-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JRwJGLXlP5heuS+MX/7Sjv8MIidf7kw7n+T1W6kp4Jc5ab2V0xnSuwidmpjXTvwN C8JMJ5nsgNiGi7ciB0IYJA== 0000703701-00-000003.txt : 20000407 0000703701-00-000003.hdr.sgml : 20000407 ACCESSION NUMBER: 0000703701-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASCENT ASSURANCE INC CENTRAL INDEX KEY: 0000703701 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 731165000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10873 FILM NUMBER: 594564 BUSINESS ADDRESS: STREET 1: 110 WEST SEVENTH STREET STREET 2: STE 300 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178783306 MAIL ADDRESS: STREET 1: 110 WEST SEVENTH STREET STREET 2: SUITE 300 CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: WESTBRIDGE CAPITAL CORP DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1999 Commission File Number 1-8538 ASCENT ASSURANCE, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 73-1165000 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 110 West Seventh Street, Fort Worth, Texas 76102 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (817) 878-3300 Registrant's Shareholder and Investor Relations Telephone Number: (817) 877-3048 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock (par value $.01) Warrants to purchase Common Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive Proxy Statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No__ The aggregate market value of voting stock held by non-affiliates of the Registrant amounted to $15,843,750 as of March 24, 2000. On March 29, 2000, 6,500,000 shares of Common Stock were outstanding.
ASCENT ASSURANCE, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I ITEM 1. Business...................................................................................3 ITEM 2. Properties................................................................................10 ITEM 3. Legal Proceedings.........................................................................11 ITEM 4. Submission of Matters to a Vote of Security Holders.......................................11 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................12 ITEM 6. Selected Consolidated Financial Data......................................................13 ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.....................................................................15 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk................................25 ITEM 8. Financial Statements and Supplementary Data...............................................27 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................76 PART III ITEM 10. Directors and Executive Officers of the Registrant........................................77 ITEM 11. Executive Compensation....................................................................77 ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................77 ITEM 13. Certain Relationships and Related Transactions............................................77 PART IV ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K...........................78
PART I ITEM 1. BUSINESS GENERAL 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. 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. 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(R) Marketing, Inc. ("NCM"), also a wholly owned subsidiary. To a lesser extent, the Company derives revenue from (i) commissions received from sales of unaffiliated products, (ii) telemarketing services, and (iii) printing services. REORGANIZATION EFFECTIVE MARCH 24, 1999 On September 16, 1998, Westbridge commenced its reorganization by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along with a disclosure statement (as amended, the "Disclosure Statement") and a proposed plan of reorganization (as amended, the "Plan"). The filing of the Disclosure Statement and Plan culminated months of negotiations between Westbridge and an ad hoc committee (the "Creditors' Committee") of holders of its 11% Senior Subordinated Notes due 2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004 (the "Convertible Notes"). The Disclosure Statement was approved by entry of an order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became effective March 24, 1999 (the "Effective Date"). On the Effective Date, Westbridge's certificate of incorporation and by-laws were amended and restated in their entirety and pursuant thereto, Westbridge changed its corporate name to "Ascent Assurance, Inc.". The following summary of the Plan omits certain information set forth in the Plan. Any statements contained herein concerning the Plan are not necessarily complete, and in each such instance reference is made to the Plan, a copy of which is incorporated by reference to Exhibit 2 of Westbridge's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on December 29, 1998. Each such statement is qualified in its entirety by such reference. The Plan provided for the recapitalization of certain old debt and equity interests in Westbridge and the issuance of new equity securities and warrants. Key terms of the Plan included the following: Cancellation of Existing Securities. Pursuant to the Plan, the following securities of Westbridge were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount and all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate liquidation preference of and all accrued and unpaid dividends on, Westbridge's Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock, and (vii) all unvested grants of restricted Old Common Stock. 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"). Distributions Under the Plan Cash Distribution To the holders of Senior Notes other than Credit Suisse First Boston Corporation ("CSFB"), cash payments totaling approximately $15.2 million, which equaled the total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors other than CSFB, were distributed subject to completion of the exchange of securities as contemplated by the Plan. In order to provide the Company with sufficient funds to make the cash distribution to the holders of the Allowed 11% Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. Issuance of New Securities Pursuant to the Plan and the purchase of New Preferred Stock, 6,500,000 shares of New Common Stock and 23,257 shares of New Preferred Stock were issued, subject to the completion of the exchange requirements as contemplated by the Plan, on the Effective Date as follows: * 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 their 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. * 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. * To holders of Old Common Stock as of December 10, 1998, 130,000 shares, or 2%, of the New Common Stock issued on the Effective Date and New Warrants to purchase an additional 693,761 shares, or 5%, of the New Common Stock issued on the Effective Date, on a fully diluted basis. Fractional shares of New Common Stock were not issued in connection with the Plan. As a result of this provision, certain holders of Old Common Stock received no distribution of New Common Stock or New Warrants under the Plan. * 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, were convertible into 4,765,165 shares of the New Common Stock on March 24, 1999. 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 owned on March 24, 1999 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. Reservation of Additional New Common Stock In connection with the New Warrants described above, 971,266 shares of New Common Stock have been reserved for issuance upon the exercise of New Warrants. The New Warrants are exercisable at an initial exercise price of $9.04 per share of New Common Stock, subject to customary anti-dilution adjustments, and will expire on March 24, 2004. Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date have been reserved for issuance to employees and directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock issued on the Effective Date have been reserved for issuance to the Company's marketing agents under the Company's 1999 Stock Option Plan, which was approved by the Company's shareholders. MARKETING DISTRIBUTION SYSTEM 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, 1999: Texas - 22 %, North Carolina - 7%, Tennessee - 7%, Arkansas - 7%, and Florida - 5 %. During 1999, new business was produced only in NFL and FLICA. Premium revenue, in thousands, for each of the Insurance Subsidiaries' is set forth below.
Year Ended December 31, ------------------------------------------------ 1999 1998 1997 ------------- ------------- ------------- FLICA: First-year $ 15,809 $ 7,714 $ 3,033 Renewal 14,938 11,769 11,605 ------------- ------------- ------------- 30,747 19,483 14,638 ------------- ------------- ------------- NFL: First-year 1,594 6,206 19,364 Renewal 55,231 66,285 72,773 ------------- ------------- ------------- 56,825 72,491 92,137 ------------- ------------- ------------- AICT: First-year 33 1,092 2,931 Renewal 7,516 9,467 9,753 ------------- ------------- ------------- 7,549 10,559 12,684 ------------- ------------- ------------- NFIC: First-year 35 4,149 12,562 Renewal 21,163 29,035 29,076 ------------- ------------- ------------- 21,198 33,184 41,638 ============= ============= ============= Consolidated Premium Revenue $ 116,319 $ 135,717 $ 161,097 ============= ============= =============
NCM was formed in early 1998 and is the principal distribution channel for the Insurance Subsidiaries products. NCM recruits agents as independent contractors who market the Insurance Subsidiaries' products on a one-to-one basis to individuals who are either not covered under group insurance protection normally available to employees of business organizations or who wish to supplement existing coverage. Agents' sales contacts generally result from leads generated either by the Company's telemarketing subsidiary or through outside sources. By utilizing a predictive automated dialing system, the Company believes its wholly owned telemarketing subsidiary, Precision Dialing Services, Inc. ("PDS") is able to generate a sufficient number of quality sales leads. By providing its agents with these sales leads, the Company believes it can attract experienced agents as well as new agents entering the business. DESCRIPTION OF PRODUCTS The Company's operations are comprised of one segment, Accident and Health insurance, which is comprised of various products underwritten or reinsured by the Insurance Subsidiaries. The Insurance Subsidiaries' products are designed with flexibility as to benefits, deductibles, coinsurance and premium payments, which can be adapted to meet regional sales or competitive needs, as well as those of the individual policyholders. Set forth below is a summary of the principal products currently underwritten by the Insurance Subsidiaries: * Medical Expense Products - These products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of medicines. The policies provide a number of options with respect to annual deductibles, coinsurance percentages, maximum benefits and stop-loss limits. After the annual deductible is met, the insured is responsible for a percentage of eligible expenses up to a specified stop-loss limit. Thereafter, eligible expenses are covered by the Insurance Subsidiaries up to certain maximum aggregate policy limits. The Medical Expense products are individually underwritten based upon medical information provided by the applicant prior to issue. Information provided in the application is verified with the applicant through a tape-recorded telephone conversation or through written correspondence. In addition, the Insurance Subsidiaries new Medical Expense products are stringently underwritten and include a para-med examination or other medical tests, depending on the age of the applicant. All such products are guaranteed renewable pursuant to the Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et seq. ("HIPAA"). * Specified Disease Products - These products include indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and "event specific" policies, which provide fixed benefits or lump sum payments upon diagnosis of certain types of internal cancer or other catastrophic diseases ("Specified Disease"). Benefits are payable directly to the insured following diagnosis of or treatment for a covered illness or injury. The payments are designed to help reduce the potential financial impact of these illnesses or injuries and may be used at the policyholder's discretion for any purpose, including offset of non-medical expenses or medical-related expenses not covered and paid for by the policyholder's other health insurance. The amount of benefits provided under the Specified Disease products is not necessarily reflective of the actual cost expected to be incurred by the insured as a result of the illness or injury. Specified Disease products are generally guaranteed renewable by contract, but are exempt from HIPAA. Historically, the Insurance Subsidiaries have also underwritten a significant amount of Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. During 1997, the Insurance Subsidiaries significantly reduced the underwriting of these products in favor of marketing the Medicare Supplement products of other insurers due to the relatively low margins for these products. The Insurance Subsidiaries continue to receive premiums on Medicare Supplement policies sold prior to that date. See Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition for a discussion of premium revenue by product. COMPETITION The accident and health insurance industry is highly competitive and includes a large number of insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines, favorable ratings from A.M. Best Company, Inc. ("A.M. Best") and larger staffs than the Company. Competitive factors applicable to the Company's business include product mix, policy benefits, service to policyholders and premium rates. The Company believes that its current benefits and premium rates are generally competitive with those offered by other companies. Management believes that service to policyholders and prompt and fair payment of claims continue to be important factors in the Company's ability to remain competitive. The Insurance Subsidiaries are not currently rated with A.M. Best. The Company believes that its lack of an A.M. Best rating is not a significant factor affecting its ability to sell its products in the markets that it serves. Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield and HMOs, provide various alternatives for defraying hospitalization and medical expenses. Much of this insurance is sold on a group basis to employer sponsored groups. The federal and state governments also provide programs for the payment of the costs associated with medical care through Medicare and Medicaid. These major medical programs generally cover a substantial amount of the medical expenses incurred as a result of accidents or illnesses. The Company's Medical Expense products are designed to provide coverage which is similar to these major medical insurance programs but are sold primarily to persons not covered by an employer sponsored group. The Company's Specified Disease products are designed to provide coverage which is supplemental to major medical insurance and may be used to defray nonmedical as well as medical expenses. Since these policies are sold to complement major medical insurance, the Company competes only indirectly with those insurers providing major medical insurance, however, other insurers may expand coverage in the future which could reduce future sales levels and profit margins. Medicare Supplement products are designed to supplement the Medicare program by reimbursing for expenses not covered by such program. Future government programs may reduce participation by private entities in such government programs. In addition to product and service competition, there is also very strong competition within the accident and health insurance market for qualified, effective agents. The recruitment and retention of such agents is important to the success and growth of the Company's business. Management believes that the Company is competitive with respect to the recruitment and training of agents. However, there can be no assurance that the Company will be able to continue to recruit or retain qualified, effective agents. REGULATION General. The Company and its Insurance Subsidiaries are subject to regulation and supervision in all jurisdictions in which they conduct business. In general, state insurance laws establish supervisory agencies with broad administrative powers relating to, among other things, the granting and revoking of licenses to transact business, regulation of trade practices, premium rate levels, premium rate increases, licensing of agents, approval of content and form of policies, maintenance of specified minimum statutory reserves and statutory capital and surplus, deposits of securities, form and content of required financial statements, nature of investments and limitations on dividends to stockholders. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders rather than to protect the interests of stockholders. The Insurance Subsidiaries' health insurance products are subject to rate regulation by state insurance departments, which generally require the maintenance of certain minimum loss ratios. The states in which the Company is licensed have the authority to change the minimum mandated statutory loss ratios to which the Company is subject, the manner in which these ratios are computed and the manner in which compliance with these ratios is measured and enforced. Most states in which the Company writes health insurance products have adopted the loss ratios recommended by the NAIC. The Company is unable to predict the impact of (i) any changes in the mandatory statutory loss ratios relating to products offered by the Company or (ii) any change in the manner in which these minimums are computed or enforced in the future. The Company has not been informed by any state that it does not meet mandated minimum ratios, and the Company believes that it is in compliance with all such minimum ratios. Similarly, the Company's ability to increase its premium rates in response to adverse loss ratios is subject to regulatory approval. Failure to obtain such approval could have a material adverse effect on the Company's business, financial condition and results of operations. Generally, before the Company is permitted to market an insurance product in a particular state, it must obtain regulatory approval from that state and adhere to that state's insurance laws and regulations which include, among other things, specific requirements regarding the form, language, premium rates and policy benefits of that product. Consequently, although the Company's policies generally provide for the same basic types and levels of coverage in each of the states in which they are marketed, the policies are not precisely identical in each state or other jurisdiction in which they are sold. Such regulation may delay the introduction of new products and may impede, or impose burdensome conditions on, rate increases or other actions that the Company may wish to take in order to enhance its operating results. In addition, federal or state legislation or regulatory pronouncements may be enacted that may prohibit or impose restrictions on the ability to sell certain types of insurance products or impose other restrictions on the Company's operations. For example, certain states in which the Company does business have adopted NAIC model statutes and regulations relating to market conduct practices of insurance companies. Any limitations or other restrictions imposed on the Company's market conduct practices by the regulators of a state that has adopted the model statutes and regulations may also be imposed by the regulators in other states which have adopted such statutes and regulations. No assurances can be given that future legislative or regulatory changes will not adversely affect the Company's business, financial condition or results of operations. The Insurance Subsidiaries are subject to periodic examinations by state regulatory authorities as part of their routine regulatory oversight process. Delaware and Mississippi are currently finalizing examinations of NFL and FLICA, respectively. Texas is currently conducting examinations of NFIC and AICT. Management does not expect the issuance of these examination reports to have a material effect on the financial condition of the Company. Many states have enacted insurance holding company laws that require registration and periodic reporting by insurance companies within their jurisdictions. Such legislation typically places restrictions on, or requires prior notice or approval of, certain transactions within the holding company system, including, without limitation, dividend payments from insurance subsidiaries and the terms of loans and transfers of assets within the holding company structure. NAIC Accounting Principles. 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. Risk-Based Capital. The NAIC's Risk-Based Capital for Life and/or Health Insurers 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 will perform a special examination of the company and issue an order specifying the corrective actions that must be followed. If a company's total adjusted capital is less than 50 percent but greater than or equal to 35 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 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control. The Insurance Departments of the States of Delaware and Mississippi have each adopted the NAIC's Model Act. At December 31, 1999, total adjusted capital for NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company, exceeded the respective Company Action Levels. The Texas Department of Insurance ("TDI") has adopted its own RBC requirements, the stated purpose of which is to require a minimum level of statutory capital and surplus to absorb the financial, underwriting and investment risks assumed by an insurer. Texas' RBC requirements differ from those adopted by the NAIC in two principal respects: (i) they use different elements to determine minimum RBC levels in their calculation formulas and (ii) they do not stipulate "Action Levels" (like those adopted by the NAIC) where corrective actions are required. However, the Commissioner of the TDI does have the power to take similar corrective actions if a company does not maintain the required minimum level of statutory capital and surplus. NFIC and AICT are domiciled in Texas and must comply with Texas RBC requirements. At December 31, 1999, AICT's RBC exceeded the minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum level prescribed by the TDI. As a result of the statutory losses sustained by the Insurance Subsidiaries since 1997, material transactions are subject to the approval by the department of insurance in each domiciliary state. In December 1997, NFIC, in response to these losses as well as the projected inability to meet RBC requirements, took appropriate steps to voluntarily cease the sale and underwriting of new business. In the second quarter of 1998, AICT significantly reduced the level of sales and underwriting of new business. NFIC and AICT have also entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the TDI. The Company has no current plans to underwrite new products in NFIC. Dividends. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile. NFL, a Delaware domestic company, may not declare or pay dividends from any source other than earned surplus without the Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines earned surplus as the amount equal to the unassigned funds as set forth in NFL's most recent statutory annual statement including surplus arising from unrealized gains or revaluation of assets. Delaware insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. During 2000, NFL is precluded from paying dividends without the prior approval of the Delaware Insurance Commissioner, as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. NFIC and AICT, Texas domestic companies, may make dividend payments from surplus profits or earned surplus arising from its business. The Texas Insurance Code defines earned surplus as unassigned surplus excluding any unrealized gains. Texas life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold is considered extraordinary and requires prior approval of the Texas Insurance Commissioner. NFIC's and AICT's earned surplus is negative, and as such, each company is precluded from paying dividends during 2000 without the prior approval of the Texas Insurance Commissioner. FLICA, a Mississippi domestic company may make dividend payments only from its actual net surplus computed as required by law in its statutory annual statement. Mississippi life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value not exceeding the lesser of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold amount requires prior approval of the Mississippi Insurance Commissioner. FLICA is precluded from paying dividends to NFL during 2000 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ended December 31, 1999. Guaranty Associations. The Company may be required, under the solvency or guaranty laws of most states in which it does business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Non-affiliated insurance company insolvencies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The incurrence and amount of such assessments may increase in the future without notice. The Company pays the amount of such assessments as they are incurred. Assessments that cannot be offset against future premium taxes are charged to expense. Assessments that qualify for offset against future premium taxes are capitalized and are offset against such future premium taxes. As a result of such assessments, the Company paid approximately $78,000 during the year ended December 31, 1999. Federal Regulation. Traditionally, the U.S. Government has not directly regulated the insurance business. However, the adoption of HIPAA, as well as other proposed federal initiatives, impacts the insurance business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance industry include controls on the cost of medical care, medical entitlement programs (e.g., Medicare), guaranteed renewability and portability of certain coverage, and minimum solvency requirements for insurers. EMPLOYEES At December 31, 1999, the Company employed 475 persons. The Company has not experienced any work stoppages, strikes or business interruptions as a result of labor disputes involving its employees, and the Company considers its relations with its employees to be good. ITEM 2. PROPERTIES On May 1, 1998, the Company moved its principal offices from 777 Main Street, Fort Worth, Texas, to 110 West Seventh Street, Fort Worth, Texas. The lease for the new facility expires in April, 2003. Westbridge Printing Services, Inc. ("WPS"), the Company's wholly owned printing subsidiary which prints all policies, forms and brochures of the Insurance Subsidiaries, maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. The Company also leases certain sales offices for its affiliated marketing agencies in Arizona and California. The Company believes that its leased facilities will meet its existing needs and that the leases can be renewed or replaced on reasonable terms if necessary. ITEM 3. LEGAL PROCEEDINGS Emergence from Chapter 11 Case As more fully described in ITEM 1 - "Business," Westbridge's Plan was confirmed by the Bankruptcy Court on December 17, 1998 and, after the satisfaction of a number of conditions, the Plan became effective on March 24, 1999. In connection with the approval and effectiveness of the Plan, the Company settled a putative class action brought on behalf of certain purchasers and sellers of Westbridge's Convertible Notes and Old Common Stock during the period October 31, 1996 through October 31, 1997. Other Legal Proceedings In the normal course of its business operations, the Company is involved in various claims and other business related disputes. In the opinion of management, the Company is not a party to any pending litigation the disposition of which would have a material adverse effect on the Company's business, financial position or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted by the Company to a vote of stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year for which this report is filed. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK-HOLDER MATTERS Price Range of Publicly Traded Securities. The New Common Stock and New Warrants are quoted on the over-the-counter bulletin board ("OTC Bulletin Board"). Based on the distributions made pursuant to the Plan, there were 6,500,000 shares of New Common Stock and 971,266 New Warrants outstanding as of March 29, 2000. The high and low price listed for the New Common Stock and New Warrants reflects the OTC Bulletin Board closing bid prices since May 28, 1999. The closing bid price on December 31, 1999 was $1.78. There were approximately 275 shareholders of record on December 31, 1999, representing approximately 1,600 beneficial owners. Until September 16, 1998, Westbridge's Old Common Stock was traded on the New York Stock Exchange ("NYSE"). As a result of the Chapter 11 filing, Westbridge's Old Common Stock was delisted from the NYSE and trading commenced on the OTC Bulletin Board. The high and low stock price listed for Westbridge's Old Common Stock reflects the OTC Bulletin Board closing bid prices from September 25, 1998, to March 23, 1999. OTC Bulletin Board bid prices, as stated, represent inter-dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. OTC Bulletin Board
Common Stock Warrants High Low High Low Ascent 1999 Fourth Quarter $ 1.813 $ 1.500 $ 0.250 $ 0.010 Third Quarter 3.375 1.750 0.313 0.188 Second Quarter 3.625 2.000 0.500 0.250 Westbridge 1999 First Quarter 0.328 0.188 1998 Fourth Quarter 0.438 0.016 Third Quarter 0.563 0.016 Second Quarter 0.875 0.313 First Quarter 0.938 0.438 1997 Fourth Quarter 4.938 0.375 Third Quarter 10.625 4.563 Second Quarter 10.125 8.875 First Quarter 12.250 9.500
Dividend Policy The Company did not pay any cash dividends on its Old Common Stock and does not anticipate declaring or paying cash dividends on its New Common Stock in the foreseeable future. For information concerning statutory limitations on the payment of dividends to the Company by the Insurance Subsidiaries and further discussion of the Company's results of operations and liquidity, see ITEM 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition", ITEM 1 - "Business -- Regulation", and NOTE 10 - "Statutory Capital And Surplus" to the Company's Consolidated Financial Statements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information set forth below was derived from the Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with ITEM 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Consolidated Financial Statements of the Company and related notes.
