--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
717 North Harwood Street 75201
DALLAS, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (214) 954-7111
PennCorp Financial Group, Inc.
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
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 August 7, 2000, was
9,059,000.
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1
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
TABLE OF CONTENTS
PAGE
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements..........................................3
Consolidated Balance Sheets..................................3
Consolidated Statements of Operations and Comprehensive Loss.4
Consolidated Statements of Cash Flows........................5
Notes to Unaudited Consolidated Financial Statements.........6
Review by Independent Certified Public Accountants..........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...32
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings............................................34
Item 2. Changes in Securities and Use of Proceeds....................35
Item 4. Submission of Matters to a Vote of Security Holders..........36
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
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale, at fair value............................. $ 1,435,635 $ 2,363,690
Equity securities available for sale, at fair value............................ 969 2,008
Mortgage loans on real estate, net............................................. 15,955 20,032
Policy loans................................................................... 148,359 197,287
OTHER INVESTMENTS.............................................................. 26,102 26,570
------------ ------------
Total investments ........................................................... 1,627,020 2,609,587
Cash and cash equivalents......................................................... 43,167 141,636
Accrued investment income......................................................... 24,515 37,922
Accounts and notes receivable..................................................... 2,362 11,935
Present value of insurance in force............................................... 98,639 119,766
Deferred policy acquisition costs................................................. 70,418 113,726
Costs in excess of net assets acquired............................................ 78,031 79,725
Income taxes, primarily deferred.................................................. 79,031 111,517
Due from reinsurers............................................................... 470,455 33,977
OTHER ASSETS...................................................................... 56,583 28,357
------------ ------------
TOTAL ASSETS ................................................................ $ 2,550,221 $ 3,288,148
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals................................................ $ 2,227,862 $ 2,756,957
Notes payable.................................................................. 82,000 279,646
ACCRUED EXPENSES AND OTHER LIABILITIES......................................... 90,301 98,579
------------ ------------
TOTAL LIABILITIES 2,400,163 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........................................................ 724,494 428,974
Accumulated other comprehensive loss, net of income tax benefits.................. (53,645) (62,712)
Accumulated deficit............................................................... (520,882) (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................................................... 150,058 152,966
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................. $ 2,550,221 $ 3,288,148
============ ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums........................................ $ 7,029 $ 66,378 $ 19,385 $ 147,770
Interest sensitive policy product charges....... 20,623 36,218 46,543 68,698
Net investment income........................... 34,208 69,528 77,331 155,635
Other income.................................... 1,524 9,486 4,489 20,431
Net losses from the sale of investments......... (10,547) (3,247) (13,306) (1,068)
Net gains (losses) from sales of subsidiaries... -- 26,808 (8,383) 27,804
------------- ------------- ------------- -------------
TOTAL REVENUES.............................. 52,837 205,171 126,059 419,270
------------- ------------- ------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits........................... 47,197 103,580 104,453 232,207
Amortization of present value of insurance in
force and deferred policy acquisition costs... 5,564 18,726 15,186 41,095
Amortization of costs in excess of net assets
acquired...................................... 848 8,758 1,695 10,786
Underwriting and other administrative expenses.. 20,477 45,421 47,037 99,139
Interest and amortization of deferred debt
issuance costs................................ 4,551 11,224 10,737 25,344
Restructuring charge............................ 923 5,136 923 5,141
Impairment provision associated with Assets of
Businesses Held for Sale...................... -- 28,199 -- 58,486
------------- ------------- ------------- -------------
TOTAL BENEFITS AND EXPENSES................. 79,560 221,044 180,031 472,198
------------- ------------- ------------- -------------
Loss before income taxes and extraordinary items... (26,723) (15,873) (53,972) (52,928)
Income taxes.................................... 5,686 3,343 6,524 7,943
------------- ------------- ------------- -------------
Loss before extraordinary items.................... (32,409) (19,216) (60,496) (60,871)
Extraordinary items net of applicable income
tax benefits.................................... (2,443) -- (2,443) --
------------- ------------- ------------- -------------
Net loss .......................................... (34,852) (19,216) (62,939) (60,871)
Preferred stock dividend requirements........... -- 4,457 4,456 8,913
------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK................ $ (34,852) $ (23,673) $ (67,395) $ (69,784)
============= ============= ============= =============
PER SHARE INFORMATION(1):
Basic:
Loss before extraordinary items................. $ (3.58) $ (2.12) $ (6.68) $ (6.72)
Extraordinary items............................. (.27) -- (.27) --
------------- ------------- ------------- -------------
NET LOSS........................................ $ (3.85) $ (2.12) $ (6.95) $ (6.72)
============= ============= ============= =============
COMMON SHARES USED IN COMPUTING BASIC LOSS PER SHARE 9,059 9,059 9,059 9,059
============= ============= ============= =============
Diluted:
Loss before extraordinary items................. $ (3.58) $ (2.12) $ (6.68) $ (6.72)
Extraordinary items............................. (.27) -- (.27) --
------------- ------------- ------------- -------------
NET LOSS........................................ $ (3.85) $ (2.12) $ (6.95) $ (6.72)
============= ============= ============= =============
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.
<PAGE>
COMPREHENSIVE LOSS INFORMATION:
Net loss........................................ $ (34,852) $ (19,216) $ (62,939) $ (60,871)
------------- ------------- ------------- -------------
Other comprehensive income (loss), before tax
Foreign currency translation adjustments...... -- 2,334 -- 3,404
Unrealized losses on securities:
Unrealized holding gains (losses) during
the period................................ 5,743 (59,829) (13,593) (102,266)
Reclassification adjustment for (gains) losses
included in net loss...................... (9,560) 924 12,334 (911)
Reclassification adjustment resulting from
sale of subsidiaries...................... -- (2,656) 15,206 (3,407)
------------- ------------- ------------- -------------
(3,817) (59,227) 13,947 (103,180)
Income tax (expense) benefits related to items of
other comprehensive income (loss)............. 1,336 21,546 (4,880) 37,304
------------- ------------- ------------- -------------
Other comprehensive income (loss), net of tax... (2,481) (37,681) 9,067 (65,876)
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS.............................. $ (37,333) $ (56,897) $ (53,872) $ (126,747)
============= ============= ============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Loss before extraordinary items................................................ $ (60,496) $ (60,871)
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 (27,804)
Capitalization of deferred policy acquisition costs........................ (12,008) (48,944)
Amortization of present value of insurance in force, deferred policy
acquisition costs, intangibles, depreciation and accretion, net.......... 14,933 48,125
Decrease in policy liabilities, accruals and other policyholder funds...... (3,166) (1,967)
Deferred income tax expense................................................ 4,809 8,309
Other, net................................................................. 16,810 20,462
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES.................................. (30,735) (4,204)
------------- -------------
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..................................... 64,449 165,649
Purchases of fixed maturity securities available for sale...................... (77,605) (595,258)
Maturities of fixed maturity securities available for sale..................... 87,724 215,688
Sales of fixed maturity securities available for sale.......................... 487,313 481,644
Sales of equity securities..................................................... 17 19
Acquisitions and originations of mortgage loans................................ -- (1,082)
Sales of mortgage loans........................................................ 52 1,495
Principal collected on mortgage loans.......................................... 4,029 30,552
Other, net..................................................................... (3,153) 5,115
------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES.................................. 562,826 303,822
------------- -------------
Cash flows from financing activities:
Additional borrowings.......................................................... 82,000 --
Issuance of common stock net of related expenses of $1,496..................... 46,004 --
Payments on notes payable...................................................... (279,646) (189,036)
Receipts from interest sensitive policies credited to policyholder account balances 68,406 95,935
Return of policyholder account balances on interest sensitive products......... (114,518) (246,455)
Cash transferred to reinsurer.................................................. (432,806) --
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES...................................... (630,560) (339,556)
------------- -------------
Net decrease in cash....................................................... (98,469) (39,938)
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)..... $ 43,167 $ 184,320
============= =============
Supplemental disclosures:
INCOME TAXES PAID............................................................ $ 1,000 $ 2,523
============= =============
INTEREST PAID................................................................ $ 11,994 $ 23,991
============= =============
Non-cash financing activities:
ACCRUED AND UNPAID PREFERRED STOCK DIVIDENDS................................. $ 4,456 $ 8,913
============= =============
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.......................................... $ 269 $ --
============= =============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
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. Through its wholly-owned life insurance subsidiaries; 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 general agents. Additionally, the Company owns KB Management, LLC ("KB
Management") which provides management and advisory services to the Company and
its insurance subsidiaries; Marketing One, Inc. ("Marketing One"), a third party
marketing organization, and Southwestern Financial Corporation ("SW Financial").
