Subsequent written or oral statements attributable to Ascent or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Report and those in the Company’s reports previously filed with the SEC. Copies of these filings may be obtained by contacting Ascent or the SEC.
Investments. Investment income is an important source of revenue, and the Company’s return on invested assets has a material effect on net income. The Company’s investment policy is subject to the requirements of insurance regulatory authorities. In addition, certain assets are held on deposit in specified states and invested in specified securities in order to comply with state law. Although the Company closely monitors its investment portfolio, available yields on newly invested funds and gains or losses on existing investments depend primarily on general market conditions. The Company’s investment portfolio is managed by Seneca Capital Management, LLC, a registered investment advisor.
Excludes interest on receivables from agents of $1.0 million, $1.5 million, and $2.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Agent Receivables. In the ordinary course of business, a subsidiary of Ascent advances commissions on policies written by its general agencies and their agents. Net agent receivables were $4.5 million and $6.3 million at December 31, 2003 and 2002, respectively. Such subsidiary is reimbursed for these advances from the commissions earned over the respective policy’s life. In the event that policies lapse prior to the time the subsidiary has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the outstanding balance of the commission advance. A reserve for uncollectible agent’s balances is routinely established based upon historical experience and projected commission earnings. As of December 31, 2003 and 2002, the allowance for uncollectible commission advances was $3.4 million and $4.6 million, respectively.
Deferred Policy Acquisition Costs. Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits. Deferred policy acquisition costs totaled $21.8 million and $22.5 million at December 31, 2003 and 2002, respectively.
A premium deficiency exists if the present value of future net cash flows plus future policy benefit and claims reserves at the calculation date is negative or less than net deferred policy acquisition costs. The calculation of future net cash flows includes assumptions as to future rate increases and persistency. The Company routinely evaluates the recoverability of deferred acquisition costs in accordance with GAAP. At December 31, 2003, 2002 and 2001, there were no premium deficiencies.
Deferred Tax Asset. The Company’s net deferred tax asset before valuation allowance at December 31, 2003 and 2002 was $18.4 million and $16.0 million, respectively. As the Company reported substantial pre-tax losses for the year ended December 31, 2000, principally due to losses from major medical products issued prior to July 2000, applicable GAAP literature required that the Company’s net deferred tax asset be fully reserved as of December 31, 2000. Although the Company’s pre-tax losses declined significantly in 2001, 2002 and 2003, sustained profitability has not been achieved. Accordingly, the Company has reported no income tax benefit for 2003, 2002, and 2001 and the net deferred tax asset remains fully reserved. Applicable GAAP literature provides that the deferred tax asset valuation allowance may be eliminated once the Company achieves sustained profitability, as defined, and management concludes that it is more likely than not, that all or some portion of the deferred tax asset will be realized.
Future Policy Benefit Reserves. Policy benefit reserves are established by each of the Insurance Subsidiaries for benefit payments that have not been incurred, but are estimated to be incurred, in the future. Policy benefit reserves totaled $54.9 million at December 31, 2003 as compared to $60.7 million at December 31, 2002. Policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the applicable Insurance Subsidiary’s expected future policyholder benefits minus the discounted present value of its expected future net premiums.
These present value determinations are based upon assumed fixed investment yields, the age of the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Insurance Subsidiaries’ policy benefit reserves, each Insurance Subsidiary relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. Persistency rates have a direct impact upon policy benefit reserves because the determinations for this reserve are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly.
In accordance with GAAP, the Insurance Subsidiaries’ actuarial assumptions are generally fixed, and absent materially adverse benefit experience, they are not generally adjusted. Each of the Insurance Subsidiaries monitors the adequacy of its policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of policy benefit reserves may also be impacted by the development of new medicines and treatment procedures which may alter the incidence rates of illness and the treatment methods for illness and accident (such as out-patient versus in-patient care) or prolong life expectancy. Changes in coverage provided by major medical insurers or government plans may also affect the adequacy of reserves if, for example, such developments had the effect of increasing or decreasing the incidence rate and per claim costs of occurrences against which the applicable Insurance Subsidiary insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the need to post additional reserves, which could have a material adverse effect upon an Insurance Subsidiaries’ business, financial condition or results of operations (see “Liquidity, Capital Resources and Statutory Capital and Surplus”).
