In addition, on December 31, 1998, the Company entered into an agreement to sell Professional to GEFAH for $47.5 million in cash plus interest through the closing date. The purchase price is subject to an adjustment based on Professional's capital and surplus at the closing date. The Company currently estimates receiving net cash proceeds for the Professional Sale of approximately $40.0 million to $41.5 million.
Other Investment Income. During each of the years in the three year period ended December 31, 1998, the Company received other investment income from short-term invested assets held by the parent company.
Capital Contributions to Subsidiaries. For the years ended December 31, 1998, 1997 and 1996, the Company made capital contributions to subsidiaries totaling $7.9 million, $14.9 million and $208.7 million, respectively. During 1998, 1997 and 1996, these contributions were primarily made to certain non-life insurance subsidiaries, principally KIVEX, to fund expansion and for other corporate purposes. During 1996, the Company contributed $100.0 million to PLAIC in connection with the acquisition of United Life.
In addition to the above proceeds, there exists $7.0 million of unused commitments under the Company's existing credit facility that are available only for the purpose of payments of interests, should the Company not have sufficient liquidity from other sources. Upon consummation of the Career Sales Division divestiture the commitment will be reduced to $5.0 million.
Other Operating Expenses. For 1998, other operating expenses (including general operating, overhead and policy maintenance) increased $11.4 million from 1997. Other operating expenses were consistent between 1997 and 1996. The 1998 increase is attributable to several factors: (i) Security Life established an allowance for uncollectible agents' debit balances aggregating approximately $2.3 million, (ii) approximately $4.9 million of remediation costs associated with Year 2000 systems conversions and upgrades and (iii) additional non-deferrable expenses such as consulting fees, appraisal costs and other costs associated with the divisional realignment which are not considered restructuring costs.
Businesses Held for Sale include the operations of the Career Sales Division, KIVEX, Professional, the United Life Assets and Marketing One. The Career Sales Division, which 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. With the January 2, 1998, consummation of the acquisition of the SW Financial Controlling Interest, the Company has integrated Union Bankers, Marquette and Constitution with the Career Sales Division. 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.
Future policy benefits for traditional life insurance products generally have been computed on the net level premium method, based on estimated future investment yield, mortality, morbidity and withdrawals. Estimates used are based on experience adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience. Future policy benefits for interest sensitive products include the balance that accrues to the benefit of the
On January 2, 1998, following shareholder approval at the Company's 1997 annual meeting of shareholders, the Company consummated the acquisition, from KB Investment Fund I, LP (formerly Knightsbridge Capital Fund I, LP) (the "KB Fund") and Messrs. Steven W. Fickes, a former director and David J. Stone, a director of the Company, of their respective holdings of common stock and, in the case of the KB Fund, common stock warrants of SW Financial (collectively, the "SW Financial Controlling Interest") for an aggregate purchase price of $73,658 (not including acquisition expenses). The fair value of net assets acquired amounted to $45,520 resulting in $28,138 of costs in excess of net assets acquired which will be amortized over 30 years. As part of the acquisition of the SW Financial Controlling Interest on January 2, 1998, SW Financial Subordinated Notes in the amount of $40,000 previously purchased by the Company were reclassified to purchase consideration for SW Financial. The acquisition of the SW Financial Controlling Interest has been accounted for as a step purchase transaction in accordance with generally accepted accounting principles, and accordingly, fair values of assets and liabilities acquired have been determined as of January 2, 1998.
On December 31, 1998, the Company entered into a definitive agreement to sell the Career Sales Division and related assets to Universal American Financial Corp. ("Universal American"). The purchase price of $175,000 is subject to adjustment based on the capital and surplus of the Career Sales Division at the closing date. The purchase price consists of $136,000 in cash and $39,000 initial principal amount, subject to adjustment, of subordinated notes of Universal American. The subordinated notes will bear interest at a rate of 8.0% per annum and will mature ten years from date of issuance. The accreted value of the notes will be subject to offset in the event of adverse development (or subject to increase in the event of positive development) in the disability income reserves of PLIC and may be offset for other indemnification claims under the purchase and sale agreement. In addition, the Company is required under terms of the purchase and sale agreement to deliver the Career Sales Division and related assets with certain minimum levels of statutory capital and surplus, pay certain ongoing costs and other expenses which will result in the Company receiving net cash proceeds of approximately $70,000
In the third quarter of 1998, the Company made the decision to sell KIVEX, an internet service provider. The Company has engaged the investment banking firm of ING Barings Furman Selz in this regard and is currently soliciting interest from prospective purchasers. To date, the Company has not entered into a definitive agreement to sell KIVEX. In addition, the Company has made the decision to sell Marketing One, excluding those assets included with the sale of United Life.
