- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 1-11422
PENNCORP FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3543540
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
c/o Southwestern Financial Services Corporation 75201
717 North Harwood Street (Zip code)
Dallas, Texas
(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 [ ]
The number of Common Stock shares outstanding as of August 11, 1999, was
29,026,496.
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1
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements..........................................3
Consolidated Balance Sheets..................................3
Consolidated Statements of Operations and
Comprehensive Loss......................................4
Consolidated Statements of Cash Flows........................5
Notes to Unaudited Consolidated Financial Statements.........6
Review by Independent Certified Public Accountants..........16
Independent Auditors' Review Report.........................17
Item 2. Management's Discussion And Analysis of Financial Condition
and Results of Operations...........18
Item 3. Quantitative and Qualitative Disclosures About Market Risk...34
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................35
Item 4. Submission of Matters to a Vote of Security Holders..........36
Item 5. Other Information............................................36
Item 6. Exhibits and Reports on Form 8-K.............................36
SIGNATURE
INDEX TO EXHIBITS
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 2,409,214 $ 2,589,714
Equity securities available for sale, at fair value............................ 2,027 2,035
Mortgage loans on real estate.................................................. 41,544 36,882
Policy loans................................................................... 201,877 207,490
Cash and short-term investments................................................ 106,229 92,727
Other investments.............................................................. 27,802 27,406
------------ ------------
Total investments ........................................................... 2,788,693 2,956,254
Accrued investment income......................................................... 38,917 37,291
Accounts and notes receivable..................................................... 11,820 14,319
Present value of insurance in force............................................... 182,695 170,729
Deferred policy acquisition costs................................................. 151,092 139,708
Costs in excess of net assets acquired............................................ 101,542 108,070
Income taxes, primarily deferred.................................................. 73,257 44,597
Other assets...................................................................... 81,886 138,629
Assets of Businesses Held for Sale................................................ 764,614 2,421,804
------------ ------------
Total assets ................................................................ $ 4,194,516 $ 6,031,401
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................... $ 2,743,003 $ 2,867,038
Notes payable..................................................................... 361,887 550,923
Accrued expenses and other liabilities............................................ 113,157 110,945
Liabilities of Businesses Held for Sale........................................... 667,160 2,066,554
------------ ------------
Total liabilities............................................................ 3,885,207 5,595,460
------------ ------------
Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized, issued and outstanding 2,300,000 at June 30, 1999 and
December 31, 1998.............................................................. 116,335 112,454
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized, issued and outstanding 2,875,000 at June 30, 1999 and
December 31, 1998.............................................................. 146,704 141,673
Common stock, $.01 par value; authorized 100,000,000; issued and outstanding
30,143,416 at June 30, 1999 and 30,072,344 at December 31, 1998................ 303 301
Additional paid-in capital........................................................ 430,421 430,321
Accumulated other comprehensive income (loss), net of income taxes (benefits)..... (45,881) 19,995
Accumulated deficit............................................................... (304,742) (234,921)
Treasury shares (1,116,920 at June 30, 1999 and 1,105,369 at December 31, 1998) (32,391) (32,391)
Notes receivable and other assets secured by common stock......................... (1,440) (1,491)
------------ ------------
Total shareholders' equity................................................... 309,309 435,941
------------ ------------
Total liabilities and shareholders' equity .................................. $ 4,194,516 $ 6,031,401
============ ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness..... $ 66,378 $ 87,625 $ 147,770 $ 175,206
Interest sensitive policy product charges....... 25,637 30,668 58,117 62,601
Net investment income........................... 69,528 92,318 155,635 188,533
Other income.................................... 9,486 9,912 20,431 21,233
Net gains (losses) from the sale of investments. (3,247) 7,365 (1,068) 8,888
Net gain from sales of subsidiaries............. 26,808 -- 27,804 --
------------- ------------- ------------- -------------
Total revenues.............................. 194,590 227,888 408,689 456,461
------------- ------------- ------------- -------------
BENEFITS AND EXPENSES:
Claims incurred................................. 71,001 77,043 143,917 158,999
Change in liability for future policy benefits
and other policy benefits..................... 21,998 80,609 77,709 132,670
Amortization of present value of insurance in
force and deferred policy acquisition costs... 18,726 26,966 41,095 50,939
Amortization of costs in excess of net assets
acquired and other intangibles................ 8,758 3,915 10,786 7,657
Underwriting and other administrative expenses.. 45,421 57,934 99,139 101,195
Interest and amortization of deferred debt
issuance costs................................ 11,224 10,356 25,344 20,273
Restructuring charge............................ 5,136 (1,756) 5,141 6,261
Impairment provision associated with Assets of
Businesses Held for Sale...................... 28,200 140,485 58,486 140,485
------------- ------------- ------------- -------------
Total benefits and expenses................. 210,464 395,552 461,617 618,479
------------- ------------- ------------- -------------
Loss before income taxes (benefits) and
extraordinary charge............................. (15,874) (167,664) (52,928) (162,018)
Income taxes (benefits)....................... 3,343 (8,216) 7,943 (5,459)
------------- ------------- ------------- -------------
Loss before extraordinary charge................... (19,217) (159,448) (60,871) (156,559)
Extraordinary charge, net of income taxes..... -- -- -- (1,671)
------------- ------------- ------------- -------------
Net loss........................................... (19,217) (159,448) (60,871) (158,230)
Preferred stock dividend requirements......... 4,457 4,456 8,913 9,360
------------- ------------- ------------- -------------
Net loss applicable to common stock................ $ (23,674) $ (163,904) $ (69,784) $ (167,590)
============= ============= ============= =============
PER SHARE INFORMATION:
Basic:
Loss before extraordinary charge applicable
to common stock............................... $ (0.81) $ (5.60) $ (2.39) $ (5.80)
Extraordinary charge, net of income taxes... -- -- -- (0.06)
------------- ------------- ------------- -------------
Net loss applicable to common stock............. $ (0.81) $ (5.60) $ (2.39) $ (5.86)
============= ============= ============= =============
Common shares used in computing basic loss per share 29,201 29,266 29,193 28,921
============= ============= ============= =============
Diluted:
Loss before extraordinary charge applicable
to common stock............................... $ (0.81) $ (5.60) $ (2.39) $ (5.80)
Extraordinary charge, net of income taxes... -- -- -- (0.06)
------------- ------------- ------------- -------------
Net loss applicable to common stock............. $ (0.81) $ (5.60) $ (2.39) $ (5.86)
============= ============= ============= =============
Common shares used in computing diluted loss per share 29,201 29,266 29,193 28,921
============= ============= ============= =============
COMPREHENSIVE LOSS INFORMATION:
Net loss........................................ $ (19,217) $ (159,448) $ (60,871) $ (158,230)
Change in unrealized foreign currency translation
gains, net of income taxes.................... 2,334 (4,251) 3,404 (2,382)
Change in unrealized holding gains (losses) arising
during the period on securities available for
sale, net of income taxes (benefits) of $(26,254),
$3,310, $(41,484) and $3,433.................. (37,354) 10,106 (64,296) 11,779
Reclassification adjustments for gains included
in net loss................................... 924 (3,958) (911) (5,403)
Decrease in unrealized holding gains (losses)
resulting from the sale of subsidiaries, net
of income tax benefit of $1,104 and $666...... (3,585) -- (4,073) --
------------- ------------- ------------- -------------
Total comprehensive loss applicable
to common stock.......................... $ (56,898) $ (157,551) $ (126,747) $ (154,236)
============= ============= ============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Loss before extraordinary charge............................................... $ (60,871) $ (156,559)
Adjustments to reconcile loss before extraordinary charge to net cash
provided (used) by operating activities:
Impairment provision associated with Assets of Businesses Held for Sale.... 58,486 140,485
Net gain from sales of subsidiaries........................................ (27,804) --
Capitalization of deferred policy acquisition costs........................ (48,944) (67,580)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net.......... 48,125 56,899
Increase (decrease) in policy liabilities, accruals and other
policyholder funds....................................................... (2,423) 26,669
Other, net................................................................. 29,227 3,849
------------- -------------
Net cash (used) by operating activities................................ (4,204) 3,763
------------- -------------
Cash flows from investing activities:
Cash received from sales of subsidiaries, net of cash and short-term
investments of $31,208 of subsidiaries sold.................................. 165,649 --
Cash and short-term investments acquired in acquisition of businesses,
net of cash expended of $82,771 in 1998...................................... -- 91,492
Purchases of fixed maturity securities available for sale...................... (595,258) (513,407)
Purchases of equity securities available for sale.............................. -- (5,042)
Maturities of fixed maturity securities available for sale..................... 215,688 153,034
Sales of fixed maturity securities available for sale.......................... 481,644 425,262
Sales of equity securities..................................................... 19 1,830
Acquisitions and originations of mortgage loans................................ (1,082) (22,652)
Sales of mortgage loans........................................................ 1,495 4,927
Principal collected on mortgage loans.......................................... 30,552 32,870
Other, net..................................................................... 5,115 38
------------- -------------
Net cash provided by investing activities.................................. 303,822 168,352
------------- -------------
Cash flows from financing activities:
Additional borrowings.......................................................... -- 200,000
Reduction in notes payable..................................................... (189,036) (126,316)
Dividends on preferred and common stock........................................ -- (11,752)
Receipts from interest sensitive policies credited to
policyholder account balances................................................ 95,935 186,126
Return of policyholder account balances on interest sensitive products......... (246,455) (362,467)
------------- -------------
Net cash used by financing activities...................................... (339,556) (114,409)
------------- -------------
Net increase (decrease) in cash............................................ (39,938) 57,706
Cash and short-term investments at beginning of period............................ 224,258 109,013
------------- -------------
Cash and short-term investments at end of period (including $78,091 and
$58,796 of cash and short-term investments classified as Assets of Businesses
Held for Sale in 1999 and 1998)................................................ $ 184,320 $ 166,719
============= =============
Supplemental disclosures:
Income taxes paid............................................................ $ 2,523 $ 6,462
============= =============
Interest paid................................................................ $ 23,991 $ 17,104
============= =============
Non-cash financing activities:
Redemption of Series C Preferred stock....................................... $ -- $ 22,227
============= =============
Issuance of common stock associated with the acquisition of businesses....... $ -- $ 8,500
============= =============
Accrued and unpaid preferred stock dividends................................. $ 8,912 $ --
============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
PennCorp Financial Group, Inc. ("PennCorp," or the "Company") is an insurance
holding company. Through its wholly-owned life insurance subsidiaries;
Pennsylvania Life Insurance Company ("PLIC") and its wholly-owned subsidiary,
PennCorp Life Insurance Company (collectively referred to as "Penn Life");
Peninsular Life Insurance Company ("Peninsular"); Professional Insurance Company
("Professional") (sold March 31, 1999); 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 ("Security Life");
Occidental Life Insurance Company of North Carolina ("OLIC"); United Life &
Annuity Insurance Company ("United Life") (sold April 30, 1999); 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") (sold June 30, 1999), an
internet service provider, UC Mortgage Corp. ("UC") (sold April 30, 1999) and
Cyberlink Development, Inc. ("Cyberlink") (sold April 30, 1999).
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, 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" as of
December 31, 1998. The Assets of Businesses Held for Sale and Liabilities of
Businesses Held for Sale as of June 30, 1999 included the accounts of the Career
Sales Division since Professional, the United Life Assets (the United Life
Assets consisted of the accounts of United Life, UC, Cyberlink and certain
assets of Marketing One) and KIVEX were each disposed of on March 31, 1999,
April 30, 1999 and June 30, 1999, respectively, (see Note 3 of Notes to
Unaudited Consolidated Financial Statements).
During the three month period ended June 30, 1999, the Company concluded that it
would retain, and shut down over time, certain remaining operations of Marketing
One. As of June 30, 1999, the related financial statement accounts of Marketing
One have been reclassified out of Assets and Liabilities of Businesses Held for
Sale.
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.
The financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
6
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the FASB issued Statement of Financial Accounting Standard
("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 was originally
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. In June 1999, the FASB deferred the effective date until fiscal years
beginning after June 15, 2000. The Company is currently evaluating SFAS No.133
and has not determined its effect on the consolidated financial statements.