As part of a 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. In
addition, PLAIC became a wholly-owned subsidiary of SW Financial.
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); and 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
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
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. SFAS No. 133 was originally
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. In June 1999, the FASB deferred the effective date until fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 effective as
of January 1, 2001. The Company is currently evaluating SFAS No. 133 but does
not expect its adoption to have a material effect on its consolidated financial
statements.
3. RECAPITALIZATION AND PETITION FOR RELIEF UNDER CHAPTER 11
On January 10, 2000, PennCorp announced that it had agreed to sell its Financial
Services Division (consisting of 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 Director's
selection of the Recapitalization Plan. On April 14, 2000,
7
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECAPITALIZATION AND PETITION FOR RELIEF UNDER CHAPTER 11 (CONTINUED)
the Texas Department of Insurance issued its order approving the Form A
acquisition statement submitted by Rapoport and Inverness.
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 $12.5 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. 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 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 $269.
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 quarter ended June 30, 2000, the
Company recognized $203 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 year. (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
8
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISPOSITIONS AND OTHER EVENTS (CONTINUED)
rights and obligations under its agreement with RGA.) During the quarter ended
June 30, 2000, 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. 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 June 30, 2000, the Company had
outstanding revolving loans of $2,000. 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 June 30, 2000 was 10.6%.
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 June 30, 2000, the
Company was in compliance with all applicable covenants.
9
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SELECTED PRO FORMA FINANCIAL INFORMATION
The following selected pro forma financial information has been prepared to
illustrate the pro forma effects of the sales of the Payroll Sales Division
(sold February 4, 2000) (see Note 4), the Career Sales Division (sold July 30,
1999), KIVEX (sold June 30, 1999), Professional (sold March 31, 1999) and the
United Life Assets (sold April 30, 1999). The pro forma statement of operations
information for the six month period ended June 30, 2000 and three and six
months ended June 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>
SIX MONTHS ENDED
JUNE 30, 2000
AS REPORTED PRO FORMA
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Total revenues............................................................... $ 126,059 $ 123,791
Loss before extraordinary items.............................................. (60,496) (54,304)
PER SHARE INFORMATION(1):
Loss before extraordinary items-basic...................................... $ (6.68) $ (5.99)
Loss before extraordinary items-diluted.................................... (6.68) (5.99)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
----------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues................................ $ 205,171 $ 85,913 $ 419,270 $ 168,445
Loss before extraordinary items............... (19,216) (17,171) (60,871) (36,187)
PER SHARE INFORMATION(1):
Loss before extraordinary items-basic....... $ (2.12) $ (1.90) $ (6.72) $ (3.99)
Loss before extraordinary items-diluted..... (2.12) (1.90) (6.72) (3.99)
---------------
(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>
7. 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
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 six
10
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING CHARGES (CONTINUED)
months ended June 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 MARCH 31, AGAINST JUNE 30,
1999 LIABILITY ADJUSTMENTS 2000 PROVISION LIABILITY ADJUSTMENTS 2000
--------- --------- ----------- --------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 PLAN
Severance and
related benefits...... $ -- $ -- $ -- $ -- $ 1,020 $ (120) $ -- $ 900
========= ========= ========= ========= ========= ======== ======== ========
1999 PLAN
Severance and
related benefits...... $ 2,374 $ (1,096) $ -- $ 1,278 $ -- $ (1,200) $ 79 $ 157
Estimated holding costs
of vacated facilities. 2,122 -- -- 2,122 -- -- (8) 2,114
--------- --------- --------- --------- --------- -------- -------- --------
$ 4,496 $ (1,096) $ -- $ 3,400 $ -- $ (1,200) $ 71 $ 2,271
========= ========= ========= ========= ========= ======== ======== ========
4TH QUARTER 1998 PLAN
Severance and
related benefits...... $ 1,067 $ (75) $ -- $ 992 $ -- $ (25) $ -- $ 967
========= ========= ========= ========= ========= ======== ======== ========
1ST QUARTER 1998 PLAN
Estimated holding costs
of vacated facilities. $ 1,814 $ (345) $ -- $ 1,469 $ -- $ (1,301) $ (168) $ --
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
During the quarter ended June 30, 2000, the Company entered into contracts to
sublease vacated office space and is in negotiations to be released from
obligations related to the vacated office space beginning January 1, 2001.
Pursuant to THESE AGREEMENTS THE COMPANY ADJUSTED THE REMAINING ACCRUALS FOR THE
1999 PLAN AND 1ST quarter 1998 Plan by $8 and $168, respectively. The Company
adjusted its severance accruals during the three months ended June 30, 2000
based on actual severance paid.
<TABLE>
<CAPTION>
PAID OR PAID OR
BALANCE AT CHARGED BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31, AGAINST JUNE 30,
1998 LIABILITY ADJUSTMENTS 1999 PROVISION LIABILITY ADJUSTMENTS 1999
--------- --------- ----------- --------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 PLAN
Severance and
related benefits...... $ -- $ -- $ -- $ -- $ 3,185 $ -- $ -- $ 3,185
Estimated holding costs of
vacated facilities.... -- -- -- -- 2,122 -- -- 2,122
--------- --------- --------- --------- --------- -------- -------- --------
$ $ -- $ -- $ -- $ 5,307 $ -- $ -- $ 5,307
========= ========= ========= ========= ========= ======== ======== ========
4TH QUARTER 1998 PLAN
Severance and
related benefits...... $ 2,274 $ (370) $ -- $ 1,904 $ -- $ (236) $ 189 $ 1,857
Estimated contract
termination costs.... 32 -- -- 32 -- (41) 9 --
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,306 $ (370) $ -- $ 1,936 $ -- $ (277) $ 198 $ 1,857
========= ========= ========= ========= ========= ======== ======== ========
1ST QUARTER 1998 PLAN
Severance and
related benefits...... $ 619 $ (289) $ 5 $ 335 $ -- $ (7) $ (328) $ --
Estimated holding costs
of vacated facilities. 2,205 -- -- 2,205 -- -- (41) 2,164
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,824 $ (289) $ 5 $ 2,540 $ -- $ (7) $ (369) $ 2,164
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
11
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING CHARGES (CONTINUED)
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 three and six months ended
June 30, 1999 based on actual severance paid.
8. BUSINESS SEGMENT INFORMATION
As a result of the sale of the Payroll Sales Division on February 4, 2000, the
operating results of the Payroll Sales Division have been included in the
Business Sold for all periods presented.
Segment data as of June 30, 2000 and December 31, 1999, and for the three and
six months ended June 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PREMIUMS AND POLICY PRODUCT CHARGES:
Financial Services Division................. $ 27,652 $ 35,964 $ 58,355 $ 69,750
Businesses Sold (United States)............. -- 53,504 7,573 122,666
Businesses Sold (Canada).................... -- 13,128 -- 24,052
------------- ------------- ------------- -------------
$ 27,652 $ 102,596 $ 65,928 $ 216,468
============= ============= ============= =============
OPERATING PROFIT (LOSS):
Financial Services Division................. $ (453) $ 6,559 $ 226 $ 9,101
Businesses Sold............................. -- 14,141 2,806 24,320
------------- ------------- ------------- -------------
$ (453) $ 20,700 $ 3,032 $ 33,421
============= ============= ============= =============
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
TOTAL ASSETS:
Financial Services Division................................................ $ 2,524,511 $ 2,645,337
Businesses Sold............................................................ -- 598,011
Corporate and other........................................................ 25,710 44,800
------------- -------------
$ 2,550,221 $ 3,288,148
============= =============
</TABLE>
12
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BUSINESS SEGMENT INFORMATION (CONTINUED)
Reconciliations of segment data to the Company's consolidated data are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Segments--premiums and policy
product charges........................... $ 27,652 $ 102,596 $ 65,928 $ 216,468
Net investment income....................... 34,208 69,528 77,331 155,635
Other income................................ 1,524 9,486 4,489 20,431
Net losses from sale of investments......... (10,547) (3,247) (13,306) (1,068)
Net gains (losses) from sales of subsidiaries -- 26,808 (8,383) 27,804
------------- ------------- ------------- -------------
$ 52,837 $ 205,171 $ 126,059 $ 419,270
============= ============= ============= =============
LOSS BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES:
Segments.................................... $ (453) $ 20,700 $ 3,032 $ 33,421
Corporate expenses and eliminations......... (10,249) (15,575) (23,655) (24,114)
Impairment provision associated with
assets of Businesses Sold................. -- (28,199) -- (58,486)
Interest and amortization of deferred
debt issuance costs....................... (4,551) (11,224) (10,737) (25,344)
Net losses on the sale of investments....... (10,547) (3,247) (13,306) (1,068)
Net gains (losses) from sales of subsidiaries -- 26,808 (8,383) 27,804
Restructuring costs......................... (923) (5,136) (923) (5,141)
------------- ------------- ------------- -------------
$ (26,723) $ (15,873) $ (53,972) $ (52,928)
============= ============= ============= =============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1998, the first of ten class-action complaints was
filed in the United States District Court for the Southern District of New York
("District Court") against 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.