Nine Months Ended ASCENT ASSURANCE, INC. December 31, 1999 March 31, 1999 ----------------- -------------- (in thousands, except per share data) Income Statement Data: Premiums $ 86,371 Total revenues 105,972 Net income 2,106 Preferred stock dividends 1,874 Income applicable to common stockholders 232 Earnings Per Share: Basic $ 0.04 Diluted $ 0.04 Weighted Average Shares Outstanding: Basic 6,500 Diluted 6,510 Balance Sheet Data: Cash and invested assets $115,303 $129,142 Total assets 163,690 169,795 Policy liabilities 95,895 95,806 Notes payable 7,162 5,088 Total liabilities 116,649 119,435 Redeemable convertible preferred stock(1) 23,257 23,257 Stockholders' equity 23,784 27,103 Book Value Per Share: $ 3.66 $ 4.17
(1) Consists of 23,257 shares of New Prefered Stock, which are convertible, at the option of the holders thereof, into an aggregate of 4,765,120 shares of New Common Stock at a conversion price of $4.88 per share of New Common Stock.
Three Months Ended WESTBRIDGE CAPITAL CORP. March 31, Year Ended December 31, -------------- ----------------------------------------------------------------- 1999 1998 1997 1996 (1) 1995 -------------- --------- ------------- ------------ ----------- (in thousands, except per share data) Statement of Operations Data: Premiums $ 29,948 $ 135,717 $ 161,097 $ 156,780 $ 120,093 Total revenues 36,814 166,650 188,904 175,146 130,032 Extraordinary loss, net of income tax - - 1,007 - 407 Net income (loss) 208 (22,285) (97,144) 8,261 5,324 Preferred stock dividends - 520 1,572 1,650 1,650 Income (loss) applicable to common stockholders 208 (22,805) (98,716) 6,611 3,674 Earnings Per Share: Basic $ 0.03 $ (3.43) $ (16.07) $ 1.11 $ 0.64 Diluted $ 0.03 $ (3.43) $ (16.07) $ 0.97 $ 0.63 Weighted Average Shares Outstanding: Basic 7,032 6,640 6,143 5,978 5,698 Diluted 7,032 6,640 6,143 8,477 5,829 Balance Sheet Data: Total cash and invested assets $ 131,708 $ 148,442 $ 103,218 $ 111,516 Total assets 169,741 202,856 220,716 200,999 Policy liabilities 97,987 107,595 93,390 85,683 Notes payable 95,715 102,547 40,560 35,071 Total liabilities 219,886 229,274 152,813 138,194 Redeemable convertible preferred stock 11,935 19,000 20,000 20,000 Stockholders' (deficit) equity (62,080) (45,418) 47,903 42,805
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Ascent Assurance, Inc. ("Ascent"), adopted its corporate name on March 24, 1999, the date its predecessor, Westbridge Capital Corp. ("Westbridge") emerged from Chapter 11 reorganization proceedings. For additional information regarding the reorganization and adoption of fresh start accounting, see Notes 1 and 2 to the Consolidated Financial Statements included at Item 8. 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. 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 1997 presentation. Statements contained in this analysis and elsewhere in this document that are not based on historical information are forward-looking statements and are based on management's projections, estimates and assumptions. Management cautions readers regarding its forward-looking statements (see "Forward-Looking Statements"). BUSINESS OVERVIEW The Company derives its revenue primarily from premiums and fees from its accident and health insurance products and, to a significantly lesser extent, from commission, service, and investment income. The product lines currently marketed and underwritten by the Company's insurance subsidiaries are Medical Expense products and Specified Disease products. Medical Expense products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of medicines. Specified Disease products include indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and "event specific" policies, which provide fixed benefits or lump sum payments upon diagnoses of certain types of internal cancer or other catastrophic diseases. Historically, the Company's insurance subsidiaries have also underwritten a significant amount of Medicare Supplement products. The underwriting of Medicare Supplement products was curtailed due to the relatively low margins for these products. Commission and service income is generated from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions received by the Company for sales of insurance products underwritten primarily by unaffiliated managed care organizations (such sales have been significantly curtailed). OPERATING RESULTS Results of operations for Ascent are reported on a pro forma basis as if Ascent and Westbridge adopted fresh start accounting on January 1, 1999 and operated as a single entity for the year ended December 31, 1999. The operating results for 1999 are compared to Westbridge's results of operations for the corresponding periods in 1998 and 1997. (In thousands except insurance operating ratios.)
Pro Forma Ascent Westbridge ----------------- ---------------------------------- 1999 1998 1997 ----------------- --------------- --------------- Premiums $ 116,319 $ 135,717 $ 161,097 Other 1,789 589 0 ----------------- --------------- --------------- Total insurance operating revenue 118,108 136,306 161,097 Benefits and claims 87,498 99,419 136,866 Commissions 12,429 19,353 6,260 Amortization of deferred policy acquisition costs 1,764 4,411 30,873 Recognition of premium deficiency - 4,948 64,952 General and administrative expense 20,609 23,636 26,620 Taxes, licenses and fees 4,481 5,216 5,995 ----------------- --------------- ---------------- Total insurance operating expenses 126,781 156,983 271,566 ----------------- --------------- ---------------- Insurance operating results (8,673) (20,677) (110,469) ----------------- --------------- ---------------- Fee and service income 15,543 16,191 16,700 Fee and service expenses 12,824 15,728 15,217 ----------------- --------------- ---------------- Fee and service results 2,719 463 1,483 ----------------- --------------- ---------------- Net investment income 9,302 12,011 11,023 Net realized gain (loss) on investments (167) 2,142 84 Interest expense on notes payable (403) (881) (1,255) Interest expense on retired/canceled debt - (5,933) (5,847) Resolution of preconfirmation contingencies 1,235 - - Reorganization expenses - (9,179) (4,424) ----------------- --------------- ---------------- Income (loss) before income taxes 4,013 (22,054) (109,405) Income tax (expense) benefit (1,364) (231) 13,268 ----------------- --------------- ---------------- Net income (loss) $ 2,649 $ (22,285) $ (96,137) ================= =============== ================ Insurance operating ratios* Benefits and claims 75.2% 73.3% 85.0% Commissions 10.7% 14.3% 3.9% Amortization of deferred policy acquisition costs 1.5% 3.3% 19.2% Recognition of premium deficiency - 3.6% 40.3% General and administrative expense 17.4% 17.4% 16.5% Taxes, licenses and fees 3.9% 3.8% 3.7%
*Ratios are calculated as a percent of premium with the exception of the general and administrative expense ratio which is calculated as a percent of total insurance operating revenue. Overview. Income before income taxes for the year ended December 31, 1999 was $4.0 million compared to losses before income taxes of $22.0 million and $109.4 million for the years ended December 31, 1998 and 1997, respectively. The favorable trend in pre-tax income was attributable to: * The improvement in insurance operating results for 1999. Insurance operating results for 1998 and 1997 were adversely impacted by premium deficiency charges of $4.9 million and $65.0 million, respectively. In addition, 1997 insurance operating losses were increased by a high claims and benefit ratio attributable to unprofitable business issued in 1996 and 1997. The 1.9 percentage point increase in the benefit and claims ratio for 1999 over 1998 was offset by decreases in the aggregate of other insurance operating expenses. * Profitable fee and service results. The Company's printing and telemarketing operations generated profits during 1999 compared to losses realized in 1998 and 1997. * Non-recurring items expensed during 1998 and 1997 that were eliminated with the Company's reorganization in 1999. Non-recurring items include interest expense on retired/canceled debt and reorganization expenses. * The recognition of income relative to the resolution of preconfirmation contingencies. (See Note 2 of the Notes to the Consolidated Financial Statements.) The following narratives discuss the principal components of insurance operating results and net investment income. Premiums. Premiums, in thousands, for each major product line are set below for the year ended December 31: Pro Forma Ascent Westbridge ============== ============================= 1999 1998 1997 ============== ============= ============ Medical Expense: First-year $ 15,863 $ 15,821 $ 26,972 Renewal 39,891 48,888 48,792 ------------ ------------ ------------ 55,754 64,709 75,764 ------------ ------------ ------------ Specified Disease: First-year 1,352 1,818 1,959 Renewal 27,917 30,546 31,128 ------------ ------------ ------------ 29,269 32,364 33,087 ------------ ------------ ------------ Medicare Supplement: First-year 34 1,477 8,763 Renewal 30,526 36,554 42,652 ------------ ------------ ------------ 30,560 38,031 51,415 ------------ ------------ ------------ Other 736 613 831 ------------ ------------ ------------ Consolidated Premium Revenue $ 116,319 $ 135,717 $ 161,097 ============ ============ ============ Total premium revenue decreased $19.4 million (or 14.3%) for 1999 as compared to 1998 due to decreases in first year and renewal premiums of $1.7 million (or 8.8%) and $17.7 million (or 15.2%), respectively. The decrease in first year premiums was primarily attributable to the Company discontinuing sales of the Medicare Supplement product line. The cancellation of unprofitable blocks of business and decreased persistency resulting from the implementation of rate increases on less profitable blocks of business resulted in the decline in renewal premiums. For 1998, total premium revenue decreased $25.4 million (or 15.8%) from 1997. The decrease was principally due to a decrease of $18.8 million (or 48.8%) in first year premiums as new business premium writings were curtailed by the Company as a result of the initiation of the Company's reorganization. Renewal premiums decreased $6.6 million (or 5.4%). Benefits and Claims. Benefits and claims are comprised of claims paid, changes in claim reserves for claims incurred (whether or not reported) and changes in future policy benefit reserves. For 1999, the 1.9 percentage point increase in the ratio of benefits and claims to premium in comparison to 1998 was principally due to unfavorable experience in the Major Medical line of business partially offset by favorable trends in the Medicare Supplement line of business. The Company continues to pursue initiatives to reduce its benefits and claims to premium ratio including the redesign of products, increased production of profitable products, premium rate increases and elimination of unprofitable business. For 1998, benefits and claims as a percent of premium decreased 11.7 percentage points from 1997. The decrease was attributable to the significant claim reserve additions during 1997 resulting from substantial increases in paid claims experience on certain Medical Expense and Medicare Supplement products. Commissions. The 3.6 percentage point decrease in the ratio of commissions to premium improved insurance operating results by approximately $4.2 million for 1999 as compared to 1998. The improvement in the ratio of commissions to premium is principally attributable to declining ultimate commission rates on closed blocks of business and the lower commission rate structure implemented in the conversion from a fragmented general agency marketing operation to a single career agency force in mid-1998. Commissions as a percent of premium increased 1998 over 1997 due to a decrease in the amounts of commissions deferred and therefore, an increase in the amounts expensed on a current basis. Net Investment Income. Net investment income decreased $2.7 million (or 22.6%) for 1999 as compared to 1998 due to a 16.2% decrease in invested assets and decreased interest income from agent receivables. Invested assets decreased as a result of payments of reorganization costs and the reduction of premiums received as a result of the elimination of unprofitable blocks of business. For 1998, investment income increased $1.0 million (or 9.0%) from 1997 due to increases in interest income from agent receivables. FINANCIAL CONDITION 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. Investment policy is determined by the Board of Directors of the Company and each of the Insurance Subsidiaries. The Company's current investment policy is to balance its portfolio between long-term and short-term investments so as to achieve long-term returns consistent with the preservation of capital and maintenance of adequate liquidity to meet the payment of the Company's policy benefits and claims. The current schedule of the Company's invested asset maturities corresponds with the Company's expectations regarding anticipated cash flow payments based on the Company's policy benefit and claim cycle, which the Company believes is medium term in nature. The Company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. Also, up to 7% of the Company's fixed maturity securities may be invested in higher yielding, non-investment grade securities. The following table provides information on the Company's cash and invested assets, in thousands, as of December 31:
Ascent Westbridge --------------- -------------- 1999 1998 ------------ ----------- Cash and cash equivalents $ 5,110 $ 278 ------------ ------------ Fixed Maturities (at market value): U.S. Government and related agencies 10,688 11,776 State, county and municipal 1,867 1,586 Finance 23,950 31,919 Public utilities 9,128 13,421 Mortgage-backed 7,725 8,110 All other corporate bonds 44,205 56,052 ------------ ------------ Total Fixed Maturities 97,563 122,864 ------------ ------------ Preferred stock 1,313 2,575 Other Invested Assets: Mortgage loans on real estate 124 318 Policy loans 289 280 Short-term investments and certificates of deposit 10,904 5,393 ------------ ------------ Total Other Invested Assets 11,317 5,991 ------------ ------------ Total Cash and Invested Assets $ 115,303 $ 131,708 ============ ============
The following table summarizes consolidated investment results (excluding unrealized gains or losses) for the indicated year:
Pro Forma Ascent Westbridge -------------- --------------------------- 1999 1998 1997 -------------- ------------ ----------- (in thousands, except percentages) Net investment income (1) $ 8,016 $ 9,500 $ 9,390 Net realized (loss) gain on investments (167) 2,142 84 Average gross annual yield on fixed maturities 7.2% 7.0% 7.7%
(1) Excludes interest on receivables from agents of $1.3 million, $2.5 million, and $1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. 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, 1999: Market Value % ------------ --------- (in thousands) Ratings (1) Investment grade: U.S. Government and agencies $ 18,414 18.9 AAA 1,865 1.9 AA 10,277 10.5 A 35,823 36.7 BBB 29,732 30.5 Non-Investment grade: BB 1,133 1.2 B and below 319 .3 ----------- ---------- Total fixed maturity securities $ 97,563 100.0 =========== ========== (1) Ratings are the lower of those assigned primarily by Standard & Poor's and Moody's, when available, and are shown in the table using the Standard & Poor's rating scale. Unrated securities are assigned ratings based on the applicable NAIC designation or the rating assigned to comparable debt outstanding of the same issuer. NAIC 1 fixed maturity securities have been classified as "A" and NAIC 2 fixed maturity securities have been classified as "BBB". 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, 1999, 66.1%, 32.0% and 1.9% of the market value of the Company's fixed maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively. The scheduled contractual maturities of the Company's fixed maturity securities, excluding short-term investments and certificates of deposit, at December 31 are shown in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Ascent Westbridge 1999 1998 ----------------------- ------------------------ Market Market Value % Value % ------------ --------- ------------ -------- Scheduled Maturity (in thousands) Due in one year or less $ 4,012 4.1 $ 1,889 1.5 Due after one year through five years 33,311 34.2 32,254 26.2 Due after five years through ten years 26,367 27.0 41,959 34.2 Due after ten years 26,148 26.8 38,652 31.5 Mortgage-backed securities 7,725 7.9 8,110 6.6 ---------- --------- ---------- --------- Total fixed maturity securities $ 97,563 100.0 $ 122,864 100.0 ========== ========= =========== =========
