- --------------------------------------------------------------------------------
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 March 31, 2000
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
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 May 9, 2000, was 29,194,731.
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
TABLE OF CONTENTS
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..........18
Independent Auditors' Review Report.........................19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk...32
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings............................................33
Item 6. Exhibits and Reports on Form 8-K.............................35
SIGNATURE
INDEX TO EXHIBITS
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 1,931,371 $ 2,363,690
Equity securities available for sale, at fair value............................ 38 2,008
Mortgage loans on real estate, net............................................. 17,339 20,032
Policy loans................................................................... 150,491 197,287
Other investments.............................................................. 28,226 26,570
------------ ------------
Total investments ........................................................... 2,127,465 2,609,587
Cash and cash equivalents......................................................... 75,763 141,636
Accrued investment income......................................................... 28,561 37,922
Accounts and notes receivable..................................................... 3,127 11,935
Present value of insurance in force............................................... 114,038 119,766
Deferred policy acquisition costs................................................. 75,452 113,726
Costs in excess of net assets acquired............................................ 78,878 79,725
Income taxes, primarily deferred.................................................. 82,508 111,517
OTHER ASSETS...................................................................... 74,310 62,334
------------ ------------
Total assets ................................................................ $ 2,660,102 $ 3,288,148
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................ $ 2,245,926 $ 2,756,957
Notes payable.................................................................. 179,646 279,646
Accrued expenses and other liabilities......................................... 97,827 98,579
------------ ------------
Total liabilities 2,523,399 3,135,182
------------ ------------
Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized, issued and outstanding 2,300,000................................... 122,157 120,216
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption
value; authorized, issued and outstanding 2,875,000............................ 154,251 151,736
Common stock, $.01 par value; authorized 100,000,000; issued and outstanding
30,143,416..................................................................... 303 303
Additional paid-in capital........................................................ 428,974 428,974
Accumulated other comprehensive income (loss), net of income taxes (benefits)..... (51,164) (62,712)
Accumulated deficit............................................................... (486,030) (453,487)
Treasury shares (948,685 at March 31, 2000 and 928,685 at December 31, 1999)...... (31,450) (30,829)
Notes receivable and other assets secured by common stock......................... (338) (1,235)
------------ ------------
Total shareholders' equity................................................... 136,703 152,966
------------ ------------
Total liabilities and shareholders' equity .................................. $ 2,660,102 $ 3,288,148
============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------- -------------
REVENUES:
<S> <C> <C>
Premiums..................................................................... $ 12,356 $ 81,392
Interest sensitive policy product charges.................................... 25,920 32,480
Net investment income........................................................ 43,123 86,107
Other income................................................................. 2,965 10,945
Net gains (losses) from the sale of investments.............................. (2,759) 2,179
Net gains (losses) from sales of subsidiaries................................ (8,383) 996
------------- -------------
Total revenues........................................................... 73,222 214,099
------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits........................................................ 57,256 128,627
Amortization of present value of insurance in force and deferred
policy acquisition costs.................................................. 9,622 22,369
Amortization of costs in excess of net assets acquired....................... 847 2,028
Underwriting and other administrative expenses............................... 26,560 53,718
Interest and amortization of deferred debt issuance costs.................... 6,186 14,120
Restructuring charge......................................................... -- 5
Impairment provision associated with assets of businesses held for sale...... -- 30,287
------------- -------------
Total benefits and expenses.............................................. 100,471 251,154
------------- -------------
Loss before income taxes........................................................ (27,249) (37,055)
Income taxes................................................................. 838 4,600
------------- -------------
Net loss ....................................................................... (28,087) (41,655)
Preferred stock dividend requirements........................................ 4,456 4,456
------------- -------------
Net loss applicable to common stock............................................. $ (32,543) $ (46,111)
============= =============
PER SHARE INFORMATION:
Basic:
Loss applicable to common stock.............................................. $ (1.11) $ (1.58)
============= =============
Common shares used in computing basic loss per share............................ 29,376 29,184
============= =============
Diluted:
Loss applicable to common stock.............................................. $ (1.11) $ (1.58)
============= =============
Common shares used in computing diluted loss per share.......................... 29,376 29,184
============= =============
COMPREHENSIVE LOSS INFORMATION:
Net loss..................................................................... $ (28,087) $ (41,655)
Change in unrealized foreign currency translation gains,
net of income taxes....................................................... -- 1,070
Change in unrealized holding gains (losses) arising during the period
on securities available for sale, net of income taxes (benefits)
of $894 and $(15,230)..................................................... (1,110) (26,942)
Reclassification adjustments for (gains) losses included in net loss......... 2,774 (1,835)
Decrease in unrealized holding (gains) losses resulting from the sale
of subsidiaries, net of income taxes (benefits) of $(5,322) and $175. .... 9,884 (488)
------------- -------------
Total comprehensive loss applicable to common stock...................... $ (16,539) $ (69,850)
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (28,087) $ (41,655)
Adjustments to reconcile loss before extraordinary charge to net cash
used by operating activities:
Impairment provision associated with Assets of Businesses Held for Sale.... -- 30,287
Net (gain) loss from sales of subsidiaries................................. 8,383 (996)
Capitalization of deferred policy acquisition costs........................ (7,945) (26,864)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net.......... 9,400 23,042
Increase (decrease) in policy liabilities, accruals and other
policyholder funds....................................................... (9,190) 1,032
Deferred income taxes...................................................... (775) 830
Other, net................................................................. 18,158 2,319
------------- -------------
Net cash used by operating activities.................................. (10,056) (12,005)
------------- -------------
Cash flows from investing activities:
Cash received from sales of subsidiaries, net of cash and short-term
investments of $38,877 and $6,482 of subsidiaries sold....................... 64,449 33,740
Purchases of fixed maturity securities available for sale...................... (73,587) (435,218)
Maturities of fixed maturity securities available for sale..................... 44,573 119,117
Sales of fixed maturity securities available for sale.......................... 36,018 341,378
Acquisitions and originations of mortgage loans................................ -- (844)
Sales of mortgage loans........................................................ -- 195
Principal collected on mortgage loans.......................................... 2,645 13,021
Other, net..................................................................... (2,662) 2,425
------------- -------------
Net cash provided by investing activities.................................. 71,436 73,814
------------- -------------
Cash flows from financing activities:
Reduction in notes payable..................................................... (100,000) (36)
Receipts from interest sensitive policies credited to policyholder
account balances............................................................. 37,846 57,774
Return of policyholder account balances on interest sensitive products......... (65,099) (145,075)
------------- -------------
Net cash used by financing activities...................................... (127,253) (87,337)
------------- -------------
Net decrease in cash....................................................... (65,873) (25,528)
Cash and cash equivalents at beginning of period (including $131,531 of cash
and cash equivalents classified as businesses held for sale in 1999)........... 141,636 224,260
------------- -------------
Cash and cash equivalents at end of period (including $76,211 of cash and
cash equivalents classified as assets of businesses held for sale in 1999)..... $ 75,763 $ 198,732
============= =============
Supplemental disclosures:
Income taxes paid (refunded)................................................. $ -- $ (211)
============= =============
Interest paid................................................................ $ 3,493 $ 7,330
============= =============
Non-cash financing activities:
Accrued and unpaid preferred stock dividends................................. $ 4,456 $ 4,456
============= =============
Stock received in consideration for notes receivable......................... $ 621 $ --
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
5
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except per share amounts)
1. BASIS OF PRESENTATION
PennCorp Financial Group, Inc. ("PennCorp" or the "Company") is an insurance
holding company. Through its wholly-owned life insurance subsidiary; Pacific
Life and Accident Insurance Company ("PLAIC"), and its wholly-owned
subsidiaries, Southwestern Life Insurance Company ("Southwestern Life") and
Security Life and Trust Insurance Company ("Security Life"), the Company offers
a broad range of life, accumulation and accident and sickness insurance products
through general agents. Additionally, the Company owns KB Management, LLC ("KB
Management") which provides management and advisory services to the Company and
its insurance subsidiaries; Marketing One, Inc. ("Marketing One"), a third party
marketing organization and Southwestern Financial Corporation ("SW Financial").
As part of a subsidiary realignment, Southwestern Life and Security Life became
wholly-owned subsidiaries of PLAIC as of July 30, 1999 and January 31, 2000,
respectively.
Previously, the Company also owned Pennsylvania Life Insurance Company ("PLIC")
and its wholly-owned subsidiary, PennCorp Life Insurance Company (collectively
referred to as "Penn Life") (sold July 30, 1999); Peninsular Life Insurance
Company ("Peninsular") (sold July 30, 1999); Professional Insurance Company
("Professional") (sold March 31, 1999); Pioneer Security Life Insurance Company
("Pioneer Security") (sold February 4, 2000) 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") (sold February 4, 2000); Constitution Life Insurance Company
("Constitution") (sold July 30, 1999), Union Bankers Insurance Company ("Union
Bankers") (sold July 30, 1999), and Marquette National Life Insurance Company
("Marquette") (sold July 30, 1999); and Occidental Life Insurance Company
("OLIC") (sold February 4, 2000). United Life and Annuity Insurance Company
("United Life") (sold April 30, 1999) and KIVEX, Inc. ("KIVEX") (sold June 30,
1999). Operating results of all the subsidiaries sold have been reported herein
as "Businesses Sold".
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.
As further discussed in Note 3, PennCorp filed a voluntary petition for relief
under Chapter 11 ("Chapter 11") of title 11 of the United States Bankruptcy Code
("Bankruptcy Code"). The financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") on a going concern basis which
contemplates realization of assets and satisfaction of liabilities in the normal
course of business. 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.
Certain prior period amounts have been reclassified to conform to current period
presentation.
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, 1999.
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
6
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 will adopt SFAS No. 133 on January 1,
2001. The Company is currently evaluating SFAS No. 133 but does not expect its
adoption to have a material effect on its consolidated financial statements.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On January 10, 2000, the Company announced that it had agreed to sell its
Financial Services Division to Reassure America Life Insurance Company
("Reassure America") for $260,000 subject to certain adjustments, and would
accomplish such transaction through the filing of a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code.
On February 7, 2000 (the "Petition Date"), PennCorp filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Since
the Petition Date, PennCorp has continued to operate and manage its assets and
business as a debtor-in-possession as authorized by provisions of the Bankruptcy
Code. None of the Company's insurance subsidiaries are involved in the
Bankruptcy filing and management expects that the Company's insurance businesses
will continue to operate in their normal course.
On February 28, 2000, the Bankruptcy Court issued an order scheduling a hearing
to consider approval of the sale agreement with Reassure America, subject to
higher or better offers, and establishing the procedures for the submission of
competing offers ("Sales Procedure Order").
On March 15, 2000, the Company received a competing bid in the form of a
recapitalization plan submitted by Inverness/Phoenix Capital LLC ("Inverness")
and Vicuna Advisors, LLC ("Vicuna") on behalf of the unofficial ad hoc committee
of preferred stockholders, and Mr. Bernard Rapoport ("Rapoport") and Mr. John
Sharpe ("Sharpe") ("Recapitalization Plan"). On March 23, 2000 the Company's
Board of Directors selected the Recapitalization Plan as the final accepted
offer pursuant to the bidding procedures approved as part of the Sales Procedure
Order. On March 24, 2000, the Bankruptcy Court approved the Board of Director's
selection of the Recapitalization Plan.
The proposed Recapitalization Plan provides that the preferred stockholders will
receive one share of common stock of the reorganized company for each share of
outstanding preferred stock. In addition, the preferred stockholders will have
an opportunity, pursuant to a rights offering, to purchase .3787 shares of
common stock of the reorganized company for each share of outstanding preferred
stock owned at a purchase price of $12.50 per share. Inverness and Vicuna have
issued a standby commitment letter to the Company, committing $24,500 to fully
underwrite the rights offering. In addition, Rapoport and Sharpe have committed
to purchase equity in the recapitalized company amounting to $20,000 and $3,000,
respectively. The standby commitment letter and the Rapoport and Sharpe
investment are subject to certain conditions.
Under the Recapitalization Plan, all existing shares of the Company's common
stock will be canceled for no value, and the Company's existing senior and
subordinated debt, with principal aggregating approximately $179,646 at March
31, 2000, will be paid in full in cash. Any and all other claims and liabilities
of the Company will be paid in accordance with their terms.
Consummation of the recapitalization transaction is subject to certain
conditions including regulatory approvals, the consummation of a $95,000 credit
facility, the consummation of a proposed transaction whereby Southwestern Life
and Security Life will reinsure substantially all of their existing deferred
annuity blocks of business, an order confirming the Company's plan of
reorganization that incorporates the proposed recapitalization transaction shall
have been entered by the Bankruptcy Court and such order shall be unstayed and
in full force and effect, and the closing of the recapitalization shall occur no
later than December 31, 2000. The definitive agreements for the credit facility
and the reinsurance transaction will contain conditions to consummation
including no material adverse change as defined in the proposed $95,000 credit
agreement.
7
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 14, 2000 the Texas Department of Insurance issued its order approving
the Form A acquisition statement submitted by Rapoport and Inverness. On May 8,
2000, the reinsurance transaction was consummated.
The Company has received irrevocable commitments from holders of approximately
71 percent of the Company's two outstanding series of preferred stock indicating
that they will vote in favor of the Recapitalization Plan upon solicitation by
the Company which, when such shares are voted, will satisfy the voting
requirements for confirmation of a plan of reorganization. Inverness, Vicuna,
Rapoport and Sharpe have deposited an aggregate of $47,500 into an escrow
account, such that those funds will be used to make their respective committed
equity investments in the recapitalized company once the Recapitalization Plan
is consummated. A portion of such funds may be forfeited to the Company under
certain circumstances.
Following the filing of PennCorp's Chapter 11 petition, the New York Stock
Exchange ("NYSE") suspended all trading in the Company's listed securities and
has applied to the Securities and Exchange Commission for the removal of the
Company's common stock and $3.375 convertible preferred stock listing and
registration on the NYSE. In April 2000, following the approval by the
Securities and Exchange Commission of the NYSE's applications, the Company's
common stock and $3.375 convertible preferred stock were removed from listing
and registration on the NYSE.
The condensed financial statements of the debtor-in-possession, PennCorp, as of
March 31, 2000 and for the period from February 7, 2000 to March 31, 2000 are
presented as follows:
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
AS OF MARCH 31, 2000
(AS FILED WITH THE BANKRUPTCY COURT)
ASSETS
Cash and cash equivalents.................................. $ 17,444
Investment in subsidiaries................................. 313,389
Accounts receivable........................................ 103
Prepaid expenses and other assets.......................... 4,315
-----------
Total assets............................................. $ 335,251
===========
POST-PETITION LIABILITIES
Accounts payable and accrued expenses...................... $ 153
-----------
PRE-PETITION LIABILITIES
Notes payable.............................................. 179,646
Due to affiliates.......................................... 1,322
Accrued expenses and other liabilities..................... 9,388
-----------
190,356
SHAREHOLDERS' EQUITY
Pre-petition stockholders' equity.......................... 157,584
Post-petition cumulative loss.............................. (12,842)
-----------
Total shareholders' equity............................. 144,742
-----------
Total liabilities and shareholders' equity............. $ 335,251
===========
The difference between the equity of $144,742 as reported to the Bankruptcy
Court on April 17, 2000 and the equity of $137,175 as reported in the
accompanying consolidated financial statements is principally due to accrual of
the break fee of $6,000 associated with termination of the agreement to sell
Southwestern Life and Security Life to Reassure America, the accrual of interest
of $1,620 for the 9 1/4% senior subordinated notes, which was stayed by the
bankruptcy filing and changes in the valuation of PennCorp's investment in
subsidiaries. For many of the subsidiaries, financial statements for the three
8
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
months ended March 31, 2000 were not available at the time of the reporting to
the Bankruptcy Court which is 15 calendar days from the end of the period.
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 7, 2000 TO MARCH 31, 2000
(AS FILED WITH THE BANKRUPTCY COURT)
Revenue:
Interest income............................................... $ 116
Equity in losses of subsidiaries.............................. (9,359)
-----------
Total revenue............................................. (9,243)
-----------
Operating expenses:
General and administrative expenses........................... 457
Interest and amortization of deferred debt issuance costs..... 1,416
-----------
Total operating expenses.................................. 1,873
-----------
Loss before reorganization items and income taxes................ (11,116)
Reorganization items:
Professional fees............................................. (1,716)
-----------
Loss before income taxes......................................... (12,832)
Income taxes..................................................... (10)
-----------
Net loss.................................................. $ (12,842)
===========
PENNCORP FINANCIAL GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 7, 2000 TO MARCH 31, 2000
(AS FILED WITH THE BANKRUPTCY COURT)
Cash flows from operating activities:
Interest received............................................. $ 49
Interest paid................................................. (436)
Franchise tax refunds......................................... 27
Other operating expenses paid................................. (112)
Payments to affiliates........................................ (855)
-----------
Net cash used by operating activities before
reorganization items..................................... (1,327)
-----------
Cash flows from reorganization items:
Professional fees paid........................................ (272)
-----------
Net decrease in cash............................................. (1,599)
Cash and cash equivalents at beginning of period................. 19,043
-----------
Cash and cash equivalents at end of period....................... $ 17,444
===========
9
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISPOSITIONS AND OTHER EVENTS
On February 4, 2000, the Company consummated the sale of the Payroll Sales
Division (the Payroll Sales Division is comprised of AA Life and OLIC) receiving
total cash proceeds of approximately $103,300. As a result of the sale,
unrealized losses on securities available for sale decreased by $9,884. The
Company recognized a loss of $8,383 from the sale. The Company used $100,000 of
the proceeds to repay the Bank Credit Facility.
As of December 31, 1999 Southwestern Life owned 66,555 shares of redeemable
preferred stock of Portsmouth Financial Group Inc. ("Portsmouth"), an affiliate.
During the period ended March 31, 2000, Portsmouth was reorganized and merged
into ROP Financial Group ("ROP"), and became a wholly-owned subsidiary of
Southwestern Life. ROP has been included in the consolidated financial
statements as of March 31, 2000. The principal impact on the consolidated
financial statements is to increase other assets and other liabilities by
$15,148 and $10,448, respectively, and with a corresponding decrease in invested
assets of $4,700.
Associated with the termination of the existing employment agreements of two
executives of the Company, the Company canceled non-recourse notes receivable
secured by common stock of $621 in exchange for 20,000 shares of the Company's
common stock owned by the two executives. The result was to increase treasury
stock and decrease notes receivable.
5. NOTES PAYABLE
In anticipation of the filing of the Chapter 11 case, the Company and the
lenders party to its existing bank credit facility ("Bank Credit Facility")
executed a forbearance agreement ("Forbearance Agreement") whereby the lenders
agreed to forbear from exercising their remedies under the Bank Credit Facility
as a result of the event of default that occurred under the Bank Credit Facility
when the Company commenced the Chapter 11 case. In connection with the
commencement of the Chapter 11 Case, the Bank Credit Facility was superseded by
a Cash Collateral Agreement dated as of February 8, 2000 (as amended, the "Cash
Collateral Agreement"), by and among the Company, the lenders from time to time
party thereto and The Bank of New York, as administrative agent. The Cash
Collateral Agreement provides a mechanism for the Company to repay its currently
outstanding borrowings and establishes certain covenants with which the Company
must comply until all of the Company's outstanding loans (plus interest thereon)
are repaid. Certain covenants strictly define the Company's ability to utilize
any and all cash that is maintained in the cash collateral account held by the
agent lender. As a result, the Company may utilize cash from the cash collateral
account for only predetermined types of expenses and in specified amounts.
Management believes the Company will likely have sufficient financial
flexibility and projected liquidity sources to meet all cash requirements until
the maturity of the cash collateral agreement on June 30, 2000 (see Note 10).
The Company has prepared a plan of reorganization which was filed with the
Delaware Bankruptcy Court on April 5, 2000 which provides for the repayment of
such indebtedness (see Note 10). With respect to current liquidity projections,
there can be no assurances actual liquidity sources will develop. In the event
of a shortfall of actual liquidity sources, and as a result of the necessity of
the Company to establish a new credit facility, the Company will explore options
to generate any necessary liquidity, such as: (i) the sale of subsidiaries and
(ii) obtaining 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.
10
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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 Payroll Sales Division
(sold February 4, 2000) (see Note 4), the Career Sales Division (sold July 30,
1999), KIVEX (sold June 30, 1999), Professional (sold March 31, 1999) and the
United Life Assets (sold April 30, 1999). The pro forma statement of operations
information for the three month periods ended March 31, 2000 and 1999 gives
effect to such sales as if they had occurred on January 1, 1999. 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, 1999, or results which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
----------------------------
AS REPORTED PRO FORMA
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Total revenues............................................................... $ 73,222 $ 70,954
Loss before income taxes..................................................... (27,249) (21,632)
Net loss..................................................................... (28,087) (21,895)
Net loss applicable to common stock.......................................... (32,543) (26,351)
PER SHARE INFORMATION:
Net loss applicable to common stock-basic.................................. $ (1.11) $ (0.90)
Net loss applicable to common stock-diluted................................ (1.11) (0.90)
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
----------------------------
AS REPORTED PRO FORMA
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Total revenues............................................................... $ 214,099 $ 82,532
Loss before income taxes..................................................... (37,055) (18,995)
Net loss..................................................................... (41,655) (19,016)
Net loss applicable to common stock.......................................... (46,111) (23,472)
PER SHARE INFORMATION:
Net loss applicable to common stock-basic.................................. $ (1.58) $ (0.80)
Net loss applicable to common stock-diluted................................ (1.58) (0.80)
</TABLE>
11
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING CHARGES
The Company developed restructuring plans to realign or consolidate certain
operations resulting in restructuring costs incurred in 1999 (the "1999 Plan"),
the fourth quarter of 1998 (the "4th Quarter 1998 Plan") and the first quarter
of 1998 (the "1st Quarter 1998 Plan"). The following reflects the impact of
activity for the three months ended March 31, 2000 and 1999 on the restructuring
accrual balances under the 1999 Plan, the 4th Quarter 1998 Plan and the 1st
Quarter 1998 Plan.
<TABLE>
<CAPTION>
PAID OR
BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31,
1999 PLAN 1999 LIABILITY ADJUSTMENTS 2000
--------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Severance and related benefits................... $ 2,374 $ (1,096) $ -- $ 1,278
ESTIMATED HOLDING COSTS OF VACATED FACILITIES.... 2,122 -- -- 2,122
------------ ----------- ----------- -----------
$ 4,496 $ (1,096) $ -- $ 3,400
============ =========== =========== ===========
4TH QUARTER 1998 PLAN
---------------------
SEVERANCE AND RELATED BENEFITS................... $ 1,067 $ (75) $ -- $ 992
============ =========== =========== ===========
1ST QUARTER 1998 PLAN
----------------------
ESTIMATED HOLDING COSTS OF VACATED FACILITIES.... $ 1,814 $ (345) $ -- $ 1,469
============ =========== =========== ===========
<CAPTION>
PAID OR
BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31,
4TH QUARTER 1998 PLAN 1998 LIABILITY ADJUSTMENTS 1999
--------------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Severance and related benefits................... $ 2,274 $ (370) $ -- $ 1,904
ESTIMATED CONTRACT TERMINATION COSTS............. 32 -- -- 32
------------ ----------- ----------- -----------
$ 2,306 $ (370) $ -- $ 1,936
============ =========== =========== ===========
1ST QUARTER 1998 PLAN
----------------------
Severance and related benefits................... $ 619 $ (289) $ 5 $ 335
ESTIMATED HOLDING COSTS OF VACATED FACILITIES.... 2,205 -- -- 2,205
------------ ----------- ----------- -----------
$ 2,824 $ (289) $ 5 $ 2,540
============ =========== =========== ===========
</TABLE>
12
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BUSINESS SEGMENT INFORMATION
As a result of the sale of the Payroll Sales Division on February 4, 2000, the
operating results of the Payroll Sales Division have been included in the
Business Sold for all periods presented.
