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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number 1-11422
SOUTHWESTERN LIFE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3543540
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
717 North Harwood Street 75201
Dallas, Texas (Zip code)
(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 [ ]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of Common Stock shares outstanding as of November 13, 2000, was
9,059,000.
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1
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements...............................................3
Consolidated Balance Sheets........................................3
Consolidated Statements of Operations and Comprehensive
Income (Loss)....................................................4
Consolidated Statements of Cash Flows..............................5
Notes to Unaudited Consolidated Financial Statements...............6
Review by Independent Certified Public Accountants................17
Independent Auditors' Review Report...............................18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk........33
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings.................................................34
Item 6. Exhibits and Reports on Form 8-K..................................37
SIGNATURE
INDEX TO EXHIBITS
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 1,420,627 $ 2,363,690
Equity securities available for sale, at fair value............................ 798 2,008
Mortgage loans on real estate, net............................................. 15,606 20,032
Policy loans................................................................... 147,871 197,287
Other investments.............................................................. 32,731 26,570
------------ ------------
Total investments ........................................................... 1,617,633 2,609,587
Cash and cash equivalents......................................................... 83,373 141,636
Accrued investment income......................................................... 22,233 37,922
Accounts and notes receivable..................................................... 2,283 11,935
Present value of insurance in force............................................... 89,968 119,766
Deferred policy acquisition costs................................................. 72,156 113,726
Costs in excess of net assets acquired............................................ 77,183 79,725
Income taxes, primarily deferred.................................................. 76,385 111,517
Due from reinsurers............................................................... 452,244 33,977
Other assets...................................................................... 47,019 28,357
------------ ------------
Total assets ................................................................ $ 2,540,477 $ 3,288,148
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................ $ 2,213,434 $ 2,756,957
Notes payable.................................................................. 87,000 279,646
Accrued expenses and other liabilities......................................... 83,484 98,579
------------ ------------
Total liabilities 2,383,918 3,135,182
------------ ------------
Shareholders' equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized, issued and outstanding 2,300,000................................... -- 120,216
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value;
authorized, issued and outstanding 2,875,000................................... -- 151,736
Common stock, $.01 par value; authorized 15,000,000; issued and outstanding
9,059,000...................................................................... 91 --
Common stock, $.01 par value; authorized 100,000,000; issued and outstanding
30,143,416..................................................................... -- 303
Additional paid-in capital........................................................ 724,726 428,974
Accumulated other comprehensive loss, net of income tax benefits.................. (45,975) (62,712)
Accumulated deficit............................................................... (522,283) (453,487)
Treasury shares (928,685 at December 31, 1999).................................... -- (30,829)
Notes receivable and other assets secured by common stock......................... -- (1,235)
------------ ------------
Total shareholders' equity................................................... 156,559 152,966
------------ ------------
Total liabilities and shareholders' equity .................................. $ 2,540,477 $ 3,288,148
============ ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Premiums........................................ $ 5,844 $ 38,108 $ 25,229 $ 185,878
Interest sensitive policy product charges....... 22,515 31,841 69,058 100,539
Net investment income........................... 31,664 53,408 108,995 209,043
Other income.................................... 2,985 10,222 7,474 30,653
Net gains (losses) from the sale of investments. 132 870 (13,174) (198)
Net gains (losses) from sales of subsidiaries... -- (21,643) (8,383) 6,161
------------- ------------- ------------- -------------
Total revenues.............................. 63,140 112,806 189,199 532,076
------------- ------------- ------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits........................... 48,817 74,401 153,270 306,608
Amortization of present value of insurance in
force and deferred policy acquisition costs... 7,341 15,263 22,527 56,358
Amortization of costs in excess of net assets
acquired...................................... 847 1,265 2,542 12,051
Underwriting and other administrative expenses.. 7,540 33,168 54,577 132,307
Interest and amortization of deferred debt
issuance costs................................ 2,683 7,713 13,420 33,057
Restructuring charge............................ (216) -- 707 5,141
Impairment provision associated with Assets of
Businesses Held for Sale...................... -- -- -- 58,486
------------- ------------- ------------- -------------
Total benefits and expenses................. 67,012 131,810 247,043 604,008
------------- ------------- ------------- -------------
Loss before income taxes and extraordinary items... (3,872) (19,004) (57,844) (71,932)
Income taxes (benefits)......................... (2,472) 9,094 4,052 17,037
------------- ------------- ------------- -------------
Loss before extraordinary items.................... (1,400) (28,098) (61,896) (88,969)
Extraordinary items net of applicable income
tax benefits..................................... -- -- (2,443) --
------------- ------------- ------------- -------------
Net loss .......................................... (1,400) (28,098) (64,339) (88,969)
Preferred stock dividend requirements........... -- 4,456 4,456 13,369
------------- ------------- ------------- -------------
Net loss applicable to common stock................ $ (1,400) $ (32,554) $ (68,795) $ (102,338)
============= ============= ============= =============
PER SHARE INFORMATION(1):
Basic:
Loss before extraordinary items................. $ (0.15) $ (3.10) $ (6.83) $ (9.82)
Extraordinary items............................. -- -- (0.27) --
------------- ------------- ------------- -------------
Net loss........................................ $ (0.15) $ (3.10) $ (7.10) $ (9.82)
Common shares used in computing basic loss per share 9,059 9,059 9,059 9,059
Diluted:
Loss before extraordinary items................. $ (0.15) $ (3.10) $ (6.83) $ (9.82)
Extraordinary items............................. -- -- (0.27) --
------------- ------------- ------------- -------------
Net loss........................................ $ (0.15) $ (3.10) $ (7.10) $ (9.82)
============= ============= ============= =============
Common shares used in computing diluted loss
per share........................................ 9,059 9,059 9,059 9,059
============= ============= ============= =============
----------------
(1) Restated to reflect outstanding common shares as a result of
recapitalization effective June 13, 2000 as if recapitalization occurred at
beginning of period and the computation of loss per share does not include
the preferred stock dividend requirements.
COMPREHENSIVE INCOME (LOSS) INFORMATION:
Net loss........................................ $ (1,400) $ (28,098) $ (64,339) $ (88,969)
------------- ------------- ------------- -------------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments...... -- (1,691) -- 1,713
Unrealized losses on securities:
Unrealized holding gains (losses) during
the period................................ 11,930 (33,506) (2,336) (135,772)
Reclassification adjustment for (gains)
losses included in net income (loss)...... (130) 2,967 12,877 2,056
Reclassification adjustment resulting from
sale of subsidiaries...................... -- 3,423 15,206 16
------------- ------------- ------------- -------------
11,800 (28,807) 25,747 (131,987)
Income tax (expense) benefits related to items
of other comprehensive income (loss).......... (4,130) 9,491 (9,010) 46,795
------------- ------------- ------------- -------------
Other comprehensive income (loss), net of tax... 7,670 (19,316) 16,737 (85,192)
------------- ------------- ------------- -------------
Comprehensive income (loss)..................... $ 6,270 $ (47,414) $ (47,602) $ (174,161)
============= ============= ============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Loss before extraordinary items................................................ $ (61,896) $ (88,969)
Adjustments to reconcile loss before extraordinary charge to net cash used
by operating activities:
Impairment provision associated with Assets of Businesses Held for Sale.... -- 58,486
Net (gain) loss from sales of subsidiaries................................. 8,383 (6,161)
Capitalization of deferred policy acquisition costs........................ (16,200) (62,275)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net.......... 20,061 63,253
Decrease in policy liabilities, accruals and other policyholder funds...... (25,238) 17,333
Deferred income tax expense................................................ 2,824 16,554
Other, net................................................................. 29,825 24,489
------------- -------------
Net cash provided (used) by operating activities....................... (42,241) 22,710
------------- -------------
Cash flows from investing activities:
Cash received from sales of subsidiaries, net of cash and cash equivalents of
$38,877 and $31,208 of subsidiaries sold..................................... 64,449 138,718
Purchases of fixed maturity securities available for sale...................... (80,287) (753,814)
Purchases of equity securities................................................. (426) --
Maturities of fixed maturity securities available for sale..................... 108,675 311,723
Sales of fixed maturity securities available for sale.......................... 501,947 561,808
Sales of equity securities..................................................... 312 20
Acquisitions and originations of mortgage loans................................ -- (1,082)
Sales of mortgage loans........................................................ 52 8,229
Principal collected on mortgage loans.......................................... 4,294 33,132
Other, net..................................................................... (7,151) 12,069
------------- -------------
Net cash provided by investing activities.................................. 591,865 310,803
------------- -------------
Cash flows from financing activities:
Additional borrowings.......................................................... 87,000 --
Issuance of common stock net of related expenses of $1,496..................... 46,004 --
Payments on notes payable...................................................... (279,646) (271,277)
Receipts from interest sensitive policies credited to policyholder
account balances............................................................. 94,559 137,454
Return of policyholder account balances on interest sensitive products......... (122,998) (308,441)
Cash transferred to reinsurer.................................................. (432,806) --
------------- -------------
Net cash used by financing activities...................................... (607,887) (442,264)
------------- -------------
Net decrease in cash....................................................... (58,263) (108,751)
Cash and cash equivalents at beginning of period (including $131,531 of cash
and cash equivalents classified as Businesses Held for Sale in 1999)........... 141,636 224,258
------------- -------------
Cash and cash equivalents at end of period (including $78,091 of cash and
cash equivalents classified as Assets of Businesses Held for Sale in 1999)..... $ 83,373 $ 115,507
============= =============
Supplemental disclosures:
Income taxes paid (refunded)................................................. $ 11 $ (5,286)
============= =============
Interest paid................................................................ $ 14,280 $ 29,149
============= =============
Non-cash financing activities:
Accrued and unpaid preferred stock dividends................................. $ 4,456 $ 13,369
============= =============
Stock received in consideration for notes receivable......................... $ 959 $ --
============= =============
Cancellation of preferred stock and related dividends in exchange
for common stock........................................................... $ 279,746 $ --
============= =============
Cancellation of common stock and treasury shares............................. $ (31,457) $ --
============= =============
Issuance of stock grants..................................................... $ 1,050 $ --
============= =============
Stock options issued to consultants and former president of the Company...... $ 501 $ --
============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts and per share amounts)
1. Basis of Presentation
Southwestern Life Holdings, Inc. ("SWL Holdings" or the "Company"), formerly
known as PennCorp Financial Group, Inc. ("PennCorp"), is an insurance holding
company. The name of the Company was changed effective June 13, 2000, the date
the recapitalization transactions (see Note 3) were consummated.