Reserve Policy. The Company's reserves consist of two separate components: claim reserves and policy benefit 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. The Company's consulting actuary estimates these reserves based upon an analysis of claim inventories, loss ratios and historical claim payment studies. These estimates are developed in the aggregate for claims incurred (whether or not reported). 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 generally accepted accounting principles ("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 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 the second and third quarters of 1997 were indicative of inadequate pricing in the Company's old Medical Expense and Medicare Supplement products. See ITEM 7 - "Operating Results." Because the discount factor used in calculating the Company's policy benefit reserves is based upon the rate of return of the Company's investments designed to fund this reserve, the amount of the reserve is dependent upon the yield on these investments. Provided that there is no material adverse experience with respect to these benefits, changes in future market interest rates will not have an impact on the profitability of policies already sold. Because fluctuations in future market interest rates affect the Company's yield on new investments, they also affect the discount factor used to establish, and thus the amount of, its policy benefit reserves for new sales. In addition, because an increase in the policy benefit reserves in any period is treated as an expense for income statement purposes, market interest rate fluctuations can directly affect the Company's profitability for policies sold in such period. It is not possible to predict future market interest rate fluctuations. In accordance with GAAP, the Company's actuarial assumptions are generally fixed, and absent materially adverse benefit experience, they are not generally adjusted. The Company monitors the adequacy of its policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of the Company's 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 the Company's 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 Company insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the Company needing to post additional reserves, which could have a material adverse effect upon its business, financial condition or results of operations. The Company's Insurance Subsidiaries are required to report their results of operations and financial position to state regulatory agencies based upon statutory accounting practices ("SAP"). Under SAP, certain assumptions used in determining the policy benefit reserves, such as claim costs and investment result assumptions, are often more conservative than those appropriate for use by the Company under GAAP. In particular, SAP interest rate assumptions for investment results are fixed by statute and are generally lower than those used by the Company under GAAP. Another significant difference is that under SAP, unlike GAAP, the Company is required to expense all sales and other policy acquisition costs as they are incurred rather than capitalizing and amortizing them over the expected life of the policy. The effect of this requirement is moderated by the allowance under SAP of an accounting treatment known as the "two year preliminary term" reserve valuation method. This reserve method allows the Company to defer any accumulation of policy benefit reserves until after the second policy year. The immediate charge off of sales and acquisition expenses and the sometimes conservative claim cost and other valuation assumptions under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce the Company's gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividend distributions from the Insurance Subsidiaries. See ITEM 7 "Liquidity, Capital Resources and Statutory Capital and Surplus - The Company." Reinsurance. As is customary in the insurance industry, the Company's Insurance Subsidiaries reinsure portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and 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. The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Coinsurance Agreement") with a reinsurer effective July 1, 1996 on the in force Cancer, Heart and Intensive Care business. The Coinsurance Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. On May 1, 1997, the Coinsurance Agreement was terminated and recaptured. Consistent with the terms of the agreement, the unpaid portion of the initial ceding commission allowance was repaid inclusive of interest at 15.0%. For the year ended December 31, 1997, the amount repaid was approximately $8.6 million. See NOTE 12 - "Reinsurance" and NOTE 14 - "Extraordinary Item" to the Company's Consolidated Financial Statements. The Company generally does not cede risks associated with its Medicare Supplement products. However, 100% of the Company's risks under its Accidental Death policies currently in force are reinsured. The Company also reinsures its risks under the Medical Expense products on an excess of loss basis so that its maximum payment to any one beneficiary during any one-year period is limited ($100,000 in 1999 and 1998) for any accident or illness. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance. NFL's retention limit is $25,000 per year. No other life insurance products were reinsured during 1999, 1998 or 1997. In accordance with industry practice, the reinsurance agreements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates. At December 31, 1999, $0.5 million of the $2.3 million recoverable from reinsurers related to paid losses. Of this balance, all was recoverable from reinsurers rated "A" or higher by A.M. Best Company. LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS The Company. The Company's principal assets consist of the capital stock of its subsidiaries and invested assets. Accordingly, the Company's principal sources of funds are comprised of dividends, advances and management fees from non-insurance company subsidiaries, and tax payments under a tax sharing agreement among the Company and its subsidiaries. The Company's principal uses of cash are for capital contributions to its insurance subsidiaries and general and administrative expenses. The Company made capital contributions totaling approximately $5.9 million, $5.7 million and $45.5 million to its Insurance Subsidiaries in 1999, 1998 and 1997, respectively. The Company expects to make additional contributions to the Insurance Subsidiaries in 2000 to support planned growth in new business. 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. Preferred stock dividends accrued at December 31, 1999 were paid in January 2000 through issuance of 1,873 additional shares of preferred stock. As of December 31, 1999, Ascent had approximately $8.7 million in unrestricted cash and invested assets. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile, see Item 1 - Business - Regulations. NFL, a Delaware domestic company, is precluded from paying dividends in 2000 without the prior approval of the Delaware Insurance Commissioner, as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. NFIC and AICT, Texas domestic companies, are also precluded from paying dividends during 2000 without the prior approval of the Texas Insurance Commissioner as both companies earned surplus is negative. FLICA, a Mississippi domestic company, is precluded from paying dividends during 2000 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ended December 31, 1999. Insurance Subsidiaries. The primary sources of cash for the Insurance Subsidiaries are premiums and income on invested assets. Additional cash is periodically provided by capital contributions from the Company (see "The Company" discussion above) and from the sale of short-term investments and could, if necessary, be provided through the sale of long-term investments and blocks of business. The Insurance Subsidiaries' primary uses for cash are benefits and claims, commissions, general and administrative expenses, and taxes, licenses and fees. Inflation will affect claim costs on the Company's Medicare Supplement and Medical Expense 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 Medical Expense 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 $2.6 million, $8.0 million and $20.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. 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. The decrease in cash used for operations between 1998 and 1997 was primarily the result of (a) amounts remitted to reinsurers during 1997 terminating certain reinsurance arrangements, and (b) high paid claim levels in 1997 attributable to unprofitable blocks of business issued in 1996 and 1997. Net cash provided by (used for) investing activities for the years ended December 31, 1999, 1998 and 1997 totaled $6.4 million, $13.3 million and $(40.4) million, respectively. Net cash provided by investing activities in 1999 and 1998 was primarily used to fund the Company's operating and financing activities. Further, the significant cash outflow to acquire investments in 1997 was related to the investment of the net proceeds from the issuance of Westbridge's Convertible Notes. Net cash provided by (used for) financing activities totaled $1.0 million, $(6.0) million and $60.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. Cash flows for financing activities for the years ended December 31, 1999 and 1998 were related to the net borrowings and repayments associated with the Company's Receivables Financing program (defined below). The Company's net financing cash flow increased in 1999 as a result of increasing new business production and related agent's balances. Cash flows provided by financing activities for the year ended December 31, 1997, included approximately $70.0 million in cash inflows resulting from the issuance of Westbridge's Convertible Notes that was offset, in part, by cash payments of $7.0 million to retire a note payable associated with a recaptured reinsurance agreement and $1.0 million to retire a note with a related party. In the ordinary course of business, the Company advances commissions on policies written by its general agencies and their agents. The Company 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 Company has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. For the years ended December 31, 1999, 1998 and 1997, the Company has recorded a net provision for uncollectible commission advances totaling $0.9 million, $0.6 million and $2.8 million, respectively. The Company finances the majority of its obligations to make commission advances through Ascent Funding Corporation ("AFI"), an indirect wholly owned subsidiary of Ascent. On June 6, 1997, AFI entered into a Credit Agreement (the "Credit Agreement") with LaSalle National Bank ("LaSalle"). This Credit Agreement provided AFI with a three-year, $20.0 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from the Insurance Subsidiaries and certain affiliated marketing companies. AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. In August 1999, the Company amended the Credit Agreement which reduced the revolving loan facility to a $7.5 million facility. In connection with this commission advancing program, at December 31, 1999, the Company's net receivables from subagents totaled approximately $7.1 million and approximately $3.9 million was outstanding under the Credit Agreement. The Credit Agreement terminates on June 5, 2001, at which time the outstanding principal and interest thereunder will be due and payable. 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 and NFIC as collateral for that guaranty (the "Guaranty Agreement"). The Company's obligations under the Guaranty Agreement continue following confirmation of the Plan. As of the Effective Date, there were no events of default under the Credit or Guaranty Agreements. See NOTE 5 to the Company's Consolidated Financial Statements. In July 1999, Ascent Management, Inc. ("AMI") received a $3.3 million term loan facility with LaSalle, proceeds of which were used to fund system replacement costs. Advances under the term loan facility are secured by substantially all of AMI's assets and the Guaranty Agreement. Under the terms of the loan, principal is payable in 60 equal monthly installments beginning January 31, 2000. At December 31, 1999, approximately $3.3 million was outstanding under the term loan facility. YEAR 2000 ISSUES With the change to the year 2000, the Company experienced no significant interruptions in its normal business processes and no disruptions to services provided to its customers and agents. For the twelve months ended December 31, 1999, the Company incurred approximately $.5 million in incremental costs related to remediation of the Company's existing systems for the Year 2000. The Company's conversion effort to replace its existing policyholder and claim administration system with a new, more modern system continues. At December 31, 1999, this replacement effort was well under way. The Company expects total charges related to the system replacement to approximate $5.4 million of which the majority will be capitalized. For the twelve months ended December 31, 1999, the Company incurred approximately $4.8 million of the projected total of $5.4 million in costs related to the system replacement. FORWARD-LOOKING STATEMENTS: The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The preceding statements and certain other statements contained in Item 1 - "Business" and Item 7 - "Management's Discussion and Analysis of Results of Operation and Financial Condition", are forward-looking statements. These forward-looking statements are based on the intent, belief or current expectations of the Company and members of its senior management team. While the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report include, but are not limited to: * the effect of economic and market conditions * further adverse developments with respect to the Company's liquidity position or operations of the Company's various businesses * actions that may be taken by insurance regulatory authorities * adverse developments in the timing or results of the Company's current strategic business plan * the difficulty in controlling health care costs and integrating new operations * the ability of the Company to realize anticipated general and administrative expense savings and overhead reductions from system replacement initiatives * the ability of management to return the Company's operations to profitability * and the possible negative effects of prospective health care reform. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary objectives in managing its cash flows and investments are to maximize investment income and yield while preserving capital and minimizing credit risks. To attain these objectives, investment policies and strategies are developed using expected underwriting results, forecasted federal tax positions, regulatory requirements, forecasted economic conditions including expected fluctuations in interest rates and general market risks. Market risk represents the potential for loss due to adverse changes in the fair market value of financial instruments. The market risks associated with the financial instruments of the Company primarily relate to the Company's investment portfolio that consists largely (84.6%) of fixed income securities. The Company's investment portfolio is exposed to market risk through fluctuations in interest rates, changes in credit quality and principal prepayments. Interest Rate Risk. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The Company evaluates the potential changes in interest rates and market prices within the context of asset and liability management. Asset and liability management involves forecasting the payout pattern of the Company's liabilities, consisting primarily of accident and health claim reserves, to determine duration and then matching the duration of the liabilities to fixed income investments with a similar duration. Through active portfolio asset and liability management, the Company believes that interest rate risk is mitigated. Credit Risk. The company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. (See Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Conditions and Note 3 - "Investments" to the Company's Consolidated Financial Statements.) Approximately 1.5% of the Company's fixed-income portfolio is comprised of less than investment grade securities. The Company's investment policy allows up to 7% of the Company's fixed maturity securities to be invested in higher yielding, non-investment grade securities. Due to the overall high quality of the Company's investment portfolio ("A" as rated by Standard & Poor's), management believes the Company has marginal risk with regard to credit quality. PrePayment Risk. Mortgage-backed securities investors are compensated primarily for prepayment risk rather than credit quality risk. During periods of significant interest rate volatility, the underlying mortgages may repay more quickly or more slowly than anticipated. If the repayment of principal occurs earlier than anticipated during periods of declining interest rates, investment income may decline due to the reinvestment of these funds at the lower current market rates. To manage prepayment risk, the Company limits the type of mortgage-backed structures invested in and restricts the portfolio's total exposure in mortgage-backed securities. If the repayment occurs later than expected during periods of increasing interest rates, the cost of funds to pay liabilities may increase due to the mismatching of assets and liabilities. Sensitivity Analysis. The Company regularly conducts various analyses to gauge the financial impact of changes in interest rate on its financial condition. The ranges selected in these analyses reflect management's assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the accompanying analyses should, in no manner, be construed as a prediction of future economic events, but rather, be treated as a simple illustration of the potential impact of such events on the Company's financial results. The sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100 and 200 basis points from their levels at December 31, 1999, and with all other variables held constant. A 100 and 200 basis point increase in market interest rates would result in a pre-tax decrease in the market value of the Company's fixed income investments of $4.7 million and $9.1 million, respectively. Similarly, a 100 and 200 basis point decrease in market interest rates would result in a pre-tax increase in the market value of the Company's fixed income investments of $5.1 million and $10.5 million, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Financial Statement Schedules Covered by the Following Report of Independent Accountants.
