-----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, Knf+bwrXjFBlMfPnW/1qRdiVO5MOl4xn0OEm3CxnAVzDs6Pnj/tkIjDmlMp0M2yY BGOaBZdYrP+4JeMKWdBRkw== 0000703701-01-500006.txt : 20010421 0000703701-01-500006.hdr.sgml : 20010421 ACCESSION NUMBER: 0000703701-01-500006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 DATE AS OF CHANGE: 20010419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASCENT ASSURANCE INC CENTRAL INDEX KEY: 0000703701 STANDARD INDUSTRIAL CLASSIFICATION: 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: 1604985 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 f10k1200.txt 12/31/00 10-K 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, 2000 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 $9,750,000 as of March 29, 2001. On March 29, 2001, 6,500,000 shares of Common Stock were outstanding. ASCENT ASSURANCE, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I ITEM 1. Business 2 ITEM 2. Properties 9 ITEM 3. Legal Proceedings 9 ITEM 4. Submission of Matters to a Vote of Security Holders 9 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 10 ITEM 6. Selected Consolidated Financial Data 11 ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 24 ITEM 8. Financial Statements and Supplementary Data 26 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 72 PART III ITEM 10. Directors and Executive Officers of the Registrant 73 ITEM 11. Executive Compensation 73 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 73 ITEM 13. Certain Relationships and Related Transactions 73 PART IV ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K 74
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 life and health insurance 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) telemarketing services, (ii) printing services and (iii) renewal commissions for prior year sales of unaffiliated insurance products. 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, 2000: Texas - 20 %, Florida - 11%, North Carolina - 6%, Tennessee - 6% and Arkansas - 6%. During 2000 and 1999, new business was produced only in NFL and FLICA, with FLICA underwriting approximately 88% of new policies issued. In April 2000, NFL began reinsuring 60% of the risk under new major medical policies issued by FLICA. Premium revenue, in thousands, for each Insurance Subsidiary is set forth below.
Year Ended December 31, ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- FLICA: First-year $ 19,804 $ 15,809 $ 7,714 Renewal 23,516 14,938 11,769 ----------- ----------- ----------- 43,320 30,747 19,483 ----------- ----------- ----------- NFL: First-year 10,676 1,594 6,206 Renewal 44,796 55,231 66,285 ----------- ----------- ----------- 55,472 56,825 72,491 ----------- ----------- ----------- NFIC: First-year - - 4,149 Renewal 15,093 21,198 29,035 ----------- ----------- ----------- 15,093 21,198 33,184 ----------- ----------- ----------- AICT: First-year - - 1,092 Renewal 5,519 7,549 9,467 ----------- ----------- ----------- 5,519 7,549 10,559 Other: First-year 504 - - Renewal - - - ----------- ----------- ----------- 504 - - ----------- ----------- ----------- Consolidated Premium Revenue $ 119,908 $ 116,319 $ 135,717 =========== =========== ===========
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. The principal products currently marketed by NCM and underwritten by the Insurance Subsidiaries are all medical expense reimbursement policies. These 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. The principal product groups currently underwritten by the Insurance Subsidiaries are summarized below: Comprehensive major medical 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. All such products are guaranteed renewable pursuant to the Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et seq. ("HIPAA"). Hospital/surgical major medical products - These products are similar to comprehensive major medical products except that benefits are limited to hospital/surgical services (services such as routine well care physician visits and prescription drugs are excluded) and deductibles and coinsurance provisions are generally higher. All such products are guaranteed renewable pursuant to the Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et seq. ("HIPAA"). Supplemental 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. Benefits are payable directly to the insured following diagnosis of or treatment for a covered illness or injury. Specified disease products are generally guaranteed renewable by contract, but are exempt from HIPAA. Major medical products comprise approximately 95% of new business sales. These 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 major medical products currently underwritten by the Insurance Subsidiaries are stringently underwritten and include a para-med examination or other medical tests, depending on the age of the applicant. Prior to 1998, the Insurance Subsidiaries also underwrote Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. 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 major medical 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 supplemental specified disease products are designed to provide coverage which is supplemental to major medical insurance and may be used to defray non-medical 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 National Association of Insurance Commissioners ("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. 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. 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. Effective September 28, 2000, NFL and FLICA changed their state of incorporation from Delaware and Mississippi, respectively, to the state of Texas. As a result, the Insurance Subsidiaries are all Texas domestic companies and are subject to regulation under Texas insurance laws. The Texas Department of Insurance adopted the NAIC's RBC Model Act during 2000. NFL's and FLICA's statutory annual statements for the year ended December 31, 2000 filed with the Texas Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC; however, FLICA did not meet the negative trend test. Due to adverse claims experience for major medical products, FLICA required an additional capital contribution in April 2001 to maintain Company Action Level RBC at March 31, 2001 (see "Liquidity, Capital Resources, and Statutory Capital and Surplus" at Item 7). In 1998, NFIC and AICT 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 Texas Department of Insurance in response to losses sustained in 1997 and 1998 as well as the projected inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of new business in 1998. At December 31, 2000, AICT's RBC exceeded Company Action Level RBC; however, NFIC's RBC only exceeded Authorized Control Level RBC. Both NFIC and AICT are in compliance with the terms of the voluntary consent order. Premium Writing Ratios. Under Florida Statutes Section 624.4095, Florida licensed insurance companies' ratio of actual or projected annual written premiums to current or projected surplus with regards to policyholders ("the premium writing ratio") may not exceed specified levels for gross and net written premiums as defined by the statute. If a company exceeds the premium writing ratio, the Florida Department of Insurance shall suspend the company's certificate of authority in Florida or establish by order maximum gross or net annual premiums to be written by the company consistent with maintaining the ratios specified. At December 31, 2000, the premium writing ratio for FLICA, which currently underwrites insurance policies in Florida, exceeded the limit mandated by Florida law. In April 2001, FLICA received the required capital contribution to meet the Florida premium writing ratio. As FLICA produces 88% of the Company's new business and approximately 40% of its new business production is in the state of Florida, maintaining the ability to write new business in Florida is a significant factor in the Company's current business plan. Continued adverse claims experience for major medical products could have a material adverse impact on FLICA's ability to maintain compliance with the Florida premium writing ratio and a material adverse effect on the Company's business (see "Liquidity, Capital Resources, and Statutory Capital and Surplus" at Item 7). Dividends. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the Texas Department of Insurance. The Texas Insurance Code allows life and health insurance companies to make dividend payments from surplus profits or earned surplus arising from its business. Earned surplus is defined as unassigned surplus excluding any unrealized gains. Texas life and health 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. Dividends exceeding the applicable threshold are considered extraordinary and require the prior approval of the Texas Insurance Commissioner. The Insurance Subsidiaries are precluded from paying dividends during 2001 without prior approval of the Texas Insurance Commissioner as the companies' earned surplus is negative. On September 30, 2000, NFL transferred its 100% ownership of FLICA to Ascent through an extraordinary dividend approved by the Texas Department of Insurance. 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 $77,000 during the year ended December 31, 2000. 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. The Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley Act", or "GLBA") contains privacy provisions and introduces new controls over the transfer and use of individuals' nonpublic personal data by financial institutions, including insurance companies, insurance agents and brokers licensed by state insurance regulatory authorities. Numerous pieces of federal and state legislation aimed at protecting the privacy of nonpublic personal financial and health information are pending. The privacy provisions of GLBA became effective in November 2000, but required compliance with GLBA has been deferred and is optional until July 1, 2001. By July 1, 2001, the Company is required to provide written notice of its privacy practices to all of the Company's insureds. In addition, the Company must provide insureds with an opportunity to state their preferences regarding the Company's use of their non-public personal information. GLBA provides that there is no federal preemption of a state's insurance related privacy laws if the state law is more stringent than the privacy rules imposed under GLBA. Pursuant to the authority granted under GLBA to state insurance regulatory authorities to regulate, the National Association of Insurance Commissioners has recently promulgated a new model regulation called Privacy of Consumer Financial and Health Information Regulation. Numerous state insurance authorities are expected to adopt this model regulation before July 1, 2001, while some states must pass legislative reforms to allow implementation of new state privacy rules pursuant to GLBA. At the present time, the impact of the privacy provisions of GLBA or any state privacy legislation on the Company's financial condition or results of operations is not estimable. 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 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: |X| To holders of general unsecured claims and Convertible Notes as of December 10, 1998, 6,077,500 shares, and to management at the Effective Date, 32,500 shares, or in aggregate 94% of the New Common Stock issued on the Effective Date. Holders of general unsecured claims and Convertible Notes received their first distribution of shares in partial satisfaction and discharge of 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. |X| To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the New Common Stock issued on the Effective Date, on a fully diluted basis. |X| To 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. |X| To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, 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. EMPLOYEES At December 31, 2000, the Company employed 650 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 The Company's principal offices are located at 110 West Seventh Street, Fort Worth, Texas. The lease for this facility expires in April, 2003. Westbridge Printing Services, Inc., the Company's wholly owned printing subsidiary, maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. Precision Dialing Services, the Company's wholly owned telemarketing subsidiary, maintains its facility at 9550 Forest Lane, Dallas, Texas under a lease agreement which expires in December, 2003. 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 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 STOCKHOLDER MATTERS Price Range of Publicly Traded Securities. The Company's Common Stock and Warrants are quoted on the over-the-counter bulletin board ("OTC Bulletin Board"). There were 6,500,000 shares of Common Stock and 971,266 Warrants outstanding as of March 27, 2001. The high and low price listed for the Common Stock and Warrants reflects the OTC Bulletin Board closing bid prices since May 28, 1999, the initial trading date of the Company's securities. The closing bid price on December 31, 2000 was $1.00. There were approximately 298 shareholders of record on December 31, 2000, representing approximately 1,450 beneficial owners. OTC Bulletin Board
Common Stock Warrants High Low High Low 2000 Fourth Quarter $2.375 $0.813 $0.120 $0.016 Third Quarter 3.125 1.250 0.150 0.020 Second Quarter 3.125 1.625 0.250 0.040 First Quarter 2.875 1.688 0.250 0.040 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
Dividend Policy The Company does not anticipate declaring or paying cash dividends on its 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 11 - "Statutory Capital And Surplus" to the Company's Consolidated Financial Statements at Item 8. 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.
