Document:

IN THE UNITED STATES BANKRUPTCY COURT

                         FOR THE DISTRICT OF DELAWARE

In re:                              )           Chapter 11
                                    )
PennCorp Financial Group, Inc.,     )           Case No. 00-888 (PJW)
                                    )
                  Debtor.           )

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                            PLAN OF REORGANIZATION
                      OF PENNCORP FINANCIAL GROUP, INC.
                   UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
                  PROPOSED BY THE COMPANY AND THE UNOFFICIAL
                      COMMITTEE OF PREFERRED SHAREHOLDERS
--------------------------------------------------------------------------------

                                    Jeffrey L. Tanenbaum

                                    WEIL, GOTSHAL & MANGES LLP
                                    767 Fifth Avenue
                                    New York, New York 10153
                                    Facsimile: (212) 310 - 8007

                                    Martin Sosland

                                    WEIL, GOTSHAL & MANGES LLP
                                    100  Crescent Court Suite 1300
                                    Dallas, Texas 75201-6950

                                    Thomas L. Ambro
                                    Mark Collins

                                    RICHARDS, LAYTON & FINGER
                                    One Rodney Square
                                    P.O. Box 551
                                    Wilmington, Delaware 19899
                                    Facsimile: (302) 658-6548

                                    Co-Counsel to PennCorp Financial Group, Inc.

                                    James H.M. Sprayregen
                                    Lena Mandel

                                    KIRKLAND & ELLIS
                                    200 E. Randolph Drive
                                    Chicago, Illinois 60601
                                    Facsimile: (312) 861-2200

<PAGE>

                                    Laura Davis Jones

                                    PACHULSKI, STANG, ZIEL, YOUNG & JONES
                                    919 North Market Street
                                    Wilmington, Delaware 19801
                                    Facsimile: (302) 652-4400

                                    Co-Counsel to Inverness/Phoenix Capital
                                    LLC., lead member of the Unofficial
                                    Committee of Preferred Shareholders

Dated:  April 25, 2000

<PAGE>

                               TABLE OF CONTENTS

                                                                          Page
                                                                          ----

ARTICLE I.  DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME
               AND GOVERNING LAW............................................1
      A.    Rules of Interpretation, Computation of Time and Governing Law..1
      B.    Defined Terms...................................................1

ARTICLE II. ADMINISTRATIVE AND PRIORITY TAX CLAIMS..........................8
      A.    Administrative Claims...........................................8
      B.    Professional Compensation.......................................8
      C.    Priority Tax Claims.............................................9

ARTICLE III.CLASSIFICATION AND TREATMENTOF CLASSIFIED CLAIMS AND EQUITY
               INTERESTS....................................................9
      A.    Summary.........................................................9
      B.    Classification and Treatment of Claims and Equity Interests....10
      C.    Special Provision Governing Unimpaired Claims..................12

ARTICLE IV. ACCEPTANCE OR REJECTION OF THE PLAN............................13
      A.    Voting Classes.................................................13
      B.    Acceptance by Impaired Classes.................................13
      C.    Presumed Acceptance of Plan....................................13
      D.    Presumed Rejection of Plan.....................................13
      E.    Non-Consensual Confirmation....................................13

ARTICLE V.  MEANS FOR IMPLEMENTATION OF THE PLAN...........................13
      A.    Continued Corporate Existence and Vesting of Assets in the
              Reorganized Debtor ..........................................13
      B.    Cancellation of Notes, Instruments and Common Stock............13
      C.    Issuance of New Securities; Execution of Related Documents.....14
      D.    Terms of the Rights Offering...................................14
      E.    Terms of the Rapoport/Sharpe Investment........................14
      F.    Terms of the New Common Stock .................................15
      G.    Corporate Governance, Directors and Officers, and Corporate
               Action .....................................................15
      H.    Sources of Cash for Plan Distribution..........................16
      I.    Change of Corporate Name.......................................16

ARTICLE VI. TREATMENT OF EXECUTORY CONTRACTSAND UNEXPIRED LEASES...........16
      A.    Assumption of Executory Contracts and Unexpired Leases.........16
      B.    Claims Based on Rejection of Executory Contracts or Unexpired
               Leases .....................................................16
      C.    Cure of Defaults for Executory Contracts and Unexpired Leases
               Assumed ....................................................17
      D.    Indemnification of Directors, Officers and Employees...........17
      E.    Compensation and Benefit Programs..............................17

ARTICLE VII.PROVISIONS GOVERNING DISTRIBUTIONS.............................17
      A.    Distributions for Claims Allowed as of the Effective Date......17
      B.    Distributions by the Reorganized Debtor; Distributions with
               Respect to Old Notes .......................................18
      C.    Delivery and Distributions and Undeliverable or Unclaimed
               Distributions ..............................................18
      D.    Distribution Record Date.......................................19
      E.    Timing and Calculation of Amounts to be Distributed............19
      F.    No Fractional Shares ..........................................19
      G.    Setoffs........................................................19
      H.    Surrender of Canceled Instruments or Securities................19

<PAGE>

      I.    Lost, Stolen, Mutilated or Destroyed Securities................20

ARTICLE VIIIPROCEDURES FOR RESOLVING DISPUTED CLAIMS.......................20
      A.    Prosecution of Objections to Claims............................20
      B.    Estimation of Claims...........................................20
      C.    Payments and Distributions on Disputed Claims or Interests.....21

ARTICLE IX. CONDITIONS PRECEDENT TO CONSUMMATION OF THE PLAN...............21
      A.    Conditions Precedent to Consummation...........................21
      B.    Effect of Non-Occurrence of Conditions to Consummation.........22

ARTICLE X.  RELEASE, INJUNCTIVE AND RELATED PROVISIONS.....................22
      A.    Subordination..................................................22
      B.    Limited Releases by the Debtor.................................22
      C.    Preservation of Rights of Action...............................22
      D.    Exculpation....................................................23
      E.    Injunction.....................................................23

ARTICLE XI. RETENTION OF JURISDICTION......................................23

ARTICLE XII.MISCELLANEOUS PROVISIONS.......................................24
      A.    Dissolution of Committee(s)....................................24
      B.    Payment of Statutory Fees......................................24
      C.    Fees and Expenses of the Unofficial Preferred Shareholders'
               Committee ..................................................24
      D.    Discharge of Debtor............................................24
      E.    Modification of Plan...........................................25
      F.    Revocation of Plan.............................................25
      G.    Successors and Assigns.........................................25
      H.    Reservation of Rights..........................................25
      I.    Section 1145 Exemption.........................................25
      J.    Section 1146 Exemption.........................................25
      K     Further Assurances.............................................25
      L.    Service of Documents...........................................26
      M.    Filing of Additional Documents.................................27

<PAGE>

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                            PLAN OF REORGANIZATION
            OF PENNCORP FINANCIAL GROUP, INC. UNDER CHAPTER 11 OF
             THE BANKRUPTCY CODE PROPOSED BY THE COMPANY AND THE
                UNOFFICIAL COMMITTEE OF PREFERRED SHAREHOLDERS
--------------------------------------------------------------------------------

Pursuant to chapter 11, title 11 of the United States Code,  11 U.S.C.  Sections
101 et seq., PennCorp Financial Group, Inc., the debtor and debtor-in-possession
in  the  above-captioned  and  numbered  case,  and  the  Unofficial   Preferred
Shareholders'  Committee  hereby  respectfully  propose  the  following  Plan of
Reorganization under chapter 11 of the Bankruptcy Code:

                                  ARTICLE I.
                   DEFINED TERMS, RULES OF INTERPRETATION,
                    COMPUTATION OF TIME AND GOVERNING LAW

A.    Rules of Interpretation, Computation of Time and Governing Law

      1.  For  purposes  of the  Plan:  (a)  whenever  from  the  context  it is
appropriate,  each term,  whether  stated in the  singular or the plural,  shall
include both the singular and the plural,  and pronouns stated in the masculine,
feminine or neuter gender shall include the  masculine,  feminine and the neuter
gender;  (b) any  reference  in the  Plan to a  contract,  instrument,  release,
indenture  or other  agreement  or  document  being in a  particular  form or on
particular  terms and conditions means that such document shall be substantially
in such form or substantially on such terms and conditions; (c) any reference in
the Plan to an existing  document or exhibit Filed,  or to be Filed,  shall mean
such  document  or exhibit,  as it may have been or may be amended,  modified or
supplemented;  (d) unless  otherwise  specified,  all  references in the Plan to
Sections or Articles are references to Sections or Articles of the Plan; (e) the
words "herein" and "hereto"  refer to the Plan in its entirety  rather than to a
particular  portion of the Plan;  (f)  captions  and  headings to  Articles  and
Sections are inserted for  convenience of reference only and are not intended to
be a part of or to  affect  the  interpretation  of the  Plan;  (g) the rules of
construction  set forth in section 102 of the Bankruptcy  Code shall apply;  and
(h) any term used in capitalized form in the Plan that is not defined herein but
that is used in the  Bankruptcy  Code or the  Bankruptcy  Rules  shall  have the
meaning assigned to such term in the Bankruptcy Code or the Bankruptcy Rules, as
the case may be.

      2. In computing any period of time  prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.

      3. Except to the extent that the Bankruptcy  Code or Bankruptcy  Rules are
applicable, and subject to the provisions of any contract, instrument,  release,
indenture or other  agreement or document  entered into in  connection  with the
Plan,  the rights and  obligations  arising under the Plan shall be governed by,
and construed and enforced in  accordance  with,  the laws of the State in which
the  Bankruptcy  Court  resides,  without  giving  effect to the  principles  of
conflict of laws thereof.

B.    Defined Terms

      Unless the context otherwise requires,  the following terms shall have the
following meanings when used in capitalized form in the Plan:

     1.  "Administrative  Claim"  means  a  Claim  for  costs  and  expenses  of
administration  under section  503(b),  507(b) or  1114(e)(2) of the  Bankruptcy
Code, including:  (a) the actual and necessary costs and expenses incurred after
the Petition  Date of  preserving  the Estate and  operating the business of the
Debtor (such as wages, salaries or commissions for services and payments for

                                   - 1 -

<PAGE>

goods and other  services  and leased  premises);  (b)  compensation  for legal,
financial advisory,  accounting and other services and reimbursement of expenses
awarded or allowed under section 330(a) or 331 of the  Bankruptcy  Code; and (c)
all fees and charges  assessed  against the Estate under chapter 123 of title 28
United States Code, 28 U.S.C. Sections 1911-1930.

     2. "Allowed" means, with respect to any Claim or Equity Interest, except as
otherwise  provided  herein:  a Claim  or  Equity  Interest  (a)  that  has been
scheduled by the Debtor in its schedules of  liabilities as other than disputed,
contingent  or  unliquidated,  (b) as to which  the  Debtor  or  other  party in
interest have not Filed an objection on or before the Confirmation  Date or such
other  applicable  period  of  limitation  fixed  by the  Bankruptcy  Code,  the
Bankruptcy Rules, or the Bankruptcy Court, or as to which any objection has been
determined by a Final Order to the extent such  objection is determined in favor
of the  relevant  Holder,  (c) as to which the  liability  of the Debtor and the
amount  thereof  are  determined  by a  Final  Order  of a  court  of  competent
jurisdiction  other than the Bankruptcy  Court; or (d) that is expressly allowed
pursuant to the terms of this Plan.

     3.  "Allowed  Claim"  means  an  Allowed  Claim  in  the  particular  Class
described.

     4.  "Allowed  Equity  Interest"  means an Allowed  Equity  Interest  in the
particular Class described.

     5.  "Amended   Certificate  of  Incorporation"  means  the  Certificate  of
Incorporation  of the  Reorganized  Debtor,  as restated as described in Article
V.G.1  of the  Plan,  the  form  of  which  shall  be  Filed  on or  before  the
Confirmation Date.

     6. "Ballot Date" means the date stated in the Voting  Instructions by which
all Ballots must be received.

     7. "Ballots" mean the ballots  accompanying  the Disclosure  Statement upon
which Holders of Impaired Claims and Impaired  Interests  entitled to vote shall
indicate their  acceptance or rejection of the Plan in accordance  with the Plan
and the Voting Instructions.

     8. " Bank Secured  Claims" means all Claims arising from or relating to the
Prepetition  Bank  Credit  Facility,  including  Claims for  accrued  and unpaid
interest at the  non-default  contract  rate through the Effective  Date,  which
Claims shall be deemed Allowed without the need to file any proof of Claim.

     9. "Bankruptcy Code" means title I of the Bankruptcy Reform Act of 1978, as
amended  from time to time,  as set forth in sections 101 et seq. of title 11 of
the United  States  Code,  and  applicable  portions  of titles 18 and 28 of the
United States Code.

     10.  "Bankruptcy  Court"  means the United  States  District  Court  having
jurisdiction  over the Chapter 11 Case and, to the extent of any reference  made
pursuant to section 157 of title 28 of the United States Code and/or the General
Order of such District  Court  pursuant to section 151 of title 28 of the United
States Code, the bankruptcy unit of such District Court.

     11. "Bankruptcy  Rules"means the Federal Rules of Bankruptcy Procedure,  as
amended from time to time, as  applicable  to the Chapter 11 Cases,  promulgated
under 28  U.S.C.  ss.  2075 and the  General,  Local and  Chambers  Rules of the
Bankruptcy Court.

     12.  "Beneficial  Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.

     13.  "Business Day" means any day,  other than a Saturday,  Sunday or legal
holiday (as defined in Bankruptcy Rule 9006(a)).