Page Number(s) Reports of Independent Accountants............................................................................28-29 Financial Statements: Ascent Assurance, Inc. Consolidated Balance Sheets at December 31, 1999 and March 31, 1999.................................................................30 Westbridge Capital Corp. Consolidated Balance Sheet at December 31, 1998....................................................................................31 Ascent Assurance, Inc. Consolidated Statement of Income for the Nine Months Ended December 31, 1999.................................................................................32 Westbridge Capital Corp. Consolidated Statements of Income for the Three Months Ended March 31, 1999 and Years Ended December 31, 1998 and 1997.........................................33 Ascent Assurance, Inc. Consolidated Statement of Comprehensive Income for the Nine Months Ended December 31, 1999......................................................34 Westbridge Capital Corp. Consolidated Statement of Comprehensive Income for the Three Months Ended March 31, 1999 and Years Ended December 31, 1998 and 1997............................35 Ascent Assurance, Inc. Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended December 31, 1999......................................................36 Westbridge Capital Corp. Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 1999 and Years Ended December 31, 1998 and 1997............................37 Ascent Assurance, Inc. Consolidated Statement of Cash Flows for the Nine Months ended December 31, 1999.....................................................................38 Westbridge Capital Corp. Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999 and Years Ended December 31, 1998 and 1997............................39 Notes to The Consolidated Financial Statements...........................................................40-63 Financial Statement Schedules: II. Condensed Financial Information of Registrant............................................................64-73 III. Supplementary Insurance Information.........................................................................74 IV. Reinsurance.................................................................................................75 V. Valuation and Qualifying Accounts and Reserves..............................................................76
All other Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Ascent Assurance, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Ascent Assurance, Inc. and its subsidiaries at December 31, 1999 and March 31, 1999 and the results of their operations and their cash flows for the nine months ended December 31, 1999, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company's predecessor, Westbridge Capital Corp., filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan of Reorganization on December 17, 1998, and, after the satisfaction of a number of conditions, the Plan of Reorganization became effective on March 24, 1999 and the company emerged from bankruptcy. In connection with its emergence from Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent Assurance, Inc. and adopted fresh start accounting. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dallas, Texas March 29, 2000 Report of Independent Accountants To the Board of Directors and Stockholders of Westbridge Capital Corp. (now, Ascent Assurance, Inc.) In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1998 and the results of their operations and their cash flows for the three months ended March 31, 1999 and for each of the two years in the period 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. As discussed in Note 1 to the consolidated financial statements, Westbridge Capital Corp. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan of Reorganization on December 17, 1998, and, after the satisfaction of a number of conditions, the Plan of Reorganization became effective on March 24, 1999 and the Company emerged from bankruptcy. In connection with its emergence from Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent Assurance, Inc. and adopted fresh start accounting. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dallas, Texas March 29, 2000
Ascent Assurance, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) December 31, 1999 March 31, 1999 ------------------- ------------------- Assets Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $103,436 and $116,352) $ 97,563 $ 116,352 Equity securities, at market (cost $1,365 and $2,275) 1,313 2,275 Other investments 413 516 Short-term investments 10,904 7,789 ------------------- ------------------- Total Investments 110,193 126,932 Cash 5,110 2,210 Accrued investment income 2,030 2,169 Receivables from agents, net of allowance for doubtful accounts of $6,060 and $5,125 7,062 8,182 Deferred policy acquisition costs 19,393 15,039 Deferred tax asset, net 7,086 7,347 Property and equipment, net of accumulated depreciation of $1,546 and $3,556 6,272 2,572 Other assets 6,544 5,344 ------------------- ------------------- Total Assets $ 163,690 $ 169,795 =================== =================== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity Liabilities: Policy liabilities and accruals: Future policy benefits $ 57,119 $ 54,738 Claim reserves 38,776 41,068 ------------------- ------------------- Total Policy Liabilities and Accruals 95,895 95,806 Accounts payable and other liabilities 13,592 18,541 Notes payable 7,162 5,088 ------------------- ------------------- Total Liabilities 116,649 119,435 ------------------- ------------------- Redeemable convertible preferred stock 23,257 23,257 ------------------- ------------------- Stockholders' Equity: Common stock ($.01 par value, 30,000,000 shares authorized; 6,500,000 shares issued) 65 65 Capital in excess of par value 27,338 27,038 Accumulated other comprehensive loss, net of tax (3,851) - Retained Earnings 232 - ------------------- ------------------- Total Stockholders' Equity 23,784 27,103 ------------------- ------------------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity $ 163,690 $ 169,795 =================== ===================
See Notes to Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED BALANCE SHEET (in thousands, except per share data) December 31, 1998 -------------------- Assets Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $116,871) $ 122,864 Equity securities, at market (cost $2,551) 2,575 Other investments 598 Short-term investments 5,393 ------------ Total Investments 131,430 Cash 278 Accrued investment income 2,372 Receivables from agents, net of allowance for doubtful accounts of $5,176 9,860 Deferred policy acquisition costs 14,177 Other assets 11,624 ============= Total Assets $ 169,741 ============= Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit Liabilities: Policy liabilities and accruals: Future policy benefits $ 53,871 Claim reserves 44,116 ------------- Total Policy Liabilities and Accruals 97,987 Accounts payable and other liabilities 14,807 Accrued interest and dividends payable 11,377 Notes payable 6,192 Senior subordinated notes, net of unamortized discount, due 2002 19,523 Convertible subordinated notes, due 2004 70,000 ------------- Total Liabilities 219,886 ------------- Redeemable convertible preferred stock 11,935 ------------- Stockholders' Deficit: Common stock ($.10 par value, 30,000,000 shares authorized; 7,035,809 shares issued) 703 Capital in excess of par value 37,641 Accumulated other comprehensive income, net of tax 3,911 Deficit (104,335) ------------- Total Stockholders' Deficit (62,080) ------------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit $ 169,741 =============
See the Notes to the Consolidated Financial Statements.
Ascent Assurance, Inc. CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) Nine Months Ended December 31, 1999 --------------------- Revenues: Premiums: First-year $ 14,350 Renewal 72,021 ----------------- Total Premiums 86,371 Net investment income 6,740 Fee and service income 13,069 Net realized loss on investments (208) ----------------- 105,972 ----------------- Benefits, claims and expenses: Benefits and claims 65,699 Amortization of deferred policy acquisition costs 1,478 Commissions 14,610 General and administrative expenses 18,483 Taxes, licenses and fees 3,422 Interest expense on notes payable 284 Resolution of preconfirmation contingencies (1,235) ----------------- Total expenses 102,741 ----------------- Income before income taxes 3,231 Federal income tax expense (1,125) ----------------- Net income 2,106 Preferred stock dividends 1,874 ----------------- Income applicable to common stockholders $ 232 ================= Basic and diluted net income per common share $ .04 ================= Weighted average shares outstanding: Basic 6,500 Diluted 6,510
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now Ascent Assurance, Inc.) CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended Year Ended March 31, December 31, --------------- --------------------------------- 1999 1998 1997 --------------- -------------- --------------- Revenues: Premiums: First-year $ 3,121 $ 19,161 $ 37,890 Renewal 26,827 116,556 123,207 ----------- ------------- ------------- Total Premiums 29,948 135,717 161,097 Net investment income 2,562 12,011 11,023 Fee and service income 4,263 16,780 16,700 Net realized gain on investments 41 2,142 84 ----------- ------------- ------------- 36,814 166,650 188,904 ----------- ------------- ------------- Benefits, claims and expenses: Benefits and claims 21,799 99,419 136,866 Amortization of deferred policy acquisition costs 286 4,411 30,873 Commissions 6,134 30,568 16,690 General and administrative expenses 6,635 28,149 31,407 Reorganization expense - 9,179 4,424 Recognition of premium deficiency - 4,948 64,952 Taxes, licenses and fees 1,059 5,216 5,995 Interest expense on notes payable 119 881 1,255 Interest expense on retired/cancelled debt 507 5,933 5,847 ----------- ------------- ------------- 36,539 188,704 298,309 ----------- ------------- ------------- Income (loss) before income taxes and extraordinary item 275 (22,054) (109,405) Federal income tax (expense) benefit (67) (231) 13,268 ----------- ------------- ------------- Income (loss) before extraordinary item 208 (22,285) (96,137) Extraordinary loss, net of tax - - 1,007 =========== ============= ============== Net income (loss) $ 208 $ (22,285) $ (97,144) =========== ============= ============== Preferred stock dividends - 520 1,572 =========== ============= ============== Income (loss) applicable to common stockholders $ 208 $ (22,805) $ (98,716) =========== ============= ============== Basic and diluted net income per common share: Income (loss) before extraordinary item $ .03 $ (3.43) $ (15.91) Extraordinary loss - - (.16) =========== ============= ============== Net income (loss) $ .03 $ (3.43) $ (16.07) =========== ============= ============== Weighted average shares outstanding: Basic 7,032 6,640 6,143 Diluted 7,032 6,640 6,143
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands) Nine Months Ended December 31, 1999 ----------------- Net income $ 2,106 Other comprehensive income (loss): Unrealized holding loss arising during period, net of tax (3,956) Reclassification adjustment of gain on sales of investments included in net income, net of tax 105 =========== Comprehensive loss $ (1,745) =========== See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended Year Ended March 31, December 31, ------------------ ------------------------------------- 1999 1998 1997 ------------------ ----------------- ---------------- Net income (loss) $ 208 $ (22,285) $ (97,144) Other comprehensive income (loss): Unrealized holding gain (loss) arising during period, net of tax (1,959) 534 3,690 Reclassification adjustment of loss on sales of investments included in net income, net of tax (27) (1,272) (98) ================== ================= ================ Comprehensive loss $ (1,778) $ (23,023) $ (93,552) ================== ================= ================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except per share data) Accumulated Total Capital Other Stock Common Stock in Excess Comprehensive Retained holders' Shares Amount of Par Value Loss Earnings Equity Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103 Net income 2,106 2,106 Preferred stock dividend (1,874) (1,874) Other comprehensive loss, net of tax (3,851) (3,851) Amortization of unearned compensation 300 300 ----------- ------- ----------- ----------- --------- ---------- Balance at December 31, 1999 6,500,000 $ 65 $ 27,338 $ (3,851) $ 232 $ 23,784 =========== ======= =========== =========== ========= ==========
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except per share data) Total Accumulated Stock- Capital Other Retained holders' Common Stock in Excess Comprehensive Earnings Treasury Stock Equity Shares Amount of Par Value Income (Deficit) Shares Amount (Deficit) ------ ------ ------------ ------------- --------- -------- -------- --------- Balance at December 31, 1996 6,039,994 $ 604 $ 29,226 $ 1,057 $ 17,186 28,600 $ (170) $ 47,903 Net loss (97,144) (97,144) Preferred stock dividend (1,572) (1,572) Other comprehensive income, net of tax 3,592 3,592 Preferred stock converted to common 118,905 12 937 949 Issuance of shares under stock option plans 42,500 4 115 119 Award and issuance of restricted shares 67,000 7 1,179 1,186 Cancellation of treasury stock (28,600) (3) (167) (28,600) 170 0 Shares purchased and canceled under stock option plans (44,360) (4) (447) (451) ----------- ------- ---------- --------- --------- -------- ------- ---------- Balance at December 31, 1997 6,195,439 620 30,843 4,649 (81,530) - - (45,418) Net loss (22,285) (22,285) Preferred stock dividend (520) (520) Other comprehensive loss, net of tax (738) (738) Preferred stock converted to common 840,071 83 6,982 7,065 Other, net 299 - (184) (184) ----------- ------- ---------- --------- --------- -------- ------- ---------- Balance at December 31, 1998 7,035,809 703 37,641 3,911 (104,335) - - (62,080) Net income 208 208 Other comprehensive loss, net of tax (1,986) (1,986) Cancellation of old preferred stock 11,935 (3,088) 8,847 Issuance of new preferred stock (477) (477) Cancellation of old common stock (7,035,809) (703) (703) Issuance of new common stock 6,500,000 65 79,203 79,268 Fresh start adjustments (101,741) (1,925) 107,692 4,026 =========== ======= ========== ========= ========= ======== ======= ========== Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - - $ - $ 27,103 =========== ======= ========== ========= ========= ======== ======= ==========
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Nine Months Ended December 31, 1999 -------------------- Cash Flows From Operating Activities: Net income $ 2,106 Adjustments to reconcile net income to cash used for operating activities: Amortization of deferred policy acquisition costs 1,478 Additions to deferred policy acquisition costs (5,832) Decrease in receivables from agents 1,120 Increase in other assets (1,061) Increase in policy liabilities and accruals 89 Decrease in accounts payable and accruals (4,949) Decrease in deferred income taxes, net 261 Other, net 1,707 ------------------- Net Cash Used For Operating Activities (5,081) ------------------- Cash Flows From Investing Activities: Proceeds from investments sold: Fixed maturities, called or matured 1,132 Fixed maturities, sold 17,096 Other investments, sold or matured 873 Cost of investments acquired (9,001) Property and equipment purchased (4,193) ------------------- Net Cash Provided By Investing Activities 5,907 ------------------- Cash Flows From Financing Activities: Issuance of notes payable 4,129 Repayment of notes payable (2,055) ------------------- Net Cash Provided by Financing Activities 2,074 ------------------- Increase in Cash During Period 2,900 Cash at Beginning of Period 2,210 =================== Cash at End of Period $ 5,110 =================== See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, Year Ended December 31, ---------------- -------------------------- 1999 1998 1997 Cash Flows From Operating Activities: Net income (loss) $ 208 $ (22,285) $ (97,144) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Recognition of premium deficiency - 4,948 64,952 Amortization of deferred policy acquisition costs 286 4,411 30,873 Additions to deferred policy acquisition costs (1,148) (4,371) (31,119) Decrease (increase) in receivables from agents 1,678 10,643 (2,192) (Increase) decrease in other assets (1,007) 513 2,194 (Decrease) increase in policy liabilities and accruals (2,181) (9,608) 14,205 Increase in accounts payable and accruals 4,428 6,532 8,996 Decrease in deferred income taxes, net (1,070) - (10,299) Other, net 1,308 1,211 (440) ------------- ------------ ------------ Net Cash Provided By (Used For) Operating Activities 2,502 (8,006) (19,974) ------------- ------------ ------------ Cash Flows From Investing Activities: Proceeds from investments sold: Fixed maturities, called or matured 2,215 7,531 9,469 Fixed maturities, sold 4,904 13,810 25,345 Other investments, sold or matured 139 8,913 867 Cost of investments acquired (5,851) (15,772) (75,745) Other (873) (1,184) (300) ------------- ------------ ------------ Net Cash Provided By (Used For) Investing Activities 534 13,298 (40,364) ------------- ------------ ------------ Cash Flows From Financing Activities: Retirement of senior subordinated debentures (15,167) - - Issuance of preferred stock 15,167 - - Decrease (increase) in deferred debt costs - 864 (1,230) Issuance of convertible subordinated notes - - 70,000 Issuance of notes payable 911 5,461 21,044 Repayment of notes payable (2,015) (12,369) (29,154) Issuance of common stock - - 140 Purchase and cancellation of common stock - - (445) ------------- ------------ ------------ Net Cash (Used For) Provided By Financing Activities (1,104) (6,044) 60,355 ------------- ------------ ------------ Increase (decrease) increase in Cash During Period 1,932 (752) 17 Cash At Beginning Of Period 278 1,030 1,013 ------------- ------------ ------------ Cash At End Of Period $ 2,210 $ 278 $ 1,030 ============= ============ ============