ASCENT ASSURANCE, INC. Year Ended Nine Months Ended December 31, 2000 December 31, 1999 March 31, 1999 ----------------- ------------------ ---------------- (in thousands, except per share data) Statement of Operations Data: Premiums $ 119,908 $ 86,371 Total revenues 149,586 105,972 (Loss) income before income taxes (12,939) 3,231 Net (loss) income (3) (18,942) 2,106 Preferred stock dividends 2,576 1,874 (Loss) income applicable to common shareholders (21,518) 232 (Loss) Earnings Per Share(3): Basic $ (3.31) $ 0.04 Diluted $ (3.31) $ 0.04 Weighted Average Shares Outstanding: Basic 6,500 6,500 Diluted 6,500 6,510 Balance Sheet Data: Cash and invested assets $ 112,235 $ 115,303 $ 129,142 Total assets 160,478 163,690 169,795 Policy liabilities 104,084 95,895 95,806 Notes payable(1) 8,947 7,162 5,088 Total liabilities 128,698 116,649 119,435 Redeemable convertible preferred stock(2) 27,705 23,257 23,257 Stockholders' equity 4,075 23,784 27,103 Book Value Per Share(3) $ .63 $ 3.66 $ 4.17
(1) In April 2001, the Company borrowed an additional $11,000. See "Liquidity, Capital Resources, and Statutory Capital and Surplus" at Item 7. (2) At December 31, 2000, consists of 27,705 shares of New Preferred Stock, which are convertible, at the option of the holders thereof, into an aggregate of 5,676,469 shares of New Common Stock at a conversion price of $4.88 per share of New Common Stock. (3) Net loss for the year ended December 31, 2000 includes a non-cash charge of $10.4 million related to an increase in the deferred tax asset valuation allowance which increased loss per share and decreased book value per share by $(1.60). WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, Year Ended December 31, ---------- ----------------------------------------- 1999 1998 1997 1996 (1) ---------- ----------- ----------- ----------- (in thousands, except per share data) Statement of Operations Data: Premiums $ 29,948 $ 135,717 $ 161,097 $ 156,780 Total revenues 36,814 166,650 188,904 175,146 Extraordinary loss, net of income tax - - 1,007 - Net income (loss) 208 (22,285) (97,144) 8,261 Preferred stock dividends - 520 1,572 1,650 Income (loss) applicable to common stockholders 208 (22,805) (98,716) 6,611 Earnings (Loss) Per Share: Basic $ 0.03 $ (3.43) $ (16.07) $ 1.11 Diluted $ 0.03 $ (3.43) $ (16.07) $ 0.97 Weighted Average Shares Outstanding: Basic 7,032 6,640 6,143 5,978 Diluted 7,032 6,640 6,143 8,477 Balance Sheet Data: Total cash and invested assets $ 131,708 $ 148,442 $ 103,218 Total assets 169,741 202,856 220,716 Policy liabilities 97,987 107,595 93,390 Notes payable 95,715 102,547 40,560 Total liabilities 219,886 229,274 152,813 Redeemable convertible preferred stock 11,935 19,000 20,000 Stockholders' (deficit) equity (62,080) (45,418) 47,903
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Business Overview. 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 2 and 4 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 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) telemarketing services, (ii) printing services, and (iii) renewal commissions received by the Company for prior year sales of insurance products for unaffiliated insurance carriers. The following discussion provides management's assessment of financial results and material changes in financial position for the Company. For a better understanding of this analysis, reference should be made to Item 1 - "Business" and to Item 8 - "Financial Statements and Supplementary Data". Certain reclassifications of prior years' amounts have been made to conform with the 2000 presentation. Forward-Looking Statements. 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. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Various 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: |X| further adverse claims experience or other events adversely impacting the Company's liquidity position, |X| actions that may be taken by insurance regulatory authorities, |X| adverse developments in the timing or results of the Company's current strategic business plan to return operations to profitability by improving claims experience and reducing overhead expenses, |X| the loss of key personnel, |X| and the effect of changing economic and market conditions, especially medical expense inflation and health care reform initiatives. 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. OPERATING RESULTS Results of operations for Ascent are reported for 2000 and 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 2000 and 1999 are compared to Westbridge's results of operations for the corresponding period in 1998. (In thousands except insurance operating ratios.)
Pro Forma Ascent Ascent Westbridge ----------- ----------- ----------- 2000 1999 1998 ----------- ----------- ----------- Premiums $ 119,908 $ 116,319 $ 135,717 Other 3,335 1,789 589 ----------- ----------- ----------- Total insurance operating revenue 123,243 118,108 136,306 Benefits and claims 101,940 87,498 99,419 Commissions 17,969 16,264 22,692 (Increase) decrease in deferred acquisition costs (6,818) (5,216) 40 Recognition of premium deficiency 1,500 - 4,948 General and administrative expense 28,284 23,345 24,668 Taxes, licenses and fees 4,540 4,481 5,216 ----------- ----------- ----------- Total insurance operating expenses 147,415 126,372 156,983 ----------- ----------- ----------- Insurance operating results (24,172) (8,264) (20,677) ----------- ----------- ----------- Fee and service income 17,056 15,543 16,191 Fee and service expenses 14,481 13,233 15,728 ----------- ----------- ----------- Fee and service results 2,575 2,310 463 ----------- ----------- ----------- Net investment income 9,741 9,302 12,011 Net realized (loss) gain on investments (454) (167) 2,142 Interest expense on notes payable (629) (403) (881) Interest expense on retired/canceled debt - - (5,933) Resolution of pre-confirmation contingencies - 1,235 - Reorganization expenses - - (9,179) ----------- ----------- ----------- (Loss) income before income taxes (12,939) 4,013 (22,054) Income tax benefit (expense) (6,003) (1,364) (231) ----------- ----------- ----------- Net (loss) income $ (18,942) $ 2,649 $ (22,285) =========== =========== =========== Insurance operating ratios* Benefits and claims 85.0% 75.2% 73.3% Commissions 15.0% 14.0% 16.7% Increase in deferred acquisition costs (5.7%) (4.5%) - Recognition of premium deficiency 1.3% - 3.6% General and administrative expense 22.9% 19.8% 18.1% Taxes, licenses and fees 3.8% 3.9% 3.8%
*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. For the year ended December 31, 2000, the loss before income taxes was $(12.9) million compared to income before income taxes of $4.0 million for 1999 and a loss before income taxes of $(22.1) million for 1998. The pre-tax operating loss for 2000 was attributable to losses from the Group Preferred Provider Organization ("GPPO") product, the principal major medical product marketed by FLICA from 1998 to July 2000 which represented 32% of premium revenue for 2000. Such pre-tax loss includes a non-cash premium deficiency charge of $(1.5) million. As discussed below, losses from the GPPO product were principally driven by higher than expected claims frequency. Management believes that significant rate increase actions will reduce losses from the GPPO product in 2001. Due to losses from the GPPO product, FLICA has required significant capital contributions during 2000 and 2001 to comply with statutory capital and surplus requirements. Continued adverse claims experience for the GPPO product could have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements and maintain its new business production at current levels (see "Liquidity, Capital Resources and Statutory Capital and Surplus" and Item 1 - Business, "Regulation"). In July 2000, the Company began marketing a new major medical policy in all significant marketing regions. The new major medical policy is designed to produce a substantially lower benefits and claims to premium ratio than the old GPPO product. Management believes that the new major medical policy has been well accepted by the Company's career agency force. At March 31, 2001, annualized premiums in force for the new major medical policy were $13.8 million. As a result of the fourth quarter losses from the old GPPO product, the Company has reported a cumulative pre-tax loss since the fresh start date of March 31, 1999. Principally as a result of this cumulative pre-tax loss position, generally accepted accounting principles ("GAAP") require that a valuation allowance be provided for any net deferred tax asset. Accordingly, an additional deferred tax asset valuation allowance of $10.4 million was established at December 31, 2000 which resulted in the Company reporting income tax expense of $6 million for the year ended December 31, 2000 (see below and Note 11-"Income Taxes" to the Company's Consolidated Financial Statements at Item 8.) This adjustment had no impact on the Company's cash position at December 31, 2000 and did not impact statutory capital and surplus of the Insurance Subsidiaries. In comparing 1999 to 1998, operating results for 1998 were adversely impacted by premium deficiency charges of $4.9 million, reorganization expenses of $9.2 million and interest expense on retired / canceled debt of $5.9 million. The following narratives discuss the principal components of insurance operating results. Premiums. The Insurance Subsidiaries' premium revenue is derived principally from the following medical expense reimbursement products: major medical, supplemental specified disease and Medicare supplement. Major medical 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. Supplemental 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. Prior to 1998, the Insurance Subsidiaries also underwrote Medicare supplement products and continue to receive renewal premiums from such policies. Premium revenue, in thousands, for each major product line is set forth below:
Pro Forma Ascent Ascent Westbridge ----------- ----------- ----------- 2000 1999 1998 ----------- ----------- ----------- Major medical: First-year $ 28,082 $ 15,863 $ 15,821 Renewal 37,632 39,891 48,888 ----------- ----------- ----------- 65,714 55,754 64,709 ----------- ----------- ----------- Supplemental specified disease: First-year 1,394 1,352 1,818 Renewal 26,287 27,917 30,546 ----------- ----------- ----------- 27,681 29,269 32,364 ----------- ----------- ----------- Medicare supplement: First-year - 34 1,477 Renewal 23,927 30,526 36,554 ----------- ----------- ----------- 23,927 30,560 38,031 ----------- ----------- ----------- Other 2,586 736 613 ----------- ----------- ----------- Consolidated Premium Revenue $ 119,908 $ 116,319 $ 135,717 =========== =========== ===========
Total premiums increased by $3.6 million, or 3.1%, for 2000 as compared to 1999 as new business production exceeded the expected decline in renewal premiums from older, closed blocks of business. Major medical products comprised 95% of new business sales for 2000 and represented 55% of consolidated premium revenue for 2000 as compared to 48% for 1999 and 1998. Premiums related to the old GPPO major medical product were $38.2 million, $17.5 million and $3.2 million for 2000, 1999 and 1998, respectively. The Company began implementing significant rate increases on the old GPPO product in July 2000 and anticipates implementing additional significant rate increases in 2001. For 2000, approximately 88% of new business was underwritten by FLICA. Continued adverse claims experience for the old GPPO product could have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements and maintain its new business production at current levels (see "Liquidity, Capital Resources and Statutory Capital and Surplus" and Item 1 - Business, "Regulation"). For 1999, premiums decreased $19.4 million, or 14.3%, from 1998 due to the discontinuance of the sale of the Medicare supplement product line, the cancellation of blocks of business and decreased persistency from the implementation of premium rate increases. Benefits and Claims. Benefits and claims are comprised of (1) claims paid, (2) changes in claim reserves for claims incurred (whether or not reported), and (3) changes in future policy benefit reserves. The ratio of consolidated benefits and claims to consolidated premiums increased to 85.0% for 2000, a 9.8 percentage point increase as compared to 1999. This increase in the benefits and claim ratio increased consolidated pre-tax losses for 2000 by $11.8 million for 2000. In the fourth quarter of 2000, claims payments exceeded historical levels due to full implementation of the Company's new claims data processing system which was converted to in May 2000. As a result, the pending claims inventory was significantly reduced at December 31, 2000 and the Company determined that the benefits and claim ratio for the old GPPO product was substantially higher than expected. Adverse claims experience for the old GPPO product was due primarily to higher than expected claims frequency, particularly for young women and children. The increase in expected benefits and claim ratio for the old GPPO product resulted in a consolidated claims and benefit ratio for the fourth quarter of 2000 of 99.8% (see "Financial Condition - Claims Reserves"). Continued adverse claims experience for the old GPPO product could have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements (see "Liquidity, Capital Resources and Statutory Capital and Surplus"). For 1999, the 1.9 percentage point increase in the ratio of benefits to premium in comparison to 1998 was principally attributable to unfavorable experience in the major medical line of business partially offset by favorable experience in the Medicare supplement line of business. Commissions. For 2000, the commissions to premium ratio increased from 1999 by 1.0 percentage point as a result of the increase in the amount of new major medical premiums and change in business mix. Commissions as a percent of premium decreased for 1999 as compared to 1998 principally due 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. General and administrative expense. General and administrative expense for 2000 increased over 1999 principally due to increased new business production and non-recurring expenses related to the implementation in May, 2000 of the Company's new policy administration and claims data processing systems. Recognition of premium deficiency. In general, a premium deficiency exists if the present value of future cash flows plus future policy benefit and claim reserves at the calculation date is negative or less than net deferred policy acquisition costs. The calculation of future cash flows includes assumptions as to future rate increases and persistency. The Company routinely evaluates the recoverability of deferred acquisition costs in accordance with GAAP. As a result of fourth quarter losses for the old GPPO product, the Company determined that a premium deficiency of $1.5 million existed at December 31, 2000 related to medical expense reimbursement products issued subsequent to the fresh start date of March 31, 1999. Accordingly, deferred policy acquisition costs were reduced by $1.5 million at December 31, 2000. Net Investment Income. Net investment income increased $0.4 million, or 4.7%, for 2000 as compared to 1999 due to an increase in interest income relative to agent balance receivables. For 1999, net investment income decreased $2.7 million, or 22.6%, from 1998 due to 16.2% decrease in invested assets and decreased interest income from agent balance receivables. Invested assets decreased as a result of payments of reorganization costs and reduction of premiums received as a result of the elimination of unprofitable blocks of business. 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 5% 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 Assurance ------------------------------ 2000 1999 ------------- ------------- Cash and cash equivalents $ 2,658 $ 5,110 ------------- ------------- Fixed Maturities (at market value): U.S. Government and related agencies 10,462 10,688 State, county and municipal 1,982 1,867 Finance 23,445 23,950 Public utilities 6,787 9,128 Mortgage-backed 13,302 7,725 All other corporate bonds 44,612 44,205 ------------- ------------- Total Fixed Maturities 100,590 97,563 ------------- ------------- Preferred stock 1,335 1,313 Other Invested Assets: Mortgage loans on real estate 56 124 Policy loans 342 289 Short-term investments and certificates of deposit 7,254 10,904 ------------- ------------- Total Other Invested Assets 7,652 11,317 ------------- ------------- Total Cash and Invested Assets $ 112,235 $ 115,303 ============= =============
The following table summarizes consolidated investment results (excluding unrealized gains or losses) for the indicated year:
Pro Forma Ascent Ascent Westbridge ---------- ---------- ---------- 2000 1999 1998 ---------- ---------- ---------- Net investment income (1) $ 7,805 $ 8,016 $ 9,500 Net realized (loss) gain on investments (454) (167) 2,142 Average gross annual yield on fixed maturities 7.2% 7.2% 7.0%
The following table indicates by rating the composition of the Company's fixed maturity securities portfolio, excluding short-term investments and certificates of deposit, at December 31, 2000:
Market Value % -------------- ------------ (in thousands) Ratings (1) Investment grade: U.S. Government and agencies $ 22,754 22.6 AAA 2,885 2.9 AA 8,305 8.3 A 38,552 38.3 BBB 27,168 27.0 Non-Investment grade: BB 674 0.7 B and below 252 0.2 ------------ ------------ Total fixed maturity securities $ 100,590 100.0 ============ ============
(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, 2000, 70.4%, 27.0% and 2.6% of the market value of the Company's fixed maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively. 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.