3. DISPOSITIONS AND OTHER TRANSACTIONS
On March 31, 1999, the Company consummated the sale of Professional to GE
Financial Assurance Holdings, Inc. The operating results of Professional are
included in the consolidated operating results through March 31, 1999. The
Company realized a gain from the sale of Professional totaling $996. Also, as a
result of the sale, unrealized gains on securities held for sale by Professional
decreased $488. The purchase and sale agreement includes certain settlement and
consideration adjustment provisions which will occur prior to August 23, 1999
and will likely result in a reduction of the consideration received by the
Company of approximately $1,200.
On April 30, 1999, the Company consummated the sale of the United Life Assets to
ING America Insurance Holdings, Inc. ("ING"). The operating results of the
United Life Assets are included in the consolidated operating results through
April 30, 1999. The Company realized a loss from the sale of the United Life
Assets totaling $4,104. Also, as a result of the sale, unrealized gains on
securities held for sale by United Life decreased $3,585. The purchase and sale
agreement includes certain settlement and consideration adjustment provisions
which are likely to occur prior to December 31, 1999.
On June 30, 1998, the Company consummated the sale of KIVEX to Allegiance
Telecom, Inc. ("Allegiance"). The Company recorded a gain of $30,912 on the
sale. The operating results of KIVEX are included in the consolidated operating
results through June 30, 1999.
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 was originally $175,000,
consisting of $136,000 of cash and $39,000 original principal amount of
subordinated notes. In June 1999, the parties signed an amended and restated
definitive agreement. The amendments reduce the purchase price to $137,000 in
cash, including $6,500 of cash dividends to be paid by one of the Career Sales
Division companies to PennCorp. Additionally, the amendments eliminate all
purchase price adjustments relating to the disability income claim reserves of
PLIC, indemnification obligations relating to adequacy of reserves and the
closing obligation relating to the sale of Union Bankers' comprehensive medical
block of business. Consummation of the transaction occurred on July 30, 1999. As
a result of the amendments, the Company recorded an additional impairment
provision aggregating $28,200 and $58,486 during the three and six months ended
June 30, 1999, respectively (see Note 10 of Notes to Unaudited Consolidated
Financial Statements).
4. NOTES PAYABLE
On March 31, April 30, May 14, June 25 and June 30, 1999, the Company entered
into amendments (the "amendments") to its existing bank credit facility (the
"Bank Credit Facility"). The amendments provide for additional covenants and
revises certain financial covenants to the Bank Credit Facility. In addition,
the amendments changed, among other things, the maturity date of the Bank Credit
Facility to May 2000, extensions of dates for cash sweeps, principal payments
and certain available commitments.
7
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (Continued)
Significant additional covenants included in the March 31 and June 24, 1999
amendments require the Company to repay indebtedness at specified dates and
amounts throughout 1999. The timing and required debt reduction are as follows:
Date Amount
---- ------
Upon sale of Professional $ 40,000
Upon sale of United Life Assets 127,000
Upon sale of KIVEX 22,000
Upon sale of Career Sales Division 78,000
The required debt reduction of $40,000 was made on April 1, 1999, with proceeds
from the sale of Professional, and the required debt reduction of $127,000 was
made on April 30, 1999, with proceeds from the sale of the United Life Assets.
Additional debt reduction of $22,000 was made on June 30, 1999, upon the
completion of the sale of KIVEX. The Company repaid the final $78,000 of debt
reduction requirements on July 30, 1999, upon the completion of the sale of the
Career Sales Division (see Note 10 of Notes to Unaudited Consolidated Financial
Statements). At June 30, 1999, the Company and its subsidiaries were in
compliance with all applicable covenants.
Upon consummation of the Career Sales Division divestiture, the Company may only
borrow funds, up to $2,000, for the payment of interest under the amended Bank
Credit Facility and the Company's unsecured 9 1/4 Senior Subordinated Notes
("Notes") subject to certain restrictions.
5. SELECTED PRO FORMA FINANCIAL INFORMATION
The following selected pro forma financial information has been prepared to
illustrate the pro forma effects of the sales of the Career Sales Division,
KIVEX, Professional and the United Life Assets. The pro forma statement of
operations for the three and six month periods ended June 30, 1999 and 1998 give
effect to such sales as if they had occurred on January 1, 1998. The 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 sales
been made as of January 1, 1998, or results which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------------- ----------------------------
As Reported Pro forma As Reported Pro forma
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues................................ $ 194,590 $ 103,726 $ 408,689 $ 215,812
Net loss...................................... (19,217) (22,701) (60,871) (39,733)
Net loss applicable to common stock........... (23,674) (27,158) (69,784) (48,646)
Per share information:
Net loss applicable to common stock-basic... $ (0.81) $ (0.93) $ (2.39) $ (1.67)
Net loss applicable to common stock-diluted. (0.81) (0.93) (2.39) (1.67)
</TABLE>
8
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED PRO FORMA FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------------- ----------------------------
As Reported Pro forma As Reported Pro forma
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues................................ $ 227,888 $ 112,123 $ 456,461 $ 232,323
Loss before extraordinary charge.............. (159,448) (10,724) (156,559) (13,454)
Loss before extraordinary charge applicable
to common stock............................. (163,904) (15,180) (165,919) (22,814)
Per share information:
Loss before extraordinary charge applicable
to common stock-basic.................... $ (5.60) $ (0.52) $ (5.80) $ (0.79)
Loss before extraordinary charge applicable
to common stock-diluted................... (5.60) (0.52) (5.80) (0.79)
</TABLE>
6. RESTRUCTURING CHARGES
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 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.
On January 2, 1998, and January 5, 1998, respectively, the Company acquired the
SW Financial Controlling Interest (the controlling interest in SW Financial
owned by Messrs. Steven W. Fickes, a former executive officer and director, and
David J. Stone, a former director and executive officer of the Company) and the
Fickes and Stone Knightsbridge Interests (the interests in KB Investment Fund I,
LP, formerly known as Knightsbridge Capital Fund I, LP; KB Management LLC and KB
Consultants LLC, formerly known as Knightsbridge Consultants LLC; owned by
Messrs. Fickes and Stone). 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 six months ended
June 30, 1998, directly and indirectly associated with the divisional
restructuring.
As a result of the sale of the United Life Assets along with other non-core
operations, the Company announced a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company incurred restructuring costs aggregating $5,307 for the three and six
months ended June 30, 1999 associated with such restructuring.
The restructuring costs recognized the following for the three and six months
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Severance and related benefits incurred due
to staff reduction............................ $ 3,185 $ -- $ 3,185 $ 3,831
Estimated holding costs of vacated facilities... 2,122 -- 2,122 2,205
Write-off of certain fixed assets and other
impaired assets............................... -- -- -- 862
Estimated contract termination costs............ -- -- -- 4,869
------------- ------------- ------------- -------------
Total restructuring costs................... $ 5,307 $ -- $ 5,307 $ 11,767
============= ============= ============= =============
</TABLE>
9
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RESTRUCTURING CHARGES (Continued)
During the three and six months ended June 30, 1999, the Company re-evaluated
the restructuring costs and decreased the remaining accruals established in 1998
by $171 and $166, respectively. During the three and six months ended June 30,
1998, the Company re-evaluated the restructuring costs and reduced the remaining
restructuring accruals by $1,756 and $5,506, respectively, as a result of the
final determination of certain obligations. As of June 30, 1999, the Company had
remaining accruals associated with restructuring charges aggregating $9,301.
7. BUSINESS SEGMENT INFORMATION
Segment data as of June 30, 1999 and December 31, 1998, and for the three and
six months ended June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Premiums and policy product charges:
Financial Services Division................. $ 25,383 $ 34,281 $ 59,169 $ 67,296
Payroll Sales Division...................... 23,017 21,630 46,300 43,632
Businesses Held for Sale (United States).... 30,487 51,037 76,366 104,014
Businesses Held for Sale (Canada)........... 13,128 11,345 24,052 22,865
------------- ------------- ------------- -------------
$ 92,015 $ 118,293 $ 205,887 $ 237,807
============= ============= ============= =============
Operating profit (loss):
Financial Services Division................. $ 5,574 $ 4,392 $ 9,102 $ 15,767
Payroll Sales Division...................... 3,924 1,264 5,823 6,192
Businesses Held for Sale.................... 10,418 (17,459) 18,554 (8,541)
------------- ------------- ------------- -------------
$ 19,916 $ (11,803) $ 33,479 $ 13,418
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Total assets:
Financial Services Division................................................ $ 2,674,699 $ 2,823,007
Payroll Sales Division..................................................... 637,242 695,777
Businesses Held for Sale (United States)................................... 616,234 2,294,945
Businesses Held for Sale (Canada).......................................... 148,380 126,859
------------- -------------
$ 4,076,555 $ 5,940,588
============= =============
</TABLE>
10
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BUSINESS SEGMENT INFORMATION (Continued)
Reconciliations of segment data to the Company's consolidated data are as
follows (see Note 8 of Notes to Unaudited Consolidated Financial Statements):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues:
Segments--premiums and policy
product charges........................... $ 92,015 $ 118,293 $ 205,887 $ 237,807
Net investment income....................... 69,528 92,318 155,635 188,533
Other income................................ 9,486 9,912 20,431 21,233
Net gain (losses) from sale of investments.. (3,247) 7,365 (1,068) 8,888
Net gain from sales of subsidiaries......... 26,808 -- 27,804 --
------------- ------------- ------------- -------------
$ 194,590 $ 227,888 $ 408,689 $ 456,461
============= ============= ============= =============
Loss before income taxes and
extraordinary charge:
Segments.................................... $ 19,916 $ (11,803) $ 33,479 $ 13,418
Corporate expenses and eliminations......... (14,791) (14,141) (24,172) (17,305)
Impairment provision associated with
Assets of Businesses Held for Sale........ (28,200) (140,485) (58,486) (140,485)
Interest and amortization of deferred
debt issuance costs....................... (11,224) (10,356) (25,344) (20,273)
Net gains (losses) on the sale of investments (3,247) 7,365 (1,068) 8,888
Net gain from sales of subsidiaries......... 26,808 -- 27,804 --
Restructuring costs......................... (5,136) 1,756 (5,141) (6,261)
------------- ------------- ------------- -------------
$ (15,874) $ (167,664) $ (52,928) $ (162,018)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Total assets:
Segments................................................................... $ 4,076,555 $ 5,940,588
Corporate and other........................................................ 117,961 90,813
------------- -------------
$ 4,194,516 $ 6,031,401
============= =============
</TABLE>
8. ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE
The Assets and Liabilities of Businesses Held for Sale at June 30, 1999, and
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Invested assets.......................................................... $ 661,243 $ 1,974,280
Insurance assets......................................................... 17,008 329,950
Other assets............................................................. 86,363 117,574
------------- -------------
Total assets........................................................... $ 764,614 $ 2,421,804
============= =============
Insurance liabilities.................................................... $ 618,477 $ 1,853,163
Other Liabilities........................................................ 48,683 213,391
------------- -------------
Total liabilities...................................................... $ 667,160 $ 2,066,554
============= =============
</TABLE>
11
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE (Continued)
During the three months ended June 30, 1999, the Company concluded that it would
retain, and shut down over time, certain remaining operations of Marketing One.
As of June 30, 1999, the related financial statement accounts of Marketing One
have been reclassified out of Assets and Liabilities of Businesses Held for
Sale.
9. COMMITMENTS AND CONTINGENCIES
During the third quarter of 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. 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 a director and Chairman and Chief Executive Officer,
and Steven W. Fickes, formerly a director and 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, and subsequently filed, a motion to dismiss the Complaint.
Although there are no assurances that the motion to dismiss will be granted,
management believes that there are meritorious defenses to the action that were
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: (i) all expenses and
(ii) any losses in excess of a $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 has had preliminary
settlement discussions with the Plaintiff's counsel and have involved
representatives of the primary insurance carrier and their counsel.
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 had commenced a formal
investigation into possible violations of the federal securities laws including
matters relating to the Company's restatement of its financial statements for
the first six months of 1997, and for the years ended December 31, 1994, 1995
and 1996. The Company and its management are fully cooperating with the SEC in
its investigation.
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
12
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (Continued)
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 charging 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 for non-smoking policyholders 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 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
charge 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. In June
1999, the North Carolina Department of Insurance ("NCDOI") asked Security Life
about the status of its current practice of not charging cost of insurance
charges after the eighth contract year for non-smokers on these same insurance
products and requested to be informed if Security Life changes its current
practice. Security Life has responded to the NCDOI's inquiry by verifying that
no decision has been made to date to change such current practice and such
practice has not changed; and affirming that the NCDOI would be notified in the
event this current practice changes. The Company has initiated an exchange
program which enables policyholders of such life insurance products to terminate
their policies and, in exchange for the termination of the original policy and a
release, obtain either (i) the refund of all premiums paid and other
consideration or (ii) another Security Life product. As of June 30, 1999,
Security Life has established a regulatorily required contingency reserve
aggregating approximately $5,000 in its statutory financial statements
associated with the exchange program. There can be no assurances that the
exchange program will be successful or that the Company will resolve these
matters on such life insurance products 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
(which ultimately did not occur), 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 American. The Company consummated its
transaction with Universal American on July 30, 1999. A portion of the proceeds
received by the Company from Universal American for the sale of the Career Sales
Division were used to fund the purchase of equity of Universal American by the
sales force of Penn Life and to make certain other payments to the sales force
in exchange for a release of claims relating to the potential leveraged buyout.
The life insurance subsidiaries of the Company 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 in accordance with
Statement of Position 97-3 issued by the AICPA, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments."
In May 1998, the three senior executives of the Company entered into two year
employment agreements with the Company which have various annual bonus, deferred
payment and termination provisions. As of June 30, 1999, the Company had accrued
compensation expense of approximately $900 and $5,646 for the annual 1999 bonus
and deferred compensation provisions, respectively associated with these
employment agreements. The deferred compensation provisions are payable
13
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (Continued)
upon the expiration of the employment agreement, or sooner termination of the
executive by the Company without cause, or termination by the executive for
"good reason" as defined in the employment agreements.
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 and 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
that it will do so. Failure of the Company to meet such representations and
warranties could result in indemnification claims for breach of contract.
Each of the definitive purchase and sale agreements the Company has consummated
for Professional, the United Life Assets, KIVEX and the Career Sales Division,
contain indemnification provisions which survive the closing of each sales
transaction for varying periods of time. The indemnification provisions would be
invoked by the purchasers should the Company breach certain representation and
warranty provisions under any of the purchase and sale agreements.
The Company has outstanding commitments to invest up to $12,782 in various
limited partnership funds and other investments.
The Company has a contingent obligation for mortgage loans previously sold
aggregating $5,218 as a result of the Company acting as a servicing conduit.
10. SUBSEQUENT EVENTS
As previously announced in July 1999, the New York Stock Exchange ("NYSE")
advised the Company that it has fallen below the exchange's continued listing
criteria for net tangible assets available to common stock (less than $12,000)
together with 3-year average net income (less than $600). Additionally, the NYSE
informed the Company that the NYSE's Board of Directors approved new continued
listing standards which require, among other things, (1) a minimum stockholders'
equity and market capitalization of $50,000, (2) a minimum average market
capitalization of $15,000, and (3) a minimum average stock price of not less
than one dollar per share. The NYSE has indicated verbally to the Company that
these proposed rules became effective on July 27, 1999 and, as of the current
date, the Company does not meet numbers 2 and 3 of the new continued listing
criteria described above.
The Company will have 45 days from the date it receives written notification by
the NYSE of the effective date of the new standards, to present a business plan
to the NYSE that will demonstrate compliance with all aspects of these new
standards within twelve months of the notification of the effective date. If at
the time of the written notification of the effective date of the new standards
the Company is below the one dollar stock price criterion, the Company has six
months to raise its
14
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (Continued)
stock price above the one dollar level. If the NYSE accepts the Company's
business plan, the Company will be monitored quarterly by the NYSE for
compliance with its plan. The NYSE had indicated that if the Company fails to
achieve the quarterly milestones in the plan or is not in compliance with the
new continued listing criteria at the end of the twelve month period, it will be
suspended from trading on the NYSE and application will be made to the SEC to
delist the issue. The NYSE said that if the exchange does not accept the
Company's plan or if the Company elects not to submit a plan, it will be subject
to immediate trading suspension and subsequent delisting procedures. The NYSE
further indicated that if the Company achieves all quarterly milestones and
meets the new continued listing criteria at the end of the twelve months, it
will be considered to be "in good standing" and no longer subject to business
plan review, although the Company would still be subject to the NYSE's on-going
continued listing review policies and procedures.
On July 30, 1999, the Company completed the sale of the Career Sales Division to
Universal American. The net cash proceeds of the sale, after transaction costs
and fulfillment of contractual obligations, was approximately $82,000. The
Company used $78,000 of the net proceeds to reduce the principal under the
Company's Bank Credit Facility.
15
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 30, 1999 and 1998, financial statements included in this filing have
been reviewed by KPMG LLP, independent certified public accountants, in
accordance with established professional standards and procedures for such a
review.
The report of KPMG LLP commenting upon their review is included on the following
page.
(Remainder of Page Intentionally Left Blank)
16
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated balance sheet of PennCorp
Financial Group, Inc. and subsidiaries as of June 30, 1999, and the related
consolidated statements of operations and comprehensive loss for the three and
six month periods ended June 30, 1999 and 1998, and consolidated statements of
cash flows for the six month periods ended June 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PennCorp Financial Group, Inc. as
of December 31, 1998, and the related consolidated statements of operations and
comprehensive income (loss), shareholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated March 31, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the financial information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 1998, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/S/KPMG LLP
Dallas, Texas
August 12, 1999
17
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition and Results
of Operations.
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the comparable discussion filed
with the Company's annual filing with the Securities and Exchange Commission on
Form 10-K for the fiscal year ended December 31, 1998.
The following discussion should also be read in conjunction with the unaudited
consolidated financial statements and related notes of this Quarterly Report on
Form 10-Q.
CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. All statements, trend analyses and
other information contained in this report relative to markets for PennCorp's
products and trends in PennCorp's operations or financial results, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (1) general economic conditions and other
factors, including prevailing interest rate levels and stock market performance,
which may affect the ability of PennCorp to sell its products, the market value
of PennCorp's investments and the lapse rate and profitability of 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 Company
("A.M. Best"), which the Company believes are particularly important to the sale
of annuity and other accumulation products; (9) PennCorp's ability to
successfully complete its year 2000 remediation efforts and (10) current and/or
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
The Company, through its three operating divisions, provides accumulation, life,
and fixed benefit accident and sickness insurance products throughout the United
States and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, independent general agents, financial
institutions, and payroll deduction programs, and are targeted primarily to
lower and middle-income individuals in rural and suburban areas. These products
are primarily small premium accident and sickness insurance policies with
defined fixed benefit amounts, traditional whole life and universal life
insurance with low face amounts, and accumulation products such as single
premium deferred annuities.
The Company's financial condition and results of operations for the periods
covered by this and future "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are or will be affected by several common
factors, each of which is discussed below.
Dispositions and Other Transactions. On June 30, 1999, the Company completed the
sale of KIVEX to Allegiance for $34.5 million in cash. The net proceeds to the
parent company from the sale were $22.2 million after payment of costs and fees
associated with the transaction and after repayment of $10.2 million of
intercompany borrowings to insurance company affiliates of PennCorp. Of the net
proceeds, $22.0 million was used to reduce principal and commitments under the
Company's Bank Credit Facility. The Company recorded a gain of $30.9 million
from the sale.
On April 30, 1999, the Company consummated the sale of the United Life Assets.
The purchase consideration totaled $154.1 million including a dividend of $2.1
million that was paid by United Life at closing. The cash consideration
ultimately was reduced as a result of the Company's obligation to purchase
certain mortgages and other assets as well as for transaction related costs at
closing. The Company received net cash proceeds of $136.5 million of which
$127.0 million was used to reduce principal and commitments under the Company's
Bank Credit Facility. The Company realized a loss from the sale of the United
Life Assets totaling $4.1 million. Also, as a result of the sale, unrealized
gains on securities held for sale by United Life decreased $3.6 million. The
amount of mortgages purchased is subject to adjustment for a period of 90 days
18
<PAGE>
subsequent to closing pursuant to terms of the purchase and sale agreement. This
review period has been extended by mutual agreement. The determination and
settlement of the final amount of mortgages included in the sale is expected to
occur prior to December 31, 1999.
On March 31, 1999, the Company consummated the sale of Professional to GE
Financial Assurance Holdings, Inc. for cash proceeds of $47.5 million. The
Company realized net cash proceeds of $40.2 million. Of the net proceeds, $40.0
million was used to reduce principal and commitments under the Company's Bank
Credit Facility on April 1, 1999. The Company realized a gain from the sale of
Professional totaling $1.0 million. Also, as a result of the sale, unrealized
gains on securities held for sale by Professional decreased $488,000. The
purchase and sale agreement includes certain settlement and consideration
adjustment provisions which will occur prior to August 23, 1999 and will likely
result in a further reduction of consideration received of approximately $1.2
million.
On December 31, 1998, the Company entered into a definitive agreement to sell
the Career Sales Division and related assets to Universal American. The purchase
price was originally $175.0 million, consisting of $136.0 million of cash and
$39.0 million original principal amount of subordinated notes. In June 1999, the
parties signed an amended and restated definitive agreement. The amendments
reduce the purchase price to $137.0 million in cash, including $6.5 million of
cash dividends to be paid by one of the Career Sales Division companies to
PennCorp. Additionally, the amendments eliminate all purchase price adjustments
relating to the disability income claim reserves of PLIC, indemnification
obligation relating to adequacy of reserves and the closing obligation relating
to the sale of Union Bankers' comprehensive medical block of business. As a
result of the amendments, the Company recorded an additional impairment
provision aggregating $28.2 million and $58.5 million during the three and six
months ended June 30, 1999, respectively. In addition, for the three month
period ended September 30, 1999, the Company anticipates realizing a foreign
currency loss of approximately $23.3 million and an adjustment to other
comprehensive income of a like amount as a result of the Company realizing the
impacts of foreign currency translation losses through the sale of PennCorp Life
Insurance Company, PLIC's Canadian subsidiary.
The consummation of the sale of the Career Sales Division transaction occurred
on July 30, 1999. The Company received net cash proceeds of approximately $82.0
million and utilized $78.0 million of the net cash proceeds to reduce the
principal under the Company's Bank Credit Facility.
The Company has engaged Wasserstein, Perella & Co. ("Wasserstein Perella") to
review the Company's capital structure and develop recapitalization and
restructuring alternatives. The Company, with Wasserstein Perella, is currently
exploring with interested parties, a sale of the entire Company and, on a
parallel track, a restructuring or recapitalization transaction. 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.
As amended, the final maturity date of the Bank Credit Facility is May 2000.
Following the sale of the Career Sales Division and the realization of the net
proceeds therefrom to pay down the Bank Credit Facility, the aggregate amount of
indebtedness remaining under the Bank Credit Facility was approximately $167.0
million. In the event the Company does not consummate any of the transactions
described in the immediately preceding paragraph prior to the maturity date of
the Bank Credit Facility, the Company may seek to further amend the Bank Credit
Facility, to refinance the Bank Credit Facility, to sell additional assets to
fund the repayment of the Bank Credit Facility or to pursue other alternatives.
There can be no assurance that the Company will be successful in implementing
any one or more of such transactions or alternatives, the form such transactions
or alternatives may take, or the timing of such transactions or alternatives. In
the event the Company is unable to consummate any of the foregoing transactions
or alternatives and is otherwise unable to obtain sufficient liquidity to repay
the Bank Credit Facility on maturity, such failure would result in a default
under the Bank Credit Facility and the indenture governing the Notes, entitling
the holders thereof to exercise certain remedies, including the acceleration of
such indebtedness and the commencement of legal actions to collect the
indebtedness. In such event, the Company will examine and consider any
alternatives then available to the Company.
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.
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 six months
ended June 30, 1998 directly and indirectly associated with divisional
restructuring.
19
<PAGE>
As a result of the sale of the United Life Assets along with other non-core
operations, the Company announced a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company incurred restructuring costs aggregating $5.3 million for the three and
six months ended June 30, 1999.
The restructuring costs recognized the following for the three and six months
ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Severance and related benefits incurred due
to staff reduction............................ $ 3,185 $ -- $ 3,185 $ 3,831
Estimated holding costs of vacated facilities... 2,122 -- 2,122 2,205
Write-off of certain fixed assets and other
impaired assets............................... -- -- -- 862
Estimated contract termination costs............ -- -- -- 4,869
------------- ------------- ------------- -------------
Total restructuring costs................... $ 5,307 $ -- $ 5,307 $ 11,767
============= ============= ============= =============
</TABLE>
During the three and six months ended June 30, 1999, the Company re-evaluated
the restructuring costs and decreased the remaining accruals established in 1998
by $171,000 and $166,000, respectively. During the three and six months ended
June 30, 1998, the Company re-evaluated the restructuring costs and reduced the
remaining accruals by $1.8 million and $5.5 million, respectively, as a result
of the final determination of certain obligations. As of June 30, 1999, the
Company had remaining accruals associated with restructuring charges aggregating
$9.3 million.
