The following discussion provides management's assessment of financial results and material changes in financial position for the Company. For a better understanding of this analysis, reference should be made to Item 1 - "Business" and to Item 8 - "Financial Statements and Supplementary Data". Certain reclassifications of prior years' amounts have been made to conform with the 2000 presentation.
Subsequent written or oral statements attributable to the Company 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 the Company or the SEC.
In July 2000, the Company began marketing a new major medical policy in all significant marketing regions. The new major medical policy is designed to produce a substantially lower benefits and claims to premium ratio than the old GPPO product. Management believes that the new major medical policy has been well accepted by the Company's career agency force. At March 31, 2001, annualized premiums in force for the new major medical policy were $13.8 million.
As a result of the fourth quarter losses from the old GPPO product, the Company has reported a cumulative pre-tax loss since the fresh start date of March 31, 1999. Principally as a result of this cumulative pre-tax loss position, generally accepted accounting principles ("GAAP") require that a valuation allowance be provided for any net deferred tax asset. Accordingly, an additional deferred tax asset valuation allowance of $10.4 million was established at December 31, 2000 which resulted in the Company reporting income tax expense of $6 million for the year ended December 31, 2000 (see below and Note 11-"Income Taxes" to the Company's Consolidated Financial Statements at Item 8.) This adjustment had no impact on the Company's cash position at December 31, 2000 and did not impact statutory capital and surplus of the Insurance Subsidiaries.
In comparing 1999 to 1998, operating results for 1998 were adversely impacted by premium deficiency charges of $4.9 million, reorganization expenses of $9.2 million and interest expense on retired / canceled debt of $5.9 million.
For 2000, approximately 88% of new business was underwritten by FLICA. Continued adverse claims experience for the old GPPO product could have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements and maintain its new business production at current levels (see "Liquidity, Capital Resources and Statutory Capital and Surplus" and Item 1 - Business, "Regulation").
For 1999, premiums decreased $19.4 million, or 14.3%, from 1998 due to the discontinuance of the sale of the Medicare supplement product line, the cancellation of blocks of business and decreased persistency from the implementation of premium rate increases.
Benefits and Claims. Benefits and claims are comprised of (1) claims paid, (2) changes in claim reserves for claims incurred (whether or not reported), and (3) changes in future policy benefit reserves. The ratio of consolidated benefits and claims to consolidated premiums increased to 85.0% for 2000, a 9.8 percentage point increase as compared to 1999. This increase in the benefits and claim ratio increased consolidated pre-tax losses for 2000 by $11.8 million for 2000. In the fourth quarter of 2000, claims payments exceeded historical levels due to full implementation of the Company's new claims data processing system which was converted to in May 2000. As a result, the pending claims inventory was significantly reduced at December 31, 2000 and the Company determined that the benefits and claim ratio for the old GPPO product was substantially higher than expected. Adverse claims experience for the old GPPO product was due primarily to higher than expected claims frequency, particularly for young women and children. The increase in expected benefits and claim ratio for the old GPPO product resulted in a consolidated claims and benefit ratio for the fourth quarter of 2000 of 99.8% (see "Financial Condition - Claims Reserves").
Net Investment Income. Net investment income increased $0.4 million, or 4.7%, for 2000 as compared to 1999 due to an increase in interest income relative to agent balance receivables. For 1999, net investment income decreased $2.7 million, or 22.6%, from 1998 due to 16.2% decrease in invested assets and decreased interest income from agent balance receivables. Invested assets decreased as a result of payments of reorganization costs and reduction of premiums received as a result of the elimination of unprofitable blocks of business.
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 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 Conseco Capital Management, Inc., a registered investment advisor.
The following table summarizes consolidated investment results (excluding unrealized gains or losses) for the indicated year:
The following table indicates by rating the composition of the Company's fixed maturity securities portfolio, excluding short-term investments and certificates of deposit, at December 31, 2000:
The NAIC assigns securities quality ratings and uniform prices called "NAIC Designations," which are used by insurers when preparing their annual statutory reports. The NAIC assigns designations to publicly-traded as well as privately-placed securities. The ratings assigned by the NAIC range from Class 1 (highest quality rating) to Class 6 (lowest quality rating). At December 31, 2000, 70.4%, 27.0% and 2.6% of the market value of the Company's fixed maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.