2000 1999 ------------------------- ------------------------- Market Market Value % Value % ------------ ----------- ------------ ----------- Scheduled Maturity (in thousands) - - ------------------ Due in one year or less $ 7,073 7.0 $ 4,012 4.1 Due after one year through five years 28,877 28.7 33,311 34.2 Due after five years through ten years 26,327 26.2 26,367 27.0 Due after ten years 25,011 24.9 26,148 26.8 Mortgage-backed securities 13,302 13.2 7,725 7.9 ------------ ----------- ------------ ----------- Total fixed maturity securities $ 100,590 100.0 $ 97,563 100.0 ============ =========== ============ ===========
Deferred Tax Asset. As of December 31, 2000, the Company has reported cumulative pre-tax losses since the fresh start date of March 31, 1999. Realization of the Company's deferred tax asset is dependent upon the return of the Company's operations to profitability. Pre-tax losses during 2000 were principally attributable to adverse claims experience for the old GPPO major medical product. Management believes that the GPPO product losses can be reduced through rate increase management. However, under applicable GAAP literature, projections of future profitability are significantly discounted when evaluating the recoverability of deferred tax assets and do not overcome the negative evidence of cumulative losses. Accordingly, the Company increased its deferred tax valuation allowance by $10.4 million to $18.3 million to fully reserve the remaining net deferred tax asset as of December 31, 2000. Applicable GAAP literature further provides that the deferred tax asset valuation allowance may be eliminated once the Company is no longer in a cumulative loss position, as defined. Claims Reserves. Claim reserves are established by the Company for benefit payments which have already been incurred by the policyholder but which have not been paid by the Company. Claim reserves totaled $42.7 million at December 31, 2000 as compared to $38.8 million at December 31, 1999. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company's claims payment pattern accelerated in the fourth quarter of 2000 which resulted in a significant reduction in pending claims inventory at December 31, 2000. This significant change in the claims payment pattern has greatly increased the inherent uncertainty in estimating claim reserves at December 31, 2000. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations. Management considers many factors when setting reserves including: (1) historical trends; (2) current legal interpretations of coverage and liability; (3) loss payments and pending levels of unpaid claims; and (4) product mix. Based on these considerations, management believes that adequate provision has been made for the Company's claim reserves. Actual claims paid may deviate, perhaps substantially, from such reserves. Future Policy Benefit Reserves. Policy benefit reserves are established by the Company for benefit payments that have not been incurred but which are estimated to be incurred in the future. The policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the Company's expected future policyholder benefits minus the discounted present value of its expected future net premiums. These present value determinations are based upon assumed fixed investment yields, the age of the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. Except for purposes of reporting to insurance regulatory authorities and for tax filing, the Company's claim reserves and policy benefit reserves are determined in accordance with GAAP. In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Company's policy benefit reserves, the Company relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. The Company's persistency rates have a direct impact upon its policy benefit reserves because the determinations for this reserve are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly. The Company's policy benefit reserve requirements are also interrelated with product pricing and profitability. The Company must price its products at a level sufficient to fund its policyholder benefits and still remain profitable. Because the Company's claim and policyholder benefits represent the single largest category of its operating expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in the Company failing to price its products appropriately and to generate sufficient premiums to fund the payment thereof. The sharp increase in claim loss ratios experienced by the Company during 2000 was indicative of inadequate pricing in the Company's principal major medical product marketed through June 2000. 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 (see "Liquidity, Capital Resources and Statutory Capital and Surplus"). Reinsurance. As is customary in the insurance industry, the Company's Insurance Subsidiaries reinsure, or cede, portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and a coinsurance basis. Cession of reinsurance is utilized by an insurer to limit its maximum loss thereby providing a greater diversification of risk and minimizing exposures on larger risks. Reinsurance does not discharge the primary liability of the original insurer with respect to such insurance, but the Company, in accordance with prevailing insurance industry practice, reports reserves and claims after adjustment for reserves and claims ceded to other companies through reinsurance. The Company reinsures its risks under its major medical policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $100,000. Risks under its Medicare Supplement policies are not reinsured. The Company's risks under its Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retains fifty percent (50%) of the coverage amount of each of its life insurance policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL's retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates. At December 31, 2000, $1.5 million of the $2.5 million recoverable from reinsurers related to paid losses. Of this balance, all was recoverable from reinsurers rated "A" or higher by the A.M. Best Company. Statutory Accounting Practices. 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 return 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 "Liquidity, Capital Resources and Statutory Capital and Surplus"). LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS Ascent. Ascent's principal assets consist of the capital stock of its subsidiaries and invested assets. Accordingly, Ascent's principal sources of funds are comprised of dividends and advances from non-insurance subsidiaries. The Company's principal uses of cash are for capital contributions to its Insurance Subsidiaries and general and administrative expenses. The Company funded capital contributions totaling approximately $8.15 million, $5.9 million and $5.7 million to its Insurance Subsidiaries in 2000, 1999 and 1998 respectively. As of December 31, 2000, Ascent had approximately $4.3 million in unrestricted cash and invested assets. In February 2001, Ascent contributed $4.25 million to FLICA. During the first quarter of 2001, the Company determined that continued adverse claims experience for the old GPPO product (see "Operating Results") would require Ascent to make capital contributions to FLICA in excess of those originally planned. Ascent obtained debt financing (see below) and contributed an additional $11 million to FLICA in April 2001 to enable FLICA to maintain an RBC Ratio greater than Company Action Level at March 31, 2001 and to comply with the Florida premium writing ratio regulation (see "Business- Regulation" at Item 1). If the adverse claims experience for the old GPPO product exceeds management's current estimates, Ascent would be required to make additional capital contributions to FLICA in excess of those currently projected for 2001. Additional financing would be required by Ascent in order to make any such "excess" contributions. As a result, continued adverse claims experience for the old GPPO product or for other products written by the Insurance Subsidiaries could have a material adverse effect on Ascent's liquidity and capital resources and, due to potential restrictions on the ability of FLICA to underwrite new policies, its results of operations. Ascent received debt financing for the $11 million capital contribution described above from a loan made by Credit Suisse First Boston Management Corporation, which is an affiliate of Special Situations Holdings, Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating to that loan provided Ascent with total loan commitments of $11 million (all of which has been drawn). The loan bears interest at a rate of 12% per annum and matures in April, 2004. Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. The credit agreement relating to the loan provides for a facility fee of $1.5 million which is payable upon maturity or upon a change in control, as defined. Ascent's obligations are secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of Ascent and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding Corporation and Ascent Management, Inc., some or all of which is pledged as collateral for receivables financing described below). Ascent's subsidiaries (other than those listed above) have also guaranteed Ascent's obligations under the credit agreement and the loan. Continued adverse claims experience for the old GPPO product could result in events of default under the credit agreement and related agreements. Dividends on Ascent's redeemable convertible preferred stock may be paid in cash or by issuance of additional shares of preferred stock, at the Company's option. In December 2000, the Company paid preferred stock dividends through the issuance of 2,575 additional shares of preferred stock. Preferred stock dividends accrued at December 31, 1999 were paid in January 2000 through issuance of 1,873 additional shares of preferred stock. Insurance Subsidiaries. The primary source of cash for the Insurance Subsidiaries are premiums, sales and maturity of invested assets and investment income while the primary uses of cash are benefits and claims, commissions, general and administrative expenses and taxes, licenses and fees. Cash contributions of $8.15 million and $15.25 million were funded in 2000 and through April 2001, respectively, by Ascent to its Insurance Subsidiaries to maintain capital and surplus (see "Ascent" discussion above). The Company's Insurance Subsidiaries have recorded combined statutory losses of $17.0 million for 2000 as compared to $6.5 million for 1999. The increased statutory losses resulted from 1) higher than expected claims and benefits for the old GPPO major medical product (see "Operating Results") and 2) costs associated with increased new business production which must be expensed under statutory accounting (for GAAP, such costs are deferred and amortized as related premiums are recorded). Dividends paid by the Company's Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance department of the state of domicile ("Business - Regulations" at Item 1). The Insurance Subsidiaries are precluded from paying dividends during 2001 without the prior approval of the Texas Insurance Commissioner as the Companies' earned surplus is negative. Inflation will affect claim costs on the Company's Medicare supplement and major medical products. Costs associated with a hospital stay and the amounts reimbursed by the Medicare program are each determined, in part, based on the rate of inflation. If hospital and other medical costs that are reimbursed by the Medicare program increase, claim costs on the Medicare supplement products will increase. Similarly, as the hospital and other medical costs increase, claim costs on the major medical products will increase. The Company has somewhat mitigated its exposure to inflation by incorporating certain limitations on the maximum benefits which may be paid under its policies and by filing for premium rate increases as necessary. Consolidated. The Company's consolidated net cash used for operations totaled $4.9 million, $2.6 million and $8.