amount equal to the percentage determined by the Sponsor of all or a
portion (as determined by the Sponsor) of the Tax-Deferred Contributions made on
his behalf for the Contribution Period.
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6.8 - Verification of Amount of Employer Contributions by the Sponsor
The Sponsor shall verify the amount of Employer Contributions to be made by each
Employer in accordance with the provisions of the Plan. Notwithstanding any
other provision of the Plan to the contrary, the Sponsor shall determine the
portion of the Employer Contribution to be made by each Employer with respect to
an Employee who transfers from employment with one Employer as an Employee to
employment with another Employer as an Employee.
6.9 - Payment of Employer Contributions
Employer Contributions made for a Contribution Period shall be paid in cash to
the Trustee within the period of time required under the Code in order for the
contribution to be deductible by the Employer in determining its Federal income
taxes for the Plan Year.
6.10 - Eligibility to Participate in Allocation
Each Employee shall be eligible to participate in the allocation of Employer
Contributions beginning on the date he becomes, or again becomes, an Eligible
Employee in accordance with the provisions of Article III. Notwithstanding the
foregoing, no person shall be eligible to participate in the allocation of
Profit-Sharing Contributions for a Contribution Period unless he is employed by
an Employer or a Related Company on the last day of the Contribution Period;
provided, however, that if the Plan would not otherwise meet the minimum
coverage requirements of Section 410(b) of the Code in any Plan Year, the group
of Employees eligible to participate in the allocation of Profit-Sharing
Contributions shall be expanded to include the minimum number of Employees who
are not employed by an Employer or a Related Company on the last day of the
Contribution Period that is necessary to meet the minimum coverage requirements.
The Employees who become eligible to participate under the provisions of the
immediately preceding clause shall be those Employees who have completed the
greatest number of Hours of Service during the Contribution Period.
6.11 - Vesting of Employer Contributions
A Participant's vested interest in his Qualified Nonelective Contributions
Sub-Account shall be at all times 100 percent. A Participant's vested interest
in his Profit-Sharing and Matching Contributions Sub-Accounts shall be
determined in accordance with the following schedule:
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Years of Vesting Service Vested Interest
------------------------ ---------------
Less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
Notwithstanding the foregoing, if a Participant is employed by the Sponsor
before January 1, 1998, then his vested interest in his Matching Contributions
Sub-Accounts shall be determined in accordance with the following schedule:
Years of Vesting Service Vested Interest
------------------------ ---------------
Less than 1 0%
1 but less than 2 50%
2 or more 100%
Notwithstanding the foregoing, if a Participant is employed by an Employer or a
Related Company on his Normal Retirement Date, the date he becomes physically or
mentally disabled such that he can no longer continue in the service of his
Employer and is eligible to receive a benefit under his Employer's long term
disability plan, or the date he dies, his vested interest in his Profit-Sharing
and Matching Contributions Sub-Accounts shall be 100 percent.
6.12 - Election of Former Vesting Schedule
If the Sponsor adopts an amendment to the Plan that directly or indirectly
affects the computation of a Participant's vested interest in his Employer
Contributions Sub-Account, any Participant with three or more years of Vesting
Service shall have a right to have his vested interest in his Employer
Contributions Sub-Account continue to be determined under the vesting provisions
in effect prior to the amendment rather than under the new vesting provisions,
unless the vested interest of the Participant in his Employer Contributions
Sub-Account under the Plan as amended is not at any time less than such vested
interest determined without regard to the amendment. A Participant shall
exercise his right under this Section by giving written notice of his exercise
thereof to the Administrator within 60 days after the latest of (i) the date he
receives notice of the amendment from the Administrator, (ii) the effective date
of the amendment, or (iii) the date the amendment is adopted. Notwithstanding
the foregoing, a Participant's vested interest in his Employer Contributions
Sub-Account on the effective date of such an amendment shall not be less than
his vested interest in his Employer Contributions Sub-Account immediately prior
to the effective date of the amendment.
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6.13 - Forfeitures to Reduce Employer Contributions
Notwithstanding any other provision of the Plan to the contrary, the amount of
the Employer Contribution required under this Article for a Plan Year shall be
reduced by the amount of any forfeitures occurring during the Plan Year that are
not used to pay Plan expenses.
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ARTICLE VII
LIMITATIONS ON CONTRIBUTIONS
7.1 - Definitions
For purposes of this Article, the following terms have the following meanings:
(a) The "actual deferral percentage" with respect to an Eligible Employee for a
particular Plan Year means the ratio of the Tax-Deferred Contributions made
on his behalf for the Plan Year to his test compensation for the Plan Year,
except that, to the extent permitted by regulations issued under Section
401(k) of the Code, the Sponsor may elect to take into account in computing
the numerator of each Eligible Employee's actual deferral percentage the
qualified nonelective contributions made to the Plan on his behalf for the
Plan Year; provided, however, that contributions made on a Participant's
behalf for a Plan Year shall be included in determining his actual deferral
percentage for such Plan Year only if the contributions are made to the
Plan prior to the end of the 12-month period immediately following the Plan
Year to which the contributions relate. The determination and treatment of
the actual deferral percentage amounts for any Participant shall satisfy
such other requirements as may be prescribed by the Secretary of the
Treasury.
(b) The "aggregate limit" means the sum of (i) 125 percent of the greater of
the average contribution percentage for eligible participants other than
Highly Compensated Employees or the average actual deferral percentage for
Eligible Employees other than Highly Compensated Employees and (ii) the
lesser of 200 percent or two plus the lesser of such average contribution
percentage or average actual deferral percentage, or, if it would result in
a larger aggregate limit, the sum of (iii) 125 percent of the lesser of the
average contribution percentage for eligible participants other than Highly
Compensated Employees or the average actual deferral percentage for
Eligible Employees other than Highly Compensated Employees and (iv) the
lesser of 200 percent or two plus the greater of such average contribution
percentage or average actual deferral percentage.
(c) The "annual addition" with respect to a Participant for a limitation year
means the sum of the Tax-Deferred Contributions, Employer Contributions,
and After-Tax Contributions allocated to his Separate Account for the
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limitation year (including any excess contributions that are distributed
pursuant to this Article), the employer contributions, employee
contributions, and forfeitures allocated to his accounts for the limitation
year under any other qualified defined contribution plan (whether or not
terminated) maintained by an Employer or a Related Company concurrently
with the Plan, and amounts described in Sections 415(l)(2) and 419A(d)(2)
of the Code allocated to his account for the limitation year.
(d) The "Code Section 402(g) limit" means the dollar limit imposed by Section
402(g)(1) of the Code or established by the Secretary of the Treasury
pursuant to Section 402(g)(5) of the Code in effect on January 1 of the
calendar year in which an Eligible Employee's taxable year begins.
(e) The "contribution percentage" with respect to an eligible participant for a
particular Plan Year means the ratio of the sum of the matching
contributions made to the Plan on his behalf and the After-Tax
Contributions made by him for the Plan Year to his test compensation for
such Plan Year, except that, to the extent permitted by regulations issued
under Section 401(m) of the Code, the Sponsor may elect to take into
account in computing the numerator of each eligible participant's
contribution percentage the Tax-Deferred Contributions and/or qualified
nonelective contributions made to the Plan on his behalf for the Plan Year;
provided, however, that any Tax-Deferred Contributions and/or qualified
nonelective contributions that were taken into account in computing the
numerator of an eligible participant's actual deferral percentage may not
be taken into account in computing the numerator of his contribution
percentage; and provided, further, that contributions made by or on a
Participant's behalf for a Plan Year shall be included in determining his
contribution percentage for such Plan Year only if the contributions are
made to the Plan prior to the end of the 12-month period immediately
following the Plan Year to which the contributions relate. The
determination and treatment of the contribution percentage amounts for any
Participant shall satisfy such other requirements as may be prescribed by
the Secretary of the Treasury.
(f) An "elective contribution" means any employer contribution made to a plan
maintained by an Employer or any Related Company on behalf of a Participant
in lieu of cash compensation pursuant to his written election to defer
under any qualified CODA as described in Section 401(k) of the Code, any
simplified employee pension cash or deferred
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arrangement as described in Section 402(h)(1)(B) of the Code, any eligible
deferred compensation plan under Section 457 of the Code, or any plan as
described in Section 501(c)(18) of the Code, and any contribution made on
behalf of the Participant by an Employer or a Related Company for the
purchase of an annuity contract under Section 403(b) of the Code pursuant
to a salary reduction agreement.
(g) An "eligible participant" means any Employee who is eligible to make
After-Tax Contributions or to have Tax-Deferred Contributions made on his
behalf (if Tax-Deferred Contributions are taken into account in computing
contribution percentages) or to participate in the allocation of matching
contributions.
(h) An "excess deferral" with respect to a Participant means that portion of a
Participant's Tax-Deferred Contributions that when added to amounts
deferred under other plans or arrangements described in Sections 401(k),
408(k), or 403(b) of the Code, would exceed the Code Section 402(g) limit
and is includable in the Participant's gross income under Section 402(g) of
the Code.
(i) A "family member" of an Employee means the Employee's spouse, his lineal
ascendants, his lineal descendants, and the spouses of such lineal
ascendants and descendants.
(j) A "limitation year" means the calendar year.
(k) A "matching contribution" means any employer contribution allocated to an
Eligible Employee's account under the Plan or any other plan of an Employer
or a Related Company solely on account of elective contributions made on
his behalf or employee contributions made by him.
(l) A "qualified nonelective contribution" means any employer contribution made
on behalf of a Participant that the Participant could not elect instead to
receive in cash, that is a qualified nonelective contribution as defined in
Section 401(k) and Section 401(m) of the Code and regulations issued
thereunder, is nonforfeitable when made, and is distributable only as
permitted in regulations issued under Section 401(k) of the Code.
(m) The "test compensation" of an Eligible Employee for a Plan Year means
compensation as defined in Section 414(s) of the Code and regulations
issued thereunder, limited, however, to (1) $200,000 for Plan Years
beginning prior to January 1, 1994, or (2) $150,000 for Plan Years
beginning
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on or after January 1, 1994 (subject to adjustment annually as provided in
Section 401(a)(17)(B) and Section 415(d) of the Code; provided, however,
that the dollar increase in effect on January 1 of any calendar year, if
any, is effective for Plan Years beginning in such calendar year). If the
test compensation of a Participant is determined over a period of time that
contains fewer than 12 calendar months, then the annual compensation
limitation described above shall be adjusted with respect to that
Participant by multiplying the annual compensation limitation in effect for
the Plan Year by a fraction the numerator of which is the number of full
months in the period and the denominator of which is 12; provided, however,
that no proration is required for a Participant who is covered under the
Plan for less than one full Plan Year if the formula for allocations is
based on Compensation for a period of at least 12 months. In determining
the test compensation, for purposes of applying the annual compensation
limitation described above, of a Participant who is a five percent owner or
among the ten Highly Compensated Employees receiving the greatest test
compensation for the limitation year, the test compensation of the
Participant's spouse and of his lineal descendants who have not attained
age 19 as of the close of the limitation year shall be included as test
compensation of the Participant for the limitation year. If as a result of
applying the family aggregation rule described in the preceding sentence
the annual compensation limitation would be exceeded, the limitation shall
be prorated among the affected family members in proportion to each
member's test compensation as determined prior to application of the family
aggregation rules.
7.2 - Code Section 402(g) Limit
In no event shall the amount of the Tax-Deferred Contributions made on behalf of
an Eligible Employee for his taxable year, when aggregated with any elective
contributions made on behalf of the Eligible Employee under any other plan of an
Employer or a Related Company for his taxable year, exceed the Code Section
402(g) limit. In the event that the Administrator determines that the reduction
percentage elected by an Eligible Employee will result in his exceeding the Code
Section 402(g) limit, the Administrator may adjust the reduction authorization
of such Eligible Employee by reducing the percentage of his Tax-Deferred
Contributions to such smaller percentage that will result in the Code Section
402(g) limit not being exceeded. If the Administrator determines that the
Tax-Deferred Contributions made on behalf of an Eligible Employee would exceed
the Code
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Section 402(g) limit for his taxable year, the Tax-Deferred Contributions for
such Participant shall be automatically suspended for the remainder, if any, of
such taxable year. If an Employer notifies the Administrator that the Code
Section 402(g) limit has nevertheless been exceeded by an Eligible Employee for
his taxable year, the Tax-Deferred Contributions that, when aggregated with
elective contributions made on behalf of the Eligible Employee under any other
plan of an Employer or a Related Company, would exceed the Code Section 402(g)
limit, plus any income and minus any losses attributable thereto, shall be
distributed to the Eligible Employee no later than the April 15 immediately
following such taxable year. Any Tax-Deferred Contributions that are distributed
to an Eligible Employee in accordance with this Section shall not be taken into
account in computing the Eligible Employee's actual deferral percentage for the
Plan Year in which the Tax-Deferred Contributions were made, unless the Eligible
Employee is a Highly Compensated Employee. If an amount of Tax-Deferred
Contributions is distributed to a Participant in accordance with this Section,
matching contributions that are attributable solely to the distributed
Tax-Deferred Contributions, plus any income and minus any losses attributable
thereto, shall be forfeited by the Participant. Any such forfeited amounts shall
be treated as a forfeiture under the Plan in accordance with the provisions of
Article XIV as of the last day of the month in which the distribution of
Tax-Deferred Contributions pursuant to this Section occurs.
7.3 - Distribution of Excess Deferrals
Notwithstanding any other provision of the Plan to the contrary, if a
Participant notifies the Administrator in writing no later than the March 1
following the close of the Participant's taxable year that excess deferrals have
been made on his behalf under the Plan for such taxable year, the excess
deferrals, plus any income and minus any losses attributable thereto, shall be
distributed to the Participant no later than the April 15 immediately following
such taxable year. Any Tax-Deferred Contributions that are distributed to a
Participant in accordance with this Section shall nevertheless be taken into
account in computing the Participant's actual deferral percentage for the Plan
Year in which the Tax-Deferred Contributions were made. If an amount of
Tax-Deferred Contributions is distributed to a Participant in accordance with
this Section, matching contributions that are attributable solely to the
distributed Tax-Deferred Contributions, plus any income and minus any losses
attributable thereto, shall be forfeited by the Participant. Any such forfeited
amounts shall be treated as a forfeiture under the Plan in accordance with the
provisions of Article XIV as of the last
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day of the month in which the distribution of Tax-Deferred Contributions
pursuant to this Section occurs.
7.4 - Limitation on Tax-Deferred Contributions of Highly Compensated Employees
Notwithstanding any other provision of the Plan to the contrary, the
Tax-Deferred Contributions made with respect to a Plan Year on behalf of
Eligible Employees who are Highly Compensated Employees may not result in an
average actual deferral percentage for such Eligible Employees that exceeds the
greater of:
(a) a percentage that is equal to 125 percent of the average actual deferral
percentage for all other Eligible Employees; or
(b) a percentage that is not more than 200 percent of the average actual
deferral percentage for all other Eligible Employees and that is not more
than two percentage points higher than the average actual deferral
percentage for all other Eligible Employees.
In order to assure that the limitation contained herein is not exceeded with
respect to a Plan Year, the Administrator is authorized to suspend completely
further Tax-Deferred Contributions on behalf of Highly Compensated Employees for
any remaining portion of a Plan Year or to adjust the projected actual deferral
percentages of Highly Compensated Employees by reducing their percentage
elections with respect to Tax-Deferred Contributions for any remaining portion
of a Plan Year to such smaller percentages that will result in the limitation
set forth above not being exceeded. In the event of any such suspension or
reduction, Highly Compensated Employees affected thereby shall be notified of
the reduction or suspension as soon as possible and shall be given an
opportunity to make a new Tax-Deferred Contribution election to be effective the
first day of the next following Plan Year. In the absence of such an election,
the election in effect immediately prior to the suspension or adjustment
described above shall be reinstated as of the first day of the next following
Plan Year.
For purposes of applying the limitation contained in this Section, the
Tax-Deferred Contributions, qualified nonelective contributions (to the extent
that such qualified nonelective contributions are taken into account in
computing actual deferral percentages), and test compensation of any Eligible
Employee who is a family member of another Eligible Employee who is a five
percent owner or among the ten Highly Compensated Employees receiving the
greatest test compensation for the Plan Year shall be aggregated with the
Tax-Deferred Contributions, qualified
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nonelective contributions, and test compensation of such other Eligible
Employee, and such family member shall not be considered an Eligible Employee
for purposes of determining the average actual deferral percentage for all other
Eligible Employees. In determining the actual deferral percentage for any
Eligible Employee who is a Highly Compensated Employee for the Plan Year,
elective contributions and qualified nonelective contributions (to the extent
that qualified nonelective contributions are taken into account in computing
actual deferral percentages) made to his accounts under any other plan of an
Employer or a Related Company shall be treated as if all such contributions were
made to the Plan; provided, however, that if such a plan has a plan year
different from the Plan Year, any such contributions made to the Highly
Compensated Employee's accounts under the plan for the plan year ending with or
within the same calendar year as the Plan Year shall be treated as if such
contributions were made to the Plan. Notwithstanding the foregoing, such
contributions shall not be treated as if they were made to the Plan if
regulations issued under Section 401(k) of the Code do not permit such plan to
be aggregated with the Plan.
If one or more plans of an Employer or Related Company are aggregated with the
Plan for purposes of satisfying the requirements of Section 401(a)(4) or 410(b)
of the Code, then actual deferral percentages under the Plan shall be calculated
as if the Plan and such one or more other plans were a single plan. For Plan
Years beginning after December 31, 1991, plans may be aggregated to satisfy
Section 401(k) of the Code only if they have the same plan year.
The Administrator shall maintain records sufficient to show that the limitation
contained in this Section was not exceeded with respect to any Plan Year and the
amount of the qualified nonelective contributions taken into account in
computing actual deferral percentages for any Plan Year.
7.5 - Distribution of Excess Tax-Deferred Contributions
Notwithstanding any other provision of the Plan to the contrary, in the event
that the limitation contained in Section 7.4 is exceeded in any Plan Year, the
Tax-Deferred Contributions made with respect to a Highly Compensated Employee
that exceed the maximum amount permitted to be contributed to the Plan on his
behalf under Section 7.4, plus any income and minus any losses attributable
thereto, shall be distributed to the Highly Compensated Employee prior to the
end of the next succeeding Plan Year. If excess amounts are attributable to
Participants aggregated under the family aggregation rules described in Section
7.4, the excess shall be allocated among family members in proportion to the
Tax-Deferred Contributions made with respect
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to each family member. If such excess amounts are distributed more than 2 1/2
months after the last day of the Plan Year for which the excess occurred, an
excise tax may be imposed under Section 4979 of the Code on the Employer
maintaining the Plan with respect to such amounts. The maximum amount permitted
to be contributed to the Plan on a Highly Compensated Employee's behalf under
Section 7.4 shall be determined by reducing Tax-Deferred Contributions made on
behalf of Highly Compensated Employees in order of their actual deferral
percentages beginning with the highest of such percentages. The determination of
the amount of excess Tax-Deferred Contributions shall be made after application
of Section 7.3, if applicable.