As further discussed in Note 3, on February 7, 2000, PennCorp filed a voluntary
petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United
States Bankruptcy Code ("Bankruptcy Code"). On June 13, 2000, PennCorp
consummated a recapitalization plan and emerged from the Chapter 11 proceedings
as SWL Holdings. The Company owns Southwestern Financial Corporation ("SW
Financial"). Through SW Financial's wholly-owned life insurance subsidiary,
Pacific Life and Accident Insurance Company ("PLAIC"), and its wholly-owned
subsidiary, Southwestern Life Insurance Company ("Southwestern Life"), the
Company offers a broad range of life, accumulation and accident and sickness
insurance products through both independent and exclusive agents. Additionally,
the Company owns KB Management, LLC ("KB Management") which provides management
and advisory services to the Company and its insurance subsidiaries; and
Marketing One, Inc. ("Marketing One"), a third party marketing organization. As
part of a previously announced subsidiary realignment, Security Life and Trust
Insurance Company ("Security Life"), formerly a wholly-owned life insurance
company, was merged into Southwestern Life effective June 30, 2000.
Previously, PennCorp 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); Marquette National Life Insurance Company
("Marquette") (sold July 30, 1999); Occidental Life Insurance Company ("OLIC")
(sold February 4, 2000); United Life and Annuity Insurance Company ("United
Life") (sold April 30, 1999); UC Mortgage Corp. ("UC") (sold April 30, 1999);
Cyberlink Development, Inc. ("Cyberlink") (sold April 30, 1999); and KIVEX, Inc.
("KIVEX"), an internet service provider (sold June 30, 1999). Operating results
of all the subsidiaries sold have been reported herein as "Businesses Sold".
United Life, UC, Cyberlink and certain assets of Marketing One collectively are
referred herein as "United Life Assets." Penn Life, Peninsular, Constitution,
Union Bankers and Marquette collectively are referred herein as "Career Sales
Division." AA Life and Occidental collectively are referred herein as "Payroll
Sales Division."
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. All dollar amounts presented hereafter,
except share amounts, are stated in thousands.
The financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP"). These principles are established primarily by
the Financial Accounting Standards Board ("FASB") and the American Institute of
Certified Public Accountants ("AICPA"). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as well as revenues
and expenses. Accounts that the Company deems to be acutely sensitive to changes
in estimates include deferred policy acquisition costs, policy liabilities and
accruals, present value of insurance in force, costs in excess of net assets
acquired 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.
6
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (Continued)
Income (loss) per share is computed based on outstanding common shares of the
recapitalized company for all periods reported as if the recapitalization
occurred at the beginning of the reporting periods. As a result, the computation
of loss per share does not include the preferred stock dividend requirements.
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
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. In June 2000, SFAS No. 138 was
issued amending certain provisions of SFAS No. 133. The Company will adopt SFAS
No. 133 and SFAS No. 138 effective as of January 1, 2001. The Company is
currently evaluating SFAS No. 133 and SFAS 138 but does not expect its adoption
to have a material effect on its consolidated financial statements.
3. Recapitalization and Petition for Relief Under Chapter 11
On January 10, 2000, PennCorp announced that it had agreed to sell Southwestern
Life and Security Life 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"). From the
Petition Date, PennCorp continued to operate and manage its assets and business
as a debtor-in-possession as authorized by provisions of the Bankruptcy Code.
None of PennCorp's insurance subsidiaries were involved in the bankruptcy
filing.
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") (the "Recapitalization Plan"). On March 23, 2000, PennCorp'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 Directors'
selection of the Recapitalization Plan. On April 14, 2000, the Texas Department
of Insurance issued its order approving the Form A acquisition statement
submitted by Rapoport and Inverness. On June 5, 2000, the Bankruptcy Court
confirmed the Recapitalization Plan.
7
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Recapitalization and Petition for Relief Under Chapter 11 (Continued)
On June 13, 2000, the Company consummated the Recapitalization Plan and emerged
from the Chapter 11 proceedings as Southwestern Life Holdings, Inc. Pursuant to
the Recapitalization Plan, SWL Holdings issued 5,175,000 shares of common stock
in exchange for all of the outstanding preferred stock of PennCorp. The Company
also issued 1,960,000 shares of common stock pursuant to a rights offering
underwritten by Inverness and Vicunna and 1,840,000 shares to Rapoport and
Sharpe in connection with their investments. These shares were issued at a price
of $12.50 per share and the Company received $46,004 in cash (net of related
expenses of $1,496). All shares of PennCorp's common stock were canceled for no
value. Shares of SWL Holdings are listed on the Nasdaq National Market under the
symbol "SWLH" and started trading on September 28, 2000. In addition, the
Company consummated a new $95,000 credit facility and borrowed $81,000 under it
at closing. According to the Recapitalization Plan, the Company received $49,100
from PLAIC as principal and interest payments on the existing surplus debenture
and $5,900 as dividends. The $55,000 was made available to PLAIC from
Southwestern Life and Security Life as an extraordinary dividend. The Company
used these proceeds to repay the principal balances of PennCorp's senior and
subordinated debt aggregating $179,646 (see Note 5). Any and all other claims
and liabilities of PennCorp were paid or accrued in accordance with their terms.
The Company has established an additional tax valuation allowance on certain net
operating loss carryforwards, which may not be recoverable as a result of the
recapitalization and other factors.
The Company awarded 60,000 shares to two executive officers and 24,000 shares to
a former officer and director of PennCorp in consideration of his consulting
services rendered in connection with the recapitalization transaction. In
addition, the Company established a non-qualified stock option plan and issued
options to purchase 890,000 shares of the Company's common stock at prices
ranging from $12.50 to $15.00 per share. Included in these options were 55,000
shares that were awarded to certain consultants at a price of $12.50 per share
for which the Company recognized expense of $426. With the resignation of one of
the executive officers effective August 1, 2000, the Company recognized expense
of $75 with respect to previously granted stock options to acquire 150,000
shares. These options subsequently expired without being exercised.
4. Dispositions and Other Events
On February 4, 2000, PennCorp consummated the sale of the Payroll Sales Division
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.
PennCorp recognized a loss of $8,383 from the sale. PennCorp used $100,000 of
the proceeds to repay a then existing 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.
Effective May 1, 2000, Southwestern Life and Security Life each consummated with
RGA Reinsurance Company ("RGA") a 100% indemnity coinsurance agreement of all of
their respective deferred annuity business. Southwestern Life and Security Life
transferred to RGA cash of $432,806 which is equal to the amount of the
reinsured statutory policy liabilities, net of a ceding allowance of $15,131.
PennCorp recorded a deferred gain of approximately $10,172, 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 is being recognized in other income over the life
of the reinsured block of business. During the period from closing to September
30, 2000, the Company recognized $508 of such deferred gains. 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 month. (As a result of the merger of
Security Life into Southwestern Life, effective June 30, 2000, Southwestern Life
succeeded to all of Security Life's rights and obligations under its agreement
with RGA.) During the quarter ended June 30, 2000,
8
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Dispositions and Other Events (Continued)
PennCorp recognized approximately $5,292 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. The
Company has established an additional tax valuation allowance for capital loss
carryforwards associated with the sale of invested assets, which may not be
recoverable prior to their expiration dates.
5. Interest Rate Cap Agreement
On September 8, 2000, the Company entered into an interest rate cap agreement
with a bank to hedge a notional amount of $40,000 of its outstanding floating
rate notes for a term of 21 months. Pursuant to the agreement, the Company will
receive interest differential from the counter-party if the London InterBank
Offering Rate ("LIBOR") exceeds 8.5%. At September 30, 2000, LIBOR was 6.6%. The
agreement is effective December 12, 2000. The Company paid a fixed amount of $27
which will be amortized over the term of the agreement.
6. Notes Payable
In anticipation of the filing of the Chapter 11 case, PennCorp and the lenders
party to its then 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 PennCorp 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"). The Cash Collateral Agreement provided a mechanism for
PennCorp to repay its currently outstanding borrowings and established certain
covenants with which PennCorp had to comply until all of PennCorp's outstanding
loans (plus interest thereon) were repaid. PennCorp was able to use cash from
the cash collateral account for only predetermined types of expenses and in
specified amounts.
Amendment No. 2 to the Cash Collateral Agreement and Forbearance Agreement dated
as of April 25, 2000 ("Amendment No. 2") waived any non-compliance with the Cash
Collateral Agreement resulting solely from the consummation of the reinsurance
agreement with RGA on the deferred annuity business of Southwestern Life and
Security Life (see above) and extended the maturity of the Cash Collateral
Agreement and Forbearance Agreement to June 30, 2000. On May 8, 2000, PennCorp
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. On June 13, 2000, PennCorp's senior and subordinated debt were
paid in full in cash. As a result, the Company realized an after-tax
extraordinary charge of $2,443 representing the write-off of deferred costs and
a 1% premium paid to holders of the subordinated debt as required by the terms
of the indenture due to the early payoff.
On June 13, 2000, the Company consummated a $95,000 credit facility. The Company
used $81,000 of the new credit facility along with the proceeds from the
issuance of SWL Holdings common stock pursuant to the rights offering, Rapoport
and Sharpe investments and the extraordinary dividend to repay the principal
balances of the PennCorp senior and subordinated debt and related interest.
The new credit facility consists of a term loan of $80,000 and a revolving
commitment of $15,000. The maturities of the term loan during each of the five
years after December 31, 2000 are as follows: 2001, $8,625; 2002, $12,063; 2003,
$12,250; 2004, $12,437 and 2005, $12,500. At September 30, 2000, the Company had
outstanding revolving loans of $7,000. These loans bear interest at a Eurodollar
Rate plus a margin factor (as defined in the credit agreement). The effective
interest rate for these loans at September 30, 2000 was 10.5%.
9
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Notes Payable (Continued)
The new credit facility imposes certain covenants on the Company, including
covenants restricting the amount of additional indebtedness the Company may
incur, limiting the Company's ability to engage in future acquisitions and
certain other business transactions, and limiting the amount of dividends the
Company may declare and pay, and requiring the Company to maintain specified
financial ratios and meet specified financial tests. At September 30, 2000, the
Company was in compliance with all applicable covenants.
7. 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 nine month period ended September 30, 2000 and three and
nine months ended September 30, 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>
Nine Months Ended
September 30, 2000
----------------------------
As Reported Pro forma
------------- -------------
(In thousands,
except per share amounts)
<S> <C> <C>
Total revenues............................................................... $ 189,199 $ 186,931
Loss before extraordinary items.............................................. (61,896) (55,704)
Per share information(1):
Loss before extraordinary items-basic...................................... $ (6.83) $ (6.15)
Loss before extraordinary items-diluted.................................... (6.83) (6.15)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
----------------------------- ----------------------------
As Reported Pro Forma As Reported Pro forma
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues................................ $ 112,806 $ 77,643 $ 532,076 $ 246,088
Loss before extraordinary items............... (28,098) (10,992) (88,969) (47,179)
Per share information(1):
Loss before extraordinary items-basic....... $ (3.10) $ (1.21) $ (9.82) $ (5.21)
Loss before extraordinary items-diluted..... (3.10) (1.21) (9.82) (5.21)
---------------
(1) Restated to reflect outstanding common shares as a result of
recapitalization effective June 13, 2000 as if recapitalization occurred at
beginning of period and the computation of loss per share does not include
the preferred stock dividend requirements.