     14. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of which
shall be Filed on or before the Confirmation Date.

                                   - 2 -

<PAGE>

     15. "Cash" means cash and cash equivalents.

     16. "Causes of Action" mean all actions,  causes of action,  suits,  debts,
dues,  sums  of  money,  accounts,   reckonings,   bonds,  bills,  specialities,
covenants,   contracts,   controversies,    agreements,   promises,   variances,
trespasses, damages or judgments.

     17.  "Chapter  11 Case" means the case under  chapter 11 of the  Bankruptcy
Code, commenced by the Debtor in the Bankruptcy Court.

     18.  "Claim" means a claim (as defined in section  101(5) of the Bankruptcy
Code)  against  the  Debtor,  including,  but not  limited  to: (a) any right to
payment  from the Debtor  whether  or not such  right is  reduced  to  judgment,
liquidated, unliquidated,  contingent, matured, unmatured, disputed, undisputed,
legal, equitable,  secured or unsecured; or (b) any right to an equitable remedy
for breach of performance if such  performance  gives rise to a right of payment
from the Debtor,  whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent,  matured, unmatured,  disputed, undisputed, secured
or unsecured.

     19. "Claim Holder" or "Claimant" means the Holder of a Claim.

     20.  "Class"  means a category of Holders of Claims or Equity  Interests as
set forth in Article III of the Plan.

     21. "Class Action Suit" means that certain suit pending against PennCorp in
the United States District Court for the Southern District of New York under the
caption "In re PennCorp Financial Group, Inc. Securities Litigation, Master File
No. 98 Civ. 5998 (LAP)."

     22. "Class Action Suit Claims" means the Claims of the Settling  Members of
the class on whose  behalf the Class  Action  Suit was  instituted  based on the
causes of action asserted in the Class Action Suit.

     23.  "Committee" or "Committees"  means a statutory  official committee (or
committees,  if more than one)  appointed  in the  Chapter 11 Cases  pursuant to
section 1102 of the Bankruptcy Code.

     24.  "Committee  Releasees" means all members of the Committee,  as well as
all officers, directors,  employees, attorneys, financial advisors, accountants,
investment bankers, agents and representatives of each such member.

     25. "Common Stock" means the authorized common stock of PennCorp.

     26. "Confirmation" means the entry of the Confirmation Order.

     27. "Confirmation Date" means the date upon which the Confirmation Order is
entered by the Bankruptcy Court in its docket,  within the meaning of Bankruptcy
Rules 5003 and 9021.

     28. "Confirmation Order" means the order of the Bankruptcy Court confirming
the Plan pursuant to section 1129 of the Bankruptcy Code.

     29. "Consummation" means the occurrence of the Effective Date.

     30. "Creditor" means any Holder of a Claim.

     31. "D&O  Releasees"  means all  officers  and  directors of the Debtor and
their  present and future  subsidiaries  who served in such capacity on or after
the Petition Date in each case in their capacity as such.

     32. "Debtor" means PennCorp Financial Group, Inc., as debtor in the Chapter
11 Case.

                                   - 3 -

<PAGE>

     33. "Debtor in Possession" means PennCorp  Financial Group, Inc., as debtor
in possession in the Chapter 11 Case.

     34. "Delaware General  Corporation Law" means title 8 of the Delaware Code,
as now in effect or hereafter amended.

     35. "Disclosure  Statement" means the Disclosure  Statement for the Plan of
Reorganization for PennCorp under chapter 11 of the Bankruptcy Code, as amended,
supplemented,  or  modified  from time to time,  describing  the  Plan,  that is
prepared and distributed in accordance  with sections 1125,  1126(b) and/or 1145
of the Bankruptcy Code and Bankruptcy Rule 3018 and/or other applicable law.

     36.  "Disputed"  means,  with respect to any Claim or Equity Interest,  any
Claim or Equity Interest: (a) listed on the Schedules as unliquidated,  disputed
or  contingent  and which has not been  resolved  by  written  agreement  of the
parties or a Final Order of the  Bankruptcy  Court;  or (b) which was Filed with
the  Bankruptcy  Court and as to which the Debtor or any other party in interest
have interposed a timely  objection or request for estimation in accordance with
the  Bankruptcy  Code and the Bankruptcy  Rules or is otherwise  disputed by the
Debtor  in  accordance  with  applicable  law,  which  objection,   request  for
estimation  or dispute has not been  withdrawn or  determined  by a Final Order.
Prior to (i) the time an objection has been Filed and (ii) the expiration of the
time within which an objection  may be filed as set forth herein or as otherwise
established by an order of the Bankruptcy  Court, a Claim or an Equity  Interest
shall be considered a Disputed Claim or a Disputed Equity Interest to the extent
that the amount of the Claim or Equity Interest specified in a proof of Claim or
Equity Interest exceeds the amount of the Claim or Equity Interest  scheduled by
the Debtor as not disputed, contingent or unliquidated.

     37.  "Distribution Record Date" means the close of business on the Business
Day immediately preceding the Effective Date.

     38.  "Effective  Date"  means  the  date  selected  by the  Debtor  and the
Unofficial Preferred  Shareholders'  Committee which is a Business Day after the
Confirmation Date on which: (a) no stay of the Confirmation  Order is in effect,
and (b) all conditions  specified in both Article IX.A and IX.B of the Plan have
been satisfied..

     39.  "Entity"  means  an  entity  as  defined  in  section  101(15)  of the
Bankruptcy Code.

     40. "Equity  Interest" means any equity interest of the Debtor,  including,
but not limited to, all issued,  unissued,  authorized or outstanding  shares of
stock  (including the Preferred  Stock and the Common Stock),  together with any
warrants,  options or contract  rights to purchase or acquire such  interests at
any time.

     41.  "Estate"  means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Chapter 11 Case.

     42.   "Executive   Agreements"  mean  those  certain  Executive  Stock  and
Employment  Agreements to be executed by the Reorganized Debtor on the Effective
Date with  certain  senior  executives  as set forth  inSection  VI.B.8.  of the
Disclosure Statement.

     43. "Exit Credit  Facility"  means that certain $95 million  secured senior
revolving  credit  facility  pursuant  to  the  Senior  Credit  Agreement  among
Southwestern  Life Holdings,  Inc., the lenders  parties  thereto and ING (U.S.)
Capital LLC, as agent dated as of the Effective Date.

     44.  "Expiration  Date" means, in connection with the Rights Offering,  the
meaning ascribed to it in the Disclosure Statement.

     45.  "Extraordinary  Distribution"  means an extraordinary  distribution to
PennCorp  of an  aggregate  amount  of  approximately  $55  million  by  SFC  in
connection with the Consummation of the Plan, as more fully described in Section
VI.B.9.e. of the Disclosure Statement.

                                   - 4 -

<PAGE>

     46. "File" or "Filed" means file or filed with the Bankruptcy  Court in the
Chapter 11 Case.

     47. "Final  Decree" means the decree  contemplated  under  Bankruptcy  Rule
3022.

     48. "Final Order" means an order or judgment of the  Bankruptcy  Court,  or
other court of competent  jurisdiction with respect to the subject matter, which
has not been reversed,  stayed, modified or amended, and as to which the time to
appeal or seek  certiorari  has expired and no appeal or petition for certiorari
has been  timely  taken,  or as to which any  appeal  that has been taken or any
petition for  certiorari  that has been or may be filed has been resolved by the
highest  court to which  the  order  or  judgment  was  appealed  or from  which
certiorari was sought.

     49. "General  Unsecured Claim" means any Unsecured Claim that is not an Old
Note Claim, including any Opt-out Old Note Claim.

     50.  "Holder" means a Person or Entity holding an Equity Interest or Claim,
and with  respect  to a vote on the Plan,  means a  Beneficial  Holder as of the
Voting Record Date or any authorized  signatory who has completed and executed a
Ballot or on whose  behalf a Master  Ballot has been  completed  and executed in
accordance with the Voting Instructions.

     51. "Impaired Claim" means a Claim classified in an Impaired Class.

     52.  "Impaired Class" means each of Classes 7 and 8 as set forth in Article
III of the Plan.

     53. "Inverness" means Inverness  /Phoenix Capital,  LLC, a Delaware limited
liability company, together with its affiliates.

     54.  "Inverness  Releasees"  means  all  officers,  directors,   employees,
attorneys,  financial  advisors,  accountants,  investment  bankers,  agents and
representatives of Inverness.

     55. "Master  Ballots" mean the master ballots  accompanying  the Disclosure
Statement upon which the Nominees of the Beneficial Holders of the Old Notes and
Preferred  Stock shall  indicate  acceptances  or  rejections of the Plan by the
Beneficial Holders in accordance with the Voting Instructions.

     56.  "Memorandum  of  Understanding"   means  that  certain  Memorandum  of
Understanding  entered  into by PennCorp and the other  defendants  and the lead
plaintiffs  in the Class  Action Suit dated as of November 11, 1999 with respect
to the settlement of the Class Action Suit.

     57. "New Common Stock" means the  15,000,000  shares of common stock of the
Reorganized   Debtor   authorized   pursuant  to  the  Amended   Certificate  of
Incorporation.

     58. "Nominee" means any Beneficial  Holder whose securities were registered
or held of record in the name of his  broker,  dealer,  commercial  bank,  trust
company, savings and loan or other nominee.

     59.  "Non-Settling  Common  Stock  Claims"  mean all  Claims  arising  from
rescission of a purchase or sale of Common Stock or for damages arising from the
purchase  or sale of Common  Stock,  except  such Claims that are subject to the
Memorandum of Understanding.  Pursuant to Section 510(b) of the Bankruptcy Code,
the holders of Non- Settling Common Stock Claims are accorded the same treatment
as the holders of the Common Stock.

     60.  "Non-Settling  Old Note Claims" mean all Claims based on the causes of
action  asserted in the Class  Action  Suit held by those class  members who (a)
were members of the plaintiff class on the basis of their ownership of Old Notes
and (b) either (i) opted out of the plaintiff  class in the Class Action Suit or
(ii) do not  agree to a  settlement  based on the  terms  of the  Memorandum  of
Understanding. Pursuant to Section 510(b) of the Bankruptcy Code, the holders of
Non-Settling  Old Note Claims are accorded the same  treatment as the holders of
the General Unsecured Claims.

                                   - 5 -

<PAGE>

     61. "Old Note Claims"  means all Claims  arising from or related to the Old
Notes or the Old Note Indenture  (excluding the Class Action Suit Claims and the
Non-Settling Old Note Claims),  which Claims shall be deemed Allowed without the
need to file any proofs of Claim.

     62. "Old Notes" mean the 9.25% senior  subordinated  notes due 2003, issued
by PennCorp under the Old Note Indenture.

     63. "Old Note  Indenture"  means the  Indenture,  dated as of December  23,
1993, between PennCorp and HSBC Bank USA as trustee,  relating to the Old Notes,
as amended.

     64. "Old Note Indenture  Trustee" means HSBC Bank USA, as trustee under the
Old Note Indenture.

     65. "Other  Priority  Claims" mean any Claim accorded  priority in right of
payment under section 507(a) of the Bankruptcy  Code,  other than a Priority Tax
Claim or an Administrative Claim.

     66. "Other Secured Claims" mean,  collectively,  all Secured Claims against
the Debtor held by any Person or Entity,  other than Claims  classified in Class
2.

     67.   "PennCorp"  means  PennCorp   Financial   Group,   Inc.,  a  Delaware
corporation.

     68. "Person" means a person as defined in section 101(41) of the Bankruptcy
Code.

     69.  "Petition  Date" means the date on which the Debtor filed its petition
for relief commencing the Chapter 11 Case.

     70.  "Plan"  means this  Chapter 11 Plan of  Reorganization,  either in its
present form or as it may be altered,  amended,  modified or  supplemented  from
time  to time  in  accordance  with  its  terms,  the  Bankruptcy  Code  and the
Bankruptcy Rules.

     71. "Preferred Stock" means,  collectively,  $3.375  Convertible  Preferred
Stock of PennCorp and $3.50 Series II Convertible Preferred Stock of PennCorp.

     72.  "Prepetition Bank Credit Facility" means that certain Credit Agreement
dated March 12, 1997 by and among PennCorp,  the Lenders designated therein, the
Chase Manhattan Bank, the First National Bank of Chicago, and Nationsbank, N.A.,
as Managing  Agents,  Fleet National Bank,  Mellon Bank, N.A., Bank of Montreal,
CIBC  Inc.  and  Dresdner  Bank  AG,  as  Co-Agents  and the Bank of New York as
Administrative  Agent  together with all related notes,  certificates,  security
agreements,    mortgages,   pledges,   indemnities,    collateral   assignments,
undertakings,  guaranties, and other instruments and documents, as each may have
been amended or modified from time to time.

     73.  "Priority Tax Claim" means a Claim of a governmental  unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.

     74.  "Professionals"  means a Person or Entity (a)  employed  pursuant to a
Final Order in accordance  with sections 327 and 1103 of the Bankruptcy Code and
to be compensated for services rendered prior to the Effective Date, pursuant to
sections  327, 328,  329, 330 and 331 of the  Bankruptcy  Code, or (b) for which
compensation and reimbursement has been allowed by the Bankruptcy Court pursuant
to section 503(b)(4) of the Bankruptcy Code.

     75.  "Rapoport"  means Bernard  Rapoport,  an  individual  residing at 1200
Wooded Acres Drive, Waco, Texas 76710.

     76.  "Rapoport  Releasees"  means  Rapoport,  and  all  of  his  employees,
attorneys,  financial  advisors,  accountants,  investment  bankers,  agents and
representatives.

