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 contained in this report including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "target," "on track," "comfortable with," "outlook" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by such forward-looking statements. Such factors include, among other things: (1) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance, which may affect, among other things, the ability of SWL Holdings to sell its products, the market value of SWL Holdings' investments and the lapse rate and profitability of insurance products; (2) SWL Holdings' ability to achieve anticipated levels of operational efficiencies and cost-saving initiatives; (3) customer response to new products, distribution channels and marketing initiatives; (4) mortality, morbidity, and other factors which may affect the profitability of SWL Holdings' insurance products; (5) changes in the federal income tax laws and regulations which may affect the relative tax advantages of some of SWL Holdings' products; (6) increasing competition in the sale of insurance and annuities; (7) regulatory changes or actions or limitations, 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 SWL Holdings believes are particularly important to the sale of annuity and other accumulation products; (9) cash flow testing at Southwestern Life; and (10) unanticipated litigation and unanticipated results in pending litigation. There can be no assurance that these and other factors not currently anticipated by management will not materially and adversely affect SWL Holdings.
The Company's financial condition and results of operations for the periods covered by this and future reports were or will be affected by several common factors discussed below.
The following unaudited selected pro forma financial information has been prepared to illustrate the pro forma effects of the sales of Marketing One (sold November 30, 2000), Payroll Sales Division (sold February 4, 2000), Career Sales Division (sold July 30, 1999), KIVEX (sold June 30, 1999), the United Life Assets (sold April 30, 1999) and Professional (sold March 31, 1999) . The pro forma statements of operations for the years ended December 31, 2000 and 1999 give effect to such sales as if they had occurred on January 1, 1999. The unaudited selected pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had such purchases and sales been made as of January 1, 1999, or results which may occur in the future.
On January 5, 1998, following shareholder approval at the 1997 annual meeting of shareholders, PennCorp consummated the acquisition of the Fickes and Stone Knightsbridge Interests for total consideration of $10.6 million (not including acquisition expenses). Under the transaction terms, Mr. Fickes was to receive consideration in the form of estimated annual interest payments, ranging from $301,000 to $330,000, on April 15 each year through 2001 and was to be issued 173,160 shares of the PennCorp's common stock on April 15, 2001. Prior to the recapitalization, PennCorp's Board of Directors approved a settlement with Mr. Fickes pursuant to which PennCorp paid him approximately $700,000 to settle all outstanding claims including claims arising from this transaction. Mr. Stone was issued his 173,160 shares in July 1998 which he pledged to financial institutions in connection with his appeal of a judgment awarded against him and his spouse. These shares were later cancelled for no consideration pursuant to the Recapitalization Plan.
The fourth quarter 1998 Plan recognized abandoned leasehold improvement costs in connection with PennCorp's plan to sublease or vacate the New York offices. PennCorp expensed $3.0 million principally as a result of abandoning the New York leased property.
Sale of Directly Owned Subsidiaries. During the year ended December 31, 1999, PennCorp sold certain directly owned subsidiaries in connection with the disposition of the Businesses Held for Sale and received proceeds of $6.0 million.
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"); and its wholly-owned subsidiaries American-Amicable Life Insurance Company of Texas and Pioneer American Insurance Company (Pioneer Security and its subsidiaries are collectively referred to as "AA Life", sold February 4, 2000); Constitution Life Insurance Company ("Constitution", sold July 30, 1999); Union Bankers Insurance Company ("Union Bankers", sold July 30, 1999); Marquette National Life Insurance Company ("Marquette", sold July 30, 1999); Occidental Life Insurance Company ("OLIC", sold February 4, 2000); United Life and Annuity Insurance Company ("United Life", sold April 30, 1999); UC Mortgage Corp. ("UC", sold April 30, 1999); Cyberlink Development, Inc. ("Cyberlink", sold April 30, 1999); KIVEX, Inc. ("KIVEX", sold June 30, 1000), an internet service provider; and Marketing One, Inc. ("Marketing One", sold November 30, 3000), a wholly-owned third party marketing organization.
of the entity to the asset carrying amount. If the entity is determined to be unable to recover the carrying amount of its assets, intangible assets are written down initially, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based upon discounted cash flows or appraised values, depending on the nature of the associated assets.
The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies. Balances due to, or from, reinsurers have been reflected as assets and liabilities rather than being netted against the related account balances. Realized gains on retroactive reinsurance arrangements are deferred and amortized into net income over the estimated duration of the reinsured business. Financial reinsurance contracts that do not transfer significant insurance risk are accounted for utilizing deposit accounting.
$700,000 to settle all outstanding claims including claims arising from this transaction. Mr. Stone was issued his 173,160 shares in July 1998 which he pledged to financial institutions in connection with his appeal of a judgment awarded against him and his spouse. These shares were later cancelled for no consideration pursuant to the Recapitalization Plan. The fair value of net assets acquired amounted to net liabilities of $1.7 million resulting in $12.3 million of costs in excess of net assets acquired which will be amortized over seven years. The acquisition of the Fickes and Stone Knightsbridge Interests has been accounted for as a purchase transaction in accordance with generally accepted accounting principles, and accordingly, fair values of assets and liabilities acquired were recorded as of the acquisition date which became the new accounting basis.
