The Company's home offices occupy an entire two story building located at 3760 Interstate 55 North, in Jackson, Mississippi. The building and its three quarter acre site are owned by Vanguard.
General. In 1994 and early 1995, the Corporation devoted significant effort to strengthening the Statutory Surplus of Dixie Life and reducing the Corporation's dependence upon the operations of Dixie Life and the ability of Dixie Life to transfer funds to the Corporation in order for the Corporation to meet its liquidity requirements. The following steps were taken in 1994 and early 1995:
The A&H Sales increased Dixie Life's Statutory Surplus to a level so that Dixie Life is not dependent upon the reserve credit provided by the Crown Agreement to meet minimum levels
The sale of Alanco shares provides a possible source of funds to satisfy the Convertible Notes.
The SMC Transaction provides a possible source of funds to satisfy the Term Loan and the Convertible Notes. There are no assurances the transaction contemplated by the SMC Agreement will be consummated.
The Corporation's significant liquidity need at this time is for debt service. At December 31, 1994, the Corporation owed a subsidiary of SMC approximately $3,689,000 under a Term Loan. The Term Loan (originally due March 31, 1995) is now due at closing of the SMC Transaction or 90 days after the cancellation of the SMC Transaction by either party. Also, the Corporation's 10% Convertible Notes, in the amount of $1,720,000, are due May 1, 1995. Although the SMC Transaction provides a means to satisfy the Convertible Notes at closing, such notes are due before the anticipated closing date and there are no assurances that the Corporation will be able to extend such notes beyond their May 1, 1995 maturity, or effect any alternative accommodations. However, management is exploring several options and believes that the Convertible Notes will be satisfied or extended at their due date. All of the shares of Dixie Life owned by the Corporation are pledged to secure payment of the Term Loan and the Convertible Notes.
At December 31, 1994, Vanguard owed a bank approximately $524,000 under a mortgage loan secured by the home office building of Dixie Life. Under a lease agreement, Dixie Life pays Vanguard rent sufficient to cover the debt service under the mortgage.
Life has waived the Corporation's failure to satisfy the tangible net worth covenant.
The terms of the Convertible Notes provide that an event of default under the Term Loan, if not cured or waived, is an event of default under the Convertible Notes.
Going Concern Considerations. The lack of assurance that the SMC Transaction will be completed raises significant doubt about the Company's ability to continue as a going concern. Completion of the SMC Transaction together with an extension or timely repayment of the Convertible Notes would remove such uncertainties.
2. Seek to extend or secure an alternative means of paying the Convertible Notes. Liquidation of a portion of the Alanco shares is a possible source of repayment of at least a portion of the Convertible Notes.
During 1994, the Dixie Life increased its investment in fixed maturities by almost $5 million. The funding for this increase came from several sources, including $778,000 from operations, $403,000 from net collections on agent advances, $1,182,000 from net collections on student loans and $2,568,000 from a reduction in cash and short term investments. Dixie Life has completed its program, begun in 1993, to recast its investment portfolio into investments with an average maturity of approximately 10 years. Management believes its investment portfolio provides appropriate liquidity to meet the liabilities of Dixie Life as such liabilities mature.
At December 31, 1994, the Company's investments are reported in accordance with the provisions of Statement of Financial Accounting Standards No. 115 (FAS 115) which was issued by the Financial Accounting Standards Board in 1993 and effective for 1994 financial statements. As a result the carrying basis for investments is different in 1994 than in 1993.
At December 31, 1994, fixed maturity investments are all classified as available for sale and are carried at market value. Unrealized market gains and losses are reported as a separate component of stockholders' equity. Application of FAS 115 resulted in a reduction of the Corporation's stockholders' equity of $925,000 at December 31, 1994. In 1995, Dixie Life's Board of Directors approved two new investment programs. First, investment of up to $1,200,000 in five year equipment leases on food preparation equipment at a rate of prime plus 4% fixed at closing has been approved. Approximately $540,000 has been funded thus far in 1995. Second, investment of up to $1,000,000 in secured home construction loans in Arizona has been approved. These construction loans will have a loan to value ratio of not more than 65% and carry interest rates of 14.5% to 16.5%, depending on the development. No construction loans have been funded in 1995.
At December 31, 1994, Dixie Life's Statutory Surplus was $6,280,000, well in excess of the minimum requirement of any state. Prior to the 1994 A&H Sale, Dixie Life's Statutory Surplus was less than $3,000,000. Further, in order to meet its Statutory Surplus requirements, Dixie Life has, from time to time, depended upon forms of reinsurance agreements that provide surplus relief through reserve credits that, for statutory accounting purposes, increase Statutory Surplus in an amount equal to the reserve credit taken. Dixie Life's principal reinsurance agreement provided a reserve credit of $1,985,000 at December 31, 1994. It also has sold blocks of in force accident and health insurance, thereby generating significant statutory profits.
The Company incurred a net loss of $2,554,779 in 1994 compared to a net loss of $957,138 in 1993 reflecting a negative change of 167% in 1994 compared to 1993. The net loss in 1993 reflected a negative change of 213% compared to 1992 net income of $848,984. On a per share basis the net loss for 1994 was $.39 compared to a net loss of $.15 in 1993 and net income of $.13 in 1992.
$19,499,000. The 1993 level of premiums was 14% greater than 1992 premium income of $17,179,000. The decrease in premiums in 1994 was driven primarily by the A&H Sales which resulted in Dixie Life having no accident and health premiums in the last half of 1994. The composition of premium income in each of the three years was as follows:
Total benefits and expenses were $14,236,000 in 1994, $22,700,000 in 1993 and $18,213,000 in 1992, reflecting a decrease of 37% in 1994 and an increase of 25% in 1993.
In 1994, every expense category experienced a significant decrease. The decreases in benefits and claims to policyholders, amortization of deferred policy acquisition costs and commissions largely resulted from the A&H Sales. The composition of these three categories by segment were as follows:
Amortization of Deferred Policy Acquisition Costs: 1994 968,000 453,000 1,421,000 1993 1,526,000 980,000 2,506,000 1992 1,337,000 720,000 2,057,000
In 1994, a change in deferred taxes on policy liabilities, resulting from an incorrect estimate of the tax basis policy benefits at December 31, 1993, caused a $362,786 reduction of the 1994 tax benefit credited to operations. Consequently the 1994 effective tax rate was less than 2%. Income tax benefit in 1993 was 18% of the loss before income taxes compared to income tax expense of 23% on income before income taxes in 1992 and 18% in 1991.
The financial statements and supplementary data called for by this Item are set forth immediately following the Index to Financial Statements and Financial Statement Schedules at page 34.