If an amount of Tax-Deferred Contributions is distributed to a Participant in
accordance with this Section, matching contributions that are attributable
solely to the distributed Tax-Deferred Contributions, plus any income and minus
any losses attributable thereto, shall be forfeited by the Participant. Any such
forfeited amounts shall be treated as a forfeiture under the Plan in accordance
with the provisions of Article XIV as of the last day of the month in which the
distribution of Tax-Deferred Contributions pursuant to this Section occurs.
7.6 - Limitation on Matching Contributions and After-Tax Contributions of Highly
Compensated Employees
Notwithstanding any other provision of the Plan to the contrary, the matching
contributions and After-Tax Contributions made with respect to a Plan Year by or
on behalf of eligible participants who are Highly Compensated Employees may not
result in an average contribution percentage for such eligible participants that
exceeds the greater of:
(a) a percentage that is equal to 125 percent of the average contribution
percentage for all other eligible participants; or
(b) a percentage that is not more than 200 percent of the average contribution
percentage for all other eligible participants and that is not more than
two percentage points higher than the average contribution percentage for
all other eligible participants.
For purposes of applying the limitation contained in this Section, the matching
contributions, After-Tax Contributions, qualified nonelective contributions and
Tax-Deferred Contributions (to the extent that such qualified nonelective
contributions and Tax-Deferred Contributions are taken into account in computing
contribution percentages), and test compensation of any eligible participant who
is a family member
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of another eligible participant who is a five percent owner or among the ten
Highly Compensated Employees receiving the greatest test compensation for the
Plan Year shall be aggregated with the matching contributions, After-Tax
Contributions, qualified nonelective contributions, Tax-Deferred Contributions,
and test compensation of such other eligible participant, and such family member
shall not be considered an eligible participant for purposes of determining the
average contribution percentage for all other eligible participants.
In determining the contribution percentage for any eligible participant who is a
Highly Compensated Employee for the Plan Year, matching contributions, employee
contributions, qualified nonelective contributions, and elective contributions
(to the extent that qualified nonelective contributions and elective
contributions are taken into account in computing contribution percentages) made
to his accounts under any other plan of an Employer or a Related Company shall
be treated as if all such contributions were made to the Plan; provided,
however, that if such a plan has a plan year different from the Plan Year, any
such contributions made to the Highly Compensated Employee's accounts under the
plan for the plan year ending with or within the same calendar year as the Plan
Year shall be treated as if such contributions were made to the Plan.
Notwithstanding the foregoing, such contributions shall not be treated as if
they were made to the Plan if regulations issued under Section 401(m) of the
Code do not permit such plan to be aggregated with the Plan.
If one or more plans of an Employer or a Related Company are aggregated with the
Plan for purposes of satisfying the requirements of Section 401(a)(4) or 410(b)
of the Code, the contribution percentages under the Plan shall be calculated as
if the Plan and such one or more other plans were a single plan. Plans may be
aggregated to satisfy Section 401(m) of the Code only if they have the same plan
year.
The Administrator shall maintain records sufficient to show that the limitation
contained in this Section was not exceeded with respect to any Plan Year and the
amount of the elective contributions and qualified nonelective contributions
taken into account in computing contribution percentages for any Plan Year.
7.7 - Forfeiture or Distribution of Excess Contributions
Notwithstanding any other provision of the Plan to the contrary, in the event
that the limitation contained in Section 7.6 is exceeded in any Plan Year, the
matching contributions and After-Tax Contributions made by or on behalf of a
Highly Compensated Employee that exceed the maximum amount permitted to
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be contributed to the Plan by or on behalf of such Highly Compensated Employee
under Section 7.6, plus any income and minus any losses attributable thereto,
shall be forfeited, to the extent forfeitable, or distributed to the Participant
prior to the end of the next succeeding Plan Year as hereinafter provided. If
excess amounts are attributable to Participants aggregated under the family
aggregation rules described in Section 7.5, the excess shall be allocated among
family members in proportion to the matching contributions and After-Tax
Contributions and qualified nonelective contributions (to the extent that
qualified nonelective contributions are taken into account in computing
contribution percentages) made with respect to each family member. If such
excess amounts are distributed more than 2 1/2 months after the last day of the
Plan Year for which the excess occurred, an excise tax may be imposed under
Section 4979 of the Code on the Employer maintaining the Plan with respect to
such amounts.
The maximum amount permitted to be contributed to the Plan by or on behalf of a
Highly Compensated Employee under Section 7.6 shall be determined by reducing
matching contributions and After-Tax Contributions made by or on behalf of
Highly Compensated Employees in order of their contribution percentages
beginning with the highest of such percentages. The distribution or forfeiture
requirement of this Section shall be satisfied by reducing contributions made by
or on behalf of the Highly Compensated Employee to the extent necessary in the
following order:
After-Tax Contributions made by the Highly Compensated Employee, if any,
shall be distributed.
Matching contributions attributable to Tax-Deferred Contributions shall be
distributed or forfeited, as appropriate.
Any amounts forfeited with respect to a Participant pursuant to this Section
shall be treated as a forfeiture under the Plan in accordance with the
provisions of Article XIV as of the last day of the month in which the
distribution of contributions pursuant to this Section occurs. The amount of
excess After-Tax Contributions of a Participant shall in all cases be
distributable; the excess matching contributions shall be distributable to the
extent the Participant has a vested interest in his Employer Contributions
Sub-Account that is attributable to matching contributions. The determination of
the amount of excess matching contributions and After-Tax Contributions shall be
made after application of Section 7.3, if applicable, and after application of
Section 7.5, if applicable.
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7.8 - Multiple Use Limitation
Notwithstanding any other provision of the Plan to the contrary, the following
multiple use limitation as required under Section 401(m) of the Code shall
apply: the sum of the average actual deferral percentage for Eligible Employees
who are Highly Compensated Employees and the average contribution percentage for
eligible participants who are Highly Compensated Employees may not exceed the
aggregate limit. In the event that, after satisfaction of Section 7.5 and
Section 7.7, it is determined that contributions under the Plan fail to satisfy
the multiple use limitation contained herein, the multiple use limitation shall
be satisfied by further reducing the actual deferral percentages of Eligible
Employees who are Highly Compensated Employees (beginning with the highest such
percentage) to the extent necessary to eliminate the excess, with such further
reductions to be treated as excess Tax-Deferred Contributions and disposed of as
provided in Section 7.5, or in an alternative manner, consistently applied, that
may be permitted by regulations issued under Section 401(m) of the Code.
7.9 - Determination of Income or Loss
The income or loss attributable to excess contributions that are distributed
pursuant to this Article shall be determined for the preceding Plan Year under
the method otherwise used for allocating income or loss to Participant's
Separate Accounts.
7.10 - Code Section 415 Limitations on Crediting of Contributions and
Forfeitures
Notwithstanding any other provision of the Plan to the contrary, the annual
addition with respect to a Participant for a limitation year shall in no event
exceed the lesser of (i) $30,000 (adjusted as provided in Section 415(d) of the
Code, with the first adjustment being made for limitation years beginning on or
after January 1, 1996) or (ii) 25 percent of the Participant's compensation, as
defined in Section 415(c)(3) of the Code and regulations issued thereunder, for
the limitation year. If the annual addition to the Separate Account of a
Participant in any limitation year would otherwise exceed the amount that may be
applied for his benefit under the limitation contained in this Section, the
limitation shall be satisfied by reducing contributions made by or on behalf of
the Participant to the extent necessary in the following order:
After-Tax Contributions made by the Participant for the limitation year, if
any, shall be reduced.
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Tax-Deferred Contributions made on the Participant's behalf for the
limitation year that have not been matched, if any, shall be reduced.
Tax-Deferred Contributions made on the Participant's behalf for the
limitation year that have been matched and the matching contributions
attributable thereto, if any, shall be reduced pro rata.
Employer Contributions (other than matching contributions and qualified
nonelective contributions) otherwise allocable to the Participant's
Separate Account for the limitation year shall be reduced.
Qualified nonelective contributions made on the Participant's behalf for
the limitation year shall be reduced.
The amount of any reduction of Tax-Deferred Contributions or After-Tax
Contributions (plus any income attributable thereto) shall be returned to the
Participant. The amount of any reduction of Employer Contributions shall be
deemed a forfeiture for the limitation year. Amounts deemed to be forfeitures
under this Section shall be held unallocated in a suspense account established
for the limitation year and shall be applied against the Employer's contribution
obligation for the next following limitation year (and succeeding limitation
years, as necessary). If a suspense account is in existence at any time during a
limitation year, all amounts in the suspense account must be allocated to
Participants' Separate Accounts (subject to the limitations contained herein)
before any further Tax-Deferred Contributions, Employer Contributions, or
After-Tax Contributions may be made to the Plan by or on behalf of Participants.
No suspense account established hereunder shall share in any increase or
decrease in the net worth of the Trust. For purposes of this Article, excesses
shall result only from the allocation of forfeitures, a reasonable error in
estimating a Participant's annual compensation (as defined in Section 415(c)(3)
of the Code and regulations issued thereunder), a reasonable error in
determining the amount of Tax-Deferred Contributions that may be made with
respect to any Participant under the limits of Section 415 of the Code, or other
limited facts and circumstances that justify the availability of the provisions
set forth above.
7.11 - Coverage Under Other Qualified Defined Contribution Plan
If a Participant is covered by any other qualified defined contribution plan
(whether or not terminated) maintained by an Employer or a Related Company
concurrently with the Plan, and if the annual addition for the limitation year
would otherwise
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exceed the amount that may be applied for the Participant's benefit under the
limitation contained in Section 7.10, such excess shall be reduced first by
returning the employee contributions made by the Participant for the limitation
year under all of the defined contribution plans other than the Plan and the
income attributable thereto to the extent necessary. If the limitation contained
in Section 7.10 is still not satisfied after returning all of the employee
contributions made by the Participant under all such other plans, the excess
shall be reduced by returning the elective contributions made on the
Participant's behalf for the limitation year under all such other plans and the
income attributable thereto to the extent necessary on a pro rata basis among
all of such plans. If the limitation contained in Section 7.10 is still not
satisfied after returning all of the elective contributions made on the
Participant's behalf under all such other plans, the procedure set forth in
Section 7.10 shall be invoked to eliminate any such excess. If the limitation
contained in Section 7.10 is still not satisfied after invocation of the
procedure set forth in Section 7.10, the portion of the employer contributions
and of forfeitures for the limitation year under all such other plans that has
been allocated to the Participant thereunder, but which exceeds the limitation
set forth in Section 7.10, shall be deemed a forfeiture for the limitation year
and shall be disposed of as provided in such other plans; provided, however,
that if the Participant is covered by a money purchase pension plan, the
forfeiture shall be effected first under any other defined contribution plan
that is not a money purchase pension plan and, if the limitation is still not
satisfied, then under such money purchase pension plan.
7.12 - Coverage Under Qualified Defined Benefit Plan
If a Participant in the Plan is also covered by a qualified defined benefit plan
(whether or not terminated) maintained by an Employer or a Related Company, in
no event shall the sum of the defined benefit plan fraction (as defined in
Section 415(e)(2) of the Code) and the defined contribution plan fraction (as
defined in Section 415(e)(3) of the Code) exceed 1.0 in any limitation year. If,
before October 3, 1973, the Participant was an active participant in a qualified
defined benefit plan maintained by an Employer or a Related Company and
otherwise satisfies the requirements of Section 2004(d)(2) of ERISA, then for
purposes of applying this Section, the defined benefit plan fraction shall not
exceed 1.0. In the event the special limitation contained in this Section is
exceeded, the benefits otherwise payable to the Participant under any such
qualified defined benefit plan shall be reduced to the extent necessary to meet
such limitation.
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7.13 - Scope of Limitations
The limitations contained in Sections 7.10, 7.11, and 7.12 shall be applicable
only with respect to benefits provided pursuant to defined contribution plans
and defined benefit plans described in Section 415(k) of the Code.
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ARTICLE VIII
TRUST FUNDS AND SEPARATE ACCOUNTS
8.1 - General Fund
The Trustee shall maintain a General Fund as required to hold and administer any
assets of the Trust that are not allocated among the Investment Funds as
provided in the Plan or the Trust Agreement. The General Fund shall be held and
administered as a separate common trust fund. The interest of each Participant
or Beneficiary under the Plan in the General Fund shall be an undivided
interest.
8.2 - Investment Funds
The Sponsor shall determine the number and type of Investment Funds and select
the investments for such Investment Funds. The Sponsor shall communicate the
same and any changes therein in writing to the Administrator and the Trustee.
Each Investment Fund shall be held and administered as a separate common trust
fund. The interest of each Participant or Beneficiary under the Plan in any
Investment Fund shall be an undivided interest.
8.3 - Loan Investment Fund
If a loan from the Plan to a Participant is approved in accordance with the
provisions of Article XII, the Sponsor shall direct the establishment and
maintenance of a loan Investment Fund in the Participant's name. The assets of
the loan Investment Fund shall be held as a separate trust fund. A Participant's
loan Investment Fund shall be invested in the note reflecting the loan that is
executed by the Participant in accordance with the provisions of Article XII.
Notwithstanding any other provision of the Plan to the contrary, income received
with respect to a Participant's loan Investment Fund shall be allocated and the
loan Investment Fund shall be administered as provided in Article XII.
8.4 - Income on Trust
Any dividends, interest, distributions, or other income received by the Trustee
with respect to any Trust Fund maintained hereunder shall be allocated by the
Trustee to the Trust Fund for which the income was received.
8.5 - Separate Accounts
As of the first date a contribution is made by or on behalf of an Employee,
there shall be established a Separate Account in his
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name reflecting his interest in the Trust. Each Separate Account shall be
maintained and administered for each Participant and Beneficiary in accordance
with the provisions of the Plan. The balance of each Separate Account shall be
the balance of the account after all credits and charges thereto, for and as of
such date, have been made as provided herein.
8.6 - Sub-Accounts
A Participant's Separate Account shall be divided into individual Sub-Accounts
reflecting the portion of the Participant's Separate Account that is derived
from Tax-Deferred Contributions, After-Tax Contributions, Rollover
Contributions, Profit-Sharing Contributions or Matching Contributions. A
Participant's balance in each of such Participant's Sub-Accounts shall also
reflect the amounts transferred, if any, from corresponding accounts maintained
for the Participant under either the Marketing One Incorporated 401(k) Profit
Sharing Plan and Trust or the PennCorp Financial, Inc. Retirement and Savings
Plan. Each Sub-Account shall reflect separately contributions allocated to each
Trust Fund maintained hereunder and the earnings and losses attributable
thereto. The Employer Contributions Sub-Account shall reflect separately that
portion of such Sub-Account that is derived from Employer Contributions that may
be taken into account to satisfy the limitations on contributions for Highly
Compensated Employees contained in Article VII. Such other Sub-Accounts may be
established as are necessary or appropriate to reflect a Participant's interest
in the Trust.
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ARTICLE IX
LIFE INSURANCE CONTRACTS
9.1 - No Life Insurance Contracts
There shall be no life insurance contracts purchased under the Plan.
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ARTICLE X
DEPOSIT AND INVESTMENT OF CONTRIBUTIONS
10.1 - Future Contribution Investment Elections
Each Eligible Employee shall make an investment election in the manner and form
prescribed by the Administrator directing the manner in which his Tax-Deferred
Contributions, After-Tax Contributions, Rollover Contributions, and Employer
Contributions shall be invested. An Eligible Employee's investment election
shall specify the percentage, in the percentage increments prescribed by the
Administrator, of such contributions that shall be allocated to one or more of
the Investment Funds with the sum of such percentages equaling 100 percent. The
investment election by a Participant shall remain in effect until his entire
interest under the Plan is distributed or forfeited in accordance with the
provisions of the Plan or until he files a change of investment election with
the Administrator, in such form as the Administrator shall prescribe. A
Participant's change of investment election may be made effective as of the date
or dates prescribed by the Administrator.
10.2 - Deposit of Contributions
All Tax-Deferred Contributions, After-Tax Contributions, Rollover Contributions,
and Employer Contributions shall be deposited in the Trust and allocated among
the Investment Funds in accordance with the Participant's currently effective
investment election. If no investment election is on file with the Administrator
at the time contributions are to be deposited to a Participant's Separate
Account, the Participant shall be notified and an investment election form shall
be provided to him. Until such Participant shall make an effective election
under this Section, his contributions shall be allocated among the Investment
Funds as directed by the Administrator.
10.3 - Election to Transfer Between Funds
A Participant may elect to transfer investments from any Investment Fund to any
other Investment Fund. The Participant's transfer election shall specify either
(i) a percentage, in the percentage increments prescribed by the Administrator,
of the amount eligible for transfer, which percentage may not exceed 100
percent, or (ii) a dollar amount that is to be transferred. Subject to any
restrictions pertaining to a particular Investment Fund, a Participant's
transfer election may be made effective as of the date or dates prescribed by
the Administrator.
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10.4 - Investments by the Participant
The selection of any Investment Fund is the sole and exclusive responsibility of
each Participant and it is intended that the selection of an Investment Fund by
each Participant be within the parameters of Section 404(c) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and the regulations
thereunder. None of the Employer, nor the Trustee, nor any of the directors,
officers, agents or Employees of the Employer are empowered to or shall be
permitted to advise a Participant as to the manner in which his accounts shall
be invested or changed. No liability whatsoever shall be imposed upon the
Employer, the Trustee, or any director, officer, agent or Employee of the
Employer for any loss resulting to a Participant's account because of any sale
or investment directed by a Participant under this Section or because of the
Participant's failure to take any action regarding investment acquired pursuant
to such elective investment.
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ARTICLE XI
CREDITING AND VALUING SEPARATE ACCOUNTS
11.1 - Crediting Separate Accounts
All contributions made under the provisions of the Plan shall be credited to
Separate Accounts in the Trust Funds by the Trustee, in accordance with
procedures established in writing by the Administrator, either when received or
on the succeeding Valuation Date after valuation of the Trust Fund has been
completed for such Valuation Date as provided in Section 11.2, as shall be
determined by the Administrator.
11.2 - Valuing Separate Accounts
Separate Accounts in the Trust Funds shall be valued by the Trustee on the
Valuation Date, in accordance with procedures established in writing by the
Administrator, either in the manner adopted by the Trustee and approved by the
Administrator or in the manner set forth in Section 11.3 as Plan valuation
procedures, as determined by the Administrator.
11.3 - Plan Valuation Procedures
With respect to the Trust Funds, the Administrator may determine that the
following valuation procedures shall be applied. As of each Valuation Date
hereunder, the portion of any Separate Accounts in a Trust Fund shall be
adjusted to reflect any increase or decrease in the value of the Trust Fund for
the period of time occurring since the immediately preceding Valuation Date for
the Trust Fund (the "valuation period") in the following manner:
(a) First, the value of the Trust Fund shall be determined by valuing all of
the assets of the Trust Fund at fair market value.
(b) Next, the net increase or decrease in the value of the Trust Fund
attributable to net income and all profits and losses, realized and
unrealized, during the valuation period shall be determined on the basis of
the valuation under paragraph (a) taking into account appropriate
adjustments for contributions, loan payments, and transfers to and
distributions, withdrawals, loans, and transfers from such Trust Fund
during the valuation period.
(c) Finally, the net increase or decrease in the value of the Trust Fund shall
be allocated among Separate Accounts in
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the Trust Fund in the ratio of the balance of the portion of such Separate
Account in the Trust Fund as of the preceding Valuation Date less any
distributions, withdrawals, loans, and transfers from such Separate Account
balance in the Trust Fund since the Valuation Date to the aggregate
balances of the portions of all Separate Accounts in the Trust Fund
similarly adjusted, and each Separate Account in the Trust Fund shall be
credited or charged with the amount of its allocated share. Notwithstanding
the foregoing, the Administrator may adopt such accounting procedures as it
considers appropriate and equitable to establish a proportionate crediting
of net increase or decrease in the value of the Trust Fund for
contributions, loan payments, and transfers to and distributions,
withdrawals, loans, and transfers from such Trust Fund made by or on behalf
of a Participant during the valuation period.
11.4 - Finality of Determinations
The Trustee shall have exclusive responsibility for determining the balance of
each Separate Account maintained hereunder. The Trustee's determinations thereof
shall be conclusive upon all interested parties.
11.5 - Notification
Within a reasonable period of time after the end of each Plan Year, the
Administrator shall notify each Participant and Beneficiary of the balances of
his Separate Account and Sub-Accounts as of a Valuation Date during the Plan
Year.
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ARTICLE XII
LOANS
12.1 - Application for Loan
A Participant who is a party in interest, other than a shareholder employee, as
defined in Section 408(d)(3) of ERISA, may make written application to the
Administrator for a loan from his Separate Account.
As collateral for any loan granted hereunder, the Participant shall grant to the
Plan a security interest in his vested interest under the Plan equal to the
amount of the loan; provided, however, that in no event may the security
interest exceed 50 percent of the Participant's vested interest under the Plan
determined as of the date as of which the loan is originated in accordance with
Plan provisions. In the case of a Participant who is an active employee, the
Participant also shall enter into an agreement to repay the loan by payroll
withholding. No loan in excess of 50 percent of the Participant's vested
interest under the Plan shall be made from the Plan. Loans shall not be made
available to Highly Compensated Employees in an amount greater than the amount
made available to other employees.
A loan shall not be granted unless the Participant consents in writing to the
charging of his Separate Account for unpaid principal and interest amounts in
the event the loan is declared to be in default.
12.2 - Reduction of Account Upon Distribution
Notwithstanding any other provision of the Plan, the amount of a Participant's
Separate Account that is distributable to the Participant or his Beneficiary
under Article XIII or XV shall be reduced by the portion of his vested interest
that is held by the Plan as security for any loan outstanding to the
Participant, provided that the reduction is used to repay the loan. If
distribution is made because of the Participant's death prior to the
commencement of distribution of his Separate Account and less than 100 percent
of the Participant's vested interest in his Separate Account (determined without
regard to the preceding sentence) is payable to his surviving spouse, then the
balance of the Participant's vested interest in his Separate Account shall be
adjusted by reducing the vested account balance by the amount of the security
used to repay the loan, as provided in the preceding sentence, prior to
determining the amount of the benefit payable to the surviving spouse.
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12.3 - Requirements to Prevent a Taxable Distribution
Notwithstanding any other provision of the Plan to the contrary, the following
terms and conditions shall apply to any loan made to a Participant under this
Article:
(a) The interest rate on any loan to a Participant shall be a reasonable
interest rate commensurate with current interest rates charged for loans
made under similar circumstances by persons in the business of lending
money.
(b) The amount of any loan to a Participant (when added to the outstanding
balance of all other loans to the Participant from the Plan or any other
plan maintained by an Employer or a Related Company) shall not exceed the
lesser of:
(i) $50,000, reduced by the excess, if any, of the highest outstanding
balance of any other loan to the Participant from the Plan or any
other plan maintained by an Employer or a Related Company during the
preceding 12-month period over the outstanding balance of such loans
on the date a loan is made hereunder; or
(ii) 50 percent of the vested portions of the Participant's Separate
Account and his vested interest under all other plans maintained by an
Employer or a Related Company.
(c) The term of any loan to a Participant shall be no greater than five years,
except in the case of a loan used to acquire any dwelling unit which within
a reasonable period of time is to be used (determined at the time the loan
is made) as a principal residence of the Participant.
(d) Except as otherwise permitted under Treasury regulations, substantially
level amortization shall be required over the term of the loan with
payments made not less frequently than quarterly.
12.4 - Administration of Loan Investment Fund
Upon approval of a loan to a Participant, the Administrator shall direct the
Trustee to transfer an amount equal to the loan amount from the Investment Funds
in which it is invested, as directed by the Administrator, to the loan
Investment Fund established in the Participant's name. Any loan approved by the
Administrator shall be made to the Participant out of the Participant's loan
Investment Fund. All principal and interest paid by the Participant on a loan
made under this Article shall be deposited
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to his Separate Account and shall be allocated upon receipt among the Investment
Funds in accordance with the Participant's currently effective investment
election. The balance of the Participant's loan Investment Fund shall be
decreased by the amount of principal payments and the loan Investment Fund shall
be terminated when the loan has been repaid in full.
12.5 - Default
If a Participant fails to make or cause to be made, any payment required under
the terms of the loan within 90 days following the date on which such payment
shall become due or there is an outstanding principal balance existing on a loan
after the last scheduled repayment date, the Administrator shall direct the
Trustee to declare the loan to be in default, and the entire unpaid balance of
such loan, together with accrued interest, shall be immediately due and payable.
In any such event, if such balance and interest thereon is not then paid, the
Trustee shall charge the Separate Account of the borrower with the amount of
such balance and interest as of the earliest date a distribution may be made
from the Plan to the borrower without adversely affecting the tax qualification
of the Plan or of the cash or deferred arrangement.
12.6 - Special Rules Applicable to Loans
Any loan made hereunder shall be subject to the following rules:
(a) Loans limited to Eligible Employees: No loans shall be made to an Employee
who makes a Rollover Contribution in accordance with Article V, but who is
not an Eligible Employee as provided in Article III.
(b) Minimum Loan Amount: A Participant may not request a loan for less than
$1,000.
(c) Maximum Number of Outstanding Loans: A Participant with an outstanding loan
may not apply for another loan until the existing loan is paid in full and
may not refinance an existing loan or obtain a second loan for the purpose
of paying off the existing loan. A Participant may not apply for more than
one loan during the Plan Year. The provisions of this paragraph shall not
apply to any loans made prior to the effective date of this amendment and
restatement; provided, however, that a Participant may not apply for a new
loan hereunder until all outstanding loans made to the Participant prior to
the effective date of this amendment and restatement have been paid in
full.
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(d) Maximum Period for Real Estate Loans: The term of any loan to a Participant
that is used to acquire any dwelling unit which within a reasonable period
of time is to be used (determined at the time the loan is made) as a
principal residence of the Participant shall be no greater than ten years.
(e) Pre-Payment Without Penalty: A Participant may pre-pay the balance of any
loan hereunder prior to the date it is due without penalty.
(f) Effect of Termination of Employment: Upon a Participant's termination of
employment, the balance of any outstanding loan hereunder shall immediately
become due and owing.
12.7 - Loans Granted Prior to Amendment
Notwithstanding any other provision of this Article to the contrary, any loan
made under the provisions of the Plan as in effect prior to this amendment and
restatement shall remain outstanding until repaid in accordance with its terms
or the otherwise applicable Plan provisions.
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ARTICLE XIII
WITHDRAWALS WHILE EMPLOYED
13.1 - Withdrawals of After-Tax Contributions
A Participant who is employed by an Employer or a Related Company may elect in
writing, subject to the limitations and conditions prescribed in this Article,
to make a cash withdrawal in a lump sum from his After-Tax Contributions
Sub-Account.
13.2 - Withdrawals of Rollover Contributions
A Participant who is employed by an Employer or a Related Company may elect in
writing, subject to the limitations and conditions prescribed in this Article,
to make a cash withdrawal in a lump sum from his Rollover Contributions
Sub-Account.
13.3 - Withdrawals of Employer Contributions
A Participant who is employed by an Employer or a Related Company and has
attained age 59 1/2 or is determined by the Administrator to have incurred a
hardship as defined in this Article may elect in writing, subject to the
limitations and conditions prescribed in this Article to make a cash withdrawal
in a lump sum from his vested interest in his Employer Contributions
Sub-Account. Notwithstanding the foregoing, in no event may a Participant
withdraw that portion of his Employer Contributions Sub-Accoun that is
attributable to Employer Contributions that may be taken into account to satisfy
the limitations on contributions for Highly Compensated Employees contained in
Article VII prior to the Participant's attainment of age 59 1/2. The maximum
amount that a Participant may withdraw pursuant to this Section shall be an
amount ("X") determined by the following formula:
X = P(AB + D) - D
For purposes of the formula:
P = The Participant's vested interest in his Employer Contributions
Sub-Account on the date distribution is to be made; provided,
however, that if the distribution is to be made prior to the
Participant's attainment of age 59 1/2, his vested interest shall
be determined without regard to his vested interest in that
portion of his Employer Contributions Sub-Account that is
attributable to Employer Contributions that may be taken into
account to satisfy the limitations on contributions
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for Highly Compensated Employees contained in Article VII.
AB = The balance of the Participant's Employer Contributions
Sub-Account as of the Valuation Date immediately preceding the
date distribution is to be made; provided, however, that if the
distribution is to be made prior to the Participant's attainment
of age 59 1/2, such balance shall exclude that portion of his
Employer Contributions Sub-Account that is attributable to
Employer Contributions that may be taken into account to satisfy
the limitations on contributions for Highly Compensated Employees
contained in Article VII.
D = The amount of all prior withdrawals from the Participant's
Employer Contributions Sub-Account made pursuant to this Section.
13.4 - Withdrawals of Tax-Deferred Contributions
A Participant who is employed by an Employer or a Related Company and who has
attained age 59 1/2 or is determined by the Administrator to have incurred a
hardship as defined in this Article may elect in writing, subject to the
limitations and conditions prescribed in this Article, to make a cash withdrawal
in a lump sum from his Tax-Deferred Contributions Sub-Account. The maximum
amount that a Participant may withdraw pursuant to this Section because of a
hardship is the balance of his Tax-Deferred Contributions Sub-Account, exclusive
of any earnings credited to such Sub-Account.
13.5 - Limitations on Withdrawals Other than Hardship Withdrawals
Withdrawals made pursuant to this Article, other than hardship withdrawals,
shall be subject to the following conditions and limitations:
A Participant must file a written withdrawal application with the
Administrator such number of days prior to the date as of which it is to be
effective as the Administrator shall prescribe.
Withdrawals may be made effective as soon as reasonably practicable
following the Administrator's receipt of the Participant's directions.
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13.6 - Conditions and Limitations on Hardship Withdrawals
A Participant must file a written application for a hardship withdrawal with the
Administrator such number of days prior to the date as of which it is to be
effective as the Administrator may prescribe. Hardship withdrawals may be made
effective as soon as reasonably practicable following the Administrator's
receipt of the Participant's directions. The Administrator shall grant a
hardship withdrawal only if it determines that the withdrawal is necessary to
meet an immediate and heavy financial need of the Participant. An immediate and
heavy financial need of the Participant means a financial need on account of:
(a) expenses previously incurred by or necessary to obtain for the Participant,
the Participant's spouse, or any dependent of the Participant (as defined
in Section 152 of the Code) medical care described in Section 213(d) of the
Code;
(b) costs directly related to the purchase (excluding mortgage payments) of a
principal residence for the Participant;
(c) payment of tuition, related educational fees, and room and board expenses
for the next 12 months of post-secondary education for the Participant, the
Participant's spouse, or any dependent of the Participant; or
(d) the need to prevent the eviction of the Participant from his principal
residence or foreclosure on the mortgage of the Participant's principal
residence.
A withdrawal shall be deemed to be necessary to satisfy an immediate and heavy
financial need of a Participant only if all of the following requirements are
satisfied:
The withdrawal is not in excess of the amount of the immediate and heavy
financial need of the Participant.
The Participant has obtained all distributions, other than hardship
distributions, and all non-taxable loans currently available under all
plans maintained by an Employer or any Related Company.
The Participant's Tax-Deferred Contributions and After-Tax Contributions
and the Participant's elective tax-deferred contributions and employee
after-tax contributions under all other tax-qualified plans maintained by
an Employer or any Related Company shall be suspended for at least twelve
months after his receipt of the withdrawal.
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The Participant shall not make Tax-Deferred Contributions or elective
tax-deferred contributions under any other tax-qualified plan maintained by
an Employer or any Related Company for the Participant's taxable year
immediately following the taxable year of the withdrawal in excess of the
applicable limit under Section 402(g) of the Code for such next taxable
year less the amount of the Participant's Tax-Deferred Contributions and
elective tax-deferred contributions under any other plan maintained by an
Employer or any Related Company for the taxable year of the withdrawal.
The minimum hardship withdrawal that a Participant may make is $1,000. The
amount of a hardship withdrawal may include any amounts necessary to pay any
Federal, state, or local income taxes or penalties reasonably anticipated to
result from the distribution. A Participant shall not fail to be treated as an
Eligible Employee for purposes of applying the limitations contained in Article
VII of the Plan merely because his Tax-Deferred Contributions are suspended in
accordance with this Section.
13.7 - Order of Withdrawal from a Participant's Sub-Accounts
Distribution of a withdrawal amount shall be made from a Participant's
Sub-Accounts, to the extent necessary, in the order prescribed by the
Administrator, which order shall be uniform with respect to all Participants and
non-discriminatory. If the Sub-Account from which a Participant is receiving a
withdrawal is invested in more than one Investment Fund, the withdrawal shall be
charged against the Investment Funds as directed by the Administrator.
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ARTICLE XIV
TERMINATION OF EMPLOYMENT AND SETTLEMENT DATE
14.1 - Termination of Employment and Settlement Date
A Participant's Settlement Date shall occur on the date he terminates employment
with an Employer and all Related Companies because of death, disability,
retirement, or other termination of employment. Written notice of a
Participant's Settlement Date shall be given by the Administrator to the
Trustee.
14.2 - Separate Accounting for Non-Vested Amounts
If as of a Participant's Settlement Date the Participant's vested interest in
his Employer Contributions Sub-Account is less than 100 percent, that portion of
his Employer Contributions Sub-Account that is not vested shall be accounted for
separately from the vested portion and shall be disposed of as provided in the
following Section. If prior to his Settlement Date such a Participant made a
withdrawal in accordance with the provisions of Article XIII, the vested portion
of his Employer Contributions Su Account shall be equal to the maximum
withdrawable amount as determined under Article XIII, without regard to any
exclusion for amounts attributable to Employer Contributions that may be taken
into account to satisfy the limitations on contributions for Highly Compensated
Employees contained in Article VII.
14.3 - Disposition of Non-Vested Amounts
That portion of a Participant's Employer Contributions Sub-Account that is not
vested upon the occurrence of his Settlement Date shall be disposed of as
follows:
(a) If the Participant has no vested interest in his Separate Account upon the
occurrence of his Settlement Date or his vested interest in his Separate
Account as of the date of distribution does not exceed $3,500 resulting in
the Participant's receipt of a single sum payment of such vested interest,
the non-vested balance remaining in the Participant's Employer
Contributions Sub-Account will be forfeited and his Separate Account closed
as of (i) the Participant's Settlement Date, if the Participant has no
vested interest in his Separate Account, or (ii) the date the single sum
payment occurs.
(b) If the Participant's vested interest in his Separate Account exceeds $3,500
and the Participant is eligible for and consents in writing to a single sum
payment of his vested interest in his Separate Account, the non-vested
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balance remaining in the Participant's Employer Contributions Sub-Account
will be forfeited and his Separate Account closed as of the date the single
sum payment occurs, provided that such distribution occurs prior to the end
of the second Plan Year beginning on or after the Participant's Settlement
Date.
(c) If neither paragraph (a) nor paragraph (b) is applicable, the non-vested
portion of the Participant's Employer Contributions Sub-Account will
continue to be held in such Sub-Account and will not be forfeited until the
end of the five-year period beginning on his Settlement Date.
Whenever the non-vested portion of a Participant's Employer Contributions
Sub-Account is forfeited under the provisions of the Plan with respect to a Plan
Year, the amount of such forfeiture, as of the last day of the Plan Year, shall
be applied first against Plan expenses for the Plan Year and then against the
Employer Contribution obligations for the Plan Year of the Employer for which
the Participant last performed services as an Employee. Notwithstanding the
foregoing, however, should the amount of all such forfeitures for any Plan Year
with respect to any Employer exceed the amount of such Employer's Employer
Contribution obligation for the Plan Year, the excess amount of such forfeitures
shall be held unallocated in a suspense account established with respect to the
Employer and shall for all Plan purposes be applied against the Employer's
Employer Contribution obligations for the following Plan Year.
14.4 - Recrediting of Forfeited Amounts
A former Participant who forfeited the non-vested portion of his Employer
Contributions Sub-Account in accordance with the provisions of this Article and
who is reemployed by an Employer or a Related Company shall have such forfeited
amounts recredited to a new Separate Account in his name, without adjustment for
interim gains or losses experienced by the Trust, if:
(a) he returns to employment with an Employer or a Related Company before the
end of the five-year period beginning on the later of his Settlement Date
or the date he received distribution of his vested interest in his Separate
Account;
(b) he resumes employment covered under the Plan before the end of the
five-year period beginning on the date he is reemployed; and
(c) if he received distribution of his vested interest in his Separate Account,
he repays to the Plan the full amount of
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such distribution before the end of the five-year period beginning on the
date he is reemployed.
Funds needed in any Plan Year to recredit the Separate Account of a Participant
with the amounts of prior forfeitures in accordance with the preceding sentence
shall come first from forfeitures that arise during such Plan Year, and then
from Trust income earned in such Plan Year, with each Trust Fund being charged
with the amount of such income proportionately, unless his Employer chooses to
make an additional Employer Contribution, and shall finally be provided by his
Employer by way of a separate b- Employer Contribution.
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ARTICLE XV
DISTRIBUTIONS
15.1 - Distributions to Participants
A Participant whose Settlement Date occurs shall receive distribution of his
vested interest in his Separate Account in the form provided under Article XVI
beginning as soon as reasonably practicable following his Settlement Date or the
date his application for distribution is filed with the Administrator, if later.