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in cash used for operations in 2000 as compared to 1999 is primarily due to an increase in the cash basis ratio of benefits and claims to premiums and increases in general expenses relative to the implementation of the Company's policy administration and claims data processing systems. The decrease in cash used for operations in 1999 from 1998 was primarily due to a decrease in the cash basis ratio of benefits and claims and expenses to premiums, and a reduction in reorganization costs paid. Net cash provided by investing activities for the years ended December 31, 2000, 1999 and 1998 totaled $0.6 million, $6.4 million and $13.3 million, respectively. Net cash provided by investing activities in 1999 and 1998 was primarily used to fund the Company's operating and financing activities. Net cash provided by (used for) financing activities totaled $1.8 million, $1.0 million and $(6.0) million for the years ended December 31, 2000, 1999 and 1998, respectively. Financing activities during 2000 include $2.9 million in borrowings and $0.6 million in repayments related to the Company's Receivables Financing Program (defined below), and $0.5 million in repayments related to the term loan facility. Financing activities during 1999 include $3.3 million in borrowings on the term loan facility, and $0.8 million in borrowings and $3.2 million in repayments related to the Company's Receivables Financing Program. Cash flows for financing activities for 1998 were related to the net borrowings and repayments associated with the Company's Receivables Financing program. The Company's net financing cash flow increased in 2000 and 1999 as a result of increasing new business production and related agent's balances. 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. As of December 31, 2000 and 1999, the Company's allowance for uncollectable commission advances was $3.7 million and $6.1 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. AFI has entered into a Credit Agreement (the "Credit Agreement") with LaSalle Bank, NA ("LaSalle") which currently provides AFI with a $7.5 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from FLICA and NFL and certain affiliated marketing companies. Effective September 30, 2000, the Credit Agreement was amended to extend the termination date to June 5, 2002, at which time the outstanding principal and interest will be due and payable. In connection with this commission advancing program, at December 31, 2000, AFI's net receivables from subagents totaled approximately $8.7 million with approximately $6.2 million outstanding under the Credit Agreement. AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. The Company has guaranteed AFI's obligations under the Credit Agreement, and has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty (the "Guaranty Agreement"). As of April 17, 2001, there were no events of default under the Credit or Guaranty Agreements. However, continued adverse claims experience for the old GPPO major medical product could result in events of default under the Guaranty Agreement, Credit Agreement and term loan facility discussed below. In 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, 2000, approximately $2.8 million was outstanding under the term loan facility. 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 (91.8%) 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 4 - "Investments" to the Company's Consolidated Financial Statements.) Approximately 0.9% of the Company's fixed-income portfolio market value is comprised of less than investment grade securities. The Company's investment policy allows up to 5% 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, 2000, 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 $4.4 million and $8.5 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 $4.6 million and $9.5 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 27-28 Financial Statements: Ascent Assurance, Inc. Consolidated Balance Sheets at December 31, 2000 and 1999 29 Ascent Assurance, Inc. Consolidated Statements of Operations for the Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 30 Westbridge Capital Corp. Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 31 Ascent Assurance, Inc. Consolidated Statements of Comprehensive Income for the Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 32 Westbridge Capital Corp. Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 33 Ascent Assurance, Inc. Consolidated Statements of Changes in Stockholders' Equity for the Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 34 Westbridge Capital Corp. Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 35 Ascent Assurance, Inc. Consolidated Statements of Cash Flows for the Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 36 Westbridge Capital Corp. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 37 Notes to the Consolidated Financial Statements 38-60 Financial Statement Schedules: II. Condensed Financial Information of Registrant 61-69 III. Supplementary Insurance Information 70 IV. Reinsurance 71 V. Valuation and Qualifying Accounts and Reserves 72
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, 2000 and December 31, 1999, and the results of their operations and their cash flows for the year ended December 31, 2000 and nine months ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP Dallas, TX April 17, 2001 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 results of operations and cash flows of Westbridge Capital Corp. and its subsidiaries for the three months ended March 31, 1999 and for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. 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
Year Ended December 31, 2000 1999 ----------- ----------- Assets (in thousands, except per share data) - - ------ Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $104,081 and $103,436) $ 100,590 $ 97,563 Equity securities, at market (cost $1,365) 1,335 1,313 Other investments 398 413 Short-term investments 7,254 10,904 ----------- ----------- Total Investments 109,577 110,193 Cash 2,658 5,110 Accrued investment income 1,965 2,030 Receivables from agents, net of allowance for doubtful accounts of $3,711 and $6,060 8,737 7,062 Deferred policy acquisition costs 24,711 19,393 Deferred tax asset, net - 7,086 Property and equipment, net of accumulated depreciation of $2,683 and $1,546 6,375 6,272 Other assets 6,455 6,544 ----------- ----------- Total Assets $ 160,478 $ 163,690 =========== =========== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity Liabilities: Policy liabilities and accruals: Future policy benefits $ 61,306 $ 57,119 Claim reserves 42,778 38,776 ----------- ----------- Total Policy Liabilities and Accruals 104,084 95,895 Accounts payable and other liabilities 15,667 13,592 Notes payable 8,947 7,162 ----------- ----------- Total Liabilities 128,698 116,649 ----------- ----------- Redeemable convertible preferred stock 27,705 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 27,620 27,338 Accumulated other comprehensive loss, net of tax (2,324) (3,851) Retained Earnings (21,286) 232 ----------- ----------- Total Stockholders' Equity 4,075 23,784 ----------- ----------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity $ 160,478 $ 163,690 =========== ===========
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Nine Months Ended Ended December 31, 2000 December 31, 1999 ----------------- ----------------- Revenues: (in thousands, except per share data) Premiums: First-year $ 30,984 $ 14,350 Renewal 88,924 72,021 ------------ ------------ Total Premiums 119,908 86,371 Net investment income 9,741 6,740 Fee and service income 20,391 13,069 Net realized loss on investments (454) (208) ------------ ------------ Total Revenue 149,586 105,972 ------------ ------------ Benefits, claims and expenses: Benefits and claims 101,940 65,699 Increase in deferred acquisition costs (6,818) (4,354) Commissions 25,010 17,891 General and administrative expenses 35,159 21,034 Recognition of premium deficiency 1,500 - Taxes, license and fees 5,105 3,422 Interest expense on notes payable 629 284 Resolution of pre-confirmation contingencies - (1,235) ------------ ------------ Total Expenses 162,525 102,741 (Loss) income before income taxes (12,939) 3,231 Federal income tax benefit (expense) (6,003) (1,125) ------------ ------------ Net (Loss) Income (18,942) 2,106 Preferred stock dividends 2,576 1,874 ------------ ------------ (Loss) income applicable to common stockholders $ (21,518) $ 232 ============ ============ Basic and diluted net (loss) income per common share $ (3.31) $ 0.04 ============ ============ Weighted average shares outstanding: Basic 6,500 6,500 ============ ============ Diluted 6,500 6,510 ============ ============
See the Notes to the Consolidated Financial Statements. WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Year Ended Ended March 31, 1999 December 31, 1998 ----------------- ----------------- Revenues: (in thousands, except per share data) Premiums: First-year $ 3,121 $ 19,161 Renewal 26,827 116,556 ----------------- ----------------- Total Premiums 29,948 135,717 Net investment income 2,562 12,011 Fee and service income 4,263 16,780 Net realized loss on investments 41 2,142 ----------------- ----------------- Total Revenue 36,814 166,650 ----------------- ----------------- Benefits, claims and expenses: Benefits and claims 21,799 99,419 Increase in deferred acquisition costs (862) 40 Commissions 6,688 33,907 General and administrative expenses 7,229 29,181 Reorganization expense - 9,179 Recognition of premium deficiency - 4,948 Taxes, licenses and fees 1,059 5,216 Interest expense on notes payable 119 881 Interest expense on retire/cancelled debt 507 5,933 ----------------- ----------------- Total Expenses 36,539 188,704 Income (loss) before income taxes 275 (22,054) Federal income tax expense (67) (231) ----------------- ----------------- Net Income (Loss) $ 208 $ (22,285) Preferred stock dividends - 520 ----------------- ----------------- Income (loss) applicable to common stockholders $ 208 $ (22,805) ================= ================= Basic and diluted net income per common share $ 0.03 $ (3.43) ================= ================= Weighted average shares outstanding: Basic 7,032 6,640 ================= ================= Diluted 7,032 6,640 ================= =================