                                   - 6 -

<PAGE>

     77. "Rapoport /Sharpe Investment" means the terms and conditions  governing
the purchase and sale of the Rapoport/Sharpe  Shares pursuant to,  respectively,
(i) that certain  commitment  letter from  Rapoport to PennCorp  dated March 15,
2000 for the purchase of  1,600,000  shares of New Common  Stock,  and (ii) that
certain  commitment  letter from Sharpe to PennCorp dated March 15, 2000 for the
purchase of 240,000 shares of New Common Stock.

     78. "Rapoport/Sharpe Shares" means the 1,840,000 shares of New Common Stock
purchased by Rapoport and Sharpe pursuant to the Rapoport/Sharpe  Investment for
an aggregate purchase price of $23,000,000.

     79. "Reinsurance Transactions" means the reinsurance by each of SW Life and
SLT of all of their existing deferred annuity blocks of business as set forth in
that certain  Reinsurance  Agreement between SW Life and RGA Reinsurance Company
to be dated as of or about the Effective Date.

     80. "Reorganized Debtor" means the Debtor and Debtor in Possession,  or any
successor  thereto,  by merger,  consolidation,  or otherwise,  on and after the
Effective Date.

     81.  "Rights"  means the rights issued  pursuant to the Rights  Offering to
subscribe  for and to acquire in the  aggregate  1,960,000  shares of New Common
Stock for an aggregate purchase price of $24,500,000.

     82. "Rights Offering" means the terms and conditions governing the issuance
and  exercise of the Rights as described in Section  VI.B.5.  of the  Disclosure
Statement.

     83.  "Rights  Record  Date"  means the Voting  Record  Date as such term is
defined in the Disclosure Statement.

     84. "Schedules" mean the schedules of assets and liabilities,  schedules of
executory contracts,  and the statement of financial affairs Filed by the Debtor
pursuant to section 521 of the Bankruptcy  Code, the Official  Bankruptcy  Forms
and the Bankruptcy  Rules, as they may be amended and supplemented  from time to
time.

     85. "Secured Claim" means (a) a Claim that is secured by a lien on property
in which  the  Estate  has an  interest,  which  lien is  valid,  perfected  and
enforceable  under  applicable  law or by  reason of a Final  Order,  or that is
subject to setoff under section 553 of the Bankruptcy Code, to the extent of the
value of the Claim Holder's  interest in the Estate's  interest in such property
or to the extent of the amount subject to setoff,  as applicable,  as determined
pursuant to section 506(a) of the Bankruptcy  Code, or (b) a Claim Allowed under
this Plan as a Secured Claim.

     86.  "Securities Act" means the Securities Act of 1933, 15 U.S.C.  sections
77a-77aa, as now in effect or hereafter amended.

     87. "Settlement Fund" means the $9.0 million fund established in accordance
with the Memorandum of Understanding (the Debtor's contribution to which is $1.5
million),   together  with  any  interest   accrued  through  the  date  of  the
consummation of the settlement of the Class Action Suit.

     88. "Settling Members" means those members of the class on whose behalf the
Class Action Suit was instituted who are subject to a settlement pursuant to the
terms of the Memorandum of Understanding.

     89. "SFC" means Southwestern Financial  Corporation,  a wholly owned direct
subsidiary of PennCorp.

     90. "Sharpe" means John Sharpe, an individual residing at 2305 Cedar Spring
Road, Suite 410, Dallas, Texas 75201.

     91. "Sharpe Releasees" means Sharpe,  and all of his employees,  attorneys,
financial advisors, accountants, investment bankers, agents and representatives.

                                   - 7 -

<PAGE>

     92. "SLT" means Security Life and Trust Insurance  Company,  a wholly owned
indirect subsidiary of PennCorp.

     93. "Standby Purchase  Agreement" means that certain Letter Agreement dated
as of March 22, 2000 among PennCorp, Inverness and Vicuna, whereby Inverness and
Vicuna  have  agreed to  purchase  all New  Common  Stock as to which the Rights
associated  therewith  remain  unexercised  at  the  expiration  of  the  Rights
Offering.

     94. "SW Life" means  Southwestern  Life Insurance  Company,  a wholly owned
indirect subsidiary of PennCorp.

     95.  "Unimpaired  Claim"  means an  unimpaired  Claim within the meaning of
section 1124 of the Bankruptcy Code.

     96.  "Unimpaired  Class"  means an  unimpaired  Class within the meaning of
section 1124 of the Bankruptcy Code.

     97.  "Unofficial  Preferred  Shareholders'  Committee"  means  the  ad  hoc
committee formed by certain Holders of the Preferred Stock prior to the Petition
Date, consisting of AIG - Soundshore Partners, Camden Assets Management,  Forest
Investment  Management,  Highbridge  Capital  Management LLC,  Inverness/Phoenix
Capital LLC,  Executive  Capital Partners I, L.P.,  Brown's Dock,  L.L.C.,  Loeb
Partners,   Paloma  Securities  LLC,  Paloma  Strategic  Securities  Limited,  Q
Investments,  LP, Steadfast  Financial LLC, Vicuna Advisors L.L.C., W.G. Trading
and William M. McCormick..

     98. "Unofficial  Preferred  Shareholders'  Committee  Releasees" means each
member  of the  Unofficial  Preferred  Shareholders'  Committee,  as well as all
officers,  directors,  employees,  attorneys,  financial advisors,  accountants,
investment bankers, agents and representatives of each such member.

     99.  "Unsecured  Claim"  means any Claim  against  the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority Claim.

     100.  "Vicuna" means Vicuna Advisors,  L.L.C., a Delaware limited liability
company, in its capacity as investment manager to certain Delaware entities.

     101.  "Vicuna   Releasees"  means  all  officers,   directors,   employees,
attorneys,  financial  advisors,  accountants,  investment  bankers,  agents and
representatives of Vicuna and its affiliates.

                                 ARTICLE II.
                    ADMINISTRATIVE AND PRIORITY TAX CLAIMS

A.    Administrative Claims

      Subject  to the  provisions  of section  330(a) and 331 of the  Bankruptcy
Code,  each  Holder of an  Allowed  Administrative  Claim  will be paid the full
unpaid amount of such Allowed  Administrative  Claim in Cash on the later of the
Effective Date and the date such claim becomes an Allowed  Administrative Claim,
or  upon  such  other  terms  as may be  agreed  upon  by  such  Holder  and the
Reorganized  Debtor or otherwise upon order of the Bankruptcy  Court;  provided,
however, that Allowed Administrative Claims representing obligations incurred in
the ordinary  course of business or otherwise  assumed by the Debtor pursuant to
the Plan will be  assumed on the  Effective  Date and paid or  performed  by the
Reorganized  Debtor when due in accordance  with the terms and conditions of the
particular agreements governing such obligations.

                                   - 8 -

<PAGE>

B.    Professional Compensation

      Professionals  or other entities  asserting  Claims based on  professional
services  rendered  before  the  Effective  Date  must  File  and  serve  on the
Reorganized  Debtor, the Committee(s) and such other entities who are designated
by the Bankruptcy Rules, the Confirmation Order or other order of the Bankruptcy
Court an  application  for final  allowance  of such Claim no later than 60 days
after the Effective Date, provided,  however,  that Professionals engaged by the
Unofficial Preferred  Shareholders'  Committee need not file fee applications in
accordance with Article XII.C. of this Plan.  Objections to any applications for
final allowance of compensation by Professionals must be Filed and served on the
Reorganized  Debtor,  the  Committee(s) and the requesting party by the later of
(a) 90 days  after the  Effective  Date or (b) 30 days  after the  Filing of the
applicable  application.  To the extent necessary,  the Confirmation  Order will
amend and  supersede  any  previously  entered  orders of the  Bankruptcy  Court
regarding the payment of Claims by professionals in respect of services rendered
to the Debtor's estate.

C.    Priority Tax Claims

      On the Effective Date, each Holder of a Priority Tax Claim due and payable
on or prior to the  Effective  Date shall be paid Cash in an amount equal to the
amount of such Allowed  Claim,  or shall be paid on account of its Allowed Claim
on such other  terms as have been or may be agreed  upon by such  Holder and the
Debtor.  The amount of any  Priority  Tax Claim that is not an Allowed  Claim or
that is not otherwise due and payable on or prior to the Effective Date, and the
rights of the Holder of such Claim,  if any, to payment in respect thereof shall
(i) be determined in the manner in which the amount of such Claim and the rights
of the  Holder of such Claim  would have been  resolved  or  adjudicated  if the
Chapter 11 Case had not been  commenced,  (ii)  survive the  Effective  Date and
Consummation of the Plan as if the Chapter 11 Case had not been  commenced,  and
(iii) not be  discharged  pursuant to section 1141 of the  Bankruptcy  Code.  In
accordance  with  section  1124 of the  Bankruptcy  Code,  the Plan shall  leave
unaltered  the legal,  equitable,  and  contractual  rights of each  Holder of a
Priority Tax Claim.

                                 ARTICLE III.
                         CLASSIFICATION AND TREATMENT
                  OF CLASSIFIED CLAIMS AND EQUITY INTERESTS

A.    Summary

      The categories of Claims and Equity Interests listed below classify Claims
and Equity  Interests  for all  purposes,  including  voting,  confirmation  and
distribution  pursuant to the Plan and pursuant to sections 1122 and  1123(a)(1)
of the Bankruptcy Code. A Claim or Equity Interest shall be deemed classified in
a  particular  Class  only to the  extent  that  the  Claim or  Equity  Interest
qualifies within the description of that Class and shall be deemed classified in
a  different  Class to the  extent  that any  remainder  of such Claim or Equity
Interest  qualifies  within the description of such different  Class. A Claim or
Equity  Interest is in a particular  Class only to the extent that such Claim or
Equity  Interest  is Allowed  in that  Class and has not been paid or  otherwise
settled prior to the Effective Date.

      The classification of Claims and Equity Interests pursuant to this Plan is
as follows:

                                   - 9 -

<PAGE>

      Class                                  Status        Voting Rights
      -----                                  ------        -------------

      Class 1 -- Other Priority Claims       Unimpaired -- not entitled to vote
      Class 2 -- Bank  Secured  Claims       Unimpaired -- not entitled to vote
      Class 3 -- Other Secured  Claims       Unimpaired -- not entitled to vote
      Class 4 -- Old Notes                   Unimpaired -- not entitled to vote
      Class 5 -- General Unsecured Claims    Unimpaired -- not entitled to vote
      Class 6 -- Class Action Suit Claims    Unimpaired -- not entitled to vote
      Class 7 -- Interests of  Holders of
                 Preferred Stock             Impaired   -- entitled to vote
      Class 8 -- Common Equity Interests
                 and Opt-out Common
                 Stock Claims                Impaired   -- not entitled to vote

B.    Classification and Treatment of Claims and Equity Interests

      1.    Class 1 -- Other Priority Claims

            (a)  Classification: Class 1 consists of all Other Priority Claims.

            (b) Treatment:  The legal,  equitable and contractual  rights of the
Holders of Class 1 Claims are  unaltered by the Plan.  Unless the Holder of such
Claim and the Debtor and Unofficial Preferred Shareholders' Committee agree to a
different  treatment,  each Holder of an Allowed Class 1 Claim shall receive one
of the following alternative treatments, at the election of the Debtor:

                  (i) to the extent then due and owing on the Effective  Date,
            such Claim will be paid in full in Cash by the Reorganized Debtor;

                  (ii) to the  extent not due and owing on the  Effective  Date,
            such  Claim will be paid in full in Cash by the  Reorganized  Debtor
            when and as such Claim becomes due and owing in the ordinary  course
            of business; or

                  (iii) such Claim will be otherwise treated in any other manner
            so that such Claim shall otherwise be rendered  unimpaired  pursuant
            to section 1124 of the Bankruptcy Code.

            (c)  Voting:  Class 1 is not  impaired  and the  Holders  of Class 1
Claims are  conclusively  deemed to have  accepted the Plan  pursuant to section
1126(f) of the Bankruptcy Code. Therefore,  the Holders of Claims in Class 1 are
not entitled to vote to accept or reject the Plan.

      2.    Class 2 -- Bank Secured Claims

            (a)   Classification: Class 2 consists of the Bank Secured Claims.

            (b)  Treatment:  All  Bank  Secured  Claims  will  be  paid  by  the
Reorganized  Debtor in full in Cash on the Effective Date in accordance with the
terms of the Prepetition Bank Credit Facility

            (c)  Voting:  Class 2 is not  impaired  and the  Holders  of Class 2
Claims are  conclusively  deemed to have  accepted the Plan  pursuant to section
1126(f) of the Bankruptcy Code. Therefore,  the Holders of Claims in Class 2 are
not entitled to vote to accept or reject the Plan.

      3.    Class 3 -- Other Secured Claims

            (a)   Classification:  Class 3 consists of the Other Secured Claims.

            (b) Treatment: The legal, equitable and contractual  rights  of  the
Holders of Class 3 Claims are  unaltered by the Plan.  Unless the Holder of such
Claim and the Debtor and the Unofficial Preferred Shareholders'

                                   - 10 -

<PAGE>

Committee  agree to a different  treatment,  each  Holder of an Allowed  Class 3
Claim shall receive one of the following alternative treatments, at the election
of the Debtor:

                  (i)   the legal, equitable and  contractual  rights  to  which
            such Claim  entitles the Holder thereof shall be  unaltered  by  the
            Plan;

                  (ii) the Debtor shall  surrender all collateral  securing such
            Claim to the Holder thereof,  without  representation or warranty by
            or recourse against the Debtor or Reorganized Debtor; or

                  (iii) such Claim will be otherwise treated in any other manner
            so that such Claim shall otherwise be rendered  unimpaired  pursuant
            to section 1124 of the Bankruptcy Code.

            (c)  Voting:  Class 3 is not  impaired  and the  Holders  of Class 3
Claims are  conclusively  deemed to have  accepted the Plan  pursuant to section
1126(f) of the Bankruptcy Code. Therefore,  the Holders of Claims in Class 3 are
not entitled to vote to accept or reject the Plan.

      4.    Class 4 -- Old Notes Claims

            (a)   Classification:  Class 4 consists of the Claims of Holders  of
the Old Notes.

            (b) Treatment:  On the Effective Date, the  Reorganized  Debtor will
pay all Old  Notes  Claims in Cash at 101% of the  principal  amount of each Old
Note,  plus  accrued  and unpaid  interest  through  the  Effective  Date at the
non-default  contract rate,  plus any fees and expenses due and owing to the Old
Note Indenture Trustee under the terms of the Old Note Indenture.

            (c) Voting:  Class 4 is unimpaired and the Holders of Class 4 Claims
are conclusively deemed to have accepted the Plan pursuant to section 1126(f) of
the  Bankruptcy  Code.  Therefore,  the  Holders  of  Claims  in Class 4 are not
entitled to vote to accept or reject the Plan.

      5.    Class 5 -- General Unsecured Claims

            (a)  Classification:  Class 5  consists  of the Claims of Holders of
General Unsecured Claims, including the Non-Settling Old Note Claims.

            (b) Treatment:  The legal,  equitable and contractual  rights of the
Holders of Class 5 Claims are  unaltered by the Plan.  Unless the Holder of such
Claim and the Debtor and the Unofficial Preferred  Shareholders' Committee agree
to a different treatment,  each Holder of an Allowed Class 5 Claim shall receive
one of the following alternative treatments, at the election of the Debtor:

                  (i)   to the extent then due and owing on the Effective Date,
            such Claim will be paid in full in Cash by the Reorganized Debtor;

                  (ii) to the  extent not due and owing on the  Effective  Date,
            such  Claim will be paid in full in Cash by the  Reorganized  Debtor
            when and as such Claim becomes due and owing in the ordinary  course
            of business; or

                  (iii) such Claim will be otherwise treated in any other manner
            so that such Claim shall otherwise be rendered  unimpaired  pursuant
            to section 1124 of the Bankruptcy Code.

            (c)  Voting:  Class 5 is not  impaired  and the  Holders  of Class 5
Claims are  conclusively  deemed to have  accepted the Plan  pursuant to section
1126(f) of the Bankruptcy Code. Therefore,  the Holders of Claims in Class 5 are
not entitled to vote to accept or reject the Plan.

                                   - 11 -

<PAGE>

      6.    Class 6 -- Class Action Suit Claims

            (a)  Classification:  Class 6 consists of the Claims of the Settling
Members of the class on whose behalf the Class Action Suit was instituted  based
on the causes of action asserted in the Class Action Suit.

            (b)  Treatment:  Unless  the Holder of such Claim and the Debtor and
the Unofficial Preferred Shareholders' Committee agree to a different treatment,
each  Holder of an  Allowed  Class 6 Claim  shall  receive  its  portion  of the
Settlement   Fund,  as  determined   in  accordance   with  the   Memorandum  of
Understanding  or as provided by a Final Order of the court having  jurisdiction
over the Class Action Suit.

            (c) Voting:  Class 6 is unimpaired and the Holders of Class 6 Claims
are conclusively deemed to have accepted the Plan pursuant to section 1126(f) of
the  Bankruptcy  Code.  Therefore,  the  Holders  of  Claims  in Class 6 are not
entitled to vote to accept or reject the Plan.

      7.    Class 7 -- Interests of Holders of Preferred Stock

            (a)   Classification: Class 7 consists of all Interests of  Holders
of Preferred Stock.

            (b) Treatment: On the Effective Date, each Holder of Preferred Stock
shall  receive  one share of New  Common  Stock and one Right for each  share of
Preferred Stock then held by such Holder.  All Preferred Stock issued before the
Petition Date will be canceled.

            (c)   Voting: Class 7  is  impaired  and  the  Holders  of  Class  7
Interests are entitled to vote to accept or reject the Plan.

      8.    Class 8 -- Common Equity Interests  and  Non-Settling  Common  Stock
Claims

            (a) Classification:  Class 8 consists of all Interests of Holders of
Equity  Interests other than Preferred Stock and all  Non-Settling  Common Stock
Claims.

            (b)   Treatment: On the Effective Date, the members of Class 8 shall
neither  receive any  distributions  nor retain any property under the Plan. All
Common Stock issued before the Petition Date will be canceled.

            (c) Voting:  Class 8 is impaired,  but because no distributions will
be made to Holders of Class 8 Equity  Interests or Opt-out  Common Stock Claims,
nor will such Holders retain any property, such Holders are deemed to reject the
Plan pursuant to section 1126(g) of the Bankruptcy Code. Class 8 is not entitled
to vote to accept or reject the Plan.

C.    Special Provision Governing Unimpaired Claims

      Except as otherwise provided in the Plan, including as provided in Article
X, nothing under the Plan shall affect the Debtor's or the Reorganized  Debtor's
rights in respect of any Unimpaired Claims,  including,  but not limited to, all
rights in respect of legal and equitable  defenses to or setoffs or  recoupments
against such Unimpaired Claims or the Holders thereof.

                                 ARTICLE IV.
                     ACCEPTANCE OR REJECTION OF THE PLAN

A.    Voting Classes

      Each Holder of an Allowed Equity  Interest in Class 7 shall be entitled to
vote to accept or reject the Plan.

                                   - 12 -

<PAGE>

B.    Acceptance by Impaired Classes

      An Impaired Class of Equity  Interests shall have accepted the Plan if the
Holders  (other  than  any  Holder  designated  under  section  1126(e)  of  the
Bankruptcy  Code)  of at  least  two-thirds  in  amount  of the  Allowed  Equity
Interests actually voting in such Class have voted to accept the Plan.

C.    Presumed Acceptance of Plan

      Classes 1, 2, 3, 4, 5 and 6 are unimpaired under the Plan, and, therefore,
conclusively  are presumed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code.

D.    Presumed Rejection of Plan

      Class 8 is impaired and shall receive no distributions, and, therefore, is
presumed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy
Code.

E.    Non-Consensual Confirmation

      The Debtor will seek Confirmation of the Plan under section 1129(b) of the
Bankruptcy Code in view of the deemed rejection of the Plan by Class 8.

                                  ARTICLE V.
                     MEANS FOR IMPLEMENTATION OF THE PLAN

A.    Continued Corporate Existence and Vesting of  Assets  in  the  Reorganized
Debtor

      The  Reorganized  Debtor shall  continue to exist after the Effective Date
with all the powers of a corporation under the laws of the State of Delaware and
without prejudice to any right to alter or terminate such existence  (whether by
merger or otherwise)  under such applicable state law. As of the Effective Date,
except as otherwise  provided in the Plan,  all property of the Estate,  and any
property acquired by the Debtor or the Reorganized  Debtor under the Plan, shall
vest in the Reorganized Debtor, free and clear of all Claims, liens, charges, or
other  encumbrances,  except  as  those  created  pursuant  to the  Exit  Credit
Facility.  On and after the Effective Date, the  Reorganized  Debtor may operate
its  business  and may use,  acquire or dispose of property  and  compromise  or
settle any Claims,  without  supervision or approval by the Bankruptcy Court and
free of any restrictions of the Bankruptcy Code or Bankruptcy Rules,  other than
those restrictions  expressly imposed by the Plan and the Confirmation Order. In
accordance with section 1109(b) of the Bankruptcy Code,  nothing in this Article
V shall  preclude any party in interest  from  appearing  and being heard on any
issue in the Chapter 11 Case.

B.    Cancellation of Notes, Instruments and Common Stock

      On the  Effective  Date,  except to the extent  provided  otherwise in the
Plan,  (i) all notes,  instruments,  certificates,  and other  documents  of the
Debtor  evidencing the Other Secured Claims and Prepetition Bank Secured Claims,
(ii) the Old Notes, and (iii) all Equity  Interests,  including all Common Stock
and  Preferred  Stock,  shall be  canceled  and the  obligations  of the  Debtor
thereunder,  shall be discharged.  On the Effective  Date,  except to the extent
provided  otherwise in the Plan, any indenture relating to any of the foregoing,
including,  without  limitation,  the Old Note Indenture,  shall be deemed to be
canceled,  and  the  obligations  of the  debtors  thereunder,  except  for  the
obligation to indemnify the Old Notes  Indenture  Trustee,  shall be discharged;
provided however,  that the indenture or other agreement that governs the rights
of the  Holder of a Claim and that is  administered  by the Old Notes  Indenture
Trustee, an agent or servicer shall,  continue in effect solely for the purposes
of (i) allowing such Old Notes Indenture Trustee,  agent or servicer to make the
distributions  to be made on  account  of such  Claims  under  the Plan and (ii)
permitting  such Old Note Indenture  Trustee,  agent or servicer to maintain any
rights or liens it may have for fees,  costs,  and expenses under such indenture

                                   - 13 -

<PAGE>

or other  agreement.  Upon  payment in full of the fees and  expenses of the Old
Notes Indenture Trustee pursuant to Articles III.B.4 and VII.B hereof, the liens
(if any) of the Old Notes Indenture Trustee shall terminate.

C.    Issuance of New Securities; Execution of Related Documents

      On the Effective Date, the Reorganized  Debtor shall issue all securities,
notes,  instruments,  certificates,  and other  documents  required to be issued
pursuant to the Plan,  including,  without limitation,  the Exit Credit Facility
and the New Common Stock,  each of which shall be distributed as provided in the
Plan. The  Reorganized  Debtor shall execute and deliver such other  agreements,
documents and instruments,  as are required to be executed pursuant to the terms
of the Plan, the Exit Credit Facility,  the Standby  Purchase  Agreement and the
Rapoport/Sharpe Investment.

D.    Terms of the Rights Offering

      Issuer:           Reorganized Debtor.
      ------

      Underlying
      Security:         New Common Stock, par value $.01 per share.
      --------

      Rights            Each Holder of  Preferred Stock as of the Rights Record
      per Share:        Date will receive one Right for each share of Preferred
      ---------         Stock.

      Exercise:         .3787  shares of New  Common  Stock  will be issued  for
      --------          each Right that is exercised. The election  to  exercise
                        each Right shall  be made at the  time  the  Holders  of
                        Class 7 Equity Interests vote to accept  or  reject  the
                        Plan.

      Aggregate Shares
      of New Common
      Stock Offered:    1,960,000
      -------------

      Transfers:        The Rights will not be transferable.
      ---------

      Subscription
      Price:            $12.50 per share of New Common Stock.
      -----

      Standby Purchase
      Agreement:        On the Effective Date, Inverness and Vicuna, pursuant to
      ---------         the  terms  of  the  Standby  Purchase  Agreement,  will
                        purchase or cause to be purchased and fully exercise any
                        unexercised Rights.

E.    Terms of the Rapoport/Sharpe Investment

      Issuer:           Reorganized Debtor.
      ------

      Security:         New Common Stock, par value $.01 per share.
      --------

      Aggregate Shares
      of New Common
      Stock Offered:    1,840,000
      -------------

      Subscription
      Price:            $12.50 per share of New Common Stock.
      -----

      Listing:          The Debtor will use  reasonable  efforts  to  cause  the
      -------           Rapoport/Sharpe  Shares  to  be  listed  on  a  national
                        securities exchange or the NASDAQ National Market.

                                   - 14 -

<PAGE>

      Registration
      Right:            The   Rapoport/Sharpe   Investment   will  be   effected
      -----             through  a  private  placement  under  Rule  506  of the
                        Securities  Act ,  and,  in  connection  therewith,  the
                        Debtor will grant each of Rapoport  and Sharpe the right
                        to cause  the  Reorganized  Debtor to  register  the New
                        Common Stock  purchased by him, in each case,  beginning
                        six months after the Effective Date.

F.    Terms of the New Common Stock

      Authorization:    The  Amended  Certificate  of   Incorporation   of   The
      -------------     Reorganized  Debtor  shall  authorize  the  issuance  of
                        15,000,000  shares  of  New  Common  Stock.    Of   such
                        authorized shares, 9,059,000 shares  shall  be  retained
                        and issued directly under the Plan (i) to the Holders of
                        Preferred Stock, (ii) upon the exercise  of  the  Rights
                        and/or the  purchase  of  New  Common  Stock  under  the
                        Standby Purchase Agreement, (iii) pursuant to the  terms
                        of the Rapoport/Sharpe Investment,  and  (iv)  to  Msrs.
                        Steve Johnson and David Little pursuant to the Executive
                        Agreements.   640,000  shares  shall  be  reserved   for
                        issuance  to  the  Reorganized  Debtor's  officers   and
                        directors. Except as otherwise provided by the Plan,  no
                        additional shares of New  Common  Stock  may  be  issued
                        other than as directed by the board of directors of  the
                        Reorganized Debtor after the Effective Date.

      Par Value:        The New Common Stock shall have a par value of $0.01 per
      ---------         share.

      Attributes:       The New Common  Stock shall have such  attributes  as to
      ----------        voting, dividends,  liquidation and otherwise as are set
                        forth in the Amended Certificate of Incorporation and as
                        are otherwise provided by Delaware law.

      Listing:          The Reorganized Debtor will use  reasonable  efforts  to
      -------           cause the New Common Stock to be listed  on  a  national
                        securities exchange or the NASDAQ National Market.

G.    Corporate Governance, Directors and Officers, and Corporate Action

      1.    Amended Certificate of Incorporation

      On the  Effective  Date,  the  Reorganized  Debtor  will file its  Amended
Certificate  of  Incorporation  with the  Secretary  of the State of Delaware in
accordance with sections 102 and 103 of the Delaware  General  Corporation  Law.
The Amended Certificate of Incorporation will, among other things,  prohibit the
issuance  of  nonvoting  equity  securities  to the extent  required  by section
1123(a) of the  Bankruptcy  Code,  provide  for at least  15,000,000  authorized
shares of New Common Stock, and authorize the issuance of preferred stock. After
the Effective  Date,  the  Reorganized  Debtor may amend and restate its Amended
Certificate of Incorporation and other constituent documents as permitted by the
Delaware General Corporation Law.

      2.    Directors and Officers of the Reorganized Debtor

      Subject to any  requirement  of  Bankruptcy  Court  approval,  pursuant to
section  1129(a)(5),  the Debtor and/or the Unofficial  Preferred  Shareholders'
Committee will disclose,  on or prior to the Confirmation Date, the identity and
affiliations  of any Person  proposed to serve on the initial board of directors
of The  Reorganized  Debtor.  To the extent any such Person is an  Insider,  the
nature  of any  compensation  for  such  Person  will  also  be  disclosed.  The
classification  and  composition  of the board of directors  shall be consistent
with the Amended Certificate of Incorporation and as set forth in the Disclosure
Statement.  Each  such  director  and  officer  shall  serve  from and after the
Effective   Date   pursuant  to  the  terms  of  the  Amended   Certificate   of
Incorporation,  other constituent documents and the Delaware General Corporation
Law.  The  Reorganized  Debtor  will  have a  seven-person  board  of  directors
consisting initially of the following  designations:  (1) Bernard Rapoport,  (2)
James C. Comis III, (3) John T, Sharpe, (4) Robert N. Sheehy, Jr., (5) Larry  D.

                                   - 15 -

<PAGE>

Jaynes, and (6) Steve R. Johnson. On the Effective Date, one vacancy will remain
on the  Reorganized  Debtor's  board of directors  that may or may not be filled
after  the  Effective  Date  but  prior  to  the  next  annual  meeting  of  the
shareholders of the Reorganized Debtor.

      3.    Corporate Action

      On the  Effective  Date,  the  adoption  of  the  Amended  Certificate  of
Incorporation  and of new By-laws,  the  selection of directors and officers for
the  Reorganized  Debtor,  and all  actions  contemplated  by the Plan  shall be
authorized and approved in all respects (subject to the provisions of the Plan).
All matters  provided for in the Plan  involving the corporate  structure of the
Debtor or the  Reorganized  Debtor,  and any  corporate  action  required by the
Debtor or the Reorganized Debtor in connection with the Plan, shall be deemed to
have occurred and shall be in effect,  without any requirement of further action
by the security holders or directors of the Debtor or the Reorganized Debtor. On
the Effective  Date,  the  appropriate  officers and members of the  Reorganized
Debtor  and  members of the board of  directors  of the  Reorganized  Debtor are
authorized and directed to issue, execute and deliver the agreements, documents,
securities and instruments contemplated by the Plan in the name of and on behalf
of the Reorganized Debtor.

H.    Sources of Cash for Plan Distribution

      All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash  balances,  the  operations of the
Debtor  or  Reorganized  Debtor,  proceeds  of the  Extraordinary  Distribution,
proceeds  of the  Rights  Offering  and/or of the  Standby  Purchase  Agreement,
proceeds of the  Rapoport/Sharpe  Investment,  and  post-confirmation  borrowing
under  available  facilities  of the  Debtor or  Reorganized  Debtor  including,
without  limitation,  the Exit Credit Facility.  The Reorganized Debtor may also
make such  payments  using Cash received  from  principal and interest  payments
under surplus notes and advances or dividends from its subsidiaries.

I.    Change of Corporate Name

      On the Effective  Date,  the Debtor's  corporate  name shall be changed to
"Southwestern  Life  Holdings,  Inc."  Such  change of  corporate  name shall be
effected by  operation of section 303 of the Delaware  General  Corporation  Law
without effecting any corporate action otherwise required thereby.

                                 ARTICLE VI.
                       TREATMENT OF EXECUTORY CONTRACTS
                             AND UNEXPIRED LEASES

A.    Assumption of Executory Contracts and Unexpired Leases

      Immediately  prior to the  Effective  Date,  all  executory  contracts  or
unexpired  leases of the  Debtor  (including,  to the  extent  applicable,  that
certain Release and Indemnity Agreement dated December 24, 1998 and that certain
Escrow  Agreement  dated January 18, 2000) will be deemed  assumed in accordance
with the provisions and  requirements of sections 365 and 1123 of the Bankruptcy
Code except those  executory  contracts and unexpired  leases that (1) have been
rejected by order of the  Bankruptcy  Court,  (2) are the subject of a motion to
reject  pending on the Effective  Date, (3) are identified on a list to be Filed
with the Bankruptcy Court on or before the Confirmation Date, as to be rejected,
or (4) are rejected pursuant to the terms of the Plan. Entry of the Confirmation
Order by the Bankruptcy Court shall constitute  approval of such assumptions and
rejections pursuant to sections 365(a) and 1123 of the Bankruptcy Code.

B.    Claims Based on Rejection of Executory Contracts or Unexpired Leases

      All proofs of claim with respect to Claims  arising from the  rejection of
executory  contracts  or  unexpired  leases,  if any,  must be  Filed  with  the
Bankruptcy  Court  within sixty (60) days after the date of entry of an order of
the  Bankruptcy  Court  approving  such  rejection.  Any Claims arising from the
rejection  of an  executory  contract or  unexpired  lease not Filed within such
times will be forever  barred from  assertion  against the Debtor or Reorganized
Debtor, its

                                   - 16 -

<PAGE>

estate and property unless otherwise ordered by the Bankruptcy Court or provided
in this Plan, all such Claims for which proofs of claim are required to be Filed
will be,  and will be  treated  as,  General  Unsecured  Claims  subject  to the
provisions of Article VIII hereof.

C.    Cure of Defaults for Executory Contracts and Unexpired Leases Assumed

      Any monetary amounts by which each executory  contract and unexpired lease
to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section  365(b)(1) of the  Bankruptcy  Code, by payment of the default amount in
Cash on the  Effective  Date or on  such  other  terms  as the  parties  to such
executory  contracts or unexpired  leases may otherwise agree. In the event of a
dispute regarding:  (1) the amount of any cure payments,  (2) the ability of the
Reorganized  Debtor or any  assignee to provide  "adequate  assurance  of future
performance"  (within the meaning of section 365 of the  Bankruptcy  Code) under
the  contract  or lease to be assumed,  or (3) any other  matter  pertaining  to
assumption,  the cure payments  required by section  365(b)(1) of the Bankruptcy
Code shall be made  following  the entry of a Final Order  resolving the dispute
and approving the assumption.

D.    Indemnification of Directors, Officers and Employees

      The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of their  directors,  officers
or employees by reason of such Person's or Entity's service in such capacity, or
as a director,  officer,  member or employee of any other  corporation  or legal
entity,  to the extent  provided in the  Debtor's  constituent  documents,  by a
written agreement with the Debtor or the Delaware General Corporation Law, shall
be deemed and  treated as  executory  contracts  that are  assumed by the Debtor
pursuant to the Plan and section 365 of the Bankruptcy  Code as of the Effective
Date. Accordingly,  such indemnification obligations shall be treated as General
Unsecured  Claims,  and shall survive  unimpaired and unaffected by entry of the
Confirmation Order,  irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date.

E.    Compensation and Benefit Programs

      Except as otherwise  expressly  provided  hereunder,  all  employment  and
severance  policies,  and all  compensation  and benefit  plans,  policies,  and
programs of the Debtor  applicable to its employees,  retirees and  non-employee
directors and the employees and retirees of its subsidiaries, including, without
limitation,  all savings plans,  retirement plans, health care plans, disability
plans, severance benefit plans, incentive plans, and life, accidental death, and
dismemberment  insurance plans are treated as executory contracts under the Plan
and on the Effective Date will be assumed pursuant to the provisions of sections
365 and 1123 of the Bankruptcy Code.

                                 ARTICLE VII.
                      PROVISIONS GOVERNING DISTRIBUTIONS

A.    Distributions for Claims Allowed as of the Effective Date

      1. Except as  otherwise  provided in this Article VII or as may be ordered
by the  Bankruptcy  Court,  distributions  to be made on the  Effective  Date on
account of Claims and Equity Interests that are Allowed as of the Effective Date
and are  entitled to receive  distributions  under the Plan shall be made on the
Effective Date, or as soon as practicable  thereafter.  Distributions on account
of Claims and Equity  Interests  that become  Allowed  Claims or Allowed  Equity
Interests  after the Effective Date shall be made pursuant to Articles VII.C and
VIII.C below.

      2. For  purposes  of  determining  the  accrual of  interest  or rights in
respect of any other payment from and after the Effective  Date, the Exit Credit
Facility  and the New Common  Stock to be issued  under the Plan shall be deemed
issued  as of the  Effective  Date  regardless  of the  date on  which  they are
actually  dated,  authenticated  or  distributed;  provided,  however,  that the
Reorganized  Debtor shall withhold any actual payment until such distribution is
made and no interest  shall accrue or otherwise be payable on any such  withheld
amounts.

                                   - 17 -

<PAGE>

B.    Distributions by the Reorganized Debtor; Distributions with Respect to Old
      Notes

      Except  as  provided  herein,   the  Reorganized  Debtor  shall  make  all
distributions required under the Plan. Notwithstanding the provisions of Article
V.B above regarding the  cancellation  of the Old Note  Indenture,  the Old Note
Indenture  shall  continue  in effect to the extent  necessary  to allow the Old
Notes  Indenture  Trustee  to receive  Cash on behalf of the  Holders of the Old
Notes and make distributions pursuant to the Plan on account of the Old Notes as
agent for the  Reorganized  Debtor.  The Old Notes Indenture  Trustee  providing
services  related to  distributions  to the  Holders of Allowed  Old Note Claims
shall receive,  from the Reorganized  Debtor,  reasonable  compensation for such
services and  reimbursement of reasonable  expenses  incurred in connection with
such services and upon the  presentation of invoices to the Reorganized  Debtor.
These payments shall be made on terms agreed to with the Reorganized Debtor.

C.    Delivery and Distributions and Undeliverable or Unclaimed Distributions

      1.    Delivery of Distributions in General

      Distributions  to Holders of Allowed Claims and Allowed  Equity  Interests
shall be made at the  address of the Holder of such Claim or Equity  Interest as
indicated on records of the Debtor.  Except as otherwise provided by the Plan or
the Bankruptcy Code with respect to undeliverable  distributions,  distributions
to  Holders  of Bank  Secured  Claims,  and Old  Note  Claims  shall  be made in
accordance  with  the  provisions  of the  applicable  indenture,  participation
agreement,  letter of  transmittal,  loan  agreement or analogous  instrument or
agreement,  and  distributions  will be  made to  Holders  of  record  as of the
Distribution Record Date.

      2.    Undeliverable Distributions

            (a) Holding of Undeliverable Distributions.  If any Allowed Claim or
Equity Interest Holder's  distribution is returned to the Reorganized  Debtor as
undeliverable,  no further distributions shall be made to such Holder unless and
until  the   Reorganized   Debtor  is  notified  in  writing  of  such  Holder's
then-current address. Undeliverable distributions shall remain in the possession
of the  Reorganized  Debtor  pursuant to this Article VII.C until such time as a
distribution  becomes  deliverable.  Undeliverable Cash shall not be entitled to
any interest, dividends or other accruals of any kind.

            (b) After Distributions Become Deliverable. Within 20 days after the
end of each  calendar  quarter  following the Effective  Date,  the  Reorganized
Debtor shall make all distributions that become deliverable during the preceding
calendar quarter.

            (c) Failure to Claim  Undeliverable  Distributions.  In an effort to
ensure that all holders of valid claims receive their  allocated  distributions,
the  Reorganized  Debtor  will  maintain  a listing  of  unclaimed  distribution
holders.  Any Holder of an Allowed Claim or Equity Interest that does not assert
a claim pursuant to the Plan for an undeliverable distribution within five years
after  the  Effective   Date  shall  have  its  Claim  for  such   undeliverable
distribution  discharged  and shall be forever  barred from  asserting  any such
Claim against the  Reorganized  Debtor or its property.  In such cases:  (i) any
Cash held for  distribution  on account of such Claims  shall be property of the
Reorganized  Debtor, free of any restrictions  thereon;  and (ii) any New Common
Stock  held for  distribution  on  account  of such  Equity  Interests  shall be
canceled and of no further force or effect.  Nothing contained in the Plan shall
require  the  Reorganized  Debtor to  attempt to locate any Holder of an Allowed
Claim or Allowed Equity Interest.

            (d) Compliance with Tax  Requirements.  In connection with the Plan,
to the extent  applicable,  the  Reorganized  Debtor  shall  comply with all tax
withholding and reporting  requirements  imposed on it by any governmental unit,
and all distributions  pursuant to the Plan shall be subject to such withholding
and reporting requirements.

                                   - 18 -

<PAGE>

D.    Distribution Record Date

      As of the close of business on the Distribution  Record Date, the transfer
registers  for the Old Notes and for the  Preferred  Stock as  maintained by the
Debtor,  the Old Notes Indenture Trustee,  or their respective agents,  shall be
closed and there  shall be no further  changes in the Record  Holders of any Old
Notes or  Preferred  Stock.  Moreover,  the  Reorganized  Debtor  shall  have no
obligation  to  recognize  the  transfer  of any Old  Notes or  Preferred  Stock
occurring  after the  Distribution  Record  Date,  and shall be entitled for all
purposes  herein to recognize  and deal only with those  Holders of record as of
the close of business on the Distribution Record Date.

E.    Timing and Calculation of Amounts to be Distributed

      Unless  otherwise  provided for in Section III of the Plan or agreed to by
the  Holder of a Claim or Equity  Interest  and the  Debtor  and the  Unofficial
Preferred  Shareholders'  Committee,  on the Effective  Date,  each Holder of an
Allowed Claim and Allowed  Equity  Interest shall receive the full amount of the
distributions  that the Plan  provides  for Allowed  Claims and  Allowed  Equity
Interests  in the  applicable  Class.  Beginning on the date that is 20 calendar
days after the end of the calendar  quarter  following the Effective Date and 20
calendar days after the end of each calendar quarter  thereafter,  distributions
shall also be made,  pursuant to Article  VIII.C.  below, to Holders of Disputed
Claims or Disputed  Equity  Interests  in any such Class whose  Claims or Equity
Interests were allowed  during the preceding  calendar  quarter.  Such quarterly
distributions  shall  also be in the full  amount  that the  Plan  provides  for
Allowed Claims and Allowed Equity Interests in the applicable Class.

F.   No Fractional Shares

      No  fractional  shares of New Common Stock will be issued.  In the event a
Holder of an Allowed Class 7 Equity  Interest is entitled to  distribution  of a
fraction of one share of New Common  Stock,  the actual  issuance will reflect a
rounding of such fraction down to the nearest whole share.

G.    Setoffs

      The Reorganized Debtor may, pursuant to section 553 of the Bankruptcy Code
or  applicable  non-bankruptcy  law,  set off against any Allowed  Claim and the
distributions  to be made  pursuant to the Plan on account of such Claim (before
any  distribution  is made on account of such  Claim),  the  claims,  rights and
causes of action of any nature  that the Debtor or  Reorganized  Debtor may hold
against the Holder of such Allowed Claim;  provided,  however,  that neither the
failure to effect such a setoff nor the allowance of any Claim  hereunder  shall
constitute a waiver or release by the Debtor or  Reorganized  Debtor of any such
claims,  rights and causes of action that the Debtor or  Reorganized  Debtor may
possess against such Holder.

H.    Surrender of Canceled Instruments or Securities

      Except as set forth in subsection VII.I below, as a condition precedent to
receiving any  distribution  pursuant to the Plan on account of an Allowed Claim
or Allowed Equity  Interest  evidenced by the  instruments,  securities or other
documentation  canceled  pursuant to Article V.B above, the Holder of such Claim
or Equity Interest shall tender the applicable instruments,  securities or other
documentation  evidencing  such  Claim or  Equity  Interest  to the  Reorganized
Debtor.  Any Cash or New Common Stock to be distributed  pursuant to the Plan on
account of any such Claim or Equity Interest shall,  pending such surrender,  be
treated as an undeliverable distribution pursuant to Article VII.C above.

      1.    Surrender of Instruments

      Each  Holder of (a) an Old Note  Claim and (b)  Equity  Interest  based on
Preferred  Stock  shall  tender  its Old  Note  relating  to such  Claim  or any
certificate  relating  to its  Preferred  Stock  to the  Reorganized  Debtor  in
accordance  with  written  instructions  to be provided  to such  Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date. Such
instructions  shall specify that  delivery of such Old Note or such  certificate
will be effected,  and risk of loss and title  thereto will pass,  only upon the
proper  delivery  of such  Old  Notes  or such  certificates  with a  letter  of
transmittal in accordance with such instructions.  All surrendered Old Notes and
Preferred Stock certificates shall be marked as canceled.

                                   - 19 -

<PAGE>

      2.    Failure to Surrender Canceled Instruments

      Any Holder of Old Notes or  Preferred  Stock that fails to surrender or is
deemed to have failed to surrender the applicable Old Notes or certificates  for
Preferred  Stock required to be tendered  hereunder  within five years after the
Effective Date shall have its Claim for a  distribution  pursuant to the Plan on
account  of such Old Note or  Preferred  Stock  discharged  and shall be forever
barred  from  asserting  any such Claim  against the  Reorganized  Debtor or its
property.  In such  cases,  any Cash or  shares  of New  Common  Stock  held for
distribution  on account of such Claim  shall be  disposed  of  pursuant  to the
provisions set forth above in Article VII.C.

I.    Lost, Stolen, Mutilated or Destroyed Securities

      In addition to any requirements  under the Old Note Indenture or any other
agreement  (including the Prepetition  Bank Credit Facility,  if required),  any
Holder of a Claim or Equity  Interest  evidenced  by an Old Note,  a note issued
under the Prepetition  Bank Credit Facility or a certificate for Preferred Stock
that  has  been  lost,  stolen,   mutilated  or  destroyed  shall,  in  lieu  of
surrendering  such Old Note,  a note issued  under the  Prepetition  Bank Credit
Facility  or a  certificate  for  Preferred  Stock,  deliver to the  Reorganized
Debtor:  (1) an affidavit of loss  reasonably  satisfactory  to the  Reorganized
Debtor or the Old Notes  Indenture  Trustee,  as  applicable,  setting forth the
unavailability  of note or  instrument;  and (2)  such  additional  security  or
indemnity as may reasonably be required by the  Reorganized  Debtors to hold the
Reorganized Debtor or the Old Notes Indenture Trustee,  as applicable,  harmless
from any damages, liabilities or costs incurred in treating such individual as a
Holder of an Allowed Claim or Allowed Equity Interest. Upon compliance with this
Article  VII.I by a Holder of a Claim or  Equity  Interest  evidenced  by an Old
Note, a note issued under the Prepetition  Bank Credit Facility or a certificate
for  Preferred  Stock,  such Holder shall,  for all purposes  under the Plan, be
deemed to have surrendered such note or instrument.

                                ARTICLE VIII.
                   PROCEDURES FOR RESOLVING DISPUTED CLAIMS

A.    Prosecution of Objections to Claims

      1. Holders of Claims and Equity Interests need not file proofs of Claim or
Equity  Interest  with the  Bankruptcy  Court and shall be subject to Bankruptcy
Court  process  only to the  extent  provided  in the  Plan.  On and  after  the
Consummation Date, except as otherwise provided herein, all Claims shall be paid
in the  ordinary  course of business of the  Reorganized  Debtor.  If the Debtor
disputes any Claim  (including  any  Administrative  Claim,  Priority Tax Claim,
Other Secured Claim,  General Unsecured Claim, Opt-out Old Note Claim or Opt-out
Common Stock Claim), such dispute shall be determined,  resolved or adjudicated,
as the  case  may  be,  in a  manner  as if the  Chapter  11 Case  has not  been
commenced.  The Debtor may elect, at its sole option (upon consultation with the
Unofficial Preferred  Shareholders'  Committee),  to object under Section 502 of
the  Bankruptcy  Code with  respect  to any  proof of Claim or Equity  Interest,
provided,  however, that the Debtor's failure to object to any proof of Claim or
Equity  Interest shall not  constitute a waiver,  release or any admission as to
validity with respect to the underlying Claim or Equity Interest.

      2. After the  Confirmation  Date,  the Debtor and the  Reorganized  Debtor
shall have the  exclusive  authority  to File  objections,  settle,  compromise,
withdraw or litigate to judgment objections to Claims or Equity Interests.  From
and after the  Confirmation  Date,  the  Debtor and the  Reorganized  Debtor may
settle or compromise  any Disputed  Claim or Disputed  Equity  Interest  without
approval of the Bankruptcy Court.

B.    Estimation of Claims

      The Debtor or the  Reorganized  Debtor may, at any time,  request that the
Bankruptcy  Court  estimate any  contingent or  unliquidated  Claim  pursuant to
section  502(c) of the Bankruptcy  Code  regardless of whether the Debtor or the
Reorganized  Debtor  has  previously  objected  to such  Claim  or  whether  the
Bankruptcy Court has ruled on any such objection,  and the Bankruptcy Court will
retain  jurisdiction  to  estimate  any  Claim  at any  time  during  litigation
concerning  any  objection  to any Claim,  including  during the pendency of any
appeal relating to any such objection. In the event that  the  Bankruptcy  Court

                                   - 20 -

<PAGE>

estimates any  contingent or  unliquidated  Claim,  that  estimated  amount will
constitute  either the allowed  amount of such Claim or a maximum  limitation on
such Claim,  as  determined by the  Bankruptcy  Court.  If the estimated  amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized Debtor
may elect to  pursue  any  supplemental  proceedings  to object to any  ultimate
payment on such Claim. All of the  aforementioned  Claims objection,  estimation
and resolution  procedures are cumulative and not  necessarily  exclusive of one
another.  Claims  may  be  estimated  and  subsequently  compromised,   settled,
withdrawn or resolved by any mechanism approved by the Bankruptcy Court.

C.    Payments and Distributions on Disputed Claims or Interests

      Notwithstanding  any  provision  in the Plan to the  contrary,  except  as
otherwise agreed by the Reorganized  Debtor in its sole  discretion,  no partial
payments  and no partial  distributions  will be made with respect to a Disputed
Claim or Disputed  Equity  Interest  until the  resolution  of such  disputes by
settlement or Final Order.  Subject to the provisions of this Article VIII.C, as
soon as practicable  after a Disputed Claim or Disputed Equity Interest  becomes
an Allowed Claim or an Allowed Equity Interest, the Holder of such Allowed Claim
or Allowed Equity Interest will receive all payments and  distributions to which
such Holder is then entitled under the Plan.  Notwithstanding the foregoing, any
Person or Entity who holds both an Allowed Claim(s) or Equity Interests(s) and a
Disputed Claim(s) or Equity Interests(s) will receive the appropriate payment or
distribution on the Allowed Claim(s) or Equity Interest(s),  although, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no payment or
distribution   will  be  made  on  the  Disputed  Claim(s)  or  Disputed  Equity
Interest(s)  until such dispute is resolved by settlement or Final Order. In the
event  there  are  Disputed  Claims  or  Disputed  Equity  Interests   requiring
adjudication and resolution, the Debtor reserves the right, or upon order of the
Court, to establish appropriate reserves for potential payment of such claims.

                                 ARTICLE IX.
               CONDITIONS PRECEDENT TO CONSUMMATION OF THE PLAN

A.    Conditions Precedent to Consummation

      The  following  events  shall  occur  prior  to or  concurrently  with the
Consummation of the Plan:

      1. the  Confirmation  Order shall have been signed by the Bankruptcy Court
and duly  entered  on the  docket  for the  Chapter  11 Case by the Clerk of the
Bankruptcy Court in form and substance  acceptable to the Debtor,  the Committee
and the Unofficial Preferred Shareholders' Committee;

      2.    the Confirmation Order has been entered and has not been reversed or
stayed;

      3. the Exit Credit Facility shall be available to the Reorganized Debtor
in an amount not less than $90 million and on such terms and  conditions  as set
forth in the Exit Credit Facility;

      4.    the Reinsurance Transactions will have occurred;

      5.    the Extraordinary Distribution will have been paid;

      6. the Standby Purchase Agreement shall be in full force and effect, all
conditions  precedent  to the  obligations  of  Inverness  and Vicuna  under the
Standby Purchase Agreement shall have been satisfied in accordance therewith;

      7.    the Expiration Date with respect to the Rights Offering shall have
occurred;

      8.    the Rapoport/Sharpe Investment shall have been consummated; and

      9. all regulatory approvals  necessary for the  transactions  contemplated
herein shall have been received.

                                   - 21 -

<PAGE>

B.    Effect of Non-Occurrence of Conditions to Consummation

      If the Confirmation  Order is vacated,  the Plan shall be null and void in
all  respects  and nothing  contained  in the Plan or the  Disclosure  Statement
shall:  (1)  constitute a waiver or release of any Claims by or against,  or any
Equity  Interests in, the Debtor;  (2) prejudice in any manner the rights of the
Debtor, or (3) constitute an admission,  acknowledgment, offer or undertaking by
the Debtor in any respects.

                                  ARTICLE X.
                  RELEASE, INJUNCTIVE AND RELATED PROVISIONS

A.    Subordination

      The  classification  and  manner  of  satisfying  all  Claims  and  Equity
Interests and the respective  distributions  and treatments  under the Plan take
into account  and/or  conform to the relative  priority and rights of the Claims
and Equity Interests in each Class in connection with any contractual, legal and
equitable  subordination  rights relating  thereto whether arising under general
principles of equitable subordination,  section 510(b) of the Bankruptcy Code or
otherwise,  and any and all such rights are  settled,  compromised  and released
pursuant to the Plan. The Confirmation Order shall permanently enjoin, effective
as of the Effective  Date, all Persons and Entities from enforcing or attempting
to  enforce  any such  contractual,  legal and  equitable  subordination  rights
satisfied, compromised and settled pursuant to this Article X.A.

 B.   Limited Releases by the Debtor

      Except  as  otherwise  specifically  provided  in the  Plan,  for good and
valuable  consideration,  including,  but not  limited  to, the  commitment  and
obligation  of  Inverness,  Vicuna,  Rapoport  and Sharpe to  provide  financial
support  necessary for  consummation  of the Plan (including the obligations and
undertakings of Inverness and Vicuna under the Standby Purchase  Agreement,  and
the  obligations  and  undertakings  of each of  Rapoport  and Sharpe  under the
Rapoport/Sharpe  Investment),  and the services of the Committee, the Unofficial
Preferred  Shareholders'  Committee  and the D&O  Releasees  to  facilitate  the
expeditious   reorganization  of  the  Debtor  and  the  implementation  of  the
restructuring  contemplated  by the Plan,  the Inverness  Releasees,  the Vicuna
Releasees, the Rapoport Releasees, the Sharpe Releassees, the D&O Releasees, the
Committee  Releasees,  and  the  Unofficial  Preferred  Shareholders'  Committee
Releasees,  on and after the Effective  Date, are released by the Debtor and the
Reorganized Debtor and their subsidiaries from any and all claims (as defined in
section 101(5) of the Bankruptcy Code),  obligations,  rights,  suits,  damages,
causes of action, remedies and liabilities whatsoever, whether known or unknown,
foreseen  or  unforeseen,  existing  or  hereafter  arising,  in law,  equity or
otherwise,  that the Debtor or its subsidiaries would have been legally entitled
to assert in their own right (whether  individually or collectively) or that any
Holder of a Claim or Equity  Interest or other  Person or Entity would have been
legally entitled to assert on behalf of the Debtor or its subsidiaries, based in
whole or in part  upon any act or  omission,  transaction,  agreement,  event or
other  occurrence  taking place on or before the Effective  Date,  except in the
case of the D&O Releasees, for claims or liabilities (i) in respect of any loan,
advance or similar payment by the Debtor or its  subsidiaries to any such Person
which is outstanding on the Effective  Date,  (ii) in respect of any contractual
obligation  owed  by  such  Person  to the  Debtor  or its  subsidiaries  on the
Effective Date, or (iii) resulting from intentional misconduct or bad faith.

C.    Preservation of Rights of Action

      Except as otherwise  provided in the Plan or in any contract,  instrument,
release,  indenture or other agreement entered into in connection with the Plan,
in accordance  with section  1123(b) of the  Bankruptcy  Code,  the  Reorganized
Debtor shall retain and may exclusively enforce any claims, rights and Causes of
Action  that the Debtor or Estate  may hold  against  any Person or Entity.  The
Reorganized Debtor may pursue such retained claims,  rights or causes of action,
as appropriate, in accordance with the best interests of the Reorganized Debtor.
On the  Effective  Date,  the  Reorganized  Debtors shall be deemed to waive and
release any claims,  rights or Causes of Action arising under sections 544, 547,
548, 549 and 550 of the Bankruptcy Code held by the  Reorganized  Debtor against
any Person or Entity.

                                   - 22 -

<PAGE>

D.    Exculpation

      The Debtor, the Reorganized Debtor (and their Professionals acting in such
capacity),  the  Unofficial  Preferred  Shareholders  Committee  Releasees,  the
Committee Releasees, the Inverness Releasees, the Vicuna Releasees, the Rapoport
Releasees,  the Sharpe  Releasees and the D&O Releasees,  shall neither have nor
incur any  liability  to any Person or Entity for any act taken or omitted to be
taken  in  connection   with  or  related  to  the   formulation,   preparation,
dissemination,  implementation,  administration, Confirmation or Consummation of
the Plan, the Disclosure Statement or any contract, instrument, release or other
agreement  or  document  created or entered  into in  connection  with the Plan,
including the Standby Purchase Agreement and the Rapoport/Sharpe  Investment, or
any other act taken or omitted  to be taken in  connection  with the  Chapter 11
Case; provided, however, that the foregoing provisions of this Article X.D shall
have no effect on the  liability  of any Person or Entity that  results from any
such act or omission  that is  determined  in a Final Order to have  constituted
gross negligence or willful misconduct.

E.    Injunction

      From  and  after  the  Effective   Date,  all  Persons  and  Entities  are
permanently  enjoined from  commencing  or  continuing in any manner,  any suit,
action or other proceeding,  on account of or respecting any claim,  obligation,
debt,  right,  Cause of Action,  remedy or liability  released or to be released
pursuant to this Article X.

                                  ARTICLE XI.
                          RETENTION OF JURISDICTION

      Notwithstanding  the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Chapter  11 Case after the  Effective  Date as  legally  permissible,  including
jurisdiction to:

A.   allow, disallow, determine,  liquidate, classify, estimate or establish the
priority or secured or unsecured  status of any Claim,  including the resolution
of any request for payment of any Administrative Claim and the resolution of any
and all objections to the allowance or priority of Claims;

B.   grant  or  deny  any   applications   for  allowance  of   compensation  or
reimbursement  of expenses  authorized  pursuant to the  Bankruptcy  Code or the
Plan, for periods ending on or before the Effective Date;

C. resolve any matters related to the assumption,  assumption and assignment, or
rejection of any executory  contract or unexpired lease to which the Debtor is a
party or with respect to which the Debtors may be liable and to hear,  determine
and, if necessary,  liquidate,  any Claims arising  therefrom,  including  those
matters  related to the mendment after the Effective Date pursuant to Article VI
above  to add  any  executory  contracts  or  unexpired  leases  to the  list of
executory contracts and unexpired leases to be rejected;

D.   ensure that  distributions  to Holders of Allowed  Claims are  accomplished
pursuant to the  provisions  of the Plan,  including  ruling on any motion Filed
pursuant to Article VII;

E.   decide  or  resolve  any  motions,  adversary  proceedings,   contested  or
litigated  matters  and any other  matters  and  grant or deny any  applications
involving the Debtor that may be pending on the Effective Date;

F.   enter such  orders as may be  necessary  or  appropriate  to  implement  or
consummate the provisions of the Plan and all contracts, instruments,  releases,
indentures and other agreements or documents created in connection with the Plan
or the Disclosure Statement;

G.   resolve  any  cases,  controversies,  suits or  disputes  that may arise in
connection with the  Consummation,  interpretation or enforcement of the Plan or
any Person's or Entity's obligations incurred in connection with the Plan;

                                   - 23 -

<PAGE>

H.   issue  injunctions,  enter and  implement  other  orders or take such other
actions as may be  necessary  or  appropriate  to restrain  interference  by any
Person  or Entity  with  Consummation  or  enforcement  of the  Plan,  except as
otherwise provided herein;

I.   resolve any cases,  controversies,  suits or disputes  with  respect to the
releases,  injunction and other provisions contained in Article X and enter such
orders as may be necessary or appropriate to implement such releases, injunction
and other provisions;

J.   enter and  implement  such orders as are  necessary or  appropriate  if the
Confirmation  Order is for any reason  modified,  stayed,  reversed,  revoked or
vacated;

K.   determine any other matters that may arise in connection  with or relate to
the Plan,  the Disclosure  Statement,  the  Confirmation  Order or any contract,
instrument,  release,  indenture  or other  agreement  or  document  created  in
connection with the Plan or the Disclosure Statement; and

L.    enter an order and/or final decree concluding the  Chapter 11 Case.

                                 ARTICLE XII.
                           MISCELLANEOUS PROVISIONS

A.    Dissolution of Committee(s)

      On the Effective Date, the  Committee(s)  shall dissolve and members shall
be released and  discharged  from all rights and duties arising from, or related
to,  the  Chapter  11 Case,  except  that the  Committee(s)  shall  continue  in
existence  for the  limited  purpose  of  reviewing  and,  if it so  determines,
prosecuting any objections to, the final fee applications filed by Professionals
in the Chapter 11 Case.

B.    Payment of Statutory Fees

      All fees payable pursuant to section 1930 of title 28 of the United States
Code, as determined by the Bankruptcy  Court at the hearing  pursuant to section
1128 of the Bankruptcy Code, shall be paid on or before the Effective Date.

C.    Fees and Expenses of the Unofficial Preferred Shareholders' Committee

      The reasonable  fees and expenses  incurred after the Petition Date by the
Unofficial  Preferred  Shareholders'  Committee's  counsel and financial advisor
(together with the reasonable  fees and expenses of local counsel) shall be paid
(without application by or on behalf of any such professionals to the Bankruptcy
Court  and  without  notice  and a  hearing)  by the  Reorganized  Debtor  as an
Administrative  Claim under the Plan.  If the  Reorganized  Debtors and any such
professional retained by the Unofficial Preferred Shareholders' Committee cannot
agree on the amount of fees and  expenses to be paid to such  professional,  the
amount of any such  fees and  expenses  shall be  determined  by the  Bankruptcy
Court.

D.    Discharge of Debtor

     Except as otherwise  provided  herein:  (1) the rights afforded in the Plan
and the  treatment  of all  Claims  and Equity  Interests  therein,  shall be in
exchange for and in complete  satisfaction,  discharge and release of Claims and
Equity  Interests of any nature  whatsoever,  including any interest  accrued on
such Claims from and after the Petition Date,  against the Debtor and the Debtor
in Possession, or any of their assets or properties,  (2) on the Effective Date,
all such Claims against,  and Equity Interests in the Debtor shall be satisfied,
discharged  and  released  in full and (3) all  Persons  and  Entities  shall be
precluded from asserting against the Reorganized  Debtor,  its successors or its
assets or properties any other or further Claims or Equity  Interests based upon
any act or omission,  transaction  or other  activity of any kind or nature that
occurred prior to the Confirmation  Date. The Plan does not impair the rights of
any  Holders of Class 5 Claims,  including,  but not  limited to: (i) Holders of

                                   - 24 -

<PAGE>

Claims under executory and  nonexecutory  contracts and leases;  (ii) persons or
entities entitled to contractual or common law rights of indemnity, contribution
and/or  reimbursement;  or (iii)  claims of any party or entity  relating to any
environmental condition as to which the Debtor is or may be liable.

E.    Modification of Plan

      Subject  to the  limitations  contained  herein,  (1) the  Debtor  and the
Unofficial  Preferred  Shareholders'  Committee reserve the right, in accordance
with the Bankruptcy  Code and the Bankruptcy  Rules, to amend or modify the Plan
prior to the  entry of the  Confirmation  Order  and (2)  after the entry of the
Confirmation  Order,  the  Debtor  and the  Unofficial  Preferred  Shareholders'
Committee or the Reorganized  Debtor, as the case may be, may, upon order of the
Bankruptcy  Court,  amend or modify the Plan, in accordance with section 1127(b)
of the  Bankruptcy  Code,  or remedy any defect or  omission  or  reconcile  any
inconsistency  in the Plan in such manner as may be  necessary  to carry out the
purpose and intent of the Plan.

 F.   Revocation of Plan

      The Debtor and the Unofficial  Preferred  Shareholders'  Committee reserve
the right, at any time prior to the entry of the  Confirmation  Order, to revoke
and withdraw the Plan.

G.    Successors and Assigns

      The rights,  benefits  and  obligations  of any Person or Entity  named or
referred  to in the Plan shall be binding  on, and shall inure to the benefit of
any heir, executor, administrator, successor or assign of such Person or Entity.

H.    Reservation of Rights

      Except as  expressly  set forth  herein,  this Plan shall have no force or
effect unless the Bankruptcy Court shall enter the Confirmation  Orders. None of
the filing of this Plan, any statement or provision contained herein, the taking
of any action by the Debtor with respect to this Plan,  or the Debtor's  failure
to object to any proof of Claim or Equity  Interest  shall be or shall be deemed
to be an  admission  or waiver of any rights of the Debtor  with  respect to the
Holders of Claims or Equity Interests.

I.    Section 1145 Exemption

      Pursuant to Section  1145 of the  Bankruptcy  Code,  the shares of the New
Common Stock issued to any of the Holders of the Preferred  Stock  hereunder are
exempt from registration under the Securities Act.

J.    Section 1146 Exemption

      Pursuant  to  section  1146(c)  of  the  Bankruptcy  Code,  the  issuance,
transfer,  or exchange of any security under the Plan, or the making or delivery
of an  instrument  of transfer  under this Plan,  may not be taxed under any law
imposing a stamp tax or similar tax.

K     Further Assurances

      The Debtor,  the  Reorganized  Debtor and all Holders of Claims and Equity
Interests  receiving  distributions  under  the Plan and all  other  parties  in
interest shall, from time to time,  prepare,  execute and deliver any agreements
or  documents  and take any other  actions as may be  necessary  or advisable to
effectuate the provisions and intent of this Plan.

L.    Service of Documents

                                   - 25 -

<PAGE>

      Any pleading,  notice or other document  required by the Plan to be served
on or  delivered  to the  Reorganized  Debtor  shall be sent by first class U.S.
mail, postage prepaid to:

                  PennCorp Financial Group, Inc.
                  c/o Southwestern Financial Services Corp.
                  717 North Harwood Street
                  Dallas, Texas 75201
                  Attn: Scott D. Silverman, Esq.

            with copies to:

                  Weil, Gotshal & Manges LLP
                  100 Crescent Court, Suit 1300
                  Dallas, Texas 75201-6950
                  Attn: Martin Sosland, Esq.

                   Inverness/Phoenix Capital, LLC
                  660 Steamboat Road
                  Greenwich, Connecticut 06830
                  Attn: James C. Comis

            with copies to:

                  Kirkland & Ellis
                  200 East Randolph Drive
                  Chicago, Illinois 60601
                  Attn: James L. Learner,  Esq.