The Company's ability to receive principal and interest payments above $25,200 under the surplus notes is contingent upon the Company's ability to consummate each of the sales transactions of the Businesses Held for Sale currently under contract. The Company has currently estimated net cash proceeds after required debt reduction under the Company's Bank Credit Facility of $21,100. Such liquidity is necessary for the Company to fund interest payments under the Bank Credit Facility and the notes and to fund operating expenses of the Company. Though the Company has the obligation to consummate the sales of the Businesses Held for Sale and to prepay the loans to certain covenanted levels, the Company may not have the requisite ability to effectuate the sale as a result of the restrictive covenants contained in the Amended Bank Credit Facility. The accessibility of the cash proceeds of the Businesses Held for Sale are the subject of regulatory approval. While certain regulatory filings with respect to the sale of the Businesses Held for Sale have been made, not all filings have been so made and the final structure by which such proceeds will be upstreamed to the Company have not yet been finalized. The Amended Credit Agreement provides that the Company and its subsidiaries are limited from entering into certain mergers, consolidations, amalgamations, liquidations, winding up or dissolutions, incurring certain indebtedness and liabilities, making disposition, prepaying certain indebtedness, declaring dividends, or issuing, redeeming, purchasing, retiring, exchanging or converting capital securities, in each case with very limited or scheduled exceptions. While the Company believes it has scheduled or otherwise provided for a great majority of the possible combinations it will take to effectively upstream the cash proceeds of the sales of the Businesses Held for Sale, it is not possible to foresee all combinations. Accordingly, the mechanism to upstream to the Company the necessary cash to pay the covenanted prepayment under the Amended Credit Agreement may be subject to the approval of the majority banks which, if not given, would result in an event of default under the Amended Bank Credit Agreement. Should the sale transactions not close within specified time periods, the Company may face difficulty in meeting its existing and estimated cash obligations and would be in default of certain covenants under the Bank Credit Facility.
In January 1996, stockholder derivative lawsuits styled Tozour Energy Systems Retirement Plan v. David J. Stone et al and the PennCorp Financial Group, Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J. Stone et al, and the PennCorp Financial Group, Inc., C. A. No. 14795 (the "Miller Complaint") were filed against the Company and each of its directors, individually, in the Delaware Court of Chancery. The complaint in the Miller suit was never served on the Company or the other defendants. Both suits allege that the SW Financial Investment involved the usurpation of a corporate opportunity and a waste of the Company's assets by Messrs. Stone and Fickes, and that the directors of the Company in approving that transaction, failed to act in good faith and breached their fiduciary duties, including the duty of loyalty to the Company and its stockholders, having favored the interests of Messrs. Stone and Fickes over the Company and its stockholders. These lawsuits sought judgments against each of the defendants for the amount of damages sustained, or to be sustained, by the Company as a result of the breaches of fiduciary duty alleged in the complaint, the imposition of a constructive trust for the benefit of the Company on profits or benefits obtained by any defendant through the alleged breaches of fiduciary duty, attorney's fees and costs, and such other relief as the court determines to be just, proper or equitable.
During a conference on March 19, 1999, defendants sought and were granted permission to file a motion to dismiss the Complaint. Although there are not assurances that the motion to dismiss will be granted, management believes that there are meritorious defenses to the action that will be raised in connection with the motion, including whether the Complaint adequately pleads scienter (i.e., intent to defraud) as required under the Private Securities Litigation Reform Act of 1995.
reinsurance provided PLIC with approximately $20,000 of additional statutory capital and surplus allowing it to maintain its RBC at the "Company Action Level" for the year ended December 31, 1998.
We have audited the accompanying consolidated balance sheets of Southwestern Financial Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Policy and contract claims represent estimates of reported claims and claims incurred but not reported based on experience.
Deferred policy acquisition costs represent commissions and certain costs of policy issuance and underwriting. Information relating to these costs for the years ended December 31, 1997 and 1996, is as follows: