On February 7, 2000, PennCorp filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. Since the Petition Date, PennCorp has continued to operate and manage its assets and business as a debtor in possession as authorized by provisions of the Bankruptcy Code.
On February 28, 2000 the Bankruptcy Court issued an order scheduling a hearing to consider approval of the sale agreement with Reassure America, subject to higher or better offers, and establishing the procedures for the submission of competing offers.
On January 5, 1998, the Company consummated the acquisition of the interests of Fickes and Stone Knightsbridge Interests for total consideration estimated to be $10.6 million (not including acquisition expenses). Under the terms of the transaction, Mr. Fickes is 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 is to be issued 173,160 shares of the Company's Common Stock on April 15, 2001. The Company issued 173,160 shares to Mr. Stone in July 1998.
As part of the first quarter 1998 restructuring 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.
On August 30, 1997, the merger agreement between Washington National Corporation ("Washington National") and the Company terminated. The Company incurred legal, accounting and financial advisory fees associated with the merger. In addition, the Company had began to provide certain resources to Washington National including personnel to perform policy administration and claims processing function on Washington National's behalf. The aggregate advisory and administrative costs incurred by the Company during 1997 were $7.6 million.
In addition, the Company and the lenders entered into a cash collateral agreement ("Cash Collateral Agreement") which superseded the Bank Credit Facility. The Cash Collateral Agreement provides a mechanism for the Company to repay its currently outstanding borrowings and establishes certain covenants with which the Company must comply until the Company's outstanding bank borrowings and related interest are paid in full. Certain covenants strictly define the Company's ability to utilize any and all cash that is maintained in a collateral account held by the agent lender. As a result, the Company may utilize cash from the cash collateral account for only predetermined types of expenses and in specified amounts. The restrictions on cash only impacts PennCorp as the debtor-in-possession and does not impact any of PennCorp's subsidiaries. See Note 9 of Notes to Consolidated Financial Statements.
During 1999, policyholder benefits decreased 0.9% to $213.4 million compared with 1998. Death benefits decreased $6.9 million or 7.9% compared with 1998. Death benefits may vary significantly from period to period. Change in future policy benefits and other benefits increased 3.8% and 9.1% to $132.7 million and $127.8 million in 1999 and 1998, respectively. During 1999, future policy benefits were increased approximately $6.2 million as a result of the re-estimation of certain deficiency reserves on a block of Southwestern Life interest sensitive business. Certain assumptions related to the expected future experience for lapses, premiums, mortality and interest were adjusted to reflect recent experience. In addition, management began implementing a plan that included contractually allowable increases to expense charges. During 1997, future policy benefits were reduced approximately $23.9 million related to the adjustment of certain deficiency reserves on a block of Southwestern Life interest sensitive business. During 1997, management began implementing a plan intended to reduce the anticipated losses associated with these policies. Such actions included contractually allowable reductions in credited rates and increases in cost of insurance and expense charges.
Total policy revenues increased 2.3% to $92.0 million in 1999 compared to 1998. Most of the increase was attributable to AA Life's increasing new business sales during 1998 which resulted in higher traditional life renewal premiums during 1999. Total policy revenues were consistent between 1998 and 1997. Policy revenues increased $4.3 million for AA Life in 1998 but were offset by a decrease of $4.1 million for OLIC. OLIC's decline was anticipated as a result of the Company's decision to cease marketing products through any "non-payroll" production sources during 1997.
Year ended December 31, ------------------------------ 1999 1998 1997 --------- --------- --------- ($ in thousands) Revenues: Policy revenues............................ $ 112,915 $ 239,927 $ 263,680 Net investment income...................... 54,568 144,072 154,087 Other income............................... 13,015 20,984 20,138 --------- --------- --------- 180,498 404,983 437,905 --------- --------- --------- Benefits and expenses: Total policyholder benefits................ 101,565 261,639 230,818 Insurance related expenses................. 24,224 86,717 93,359 Other operating expenses................... 38,741 73,168 66,921 --------- --------- --------- 164,530 421,524 391,098 --------- --------- --------- Pre-tax operating income (loss)........... $ 15,968 $ (16,541) $ 46,807 ========= ========= =========
On April 30, 1999, the Company consummated the sale of United Life Assets to ING America Insurance Holdings, Inc. ("ING"). The operating results of United Life Assets are included consolidated operating results through April 30, 1999. The Company realized a loss from the sale totaling $3,877. As a result of the sale, unrealized gains on securities held for sale by United Life decreased $1,726. The purchase and sale agreement includes certain settlement and consideration adjustment provisions relating to certain mortgages retained by the Company and federal income tax calculations (see Note 19).