In addition, a Participant who continues in employment with an Employer or a
Related Company after his Normal Retirement Date may elect to receive
distribution of all or any portion of his Separate Account in the form provided
under Article XVI at any time following his Normal Retirement Date.
15.2 - Distributions to Beneficiaries
If a Participant dies prior to the date distribution of his vested interest in
his Separate Account begins under this Article, his Beneficiary shall receive
distribution of the Participant's vested interest in his Separate Account in the
form provided under Article XVI beginning as soon as reasonably practicable
following the date the Beneficiary's application for distribution is filed with
the Administrator. Unless distribution is to be made over the life or over a
period certain not greater than the life expectancy of the Beneficiary,
distribution of the Participant's entire vested interest shall be made to the
Beneficiary no later than the end of the fifth calendar year beginning after the
Participant's death. If distribution is to be made over the life or over a
period certain no greater than the life expectancy of the Beneficiary,
distribution shall commence no later than:
(a) If the Beneficiary is not the Participant's spouse, the end of the first
calendar year beginning after the Participant's death; or
(b) If the Beneficiary is the Participant's spouse, the later of (i) the end of
the first calendar year beginning after the Participant's death or (ii) the
end of the calendar year in which the Participant would have attained age
70 1/2.
If distribution is to be made to a Participant's spouse, it shall be made
available within a reasonable period of time after the Participant's death that
is no less favorable than the period of time applicable to other distributions.
If a Participant dies after the date distribution of his vested interest in his
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Separate Account begins under this Article, but before his entire vested
interest in his Separate Account is distributed, his Beneficiary shall receive
distribution of the remainder of the Participant's vested interest in his
Separate Account beginning as soon as reasonably practicable following the
Participant's date of death in a form that provides for distribution at least as
rapidly as under the form in which the Participant was receiving distribution.
15.3 - Cash Outs and Participant Consent
Notwithstanding any other provision of the Plan to the contrary, if a
Participant's vested interest in his Separate Account does not exceed $3,500,
distribution of such vested interest shall be made to the Participant in a
single sum payment as soon as reasonably practicable following his Settlement
Date. If a Participant's vested interest in his Separate Account is $0, he shall
be deemed to have received distribution of such vested interest as of his
Settlement Date. If a Participant's vested interest in his Separate Account
exceeds $3,500, distribution shall not commence to such Participant prior to his
Normal Retirement Date without the Participant's written consent and the written
consent of his spouse if the Participant's Separate Account is subject to the
qualified joint and survivor annuity provisions under the Addendum and payment
is not made through the purchase of a qualified joint and survivor annuity. If
at the time of a distribution or deemed distribution to a Participant from his
Separate Account, the Participant's vested interest in his Separate Account
exceeded $3,500, then for purposes of this Section, the Participant's vested
interest in his Separate Account on any subsequent date shall be deemed to
exceed $3,500.
15.4 - Required Commencement of Distribution
Notwithstanding any other provision of the Plan to the contrary, distribution of
a Participant's vested interest in his Separate Account shall commence to the
Participant no later than the earlier of:
(a) 60 days after the close of the Plan Year in which (i) the Participant's
Normal Retirement Date occurs, (ii) the 10th anniversary of the year in
which he commenced participation in the Plan occurs, or (iii) his
Settlement Date occurs, whichever is latest; or
(b) the April 1 following the close of the calendar year in which he attains
age 70 1/2, whether or not his Settlement Date has occurred, except that if
a Participant attained age 70 1/2 prior to January 1, 1988, and was not a
five-percent owner (as defined in Section 416 of the Code)
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at any time during the five-Plan-Year period ending within the calendar
year in which he attained age 70 1/2, distribution of such Participant's
vested interest in his Separate Account shall commence no later than the
April 1 following the close of the calendar year in which he attains age 70
1/2 or retires, whichever is later.
Distributions required to commence under this Section shall be made in the form
provided under Article XVI and in accordance with Section 401(a)(9) of the Code
and regulations issued thereunder, including the minimum distribution incidental
benefit requirements.
15.5 - Reemployment of a Participant
If a Participant whose Settlement Date has occurred is reemployed by an Employer
or a Related Company, he shall lose his right to any distribution or further
distributions from the Trust arising from his prior Settlement Date and his
interest in the Trust shall thereafter be treated in the same manner as that of
any other Participant whose Settlement Date has not occurred.
15.6 - Restrictions on Alienation
Except as provided in Section 401(a)(13) of the Code relating to qualified
domestic relations orders and Section 1.401(a)-13(b)(2) of Treasury regulations
relating to Federal tax levies and judgments, no benefit under the Plan at any
time shall be subject in any manner to anticipation, alienation, assignment
(either at law or in equity), encumbrance, garnishment, levy, execution, or
other legal or equitable process; and no person shall have power in any manner
to anticipate, transfer, assign (either at law or in equity), alienate or
subject to attachment, garnishment, levy, execution, or other legal or equitable
process, or in any way encumber his benefits under the Plan, or any part
thereof, and any attempt to do so shall be void.
15.7 - Facility of Payment
If the Administrator finds that any individual to whom an amount is payable
hereunder is incapable of attending to his financial affairs because of any
mental or physical condition, including the infirmities of advanced age, such
amount (unless prior claim therefor shall have been made by a duly qualified
guardian or other legal representative) may, in the discretion of the
Administrator, be paid to another person for the use or benefit of the
individual found incapable of attending to his financial affairs or in
satisfaction of legal obligations incurred by or on behalf of such individual.
The Trustee shall make such payment only upon receipt of written instructions to
such effect from the
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Administrator. Any such payment shall be charged to the Separate Account from
which any such payment would otherwise have been paid to the individual found
incapable of attending to his financial affairs and shall be a complete
discharge of any liability therefor under the Plan.
15.8 - Inability to Locate Payee
If any benefit becomes payable to any person, or to the executor or
administrator of any deceased person, and if that person or his executor or
administrator does not present himself to the Administrator within a reasonable
period after the Administrator mails written notice of his eligibility to
receive a distribution hereunder to his last known address and makes such other
diligent effort to locate the person as the Administrator determines, that
benefit will be forfeited. However, if the payee later files a claim for that
benefit, the benefit will be restored.
15.9 - Distribution Pursuant to Qualified Domestic Relations Orders
Notwithstanding any other provision of the Plan to the contrary, if a qualified
domestic relations order so provides, distribution may be made to an alternate
payee pursuant to a qualified domestic relations order, as defined in Section
414(p) of the Code, regardless of whether the Participant's Settlement Date has
occurred or whether the Participant is otherwise entitled to receive a
distribution under the Plan.
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ARTICLE XVI
FORM OF PAYMENT
16.1 - Normal Form of Payment
Unless the Participant, or his Beneficiary, if the Participant has died, elects
the optional form of payment, distribution shall be made to the Participant, or
his Beneficiary, as the case may be, in a single sum payment. Distribution of
the fair market value of the Participant's Separate Account under either the
normal or optional forms of payment shall be made in cash or in kind, as elected
by the Participant.
16.2 - Optional Form of Payment
Except as otherwise provided in the Addendum, a Participant, or his Beneficiary,
as the case may be, may elect to receive his distribution in a series of
installments over a period not exceeding the life expectancy of the Participant,
or the Participant's Beneficiary, if the Participant has died, or a period not
exceeding the joint life and last survivor expectancy of the Participant and his
Beneficiary. Each installment shall be equal in amount except as necessary to
adjust for any changes in the value of the Participant's Separate Account. The
determination of life expectancies shall be made on the basis of the expected
return multiples in Table V and VI of Section 1.72-9 of the Treasury regulations
and shall be calculated either once at the time installment payments begin or
annually for the Participant and/or his Beneficiary, if his Beneficiary is his
spouse, as determined by the Participant at the time installment payments begin.
16.3 - Change of Option Election
A Participant or Beneficiary who has elected the optional form of payment may
revoke or change his election at any time prior to the date as of which his
benefit commences by filing with the Administrator a written election in the
form prescribed by the Administrator.
16.4 - Direct Rollover
Notwithstanding any other provision of the Plan to the contrary, in lieu of
receiving distribution in the form of payment provided under this Article, a
"qualified distributee" may elect in writing, in accordance with rules
prescribed by the Administrator, to have any portion or all of a distribution
made on or after January 1, 1993, that is an "eligible rollover
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distribution" paid directly by the Plan to the "eligible retirement plan"
designated by the "qualified distributee"; provided, however, that this
provision shall not apply if the total distribution is less than $200 and that a
"qualified distributee" may not elect this provision with respect to a portion
of a distribution that is less than $500. Any such payment by the Plan to
another "eligible retirement plan" shall be a direct rollover. For purposes of
this Section, the following terms have the following meanings:
(a) An "eligible retirement plan" means an individual retirement account
described in Section 408(a) of the Code, an individual retirement annuity
described in Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in Section
401(a) of the Code that accepts rollovers; provided, however, that, in the
case of a direct rollover by a surviving spouse, an eligible retirement
plan does not include a qualified trust described in Section 401(a) of the
Code.
(b) An "eligible rollover distribution" means any distribution of all or any
portion of the balance of a Participant's Separate Account; provided,
however, that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic
payments made not less frequently than annually for the life or life
expectancy of the qualified distributee or the joint lives or joint life
expectancies of the qualified distributee and the qualified distributee's
designated beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section
401(a)(9) of the Code; and the portion of any distribution that consists of
the Participant's After-Tax Contributions.
(c) A "qualified distributee" means a Participant, his surviving spouse, or his
spouse or former spouse who is an alternate payee under a qualified
domestic relations order, as defined in Section 414(p) of the Code.
16.5 - Notice Regarding Forms of Payment
Within the 60 day period ending 30 days before the date as of which distribution
of a Participant's Separate Account commences, the Administrator shall provide
the Participant with a written explanation of his right to defer distribution
until his Normal Retirement Date, or such later date as may be provided in the
Plan, his right to make a direct rollover, and the forms of
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payment available under the Plan. Distribution of the Participant's Separate
Account may commence less than 30 days after such notice is provided to the
Participant if (i) the Administrator clearly informs the Participant of his
right to consider his election of whether or not to make a direct rollover or to
receive a distribution prior to his Normal Retirement Date and his election of a
form of payment for a period of at least 30 days following his receipt of the
notice and (ii) the Participant, after receiving the notice, affirmatively
elects an early distribution.
16.6 - Reemployment
If a Participant is reemployed by an Employer or a Related Company prior to
receiving distribution of the entire balance of his vested interest in his
Separate Account, his prior election of a form of payment hereunder shall become
ineffective.
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ARTICLE XVII
BENEFICIARIES
17.1 - Designation of Beneficiary
A married Participant's Beneficiary shall be his spouse, unless the Participant
designates a person or persons other than his spouse as Beneficiary with his
spouse's written consent; provided, however, that such written spousal consent
shall not be required if the Participant is not married to such spouse on the
date as of which distribution of the Participant's Separate Account commences. A
Participant may designate a Beneficiary on the form prescribed by the
Administrator. If no Beneficiary has been designated pursuant to the provisions
of this Section, or if no Beneficiary survives the Participant and he has no
surviving spouse, then the Beneficiary under the Plan shall be the Participant's
estate. If a Beneficiary dies after becoming entitled to receive a distribution
under the Plan but before distribution is made to him in full, and if no other
Beneficiary has been designated to receive the balance of the distribution in
that event, the estate of the deceased Beneficiary shall be the Beneficiary as
to the balance of the distribution.
17.2 - Spousal Consent Requirements
Any written spousal consent given pursuant to this Article must acknowledge the
effect of the action taken and must be witnessed by a Plan representative or a
notary public. In addition, the spouse's written consent must either (i) specify
any non-spouse Beneficiary designated by the Participant and that such
Beneficiary may not be changed without written spousal consent or (ii)
acknowledge that the spouse has the right to limit consent to a specific
Beneficiary, but permit the Participant to change the designated Beneficiary
without the spouse's further consent. A Participant's spouse will be deemed to
have given written consent to the Participant's designation of Beneficiary if
the Participant establishes to the satisfaction of a Plan representative that
such consent cannot be obtained because the spouse cannot be located or because
of other circumstances set forth in Section 401(a)(11) of the Code and
regulations issued thereunder. Any written consent given or deemed to have been
given by a Participant's spouse hereunder shall be valid only with respect to
the spouse who signs the consent.
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ARTICLE XVIII
ADMINISTRATION
18.1 - Authority of the Sponsor
The Sponsor, which shall be the administrator for purposes of ERISA and the plan
administrator for purposes of the Code, shall be responsible for the
administration of the Plan and, in addition to the powers and authorities
expressly conferred upon it in the Plan, shall have all such powers and
authorities as may be necessary to carry out the provisions of the Plan,
including the power and authority to interpret and construe the provisions of
the Plan, to make benefit determinations, and to resolve any disputes which
arise under the Plan. The Sponsor may employ such attorneys, agents, and
accountants as it may deem necessary or advisable to assist in carrying out its
duties hereunder. The Sponsor shall be a "named fiduciary" as that term is
defined in Section 402(a)(2) of ERISA. The Sponsor may:
(a) allocate any of the powers, authority, or responsibilities for the
operation and administration of the Plan (other than trustee
responsibilities as defined in Section 405(c)(3) of ERISA) among named
fiduciaries; and
(b) designate a person or persons other than a named fiduciary to carry out any
of such powers, authority, or responsibilities;
except that no allocation by the Sponsor of, or designation by the Sponsor with
respect to, any of such powers, authority, or responsibilities to another named
fiduciary or a person other than a named fiduciary shall become effective unless
such allocation or designation shall first be accepted by such named fiduciary
or other person in a writing signed by it and delivered to the Sponsor.
18.2 - Action of the Sponsor
Any act authorized, permitted, or required to be taken under the Plan by the
Sponsor and which has not been delegated in accordance with Section 18.1, may be
taken by a majority of the members of the board of directors of the Sponsor,
either by vote at a meeting, or in writing without a meeting, or by the employee
or employees of the Sponsor designated by the board of directors to carry out
such acts on behalf of the Sponsor. All notices, advice, directions,
certifications, approvals, and instructions required or authorized to be given
by the Sponsor as under the Plan shall be in writing and signed by either (i) a
majority of the members of the board of directors of the Sponsor or by such
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member or members as may be designated by an instrument in writing, signed by
all the members thereof, as having authority to execute such documents on its
behalf, or (ii) the employee or employees authorized to act for the Sponsor in
accordance with the provisions of this Section.
18.3 - Claims Review Procedure
Whenever a claim for benefits under the Plan filed by any person (herein
referred to as the "Claimant") is denied, whether in whole or in part, the
Sponsor shall transmit a written notice of such decision to the Claimant within
90 days of the date the claim was filed or, if special circumstances require an
extension, within 180 days of such date, which notice shall be written in a
manner calculated to be understood by the Claimant and shall contain a statement
of (i) the specific reasons for the denial of the claim, (ii) specific reference
to pertinent Plan provisions on which the denial is based, and (iii) a
description of any additional material or information necessary for the Claimant
to perfect the claim and an explanation of why such information is necessary.
The notice shall also include a statement advising the Claimant that, within 60
days of the date on which he receives such notice, he may obtain review of such
decision in accordance with the procedures hereinafter set forth. Within such
60-day period, the Claimant or his authorized representative may request that
the claim denial be reviewed by filing with the Sponsor a written request
therefor, which request shall contain the following information:
(a) the date on which the Claimant's request was filed with the Sponsor;
provided, however, that the date on which the Claimant's request for review
was in fact filed with the Sponsor shall control in the event that the date
of the actual filing is later than the date stated by the Claimant pursuant
to this paragraph;
(b) the specific portions of the denial of his claim which the Claimant
requests the Sponsor to review;
(c) a statement by the Claimant setting forth the basis upon which he believes
the Sponsor should reverse the previous denial of his claim for benefits
and accept his claim as made; and
(d) any written material (offered as exhibits) which the Claimant desires the
Sponsor to examine in its consideration of his position as stated pursuant
to paragraph (c) of this Section.
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Within 60 days of the date determined pursuant to paragraph (a) of this Section
or, if special circumstances require an extension, within 120 days of such date,
the Sponsor shall conduct a full and fair review of the decision denying the
Claimant's claim for benefits and shall render its written decision on review to
the Claimant. The Sponsor's decision on review shall be written in a manner
calculated to be understood by the Claimant and shall specify the reasons and
Plan provisions upon which the Sponsor's decision was based.
18.4 - Qualified Domestic Relations Orders
The Sponsor shall establish reasonable procedures to determine the status of
domestic relations orders and to administer distributions under domestic
relations orders which are deemed to be qualified orders. Such procedures shall
be in writing and shall comply with the provisions of Section 414(p) of the Code
and regulations issued thereunder.
18.5 - Indemnification
In addition to whatever rights of indemnification the members of the board of
directors of the Sponsor or any employee or employees of the Sponsor to whom any
power, authority, or responsibility is delegated pursuant to Section 18.2, may
be entitled under the articles of incorporation or regulations of the Sponsor,
under any provision of law, or under any other agreement, the Sponsor shall
satisfy any liability actually and reasonably incurred by any such person or
persons, including expenses, attorneys' fees, judgments, fines, and amounts paid
in settlement (other than amounts paid in settlement not approved by the
Sponsor), in connection with any threatened, pending or completed action, suit,
or proceeding which is related to the exercising or failure to exercise by such
person or persons of any of the powers, authority, responsibilities, or
discretion as provided under the Plan, or reasonably believed by such person or
persons to be provided hereunder, and any action taken by such person or persons
in connection therewith, unless the same is judicially determined to be the
result of such person or persons' gross negligence or willful misconduct.
18.6 - Actions Binding
Subject to the provisions of Section 18.3, any action taken by the Sponsor which
is authorized, permitted, or required under the Plan shall be final and binding
upon the Employers, the Trustee, all persons who have or who claim an interest
under the Plan, and all third parties dealing with the Employers or the Trustee.
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ARTICLE XIX
AMENDMENT AND TERMINATION
19.1 - Amendment
Subject to the provisions of Section 19.2, the Sponsor may at any time and from
time to time, by action of its board of directors, or such officers of the
Sponsor as are authorized by its board of directors, amend the Plan, either
prospectively or retroactively. Any such amendment shall be by written
instrument executed by the Sponsor.
19.2 - Limitation on Amendment
The Sponsor shall make no amendment to the Plan which shall decrease the accrued
benefit of any Participant or Beneficiary, except that nothing contained herein
shall restrict the right to amend the provisions of the Plan relating to the
administration of the Plan and Trust. Moreover, no such amendment shall be made
hereunder which shall permit any part of the Trust to revert to an Employer or
any Related Company or be used or be diverted to purposes other than the
exclusive benefit of Participants and Beneficiaries.