Prior to the restructuring, SSHW held 36,567 shares plus accrued dividends equal to 937 shares of 10.25% Series A Convertible Preferred Stock (“Series A Preferred”) of the Company with a stated value of approximately $37.5 million. Pursuant to the Exchange Agreement, SSHW received 37,504 shares of 5.5% Series B Convertible Preferred Stock (“Series B Preferred”) of the Company in exchange for the shares of Series A Preferred and accrued dividends held by SSHW. The conversion price of the Series B Preferred is $.85246 per share (or 1,173.1 shares of common stock per share of Series B Preferred) versus $4.88 per share for the Series A Preferred (or 204.9 shares of common stock per share of Series A Preferred). The shares of the Series A Preferred were cancelled.
Interest expense on the note payable to CSFBM, a related party, issued in April 2001 for an original principal amount of $11 million was $2.5 million for 2003, $2.2 million for 2002 and $1.3 million for 2001. Such interest expense includes the accrual of a facility fee pursuant to the terms of the CSFBM Credit Agreement of $0.5 million in 2003 and 2002 and $0.3 million in 2001. As previously discussed (see "Restructuring of Redeemable Preferred Stock and Notes Payable to Related Party"), the CSFBM Credit Agreement was amended to waive the facility fee on December 31, 2003. Interest expense on the note payable to CSFBM has been paid "in kind" through the issuance of additional notes payable. As of December 31, 2003, the balance of the note payable to related party was $15.3 million. The December 31, 2003 amendment to the CSFBM Credit Agreement also reduced the interest rate on the note payable to related party from 12% to 6% and will result in a reduction of interest expense in 2004.
The Company reported no income tax benefit for 2003, 2002 and 2001 due to the establishment of a valuation allowance beginning December 31, 2000 for all net deferred tax assets. (See "Critical Accounting Policies - Deferred Tax Asset".)
The following narratives discuss the principal components of insurance operating results.
Total premiums decreased by 8.5% in 2003 and 11.3% in 2002 as compared to the corresponding prior year period. This decline in premium revenue is primarily attributable to lower new business sales resulting from 1) delays in new product deliveries to NCM and 2) a disciplined pricing philosophy focused upon profitability. The decline in both first year and renewal premiums for 2002 was also attributable to the accelerated lapsing of unprofitable major medical products marketed prior to July 2000.
In July 2003, NCM began selling a new line of medical insurance products, consisting of three products with varying degrees of benefits, designed to provide increased consumer choice and price flexibility for cost conscious consumers. As of December 31, 2003, the new products had been introduced in 19 of the 24 states in which NCM markets health insurance products.
For the past several years, the costs of medical services covered by the Company’s major medical insurance policies has increased dramatically, with medical inflation averaging 15% to 20% annually in comparison to an average increase in the consumer price index of 3%. To maintain the 2003 ratio of claims and benefits to premium into future periods, the Company must accurately estimate future medical inflation and implement timely premium rate increases for both new major medical product sales and the majority of its in force insurance policies, including supplemental specified disease and Medicare supplement policies.
The statutory losses incurred during 2002 and 2001 resulted from (1) significant losses on major medical products marketed prior to July 2000 due to higher than expected claim frequency and (2) costs associated with increased new business production which must be expensed under statutory accounting (for GAAP, such costs are deferred and amortized as related premiums are recorded). Major medical claims experience adverse to management’s current estimates or adverse claims experience for other insurance products may cause Ascent to make capital contributions to the Insurance Subsidiaries in excess of those currently projected for 2004. As a result, adverse claims experience could have a material adverse effect on Ascent’s liquidity and capital resources and results of operations.
Related Party Financing. Ascent received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from CSFBM, which is an affiliate of SSHW (Ascent’s largest common stockholder), and a subsidiary of CSFB. The credit agreement relating to that loan (“CSFBM Credit Agreement”) provided Ascent with total loan commitments of $11 million, all of which were drawn in April 2001. Under restructured terms (see “Restructuring of Redeemable Convertible Preferred Stock and Notes Payable to Related Party”), the loan bears interest at a rate of 6% per annum and matures in March 2010. Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During 2003 and 2002, Ascent issued $1.7 million and $1.5 million, respectively, in additional notes for payment of interest in kind which increased the note payable balance at December 31, 2003 to approximately $15.3 million.
Bank Financing. The majority of commission advances to NCM’s agents are financed through Ascent Funding, Inc. (“AFI”), an indirect wholly owned subsidiary of Ascent. On December 31, 2003, AFI entered into a Credit Agreement (the “Credit Agreement”) with Frost National Bank (“Frost”) that provides AFI with a $3.0 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and other affiliates. As of December 31, 2003, $500,000 was outstanding under the Credit Agreement. The Credit Agreement matures on January 15, 2005, at which time the outstanding principal and interest will be due and payable. The Company maintains an agent receivable financing arrangement to facilitate growth in new business sales.