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Nine Months Ended Ended December 31, 2000 December 31, 1999 ----------------- ----------------- (in thousands) Net (loss) income $ (18,942) $ 2,106 Other comprehensive income (loss): Unrealized holding loss arising during period, net of tax 1,227 (3,956) Reclassification adjustment of gain on sales of investments included in net income, net of tax 300 105 ----------------- ----------------- Comprehensive Loss $ (17,415) $ (1,745) ================= =================
See the Notes to the Consolidated Financial Statements. WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Year Ended Ended March 31, 1999 December 31, 1998 ----------------- ----------------- (in thousands) Net income (loss) $ 208 $ (22,285) Other comprehensive income (loss): Unrealized holding gain (loss) arising during period, net of tax (1,959) 534 Reclassification adjustment of loss on sales of investments included in net income, net of tax (27) (1,272) ----------------- ----------------- Comprehensive Loss $ (1,778) $ (23,023) ================= =================
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 Capital Other Retained Total Common Stock in Excess Comprehensive (Deficit) Stockholders' ------------ 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 =========== ========= ============ ============ =========== ============= Net loss (18,942) (18,942) Preferred stock dividend (2,576) (2,576) Other comprehensive income, net of tax 1,527 1,527 Amortization of unearned compensation 282 282 ----------- --------- ------------ ------------- ----------- ------------- Balance at December 31, 2000 6,500,000 $ 65 $ 27,620 $ (2,324) $ (21,286) $ 4,075 =========== ========= ============ ============= =========== =============
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) Accumulated Capital Other Retained Total Common Stock in Excess Comprehensive (Deficit) Stockholders' ------------ Shares Amount of Par Value Income (Loss) Earnings Equity 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 STATEMENTS OF CASH FLOWS
Year Nine Months Ended Ended December 31, 2000 December 31, 1999 ----------------- ----------------- Cash Flow From Operating Activities: (in thousands, except per share data) Net (loss) income $ (18,942) $ 2,106 Adjustments to reconcile net income to cash used for operating activities: Recognition of premium deficiency 1,500 - Decrease in accrued investment income 65 139 Increase in deferred acquisition costs (6,818) (4,354) (Increase) decrease in receivables from agents (1,675) 1,120 Decrease (increase) in other assets 88 (1,200) Increase in policy liabilities and accruals 8,189 89 Increase (decrease) in accounts payable and accruals 2,075 (4,949) Decrease in deferred income taxes, net 7,086 261 Other, net 3,557 1,707 ---------------- ----------------- Net Cash Used For Operating Activities (4,875) (5,081) ---------------- ----------------- Cash Flow From Investing Activities: Purchases of fixed maturity investments (55,678) (9,001) Sales of fixed maturity investments 49,463 17,096 Maturities and calls of fixed maturity investments 4,631 1,132 Net decrease in short term and other investments 3,665 873 Property and equipment purchased (1,443) (4,193) ---------------- ----------------- Net Cash Provided By Investing Activities 638 5,907 ---------------- ----------------- Cash Flow From Financing Activities: Issuance of notes payable 2,873 4,129 Repayment of notes payable (1,088) (2,055) ---------------- ----------------- Net Cash Provided By Financing Activities 1,785 2,074 ---------------- ----------------- Increase (Decrease) In Cash During Period (2,452) 2,900 Cash At Beginning Of Period 5,110 2,210 ---------------- ----------------- Cash At End Of Period $ 2,658 $ 5,110 ================ =================
See the Notes to the Consolidated Financial Statements. WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Year Ended Ended March 31, 1999 December 31, 1998 ----------------- ----------------- Cash Flows From Operating Activities: (in thousands, except per share data) Net income (loss) $ 208 $ (22,285) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Recognition of premium deficiency - 4,948 (Increase) decrease in deferred acquisition costs (862) 40 Decrease in receivables from agents 1,678 10,643 (Increase) decrease in other assets (1,007) 513 Decrease in policy liabilities and accruals (2,181) (9,608) Increase in accounts payable and accruals 4,428 6,532 Decrease in deferred income taxes, net (1,070) - Other, net 1,308 1,211 ----------------- ---------------- Net Cash Provided By (Used For) Operating Activities 2,502 (8,006) ----------------- ---------------- Cash Flows From Investing Activities: Proceeds from investments sold: Fixed maturities, called or matured 2,215 7,531 Fixed maturities, sold 4,904 13,810 Other investments, sold or matured 139 8,913 Cost of investments acquired (5,851) (15,772) Other (873) (1,184) ----------------- ---------------- Net Cash Provided By (Used For) Investing Activities 534 13,298 ----------------- ---------------- Cash Flows From Financing Activities: Retirement of senior subordinated debentures (15,167) - Issuance of preferred stock 15,167 - Decrease in deferred debt costs - 864 Issuance of notes payable 911 5,461 Repayment of notes payable (2,015) (12,369) ----------------- ---------------- Net Cash Used For Financing Activities (1,104) (6,044) ----------------- ---------------- Increase (Decrease) In Cash During Period 1,932 (752) Cash At Beginning Of Period 278 1,030 ----------------- ---------------- Cash At End Of Period $ 2,210 $ 278 ================= ================
See the Notes to the Consolidated Financial Statements. ASCENT ASSURANCE, INC. (formerly, Westbridge Capital Corp.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS Ascent Assurance, Inc. ("Ascent"), a Delaware company incorporated in 1982, is an insurance holding company engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners. Ascent adopted its corporate name on March 24, 1999, the date its predecessor, Westbridge Capital Corp. ("Westbridge"), emerged from Chapter 11 reorganization proceedings (see Note 4). References herein to the "Company" shall mean for all periods on or prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on or after the close of business on March 31, 1999, Ascent and its subsidiaries. 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) telemarketing services, (ii) printing services, and (iii) renewal commissions received by the Company for prior year sales of insurance products underwritten by unaffiliated insurance carriers. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("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 2000 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 (see Note 4). 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. 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. No changes were made to claim reserve estimates for purposes of fresh start accounting. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company's claims payment pattern accelerated in the fourth quarter of 2000 which resulted in a significant reduction in pending claims inventory at December 31, 2000. This significant change in claims payment pattern has significantly increased the inherent uncertainty in estimating claim reserves at December 31, 2000. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations. 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, 2000 is fully reserved as discussed at Note 11. In connection with its reorganization, the Company realized a non-taxable gain from the extinguishment of certain indebtedness for tax purposes, since the gain resulted from a reorganization under the Bankruptcy Code. As a result, the Company was required to reduce certain tax attributes of Ascent Assurance, Inc., including (i) NOLs, (ii) certain tax credits, and (iii) tax bases in assets in an amount equal to the 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:
Year Nine Months Ended Ended Ascent Assurance, Inc. December 31, 2000 December 31, 1999 ----------------- ----------------- (Amounts in 000's, except per share amounts) Basic: (Loss) income available to common shareholders $ (21,518) $ 232 ================= ================= Weighted average shares outstanding 6,500 6,500 ================= ================= Basic (loss) earnings per share $ (3.31) $ 0.04 ================= ================= Diluted: (Loss) income available to common shareholders $ (21,518) $ 232 ================= ================= Weighted average shares outstanding 6,500 6,510 ================= ================= Diluted (loss) earnings per share $ (3.31) $ 0.04 ================= =================
Three Months Year Ended Ended Westbridge Capital Corp. March 31, 1999 December 31, 1998 ----------------- ----------------- Basic: Income (loss) available to common shareholders $ 208 $ (22,805) ================= ================= Weighted average shares outstanding 7,032 6,640 ================= ================= Basic earnings (loss) per share $ 0.03 $ (3.43) ================= ================= Diluted: Income (loss) available to common shareholders $ 208 $ (22,805) ================= ================= Weighted average shares outstanding 7,032 6,640 ================= ================= Diluted earnings (loss) per share $ 0.03 $ (3.43) ================= =================