M.    Filing of Additional Documents

      On or before the Effective  Date,  the Debtor may file with the Bankruptcy
Court such  agreements and other documents as may be necessary or appropriate to
effectuate and further evidence the terms and conditions of the Plan.

                                    Respectfully Submitted,

                                    PENNCORP FINANCIAL GROUP, INC.

                                    By:
                                          ------------------------------------
                                          Name:
                                          Title:

                                   - 26 -

<PAGE>

                                    INVERNESS/PHOENIX CAPITAL, LLC, lead member
                                    of THE UNOFFICIAL PREFERRED SHAREHOLDERS'
                                    COMMITTEE

                                    By:
                                          ------------------------------------
                                          Name:
                                          Title:

                                   - 27 -EXHIBIT 10.37

                          TELSCAPE INTERNATIONAL, INC.
                    2000 EXECUTIVE MARKET VALUE APPRECIATION
                                STOCK OPTION PLAN

      1. PURPOSE OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available executive personnel for positions of
substantial responsibility, to provide additional incentive to such individuals,
to reward such individuals for exemplary service and to promote the success of
the Company's business by aligning employee financial interests with long-term
shareholder value. Options granted hereunder may be either Incentive Stock
Options or Nonqualified Stock Options, at the discretion of the Board and as
reflected in the terms of the written option agreement.

      2. DEFINITIONS. As used herein, the following definitions shall apply:

      (a) "BOARD" shall mean the Committee, if the Committee has been appointed,
or the Board of Directors of the Company, if the Committee has not been
appointed.

      (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.

      (c) "COMMITTEE" shall mean the Compensation Committee appointed by the
Board of Directors in accordance with Section 4(a) of the Plan, if one is
appointed.

      (d) "COMMON SHARES" shall mean the $.00001 par value per share common
capital stock of the Company.

      (e) "COMPANY" shall mean Telscape International, Inc., a Texas
corporation, and any successor thereto.

      (f) "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of any leave of absence
authorized in writing by the Company prior to its commencement.

      (g) "EMPLOYEE" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company.
Notwithstanding the foregoing, for purposes of any Incentive Stock Option
granted hereunder, "Employee" includes only employees within the meaning of
Section 422 of the Code.

      (h) "INCENTIVE STOCK OPTION" shall mean any option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.

      (i) "NONQUALIFIED STOCK OPTION" shall mean an option not intended to
qualify as an Incentive Stock Option.

      (j) "OPTION" shall mean a stock option granted pursuant to the Plan and
represented by a written option agreement.
<PAGE>
      (k) "OPTIONED SHARES" shall mean the Common Shares subject to an Option.

      (l) "OPTIONEE" shall mean an Employee who receives an Option.

      (m) "PARENT" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.

      (n) "PLAN" shall mean this Telscape International, Inc. 2000 Executive
Market Value Appreciation Stock Option Plan, including any amendments hereto.

      (o) "SHARE" shall mean one Common Share, as adjusted in accordance with
Section 11 of the Plan.

      (p) "SUBSIDIARY" shall mean (i) in the case of an Incentive Stock Option,
a "subsidiary corporation," whether now or hereafter existing, as defined in
Section 424(f) of the Code, and (ii) in the case of a Nonqualified Stock Option,
in addition to a subsidiary corporation as defined in (i), a limited liability
company, partnership or other entity in which the Company controls fifty percent
(50%) or more of the voting power or equity interests.

      3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 2,000,000 Common Shares. The Shares may be authorized, but
unissued, or reacquired Common Shares. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.

      4. ADMINISTRATION OF THE PLAN.

      (a) PROCEDURE. The Plan shall be administered by the Board of Directors of
the Company.

            (i) The Board of Directors may appoint a Compensation Committee
consisting of not less than two members of the Board of Directors to administer
the Plan on behalf of the Board of Directors, subject to such terms and
conditions as the Board of Directors may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board of
Directors.

            (ii) From time to time the Board of Directors may increase the size
of the Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, or fill
vacancies however caused.

      (b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion (i) to grant Incentive Stock Options
or Nonqualified Stock Options; (ii) to determine, in accordance with Section
8(b) of the Plan, the fair market value of the Shares; (iii) to determine, in
accordance with Section 8(a) of the Plan, the exercise price per Share of
Options to be granted; (iv) to determine the Employees to whom, and the time or
times at which, Options shall be granted and the number of Shares to be
represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend,
and rescind rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be identical and may
include, as

                                       2
<PAGE>
conditions to exercise (as well as, in the case of Nonqualified Stock Options,
conditions to grant), vesting, forfeiture, performance criteria, noncompete and
such other restrictions, provisions and conditions as the Board may determine)
and, with the consent of the holder thereof, modify or amend each Option; (viii)
to reduce the exercise price per share of outstanding and unexercised Options;
(ix) to accelerate or defer (with the consent of the Optionee) the exercise date
of any Option; (x) to authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously granted
by the Board; and (xi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.

      (c) EFFECT OF BOARD'S DECISION. All decisions, determinations, and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.

      5. ELIGIBILITY.

      (a) EMPLOYEES. Options may be granted only to Employees.

      (b) TYPE OF OPTION. Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonqualified Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
fair market value of the stock with respect to which options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company and any Parent or
Subsidiary of the Company) exceeds $100,000, such options shall be treated as
Nonqualified Stock Options.

      (c) ORDERING AND TIMING. For purposes of Section 5(b), options shall be
taken into account in the order in which they were granted, and the fair market
value of stock shall be determined as of the time the option with respect to
such stock is granted.

      (d) NO DEEMED EMPLOYMENT RIGHTS. Nothing in the Plan or any Option granted
hereunder shall confer upon any Optionee any right with respect to continuation
of employment with the Company, nor shall it interfere in any way with the
Optionee's right or the Company's right to terminate the employment relationship
at any time, with or without cause.

      6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect until January 31, 2010, unless sooner
terminated under Section 14 of the Plan.

      7. TERM OF OPTION. The term of each Option shall be no more than ten (10)
years from the date of grant. However, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns Shares
representing more than ten percent (10%) of the voting power of all classes of
shares of the Company or any Parent or Subsidiary, the term of the Option shall
be no more than five (5) years from the date of grant.

      8. EXERCISE PRICE AND CONSIDERATION.

      (a) EXERCISE PRICE. The per Share exercise price under each Option shall
be such price as is determined by the Board, subject to the following:

                                       3
<PAGE>
            (i)   In the case of an Incentive Stock Option:

                  (A) granted to an Employee who, at the time of the grant of
the Incentive Stock Option, owns shares representing more than ten percent (10%)
of the voting power of all classes of shares of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than one hundred ten
percent (110%) of the fair market value per Share on the date of grant.

                  (B) granted to any other Employee, the per Share exercise
price shall be no less than one hundred percent (100%) of the fair market value
per Share on the date of grant.

            (ii) In the case of a Nonqualified Stock Option, the per Share
exercise price may be less than, equal to, or greater than the fair market value
per Share on the date of grant, as determined by the Board in its discretion.

      (b) FAIR MARKET VALUE. The fair market value per Share shall be determined
by the Board in its discretion and, in the case of an Incentive Stock Option, in
accordance with Section 422 of the Code.

      (c) TYPE OF CONSIDERATION. The consideration to be paid for the Shares to
be issued upon exercise of an Option, including the method of payment, shall be
determined by the Board at the time of grant and may consist, without
limitation, of cash, check, promissory note or "cashless exercise" based on the
equity buildup in the Option.

      (d) WITHHOLDING. Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay any federal, state, and local withholding
obligations of the Company, if applicable.

      9.    EXERCISE OF OPTION.

      (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board at the time of grant, and as shall not violate the terms
of the Plan. An Option may not be exercised for a fraction of a Share. An Option
shall be deemed to be exercised when written notice of such exercise has been
given to the Company and all other events have occurred for exercise, all in
accordance with the terms of the Option. Payment for the Shares upon exercise of
the Option may consist of any consideration and method of payment allowable
under Section 8(c) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the share certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Shares, notwithstanding the prior exercise of the
Option. The Company shall issue (or cause to be issued) such share certificate
promptly upon payment in full for the Shares pursuant to the terms of the
Option. In the event that the exercise of an Option is treated in part as the
exercise of an Incentive Stock Option and in part as the exercise of a
Nonqualified Stock Option pursuant to Section 5(b), the Company shall issue a
share certificate evidencing the Shares treated as acquired upon the exercise of
an Incentive Stock Option and a separate share certificate evidencing the Shares
treated as acquired upon the exercise of a Nonqualified Stock Option, and shall
identify each such certificate accordingly in its share transfer records. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the share certificate is issued, except as provided in
Section 11 of the Plan. Exercise of an Option in any manner shall result in a
decrease in the number

                                       4
<PAGE>
of Shares which thereafter may be available, both for purposes of the Plan and
for sale under the Option, by the number of Shares as to which the Option is
exercised.

      (b) TERMINATION OF STATUS AS EMPLOYEE. In the event of termination of an
Optionee's Continuous Status as an Employee, such Optionee may exercise Options
to the extent exercisable on the date of termination. In the case of an
Incentive Stock Option (and unless specified otherwise in the Option Agreement
in the case of a Nonqualified Stock Option), such exercise must occur within
three (3) months (or such shorter time as may be specified in the grant) after
the date of such termination (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement). To the extent
that the Optionee was not entitled to exercise the Option at the date of
termination, or does not exercise the Option within the time specified herein or
therein (whichever first occurs), the Option shall terminate.

      (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's Continuous Status as an
Employee as a result of total and permanent disability (i.e., the inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
twelve (12) months), the Optionee may exercise the Option, but only to the
extent of the right to exercise that had accrued as of the date of termination.
In the case of an Incentive Stock Option (and unless specified otherwise in the
Option Agreement in the case of a Nonqualified Stock Option), such exercise must
occur within twelve (12) months (or such shorter time as is specified in the
grant) from the date on which the Employee ceased working as a result of the
total and permanent disability (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement). To
the extent that the Optionee was not entitled to exercise such Option within the
time specified herein or therein (whichever first occurs), the Option shall
terminate.

      (d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section 9(b)
above, in the event of the death of an Optionee --

            (i) who is at the time of death an Employee of the Company, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued as of the date
of death; or

            (ii) whose Option has not yet expired but whose Continuous Status as
an Employee terminated prior to the date of death, the Option may be exercised,
at any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.

      (e) EXTENSION OF EXERCISE DATES. Notwithstanding subsections (b), (c), and
(d) above, the Board shall have the authority to extend the expiration date of
any outstanding option in circumstances in which it deems such action to be
appropriate (provided that no such extension shall extend the term of an Option
beyond the date on which the Option would have expired if no termination of the
Employee's Continuous Status as an Employee had occurred).

                                       5
<PAGE>
      10. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee; provided, however, that the
Board may permit further transferability, on a general or specific basis, and
may impose conditions and limitations on any permitted transferability.

      11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, SALE OR MERGER. Subject to
any required action by the shareholders of the Company, the number of Shares
covered by each outstanding Option, and the number of Shares which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per Share covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination, or reclassification of the Shares, or any other increase
or decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of any
class, or securities convertible into shares of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option. In the event of the proposed dissolution or
liquidation of the Company, the Option will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the Board.
The Board may, in the exercise of its sole discretion in such instances, declare
that any Option shall terminate as of a date fixed by the Board and give each
Optionee the right to exercise an Option as to all or any part of the Optioned
Shares, including Shares as to which the Option would not otherwise be
exercisable. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, each Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless such successor corporation does not agree to
assume the Option or to substitute an equivalent Option, in which case the Board
shall, to the extent required by law or otherwise as determined by the Board, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option as to all of the Optioned Shares, including Shares
as to which the Option would not otherwise be exercisable. If the Board makes an
Option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.

      12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Company completes the corporate action
relating to the grant of an Option and all conditions to the grant have been
satisfied, provided that conditions to the exercise of an Option shall not defer
the date of grant. Notice of a grant shall be given to each Employee to whom an
Option is so granted within a reasonable time after the determination has been
made.

      13. SUBSTITUTIONS AND ASSUMPTIONS. The Board shall have the right to
substitute or assume Options in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code applies,
provided such substitutions and assumptions are permitted

                                       6
<PAGE>
by Section 424 of the Code and the regulations promulgated thereunder. The
number of Shares reserved pursuant to Section 3 may be increased by the
corresponding number of Options assumed and, in the case of a substitution, by
the net increase in the number of Shares subject to Options before and after the
substitution.

      14. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable (including, but not limited to, amendments which the Board deems
appropriate to enhance the Company's ability to claim deductions related to
stock option exercises); provided, however, that any increase in the number of
Shares subject to the Plan, other than in connection with an adjustment under
Section 11 of the Plan, shall require approval of or ratification by the
shareholders of the Company.

      (a) EMPLOYEES IN FOREIGN COUNTRIES. The Board shall have the authority to
adopt such modifications, procedures, and subplans as may be necessary or
desirable to comply with provisions of the laws of foreign countries in which
the Company or its Parent or Subsidiaries may operate to assure the viability of
the benefits from Options granted to Employees employed in such countries and to
meet the objectives of the Plan.

      (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.

      15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, any applicable state securities laws, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

      16. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

      17. SHAREHOLDER APPROVAL. The Plan, as amended, is subject to approval by
the shareholders of the Company and shall become effective on the date of such
approval.

      18. GOVERNING LAW. The validity, construction, interpretation and effect
of this Plan shall exclusively be governed by and determined in accordance with
the laws of the State of Texas, except to the extent preempted by federal law.

                                       7

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