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 include 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, the Company anticipates incurring
internal and external costs of $6.1 million during 1999 for a total cost of
$21.4 million for year 2000 remediation. The Company estimates it has incurred
internal and external costs aggregating $2.0 million and $3.1 million for the
three months ended June 30, 1999 and 1998, respectively. For the six months
ended June 30, 1999 and 1998, the Company has incurred year 2000 costs totaling
$5.7 million and $5.4 million, 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
20
<PAGE>
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 substantially
completed the remediation of its largest administrative platforms and
anticipates successful remediation and testing of the remaining sub-systems and
system interfaces during the remainder of 1999. The Company believes that the
Payroll Sales Division is 99.0% complete with its compliancy effort for critical
business systems. 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 99.0% 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 September
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 and 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
that it will do so. Failure of the Company to meet such representations and
warranties could result in indemnification claims by the respective purchasers.
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
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.
21
<PAGE>
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 six months ended June
30, 1999 and 1998:
<TABLE>
<CAPTION>
Projected
Period
July 1, 1999 to Six Months Ended
December 31, June 30,
----------------------------
1999 1999 1998
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Cash sources:
Cash from subsidiaries................................... $ 90,180 $ 220,308 $ 41,531
Other investment income.................................. -- 539 1,912
Additional borrowings.................................... -- -- 200,000
Sales of/collection on assets currently held............. 9,869 995 --
Other, net............................................... 394 12 628
------------- ------------- -------------
Total sources...................................... 100,443 221,854 244,071
------------- ------------- -------------
Cash uses:
Acquisition of businesses................................ -- -- 73,858
Interest paid on indebtedness............................ 14,557 23,991 17,104
Operating expenses, including restructuring charges...... 7,390 3,912 9,422
Reduction of notes payable............................... 78,000 189,000 126,015
Capital contributions to subsidiaries.................... -- 4,485 2,000
Purchase of equity securities............................ -- -- 5,000
Dividends on preferred and common stock.................. -- -- 11,752
Other, net............................................... 1,400 -- --
------------- ------------- -------------
Total uses......................................... 101,347 221,388 245,151
------------- ------------- -------------
Increase (decrease) in cash and short-term investments..... (904) 466 (1,080)
Cash and short-term investments at beginning of period..... 13,120 12,654 4,464
------------- ------------- -------------
Cash and short-term investments at end of period........... $ 12,216 $ 13,120 $ 3,384
============= ============= =============
</TABLE>
Cash Sources
Cash from Subsidiaries. Cash generated by the Company's insurance subsidiaries
has been 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 have been 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 $258.5 million and $453.1 million as of June 30, 1999
and December 31, 1998, 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 approval. Such dividend restrictions are
generally the greater of 10% of statutory capital and surplus or prior year's
statutory earnings.
For the six months ended June 30, 1999 and 1998, the Company received surplus
debenture interest and principal payments from PLAIC of $165.7 million and $14.5
million, respectively, and received dividends and tax sharing payments of $54.6
million and $27.0 million, respectively. Substantially all of the surplus
debenture, dividends and tax sharing payments made by PLAIC were the direct
result of proceeds received by PLAIC from the disposition of Businesses Held for
Sale. The Surplus Note Companies received $1.8 million and $11.6 million from
their respective subsidiaries in tax sharing payments during the six months
ended June 30, 1999 and 1998, respectively.
The surplus debentures issued by PLAIC and Constitution were repaid in full in
connection with the consummation of the sale of the Career Sales Division. As
part of a subsidiary realignment in conjunction with the Career Sales Division
divestiture, PLAIC issued a new surplus debenture to SW Financial in the amount
of $150.0 million.
22
<PAGE>
Other Investment Income. During the six months ended June 30, 1999 and 1998, the
Company received other investment income from short-term invested assets held by
the parent company.
Additional Borrowings. During the six months ended June 30, 1998 the Company
borrowed under its existing bank credit facilities primarily to fund
acquisitions or repay existing indebtedness. See "Cash Uses" below for the use
of proceeds from the additional borrowings.
Sale of/Collection on Assets Currently Held. During the six months ended June
30, 1999, the Company received distribution from a limited partnership of $166.
These assets were acquired in connection with the sale of the United Life
Assets. In addition, the Company sold a non-life insurance subsidiary for $829
in connection with the sale of the United Life Assets.
Cash Uses
Acquisition of Businesses. During 1998, the Company acquired the SW Financial
Controlling Interest 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 borrowings
under its existing credit facility.
Interest Paid on Indebtedness. During the six months ended June 30, 1999 and
1998, the Company utilized varying amounts of leverage in its capital structure.
For the six months ended June 30, 1999 and 1998, the average indebtedness
outstanding aggregated $454.1 million and $451.1 million, respectively. The
Company's weighted average costs of borrowings increased significantly during
1999 as a result of the Company's increased leverage ratio and projected
weakness in future liquidity.
Operating Expenses, Including Restructuring Charges. During the six months ended
June 30, 1999 and 1998, 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 the six
months ended June 30, 1999 and 1998 aggregated $1.6 million and $1.7 million,
respectively. During the remainder of 1999, the parent company anticipates
funding an additional $1.9 million of such charges. During the six months ended
June 30, 1999, the parent company also incurred legal, accounting and investment
banking fees associated with asset dispositions aggregating $1.1 million.
Operating expenses for the six months ended June 30, 1999 and 1998 also include
costs aggregating $1.4 million and $121,000, respectively, associated with the
pending class action securityholder litigation and the SEC investigation. The
Company anticipates incurring additional expenses associated with such legal
matters (although the Company's Directors and Officers Liability Insurance
carrier is required to reimburse the Company 75% of such expenses in excess of
$1.0 million retention amount) and will additionally incur significant costs
associated with its capital restructuring efforts during the remainder of 1999.
Reduction in Notes Payable. During the six months ended June 30, 1999, the
Company made repayments under the Bank Credit Facility aggregating $189.0
million upon the consummation of sales of Professional, the United Life Assets
and KIVEX.
In conjunction with the Company's 1998 acquisition of the SW Financial
Controlling interest, the Company borrowed under its existing $450.0 million
revolving 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.
Capital Contributions to Subsidiaries. For the six months ended June 30, 1999
and 1998, the Company made capital contributions to subsidiaries totaling $4.4
million and $2.0 million, respectively. During 1999, $3.3 million of the
contribution was made to PLAIC to make a subsequent capital contribution to PLIC
and $1.1 million was made to a non-life insurance subsidiary. During 1998, the
contributions were primarily made to non-life insurance subsidiaries for other
corporate purposes.
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 the six
months ended June 30, 1998.
Dividends on Preferred and Common Stock. During the six months ended June 30,
1999 and 1998, the Company paid common and preferred stock dividends aggregating
$-- and $11.8 million, respectively. The absence of dividend payments during
1999 was due to the Company's decision to halt common and preferred stock
dividend payments as a result of liquidity concerns and restrictions contained
in the amended Bank Credit Facility.
23
<PAGE>
Projected Cash Sources and Uses for the Remaining Six Months of 1999
For the remainder of 1999, the Company anticipates receiving approximately $8.2
million in the form of principal and interest payments or dividends and tax
sharing payments from the Surplus Note Companies as a result of the ordinary
dividend flow from the Surplus Notes Companies' insurance subsidiaries. In July
1999, the Company received payments of approximately $82.0 million from the sale
of the Career Sales Division as a result of surplus debentures repayment or
dividends upon consummation of the sale of the Career Sales Division by the
Surplus Note Companies (see Notes 3 and 4 of Notes to Unaudited Consolidated
Financial Statements). On July 30, 1999, the Company utilized $78.0 million of
proceeds from the sale of the Career Sales Division to repay indebtedness of the
parent company under the Bank Credit Facility.
The Company acquired assets from United Life and Professional in connection with
the sale of such companies and anticipates it will be able to sell most of these
assets during the remainder of 1999 and realize cash proceeds of approximately
$9.9 million, though there can be no assurance that the Company will succeed in
doing so. 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.
In addition to the above proceeds, there exists $2.0 million of unused
commitments under the Company's existing credit facility that are available only
for the purpose of payments of interest with respect to the Bank Credit Facility
and the Notes, should the Company not have sufficient liquidity from other
sources.
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 and the first quarter of 2000. In May 2000,
the Company's Bank Credit Facility matures. The Company is currently working on
various sale and recapitalization alternatives in order to repay or refinance
such indebtedness. With respect to current liquidity projections, there can be
no assurances actual liquidity sources will develop as currently projected. In
the event of a shortfall of actual liquidity sources, and as a result of the
necessity of the Company to refinance the existing Bank Credit Facility, 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
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 provided by operating activities,
excluding the parent company, were $5.1 million and $12.0 million for the six
months ended June 30, 1999 and 1998, respectively. The decreasing trend in cash
flow from operating activities principally resulted from increasing costs
associated with: (i) year 2000 remediation at all of the insurance subsidiaries
and (ii) reduced costs as a result of strategic business evaluations and
associated restructuring of the Company.
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 $2,409.2
million and $2,589.7 million at June 30, 1999, and December 31, 1998,
respectively.
24
<PAGE>
During the six months ended June 30, 1999 and 1998, the Company's subsidiaries
sold $481.7 million and $427.1 million of fixed maturity and equity securities,
and purchased $595.3 million and $529.5 million of fixed maturity and equity
securities, respectively. Such sales and purchases were primarily effected in
order to reinvest cash from maturities of fixed maturity securities, meet cash
flow demands associated with policyholder surrenders that in the aggregate
exceeded policyholder deposits and to improve the quality of the investment
portfolio or avoid prepayment risks.
Cash Flow from Financing Activities. Cash used by financing activities,
excluding the parent company, were $348.5 million and $200.3 million for the six
months ended June 30, 1999 and 1998, respectively. The majority of the cash
outflow is attributable to policyholder surrenders exceeding deposits by $150.5
million and $176.3 million for the six months ended June 30, 1999 and 1998,
respectively. Cash outflows during the six months ended June 30, 1999 also
included dividends and surplus debenture principal payments aggregating $202.4
million made to the parent. Substantially all of these payments were the direct
result of proceeds received by PLAIC from disposition of Businesses Held for
Sale.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 1999 and 1998, the Company has
prepared the following 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 and KIVEX). During the three months ended June 30, 1999,
the Company concluded that it would retain, and shut down over time, certain
remaining operations of Marketing One. Consequently, the results of operations
of Marketing One have been reclassified out of "Businesses Held for Sale" to
"Corporate" for all periods presented. The selected 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)").
The Company has prepared such information as it believes that: (i) the intended
disposition of the Businesses Held for Sale and (ii) the restructuring costs are
material enough to make historical comparative results not meaningful. In
addition, the Company believes that the selected pro forma financial information
will facilitate the subsequent discussion parallel with how management views and
evaluates the operations of the Company.
The following 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 transactions described above been made as of January 1,
1998, or the results which may occur in the future.