Deferred Tax Asset. As of December 31, 2000, the Company has reported cumulative pre-tax losses since the fresh start date of March 31, 1999. Realization of the Company's deferred tax asset is dependent upon the return of the Company's operations to profitability. Pre-tax losses during 2000 were principally attributable to adverse claims experience for the old GPPO major medical product. Management believes that the GPPO product losses can be reduced through rate increase management. However, under applicable GAAP literature, projections of future profitability are significantly discounted when evaluating the recoverability of deferred tax assets and do not overcome the negative evidence of cumulative losses. Accordingly, the Company increased its deferred tax valuation allowance by $10.4 million to $18.3 million to fully reserve the remaining net deferred tax asset as of December 31, 2000. Applicable GAAP literature further provides that the deferred tax asset valuation allowance may be eliminated once the Company is no longer in a cumulative loss position, as defined.
Claims Reserves. Claim reserves are established by the Company for benefit payments which have already been incurred by the policyholder but which have not been paid by the Company. Claim reserves totaled $42.7 million at December 31, 2000 as compared to $38.8 million at December 31, 1999. 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. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company's claims payment pattern accelerated in the fourth quarter of 2000 which resulted in a significant reduction in pending claims inventory at December 31, 2000. This significant change in the claims payment pattern has greatly increased the inherent uncertainty in estimating claim reserves at December 31, 2000. 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.
Future Policy Benefit Reserves. Policy benefit reserves are established by the Company for benefit payments that have not been incurred but which are estimated to be incurred in the future. The policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the Company'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. Except for purposes of reporting to insurance regulatory authorities and for tax filing, the Company's claim reserves and policy benefit reserves are determined in accordance with GAAP.
In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Company's policy benefit reserves, the Company relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. The Company's persistency rates have a direct impact upon its 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.
The Company's policy benefit reserve requirements are also interrelated with product pricing and profitability. The Company must price its products at a level sufficient to fund its policyholder benefits and still remain profitable. Because the Company's claim and policyholder benefits represent the single largest category of its operating expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in the Company failing to price its products appropriately and to generate sufficient premiums to fund the payment thereof. The sharp increase in claim loss ratios experienced by the Company during 2000 was indicative of inadequate pricing in the Company's principal major medical product marketed through June 2000.
Reinsurance. As is customary in the insurance industry, the Company's Insurance Subsidiaries reinsure, or cede, portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and a coinsurance basis. Cession of reinsurance is utilized by an insurer to limit its maximum loss thereby providing a greater diversification of risk and minimizing exposures on larger risks. Reinsurance does not discharge the primary liability of the original insurer with respect to such insurance, but the Company, in accordance with prevailing insurance industry practice, reports reserves and claims after adjustment for reserves and claims ceded to other companies through reinsurance.
At December 31, 2000, $1.5 million of the $2.5 million recoverable from reinsurers related to paid losses. Of this balance, all was recoverable from reinsurers rated "A" or higher by the A.M. Best Company.
During the first quarter of 2001, the Company determined that continued adverse claims experience for the old GPPO product (see "Operating Results") would require Ascent to make capital contributions to FLICA in excess of those originally planned. Ascent obtained debt financing (see below) and contributed an additional $11 million to FLICA in April 2001 to enable FLICA to maintain an RBC Ratio greater than Company Action Level at March 31, 2001 and to comply with the Florida premium writing ratio regulation (see "Business- Regulation" at Item 1). If the adverse claims experience for the old GPPO product exceeds management's current estimates, Ascent would be required to make additional capital contributions to FLICA in excess of those currently projected for 2001. Additional financing would be required by Ascent in order to make any such "excess" contributions. As a result, continued adverse claims experience for the old GPPO product or for other products written by the Insurance Subsidiaries could have a material adverse effect on Ascent's liquidity and capital resources and, due to potential restrictions on the ability of FLICA to underwrite new policies, its results of operations.
Dividends on Ascent's redeemable convertible preferred stock may be paid in cash or by issuance of additional shares of preferred stock, at the Company's option. In December 2000, the Company paid preferred stock dividends through the issuance of 2,575 additional shares of preferred stock. Preferred stock dividends accrued at December 31, 1999 were paid in January 2000 through issuance of 1,873 additional shares of preferred stock.