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. (formerly, Westbridge Capital Corp.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - REORGANIZATION EFFECTIVE MARCH 24, 1999 On September 16, 1998, Westbridge Capital Corp., ("Westbridge") commenced its reorganization by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along with a disclosure statement (as amended, the "Disclosure Statement") and a proposed plan of reorganization (as amended, the "Plan"). The filing of the Disclosure Statement and Plan culminated months of negotiations between Westbridge and an ad hoc committee (the "Creditors' Committee") of holders of its 11% Senior Subordinated Notes due 2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004 (the "Convertible Notes"). The Disclosure Statement was approved by entry of an order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became effective March 24, 1999 (the "Effective Date"). On the Effective Date, Westbridge's certificate of incorporation and by-laws were amended and restated in their entirety and pursuant thereto, Westbridge changed its corporate name to "Ascent Assurance, Inc." ("Ascent"). 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. The following summary of the Plan omits certain information set forth in the Plan. Any statements contained herein concerning the Plan are not necessarily complete, and in each such instance reference is made to the Plan, a copy of which is incorporated by reference to Exhibit 2 of Westbridge's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on December 29, 1998. Each such statement is qualified in its entirety by such reference. The Plan provided for the recapitalization of certain old debt and equity interests in Westbridge and the issuance of new equity securities and warrants. Key terms of the Plan included the following: Cancellation of Existing Securities Pursuant to the Plan, the following securities of Westbridge were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount and all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate liquidation preference of and all accrued and unpaid dividends on, Westbridge's Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock, and (vii) all unvested grants of restricted Old Common Stock. 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") Distributions Under the Plan Cash Distribution To the holders of Senior Notes other than Credit Suisse First Boston Corporation ("CSFB"), cash payments totaling approximately $15.2 million, which equaled the total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors other than CSFB, were distributed subject to completion of the exchange of securities as contemplated by the Plan. In order to provide the Company with sufficient funds to make the cash distribution to the holders of the Allowed 11% Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. Issuance of New Securities Pursuant to the Plan and the purchase of New Preferred Stock, 6,500,000 shares of New Common Stock and 23,257 shares of New Preferred Stock were issued, subject to the completion of the exchange requirements as contemplated by the Plan, on the Effective Date as follows: * 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. * 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. * To holders of Old Common Stock as of December 10, 1998, 130,000 shares or 2%, of the New Common Stock issued on the Effective Date and New Warrants to purchase an additional 693,761 shares, or 5%, of the New Common Stock issued on the Effective Date, on a fully diluted basis. Fractional shares of New Common Stock were not issued in connection with the Plan. As a result of this provision, certain holders of Old Common Stock received no distribution of New Common Stock or New Warrants under the Plan. * 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. Reservation of Additional New Common Stock 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. Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to employees and directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock issued on the Effective Date are reserved for issuance to the Company's marketing agents under the Company's 1999 Stock Option Plan, which was approved by the Company's shareholders. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCLUDING FRESH START ACCOUNTING PRINCIPLES EFFECTIVE MARCH 31, 1999 FOR ASCENT Basis of Presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of Ascent Assurance, Inc. and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Certain reclassifications of prior years' amounts have been made to conform with the 1999 financial statement presentation. Fresh Start Adjustments. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company adopted fresh start reporting effective March 31, 1999. Fresh start reporting requires the new reporting entity created on the reorganization effective date to determine a reorganization book value. The reorganization book value is allocated to the fair value of assets and liabilities similar to the purchase method of accounting under Accounting Principles Board Opinion No. 16. As a result of the application of fresh start reporting, the financial statements of Ascent issued subsequent to the adoption of fresh start reporting will not be comparable with those of Westbridge prepared before adoption of fresh start accounting, including the historical financial statements of Westbridge in this annual report. With the adoption of fresh start accounting, the Company retained a fiscal accounting year ended on December 31 of each year. Ascent's reorganization book value was determined with the assistance of its financial advisors. The significant factors used in the determination of reorganization book value were analyses of industry, economic and overall market conditions, historical and projected performance of the Company, and certain financial analyses, including discounted future cash flows. The effects of the Plan and fresh start reporting on the Company's consolidated balance sheet as of March 31, 1999 are as follows (in thousands):
Westbridge Issue New Issue New Fresh Start Ascent 03/31/1999 Preferred (a) Common (b) Adjustments(c) 03/31/1999 -------------- -------------- ---------------- ------------------ --------------- Assets Total investments $ 126,932 $ $ $ $ 126,932 Cash 2,210 2,210 Accrued investment income 2,169 2,169 Agent receivables, net 8,182 8,182 Deferred policy acquisition costs 15,039 15,039 Deferred tax asset, net 1,070 6,277 7,347 Other assets 13,504 (3,088) (2,500) 7,916 -------------- -------------- ---------------- ------------------ --------------- Total assets $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795 ============== ============== ================ ================== =============== Liabilities, Preferred Stock & Equity Policy liabilities and accruals $ 95,806 $ $ $ $ 95,806 Accounts payable and accruals 18,790 (249) 18,541 Notes payable 5,088 5,088 Accrued dividends 1,304 (1,304) - Accrued interest 10,518 (3,257) (7,261) - Senior subordinated notes, net 19,523 (19,523) - Convertible subordinated notes 70,000 (70,000) - -------------- -------------- ---------------- ------------------ --------------- Total liabilities 221,029 (22,780) (78,565) (249) 119,435 Old Series A preferred stock 11,935 (11,935) - New Series A preferred stock 23,257 23,257 -------------- -------------- ---------------- ------------------ --------------- Total preferred stock 11,935 23,257 (11,935) - 23,257 Old common stock 703 (703) - New common stock 65 65 Additional paid in capital 37,641 91,138 (101,741) 27,038 Accumulated other comprehensive income, net of tax 1,925 (1,925) - Retained earnings (104,127) (477) (3,088) 107,692 - -------------- -------------- ---------------- ------------------ --------------- Total equity (63,858) (477) 87,412 4,026 27,103 -------------- -------------- ---------------- ------------------ --------------- Total liabilities, preferred stock and equity $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795 ============== ============== ================ ================== ===============
(a) Reflects issuance of 23,257 shares of New Preferred Stock to CSFB for $15.2 million in cash and exchange of Senior Notes held by CSFB, including accrued interest, for $8.1 million. Includes simultaneous retirement of Senior Notes held by holders other than CSFB, including accrued interest, for $15.2 million and write-off of unamortized debt discount of $0.5 million. (b) Reflects issuance of 6,500,000 shares of New Common Stock in exchange for Convertible Notes, Old Preferred Stock, Old Common Stock and settlement of general unsecured claims. Includes 32,500 shares of New Common Stock issued to management on the Effective Date, and includes write-off of unamortized debt issuance costs of $3.1 million. (c) Reflects adjustments to record assets and liabilities at fair market value and to set retained earnings to zero. The following significant accounting policies are applicable to the financial statements of both Ascent and Westbridge, unless otherwise indicated. Investments. The Company's fixed maturity portfolio is classified as available-for-sale and is carried at estimated market value. Equity securities (common and nonredeemable preferred stocks) are also carried at estimated market value. With the application of fresh start reporting, the Company's marketable securities book values under GAAP were adjusted to equal the market values of such securities at March 31, 1999. Accordingly, the stockholders' equity section of Ascent's March 31, 1999 fresh start balance sheet reflects a zero balance in accumulated other comprehensive income. Changes in aggregate unrealized appreciation or depreciation on fixed maturity and equity securities subsequent to March 31, 1999 are reported directly in stockholders' equity, net of applicable deferred income taxes and, accordingly, will have no effect on current operations. 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 DPAC is the cost of insurance purchased on acquired business. 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. No changes were made to DPAC assumptions for purposes of fresh start accounting. Future Policy Benefits. Liabilities for future policy benefits not yet incurred are computed primarily using the net level premium method including actuarial assumptions as to investment yield, mortality, morbidity, withdrawals, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on the Company's experience as adjusted to provide for possible adverse deviation. Generally, these actuarial assumptions are fixed and, absent material adverse benefit experience, are not adjusted. No changes were made to such actuarial assumptions for purposes of fresh start accounting. Claim Reserves. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. These liabilities are subject to the impact of future changes in claim experience. As estimates are revised, any adjustments are reflected in current operations. No changes were made to claim reserve estimates for purposes of fresh start accounting. 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 deferred tax asset at December 31, 1999 is net of a valuation allowance of approximately $16.9 million related principally to net operating loss carryforwards ("NOLs") of Ascent's operating subsidiaries. In connection with its reorganization, the Company realized a non-taxable gain from the extinguishment of certain indebtedness for tax purposes, since the gain results from a reorganization under the Bankruptcy Code. However, the Company is required to reduce certain tax attributes of the holding company, including (i) NOLs, (ii) certain tax credits, and (iii) tax bases in assets in an amount equal to such a gain on extinguishment. Resolution of Preconfirmation Contingencies. Preconfirmation contingencies are disputed, unliquidated or contingent claims that are unresolved at the date of the confirmation of the plan of reorganization. As part of fresh start accounting, the Company estimated and recorded values for preconfirmation contingencies relative to the payment of professional fees and the collection of receivables from third parties. During the third quarter of 1999, the Company favorably resolved such preconfirmation contingencies. In accordance with generally accepted accounting principles, the Company recognized $1.2 million of income relative to the favorable resolution of such preconfirmation contingencies. 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 is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. Diluted weighted average shares exclude all convertible securities for loss periods. The following tables reflect the calculation of basic and diluted earnings per share: Ascent ----------------- Nine Months Ended December 31, 1999 -------------------- (Amounts in 000's, except per share amounts) Basic: Income available to common shareholders $ 232 ================= Weighted average shares outstanding 6,500 ================= Basic earnings per share $ 0.04 ================= Diluted: Income available to common shareholders $ 232 ================= Weighted average shares outstanding 6,510 ================= Diluted earnings per share $ 0.04 =================
Westbridge ------------------------------------------------------ Three Months Ended Year Ended March 31, December 31, ---------------- ---------------------------------- 1999 1998 1997 ---------------- --------------- ------------- (Amounts in 000's, except per share amounts) Basic: Income (loss) available to common shareholders $ 208 $ (22,805) $ (98,716) ============== =============== ============= Weighted average shares outstanding 7,032 6,640 6,143 ============== =============== ============= Basic earnings (loss) per share $ 0.03 $ (3.43) $ (16.07) ============== =============== ============= Diluted: Income (loss) available to common shareholders $ 208 $ (22,805) $ (98,716) ============== =============== ============= Weighted average shares outstanding 7,032 6,640 6,143 ============== =============== ============= Diluted earnings (loss) per share $ 0.03 $ (3.43) $ (16.07) ============== =============== =============
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 December 1997, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting for insurance-related assessments. The Company adopted SOP 97-3 on a prospective basis effective January 1, 1999. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations, liquidity or financial position. In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use," which requires capitalization of certain costs after the date of adoption in connection with developing or obtaining software for internal use. The Company adopted SOP 98-1 on a prospective basis effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, liquidity or financial position. 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 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 effected by SFAS 133. NOTE 3 - INVESTMENTS Major categories of investment income are summarized as follows:
Ascent Westbridge ----------------- ---------------------------------------------------- Nine Months Three Months Ended December 31, Ended March 31, Year Ended December 31, ----------------- ---------------- -------------------------------- 1999 1999 1998 1997 ----------------- ---------------- --------------- ------------- (in thousands) Fixed maturities $ 5,368 $ 2,125 $ 8,754 $ 8,268 Short-term investments 291 86 708 891 Interest on receivables from agents 941 345 2,511 1,633 Other 201 73 351 468 ----------------- ---------------- --------------- ------------- 6,801 2,629 12,324 11,260 Less: Investment expenses 61 67 313 237 ================= ================ =============== ============= Net investment income $ 6,740 $ 2,562 $ 12,011 $ 11,023 ================= ================ =============== =============
Realized (loss) gain on investments are summarized as follows:
Ascent Westbridge ----------------- ---------------------------------------------------- Nine Months Three Months Ended December 31, Ended March 31, Year Ended December 31, ----------------- ----------------- ------------------------------- 1999 1999 1998 1997 ----------------- ---------------- --------------- ------------- (in thousands) Fixed maturities $ (162) $ 40 $ 403 $ 535 Equity securities (37) 1 1,555 (385) Other (9) - 184 (66) ================= ================ =============== ============= Realized (loss) gain on investments $ (208) $ 41 $ 2,142 $ 84 ================= ================ =============== =============
Unrealized (depreciation) appreciation on investments is reflected directly in stockholders' equity as a component of accumulated other comprehensive (loss) income and is summarized as follows:
Ascent Westbridge ---------------------- ------------------------------------------ Nine Months Ended Three Months Ended Year Ended December 31, March 31, December 31, ---------------------- ------------------------------------------ 1999 1999 1998 ---------------------- -------------------- ------------------ (in thousands) Balance at beginning of period $ - $ 3,911 $ 4,649 Unrealized depreciation, net of tax, on fixed maturities available-for-sale (3,817) (1,840) 54 Unrealized depreciation, net of tax tax, on equity securities and other investments (34) (146) (792) Fresh start adjustment - (1,925) - ====================== ==================== =================== Balance at end of period $ (3,851) $ - $ 3,911 ====================== ==================== ===================
Estimated market values represent the closing sales prices of marketable securities. The amortized cost and estimated market values of investments in fixed maturities are summarized by category as follows:
Ascent - -------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 1999 Available-for-Sale Cost Gains Losses Value - ---------------------------------------------- --------------- -------------- --------------- -------------- (in thousands) U.S. Government and governmental agencies and authorities $ 11,113 $ - $ 425 $ 10,688 States, municipalities, and political subdivisions 2,021 - 154 1,867 Finance companies 25,220 - 1,270 23,950 Public utilities 9,806 - 678 9,128 Mortgage-backed securities 7,823 57 155 7,725 All other corporate bonds 47,453 26 3,274 44,205 =============== ============== =============== ============== Balance at December 31, 1999 $ 103,436 $ 83 $ 5,956 $ 97,563 =============== ============== =============== ==============
Ascent - -------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market March 31, 1999 Available-for-Sale Cost Gains Losses Value - ---------------------------------------------- --------------- -------------- --------------- -------------- (in thousands) U.S. Government and governmental agencies and authorities $ 11,271 $ - $ - $ 11,271 States, municipalities, and political subdivisions 1,543 - - 1,543 Finance companies 31,525 - - 31,525 Public utilities 12,745 - - 12,745 Mortgage-backed securities 7,349 - - 7,349 All other corporate bonds 51,919 - - 51,919 =============== ============== =============== ============== Balance at March 31, 1999 $ 116,352 $ - $ - $ 116,352 =============== ============== =============== ==============
Westbridge - -------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market 1998 Available-for-Sale Cost Gains Losses Value - ---------------------------------------------- --------------- -------------- --------------- -------------- (in thousands) U.S. Government and governmental agencies and authorities $ 11,145 $ 644 $ 13 $ 11,776 States, municipalities, and political Subdivisions 1,490 96 - 1,586 Finance companies 30,441 1,549 71 31,919 Public utilities 12,745 801 125 13,421 Mortgage-backed securities 7,834 284 8 8,110 All other corporate bonds 53,216 3,346 510 56,052 =============== ============== =============== ============== Balance at December 31, 1998 $ 116,871 $ 6,720 $ 727 $ 122,864 =============== ============== =============== ==============
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1999, are shown below, in thousands, summarized by year to contractual maturity. Mortgage-backed securities are listed separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Estimated Amortized Market Cost Value ----------------- ----------------- (in thousands) Due in one year or less $ 4,044 $ 4,012 Due after one year through five years 34,580 33,311 Due after five years through ten years 28,193 26,367 Due after ten years 28,796 26,148 Mortgage-backed securities 7,823 7,725 ----------------- ----------------- $ 103,436 $ 97,563 ================= =================
A summary of unrealized (depreciation) appreciation on investments in fixed maturities and equity securities available-for-sale, which is reflected directly in stockholders' equity as a component of accumulated other comprehensive (loss) income, is as follows:
Ascent Westbridge ---------------------------------------- ---------------- December 31, March 31, December 31, 1999 1999 1998 ------------------ ----------------- ----------------- (in thousands) Amortized cost $ 104,801 $ 118,627 $ 119,422 Estimated market value 98,876 118,627 125,439 ------------------ ----------------- ----------------- (Deficit) excess of market value to amortized cost (5,925) - 6,017 Estimated tax (benefit) provision (2,074) - 2,106 ------------------ ----------------- ----------------- Unrealized (depreciation) appreciation, net of tax $ (3,851) $ - $ 3,911 ================== ================= =================