25
<PAGE>
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Retained Business--Financial Services Division:
Operating income.............................. $ 5,574 $ 4,392 $ 9,102 $ 15,767
Net investment gains (losses)................. (2,560) 2,671 (1,438) 2,901
Restructuring costs........................... (5,275) -- (5,313) (2,164)
------------- ------------- ------------- -------------
(2,261) 7,063 2,351 16,504
------------- ------------- ------------- -------------
Retained Business--Payroll Sales Division:
Operating income.............................. 3,924 1,264 5,823 6,192
Net investment gains (losses)................. (745) 314 (758) 338
------------- ------------- ------------- -------------
3,179 1,578 5,065 6,530
------------- ------------- ------------- -------------
Businesses Held for Sale:
Operating income.............................. 10,418 (17,459) 18,554 (8,541)
Net investment gains (losses)................. (62) 4,382 1,009 5,651
Restructuring costs........................... 169 23 202 (3,051)
Net gain from sale of subsidiary.............. 26,808 -- 27,804 --
Impairment valuation.......................... (28,200) (140,485) (58,486) (140,485)
------------- ------------- -------------- -------------
9,133 (153,539) (10,917) (146,426)
------------- ------------- ------------- --------------
Corporate:
Interest and amortization of deferred
debt issuance cost.......................... (11,224) (10,356) (25,344) (20,273)
Corporate expenses, eliminations and other.... (14,791) (14,141) (24,172) (17,305)
Net investment gains (losses)................. 120 (2) 119 (2)
Restructuring costs........................... (30) 1,733 (30) (1,046)
------------- ------------- ------------- -------------
(25,925) (22,766) (49,427) (38,626)
------------- ------------- ------------- -------------
Loss before income taxes and
extraordinary charge.......................... $ (15,874) $ (167,664) $ (52,928) $ (162,018)
============= ============= ============= =============
</TABLE>
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.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ 25,383 $ 34,281 $ 59,169 $ 67,296
Net investment income......................... 39,206 46,453 82,062 94,536
Other income.................................. 2,162 1,681 3,485 3,095
------------- ------------- ------------- -------------
66,751 82,415 144,716 164,927
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... 41,814 60,841 97,183 119,899
Insurance related expenses.................... 6,842 5,212 16,039 9,125
Other operating expenses...................... 12,521 11,970 22,392 20,136
------------- ------------- ------------- -------------
61,177 78,023 135,614 149,160
------------- ------------- ------------- -------------
Pre-tax operating income.................... $ 5,574 $ 4,392 $ 9,102 $ 15,767
============= ============= ============= =============
</TABLE>
Policy Revenues. Policy revenues include: (i) premiums received on traditional
life products and a small amount of traditional annuities (ii) mortality and
administrative fees earned on universal life insurance and annuities and (iii)
surrender charges on
26
<PAGE>
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 three and six months
ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Life premiums:
Universal life (first year)................... $ 2,509 $ 2,790 $ 5,027 $ 5,663
Universal life (renewal)...................... 12,859 22,669 32,369 49,685
Yearly renewable term reinsurance on
universal life.............................. (2,232) (1,545) (4,374) (3,390)
Traditional life (first year)................. 2,111 2,764 4,954 5,686
Traditional life (renewal).................... 7,393 10,634 15,656 18,806
------------- ------------- ------------- -------------
Life premiums, net of reinsurance........... 22,640 37,312 53,632 76,450
------------- ------------- ------------- -------------
Annuity premiums:
Interest-sensitive fixed (first year)......... 1,467 3,503 3,890 6,963
Interest-sensitive fixed (renewal)............ 423 1,079 768 1,595
------------- ------------- ------------- -------------
Annuity premiums, net of reinsurance........ 1,890 4,582 4,658 8,558
------------- ------------- ------------- -------------
Fixed benefit premiums:
Long-term care premiums net of reinsurance
(all first year)............................ (479) 3 (74) 3
------------- ------------- ------------- -------------
Premiums, net of reinsurance.............. 24,051 41,897 58,216 85,011
Less premiums on universal life and
annuities which are recorded as additions
to insurance liabilities...................... (17,258) (30,041) (42,054) (63,906)
------------- ------------- ------------- -------------
Premiums on products with mortality or
morbidity risk.......................... 6,793 11,856 16,162 21,105
Fees and surrender charges on interest
sensitive products............................ 18,590 22,425 43,007 46,191
------------- ------------- ------------- -------------
Policy revenues........................... $ 25,383 $ 34,281 $ 59,169 $ 67,296
============= ============= ============= =============
</TABLE>
Policy revenues decreased 26.0% and 12.1% during the three and six months ended
June 30, 1999, respectively. Life premiums collected, net of reinsurance, were
$22.6 million and $53.6 million for the three and six months ended June 30, 1999
compared with $37.3 million and $76.5 million in the comparable periods of 1998.
First year universal life premiums decreased 10.1% and 11.2% in the three and
six months ended June 30, 1999, respectively, to $2.5 million and $5.0 million
for the three and six months ended June 30, 1999, respectively, and first year
traditional life decreased 23.6% and 12.9% to $2.1 million and $5.0 million for
the three and six months ended June 30, 1999, respectively. The decline is
attributable to lower sales at Security Life. New life sales were strong at
Security Life for the three month period ended March 31, 1998 but had declined
significantly throughout the remainder of 1998 and for the three and six months
ended June 30, 1999 reflecting the impact of ratings downgrades and management
changes in Security Life's marketing management. Universal life and traditional
life renewal premiums declined 39.2% and 29.9% for the three and six months
ended June 30, 1999 compared with the comparable 1998 periods. This reflects
ratings downgrades and the impact of certain management actions instituted by
Security Life. On January 1, 1999 Security Life instituted an exchange or refund
program for holders of certain types of interest sensitive insurance contracts.
This program resulted in a refund of premiums of $12.5 million and $18.1 million
for the three and six months ended June 30, 1999, respectively, and will likely
result in additional refund of premiums for the remainder of 1999. See
"Policyholder Benefits," included herein and Note 9 of the Notes to Unaudited
Consolidated Financial Statements. Annuity premiums of $1.9 million and $4.7
million for the three and six months ended June 30, 1999, respectively, were
less than premiums of $4.6 million and $8.6 million in the comparable periods of
1998. 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. Southwestern Life entered into an amendment to its
currently existing reinsurance on long-term care products increasing the cession
amount to 80% retroactively to September 30, 1998. The impact of such amendment
was to reduce premium consideration for long-term care by $900,000 for the three
and six month periods ended June 30, 1999.
27
<PAGE>
Net Investment Income. Net investment income decreased 15.6% and 13.2% to $39.2
million and $82.1 million for the three and six months ended June 30, 1999,
respectively, due to a decrease in invested assets and reduced yields on
investments. Average invested assets declined approximately $257.8 million and
$268.4 million for the three and six months ended June 30, 1999, respectively,
compared with the comparable periods in 1998. Most of this decrease resulted
from the need to liquidate invested assets to provide cash to fund surrenders of
annuities and universal life products, which totaled $68.2 million and $143.6
million for the three and six months ended June 30, 1999, respectively. Most of
these surrenders involved annuities which 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 annuity contracts 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 7.0% for the three and six months
ended June 30, 1999 compared to 7.1% for the three and six months ended June 30,
1998. The decline during 1999 principally reflects the Company's share of an
operating loss on a joint venture investment. This investment was sold in July
1999.
Other Income. Other income increased $481,000 and $390,000 to $2.2 million and
$3.5 million for the three and six months ended June 30, 1999, respectively. The
modest increase principally reflects changes in consideration received on
supplemental contracts. Supplemental contract revenue is derived from annuity
contracts which have reached the annuitization period. Consideration from
supplemental contracts recognized as other income is offset by policyholder
benefits, resulting in no net effect on the Company's results of operations.
Total Policyholder Benefits. The following table shows the components of total
policyholder benefits for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Death benefits.................................. $ 23,175 $ 22,240 $ 43,338 $ 45,791
Other insurance policy benefits and change
in future policy benefits..................... 18,639 38,601 53,845 74,108
------------- ------------- ------------- -------------
Total policyholder benefits..................... $ 41,814 $ 60,841 $ 97,183 $ 119,899
============= ============= ============= =============
</TABLE>
Policyholder benefits decreased 31.3% and 18.9% to $41.8 million and $97.2
million for the three and six months ended June 30, 1999 compared with the
comparable 1998 periods. Death benefits increased $935 or 4.2% and decreased
$2.5 million or 5.4% for the three and six months ended June 30, 1999 compared
with the comparable 1998 periods. Death benefits may vary significantly from
period to period. Change in future policy benefits and other benefits decreased
51.7% and 27.3% to $18.6 million and $53.8 million for the three and six months
ended June 30, 1999. As a result of the exchange program at Security Life,
reserves decreased $12.4 million and $19.7 million for the three and six months
ended June 30, 1999. The remainder of the decrease is principally due to reduced
scheduled annuity benefits reflecting lower in force amounts resulting from
surrender activity.
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 $513.3 million as
of June 30, 1999 and $525.4 million as of December 31, 1998. If developing
trends associated with certain blocks of business 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 potential litigation.
The Company is continuing to refine its actuarial estimates 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.
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,
28
<PAGE>
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. There can be no assurances that
the exchange program will be successful or that the Company will resolve these
matters on such life insurance products 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. The exchange
program is not expected to have a material effect on the Company's financial
position or results of operations (see Note 9 of Notes to Unaudited Consolidated
Financial Statements).
Insurance Related Expenses. Insurance related expenses (including commissions,
amortization of deferred policy acquisition costs and amortization of present
value of insurance in force) increased $1.6 million and $6.9 million during the
three and six months ended June 30, 1999, respectively, compared with the
comparable 1998 periods. Amortization of deferred policy acquisition costs
increased $1.8 million and $3.4 million during the three and six months ended
June 30, 1999 compared to the comparable 1998 periods. These increases
principally reflect the growing block of policies in force, as a result of new
business sales subsequent to the Company's acquisitions of Security Life and
Southwestern Life. Amortization of present value of future insurance in force
increased $1.3 million and $5.3 million for the three and six months ended June
30, 1999. During the three months ended March 31, 1998, Southwestern Life
benefited from a favorable impact of unlocking certain assumptions regarding the
future profitability of certain interest sensitive life insurance products.
Other Operating Expenses. For the three and six months ended June 30, 1999,
other operating expenses (including general operating, overhead and policy
maintenance) increased $551,000 and $2.3 million from the comparable periods in
1998. The increase in the three and six months ended June 30, 1999 is
principally attributable to additional non-deferrable expenses related to costs
associated with year 2000 remediation efforts and systems conversions for
Security Life.
RETAINED BUSINESS--PAYROLL SALES DIVISION
The Payroll Sales Division includes the operations of AA Life and OLIC. AA Life
markets and underwrites customized life insurance and accumulation products to
U.S. military personnel and federal employees through a general agency force.
OLIC provides individual fixed benefit and life products utilizing a network of
independent agents primarily in the southeastern United States through
employer-sponsored payroll deduction programs.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ 23,017 $ 21,630 $ 46,300 $ 43,632
Net investment income......................... 9,230 9,679 18,788 19,479
Other income.................................. 469 281 960 256
------------- ------------- ------------- -------------
32,716 31,590 66,048 63,367
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... 15,536 16,759 33,321 31,927
Insurance related expenses.................... 8,676 8,858 17,564 16,693
Other operating expenses...................... 4,580 4,709 9,340 8,555
------------- ------------- ------------- -------------
28,792 30,326 60,225 57,175
------------- ------------- ------------- -------------
Pre-tax operating income.................... $ 3,924 $ 1,264 $ 5,823 $ 6,192
============= ============= ============= =============
</TABLE>
29
<PAGE>
Policy Revenues. Premiums received, net of reinsurance, by major product line
for the three and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Life premiums:
Universal life (first year)................... $ 176 $ 233 $ 404 $ 478
Universal life (renewal)...................... 6,601 6,145 12,822 12,590
Traditional life (first year)................. 4,038 4,332 8,297 8,560
Traditional life (renewal).................... 9,698 6,948 19,423 14,373
------------- ------------- ------------- -------------
Life premiums, net of reinsurance........... 20,513 17,658 40,946 36,001
------------- ------------- ------------- -------------
Annuity premiums:
Interest-sensitive fixed (first year)......... 53 21 275 34
Interest-sensitive fixed (renewal)............ 177 201 357 404
------------- ------------- ------------- -------------
Annuity premiums, net of reinsurance........ 230 222 632 438
------------- ------------- ------------- -------------
Fixed benefit premiums:
Accident and health (first year).............. 589 618 1,220 1,234
Accident and health (renewal)................. 2,488 2,436 4,980 4,871
------------- ------------- ------------- -------------
Fixed benefit premiums, net of reinsurance.. 3,077 3,054 6,200 6,105
------------- ------------- ------------- -------------
Premiums, net of reinsurance................ 23,820 20,934 47,778 42,544
Less premiums on universal life and
annuities which are recorded as additions
to insurance liabilities...................... (7,007) (6,600) (13,858) (13,506)
------------- ------------- ------------- -------------
Premiums on products with mortality or
morbidity risk............................ 16,813 14,334 33,920 29,038
Fees and surrender charges on interest
sensitive products............................ 6,204 7,296 12,380 14,594
------------- ------------- ------------- -------------
Policy revenues............................. $ 23,017 $ 21,630 $ 46,300 $ 43,632
============= ============= ============= =============
</TABLE>
Total policy revenues increased modestly between the three months ended June 30,
1999 and the comparable 1998 periods. Policy revenues increased $1.4 million and
$2.7 million or 6.4% and 6.1% during the three and six months ended June 30,
1999, respectively. Most of the increase was attributable to AA Life's
increasing new business sales during 1998 which resulted in higher renewal
premiums during the three and six months ended June 30, 1999.