Insurance Subsidiaries. The primary source of cash for the Insurance Subsidiaries are premiums, sales and maturity of invested assets and investment income while the primary uses of cash are benefits and claims, commissions, general and administrative expenses and taxes, licenses and fees. Cash contributions of $8.15 million and $15.25 million were funded in 2000 and through April 2001, respectively, by Ascent to its Insurance Subsidiaries to maintain capital and surplus (see "Ascent" discussion above). The Company's Insurance Subsidiaries have recorded combined statutory losses of $17.0 million for 2000 as compared to $6.5 million for 1999. The increased statutory losses resulted from 1) higher than expected claims and benefits for the old GPPO major medical product (see "Operating Results") 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).
Dividends paid by the Company's Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance department of the state of domicile ("Business - Regulations" at Item 1). The Insurance Subsidiaries are precluded from paying dividends during 2001 without the prior approval of the Texas Insurance Commissioner as the Companies' earned surplus is negative.
Inflation will affect claim costs on the Company's Medicare supplement and major medical products. Costs associated with a hospital stay and the amounts reimbursed by the Medicare program are each determined, in part, based on the rate of inflation. If hospital and other medical costs that are reimbursed by the Medicare program increase, claim costs on the Medicare supplement products will increase. Similarly, as the hospital and other medical costs increase, claim costs on the major medical products will increase. The Company has somewhat mitigated its exposure to inflation by incorporating certain limitations on the maximum benefits which may be paid under its policies and by filing for premium rate increases as necessary.
Consolidated. The Company's consolidated net cash used for operations totaled $4.9 million, $2.6 million and $8.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in cash used for operations in 2000 as compared to 1999 is primarily due to an increase in the cash basis ratio of benefits and claims to premiums and increases in general expenses relative to the implementation of the Company's policy administration and claims data processing systems. The decrease in cash used for operations in 1999 from 1998 was primarily due to a decrease in the cash basis ratio of benefits and claims and expenses to premiums, and a reduction in reorganization costs paid.
Net cash provided by (used for) financing activities totaled $1.8 million, $1.0 million and $(6.0) million for the years ended December 31, 2000, 1999 and 1998, respectively. Financing activities during 2000 include $2.9 million in borrowings and $0.6 million in repayments related to the Company's Receivables Financing Program (defined below), and $0.5 million in repayments related to the term loan facility. Financing activities during 1999 include $3.3 million in borrowings on the term loan facility, and $0.8 million in borrowings and $3.2 million in repayments related to the Company's Receivables Financing Program. Cash flows for financing activities for 1998 were related to the net borrowings and repayments associated with the Company's Receivables Financing program. The Company's net financing cash flow increased in 2000 and 1999 as a result of increasing new business production and related agent's balances.
AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. The Company has guaranteed AFI's obligations under the Credit Agreement, and has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty (the "Guaranty Agreement"). As of April 17, 2001, there were no events of default under the Credit or Guaranty Agreements. However, continued adverse claims experience for the old GPPO major medical product could result in events of default under the Guaranty Agreement, Credit Agreement and term loan facility discussed below.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the results of operations and cash flows of Westbridge Capital Corp. and its subsidiaries for the three months ended March 31, 1999 and for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
ASCENT ASSURANCE, INC. (formerly, Westbridge Capital Corp.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Ascent Assurance, Inc. ("Ascent"), a Delaware company incorporated in 1982, is an insurance holding company 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. Ascent adopted its corporate name on March 24, 1999, the date its predecessor, Westbridge Capital Corp. ("Westbridge"), emerged from Chapter 11 reorganization proceedings (see Note 4). References herein to the "Company" shall mean for all periods on or prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on or after the close of business on March 31, 1999, Ascent and its subsidiaries.
Reflects adjustments to record assets and liabilities at fair market value and to set retained earnings to zero.