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.
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
September 22, 2000. The Company expects the settlement to receive final approval
at that hearing.
13
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In May 1998, the North Carolina Attorney General's Office (the "NCAG") initiated
an inquiry concerning certain life insurance products historically sold by
Security Life and representations allegedly made by Security Life's agents and
officers with respect to not charging insurance charges after the eighth policy
year for non-smoker insureds. The NCAG indicated that Security Life may be
estopped to change its current practice of not charging the cost of the
insurance for non-smoking policyholders because of certain representations made
by agents and officers of Security Life. Although Security Life has not charged
the cost of insurance charges for non-smoker policyholders who reached their
ninth policy year, this practice is not guaranteed under the life insurance
contracts. The contracts specifically allow Security Life the right to change
the cost of insurance rates in accordance with the parameters set forth in the
insurance contracts. Security Life has responded to the NCAG's inquiry by
denying that it is estopped from changing the cost of insurance rates based on
the alleged representations, and 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. Security Life denies the allegations in the petition and
intends to vigorously defend this lawsuit. The trial court in which this case is
pending has granted class certification in at least one other lawsuit involving
similar types of claims. As of June 30, 2000, the parties were discussing a
settlement of the lawsuit, but there can be no assurances that the Company will
resolve these matters on such life insurance products on a satisfactory basis,
or at all, or that any such resolution would not have a material adverse effect
on the Company's financial condition, results of operations or cash flows. The
Company has accrued approximately $1.0 million for expenses anticipated to be
incurred in conjunction with the potential settlement.
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
14
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
net present value of future economic damages. The Company has established a
liability for these damages. 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.
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 obligations. Assessments from guaranty
associations, which have not been material, are recorded in accordance with
Statement of Position 97-3 issued by the AICPA, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments."
Since December 31, 1999 the Company has not experienced any significant
disruption in the Company's business, or an increase in the cost of the Company
doing business related to the year 2000 issue.
The Company provided certain representations and warranties to each respective
purchaser of the businesses sold with respect to each entity's ability to
process date-sensitive information for the year 2000 and beyond. Although the
Company believes that it is in compliance with, and is not aware of any breach
of the year 2000 representations and warranties provided to the respective
purchasers, there can be no assurances that the Company is in compliance with
all such representations and warranties. A breach by the Company of such
representations and warranties could result in indemnification obligations owed
by the Company to the purchasers.
Each of the definitive purchase and sale agreements the Company has consummated
for Professional, the United Life Assets, KIVEX, the Career Sales Division and
the Payroll Sales Division contain indemnification provisions which survive the
closing of each sales transaction for varying periods of time. The
indemnification provisions would be invoked by the purchasers should the Company
be found in breach of certain representation and warranty provisions or upon the
occurrence of specified events contained in the purchase and sale agreements.
The Company has purchased representations and warranty insurance to cover
potential indemnification claims arising under each of the definitive purchase
and sale agreements in an aggregate amount of $20,000 for all indemnification
claims.
The Company's insurance subsidiaries are required, at least annually, to perform
cash flow and "Asset Adequacy Analysis" under differing interest rate scenarios.
At December 31, 1999, Southwestern Life failed certain of those cash flow
testing scenarios. As a result, Southwestern Life performed a series of expanded
tests. Based upon the results of these expanded tests, Southwestern Life has
determined that additional statutory reserves were not needed at December 31,
1999. Factors that may require Southwestern Life to establish additional
statutory reserves in future periods include changes in interest rates, timing
of the emergence of insurance profits, persistency of the insurance in force,
sales or reinsurance of blocks of insurance in force and mortality experience.
Management actions that may mitigate the need for these additional reserves may
include but are not limited to, new profitable business being added to the
insurance in force, reinsurance or actions that impact persistency, mortality
experience, interest spreads and costs to administer the insurance in force.
Southwestern Life periodically monitors these factors to determine if additional
statutory reserves will be required.
15
<PAGE>
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's insurance subsidiaries had outstanding commitments to invest up to
$6,043 in various limited partnership funds and other investments.
As of June 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. The amount of mortgages the Company may be required to
repurchase is not expected to exceed approximately $1,600. At June 30, 2000, the
Company had established a $1,200 liability related to these contingencies.
In addition, the Company has been notified by ING that it disputes certain
federal income tax calculations under the provisions of the United Life Assets
purchase and sale agreement. Under the provisions of the purchase and sale
agreement ING is to provide the Company with preliminary tax returns in order
for the Company to evaluate any potential differential in tax amounts between
closing and the final return preparation. To date ING has not provided such
preliminary tax returns and hence the Company has not been able to fully
evaluate the merits of ING's claim. At June 30, 2000, the Company had
established a liability of $1,151 related to this contingency.
At June 30, 2000, the Company had a contingent obligation for mortgage loans
previously sold aggregating $3,688 as a result of the Company acting as a
servicing conduit.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
16
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 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.
(formerly PennCorp Financial Group, Inc.)
We have reviewed the accompanying condensed consolidated balance sheet of
Southwestern Life Holdings, Inc. and subsidiaries as of June 30, 2000, and the
related condensed consolidated statements of operations and comprehensive loss
for the three and six month periods ended June 30, 2000 and 1999, and condensed
consolidated statements of cash flows for the six month periods ended June 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.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, 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
August 10, 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 filed
with the Company's annual filing with the Securities and Exchange Commission on
Form 10-K for the fiscal year ended December 31, 1999.
The following discussion should also be read in conjunction with the unaudited
consolidated financial statements and related notes of this Quarterly Report on
Form 10-Q.
CAUTIONARY STATEMENT
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. All statements, trend analyses and
other information contained in this report relative to markets for SWL Holdings'
products and trends in SWL Holdings' operations or financial results, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (1) general economic conditions and other
factors, including prevailing interest rate levels and stock market performance,
which may affect the ability of 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 other
factors not currently anticipated by management will not also materially and
adversely affect the Company's results of operations.
BANKRUPTCY PROCEEDINGS AND RECAPITALIZATION
On January 10, 2000, PennCorp announced that it had agreed to sell its Financial
Services Division to Reassure America for $260 million subject to certain
adjustments, and would accomplish such transaction through the filing of a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
On February 7, 2000, PennCorp filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. 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.
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 Director's 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.
On June 5, 2000, the Bankruptcy Court confirmed the Recapitalization Plan.
19
<PAGE>
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 $12.5 per share and the Company received $46.0 million in cash (net of
related expenses). All shares of PennCorp's common stock were canceled for no
value. The SWL Holdings common stock trades on the OTC Bulletin Board under the
symbol "SWLH." 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 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 $269.
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 general 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 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, each of which is discussed below.
DISPOSITIONS AND OTHER TRANSACTIONS. 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.
In conjunction with the sale of the Payroll Sales Division and as part of a
series of pre-restructuring transactions, Southwestern Life and Security Life
paid extraordinary dividends consisting of affiliate notes and securities
aggregating $15.5 million and $14.2 million, respectively.