Segment data as of March 31, 2000 and December 31, 1999, and for the three
months ended March 31, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
PREMIUMS AND POLICY PRODUCT CHARGES:
Financial Services Division.............................................. $ 30,703 $ 33,786
Businesses Sold (United States).......................................... 7,573 69,162
Businesses Sold (Canada)................................................. -- 10,924
------------- -------------
$ 38,276 $ 113,872
============= =============
OPERATING PROFIT (LOSS):
Financial Services Division.............................................. $ 1,635 $ 2,542
Businesses Sold.......................................................... 2,806 10,179
------------- -------------
$ 4,441 $ 12,721
============= =============
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
TOTAL ASSETS:
Financial Services Division.............................................. $ 2,635,321 $ 2,645,337
Businesses Sold.......................................................... -- 598,011
Corporate and other...................................................... 24,781 44,800
------------- -------------
$ 2,660,102 $ 3,288,148
============= =============
</TABLE>
Reconciliations of segment data to the Company's consolidated data are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
TOTAL REVENUES:
Segments--premiums and policy product charges............................. $ 38,276 $ 113,872
Net investment income.................................................... 43,123 86,107
Other income............................................................. 2,965 10,945
Net gains (losses) from sale of investments.............................. (2,759) 2,179
Net gains (losses) from sales of subsidiaries............................ (8,383) 996
------------- -------------
$ 73,222 $ 214,099
============= =============
LOSS BEFORE INCOME TAXES:
Segments................................................................. $ 4,441 $ 12,721
Corporate expenses and eliminations...................................... (14,362) (8,539)
Impairment provision associated with assets of Businesses Sold........... -- (30,287)
Interest and amortization of deferred debt issuance costs................ (6,186) (14,120)
Net gains (losses) on the sale of investments............................ (2,759) 2,179
Net gains (losses) from sales of subsidiaries........................... (8,383) 996
Restructuring costs...................................................... -- (5)
------------- -------------
$ (27,249) $ (37,055)
============= =============
</TABLE>
13
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1998, the first of ten class-action complaints was
filed in the United States District Court for the Southern District of New York
("District Court") 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 District Court appointed lead
plaintiffs on behalf of shareholders and noteholders. The District 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. As explained below, the primary
insurer has agreed in principle to contribute to a settlement of the litigation.
Following settlement discussions with the Plaintiffs' counsel and
representatives of the primary insurance carrier and their counsel, the parties
to the Complaint entered into a Memorandum of Understanding dated November 11,
1999 (the "Memo") containing the essential terms of a settlement.
The Memo states that $9,000 of cash plus interest accruing through the date of
consummation of the settlement, will be paid in full and final settlement of all
claims set forth in the Complaint (the "Settlement"). Of that sum, $1,500 plus
interest will be paid by the Company and $7,500 plus interest will be paid by
the Company's outside directors and officers liability insurance carrier. The
Settlement is conditioned upon, among other things, confirmatory discovery,
execution of a definitive settlement agreement and related documents, notice to
the Company's shareholders of the Settlement and final approval by the United
States District Court (with all time to appeal such approval having run or any
appeals having been resolved in favor of approval of the Settlement). During the
three months ended December 31, 1999, the Company paid the $1,500 liability
related to the settlement to an escrow account.
The Company expects that this litigation will not affect its ability to operate
through 2000. 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 the Settlement is not
consummated and 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.
14
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. During 1999 the Company initiated an
exchange program which enabled 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. On November 5, 1999,
Security Life was served with an Original Petition filed in state court in
Dallas County, Texas, asserting a class action concerning such policies. The
petition alleges that Security Life has waived the right to charge cost of
insurance charges after the eighth year on such non-smoker policies and to
increase cost of insurance charges on such smoker policies. The petition alleges
Security Life made these waivers through its marketing pieces and signed
statements by its officers. The petition also alleges that not all of the facts
were outlined in the Company's communication to its policyholders outlining the
exchange program and therefore alleges Security Life's exchange program is
deceptive. The petition asks for declaratory judgment concerning the rights of
the Plaintiffs, and the class of policyholders of such policies and for
attorney's fees. It, among other things, asks for an injunction to prevent
Security Life from charging cost of insurance charges for such non-smoker
policies or increasing cost of insurance charges on such smoker policies after
the eighth contract year. It also asks the Court to rule the releases signed by
such policyholders under the exchange program be declared null and void and
those policyholders who signed the releases be given the option of reinstating
the prior policies. Security Life denies the allegations in the petition and
intends to vigorously defend this lawsuit. The trial court in which this case is
pending has granted class certification in at least one other lawsuit involving
similar types of claims. There can be no assurances 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.
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.
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."
Since December 31, 1999 the Company has not experienced any significant
disruption in the Company's business, or an increase in the cost of the Company
doing business related to the year 2000 issue.
15
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company provided certain representations and warranties to each respective
purchaser of the businesses sold with respect to each entity's ability to
process date-sensitive information for the year 2000 and beyond. Although the
Company believes that it is in compliance with, and is not aware of any breach
of the year 2000 representations and warranties provided to the respective
purchasers, there can be no assurances that the Company is in compliance with
all such representations and warranties. A breach by the Company of such
representations and warranties could result in indemnification obligations owed
by the Company to the purchasers.
Each of the definitive purchase and sale agreements the Company has consummated
for Professional, the United Life Assets, KIVEX, the Career Sales Division and
the Payroll 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
be found in breach of certain representation and warranty provisions or upon the
occurrence of specified events contained in the purchase and sale agreements.
The Company has purchased representations and warranty insurance to cover
potential indemnification claims arising under each of the definitive purchase
and sale agreements in an aggregate amount of $20,000 for all indemnification
claims.
The Company's insurance subsidiaries are required, at least annually, to perform
cash flow and "Asset Adequacy Analysis" under differing interest rate scenarios.
At December 31, 1999, Southwestern Life failed certain of those cash flow
testing scenarios. As a result, Southwestern Life performed a series of expanded
tests. Based upon the results of these expanded tests, Southwestern Life has
determined that additional statutory reserves were not needed at December 31,
1999. Factors that may require Southwestern Life to establish additional
statutory reserves in future periods include changes in interest rates, timing
of the emergence of insurance profits, persistency of the insurance in force,
sales or reinsurance of blocks of insurance in force and mortality experience.
Management actions that may mitigate the need for these additional reserves may
include but are not limited to, new profitable business being added to the
insurance in force, reinsurance or actions that impact persistency, mortality
experience, interest spreads and costs to administer the insurance in force.
Southwestern Life periodically monitors these factors to determine if additional
statutory reserves will be required.
The Company's insurance subsidiaries had outstanding commitments to invest up to
$6,929 in various limited partnership funds and other investments.
As of March 31, 2000, the Company sold substantially all of the mortgages
originally held by United Life but retained by the Company as a part of the Sale
of the United Life Assets. The Company may be obligated to repurchase certain of
the mortgages sold. The amount of mortgages the Company may be required to
repurchase is not expected to exceed approximately $1,600. At March 31, 2000,
the Company has established a $1,200 liability related to these contingencies.
In addition, the Company has been notified by ING that it disputes certain
federal income tax calculations under the provisions of the related purchase and
sale agreement. Under the provisions of the purchase and sale agreement ING is
to provide the Company with preliminary tax returns in order for the Company to
evaluate any potential differential in tax amounts between closing and the final
return preparation. To date ING has not provided such preliminary tax returns
and hence the Company has not been able to fully evaluate the merits of ING's
claim. At March 31, 2000, the Company has established a liability of $1,151
related to this contingency.
At March 31, 2000, the Company had a contingent obligation for mortgage loans
previously sold aggregating $3,893 as a result of the Company acting as a
servicing conduit.
10. SUBSEQUENT EVENTS
The Company filed a plan of reorganization with the Bankruptcy Court on April 5,
2000. On April 28, 2000 the Bankruptcy Court approved the adequacy of the
Company's Disclosure Statement for its Plan of Reorganization. The approval
allowed the Company to commence the solicitation of votes for approval of its
Plan of Reorganization. Plan materials and ballots were mailed out the week of
May 1, 2000 with a deadline of May 31, 2000 for recording completed ballots. A
hearing to consider confirmation of the Plan and to consider any objections or
proposed amendments or modifications thereto is scheduled for June 5, 2000.
16
<PAGE>
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company, the lenders party thereto and the Bank of New York, as
administrative agent, entered into Amendment No. 2 to the Cash Collateral
Agreement and Forbearance Agreement dated as of April 25, 2000 ("Amendment No.
2"). Amendment No. 2 waived any non-compliance with the Cash Collateral
Agreement resulting solely from the consummation of the reinsurance agreement
with Reinsurance Group of America ("RGA") on the deferred annuity business of
Southwestern Life and Security Life (see below) and extended the maturity of the
Cash Collateral Agreement and Forbearance Agreement to June 30, 2000. On May 8,
2000, the Company made a principal payment of $5,000 together with interest
accrued through the date of prepayment in connection with Amendment No. 2. The
execution, delivery and performance of Amendment No. 2 were approved by the
Bankruptcy Court on April 28, 2000.
Effective May 1, 2000, Southwestern Life and Security Life consummated with RGA
a 100% indemnity coinsurance agreement of all of their respective deferred
annuity business. Southwestern Life and Security Life transferred to RGA cash of
approximately $434,250, which is equal to the amount of the reinsured statutory
policy liabilities, net of a ceding allowance of approximately $15,750. The
Company recorded a deferred gain of approximately $10,600, representing the
difference between ceded policy liabilities calculated on a GAAP basis, net of
deferred policy acquisition costs and present value of insurance in force
associated with these policies and the cash transferred net of the ceding
allowance. The deferred gain will be recognized in other income over the life of
the reinsured block of business. Southwestern Life and Security Life retained
the administration for the ceded block of business and are reimbursed by RGA for
administrative costs at the rate of approximately $5.00 per annuity contract in
force per year. During April 2000, the Company recognized approximately $5,772
in pre-tax capital losses from liquidating invested assets to provide the cash
required to consummate the reinsurance transaction.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
17
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 2000 and 1999, 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)
18
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of PennCorp Financial Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
PennCorp Financial Group, Inc. and subsidiaries as of March 31, 2000, and the
related condensed consolidated statements of operations and comprehensive loss
for the three month periods ended March 31, 2000 and 1999, and condensed
consolidated statements of cash flows for the three month periods ended March
31, 2000 and 1999. These condensed 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 condensed 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, 1999, 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 April 10, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the financial information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Our report dated April 10, 2000, on the consolidated balance sheet of PennCorp
Financial Group, Inc. as of and for the year ended December 31, 1999, contains
an explanatory paragraph that states that PennCorp Financial Group, Inc. filed a
voluntary petition for relief under chapter 11 of title 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The Company has filed a plan of reorganization and will seek
confirmation of the Recapitalization Plan by the Bankruptcy Court. Should the
recapitalization plan not be approved by the Bankruptcy Court, be materially
delayed or not be consummated, the Company may have to sell assets or otherwise
realize assets and liquidate or settle liabilities for amounts other than those
reflected in the consolidated financial statements or related notes. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated balance sheet as of December 31, 1999 does not
include any adjustments that might result from the outcome of these
uncertainties.
/S/KPMG LLP
Dallas, Texas
May 10, 2000
19
<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, 1999.
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; (3) customer response to new products,
distribution channels and marketing initiatives; (4) mortality, morbidity, and
other factors which may affect the profitability of PennCorp's insurance
products; (5) changes in the Federal income tax laws and regulations which may
affect the relative tax advantages of some of PennCorp's products; (6)
increasing competition in the sale of insurance and annuities; (7) regulatory
changes or actions, including those relating to regulation of insurance products
and of insurance companies; (8) ratings assigned to PennCorp's insurance
subsidiaries by independent rating organizations such as A.M. Best, which the
Company believes are particularly important to the sale of annuity and other
accumulation products; (9) cash flow testing at Southwestern Life; (10)
PennCorp's continued ability to address Year 2000 issues; (11) PennCorp's
ability to consummate the Recapitalization Plan; and (12) 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.
BANKRUPTCY PROCEEDINGS
On January 10, 2000, the Company announced that it had agreed to sell its
Financial Services Division to Reassure America for $260 million subject to
certain adjustments, and would accomplish such transaction through the filing of
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
On February 7, 2000, PennCorp filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. Since
the Petition Date, PennCorp has continued to operate and manage its assets and
business as a debtor-in-possession as authorized by provisions of the Bankruptcy
Code.
On February 28, 2000, the Bankruptcy Court issued an order scheduling a hearing
to consider approval of the sale agreement with Reassure America, subject to
higher or better offers, and establishing the procedures for the submission of
competing offers.
On March 15, 2000, the Company received a competing bid in the form of a
recapitalization plan submitted by Inverness and Vicuna on behalf of the
unofficial ad hoc committee of preferred stockholders, and Rapoport and Sharpe.
On March 23, 2000 the Company's Board of Directors selected the Recapitalization
Plan as the final accepted offer pursuant to the bidding procedures approved as
part of the Sales Procedure Order. On March 24, 2000, the Bankruptcy Court
approved the Board of Director's selection of the Recapitalization Plan.
The proposed Recapitalization Plan provides that the preferred stockholders will
receive one share of common stock of the reorganized company for each share of
outstanding preferred stock. In addition, the preferred stockholders will have
an opportunity, pursuant to a rights offering, to purchase .3787 shares of
common stock of the reorganized company for each share of outstanding preferred
stock owned at a purchase price of $12.50 per share. Inverness and Vicuna have
issued a stand by commitment letter to the Company, committing $24.5 million to
fully underwrite the rights offering. In addition, Rapoport and Sharpe have
committed to purchase equity in the recapitalized company amounting to $20.0
million and $3.0 million, respectively. The standby commitment letter and the
Rapoport and Sharpe investment, are subject to certain conditions.
20
<PAGE>
Under the Recapitalization Plan, all existing shares of the Company's common
stock will be canceled for no value, and the Company's existing senior and
subordinated debt, with principal currently aggregating approximately $180
million, will be paid in full in cash. Any and all other claims and liabilities
of the Company will be paid in accordance with their terms.
Consummation of the recapitalization transaction is subject to certain
conditions including regulatory approvals, the consummation of a $95 million
credit facility, the consummation of a proposed transaction whereby Southwestern
Life and Security Life will reinsure substantially all of their existing
deferred annuity blocks of business, an order confirming the Company's plan of
reorganization that incorporates the proposed recapitalization transaction shall
have been entered by the Bankruptcy Court and such order shall be unstayed and
in full force and effect, and the closing of the recapitalization shall occur no
later than December 31, 2000. The definitive agreements for the credit facility
and the reinsurance transaction will contain conditions to consummation
including no material adverse change as defined in the proposed $95 million
credit agreement.
On April 14, 2000 the Texas Department of Insurance issued its order approving
the Form A acquisition statement submitted by Rapoport and Inverness. On May 8,
2000, the reinsurance transaction was consummated.
The Company has received irrevocable commitments from holders of approximately
71 percent of the Company's two outstanding series of preferred stock indicating
that they will vote in favor of the Recapitalization Plan upon solicitation by
the Company which, when such shares are voted, will satisfy the voting
requirements for confirmation of a plan of reorganization. Inverness, Vicuna,
Rapoport and Sharpe have deposited an aggregate of $47.5 million into an escrow
account, such that those funds will be used to make their respective committed
equity investments in the recapitalized company once the Recapitalization Plan
is consummated. A portion of such funds may be forfeited to the Company under
certain circumstances.
The Company filed a plan of reorganization with the Bankruptcy Court on April 5,
2000. On April 28, 2000, the Bankruptcy Court approved the adequacy of the
Company's Disclosure Statement for its Plan of Reorganization. The approval
allowed the Company to commence the solicitation of votes for approval of its
Plan of Reorganization. Plan materials and ballots were mailed out the week of
May 1, 2000 with a deadline of May 31, 2000 for recording completed ballots. A
hearing to consider confirmation of the Plan and to consider any objections or
proposed amendments or modifications thereto is scheduled for June 5, 2000, with
consummation of the recapitalization transaction anticipated to occur promptly
following confirmation.
GENERAL
Historically, 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. During 1999 and the first two months of
2000, the Company disposed of its Career Sales Division, Payroll Sales Division
and certain operating subsidiaries. Each disposition impacted certain
distribution channels and related products historically utilized by the Company.
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 January 10, 2000, the Company announced
that it had agreed to sell its Payroll Sales Division to a company formed by
Thoma Cressey Equity Partners for approximately $102.0 million subject to
certain adjustments. On February 4, 2000, the Company consummated the sale of
the Payroll Sales Division for cash proceeds of approximately $103.3 million.
The Company used $100.0 million of the proceeds to repay the Bank Credit
Facility.
As part of a series of pre-restructuring transactions, Southwestern Life and
Security Life paid extraordinary dividends consisting of affiliate notes and
securities aggregating $15,461 and $14,167, respectively.
21
<PAGE>
Effective May 1, 2000, Southwestern Life and Security Life consummated with RGA
a 100% indemnity coinsurance agreement of all of their respective deferred
annuity business. Southwestern Life and Security Life transferred to RGA cash of
approximately $434.3 million, which is equal to the amount of the reinsured
statutory policy liabilities, net of a ceding allowance of approximately $15.8
million. The Company recorded a deferred gain of approximately $10.6 million,
representing the difference between ceded policy liabilities calculated on a
GAAP basis, net of deferred policy acquisition costs and present value of
insurance in force associated with these policies and the cash transferred net
of the ceding allowance. The deferred gain will be recognized in other income
over the life of the reinsured block of business. Southwestern Life and Security
Life retained the administration for the ceded block of business and will be
reimbursed by RGA for administrative costs at the rate of approximately $5.00
per annuity contract in force per year. During April 2000, the Company
recognized approximately $5.8 million in pre-tax capital losses from liquidating
invested assets to provide the cash required to consummate the reinsurance
transaction. In addition, the Company will receive a monthly trail commission
equal to one-twelfth of 0.32% of outstanding statutory reserves.
RESTRUCTURING AND OTHER COSTS. The Company developed restructuring plans to
realign or consolidate certain operations resulting in restructuring costs
incurred in 1999 (the "1999 Plan") and the fourth quarter of 1998 (the "4th
Quarter 1998 Plan") and the first quarter of 1998 (the "1st Quarter 1998 Plan").
The following reflects the impact of activity for the three months ended March
31, 2000 and 1999 on the restructuring accrual balances under the 1999 Plan, the
4th Quarter 1998 Plan and the 1st Quarter 1998 Plan (in thousands):
<TABLE>
<CAPTION>
PAID OR
BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31,
1999 PLAN 1999 LIABILITY ADJUSTMENTS 2000
--------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Severance and related benefits................... $ 2,374 $ (1,096) $ -- $ 1,278
Estimated holding costs of vacated facilities.... 2,122 -- -- 2,122
------------ ----------- ----------- -----------
$ 4,496 $ (1,096) $ -- $ 3,400
============ =========== =========== ===========
4TH QUARTER 1998 PLAN
---------------------
Severance and related benefits................... $ 1,067 $ (75) $ -- $ 992
============ =========== =========== ===========
1ST QUARTER 1998 PLAN
----------------------
Estimated holding costs of vacated facilities.... $ 1,814 $ (345) $ -- $ 1,469
============ =========== =========== ===========
<CAPTION>
PAID OR
BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31,
4TH QUARTER 1998 PLAN 1998 LIABILITY ADJUSTMENTS 1999
--------------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Severance and related benefits................... $ 2,274 $ (370) $ -- $ 1,904
Estimated contract termination costs............. 32 -- -- 32
------------ ----------- ----------- -----------
$ 2,306 $ (370) $ -- $ 1,936
============ =========== =========== ===========
1ST QUARTER 1998 PLAN
---------------------
Severance and related benefits................... $ 619 $ (289) $ 5 $ 335
Estimated holding costs of vacated facilities.... 2,205 -- -- 2,205
------------ ----------- ----------- -----------
$ 2,824 $ (289) $ 5 $ 2,540
============ =========== =========== ===========
</TABLE>
22
<PAGE>
YEAR 2000 ISSUES
Since December 31, 1999 the Company has not experienced any significant
disruption in the Company's business, or an increase in the cost of the Company
doing business related to the year 2000 issue.
The Company provided certain representations and warranties to each respective
purchaser of the businesses sold with respect to each entity's ability to
process date-sensitive information for the year 2000 and beyond. Although the
Company believes that it is in compliance with, and is not aware of any breach
of the year 2000 representations and warranties provided to the respective
purchasers, there can be no assurances that the Company is in compliance with
all such representations and warranties. A breach by the Company of such
representations and warranties could result in indemnification obligations owed
by the Company to the 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.
Since the February 7, 2000 bankruptcy petition filing, the Company has been
managing its assets as a "debtor-in-possession" (see Note 3 of Notes to
Unaudited Consolidated Financial Statements). In anticipation of the filing of
the Chapter 11 Case, the Company and the lenders party to the Bank Credit
Facility executed a forbearance agreement ("Forbearance Agreement") whereby the
lenders agreed to forbear from exercising their remedies under the Bank Credit
Facility as a result of the event of default that occurred under the Bank Credit
Facility when the Company commenced the Chapter 11 Case.
In addition, the Company and the lenders entered into a cash collateral
agreement ("Cash Collateral Agreement") which superseded the Bank Credit
Facility. The Cash Collateral Agreement provides a mechanism for the Company to
repay its currently outstanding borrowings and establishes certain covenants
with which the Company must comply until the Company's outstanding bank
borrowings and related interest are paid in full. Certain covenants strictly
define the Company's ability to utilize any and all cash that is maintained in a
collateral account held by the agent lender. As a result, the Company may
utilize cash from the cash collateral account for only predetermined types of
expenses and in specified amounts. The restrictions on cash only impacts
PennCorp as the debtor-in-possession and does not impact any of PennCorp's
subsidiaries.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
23
<PAGE>
The following table shows the cash sources and uses of the parent company on a
projected basis for the remaining 2000 and on an actual basis for the periods
February 8, 2000 to March 31, 2000 (as a debtor-in-possession), January 1, 2000
to February 7, 2000 and for the three months ended March 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
PROJECTED
PERIOD PERIOD PERIOD THREE
APRIL 1, 2000 FEBRUARY 8, JANUARY 1, MONTHS
TO 2000 TO 2000 TO ENDED
DECEMBER 31, MARCH 31, FEBRUARY 7, MARCH 31,
2000(1) 2000 2000 1999
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Cash sources:
Cash from subsidiaries.......................... $ 64,800 $ -- $ 130,127 $ 18,311
Issuance of common stock........................ 47,500 -- -- --
Additional borrowings........................... 90,000 -- -- --
Other investment income......................... 189 49 44 124
Other, net...................................... -- 27 26 12
------------ ------------ ------------ -----------
TOTAL SOURCES............................... 202,489 76 130,197 18,447
------------ ------------ ------------ -----------
Cash uses:
Interest paid on indebtedness................... 12,879 436 3,057 7,330
Operating expenses, including restructuring charges 11,236 384 18,575 4,930
Reduction of notes payable...................... 180,021 -- 100,000 --
Costs of recapitalization....................... 13,500 -- -- --
Capital contributions to subsidiaries........... -- -- -- 3,303
Other, net...................................... -- 855 -- --
------------ ------------ ------------ -----------
TOTAL USES.................................. 217,636 1,675 121,632 15,563
------------ ------------ ------------ -----------
Increase (decrease) in cash and short-term
investments .................................... (15,147) (1,599) 8,565 2,884
Cash and short-term investments at beginning of
period ......................................... 17,444 19,043 10,478 12,654
---------- ------------ ------------ -----------
Cash and short-term investments at end of period.. $ 2,297 $ 17,444 $ 19,043 $ 15,538
============ ============ ============ ===========
</TABLE>
---------------
(1) Projected amounts are on pro forma basis which considers the impact of
the Recapitalization Plan as if such plan is consummated on June 15,
2000. There can be no assurance that the Recapitalization Plan will be
consummated in its current form or at all.