Claim Reserves. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. No changes were made to claim reserve estimates for purposes of fresh start accounting. 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. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company's claims payment pattern accelerated in the fourth quarter of 2000 which resulted in a significant reduction in pending claims inventory at December 31, 2000. This significant change in claims payment pattern has significantly increased the inherent uncertainty in estimating claim reserves at December 31, 2000. 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.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. The insurance departments of the states of domicile of the Company's insurance subsidiaries have adopted the Codification effective January 1, 2001. The Company does not expect the Codification to materially impact statutory surplus.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement (as amended by SFAS No. 137, "Accounting For Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS No. 133, an amendment of SFAS No. 133") is effective for fiscal years beginning after June 15, 2000. The pronouncement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As the Company has not participated in derivative or hedging activities, the Company's financial statements are not affected by SFAS 133.
During the first quarter of 2001, the Company determined that continued adverse claims experience for the Group Preferred Provider Organization ("GPPO") product, the principal product marketed by the Company from 1998 through June 2000, would require Ascent to make capital contributions to FLICA in excess of those originally planned. Ascent obtained debt financing (see below) and contributed an additional $11 million to FLICA in April 2001 to enable FLICA to maintain an RBC Ratio greater than Company Action Level at March 31, 2001 and to comply with the Florida premium writing ratio regulation (see Note 12). To the extent that the adverse claims experience for the old GPPO product exceeds management's current estimates, Ascent would be required to make additional capital contributions to FLICA in excess of those currently projected for 2001. Additional financing would be required by Ascent in order to make any such "excess" contributions. Management believes that significant rate increase actions will reduce losses from the GPPO product in 2001.
New Equity Capital Structure Pursuant to Ascent's Amended and Restated Certificate of Incorporation, the total number of shares of capital stock Ascent has the authority to issue is 30,040,000, consisting of 30,000,000 shares of common stock, par value $.01 per share (the "New Common Stock") and 40,000 shares of preferred stock, par value $.01 per share, all of which are designated Series A Convertible Preferred Stock (the "New Preferred Stock")
|X| To holders of general unsecured claims and Convertible Notes as of December 10, 1998 6,077,500 shares, and to management at the Effective Date, 32,500 shares, or in aggregate 94% of the New Common Stock issued on the Effective Date. Holders of general unsecured claims and Convertible Notes received their first distribution of shares in partial satisfaction and discharge of the allowed claims in April 1999. The second distribution was made in September 1999 and the remaining shares of New Common Stock were distributed in November 1999.
|X| To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the New Common Stock issued on the Effective Date, on a fully diluted basis.
|X| To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, are convertible into 4,765,165 shares of the New Common Stock. As a result of the New Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New Common Stock received by the CSFB Affiliate in respect of the Convertible Notes owned by CSFB, the CSFB Affiliate beneficially owns approximately 56.6% of the New Common Stock on an as converted basis, assuming the exercise of all New Warrants and issuance of New Common Stock reserved under the 1999 Stock Option Plan as discussed below. The New Preferred Stock has a stated value of $1,000 per share and a cumulative annual dividend rate of $102.50 per share payable in January of each year in cash or by the issuance of additional shares of New Preferred Stock. The New Preferred Stock is convertible at any time into 204.8897 shares of New Common Stock at an initial conversion price of $4.88 per share of New Common Stock, subject to customary anti-dilution adjustments.
In connection with the New Warrants described above, 971,266 shares of New Common Stock are reserved for issuance upon the exercise of New Warrants. The New Warrants are exercisable at an initial exercise price $9.04 per share of New Common Stock, subject to customary anti-dilution adjustments, and will expire on March 24, 2004.
Withdrawals - Issues through 1980 are based on industry experience; 1981 through 2000 issues are based on industry experience and Company experience, where available. Policies acquired in acquisitions are based on recent experience of the blocks acquired.
Mortality - Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through 1992 us the 1965-1970 Ultimate Table. 1993 and later issues use the 1975-1980 Ultimate Table. Policies acquired in acquisitions use the 1965-1970 Ultimate Table.
Morbidity - Based on industry tables published in 1974 by Tillinghast, Nelson and Warren, Inc., as well as other population statistics and morbidity studies.
The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 2000, 1999 and 1998, to the amounts reported in the Company's balance sheet:
Included in reinsurance recoverables on claim reserves is approximately $1.5 million, $0.5 million, $0.9 million and $0.7 million relating to paid claims as of December 31, 2000, 1999, March 31, 1999 and December 31, 1998, respectively.