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 approximately $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 quarter ended June
30, 2000, the Company recognized $203 of such deferred gains. Southwestern Life
and Security Life retained the administration for the ceded block of business
and will be
20
<PAGE>
reimbursed by RGA for administrative costs at the rate of approximately $5.00
per annuity contract in force per year. (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 six months ended
June 30, 2000 and 1999 on the restructuring accrual balances under the 1999
Plan, the 4th Quarter 1998 Plan and the 1st Quarter 1998 Plan (in thousands):
<TABLE>
<CAPTION>
PAID OR PAID OR
BALANCE AT CHARGED BALANCE AT CHARGED BALANCE AT
DECEMBER 31, AGAINST MARCH 31, AGAINST JUNE 30,
1999 LIABILITY ADJUSTMENTS 2000 PROVISION LIABILITY ADJUSTMENTS 2000
--------- --------- ----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 PLAN
Severance and
related benefits...... $ -- $ -- $ -- $ -- $ 1,020 $ (120) $ -- $ 900
========= ========= ========= ========= ========= ======== ======== =========
1999 PLAN
Severance and
related benefits...... $ 2,374 $ (1,096) $ -- $ 1,278 $ -- $ (1,200) $ 79 $ 157
Estimated holding costs
of vacated facilities. 2,122 -- -- 2,122 -- -- (8) 2,114
--------- --------- --------- --------- --------- -------- -------- --------
$ 4,496 $ (1,096) $ -- $ 3,400 $ -- $ (1,200) $ 71 $ 2,271
========= ========= ========= ========= ========= ======== ======== ========
4TH QUARTER 1998 PLAN
Severance and
related benefits...... $ 1,067 $ (75) $ -- $ 992 $ -- $ (25) $ -- $ 967
========= ========= ========= ========= ========= ======== ======== ========
1ST QUARTER 1998 PLAN
Estimated holding costs
of vacated facilities. $ 1,814 $ (345) $ -- $ 1,469 $ -- $ (1,301) $ (168) $ --
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
During the quarter ended June 30, 2000, the Company entered into contracts to
sublease vacated office space and is in negotiations to be released from
obligations related to the vacated office space beginning January 1, 2001.
Pursuant to THESE AGREEMENTS THE COMPANY ADJUSTED THE REMAINING ACCRUALS FOR THE
1999 PLAN AND 1ST quarter 1998 Plan by $8,000 and $168,000, respectively. The
Company adjusted its severance accruals during the three months ended June 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 MARCH 31, AGAINST JUNE 30,
1998 LIABILITY ADJUSTMENTS 1999 PROVISION LIABILITY ADJUSTMENTS 1999
--------- --------- ----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 PLAN
Severance and
related benefits...... $ -- $ -- $ -- $ -- $ 3,185 $ -- $ -- $ 3,185
Estimated holding costs of
vacated facilities.... -- -- -- -- 2,122 -- -- 2,122
--------- --------- --------- --------- --------- -------- -------- --------
$ $ -- $ -- $ -- $ 5,307 $ -- $ -- $ 5,307
========= ========= ========= ========= ========= ======== ======== ========
4TH QUARTER 1998 PLAN
Severance and
related benefits...... $ 2,274 $ (370) $ -- $ 1,904 $ -- $ (236) $ 189 $ 1,857
Estimated contract
termination costs.... 32 -- -- 32 -- (41) 9 --
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,306 $ (370) $ -- $ 1,936 $ -- $ (277) $ 198 $ 1,857
========= ========= ========= ========= ========= ======== ======== ========
1ST QUARTER 1998 PLAN
Severance and
related benefits...... $ 619 $ (289) $ 5 $ 335 $ -- $ (7) $ (328) $ --
Estimated holding costs
of vacated facilities. 2,205 -- -- 2,205 -- -- (41) 2,164
--------- --------- --------- --------- --------- -------- -------- --------
$ 2,824 $ (289) $ 5 $ 2,540 $ -- $ (7) $ (369) $ 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 three and six months ended
June 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
22
<PAGE>
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 June 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 SIX
PERIOD JUNE 13, FEBRUARY 8, JANUARY 1, MONTHS
JULY 1, 2000 TO 2000 TO 2000 TO 2000 TO ENDED
DECEMBER 31, JUNE 30, JUNE 12, FEBRUARY 7, JUNE 30,
2000 2000 2000 2000 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash sources:
Cash from subsidiaries.................... $ 11,366 $ 55,000 $ 4,105 $ 130,127 $ 220,308
Issuance of common stock.................. -- 46,004 -- -- --
Additional borrowings..................... 3,000 82,000 -- -- --
Other investment income................... -- 39 245 44 539
Sale of/collection on assets held......... -- -- 57 -- 995
OTHER, NET................................ -- -- 32 26 12
----------- ----------- ----------- ----------- -----------
TOTAL SOURCES......................... 14,366 183,043 4,439 130,197 221,854
----------- ----------- ----------- ----------- -----------
Cash uses:
Interest paid on indebtedness............. 4,500 6,683 2,254 3,057 23,991
Operating expenses, including
restructuring charges................... 2,102 6,261 1,029 18,575 3,912
Reduction of notes payable................ 4,000 174,646 5,000 100,000 189,000
Costs of recapitalization................. 3,202 7,592 -- -- --
Capital contributions to subsidiaries..... -- -- -- -- 4,485
OTHER, NET................................ -- -- 877 -- --
----------- ----------- ----------- ----------- -----------
TOTAL USES............................ 13,804 195,182 9,160 121,632 221,388
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash equivalents..... 562 (12,139) (4,721) 8,565 466
Cash and cash equivalents at
beginning of period....................... 2,183 14,322 19,043 10,478 12,654
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period (1)......................... $ 2,745 $ 2,183 $ 14,322 $ 19,043 $ 13,120
=========== =========== =========== =========== ===========
----------------
(1) Company's unused resolver as of December 31, 2000 is projected to be $14.0
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 payments have been made to non-insurance intermediate holding
companies and paid to the Company in the form of dividends and tax sharing
payments. The amounts outstanding under the surplus debentures totaled $107.5
million and $258.3 million as of June 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.
The Surplus Note Companies rely upon dividends and tax sharing payments from
their respective insurance subsidiaries. Each of the insurance subsidiaries is
in turn subject to regulatory restrictions under Texas insurance laws and
regulations
23
<PAGE>
with respect to the maximum amount of dividends that can be paid to the Surplus
Note Companies within a twelve month period without prior regulatory approval.
Such dividend restrictions are generally the greater of 10% of statutory capital
and surplus or prior year's statutory earnings.
CASH SOURCES AND USES FOR THE PERIOD JUNE 13 TO JUNE 30, 2000
During the period June 13 to June 30, 2000, the Company received capital
contribution 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 $82.0 million under the new credit facility. The
Company also received $49.1 million from PLAIC as principal and interest
payments on the existing surplus debenture and $5.9 million in 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 senior and subordinated debt aggregating $174.6 million
and related interest. Additionally, the Company made interest payments totaling
$6.7 million and incurred cash operating expenses of $6.3 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 $7.6 million.
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 $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.
CASH SOURCES AND USES FOR THE SIX MONTHS ENDED JUNE 30, 1999
CASH FROM SUBSIDIARIES. For the six months ended June 30, 1999, PennCorp
received surplus debenture interest and principal payments from PLAIC of $165.7
million, and received dividends and tax sharing payments of $54.6 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.
OTHER INVESTMENT INCOME. During the six months ended June 30, 1999, PennCorp
received other investment income from short-term invested assets held by the
parent company.
24
<PAGE>
SALE OF/COLLECTION ON ASSETS HELD. During the six months ended June 30, 1999,
PennCorp received distributions from a limited partnership of $166,000. These
assets were acquired in connection with the sale of the United Life Assets. In
addition, PennCorp sold a non-life insurance subsidiary for $829,000 in
connection with the sale of the United Life Assets.
INTEREST PAID ON INDEBTEDNESS. During the six months ended June 30, 1999,
PennCorp made interest payments totaling $24.0 million.
OPERATING EXPENSES, INCLUDING RESTRUCTURING CHARGES. During the six months ended
June 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 six months ended June 30, 1999
aggregated $1.6 million. During the six months ended June 30, 1999, PennCorp
also incurred legal, accounting and investment banking fees associated with
asset dispositions aggregating $1.1 million. Operating expenses for the six
months ended June 30, 1999 also include costs aggregating $1.4 million
associated with the pending class action securityholder litigation and an SEC
investigation.
REDUCTION IN NOTES PAYABLE. During the six months ended June 30, 1999, PennCorp
made repayment under the Bank Credit Facility aggregating $189.0 million upon
the consummation of sales of Professional, the United Life Assets and KIVEX.
CAPITAL CONTRIBUTIONS TO SUBSIDIARIES. For the six months ended June 30, 1999,
PennCorp made capital contributions to subsidiaries totaling $4.5 million. Of
the total contributions, $3.3 million was made to PLAIC to make a subsequent
capital contribution to PLIC and $1.2 million was made to a non-life insurance
subsidiary.