19.3 - Termination
The Sponsor reserves the right, by action of its board of directors, to
terminate the Plan as to all Employers at any time (the effective date of such
termination being hereinafter referred to as the "termination date"). Upon any
such termination of the Plan, the following actions shall be taken for the
benefit of Participants and Beneficiaries:
(a) As of the termination date, each Investment Fund shall be valued and all
Separate Accounts and Sub-Accounts shall be adjusted in the manner provided
in Article XI, with any unallocated contributions or forfeitures being
allocated as of the termination date in the manner otherwise provided in
the Plan. The termination date shall become a Valuation Date for purposes
of Article XI. In determining the net worth of the Trust, there shall be
included as a liability such amounts as shall be necessary to pay all
expenses in connection with the termination of the Trust and the
liquidation and distribution of the property of the Trust, as well as other
expenses, whether or not accrued, and shall include as an asset all accrued
income.
(b) All Separate Accounts shall then be disposed of to or for the benefit of
each Participant or Beneficiary in
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accordance with the provisions of Article XV as if the termination date
were his Settlement Date; provided, however, that notwithstanding the
provisions of Article XV, if the Plan does not offer an annuity option and
if neither his Employer nor a Related Company establishes or maintains
another defined contribution plan (other than an employee stock ownership
plan as defined in Section 4975(e)(7) of the Code), the Participant's
written consent to the commencement of distribution shall not be required
regardless of the value of the vested portions of his Separate Account.
(c) Notwithstanding the provisions of paragraph (b) of this Section, no
distribution shall be made to a Participant of any portion of the balance
of his Tax-Deferred Contributions Sub-Account prior to his separation from
service (other than a distribution made in accordance with Article XIII or
required in accordance with Section 401(a)(9) of the Code) unless (i)
neither his Employer nor a Related Company establishes or maintains another
defined contribution plan (other than an employee stock ownership plan as
defined in Section 4975(e)(7) of the Code, a tax credit employee stock
ownership plan as defined in Section 409 of the Code, or a simplified
employee pension as defined in Section 408(k) of the Code) either at the
time the Plan is terminated or at any time during the period ending 12
months after distribution of all assets from the Plan; provided, however,
that this provision shall not apply if fewer than two percent of the
Eligible Employees under the Plan were eligible to participate at any time
in such other defined contribution plan during the 24-month period
beginning 12 months before the Plan termination, and (ii) the distribution
the Participant receives is a "lump sum distribution" as defined in Section
402(e)(4) of the Code, without regard to clauses (i), (ii), (iii), and (iv)
of sub-paragraph (A), sub-paragraph (B), or sub-paragraph (H) thereof.
Notwithstanding anything to the contrary contained in the Plan, upon any such
Plan termination, the vested interest of each Participant and Beneficiary in his
Employer Contributions Sub-Account shall be 100 percent; and, if there is a
partial termination of the Plan, the vested interest of each Participant and
Beneficiary who is affected by the partial termination in his Employer
Contributions Sub-Account shall be 100 percent. For purposes of the preceding
sentence only, the Plan shall be deemed to terminate automatically if there
shall be a complete discontinuance of contributions hereunder by all Employers.
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19.4 - Reorganization
The merger, consolidation, or liquidation of any Employer with or into any other
Employer or a Related Company shall not constitute a termination of the Plan as
to such Employer. If an Employer disposes of substantially all of the assets
used by the Employer in a trade or business or disposes of a subsidiary and in
connection therewith one or more Participants terminates employment but
continues in employment with the purchaser of the assets or with such
subsidiary, no distribution from the Plan shall be made to any such Participant
prior to his separation from service (other than a distribution made in
accordance with Article XIII or required in accordance with Section 401(a)(9) of
the Code), except that a distribution shall be permitted to be made in such a
case, subject to the Participant's consent (to the extent required by law), if
(i) the distribution would constitute a "lump sum distribution" as defined in
section 402(e)(4) of the Code, without regard to clauses (i), (ii), (iii), or
(iv) of sub-paragraph (A), sub-paragraph (B), or sub-paragraph (H) thereof, (ii)
the Employer continues to maintain the Plan after the disposition, (iii) the
purchaser does not maintain the Plan after the disposition, and (iv) the
distribution is made by the end of the second calendar year after the calendar
year in which the disposition occurred.
19.5 - Withdrawal of an Employer
An Employer other than the Sponsor may withdraw from the Plan at any time upon
notice in writing to the Administrator (the effective date of such withdrawal
being hereinafter referred to as the "withdrawal date"), and shall thereupon
cease to be an Employer for all purposes of the Plan. An Employer shall be
deemed automatically to withdraw from the Plan in the event of its complete
discontinuance of contributions, or, subject to Section 19.4 and unless the
Sponsor otherwise directs, it ceases to be a Related Company of the Sponsor or
any other Employer. Upon the withdrawal of an Employer, the withdrawing Employer
shall determine whether a partial termination has occurred with respect to its
Employees. In the event that the withdrawing Employer determines a partial
termination has occurred, the action specified in Section 19.3 shall be taken as
of the withdrawal date, as on a termination of the Plan, but with respect only
to Participants who are employed solely by the withdrawing Employer, and who,
upon such withdrawal, are neither transferred to nor continued in employment
with any other Employer or a Related Company. The interest of any Participant
employed by the withdrawing Employer who is transferred to or continues in
employment with any other Employer or a Related Company, and the interest of any
Participant employed solely by an Employer or a Related Company other than the
withdrawing
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Employer, shall remain unaffected by such withdrawal; no adjustment to his
Separate Accounts shall be made by reason of the withdrawal; and he shall
continue as a Participant hereunder subject to the remaining provisions of the
Plan.
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ARTICLE XX
ADOPTION BY OTHER ENTITIES
20.1 - Adoption by Related Companies
A Related Company that is not an Employer may, with the consent of the Sponsor,
adopt the Plan and become an Employer hereunder by causing an appropriate
written instrument evidencing such adoption to be executed in accordance with
the requirements of its organizational authority. Any such instrument shall
specify the effective date of the adoption.
20.2 - Effective Plan Provisions
An Employer who adopts the Plan shall be bound by the provisions of the Plan in
effect at the time of the adoption and as subsequently in effect because of any
amendment to the Plan.
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ARTICLE XXI
MISCELLANEOUS PROVISIONS
21.1 - No Commitment as to Employment
Nothing contained herein shall be construed as a commitment or agreement upon
the part of any person to continue his employment with an Employer or Related
Company, or as a commitment on the part of any Employer or Related Company to
continue the employment, compensation, or benefits of any person for any period.
21.2 - Benefits
Nothing in the Plan nor the Trust Agreement shall be construed to confer any
right or claim upon any person, firm, or corporation other than the Employers,
the Trustee, Participants, and Beneficiaries.
21.3 - No Guarantees
The Employers, the Administrator, and the Trustee do not guarantee the Trust
from loss or depreciation, nor do they guarantee the payment of any amount which
may become due to any person hereunder.
21.4 - Expenses
The expenses of administration of the Plan, including the expenses of the
Administrator and fees of the Trustee, shall be paid from the Trust as a general
charge thereon, unless the Sponsor elects to make payment. Notwithstanding the
foregoing, the Sponsor may direct that administrative expenses that are
allocable to the Separate Account of a specific Participant shall be paid from
that Separate Account and the costs incident to the management of the assets of
an Investment Fund or to the purchase or sale of securities held in an
Investment Fund shall be paid by the Trustee from such Investment Fund.
21.5 - Precedent
Except as otherwise specifically provided, no action taken in accordance with
the Plan shall be construed or relied upon as a precedent for similar action
under similar circumstances.
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21.6 - Duty to Furnish Information
The Employers, the Administrator, and the Trustee shall furnish to any of the
others any documents, reports, returns, statements, or other information that
the other reasonably deems necessary to perform its duties hereunder or
otherwise imposed by law.
21.7 - Withholding
The Trustee shall withhold any tax which by any present or future law is
required to be withheld, and which the Administrator notifies the Trustee in
writing is to be so withheld, from any payment to any Participant or Beneficiary
hereunder.
21.8 - Merger, Consolidation, or Transfer of Plan Assets
The Plan shall not be merged or consolidated with any other plan, nor shall any
of its assets or liabilities be transferred to another plan, unless, immediately
after such merger, consolidation, or transfer of assets or liabilities, each
Participant in the Plan would receive a benefit under the Plan which is at least
equal to the benefit he would have received immediately prior to such merger,
consolidation, or transfer of assets or liabilities (assuming in each instance
that the Plan had then terminated)
21.9 - Back Pay Awards
The provisions of this Section shall apply only to an Employee or former
Employee who becomes entitled to back pay by an award or agreement of an
Employer without regard to mitigation of damages. If a person to whom this
Section applies was or would have become an Eligible Employee after such back
pay award or agreement has been effected, and if any such person who had not
previously elected to make Tax-Deferred Contributions pursuant to Section 4.1
shall within 30 days of the date he receives notice of the provisions of this
Section make an election to make Tax-Deferred Contributions in accordance with
such Section 4.1 (retroactive to any Enrollment Date as of which he was or has
become eligible to do so), then such Participant may elect that any Tax-Deferred
Contributions not previously made on his behalf but which, after application of
the foregoing provisions of this Section, would have been made under the
provisions of Article IV and any After-Tax Contributions which he had not
previously made but which, after application of the foregoing provisions of this
Section, he would have made under the provisions of Article V, shall be made out
of the proceeds of such back pay award or agreement. In addition, if any such
Employee or former Employee would have been eligible to participate in the
allocation of Employer Contributions under the provisions of Article VI for any
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prior Plan Year after such back pay award or agreement has been effected, his
Employer shall make an Employer Contribution equal to the amount of the Employer
Contribution which would have been allocated to such Participant under the
provisions of Article VI as in effect during each such Plan Year. The amounts of
such additional contributions shall be credited to the Separate Account of such
Participant. Any additional contributions made by such Participant and by an
Employer pursuant to this Section shall be made in accordance with, and subject
to the limitations of the applicable provisions of Articles IV, V, VI, and VII.
21.10 - Condition on Employer Contributions
Notwithstanding anything to the contrary contained in the Plan or the Trust
Agreement, any contribution of an Employer hereunder is conditioned upon the
continued qualification of the Plan under Section 401(a) of the Code, the exempt
status of the Trust under Section 501(a) of the Code, and the deductibility of
the contribution under Section 404 of the Code. Except as otherwise provided in
this Section and Section 21.11, however, in no event shall any portion of the
property of the Trust ever revert to or otherwise inure to the benefit of an
Employer or any Related Company.
21.11 - Return of Contributions to an Employer
Notwithstanding any other provision of the Plan or the Trust Agreement to the
contrary, in the event any contribution of an Employer made hereunder:
(a) is made under a mistake of fact, or
(b) is disallowed as a deduction under Section 404 of the Code,
such contribution may be returned to the Employer within one year after the
payment of the contribution or the disallowance of the deduction to the extent
disallowed, whichever is applicable. In the event the Plan does not initially
qualify under Section 401(a) of the Code, any contribution of an Employer made
hereunder may be returned to the Employer within one year of the date of denial
of the initial qualification of the Plan, but only if an application for
determination was made within the period of time prescribed under Section
403(c)(2)(B) of ERISA.
21.12 - Validity of Plan
The validity of the Plan shall be determined and the Plan shall be construed and
interpreted in accordance with the laws of the State or Commonwealth in which
the Sponsor has its principal
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place of business, except as preempted by applicable Federal law. The invalidity
or illegality of any provision of the Plan shall not affect the legality or
validity of any other part thereof.
21.13 - Trust Agreement
The Trust Agreement and the Trust maintained thereunder shall be deemed to be a
part of the Plan as if fully set forth herein and the provisions of the Trust
Agreement are hereby incorporated by reference into the Plan.
21.14 - Parties Bound
The Plan shall be binding upon the Employers, all Participants and Beneficiaries
hereunder, and, as the case may be, the heirs, executors, administrators,
successors, and assigns of each of them.
21.15 - Application of Certain Plan Provisions
A Participant's Beneficiary, if the Participant has died, or alternate payee
under a qualified domestic relations order shall be treated as a Participant for
purposes of directing investments as provided in Article X. For purposes of the
general administrative provisions and limitations of the Plan, a Participant's
Beneficiary or alternate payee under a qualified domestic relations order shall
be treated as any other person entitled to receive benefits under the Plan. Upon
any termination of the Plan, any such Beneficiary or alternate payee under a
qualified domestic relations order who has an interest under the Plan at the
time of such termination, which does not cease by reason thereof, shall be
deemed to be a Participant for all purposes of the Plan.
21.16 - Leased Employees
Any leased employee, other than an excludable leased employee, shall be treated
as an employee of the Employer for which he performs services for all purposes
of the Plan; provided, however, that contributions to a qualified plan made on
behalf of a leased employee by the leasing organization that are attributable to
services for the Employer shall be treated as having been made by the Employer
and there shall be no duplication of benefits under this Plan. A "leased
employee" means any person who performs services for an Employer or a Related
Company (the "recipient") (other than an employee of the recipient) pursuant to
an agreement between the recipient and any other person (the "leasing
organization") on a substantially full-time basis for a period of at least one
year, provided that such services are of a type historically performed, in the
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business field of the recipient, by employees. An "excludable leased employee"
means any leased employee of the recipient who is covered by a money purchase
pension plan maintained by the leasing organization which provides for (i) a
nonintegrated employer contribution on behalf of each participant in the plan
equal to at least ten percent of compensation, (ii) full and immediate vesting,
and (iii) immediate participation by employees of the leasing organization
(other than employees who perform substantially all of their services for the
leasing organization or whose compensation from the leasing organization in each
plan year during the four-year period ending with the plan year is less than
$1,000); provided, however, that leased employees do not constitute more than 20
percent of the recipient's nonhighly compensated work force. For purposes of
this Section, contributions or benefits provided to a leased employee by the
leasing organization that are attributable to services performed for the
recipient shall be treated as provided by the recipient.
21.17 - Transferred Funds
If funds from another qualified plan are transferred or merged into the Plan,
such funds shall be held and administered in accordance with any restrictions
applicable to them under such other plan to the extent required by law and shall
be accounted for separately to the extent necessary to accomplish the foregoing.
21.18 - Special Provisions Pertaining to the Merger of the Marketing One
Incorporated 401(k) Profit sharing Plan and Trust and the PennCorp
Financial, Inc. Retirement and Savings Plan into the Plan
Effective January 1, 1998, the Marketing One Incorporated 401(k) Profit Sharing
Plan and Trust (the "Marketing One Plan") and the PennCorp Financial, Inc.
Retirement and Savings Plan (the "Old PennCorp Plan") shall be merged into the
Plan, so that all assets of the Marketing One Plan and Old PennCorp Plan shall
be transferred to the Plan for application under the terms of the Plan and the
liabilities for benefits accrued under the Marketing One Plan and Old PennCorp
Plan through December 31, 1997 shall be assumed by the Plan. In connection with
the merger of the Marketing One Plan and Old PennCorp Plan into the Plan,
amounts reflecting the account balance of each Participant's separate accounts
under the Marketing One Plan and Old PennCorp Plan as of December 31, 1997 shall
be transferred to the corresponding Sub-Account for such Participant maintained
under Section 8.6 of the Plan.
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ARTICLE XXII
TOP-HEAVY PROVISIONS
22.1 - Definitions
For purposes of this Article, the following terms shall have the following
meanings:
(a) The "compensation" of an employee means compensation as defined in Section
415 of the Code and regulations issued thereunder. In no event, however,
shall the compensation of a Participant taken into account under the Plan
for any Plan Year exceed (1) $200,000 for Plan Years beginning prior to
January 1, 1994, or (2) $150,000 for Plan Years beginning on or after
January 1, 1994 (subject to adjustment annually as provided in Section
401(a)(17)(B) and Section 415(d) of the Code; provided, however, that the
dollar increase in effect on January 1 of any calendar year, if any, is
effective for Plan Years beginning in such calendar year). If the
compensation of a Participant is determined over a period of time that
contains fewer than 12 calendar months, then the annual compensation
limitation described above shall be adjusted with respect to that
Participant by multiplying the annual compensation limitation in effect for
the Plan Year by a fraction the numerator of which is the number of full
months in the period and the denominator of which is 12; provided, however,
that no proration is required for a Participant who is covered under the
Plan for less than one full Plan Year if the formula for allocations is
based on Compensation for a period of at least 12 months. In determining
the compensation, for purposes of applying the annual compensation
limitation described above, of a Participant who is a five-percent owner or
one of the ten Highly Compensated Employees receiving the greatest
compensation for the Plan Year, the compensation of the Participant's
spouse and of his lineal descendants who have not attained age 19 as of the
close of the Plan Year shall be included as compensation of the Participant
for the Plan Year. If as a result of applying the family aggregation rule
described in the preceding sentence the annual compensation limitation
would be exceeded, the limitation shall be prorated among the affected
family members in proportion to each member's compensation as determined
prior to application of the family aggregation rules.
(b) The "determination date" with respect to any Plan Year means the last day
of the preceding Plan Year, except that
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the determination date with respect to the first Plan Year of the Plan,
shall mean the last day of such Plan Year.
(c) A "key employee" means any Employee or former Employee who is a key
employee pursuant to the provisions of Section 416(i)(1) of the Code and
any Beneficiary of such Employee or former Employee.
(d) A "non-key employee" means any Employee who is not a key employee.
(e) A "permissive aggregation group" means those plans included in each
Employer's required aggregation group together with any other plan or plans
of the Employer, so long as the entire group of plans would continue to
meet the requirements of Sections 401(a)(4) and 410 of the Code.
(f) A "required aggregation group" means the group of tax-qualified plans
maintained by an Employer or a Related Company consisting of each plan in
which a key employee participates and each other plan that enables a plan
in which a key employee participates to meet the requirements of Section
401(a)(4) or Section 410 of the Code, including any plan that terminated
within the five-year period ending on the relevant determination date.
(g) A "super top-heavy group" with respect to a particular Plan Year means a
required or permissive aggregation group that, as of the determination
date, would qualify as a top-heavy group under the definition in paragraph
(i) of this Section with "90 percent" substituted for "60 percent" each
place where "60 percent" appears in the definition.
(h) A "super top-heavy plan" with respect to a particular Plan Year means a
plan that, as of the determination date, would qualify as a top-heavy plan
under the definition in paragraph (j) of this Section with "90 percent"
substituted for "60 percent" each place where "60 percent" appears in the
definition. A plan is also a "super top-heavy plan" if it is part of a
super top-heavy group.
(i) A "top-heavy group" with respect to a particular Plan Year means a required
or permissive aggregation group if the sum, as of the determination date,
of the present value of the cumulative accrued benefits for key employees
under all defined benefit plans included in such group and the aggregate of
the account balances of key employees under all defined contribution plans
included in such group
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exceeds 60 percent of a similar sum determined for all employees covered by
the plans included in such group.