</TABLE>
8. Restructuring Charges
As a result of the merger of Security Life into Southwestern Life and the
consummation of the Recapitalization Plan, the Company adopted a restructuring
plan during the quarter ended June 30, 2000 (the "2000 Plan"). Pursuant to the
10
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Restructuring Charges (Continued)
2000 Plan, the Company is reducing its workforce in most areas of the Company
(including finance, policyholder services, marketing, information technology and
human resources) by 52 employees. The 2000 Plan is expected to be completed by
December 31, 2000.
Prior to 2000, 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 and nine months ended September 30, 2000
and 1999 on the restructuring accrual balances under the 2000 Plan, the 1999
Plan, the 4th Quarter 1998 Plan and the 1st Quarter 1998 Plan.
<TABLE>
<CAPTION>
Paid or Paid or
Balance at Charged Balance at Charged Balance at
December 31, Against June 30, Against September 30,
1999 Provision Liability Adjustments 2000 Liability Adjustments 2000
----------- --------- --------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 Plan
Severance and
related benefits...... $ -- $ 1,020 $ (120) $ -- $ 900 $ (613) $ -- $ 287
========= ========= ========= ========= ========= ======== ======== ========
1999 Plan
Severance and
related benefits...... $ 2,374 $ -- $ (2,296) $ 79 $ 157 $ (13) $ (144) $ --
Estimated holding costs
of vacated facilities. 2,122 -- -- (8) 2,114 (1,087) (72) 955
--------- --------- --------- --------- --------- -------- --------- --------
$ 4,496 $ -- $ (2,296) $ 71 $ 2,271 $ (1,099) $ (216) $ 955
========= ========= ========= ========= ========= ======== ======== ========
4th Quarter 1998 Plan
Severance and
related benefits...... $ 1,067 $ -- $ (100) $ -- $ 967 $ (967) $ -- $ --
========= ========= ========= ========= ========= ======== ======== ========
1st Quarter 1998 Plan
Estimated holding costs
of vacated facilities. $ 1,814 $ -- $ (1,646) $ (168) $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
During the quarter ended June 30, 2000, the Company agreed to assign its lease
on certain vacated office space to a third party and is released from
obligations related to the vacated office space beginning January 1, 2001. As
part of this agreement, the new lessee will have the use of furniture located in
the vacated space but the Company will retain the furniture lease obligation,
which totals approximately $46 per quarter through 2004. Pursuant to these
agreements the Company reduced the remaining accruals for the 1999 Plan by $72
and $80 for the quarter and nine months ended September 30, 2000, respectively.
The Company adjusted its severance accruals during the three and nine months
ended September 30, 2000 based on actual severance paid.
11
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Restructuring Charges (Continued)
<TABLE>
<CAPTION>
Paid or Paid or
Balance at Charged Balance at Charged Balance at
December 31, Against June 30, Against September 30,
1998 Provision Liability Adjustments 1999 Liability Adjustments 1999
----------- --------- --------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 Plan
Severance and
related benefits...... $ -- $ 3,185 $ -- $ -- $ 3,185 $ (584) $ -- $ 2,601
Estimated holding costs of
vacated facilities.... -- 2,122 -- -- 2,122 -- -- 2,122
--------- --------- --------- --------- --------- -------- -------- --------
$ -- $ 5,307 $ -- $ -- $ 5,307 $ (584) $ -- $ 4,723
========= ========= ========= ========= ========= ======== ======== ========
4th Quarter 1998 Plan
Severance and
related benefits...... $ 2,274 $ -- $ (606) $ 189 $ 1,857 $ (548) $ -- $ 1,309
Estimated contract
termination costs.... 32 -- (41) 9 -- -- -- --
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,306 $ -- $ (647) $ 198 $ 1,857 $ (548) $ -- $ 1,309
========= ========= ========= ========= ========= ======== ======== ========
1st Quarter 1998 Plan
Severance and
related benefits...... $ 619 $ -- $ (296) $ (323) $ -- $ -- $ -- $ --
Estimated holding costs
of vacated facilities. 2,205 -- -- (41) 2,164 -- -- 2,164
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,824 $ -- $ (296) $ (364) $ 2,164 $ -- $ -- $ 2,164
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
As a result of the sale of the United Life Assets along with other non-core
operations, the Company adopted a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company adjusted its severance accruals during the nine months ended September
30, 1999 based on actual severance paid.
9. 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
Businesses Sold for all periods presented.
Segment data as of September 30, 2000 and December 31, 1999, and for the three
and nine months ended September 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Premiums and policy product charges:
Ongoing Insurance Operations................ $ 28,359 $ 34,321 $ 86,714 $ 104,071
Businesses Sold (United States)............. -- 32,635 7,573 155,301
Businesses Sold (Canada).................... -- 2,993 -- 27,045
------------- ------------- ------------- -------------
$ 28,359 $ 69,949 $ 94,287 $ 286,417
============= ============= ============= =============
Operating profit (loss):
Ongoing Insurance Operations................ $ (1,546) $ 13,942 $ (1,320) $ 23,043
Businesses Sold............................. -- 2,862 2,806 27,182
------------- ------------- ------------- -------------
$ (1,546) $ 16,804 $ 1,486 $ 50,225
============= ============= ============= =============
</TABLE>
12
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Business Segment Information (Continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Total assets:
Ongoing insurance operations............................................... $ 2,515,798 $ 2,645,337
Businesses Sold............................................................ -- 598,011
Corporate and other........................................................ 24,679 44,800
------------- -------------
$ 2,540,477 $ 3,288,148
============= =============
</TABLE>
Reconciliations of segment data to the Company's consolidated data are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues:
Segments--premiums and policy
product charges........................... $ 28,359 $ 69,949 $ 94,287 $ 286,417
Net investment income....................... 31,664 53,408 108,995 209,043
Other income................................ 2,985 10,222 7,474 30,653
Net gains (losses) from sale of investments. 132 870 (13,174) (198)
Net gains (losses) from sales of subsidiaries -- (21,643) (8,383) 6,161
------------- ------------- ------------- -------------
$ 63,140 $ 112,806 $ 189,199 $ 532,076
============= ============= ============= =============
Loss before extraordinary item and income taxes:
Segments.................................... $ (1,546) $ 16,804 $ 1,486 $ 50,225
Corporate expenses, eliminations and other.. 9 (7,322) (23,646) (31,436)
Impairment provision associated with
assets of Businesses Sold................. -- -- -- (58,486)
Interest and amortization of deferred
debt issuance costs....................... (2,683) (7,713) (13,420) (33,057)
Net gains (losses) on the sale of investments 132 870 (13,174) (198)
Net gains (losses) from sales of subsidiaries -- (21,643) (8,383) 6,161
Restructuring costs......................... 216 -- (707) (5,141)
------------- ------------- ------------- -------------
$ (3,872) $ (19,004) $ (57,844) $ (71,932)
============= ============= ============= =============
</TABLE>
10. 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 PennCorp and certain of its then current or former
directors and officers. (None of the individual defendants are currently
officers or directors of SWL Holdings.) The actions were consolidated in the
first quarter of 1999.
Plaintiffs allege 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 PennCorp's common stock and subordinated
notes during the period of February 8, 1996, through November 16, 1998.
13
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Commitments and Contingencies (Continued)
The parties entered into a Stipulation of Settlement dated April 28, 2000
containing the terms of the settlement of this matter. The Stipulation 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. Of that
sum, $1,500 was paid by PennCorp during the third quarter of 1999 into an escrow
account established by plaintiffs' counsel, and $7,500 plus interest will be
paid by PennCorp's outside directors and officers liability insurance carrier.
On June 19, 2000, the District Court entered an Order Preliminarily Approving
Settlement and Providing For Notice and set a final hearing on the matter for
November 16, 2000. The Company expects the settlement to receive final approval
at that hearing.
On October 10, 2000, the SEC notified the Company that its formal investigation
into possible violations of the federal securities laws had been terminated and
no enforcement action had been recommended to the Commission.
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 is 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. On August 30, 2000, the lawsuit was amended to add a claim
that Security Life had improperly reduced the interest rates credited to
accumulated values in such policies, in an effort to offset losses incurred by
Security Life on those policies. Security Life has denied all of the allegations
in the lawsuit. However, because of the substantial expense and uncertainty
associated with class action litigation, the Company has entered into an
agreement for a proposed settlement of this lawsuit. This proposed settlement
must be approved by the Dallas County court. On September 8, 2000, the court
granted preliminary approval of the proposed settlement, and ordered that notice
be sent to all class members. A hearing at which the court will consider final
approval of the proposed settlement is scheduled for November 17, 2000. The
Company has accrued
14
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Commitments and Contingencies (Continued)
$1,350 for expenses anticipated to be incurred in connection with the proposed
settlement and $2,400 of additional policy liabilities. Estimates for additional
policy liabilities are dependent on elections made by class members and on other
factors some of which cannot yet be reasonably estimated. The recorded liability
reflects costs the Company considers likely to be incurred if the settlement is
confirmed based only on known or reasonably estimable factors. Therefore, the
ultimate cost to the Company may be greater than estimated and may have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
Jerrold Schnoebelen ("Schnoebelen") was an agent whose marketing contract with
United Life provided that he would be entitled to an annual commission (trail
fee) based on various percentages of the total accumulated value of annuity
contracts in force for 13 months with United Life which were produced by
Schnoebelen and his designees. Schnoebelen generally ceased writing new business
with United Life in 1993 and his agency contract was terminated in 1997. In 1998
Schnoebelen brought suit in US District Court in San Diego, California against
United Life alleging that United Life had not paid him all the trail fees to
which he was entitled after 1994 and alleging various contractual and tortious
causes of action. When PennCorp sold United Life in 1999, it and PLAIC
indemnified the buyer against losses for past damages from this lawsuit. The
Company denied the claims and vigorously defended the lawsuit. On July 20, 2000,
the jury returned a verdict against United Life in the amount of $1,125 being
$287 for past economic damages and $838 for the net present value of future
economic damages. The Company has established a liability of $1,125 for these
damages. The Company filed various post-judgment motions for relief from the
judgment, all of which were denied by the trial court. The Company believes it
has valid grounds to appeal and obtain a reversal of the judgment and fully
intends to pursue such appeal. The Company further believes that most, if not
all, of the future economic damages are not encompassed by the indemnity
agreement and are therefore the responsibility of the buyer of United Life.