CASH SOURCES
CASH FROM SUBSIDIARIES. Cash generated by the Company's insurance subsidiaries
is made available to PennCorp principally through periodic payments of principal
and interest on surplus debentures issued by PLAIC, Constitution (sold July 30,
1999) and Pioneer Security (sold February 4, 2000) (collectively, the "Surplus
Note Companies"). 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 and the surplus notes issued by Pioneer Security were repaid in
full in connection with the consummation of the sale of the Payroll 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. As part of a subsidiary realignment in
conjunction with the Payroll Sales Division divestiture, PLAIC issued a new
surplus debenture to SW Financial in the amount of $35.0 million. With respect
to Constitution, Pioneer Security and PLAIC (as a result of its surplus
debentures issued as of July 30, 1999 and January 31, 2000), 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 $154.1
million and $258.3 million as of March 31, 2000 and December 31, 1999,
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 under the Texas Insurance Laws and
Regulations 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.
24
<PAGE>
CASH SOURCES AND USES FOR THE PERIOD FEBRUARY 8, 2000 TO MARCH 31, 2000
During the period from February 8, 2000 to March 31, 2000 the Company (as a
debtor-in-possession) received $49 of short- term investment income and $27 from
a tax refund. The Company paid $436 in interest on its senior debt and incurred
$384 of operating expenses. The Company made payments of $855 to a non-insurance
subsidiary representing a return of the subsidiary's funds previously swept to
the cash collateral account.
CASH SOURCES AND USES FOR THE PERIOD JANUARY 1, 2000 TO FEBRUARY 7, 2000
As part of series of pre-restructuring transactions, Security Life became a
wholly-owned subsidiary of PLAIC. In addition, PLAIC was permitted to prepay
$20.4 million of principal and interest on its surplus debenture to SW
Financial, which then paid these funds as a dividend to the Company. On February
4, 2000, AA Holdings sold the companies in the Payroll Sales Division for $103.3
million. The net proceeds to the parent company after repayment of intercompany
borrowings to insurance company affiliates of PennCorp was $97.0 million. In
addition, the Company received a $12.7 million dividend from AA Holdings. Of the
proceeds, $100.0 million were used to repay a portion of the Company's Bank
Credit Facility.
For the period from January 1, 2000 to February 7, 2000, the Company paid $10.0
million in employment contract obligations and $280,000 in transaction bonuses
($8.3 million had been accrued and expensed prior to December 31, 1999) under
executive employment agreements with certain senior executives of the Company
and its subsidiaries. In addition, the Company paid $2.0 million for insurance
coverage, principally to cover possible indemnification claims arising from a
breach of the representations and warranties contained in each of the subsidiary
and asset sale agreements, $1.9 million in retainers to professional services
firms and $3.5 million for other professional and legal services. Interest
totaling $3.1 million was paid during the period in order to bring the Bank
Credit Facility current.
CASH SOURCES AND USES FOR THE THREE MONTHS ENDED MARCH 31, 1999
CASH FROM SUBSIDIARIES. For the three months ended March 31, 1999, the Company
received surplus debenture interest and principal payments from PLAIC of
$456,000, and received dividends and tax sharing payments of $17.8 million from
non- insurance intermediate holding companies. The Surplus Note Companies
refunded taxes of $378,000 to their respective subsidiaries during the three
months ended March 31, 1999.
INTEREST PAID ON INDEBTEDNESS. During the three months ended March 31, 1999, the
Company made interest payments totaling $7.3 million.
OPERATING EXPENSES, INCLUDING RESTRUCTURING CHARGES. During the three months
ended March 31, 1999, the 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 three months
ended March 31, 1999 aggregated $1.6 million. During the three months ended
March 31, 1999, the parent company also incurred legal, accounting and
investment banking fees associated with asset dispositions aggregating $594,000.
Operating expenses for the three months ended March 31, 1999 also include costs
aggregating $733,000 associated with the pending class action securityholder
litigation and the SEC investigation.
CAPITAL CONTRIBUTIONS TO SUBSIDIARIES. For the three months ended March 31,
1999, the Company made capital contributions to subsidiaries totaling $3.3
million. The contribution was made to PLAIC to make a subsequent capital
contribution to PLIC.
PROJECTED CASH SOURCES AND USES FOR THE REMAINING NINE MONTHS OF 2000
The pro forma schedule of cash sources and uses of the parent company for the
remaining nine months of 2000, assumes the consummation of the Recapitalization
Plan in June of 2000. As part of this plan, additional equity of $47.5 million
would be contributed and the Company would enter into a new $95.0 million credit
facility of which $90.0 million is anticipated to be drawn during 2000. Existing
senior and subordinated debt with a principal balance of $180.0 million would be
repaid. The parent company would receive approximately $55.0 million from PLAIC
as principal repayment on the existing surplus debenture. The $55.0 million
would be made available to PLAIC from proceeds received as the result of an
extraordinary dividend from Southwestern Life and Security Life, which is
subject to approval by the Texas Department of Insurance. Projected cash sources
also include $9.8 million in dividends and principal and interest payments on
the surplus debenture. Closing costs associated with the Recapitalization Plan
are estimated to aggregate $13.5 million.
25
<PAGE>
Management believes the Company will likely have sufficient financial
flexibility and projected liquidity sources to meet all cash requirements until
the maturity of the cash collateral agreement on June 30, 2000 (see Note 10 of
Notes to Unaudited Consolidated Financial Statements). The Company filed a plan
of recapitalization with the Delaware Bankruptcy Court which will provide for
the repayment of such indebtedness (see Note 3 of Notes to Unaudited
Consolidated Financial Statements). With respect to current liquidity
projections, there can be no assurances actual liquidity sources will develop.
In the event of a shortfall of actual liquidity sources, and as a result of the
necessity of the Company to establish a new credit facility, the Company will
explore options to generate any necessary liquidity, such as: (i) the sale of
subsidiaries and (ii) obtaining 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 (used) by operating
activities, excluding the parent company, were $13.1 million and $(337,000) for
the three months ended March 31, 2000 and 1999, respectively. The increasing
trend in cash flow from operating activities principally resulted from
decreasing costs associated with: (i) year 2000 remediation at all of the
insurance subsidiaries; (ii) reduced costs as a result of strategic business
evaluations and associated restructuring of the Company and (iii) sale of KIVEX,
which used cash from operating activities due to its rapid growth in 1999.
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.
During the three months ended March 31, 2000 and 1999, the Company's
subsidiaries sold $36.0 million and $341.4 million of fixed maturity and equity
securities, and purchased $73.6 million and $435.2 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 $157.4 million and $101.9 million for the
three months ended March 31, 2000 and 1999, respectively. Cash outflows during
the three months ended March 31, 2000 and 1999 include dividends and surplus
debenture principal payments aggregating $130.1 million and $17.9 million,
respectively, made to the parent company. For the three months ended March 31,
1999 PennCorp made a $3.3 million capital contribution to PLAIC to make a
subsequent contribution to PLIC. In addition, policyholder surrenders exceeding
deposits by $27.3 million and $87.3 million for the three months ended March 31,
2000 and 1999, respectively.
RESULTS OF OPERATIONS
For the three months ended March 31, 2000 and 1999, the Company has prepared the
following selected pro forma financial information for the Company's Financial
Services Division (Southwestern Life and Security Life) and Businesses Sold
(Payroll Sales Division, Career Sales Division, Professional, the United Life
Assets and KIVEX). As a result of the sale of the Payroll Sales Division on
February 4, 2000, the operating results of the Payroll Sales Division have been
included in the Businesses Sold 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
26
<PAGE>
dispose of the Businesses Held for Sale ((i), (ii) and (iii) collectively,
"Operating Income (Loss)"). The Company considers operating income (loss) to
reflect a division's "core earnings (loss)" and to be the most relevant and
useful information to evaluate trends impacting each of the Company's divisions.
This information is used by the Company's principal decision makers to evaluate
the performance of each division as it eliminates the impact of transactions
that the Company considers to be unrelated to the core operating results of the
divisions. Other companies that operate primarily in the life insurance industry
may or may not use similar measures.
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,
1999, or the results which may occur in the future.
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------- ------------
($ IN THOUSANDS)
<S> <C> <C>
Retained Business--Financial Services Division:
Operating income........................................................... $ 1,635 $ 2,542
Net investment gains (losses).............................................. (2,720) 1,122
Restructuring costs........................................................ -- (38)
------------- -------------
(1,085) 3,626
------------- -------------
Businesses Sold:
Operating income (loss).................................................... 2,806 10,179
Net investment gains (losses).............................................. (39) 1,057
Restructuring costs........................................................ -- 33
Net gains (losses) from sale of subsidiaries.............................. (8,383) 996
Impairment valuation....................................................... -- (30,287)
------------- -------------
(5,616) (18,022)
------------- -------------
Corporate:
Interest and amortization of deferred
debt issuance cost....................................................... (6,186) (14,120)
Corporate expenses, eliminations and other................................. (14,362) (8,539)
------------- -------------
(20,548) (22,659)
------------- -------------
Loss before income taxes..................................................... $ (27,249) $ (37,055)
============= =============
</TABLE>
27
<PAGE>
RETAINED BUSINESS--FINANCIAL SERVICES DIVISION
The Financial Services Division includes the operations of Southwestern Life and
Security Life. Southwestern Life and Security Life market life insurance and, to
a lesser extent annuity products, through independent general agents who sell
directly to individuals primarily in the southwestern and southeastern United
States.
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Revenues:
Policy revenues............................................................ $ 30,703 $ 33,786
Net investment income...................................................... 40,562 41,872
Other income............................................................... 2,330 1,323
------------- -------------
73,595 76,981
------------- -------------
Benefits and expenses:
Total policyholder benefits................................................ 51,912 55,370
Insurance related expenses................................................. 9,771 9,500
Other operating expenses................................................... 10,277 9,569
------------- -------------
71,960 74,439
------------- -------------
Pre-tax operating income................................................. $ 1,635 $ 2,542
============= =============
</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 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 months ended
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Life premiums:
Universal life (first year)................................................ $ 2,210 $ 2,518
Universal life (renewal)................................................... 25,233 19,510
Yearly renewable term reinsurance on universal life........................ (2,558) (2,142)
Traditional life (first year).............................................. 1,461 2,843
Traditional life (renewal)................................................. 7,889 8,263
------------- -------------
Life premiums, net of reinsurance........................................ 34,235 30,992
Annuity premiums............................................................. 1,913 2,768
Fixed benefit premiums:
Long-term care premiums net of reinsurance................................. 181 405
------------- -------------
Premiums, net of reinsurance............................................. 36,329 34,165
Less premiums on universal life and
annuities which are recorded as additions
to insurance liabilities................................................... (29,356) (24,796)
------------- -------------
Premiums on products with mortality or
morbidity risk....................................................... 6,973 9,369
Fees and surrender charges on interest
sensitive products......................................................... 23,730 24,417
------------- -------------
Policy revenues........................................................ $ 30,703 $ 33,786
============= =============
</TABLE>
28
<PAGE>
Life premiums net of reinsurance increased 10.5% during the three months ended
March 31, 2000. Life premiums collected, net of reinsurance, were $34.2 million
for the three months ended March 31, 2000 compared with $31.0 million in the
comparable period of 1999. First year universal life premiums decreased 12.2% in
the three months ended March 31, 2000, to $2.2 million and first year
traditional life decreased 48.6% to $1.4 million. The decline is partially
attributable to lower sales at Security Life. The decision to cease new life
sales at Security Life was announced during the third quarter of 1999 as a
result of management's decision to reduce costs and concentrate its marketing
efforts at Southwestern Life. In addition, first year traditional life premiums
at Southwestern Life decreased 53.9% to $1.1 million for the three months ended
March 31, 2000 compared with the comparable 1999 period principally due to a
decrease in single premiums of $1.0 million, which can vary significantly from
period to period.
Universal life and traditional life renewal premiums increased $5.3 million or
19.3% for the three months ended March 31, 2000 compared with the comparable
1999 period. The increase reflects the completion of the Security Life exchange
or refund program at December 31, 1999. The exchange or refund program was
instituted by Security Life on January 1, 1999 for policyholders of certain
types of interest sensitive insurance contracts and resulted in a refund of
premiums of $5.6 million during the three months ended March 31, 1999. Universal
life and traditional life renewal premiums at Southwestern Life increased by
4.3% to $20.6 million for the three months ended March 31, 2000 compared with
the comparable 1999 period. Annuity premiums of $1.9 million for the three
months ended March 31, 2000 were less than premiums of $2.8 million in the
comparable period of 1999. Annuity sales are likely to continue to decline
unless market conditions for fixed annuities become more favorable and
Southwestern Life's ratings improve.
NET INVESTMENT INCOME. Net investment income decreased 3.1% to $40.6 million for
the three months ended March 31, 2000 due to a decrease in invested assets
partially offset by an increase in yields on investments. Average invested
assets declined approximately $207.3 million for the three months ended March
31, 2000 compared with the comparable period in 1999. Most of this decrease
resulted from the need to liquidate invested assets to provide cash to fund
surrenders of annuities and universal life products. Most of the 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
without the insurance companies actively marketing other replacement business
for these accumulation products. 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 increased to 7.2% for the three
months ended March 31, 2000 compared to 7.0% for the three months ended March
31, 1999.
OTHER INCOME. Other income increased $1.0 million to $2.3 million for the three
months ended March 31, 2000. The increase principally reflects changes in
consideration received on supplemental contracts. Supplemental contract revenue
is derived from annuity contracts which have reached the annuitization period.
Consideration from supplemental contracts recognized as other income is offset
by policyholder benefits, resulting in no net effect on the Company's results of
operations.
TOTAL POLICYHOLDER BENEFITS. The following table shows the components of total
policyholder benefits for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Death benefits............................................................... $ 22,994 $ 20,162
Other insurance policy benefits and change
in future policy benefits.................................................. 28,918 35,208
------------- -------------
Total policyholder benefits.................................................. $ 51,912 $ 55,370
============= =============
</TABLE>
Policyholder benefits decreased 6.2% to $51.9 million for the three months ended
March 31, 2000 compared with the comparable 1999 period. Death benefits
increased $2.8 million or 14.0% for the three months ended March 31, 2000
compared with the comparable 1999 period. Death benefits may vary significantly
from period to period. Other policy benefits and change in policy benefits
decreased $6.3 million or 17.9% for the three months ended March 31, 2000
compared with the comparable 1999 period. The decrease is attributable to a
decline in interest credited to universal life and annuity policies at Security
Life as a result of fewer policies in force following the exchange program,
surrender activity and the absence of new business production. In addition,
29
<PAGE>
higher death benefits during 2000 result in a larger decrease in reserves as a
result of reserves released at death when compared to the 1999 period.
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 $531.0 million as
of March 31, 2000 and $527.1 million as of December 31, 1999, respectively. If
developing trends were to continue, principally the less than expected level of
the lapses currently associated with such interest sensitive blocks of business,
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. A decrease of 1% in the assumed lapse rate would
increase policy reserves associated with such contract by $9.0 million.
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 actions including
potential sales disruption and the threat of litigation.
INSURANCE RELATED EXPENSES. Insurance related expenses (including non-deferrable
commissions, amortization of deferred policy acquisition costs and amortization
of present value of insurance in force) increased $271,000 during the three
months ended March 31, 2000 compared with the comparable 1999 period. The
increase during the three months ended March 31, 2000 principally reflects the
decision by management to accelerate payment of approximately $2.2 million of
accumulation bonuses owed to agents. The increase was partially offset by a
decrease to non-deferrable commissions at Security Life resulting from decreases
in new and renewal premium and an adjustment of approximately $700,000 based
upon a re-evaluation of credit balances with terminated or inactive agents. The
remainder of the difference is principally due to the effect of unlocking
assumptions for certain interest-sensitive blocks of business during each of the
three month periods ended March 31, 2000 and 1999.
OTHER OPERATING EXPENSES. For the three months ended March 31, 2000, other
operating expenses (including general operating, overhead and policy
maintenance) increased $708,000 from the comparable period in 1999. The increase
principally results from a reduction in deferred expenses as a result of ceasing
new business production at Security Life and a guaranty fund refund of
approximately $400,000 received by Southwestern Life in the first quarter of
1999, offset by a reduction in non- deferrable expenses related to costs
associated with year 2000 remediation efforts and systems conversions for
Security Life as these projects were substantially completed in 1999.
BUSINESSES SOLD
Businesses Sold include the operations of the Payroll Sales Division (sold
February 4, 2000), the Career Sales Division (sold July 30, 1999), KIVEX (sold
June 30, 1999), Professional (sold March 31, 1999) and the United Life Assets
(sold April 30, 1999). The following description of these operations was
applicable prior to their respective dates of sale. 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. The Career Sales Division 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 and includes the operations of Union
Bankers, Marquette and Constitution. 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.
30
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Revenues:
Policy revenues............................................................ $ 7,573 $ 80,086
Net investment income...................................................... 2,907 42,780
Other income............................................................... 212 6,647
------------- -------------
10,692 129,513
------------- -------------
Benefits and expenses:
Total policyholder benefits................................................ 5,344 73,257
Insurance related expenses................................................. 978 14,137
Other operating expenses................................................... 1,564 31,940
------------- -------------
7,886 119,334
------------- -------------
Pre-tax operating income (loss)............................................ $ 2,806 $ 10,179
============= =============
</TABLE>
POLICY REVENUES. Policy revenues declined 90.5% or $72.5 million in the three
months ended March 31, 2000 compared to the comparable 1999 period. The decline
is primarily attributable to the sale of Professional, the United Life Assets,
the Career Sales Division and the Payroll Sales Division on March 31, 1999,
April 30, 1999, July 30, 1999 and February 4, 2000, respectively.
NET INVESTMENT INCOME. Net investment income decreased $39.9 million during the
three months ended March 31, 2000 compared to the comparable 1999 period. The
decrease is primarily attributable to the sales of Professional, the United Life
Assets, the Career Sales Division and the Payroll Sales Division on March 31,
1999, April 30, 1999. July 30, 1999 and February 4, 2000, respectively.
OTHER INCOME. Other income decreased $6.4 million in the three months ended
March 31, 2000 compared to the comparable 1999 period. Most of the decrease is
attributable to the sale of KIVEX on June 30, 1999.
TOTAL POLICYHOLDER BENEFITS. Policyholder benefits decreased $67.9 million in
the three months ended March 31, 2000 compared to the comparable 1999 period.
The decrease is attributable to the sales of Professional, the United Life
Assets, the Career Sales Division and the Payroll Sales Division on March 31,
1999, April 30, 1999, July 30, 1999 and February 4, 2000, 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 $13.2 million to $978,000 for the three
months ended March 31, 2000 compared to the comparable 1999 period. Most of the
decrease is attributable to the sales of Professional and the United Life
Assets, the Career Sales Division and the Payroll Sales Division on March 31,
1999, April 30, 1999, July 30, 1999 and February 4, 2000, respectively.
OTHER OPERATING EXPENSES. Other operating expenses (including general operating,
overhead and policy maintenance) decreased $30.4 million and in the three months
ended March 31, 2000 compared to the comparable 1999 period. The decrease is
principally attributable to the sales of Professional, United Life, KIVEX, the
Career Sales Division and the Payroll Sales Division on March 31, 1999, April
30, 1999, June 30, 1999, July 30, 1999 and February 4, 2000, respectively.
GENERAL CORPORATE
INTEREST AND AMORTIZATION OF DEFERRED DEBT ISSUANCE COSTS. Interest and
amortization of deferred debt issuance costs decreased $7.9 million for the
three months ended March 31, 2000 compared to the comparable 1999 period. The
decrease is principally a result of principal repayments under the bank credit
facility. As a result of the sales of the Payroll Sales Division, the Career
Sales Division, KIVEX, the United Life Assets and Professional, the Company
reduced the outstanding Bank Credit Facility by $367.0 million. In addition, the
Company repaid an additional $2.0 million of indebtedness as a result of
liquidity at the parent company above the amounts prescribed in the Bank Credit
Facility. The decrease was partially offset by higher weighted average borrowing
costs and additional costs associated with credit facility fees. These are a
direct result of the Company's current financial position. In addition, during
31
<PAGE>
the three month period ended March 31, 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 to be amortized in proportion to
the impact of periodic changes in a credit facility as compared with its
original terms.
CORPORATE EXPENSES, ELIMINATIONS AND OTHER. Corporate expenses, eliminations and
other costs were $14.4 million and $8.5 million for the three months ended March
31, 2000 and 1999, respectively. The increase is principally attributable to a
break fee of $6.0 million that was accrued to be paid to Reassure America upon
the termination of the contract to sell Southwestern Life and Security Life.
INCOME TAXES (BENEFITS). For the three months ended March 31, 2000, the Company
recognized income tax expense of $838,000 on loss before taxes of $27.2 million.
For the three months ended March 31, 1999, income tax expense was $4.6 million
on loss before taxes of $37.1 million. The unusual effective tax rates in 2000
and 1999 are substantially due to the non-deductibility of the reduction in
carrying value of the assets associated with Businesses Sold and a tax valuation
allowance, primarily representing unrecoverable net operating loss carryforwards
at certain non-life companies.
NET INVESTMENT GAINS (LOSSES). The Company maintains an investment portfolio
that focuses on maximizing investment income, without exposure to unwarranted
interest rate and credit risk. The Company actively manages asset duration and
liquidity risks. As a result of this strategy, the Company routinely sells
positions in securities no longer meeting its criteria. Sales of securities
resulted in the Company realizing gains (losses) of $(2.8) million and $2.2
million, during the three months ended March 31, 2000 and 1999, respectively.
During the three months ended March 31, 2000 and 1999, 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
$27.3 million and $87.3 million, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company analyzes and reviews the risks arising from market exposures of
financial instruments. Downward movement in market interest rates during the
first three months of 2000 resulted in a decline in the unrealized depreciation
of the bond portfolio since the end of 1999. However, the Company's assets and
liabilities portfolio and its exposure to market risk has not changed materially
from its position at December 31, 1999. 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, 1999.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
32
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the third quarter of 1998, the first of ten class-action complaints was
filed in the United States District Court for the Southern District of New York
("District Court") 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 $15.0 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. As explained
below, the primary insurer has agreed in principle to contribute to a settlement
of the litigation.