Net Investment Income. Net investment income decreased 4.6% and 3.5% for the
three and six months ended June 30, 1999 from the comparable 1998 periods to
$9.2 million and $18.8 million. The decrease in net investment income was
primarily the result of a decrease in average invested assets which decreased
$6.7 million and $5.4 million in the three and six months ended June 30, 1999,
respectively, compared to the comparable 1998 periods. The decrease is primarily
attributed to lower invested assets at OLIC as a result of surrenders and a
limited amount of new business production.
Other Income. Other income was $469,000 and $960,000 during the three and six
months ended June 30, 1999, respectively, compared to $281,000 and $256,000 in
the comparable 1998 periods. Supplemental contracts represent most of the other
income in the three and six months ended June 30, 1999. These can fluctuate
significantly from period to period but have little impact on results of
operations as proceeds are offset by change in reserves.
30
<PAGE>
Total Policyholder Benefits. The following table shows the components of total
policyholder benefits for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Death benefits.................................. $ 5,037 $ 5,318 $ 11,672 $ 11,563
Fixed benefit claims incurred................... 1,934 2,102 4,437 4,127
Other insurance policy benefits and
change in future policy benefits.............. 8,565 9,339 17,212 16,237
------------- ------------- ------------- -------------
Total policyholder benefits..................... $ 15,536 $ 16,759 $ 33,321 $ 31,927
============= ============= ============= =============
</TABLE>
Policyholder benefits totaled $15.5 million in the three months ended June 30,
1999, which was 7.3% or $1.2 million decrease compared with the comparable 1998
period. Policyholder benefits totaled $33.3 million or a 4.4% increase in the
six months ended June 30, 1999, compared with the comparable 1998 periods. The
decrease in benefits for the three months ended June 30, 1999 is principally
attributable to a decrease in death benefits at AA Life. The increase for the
six months ended June 30, 1999, is principally attributable to OLIC which
experienced increases in future policy benefits and claim reserves associated
with accident and health products.
Insurance Related Expenses. Insurance related expenses (including commissions,
amortization of deferred policy acquisition costs and amortization of present
value of insurance in force) decreased $182,000 and increased $871,000 for the
three and six months ended June 30, 1999, respectively, compared to the
comparable 1998 periods. Amortization of deferred policy acquisition costs at AA
Life increased $455,000 and $1.8 million for the three and six months ended June
30, 1999, respectively, compared to the comparable 1998 periods primarily
reflecting the growing block of policies in force as a result of new business
sales subsequent to the Company's acquisition of AA Life. Amortization of the
present value of insurance in force profits decreased $352,000 and $483,000 for
the three and six months ended June 30, 1999, respectively, compared with the
comparable 1998 periods, primarily as a result of unlocking assumptions
regarding future profitability at OLIC during the three months ended December
31, 1998, which significantly reduced the amount of such assets, hence lowering
future amortization. Commissions decreased $286,000 and $422,000 for the three
and six months ended June 30, 1999, respectively, compared with the comparable
1998 periods, primarily as a result of declining sales at OLIC.
OLIC is currently implementing a plan to enhance the profitability associated
with certain of its interest sensitive life insurance and fixed benefit
products. If OLIC's plan is not implemented successfully the Company may be
required to reduce intangible assets, which could have a material impact on the
Company's financial position and results of operations. Profitability
enhancement measures include, but are not limited to, the redetermination of
non-guaranteed charges and/or benefits under the contracts. Such changes may
require the approval of the various state insurance departments, and there can
be no guarantee that OLIC will be granted the revised rates that it seeks. There
are risks associated with these management actions including potential sales
disruption, excess lapse activity, policyholder anti-selection and potential
litigation. Management is also assessing reinsurance alternatives to strengthen
OLIC's capital position.
Other Operating Expenses. Other operating expenses (including general operating,
overhead and policy maintenance) decreased $129,000 in the three months ended
June 30, 1999 and increased $785,000 in the six months ended June 30, 1999
compared to the comparable 1998 periods. The increase for the six months ended
June 30, 1999, is principally attributable to non- deferrable expenses related
to costs associated with year 2000 remediation efforts and systems conversions.
BUSINESSES HELD FOR SALE
Businesses Held for Sale include the operations of the Career Sales Division,
KIVEX (sold June 30, 1999), Professional (sold March 31, 1999) and the United
Life Assets (sold April 30, 1999). The Career Sales Division, which includes the
operations of Penn Life, markets and underwrites fixed benefit accident and
sickness products and, to a lesser extent, life products through a sales force
exclusive to the Company throughout the United States and Canada. With the
January 2, 1998, consummation of the acquisition of the SW Financial Controlling
Interest, the Company has integrated Union Bankers, Marquette and Constitution
with the Career Sales Division. KIVEX is an internet service provider.
Professional provides individual fixed benefit and life products utilizing a
network of independent agents primarily in the southeastern United States
through employer-sponsored payroll deduction programs. United Life principally
markets fixed and variable annuities through financial institutions and
independent general agents, primarily in the southern and western United States.
31
<PAGE>
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ 43,615 $ 62,382 $ 100,418 $ 126,879
Net investment income......................... 17,709 37,208 51,691 74,338
Other income.................................. 6,703 3,209 11,957 8,654
------------- ------------- ------------- -------------
68,027 102,799 164,066 209,871
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... 35,649 80,052 91,122 139,843
Insurance related expenses.................... 8,911 23,813 21,765 45,739
Other operating expenses...................... 13,049 16,393 32,625 32,830
------------- ------------- ------------- -------------
57,609 120,258 145,512 218,412
------------- ------------- ------------- -------------
Pre-tax operating income (loss)............... $ 10,418 $ (17,459) $ 18,554 $ (8,541)
============= ============= ============= =============
</TABLE>
Policy Revenues. Policy revenues declined 30.1% and 20.9% or $18.8 million and
$26.5 million in the three and six months ended June 30, 1999 compared to the
comparable 1998 periods. The decline is primarily attributable to the sale of
Professional and the United Life Assets on March 31, 1999 and April 30, 1999,
respectively. In addition, Union Bankers discontinued sales of major medical
health products and its life insurance products and increased its utilization of
reinsurance, each of which had the impact of lowering policy revenues.
Net Investment Income. Net investment income decreased $19.5 million and $22.6
million during the three and six months ended June 30, 1999 compared to the
comparable 1998 periods. The decrease is primarily attributable to the sales of
Professional and the United Life Assets on March 31, 1999 and April 30, 1999,
respectively.
Other Income. Other income increased $3.5 million and $3.3 million in the three
and six months ended June 30, 1999, respectively, compared to the comparable
1998 periods. Most of the increase is attributable to an increase in revenues
for KIVEX in the three and six months ended June 30, 1999 compared to the
comparable 1998 periods.
Total Policyholder Benefits. Policyholder benefits decreased $44.4 million and
$48.7 million in the three and six months ended June 30, 1999 compared to the
comparable 1998 periods. During the three months ended June 30, 1998, PennLife
increased reserves on long-term care products and disability income products by
$24.6 million to reflect changes in estimates based on adverse claims
experience. Union Bankers experienced a decrease in policyholder benefits of
$6.9 million and $10.1 million, in the three and six months ended June 30, 1999,
respectively, 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. Most of the
remainder of the decrease is attributable to the sales of Professional and the
United Life Assets on March 31, 1999 and April 30, 1999, respectively.
Insurance Related Expenses. Insurance related expenses (including commissions,
amortization of deferred policy acquisition costs and amortization of present
value of insurance in force) decreased $14.9 million and $24.0 million to $8.9
million and $21.8 million for the three and six months ended June 30, 1999,
respectively, compared to the comparable 1998 periods. Amortization of present
value of insurance in force decreased $6.0 million and $11.1 million in the
three and six months ended June 30, 1999, respectively. Amortization of deferred
policy acquisition costs decreased $5.5 million and $7.7 million. These
decreases principally reflect the Company recording an impairment provision
associated with assets of Businesses Held for Sale in 1998 resulting in the
elimination of substantially all insurance assets subject to amortization for
the Career Sales Division. Most of the remainder of the decrease is attributable
to the sales of Professional and the United Life Assets on March 31, 1999 and
April 30, 1999, respectively.
Other Operating Expenses. Other operating expenses (including general operating,
overhead and policy maintenance) decreased $3.3 million and $205,000 in the
three and six months ended June 30, 1999, respectively, compared to the
comparable 1998 periods. The decrease is principally attributable to the sales
of Professional and United Life on March 31, 1999 and April 30, 1999,
respectively. The decrease is partially offset by the increased operating
expenses at KIVEX, reflecting costs associated with its expansion into new
cities.
32
<PAGE>
GENERAL CORPORATE
Interest and Amortization of Deferred Debt Issuance Costs. Interest and
amortization of deferred debt issuance costs increased $868,000 and $5.1
million, respectively, in the three and six months ended June 30, 1999, compared
to the comparable 1998 periods. This is the result of higher weighted average
borrowing costs, 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. In addition, during the six month period
ended June 30, 1999, the Company accelerated amortization of certain deferred
loan costs in the amount of $2.1 million in accordance with Emerging Issues Task
Force ("EITF") Issue No. 98-14, "Debtor's Accounting for Changes in
Line-of-Credit or Revolving-Debt-Arrangements," as a result of the amendment to
the Bank Credit Facility. EITF Issue No. 98-14 requires the unamortized deferred
loan costs be written off in proportion to the decrease in borrowing capacity of
the original arrangement. These increases were partially offset by a debt
reduction of $40.0 million of principal made on April 1, 1999 with proceeds from
the sale of Professional and a debt reduction of $127.0 million of principal
made on April 30, 1999 with proceeds from the sale of the United Life Assets.
Additional debt reductions of $22.0 million and $78.0 million were made on June
30, 1999 and July 30, 1999 with proceeds from the sale of KIVEX and the Career
Sales Division, respectively.
Corporate Expenses, Eliminations and Other. Corporate expenses, eliminations and
other costs were $14.8 million and $14.1 million for the three months ended June
30, 1999 and 1998, respectively, and were $24.2 million and $17.3 million for
the six months ended June 30, 1999 and 1998, respectively. The increase is
primarily attributable to several factors: (i) additional amortization of costs
in excess of net assets acquired of approximately $7.0 million for the three
months ended June 30, 1999 associated with KB Management. The write-off reflects
the Board of Directors' decision to terminate KB Investment Fund I, LP, for
which KB Management and KB Investment acts as administrator and general partner,
respectively; (ii) additional costs associated with efforts to develop
recapitalization and restructuring alternatives; (iii) consulting and legal fees
of $800,000 and $4.0 million for the three and six months ended June 30, 1999,
respectively, associated with the disposal of the Businesses Held for Sale as
well as the negotiation and implementation of, and compliance with, the amended
Bank Credit Facility, pending class action securityholder litigation and the SEC
investigation; and (iv) additional deferred compensation of $1.7 million and
$3.5 million for the three and six months ended June 30, 1999, associated with
the two year employment agreements of the Company's three senior executives
which were entered into in May 1998. The increases were partially offset by
reduction of expenses associated with the closing of the Company's New York and
Bethesda offices.
Income Taxes (Benefits). For the three months ended June 30, 1999, the Company
recognized income tax expense of $3.3 million on loss before taxes of $15.9
million. For the six months ended June 30, 1999, income tax expense was $7.9
million on loss before taxes of $52.9 million. The significant change in the
effective tax rate between 1999 and 1998 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.
In light of the continued changes in the ownership of the Company's common and
preferred stock, management and its advisors are performing ongoing evaluations
of the possibility of a "change of control" as defined by the Internal Revenue
Code Section 382. Change of control provisions of Section 382 could limit the
Company's ability to utilize certain tax benefits including net operating loss
carryforwards which could negatively impact the operating results and cash flows
of the Company and its subsidiaries in future periods.
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 losses of $3.2 million and gains of $7.4
million, during the three months ended June 30, 1999 and 1998, respectively. The
Company realized losses on sales of securities totaling $1.1 million and gains
totaling $8.9 million during the six months ended June 30, 1999 and 1998,
respectively. During the six months ended June 30, 1999 and 1998, 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 $150.5 million and $176.3 million, respectively.