Credit Arrangement. The Company finances the majority of its obligations to make commission advances through Ascent Funding, Inc. ("AFI"), an indirect wholly owned subsidiary. AFI has entered into a Credit Agreement (the "Credit Agreement") with LaSalle Bank which currently provides AFI with a $7.5million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from FLICA and NFL and certain affiliated marketing companies. Effective September 30, 2000, the Credit Agreement was amended to extend the termination date to June 5, 2002. As of December 31, 2000, $6.2 million was outstanding under the Credit Agreement (weighted average interest rate of 8.31%). The Company incurs a commitment fee on the unused portion of the Credit Agreement at at rate of 0.50% per annum. Interest of $0.5 million was expensed and paid in 2000. Interest of $0.3 million was expensed and paid in 1999.
AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. AFI's obligations under the Credit Agreement have been guaranteed by Ascent (the "Guaranty Agreement"), and the Company has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty. See Note 3 for discussion of compliance with debt covenants.
Accrued but unpaid interest on the Senior Notes through the Petition Date was approximately $2.1 million. The Plan required the continued accrual of interest on the Senior Notes from the Petition Date to the Effective Date. Accrued but unpaid interest on the Senior Notes from the Petition Date to December 31, 1998 totaled approximately $0.6 million. Contractual interest continued to accrue at a rate of $6,111 per day from January 1, 1999 through the Effective Date.
As of the Effective Date, these Senior Notes were canceled, extinguished and retired. As more fully described in Note 4, holders of Allowed 11% Senior Note Claims held by creditors other than CSFB received cash payments totaling $15.2 million.
New Preferred Stock On March 24, 1999, pursuant to the Plan, the Company authorized 40,000 shares of non-voting New Preferred Stock, of which 23,257 shares are owned by CSFB (see Note 4).
The following summarized the significant terms of the New Preferred Stock:
x Cumulative annual dividend rate of $102.50 per share payable annually in arrears on the last day of January in each year by issuance of cash or additional shares of New Preferred Stock.
x Each share of New Preferred Stock is convertible at any time in 204.8897 shares of New Common Stock at an initial conversation price of $4.88 per share, subject to customary anti-dilution adjustments.
Prior to the Effective Date of the Plan (see Note 4), the Company had the following preferred stock outstanding:
One thousand shares of the Company's Old Preferred Stock were converted into shares of Old Common Stock, par value $.10 per share, during the year ended December 31, 1997. The converted shares of Old Preferred Stock had an aggregate liquidation preference of $1,000,000 and were converted into 118,905 shares of Old Common Stock.
Taxes paid (recovered) in 2000, 1999 and 1998 were $(1.2) million, $80,000, and $1.1 million respectively. The Company and its wholly owned subsidiaries, other than FLICA, file a consolidated federal income tax return. FLICA files a separate federal income tax return. Prior to 2000, NFIC and AICT filed a separate consolidated tax return. NFIC and AICT entered the Ascent Assurance consolidated return in 2000.
At December 31, 2000 and 1999, NFL has approximately $7.8 million and $8.0 million in its shareholders surplus account from which it could make distributions to the Company without incurring any federal tax liability. The amount of dividends which may be paid by NFL to the Company is limited by statutory regulations.
In December 1990, the Company and NFL entered into an agreement under which NFL issued a surplus certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the surplus certificate bore interest at an agreed upon rate not to exceed 10% and was repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance agreements and (ii) NFL receiving prior approval for repayment from the Delaware Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. In 1999, with the prior approval of the Delaware Insurance Commissioner, NFL converted the remaining $776,961 of the surplus debenture to $600,000 of capital stock and $176,961 of paid in surplus.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model Act"). The Model Act provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory attention. The Model Act (or similar legislation or regulation) has been adopted in states where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention, varying with the ratio of the insurance company's total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its risk-based capital ("RBC"). If a company's total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, or if a negative trend (as defined by the NAIC) has occurred and total adjusted capital is less than 125 percent of 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 75 percent but greater than or equal to 50 percent of its RBC (the "Regulatory Action 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 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control. The NAIC's requirements are effective on a state by state basis if, and when, they are adopted by the regulators in the respective states.