Following settlement discussions with the Plaintiffs' counsel and
representatives of the primary insurance carrier and their counsel, the parties
to the Complaint entered into a Memorandum of Understanding dated November 11,
1999 (the "Memo") containing the essential terms of a settlement.
The Memo states that $9.0 million of cash plus interest accruing through the
date of consummation of the settlement, will be paid in full and final
settlement of all claims set forth in the Complaint (the "Settlement"). Of that
sum, $1.5 million plus interest will be paid by the Company and $7.5 million
plus interest will be paid by the Company's outside directors and officers
liability insurance carrier. The Settlement is conditioned upon, among other
things, confirmatory discovery, execution of a definitive settlement agreement
and related documents, notice to the Company's shareholders of the Settlement
and final approval by the United States District Court (with all time to appeal
such approval having run or any appeals having been resolved in favor of
approval of the Settlement). During the three months ended December 31, 1999,
the Company paid the $1.5 million liability related to the settlement to an
escrow account.
The Company expects that this litigation will not affect its ability to operate
through 2000. 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 the Settlement is not
consummated and 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.
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
33
<PAGE>
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. During 1999 the Company has initiated an
exchange program which enabled 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. On November 5, 1999,
Security Life was served with an Original Petition filed in state court in
Dallas County, Texas, asserting a class action concerning such policies. The
petition alleges that Security Life has waived the right to charge cost of
insurance charges after the eighth year on such non-smoker policies and to
increase cost of insurance charges on such smoker policies. The petition alleges
Security Life made these waivers through its marketing pieces and signed
statements by its officers. The petition also alleges that not all of the facts
were outlined in the Company's communication to its policyholders outlining the
exchange program and therefore alleges Security Life's exchange program is
deceptive. The petition asks for declaratory judgment concerning the rights of
the Plaintiffs, and the class of policyholders of such policies and for
attorney's fees. It, among other things, asks for an injunction to prevent
Security Life from charging cost of insurance charges for such non-smoker
policies or increasing cost of insurance charges on such smoker policies after
the eighth contract year. It also asks the Court to rule the releases signed by
such policyholders under the exchange program be declared null and void and
those policyholders who signed the releases be given the option of reinstating
the prior policies. Security Life denies the allegations in the petition and
intends to vigorously defend this lawsuit. The trial court in which this case is
pending has granted class certification in at least one other lawsuit involving
similar types of claims. There can be no assurances 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.
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.
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Stock Purchase Agreement, dated as of January 7, 2000, by and between
Reassure America Life Insurance Company and the Company. (2)
2.2 Stock Purchase Agreement, dated as of January 8, 2000, by and between
Pioneer-Occidental Holdings Company and American-Amicable Holdings
Corporation. (2)
2.3 Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
by and between American-Amicable Holdings Corporation and
Pioneer-Occidental Holdings Company. (3)
Management Compensation Related Agreements
10.1 Executive Employment Agreement dated January 28, 2000, by and
between the Company and Keith A. Maib. (3)
10.2 Agreement dated January 28, 2000, by and between the Company and
Keith A. Maib. (3)
10.3 Executive Employment Agreement dated January 28, 2000, by and
between the Company and James P. McDermott. (3)
10.4 Agreement dated January 28, 2000, by and between the Company and
James P. McDermott. (3)
10.5 Executive Employment Agreement dated January 28, 2000, by and
between the Company and Scott D. Silverman. (3)
10.6 Agreement dated January 28, 2000, by and between the Company and
Scott D. Silverman. (3)
10.7 Amendment No. 2 and Waiver dated as of April 25, 2000 to Cash
Collateral Agreement, dated as of February 8, 2000 and Forbearance
Agreement, dated as of February 4, 2000, by and among the Company as
Debtor and Debtor-in-Possession, AMH Holdings Corporation,
Southwestern Financial Corporation, Southwestern Financial Services
Corporation, PennCorp Occidental Corp., KB Investment L.L.C., KB
Management L.L.C.; certain of the lenders signatory to the Cash
Collateral Agreement, the Managing Agents and the Co-Agents named
therein, and The Bank of New York, as administrative agent. (1)
10.8 Amendment No. 1 to Cash Collateral Agreement, dated as of February 10,
2000, among the Company as Debtor and Debtor-in-Possession, the
lenders signatory thereto, and the Bank of New York, as administrative
agent. (4)
10.9 Cash Collateral Agreement dated as of February 8, 2000, among the
Company as Debtor and Debtor-in-Possession, the lenders signatory
thereto, and the Bank of New York, as administrative agent. (4)
10.10 Forbearance Agreement dated as of February 4, 2000, among
American-Amicable Holdings Corporation, Southwestern Financial
Corporation, Southwestern Financial Services Corporation, PennCorp
Occidental Corp., KB Investment L.L.C., KB Management L.L.C. and the
lenders signatory to the Credit Agreement, the Managing Agents and the
Co-Agents named therein and The Bank of New York, as administrative
agent and collateral agent under the Security Agreements. (4)
10.11 Waco Consent and Waiver and Amendment dated as of January 31, 2000,
to Credit Agreement, among the Company, the lenders signatory thereto,
the Managing Agents and the Co-Agents named therein and The Bank of
New York, as administrative agent. (6)
10.12 Swiss Re Consent dated as of January 31, 2000, to Credit Agreement,
among the Company, the lenders signatory thereto, the Managing Agents
and the Co-Agents named therein and The Bank of New York, as
administrative agent. (6)
35
<PAGE>
10.13 Other Consent dated as of January 31, 2000, to Credit Agreement,
among the Company, the lenders signatory thereto, the Managing Agents
and the Co-Agents named therein and The Bank of New York, as
administrative agent. (6)
10.14 Offer Letter, dated as of March 15, 2000, from Inverness/Phoenix
Capital LLC, Vicuna Advisors, LLC in its capacity as investment
manager to certain Delaware entities, Bernard Rapoport and John Sharpe
(the "Offerors'). (5)
10.15 Offer Supplement Letter, dated as of March 20, 2000, from
Inverness/Phoenix Capital LLC, Vicuna Advisors, LLC in its capacity as
investment manager to certain Delaware entities, Bernard Rapoport and
John Sharpe (the "Offerors'). (5)
10.16 Equity Commitment Letter, dated as of March 20, 2000, by Bernard
Rapoport. (5)
10.17 Equity Commitment Letter, dated as of March 20, 2000, by John Sharpe.
(5)
10.18 Revised Standby Underwriting Commitment Letter, dated as of March 22,
2000, by and among Inverness/Phoenix Capital, LLC, Vicuna Advisors,
LLC and the Company. (5)
10.19 Amended and Restated Escrow Agreement, dated as of March 21, 2000, by
and among the Offerors and Citibank N.A., as the escrow agent. (5)
10.20 Lock-Up Agreement, dated as of March 15, 2000, by and between the
Company and certain preferred stockholders listed therein. (5)
10.21 Letter, dated as of March 21, 2000, by ING (U.S.) Capital LLC and ING
Barings LLC to Inverness Management LLC. (5)
10.22 Surplus Debenture Number Eight in the original principal amount of
$35,000,000, issued by Pacific Life and Accident Insurance Company to
Southwestern Financial Corporation, dated January 31, 2000. (6)
10.23 Proposed Plan of Reorganization of PennCorp Financial Group, Inc. (1)
11.1 Computation of Loss per Share
15.1 Independent Auditors' Report (7)
27 Financial Data Schedule
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K, dated
January 10, 2000, which was filed with the Securities and Exchange
Commission by the Company on January 10, 2000, relating to the press
release announcement by the Company, dated January 10, 2000, that it
had (a) entered into a Stock Purchase Agreement, dated as of January
7, 2000, for the sale of Southwestern Life Insurance Company and
Security Life & Trust Insurance Company to Reassurance America Life
Insurance Company; and (b) had, through its subsidiary
American-Amicable Holdings Corporation, entered into a Stock Purchase
Agreement, dated as of January 8, 2000, for the sale of its Waco,
Texas-based insurance operations to Pioneer-Occidental Holdings
Company.
(3) Such exhibit is incorporated by reference to the Form 8-K, dated
February 4, 2000, which was filed with the Securities and Exchange
Commission by the Company on February 11, 2000, relating to (a) the
Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
by and between American-Amicable Holdings Corporation and
Pioneer-Occidental Holdings Company; (b) the press release, dated
February 4, 2000, issued by the Company announcing the consummation of
the sale of the Waco, Texas-based insurance operations to
Pioneer-Occidental Holdings Company; (c) the press release, dated
February 7, 2000, issued by the Company announcing the filing by the
Company of a voluntary petition for relief under chapter 11 of title
11 of the United States Code in the Bankruptcy Court for the District
of Delaware; (d) the Executive Employment Agreement, dated January 28,
36
<PAGE>
2000, by and between the Company and Keith A. Maib; (e) the Agreement,
dated January 28, 2000, by and between the Company and Keith A. Maib;
(f) the Executive Employment Agreement, dated January 28, 2000, by and
between the Company and James P. McDermott; (g) the Agreement, dated
January 28, 2000, by and between the Company and James P. McDermott;
(h) the Executive Employment Agreement, dated January 28, 2000, by and
between the Company and Scott D. Silverman; and (i) the Agreement,
dated January 28, 2000, by and between the Company and Scott D.
Silverman.
(4) Such exhibit is incorporated by reference to the Form 8-K, dated
February 4, 2000, which was filed with the Securities and Exchange
Commission by the Company on February 29, 2000, reporting in
connection with that certain Credit Agreement dated as of March 12,
1997, the execution by the Company of (a) the Forbearance Agreement
dated as of February 4, 2000; (b) the Cash Collateral Agreement dated
as of February 8, 2000; and (c) Amendment No. 1 to Cash Collateral
Agreement dated as of February 10, 2000.
(5) Such exhibit is incorporated by reference to the Form 8-K, dated March
23, 2000, which was filed with the Securities and Exchange Commission
by the Company on March 30, 2000, relating to (a) the issuance of a
press release, dated March 24, 2000, by the Company announcing its
approval of a recapitalization transaction proposed by
Inverness/Phoenix Capital LLC and Vicuna Advisors, LLC, on behalf of
the Offerors; (b) the execution of the Offer Letter, dated as of March
15, 2000, by and among the Offerors and the Company; (c) the execution
of the Offer Supplement Letter, dated as of March 20, 2000, by and
among the Offerors and the Company; (d) the Equity Commitment Letter,
dated as of March 15, 2000, by Bernard Rapoport; (e) the Equity
Commitment Letter, dated as of March 15, 2000, by John Sharpe; (f) the
Revised Standby Underwriting Commitment Letter, dated as of March 22,
2000, by and among Inverness/Phoenix Capital, LLC, Vicuna Advisors,
LLC and the Company; (g) the Amended and Restated Escrow Agreement,
dated as of March 21, 2000, by and among the Offerors and Citibank
N.A., as the escrow agent; (h) the Lock-Up Agreement, dated as of
March 15, 2000, by and between the Company and certain preferred
stockholders listed therein; and (i) the Letter, dated as of March 21,
2000, by ING (U.S.) Capital LLC and ING Barings LLC to Inverness
Management LLC.
(6) Such exhibit is incorporated by reference to the Annual Report on Form
10-K filed for the fiscal year ended December 31, 1999 of PennCorp
Financial Group, Inc.
(7) 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 January 10, 2000 was filed with the
Securities and Exchange Commission ("SEC") on January 10, 2000, reporting the
issuance of a press release by the Company, dated January 10, 2000, which
announced that the Company had entered into a definitive agreement, the Stock
Purchase Agreement, dated as of January 7, 2000, between Reassure America Life
Insurance Company and the Company (the "Swiss Re Agreement") for the sale of
Southwestern Life Insurance Company and Security Life & Trust Insurance Company
to Reassurance America Life Insurance Company, a subsidiary of Swiss Reinsurance
Company of Zurich, Switzerland, for $260 million in cash, subject to certain
adjustments. The Swiss Re Agreement requires that the Company effectuate the
sale through a voluntary Chapter 11 case, subject to bankruptcy court approval.
The Company also announced in the press release dated January 10, 2000, that it
had, through its subsidiary American-Amicable Holdings Corporation, entered into
a definitive agreement, the Stock Purchase Agreement, dated as of January 8,
2000, for the sale of its Waco, Texas-based insurance operations to a new
acquisition company formed by Thoma Cressey Equity Partners for $102 million in
cash, subject to certain adjustments. The Waco-based operations include Pioneer
Security Life Insurance Company, Occidental Life Insurance Company,
American-Amicable Life Insurance Company of Texas and Pioneer American Insurance
Company.
A report on Form 8-K dated February 4, 2000 was filed with the SEC on
February 11, 2000, reporting the Amendment to Stock Purchase Agreement, dated as
of February 4, 2000, by and between American-Amicable Holdings Corporation ("AA
Holdings") and Pioneer-Occidental Holdings Company (the "Waco Transaction"), and
further reporting the issuance of a press release by the Company, dated February
4, 2000, that AA Holdings had consummated the Waco Transaction. The Form 8-K
also reported the issuance of a press release by the Company, dated February 7,
2000, that the Company filed a voluntary petition for relief under chapter 11 of
title 11 of the United States Code in the Bankruptcy Court for the District of
Delaware. Additionally, the Form 8-K also reported the Executive Employment
Agreement, dated January 28, 2000, by and between the Company and Keith A. Maib;
Agreement, dated January 28, 2000, by and between the Company and Keith A. Maib;
Executive Employment, dated January 28, 2000, by and between the Company and
37
<PAGE>
James P. McDermott; Agreement, dated January 28, 2000, by and between the
Company and James P. McDermott; Executive Employment Agreement, dated January
28, 2000, by and between the Company and Scott D. Silverman; and Agreement,
dated January 28, 2000, by and between the Company and Scott D. Silverman.
A report on Form 8-K dated February 4, 2000 was filed with the SEC on
February 29, 2000, reporting that, in connection with that certain Credit
Agreement dated as of March 12, 1997, as amended, the Company executed a
Forbearance Agreement, dated as of February 4, 2000, by and among the Company
and the financial institutions party thereto, and The Bank of New York, as
administrative agent; the Company executed a Cash Collateral Agreement, dated as
of February 8, 2000, by and among the Company, the financial institutions party
thereto, and the Bank of New York, as administrative agent; and the Company
executed Amendment No. 1 to Cash Collateral Agreement, dated as of February 10,
2000, by and among the Company, the financial institutions party thereto, and
the Bank of New York, as administrative agent.
A report on Form 8-K dated March 23, 2000 was filed with the SEC on
March 30, 2000, reporting the issuance of a press release by the Company, dated
March 24, 2000, that the Company's Board of Directors (the "Board"), in a
meeting convened on March 23, 2000, approved a recapitalization transaction (the
"Recapitalization") proposed by Inverness/Phoenix Capital LLC and Vicuna
Advisors, LLC, on behalf of the unofficial ad hoc committee of preferred
stockholders, and Bernard Rapoport and John Sharpe (the "Offerors") as the
higher and better offer; and that the selection of the Recapitalization by the
Board was approved by the Delaware Bankruptcy Court on March 24, 2000. The Form
8-K also reported the execution of the Offer Letter, dated as of March 15, 2000,
by and among the Offerors and the Company; the execution of the Offer Supplement
Letter, dated as of March 20, 2000, by and among the Offerors and the Company;
the Equity Commitment Letter, dated as of March 15, 2000, by Bernard Rapoport;
the Equity Commitment Letter, dated as of March 15, 2000, by John Sharpe; the
Revised Standby Underwriting Commitment Letter, dated as of March 22, 2000, by
and among Inverness/Phoenix Capital, LLC, Vicuna Advisors, LLC and the Company;
the Amended and Restated Escrow Agreement, dated as of March 21, 2000, by and
among the Offerors and Citibank N.A., as the escrow agent; the Lock-Up
Agreement, dated as of March 15, 2000, by and between the Company and certain
preferred stockholders listed therein; and the Letter, dated as of March 21,
2000, by ING (U.S.) Capital LLC and ING Barings LLC, confirming to Inverness
Management LLC the negotiated Credit Agreement.
38
<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: May 12, 2000
39
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBERS
2.1 Stock Purchase Agreement, dated as of January 7, 2000, by and between
Reassure America Life Insurance Company and the Company. (2)
2.2 Stock Purchase Agreement, dated as of January 8, 2000, by and between
Pioneer-Occidental Holdings Company and American-Amicable Holdings
Corporation. (2)
2.3 Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
by and between American-Amicable Holdings Corporation and
Pioneer-Occidental Holdings Company. (3)
Management Compensation Related Agreements
10.1 Executive Employment Agreement dated January 28, 2000, by and
between the Company and Keith A. Maib. (3)
10.2 Agreement dated January 28, 2000, by and between the Company and
Keith A. Maib. (3)
10.3 Executive Employment Agreement dated January 28, 2000, by and
between the Company and James P. McDermott. (3)
10.4 Agreement dated January 28, 2000, by and between the Company and
James P. McDermott. (3)
10.5 Executive Employment Agreement dated January 28, 2000, by and
between the Company and Scott D. Silverman. (3)
10.6 Agreement dated January 28, 2000, by and between the Company and
Scott D. Silverman. (3)
10.7 Amendment No. 2 and Waiver dated as of April 25, 2000 to Cash
Collateral Agreement, dated as of February 8, 2000 and Forbearance
Agreement, dated as of February 4, 2000, by and among the Company as
Debtor and Debtor-in-Possession, AMH Holdings Corporation,
Southwestern Financial Corporation, Southwestern Financial Services
Corporation, PennCorp Occidental Corp., KB Investment L.L.C., KB
Management L.L.C.; certain of the lenders signatory to the Cash
Collateral Agreement, the Managing Agents and the Co-Agents named
therein, and The Bank of New York, as administrative agent. (1)
10.8 Amendment No. 1 to Cash Collateral Agreement, dated as of February 10,
2000, among the Company as Debtor and Debtor-in-Possession, the
lenders signatory thereto, and the Bank of New York, as administrative
agent. (4)
10.9 Cash Collateral Agreement dated as of February 8, 2000, among the
Company as Debtor and Debtor-in-Possession, the lenders signatory
thereto, and the Bank of New York, as administrative agent.(4)
10.10 Forbearance Agreement dated as of February 4, 2000, among
American-Amicable Holdings Corporation, Southwestern Financial
Corporation, Southwestern Financial Services Corporation, PennCorp
Occidental Corp., KB Investment L.L.C., KB Management L.L.C. and the
lenders signatory to the Credit Agreement, the Managing Agents and the
Co-Agents named therein and The Bank of New York, as administrative
agent and collateral agent under the Security Agreements. (4)
10.11 Waco Consent and Waiver and Amendment dated as of January 31, 2000,
to Credit Agreement, among the Company, the lenders signatory thereto,
the Managing Agents and the Co-Agents named therein and The Bank of
New York, as administrative agent. (6)
40
<PAGE>
10.12 Swiss Re Consent dated as of January 31, 2000, to Credit Agreement,
among the Company, the lenders signatory thereto, the Managing Agents
and the Co-Agents named therein and The Bank of New York, as
administrative agent. (6)
10.13 Other Consent dated as of January 31, 2000, to Credit Agreement,
among the Company, the lenders signatory thereto, the Managing Agents
and the Co-Agents named therein and The Bank of New York, as
administrative agent. (6)
10.14 Offer Letter, dated as of March 15, 2000, from Inverness/Phoenix
Capital LLC, Vicuna Advisors, LLC in its capacity as investment
manager to certain Delaware entities, Bernard Rapoport and John Sharpe
(the "Offerors'). (5)
10.15 Offer Supplement Letter, dated as of March 20, 2000, from
Inverness/Phoenix Capital LLC, Vicuna Advisors, LLC in its capacity as
investment manager to certain Delaware entities, Bernard Rapoport and
John Sharpe (the "Offerors'). (5)
10.16 Equity Commitment Letter, dated as of March 20, 2000, by Bernard
Rapoport. (5)
10.17 Equity Commitment Letter, dated as of March 20, 2000, by John Sharpe.
(5)
10.18 Revised Standby Underwriting Commitment Letter, dated as of March 22,
2000, by and among Inverness/Phoenix Capital, LLC, Vicuna Advisors,
LLC and the Company. (5)
10.19 Amended and Restated Escrow Agreement, dated as of March 21, 2000, by
and among the Offerors and Citibank N.A., as the escrow agent. (5)
10.20 Lock-Up Agreement, dated as of March 15, 2000, by and between the
Company and certain preferred stockholders listed therein. (5)
10.21 Letter, dated as of March 21, 2000, by ING (U.S.) Capital LLC and ING
Barings LLC to Inverness Management LLC. (5)
10.22 Surplus Debenture Number Eight in the original principal amount of
$35,000,000, issued by Pacific Life and Accident Insurance Company to
Southwestern Financial Corporation, dated January 31, 2000. (6)
10.23 Proposed Plan of Reorganization of PennCorp Financial Group, Inc. (1)
11.1 Computation of Loss per Share
15.1 Independent Auditors' Report (7)
27 Financial Data Schedule
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Form 8-K, dated
January 10, 2000, which was filed with the Securities and Exchange
Commission by the Company on January 10, 2000, relating to the press
release announcement by the Company, dated January 10, 2000, that it
had (a) entered into a Stock Purchase Agreement, dated as of January
7, 2000, for the sale of Southwestern Life Insurance Company and
Security Life & Trust Insurance Company to Reassurance America Life
Insurance Company; and (b) had, through its subsidiary
American-Amicable Holdings Corporation, entered into a Stock Purchase
Agreement, dated as of January 8, 2000, for the sale of its Waco,
Texas-based insurance operations to Pioneer-Occidental Holdings
Company.
(3) Such exhibit is incorporated by reference to the Form 8-K, dated
February 4, 2000, which was filed with the Securities and Exchange
Commission by the Company on February 11, 2000, relating to (a) the
Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
by and between American-Amicable Holdings Corporation and
Pioneer-Occidental Holdings Company; (b) the press release, dated
February 4, 2000, issued by the Company announcing the consummation
41
<PAGE>
of the sale of the Waco, Texas-based insurance operations to
Pioneer-Occidental Holdings Company; (c) the press release, dated
February 7, 2000, issued by the Company announcing the filing by the
Company of a voluntary petition for relief under chapter 11 of title
11 of the United States Code in the Bankruptcy Court for the District
of Delaware; (d) the Executive Employment Agreement, dated January 28,
2000, by and between the Company and Keith A. Maib; (e) the Agreement,
dated January 28, 2000, by and between the Company and Keith A. Maib;
(f) the Executive Employment Agreement, dated January 28, 2000, by and
between the Company and James P. McDermott; (g) the Agreement, dated
January 28, 2000, by and between the Company and James P. McDermott;
(h) the Executive Employment Agreement, dated January 28, 2000, by and
between the Company and Scott D. Silverman; and (i) the Agreement,
dated January 28, 2000, by and between the Company and Scott D.
Silverman.
(4) Such exhibit is incorporated by reference to the Form 8-K, dated
February 4, 2000, which was filed with the Securities and Exchange
Commission by the Company on February 29, 2000, reporting in
connection with that certain Credit Agreement dated as of March 12,
1997, the execution by the Company of (a) the Forbearance Agreement
dated as of February 4, 2000; (b) the Cash Collateral Agreement dated
as of February 8, 2000; and (c) Amendment No. 1 to Cash Collateral
Agreement dated as of February 10, 2000.