AFI’s obligations under the Credit Agreement are secured by liens upon substantially all of AFI’s assets. AFI’s principal assets at December 31, 2003 are net agent receivables of $4.6 million. In addition, NCM and Ascent have guaranteed AFI’s obligation under the Credit Agreement, and have pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, and FLICA as collateral for those guaranties (the “Guaranty Agreements”). As of December 31, 2003, there were no events of default under the Credit or Guaranty Agreements.
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2003,
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ascent Assurance, Inc., at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective July 1, 2003, the Company adopted the provisions of Statement of Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”
Loss applicable to common stockholders $ (3,107 ) $ (4,194 ) $ (5,051 )
Adjustments to reconcile net loss to cash used for operating activities:
Decrease in policy liabilities and accruals (10,491 ) (7,215 ) (5,311 )
Retirement of Series A redeemable convertible preferred stock (37,504 ) -
Net Cash (Used for) Provided by Financing Activities (4,160 ) (1,956 ) 8,203
Ascent Assurance, Inc. (“Ascent”) is the successor to a Delaware company originally incorporated in 1982 as an insurance holding company. Ascent, through its applicable subsidiaries, is engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners.
The Company’s revenues result primarily from premiums and fees from the insurance products sold by its wholly-owned subsidiaries National Foundation Life Insurance Company (“NFL”), Freedom Life Insurance Company of America (“FLICA”), National Financial Insurance Company (“NFIC”) and American Insurance Company of Texas (“AICT”), and together with NFL, NFIC and FLICA, collectively, the “Insurance Subsidiaries”, and marketed by NationalCare® Marketing, Inc. (“NCM”), also a wholly-owned subsidiary. The insurance subsidiaries are licensed to conduct business in 40 states and the District of Columbia. Each of the following states accounted for more than 5% of premium revenue for the year ended December 31, 2003: Florida - 18%, Texas - 13%, Colorado - 8%, and Oklahoma - 6%. The Company has no significant concentrations of credit risks.
Short-Term Investments. Short-term investments are stated at cost, which approximates market.
Deferred Policy Acquisition Costs (“DPAC”). Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Also included in Other Assets is the the value of business acquired. The amortization of these costs is based on actuarially estimated future premium revenues, and the amortization rate is adjusted periodically to reflect actual experience. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits.
Property and Equipment. Property and equipment is stated on the basis of cost and consists primarily of furniture, fixtures, leasehold improvements and software. Depreciation is computed principally by the straight-line method for financial reporting purposes using estimated useful lives of 2 to 10 years.
Federal Income Taxes. The Company records income taxes based on the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded when such differences arise. A valuation allowance, reducing any recognized deferred tax asset, must be recorded if it is determined that it is more likely than not that such deferred tax asset will not be realized. The net deferred tax asset at December 31, 2003 and 2002 is fully reserved as discussed at Note 10.
Earnings Per Share. Under GAAP, there are two measures of earnings per share: “basic earnings per share” and “diluted earnings per share”. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. For the years 2003, 2002 and 2001, stock options of 918,050, 1,014,650 and 1,085,850, respectively, and the conversion of the preferred stock (see Note 7) could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
Loss earnings per share $ (0.48 ) $ (0.64 ) $ (0.78 )
Loss applicable to common shareholders $ (3,107 ) $ (4,194 ) $ (5,051 )
Diluted loss per share $ (0.48 ) $ (0.64 ) $ (0.78 )
Ascent’s ability to make additional investment in its Insurance Subsidiaries in the form of capital contributions, if needed, in order for such subsidiary to comply with minimum regulatory capital requirements;
Recently Issued Accounting Pronouncements. In May 2003, the FASB issued SFAS No. 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability measured at fair value. The Statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. Ascent implemented SFAS 150 effective with the beginning of the third quarter 2003. As a result, Ascent’s Series A Redeemable Convertible Preferred Stock of approximately $36.6 million was classified as a liability in the Company’s interim September 30, 2003 balance sheet. At December 31, 2003, the outstanding shares of Ascent’s Series A Redeemable Convertible Preferred Stock were exchanged for shares of Ascent’s Series B Redeemable Convertible Preferred Stock (see Note 3 - Restructuring of Redeemable Convertible Preferred Stock and Notes Payable to Related Party).
NOTE 3 - RESTRUCTURING OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND NOTES PAYABLE TO RELATED PARTY
Realized gain (loss) on investments are summarized as follows (in thousands):
In evaluating fixed maturities to determine whether any of the unrealized losses are other than temporary, management’s assessments as to the nature of declines in fair values are based upon historical operating trends, business prospects, status of the industry in which the company operates, analyst ratings on the issuer and sector, the quality of the investments, the severity and duration of the unrealized losses and the Company’s ability and intent to hold the investments. If fair value is less than the carrying value and the decline in value is determined to be other than temporary, an appropriate write-down is recorded through realized losses.