Investments with a carrying value of $111.5 million and $216.6 million were on deposit with certain regulatory authorities as of December 31, 2000 and 1999, respectively. Amounts on deposit for 1999 were temporarily approximately $100.0 million higher as a result of a change in custodians.
As of December 31, 1999, the cumulative accrued and unpaid dividends on the $3.375 Convertible Preferred Stock amounted to $11.3 million. As of December 31, 1999, the cumulative accrued and unpaid dividends on the $3.50 Convertible Preferred Stock amounted to $14.3 million. The accrued and unpaid dividends were cancelled as a result of the consummation of the Recapitalization Plan.
The following table summarizes data relating to SWL Holding's stock options activity and associated weighted average option exercise information for the year ended December 31, 2000:
On March 16, 1998, the NAIC approved the codification of statutory accounting practices. The codification will constitute the only source of "prescribed" statutory accounting practices and has been substantially adopted by the Texas Department of Insurance, the state of domicile of the Company's insurance subsidiaries. The Statements of Statutory Accounting Principles established under the codification was effective January 1, 2001. The Company has not fully determined the impact the adoption of the codification will have on unassigned surplus of each insurance subsidiary though the Company does not believe it will be material.
PennCorp impaired costs in excess of net assets acquired for the Career Sales Division, Professional and the United Life Assets in 1998 by $100.1 million, $3.3 million and $11.1 million, respectively. To the extent that the impairment provision exceeded costs in excess of net assets acquired associated with each company to be disposed, additional impairment was necessary. As this was the case for the Career Sales Division, PennCorp reduced other intangible assets in accordance with APB No. 17. As a result, PennCorp fully impaired the present value of insurance in force and deferred policy acquisition costs resulting in charges of $98.2 million and $191.6 million, respectively, net of related deferred taxes of $95.1 million. Additionally, PennCorp established a liability aggregating $33.8 million for the remaining impairment as a result of all monetary assets of the Career Sales Division being recorded at fair value.
As of December 31, 2000 and 1999, the Company had invested a total of $3.7 million and $13.5 million, respectively, in transactions sponsored by Wand Partners L.L.C. ("Wand Partners") in which a director of PennCorp is a managing member. The Company has commitments to invest up to an additional $2.5 million in future transactions sponsored by Wand Partners. This individual is not a director of SWL Holdings.
During 1998, PennCorp liquidated its common stock and preferred stock holdings in ACO Brokerage Holdings Corporation ("ACO"). ACO was an affiliate of KB Fund (see Note 3), KB Fund owned a 28.6% interest in Acordia, Inc. (an affiliate of ACO). Total proceeds received from the sale of the preferred and common stock aggregated $30.5 million. PennCorp acquired the common stock interest in January 1, 1998 for $5.0 million.
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 against PennCorp and certain of its then current or former directors and officers. None of the individual defendants are currently officers or directors of the Company. During a pre-trial conference on November 9, 1998, all parties agreed to consolidation of all of the actions and the court appointed lead plaintiffs on behalf of certain shareholders and noteholders. The court also approved the selection of three law firms as co-lead counsel for those shareholders and noteholders. A consolidated and amended complaint was filed on January 22, 1999, and 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").
Security Life denied all of the allegations in the lawsuit. However, because of the substantial expense and uncertainty associated with class action litigation, Security Life entered into an agreement to settle the lawsuit dated September 7, 2000 pursuant to which (i) legal fees of approximately $1.3 million were to be paid to plaintiffs' counsel, (ii) certain changes were to be made to the terms of Concept 90 policies remaining in force or reinstated pursuant to the settlement, and (iii) certain optional in-kind relief (which included the option to seek reinstatement of Concept 90 policies no longer in force) was to be provided to the plaintiffs pursuant to elections made by individual plaintiffs within a specified time period and in a specified manner with respect to their current or former Concept 90 policies. The settlement was expressly subject to approval by the court.
The Company filed post-judgment motions for relief which were denied by the trial court. The Company has appealed the judgment to the United States Court of Appeals for the Ninth Circuit, believes that it has valid grounds to obtain a reversal of the judgment in whole or in part on appeal, and intends to pursue its appeal vigorously. The Company also believes that a significant portion of the judgment may not be covered by the indemnity agreement and thus would be the responsibility of the buyer of United Life.
As part of the first quarter 1998 Plan, the Company terminated an information technology outsourcing agreement. The original contract termination fee was $4.6 million. As a result of an amendment to the termination agreement, the Company exited the agreement for a payment of $3.2 million and the remaining accrual was adjusted during 1998.