(5) Such exhibit is incorporated by reference to the Form 8-K, dated March
23, 2000, which was filed with the Securities and Exchange Commission
by the Company on March 30, 2000, relating to (a) the issuance of a
press release, dated March 24, 2000, by the Company announcing its
approval of a recapitalization transaction proposed by
Inverness/Phoenix Capital LLC and Vicuna Advisors, LLC, on behalf of
the Offerors; (b) the execution of the Offer Letter, dated as of March
15, 2000, by and among the Offerors and the Company; (c) the execution
of the Offer Supplement Letter, dated as of March 20, 2000, by and
among the Offerors and the Company; (d) the Equity Commitment Letter,
dated as of March 15, 2000, by Bernard Rapoport; (e) the Equity
Commitment Letter, dated as of March 15, 2000, by John Sharpe; (f) the
Revised Standby Underwriting Commitment Letter, dated as of March 22,
2000, by and among Inverness/Phoenix Capital, LLC, Vicuna Advisors,
LLC and the Company; (g) the Amended and Restated Escrow Agreement,
dated as of March 21, 2000, by and among the Offerors and Citibank
N.A., as the escrow agent; (h) the Lock-Up Agreement, dated as of
March 15, 2000, by and between the Company and certain preferred
stockholders listed therein; and (i) the Letter, dated as of March 21,
2000, by ING (U.S.) Capital LLC and ING Barings LLC to Inverness
Management LLC.
(6) Such exhibit is incorporated by reference to the Annual Report on Form
10-K filed for the fiscal year ended December 31, 1999 of PennCorp
Financial Group, Inc.
(7) Included in Item 1 of Part I of this Form 10-Q.
42
AMENDMENT NO. 2
and
WAIVER
Dated as of April __, 2000
to
CASH COLLATERAL AGREEMENT
Dated as of February 8, 2000
and
FORBEARANCE AGREEMENT
Dated as of February 4, 2000
PENNCORP FINANCIAL GROUP, INC., a Delaware corporation (the "Company"),
the Pledgors (as defined below), certain of the lenders signatory to the Cash
Collateral Agreement referred to below (the "Banks"), the Managing Agents and
the Co-Agents named therein (the "Agents") and THE BANK OF NEW YORK, as
administrative agent for the Banks (the "Administrative Agent"), hereby agree as
follows:
1. Cash Collateral Agreement.
-------------------------
(a) Reference is hereby made to the Cash Collateral Agreement, dated
as of February 8, 2000, among the Company, the Banks, the Agents and the
Administrative Agent, as amended by Amendment No. 1 dated February 10, 2000 (the
"Cash Collateral Agreement").
(b) The Cash Collateral Agreement as further amended herein is and
shall continue to be in full force and effect and is hereby in all respects
confirmed, approved and ratified.
2. Forbearance Agreement.
---------------------
(a) Reference is also made to the Forbearance Agreement, dated as of
February 4, 2000, among the Pledgors, the Banks signatory thereto, the Agents,
the Administrative Agent, and the Collateral Agent (in each case as defined
therein)(the "Forbearance Agreement").
(b) The Forbearance Agreement as further amended herein is and shall
continue to be in full force and effect and is hereby in all respects confirmed,
approved and ratified.
<PAGE>
3. Definitions.
-----------
(a) All terms defined in the Cash Collateral Agreement or the
Forbearance Agreement are used in this Amendment No. 2 and Waiver (this
"Amendment and Waiver") with the meanings therein ascribed to them.
(b) For purposes of this Amendment and Waiver:
"Amendment No. 2 and Waiver Effective Date" shall have the
meaning ascribed to that term in paragraph 8 of this Amendment and Waiver.
"Bankruptcy Court Order" means an order of the Bankruptcy
Court approving the execution, delivery and performance by the Company of this
Amendment and Waiver.
"Reinsurance Agreement" shall mean the reinsurance agreement
between Southwestern Life Insurance Company, Security Life and Trust Insurance
Company and RGA Reinsurance Company, dated as of _________, 2000, in the form
attached hereto as Exhibit A, as such form may be amended or modified from time
to time after the Amendment No. 2 and Waiver Effective Date; provided, that any
such amendment or modification that is material and adverse to the Company shall
have been approved by the Majority Banks; provided further, that any amendment
or modification of Article VI, Paragraph 6 shall be deemed to be material and
adverse to the Company and shall require approval by the Majority Banks.
4. Representations and Warranties.
------------------------------
In order to induce the Banks to execute and deliver this Amendment
and Waiver, the Company hereby represents and warrants as follows:
(a) (i) The Company 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 Waiver and the Cash Collateral Agreement, as further amended by this
Amendment and Waiver. This Amendment and Waiver has been duly executed and
delivered by the duly authorized officers of the Company, and the Cash
Collateral Agreement, as further amended by this Amendment and Waiver is, the
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, whether at law or in equity
(including principles of good faith and fair dealing). The execution, delivery
and performance in accordance with their respective terms by the Company of this
Amendment and Waiver and the Cash Collateral Agreement, as further amended by
this Amendment and Waiver 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 the Bankruptcy Court Order, which is
a Final Order and is in full force and effect, 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 Subsidiary under (1) any Contract to which the Company, or any
2
<PAGE>
Subsidiary is a party or by which the Company, 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.
(ii) Each of the Pledgors 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 Waiver and the Forbearance Agreement, as further amended by this Amendment
and Waiver. This Amendment and Waiver has been duly executed and delivered by
the duly authorized officers of each Pledgor, and the Forbearance Agreement, as
further amended by this Amendment and Waiver is, the legal, valid and binding
obligation of such Pledgor enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally, whether at law or in equity (including principles
of good faith and fair dealing). The execution, delivery and performance in
accordance with their respective terms by each Pledgor of this Amendment and
Waiver and the Forbearance Agreement, as further amended by this Amendment and
Waiver 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 such Pledgor
or of any of its Subsidiaries, to have been obtained, or any Governmental
Registration to have been made, other than the Bankruptcy Court Order, which is
a Final Order and is in full force and effect, 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 such
Pledgor or any Subsidiary under (1) any Contract to which such Pledgor, or any
Subsidiary is a party or by which such Pledgor, 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) (i) The copy of the Reinsurance Agreement attached hereto as
Exhibit A is the current draft as of the Amendment No. 2 and Waiver Effective
Date.
(ii) The copy of the Bankruptcy Court Order attached hereto as
Exhibit B is a true and correct copy of such order.
(c) Each of the foregoing representations and warranties shall
constitute representations and warranties subject to Section 9(b) of the Cash
Collateral Agreement and shall be made at and as of the Amendment No. 2 and
Waiver Effective Date.
5. Amendments to the Cash Collateral Agreement.
-------------------------------------------
(a) Effective upon the satisfaction of the condition specified in
paragraph 8(a) hereof, the Cash Collateral Agreement shall be amended as
follows:
3
<PAGE>
(i) by amending nunc pro tunc, the existing definition of
Company Operating Budget to read in its entirety as follows:
"Company Operating Budget" shall mean the operating budget of the
Company as identified in Schedule 1.01(A) to this Agreement as approved by
the Bankruptcy Court on February 28, 2000.
(ii) by adding, in alphabetical order, the following new
definition:
""Subscription Bank Account" shall mean the Bank Account established
by the Company for, and only for, the deposit of cash received in escrow
for the payment for shares pursuant to the subscription agreement under
the preferred shareholder's recapitalization plan."
(iii) by amending Section 8.16 to add the following proviso
at the end thereof:
"provided further that this Section 8.16 shall not apply to the
Subscription Bank Account".
(b) Upon and after the Amendment No. 2 and Waiver Effective Date,
the Cash Collateral Agreement is hereby further amended as follows:
(i) by amending Section 2.01(c) by deleting the proviso to the
first sentence, and substituting therefore, the following:
"provided, that no withdrawal in respect of Operating Expenses shall be
made if, after giving effect thereto, and to all other withdrawals then
requested to be made from the Collateral Account, the remaining aggregate
balance in the Collateral Account and the Custody Account collectively would be
less than $3,500,000."
(ii) by amending Section 8.01 by adding thereto the following
new section (o):
"(o) provide the Agent with any information reasonably requested by
the Agent concerning the status of the plan of reorganization of the Company
dated April 5, 2000 or any other plan of reorganization for the Company or other
disposition of the Company's assets."
(iii) (A) by amending Section 8.06(a) by adding at the end of
the first sentence the following proviso:
"provided that, within two Business Days after any dissolution or
wind down permitted under this Section, the Company shall comply with its
obligations under Section 4.03 of the Company Security Agreement." and
(B) by adding to Schedule 8.06(a) a new final sentence
reading as follows:
4
<PAGE>
"The liquidation or dissolution of Southwestern Financial
Corporation, AMH Holdings Corporation, or PennCorp Financial Services,
Inc.."
6. Certain Other Amendments.
------------------------
(a) Upon and after the Amendment No. 2 and Waiver Effective Date,
Section 10 of the Forbearance Agreement shall be amended by amending the
existing definition of Termination Date to read as follows:
"Termination Date" shall mean the earlier to occur of (a) the
dismissal of the Chapter 11 Case, (b) the conversion of the Chapter 11
Case to a case under Chapter 7 of the Bankruptcy Code, and (c) June 30,
2000.
(b) Effective upon the satisfaction of the condition specified in
paragraph 8(a) hereof, Section 3 of the Company Security Agreement is hereby
amended by adding at the end of the existing proviso thereof the following
proviso:
"; and provided further that Collateral shall not include the
Subscription Bank Account."
7. Waiver.
------
Upon and after the Amendment No. 2 and Waiver Effective Date, the
Majority Banks hereby waive application of and the Company's obligation to
comply with Section 8.15 of the Cash Collateral Agreement to the extent, and
only to the extent, that any non-compliance results solely from the consummation
of the Reinsurance Agreement; provided that the waiver granted in this paragraph
7 shall cease to be effective, and Section 8.15 shall thereupon again be
effective, if the Terminal Accounting and Settlement contemplated by paragraph 6
of Article VI of the Reinsurance Agreement shall not be completed within the ten
calendar day period contemplated by that paragraph, should that paragraph become
applicable.
8. Conditions to Effectiveness: Amendment No. 2 and Waiver Effective
-----------------------------------------------------------------
Date.
----
(a) This Amendment and Waiver (i) shall be effective as of February
28, 2000 with respect to the amendment described in paragraph 5(a)(i) and (ii)
shall be effective as of the date first written above with respect to the
amendments in paragraphs 5(a)(ii) and (iii) and 6(b), but no such amendments
shall become effective as of such dates until such time as this Amendment and
Waiver has been executed and delivered by the Company, the Majority Banks and
the Administrative Agent.
(b) This Amendment and Waiver shall become effective as of the date
first written above with respect to paragraph 5(b), paragraph 6(a) and paragraph
7, but shall not become effective as of such date until the time (such time, the
"Amendment No. 2 and Waiver Effective Date") as:
5
<PAGE>
(i) this Amendment and Waiver has been executed and delivered
by the Company, the Majority Banks and the Administrative Agent;
(ii) all amounts payable pursuant to Section 11.03 of the Cash
Collateral Agreement for which invoices have been delivered to the Company on or
prior to such date, have been paid in full;
(iii) the Banks, after April 1, 2000, shall have received a
prepayment pursuant to Section 3.05(a) of the Cash Collateral Agreement from the
Company in the principal amount not less than $5,000,000 together with interest
accrued through the date of prepayment; and
(iv) the Bankruptcy Court Order shall have become a Final
Order.
provided, however that if the above conditions are not met on or
before May [ ], 2000, this Amendment and Waiver will terminate with respect to
the amendments referred to in this paragraph 8(b) on such date.
9. Governing Law.
-------------
The rights and duties of the Company, the Agent and the Banks under
this Amendment and Waiver shall, pursuant to New York General Obligations Law
Section 5-1401, be governed by the law of the State of New York.
10. Counterparts.
------------
This Amendment and Waiver 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.
11. Headings.
--------
Section headings in this Amendment and Waiver are included herein
for convenience and reference only and shall not constitute a part of this
Amendment and Waiver for any other purpose.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be duly executed as of the day and year first above written.
PENNCORP FINANCIAL GROUP, INC.
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Executive Vice President
AMH HOLDINGS CORPORATION
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Executive Vice President
SOUTHWESTERN FINANCIAL CORPORATION
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Senior Vice President
SOUTHWESTERN FINANCIAL SERVICES
CORPORATION
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Assistant Secretary
KB MANAGEMENT L.L.C.
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Authorized Manager
<PAGE>
KB INVESTMENT L.L.C.
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: Authorized Manager
PENNCORP OCCIDENTAL CORP.
By: /S/ SCOTT D. SILVERMAN
----------------------------------
Name: Scott D. Silverman
Title: President and Secretary
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/ GLENN R. MEYER
----------------------------------
Name: Glenn R. Meyer
Title: M.D.
BANK OF AMERICA, N.A., formerly known as
Nations Bank, N.A., as a Managing
Agent and as a Bank
By: /S/ WILLIAM E. LUWUPSTHE, IV
----------------------------------
Name: William E. Luwupsthe, IV
Title: Managing Director
<PAGE>
FLEET NATIONAL BANK, as a
Co-Agent and as a Bank
By: /S/ DONALD R. NICHOLSON
----------------------------------
Name: Donald R. Nicholson
Title: SVP
MELLON BANK, N.A., as a Co-Agent
and as a Bank
By: /S/ GARY A. SAUL
----------------------------------
Name: Gary A. Saul
Title: First Vice President
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 AND
GRAND CAYMAN BRANCHES, as a Co-
Agent and as a Bank
By: /S/ GEORGE T. FERGUSON, IV
----------------------------------
Name: George T. Ferguson, IV
Title: Assistant Vice President
By: /S/ STEPHEN A. KOVACH
----------------------------------
Name: Stephen A. Kovach
Title: Assistant Vice President
FIRST UNION NATIONAL BANK
By: /S/ THOMAS L. STITCHBERRY
----------------------------------
Name: Thomas L. Stitchberry
Title: Senior Vice President
BEAR STEARNS & CO., INC.
By:/S/ GREGORY A. HARLEY
----------------------------------
Name: Gregory A. Harley
Title: Senior Managing Director
DK ACQUISITION PARTNERS, L.P.
By:
----------------------------------
Name:
Title:
ING (U.S.) CAPITAL CORPORATION
By: /S/ MARY FORSTNER
----------------------------------
Name: Mary Forstner
Title: Senior Associate
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
PennCorp Financial Group, Inc., ) Case No. 00-888 (PJW)
)
Debtor. )
- --------------------------------------------------------------------------------
PLAN OF REORGANIZATION
OF PENNCORP FINANCIAL GROUP, INC.
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
PROPOSED BY THE COMPANY AND THE UNOFFICIAL
COMMITTEE OF PREFERRED SHAREHOLDERS
- --------------------------------------------------------------------------------
Jeffrey L. Tanenbaum
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Facsimile: (212) 310 - 8007
Martin Sosland
WEIL, GOTSHAL & MANGES LLP
100 Crescent Court Suite 1300
Dallas, Texas 75201-6950
Thomas L. Ambro
Mark Collins
RICHARDS, LAYTON & FINGER
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
Facsimile: (302) 658-6548
Co-Counsel to PennCorp Financial Group, Inc.
James H.M. Sprayregen
Lena Mandel
KIRKLAND & ELLIS
200 E. Randolph Drive
Chicago, Illinois 60601
Facsimile: (312) 861-2200
<PAGE>
Laura Davis Jones
PACHULSKI, STANG, ZIEL, YOUNG & JONES
919 North Market Street
Wilmington, Delaware 19801
Facsimile: (302) 652-4400
Co-Counsel to Inverness/Phoenix Capital
LLC., lead member of the Unofficial
Committee of Preferred Shareholders
Dated: April 25, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME
AND GOVERNING LAW............................................1
A. Rules of Interpretation, Computation of Time and Governing Law..1
B. Defined Terms...................................................1
ARTICLE II. ADMINISTRATIVE AND PRIORITY TAX CLAIMS..........................8
A. Administrative Claims...........................................8
B. Professional Compensation.......................................8
C. Priority Tax Claims.............................................9
ARTICLE III.CLASSIFICATION AND TREATMENTOF CLASSIFIED CLAIMS AND EQUITY
INTERESTS....................................................9
A. Summary.........................................................9
B. Classification and Treatment of Claims and Equity Interests....10
C. Special Provision Governing Unimpaired Claims..................12
ARTICLE IV. ACCEPTANCE OR REJECTION OF THE PLAN............................13
A. Voting Classes.................................................13
B. Acceptance by Impaired Classes.................................13
C. Presumed Acceptance of Plan....................................13
D. Presumed Rejection of Plan.....................................13
E. Non-Consensual Confirmation....................................13
ARTICLE V. MEANS FOR IMPLEMENTATION OF THE PLAN...........................13
A. Continued Corporate Existence and Vesting of Assets in the
Reorganized Debtor ..........................................13
B. Cancellation of Notes, Instruments and Common Stock............13
C. Issuance of New Securities; Execution of Related Documents.....14
D. Terms of the Rights Offering...................................14
E. Terms of the Rapoport/Sharpe Investment........................14
F. Terms of the New Common Stock .................................15
G. Corporate Governance, Directors and Officers, and Corporate
Action .....................................................15
H. Sources of Cash for Plan Distribution..........................16
I. Change of Corporate Name.......................................16
ARTICLE VI. TREATMENT OF EXECUTORY CONTRACTSAND UNEXPIRED LEASES...........16
A. Assumption of Executory Contracts and Unexpired Leases.........16
B. Claims Based on Rejection of Executory Contracts or Unexpired
Leases .....................................................16
C. Cure of Defaults for Executory Contracts and Unexpired Leases
Assumed ....................................................17
D. Indemnification of Directors, Officers and Employees...........17
E. Compensation and Benefit Programs..............................17
ARTICLE VII.PROVISIONS GOVERNING DISTRIBUTIONS.............................17
A. Distributions for Claims Allowed as of the Effective Date......17
B. Distributions by the Reorganized Debtor; Distributions with
Respect to Old Notes .......................................18
C. Delivery and Distributions and Undeliverable or Unclaimed
Distributions ..............................................18
D. Distribution Record Date.......................................19
E. Timing and Calculation of Amounts to be Distributed............19
F. No Fractional Shares ..........................................19
G. Setoffs........................................................19
H. Surrender of Canceled Instruments or Securities................19
<PAGE>
I. Lost, Stolen, Mutilated or Destroyed Securities................20
ARTICLE VIIIPROCEDURES FOR RESOLVING DISPUTED CLAIMS.......................20
A. Prosecution of Objections to Claims............................20
B. Estimation of Claims...........................................20
C. Payments and Distributions on Disputed Claims or Interests.....21
ARTICLE IX. CONDITIONS PRECEDENT TO CONSUMMATION OF THE PLAN...............21
A. Conditions Precedent to Consummation...........................21
B. Effect of Non-Occurrence of Conditions to Consummation.........22
ARTICLE X. RELEASE, INJUNCTIVE AND RELATED PROVISIONS.....................22
A. Subordination..................................................22
B. Limited Releases by the Debtor.................................22
C. Preservation of Rights of Action...............................22
D. Exculpation....................................................23
E. Injunction.....................................................23
ARTICLE XI. RETENTION OF JURISDICTION......................................23
ARTICLE XII.MISCELLANEOUS PROVISIONS.......................................24
A. Dissolution of Committee(s)....................................24
B. Payment of Statutory Fees......................................24
C. Fees and Expenses of the Unofficial Preferred Shareholders'
Committee ..................................................24
D. Discharge of Debtor............................................24
E. Modification of Plan...........................................25
F. Revocation of Plan.............................................25
G. Successors and Assigns.........................................25
H. Reservation of Rights..........................................25
I. Section 1145 Exemption.........................................25
J. Section 1146 Exemption.........................................25
K Further Assurances.............................................25
L. Service of Documents...........................................26
M. Filing of Additional Documents.................................27
<PAGE>
- --------------------------------------------------------------------------------
PLAN OF REORGANIZATION
OF PENNCORP FINANCIAL GROUP, INC. UNDER CHAPTER 11 OF
THE BANKRUPTCY CODE PROPOSED BY THE COMPANY AND THE
UNOFFICIAL COMMITTEE OF PREFERRED SHAREHOLDERS
- --------------------------------------------------------------------------------
Pursuant to chapter 11, title 11 of the United States Code, 11 U.S.C. Sections
101 et seq., PennCorp Financial Group, Inc., the debtor and debtor-in-possession
in the above-captioned and numbered case, and the Unofficial Preferred
Shareholders' Committee hereby respectfully propose the following Plan of
Reorganization under chapter 11 of the Bankruptcy Code:
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. Rules of Interpretation, Computation of Time and Governing Law
1. For purposes of the Plan: (a) whenever from the context it is
appropriate, each term, whether stated in the singular or the plural, shall
include both the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, feminine and the neuter
gender; (b) any reference in the Plan to a contract, instrument, release,
indenture or other agreement or document being in a particular form or on
particular terms and conditions means that such document shall be substantially
in such form or substantially on such terms and conditions; (c) any reference in
the Plan to an existing document or exhibit Filed, or to be Filed, shall mean
such document or exhibit, as it may have been or may be amended, modified or
supplemented; (d) unless otherwise specified, all references in the Plan to
Sections or Articles are references to Sections or Articles of the Plan; (e) the
words "herein" and "hereto" refer to the Plan in its entirety rather than to a
particular portion of the Plan; (f) captions and headings to Articles and
Sections are inserted for convenience of reference only and are not intended to
be a part of or to affect the interpretation of the Plan; (g) the rules of
construction set forth in section 102 of the Bankruptcy Code shall apply; and
(h) any term used in capitalized form in the Plan that is not defined herein but
that is used in the Bankruptcy Code or the Bankruptcy Rules shall have the
meaning assigned to such term in the Bankruptcy Code or the Bankruptcy Rules, as
the case may be.
2. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
3. Except to the extent that the Bankruptcy Code or Bankruptcy Rules are
applicable, and subject to the provisions of any contract, instrument, release,
indenture or other agreement or document entered into in connection with the
Plan, the rights and obligations arising under the Plan shall be governed by,
and construed and enforced in accordance with, the laws of the State in which
the Bankruptcy Court resides, without giving effect to the principles of
conflict of laws thereof.
B. Defined Terms
Unless the context otherwise requires, the following terms shall have the
following meanings when used in capitalized form in the Plan:
1. "Administrative Claim" means a Claim for costs and expenses of
administration under section 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses incurred after
the Petition Date of preserving the Estate and operating the business of the
Debtor (such as wages, salaries or commissions for services and payments for
- 1 -
<PAGE>
goods and other services and leased premises); (b) compensation for legal,
financial advisory, accounting and other services and reimbursement of expenses
awarded or allowed under section 330(a) or 331 of the Bankruptcy Code; and (c)
all fees and charges assessed against the Estate under chapter 123 of title 28
United States Code, 28 U.S.C. Sections 1911-1930.
2. "Allowed" means, with respect to any Claim or Equity Interest, except as
otherwise provided herein: a Claim or Equity Interest (a) that has been
scheduled by the Debtor in its schedules of liabilities as other than disputed,
contingent or unliquidated, (b) as to which the Debtor or other party in
interest have not Filed an objection on or before the Confirmation Date or such
other applicable period of limitation fixed by the Bankruptcy Code, the
Bankruptcy Rules, or the Bankruptcy Court, or as to which any objection has been
determined by a Final Order to the extent such objection is determined in favor
of the relevant Holder, (c) as to which the liability of the Debtor and the
amount thereof are determined by a Final Order of a court of competent
jurisdiction other than the Bankruptcy Court; or (d) that is expressly allowed
pursuant to the terms of this Plan.