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. The insurance departments of the states of domicile of the Company's insurance subsidiaries have adopted the Codification effective January 1, 2001. The Company does not expect the Codification to materially impact statutory surplus. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement (as amended by SFAS No. 137, "Accounting For Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS No. 133, an amendment of SFAS No. 133") is effective for fiscal years beginning after June 15, 2000. The pronouncement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As the Company has not participated in derivative or hedging activities, the Company's financial statements are not affected by SFAS 133. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). The Company adopted FIN 44 on a prospective basis effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's results of operations, liquidity or financial position. NOTE 3 - FINANCING OBTAINED IN APRIL 2001 During the first quarter of 2001, the Company determined that continued adverse claims experience for the Group Preferred Provider Organization ("GPPO") product, the principal product marketed by the Company from 1998 through June 2000, would require Ascent to make capital contributions to FLICA in excess of those originally planned. Ascent obtained debt financing (see below) and contributed an additional $11 million to FLICA in April 2001 to enable FLICA to maintain an RBC Ratio greater than Company Action Level at March 31, 2001 and to comply with the Florida premium writing ratio regulation (see Note 12). To the extent that the adverse claims experience for the old GPPO product exceeds management's current estimates, Ascent would be required to make additional capital contributions to FLICA in excess of those currently projected for 2001. Additional financing would be required by Ascent in order to make any such "excess" contributions. Management believes that significant rate increase actions will reduce losses from the GPPO product in 2001. In April 2001, Ascent received debt financing for the $11 million capital contribution described above from a loan made by Credit Suisse First Boston Management Corporation, which is an affiliate of Special Situations Holdings, Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating to that loan provided Ascent with total loan commitments of $11 million (all of which has been drawn). The loan bears interest at a rate of 12% per annum and matures in April 2004. Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. The credit agreement relating to the loan provides for a facility fee of $1.5 million which is payable upon maturity or upon a change in control, as defined. Ascent's obligations are secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of Ascent and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding Corporation and Ascent Management, Inc., some or all of which is pledged as collateral to LaSalle Bank NA ("LaSalle") for receivables financing - see Note 8. Ascent's subsidiaries (other than those listed above) have also guaranteed Ascent's obligations under the credit agreement and the loan. In connection with the $11 million loan, LaSalle waived certain events of default and amended various agreements related to receivables financing described at Note 8. Debt covenants under the credit agreement related to the $11 million loan are substantially similar to those under the LaSalle receivable financing arrangements. NOTE 4 - 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: |X| To holders of general unsecured claims and Convertible Notes as of December 10, 1998 6,077,500 shares, and to management at the Effective Date, 32,500 shares, or in aggregate 94% of the New Common Stock issued on the Effective Date. Holders of general unsecured claims and Convertible Notes received their first distribution of shares in partial satisfaction and discharge of the allowed claims in April 1999. The second distribution was made in September 1999 and the remaining shares of New Common Stock were distributed in November 1999. |X| To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the New Common Stock issued on the Effective Date, on a fully diluted basis. |X| To 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. |X| To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, are convertible into 4,765,165 shares of the New Common Stock. As a result of the New Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New Common Stock received by the CSFB Affiliate in respect of the Convertible Notes owned by CSFB, the CSFB Affiliate beneficially owns approximately 56.6% of the New Common Stock on an as converted basis, assuming the exercise of all New Warrants and issuance of New Common Stock reserved under the 1999 Stock Option Plan as discussed below. The New Preferred Stock has a stated value of $1,000 per share and a cumulative annual dividend rate of $102.50 per share payable in January of each year in cash or by the issuance of additional shares of New Preferred Stock. The New Preferred Stock is convertible at any time into 204.8897 shares of New Common Stock at an initial conversion price of $4.88 per share of New Common Stock, subject to customary anti-dilution adjustments. 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 5 - INVESTMENTS Major categories of investment income are summarized as follows:
Ascent Assurance, Inc. Westbridge Capital Corp. ----------------------------- ----------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, March 31, December 31, 2000 1999 1999 1998 ---- ---- ---- ---- Fixed maturities $ 7,088 $ 5,368 $ 2,125 $ 8,754 Short-term investments 741 291 86 708 Interest on receivables from agents 1,936 941 345 2,511 Other 189 201 73 351 ------------- ------------- ------------- ------------- 9,954 6,801 2,629 12,324 Less: Investment expenses 213 61 67 313 ------------- ------------- ------------- ------------- Net investment income $ 9,741 $ 6,740 $ 2,562 $ 12,011 ============= ============= ============= =============
Realized (loss) gain on investments are summarized as follows:
Ascent Assurance, Inc. Westbridge Capital Corp. ----------------------------- ----------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, March 31, December 31, 2000 1999 1999 1998 ---- ---- ---- ---- Fixed maturities $ (454) $ (162) $ 40 $ 403 Equity securities - (37) 1 1,555 Other - (9) - 184 ------------- ------------- ------------- ------------- Realized (loss) gain on investments $ (454) $ (208) $ 41 $ 2,142 ============= ============= ============= =============
Unrealized (depreciation) appreciation on investments is reflected directly in stockholders' equity as a component of accumulated other comprehensive (loss) income and is summarizes as follows:
Ascent Westbridge ------------------------------ ------------- Year Nine Months Three Months Ended Ended Ended December 31, March 31, 2000 1999 1999 ---- ---- ---- Balance at beginning of period $ (3,851) $ - $ 3,911 Unrealized depreciation, net of tax, on fixed maturities available-for-sale 1,513 (3,817) (1,840) Unrealized depreciation, net of tax, on equity securities and other investments 14 (34) (146) Fresh start adjustment - - (1,925) ------------- -------------- ------------- Balance at end of period $ (2,324) $ (3,851) $ - ============= ============== =============
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:
Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 2000 Available-for-Sale Cost Gains Losses Value - - ------------------------------------ ---- ----- ------ ----- (in thousands) U.S. Government and governmental agencies and authorities $ 10,415 $ 74 $ 27 $ 10,462 States, municipalities, and political subdivisions 2,013 - 31 1,982 Finance companies 23,891 63 509 23,445 Public utilities 7,091 8 312 6,787 Mortgage-backed securities 13,328 28 54 13,302 All other corporate bonds 47,343 143 2,874 44,612 ------------- ------------- ------------- ------------ Balance at December 31, 2000 $ 104,081 $ 316 $ 3,807 $ 100,590 ============= ============= ============= ============
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, 2000 $ 103,436 $ 83 $ 5,956 $ 97,563 ============= ============= ============= ============
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 2000, 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 $ 7,120 $ 7,073 Due after one year through five years 29,223 28,877 Due after five years through ten years 27,244 26,327 Due after ten years 27,166 25,011 Mortgage-backed securities 13,328 13,302 ------------ ------------ $ 104,081 $ 100,590 ============ ============
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: December 31, December 31, 2000 1999 ---- ---- (in thousands) Amortized cost $ 105,446 $ 104,801 Estimated market value 101,925 98,876 ------------- ------------- (Deficit) excess of market value to amortized cost (3,521) (5,925) Estimated tax (benefit) provision (1,197) (2,074) ------------- ------------- Unrealized (depreciation) appreciation, net of tax $ (2,324) $ (3,851) ============= =============
At December 31, 2000, the estimated tax benefit related to unrealized investment losses has been fully reserved (see Note 11). Proceeds from sales and maturities of investments in fixed maturity securities were approximately $54.1 million for the year ended December 31, 2000, $18.2 million for the nine months ended December 31, 1999 and $7.1 million for the three months ended March 31, 1999. Gross gains of $0.3 million and gross losses of $0.7 million were realized on fixed maturity investment sales during 2000. 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. The basis used in determining the cost of securities sold was the specific identification method. Included in fixed maturities at December 31, 2000 and 1999, are high-yield, unrated or less than investment grade corporate debt securities comprising approximately 0.9% and 1.5% of fixed maturities at December 31, 2000 and 1999, respectively. Investment securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 2000 and 1999 had a par value totaling $27.2 million and $27.3 million, respectively. At December 31, 2000 and 1999, the Company had restricted cash and investments totaling $2.5 million related to its receivables financing program (see Note 8). NOTE 6 - 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 2000 issues are based on industry experience and Company experience, where available. Policies acquired in acquisitions are based on recent experience of the blocks acquired. 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 us the 1965-1970 Ultimate Table. 1993 and later issues use the 1975-1980 Ultimate Table. Policies acquired in acquisitions use the 1965-1970 Ultimate Table. Morbidity - Based on industry tables published in 1974 by Tillinghast, Nelson and Warren, Inc., as well as other population statistics and morbidity studies. NOTE 7 - CLAIM RESERVES The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 2000, 1999 and 1998, to the amounts reported in the Company's balance sheet: Ascent Assurance, Inc. Westbridge Capital Corp. ------------------------------ ------------------------------ Year Nine Months Three Months Year Ended Ended Ended Ended December 31, December 31, March 31, December 31, 2000 1999 1999 1998 (in thousands) Balance at beginning of period (Gross) $ 38,776 $ 41,068 $ 44,116 $ 51,784 Less: reinsurance recoverables on claim reserves 1,501 1,871 1,765 2,955 ------------- ------------- -------------- ---------- Net balance at beginning of period 37,275 39,197 42,351 48,829 Incurred related to: Current year 94,516 60,255 19,401 98,203 Prior years 1,550 2,213 1,596 (95) ------------- ------------- -------------- ---------- Total incurred 96,066 62,468 20,997 98,108 ------------- ------------- -------------- ---------- Paid related to: Current year 61,834 47,300 5,277 67,911 Prior years 31,220 17,090 18,874 36,675 ------------- ------------- -------------- ---------- Total paid 93,054 64,390 24,151 104,586 ------------- ------------- -------------- ---------- Balance at end of period 40,287 37,275 39,197 42,351 Plus: reinsurance recoverables on claim reserves 2,491 1,501 1,871 1,765 ------------- ------------- -------------- ---------- Balance at end of period (Gross) $ 42,778 $ 38,776 $ 41,068 $ 44,116 ============= ============= ============== ==========