On or about September 11, 2000 Southwestern Life received an original petition
filed on September 7, 2000 in state court located in Jasper, Texas styled
Martindale, et al. v. Southwestern Life Insurance Company and Ervin Jackson
asserting claims against Southwestern Life and its agent co-defendant on behalf
of a purported class of persons who had an ownership interest in universal life
insurance policies or interest-sensitive non-participating whole life insurance
policies issued by Southwestern Life during the period from January 1, 1981 to
the present and who were residents of the United States on the date(s) of
issuance of such policy(ies). The original petition alleges that Southwestern
Life and/or its agent co-defendant committed, among other things, breach of
contract, breach of fiduciary duty, breach of duty of good faith and fair
dealing, negligent misrepresentation, unfair or deceptive acts, and fraud in
connection with the sale of such policies, and seeks class certification,
equitable relief and recovery of actual, statutory and punitive damages in
unspecified amounts as well as costs and attorneys' fees. Both Southwestern Life
and the agent co-defendant timely filed answers denying all allegations made in
the original petition and contesting venue for the action, and Southwestern Life
subsequently filed a notice of removal removing the case to the United States
District Court for the Eastern District of Texas located in Beaumont, Texas. No
discovery has been taken in this case to date. Southwestern Life denies any and
all allegations made in the original petition and intends to defend this case
vigorously. There can be no assurance that Southwestern Life will be able to
defend or resolve the issues presented in this action successfully or at all or
that any verdict or other resolution would not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
The life insurance subsidiaries of the Company are parties 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's
subsidiaries.
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
15
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Commitments and Contingencies (Continued)
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."
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 and other factors 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 changes in 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 at September 30, 2000 had outstanding
commitments to invest up to $4,800 in various limited partnership funds and
other investments.
As of September 30, 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. At September 30, 2000, the Company had established a $1,200
liability related to these contingencies.
The Company and ING agreed on certain federal income tax calculations under the
provisions of the United Life Assets purchase and sale agreement relating to the
differential in tax amounts between closing and the final return. At September
30, 2000, the Company had established a liability of $721 related to this
agreement which was subsequently paid.
At September 30, 2000, the Company had a contingent obligation for mortgage
loans previously sold aggregating $3,335 as a result of the Company acting as a
servicing conduit.
16
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 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)
17
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders of Southwestern Life Holdings, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Southwestern Life Holdings, Inc. and subsidiaries as of September 30, 2000, and
the related condensed consolidated statements of operations and comprehensive
income (loss) for the three and nine month periods ended September 30, 2000 and
1999, and condensed consolidated statements of cash flows for the nine month
periods ended September 30, 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 accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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
November 6, 2000
18
<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
contained in the Company's annual report to 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 contained in 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 SWL Holdings'
products and trends in SWL Holdings' operations or financial results, as well as
all other statements contained in this report including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," "should",
"could", "goal", "target", "on-track", "comfortable with" 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 such
forward-looking statements. Such factors include, among other things: (1)
general economic conditions and other factors, including prevailing interest
rate levels and stock and credit market performance, which may affect, among
other things, the ability of SWL Holdings to sell its products, the market value
of SWL Holdings' investments and the lapse rate and profitability of insurance
products; (2) SWL Holdings' 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 SWL Holdings' insurance
products; (5) changes in the Federal income tax laws and regulations which may
affect the relative tax advantages of some of SWL Holdings' 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 SWL Holdings' 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; and (10)
unanticipated litigation. There can be no assurance that these and other factors
not currently anticipated by management will not materially and adversely affect
the Company.
BANKRUPTCY PROCEEDINGS AND RECAPITALIZATION
On January 10, 2000, PennCorp announced that it had agreed to sell Southwestern
Life and Security Life 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 Bankruptcy Code in the Bankruptcy Court. From the Petition
Date, PennCorp continued to operate and manage its assets and business as a
debtor-in-possession as authorized by provisions of the Bankruptcy Code. None of
PennCorp's insurance subsidiaries were involved in the bankruptcy filing.
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, PennCorp 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, PennCorp'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 Directors' selection of the Recapitalization Plan. 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 effective May 1, 2000.
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<PAGE>
On June 5, 2000, the Bankruptcy Court confirmed the Recapitalization Plan.
On June 13, 2000, the Company consummated the Recapitalization Plan and emerged
from the Chapter 11 proceedings as Southwestern Life Holdings, Inc. Pursuant to
the Recapitalization Plan, SWL Holdings issued 5,175,000 shares of common stock
in exchange for all of the outstanding preferred stock of PennCorp. The Company
also issued 1,960,000 shares of common stock pursuant to a rights offering
underwritten by Inverness and Vicunna and 1,840,000 shares to Rapoport and
Sharpe in connection with their investments. These shares were issued at a price
of $12.50 per share and the Company received $46.0 million in cash (net of
related expenses of $1.5 million). All shares of PennCorp's common stock were
canceled for no value. Shares of SWL Holdings' common stock are listed on the
Nasdaq National Market under the symbol "SWLH" and started trading on September
28, 2000. In addition, the Company consummated a new $95.0 million credit
facility and borrowed $81.0 million under it at closing. According to the
Recapitalization Plan, the Company received $49.1 million from PLAIC as
principal and interest payments on the existing surplus debenture and $5.9
million as dividends. The $55.0 million was made available to PLAIC from
Southwestern Life and Security Life as an extraordinary dividend. The Company
used these proceeds to repay the principal balances of PennCorp's senior and
subordinated debt aggregating $179.6 million. Any and all other claims and
liabilities of PennCorp were paid or accrued in accordance with their terms. The
Company has established an additional tax valuation allowance on certain net
operating loss carryforwards, which may not be recoverable as a result of the
recapitalization and other factors.
The Company awarded 60,000 shares to two executive officers and 24,000 shares to
a former officer and director of PennCorp in consideration of his consulting
services rendered in connection with the recapitalization transaction. In
addition, the Company established a non-qualified stock option plan and issued
options to purchase 890,000 shares of the Company's common stock at prices
ranging from $12.50 to $15.00 per share. Included in these options were 55,000
shares that were awarded to certain consultants at a price of $12.50 per share
for which the Company recognized expense of $426,000. With the resignation of
one of the executive officers effective August 1, 2000, the Company recognized
expense of $75,000 with respect to previously granted stock options to acquire
150,000 shares. These options subsequently expired without being exercised.
GENERAL
Historically, PennCorp, through three operating divisions, provided
accumulation, life, and fixed benefit accident and sickness insurance products
throughout the United States and Canada. PennCorp's products were sold through
several distribution channels, including exclusive agents, independent agents,
financial institutions, and payroll deduction programs, and were targeted
primarily to lower- and middle-income individuals in rural and suburban areas.
PennCorp's products were primarily small premium accident and sickness insurance
policies with defined fixed benefit amounts, traditional whole life and
universal life insurance policies with low face amounts, and accumulation
products such as single premium deferred annuities. During 1999 and the first
two months of 2000, PennCorp disposed of its Career Sales Division, Payroll
Sales Division and certain operating subsidiaries. Each disposition affected
certain distribution channels and related products historically utilized by
PennCorp.
The Company's financial condition and results of operations for the periods
covered by this and future reports are or will be affected by several common
factors discussed below.
Dispositions and Other Events. On February 4, 2000, PennCorp consummated the
sale of the Payroll Sales Division for cash proceeds of approximately $103.3
million. PennCorp used $100.0 million of the proceeds to repay its then existing
bank credit facility.
Effective May 1, 2000, Southwestern Life and Security Life each 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 $432.8 million, which is equal to the amount of the reinsured
statutory policy liabilities, net of a ceding allowance of $15.1 million.
PennCorp recorded a deferred gain of approximately $10.2 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 is being recognized in other income over the life
of the reinsured block of business. During the period from closing to September
30, 2000, the Company recognized $508,000 of such deferred gains. Southwestern
Life and Security Life retained the administration for the ceded block of
business and are
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<PAGE>
reimbursed by RGA for administrative costs at the rate of approximately $5.00
per annuity contract in force per month. (As a result of the merger of Security
Life into Southwestern Life, effective June 30, 2000, Southwestern Life
succeeded to all of Security Life's rights and obligations under its agreement
with RGA.) During the quarter ended June 30, 2000, PennCorp recognized
approximately $5.3 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. The Company has
established an additional tax valuation allowance for capital loss carryforwards
associated with the sale of invested assets, which may not be recoverable prior
to their expiration dates.
Restructuring and Other Costs. As a result of the merger of Security Life into
Southwestern Life and the consummation of the Recapitalization Plan, the Company
adopted a restructuring plan during the quarter ended June 30, 2000 (the "2000
Plan"). Pursuant to the 2000 Plan, the Company is reducing its workforce in most
areas of the Company (including finance, policyholder services, marketing,
information technology and human resources) by 52 employees. The 2000 Plan is
expected to be completed by December 31, 2000, and result in operating expense
reductions and cash savings of approximately $2.4 million annually. Prior to
2000, 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 and nine months
ended September 30, 2000 and 1999 on the restructuring accrual balances under
the 2000 Plan, 1999 Plan, the 4th Quarter 1998 Plan and the 1st Quarter 1998
Plan (in thousands):
<TABLE>
<CAPTION>
Paid or Paid or
Balance at Charged Balance at Charged Balance at
December 31, Against June 30, Against September 30,
1999 Provision Liability Adjustments 2000 Liability Adjustments 2000
----------- --------- --------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 Plan
Severance and
related benefits...... $ -- $ 1,020 $ (120) $ -- $ 900 $ (613) $ -- $ 287
========= ========= ========= ========= ========= ======== ======== ========
1999 Plan
Severance and
related benefits...... $ 2,374 $ -- $ (2,296) $ 79 $ 157 $ (13) $ (144) $ --
Estimated holding costs
of vacated facilities. 2,122 -- -- (8) 2,114 (1,087) (72) 955
--------- --------- --------- --------- --------- -------- -------- --------
$ 4,496 $ -- $ (2,296) $ 71 $ 2,271 $ (1,099) $ (216) $ 955
========= ========= ========= ========= ========= ======== ======== ========
4th Quarter 1998 Plan
Severance and
related benefits...... $ 1,067 $ -- $ (100) $ -- $ 967 $ (967) $ -- $ --
========= ========= ========= ========= ========= ======== ======== ========
1st Quarter 1998 Plan
Estimated holding costs
of vacated facilities. $ 1,814 $ -- $ (1,646) $ (168) $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
During the quarter ended June 30, 2000, the Company agreed to assign its lease
on certain vacated office space to a third party and is released from
obligations related to the vacated office space beginning January 1, 2001. As
part of this agreement, the new lessee will have the use of furniture located in
the vacated space but the Company will retain the furniture lease obligation,
which totals approximately $46,000 per quarter through 2004. Pursuant to these
agreements the Company reduced the remaining accruals for the 1999 Plan by
$72,000 and $80,000 for the quarter and nine months ended September 30, 2000,
respectively. The Company adjusted its severance accruals during the three and
nine months ended September 30, 2000 based on actual severance paid.