PROJECTED CASH SOURCES AND USES FOR THE REMAINING SIX MONTHS OF 2000
Projected cash sources include $11.4 million in dividends and principal and
interest payment on the surplus debenture and a $3.0 million borrowing under the
new credit facility. Projected cash uses include the payments of principal and
interest on the new credit facility of $4.0 million and $4.5 million,
respectively, the payments of operating expenses of $2.1 million and the
payments of remaining costs associated with the Recapitalization Plan of $3.2
million.
Management believes the Company will likely have sufficient financial
flexibility and projected liquidity sources to meet all cash requirements. At
June 30, 2000, the amount available to be drawn under the new credit facility
was $13.0 million.
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 $15.2 million and $5.1 million for the six
months ended June 30, 2000 and 1999, respectively. The increase in cash flow
from operating activities principally resulted from decreasing costs associated
with: (i) year 2000 remediation at all of the insurance subsidiaries; (ii)
reduced costs as a result of strategic business evaluations and associated
restructuring of the Company and (iii) sale of KIVEX, which used cash from
operating activities due to its rapid growth in 1999.
CASH FLOW FROM INVESTING ACTIVITIES. The Company's investment portfolio is
managed with the objectives of maintaining high credit quality and liquidity,
maximizing current income within acceptable levels of risk, minimizing market
and credit risk, and matching the anticipated maturities of investments to the
Company's liabilities. The Company believes a conservative investment strategy
fits the nature of its insurance products which have little or no inflation risk
and limited build-up of cash accumulation values in earlier years.
25
<PAGE>
Cash provided by investing activities were $562.8 million and $303.0 million for
the six months ended June 30, 2000 and 1999, respectively. During the six months
ended June 30, 2000 and 1999, the Company's subsidiaries sold $487.3 million and
$481.7 million of fixed maturity and equity securities, and purchased $77.6
million and $595.3 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 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, were $668.1 million and $348.5 million for the six
months ended June 30, 2000 and 1999, respectively. Cash outflows during the six
months ended June 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 $189.1
million and $202.4 million, respectively, made to the parent company. For the
six months ended June 30, 1999, PennCorp made a $3.3 million capital
contribution to PLAIC to make a subsequent contribution to PLIC and a $1.2
million capital contribution to a non-life insurance subsidiary. In addition,
policyholder surrenders exceeded deposits by $46.1 million and $150.5 million
for the six months ended June 30, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000 and 1999, the Company has
prepared the following selected pro forma financial information for the
Company's Financial Services Division (Southwestern Life and Security Life) and
Businesses Sold (Payroll Sales Division, Career Sales Division, Professional,
the United Life Assets and KIVEX). As a result of the sale of the Payroll Sales
Division on February 4, 2000, the operating results of the Payroll Sales
Division have been included in the Businesses Sold for all periods presented.
"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.
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.
26
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Retained Business--Financial Services Division:
Operating income.............................. $ (453) $ 6,559 $ 226 $ 9,101
Net investment losses......................... (10,599) (2,560) (13,319) (1,438)
Restructuring costs........................... (923) (5,275) (923) (5,313)
------------- ------------- ------------- -------------
(11,975) (1,276) (14,016) 2,350
------------- ------------- ------------- -------------
Businesses Sold:
Operating income (loss)....................... -- 14,141 2,806 24,320
Net investment gains (losses)................. -- (807) (39) 250
Restructuring costs........................... -- 169 -- 202
Net gains (losses) from sale of subsidiaries.. -- 26,808 (8,383) 27,804
Impairment valuation.......................... -- (28,199) -- (58,486)
------------- ------------- ------------- -------------
-- 12,112 (5,616) (5,910)
------------- ------------- ------------- -------------
Corporate:
Interest and amortization of deferred
debt issuance cost.......................... (4,551) (11,224) (10,737) (25,344)
Corporate expenses, eliminations and other.... (10,249) (15,575) (23,655) (24,114)
Net investment gains.......................... 52 120 52 120
Restructuring costs........................... -- (30) -- (30)
------------- ------------- ------------- -------------
(14,748) (26,709) (34,340) (49,368)
------------- ------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEMS AND INCOME TAXES... $ (26,723) $ (15,873) $ (53,972) $ (52,928)
============= ============= ============= =============
</TABLE>
RETAINED BUSINESS--FINANCIAL SERVICES DIVISION
The Financial Services Division includes the operations of Southwestern Life and
Security Life. (Effective June 30, 2000, Security Life was merged into
Southwestern Life.) Southwestern Life and Security Life market life insurance
and, to a lesser extent annuity products, through independent general agents who
sell directly to individuals primarily in the southwestern and southeastern
United States.
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ 27,652 $ 35,964 $ 58,355 $ 69,750
Net investment income......................... 33,653 40,190 73,255 82,062
Other income.................................. 881 2,161 3,211 3,484
------------- ------------- ------------- -------------
62,186 78,315 134,821 155,296
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... 47,200 52,397 99,108 107,767
Insurance related expenses.................... 4,729 6,539 14,500 16,039
Other operating expenses...................... 10,710 12,820 20,987 22,389
------------- ------------- ------------- -------------
62,639 71,756 134,595 146,195
------------- ------------- ------------- -------------
PRE-TAX OPERATING INCOME...................... $ (453) $ 6,559 $ 226 $ 9,101
============= ============= ============= =============
</TABLE>
POLICY REVENUES. Policy revenues include: (i) premiums received on traditional
life products and a small amount of traditional annuities (ii) mortality and
administrative fees earned on universal life insurance and annuities and (iii)
27
<PAGE>
surrender charges on terminated universal life and annuity products. In
accordance with GAAP, premiums on universal life and annuity products are
accounted for as deposits to insurance liabilities.
Premiums, net of reinsurance, by major product line for the three and six months
ended June 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Life premiums:
Universal life (first year)................... $ 1,756 $ 2,509 $ 3,966 $ 5,027
Universal life (renewal)...................... 23,337 12,859 48,570 32,369
Yearly renewable term reinsurance on
universal life.............................. (2,680) (2,232) (5,238) (4,374)
Traditional life (first year)................. 1,369 2,111 2,828 4,954
Traditional life (renewal).................... 8,120 7,393 16,010 15,656
------------- ------------- ------------- -------------
Life premiums, net of reinsurance........... 31,902 22,640 66,136 53,632
Annuity premiums................................ 466 1,890 2,379 4,658
Fixed benefit premiums:
Long-term care premiums net of reinsurance.... 220 (479) 401 (74)
------------- ------------- ------------- -------------
Premiums, net of reinsurance................ 32,588 24,051 68,916 58,216
Less premiums on universal life and
annuities which are recorded as additions
to insurance liabilities...................... (25,559) (17,258) (54,915) (42,054)
------------- ------------- ------------- -------------
Premiums on products with mortality or
morbidity risk............................. 7,029 6,793 14,001 16,162
Fees and surrender charges on interest
sensitive products............................ 20,623 29,171 44,354 53,588
------------- ------------- ------------- -------------
POLICY REVENUES............................. $ 27,652 $ 35,964 $ 58,355 $ 69,750
============= ============= ============= =============
</TABLE>
Life premiums net of reinsurance increased 40.9% and 23.3% during the three and
six months ended June 30, 2000, respectively. Life premiums collected, net of
reinsurance, were $31.9 million and $66.1 million for the three and six months
ended June 30, 2000 compared with $22.6 million and $53.6 million in the
comparable periods of 1999, respectively. First year universal life premiums
decreased 30.0% and 21.1% in the three and six months ended June 30, 2000 to
$1.8 million and $4.0 million, respectively. First year traditional life
premiums decreased 35.1% and 42.9% in the three and six months ended June 30,
2000 to $1.4 million and $2.8 million, respectively. The decline is partially
attributable to lower sales at Security Life. The decision to cease new life
sales at Security Life was announced during the third quarter of 1999 as a
result of management's decision to reduce costs and concentrate its marketing
efforts at Southwestern Life. In addition, first year traditional life premiums
at Southwestern Life decreased 55.3% and 54.5% to $910,000 and $2.0 million for
the three and six months ended June 30, 2000, respectively, compared with the
comparable 1999 periods. The decrease in first year traditional life premiums is
principally due to a decrease in single premiums of $1.1 million and $2.4
million during the three and six month periods of 2000, respectively. Single
premiums can vary significantly from period to period.