3. "Allowed Claim" means an Allowed Claim in the particular Class
described.
4. "Allowed Equity Interest" means an Allowed Equity Interest in the
particular Class described.
5. "Amended Certificate of Incorporation" means the Certificate of
Incorporation of the Reorganized Debtor, as restated as described in Article
V.G.1 of the Plan, the form of which shall be Filed on or before the
Confirmation Date.
6. "Ballot Date" means the date stated in the Voting Instructions by which
all Ballots must be received.
7. "Ballots" mean the ballots accompanying the Disclosure Statement upon
which Holders of Impaired Claims and Impaired Interests entitled to vote shall
indicate their acceptance or rejection of the Plan in accordance with the Plan
and the Voting Instructions.
8. " Bank Secured Claims" means all Claims arising from or relating to the
Prepetition Bank Credit Facility, including Claims for accrued and unpaid
interest at the non-default contract rate through the Effective Date, which
Claims shall be deemed Allowed without the need to file any proof of Claim.
9. "Bankruptcy Code" means title I of the Bankruptcy Reform Act of 1978, as
amended from time to time, as set forth in sections 101 et seq. of title 11 of
the United States Code, and applicable portions of titles 18 and 28 of the
United States Code.
10. "Bankruptcy Court" means the United States District Court having
jurisdiction over the Chapter 11 Case and, to the extent of any reference made
pursuant to section 157 of title 28 of the United States Code and/or the General
Order of such District Court pursuant to section 151 of title 28 of the United
States Code, the bankruptcy unit of such District Court.
11. "Bankruptcy Rules"means the Federal Rules of Bankruptcy Procedure, as
amended from time to time, as applicable to the Chapter 11 Cases, promulgated
under 28 U.S.C. ss. 2075 and the General, Local and Chambers Rules of the
Bankruptcy Court.
12. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
13. "Business Day" means any day, other than a Saturday, Sunday or legal
holiday (as defined in Bankruptcy Rule 9006(a)).
14. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of which
shall be Filed on or before the Confirmation Date.
- 2 -
<PAGE>
15. "Cash" means cash and cash equivalents.
16. "Causes of Action" mean all actions, causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills, specialities,
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages or judgments.
17. "Chapter 11 Case" means the case under chapter 11 of the Bankruptcy
Code, commenced by the Debtor in the Bankruptcy Court.
18. "Claim" means a claim (as defined in section 101(5) of the Bankruptcy
Code) against the Debtor, including, but not limited to: (a) any right to
payment from the Debtor whether or not such right is reduced to judgment,
liquidated, unliquidated, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured; or (b) any right to an equitable remedy
for breach of performance if such performance gives rise to a right of payment
from the Debtor, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.
19. "Claim Holder" or "Claimant" means the Holder of a Claim.
20. "Class" means a category of Holders of Claims or Equity Interests as
set forth in Article III of the Plan.
21. "Class Action Suit" means that certain suit pending against PennCorp in
the United States District Court for the Southern District of New York under the
caption "In re PennCorp Financial Group, Inc. Securities Litigation, Master File
No. 98 Civ. 5998 (LAP)."
22. "Class Action Suit Claims" means the Claims of the Settling Members of
the class on whose behalf the Class Action Suit was instituted based on the
causes of action asserted in the Class Action Suit.
23. "Committee" or "Committees" means a statutory official committee (or
committees, if more than one) appointed in the Chapter 11 Cases pursuant to
section 1102 of the Bankruptcy Code.
24. "Committee Releasees" means all members of the Committee, as well as
all officers, directors, employees, attorneys, financial advisors, accountants,
investment bankers, agents and representatives of each such member.
25. "Common Stock" means the authorized common stock of PennCorp.
26. "Confirmation" means the entry of the Confirmation Order.
27. "Confirmation Date" means the date upon which the Confirmation Order is
entered by the Bankruptcy Court in its docket, within the meaning of Bankruptcy
Rules 5003 and 9021.
28. "Confirmation Order" means the order of the Bankruptcy Court confirming
the Plan pursuant to section 1129 of the Bankruptcy Code.
29. "Consummation" means the occurrence of the Effective Date.
30. "Creditor" means any Holder of a Claim.
31. "D&O Releasees" means all officers and directors of the Debtor and
their present and future subsidiaries who served in such capacity on or after
the Petition Date in each case in their capacity as such.
32. "Debtor" means PennCorp Financial Group, Inc., as debtor in the Chapter
11 Case.
- 3 -
<PAGE>
33. "Debtor in Possession" means PennCorp Financial Group, Inc., as debtor
in possession in the Chapter 11 Case.
34. "Delaware General Corporation Law" means title 8 of the Delaware Code,
as now in effect or hereafter amended.
35. "Disclosure Statement" means the Disclosure Statement for the Plan of
Reorganization for PennCorp under chapter 11 of the Bankruptcy Code, as amended,
supplemented, or modified from time to time, describing the Plan, that is
prepared and distributed in accordance with sections 1125, 1126(b) and/or 1145
of the Bankruptcy Code and Bankruptcy Rule 3018 and/or other applicable law.
36. "Disputed" means, with respect to any Claim or Equity Interest, any
Claim or Equity Interest: (a) listed on the Schedules as unliquidated, disputed
or contingent and which has not been resolved by written agreement of the
parties or a Final Order of the Bankruptcy Court; or (b) which was Filed with
the Bankruptcy Court and as to which the Debtor or any other party in interest
have interposed a timely objection or request for estimation in accordance with
the Bankruptcy Code and the Bankruptcy Rules or is otherwise disputed by the
Debtor in accordance with applicable law, which objection, request for
estimation or dispute has not been withdrawn or determined by a Final Order.
Prior to (i) the time an objection has been Filed and (ii) the expiration of the
time within which an objection may be filed as set forth herein or as otherwise
established by an order of the Bankruptcy Court, a Claim or an Equity Interest
shall be considered a Disputed Claim or a Disputed Equity Interest to the extent
that the amount of the Claim or Equity Interest specified in a proof of Claim or
Equity Interest exceeds the amount of the Claim or Equity Interest scheduled by
the Debtor as not disputed, contingent or unliquidated.
37. "Distribution Record Date" means the close of business on the Business
Day immediately preceding the Effective Date.
38. "Effective Date" means the date selected by the Debtor and the
Unofficial Preferred Shareholders' Committee which is a Business Day after the
Confirmation Date on which: (a) no stay of the Confirmation Order is in effect,
and (b) all conditions specified in both Article IX.A and IX.B of the Plan have
been satisfied..
39. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
40. "Equity Interest" means any equity interest of the Debtor, including,
but not limited to, all issued, unissued, authorized or outstanding shares of
stock (including the Preferred Stock and the Common Stock), together with any
warrants, options or contract rights to purchase or acquire such interests at
any time.
41. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Chapter 11 Case.
42. "Executive Agreements" mean those certain Executive Stock and
Employment Agreements to be executed by the Reorganized Debtor on the Effective
Date with certain senior executives as set forth inSection VI.B.8. of the
Disclosure Statement.
43. "Exit Credit Facility" means that certain $95 million secured senior
revolving credit facility pursuant to the Senior Credit Agreement among
Southwestern Life Holdings, Inc., the lenders parties thereto and ING (U.S.)
Capital LLC, as agent dated as of the Effective Date.
44. "Expiration Date" means, in connection with the Rights Offering, the
meaning ascribed to it in the Disclosure Statement.
45. "Extraordinary Distribution" means an extraordinary distribution to
PennCorp of an aggregate amount of approximately $55 million by SFC in
connection with the Consummation of the Plan, as more fully described in Section
VI.B.9.e. of the Disclosure Statement.
- 4 -
<PAGE>
46. "File" or "Filed" means file or filed with the Bankruptcy Court in the
Chapter 11 Case.
47. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
48. "Final Order" means an order or judgment of the Bankruptcy Court, or
other court of competent jurisdiction with respect to the subject matter, which
has not been reversed, stayed, modified or amended, and as to which the time to
appeal or seek certiorari has expired and no appeal or petition for certiorari
has been timely taken, or as to which any appeal that has been taken or any
petition for certiorari that has been or may be filed has been resolved by the
highest court to which the order or judgment was appealed or from which
certiorari was sought.
49. "General Unsecured Claim" means any Unsecured Claim that is not an Old
Note Claim, including any Opt-out Old Note Claim.
50. "Holder" means a Person or Entity holding an Equity Interest or Claim,
and with respect to a vote on the Plan, means a Beneficial Holder as of the
Voting Record Date or any authorized signatory who has completed and executed a
Ballot or on whose behalf a Master Ballot has been completed and executed in
accordance with the Voting Instructions.
51. "Impaired Claim" means a Claim classified in an Impaired Class.
52. "Impaired Class" means each of Classes 7 and 8 as set forth in Article
III of the Plan.
53. "Inverness" means Inverness /Phoenix Capital, LLC, a Delaware limited
liability company, together with its affiliates.
54. "Inverness Releasees" means all officers, directors, employees,
attorneys, financial advisors, accountants, investment bankers, agents and
representatives of Inverness.
55. "Master Ballots" mean the master ballots accompanying the Disclosure
Statement upon which the Nominees of the Beneficial Holders of the Old Notes and
Preferred Stock shall indicate acceptances or rejections of the Plan by the
Beneficial Holders in accordance with the Voting Instructions.
56. "Memorandum of Understanding" means that certain Memorandum of
Understanding entered into by PennCorp and the other defendants and the lead
plaintiffs in the Class Action Suit dated as of November 11, 1999 with respect
to the settlement of the Class Action Suit.
57. "New Common Stock" means the 15,000,000 shares of common stock of the
Reorganized Debtor authorized pursuant to the Amended Certificate of
Incorporation.
58. "Nominee" means any Beneficial Holder whose securities were registered
or held of record in the name of his broker, dealer, commercial bank, trust
company, savings and loan or other nominee.
59. "Non-Settling Common Stock Claims" mean all Claims arising from
rescission of a purchase or sale of Common Stock or for damages arising from the
purchase or sale of Common Stock, except such Claims that are subject to the
Memorandum of Understanding. Pursuant to Section 510(b) of the Bankruptcy Code,
the holders of Non- Settling Common Stock Claims are accorded the same treatment
as the holders of the Common Stock.
60. "Non-Settling Old Note Claims" mean all Claims based on the causes of
action asserted in the Class Action Suit held by those class members who (a)
were members of the plaintiff class on the basis of their ownership of Old Notes
and (b) either (i) opted out of the plaintiff class in the Class Action Suit or
(ii) do not agree to a settlement based on the terms of the Memorandum of
Understanding. Pursuant to Section 510(b) of the Bankruptcy Code, the holders of
Non-Settling Old Note Claims are accorded the same treatment as the holders of
the General Unsecured Claims.
- 5 -
<PAGE>
61. "Old Note Claims" means all Claims arising from or related to the Old
Notes or the Old Note Indenture (excluding the Class Action Suit Claims and the
Non-Settling Old Note Claims), which Claims shall be deemed Allowed without the
need to file any proofs of Claim.
62. "Old Notes" mean the 9.25% senior subordinated notes due 2003, issued
by PennCorp under the Old Note Indenture.
63. "Old Note Indenture" means the Indenture, dated as of December 23,
1993, between PennCorp and HSBC Bank USA as trustee, relating to the Old Notes,
as amended.
64. "Old Note Indenture Trustee" means HSBC Bank USA, as trustee under the
Old Note Indenture.
65. "Other Priority Claims" mean any Claim accorded priority in right of
payment under section 507(a) of the Bankruptcy Code, other than a Priority Tax
Claim or an Administrative Claim.
66. "Other Secured Claims" mean, collectively, all Secured Claims against
the Debtor held by any Person or Entity, other than Claims classified in Class
2.
67. "PennCorp" means PennCorp Financial Group, Inc., a Delaware
corporation.
68. "Person" means a person as defined in section 101(41) of the Bankruptcy
Code.
69. "Petition Date" means the date on which the Debtor filed its petition
for relief commencing the Chapter 11 Case.
70. "Plan" means this Chapter 11 Plan of Reorganization, either in its
present form or as it may be altered, amended, modified or supplemented from
time to time in accordance with its terms, the Bankruptcy Code and the
Bankruptcy Rules.
71. "Preferred Stock" means, collectively, $3.375 Convertible Preferred
Stock of PennCorp and $3.50 Series II Convertible Preferred Stock of PennCorp.
72. "Prepetition Bank Credit Facility" means that certain Credit Agreement
dated March 12, 1997 by and among PennCorp, the Lenders designated therein, the
Chase Manhattan Bank, the First National Bank of Chicago, and Nationsbank, N.A.,
as Managing Agents, Fleet National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc. and Dresdner Bank AG, as Co-Agents and the Bank of New York as
Administrative Agent together with all related notes, certificates, security
agreements, mortgages, pledges, indemnities, collateral assignments,
undertakings, guaranties, and other instruments and documents, as each may have
been amended or modified from time to time.
73. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
74. "Professionals" means a Person or Entity (a) employed pursuant to a
Final Order in accordance with sections 327 and 1103 of the Bankruptcy Code and
to be compensated for services rendered prior to the Effective Date, pursuant to
sections 327, 328, 329, 330 and 331 of the Bankruptcy Code, or (b) for which
compensation and reimbursement has been allowed by the Bankruptcy Court pursuant
to section 503(b)(4) of the Bankruptcy Code.
75. "Rapoport" means Bernard Rapoport, an individual residing at 1200
Wooded Acres Drive, Waco, Texas 76710.
76. "Rapoport Releasees" means Rapoport, and all of his employees,
attorneys, financial advisors, accountants, investment bankers, agents and
representatives.
- 6 -
<PAGE>
77. "Rapoport /Sharpe Investment" means the terms and conditions governing
the purchase and sale of the Rapoport/Sharpe Shares pursuant to, respectively,
(i) that certain commitment letter from Rapoport to PennCorp dated March 15,
2000 for the purchase of 1,600,000 shares of New Common Stock, and (ii) that
certain commitment letter from Sharpe to PennCorp dated March 15, 2000 for the
purchase of 240,000 shares of New Common Stock.
78. "Rapoport/Sharpe Shares" means the 1,840,000 shares of New Common Stock
purchased by Rapoport and Sharpe pursuant to the Rapoport/Sharpe Investment for
an aggregate purchase price of $23,000,000.
79. "Reinsurance Transactions" means the reinsurance by each of SW Life and
SLT of all of their existing deferred annuity blocks of business as set forth in
that certain Reinsurance Agreement between SW Life and RGA Reinsurance Company
to be dated as of or about the Effective Date.
80. "Reorganized Debtor" means the Debtor and Debtor in Possession, or any
successor thereto, by merger, consolidation, or otherwise, on and after the
Effective Date.
81. "Rights" means the rights issued pursuant to the Rights Offering to
subscribe for and to acquire in the aggregate 1,960,000 shares of New Common
Stock for an aggregate purchase price of $24,500,000.
82. "Rights Offering" means the terms and conditions governing the issuance
and exercise of the Rights as described in Section VI.B.5. of the Disclosure
Statement.
83. "Rights Record Date" means the Voting Record Date as such term is
defined in the Disclosure Statement.
84. "Schedules" mean the schedules of assets and liabilities, schedules of
executory contracts, and the statement of financial affairs Filed by the Debtor
pursuant to section 521 of the Bankruptcy Code, the Official Bankruptcy Forms
and the Bankruptcy Rules, as they may be amended and supplemented from time to
time.
85. "Secured Claim" means (a) a Claim that is secured by a lien on property
in which the Estate has an interest, which lien is valid, perfected and
enforceable under applicable law or by reason of a Final Order, or that is
subject to setoff under section 553 of the Bankruptcy Code, to the extent of the
value of the Claim Holder's interest in the Estate's interest in such property
or to the extent of the amount subject to setoff, as applicable, as determined
pursuant to section 506(a) of the Bankruptcy Code, or (b) a Claim Allowed under
this Plan as a Secured Claim.
86. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
87. "Settlement Fund" means the $9.0 million fund established in accordance
with the Memorandum of Understanding (the Debtor's contribution to which is $1.5
million), together with any interest accrued through the date of the
consummation of the settlement of the Class Action Suit.
88. "Settling Members" means those members of the class on whose behalf the
Class Action Suit was instituted who are subject to a settlement pursuant to the
terms of the Memorandum of Understanding.
89. "SFC" means Southwestern Financial Corporation, a wholly owned direct
subsidiary of PennCorp.
90. "Sharpe" means John Sharpe, an individual residing at 2305 Cedar Spring
Road, Suite 410, Dallas, Texas 75201.
91. "Sharpe Releasees" means Sharpe, and all of his employees, attorneys,
financial advisors, accountants, investment bankers, agents and representatives.
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<PAGE>
92. "SLT" means Security Life and Trust Insurance Company, a wholly owned
indirect subsidiary of PennCorp.
93. "Standby Purchase Agreement" means that certain Letter Agreement dated
as of March 22, 2000 among PennCorp, Inverness and Vicuna, whereby Inverness and
Vicuna have agreed to purchase all New Common Stock as to which the Rights
associated therewith remain unexercised at the expiration of the Rights
Offering.
94. "SW Life" means Southwestern Life Insurance Company, a wholly owned
indirect subsidiary of PennCorp.
95. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
96. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
97. "Unofficial Preferred Shareholders' Committee" means the ad hoc
committee formed by certain Holders of the Preferred Stock prior to the Petition
Date, consisting of AIG - Soundshore Partners, Camden Assets Management, Forest
Investment Management, Highbridge Capital Management LLC, Inverness/Phoenix
Capital LLC, Executive Capital Partners I, L.P., Brown's Dock, L.L.C., Loeb
Partners, Paloma Securities LLC, Paloma Strategic Securities Limited, Q
Investments, LP, Steadfast Financial LLC, Vicuna Advisors L.L.C., W.G. Trading
and William M. McCormick..
98. "Unofficial Preferred Shareholders' Committee Releasees" means each
member of the Unofficial Preferred Shareholders' Committee, as well as all
officers, directors, employees, attorneys, financial advisors, accountants,
investment bankers, agents and representatives of each such member.
99. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority Claim.
100. "Vicuna" means Vicuna Advisors, L.L.C., a Delaware limited liability
company, in its capacity as investment manager to certain Delaware entities.
101. "Vicuna Releasees" means all officers, directors, employees,
attorneys, financial advisors, accountants, investment bankers, agents and
representatives of Vicuna and its affiliates.
ARTICLE II.
ADMINISTRATIVE AND PRIORITY TAX CLAIMS
A. Administrative Claims
Subject to the provisions of section 330(a) and 331 of the Bankruptcy
Code, each Holder of an Allowed Administrative Claim will be paid the full
unpaid amount of such Allowed Administrative Claim in Cash on the later of the
Effective Date and the date such claim becomes an Allowed Administrative Claim,
or upon such other terms as may be agreed upon by such Holder and the
Reorganized Debtor or otherwise upon order of the Bankruptcy Court; provided,
however, that Allowed Administrative Claims representing obligations incurred in
the ordinary course of business or otherwise assumed by the Debtor pursuant to
the Plan will be assumed on the Effective Date and paid or performed by the
Reorganized Debtor when due in accordance with the terms and conditions of the
particular agreements governing such obligations.
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<PAGE>
B. Professional Compensation
Professionals or other entities asserting Claims based on professional
services rendered before the Effective Date must File and serve on the
Reorganized Debtor, the Committee(s) and such other entities who are designated
by the Bankruptcy Rules, the Confirmation Order or other order of the Bankruptcy
Court an application for final allowance of such Claim no later than 60 days
after the Effective Date, provided, however, that Professionals engaged by the
Unofficial Preferred Shareholders' Committee need not file fee applications in
accordance with Article XII.C. of this Plan. Objections to any applications for
final allowance of compensation by Professionals must be Filed and served on the
Reorganized Debtor, the Committee(s) and the requesting party by the later of
(a) 90 days after the Effective Date or (b) 30 days after the Filing of the
applicable application. To the extent necessary, the Confirmation Order will
amend and supersede any previously entered orders of the Bankruptcy Court
regarding the payment of Claims by professionals in respect of services rendered
to the Debtor's estate.
C. Priority Tax Claims
On the Effective Date, each Holder of a Priority Tax Claim due and payable
on or prior to the Effective Date shall be paid Cash in an amount equal to the
amount of such Allowed Claim, or shall be paid on account of its Allowed Claim
on such other terms as have been or may be agreed upon by such Holder and the
Debtor. The amount of any Priority Tax Claim that is not an Allowed Claim or
that is not otherwise due and payable on or prior to the Effective Date, and the
rights of the Holder of such Claim, if any, to payment in respect thereof shall
(i) be determined in the manner in which the amount of such Claim and the rights
of the Holder of such Claim would have been resolved or adjudicated if the
Chapter 11 Case had not been commenced, (ii) survive the Effective Date and
Consummation of the Plan as if the Chapter 11 Case had not been commenced, and
(iii) not be discharged pursuant to section 1141 of the Bankruptcy Code. In
accordance with section 1124 of the Bankruptcy Code, the Plan shall leave
unaltered the legal, equitable, and contractual rights of each Holder of a
Priority Tax Claim.
ARTICLE III.
CLASSIFICATION AND TREATMENT
OF CLASSIFIED CLAIMS AND EQUITY INTERESTS
A. Summary
The categories of Claims and Equity Interests listed below classify Claims
and Equity Interests for all purposes, including voting, confirmation and
distribution pursuant to the Plan and pursuant to sections 1122 and 1123(a)(1)
of the Bankruptcy Code. A Claim or Equity Interest shall be deemed classified in
a particular Class only to the extent that the Claim or Equity Interest
qualifies within the description of that Class and shall be deemed classified in
a different Class to the extent that any remainder of such Claim or Equity
Interest qualifies within the description of such different Class. A Claim or
Equity Interest is in a particular Class only to the extent that such Claim or
Equity Interest is Allowed in that Class and has not been paid or otherwise
settled prior to the Effective Date.
The classification of Claims and Equity Interests pursuant to this Plan is
as follows:
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Class Status Voting Rights
----- ------ -------------
Class 1 -- Other Priority Claims Unimpaired -- not entitled to vote
Class 2 -- Bank Secured Claims Unimpaired -- not entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to vote
Class 4 -- Old Notes Unimpaired -- not entitled to vote
Class 5 -- General Unsecured Claims Unimpaired -- not entitled to vote
Class 6 -- Class Action Suit Claims Unimpaired -- not entitled to vote
Class 7 -- Interests of Holders of
Preferred Stock Impaired -- entitled to vote
Class 8 -- Common Equity Interests
and Opt-out Common
Stock Claims Impaired -- not entitled to vote
B. Classification and Treatment of Claims and Equity Interests
1. Class 1 -- Other Priority Claims
(a) Classification: Class 1 consists of all Other Priority Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 1 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor and Unofficial Preferred Shareholders' Committee agree to a
different treatment, each Holder of an Allowed Class 1 Claim shall receive one
of the following alternative treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date,
such Claim will be paid in full in Cash by the Reorganized Debtor;
(ii) to the extent not due and owing on the Effective Date,
such Claim will be paid in full in Cash by the Reorganized Debtor
when and as such Claim becomes due and owing in the ordinary course
of business; or
(iii) such Claim will be otherwise treated in any other manner
so that such Claim shall otherwise be rendered unimpaired pursuant
to section 1124 of the Bankruptcy Code.