21
<PAGE>
<TABLE>
<CAPTION>
Paid or Paid or
Balance at Charged Balance at Charged Balance at
December 31, Against June 30, Against September 30,
1998 Provision Liability Adjustments 1999 Liability Adjustments 1999
----------- --------- --------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 Plan
Severance and
related benefits...... $ -- $ 3,185 $ -- $ -- $ 3,185 $ (584) $ -- $ 2,601
Estimated holding costs of
vacated facilities.... -- 2,122 -- -- 2,122 -- -- 2,122
--------- --------- --------- --------- --------- -------- -------- --------
$ -- $ 5,307 $ -- $ -- $ 5,307 $ (584) $ -- $ 4,723
========= ========= ========= ========= ========= ======== ======== ========
4th Quarter 1998 Plan
Severance and
related benefits...... $ 2,274 $ -- $ (606) $ 189 $ 1,857 $ (548) $ -- $ 1,309
Estimated contract
termination costs.... 32 -- (41) 9 -- -- -- --
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,306 $ -- $ (647) $ 198 $ 1,857 $ (548) $ -- $ 1,309
========= ========= ========= ========= ========= ======== ======== ========
1st Quarter 1998 Plan
Severance and
related benefits...... $ 619 $ -- $ (296) $ (323) $ -- $ -- $ -- $ --
Estimated holding costs
of vacated facilities. 2,205 -- -- (41) 2,164 -- -- 2,164
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,824 $ -- $ (296) $ (364) $ 2,164 $ -- $ -- $ 2,164
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
As a result of the sale of the United Life Assets along with other non-core
operations, the Company adopted a restructuring plan in June 1999 to
significantly reduce its Dallas-based staff and vacate certain office space. The
Company adjusted its severance accruals during the nine months ended September
30, 1999 based on actual severance paid.
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. SWL Holdings ("parent company"), formerly known as PennCorp, 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) holding company administrative expenses; (iii) income taxes and (iv)
investments in subsidiaries. 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.
Between February 7, 2000 and June 13, 2000, PennCorp was managing its assets as
a "debtor-in-possession" as a result of the bankruptcy petition filing (see Note
3 of Notes to Unaudited Consolidated Financial Statements).
On June 13, 2000, the Company consummated a $95.0 million credit facility. The
Company used $81.0 million of the new credit facility along with the proceeds
from the issuance of SWL Holdings common stock pursuant to the rights offering
and Rapoport and Sharpe investments and the $55.0 million extraordinary
dividends to repay the entire
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principal balance of PennCorp's senior and subordinated debt and related
interest (see Note 3 of Notes to Unaudited Consolidated Financial Statements).
The following table shows the cash sources and uses of the parent company on a
projected basis for the remainder of 2000 and on an actual basis for the periods
June 13, 2000 to September 30, 2000, February 8, 2000 to June 12, 2000 (as a
debtor-in-possession), January 1, 2000 to February 7, 2000 and for the six
months ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Projected Period Period Period Nine
Period June 13, February 8, January 1, Months
October 1, 2000 to 2000 to 2000 to 2000 to Ended
December 31, September 30, June 12, February 7, September 30,
2000 2000 2000 2000 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash sources:
Cash from subsidiaries.................... $ 8,945 $ 56,016 $ 4,105 $ 130,127 $ 343,055
Sales of directly owned subsidiaries...... -- -- -- -- 5,989
Issuance of common stock.................. -- 46,004 -- -- --
Additional borrowings..................... 2,000 87,000 -- -- --
Other investment income................... -- 43 245 44 695
Sale of/collection on assets held......... -- 163 57 -- 9,438
Other, net................................ 43 28 32 26 12
----------- ----------- ----------- ----------- -----------
Total sources......................... 10,988 189,254 4,439 130,197 359,189
----------- ----------- ----------- ----------- -----------
Cash uses:
Interest paid on indebtedness............. 2,418 8,970 2,254 3,057 29,149
Operating expenses, including
restructuring charges................... 828 6,817 1,029 18,575 13,297
Reduction of notes payable................ 5,500 174,646 5,000 100,000 269,000
Costs of recapitalization................. 735 10,565 -- -- --
Capital contributions to subsidiaries..... -- -- -- -- 27,668
Costs to dispose of Businesses Sold....... -- -- -- -- 14,991
Payment from escrow related to sale
of subsidiary........................... 999 -- -- -- --
Other, net................................ 111 1,432 877 -- --
----------- ----------- ----------- ----------- -----------
Total uses............................ 10,591 202,430 9,160 121,632 354,105
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash equivalents..... 397 (13,176) (4,721) 8,565 5,084
Cash and cash equivalents at
beginning of period....................... 1,146 14,322 19,043 10,478 12,654
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period (1)......................... $ 1,543 $ 1,146 $ 14,322 $ 19,043 $ 17,738
=========== =========== =========== =========== ===========
----------------
(1) Company's unused revolver as of December 31, 2000 is projected to be $11.5
million.
</TABLE>
Cash Sources
Cash from Subsidiaries. Cash generated by the Company's insurance subsidiaries
is made available to SWL Holdings 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
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<PAGE>
payments have been made to non-insurance intermediate holding companies and
subsequently paid to the Company in the form of dividends. The amounts
outstanding under the surplus debentures totaled $107.5 million and $258.3
million as of September 30, 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 SWL
Holdings to meet its cash requirements.
Currently PLAIC relies upon dividends and tax sharing payments from Southwestern
Life, which is in turn subject to regulatory restrictions under Texas insurance
laws and regulations with respect to the maximum amount of dividends that can be
paid to PLAIC 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.
Cash Sources and Uses for the Period June 13 to September 30, 2000
During the period June 13 to September 30, 2000, the Company received capital
contributions of $46.0 million (net of related expenses) through the issuance of
3,800,000 shares of common stock pursuant to the Recapitalization Plan. In
addition, the Company borrowed $87.0 million under the new credit facility. The
Company also received $49.8 million from PLAIC as principal and interest
payments on the existing surplus debentures and $5.9 million in dividends.
Additionally, the Company received a dividend of $350,000 from a non-insurance
subsidiary. These payments were funded by $55.0 million that was made available
to PLAIC from Southwestern Life and Security Life as an extraordinary dividend.
The Company used these proceeds to repay the principal balances of senior and
subordinated debt aggregating $174.6 million and related interest. During the
period from June 13 to September 30, 2000, the Company made interest payments
totaling $9.0 million and incurred cash operating expenses of $6.8 million
including a $6.0 million fee paid for the termination of the contract to sell
Southwestern Life and Security Life. The Company paid costs associated with the
Recapitalization Plan of $10.6 million. In addition, the Company established an
escrow account in the amount of $1.4 million in connection with posting bond for
appeal of the judgment rendered in the Schnoebelen lawsuit (see Note 10 of Notes
to Unaudited Consolidated Financial Statements). The Company also paid $27,000
for the interest rate cap agreement (see Note 5 of Notes to Unaudited
Consolidated Financial Statements).
Cash Sources and Uses for the Period February 8, 2000 to June 12, 2000
During the period from February 8, 2000 to June 12, 2000, PennCorp (as a
debtor-in-possession) received $4.1 million of dividends and surplus debenture
interest from subsidiaries and $245,000 of short-term investment income, $57,000
of proceeds from sale of mortgage loans and collection of receivables and
$32,000 from tax refunds. PennCorp paid $2.3 million in interest on its senior
debt and incurred $1.0 million of operating expenses. PennCorp made a $5.0
million principal payment on its credit facility and payments of $855,000 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 PennCorp. On February 4,
2000, AA Holdings sold the companies in the Payroll Sales Division for $103.3
million. The net proceeds to PennCorp after repayment of intercompany borrowings
to insurance company affiliates of PennCorp was $97.0 million. In addition,
PennCorp received a $12.7 million dividend from AA Holdings. Of the proceeds,
$100.0 million were used to repay a portion of PennCorp's bank credit facility.
For the period from January 1, 2000 to February 7, 2000, PennCorp 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 PennCorp and
its subsidiaries. In addition, PennCorp 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 PennCorp's
bank credit facility current.
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<PAGE>
Cash Sources and Uses for the Nine Months Ended September 30, 1999
Cash from Subsidiaries. For the nine months ended September 30, 1999, PennCorp
received surplus debenture interest and principal payments from PLAIC of $221.8
million, and received dividends and tax sharing payments of $121.2 million from
non-insurance intermediate holding companies. Substantially all of the surplus
debenture, dividends and tax sharing payments made by PLAIC were the direct
result of proceeds received by PLAIC from the disposition of Businesses Sold.
Sales of Directly Owned Subsidiaries. During the nine months ended September 30,
1999, the Company sold directly owned subsidiaries and received cash proceeds of
$6.0 million in connection with the disposition of the United Life Assets and
the Career Sales Division.
Other Investment Income. During the nine months ended September 30, 1999,
PennCorp received other investment income from short-term invested assets held
by the parent company.
Sale of/Collection on Assets. During the nine months ended September 30, 1999,
the Company received mortgage loan principal payments and distribution from a
limited partnership totaling $1.4 million. In addition, the Company sold certain
mortgage loans held directly by PennCorp for $8.0 million cash.
Interest Paid on Indebtedness. During the nine months ended September 30, 1999,
PennCorp made interest payments totaling $29.1 million.
Operating Expenses, Including Restructuring Charges. During the nine months
ended September 30, 1999, PennCorp directly and indirectly, through charges from
its subsidiaries, incurred significant operating and restructuring charges.
Total restructuring charges paid by PennCorp during the nine months ended
September 30, 1999 aggregated $994,000. During the nine months ended September
30, 1999, PennCorp also incurred legal, accounting and investment banking fees
associated with asset dispositions aggregating $2.3 million. Operating expenses
for the nine months ended September 30, 1999 also include costs aggregating $1.5
million associated with the pending class action securityholder litigation and
an SEC investigation.
Reduction in Notes Payable. During the nine months ended September 30, 1999,
PennCorp made repayment under the Bank Credit Facility aggregating $267.0
million upon the consummation of sales of Professional, the United Life Assets,
KIVEX and the Career Sales Division. An additional $2.0 million was repaid
during September 1999 as a result of liquidity at PennCorp level above the
amounts prescribed in the Bank Credit Facility, as amended.