33
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company analyzes and reviews the risks arising from market exposures of
financial instruments. Upward movement in market interest rates during the first
half of 1999 resulted in a significant decline in the unrealized appreciation of
the bond portfolio since the end of 1998. However, the Company's assets and
liabilities portfolio and its exposure to market risk has not changed materially
from its position at December 31, 1998. For disclosures about the Company's
market risk exposures of financial instruments for its Retained Businesses, see
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(Remainder of Page Intentionally Left Blank)
34
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
During the third quarter of 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. 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 a director and Chairman and Chief Executive Officer,
and Steven W. Fickes, formerly a director and 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, and subsequently filed a motion to dismiss the Complaint.
Although there are no 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 $15.0 million of
primary and $10.0 million of excess coverage, respectively, for securities
claims. The primary insurance coverage requires the Company to bear 25% of: (i)
all expenses and (ii) any losses in excess of a $1.0 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
has had preliminary settlement discussions with the Plaintiff's counsel and have
involved representatives of the primary insurance carrier and their counsel.
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 had commenced a formal
investigation into possible violations of the federal securities laws including
matters relating to the Company's restatement of its financial statements for
the first six months of 1997, and for the years ended December 31, 1994, 1995
and 1996. The Company and its management are fully cooperating with the SEC in
its investigation.
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.
35
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 13, 1999. The
proposals and results are as follows:
1. The election of two Class I Directors, each to hold office for a three year
term expiring at the 2002 annual meeting of shareholders and/or until such
director's successor shall be elected and qualified.
VOTING
- --------------------------------------------------------------------------------
NUMBER OF NUMBER OF
NUMBER OF SHARES BROKER
SHARES FOR WITHHELD NON-VOTES
Thomas A. Player 19,363,895 6,342,429 0
David C. Smith 19,357,805 6,348,519 0
The term of office of the following directors continued after the meeting:
Keith A. Maib, Kenneth Roman, Allan D. Greenberg, Bruce W. Schnitzer and
David J. Stone. However, David J. Stone resigned as a Director on June 17,
1999.
2. To ratify the selection of KPMG, L.L.P. as the Company's independent
auditors for 1999.
VOTING
- --------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SHARES BROKER
SHARES FOR AGAINST ABSTAINED NON-VOTES
24,868,539 764,722 73,063 0
3. The adoption of an amendment to the Company's 1996 Stock Award and Stock
Option Plan.
VOTING
- --------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SHARES BROKER
SHARES FOR AGAINST ABSTAINED NON-VOTES
5,482,134 7,849,050 199,375 12,175,765
Item 5. Other Information
The disclosures contained in Notes 3, 4 and 10 to the Unaudited Consolidated
Financial Statements of the Company contained in Item 1 of Part I of this Form
10-Q with respect to the sale of the Career Sales Division is incorporated
herein by reference. In addition, the unaudited Selected Pro Forma Financial
Information contained in Note 5 to the Unaudited Consolidated Financial
Statements of the Company contained in Item 1 of Part I of this Form 10-Q and
the Selected Pro Forma Financial Information contained in Item 2 of Part I of
this Form 10-Q reflecting the disposition of the Career Sales Division as well
as the disposition of KIVEX, Professional and the United Life Assets, is
incorporated herein by reference.
The disclosure contained in Note 10 to the Unaudited Consolidated Financial
Statements of the Company contained in Item 1 of Part I of this Form 10-Q with
respect to the notification by the NYSE to the Company is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Purchase Agreement dated June 11, 1999, by and between PennCorp
Financial Services, Inc. and Allegiance Telecom, Inc. (2)
36
<PAGE>
10.2 First Amendment to Stock Purchase Agreement dated as of June 30, 1999,
by and between PennCorp Financial Services, Inc. and Allegiance
Telecom, Inc. (3)
10.3 Amendment No. 7 dated as of April 30, 1999, to Credit Agreement, among
the lenders signatory thereto, the Managing Agents and the Co-Agents
named therein and the Bank of New York, as administrative agent. (1)
10.4 Amendment No. 8 dated as of May 14, 1999, to Credit Agreement, among
the lenders signatory thereto, the Managing Agent and the Co-Agents
named therein and the Bank of New York, as administrative agent. (1)
10.5 Amendment No. 9 dated as of June 25, 1999, to Credit Agreement, among
the lenders signatory thereto, the Managing Agents and the Co-Agents
named therein and The Bank of New York, as administrative agent. (3)
10.6 Amended and Restated Purchase Agreement dated as of July 2, 1999,
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. (3)
10.7 Amendment No. 10 dated as of June 30, 1999, to Credit Agreement, among
the lenders signatory thereto, the Managing Agents and the co-Agents
named therein and The Bank of New York, as administrative agent. (3)
11.1 Computation of Loss per Share (1)
15.1 Independent Auditors' Report (4)
27 Financial Data Schedule (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K dated
June 11, 1999, which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on June 18, 1999.
(3) Such exhibit is incorporated by reference to the Form 8-K dated
June 25, 1999, which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on July 13, 1999.
(4) Included in Item 1 of Part I of this Form 10-Q.
(b) Reports on Form 8-K
A report on Form 8-K dated May 28, 1999 was filed with the Securities
and Exchange Commission ("SEC") on June 1, 1999, reporting the
agreement in principle by the Company, subject to consent of its Board
of Directors and the lenders in its senior bank facility, to amendments
to the definitive agreement to sell its Career Sales Division and
related assets to Universal American Financial Corp.
A report on Form 8-K dated June 11, 1999 was filed with the SEC on June
18, 1999, reporting the execution by the Company of a stock purchase
agreement with Allegiance Telecom, Inc. ("Allegiance"), dated as of
June 11, 1999 to sell all of the outstanding stock of KIVEX, Inc.
("KIVEX").
A report on Form 8-K dated June 25, 1999 was filed with the SEC on July
13, 1999, reporting the consummation of the sale of KIVEX to Allegiance
and the use of the net proceeds from the sale to repay indebtedness
under the Credit Agreement. The Form 8-K also reported the further
amendment to the Credit Agreement effective as of June 25, 1999. Also
reported on the Form 8-K was the execution of an Amended and Restated
Purchase Agreement by the Company with Universal American Financial
Corp. and American Exchange Life Insurance Company dated as of July 2,
1999 to sell the Company's Career Sales Division. In addition, the Form
8-K also reported the further amendment to the Credit Agreement
effective as of June 30, 1999.
37
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNCORP FINANCIAL GROUP, INC.
By:/s/James P. McDermott
---------------------
James P. McDermott
Executive Vice President and Chief Financial Officer
(Authorized officer and principal accounting
and financial officer of the Registrant)
Date: August 12, 1999
38
<PAGE>
INDEX TO EXHIBITS
Exhibit Numbers
10.1 Purchase Agreement dated June 11, 1999, by and between PennCorp Financial
Services, Inc. and Allegiance Telecom, Inc. (2)
10.2 First Amendment to Stock Purchase Agreement dated as of June 30, 1999, by
and between PennCorp Financial Services, Inc. and Allegiance Telecom, Inc.
(3)
10.3 Amendment No. 7 dated as of April 30, 1999, to Credit Agreement, among the
lenders signatory thereto, the Managing Agents and the Co-Agents named
therein and the Bank of New York, as administrative agent. (1)
10.4 Amendment No. 8 dated as of May 14, 1999, to Credit Agreement, among the
lenders signatory thereto, the Managing Agent and the Co-Agents named
therein and the Bank of New York, as administrative agent. (1)
10.5 Amendment No. 9 dated as of June 25, 1999, to Credit Agreement, among the
lenders signatory thereto, the Managing Agents and the Co-Agents named
therein and The Bank of New York, as administrative agent. (3)
10.6 Amended and Restated Purchase Agreement dated as of July 2, 1999, 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. (3)
10.7 Amendment No. 10 dated as of June 30, 1999, to Credit Agreement, among the
lenders signatory thereto, the Managing Agents and the co-Agents named
therein and The Bank of New York, as administrative agent. (3)
11.1 Computation of Loss per Share (1)
15.1 Independent Auditors' Report (4)
27 Financial Data Schedule (1)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K dated June
11, 1999, which was filed with the Securities and Exchange Commission
by PennCorp Financial Group, Inc. on June 18, 1999.
(3) Such exhibit is incorporated by reference to the Form 8-K dated June
25, 1999, which was filed with the Securities and Exchange Commission
by PennCorp Financial Group, Inc. on July 13, 1999.
(4) Included in Item 1 of Part I of this Form 10-Q.
39
<PAGE>
EXHIBIT 11.1
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic net loss applicable to common stock:
Loss before extraordinary charge
applicable to common stock.................... $ (23,674) $ (163,904) $ (69,784) $ (165,919)
Redemption Premium on Series C
Preferred Stock............................. -- -- -- (1,913)
------------- ------------- ------------- -------------
(23,674) (163,904) (69,784) (167,832)
Extraordinary charge............................ -- -- -- (1,671)
------------- ------------- ------------- -------------
$ (23,674) $ (163,904) $ (69,784) $ (169,503)
============= ============= ============= =============
Diluted net loss applicable to common stock:
Loss before extraordinary charge
applicable to common stock.................... $ (23,674) $ (163,904) $ (69,784) $ (165,919)
Redemption Premium on Series C
Preferred Stock............................. -- -- -- (1,913)
------------- ------------- ------------- -------------
(23,674) (163,904) (69,784) (167,832)
Extraordinary charge............................ -- -- -- (1,671)
------------- ------------- ------------- -------------
$ (23,674) $ (163,904) $ (69,784) $ (169,503)
============= ============= ============= =============
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Basic:
Shares outstanding beginning of period.......... 30,072 28,860 30,072 28,860
Incremental shares applicable to Stock
Warrants/Stock Options and Restricted Stock... 73 377 62 376
Acquisition of Fickes and Stone
Knightsbridge Interests....................... 173 347 173 347
Redemption of Series C Preferred Stock.......... -- 692 -- 348
Treasury shares................................. (1,117) (1,010) (1,114) (1,010)
------------- ------------- ------------- -------------
29,201 29,266 29,193 28,921
============= ============= ============= =============
Diluted:
Shares outstanding beginning of period.......... 30,072 28,860 30,072 28,860
Incremental shares applicable to Stock
Warrants/Stock Options and Restricted Stock... 73 377 62 376
Acquisition of Fickes and Stone
Knightsbridge Interests....................... 173 347 173 347
Redemption of Series C Preferred Stock.......... -- 692 -- 348
Treasury shares................................. (1,117) (1,010) (1,114) (1,010)
------------- ------------- ------------- -------------
29,201 29,266 29,193 28,921
============= ============= ============= =============
</TABLE>
40
AMENDMENT NO. 7
Dated as of April 30, 1999
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:
I.
CREDIT AGREEMENT
1. Credit Agreement. (a) 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 Amendment No. 7 (this
"Amendment") that are defined in the Credit Agreement and are not otherwise
defined herein are used herein with the meanings therein ascribed to them.
(b) The Credit Agreement as amended by this Amendment is and
shall continue to be in full force and effect and is hereby in all respects
confirmed, approved and ratified.
2. Amendments to the Credit Agreement. Upon and after the Amendment No.
7 Effective Date (as defined below), the Credit Agreement shall be amended as
follows:
(a) Section 8.29(c) of the Credit Agreement is hereby amended
by replacing the term "30th" with the term "45th".