(j) A "top-heavy plan" with respect to a particular Plan Year means (i), in the
case of a defined contribution plan (including any simplified employee
pension plan), a plan for which, as of the determination date, the
aggregate of the accounts (within the meaning of Section 416(g) of the Code
and the regulations and rulings thereunder) of key employees exceeds 60
percent of the aggregate of the accounts of all participants under the
plan, with the accounts valued as of the relevant valuation date and
increased for any distribution of an account balance made in the five-year
period ending on the determination date, (ii), in the case of a defined
benefit plan, a plan for which, as of the determination date, the present
value of the cumulative accrued benefits payable under the plan (within the
meaning of Section 416(g) of the Code and the regulations and rulings
thereunder) to key employees exceeds 60 percent of the present value of the
cumulative accrued benefits under the plan for all employees, with the
present value of accrued benefits to be determined under the accrual method
uniformly used under all plans maintained by an Employer or, if no such
method exists, under the slowest accrual method permitted under the
fractional accrual rate of Section 411(b)(1)(C) of the Code and including
the present value of any part of any accrued benefits distributed in the
five-year period ending on the determination date, and (iii) any plan
(including any simplified employee pension plan) included in a required
aggregation group that is a top-heavy group. For purposes of this
paragraph, the accounts and accrued benefits of any employee who has not
performed services for an Employer or a Related Company during the
five-year period ending on the determination date shall be disregarded. For
purposes of this paragraph, the present value of cumulative accrued
benefits under a defined benefit plan for purposes of top-heavy
determinations shall be calculated using the actuarial assumptions
otherwise employed under such plan, except that the same actuarial
assumptions shall be used for all plans within a required or permissive
aggregation group. A Participant's interest in the Plan attributable to any
Rollover Contributions, except Rollover Contributions made from a plan
maintained by an Employer or a Related Company, shall not be considered in
determining whether the Plan is top-heavy. Notwithstanding the foregoing,
if a plan is included in a required or permissive aggregation group that is
not a top-heavy group, such plan shall not be a top-heavy plan.
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(k) The "valuation date" with respect to any determination date means the most
recent Valuation Date occurring within the 12-month period ending on the
determination date.
22.2 - Applicability
Notwithstanding any other provision of the Plan to the contrary, the provisions
of this Article shall be applicable during any Plan Year in which the Plan is
determined to be a top-heavy plan as hereinafter defined. If the Plan is
determined to be a top-heavy plan and upon a subsequent determination date is
determined no longer to be a top-heavy plan, the vesting provisions of Article
VI shall again become applicable as of such subsequent determination date;
provided, however, that if the prior vesting provisions do again become
applicable, any Employee with three or more years of Vesting Service may elect
in accordance with the provisions of Article VI, to continue to have his vested
interest in his Employer Contributions Sub-Account determined in accordance with
the vesting schedule specified in Section 22.5.
22.3 - Minimum Employer Contribution
If the Plan is determined to be a top-heavy plan, the Employer Contributions
allocated to the Separate Account of each non-key employee who is an Eligible
Employee and who is employed by an Employer or a Related Company on the last day
of such top-heavy Plan Year shall be no less than the lesser of (i) three
percent of his compensation or (ii) the largest percentage of compensation that
is allocated as an Employer Contribution and/or Tax-Deferred Contribution for
such Plan Year to the Separate Account of any key employee; except that, in the
event the Plan is part of a required aggregation group, and the Plan enables a
defined benefit plan included in such group to meet the requirements of Section
401(a)(4) or 410 of the Code, the minimum allocation of Employer Contributions
to each such non-key employee shall be three percent of the compensation of such
non-key employee. Any minimum allocation to a non-key employee required by this
Section shall be made without regard to any social security contribution made on
behalf of the non-key employee, his number of hours of service, his level of
compensation, or whether he declined to make elective or mandatory
contributions. Notwithstanding the minimum top-heavy allocation requirements of
this Section, if the Plan is a top-heavy plan, each non-key employee who is an
Eligible Employee and who is employed by an Employer or a Related Company on the
last day of a top-heavy Plan Year and who is also covered under any other
top-heavy plan or plans of an Employer will receive the top-heavy benefits
provided under such other plan in lieu of the minimum top-heavy allocation under
the Plan.
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22.4 - Adjustments to Section 415 Limitations
If the Plan is determined to be a top-heavy plan and an Employer maintains a
defined benefit plan covering some or all of the Employees that are covered by
the Plan, the defined benefit plan fraction and the defined contribution plan
fraction, described in Article VII, shall be determined as provided in Section
415 of the Code by substituting "1.0" for "1.25" each place where "1.25"
appears, except that such substitutions shall not be applied to the Plan if (i)
the Plan is not a super top-heavy plan, (ii) the Employer Contribution for such
top-heavy Plan Year for each non-key employee who is to receive a minimum
top-heavy benefit hereunder is not less than four percent of such non-key
employee's compensation, and (iii) the minimum annual retirement benefit accrued
by a non-key employee who participates under one or more defined benefit plans
of an Employer or a Related Company for such top-heavy Plan Year is not less
than the lesser of three percent times years of service with an Employer or a
Related Company or thirty percent.
22.5 - Accelerated Vesting
If the Plan is determined to be a top-heavy plan, a Participant's vested
interest in his Employer Contributions Sub-Account shall be determined no less
rapidly than in accordance with the following vesting schedule:
Years of Vesting Service Vested Interest
------------------------ ---------------
less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
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ARTICLE XXIII
EFFECTIVE DATE
23.1 - Effective Date of Amendment and Restatement
This amendment and restatement is effective as of January 1, 1998.
* * *
EXECUTED AT Bethesda, Maryland as of, this 1st day of January, 1998.
PENNCORP FINANCIAL GROUP, INC.
By: /s/John P. Collins
----------------------
Title: Vice President
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ADDENDUM
Notwithstanding any other provisions of the Plan to the contrary, the following
Articles XVI and XVII shall apply with respect to distributions to a Participant
or his Beneficiary who was employed by the Sponsor prior to January 1, 1998, and
the corresponding sections of the Plan shall not apply to distributions to such
Participants and Beneficiaries.
ARTICLE XVI
FORM OF PAYMENT
16.1 - Definitions
For purposes of this Article, the following terms have the following meanings:
(a) A Participant's "annuity starting date" means the first day of the first
period for which an amount is paid as an annuity.
(b) The "automatic annuity form" means the form of annuity that will be
purchased on behalf of a Participant who has elected the optional annuity
form of payment unless the Participant elects another form of annuity.
(c) A "qualified election" means an election that is made during the qualified
election period. A qualified election of a form of payment other than a
qualified joint and survivor annuity or designating a Beneficiary other
than the Participant's spouse to receive amounts otherwise payable as a
qualified preretirement survivor annuity must include the written consent
of the Participant's spouse, if any. A Participant's spouse will be deemed
to have given written consent to the Participant's election if the
Participant establishes to the satisfaction of a Plan representative that
spousal consent cannot be obtained because the spouse cannot be located or
because of other circumstances set forth in Section 401(a)(11) of the Code
and regulations issued thereunder. The spouse's written consent must
acknowledge the effect of the Participant's election and must be witnessed
by a Plan representative or a notary public. In addition, the spouse's
written consent must either (i) specify the form of payment selected
instead of a joint and survivor annuity, if applicable, and that such form
may not be changed
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(except to a qualified joint and survivor annuity) without written spousal
consent and specify any non-spouse Beneficiary designated by the
Participant, if applicable, and that such Beneficiary may not be changed
without written spousal consent or (ii) acknowledge that the spouse has the
right to limit consent as provided in clause (i), but permit the
Participant to change the form of payment selected or the designated
Beneficiary without the spouse's further consent. Any written consent given
or deemed to have been given by a Participant's spouse hereunder shall be
irrevocable and shall be effective only with respect to such spouse and not
with respect to any subsequent spouse.
(d) The "qualified election period" with respect to the automatic annuity form
means the 90 day period ending on a Participant's annuity starting date.
The "qualified election period" with respect to a qualified preretirement
survivor annuity means the period beginning on the later of (i) the date he
elects an annuity form of payment or (ii) the first day of the Plan Year in
which the Participant attains age 35 or, if he terminates employment prior
to such date, the day he terminates employment with his Employer and all
Related Companies. A Participant whose employment has not terminated may
make a qualified election designating a Beneficiary other than his spouse
prior to the Plan Year in which he attains age 35; provided, however, that
such election shall cease to be effective as of the first day of the Plan
Year in which the Participant attains age 35.
(e) A "qualified joint and survivor annuity" means an immediate annuity payable
at earliest retirement age under the Plan, as defined in regulations issued
under Section 401(a)(11) of the Code, for the life of a Participant with a
survivor annuity payable for the life of the Participant's spouse that is
equal to at least 50 percent of the amount of the annuity payable during
the joint lives of the Participant and his spouse, provided that the
survivor annuity shall not be payable to a Participant's spouse if such
spouse is not the same spouse to whom the Participant was married on his
annuity starting date.
(f) A "qualified preretirement survivor annuity" means an annuity payable to
the surviving spouse of a Participant in accordance with the provisions of
Section 16.6.
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(g) A "single life annuity" means an annuity payable for the life of the
Participant.
16.2 - Normal Form of Payment
Except as otherwise provided in Section 16.6, unless a Participant, or his
Beneficiary, if the Participant has died, elects one of the optional forms of
payment, distribution shall be made to the Participant, or his Beneficiary, as
the case may be, in a single sum payment. Distribution of the fair market value
of the Participant's Separate Account shall be made in cash or in kind, as
elected by the Participant.
16.3 - Optional Forms of Payment
A Participant, or his Beneficiary, as the case may be, may elect to receive
distribution in one of the following optional forms of payment:
(a) Installment Payments - Distribution shall be made in a series of
installments over a period not exceeding the life expectancy of the
Participant, or the Participant's Beneficiary, if the Participant has died,
or a period not exceeding the joint life and last survivor expectancy of
the Participant and his Beneficiary. Each installment shall be equal in
amount except as necessary to adjust for any changes in the value of the
Participant's Separate Account. The determination of life expectancies
shall be made on the basis of the expected return multiples in Tables V and
VI of Section 1.72-9 of the Treasury regulations and shall be calculated
either once at the time installment payments begin or annually for the
Participant and/or his Beneficiary, if his Beneficiary is his spouse, as
determined by the Participant at the time installment payments begin.
Distribution of the fair market value of the Participant's Separate Account
shall be made in cash or in kind, as elected by the Participant.
(b) Annuity Contract - Distribution shall be made through the purchase of a
single premium, nontransferable annuity contract for such term and in such
form as the Participant, or his Beneficiary, if the Participant has died,
shall select, subject to the provisions of Section 16.5; provided, however,
that a Participant's Beneficiary may not elect to receive distribution of
an annuity payable over the joint lives of the Beneficiary and any other
individual. The terms of any annuity contract purchased hereunder and
distributed to a
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Participant or his Beneficiary shall comply with the requirements of the
Plan.
16.4 - Change of Option Election
Subject to the provisions of Section 16.5, a Participant or Beneficiary who has
elected an optional form of payment may revoke or change his election at any
time prior to his annuity starting date by filing with the Administrator a
written election in the form prescribed by the Administrator.
16.5 - Form of Annuity Requirements
If a Participant elects to receive distribution through the purchase of an
annuity contract, distribution shall be made to such Participant through the
purchase of an annuity contract that provides for payment in one of the
following automatic annuity forms, unless the Participant elects a different
type of annuity:
(a) The automatic annuity form for a Participant who is married on his annuity
starting date is the 50 percent qualified joint and survivor annuity.
(b) The automatic annuity form for a Participant who is not married on his
annuity starting date is the single life annuity.
A Participant's election of an annuity other than the automatic annuity form
shall not be effective unless it is a qualified election; provided, however,
that spousal consent shall not be required if the form of annuity elected by the
Participant is a qualified joint and survivor annuity. A Participant who has
elected the optional annuity form of payment can revoke or change his election
only pursuant to a qualified election.
16.6 - Qualified Preretirement Survivor Annuity Requirements
If a married Participant elects to receive distribution through the purchase of
an annuity contract and dies before his annuity starting date, his spouse shall
receive distribution of the value of the Participant's vested interest in his
Separate Account through the purchase of an annuity contract that provides for
payment over the life of the Participant's spouse. A Participant's spouse may
elect to receive distribution under any one of the other forms of payment
available under this Article instead of in the qualified preretirement survivor
annuity form. If a married Participant's Beneficiary designation on file with
the Administrator pursuant to Article XVII designates a non-spouse Beneficiary,
the designation shall become inoperative upon the Participant's election to
receive distribution through
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the purchase of an annuity contract, unless the Participant files a new
designation of Beneficiary form with the Administrator. A Participant can only
designate a non-spouse Beneficiary to receive distribution of that portion of
his Separate Account otherwise payable as a qualified preretirement survivor
annuity pursuant to a qualified election.
16.7 - Direct Rollover
Notwithstanding any other provision of the Plan to the contrary, in lieu of
receiving distribution in the form of payment provided under this Article, a
"qualified distributee" may elect in writing, in accordance with rules
prescribed by the Administrator, to have any portion or all of a distribution
made on or after January 1, 1993, that is an "eligible rollover distribution"
paid directly by the Plan to the "eligible retirement plan" designated by the
"qualified distributee"; provided, however, that this provision shall not apply
if the total distribution is less than $200 and that a "qualified distributee"
may not elect this provision with respect to a portion of a distribution that is
less than $500. Any such payment by the Plan to another "eligible retirement
plan" shall be a direct rollover and shall be made only after all applicable
consent requirements are satisfied. For purposes of this Section, the following
terms have the following meanings:
(a) An "eligible retirement plan" means an individual retirement account
described in Section 408(a) of the Code, an individual retirement annuity
described in Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in Section
401(a) of the Code that accepts rollovers; provided, however, that, in the
case of a direct rollover by a surviving spouse, an eligible retirement
plan does not include a qualified trust described in Section 401(a) of the
Code.
(b) An "eligible rollover distribution" means any distribution of all or any
portion of the balance of a Participant's Separate Account; provided,
however, that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic
payments made not less frequently than annually for the life or life
expectancy of the qualified distributee or the joint lives or joint life
expectancies of the qualified distributee and the qualified distributee's
designated beneficiary, or for a specified period of ten years or more; and
any distribution to the extent such distribution is required under Section
401(a)(9) of the
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Code; and the portion of any distribution that consists of the
Participant's After-Tax Contributions.
(c) A "qualified distributee" means a Participant, his surviving spouse, or his
spouse or former spouse who is an alternate payee under a qualified
domestic relations order, as defined in Section 414(p) of the Code.
16.8 - Notice Regarding Forms of Payment
Within the 60 day period ending 30 days before a Participant's annuity starting
date or any other distribution of a Participant's Separate Account under this
Section, the Administrator shall provide him with a written explanation of his
right to defer distribution until his Normal Retirement Date, or such later date
as may be provided in the Plan, his right to make a direct rollover, and the
forms of payment available under the Plan. If a Participant elects to receive
distribution through the purchase of an annuity contract under this Section,
such written explanation shall also include a written explanation of (i) the
terms and conditions of the automatic annuity form applicable, (ii) the
Participant's right to choose a form of payment other than the automatic annuity
form or to revoke such choice, and (iii) the rights of the Participant's spouse.
Notwithstanding the foregoing, distribution of the Participant's Separate
Account may commence less than 30 days after such notice is provided to the
Participant if (i) the Administrator clearly informs the Participant of his
right to consider his election of whether or not to make a direct rollover or to
receive a distribution prior to his Normal Retirement Date and his election of a
form of payment for a period of at least 30 days following his receipt of the
notice, (ii) the Participant, after receiving the notice, affirmatively elects
an early distribution with his spouse's written consent, if necessary, (iii) the
Participant's annuity starting date is a date after the date the notice is
provided to him, (iv) the Participant may revoke his election at any time prior
to the later of his annuity starting date or the expiration of the seven-day
period beginning the day after the date the notice is provided to him, and (v)
distribution does not commence to the Participant before such revocation period
ends.
16.9 - Reemployment
If a Participant is reemployed by an Employer or a Related Company prior to
receiving distribution of the entire balance of his vested interest in his
Separate Account, his prior election of a form of payment hereunder shall become
ineffective. Notwithstanding the foregoing, if a Participant had elected to
receive distribution through the purchase of an annuity contract, the
requirements of Sections 16.5 and 16.6 of the Plan shall
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continue in effect with respect to his entire Separate Account.
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ARTICLE XVII
BENEFICIARIES
17.1 - Designation of Beneficiary
A married Participant's Beneficiary shall be his spouse, unless the Participant
designates a person or persons other than his spouse as Beneficiary with his
spouse's written consent; provided, however, that such written spousal consent
shall not be required if the Participant is not married to such spouse on the
date as of which distribution of the Participant's Separate Account commences. A
Participant may designate a Beneficiary on the form prescribed by the
Administrator. If no Beneficiary has been designated pursuant to the provisions
of this Section, or if no Beneficiary survives the Participant and he has no
surviving spouse, then the Beneficiary under the Plan shall be the Participant's
estate. If a Beneficiary dies after becoming entitled to receive a distribution
under the Plan but before distribution is made to him in full, and if no other
Beneficiary has been designated to receive the balance of the distribution in
that event, the estate of the deceased Beneficiary shall be the Beneficiary as
to the balance of the distribution. A Participant's designation of a Beneficiary
shall be subject to the qualified preretirement survivor annuity provisions of
Article XVI.
17.2 - Spousal Consent Requirements
Any written spousal consent given pursuant to this Article must acknowledge the
effect of the action taken and must be witnessed by a Plan representative or a
notary public. In addition, the spouse's written consent must either (i) specify
any non-spouse Beneficiary designated by the Participant and that such
Beneficiary may not be changed without written spousal consent or (ii)
acknowledge that the spouse has the right to limit consent to a specific
Beneficiary, but permit the Participant to change the designated Beneficiary
without the spouse's further consent. A Participant's spouse will be deemed to
have given written consent to the Participant's designation of Beneficiary if
the Participant establishes to the satisfaction of a Plan representative that
such consent cannot be obtained because the spouse cannot be located or because
of other circumstances set forth in Section 401(a)(11) of the Code and
regulations issued thereunder. Any written consent given or deemed to have been
given by a Participant's spouse hereunder shall be valid only with respect to
the spouse who signs the consent.