Proceeds from sales and maturities of investments in fixed maturity securities were approximately $18.2 million for the nine months ended December 31, 1999, $7.1 million for the three months ended March 31, 1999 and $25.1 million in 1998. Gross gains of $0.1 million and gross losses of $0.3 million were realized on fixed maturity investment sales during the nine months ended December 31, 1999. Gross gains of $0.2 million and gross losses of $0.2 million were realized on fixed maturity investment sales during the three months ended March 31, 1999. Gross gains of $0.8 million and gross losses of $0.4 million were realized on fixed maturity investment sales during 1998. The basis used in determining the cost of securities sold was the specific identification method. Included in fixed maturities at December 31, 1999 and 1998, are high-yield, unrated or less than investment grade corporate debt securities comprising less than 1.3% and 3.2% of total cash and invested assets at December 31, 1999 and 1998, respectively. Investment securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1999 and 1998 had a par value totaling $27.3 million and $28.2 million, respectively. At December 31, 1999 and 1998, the Company had restricted cash and investments totaling $2.6 million and $2.5 million, respectively, related to its receivables financing program (see NOTE 5 "Financing Activities"). NOTE 4 - FUTURE POLICY BENEFITS Future policy benefits for Accident and Health insurance products have been calculated using assumptions (which generally contemplate the risk of adverse deviation) for withdrawals, interest, mortality and morbidity appropriate at the time the policies were issued. The more material assumptions are as follows: Withdrawals Issues through 1980 are based on industry experience; 1981 through 1996 issues are based on industry experience and Company experience, where available. Policies acquired in acquisitions are based on recent experience of the blocks acquired. Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most 1981 through 1992 issues are 10% graded to 7% in 10 years except for certain NationalCare and Supplemental Hospital Income issues which are 8% graded to 6% in 8 years and LifeStyles Products which are 9% graded to 7% in 10 years. 1993 and later issues are 7% level. Certain policies acquired in 1992 are 6.4% level while other policies acquired in 1993 and 1994 are 6% level. Policies acquired in the acquisition of NFIC and AICT are 7% level. Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through 1992 use 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. NOTE 5 - FINANCING ACTIVITIES Credit Arrangement. The Company finances the majority of its obligations to make commission advances through Ascent Funding Inc. ("AFI"), an indirect wholly owned subsidiary. On June 6, 1997, Westbridge Funding Corporation, now AFI, entered into a Credit Agreement dated as of such date with LaSalle National Bank (the "Credit Agreement"). See NOTE 14 - "Extraordinary Item." This Credit Agreement provided AFI with a three-year, $20.0 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from the Insurance Subsidiaries and certain affiliated marketing companies. AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. In August 1999, the Company amended the Credit Agreement, reducing the revolving loan facility to a $7.5 million facility, and extending the termination date to June 5, 2001 from June 5, 2000. As of December 31, 1999, $3.9 million was outstanding under the Credit Agreement (weighted average interest rate of 7.62%). The Company incurs a commitment fee on the unused portion of the Credit Agreement at a rate of 0.50% per annum. Interest of $0.3 million was expensed and paid in 1999. 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 and NFIC as collateral for that guaranty. As of December 31, 1999, there were no events of default under the Guaranty or Credit Agreements, which were amended to reflect the recapitalization of the Company. In July 1999, Ascent Management, Inc. ("AMI") entered into a $3.3 million term loan agreement with LaSalle, secured by substantially all of AMI's assets and the guarantee of Ascent. Principal is payable in 60 equal monthly installments beginning January 31, 2000. Interest of $98,000 was expensed and paid in 1999. Prior to the Effective Date of the Plan (see NOTE 1), the Company had the following debt securities outstanding: Senior Notes. During the first quarter of 1995, the Company issued $20.0 million aggregate principal amount of its Senior Notes, due 2002, in an underwritten public offering. The Senior Notes were issued at par, less an underwriting discount of 4%. Contractual interest on the Senior Notes was payable in monthly installments. In November 1997, the Company suspended the scheduled monthly interest payments on these Senior Notes. 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, 1999 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 1, holders of Allowed 11% Senior Note Claims held by creditors other than CSFB received cash payments totaling $15.2 million. As more fully described in NOTE 7, in order to provide the Company with sufficient funds to make the cash distributions to the holders of the Allowed 11% Senior Notes under the Plan, the Company entered into a Stock Purchase Agreement with CSFB, a significant noteholder, pursuant to which CSFB, subject to the conditions contained therein, purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. Convertible Notes. During the second quarter of 1997, the Company completed the sale of $70.0 million aggregate principal amount of its Convertible Notes, due 2004, in an underwritten public offering. Contractual interest on the Convertible Notes was payable in semi-annual installments on May 1 and November 1 of each year, commencing November 1, 1997. In November 1997, the Company suspended the scheduled interest payments on these Convertible Notes. At the Petition Date, approximately $7.3 million of unpaid interest was accrued. The Company did not accrue interest on its Convertible Notes after the Petition Date as it was unlikely such interest would be paid under the Plan. The amount of contractual interest that would have otherwise been accrued from the Petition Date to December 31, 1998 totaled $2.7 million, and such contractual interest would have continued to accrue at $14,583 per day from January 1, 1999 until the Effective Date. As of the Effective Date, these Convertible Notes were canceled, extinguished and retired. Holders of the Convertible Notes and allowed general unsecured creditors received their pro rata share of 94% of the New Common Stock issued on the Effective Date. Total interest paid on debt in 1998 and 1997 was $0.8 million and $3.0 million, respectively. NOTE 6 - CLAIM RESERVES The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 1999, 1998 and 1997, to the amounts reported in the Company's balance sheet:
Ascent Westbridge ------------------ ------------------------------------------------------- Nine Months Three Months Ended Ended December 31, March 31, Year Ended December 31, ------------------ ---------------- ---------------------------------- 1999 1999 1998 1997 ------------------ ---------------- --------------- --------------- Balance at beginning of period (Gross) $ 41,068 $ 44,116 $ 51,784 $ 39,186 Less: reinsurance recoverables on claim reserves 1,871 1,765 2,955 1,456 ------------------ ---------------- --------------- --------------- Net balance at beginning of period 39,197 42,351 48,829 37,730 Incurred related to: Current year 60,255 19,401 98,203 111,459 Prior years 2,213 1,596 (95) 22,512 ------------------ ---------------- --------------- --------------- Total incurred 62,468 20,997 98,108 133,971 ------------------ ---------------- --------------- --------------- Paid related to: Current year 47,300 5,277 67,911 77,168 Prior years 17,090 18,874 36,675 45,704 ------------------ ---------------- --------------- --------------- Total paid 64,390 24,151 104,586 122,872 ------------------ ---------------- --------------- --------------- Balance at end of period 37,275 39,197 42,351 48,829 Plus: reinsurance recoverables on claim reserves 1,501 1,871 1,765 2,955 ================== ================ =============== =============== Balance at end of period (Gross) $ 38,776 $ 41,068 $ 44,116 $ 51,784 ================== ================ =============== ===============
Included in reinsurance recoverables on claim reserves is approximately $0.5 million, $0.9 million, $0.7 million and $1.9 million relating to paid claims as of December 31, 1999, March 31, 1999, and December 31, 1998 and 1997, respectively. NOTE 7 - PREFERRED STOCK 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 1). The following summarizes the significant terms of the New Preferred Stock: * Stated value of $1,000 share. * 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. * Each share of 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, subject to customary anti-dilution adjustments. The New Preferred Stock is mandatorily redeemable in cash on the fifth anniversary of the Effective Date in an amount equal to the stated value per share plus all accrued and unpaid dividends thereon to the date of redemption. Effective January 31, 2000, the Company declared a dividend in the amount of $1,873,965 on preferred stock. The dividend was accrued at December 31, 1999 and paid through the issue of 1,873 additional shares of preferred stock and a $965 distribution of cash. Prior to the Effective Date of the Plan (see NOTE 1), the Company had the following preferred stock outstanding: Old Preferred Stock On April 12, 1994, the Company issued 20,000 shares of Old Preferred Stock, at a price of $1,000 per share. The Old Preferred Stock was issued in a private placement and was subsequently registered with the Securities and Exchange Commission under a registration statement, which was declared effective in October 1994. The terms of the Old Preferred Stock included a cumulative annual dividend rate of 8.25%, subject to increase to 9.25%, upon non-compliance by the Company with certain restrictions. Seven thousand sixty-five (7,065) shares of the Old Preferred Stock were converted into shares of Old Common Stock during the year ended December 31, 1998. The converted shares of Old Preferred Stock had an aggregate liquidation preference of $7,065,000 and were converted into 840,071 shares of Old Common Stock. Old Preferred Stock was convertible into 1,419,144 shares of Common Stock as of December 31, 1998 at a conversion price of $8.41 per share. 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. In November 1997, the Company suspended the scheduled dividend payments on its Old Preferred Stock. The failure to declare and pay the scheduled dividend on the Old Preferred Stock constituted an event of non-compliance under the terms of the Old Preferred Stock Agreement and resulted in an immediate increase from 8.25% to 9.25% in the rate at which dividends accrued on the Old Preferred Stock. At the Petition Date, approximately $1.3 million of cumulative, unpaid dividends were accrued. The Company did not accrue dividends on its Old Preferred Stock after the Petition Date as it was unlikely such dividends would be paid under the Plan. The amount of contractual dividends that would have otherwise been accrued from the Petition Date to December 31, 1998 totaled $0.6 million, and such contractual dividends would have continued to accrue at $3,067 per day from January 1, 1999 until the Effective Date. As of the Effective Date, shares of Old Preferred Stock were canceled, extinguished and retired. Holders of Old Preferred Stock received their pro rata share of 4% of the New Common Stock issued on the Effective Date and New Warrants to purchase their pro rata share of up to 2% of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis. NOTE 8 - DEFERRED POLICY ACQUISITION COSTS ("DPAC") A summary of DPAC follows (in thousands):
Ascent Westbridge ------------------ ---------------------------------------------------- Nine Months Ended Three Months December 31, Ended March 31, Year Ended December 31, ------------------ ----------------- ------------- --- ------------- 1999 1999 1998 1997 ------------------ ----------------- ------------- ------------- Balance at beginning of period $ 15,039 $ 14,177 $ 19,165 $ 83,871 Deferrals: Commissions 3,281 555 3,339 27,933 Issue Costs 2,551 593 1,032 3,186 ------------------ ----------------- ------------- ------------- 20,871 15,325 23,536 114,990 Recognition of premium deficiency - - (4,948) (64,952) Amortization expense (1,478) (286) (4,411) (30,873) ================== ================= ============= ============= Balance at end of period $ 19,393 $ 15,039 $ 14,177 $ 19,165 ================== ================= ============= =============
Recognition of Premium Deficiency. During 1997, policy persistency declined in connection with the implementation of certain rate increases together with intensified competitor solicitation of the Company's policyholders. These events affected the future profit margins available to absorb amortization of DPAC. As a result of these adverse changes, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter of 1997. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency for certain old lines of business existed as of December 31, 1997. A premium deficiency occurs when the projected present value of future premiums associated with these policies will not be adequate to cover the projected present value of future payments for benefits and related amortization of DPAC. GAAP requires the immediate recognition of a premium deficiency by charging the unamortized DPAC to expense. Accordingly, for the quarter and year ended December 31, 1997, the Company recorded a non-cash charge to expense of approximately $65.0 million and incurred a significant loss for the year ended December 31, 1997. This adjustment had no impact on the Company's cash position at December 31, 1997 nor did it affect the statutory capital and surplus of the Insurance Subsidiaries. During 1998, the Company continued to experience adverse loss ratios and declining persistency on its old Medical Expense and Medicare Supplement products, although the loss ratios for 1998 reflected an improvement over 1997. As a result of these factors, the Company undertook a further revaluation of the recoverability of DPAC in the third quarter of 1998. Based on the results of this review, the Company determined that an additional premium deficiency existed and recorded a non-cash charge to expense of approximately $5.0 million in the third quarter of 1998. This adjustment had no impact on the Company's cash position or on the statutory capital and surplus of the Insurance Subsidiaries. NOTE 9 - INCOME TAXES The provision for (benefit from) income taxes is calculated as the amount of income taxes expected to be payable for the current year plus (or minus) the deferred income tax expense (or benefit) represented by the change in the deferred income tax accounts at the beginning and end of the year. The effect of changes in tax rates and federal income tax laws are reflected in income from continuing operations in the period such changes are enacted. 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. Taxes paid in 1999, 1998 and 1997 were $80,000, $1.1 million and $118,000, respectively. The Company and its wholly owned subsidiaries, other than NFIC, AICT and FLICA, file a consolidated federal income tax return. NFIC, AICT and FLICA file separate federal income tax returns. The provision for (benefit from) U.S. federal income taxes charged to continuing operations was as follows:
Ascent Westbridge ------------------- ------------------------------------------------------ Nine Months Ended Three Months December 31, Ended March 31, Year Ended December 31, ------------------- ------------------ -------------------------------- 1999 1999 1998 1997 ------------------- ------------------ ------------- -------------- (in thousands) Current $ (1,199) $ 67 $ 231 $ (926) Deferred 2,324 - - (12,342) ------------------- ------------------ ------------- -------------- Total provision for (benefit from) income taxes $ 1,125 $ 67 $ 231 $ (13,268) =================== ================== ============= ==============
Provision has not been made for state and foreign income tax expense since such expense is minimal. In addition, as described in NOTE 14 - "Extraordinary Item," the Company recognized an extraordinary loss of approximately $1.0 million for the year ended December 31, 1997. This amount has been reflected in the accompanying financial statements, net of approximately $0.5 million in deferred taxes. The differences between the effective tax rate and the amount derived by multiplying the (loss) income before income taxes by the federal income tax rate for the Company's last three years was as follows:
Ascent Westbridge ------------------- ------------------------------------------------------ Nine Months Three Months Ended Ended December 31, March 31, Year Ended December 31, ------------------- ------------------ -------------------------------- 1999 1999 1998 1997 ------------------- ------------------ ------------- -------------- (in thousands) Statutory tax rate 34% 34% (34%) (34%) Unutilized loss carryforwards 2% (9%) 31% 22% Other items, net (1%) (1%) 4% - ------------------- ------------------ ------------- -------------- Effective tax rate 35% 24% 1% (12%) =================== ================== ============= ==============
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:
Ascent Westbridge -------------------------------------------- ------------------ December 31, March 31, December 31, 1999 1999 1998 -------------------- ------------------- ------------------ Deferred Tax Assets: Deferred policy acquisition costs $ 2,970 $ 4,632 $ 5,035 Policy reserves 4,150 3,375 2,921 Net operating loss carryforwards 17,998 18,524 28,149 Other deferred tax assets 964 (415) 4,725 Valuation allowance (16,949) (16,949) (36,449) -------------------- ------------------- ------------------ Total deferred tax asset 9,133 9,167 4,381 -------------------- ------------------- ------------------ Deferred Tax Liabilities Unrealized gain on investments (2,074) - 2,761 Other deferred tax liabilities 4,121 1,820 1,620 -------------------- ------------------- ------------------ Total deferred tax liability 2,047 1,820 4,381 -------------------- ------------------- ------------------ Net deferred tax asset $ 7,086 $ 7,347 $ - ==================== =================== ==================
As a result of the fresh start reporting (discussed at Note 2), a net deferred tax asset of $7,347 was established at March 31, 1999. This deferred tax asset was net of a valuation allowance of approximately $16.9 million for the tax effect of all but $4.5 million of the Company's net operating loss carryovers ($1.6 million net tax benefit at statutory rates), since it appeared more likely than not that the excess benefits would not be realized in future periods. At December 31, 1999, net operating loss carryovers included in total deferred tax assets reflect the effects of current operations and miscellaneous adjustments. 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, 1999, 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 which would approximate $0.9 million have not been provided on such amount. At December 31, 1999 and 1998, NFL has approximately $8.0 million and $7.8 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. At December 31, 1999, the Company and its wholly owned subsidiaries have aggregate net operating loss carryforwards, net of bankruptcy related tax attribute reductions of approximately $52.9 million for regular tax and $46.8 million for alternative minimum tax purposes, which will expire in 2003 through 2014. NOTE 10 - STATUTORY CAPITAL AND SURPLUS Under the applicable laws of the states in which insurance companies are licensed, the companies are required to maintain minimum amounts of capital and surplus. Under the laws of their states of domicile, NFL (Delaware), FLICA (Mississippi), NFIC (Texas), and AICT (Texas) are required to maintain aggregate capital and surplus of $.55 million, $1.0 million, $1.4 million, and $1.4 million, respectively. The following states where the companies are licensed require greater amounts of capital and surplus: California $2.5 million of capital and $2.5 million of surplus, Washington $4.8 million of aggregate capital and surplus and Nebraska and Tennessee $1 million of capital and $1 million of surplus. Accordingly, the minimum aggregate statutory capital and surplus which NFL and NFIC must each maintain is $5.0 million. FLICA must maintain a minimum of $4.8 million and AICT must maintain $2.0 million. At December 31, 1999, aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was approximately $15.0 million, $10.4 million, $2.0 million and $3.6 million, respectively. Although NFIC's capital and surplus is less than $5.0 million at December 31, 1999, NFIC voluntarily ceased writing new business effective December 15, 1997. Moreover, NFIC's capital and surplus exceeds the minimum requirements of its state of domicile, Texas. Statutory net (losses) income for NFL, FLICA, NFIC and AICT for the year ended December 31, 1999 were $(5.4) million, $(5.0) million, $(1.2) million and $.7 million, respectively. FLICA, through its parent FHC, is wholly owned by NFL, and AICT is wholly owned by NFIC. Accordingly, statutory capital and surplus of the parent includes the statutory capital and surplus of the respective subsidiary. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile. NFL, a Delaware domestic company, may not declare or pay dividends from any source other than earned surplus without the Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines earned surplus as the amount equal to the unassigned funds as set forth in NFL's most recent statutory annual statement including surplus arising from unrealized gains or revaluation of assets. Delaware insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. During 1999, NFL is precluded from paying dividends without the prior approval of the Delaware Insurance Commissioner as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. Effective March 31, 1999, the Delaware Department of Insurance approved a quasi - reorganization of the Company's surplus. Under the reorganization, the Company's unassigned surplus deficit of $36,446,154 was eliminated. Likewise, the Company's gross paid in and contributed surplus decreased by an equal amount. NFIC and AICT, Texas domestic companies, may make dividend payments from surplus profits or earned surplus arising from its business. The Texas Insurance Code defines earned surplus as unassigned surplus excluding any unrealized gains. Texas life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold is considered extraordinary and requires prior approval of the Texas Insurance Commissioner. NFIC's and AICT's earned surplus is negative, and as such, each company is precluded from paying dividends during 1999 without the prior approval of the Texas Insurance Commissioner. FLICA, a Mississippi domestic company, may make dividend payments only from its actual net surplus computed as required by law in its statutory annual statement. Mississippi life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value not exceeding the lesser of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold amount requires prior approval of the Mississippi Insurance Commissioner. FLICA is precluded from paying dividends to NFL during 1999 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ending December 31, 1999. 