Universal life and traditional life renewal premiums increased $11.2 million and
$16.6 million, or 55.3% and 34.5%, for the three and six months ended June 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 $12.5
million and $18.1 million during the three and six months ended June 30, 1999,
respectively. The refund program was completed at December 31, 1999. Universal
life and traditional life renewal premiums at Southwestern Life increased 1.5%
to $40.3 million during the three and six months ended June 30, 2000,
respectively, compared with the comparable 1999 periods. Annuity premiums of
$466,000 and $2.4 million for the three and six months ended June 30, 2000,
respectively, were less than the
28
<PAGE>
premiums of $1.9 million and $4.7 million in the comparable periods of 1999. The
decrease in annuity premiums principally reflects the consummation of the
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).
NET INVESTMENT INCOME. Net investment income decreased 16.3% and 10.7% to $33.7
million and $73.3 million for the three and six months ended June 30, 2000,
respectively, compared with the 1999 comparable periods. The decrease is
primarily due to a decline in invested assets. Average invested assets declined
approximately $340.6 million and $164.1 million for the three and six months
ended June 30, 2000, respectively, compared with the comparable 1999 periods.
The decrease in invested assets resulted from the reinsurance of substantially
of the deferred annuity block business and 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. In addition, policyholder surrenders exceeded
deposits by $18.8 million and $46.1 million for the three and six months ended
June 30, 2000, respectively. The decrease in invested assets due to surrenders
was partially offset by premiums on new and existing life policies and
investment income collected, less commissions and operating expenses. Weighted
average yields on invested assets have decreased to 6.6% and 6.8% for the three
and six months ended June 30, 2000 compared to 6.9% for the three and six months
ended June 30, 1999, respectively. Weighted average yields were lower for the
three and six months ended June 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.
OTHER INCOME. Other income was $881,000 and $3.2 million for the three and six
months ended June 30, 2000, respectively, compared with $2.2 million and $3.5
million in the comparable periods of 1999. The decrease principally reflects
changes in consideration received on supplemental contracts. Supplemental
contract revenue is derived from annuity contracts which have reached the
annuitization period. Consideration from supplemental contracts recognized as
other income is offset by policyholder benefits, resulting in no net effect on
the Company's results of operations.
TOTAL POLICYHOLDER BENEFITS. The following table shows the components of total
policyholder benefits for the three and six months ended June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Death benefits.................................. $ 18,413 $ 23,177 $ 41,407 $ 43,339
Other insurance policy benefits and change
in future policy benefits..................... 28,787 29,220 57,701 64,428
------------- ------------- ------------- -------------
TOTAL POLICYHOLDER BENEFITS..................... $ 47,200 $ 52,397 $ 99,108 $ 107,767
============= ============= ============= =============
</TABLE>
Policyholder benefits decreased 9.9% and 8.0% to $47.2 million and $99.1 million
for the three and six months ended June 30, 2000, respectively, compared with
the comparable 1999 periods. Death benefits decreased $4.8 million and $1.9
million, or 20.6% and 4.5%, for the three and six months ended June 30, 2000,
respectively. Death benefits may vary significantly from period to period. Other
policy benefits and change in policy benefits decreased $433,000 and $6.7
million, or 1.5% and 10.4%, during the three and six months ended June 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. In
addition, higher death benefits during the first quarter 2000 resulted in a
larger decrease in reserves as a result of reserves released at death when
compared to the 1999 periods. This was partially offset by increases to certain
deficiency reserves and unearned revenue reserves of approximately $5.2 million
as a result of unlocking assumptions, including future lapsation, on certain
interest-sensitive blocks of business of Security Life during the three months
ended June 30, 2000.
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
29
<PAGE>
policy reserves and account values associated with such contracts, which
aggregated approximately $548.0 million as of June 30, 2000 and $527.1 million
as of December 31, 1999, respectively. If developing trends were to continue,
principally the less than expected level of the lapses currently associated with
such interest sensitive blocks of business, the Company would be required to
record additional reserves or reduce intangible assets, which could have a
material impact on the Company's financial position and results of operations. A
decrease of 1% in the assumed lapse rate would increase policy reserves
associated with such 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 $1.8 million and $1.5 million
during the three and six months ended June 30, 2000, respectively, compared with
the comparable 1999 periods. The decrease during the three and six months ended
June 30, 2000 principally 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. The decrease for the six
months ended June 30, 2000 was partially offset by the decision by management to
accelerate payment of approximately $2.2 million of accumulation bonuses owed to
agents. The decrease was also partially offset by a decrease to non-deferrable
commissions at Security Life resulting from decreases in new and renewal premium
and an adjustment of approximately $700,000 based upon a re-evaluation of credit
balances with terminated or inactive agents.
OTHER OPERATING EXPENSES. For the three and six months ended June 30, 2000,
other operating expenses (including general operating, overhead and policy
maintenance) decreased $2.1 million and $1.4 million, respectively, from the
comparable periods in 1999. The decrease principally results from a reduction in
expenses as a result of restructuring efforts to reduce costs, a reduction in
expenses related to costs associated with year 2000 remediation efforts and
systems conversions for Security Life as these projects were substantially
completed during the third quarter of 1999.
BUSINESSES SOLD
Businesses Sold include the operations of the Payroll Sales Division (sold
February 4, 2000), the Career Sales Division (sold July 30, 1999), KIVEX (sold
June 30, 1999), Professional (sold March 31, 1999) and the United Life Assets
(sold April 30, 1999). The following description of these operations was
applicable prior to their respective dates of sale. The Payroll Sales Division
includes the operations of AA Life and OLIC. AA Life markets and underwrites
customized life insurance and accumulation products to U.S. military personnel
and federal employees through a general agency force. OLIC provides individual
fixed benefit and life products utilizing a network of independent agents
primarily in the southeastern United States through employer-sponsored payroll
deduction programs. The Career Sales Division includes the operations of Penn
Life, markets and underwrites fixed benefit accident and sickness products and,
to a lesser extent, life products through a sales force exclusive to the Company
throughout the United States and Canada and includes the operations of Union
Bankers, Marquette and Constitution. KIVEX is an internet service provider.
Professional provides individual fixed benefit and life products utilizing a
network of independent agents primarily in the southeastern United States
through employer-sponsored payroll deduction programs. United Life principally
markets fixed and variable annuities through financial institutions and
independent general agents, primarily in the southern and western United States.
30
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Policy revenues............................... $ -- $ 66,632 $ 7,573 $ 146,718
Net investment income......................... -- 27,700 2,907 70,480
Other income.................................. -- 6,212 212 12,859
------------- ------------- ------------- -------------
-- 100,544 10,692 230,057
------------- ------------- ------------- -------------
Benefits and expenses:
Total policyholder benefits................... -- 51,183 5,344 124,440
Insurance related expenses.................... -- 25,192 978 39,329
Other operating expenses...................... -- 10,028 1,564 41,968
------------- ------------- ------------- -------------
-- 86,403 7,886 205,737
------------- ------------- ------------- -------------
PRE-TAX OPERATING INCOME (LOSS)............... $ -- $ 14,141 $ 2,806 $ 24,320
============= ============= ============= =============
</TABLE>
POLICY REVENUES. Policy revenues declined $66.6 million and $139.1 million in
the three and six months ended June 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.
NET INVESTMENT INCOME. Net investment income decreased $27.7 million and $67.6
million during the three and six months ended June 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 $6.2 million and $12.6 million in the three
and six months ended June 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 $51.2 million and
$119.1 million in the three and six months ended June 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 $25.2 million and $38.4 million to $--
and $978,000 for the three and six months ended June 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 $10.0 million and $40.4 million in
the three and six months ended June 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 $6.7 million and $14.6
million for the three and six months ended June 30, 2000, respectively, compared
to the comparable 1999 periods. The decrease is principally a result of
principal repayments under PennCorp's bank credit
31
<PAGE>
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 outstanding 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.
CORPORATE EXPENSES, ELIMINATIONS AND OTHER. Corporate expenses, eliminations and
other costs were $10.2 million and $23.7 million for the three and six months
ended June 30, 2000, respectively, compared with $15.6 million and $24.1 million
for the three and six months ended June 30, 1999, respectively. Included in the
three and six months results of 1999 are non-recurring costs of approximately
$9.5 million and $14.5 million; respectively, 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 three months ended June 30, 2000
was partially offset by costs incurred associated with the recapitalization of
approximately $5.4 million. The decrease for the first six months of 2000 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.