Fixed maturity securities ................... $231,196 $310,798 $231,867 Mortgage loans on real estate ............... 9,610 27,773 26,498 Policy loans ................................ 13,996 16,235 9,037 Cash and cash equivalents ................... 7,548 9,016 6,366 Other investments ........................... 2,422 13,553 9,177 -------- -------- -------- Gross investment income ................... 264,772 377,375 282,945 Less: investment expenses ................... 7,172 8,323 9,708 -------- -------- -------- Net investment income ..................... $257,600 $369,052 $273,237 ======== ======== ========
As a part of the purchase accounting for the Company's acquisitions, a present value of insurance in force is established which represents the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. Such value is the actuarially determined present value of the projected cash flows from the acquired policies, discounted at an appropriate risk rate of return.
Significant additional covenants included in the March 31 and June 25, 1999 amendments required the Company to repay indebtedness at specified dates and amounts throughout 1999. The timing and required debt reduction were as follows:
Extraordinary Charges. For the year ended December 31, 1998, the Company realized an after-tax extraordinary charge of $1,671 which represents the write-off of the deferred financing costs associated with the refinance of a SW Financial existing note that the Company assumed as a part of the acquisition of SW Financial Controlling Interest.
As of December 31, 1999, the Company has non-life consolidated net operating loss carryforwards of approximately $71,232 for tax purposes which, if not utilized, will begin to expire in 2012. As of December 31, 1999, the Company also has non-life consolidated capital loss carryforwards of approximately $104,820 for tax purposes which, if not utilized, will expire in 2004.
During the year ended December 31, 1998, 83,260 stock options were exercised and issued to certain employees as discounted restricted common stock of the Company with vesting periods of three and four years. During the year ended December 31, 1998, the Company recognized $2,751 of deferred compensation, associated with the issuance of this common stock. For the years ended December 31, 1999 and 1998, the Company recognized $180 and $2,267, respectively, of compensation expense. As of December 31, 1999, the balance of deferred compensation was $304 and was recorded as a reduction to shareholders' equity.
As a result of the Company's announcement of its decision to sell the Career Sales Division, KIVEX, Professional and the United Life Assets within a period not likely to exceed one year, the assets and liabilities of the Career Sales Division, KIVEX, Professional and the United Life Assets were reported as
The Company expects that this litigation will not affect its ability to operate through 2000. While it is not feasible to predict or determine the final outcome of these proceedings or to estimate the amounts or potential range of loss with respect to these matters, management believes that if the Settlement is not consummated and there is an adverse outcome with respect to such proceedings, it would have a material adverse impact on the Company and affect its ability to operate as is currently intended.
The following reflects the impact of activity for the year ended December 31, 1999 on the restructuring accrual balances under the 1999 Plan:
Under the Recapitalization Plan, all existing shares of the Company's common stock will be cancelled for no value, and the Company's existing senior and subordinated debt, with principal aggregating approximately $179,646 at March 31, 2000, will be paid in full in cash. Any and all other claims and liabilities of the Company will be paid in accordance with their terms.
The following is a summary of the quarterly results of operations for the years ended December 31, 1999 and 1998:
In August 1997, the Company acquired from ICH the remaining 17% interest in ICH Funding and certain other assets and released ICH from indemnification obligations relative to certain tax, litigation and other matters.
SWF and its subsidiaries market and underwrite a broad range of life insurance, annuities and accident and health products to individuals through a sales force of independent agents. The insurance subsidiaries are licensed to write business in 48 states, the District of Columbia and Guam. Approximately 27.4% of the total direct premium of the Company's insurance subsidiaries was generated from business written in Texas. No other states accounted for more than 10% of the direct premium of the Company in 1997.
Investments with a fair value of $119,695 were on deposit with certain regulatory authorities at December 31, 1997.
Eliminate effects from reinsurance contract with affiliate ........................................... (4,161) Less effect on other balance sheet accounts: Value of business acquired and deferred acquisition costs .............................................. (2,768) Deferred income taxes................................. (16,000) Minority interest in unrealized losses................ 235 --------- Change in unrealized investment gains and losses........ $ 25,790 =========
Universal life and investment contract liabilities: Universal life and annuities ....................... 1,315,333 Guaranteed investment contracts .................... 163 ---------- Total universal and investment contract liabilities 1,315,496 ----------
Income taxes computed using the prevailing corporate tax rate of 35% are reconciled to the Company's actual income tax expense attributable to income for the year ended December 31, 1997, as follows:
Net deferred tax asset ................................... 55,718 Valuation allowance ...................................... (20,972) --------- $ 34,746 =========
Balance at beginning of period ............................... $ 15,095 Policy acquisition costs deferred: Commissions ................................................ 17,443 Underwriting and issue costs ............................... 7,366 Policy acquisition costs amortized ........................... (9,092) Unrealized investment (gain) loss adjustment ................. (206) -------- Unamortized deferred policy acquisition costs at period end .. $ 30,606 ========