In September 1986, the Company established a retirement savings plan ("401(k) plan") for its employees. As amended in August 1999, all employees are eligible to participate in the 401(k) plan upon completion of six months of service. The 401(k) plan is qualified under Section 401(a) of the Internal Revenue Code ("IRC") and the trust established to hold the assets of the 401(k) plan is tax-exempt under Section 501 (a) of the IRC. Ascent Assurance, Inc. is the plan administrator, and may amend, terminate or suspend contributions to the plan at any time it may deem advisable. Employees who elect to participate may contribute up to 10% of pre-tax compensation, including commissions, bonuses and overtime. The Company may make discretionary contributions, determined by the Company's Board of Directors, up to 50% of the employees' first 3% of deferred compensation. Certain IRC required limitations may be imposed for participants who are treated as "highly compensated employees" for purposes of the IRC. Participants vest 25% after one year of service, 50% after two years of service, 75% after three years of service and 100% after 4 years of service. Employee contributions are invested in any of ten investment funds at the discretion of the employee. Generally, the Company contributions are in the form of common stock. During the period of July 1998 through October 1999, the Company made cash contributions. The Company's contributions to the 401 (k) plan in 2000, 1999 and 1998 approximated $92,000, $96,000 and $80,000, respectively.
1999 Stock Option Plan Pursuant to the Plan (see Note 4), on March 24, 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999 Plan") in order to further and promote the interest of the Company, its subsidiaries and its shareholders by enabling the Company and its subsidiaries to attract, retain and motivate employees, non-employee directors and consultants (including marketing agents) or those who will become employees, non-employee directors and consultants (including marketing agents), and to align the interests of those individuals and the Company's shareholders. To do this, the 1999 Plan offers equity-based opportunities providing such employees and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and its subsidiaries.
The 1999 Plan became effective on the date of its adoption by the Company and will remain in effect until December 31, 2008, except with respect to awards (as that term is defined in the 1999 Plan) then outstanding, unless terminated or suspended by the Board of Directors at that time. After such date no further awards shall be granted under the 1999 Plan.
The weighted average fair value of options granted during 2000 was $1.57. 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 2000 and 1999, respectively: dividend yield of 0% for both years; expected volatility of 1.839 and 1.142; risk free interest rate of 6.57% for both years; expected life of 5 years for both years.
Compensation cost recognized in the income statement for stock-based employee compensation awards was $0.3 million for both 2000 and 1999.
If the fair value of the stock compensation granted had been accounted for under FAS 123, the pro forma net loss for the year ended December 31, 2000 would have been $(19.1) million or $(3.33) per basic share and diluted share. For the nine months ended December 31, 1999, the pro forma net income would have been $2.0 million, or $(.05) per basic share and diluted share. For purposes of pro forma disclosure, the estimated fair value of the stock compensation is amortized to expense over the stock's vesting period. The effect on net income of the stock compensation amortization for the year presented above is not likely to be representative of the effects on reported net income for future years.
The Company reinsures its risks under its Medical Expense policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $100,000. Risks under its Medicare Supplement policies are not reinsured. The Company's risks under its Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retains fifty percent (50%) of the coverage amount of each of its life insurance policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL's retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates.
The Company's future minimum lease payments for non-cancelable operating leases, relating primarily to office facilities and data processing equipment having a remaining term in excess of one year, at December 31, 2000, aggregated $8.9 million. The amounts due by year are as follows: 2001 - $2.0 million; 2002 - $2.0 million; 2003 - $1.6 million; 2004 - $1.0 million; 2005 - $0.9 million; and thereafter - $1.4 million. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $2.1 million, $2.4 million and $3.2 million in 2000, 1999 and 1998, respectively.
(1) Increase in losses for the fourth quarter of 2000 due to adverse claims experience for major medical products (see Note 3) and recognition of premium deficiency (see Note 10).
(2) Includes $10.4 million non-cash charge for increase in deferred tax asset valuation allowance (see Note 11).
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now ASCENT ASSURANCE, INC.) CONDENSED STATEMENTS OF INCOME
WESTBRIDGE CPAITAL CORP. (now ASCENT ASSURANCE, INC.) (PARENT COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now ASCENT ASSURANCE, INC.) STATEMENT OF CASH FLOWS