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. Delaware, Texas and Mississippi also maintain discretionary powers relative to the declaration and payment of dividends based upon an insurance company's financial position. In light of the statutory losses incurred by the Insurance Subsidiaries during 1997 and 1998 and by NFL, FLICA and NFIC for 1999, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future. 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 will perform a special examination of the company and issue an order specifying the corrective actions that must be followed. If a company's total adjusted capital is less than 50 percent but greater than or equal to 35 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 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. The Insurance Departments of the States of Delaware and Mississippi have each adopted the NAIC's Model Act. At December 31, 1999, total adjusted capital for NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company, exceeded the respective Company Action Levels. The Texas Department of Insurance ("TDI") has adopted its own RBC requirements, the stated purpose of which is to require a minimum level of statutory capital and surplus to absorb the financial, underwriting and investment risks assumed by an insurer. Texas' RBC requirements differ from those adopted by the NAIC in two principal respects: (i) they use different elements to determine minimum RBC levels in their calculation formulas and (ii) they do not stipulate "Action Levels" (like those adopted by the NAIC) where corrective actions are required. However, the Commissioner of the TDI does have the power to take similar corrective actions if a company does not maintain the required minimum level of statutory capital and surplus. NFIC and AICT are domiciled in Texas and must comply with Texas RBC requirements. At December 31, 1999, AICT's RBC exceeded the minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum level prescribed by the TDI. 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 bears interest at an agreed upon rate not to exceed 10% and is 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. As a result of the statutory losses sustained by the Insurance Subsidiaries since 1997, material transactions are subject to the approval by the department of insurance in each domiciliary state. In December 1997, NFIC, in response to these losses as well as the projected inability to meet RBC requirements, took appropriate steps to voluntarily cease the sale and underwriting of new business. In the second quarter of 1998, AICT significantly reduced the level of sales and underwriting of new business. NFIC and AICT have also entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the TDI. The Company has no current plans to underwrite new products in NFIC. The statutory financial statements of the Insurance Subsidiaries are prepared using accounting methods which are prescribed or permitted by the insurance department of the respective companies' state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. NOTE 11 - EMPLOYEE BENEFIT PLANS 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 December 1999, the Company made cash contributions. The Company's contributions to the 401(k) plan in 1999, 1998 and 1997 approximated $123,000, $80,000 and $106,000, respectively. The Company's incentive stock option plans adopted as of July 1, 1982, September 5, 1985, and March 26, 1992, and the Company's restricted stock plan adopted as of April 19, 1996, have been canceled as of the Effective Date. All outstanding grants of stock options or restricted stock have been extinguished as contemplated by the terms of the Plan. 1999 Stock Option Plan. Pursuant to the Plan (see NOTE 1), 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. A summary of stock option activity for the year ended December 31, 1999 is as follows: Outstanding at January 1, 1999 - Granted 1,106,750 Exercised - Forfeited / Cancelled (10,000) ======================= Outstanding at December 31, 1999 1,096,750 ======================= The weighted average option exercise price was $2.88 for options outstanding at December 31, 1999. The weighted average option exercise price was $2.85 and $2.85, respectively, for options granted and forfeited during 1999. The weighted average fair value of options granted during 1999 was $2.85. 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 1999: dividend yield of 0%; expected volatility of 1.142; risk free interest rate of 6.57%; expected life of 5 years. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because change in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Total compensation cost recognized in the income statement for stock-based employee compensation awards was $300,471 for 1999. If the fair value of the stock compensation granted had been accounted for under FAS 123, the pro forma net loss for the nine months ended December 31, 1999 would have been ($347,089), or ($0.05) per basic share or ($0.05) per 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 following table summarizes information about the stock options outstanding at December 31, 1999: Weighted Average Remaining Exercise Number Contractual Weighted Average Prices Outstanding Life Exercise Price - ---------- ------------- ----------------- -------------------- $0.01 335,700 9.25 $0.01 $3.00 135,000 2.25 $3.00 $4.39 626,050 9.25 $4.39 ------------- ------------------ -------------------- 1,096,750 8.39 $2.88 ============= ================== ==================== There were no options exercisable at December 31, 1999. NOTE 12 - REINSURANCE The Insurance Subsidiaries cede insurance to other insurers and reinsurers on both life and accident and health business. Reinsurance agreements are used to limit maximum losses and provide greater diversity of risk. The Company remains liable to policyholders to the extent the reinsuring companies are unable to meet their treaty obligations. Total accident and health premiums of $2.6 million, $2.8 million, and $3.6 million, were paid to reinsurers in 1999, 1998, and 1997, respectively. Face amounts of life insurance in force approximated $31.7 million, $37.5 million, and $53.1 million at December 31, 1999, 1998 and 1997, respectively. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance whereby NFL cedes claims in excess of $25,000 per year. Premiums of $13,706 and $22,046 were paid to the reinsurer for the year ended December 31, 1999 and 1998, respectively. No other life insurance products were reinsured during 1999, 1998 or 1997. The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Agreement") with a reinsurer effective July 1, 1996 on the in force Specified Disease business. The Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. This ceding commission allowance was to be repaid, inclusive of interest at 12.5%, as statutory profits emerged from the reinsured block of business. For the year ended December 31, 1996, the repayment was $1.9 million. The ceding allowance payable for the year ended December 31, 1996 was $8.6 million. The Company exercised its option to terminate and recapture this Agreement on April 1, 1997 consisting of approximately $9.0 million in total recapture costs calculated at an interest rate of 15% less approximately $2.0 million in unearned premium reserves due to NFL and FLICA. See NOTE 14 - "Extraordinary Item." NOTE 13 - COMMITMENTS AND CONTINGENCIES 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, 1999, aggregated $6.9 million. The amounts due by year are as follows: 2000-$2.3 million; 2001-$1.6 million; 2002-$1.3 million; 2003-$0.8 million; 2004-$0.5 million; and thereafter-$0.4 million. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $2.4 million, $3.2 million and $4.4 million in 1999, 1998 and 1997, respectively. In the normal course of their business operations, the Insurance Subsidiaries, continue to be involved in various claims, lawsuits (alleging actual as well as substantial exemplary damages) and regulatory matters. In the opinion of management, the disposition of these or any other legal matters will not have a material adverse effect on the Company's business, consolidated financial position or results of operations. 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. NOTE 14 - EXTRAORDINARY ITEM For the year ended December 31, 1997, the Company recognized an aggregate of $1.0 million in extraordinary losses, net of taxes. Of this amount, (i) $0.6 million resulted from the recognition of unamortized financing fees associated with the prepayment and refinancing of the Company's revolving credit facility with Fleet National Bank (See NOTE 5 - "Financing Activities"); and (ii) $0.4 million resulted from the termination and recapture of the block of reinsured policies referred to in NOTE 12 - "Reinsurance." NOTE 15 - RECONCILIATION TO STATUTORY REPORTING A reconciliation of capital and surplus net income (loss) as reported on a statutory basis by the Company's Insurance Subsidiaries to the Company's consolidated GAAP stockholders' equity (deficit) and net income (loss) is as follows:
Year Ended December 31, -------------------------------------------------- 1999 1998 1997 ------------- ------------- --------------- (in thousands) Consolidated statutory capital and surplus $ 16,990 $ 17,937 $ 21,592 Deferred acquisition costs 19,393 14,177 19,165 Future policy benefits and claims (9,518) (9,521) (10,147) Unrealized gain or (loss) on investments, net of tax (2,585) 3,037 3,446 Income taxes 3,363 - (1,037) Nonadmitted assets 1,490 2,123 832 Asset valuation reserve 687 796 1,049 Interest maintenance reserve 1,251 1,380 1,499 Other (273) 863 591 Non-insurance subsidiaries and eliminations (7,014) (92,872) (82,408) ------------- ------------- --------------- GAAP stockholders' equity (deficit) $ 23,784 $ (62,080) $ (45,418) ============== ============== ================
Year Ended December 31, ------------------------------------------------ 1999 1998 1997 ------------- ------------- ------------- (in thousands) Consolidated statutory net income $ (6,486) $ (8,108) $ (49,618) Deferred acquisition costs, net of amortization 5,217 (41) 735 Future policy benefits and claims 228 806 2,493 Recognition of premium deficiency - (4,948) (64,952) Coinsurance funds withheld reinsurance treaty - - 8,575 Income taxes (4,366) 1,250 13,970 Extraordinary item, net of tax - - (1,007) Other (384) (468) (676) Non-insurance subsidiaries and eliminations 8,105 (10,776) (6,664) ------------- -------------- -------------- GAAP net income (loss) $ 2,314 $ (22,285) $ (97,144) ============= = ============== ==============
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for each of the Company's last two years of operations is as follows (in thousands, except per share data):
Ascent Quarter Ended ----------------------------------------------------- June September December 1999 1999 1999 -------------- -------------- ---------------- Premium income $ 29,574 $ 28,512 $ 28,285 Net investment income 2,333 2,222 2,185 Net realized loss on investments (63) (107) (38) Fee, service and other income 4,196 4,506 4,367 -------------- -------------- ---------------- Total revenues $ 36,040 $ 35,133 $ 34,799 ============== ============== ================ Income before income taxes $ 1,622 $ 1,071 $ 538 Net income 1,054 707 345 Preferred stock dividend 647 596 631 Income (loss) applicable to common stockholders 407 111 (286) Earnings (loss) per share: Basic $ 0.06 $ 0.02 $ (0.04) Diluted $ 0.06 $ 0.02 $ (0.04)
Westbridge Quarter Ended ------------------------------------------------------------------------------- March June September December March 1998 1998 1998 1998 1999 ------------ ------------- ------------- ------------- ----------- Premium income $ 37,439 $ 35,251 $ 33,278 $ 29,749 $ 29,948 Net investment income 3,166 3,192 2,929 2,724 2,562 Net realized gains on investments 262 267 1,576 37 41 Fee, service and other income 4,236 4,155 4,215 4,174 4,263 ============ ============= ============= ============ =========== Total revenues $ 45,103 $ 42,865 $ 41,998 $ 36,684 $ 36,814 ============ ============= ============= ============ =========== (Loss) income before income taxes (5,725) (3,629) (6,663) (6,037) 275 Net (loss) income (4,966) (3,149) (6,907) (7,263) 208 Preferred stock dividend 471 (62) 111 - - (Loss) income applicable to common stockholders (5,437) (3,087) (7,018) (7,263) 208 (Loss) earnings per share: Basic $ (0.88) $ (0.48) $ (1.01) $ (1.05) $ 0.03 Diluted $ (0.88) $ (0.48) $ (1.01) $ (1.05) $ 0.03
SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (in thousands) December 31, March 31, --------------- ------------- 1999 1999 --------------- ------------- Assets: Cash $ 4,027 $ 658 Short-term investments 4,686 1,906 Fixed maturities, at market value - 7,564 Equity securities, at market value - 910 Investment in consolidated subsidiaries 45,021 41,959 Accrued investment income 3 171 Deferred tax assets 646 - Other assets 50 25 --------------- ------------- Total Assets $ 54,433 $ 53,193 =============== ============= Liabilities: Dividends payable $ 1,874 $ - Other liabilities 5,518 2,833 --------------- ------------- Total Liabilities 7,392 2,833 --------------- ------------- Redeemable Convertible Preferred Stock 23,257 23,257 --------------- ------------- Stockholders' Equity: Common stock 65 65 Capital in excess of par value 27,338 27,038 Accumulated other comprehensive loss, net of tax (3,851) - Retained Earnings 232 - --------------- ------------- Total Stockholders' Equity 23,784 27,103 --------------- ------------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity $ 54,433 $ 53,193 =============== ============= The financial statement should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now Ascent Assurance, Inc.) CONDENSED BALANCE SHEET (in thousands) December 31, --------------------- 1998 --------------------- Assets: Cash $ 482 Short-term investments 503 Fixed maturities, at market value 10,433 Equity securities, at market value 1,010 Investment in consolidated subsidiaries 39,584 Accrued investment income 213 Other assets 3,088 --------------------- Total Assets $ 55,313 ===================== Liabilities: Senior subordinated notes, net $ 19,523 Convertible subordinated notes 70,000 Interest and dividends payable 11,315 Other liabilities 4,620 --------------------- Total Liabilities 105,458 --------------------- Redeemable Convertible Preferred Stock 11,935 --------------------- Stockholders' Equity: Common stock 703 Capital in excess of par value 37,641 Accumulated other comprehensive income, net of tax 3,911 Deficit (104,335) --------------------- Total Stockholders' Deficit (62,080) --------------------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit $ 55,313 ===================== The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) CONDENSED STATEMENT OF INCOME (in thousands) Nine Months Ended December 31, 1999 -------------------- Net investment income $ 509 Realized losses on investments (376) Intercompany income derived from: Interest on Surplus Certificates 58 Interest on advances to subsidiaries 22 Other income 3 -------------------- 216 -------------------- Resolution of preconfirmation contingencies (1,235) General and administrative expenses (237) Taxes, licenses and fees (1) Interest expense - -------------------- (1,473) -------------------- Income before income taxes and equity in undistributed net earnings of subsidiaries 1,689 Provision for income taxes (629) -------------------- 2,318 Equity in undistributed net loss of Subsidiaries (212) -------------------- Net income 2,106 Preferred stock dividends 1,874 -------------------- Income applicable to common stockholders $ 232 ==================== The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now ASCENT ASSURANCE, INC.) CONDENSED STATEMENTS OF INCOME (in thousands) Three Months Ended March 31, Year Ended December 31, ------------------- --------------------------------- 1999 1998 1997 ------------------- --------------- ------------- Net investment income $ 209 $ 1,090 $ 1,579 Realized gains on investments 12 475 984 Intercompany income derived from: Interest on Surplus Certificates 20 78 78 Rental of leasehold improvements and equipment - 397 1,926 Interest on advances to subsidiaries 110 254 266 Other income - 121 228 ------------------- --------------- ------------- 351 2,415 5,061 ------------------- --------------- ------------- General and administrative expenses (112) 2,319 4,349 Reorganization expense - 7,856 1,324 Taxes, licenses and fees 24 45 164 Interest expense 507 5,933 5,846 ------------------- --------------- ------------- 419 16,153 11,683 ------------------- --------------- ------------- Loss before income taxes and equity in undistributed net earnings of subsidiaries and FHC (68) (13,738) (6,622) (Benefit from) provision for income taxes - (235) 3,939 ------------------- --------------- ------------- (68) (13,503) (10,561) Equity in undistributed net earnings (losses) of subsidiaries and FHC 276 (8,782) (86,419) ------------------- --------------- ------------- Income (loss) before extraordinary item 208 (22,285) (96,980) Extraordinary loss (1) - - 164 ------------------- --------------- ------------- Net income (loss) 208 (22,285) (97,144) Preferred stock dividends - 520 1,572 ------------------- --------------- ------------- Income (loss) applicable to common stockholders $ 208 $ (22,805) $ (98,716) =================== =============== =============
(1) From early extinguishment of debt, net of income tax benefit of $85. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) STATEMENT OF COMPREHENSIVE INCOME (in thousands) Nine Months Ended December 31, ------------------- 1999 ------------------- Net income $ 2,106 Other comprehensive income (loss): Unrealized holding loss arising during period, net of tax (245) Reclassification adjustment of loss on sales of investments included in net income, net of tax 245 Other comprehensive loss on investment in subsidiaries: Unrealized holding loss arising during period, net of tax (3,711) Reclassification adjustment of loss on sales of investments included in net income, net of tax (140) ==================== Comprehensive loss $ (1,745) ==================== The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now ASCENT ASSURANCE, INC.) STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended March 31, December 31, -------------------- ------------------------------------- 1999 1998 1997 -------------------- ----------------- ---------------- Net income (loss) $ 208 $ (22,285) $ (97,144) Other comprehensive income (loss): Unrealized holding (loss) gain arising during period, net of tax (331) 6 1,285 Reclassification adjustment of gain on sales of investments included in net income, net of tax (8) (308) (640) Other comprehensive income (loss) on investment in subsidiaries: Unrealized holding (loss) gain arising during period, net of tax (1,628) 528 2,405 Reclassification adjustment of (gain) loss on sales of investments included in net income, net of tax (19) (964) 542 ==================== ================= ================ Comprehensive loss $ (1,778) $ (23,023) $ (93,552) ==================== ================= ================
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except per share data) Accumulated Total Capital Other Stock Common Stock in Excess Comprehensive Retained holders' Shares Amount of Par Value Loss Earnings Equity Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103 Net income 2,106 2,106 Preferred stock dividend (1,874) (1,874) Other comprehensive loss on investment in subsidiaries (3,851) (3,851) Amortization of unearned compensation 300 300 ============ =========== ============== =============== ========== ============ Balance at December 31, 1999 6,500,000 $ 65 $ 27,338 $ (3,851) $ 232 $ 23,784 ============ =========== ============== =============== ========== ============