INCOME TAXES (BENEFITS). For the three and six months ended June 30, 2000, the
Company recognized income taxes of $5.7 million and $6.5 million on loss before
taxes and extraordinary items of $26.7 million and $54.0 million. For the three
and six months ended June 30, 1999, income tax expense was $3.3 million and $7.9
million on loss before taxes and extraordinary items of $15.9 million and $52.9
million, respectively. The unusual effective tax rates in 2000 and 1999 are
substantially due to the non-deductibility of the reduction in carrying value of
the assets associated with Businesses Sold and a tax valuation allowance,
primarily representing unrecoverable net operating loss 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 losses of $10.5 million and $13.3 million during the three and six
months ended June 30, 2000, respectively, and $3.2 million and $1.1 million
during the three and six months ended June 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
$46.1 million and $150.5 million for the six months ended June 30, 2000 and
1999, respectively. During the three months 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.
32
<PAGE>
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 six months of 2000 resulted in a decline in the unrealized depreciation of
the bond portfolio since the end of 1999. However, the Company's assets and
liabilities portfolio and its exposure to market risk has not changed materially
from its position at December 31, 1999. For disclosures about the Company's
market risk exposures of financial instruments for its Retained Businesses, see
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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 to the Complaint entered into a Stipulation of Settlement dated May
24, 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 set forth in the Complaint (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 September 22, 2000. The Company expects the Settlement
to receive final approval at that hearing.
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
34
<PAGE>
non-smoker policies and to increase cost of insurance charges on such smoker
policies. The petition alleges Security Life made these waivers through its
marketing pieces and signed statements by its officers. The petition also
alleges that not all of the facts were outlined in the Company's communication
to its policyholders outlining the exchange program and therefore alleges
Security Life's exchange program is deceptive. The petition asks for declaratory
judgment concerning the rights of the Plaintiffs, and the class of policyholders
of such policies and for attorney's fees. It, among other things, asks for an
injunction to prevent Security Life from charging cost of insurance charges for
such non-smoker policies or increasing cost of insurance charges on such smoker
policies after the eighth contract year. It also asks the Court to rule the
releases signed by such policyholders under the exchange program be declared
null and void and those policyholders who signed the releases be given the
option of reinstating the prior policies. Security Life denies the allegations
in the petition and intends to vigorously defend this lawsuit. The trial court
in which this case is pending has granted class certification in at least one
other lawsuit involving similar types of claims. As of June 30, 2000, the
parties were discussing a settlement of the lawsuit, but there can be no
assurances that the Company will resolve these matters on such life insurance
products on a satisfactory basis, or at all, or that any such resolution would
not have a material adverse effect on the Company's financial condition, results
of operations or cash flows. The Company has accrued approximately $1.0 million
for expenses anticipated to be incurred in conjunction with the potential
settlement.
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 for these damages. 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.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company's Current Report on Form 8-K filed June 20, 2000 (event date June
13, 2000) reported under Item 3 the recapitalization of the Company's securities
that was effected pursuant to the Recapitalization Plan. Such information is
incorporated by reference in this Item 2. The 9,059,000 shares of new Common
Stock issued on June 13, 2000 under the Recapitalization Plan were not
registered under the Securities Act of 1933 in reliance upon the exemptions from
registration set forth below.
The issuance of 5,175,000 shares of new Common Stock in exchange for Preferred
Stock, the issuance to holders of Preferred Stock of rights to purchase new
Common Stock and the issuance of 1,126,717 shares of new Common Stock upon
exercise of such rights, all pursuant to the Recapitalization Plan, were exempt
from registration under the Securities Act by Sections 1145(a)(1) and 1145(a)(2)
of the Bankruptcy Code.
The issuance of 833,283 shares of new Common Stock to Inverness/Phoenix Capital
LLC and its affiliates pursuant to the Standby Purchase Agreement dated March
22, 2000 with the Company was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act. These purchasers purchased all
of the shares issuable under the rights to the extent not subscribed for by
other rights holders.
35
<PAGE>
The issuance of 1,840,000 shares of new Common Stock to Bernard Rapoport and
John T. Sharpe pursuant to their Subscription Agreement dated June 13, 2000 with
the Company was exempt from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act.
The issuance of 60,000 shares of new Common Stock to executive officers
(including 50,000 shares awarded to the Company's President, Steve Johnson, and
10,000 shares awarded to David B. Little, its Senior Vice President and
Administrative Officer, under their Employment Agreements dated June 13, 2000
with the Company) pursuant to the Recapitalization Plan was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act.
The issuance of 24,000 shares of new Common Stock to William A. McCormick, a
consultant to the Company (previously an officer and director), under his
Consulting Agreement dated June 13, 2000 with the Company and pursuant to the
Recapitalization Plan was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act.
The issuance of options to purchase 585,000 shares of new Common Stock to
officers, directors and employees of the Company pursuant to the
Recapitalization Plan and the issuance of options to purchase 55,000 shares of
new Common Stock to four persons not related to the Company were exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act.
The Company entered into a registration rights agreement with the holders of
shares of new Common Stock acquired pursuant to the aforementioned Standby
Purchase Agreement, Subscription Agreement and Employment Agreement with Mr.
Johnson. The registration rights agreement obligates the Company to register
under the Securities Act resales of such new Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Holders of record as of April 25, 2000 of preferred stock equity interests in
Class 7 of the Recapitalization Plan were entitled to vote to accept or reject
the Recapitalization Plan. Ballots were required to be received by the balloting
agent by 5:00 p.m. Eastern Time on May 31, 2000. Of the 5,175,000 outstanding
shares entitled to vote, 4,572,032 shares voted, which represented 88.4 % of the
outstanding shares entitled to vote. Of that 4,572,032 shares, 4,571,582 shares
voted to accept and 450 shares voted to reject the Recapitalization Plan.
36
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2.1 Stock Purchase Agreement, dated as of December 31, 1998, between GE
Financial Assurance Holdings, Inc. and Pacific Life and Accident
Insurance Company (2)
2.2 Agreement, dated as of December 31, 1998, between GE Financial
Assurance Holdings, Inc. and the Registrant (2)
2.3 Purchase Agreement, dated February 21, 1999, among ING America
Insurance Holdings, Inc., the Registrant, Pacific Life and Accident
Insurance Company, Marketing One Financial Corporation and Marketing
One, Inc. (3)
2.4 Stock Purchase Agreement, dated June 11, 1999, between PennCorp
Financial Services, Inc. and Allegiance Telecom, Inc. (4)
2.5 First Amendment to Stock Purchase Agreement, dated as of June 30,
1999, between PennCorp Financial Services, Inc. and Allegiance
Telecom, Inc. (5)
2.6 Amended and Restated Purchase Agreement, dated as of July 2, 1999,
among Universal American Financial Corp., the Registrant, Pacific Life
and Accident Insurance Company, Pennsylvania Life Insurance Company,
Southwestern Financial Corporation, Constitution Life Insurance
Company, and Penncorp Financial Services, Inc. (5)
2.7 Stock Purchase Agreement, dated as of January 7, 2000, between
Reassure America Life Insurance Company and the Registrant (6)
2.8 Stock Purchase Agreement, dated as of January 8, 2000, between
Pioneer-Occidental Holdings Company and American-Amicable Holdings
Corporation (6)
2.8.1 Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
between American-Amicable Holdings Corporation and Pioneer-Occidental
Holdings Company (7)
2.9 Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of the
Registrant (8)
3.1 Amended and Restated Certificate of Incorporation(9)
3.2 Amended and Restated Bylaws (9)
4.1 $95,000,000 Senior Credit Agreement, dated as of June 13, 2000, among
the Registrant, as Borrower, The Lenders Party Thereto and Ing (U.S.)
Capital LLC as Administrative Agent (8)
4.2 Registration Agreement, dated as of June 13, 2000, among the
Registrant, Inverness/Phoenix Capital LLC, Bernard Rapoport, SLM
Investment, LP, Sharpe Taylor Investments, Ltd., JTS Family Limited
Partnership #14, John Sharpe and Steve Johnson (8)
4.3 $150,000,000 principal amount Surplus Debenture No. Seven, dated July
30, 1999, issued by Pacific Life and Accident Insurance Company to
Southwestern Financial Corporation (10)
4.3.1 Amendment to $150,000,000 Principal Amount Surplus Debenture No.
Seven, dated June 13, 2000(1)
10.1.1 Executive Stock and Employment Agreement, dated as of June 13, 2000,
between the Registrant and Bernard Rapoport (8)
37
<PAGE>
10.1.2 Employment Agreement, dated as of June 13, 2000, between the
Registrant and Steve Johnson (8)
10.1.2.1 Separation Agreement, dated as of August 1, 2000, between the
Registrant and Steve Johnson(12)
10.1.3 Employment Agreement, dated as of June 13, 2000, between the
Registrant and David Little (8)
10.1.4 Employment Agreement, dated as of June 13, 2000, between the
Registrant and Ron Archer (8)
10.1.5 Employment Agreement, dated as of June 13, 2000, between the
Registrant and David Commons (8)
10.2.1 Consulting Agreement, dated as of June 13, 2000, between the
Registrant and John Sharpe (8)
10.2.2 Consulting Agreement, dated as of June 13, 2000, between the
Registrant and William Mccormick (8)
10.3.1 Option Agreement, dated June 13, 2000, between the Registrant and
John Sharpe (8)
11.1 Computation of Loss Per Share (1)
15.1 Independent Auditors' Report (11)
27 Financial Data Schedule (1)
------------------
(1) Filed herewith.