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AMENDMENT NUMBER TWO
WHEREAS, the stockholders of PennCorp Financial Group, Inc. (the
"Company") approved the Company's 1996 Stock Award and Stock Option Plan (as
amended, the "Plan") on July 11, 1996;
WHEREAS, the Board of Directors of the Company has approved amending
the Plan to allow Non-Employee Directors (as defined therein) who have a
Pecuniary Interest (as defined therein) in more than 100,000 shares to receive
the annual 7,500 share option grant available to Non-Employee Directors and to
elect to receive all or a portion of their annual retainer in Company Common
Stock;
NOW THEREFORE, upon the approval of the stockholders of the Company,
the Plan shall be amended as set forth below:
1. Section 10(c) is hereby deleted in its entirety and the following is
substituted in lieu thereof:
(c) Annual Grants. Each Nonemployee Director who has not received a
grant pursuant to Section 10(b) above during the 12-month period ending on
the date of the applicable annual meeting of the Company's shareholders,
shall automatically be granted on the date of such annual meeting of
shareholders a Stock Option to purchase 7,500 shares of Common Stock, which
shall be exercisable 18 months after the date of the grant. Such Stock
Option's exercise price shall be the Fair Market Value on the grant date,
and the Stock Option may be exercised only during the Exercise Period.
During the Exercise Period, the Nonemployee Director shall have the right
to either exercise the Stock Option at the exercise price or receive a
restricted Stock Award for that number of shares of Common Stock determined
by (a) multiplying the number of shares subject to the Stock Option by the
difference between the Fair Market Value on the Exercise Date and the
exercise price, and (b) dividing the product resulting from clause (a)
above by 85 percent of the Fair Market Value on the Exercise Date.
Fractional shares shall be rounded (up or down) to the nearest whole
number. Any restricted Stock Award granted pursuant to this Section 10(c)
shall not vest for a period of three years from the date of the Stock Award
and shall be forfeited if the Nonemployee Director ceases to be a director
of the Company for any reason other than as a result of a change of control
or ownership of the Company, the failure to obtain the required votes of
the Company's shareholders approving the election of the Nonemployee
Director, or the Nonemployee Director's death or Disability. Any Stock
Award issued pursuant to this Section 10(c) shall cancel the Stock Option
underlying the Stock Award.
2. Section 11(a) is hereby deleted in its entirety and the following is
substituted in lieu thereof:
(a) A Nonemployee Director may elect to forego up to 100 percent of
the cash compensation attributable to the Nonemployee Director's annual
retainer fees and to receive in lieu thereof a Stock Award as determined
pursuant to Section 11(b) below. Any such election shall be in writing and
must be made at least six months before the services are rendered giving
rise to such compensation. Such election may not be revoked or changed
thereafter except as to compensation for services rendered at least six
months after any such election to revoke or change is made in writing.
EXHIBIT 10.31
May 21, 1998
Mr. James P. McDermott
c/o PennCorp Financial, Inc.
3 Bethesda Metro Center
Suite 1600
Bethesda, Maryland 20814
Re: Option to Purchase Shares of ACO Brokerage Holdings Corporation
Dear Mr. McDermott:
The Board of Directors of PennCorp Financial Group, Inc. (the "Company")
has authorized and approved granting you the option described herein with
respect to a portion of the 50,000 shares of Common Stock, par value $0.01 per
share, of ACO Brokerage Holdings Corporation currently owned by the Company (the
"Shares"). Such grant shall be on the terms specified in this letter agreement
(the "Option Agreement").
1. Grant of Option. Subject to the terms and conditions set forth herein,
the Company hereby grants to you, as a matter of separate inducement and not in
lieu of any salary or other compensation for services as an employee of the
Company, the right and option described in paragraph 3 below (the "Option") with
respect to an aggregate of one thousand one hundred (1,100) Shares (the "Option
Shares") at a price of $100.00 per Option Share (the "Exercise Price").
2. Exercisability and Termination of Option.
(a) During a period commencing on the date hereof and terminating upon the
earliest to occur of the events specified in paragraph 2(b) below,
this Option may be exercised by you for all or a portion of the Option
Shares in the manner described in paragraph 5 below. To the extent
that this Option is not exercised within the period of exercisability
specified herein, it shall expire as to the then unexercised part. In
no event shall you exercise this Option for a fraction of an Option
Share.
(b) The unexercised portion of the Option granted herein will
automatically and without notice terminate and become null and void
upon the earliest to occur of the following:
(i) the date of your voluntary termination of your employment with
the Company, any parent thereof and all subsidiaries thereof,
unless termination is for Good Reason as defined in the Executive
Retention Agreement entered into as of May 22, 1998 between you
and the Company ("Retention Agreement");
(ii) the date of termination of your employment by the Company or any
parent or subsidiary thereof for Cause as defined in the
Retention Agreement; or
(iii)as described below, in connection with the sale of the Option
Shares by the Company.
<PAGE>
In the event of the sale of the Option Shares by the Company, this Option,
to the extent not theretofore terminated, shall terminate upon notice to you in
respect of such sale, and you will receive, in respect of each Option Shares for
which this Option is then exercisable, an amount equal to the excess of the
gross price (before taking into account any other obligations of the Company
relating to the Option Shares) received by the Company for such Option Shares
over the Exercise Price, payable in cash upon the closing of such sale of the
Option Shares less applicable tax withholdings.
3. Form of Option. Upon delivery by you of an Exercise Notice (as defined
in paragraph 5) to the Company, you shall be entitled to receive from the
Company, in respect of each Option Share subject to such Exercise Notice, an
amount in cash equal to the excess of the fair market value without taking into
account any other obligations of the Company relating to the Option Shares (if
other than in connection with the sale of the Option Shares by the Company, then
as such fair market value is determined in good faith by the Board of Directors
of the Company) of such Option Share over the Exercise Price. You shall not be
entitled to receive any Option Shares upon any exercise of this Option.
4. Assignability and Non-transferability of Option. This Option is not
transferable by you, in whole or in part, other than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you.
Except to the extent provided above, this Option may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process, and any purported assignment in contravention hereof shall
be void and of no effect. 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 the
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.
5. Method of Exercising this Option. Any exercise of this Option shall be
made by written notice (an "Exercise Notice") addressed to the Secretary of the
Company at the principal place of business of the Company, which notice shall
state the number of Option Shares for which this Option is then being exercised.
6. Certain Adjustments. In the event of any stock dividend,
recapitalization, merger, consolidation, stock split, reverse stock split or
other event affecting the Option Shares, the Option granted hereunder shall be
extended to such stock or other securities received by the Company in addition
to or in exchange for the Option Shares, with an appropriate adjustment to the
Exercise Price.
<PAGE>
7. Withholding. The Company may withhold from sums or property due or to
become due to you from the Company an amount necessary to satisfy its obligation
to withhold taxes incurred by reason of the exercise of this Option, or may
require you to reimburse the Company in such amount.
8. No Contract of Employment. This Option Agreement is not a contract of
employment and the terms of your employment, if any, shall not be affected
hereby or by any agreement referred to herein except to the extent specifically
so provided herein or therein. Nothing herein shall be construed to impose any
obligation on the Company or any parent or subsidiary thereof to employ you, and
nothing herein shall impose any obligation on your part to be employed by the
Company or any parent or subsidiary thereof.
9. Complete Agreement. This Option Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matters herein
contained and shall supersede all prior written or oral agreements and
understandings among the parties with respect to such matters.
10. Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Amendments. This Option Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated, except upon the
execution and delivery of a written agreement executed by the parties hereto.
12. Governing Law. This Option Agreement, including, without limitation,
the interpretation, construction, validity and enforceability hereof, shall be
governed by the laws (other than the conflict of laws rules) of the State of New
York.
Please indicate your acceptance of all the terms and conditions of this
Option Agreement by signing and returning a copy of this Option Agreement to the
Company.
Very truly yours,
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott D. Silverman
--------------------------
Name: Scott D. Silverman
Title: Executive Vice President
Accepted and Agreed to as of
the date first above written:
/s/ James P. McDermott
- ----------------------
James P. McDermott
EXHIBIT 10.32
May 21, 1998
Mr. Scott Silverman
c/o PennCorp Financial, Inc.
3 Bethesda Metro Center
Suite 1600
Bethesda, Maryland 20814
Re: Option to Purchase Shares of ACO Brokerage Holdings Corporation
Dear Mr. Silverman:
The Board of Directors of PennCorp Financial Group, Inc. (the "Company")
has authorized and approved granting you the option described herein with
respect to a portion of the 50,000 shares of Common Stock, par value $0.01 per
share, of ACO Brokerage Holdings Corporation currently owned by the Company (the
"Shares"). Such grant shall be on the terms specified in this letter agreement
(the "Option Agreement").
1. Grant of Option. Subject to the terms and conditions set forth herein,
the Company hereby grants to you, as a matter of separate inducement and not in
lieu of any salary or other compensation for services as an employee of the
Company, the right and option described in paragraph 3 below (the "Option") with
respect to an aggregate of one thousand one hundred (1,100) Shares (the "Option
Shares") at a price of $100.00 per Option Share (the "Exercise Price").
2. Exercisability and Termination of Option.
(a) During a period commencing on the date hereof and terminating upon the
earliest to occur of the events specified in paragraph 2(b) below,
this Option may be exercised by you for all or a portion of the Option
Shares in the manner described in paragraph 5 below. To the extent
that this Option is not exercised within the period of exercisability
specified herein, it shall expire as to the then unexercised part. In
no event shall you exercise this Option for a fraction of an Option
Share.
(b) The unexercised portion of the Option granted herein will
automatically and without notice terminate and become null and void
upon the earliest to occur of the following:
(i) the date of your voluntary termination of your employment with
the Company, any parent thereof and all subsidiaries thereof,
unless termination is for Good Reason as defined in the Executive
Retention Agreement entered into as of November 24, 1997 between
you and the Company ("Retention Agreement");
(ii) the date of termination of your employment by the Company or any
parent or subsidiary thereof for Cause as defined in the
Retention Agreement; or
(iii)as described below, in connection with the sale of the Option
Shares by the Company.
<PAGE>
In the event of the sale of the Option Shares by the Company, this Option,
to the extent not theretofore terminated, shall terminate upon notice to you in
respect of such sale, and you will receive, in respect of each Option Shares for
which this Option is then exercisable, an amount equal to the excess of the
gross price (before taking into account any other obligations of the Company
relating to the Option Shares) received by the Company for such Option Shares
over the Exercise Price, payable in cash upon the closing of such sale of the
Option Shares less applicable tax withholdings.
3. Form of Option. Upon delivery by you of an Exercise Notice (as defined
in paragraph 5) to the Company, you shall be entitled to receive from the
Company, in respect of each Option Share subject to such Exercise Notice, an
amount in cash equal to the excess of the fair market value without taking into
account any other obligations of the Company relating to the Option Shares (if
other than in connection with the sale of the Option Shares by the Company, then
as such fair market value is determined in good faith by the Board of Directors
of the Company) of such Option Share over the Exercise Price. You shall not be
entitled to receive any Option Shares upon any exercise of this Option.
4. Assignability and Non-transferability of Option. This Option is not
transferable by you, in whole or in part, other than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you.
Except to the extent provided above, this Option may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process, and any purported assignment in contravention hereof shall
be void and of no effect. 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 the
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.
5. Method of Exercising this Option. Any exercise of this Option shall be
made by written notice (an "Exercise Notice") addressed to the Secretary of the
Company at the principal place of business of the Company, which notice shall
state the number of Option Shares for which this Option is then being exercised.
6. Certain Adjustments. In the event of any stock dividend,
recapitalization, merger, consolidation, stock split, reverse stock split or
other event affecting the Option Shares, the Option granted hereunder shall be
extended to such stock or other securities received by the Company in addition
to or in exchange for the Option Shares, with an appropriate adjustment to the
Exercise Price.
<PAGE>
7. Withholding. The Company may withhold from sums or property due or to
become due to you from the Company an amount necessary to satisfy its obligation
to withhold taxes incurred by reason of the exercise of this Option, or may
require you to reimburse the Company in such amount.
8. No Contract of Employment. This Option Agreement is not a contract of
employment and the terms of your employment, if any, shall not be affected
hereby or by any agreement referred to herein except to the extent specifically
so provided herein or therein. Nothing herein shall be construed to impose any
obligation on the Company or any parent or subsidiary thereof to employ you, and
nothing herein shall impose any obligation on your part to be employed by the
Company or any parent or subsidiary thereof.
9. Complete Agreement. This Option Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matters herein
contained and shall supersede all prior written or oral agreements and
understandings among the parties with respect to such matters.
10. Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Amendments. This Option Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated, except upon the
execution and delivery of a written agreement executed by the parties hereto.
12. Governing Law. This Option Agreement, including, without limitation,
the interpretation, construction, validity and enforceability hereof, shall be
governed by the laws (other than the conflict of laws rules) of the State of New
York.
Please indicate your acceptance of all the terms and conditions of this
Option Agreement by signing and returning a copy of this Option Agreement to the
Company.
Very truly yours,
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Charles Lubochinski
---------------------------
Name: Charles Lubochinski
Title: Sr. Vice President
Accepted and Agreed to as of
the date first above written:
/s/ Scott Silverman
- -------------------
Scott Silverman
EXHIBIT 10.33
May 21, 1998
Mr. Charles Lubochinski
c/o PennCorp Financial, Inc.
3 Bethesda Metro Center
Suite 1600
Bethesda, Maryland 20814
Re: Option to Purchase Shares of ACO Brokerage Holdings Corporation
Dear Mr. Lubochinski:
The Board of Directors of PennCorp Financial Group, Inc. (the "Company")
has authorized and approved granting you the option described herein with
respect to a portion of the 50,000 shares of Common Stock, par value $0.01 per
share, of ACO Brokerage Holdings Corporation currently owned by the Company (the
"Shares"). Such grant shall be on the terms specified in this letter agreement
(the "Option Agreement").
1. Grant of Option. Subject to the terms and conditions set forth herein,
the Company hereby grants to you, as a matter of separate inducement and not in
lieu of any salary or other compensation for services as an employee of the
Company, the right and option described in paragraph 3 below (the "Option") with
respect to an aggregate of one thousand one hundred (1,100) Shares (the "Option
Shares") at a price of $100.00 per Option Share (the "Exercise Price").
2. Exercisability and Termination of Option.
(a) During a period commencing on the date hereof and terminating upon the
earliest to occur of the events specified in paragraph 2(b) below,
this Option may be exercised by you for all or a portion of the Option
Shares in the manner described in paragraph 5 below. To the extent
that this Option is not exercised within the period of exercisability
specified herein, it shall expire as to the then unexercised part. In
no event shall you ---------------------------------------- exercise
this Option for a fraction of an Option Share.
(b) The unexercised portion of the Option granted herein will
automatically and without notice terminate and become null and void
upon the earliest to occur of the following:
(i) the date of your voluntary termination of your employment with
the Company, any parent thereof and all subsidiaries thereof,
unless termination is for Good Reason as defined in the Executive
Retention Agreement entered into as of November 24, 1997 between
you and the Company ("Retention Agreement");
(ii) the date of termination of your employment by the Company or any
parent or subsidiary thereof for Cause as defined in the
Retention Agreement; or
(iii)as described below, in connection with the sale of the Option
Shares by the Company.
In the event of the sale of the Option Shares by the Company, this Option,
to the extent not theretofore terminated, shall terminate upon notice to you in
respect of such sale, and you will receive, in respect of each Option Shares for
which this Option is then exercisable, an amount equal to the excess of the
gross price (before taking into account any other obligations of the Company
relating to the Option Shares) received by the Company for such Option Shares
over the Exercise Price, payable in cash upon the closing of such sale of the
Option Shares less applicable tax withholdings.
3. Form of Option. Upon delivery by you of an Exercise Notice (as defined
in paragraph 5) to the Company, you shall be entitled to receive from the
Company, in respect of each Option Share subject to such Exercise Notice, an
amount in cash equal to the excess of the fair market value without taking into
account any other obligations of the Company relating to the Option Shares (if
other than in connection with the sale of the Option Shares by the Company, then
as such fair market value is determined in good faith by the Board of Directors
of the Company) of such Option Share over the Exercise Price. You shall not be
entitled to receive any Option Shares upon any exercise of this Option.
4. Assignability and Non-transferability of Option. This Option is not
transferable by you, in whole or in part, other than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you.
Except to the extent provided above, this Option may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process, and any purported assignment in contravention hereof shall
be void and of no effect. 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 the
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.
5. Method of Exercising this Option. Any exercise of this Option shall be
made by written notice (an "Exercise Notice") addressed to the Secretary of the
Company at the principal place of business of the Company, which notice shall
state the number of Option Shares for which this Option is then being exercised.
6. Certain Adjustments. In the event of any stock dividend,
recapitalization, merger, consolidation, stock split, reverse stock split or
other event affecting the Option Shares, the Option granted hereunder shall be
extended to such stock or other securities received by the Company in addition
to or in exchange for the Option Shares, with an appropriate adjustment to the
Exercise Price.
<PAGE>
7. Withholding. The Company may withhold from sums or property due or to
become due to you from the Company an amount necessary to satisfy its obligation
to withhold taxes incurred by reason of the exercise of this Option, or may
require you to reimburse the Company in such amount.
8. No Contract of Employment. This Option Agreement is not a contract of
employment and the terms of your employment, if any, shall not be affected
hereby or by any agreement referred to herein except to the extent specifically
so provided herein or therein. Nothing herein shall be construed to impose any
obligation on the Company or any parent or subsidiary thereof to employ you, and
nothing herein shall impose any obligation on your part to be employed by the
Company or any parent or subsidiary thereof.
9. Complete Agreement. This Option Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matters herein
contained and shall supersede all prior written or oral agreements and
understandings among the parties with respect to such matters.
10. Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Amendments. This Option Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated, except upon the
execution and delivery of a written agreement executed by the parties hereto.
12. Governing Law. This Option Agreement, including, without limitation,
the interpretation, construction, validity and enforceability hereof, shall be
governed by the laws (other than the conflict of laws rules) of the State of New
York.
Please indicate your acceptance of all the terms and conditions of this
Option Agreement by signing and returning a copy of this Option Agreement to the
Company.
Very truly yours,
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott D. Silverman
--------------------------
Name: Scott D. Silverman
Title: Executive Vice President
Accepted and Agreed to as of
the date first above written:
/s/ Charles Lubochinski
- -----------------------
Charles Lubochinski
EXHIBIT 10.34
May 21, 1998
Mr. Michael Prager
c/o PennCorp Financial, Inc.
3 Bethesda Metro Center
Suite 1600
Bethesda, Maryland 20814
Re: Option to Purchase Shares of ACO Brokerage Holdings Corporation
Dear Mr. Prager:
The Board of Directors of PennCorp Financial Group, Inc. (the "Company")
has authorized and approved granting you the option described herein with
respect to a portion of the 50,000 shares of Common Stock, par value $0.01 per
share, of ACO Brokerage Holdings Corporation currently owned by the Company (the
"Shares"). Such grant shall be on the terms specified in this letter agreement
(the "Option Agreement").
1. Grant of Option. Subject to the terms and conditions set forth herein,
the Company hereby grants to you, as a matter of separate inducement and not in
lieu of any salary or other compensation for services as an employee of the
Company, the right and option described in paragraph 3 below (the "Option") with
respect to an aggregate of one thousand one hundred (1,100) Shares (the "Option
Shares") at a price of $100.00 per Option Share (the "Exercise Price").