Capital Contributions to Subsidiaries. For the nine months ended September 30,
1999, PennCorp made capital contributions to subsidiaries totaling $27.7
million. Of the total contributions, $20.2 million was contributed to
subsidiaries to meet certain target capital and surplus requirements as required
by the purchase and sale agreement for the Career Sales Division, $3.3 million
was made to PLAIC to make a subsequent capital contribution to PLIC and $4.2
million was made to non-life insurance subsidiaries.
Projected Cash Sources and Uses for the Remaining Three Months of 2000
Projected cash sources include $8.9 million in cash from subsidiaries and $2.0
million of additional borrowing under the new credit facility. Projected cash
uses include the payments of principal and interest on the new credit facility
of $5.5 million and $2.4 million, respectively, the payments of operating
expenses of $828,000 and the payments of remaining costs associated with the
Recapitalization Plan of $735,000. In addition, the Company anticipates paying
from escrow $999,000 associated with the sale of the Career Sales Division.
Management believes the Company will likely have sufficient financial
flexibility and projected liquidity sources to meet all projected cash
requirements. At September 30, 2000, the amount available to be drawn under the
new credit facility was $8.0 million.
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<PAGE>
Subsidiaries, Principally Insurance Operations
The insurance subsidiaries' principal sources of cash are premiums and
investment income. The insurance subsidiaries' primary uses of cash are policy
claims, commissions, operating expenses, income taxes and payments to the
Company for principal and interest due under surplus debentures, tax sharing
payments and dividends. Both sources and uses of cash are reasonably
predictable.
Cash Flow from Operating Activities. Cash provided by operating activities,
excluding the parent company, were $9.6 million and $41.1 million for the nine
months ended September 30, 2000 and 1999, respectively. The decrease in cash
flow from operating activities principally resulted from the sales of
subsidiaries, which provided $3.8 million of cash from operations for the nine
months ended September 30, 2000 compared to $39.7 million for the comparable
1999 period. This was partially offset by increases in cash flow from operating
activities of retained companies. The increase principally resulted from
decreasing costs associated with year 2000 remediation at all of the insurance
subsidiaries and reduced costs as a result of strategic business evaluations and
associated restructuring of the Company.
Cash Flow from Investing Activities. Cash provided by investing activities was
$591.8 million and $316.5 million for the nine months ended September 30, 2000
and 1999, respectively. During the nine months ended September 30, 2000 and
1999, the Company's subsidiaries sold $502.3 million and $561.8 million,
respectively, of fixed maturity and equity securities, and purchased $80.7
million and $753.8 million of fixed maturity and equity securities,
respectively. During the three months ended June 30, 2000 the Company's
subsidiaries sold securities in order to transfer cash of $432.8 million
associated with an indemnity coinsurance agreement with RGA and to pay dividends
to the parent company of $55.0 million as part of the Recapitalization Plan.
Other 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
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, was $651.4 million and $465.5 million for the nine
months ended September 30, 2000 and 1999, respectively. Cash outflows during the
nine months ended September 30, 2000 and 1999 include cash transferred on
reinsurance ceded of $432.8 million upon consummation of the RGA reinsurance
transaction, dividends, including dividends totaling $55.0 million associated
with the recapitalization, and surplus debenture principal payments aggregating
$190.2 million and $319.9 million, respectively, made to the parent company. For
the nine months ended September 1999, the Company's subsidiaries received
capital contributions from PennCorp aggregating $27.7 million, of which $20.2
million was contributed to life insurance subsidiaries to meet certain target
capital and surplus requirements as required by the purchase and sale agreement
for the Career Sales Division, $3.3 million was contributed to PLAIC to make a
subsequent capital contribution to PLIC and $4.2 million was contributed to
non-life insurance subsidiaries. In addition, policyholder surrenders exceeded
deposits by $21.8 million and $171.0 million for the nine months ended September
30, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2000 and 1999, the Company has
prepared the following selected pro forma financial information for the
Company's Ongoing Insurance Operations (Southwestern Life, Security Life and
PLAIC) 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. "Operating Income (Loss)," as used below, excludes the impact of: (i)
federal income tax expense (benefit) (ii) restructuring costs, (iii) gains or
losses on the sale of investments and (iv) the impact of the Company's decision
to dispose of the Businesses Held for Sale. 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Retained Business:
Operating income (loss)....................... $ (1,546) $ 13,942 $ (1,320) $ 23,043
Net investment gains (losses)................. 132 1,035 (13,187) (403)
Restructuring costs (credit).................. 216 -- (707) (5,313)
------------- ------------- ------------- -------------
(1,198) 14,977 (15,214) 17,327
------------- ------------- ------------- -------------
Businesses Sold
Operating income.............................. -- 2,862 2,806 27,182
Net investment gains (losses)................. -- (82) (39) 168
Restructuring costs........................... -- -- -- 202
Net gains (losses) from sale of subsidiaries.. -- (21,643) (8,383) 6,161
Impairment valuation.......................... -- -- -- (58,486)
------------- ------------- ------------- -------------
-- (18,863) (5,616) (24,773)
------------- ------------- ------------- -------------
Corporate:
Interest and amortization of deferred
debt issuance cost.......................... (2,683) (7,713) (13,420) (33,057)
Corporate expenses, eliminations and other.... 9 (7,322) (23,646) (31,436)
Net investment gains (losses)................. -- (83) 52 37
Restructuring costs........................... -- -- -- (30)
------------- ------------- ------------- -------------
(2,674) (15,118) (37,014) (64,486)
------------- ------------- ------------- -------------
Loss before extraordinary items and
income taxes.................................... $ (3,872) $ (19,004) $ (57,844) $ (71,932)
============= ============= ============= =============
</TABLE>
RETAINED BUSINESS--ONGOING INSURANCE OPERATIONS
The Ongoing Insurance Operations include the operations of Southwestern Life,
Security Life and PLAIC. (Effective June 30, 2000, Security Life was merged into
Southwestern Life.) Southwestern Life and Security Life market life insurance
and, to a lesser extent, health and annuity products through independent agents
who sell directly to individuals primarily in the southwestern and southeastern
United States. PLAIC markets annuity products in Texas.
27
<PAGE>
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ 28,359 $ 34,321 $ 86,714 $ 104,071
Net investment income......................... 31,386 40,287 104,641 122,349
Other income.................................. 2,494 5,973 5,705 9,457
------------- ------------- ------------- -------------
62,239 80,581 197,060 235,877
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... 48,817 50,634 147,930 158,401
Insurance related expenses.................... 4,998 7,145 19,498 23,184
Other operating expenses...................... 9,970 8,860 30,952 31,249
------------- ------------- ------------- -------------
63,785 66,639 198,380 212,834
------------- ------------- ------------- -------------
Pre-tax operating income...................... $ (1,546) $ 13,942 $ (1,320) $ 23,043
============= ============= ============= =============
</TABLE>
Policy Revenues. Policy revenues include: (i) premiums received on traditional
life products and a small amount of long- term care and traditional annuities
(ii) mortality and administrative fees earned on universal life insurance and
annuities and (iii) surrender charges on terminated universal life and annuity
policies. In accordance with GAAP, premiums on universal life and annuity
products are accounted for as deposits to insurance liabilities.
Premiums, net of reinsurance, by major product line for the three and nine
months ended September 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Life premiums:
Universal life (first year)................... $ 1,662 $ 2,224 $ 5,628 $ 7,251
Universal life (renewal)...................... 22,203 21,371 70,773 53,740
Yearly renewable term reinsurance on
universal life.............................. (2,663) (2,149) (7,901) (6,523)
Traditional life (first year)................. 254 2,074 3,082 7,028
Traditional life (renewal).................... 8,032 9,013 24,040 24,669
------------- ------------- ------------- -------------
Life premiums, net of reinsurance........... 29,488 32,533 95,622 86,165
Annuity premiums................................ 318 1,993 2,697 6,651
Health premiums:
Long-term care premiums net of reinsurance.... 223 131 624 57
------------- ------------- ------------- -------------
Premiums, net of reinsurance................ 30,029 34,657 98,943 92,873
Less premiums on universal life and
annuities which are recorded as additions
to insurance liabilities...................... (24,183) (25,588) (79,098) (67,642)
------------- ------------- ------------- -------------
Premiums on products with mortality or
morbidity risk............................. 5,846 9,069 19,845 25,231
Fees and surrender charges on interest
sensitive products............................ 22,513 25,252 66,869 78,840
------------- ------------- ------------- -------------
Policy revenues............................. $ 28,359 $ 34,321 $ 86,714 $ 104,071
============= ============= ============= =============
</TABLE>
Life premiums net of reinsurance decreased 9.4% during the quarter ended
September 30, 2000 and increased 11.0% during the nine months ended September
30, 2000, respectively. Life premiums collected, net of reinsurance, were $29.5
million and $95.6 million for the three and nine months ended September 30, 2000
compared with $32.5 million and
28
<PAGE>
$86.2 million in the comparable periods of 1999, respectively. First year
universal life premiums decreased 25.3% and 22.4% in the three and nine months
ended September 30, 2000 to $1.7 million and $5.6 million, respectively. First
year traditional life premiums decreased 87.8% and 56.1% in the three and nine
months ended September 30, 2000 to $254,000 and $3.1 million, respectively. The
decline in new life sales reflects the impact of ratings downgrades and
uncertainties surrounding the parent company's bankruptcy and recapitalization.
In addition, 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. The decrease
in first year traditional life premiums is also due to a decrease in single
premiums of $1.4 million and $2.9 million during the three and nine month
periods of 2000, respectively. Single premiums can vary significantly from
period to period.
Universal life and traditional life renewal premiums decreased $149,000 and
increased $16.4 million for the three and nine months ended September 30, 2000,
respectively, as compared with the comparable 1999 periods. The comparable
periods for 1999 included negative premiums associated with the Security Life
exchange or refund program. 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 $3.5
million and $21.6 million during the three and nine months ended September 30,
1999, respectively. The refund program was completed at December 31, 1999.
Annuity premiums of $318,000 and $2.7 million for the three and nine months
ended September 30, 2000, respectively, were less than the premiums of $2.0
million and $6.7 million in the comparable periods of 1999. The decrease in
annuity premiums principally reflects the consummation of the RGA reinsurance
transaction whereby Southwestern Life and Security Life reinsured substantially
all of their existing deferred annuity blocks of business effective May 1, 2000,
(see Note 4 of Notes to Unaudited Consolidated Financial Statements).
Long-term care premiums increased $92,000 and $567,000 for the quarter and nine
months ended September 30, 2000 compared with the comparable 1999 periods.
Premiums for the 1999 periods reflect the retroactive effects of an amendment to
the reinsurance contract which increased the cession amount to 80% retroactively
to 1998.