(2) Incorporated by reference to the current report on Form 8-K dated January
11, 1999, which was filed with the SEC by the Registrant on January 11,
1999.
(3) Incorporated by reference to the current report on Form 8-K dated March 31,
1999, which was filed with the SEC by the Registrant on April 5, 1999.
(4) Incorporated by reference to the current report on Form 8-K dated June 11,
1999, which was filed with the SEC by the Registrant on June 18, 1999.
(5) Incorporated by reference to the current report on Form 8-K dated June 25,
1999, which was filed with the SEC by the Registrant on July 13, 1999.
(6) Incorporated by reference to the current report on Form 8-K dated January
10, 2000, which was filed with the SEC by the Registrant on January 10,
2000.
(7) Incorporated by reference to the current report on Form 8-K dated February
4, 2000, which was filed with the SEC by the Registrant on February 11,
2000.
(8) Incorporated by reference to the current report on Form 8-K dated June 13,
2000, which was filed with the SEC by the Registrant on June 20, 2000.
(9) Incorporated by reference to the registration statement on Form 8-A which
was filed with the SEC by the Registrant on June 13, 2000.
(10) Incorporated by reference to the quarterly report on Form 10-Q for the
three months ended September 30, 1999, which was filed with the SEC by the
Registrant on November 15, 1999.
(11) Included in Item 1 of Part I of this Form 10-Q.
(12) 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.
38
<PAGE>
(B) REPORTS ON FORM 8-K
On June 20, 2000, the Company filed a current report on Form 8-K with the SEC
reporting under Item 3 the consummation on June 13, 2000 of the plan of
reorganization confirmed by the bankruptcy court on June 5, 2000. The Form 8-K
also reported under Item 1 the change in control effected by the plan of
reorganization.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
39
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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: August 14, 2000
40
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBERS
2.1 Stock Purchase Agreement, dated as of December 31, 1998, between GE
Financial Assurance Holdings, Inc. and Pacific Life and Accident
Insurance Company (2)
2.2 Agreement, dated as of December 31, 1998, between GE Financial
Assurance Holdings, Inc. and the Registrant (2)
2.3 Purchase Agreement, dated February 21, 1999, among ING America
Insurance Holdings, Inc., the Registrant, Pacific Life and Accident
Insurance Company, Marketing One Financial Corporation and Marketing
One, Inc. (3)
2.4 Stock Purchase Agreement, dated June 11, 1999, between PennCorp
Financial Services, Inc. and Allegiance Telecom, Inc. (4)
2.5 First Amendment to Stock Purchase Agreement, dated as of June 30,
1999, between PennCorp Financial Services, Inc. and Allegiance
Telecom, Inc. (5)
2.6 Amended and Restated Purchase Agreement, dated as of July 2, 1999,
among Universal American Financial Corp., the Registrant, Pacific Life
and Accident Insurance Company, Pennsylvania Life Insurance Company,
Southwestern Financial Corporation, Constitution Life Insurance
Company, and Penncorp Financial Services, Inc. (5)
2.7 Stock Purchase Agreement, dated as of January 7, 2000, between
Reassure America Life Insurance Company and the Registrant (6)
2.8 Stock Purchase Agreement, dated as of January 8, 2000, between
Pioneer-Occidental Holdings Company and American-Amicable Holdings
Corporation (6)
2.8.1 Amendment to Stock Purchase Agreement, dated as of February 4, 2000,
between American-Amicable Holdings Corporation and Pioneer-Occidental
Holdings Company (7)
2.9 Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of the
Registrant (8)
3.1 Amended and Restated Certificate of Incorporation(9)
3.2 Amended and Restated Bylaws (9)
4.1 $95,000,000 Senior Credit Agreement, dated as of June 13, 2000, among
the Registrant, as Borrower, the Lenders Party Thereto and Ing (U.S.)
Capital LLC as Administrative Agent (8)
4.2 Registration Agreement, dated as of June 13, 2000, among the
Registrant, Inverness/Phoenix Capital LLC, Bernard Rapoport, SLM
Investment, LP, Sharpe Taylor Investments, Ltd., JTS Family Limited
Partnership #14, John Sharpe and Steve Johnson (8)
4.3 $150,000,000 principal amount Surplus Debenture No. Seven, dated July
30, 1999, issued by Pacific Life and Accident Insurance Company to
Southwestern Financial Corporation (10)
4.3.1 AMENDMENT TO $150,000,000 Principal Amount Surplus Debenture No.
Seven, dated June 13, 2000(1)
10.1.1 Executive Stock and Employment Agreement, dated as of June 13, 2000,
between the Registrant and Bernard Rapoport (8)
41
<PAGE>
10.1.2 Employment Agreement, dated as of June 13, 2000, between the
Registrant and Steve Johnson (8)
10.1.2.1 Separation Agreement, dated as of August 1, 2000, between the
Registrant and Steve Johnson(12)
10.1.3 Employment Agreement, dated as of June 13, 2000, between the
Registrant and David Little (8)
10.1.4 Employment Agreement, dated as of June 13, 2000, between the
Registrant and Ron Archer (8)
10.1.5 Employment Agreement, dated as of June 13, 2000, between the
Registrant and David Commons (8)
10.2.1 Consulting Agreement, dated as of June 13, 2000, between the
Registrant and John Sharpe (8)
10.2.2 Consulting Agreement, dated as of June 13, 2000, between the
Registrant and William Mccormick (8)
10.3.1 Option Agreement, dated June 13, 2000, between the Registrant
and John Sharpe (8)
11.1 Computation of Loss Per Share (1)
15.1 Independent Auditors' Report (11)
27 Financial Data Schedule (1)
------------------
(1) Filed herewith.
(2) Incorporated by reference to the current report on Form 8-K dated January
11, 1999, which was filed with the SEC by the Registrant on January 11,
1999.
(3) Incorporated by reference to the current report on Form 8-K dated March 31,
1999, which was filed with the SEC by the Registrant on April 5, 1999.
(4) Incorporated by reference to the current report on Form 8-K dated June 11,
1999, which was filed with the SEC by the Registrant on June 18, 1999.
(5) Incorporated by reference to the current report on Form 8-K dated June 25,
1999, which was filed with the SEC by the Registrant on July 13, 1999.
(6) Incorporated by reference to the current report on Form 8-K dated January
10, 2000, which was filed with the SEC by the Registrant on January 10,
2000.
(7) Incorporated by reference to the current report on Form 8-K dated February
4, 2000, which was filed with the SEC by the Registrant on February 11,
2000.
(8) Incorporated by reference to the current report on Form 8-K dated June 13,
2000, which was filed with the SEC by the Registrant on June 20, 2000.
(9) Incorporated by reference to the registration statement on Form 8-A which
was filed with the SEC by the Registrant on June 13, 2000.
(10) Incorporated by reference to the quarterly report on Form 10-Q for the
three months ended September 30, 1999, which was filed with the SEC by the
Registrant on November 15, 1999.
(11) Included in Item 1 of Part I of this Form 10-Q.
(12) 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.
42
<PAGE>
EXHIBIT 11.1
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY PENNCORP FINANCIAL GROUP, INC.)
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic net loss:
Loss before extraordinary charge.............. $ (32,409) $ (19,216) $ (60,496) $ (60,871)
Extraordinary items........................... (2,443) -- (2,443) --
------------- ------------- ------------- -------------
NET LOSS.................................... $ (34,852) $ (19,216) $ (62,939) $ (60,871)
============= ============= ============= =============
Diluted net loss:
Loss before extraordinary charge.............. $ (32,409) $ (19,216) $ (60,496) $ (60,871)
Extraordinary items........................... (2,443) -- (2,443) --
------------- ------------- ------------- -------------
NET LOSS.................................... $ (34,852) $ (19,216) $ (62,939) $ (60,871)
============= ============= ============= =============
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>
43