3. Representations and Warranties. In order to induce the Banks to
execute and deliver this Amendment, the Company and each Securing Party hereby
represents and warrants as follows:
(a) The Company and each Securing Party has the power, and has
taken all necessary action (including any necessary stockholder action) to
authorize it, to execute, deliver and perform in accordance with their
respective terms, this Amendment and the Credit Agreement, as amended by this
Amendment. This Amendment has been duly executed and delivered by the duly
authorized officers of the Company and is, and the Credit Agreement, as
1
<PAGE>
amended by this Amendment is, the legal, valid and binding obligation of the
Company enforceable in accordance with its terms, except as enforceability may
be limited by any applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally. The
execution, delivery and performance in accordance with their respective terms by
the Company of this Amendment and the Credit Agreement, as amended by this
Amendment do not and (absent any change in any Applicable Law or applicable
Contract) will not (A) require any Governmental Approval or any other consent or
approval, including any consent or approval of the stockholders of the Company
or of any Subsidiary, to have been obtained, or any Governmental Registration to
have been made, other than Governmental Approvals and other consents and
approvals and Governmental Registrations that have been obtained or made, are
final and not subject to review on appeal or to collateral attack, are in full
force and effect and, in the case of any such consents or approvals required
under any Applicable Law or Contract as in effect on the Amendment No. 7
Effective Date, or (B) violate, conflict with, result in a breach of, constitute
a default under, or result in or require the creation of any Lien (other than
the Security Interest) upon any assets of the Company or any Securing Party or
any Subsidiary under (1) any Contract to which the Company, any Securing Party,
or any Subsidiary is a party or by which the Company, any Securing Party, or any
Subsidiary or any of their respective properties may be bound, or (2) any
Applicable Law. As used herein, "Governmental Approval" shall mean any
authority, consent, approval, license (or the like) or exemption (or the like)
of any governmental unit; "Governmental Registration" shall mean any
registration or filing (or the like) with, or report or notice (or the like) to,
any governmental unit.
(b) The Company will be, before the Section 8.29 Effective
Date, duly authorized by each of the Operating Bank Account Subsidiaries to
authorize The Bank of New York and the other Depositary Banks to take the
actions specified in Section 8.29(b)(i), other than any such action that would
violate an Applicable Law applicable to an Insurance Company or any Subsidiary
of an Insurance Company.
(c) (i) Each Insurance Company is presently transferring funds
to Operating Bank Account Subsidiaries in amounts and at times that are
consistent with its past practices and there has been no material deviation from
those past practices at any time during the six months ending on the Amendment
No. 7 Effective Date.
(ii) Each Subsidiary of an Insurance Company is
presently transferring funds to the Insurance Company of which it is a
Subsidiary, or to Operating Bank Account Subsidiaries, in amounts and at times
that are consistent with its past practices, and there has been no material
deviation from those past practices at any time during the 6 months ending on
the Amendment No. 7 Effective Date.
(d) Each of the foregoing representations and warranties
shall be made at and as of the Amendment No. 7 Effective Date.
4. Conditions to Effectiveness: Amendment No. 7 Effective Date. This
Amendment shall be effective as of the date first written above, but shall not
become effective as of such date until the date (the "Amendment No. 7 Effective
Date") that the Administrative Agent shall have received this Amendment duly
executed by the Company and the Majority Banks.
2
<PAGE>
5. Governing Law. The rights and duties of the Company, the Agent and
the Banks under this Amendment shall, pursuant to New York General Obligations
Law Section 5-1401, be governed by the law of the State of New York.
6. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
7. Headings. Section headings in this Amendment are included herein for
convenience and reference only and shall not constitute a part of this Amendment
for any other purpose.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 7 to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /s/Scott D. Silverman
--------------------------------
Name: Scott D. Silverman
Title: Executive Vice President
THE BANK OF NEW YORK, as
Administrative Agent, Collateral Agent and as a Bank
By: /s/Peter W. Helt
--------------------------------
Name: Peter W. Helt
Title: Vice President
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By: /s/Lawrence M. Karp
--------------------------------
Name: Lawrence M. Karp
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as a Managing Agent and as a Bank
By: /s/Richard A. Peterson
--------------------------------
Name: Richard A. Peterson
Title: First Vice President
<PAGE>
NATIONSBANK, N.A., as a Managing Agent
and as a Bank
By: /s/William E. Livingstone, IV
--------------------------------
Name: William E. Livingstone, IV
Title: Managing Director
FLEET NATIONAL BANK, as a Co-Agent
and as a Bank
By:
--------------------------------
Name:
Title:
MELLON BANK, N.A., as a Co-Agent
and as a Bank
By: /s/Gary A. Saul
--------------------------------
Name: Gary A. Saul
Title: Vice President
BANK OF MONTREAL, as a Co-Agent
and as a Bank
By: /s/Thomas E. McGraw
--------------------------------
Name: Thomas E. McGraw
Title: Director
CIBC INC., as a Co-Agent and as a Bank
By: /s/Gerald Girardi
--------------------------------
Name: Gerald Girardi
Title: Executive Director
CIBC World Markets Corp. As Agent
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH &
GRAND CAYMAN BRANCH, as a Co-Agent
and as a Bank
By: /s/Lloyd C. Stevens and /s/Lisa Kim-Centrillo
---------------------------------------------
Name: Lloyd C. Stevens and Lisa Kim-Centrillo
Title: Vice President
SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION
By:
--------------------------------
Name:
Title:
BANK ONE, TEXAS N.A.
By: /s/Richard A. Peterson
--------------------------------
Name: Richard A. Peterson
Title: Officer
FIRST UNION NATIONAL BANK
By:
--------------------------------
Name:
Title:
BEAR STEARNS & CO., INC.
By:
--------------------------------
Name:
Title:
<PAGE>
SG COWEN SECURITIES CORPORATION
By: /s/Michael J. Gelblet
--------------------------------
Name: Michael J. Gelblet
Title: Director
ING (U.S.) CAPITAL CORPORATION
By:
--------------------------------
Name:
Title:
AMENDMENT NO. 8
Dated as of May 14, 1999
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:
I.
CREDIT AGREEMENT
1. Credit Agreement. (a) 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 Amendment No. 8 (this
"Amendment") that are defined in the Credit Agreement and are not otherwise
defined herein are used herein with the meanings therein ascribed to them.
(b) The Credit Agreement as amended by this Amendment is and
shall continue to be in full force and effect and is hereby in all respects
confirmed, approved and ratified.
2. Amendments to the Credit Agreement. Upon and after the Amendment No.
8 Effective Date (as defined below), the Credit Agreement shall be amended as
follows:
(a) Section 8.29(c) of the Credit Agreement is hereby amended
by replacing the term "45th" with the term "52nd".
3. Representations and Warranties. In order to induce the Banks to
execute and deliver this Amendment, the Company and each Securing Party hereby
represents and warrants as follows:
(a) The Company and each Securing Party has the power, and has
taken all necessary action (including any necessary stockholder action) to
authorize it, to execute, deliver and perform in accordance with their
respective terms, this Amendment and the Credit Agreement, as amended by this
Amendment. This Amendment has been duly executed and
1
<PAGE>
delivered by the duly authorized officers of the Company and is, and the Credit
Agreement, as amended by this Amendment is, the legal, valid and binding
obligation of the Company enforceable in accordance with its terms, except as
enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally. The execution, delivery and performance in
accordance with their respective terms by the Company of this Amendment and the
Credit Agreement, as amended by this Amendment do not and (absent any change in
any Applicable Law or applicable Contract) will not (A) require any Governmental
Approval or any other consent or approval, including any consent or approval of
the stockholders of the Company or of any Subsidiary, to have been obtained, or
any Governmental Registration to have been made, other than Governmental
Approvals and other consents and approvals and Governmental Registrations that
have been obtained or made, are final and not subject to review on appeal or to
collateral attack, are in full force and effect and, in the case of any such
consents or approvals required under any Applicable Law or Contract as in effect
on the Amendment No. 8 Effective Date, or (B) violate, conflict with, result in
a breach of, constitute a default under, or result in or require the creation of
any Lien (other than the Security Interest) upon any assets of the Company or
any Securing Party or any Subsidiary under (1) any Contract to which the
Company, any Securing Party, or any Subsidiary is a party or by which the
Company, any Securing Party, or any Subsidiary or any of their respective
properties may be bound, or (2) any Applicable Law. As used herein,
"Governmental Approval" shall mean any authority, consent, approval, license (or
the like) or exemption (or the like) of any governmental unit; "Governmental
Registration" shall mean any registration or filing (or the like) with, or
report or notice (or the like) to, any governmental unit.
(b) The Company will be, before the Section 8.29 Effective
Date, duly authorized by each of the Operating Bank Account Subsidiaries to
authorize The Bank of New York and the other Depositary Banks to take the
actions specified in Section 8.29(b)(i), other than any such action that would
violate an Applicable Law applicable to an Insurance Company or any Subsidiary
of an Insurance Company.
(c) (i) Each Insurance Company is presently transferring funds
to Operating Bank Account Subsidiaries in amounts and at times that are
consistent with its past practices and there has been no material deviation from
those past practices at any time during the six months ending on the Amendment
No. 8 Effective Date.
(ii) Each Subsidiary of an Insurance Company is
presently transferring funds to the Insurance Company of which it is a
Subsidiary, or to Operating Bank Account Subsidiaries, in amounts and at times
that are consistent with its past practices, and there has been no material
deviation from those past practices at any time during the 6 months ending on
the Amendment No. 8 Effective Date.
(d) Each of the foregoing representations and warranties
shall be made at and as of the Amendment No. 8 Effective Date.
4. Conditions to Effectiveness: Amendment No. 8 Effective Date. This
Amendment shall be effective as of the date first written above, but shall not
become effective as of such date until the date (the "Amendment No. 8 Effective
Date") that the Administrative Agent shall have received this Amendment duly
executed by the Company and the Majority Banks.
2
<PAGE>
5. Governing Law. The rights and duties of the Company, the Agent and
the Banks under this Amendment shall, pursuant to New York General Obligations
Law Section 5-1401, be governed by the law of the State of New York.
6. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
7. Headings. Section headings in this Amendment are included herein for
convenience and reference only and shall not constitute a part of this Amendment
for any other purpose.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 8 to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /s/Scott D. Silverman
--------------------------------
Name: Scott D. Silverman
Title: Executive Vice President
THE BANK OF NEW YORK, as
Administrative Agent, Collateral Agent and as a Bank
By: /s/Peter W. Helt
--------------------------------
Name: Peter W. Helt
Title: Vice President
THE CHASE MANHATTAN BANK, as a
Managing Agent and as a Bank
By: /s/Lawrence M. Karp
--------------------------------
Name: Lawrence M. Karp
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
as a Managing Agent and as a Bank
By:
--------------------------------
Name:
Title:
<PAGE>
NATIONSBANK, N.A., as a Managing Agent
and as a Bank
By: /s/William E. Livingstone, IV
--------------------------------
Name: William E. Livingstone, IV
Title: Managing Director
FLEET NATIONAL BANK, as a Co-Agent
and as a Bank
By: /s/Donald R. Nicholson
--------------------------------
Name: Donald R. Nicholson
Title: Sr. Vice President
MELLON BANK, N.A., as a Co-Agent
and as a Bank
By: /s/Gary A. Saul
--------------------------------
Name: Gary A. Saul
Title: Vice President
BANK OF MONTREAL, as a Co-Agent
and as a Bank
By:
--------------------------------
Name:
Title:
CIBC INC., as a Co-Agent and as a Bank
By:
--------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH &
GRAND CAYMAN BRANCH, as a Co-Agent
and as a Bank
By: /s/Lloyd C. Stevens and /s/Rajiv Gupta
---------------------------------------
Name: Lloyd C. Stevens and Rajiv Gupta
Title: Vice President and Assistant Vice President
SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION
By:
--------------------------------
Name:
Title:
BANK ONE, TEXAS N.A.
By:
--------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By: /s/Kimberly Shaffer
--------------------------------
Name: Kimberly Shaffer
Title: Vice President
BEAR STEARNS & CO., INC.
By: /s/Gregory L. Hanley
--------------------------------
Name: Gregory L. Hanley
Title: Senior Managing Director
<PAGE>
SG COWEN SECURITIES CORPORATION
By: /s/Michael Gelblet
--------------------------------
Name: Michael Gelblet
Title: Director
ING (U.S.) CAPITAL CORPORATION
By:
--------------------------------
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 2,409,214
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,027
<MORTGAGE> 41,544
<REAL-ESTATE> 7,433
<TOTAL-INVEST> 2,788,693
<CASH> 106,229
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 151,092
<TOTAL-ASSETS> 4,194,516
<POLICY-LOSSES> 2,583,513
<UNEARNED-PREMIUMS> 39,741
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<POLICY-HOLDER-FUNDS> 72,241
<NOTES-PAYABLE> 361,887
0
263,039
<COMMON> 303
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205,887
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<INVESTMENT-GAINS> (1,068)
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<BENEFITS> 221,626
<UNDERWRITING-AMORTIZATION> 29,057
<UNDERWRITING-OTHER> 174,804
<INCOME-PRETAX> (52,928)
<INCOME-TAX> 7,943
<INCOME-CONTINUING> 60,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,871)
<EPS-BASIC> (2.39)
<EPS-DILUTED> (2.39)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