Net Investment Income. Net investment income decreased 22.1% and 14.5% to $31.4
million and $104.6 million for the three and nine months ended September 30,
2000, respectively, compared with the 1999 comparable periods. The decrease is
primarily due to a decline in invested assets. Average invested assets declined
by approximately $572.3 million and $322.6 million for the three and nine months
ended September 30, 2000, respectively, compared with the comparable 1999
periods. The decrease in invested assets resulted from the reinsurance of
substantially all of the deferred annuity business, the need to liquidate
invested assets to provide cash for the $55.0 million extraordinary dividend and
for funding surrenders of annuities and universal life products. At the
consummation of the reinsurance transaction, invested assets aggregating $432.8
million were transferred to the reinsurer. The impact of reinsurance was
slightly offset by the fact that policyholder deposits exceeded surrenders by
$7.8 million during the three months ended September 30, 2000. Policyholder
surrenders exceeded deposits by $28.4 million for the nine months ended
September 30, 2000. Weighted average yields on invested assets were 7.1% and
7.0% for the three and nine months ended September 30, 2000 compared to 6.9% and
7.0% for the three and nine months ended September 30, 1999. Weighted average
yields were impacted slightly for the nine months ended September 30, 2000 as a
result of maintaining higher cash balances resulting from sales of securities in
order to consummate the annuity reinsurance transaction and pay the special
dividends associated with the recapitalization. Weighted average yields improved
slightly for the three months ended September 30, 2000 principally as a result
of being able to reduce cash balances subsequent to the consummation of the
reinsurance transaction and the recapitalization.
Other Income. Other income was $2.5 million and $5.7 million for the three and
nine months ended September 30, 2000, respectively, compared with $6.0 million
and $9.5 million in the comparable periods of 1999. Included in other income for
the three and nine months ended September 30, 2000 is the amortization of
deferred gain on the reinsurance of deferred annuities which totaled $305,000
and $508,000, respectively. Included in the three and nine months ended
September 30, 1999 was income of $5.7 million which resulted from a gain and
distribution of assets from the sale of most of the assets and operations of an
investment in a joint venture. Other changes in other income principally reflect
changes in consideration received on supplemental contracts. Supplemental
contract revenue is derived from annuity contracts which have reached the
annuitization period. Consideration from supplemental contracts recognized as
other income is offset by policyholder benefits, resulting in no net effect on
the Company's results of operations.
29
<PAGE>
Total Policyholder Benefits. The following table shows the components of total
policyholder benefits for the three and nine months ended September 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Death benefits.................................. $ 19,785 $ 18,636 $ 61,192 $ 61,975
Other insurance policy benefits and change
in future policy benefits..................... 29,032 31,998 86,738 96,426
------------- ------------- ------------- -------------
Total policyholder benefits..................... $ 48,817 $ 50,634 $ 147,930 $ 158,401
============= ============= ============= =============
</TABLE>
Policyholder benefits decreased 3.6% and 6.6% to $48.8 million and $147.9
million for the three and nine months ended September 30, 2000, respectively,
compared with the comparable 1999 periods. Death benefits increased (decreased)
$1.1 million and $(783,000) or 6.2% and (1.3)%, for the three and nine months
ended September 30, 2000, respectively. Death benefits may vary significantly
from period to period. Other policy benefits and change in policy benefits
decreased $3.0 million and $9.7 million, or 9.3% and 10.0%, during the three and
nine months ended September 30, 2000, respectively. The decrease is attributable
to a decrease in interest credited on deferred annuities which were reinsured
effective May 1, 2000. The decrease is also attributable to a decline in
interest credited to universal life 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. This was partially offset by increases
to certain deficiency reserves and unearned revenue reserves during the nine
months ended September 30, 2000 of approximately $5.2 million as a result of
unlocking assumptions, including future lapsation, on certain interest-sensitive
blocks of business of Security Life. This was also partially offset by an
increase to policy liabilities of $2.4 million during the three months ended
September 30, 2000 pursuant to a proposed settlement of a lawsuit (see Note 10
of Notes to Unaudited Consolidated Financial Statements). Estimates for
additional policy liabilities are dependent on elections made by class members
and by other factors some of which cannot yet be reasonably estimated. The
recorded liability reflects costs the Company considers likely to be incurred if
the settlement is confirmed based only on known or reasonably estimable factors.
Therefore, the ultimate cost to the Company may be greater than estimated and
may have a material adverse effect on the Company's financial condition, results
of operations and cash flows.
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 $550.6 million as
of September 30, 2000 and $527.1 million as of December 31, 1999, respectively.
Should withdrawal rates experienced be less than the expected level of the
lapses 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 contracts 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) decreased $2.1 million and $3.7 million
during the three and nine months ended September 30, 2000, respectively,
compared with the comparable 1999 periods. The decrease during the three months
ended September 30, 2000 compared to the 1999 period results from a decrease to
non-deferrable commissions resulting from decreases in new and renewal premiums
and additional ceding allowances principally from the reinsurance of deferred
annuities. In addition, the amortization of present value of insurance in force
was higher in the three months ended September 30, 1999 as a result of
adjustments to amortization of present value of insurance in force at Security
Life. The decrease during the nine months ended September 30, 2000 also reflects
the effect of unlocking assumptions, including future lapsation, for certain
interest-sensitive blocks of business at Security Life, which was approximately
$1.0 million and a decrease to non-deferrable commissions at
30
<PAGE>
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 decrease for the nine months
ended September 30, 2000 was partially offset by the decision by management to
accelerate payment of approximately $2.2 million of accumulation bonuses owed to
agents.
Other Operating Expenses. For the three and nine months ended September 30,
2000, other operating expenses (including general operating, overhead and policy
maintenance) increased (decreased) $1.1 million and $(297,000), respectively,
from the comparable periods in 1999. The liability held at Southwestern Life to
reflect expected assessments to life and guaranty associations of states in
which it is licensed to do business was reduced by approximately $1.5 million as
a result of a revaluation of such estimates made in the three months ending
September 30, 1999. Without this adjustment operating expenses for the three and
nine months ended September 30, 2000 would have been $400,000 and $1.8 million,
respectively, less than the 1999 periods. The decreases result principally from
a reduction in expenses as a result of restructuring efforts to reduce costs and
reductions in expenses related to costs associated with year 2000 remediation
efforts and systems conversion costs for Security Life.
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.
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ -- $ 35,628 $ 7,573 $ 182,346
Net investment income......................... -- 12,367 2,907 82,847
Other income.................................. -- 1,608 212 14,467
------------- ------------- ------------- -------------
-- 49,603 10,692 279,660
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... -- 23,767 5,344 148,207
Insurance related expenses.................... -- 12,455 978 51,784
Other operating expenses...................... -- 10,519 1,564 52,487
------------- ------------- ------------- -------------
-- 46,741 7,886 252,478
------------- ------------- ------------- -------------
Pre-tax operating income (loss)............... $ -- $ 2,862 $ 2,806 $ 27,182
============= ============= ============= =============
</TABLE>
Policy Revenues. Policy revenues declined $35.6 million and $174.8 million in
the three and nine months ended September 30, 2000, respectively, compared to
the comparable 1999 periods. 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.
31
<PAGE>
Net Investment Income. Net investment income decreased $12.4 million and $79.9
million during the three and nine months ended September 30, 2000, respectively,
compared to the comparable 1999 periods. 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 $1.6 million and $14.3 million in the three
and nine months ended September 30, 2000, respectively, compared to the
comparable 1999 periods. Most of the decrease is attributable to the sale of
KIVEX on June 30, 1999.
Total Policyholder Benefits. Policyholder benefits decreased $23.8 million and
$142.9 million in the three and nine months ended September 30, 2000,
respectively, compared to the comparable 1999 periods. 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 $12.5 million and $50.8 million to $--
and $978,000 for the three and nine months ended September 30, 2000,
respectively, compared to the comparable 1999 periods. 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 $10.5 million and $50.9 million in
the three and nine months ended September 30, 2000, respectively, compared to
the comparable 1999 periods. 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 $5.0 million and $19.6
million for the three and nine months ended September 30, 2000, respectively,
compared to the comparable 1999 periods. The decrease is principally a result of
principal repayments under PennCorp's bank credit facility. As a result of the
sales of the Payroll Sales Division in 2000 and the Career Sales Division,
KIVEX, the United Life Assets and Professional in 1999, PennCorp reduced its
outstanding bank credit facility by $367.0 million. PennCorp also 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. In addition,
at emergence from the Chapter 11 proceedings, the Company repaid the remaining
amounts outstanding under PennCorp's bank credit facility and its senior
subordinated notes aggregating $179.6 million with existing cash, borrowings of
$81.0 million from the $95.0 million new bank credit facility (the "New Credit
Facility")(see Note 5 of Notes to Unaudited Consolidated Financial Statements),
the $46.0 million capital contribution (net of related expenses) in connection
with the recapitalization transaction and $55.0 million extraordinary dividends
from Southwestern Life and Security Life. In addition, during the six month
period ended June 30, 1999, PennCorp 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.
On September 8, 2000, the Company entered into an interest rate cap agreement
with a bank to hedge a notional amount of $40,000 of its outstanding floating
rate notes for a term of 21 months effective December 12, 2000. Pursuant to the
agreement, the Company will receive interest differential from the counter-party
if the LIBOR exceeds 8.5%. At September 30, 2000, LIBOR was 6.6%.
Corporate Expenses, Eliminations and Other. Corporate expenses, eliminations and
income and expenses from other non-insurance companies resulted in net income of
$9,000 and net expenses of $23.6 million for the three and nine months ended
September 30, 2000, respectively, compared with net expenses of $7.3 million and
$31.4 million for the
32
<PAGE>
three and nine months ended September 30, 1999, respectively. Included in the
nine month results of 1999 are non- recurring costs including additional
amortization of costs in excess of net assets acquired associated with KB
Management reflecting the decision to terminate KB Management as administrator
and general partner of a previous affiliate, additional costs associated with
efforts to develop recapitalization and restructuring alternatives, consulting
and legal fees associated with the disposal of the Businesses Held for Sale as
well as other corporate matters. The decrease for the nine months ended
September 30, 2000 was partially offset by costs incurred associated with the
recapitalization of approximately $5.4 million and was also partially offset by
a break fee of $6.0 million that was paid to Reassure America upon the
termination of PennCorp's contract to sell Southwestern Life and Security Life.
A small net income of $9,000 during the three months ended September 30, 2000
resulted principally from efforts to substantially reduce corporate overhead. As
a result, income from non-life subsidiaries and interest income slightly
exceeded corporate expenses for the quarter.
Income Taxes (Benefits). For the three and nine months ended September 30, 2000,
the Company recognized income taxes (benefits) of $(2.5) million and $4.1
million on loss before taxes and extraordinary items of $3.9 million and $57.8
million. For the three and nine months ended September 30, 1999, income tax
expense was $9.1 million and $17.0 million on loss before taxes and
extraordinary items of $19.0 million and $71.9 million, respectively. The tax
benefit for the three months ended September 30, 2000 results principally from
the tax benefit on losses incurred by the life companies, which includes
interest expense on PLAIC's surplus debenture and from the utilization of net
operating loss carryovers on income from the non-life group. In addition, the
unusual effective tax rates for the nine months of 2000 and for 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 and capital loss
carryforwards.