Future policy benefits for Accident and Health insurance products have been calculated using assumptions (which generally contemplate the risk of adverse deviation) for lapses, interest, mortality and morbidity appropriate at the time the policies were issued. The more material assumptions are as follows:
The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.
Included in reinsurance recoverables on claim reserves is approximately $1.4 million, $0.5 million, and $0.9 million relating to paid claims as of December 31, 2003, 2002 and 2001, respectively.
CSFB Financing. Ascent received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from CSFBM, which is an affiliate of SSHW (Ascent’s largest stockholder.) The credit agreement relating to that loan (“CSFBM Credit Agreement”) provided Ascent with total loan commitments of $11 million, all of which were drawn in April 2001. Under reconstructed terms (see Note 3 - Restructuring of Redeemable Convertible Preferred Stock and Notes Payable to Related Party), the loan bears interest at a rate of 6% per annum and matures in April 2010. Terms of the CSFBM Credit Agreement are equivalent to terms that exist in arm’s-length credit transactions.
Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During 2003, 2002 and 2001, Ascent issued $1.7 million, $1.5 million and $987,000, respectively, in additional notes for payment or interest in kind, which increased the note payable balance at December 31, 2003 to approximately $15.3 million.
Bank Financing. The majority of commission advances to NCM’s agents are financed through Ascent Funding, Inc. (“AFI”), an indirect wholly owned subsidiary of Ascent. On December 31, 2003, AFI entered into a Credit Agreement (the “Credit Agreement”) with Frost National Bank (“Frost”) that provides AFI with a $3.0 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and other affiliates. As of December 31, 2003, $500,000 was outstanding under the Credit Agreement. The Credit Agreement matures on January 15, 2005, at which time the outstanding principal and interest will be due and payable.
The Company has authorized 40,000 shares of non-voting preferred stock. At December 31, 2003, 37,504 shares of Series B Preferred were outstanding all of which are owned by SSHW, which is the Company’s largest common stockholder and is also an affiliate of CSFB. The Series B Preferred Stock has been classified as Stockholders’ Equity in the Consolidated Balance Sheet at December 31, 2003 as the terms include substantive conversion features and conversion is probable.
Cumulative annual dividend rate of $50.50 per share payable, at a minimum, annually in arrears by the last day of January in each year by issuance of cash or additional shares of preferred stock.
Each share of preferred stock is convertible at any time into 1,173.0756 shares of common stock at an initial conversion price of $0.85246 per share, subject to customary anti-dilution adjustments.
During 2003, Ascent paid dividends on the Series A Preferred through the issuance of 3,608 additional shares of preferred stock and $2,076 in cash for fractional shares. During 2002, the Company paid Series A Preferred dividends through the issuance of 3,261 additional shares of preferred stock and $1,831 in cash for fractional shares. In December 2001, the Company paid Series A Preferred dividends through the issuance of 2,930 additional shares of preferred stock and $1,603 in cash for fractional shares.
The Company routinely evaluates the recoverability of deferred acquisition costs in accordance with GAAP. In general, a premium deficiency exists if the present value of future net cash flow plus future policy benefit and claim reserves at the calculation date is negative or less than net deferred policy acquisition costs. The calculation of future net cash flow includes assumptions as to future rate increases, investment income and persistency. Premium deficiencies did not exist for the years reported.
No federal income taxes were paid or incurred in 2003, 2002, and 2001. The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Prior to 2002, FLICA filed a separate federal income tax return.
Deferred taxes are recorded for temporary differences between the financial reporting basis and the federal income tax basis of the Company’s assets and liabilities. The sources of these differences and the estimated tax effect of each are as follows:
Under the provisions of pre-1984 life insurance tax regulations, NFL was taxed on the lesser of taxable investment income or income from operations, plus one-half of any excess of income from operations over taxable investment income. One-half of the excess (if any) of the income from operations over taxable investment income, an amount which was not currently subject to taxation, plus special deductions allowed in computing the income from operations, were placed in a special memorandum tax account known as the policyholders’ surplus account. The aggregate accumulation in the account at December 31, 2003, approximated $2.5 million. Federal income taxes will become payable on this account at the then current tax rate when, and to the extent that, the account exceeds a specific maximum, or when and if distributions to stockholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income. The Company does not anticipate any transactions that would cause any part of the amount to become taxable and, accordingly, deferred taxes that would approximate $0.9 million have not been provided on such amount.