(c) Voting: Class 1 is not impaired and the Holders of Class 1
Claims are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 1 are
not entitled to vote to accept or reject the Plan.
2. Class 2 -- Bank Secured Claims
(a) Classification: Class 2 consists of the Bank Secured Claims.
(b) Treatment: All Bank Secured Claims will be paid by the
Reorganized Debtor in full in Cash on the Effective Date in accordance with the
terms of the Prepetition Bank Credit Facility
(c) Voting: Class 2 is not impaired and the Holders of Class 2
Claims are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 2 are
not entitled to vote to accept or reject the Plan.
3. Class 3 -- Other Secured Claims
(a) Classification: Class 3 consists of the Other Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 3 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor and the Unofficial Preferred Shareholders'
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<PAGE>
Committee agree to a different treatment, each Holder of an Allowed Class 3
Claim shall receive one of the following alternative treatments, at the election
of the Debtor:
(i) the legal, equitable and contractual rights to which
such Claim entitles the Holder thereof shall be unaltered by the
Plan;
(ii) the Debtor shall surrender all collateral securing such
Claim to the Holder thereof, without representation or warranty by
or recourse against the Debtor or Reorganized Debtor; or
(iii) such Claim will be otherwise treated in any other manner
so that such Claim shall otherwise be rendered unimpaired pursuant
to section 1124 of the Bankruptcy Code.
(c) Voting: Class 3 is not impaired and the Holders of Class 3
Claims are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 3 are
not entitled to vote to accept or reject the Plan.
4. Class 4 -- Old Notes Claims
(a) Classification: Class 4 consists of the Claims of Holders of
the Old Notes.
(b) Treatment: On the Effective Date, the Reorganized Debtor will
pay all Old Notes Claims in Cash at 101% of the principal amount of each Old
Note, plus accrued and unpaid interest through the Effective Date at the
non-default contract rate, plus any fees and expenses due and owing to the Old
Note Indenture Trustee under the terms of the Old Note Indenture.
(c) Voting: Class 4 is unimpaired and the Holders of Class 4 Claims
are conclusively deemed to have accepted the Plan pursuant to section 1126(f) of
the Bankruptcy Code. Therefore, the Holders of Claims in Class 4 are not
entitled to vote to accept or reject the Plan.
5. Class 5 -- General Unsecured Claims
(a) Classification: Class 5 consists of the Claims of Holders of
General Unsecured Claims, including the Non-Settling Old Note Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 5 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor and the Unofficial Preferred Shareholders' Committee agree
to a different treatment, each Holder of an Allowed Class 5 Claim shall receive
one of the following alternative treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date,
such Claim will be paid in full in Cash by the Reorganized Debtor;
(ii) to the extent not due and owing on the Effective Date,
such Claim will be paid in full in Cash by the Reorganized Debtor
when and as such Claim becomes due and owing in the ordinary course
of business; or
(iii) such Claim will be otherwise treated in any other manner
so that such Claim shall otherwise be rendered unimpaired pursuant
to section 1124 of the Bankruptcy Code.
(c) Voting: Class 5 is not impaired and the Holders of Class 5
Claims are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 5 are
not entitled to vote to accept or reject the Plan.
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<PAGE>
6. Class 6 -- Class Action Suit Claims
(a) Classification: Class 6 consists of the Claims of the Settling
Members of the class on whose behalf the Class Action Suit was instituted based
on the causes of action asserted in the Class Action Suit.
(b) Treatment: Unless the Holder of such Claim and the Debtor and
the Unofficial Preferred Shareholders' Committee agree to a different treatment,
each Holder of an Allowed Class 6 Claim shall receive its portion of the
Settlement Fund, as determined in accordance with the Memorandum of
Understanding or as provided by a Final Order of the court having jurisdiction
over the Class Action Suit.
(c) Voting: Class 6 is unimpaired and the Holders of Class 6 Claims
are conclusively deemed to have accepted the Plan pursuant to section 1126(f) of
the Bankruptcy Code. Therefore, the Holders of Claims in Class 6 are not
entitled to vote to accept or reject the Plan.
7. Class 7 -- Interests of Holders of Preferred Stock
(a) Classification: Class 7 consists of all Interests of Holders
of Preferred Stock.
(b) Treatment: On the Effective Date, each Holder of Preferred Stock
shall receive one share of New Common Stock and one Right for each share of
Preferred Stock then held by such Holder. All Preferred Stock issued before the
Petition Date will be canceled.
(c) Voting: Class 7 is impaired and the Holders of Class 7
Interests are entitled to vote to accept or reject the Plan.
8. Class 8 -- Common Equity Interests and Non-Settling Common Stock
Claims
(a) Classification: Class 8 consists of all Interests of Holders of
Equity Interests other than Preferred Stock and all Non-Settling Common Stock
Claims.
(b) Treatment: On the Effective Date, the members of Class 8 shall
neither receive any distributions nor retain any property under the Plan. All
Common Stock issued before the Petition Date will be canceled.
(c) Voting: Class 8 is impaired, but because no distributions will
be made to Holders of Class 8 Equity Interests or Opt-out Common Stock Claims,
nor will such Holders retain any property, such Holders are deemed to reject the
Plan pursuant to section 1126(g) of the Bankruptcy Code. Class 8 is not entitled
to vote to accept or reject the Plan.
C. Special Provision Governing Unimpaired Claims
Except as otherwise provided in the Plan, including as provided in Article
X, nothing under the Plan shall affect the Debtor's or the Reorganized Debtor's
rights in respect of any Unimpaired Claims, including, but not limited to, all
rights in respect of legal and equitable defenses to or setoffs or recoupments
against such Unimpaired Claims or the Holders thereof.
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes
Each Holder of an Allowed Equity Interest in Class 7 shall be entitled to
vote to accept or reject the Plan.
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<PAGE>
B. Acceptance by Impaired Classes
An Impaired Class of Equity Interests shall have accepted the Plan if the
Holders (other than any Holder designated under section 1126(e) of the
Bankruptcy Code) of at least two-thirds in amount of the Allowed Equity
Interests actually voting in such Class have voted to accept the Plan.
C. Presumed Acceptance of Plan
Classes 1, 2, 3, 4, 5 and 6 are unimpaired under the Plan, and, therefore,
conclusively are presumed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code.
D. Presumed Rejection of Plan
Class 8 is impaired and shall receive no distributions, and, therefore, is
presumed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy
Code.
E. Non-Consensual Confirmation
The Debtor will seek Confirmation of the Plan under section 1129(b) of the
Bankruptcy Code in view of the deemed rejection of the Plan by Class 8.
ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN
A. Continued Corporate Existence and Vesting of Assets in the Reorganized
Debtor
The Reorganized Debtor shall continue to exist after the Effective Date
with all the powers of a corporation under the laws of the State of Delaware and
without prejudice to any right to alter or terminate such existence (whether by
merger or otherwise) under such applicable state law. As of the Effective Date,
except as otherwise provided in the Plan, all property of the Estate, and any
property acquired by the Debtor or the Reorganized Debtor under the Plan, shall
vest in the Reorganized Debtor, free and clear of all Claims, liens, charges, or
other encumbrances, except as those created pursuant to the Exit Credit
Facility. On and after the Effective Date, the Reorganized Debtor may operate
its business and may use, acquire or dispose of property and compromise or
settle any Claims, without supervision or approval by the Bankruptcy Court and
free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than
those restrictions expressly imposed by the Plan and the Confirmation Order. In
accordance with section 1109(b) of the Bankruptcy Code, nothing in this Article
V shall preclude any party in interest from appearing and being heard on any
issue in the Chapter 11 Case.
B. Cancellation of Notes, Instruments and Common Stock
On the Effective Date, except to the extent provided otherwise in the
Plan, (i) all notes, instruments, certificates, and other documents of the
Debtor evidencing the Other Secured Claims and Prepetition Bank Secured Claims,
(ii) the Old Notes, and (iii) all Equity Interests, including all Common Stock
and Preferred Stock, shall be canceled and the obligations of the Debtor
thereunder, shall be discharged. On the Effective Date, except to the extent
provided otherwise in the Plan, any indenture relating to any of the foregoing,
including, without limitation, the Old Note Indenture, shall be deemed to be
canceled, and the obligations of the debtors thereunder, except for the
obligation to indemnify the Old Notes Indenture Trustee, shall be discharged;
provided however, that the indenture or other agreement that governs the rights
of the Holder of a Claim and that is administered by the Old Notes Indenture
Trustee, an agent or servicer shall, continue in effect solely for the purposes
of (i) allowing such Old Notes Indenture Trustee, agent or servicer to make the
distributions to be made on account of such Claims under the Plan and (ii)
permitting such Old Note Indenture Trustee, agent or servicer to maintain any
rights or liens it may have for fees, costs, and expenses under such indenture
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<PAGE>
or other agreement. Upon payment in full of the fees and expenses of the Old
Notes Indenture Trustee pursuant to Articles III.B.4 and VII.B hereof, the liens
(if any) of the Old Notes Indenture Trustee shall terminate.
C. Issuance of New Securities; Execution of Related Documents
On the Effective Date, the Reorganized Debtor shall issue all securities,
notes, instruments, certificates, and other documents required to be issued
pursuant to the Plan, including, without limitation, the Exit Credit Facility
and the New Common Stock, each of which shall be distributed as provided in the
Plan. The Reorganized Debtor shall execute and deliver such other agreements,
documents and instruments, as are required to be executed pursuant to the terms
of the Plan, the Exit Credit Facility, the Standby Purchase Agreement and the
Rapoport/Sharpe Investment.
D. Terms of the Rights Offering
Issuer: Reorganized Debtor.
------
Underlying
Security: New Common Stock, par value $.01 per share.
--------
Rights Each Holder of Preferred Stock as of the Rights Record
per Share: Date will receive one Right for each share of Preferred
--------- Stock.
Exercise: .3787 shares of New Common Stock will be issued for
-------- each Right that is exercised. The election to exercise
each Right shall be made at the time the Holders of
Class 7 Equity Interests vote to accept or reject the
Plan.
Aggregate Shares
of New Common
Stock Offered: 1,960,000
-------------
Transfers: The Rights will not be transferable.
---------
Subscription
Price: $12.50 per share of New Common Stock.
-----
Standby Purchase
Agreement: On the Effective Date, Inverness and Vicuna, pursuant to
--------- the terms of the Standby Purchase Agreement, will
purchase or cause to be purchased and fully exercise any
unexercised Rights.
E. Terms of the Rapoport/Sharpe Investment
Issuer: Reorganized Debtor.
------
Security: New Common Stock, par value $.01 per share.
--------
Aggregate Shares
of New Common
Stock Offered: 1,840,000
-------------
Subscription
Price: $12.50 per share of New Common Stock.
-----
Listing: The Debtor will use reasonable efforts to cause the
------- Rapoport/Sharpe Shares to be listed on a national
securities exchange or the NASDAQ National Market.
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<PAGE>
Registration
Right: The Rapoport/Sharpe Investment will be effected
----- through a private placement under Rule 506 of the
Securities Act , and, in connection therewith, the
Debtor will grant each of Rapoport and Sharpe the right
to cause the Reorganized Debtor to register the New
Common Stock purchased by him, in each case, beginning
six months after the Effective Date.
F. Terms of the New Common Stock
Authorization: The Amended Certificate of Incorporation of The
------------- Reorganized Debtor shall authorize the issuance of
15,000,000 shares of New Common Stock. Of such
authorized shares, 9,059,000 shares shall be retained
and issued directly under the Plan (i) to the Holders of
Preferred Stock, (ii) upon the exercise of the Rights
and/or the purchase of New Common Stock under the
Standby Purchase Agreement, (iii) pursuant to the terms
of the Rapoport/Sharpe Investment, and (iv) to Msrs.
Steve Johnson and David Little pursuant to the Executive
Agreements. 640,000 shares shall be reserved for
issuance to the Reorganized Debtor's officers and
directors. Except as otherwise provided by the Plan, no
additional shares of New Common Stock may be issued
other than as directed by the board of directors of the
Reorganized Debtor after the Effective Date.
Par Value: The New Common Stock shall have a par value of $0.01 per
--------- share.
Attributes: The New Common Stock shall have such attributes as to
---------- voting, dividends, liquidation and otherwise as are set
forth in the Amended Certificate of Incorporation and as
are otherwise provided by Delaware law.
Listing: The Reorganized Debtor will use reasonable efforts to
------- cause the New Common Stock to be listed on a national
securities exchange or the NASDAQ National Market.
G. Corporate Governance, Directors and Officers, and Corporate Action
1. Amended Certificate of Incorporation
On the Effective Date, the Reorganized Debtor will file its Amended
Certificate of Incorporation with the Secretary of the State of Delaware in
accordance with sections 102 and 103 of the Delaware General Corporation Law.
The Amended Certificate of Incorporation will, among other things, prohibit the
issuance of nonvoting equity securities to the extent required by section
1123(a) of the Bankruptcy Code, provide for at least 15,000,000 authorized
shares of New Common Stock, and authorize the issuance of preferred stock. After
the Effective Date, the Reorganized Debtor may amend and restate its Amended
Certificate of Incorporation and other constituent documents as permitted by the
Delaware General Corporation Law.
2. Directors and Officers of the Reorganized Debtor
Subject to any requirement of Bankruptcy Court approval, pursuant to
section 1129(a)(5), the Debtor and/or the Unofficial Preferred Shareholders'
Committee will disclose, on or prior to the Confirmation Date, the identity and
affiliations of any Person proposed to serve on the initial board of directors
of The Reorganized Debtor. To the extent any such Person is an Insider, the
nature of any compensation for such Person will also be disclosed. The
classification and composition of the board of directors shall be consistent
with the Amended Certificate of Incorporation and as set forth in the Disclosure
Statement. Each such director and officer shall serve from and after the
Effective Date pursuant to the terms of the Amended Certificate of
Incorporation, other constituent documents and the Delaware General Corporation
Law. The Reorganized Debtor will have a seven-person board of directors
consisting initially of the following designations: (1) Bernard Rapoport, (2)
James C. Comis III, (3) John T, Sharpe, (4) Robert N. Sheehy, Jr., (5) Larry D.
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<PAGE>
Jaynes, and (6) Steve R. Johnson. On the Effective Date, one vacancy will remain
on the Reorganized Debtor's board of directors that may or may not be filled
after the Effective Date but prior to the next annual meeting of the
shareholders of the Reorganized Debtor.
3. Corporate Action
On the Effective Date, the adoption of the Amended Certificate of
Incorporation and of new By-laws, the selection of directors and officers for
the Reorganized Debtor, and all actions contemplated by the Plan shall be
authorized and approved in all respects (subject to the provisions of the Plan).
All matters provided for in the Plan involving the corporate structure of the
Debtor or the Reorganized Debtor, and any corporate action required by the
Debtor or the Reorganized Debtor in connection with the Plan, shall be deemed to
have occurred and shall be in effect, without any requirement of further action
by the security holders or directors of the Debtor or the Reorganized Debtor. On
the Effective Date, the appropriate officers and members of the Reorganized
Debtor and members of the board of directors of the Reorganized Debtor are
authorized and directed to issue, execute and deliver the agreements, documents,
securities and instruments contemplated by the Plan in the name of and on behalf
of the Reorganized Debtor.
H. Sources of Cash for Plan Distribution
All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash balances, the operations of the
Debtor or Reorganized Debtor, proceeds of the Extraordinary Distribution,
proceeds of the Rights Offering and/or of the Standby Purchase Agreement,
proceeds of the Rapoport/Sharpe Investment, and post-confirmation borrowing
under available facilities of the Debtor or Reorganized Debtor including,
without limitation, the Exit Credit Facility. The Reorganized Debtor may also
make such payments using Cash received from principal and interest payments
under surplus notes and advances or dividends from its subsidiaries.
I. Change of Corporate Name
On the Effective Date, the Debtor's corporate name shall be changed to
"Southwestern Life Holdings, Inc." Such change of corporate name shall be
effected by operation of section 303 of the Delaware General Corporation Law
without effecting any corporate action otherwise required thereby.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases
Immediately prior to the Effective Date, all executory contracts or
unexpired leases of the Debtor (including, to the extent applicable, that
certain Release and Indemnity Agreement dated December 24, 1998 and that certain
Escrow Agreement dated January 18, 2000) will be deemed assumed in accordance
with the provisions and requirements of sections 365 and 1123 of the Bankruptcy
Code except those executory contracts and unexpired leases that (1) have been
rejected by order of the Bankruptcy Court, (2) are the subject of a motion to
reject pending on the Effective Date, (3) are identified on a list to be Filed
with the Bankruptcy Court on or before the Confirmation Date, as to be rejected,
or (4) are rejected pursuant to the terms of the Plan. Entry of the Confirmation
Order by the Bankruptcy Court shall constitute approval of such assumptions and
rejections pursuant to sections 365(a) and 1123 of the Bankruptcy Code.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within sixty (60) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of an executory contract or unexpired lease not Filed within such
times will be forever barred from assertion against the Debtor or Reorganized
Debtor, its
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<PAGE>
estate and property unless otherwise ordered by the Bankruptcy Court or provided
in this Plan, all such Claims for which proofs of claim are required to be Filed
will be, and will be treated as, General Unsecured Claims subject to the
provisions of Article VIII hereof.
C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. Indemnification of Directors, Officers and Employees
The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of their directors, officers
or employees by reason of such Person's or Entity's service in such capacity, or
as a director, officer, member or employee of any other corporation or legal
entity, to the extent provided in the Debtor's constituent documents, by a
written agreement with the Debtor or the Delaware General Corporation Law, shall
be deemed and treated as executory contracts that are assumed by the Debtor
pursuant to the Plan and section 365 of the Bankruptcy Code as of the Effective
Date. Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims, and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date.
E. Compensation and Benefit Programs
Except as otherwise expressly provided hereunder, all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtor applicable to its employees, retirees and non-employee
directors and the employees and retirees of its subsidiaries, including, without
limitation, all savings plans, retirement plans, health care plans, disability
plans, severance benefit plans, incentive plans, and life, accidental death, and
dismemberment insurance plans are treated as executory contracts under the Plan
and on the Effective Date will be assumed pursuant to the provisions of sections
365 and 1123 of the Bankruptcy Code.
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Effective Date
1. Except as otherwise provided in this Article VII or as may be ordered
by the Bankruptcy Court, distributions to be made on the Effective Date on
account of Claims and Equity Interests that are Allowed as of the Effective Date
and are entitled to receive distributions under the Plan shall be made on the
Effective Date, or as soon as practicable thereafter. Distributions on account
of Claims and Equity Interests that become Allowed Claims or Allowed Equity
Interests after the Effective Date shall be made pursuant to Articles VII.C and
VIII.C below.
2. For purposes of determining the accrual of interest or rights in
respect of any other payment from and after the Effective Date, the Exit Credit
Facility and the New Common Stock to be issued under the Plan shall be deemed
issued as of the Effective Date regardless of the date on which they are
actually dated, authenticated or distributed; provided, however, that the
Reorganized Debtor shall withhold any actual payment until such distribution is
made and no interest shall accrue or otherwise be payable on any such withheld
amounts.
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<PAGE>
B. Distributions by the Reorganized Debtor; Distributions with Respect to Old
Notes
Except as provided herein, the Reorganized Debtor shall make all
distributions required under the Plan. Notwithstanding the provisions of Article
V.B above regarding the cancellation of the Old Note Indenture, the Old Note
Indenture shall continue in effect to the extent necessary to allow the Old
Notes Indenture Trustee to receive Cash on behalf of the Holders of the Old
Notes and make distributions pursuant to the Plan on account of the Old Notes as
agent for the Reorganized Debtor. The Old Notes Indenture Trustee providing
services related to distributions to the Holders of Allowed Old Note Claims
shall receive, from the Reorganized Debtor, reasonable compensation for such
services and reimbursement of reasonable expenses incurred in connection with
such services and upon the presentation of invoices to the Reorganized Debtor.
These payments shall be made on terms agreed to with the Reorganized Debtor.
C. Delivery and Distributions and Undeliverable or Unclaimed Distributions
1. Delivery of Distributions in General
Distributions to Holders of Allowed Claims and Allowed Equity Interests
shall be made at the address of the Holder of such Claim or Equity Interest as
indicated on records of the Debtor. Except as otherwise provided by the Plan or
the Bankruptcy Code with respect to undeliverable distributions, distributions
to Holders of Bank Secured Claims, and Old Note Claims shall be made in
accordance with the provisions of the applicable indenture, participation
agreement, letter of transmittal, loan agreement or analogous instrument or
agreement, and distributions will be made to Holders of record as of the
Distribution Record Date.
2. Undeliverable Distributions
(a) Holding of Undeliverable Distributions. If any Allowed Claim or
Equity Interest Holder's distribution is returned to the Reorganized Debtor as
undeliverable, no further distributions shall be made to such Holder unless and
until the Reorganized Debtor is notified in writing of such Holder's
then-current address. Undeliverable distributions shall remain in the possession
of the Reorganized Debtor pursuant to this Article VII.C until such time as a
distribution becomes deliverable. Undeliverable Cash shall not be entitled to
any interest, dividends or other accruals of any kind.
(b) After Distributions Become Deliverable. Within 20 days after the
end of each calendar quarter following the Effective Date, the Reorganized
Debtor shall make all distributions that become deliverable during the preceding
calendar quarter.
(c) Failure to Claim Undeliverable Distributions. In an effort to
ensure that all holders of valid claims receive their allocated distributions,
the Reorganized Debtor will maintain a listing of unclaimed distribution
holders. Any Holder of an Allowed Claim or Equity Interest that does not assert
a claim pursuant to the Plan for an undeliverable distribution within five years
after the Effective Date shall have its Claim for such undeliverable
distribution discharged and shall be forever barred from asserting any such
Claim against the Reorganized Debtor or its property. In such cases: (i) any
Cash held for distribution on account of such Claims shall be property of the
Reorganized Debtor, free of any restrictions thereon; and (ii) any New Common
Stock held for distribution on account of such Equity Interests shall be
canceled and of no further force or effect. Nothing contained in the Plan shall
require the Reorganized Debtor to attempt to locate any Holder of an Allowed
Claim or Allowed Equity Interest.
(d) Compliance with Tax Requirements. In connection with the Plan,
to the extent applicable, the Reorganized Debtor shall comply with all tax
withholding and reporting requirements imposed on it by any governmental unit,
and all distributions pursuant to the Plan shall be subject to such withholding
and reporting requirements.
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<PAGE>
D. Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
registers for the Old Notes and for the Preferred Stock as maintained by the
Debtor, the Old Notes Indenture Trustee, or their respective agents, shall be
closed and there shall be no further changes in the Record Holders of any Old
Notes or Preferred Stock. Moreover, the Reorganized Debtor shall have no
obligation to recognize the transfer of any Old Notes or Preferred Stock
occurring after the Distribution Record Date, and shall be entitled for all
purposes herein to recognize and deal only with those Holders of record as of
the close of business on the Distribution Record Date.