2. Exercisability and Termination of Option.
(a) During a period commencing on the date hereof and terminating upon the
earliest to occur of the events specified in paragraph 2(b) below,
this Option may be exercised by you for all or a portion of the Option
Shares in the manner described in paragraph 5 below. To the extent
that this Option is not exercised within the period of exercisability
specified herein, it shall expire as to the then unexercised part. In
no event shall you exercise this Option for a fraction of an Option
Share.
(b) The unexercised portion of the Option granted herein will
automatically and without notice terminate and become null and void
upon the earliest to occur of the following:
(i) the date of your voluntary termination of your employment with
the Company, any parent thereof and all subsidiaries thereof,
unless termination is for Good Reason as defined in the Executive
Retention Agreement entered into as of November 24, 1997 between
you and the Company ("Retention Agreement");
(ii) the date of termination of your employment by the Company or any
parent or subsidiary thereof for Cause as defined in the
Retention Agreement; or
(iii)as described below, in connection with the sale of the Option
Shares by the Company.
<PAGE>
In the event of the sale of the Option Shares by the Company, this Option,
to the extent not theretofore terminated, shall terminate upon notice to you in
respect of such sale, and you will receive, in respect of each Option Shares for
which this Option is then exercisable, an amount equal to the excess of the
gross price (before taking into account any other obligations of the Company
relating to the Option Shares) received by the Company for such Option Shares
over the Exercise Price, payable in cash upon the closing of such sale of the
Option Shares less applicable tax withholdings.
3. Form of Option. Upon delivery by you of an Exercise Notice (as defined
in paragraph 5) to the Company, you shall be entitled to receive from the
Company, in respect of each Option Share subject to such Exercise Notice, an
amount in cash equal to the excess of the fair market value without taking into
account any other obligations of the Company relating to the Option Shares (if
other than in connection with the sale of the Option Shares by the Company, then
as such fair market value is determined in good faith by the Board of Directors
of the Company) of such Option Share over the Exercise Price. You shall not be
entitled to receive any Option Shares upon any exercise of this Option.
4. Assignability and Non-transferability of Option. This Option is not
transferable by you, in whole or in part, other than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you.
Except to the extent provided above, this Option may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process, and any purported assignment in contravention hereof shall
be void and of no effect. 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 the
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.
5. Method of Exercising this Option. Any exercise of this Option shall be
made by written notice (an "Exercise Notice") addressed to the Secretary of the
Company at the principal place of business of the Company, which notice shall
state the number of Option Shares for which this Option is then being exercised.
6. Certain Adjustments. In the event of any stock dividend,
recapitalization, merger, consolidation, stock split, reverse stock split or
other event affecting the Option Shares, the Option granted hereunder shall be
extended to such stock or other securities received by the Company in addition
to or in exchange for the Option Shares, with an appropriate adjustment to the
Exercise Price.
<PAGE>
7. Withholding. The Company may withhold from sums or property due or to
become due to you from the Company an amount necessary to satisfy its obligation
to withhold taxes incurred by reason of the exercise of this Option, or may
require you to reimburse the Company in such amount.
8. No Contract of Employment. This Option Agreement is not a contract of
employment and the terms of your employment, if any, shall not be affected
hereby or by any agreement referred to herein except to the extent specifically
so provided herein or therein. Nothing herein shall be construed to impose any
obligation on the Company or any parent or subsidiary thereof to employ you, and
nothing herein shall impose any obligation on your part to be employed by the
Company or any parent or subsidiary thereof.
9. Complete Agreement. This Option Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matters herein
contained and shall supersede all prior written or oral agreements and
understandings among the parties with respect to such matters.
10. Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Amendments. This Option Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated, except upon the
execution and delivery of a written agreement executed by the parties hereto.
12. Governing Law. This Option Agreement, including, without limitation,
the interpretation, construction, validity and enforceability hereof, shall be
governed by the laws (other than the conflict of laws rules) of the State of New
York.
Please indicate your acceptance of all the terms and conditions of this
Option Agreement by signing and returning a copy of this Option Agreement to the
Company.
Very truly yours,
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott Silverman
-----------------------
Name: Scott Silverman
Title: Executive Vice President
Accepted and Agreed to as of
the date first above written:
/s/ Michael Prager
- ------------------
Michael Prager
EXHIBIT 10.40
EXECUTION COPY
WAIVER
Dated as of August 14, 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, among the Company, the Banks, the Agents and the
Administrative Agent (as amended, modified or waived prior to the date hereof,
the "Credit Agreement"). Terms used in this Waiver (this "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
modified by this Waiver is and shall continue to be in full force and effect and
is hereby in all respects confirmed, approved and ratified.
2. Waivers. (a) The Banks hereby waive compliance with Section 8.01(a) of
the Credit Agreement to the extent that any non-compliance results solely from
the failure to deliver the financial statements, balance sheets and certificates
required by such Section 8.01(a) within 45 days after the end of the fiscal
quarter of the Company ending June 30, 1998; provided that, notwithstanding the
foregoing, the Company shall deliver such financial statements, balance sheets
and certificates to each of the Banks no later than August 24, 1998.
(b) The Banks hereby waive compliance with Section 8.10 of the Credit
Agreement for the period (the "Waiver Period") from and including June 30, 1998
to and including September 28, 1998 to the extent that any non-compliance
results solely from the write-down of the book value of Pennsylvania Life
Insurance Company, Union Bankers Insurance Company, Constitution Life Insurance
Company, Marquette Life Insurance Company, KIVEX, Inc. and/or Forum Benefits,
Inc. (collectively, the "Held for Sale Companies", being the assets designated
by the Company as "Held for Sale") in connection with the potential sale of the
Held for Sale Companies; provided that, notwithstanding the foregoing, during
such Waiver Period, the Company shall not permit the Leverage Ratio to exceed
46% at any time and provided, further, that, for the period (the "Restricted
Payment Period") from and including August 14, 1998 to and including September
28, 1998, the Company shall
<PAGE>
not (i) make, or permit any Subsidiary to make, any Restricted Payment or (ii)
incur any Indebtedness (other than the Loans under the Credit Agreement).
(c) The Banks hereby waive compliance with Section 8.13 of the Credit
Agreement for the Waiver Period to the extent that any non-compliance results
solely from the write-down of the book value of any or all of the Held For Sale
Companies in connection with the potential sale thereof ; provided that,
notwithstanding the foregoing, during such Waiver Period, the Company shall not
permit the Net Worth of the Company and its Consolidated Subsidiaries to be less
than $625,000,000 at any time and provided, further, that, for the Restricted
Payment Period, the Company shall not (i) make, or permit any Subsidiary to
make, any Restricted Payment or (ii) incur any Indebtedness (other than the
Loans under the Credit Agreement).
For purposes hereof, "Restricted Payment" shall mean any payment on account
of any purchase, redemption, retirement, exchange or conversion of (i) any share
of capital stock of the Company or any security convertible into, or any option,
warrant or other right to acquire, any share of capital stock of the Company or
(ii) the Subordinated Notes or any other subordinated Indebtedness.
3. Fees. The Company agrees to pay, on August 14, 1998, a fee to each Bank
that executes this Waiver on or before August 14, 1998, such fee to be in an
amount for each such Bank equal to 0.05% of such Bank's Commitment on August 14,
1998. Such fees, once paid, shall not be refundable in whole or in part.
4. Effective Date. The 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 Waiver has been executed by the Company, the Majority Banks and the
Administrative Agent.
5. Governing Law. This Waiver shall be governed by, and construed in
accordance with, the law of the State of New York.
6. Counterparts. This 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 Waiver by signing any such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this 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: EVP & CFO
THE BANK OF NEW YORK, as
Administrative Agent and as a Bank
By: /s/Lizanne T. Eberle
------------------------
Name: Lizanne T. Eberle
Title: Vice President
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By: /s/Helen L. Newcomb
-----------------------
Name: Helen L. Newcomb
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as a Managing Agent and as a Bank
By: /s/ Bruce E. Cox
------------------------
Name: Bruce E. Cox
Title: Vice President
NATIONSBANK, N.A., as a Managing Agent
and as a Bank
By: /s/Jim V. Miller
------------------------
Name: Jim V. Miller
Title: Senior Vice President
FLEET NATIONAL BANK, as a Co-Agent
and as a Bank
By: /s/William A. Bagby
------------------------
Name: William A. Bagby
Title: Senior 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/Brian L. Banke
------------------------
Name: Brian L. Banke
Title: Director
<PAGE>
CIBC INC., as a Co-Agent and as a Bank
By: /s/Edward C. Neu
------------------------
Name: Edward Neu
Title: Executive Director
CIBC Oppenheimer Corp., as agent
DRESDNER BANK AG, NEW YORK BRANCH &
GRAND CAYMAN BRANCH, as a Co-Agent
and as a Bank
By:
------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION
By:
------------------------
Name:
Title:
BANK ONE, TEXAS N.A.
By: /s/Robert Humphreys
------------------------
Name: Robert Humphreys
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/Thomas L. Stitchberry
----------------------------
Name: Thomas L. Stitchberry
Title: Senior Vice President
LTCB TRUST COMPANY
By: /s/Jun Ebihara
------------------------
Name: Jun Ebihara
Title: Senior Vice President
ING (U.S.) CAPITAL CORPORATION
By: /s/T.D. Prangley
------------------------
Name: T.D. Prangley
Title: Vice President
EXHIBIT 12
PENNCORP FINANCIAL GROUP, INC.
STATEMENT RE RATIO OF EARNINGS (LOSS) TO FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
For the Years Ended December 31, 1998, 1997, 1996, 1995 and 1994
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes,
equity in earnings of unconsolidated
affiliates and extraordinary charge......... $ (424,628) $ 51,543 $ 110,579 $ 79,457 $ 60,653
Adjustments to earnings (loss):
Fixed charges................................ 42,265 25,081 21,756 22,581 20,641
Interest capitalized......................... - - (400) (260) -
Preferred stock dividend requirements........ - - - - -
---------- ---------- ---------- ---------- ----------
Total earnings (loss) and fixed charges......... $ (382,363) $ 76,624 $ 131,935 $ 101,778 $ 81,294
========== ========== ========== ========== ==========
Fixed charges:
Interest expense............................. $ 41,491 $ 22,497 $ 17,741 $ 18,729 $ 17,404
Amortization of deferred debt issuance costs. 723 858 1,238 1,051 870
Rental expense............................... 51 1,726 2,777 2,801 2,367
---------- ---------- ---------- ---------- ----------
Total fixed charges............................. $ 42,265 $ 25,081 $ 21,756 $ 22,581 $ 20,641
========== ========== ========== ========== ==========
Preferred stock dividend requirements:
Preferred stock dividends.................... $ 18,273 $ 19,533 $ 14,646 $ 6,540 $ 1,151
Gross-up for taxes........................... 10,732 12,769 8,616 3,525 663
---------- ---------- ---------- ---------- ----------
Total preferred stock dividend requirements..... $ 29,005 $ 32,302 $ 23,262 $ 10,065 $ 1,814
========== ========== ========== ========== ==========
Ratio of earnings (loss) to fixed charges....... (9.05) 3.27 6.06 4.51 3.94
========== ========== ========== ========== ==========
Combined ratio of earnings (loss) to fixed charges
and preferred stock dividend requirements.... (5.36) 1.34 2.93 3.12 3.62
========== ========== ========== ========== ==========
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
INSURANCE HOLDING COMPANY SYSTEM
As of December 31, 1998
PENNCORP FINANCIAL GROUP, INC. (Delaware)
K.B. Management, L.L.C. (New York)
K.B. Investment, L.L.C. (New York) *
K.B. Investment Fund I, L.P. (Delaware) *
Southwestern Financial Corporation (Delaware)
Southwestern Financial Services Corporation (Delaware)
BGFRTS L.L.C. (Texas) *
Constitution Life Insurance Company (Texas)
Southwestern Life Insurance Company (Texas)
GSSW Limited Partnership (Delaware) *
I.C.H. Funding Corp. (Delaware)
Quail Creek Recreation, Inc. (Arizona)
GSSW-REO Ownership Corporation (Texas)
Saddlecreek Enterprise, L.L.C. (Texas)*
Quail Creek Water Company, Inc. (Arizona)
Union Bankers Insurance Company (Texas)
Marquette National Life Insurance Company (Texas)
American-Amicable Holdings Corporation (Delaware)
Pioneer Security Life Insurance Company (Texas)
Security Life and Trust Company (Texas)
Group Consultants, Inc. (Georgia)
The Network Agency, Inc. (Ohio)
Integon Life Network Corporation (North Carolina)
Occidental Life Insurance Company of North Carolina (Texas)
American-Amicable Life Insurance Company of Texas (Texas)
Pioneer American Insurance Company (Texas)
ALICO Management Company (Texas)
Pacific Life and Accident Insurance Company (Texas)
Professional Insurance Company (Texas) *
Pennsylvania Life Insurance Company (Pennsylvania)
Pennsylvania Life Insurance Company (Canadian Branch)
Peninsular Life Insurance Company (North Carolina)
PennCorp Life Insurance Company (Canada)
PennCorp Canada Marketing, Inc. (Canada)
United Life & Annuity Insurance Company (Texas)
Marketing One Financial Corporation (Delaware) *
Marketing One, Inc. (Nevada)
Marketing One Investment Services Corporation (Texas)
Finesse Investments, Inc. (Hawaii)
Marketing One of Alabama, Inc. (Alabama)
Marketing One Securities, Inc. (California)
Tax Savers Agency, Inc. (Ohio) *
Premier One, Inc. (North Carolina)
United Variable Services, Inc. (Oregon)
UC Mortgage Corp. (Delaware)
PennCorp Financial, Inc. (Delaware)
California Sales Agency, Inc. (California)
Midwest Region, Inc. (Iowa)
Midwest Region Inc. of Colorado (Colorado)
Mississippi Region Associates, Inc. (Alabama)
Safe Drivers Agency Limited (United Kingdom)
Southeastern Region Associates, Inc. (Alabama)
United Silver Spring Associates, Inc. (Delaware)
PennCorp Financial Services, Inc. (Delaware)
Kivex, Inc. (Delaware)
PennCorp Occidental Corp. (Delaware)
Penn La Franco Corporation (British Virgin Islands)
* Ownership information on companies not 100% wholly owned by immediate parent:
1. K.B. Investment, L.L.C. - 99% owned by PennCorp Financial Group, Inc. and
1% owned by American-Amicable Holdings Corp.
2. K.B. Investment Fund I, L.P. - Delaware limited partnership whose general
partner is K.B. Investment, L.L.C.
3. BGFRTS, L.L.C. - 50% owned by Southwestern Financial Services Corporation
and 50% owned by Southwestern Life Insurance Company.
4. GSSW Limited Partnership - 99% owned by Southwestern Life Insurance Company
and 1% owned by BGFRTS, L.L.C.
5. Saddlecreek Enterprise, L.L.C. - 50% owned by Southwestern Life Insurance
Company and 50% owned by Stone Realty, Inc., a non-life affiliate.
6. Professional Insurance Company - 99.9% owned by Pacific Life and Accident
Insurance Company; 1% owned by outside parties.
<PAGE>
PENNCORP FINANCIAL GROUP, INC.
INSURANCE HOLDING COMPANY SYSTEM - INSURERS & PARENT COMPANIES ONLY
As of December 31, 1998
PENNCORP FINANCIAL GROUP, INC. (Delaware)
Southwestern Financial Corporation (Delaware)*
Southwestern Life Companies, Inc. (Delaware)
Constitution Life Insurance Company (Texas)
Southwestern Life Insurance Company (Texas)
Union Bankers Insurance Company (Texas)
Marquette National Life Insurance Company (Texas)
American-Amicable Holdings Corporation (Delaware)
Pioneer Security Life Insurance Company (Texas)
Security Life and Trust Insurance Corporation (Texas)
Occidental Life Insurance Company of North Carolina (Texas)
American-Amicable Life Insurance Company of Texas (Texas)
Pioneer American Insurance Company (Texas)
Pacific Life and Accident Insurance Company (Texas)
Professional Insurance Company (Texas) *
Pennsylvania Life Insurance Company (Pennsylvania)
Pennsylvania Life Insurance Company (Canadian Branch)
Peninsular Life Insurance Company (North Carolina)
PennCorp Life Insurance Company (Canada)
United Life & Annuity Insurance Company (Louisiana)
Ownership information on companies not 100% wholly owned by immediate parent:
Professional Insurance Company - 99.9% owned by Pacific Life and Accident
Insurance Company; 1% owned by outside parties.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PennCorp Financial Group, Inc.:
The audits referred to in our report dated March 31, 1999 included the related
financial statement schedules as of December 31, 1998, and for each of the years
in the three-year period ended December 31, 1998, included herein. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We consent to the incorporation by reference in the registration statements (No.
333-13285) on Form S-3 and (Nos. 333-48629, 333-48631 and 333-48637) on Form S-8
of PennCorp Financial Group, Inc. of our reports included herein relating to the
consolidated balance sheets of PennCorp Financial Group, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations and comprehensive income (loss), changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, and all related schedules, and to the reference to our firm under the
heading "Experts" in the prospectus related to the Form S-3 registration
statement.
KPMG LLP
Dallas, Texas
March 31, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PennCorp Financial Group, Inc.:
We consent to the incorporation by reference in the registration statements (No.
333-13285) on Form S-3 and (Nos. 333-48629, 333-48631 and 333-48637) on Form S-8
of PennCorp Financial Group, Inc. of our report dated March 19, 1998, relating
to the consolidated balance sheets of Southwestern Financial Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended, which report appears in the December 31, 1997 annual report on Form 10-K
of PennCorp Financial Group, Inc.
KPMG LLP
Dallas, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,589,714
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,035
<MORTGAGE> 36,882
<REAL-ESTATE> 8,644
<TOTAL-INVEST> 2,956,254
<CASH> 37,291
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 139,708
<TOTAL-ASSETS> 6,031,401
<POLICY-LOSSES> 2,757,500
<UNEARNED-PREMIUMS> 1,972
<POLICY-OTHER> 38,319
<POLICY-HOLDER-FUNDS> 69,247
<NOTES-PAYABLE> 550,923
0
254,127
<COMMON> 301
<OTHER-SE> 181,513
<TOTAL-LIABILITY-AND-EQUITY> 6,031,401
459,158
<INVESTMENT-INCOME> 369,052
<INVESTMENT-GAINS> 14,068
<OTHER-INCOME> 37,717
<BENEFITS> 541,762
<UNDERWRITING-AMORTIZATION> 79,291
<UNDERWRITING-OTHER> 625,733
<INCOME-PRETAX> (424,628)
<INCOME-TAX> (3,369)
<INCOME-CONTINUING> (421,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (441,203)
<EPS-PRIMARY> (15.23)
<EPS-DILUTED> (15.23)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