As a result of losses from major medical products marketed prior to July 2000, FLICA required significant capital contributions during 2002 and 2001 to comply with minimum statutory capital and surplus requirements. In April 2001, Ascent obtained debt financing of $11 million from a subsidiary of CSFB. The proceeds of this loan were used to fund an $11 million capital contribution to FLICA. Major medical claims experience adverse to management’s current estimates or adverse claims experience for other insurance products may cause Ascent to make capital contributions to the Insurance Subsidiaries in excess of those currently projected for 2004. As a result, adverse claims experience could have a material adverse effect on Ascent’s liquidity and capital resources and results of operations.
The Insurance Subsidiaries are precluded from paying dividends during 2004 without prior approval of the Texas Insurance Commissioner as the companies’ earned surplus is negative. Generally, all states require insurance companies to maintain statutory capital and surplus that is reasonable in relation to their existing liabilities and adequate to their financial needs. The Texas Department of Insurance also maintains discretionary powers relative to the declaration and payment of dividends based upon an insurance company’s financial position. Due to recent statutory losses incurred by the Insurance Subsidiaries, the Company does not expect to receive any dividends from the Insurance Subsidiaries for the foreseeable future.
If a company’s total adjusted capital is less than or equal to 200 percent but greater than 150 percent of its RBC, (the “Company Action Level”), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions.
If a company’s total adjusted capital is less than or equal to 100 percent but greater than 70 percent of its RBC (the “Authorized Control Level”), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control.
If a company’s total adjusted capital is less than or equal to 70 percent of its RBC (the “Mandatory Control Level”), the regulatory authority must place the company under its control.
The Texas Department of Insurance adopted the NAIC’s Model Act during 2000. NFL’s and FLICA’s statutory annual statements for the year ended December 31, 2003 filed with the Texas Department of Insurance reflect total adjusted capital in excess of Company Action Level RBC.
Future policy benefits and claims (4,195 ) (5,303 ) (7,049 )
The weighted average fair value of options granted during 2002 and 2001 was $0.47 and $1.26. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following significant weighted-average assumptions used for grants in 2002 and 2001, respectively: dividend yield of 0% for both years; expected volatility of 1.214 and 1.218; risk-free interest rate of 4.32% for 2002 and 4.65% for 2001; expected life of 3 years for 2002 and 5 years for 2001. The Company did not grant any stock options in 2003.
The Company applies the intrinsic value method, in accordance with APB 25, in accounting for its stock options issued to employees and non-employee directors. Accordingly, no compensation expense has been recognized for options granted with an exercise price equal to market value at the date of grant. The Company applies the fair value method in accounting for stock options issued to consultants (including marketing agents).
Compensation cost recognized in the income statement for stock-based employee and consultants (including marketing agents) compensation awards was approximately $6,000 in 2003, $55,000 in 2002, and $400,000 in 2001.
Pro forma net loss $ (3,413 ) $ (4,467 ) $ (5,443 )
Diluted - as reported $ (0.48 ) $ (0.64 ) $ (0.78 )
Diluted - pro forma $ (0.52 ) $ (0.69 ) $ (0.84 )
The Company’s Insurance Subsidiaries are subject to extensive governmental regulation and supervision at both federal and state levels. Such regulation includes premium rate levels, premium rate increases, policy forms, minimum loss ratios, dividend payments, claims settlement, licensing of insurers and their agents, capital adequacy, transfer of control, and amount and type of investments. Additionally, there are numerous health care reform proposals and regulatory initiatives under consideration which if enacted could have significant impact on the Company’s results of operations.
Diluted $ (0.10 ) $ (0.08 ) $ (0.16 ) $ (0.13 )
Loss applicable to common stockholders (1,144 ) (774 ) (672 ) (1,605 )
Accounts receivable and accounts payable. The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximates their fair value.
Available-for-sale securities. The fair values for available-for-sale securities are based on quoted market prices (See Note 4).
Net loss $ (1,348 ) $ (931 ) $ (2,119 )
Net income (loss) $ (1,348 ) $ (931 ) $ (2,119 )
Equity in undistributed net income of subsidiaries (4,038 ) (1,959 ) (100 )
Increase in receivables from subsidiaries (1,166 ) (1,242 ) (655 )
Total $ 21,819 $ 54,872 $ 26,196 $ 101,574 $ 6,151 $ 68,536 $ 7,433 $ 46,601 $ 101,957
Total $ 22,546 $ 60,660 $ 30,899 $ 111,048 $ 7,722 $ 78,299 $ 9,261 $ 44,649 $ 112,513