E. Timing and Calculation of Amounts to be Distributed
Unless otherwise provided for in Section III of the Plan or agreed to by
the Holder of a Claim or Equity Interest and the Debtor and the Unofficial
Preferred Shareholders' Committee, on the Effective Date, each Holder of an
Allowed Claim and Allowed Equity Interest shall receive the full amount of the
distributions that the Plan provides for Allowed Claims and Allowed Equity
Interests in the applicable Class. Beginning on the date that is 20 calendar
days after the end of the calendar quarter following the Effective Date and 20
calendar days after the end of each calendar quarter thereafter, distributions
shall also be made, pursuant to Article VIII.C. below, to Holders of Disputed
Claims or Disputed Equity Interests in any such Class whose Claims or Equity
Interests were allowed during the preceding calendar quarter. Such quarterly
distributions shall also be in the full amount that the Plan provides for
Allowed Claims and Allowed Equity Interests in the applicable Class.
F. No Fractional Shares
No fractional shares of New Common Stock will be issued. In the event a
Holder of an Allowed Class 7 Equity Interest is entitled to distribution of a
fraction of one share of New Common Stock, the actual issuance will reflect a
rounding of such fraction down to the nearest whole share.
G. Setoffs
The Reorganized Debtor may, pursuant to section 553 of the Bankruptcy Code
or applicable non-bankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim), the claims, rights and
causes of action of any nature that the Debtor or Reorganized Debtor may hold
against the Holder of such Allowed Claim; provided, however, that neither the
failure to effect such a setoff nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtor or Reorganized Debtor of any such
claims, rights and causes of action that the Debtor or Reorganized Debtor may
possess against such Holder.
H. Surrender of Canceled Instruments or Securities
Except as set forth in subsection VII.I below, as a condition precedent to
receiving any distribution pursuant to the Plan on account of an Allowed Claim
or Allowed Equity Interest evidenced by the instruments, securities or other
documentation canceled pursuant to Article V.B above, the Holder of such Claim
or Equity Interest shall tender the applicable instruments, securities or other
documentation evidencing such Claim or Equity Interest to the Reorganized
Debtor. Any Cash or New Common Stock to be distributed pursuant to the Plan on
account of any such Claim or Equity Interest shall, pending such surrender, be
treated as an undeliverable distribution pursuant to Article VII.C above.
1. Surrender of Instruments
Each Holder of (a) an Old Note Claim and (b) Equity Interest based on
Preferred Stock shall tender its Old Note relating to such Claim or any
certificate relating to its Preferred Stock to the Reorganized Debtor in
accordance with written instructions to be provided to such Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date. Such
instructions shall specify that delivery of such Old Note or such certificate
will be effected, and risk of loss and title thereto will pass, only upon the
proper delivery of such Old Notes or such certificates with a letter of
transmittal in accordance with such instructions. All surrendered Old Notes and
Preferred Stock certificates shall be marked as canceled.
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<PAGE>
2. Failure to Surrender Canceled Instruments
Any Holder of Old Notes or Preferred Stock that fails to surrender or is
deemed to have failed to surrender the applicable Old Notes or certificates for
Preferred Stock required to be tendered hereunder within five years after the
Effective Date shall have its Claim for a distribution pursuant to the Plan on
account of such Old Note or Preferred Stock discharged and shall be forever
barred from asserting any such Claim against the Reorganized Debtor or its
property. In such cases, any Cash or shares of New Common Stock held for
distribution on account of such Claim shall be disposed of pursuant to the
provisions set forth above in Article VII.C.
I. Lost, Stolen, Mutilated or Destroyed Securities
In addition to any requirements under the Old Note Indenture or any other
agreement (including the Prepetition Bank Credit Facility, if required), any
Holder of a Claim or Equity Interest evidenced by an Old Note, a note issued
under the Prepetition Bank Credit Facility or a certificate for Preferred Stock
that has been lost, stolen, mutilated or destroyed shall, in lieu of
surrendering such Old Note, a note issued under the Prepetition Bank Credit
Facility or a certificate for Preferred Stock, deliver to the Reorganized
Debtor: (1) an affidavit of loss reasonably satisfactory to the Reorganized
Debtor or the Old Notes Indenture Trustee, as applicable, setting forth the
unavailability of note or instrument; and (2) such additional security or
indemnity as may reasonably be required by the Reorganized Debtors to hold the
Reorganized Debtor or the Old Notes Indenture Trustee, as applicable, harmless
from any damages, liabilities or costs incurred in treating such individual as a
Holder of an Allowed Claim or Allowed Equity Interest. Upon compliance with this
Article VII.I by a Holder of a Claim or Equity Interest evidenced by an Old
Note, a note issued under the Prepetition Bank Credit Facility or a certificate
for Preferred Stock, such Holder shall, for all purposes under the Plan, be
deemed to have surrendered such note or instrument.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. Prosecution of Objections to Claims
1. Holders of Claims and Equity Interests need not file proofs of Claim or
Equity Interest with the Bankruptcy Court and shall be subject to Bankruptcy
Court process only to the extent provided in the Plan. On and after the
Consummation Date, except as otherwise provided herein, all Claims shall be paid
in the ordinary course of business of the Reorganized Debtor. If the Debtor
disputes any Claim (including any Administrative Claim, Priority Tax Claim,
Other Secured Claim, General Unsecured Claim, Opt-out Old Note Claim or Opt-out
Common Stock Claim), such dispute shall be determined, resolved or adjudicated,
as the case may be, in a manner as if the Chapter 11 Case has not been
commenced. The Debtor may elect, at its sole option (upon consultation with the
Unofficial Preferred Shareholders' Committee), to object under Section 502 of
the Bankruptcy Code with respect to any proof of Claim or Equity Interest,
provided, however, that the Debtor's failure to object to any proof of Claim or
Equity Interest shall not constitute a waiver, release or any admission as to
validity with respect to the underlying Claim or Equity Interest.
2. After the Confirmation Date, the Debtor and the Reorganized Debtor
shall have the exclusive authority to File objections, settle, compromise,
withdraw or litigate to judgment objections to Claims or Equity Interests. From
and after the Confirmation Date, the Debtor and the Reorganized Debtor may
settle or compromise any Disputed Claim or Disputed Equity Interest without
approval of the Bankruptcy Court.
B. Estimation of Claims
The Debtor or the Reorganized Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtor or the
Reorganized Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court will
retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
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<PAGE>
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized Debtor
may elect to pursue any supplemental proceedings to object to any ultimate
payment on such Claim. All of the aforementioned Claims objection, estimation
and resolution procedures are cumulative and not necessarily exclusive of one
another. Claims may be estimated and subsequently compromised, settled,
withdrawn or resolved by any mechanism approved by the Bankruptcy Court.
C. Payments and Distributions on Disputed Claims or Interests
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim or Disputed Equity Interest until the resolution of such disputes by
settlement or Final Order. Subject to the provisions of this Article VIII.C, as
soon as practicable after a Disputed Claim or Disputed Equity Interest becomes
an Allowed Claim or an Allowed Equity Interest, the Holder of such Allowed Claim
or Allowed Equity Interest will receive all payments and distributions to which
such Holder is then entitled under the Plan. Notwithstanding the foregoing, any
Person or Entity who holds both an Allowed Claim(s) or Equity Interests(s) and a
Disputed Claim(s) or Equity Interests(s) will receive the appropriate payment or
distribution on the Allowed Claim(s) or Equity Interest(s), although, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no payment or
distribution will be made on the Disputed Claim(s) or Disputed Equity
Interest(s) until such dispute is resolved by settlement or Final Order. In the
event there are Disputed Claims or Disputed Equity Interests requiring
adjudication and resolution, the Debtor reserves the right, or upon order of the
Court, to establish appropriate reserves for potential payment of such claims.
ARTICLE IX.
CONDITIONS PRECEDENT TO CONSUMMATION OF THE PLAN
A. Conditions Precedent to Consummation
The following events shall occur prior to or concurrently with the
Consummation of the Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy Court
and duly entered on the docket for the Chapter 11 Case by the Clerk of the
Bankruptcy Court in form and substance acceptable to the Debtor, the Committee
and the Unofficial Preferred Shareholders' Committee;
2. the Confirmation Order has been entered and has not been reversed or
stayed;
3. the Exit Credit Facility shall be available to the Reorganized Debtor
in an amount not less than $90 million and on such terms and conditions as set
forth in the Exit Credit Facility;
4. the Reinsurance Transactions will have occurred;
5. the Extraordinary Distribution will have been paid;
6. the Standby Purchase Agreement shall be in full force and effect, all
conditions precedent to the obligations of Inverness and Vicuna under the
Standby Purchase Agreement shall have been satisfied in accordance therewith;
7. the Expiration Date with respect to the Rights Offering shall have
occurred;
8. the Rapoport/Sharpe Investment shall have been consummated; and
9. all regulatory approvals necessary for the transactions contemplated
herein shall have been received.
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<PAGE>
B. Effect of Non-Occurrence of Conditions to Consummation
If the Confirmation Order is vacated, the Plan shall be null and void in
all respects and nothing contained in the Plan or the Disclosure Statement
shall: (1) constitute a waiver or release of any Claims by or against, or any
Equity Interests in, the Debtor; (2) prejudice in any manner the rights of the
Debtor, or (3) constitute an admission, acknowledgment, offer or undertaking by
the Debtor in any respects.
ARTICLE X.
RELEASE, INJUNCTIVE AND RELATED PROVISIONS
A. Subordination
The classification and manner of satisfying all Claims and Equity
Interests and the respective distributions and treatments under the Plan take
into account and/or conform to the relative priority and rights of the Claims
and Equity Interests in each Class in connection with any contractual, legal and
equitable subordination rights relating thereto whether arising under general
principles of equitable subordination, section 510(b) of the Bankruptcy Code or
otherwise, and any and all such rights are settled, compromised and released
pursuant to the Plan. The Confirmation Order shall permanently enjoin, effective
as of the Effective Date, all Persons and Entities from enforcing or attempting
to enforce any such contractual, legal and equitable subordination rights
satisfied, compromised and settled pursuant to this Article X.A.
B. Limited Releases by the Debtor
Except as otherwise specifically provided in the Plan, for good and
valuable consideration, including, but not limited to, the commitment and
obligation of Inverness, Vicuna, Rapoport and Sharpe to provide financial
support necessary for consummation of the Plan (including the obligations and
undertakings of Inverness and Vicuna under the Standby Purchase Agreement, and
the obligations and undertakings of each of Rapoport and Sharpe under the
Rapoport/Sharpe Investment), and the services of the Committee, the Unofficial
Preferred Shareholders' Committee and the D&O Releasees to facilitate the
expeditious reorganization of the Debtor and the implementation of the
restructuring contemplated by the Plan, the Inverness Releasees, the Vicuna
Releasees, the Rapoport Releasees, the Sharpe Releassees, the D&O Releasees, the
Committee Releasees, and the Unofficial Preferred Shareholders' Committee
Releasees, on and after the Effective Date, are released by the Debtor and the
Reorganized Debtor and their subsidiaries from any and all claims (as defined in
section 101(5) of the Bankruptcy Code), obligations, rights, suits, damages,
causes of action, remedies and liabilities whatsoever, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law, equity or
otherwise, that the Debtor or its subsidiaries would have been legally entitled
to assert in their own right (whether individually or collectively) or that any
Holder of a Claim or Equity Interest or other Person or Entity would have been
legally entitled to assert on behalf of the Debtor or its subsidiaries, based in
whole or in part upon any act or omission, transaction, agreement, event or
other occurrence taking place on or before the Effective Date, except in the
case of the D&O Releasees, for claims or liabilities (i) in respect of any loan,
advance or similar payment by the Debtor or its subsidiaries to any such Person
which is outstanding on the Effective Date, (ii) in respect of any contractual
obligation owed by such Person to the Debtor or its subsidiaries on the
Effective Date, or (iii) resulting from intentional misconduct or bad faith.
C. Preservation of Rights of Action
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the Plan,
in accordance with section 1123(b) of the Bankruptcy Code, the Reorganized
Debtor shall retain and may exclusively enforce any claims, rights and Causes of
Action that the Debtor or Estate may hold against any Person or Entity. The
Reorganized Debtor may pursue such retained claims, rights or causes of action,
as appropriate, in accordance with the best interests of the Reorganized Debtor.
On the Effective Date, the Reorganized Debtors shall be deemed to waive and
release any claims, rights or Causes of Action arising under sections 544, 547,
548, 549 and 550 of the Bankruptcy Code held by the Reorganized Debtor against
any Person or Entity.
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<PAGE>
D. Exculpation
The Debtor, the Reorganized Debtor (and their Professionals acting in such
capacity), the Unofficial Preferred Shareholders Committee Releasees, the
Committee Releasees, the Inverness Releasees, the Vicuna Releasees, the Rapoport
Releasees, the Sharpe Releasees and the D&O Releasees, shall neither have nor
incur any liability to any Person or Entity for any act taken or omitted to be
taken in connection with or related to the formulation, preparation,
dissemination, implementation, administration, Confirmation or Consummation of
the Plan, the Disclosure Statement or any contract, instrument, release or other
agreement or document created or entered into in connection with the Plan,
including the Standby Purchase Agreement and the Rapoport/Sharpe Investment, or
any other act taken or omitted to be taken in connection with the Chapter 11
Case; provided, however, that the foregoing provisions of this Article X.D shall
have no effect on the liability of any Person or Entity that results from any
such act or omission that is determined in a Final Order to have constituted
gross negligence or willful misconduct.
E. Injunction
From and after the Effective Date, all Persons and Entities are
permanently enjoined from commencing or continuing in any manner, any suit,
action or other proceeding, on account of or respecting any claim, obligation,
debt, right, Cause of Action, remedy or liability released or to be released
pursuant to this Article X.
ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Chapter 11 Case after the Effective Date as legally permissible, including
jurisdiction to:
A. allow, disallow, determine, liquidate, classify, estimate or establish the
priority or secured or unsecured status of any Claim, including the resolution
of any request for payment of any Administrative Claim and the resolution of any
and all objections to the allowance or priority of Claims;
B. grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. resolve any matters related to the assumption, assumption and assignment, or
rejection of any executory contract or unexpired lease to which the Debtor is a
party or with respect to which the Debtors may be liable and to hear, determine
and, if necessary, liquidate, any Claims arising therefrom, including those
matters related to the mendment after the Effective Date pursuant to Article VI
above to add any executory contracts or unexpired leases to the list of
executory contracts and unexpired leases to be rejected;
D. ensure that distributions to Holders of Allowed Claims are accomplished
pursuant to the provisions of the Plan, including ruling on any motion Filed
pursuant to Article VII;
E. decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor that may be pending on the Effective Date;
F. enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments, releases,
indentures and other agreements or documents created in connection with the Plan
or the Disclosure Statement;
G. resolve any cases, controversies, suits or disputes that may arise in
connection with the Consummation, interpretation or enforcement of the Plan or
any Person's or Entity's obligations incurred in connection with the Plan;
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<PAGE>
H. issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference by any
Person or Entity with Consummation or enforcement of the Plan, except as
otherwise provided herein;
I. resolve any cases, controversies, suits or disputes with respect to the
releases, injunction and other provisions contained in Article X and enter such
orders as may be necessary or appropriate to implement such releases, injunction
and other provisions;
J. enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
K. determine any other matters that may arise in connection with or relate to
the Plan, the Disclosure Statement, the Confirmation Order or any contract,
instrument, release, indenture or other agreement or document created in
connection with the Plan or the Disclosure Statement; and
L. enter an order and/or final decree concluding the Chapter 11 Case.
ARTICLE XII.
MISCELLANEOUS PROVISIONS
A. Dissolution of Committee(s)
On the Effective Date, the Committee(s) shall dissolve and members shall
be released and discharged from all rights and duties arising from, or related
to, the Chapter 11 Case, except that the Committee(s) shall continue in
existence for the limited purpose of reviewing and, if it so determines,
prosecuting any objections to, the final fee applications filed by Professionals
in the Chapter 11 Case.
B. Payment of Statutory Fees
All fees payable pursuant to section 1930 of title 28 of the United States
Code, as determined by the Bankruptcy Court at the hearing pursuant to section
1128 of the Bankruptcy Code, shall be paid on or before the Effective Date.
C. Fees and Expenses of the Unofficial Preferred Shareholders' Committee
The reasonable fees and expenses incurred after the Petition Date by the
Unofficial Preferred Shareholders' Committee's counsel and financial advisor
(together with the reasonable fees and expenses of local counsel) shall be paid
(without application by or on behalf of any such professionals to the Bankruptcy
Court and without notice and a hearing) by the Reorganized Debtor as an
Administrative Claim under the Plan. If the Reorganized Debtors and any such
professional retained by the Unofficial Preferred Shareholders' Committee cannot
agree on the amount of fees and expenses to be paid to such professional, the
amount of any such fees and expenses shall be determined by the Bankruptcy
Court.
D. Discharge of Debtor
Except as otherwise provided herein: (1) the rights afforded in the Plan
and the treatment of all Claims and Equity Interests therein, shall be in
exchange for and in complete satisfaction, discharge and release of Claims and
Equity Interests of any nature whatsoever, including any interest accrued on
such Claims from and after the Petition Date, against the Debtor and the Debtor
in Possession, or any of their assets or properties, (2) on the Effective Date,
all such Claims against, and Equity Interests in the Debtor shall be satisfied,
discharged and released in full and (3) all Persons and Entities shall be
precluded from asserting against the Reorganized Debtor, its successors or its
assets or properties any other or further Claims or Equity Interests based upon
any act or omission, transaction or other activity of any kind or nature that
occurred prior to the Confirmation Date. The Plan does not impair the rights of
any Holders of Class 5 Claims, including, but not limited to: (i) Holders of
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<PAGE>
Claims under executory and nonexecutory contracts and leases; (ii) persons or
entities entitled to contractual or common law rights of indemnity, contribution
and/or reimbursement; or (iii) claims of any party or entity relating to any
environmental condition as to which the Debtor is or may be liable.
E. Modification of Plan
Subject to the limitations contained herein, (1) the Debtor and the
Unofficial Preferred Shareholders' Committee reserve the right, in accordance
with the Bankruptcy Code and the Bankruptcy Rules, to amend or modify the Plan
prior to the entry of the Confirmation Order and (2) after the entry of the
Confirmation Order, the Debtor and the Unofficial Preferred Shareholders'
Committee or the Reorganized Debtor, as the case may be, may, upon order of the
Bankruptcy Court, amend or modify the Plan, in accordance with section 1127(b)
of the Bankruptcy Code, or remedy any defect or omission or reconcile any
inconsistency in the Plan in such manner as may be necessary to carry out the
purpose and intent of the Plan.
F. Revocation of Plan
The Debtor and the Unofficial Preferred Shareholders' Committee reserve
the right, at any time prior to the entry of the Confirmation Order, to revoke
and withdraw the Plan.
G. Successors and Assigns
The rights, benefits and obligations of any Person or Entity named or
referred to in the Plan shall be binding on, and shall inure to the benefit of
any heir, executor, administrator, successor or assign of such Person or Entity.
H. Reservation of Rights
Except as expressly set forth herein, this Plan shall have no force or
effect unless the Bankruptcy Court shall enter the Confirmation Orders. None of
the filing of this Plan, any statement or provision contained herein, the taking
of any action by the Debtor with respect to this Plan, or the Debtor's failure
to object to any proof of Claim or Equity Interest shall be or shall be deemed
to be an admission or waiver of any rights of the Debtor with respect to the
Holders of Claims or Equity Interests.
I. Section 1145 Exemption
Pursuant to Section 1145 of the Bankruptcy Code, the shares of the New
Common Stock issued to any of the Holders of the Preferred Stock hereunder are
exempt from registration under the Securities Act.
J. Section 1146 Exemption
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance,
transfer, or exchange of any security under the Plan, or the making or delivery
of an instrument of transfer under this Plan, may not be taxed under any law
imposing a stamp tax or similar tax.
K Further Assurances
The Debtor, the Reorganized Debtor and all Holders of Claims and Equity
Interests receiving distributions under the Plan and all other parties in
interest shall, from time to time, prepare, execute and deliver any agreements
or documents and take any other actions as may be necessary or advisable to
effectuate the provisions and intent of this Plan.
L. Service of Documents
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<PAGE>
Any pleading, notice or other document required by the Plan to be served
on or delivered to the Reorganized Debtor shall be sent by first class U.S.
mail, postage prepaid to:
PennCorp Financial Group, Inc.
c/o Southwestern Financial Services Corp.
717 North Harwood Street
Dallas, Texas 75201
Attn: Scott D. Silverman, Esq.
with copies to:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suit 1300
Dallas, Texas 75201-6950
Attn: Martin Sosland, Esq.
Inverness/Phoenix Capital, LLC
660 Steamboat Road
Greenwich, Connecticut 06830
Attn: James C. Comis
with copies to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: James L. Learner, Esq.
M. Filing of Additional Documents
On or before the Effective Date, the Debtor may file with the Bankruptcy
Court such agreements and other documents as may be necessary or appropriate to
effectuate and further evidence the terms and conditions of the Plan.
Respectfully Submitted,
PENNCORP FINANCIAL GROUP, INC.
By:
------------------------------------
Name:
Title:
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<PAGE>
INVERNESS/PHOENIX CAPITAL, LLC, lead member
of THE UNOFFICIAL PREFERRED SHAREHOLDERS'
COMMITTEE
By:
------------------------------------
Name:
Title:
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<TABLE>
EXHIBIT 11.1
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Basic net loss applicable to common stock:
Loss before extraordinary charge
applicable to common stock............................................... $ (32,543) $ (46,111)
============= =============
Diluted net loss applicable to common stock:
Loss before extraordinary charge
applicable to common stock............................................... $ (32,543) $ (46,111)
============= =============
Basic:
Shares outstanding beginning of period..................................... 30,143 30,072
Incremental shares applicable to Stock
Warrants/Stock Options and Restricted Stock.............................. 2 50
Acquisition of Fickes and Stone
Knightsbridge Interests.................................................. 173 173
Treasury shares............................................................ (942) (1,111)
------------- -------------
29,376 29,184
============= =============
Diluted:
Shares outstanding beginning of period..................................... 30,143 30,072
Incremental shares applicable to Stock
Warrants/Stock Options and Restricted Stock.............................. 2 50
Acquisition of Fickes and Stone
Knightsbridge Interests.................................................. 173 173
Treasury shares............................................................ (942) (1,111)
------------- -------------
29,376 29,184
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 1,931,371
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 38
<MORTGAGE> 17,339
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,127,465
<CASH> 75,763
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 75,452
<TOTAL-ASSETS> 2,660,102
<POLICY-LOSSES> 2,199,584
<UNEARNED-PREMIUMS> 2,030
<POLICY-OTHER> 29,617
<POLICY-HOLDER-FUNDS> 14,695
<NOTES-PAYABLE> 179,646
0
276,408
<COMMON> 303
<OTHER-SE> (140,008)
<TOTAL-LIABILITY-AND-EQUITY> 2,660,102
38,276
<INVESTMENT-INCOME> 43,123
<INVESTMENT-GAINS> (2,759)
<OTHER-INCOME> 2,965
<BENEFITS> 57,256
<UNDERWRITING-AMORTIZATION> 9,622
<UNDERWRITING-OTHER> 26,560
<INCOME-PRETAX> (27,249)
<INCOME-TAX> 838
<INCOME-CONTINUING> (28,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,087)
<EPS-BASIC> (1.11)
<EPS-DILUTED> (1.11)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