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II WESTBRIDGE CAPITAL CORP.(now ASCENT ASSURANCE, INC.) (PARENT COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except per share data) Accumulated Total Other Stock- Capital Comprehensive Retained holders' Common Stock in Excess Income Earnings Treasury Stock Equity Shares Amount of Par Value (Loss) (Deficit) Shares Amount (Deficit) ------ ------ ------------ ------------ --------- ------ ------ --------- Balance at December 31, 1996 6,039,994 $ 604 $ 29,226 $ 1,057 $ 17,186 28,600 $(170) $ 47,903 Net loss (97,144) (97,144) Preferred stock dividend (1,572) (1,572) Other comprehensive income, net of tax 645 645 Other comprehensive income on investments in subsidiaries, net of tax 2,947 2,947 Preferred stock converted to common 118,905 12 937 949 Issuance of shares under stock option plans 42,500 4 115 119 Award and issuance of restricted shares 67,000 7 1,179 1,186 Cancellation of treasury stock (28,600) (3) (167) (28,600) 170 0 Shares purchased and canceled under stock option plans (44,360) (4) (447) (451) ------------- -------- ------------ ------------ ---------- ------- ------ ---------- Balance at December 31, 1997 6,195,439 620 30,843 4,649 (81,530) - - (45,418) Net loss (22,285) (22,285) Preferred stock dividend (520) (520) Other comprehensive loss, net of tax (302) (302) Other comprehensive loss on investments in subsidiaries, net of tax (436) (436) Preferred stock converted to common 840,071 83 6,982 7,065 Other, net 299 - (184) (184) ------------- -------- ----------- ------------ ---------- ------- ------- ---------- Balance at December 31, 1998 7,035,809 703 37,641 3,911 (104,335) - - (62,080) Net income 208 208 Other comprehensive loss, net of tax (339) (339) Other comprehensive loss on investments in subsidiaries, net of tax (1,647) (1,647) Cancellation of old preferred stock 11,935 (3,088) 8,847 Issuance of new preferred stock (477) (477) Cancellation of old common stock (7,035,809) (703) (703) Issuance of new common stock 6,500,000 65 79,203 79,268 Fresh start adjustments (101,741) (1,925) 107,692 4,026 ============= ======== =========== ============ ========= ======= ======= ========== Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - - $ - $ 27,103 ============= ======== =========== ============ ========= ======= ======= ==========
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (in thousands) Nine Months Ended December 31, --------------------- 1999 --------------------- Cash Flows From Operating Activities: Net income $ 2,106 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed net income of subsidiaries 212 Accrued investment income 168 Increase in other assets (671) Increase in other liabilities 2,685 Dividends received from subsidiaries 300 Other, net (2,263) --------------------- Net Cash Provided By Operating Activities 2,537 --------------------- Cash Flows From Investing Activities: Proceeds from sale of fixed maturity investments 3,938 Cost of fixed maturity investments acquired (699) Proceeds from sale of equity securities 873 Net change in short term investments (2,780) Capital contributions to subsidiaries (500) --------------------- Net Cash Provided by Investing Activities 832 --------------------- Cash Flows From Financing Activities: Net Cash Provided By Financing Activities - --------------------- Increase in Cash during the period 3,369 Cash at beginning of period 658 ===================== Cash at end of period $ 4,027 ===================== The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now ASCENT ASSURANCE, INC.) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (in thousands) Three Months Ended March 31, Year Ended December 31, ---------------- ------------------------------------ 1999 1998 1997 ---------------- --------------- ---------------- Cash Flows From Operating Activities: Net income (loss) $ 208 $ (22,285) $ (97,144) Adjustments to reconcile net income (loss) to cash used for operating activities: Equity in undistributed net (income) loss of subsidiaries (276) 8,782 86,419 Depreciation expense - 89 422 Accrued investment income 42 75 (238) Decrease (increase) in other assets 3,063 (1,062) (2,485) (Decrease) increase in other liabilities (13,102) 6,263 665 Increase in interest and dividend payable - 5,934 2,874 Other, net 9,589 595 2,980 ---------------- --------------- ---------------- Net Cash Used For Operating Activities (476) (1,609) (6,507) ---------------- --------------- ---------------- Cash Flows From Investing Activities: Proceeds from sale of investments 2,455 5,176 42,268 Cost of investments acquired - - (57,366) Net change in short term investments (1,403) 1,811 (1,192) Additions to leasehold improvements and equipment, net of retirements - (27) (349) (Increase) decrease in other assets - (283) 288 Capital contributions to subsidiaries (400) (6,321) (43,105) ---------------- --------------- ---------------- Net Cash Provided by (Used For) Investing Activities 652 356 (59,456) ---------------- --------------- ---------------- Cash Flows From Financing Activities: Retirement of senior subordinated debentures (15,167) - - Issuance of preferred stock 15,167 - - Decrease (increase) in other assets - 732 (1,914) Issuance of convertible notes - - 70,000 Retirement of note payable - - (1,103) Issuance of common stock - - 140 Purchase and cancellation of common stock - - (276) ---------------- --------------- ---------------- Net Cash Provided By Financing Activities - 732 66,847 ---------------- --------------- ---------------- Increase (decrease) in Cash During the Period 176 (521) 884 Cash at Beginning of Period 482 1,003 119 ================ =============== ================ Cash at End of Period $ 658 $ 482 $ 1,003 ================ =============== ================
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION (in thousands) Other Policy Deferred Claims Benefits Amortization Policy Future and Net and of Policy Other Acquisition Policy Benefits Premium Investment Claims Acquisition Operating Premiums Segment Costs Benefits Payable Revenue Income Expense Costs Expenses Written* - -------------------------- ----------- ---------- -------- --------- ---------- --------- ------------ --------- -------- Ascent Assurance, Inc. Nine Months ended December 31, 1999: Insurance operations $ 19,393 $ 57,119 $ 38,776 $ 86,371 $ 5,223 $ 65,699 $ 1,478 $ 26,488 $38,599 Other activities - - - - 1,008 - - 10,549 Corporate (parent company) - - - - 509 - - (1,473) ========== ========== ========= ========== ========= ========= =========== ========== Total $ 19,393 $ 57,119 $ 38,776 $ 86,371 $ 6,740 $ 65,699 $ 1,478 $ 35,564 ========== ========== ========= ========== ========= ========= =========== ========== Westbridge Capital Corp. Three Months ended March 31, 1999: Insurance operations $ 15,039 $ 54,738 $ 41,068 $ 29,948 $ 1,987 $ 21,799 $ 286 $ 10,402 $ 9,366 Other activities - - - - 366 - - 3,633 Corporate (parent company) - - - - 209 - - 419 ========== ========== ========= ========== ========= ========== =========== ======== Total $ 15,039 $ 54,738 $ 41,068 $ 29,948 $ 2,562 $ 21,799 $ 286 $ 14,454 ========== ========== ========= ========== ========= ========== =========== ======== Year ended December 31, 1998: Insurance operations $ 14,177 $ 53,871 $ 44,116 $ 135,717 $ 8,314 $ 99,419 $ 4,411 $ 44,447 $31,216 Other activities - - - - 2,607 - - 24,274 Corporate (parent company) - - - - 1,090 - - 16,153 ========== ========== ========= ========== ========= ========== =========== ========= Total $ 14,177 $ 53,871 $ 44,116 $ 135,717 $ 12,011 $ 99,419 $ 4,411 $ 84,874 ========== ========== ========= ========== ========= ========== =========== ========= Year ended December 31, 1997: Insurance operations $ 19,165 $ 55,811 $ 51,784 $ 161,097 $ 7,325 $ 136,866 $ 30,873 $ 91,633 $73,611 Other activities - - - - 1,547 - - 27,564 Corporate (parent company) - - - - 2,151 - - 11,373 ========== ========== ========= ========== ========= ========== =========== ========= Total $ 19,165 $ 55,811 $ 51,784 $ 161,097 $ 11,023 $ 136,866 $ 30,873 $130,570 ========== ========== ========= ========== ========= ========== =========== =========
*Premiums Written--Amounts do not apply to life insurance.
SCHEDULE IV REINSURANCE (in thousands, except percentages) Assumed Percentage Ceded to From of Amount Gross Other Other Net Assumed Amount Companies Companies Amount to Net --------------- -------------- -------------- --------------- ----------- ASCENT ASSURANCE, INC. Nine months ended December 31, 1999: Life insurance in force $ 38,184 $ 6,465 $ - $ 31,719 - =============== ============== ============== =============== Premiums: Life $ 396 $ 12 $ - $ 384 - Accident and health 86,794 1,849 1,042 85,987 1.21% --------------- -------------- -------------- --------------- Total premiums $ 87,190 $ 1,861 $ 1,042 $ 86,371 1.21% =============== ============== ============== =============== WESTBRIDGE CAPITAL CORP. Three months ended March 31, 1999: Life insurance in force $ 43,157 $ 7,072 $ - $ 36,085 - =============== ============== ============== =============== Premiums: Life $ 147 $ 2 $ - $ 145 - Accident and health 30,041 722 484 29,803 1.62% --------------- -------------- -------------- --------------- Total premiums $ 30,188 $ 724 $ 484 $ 29,948 1.62% =============== ============== ============== =============== Year ended December 31, 1998: Life insurance in force $ 44,815 $ 7,275 $ - $ 37,540 - =============== ============== ============== =============== Premiums: Life $ 664 $ 22 $ - $ 642 - Accident and health 136,291 2,812 1,596 135,075 1.18% --------------- -------------- -------------- --------------- Total premiums $ 136,955 $ 2,834 $ 1,596 $ 135,717 1.18% =============== ============== ============== =============== Year ended December 31, 1997: Life insurance in force $ 53,065 $ - $ - $ 53,065 - =============== ============== ============== =============== Premiums: Life $ 832 $ - $ - $ 832 - Accident and health 161,865 3,635 2,035 160,265 1.27% --------------- -------------- -------------- --------------- Total premiums $ 162,697 $ 3,635 $ 2,035 $ 161,097 1.26% =============== ============== ============== ===============
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) Additions Charged Balance Balance at to at Beginning Costs and Deductions End of of Period Expenses (Charge Offs) Other* Period ------------- ------------- ----------------- ------------- ----------- ASCENT ASSURANCE, INC. Nine months ended December 31, 1999: Allowance for doubtful agents' balances $ 5,125 $ 123 $ (1,356) $ 2,168 $ 6,060 ============= ============= ================= ============= ============= WESTBRIDGE CAPITAL CORP. Three months ended March 31, 1999: Allowance for doubtful agents' balances $ 5,176 $ 195 $ (246) $ - $ 5,125 ============= ============= ================= ============= ============= Year ended December 31, 1998: Allowance for doubtful agents' balances $ 4,531 $ 645 $ - $ - $ 5,176 ============= ============= ================= ============= ============= Year ended December 31, 1997: Allowance for doubtful agents' balances $ 1,729 $ 2,802 $ - $ - $ 4,531 ============= ============= ================= ============= =============
* Represents reclassification of allowance netted against receivable. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to directors and executive officers is incorporated herein by reference to "Election of Directors" and "Certain Information Regarding the Executive Officers" from the Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders, which will be filed on or before April 30, 2000. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation is incorporated herein by reference to "Election of Directors -- Executive Compensation" from the Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders, which will be filed on or before April 30, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of certain beneficial owners and management is incorporated herein by reference to "Principal Stockholders" and "Election of Directors -- Security Ownership of Management" from the Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders, which will be filed on or before April 30, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transaction is incorporated herein by reference to "Principal Stockholders" and "Election of Directors" from the Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders, which will be filed on or before April 30, 2000. PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) The documents set forth below are filed as part of this report. (1) Financial Statements: Reference is made to ITEM 8, "Index to Financial Statements and Financial Statement Schedules." (2) Financial Statement Schedules: Reference is made to ITEM 8, "Index to Financial Statements and Financial Statement Schedules." All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (3) Exhibits: The following exhibits are filed herewith. Exhibits incorporated by reference are indicated in the parentheses following the description. 2.1 First Amended Plan of Reorganization of Westbridge Capital Corp. Under Chapter 11 of the Bankruptcy Code, dated as of October 30, 1998 (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on September 21, 1998). 2.2 Amended Disclosure Schedule Accompanying the First Amended Plan of Reorganization of Westbridge Capital Corp. under Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on September 21, 1998). 2.3 Findings of Fact, Conclusions of Law, and Order confirming the First Amended Plan of Reorganization of Westbridge Capital Corp. dated October 30, 1998, as modified (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on December 29, 1998). 3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 24, 1999 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-A filed on March 25, 1999). 3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Form 8-A filed on March 25, 1999). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed on March 25, 1999). 4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed on March 25, 1999). 4.3 Form of Warrant Agreement dated as of March 24, 1999, between the Company and LaSalle National Bank, as warrant agent (incorporated by reference to Exhibit 4.3 to the Company's Form 8-A filed on March 25, 1999). 4.4 Form of Preferred Stock Certificate (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.1 Credit Agreement dated as of June 6, 1997 between Westbridge Funding Corporation and LaSalle National Bank (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.2 Guaranty Agreement dated as of June 6, 1997 by Westbridge Capital Corp. in favor of LaSalle National Bank (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.3 Pledge Agreement dated as of June 6, 1997 between Westbridge Marketing Corporation and LaSalle National Bank (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.4 Security Agreement dated as of June 6, 1997 between Westbridge Funding Corporation for the benefit of LaSalle National Bank (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.5 Second Amended and Restated Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between National Foundation Life Insurance Company, National Financial Insurance Company, American Insurance Company of Texas, Freedom Life Insurance Company of America, and Westbridge Funding Corporation (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.6 Amended and Restated Non-Insurance Company Sellers Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between American Senior Security Plans, L.L.C., Freedom Marketing, Inc., Health Care-One Insurance Agency, Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of Texas, Inc., and Westbridge Marketing Corporation (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.7 Lock-Up Agreement, dated as of September 16, 1998, by and among the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on September 21, 1998). 10.8 Stock Purchase Agreement, dated as of September 16, 1998, between the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed on September 21, 1998). 10.9 Employment Agreement, dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed on September 21, 1998). 10.10Employment Agreement dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick H. O'Neill (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed on September 21, 1998). 10.11First Amendment and Waiver to Credit Agreement among Westbridge Funding Corporation, Westbridge Capital Corp. and LaSalle National Bank dated as of September 8, 1998 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.12First Amendment to Guaranty Agreement dated as of March 24, 1999 between Westbridge Capital Corp. in favor of LaSalle National Bank (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.13Registration Rights Agreement dated as of March 24, 1999 between the Company and Special Situations Holdings, Inc. - Westbridge (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.141999 Stock Option Plan dated as of March 24, 1999 (incorporated by reference to the Company's Schedule 14A filed with the Commission on April 30, 1999). 10.15Installment Note Agreement dated July 20, 1999 between Ascent Management, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.16Second Amendment to Credit Agreement dated August 12, 1999 between Ascent Funding, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.17Second Amendment to Guaranty Agreement dated July 20, 1999 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 21.1* List of Subsidiaries of Ascent Assurance, Inc. 24.1* Consent of PricewaterhouseCoopers LLP 27.1* Financial Data Schedule. (b) Report on Form 8-K. The Registrant filed a Report on Form 8-K dated March 25, 1999 in response to Item 5, Other Events, to report its emergence on March 24, 1999 from the Chapter 11 Case commenced on September 16, 1998. The Registrant filed a Report on Form 8-K dated December 29, 1998 in response to Item 3, Bankruptcy or Receivership, to report the confirmation of its First Amended Plan of Reorganization (the "Plan") under Chapter 11 of Title 11 of the United States Bankruptcy Court in the District of Delaware. In conjunction with this filing, the Company submitted a copy of the Confirmation Order with accompanying exhibits, including a copy of the Plan as confirmed. - ------------------------ * Filed Herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 2000. ASCENT ASSURANCE, INC. /s/ Cynthia B. Koenig Cynthia B. Koenig Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - ---------------------------------- ------------------------------------------- ------------------------ /s/ Patrick J. Mitchell Director, Chairman of the Board March 29, 2000 - -------------------------- (Patrick J. Mitchell) and Chief Executive Officer (Principal Executive Officer) /s/ John H. Gutfreund Director March 29, 2000 (John H. Gutfreund) /s/ Richard H. Hershman Director March 29, 2000 (Richard H. Hershman) /s/ Michael A. Kramer Director March 29, 2000 (Michael A. Kramer) /s/ Robert A. Peiser Director March 29, 2000 (Robert A. Peiser) /s/ James K. Steen Director March 29, 2000 (James K. Steen) /s/ Paul E. Suckow Director March 29, 2000 (Paul E. Suckow)
INDEX OF EXHIBITS Exhibit Number Description of Exhibit 21.1* List of Subsidiaries of Ascent Assurance, Inc. 24.1* Consent of PricewaterhouseCoopers LLP 27.1* Financial Data Schedule. * Filed Herewith
Exhibit 21.1 SUBSIDIARIES OF ASCENT ASSURANCE, INC. Percentage Subsidiary Ownership 1. National Foundation Life Insurance Company (Delaware) 100% 2. American Insurance Company of Texas (Texas) 100% 3. National Financial Insurance Company (Texas) 100% 4. Freedom Life Insurance Company of America (Mississippi) 100% 5. Freedom Holding Company (Kentucky) 100% 6. Ascent Funding, Inc. (Delaware) 100% 7. Foundation Financial Services, Inc. (Nevada) 100% 8. NationalCare(R) Marketing, Inc. (Delaware) 100% 9. Westbridge Printing Services, Inc. (Delaware) 100% 10. Ascent Management, Inc. (Delaware) 100% 11. Ascent Financial, Inc. (Delaware) 100% 12. Precision Dialing Services, Inc. (Delaware) 100% 13. Senior Benefits, LLC (Arizona) 100% 14. American Senior Security Plans, LLC (Delaware) 100% 15. Health Care-One Marketing Group, Inc. (Texas) 80% 16. LifeStyles Marketing Group, Inc. (Delaware) 100% 17. Health Care-One Insurance Agency, Inc. (California) 50% 18. Pacific Casualty Company, Inc. (Hawaii) 100%
Exhibit 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 (No. 333-82155) of Ascent Assurance, Inc. and its subsidiaries of our reports dated March 29, 2000, appearing on pages 28 and 29 of this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dallas, Texas March 29, 2000 EX-27 2 ARTICLE 7 FDS FOR 10-K
7 1,000 9-MOS DEC-31-1999 APR-01-1999 DEC-31-1999 97,563 0 0 1,313 124 0 110,193 5,110 0 19,393 163,690 95,895 0 0 0 7,162 23,257 0 65 23,719 163,690 86,371 6,740 (208) 13,069 65,699 1,478 18,483 3,231 1,125 2,106 0 0 0 232 .04 .04 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----