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. The Company realized
capital gains (losses) of $132,000 and $(13.2) million during the three and nine
months ended September 30, 2000, respectively, and $870,000 and $(198,000)
during the three and nine months ended September 30, 1999, respectively. During
the quarter ended June 30, 2000, the Company liquidated invested assets to
provide the cash required to consummate the RGA reinsurance transaction and
recognized $5.3 million in pre-tax capital losses. The Company also liquidates
securities available for sale in order to meet cash flow demands associated with
policyholder surrenders that in the aggregate exceeded policyholder deposits by
$28.4 million and $171.0 million for the nine months ended September 30, 2000
and 1999, respectively. During the quarter ended June 30, 2000, the Company
recognized a permanent impairment of $4.5 million on a fixed maturity issue in
default and $673,000 on an investment in a limited partnership.
Extraordinary Items. Extraordinary items reflect premiums of $1.1 million paid
on the redemption of PennCorp's then- existing senior debt as required by the
indenture for early payoff and $1.3 million of unamortized loan costs that were
written off as all of PennCorp's senior debt and bank credit facility were
repaid.
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 nine months of 2000 resulted in a decline in the unrealized depreciation
of the bond portfolio since the end of 1999. In addition, the Company reinsured
substantially all of its deferred annuities, which reduces its exposure to
movements in market interest rates. However, with respect to the Company's
remaining assets and liabilities portfolio, 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.
33
<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 PennCorp and certain of its then current or former
directors and officers. (None of the individual defendants are currently
officers or directors of SWL Holdings.)
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,
PennCorp, 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 PennCorp's common stock and purchasers of
the PennCorp's subordinated notes during the period of February 8, 1996, through
November 16, 1998.
The parties entered into a Stipulation of Settlement dated April 28, 2000 (the
"Stipulation") containing the terms of the settlement of this matter. The
Stipulation 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 (the "Settlement"). Of that sum, $1.5 million was paid
by PennCorp during the third quarter of 1999 into an escrow account established
by plaintiffs' counsel, and $7.5 million plus interest will be paid by
PennCorp's outside directors and officers liability insurance carrier. On June
19, 2000, the District Court entered an Order Preliminarily Approving Settlement
and Providing For Notice and set a final hearing on the matter for November 16,
2000. The Company expects the Settlement to receive final approval at that
hearing.
On October 10, 2000, the SEC notified the Company that its formal investigation
into possible violations of the federal securities laws had been terminated and
no enforcement action had been recommended to the Commission.
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 is 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
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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. On August 30, 2000, the lawsuit was amended to add a claim
that Security Life had improperly reduced the interest rates credited to
accumulated values in such policies, in an effort to offset losses incurred by
Security Life on those policies. Security Life has denied all of the allegations
in the lawsuit. However, because of the substantial expense and uncertainty
associated with class action litigation, the Company has entered into an
agreement for a proposed settlement of this lawsuit. This proposed settlement
must be approved by the Dallas County court. On September 8, 2000, the court
granted preliminary approval of the proposed settlement, and ordered that notice
be sent to all class members. A hearing at which the court will consider final
approval of the proposed settlement is scheduled for November 17, 2000. The
Company has accrued $1.4 million for expenses anticipated to be incurred in
connection with the proposed settlement and $2.4 million of additional policy
liabilities. Estimates for additional policy liabilities are dependent on
elections made by class members and on other factors some of which cannot yet be
reasonably estimated. The recorded liability reflects costs the Company
considers likely to be incurred if the settlement is confirmed based only on
known or reasonably estimable factors. Therefore, the ultimate cost to the
Company may be greater than estimated and may have a material adverse effect on
the Company's financial condition, results of operations and cash flows.
Jerrold Schnoebelen was an agent whose marketing contract with United Life &
Annuity provided that he would be entitled to an annual commission (trail fee)
based on various percentages of the total accumulated value of annuity contracts
in force for 13 months with United Life which were produced by Schnoebelen and
his designees. Schnoebelen generally ceased writing new business with United
Life in 1993 and his agency contract was terminated in 1997. In 1998 Schnoebelen
brought suit in US District Court in San Diego, California against United Life
alleging that United Life had not paid him all the trail fees to which he was
entitled after 1994 and alleging various contractual and tortious causes of
action. When PennCorp sold United Life in 1999, it and PLAIC indemnified the
Buyer against losses for past damages from this lawsuit. The Company denied the
claims and vigorously defended the lawsuit. On July 20, 2000, the jury returned
a verdict against United Life in the amount of $1.1 million being $288,000 for
past economic damages and $838,000 for the net present value of future economic
damages. The Company has established a liability of $1.1 million for these
damages. The Company filed various post-judgment motions for relief from the
judgment, all of which were denied by the trial court. The Company believes it
has valid grounds to appeal and obtain a reversal of the judgment and fully
intends to pursue such appeal. The Company further believes that most, if not
all, of the future economic damages are not encompassed by the indemnity
agreement and are therefore the responsibility of the buyer of United Life.
On or about September 11, 2000 Southwestern Life received an original petition
filed on September 7, 2000 in state court located in Jasper, Texas styled
Martindale, et al. v. Southwestern Life Insurance Company and Ervin Jackson
asserting claims against Southwestern Life and its agent co-defendant on behalf
of a purported class of persons who had an ownership interest in universal life
insurance policies or interest-sensitive non-participating whole life insurance
policies issued by Southwestern Life during the period from January 1, 1981 to
the present and who were residents of the United States on the date(s) of
issuance of such policy(ies). The original petition alleges that Southwestern
Life and/or its agent co-defendant committed, among other things, breach of
contract, breach of fiduciary duty, breach of duty of good faith and fair
dealing, negligent misrepresentation, unfair or deceptive acts, and fraud in
connection with the sale of such policies, and seeks class certification,
equitable relief and recovery of actual, statutory and punitive damages in
unspecified amounts as well as costs and attorneys' fees. Both Southwestern Life
and the agent co-defendant timely filed answers denying all allegations made in
the original petition and contesting venue for the action, and Southwestern Life
subsequently filed a notice of removal removing the case to the United States
District Court for the Eastern District of Texas located in Beaumont, Texas. No
discovery has been taken in this case to date. Southwestern Life denies any and
all allegations made in the original petition and intends to defend this case
vigorously. There can be no assurance
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that Southwestern Life will be able to defend or resolve the issues presented in
this action successfully or at all or that any verdict or other resolution would
not have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
The life insurance subsidiaries of the Company are parties 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's
subsidiaries.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Separation Agreement dated as of August 1, 2000, between the
Registrant and Steve R. Johnson (2).
10.2 Assignment and Assumption of Lease Obligations dated as of August 15,
2000 between Southwestern Financial Services Corporation and
Middleberg, Riddle & Gianna (1).
10.3 Consent to Partial Assignment and Lease Amendment No. 1 dated as of
August 30, 2000 between Southwestern Financial Services Corporation
and Middleberg, Riddle & Gianna (1).
10.4 Letter Agreement fixing effective date of Consent to Partial
Assignment and Lease Amendment No. 1 dated as of September 19, 2000
between Southwestern Financial Services Corporation and BRE/Maxus,
L.P. (1).
11.1 Computation of loss per share (1)
15.1 Independent Auditors' Report (3)
27 Financial Data Schedule (1)
------------------
(1) Filed herewith.
(2) Incorporated by reference to the current report on Form 8-K dated August 1,
2000, which was filed with the SEC by the Registrant on August 8, 2000.
(3) Included in Item 1 of Part I of this Form 10-Q.
(b) Reports on Form 8-K
On August 8, 2000, the Company filed a current report on Form 8-K with the SEC
reporting under Item 5 the resignation of Steve R. Johnson from his position as
a Director, President and Chief Operating Officer of the Company.
On September 28, 2000, the Company filed a current report on Form 8-K with the
SEC reporting under Item 5 the commencement of trading of the Company's common
stock on the Nasdaq National Market under the symbol "SWLH."
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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.
SOUTHWESTERN LIFE HOLDINGS, INC.
By:/s/David A. Commons
-----------------------------
David A. Commons
Senior Vice President, Chief
Financial Officer and Treasurer
(Authorized officer and principal
accounting and financial officer
of the Registrant)
Date: November 14, 2000
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INDEX TO EXHIBITS
Exhibit Numbers
10.1 Separation Agreement dated as of August 1, 2000, between the
Registrant and Steve R. Johnson (2).
10.2 Assignment and Assumption of Lease Obligations dated as of August 15,
2000 between Southwestern Financial Services Corporation and
Middleberg, Riddle & Gianna (1).
10.3 Consent to Partial Assignment and Lease Amendment No. 1 dated as of
August 30, 2000 between Southwestern Financial Services Corporation
and Middleberg, Riddle & Gianna (1).
10.4 Letter Agreement fixing effective date of Consent to Partial
Assignment and Lease Amendment No. 1 dated as of September 19, 2000
between Southwestern Financial Services Corporation and BRE/Maxus,
L.P. (1).
11.1 Computation of loss per share (1)
15.1 Independent Auditors' Report (3)
27 Financial Data Schedule (1)
------------------
(1) Filed herewith.
(2) Incorporated by reference to the current report on Form 8-K dated August 1,
2000, which was filed with the SEC by the Registrant on August 8, 2000.
(3) Included in Item 1 of Part I of this Form 10-Q.
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EXHIBIT 11.1
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic net loss:
Loss before extraordinary charge.............. $ (1,400) $ (28,098) $ (61,896) $ (88,969)
Extraordinary items........................... -- -- (2,443) --
------------- ------------- ------------- -------------
Net loss.................................... $ (1,400) $ (28,098) $ (64,339) $ (88,969)
============= ============= ============= =============
Diluted net loss:
Loss before extraordinary charge.............. $ (1,400) $ (28,098) $ (61,896) $ (88,969)
Extraordinary items........................... -- -- (2,443) --
------------- ------------- ------------- -------------
Net loss.................................... $ (1,400) $ (28,098) $ (64,339) $ (88,969)
============= ============= ============= =============
Basic:
Average shares outstanding during
the period (1).............................. 9,059 9,059 9,059 9,059
============= ============= ============= =============
Diluted:
Average shares outstanding during
the period (1).............................. 9,059 9,059 9,059 9,059
============= ============= ============= =============
--------------
(1) Restated to reflect outstanding common shares as a result of
recapitalization effective June 13, 2000 as if recapitalization occurred at
beginning of period.
</TABLE>
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