Included in reinsurance recoverables on claim reserves is approximately $1.5 million, $0.5 million, $0.9 million and $0.7 million relating to paid claims as of December 31, 2000, 1999, March 31, 1999 and December 31, 1998, respectively. NOTE 8 - 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. AFI has entered into a Credit Agreement (the "Credit Agreement") with LaSalle Bank which currently provides AFI with a $7.5million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from FLICA and NFL and certain affiliated marketing companies. Effective September 30, 2000, the Credit Agreement was amended to extend the termination date to June 5, 2002. As of December 31, 2000, $6.2 million was outstanding under the Credit Agreement (weighted average interest rate of 8.31%). The Company incurs a commitment fee on the unused portion of the Credit Agreement at at rate of 0.50% per annum. Interest of $0.5 million was expensed and paid in 2000. Interest of $0.3 million was expensed and paid in 1999. AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. AFI's obligations under the Credit Agreement have been guaranteed by Ascent (the "Guaranty Agreement"), and the Company has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty. See Note 3 for discussion of compliance with debt covenants. 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. As of December 31, 2000, $2.8 million was outstanding under the term loan facility (weighted average interest rate of 8.24%). Interest of $0.2 million was expensed and paid in 2000. Interest of $0.1 million was capitalized and paid in 1999. Prior to the Effective Date of the Plan (see Note 4), 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, 1998 totaled approximately $0.6 million. Contractual interest continued to accrue at a rate of $6,111 per day from January 1, 1999 through the Effective Date. As of the Effective Date, these Senior Notes were canceled, extinguished and retired. As more fully described in Note 4, holders of Allowed 11% Senior Note Claims held by creditors other than CSFB received cash payments totaling $15.2 million. As more fully described in Note 9, 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 was $0.8 million. NOTE 9 - 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 4). The following summarized the significant terms of the New Preferred Stock: x Stated value of $1,000 per share. x Cumulative annual dividend rate of $102.50 per share payable annually in arrears on the last day of January in each year by issuance of cash or additional shares of New Preferred Stock. x Each share of New Preferred Stock is convertible at any time in 204.8897 shares of New Common Stock at an initial conversation price of $4.88 per share, subject to customary anti-dilution adjustments. 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. In December 2000, the Company paid preferred stock dividends through the issuance of 2,575 additional shares of preferred stock and a $825 distribution of cash. Preferred stock dividends accrued at December 31, 1999 were paid in January 2000 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 4), 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 10 - DEFERRED POLICY ACQUISITION COSTS ("DPAC") A summary of DPAC follows (in thousands):
Ascent Assurance, Inc. Westbridge Capital Corp. ------------------------------- --------------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, December 31, March 31, December 31, 2000 1999 1999 1998 ---- ---- ---- ---- Balance at beginning of period $ 19,393 $ 15,039 $ 14,177 $ 19,165 Deferrals 9,816 5,832 1,148 4,371 Recognition of premium deficiency (1,500) - - (4,948) Amortization expense (2,998) (1,478) (286) (4,411) -------------- -------------- -------------- -------------- Balance at end of period $ 24,711 $ 19,393 $ 15,039 $ 14,177 ============== ============== ============== ==============
Recognition of Premium Deficiency In general, a premium deficiency exists if the present value of future cash flows plus future policy benefit and claim reserves at the calculation date is negative or less than net deferred policy acquisition costs. The calculation of future cash flows includes assumptions as to future rate increases and persistency. The Company routinely evaluates the recoverability of deferred acquisition costs in accordance with GAAP. As a result of fourth quarter losses for certain major medical products, the Company determined that a premium deficiency of $1.5 million existed at December 31, 2000 related to medical expense reimbursement products issued subsequent to the fresh start date of March 31, 1999. Accordingly, deferred policy acquisition costs were reduced by $1.5 million at December 31, 2000 by a non-cash charge to expense. During 1998, the Company experienced adverse loss ratios and declining persistency on its old major medical and Medicare supplement products. 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 a premium deficiency existed and recorded a non-cash charge to expense of approximately $5.0 million in the third quarter of 1998. NOTE 11 - 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 (recovered) in 2000, 1999 and 1998 were $(1.2) million, $80,000, and $1.1 million respectively. The Company and its wholly owned subsidiaries, other than FLICA, file a consolidated federal income tax return. FLICA files a separate federal income tax return. Prior to 2000, NFIC and AICT filed a separate consolidated tax return. NFIC and AICT entered the Ascent Assurance consolidated return in 2000. The provision for (benefit from) U.S. federal income taxes charged to continuing operations was as follows:
Ascent Assurance, Inc. Westbridge Capital Corp. ------------------------------ ----------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, December 31, March 31, December 31, 2000 1999 1999 1998 ---- ---- ---- ---- (in thousands) Current $ (206) $ (1,199) $ 67 $ 231 Deferred 6,209 2,324 - - ------------ -------------- ------------ ------------- Total provision for income taxes $ 6,003 $ 1,125 $ 67 $ 231 ============ ============== ============ =============
Provision has not been made for state and foreign income tax expense since such expense is minimal. 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 Assurance, Inc. Westbridge Capital Corp. ------------------------------ ----------------------------- Year Nine Months Three Months Year Ended Ended Ended Ended December 31, December 31, March 31, December 31, 2000 1999 1999 1998 ---- ---- ---- ---- Statutory tax rate (34%) 34% 34% (34%) Change in valuation allowance 80% - - - Unutilized loss carryforwards - 2% (9%) 31% Other items, net - (1%) (1%) 4% ------------- ------------- ------------- ------------- Effective tax rate 46% 35% 24% 1% ============= ============= ============= =============
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:
December 31, 2000 1999 ---- ---- (in thousands) Deferred Tax Assets: Unrealized gain on investments $ 1,197 $ 2,074 Policy reserves 6,792 4,150 Net operating loss carryforwards 13,538 17,998 Other deferred tax assets 3,056 964 -------------- ------------- Total deferred tax asset $ 24,583 $ 25,186 -------------- ------------- Deferred Tax Liabilities: Deferred policy acquisition costs $ 1,361 $ (2,970) Other deferred tax liabilities 4,959 4,121 -------------- ------------- Total deferred tax liability $ 6,320 $ 1,151 -------------- ------------- Net Deferred Tax Asset Before Valuation Allowance $ 18,263 $ 24,035 Less Valuation Allowance (18,263) (16,949) -------------- ------------- Net Deferred Tax Asset $ - $ 7,086 ============== =============
As of December 31, 2000, the Company has reported cumulative pre-tax losses since the fresh start date of March 31, 1999. Realization of the Company's deferred tax asset is dependent upon the return of the Company's operations to profitability. Pre-tax losses during 2000 were principally attributable to adverse claims experience for certain major medical products. Management believes that such product losses can be significantly reduced through aggressive rate increase management. However, projections of future profitability are significantly discounted when evaluating the recoverability of deferred tax assets and do not overcome the negative evidence of cumulative losses. Accordingly, the Company increased its deferred tax asset valuation allowance by $10.4 million to $18.3 million to fully reserve the remaining net deferred tax assets as of December 31, 2000. As a result of limitations arising from the action of sections 108 and 382 of the Internal Revenue Code, the Company's net operating loss carryforwards and valuation allowance as of December 31, 1999 were reduced by $9.1 million. Changes in the valuation allowance applicable to the net deferred tax asset for the three years ended December 31, 2000 are as follows:
Ascent Assurance, Inc. Westbridge Capital Corp. Year Nine Months Three Months Year Ended Ended Ended Ended December 31, 2000 December 31, 1999 March 31, 1999 December 31, 1998 ----------------- ----------------- -------------- ----------------- (in thousands) Balance, beginning of year $ (16,949) $ (16,949) $ (36,449) $ (28,728) Decrease in valuation allowance related to permanent limitations of net operating loss carryforwards 9,081 - 19,500 - Increase in valuation allowance charged to income (10,395) - - (7,721) ---------------- --------------- --------------- ------------------ Balance, end of year $ (18,263) $ (16,949) $ (16,949) $ (36,449) ================ =============== =============== ==================
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, 2000, 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, 2000 and 1999, NFL has approximately $7.8 million and $8.0 million in its shareholders surplus account from which it could make distributions to the Company without incurring any federal tax liability. The amount of dividends which may be paid by NFL to the Company is limited by statutory regulations. At December 31, 2000, the Company and its wholly owned subsidiaries have aggregate net operating loss carryforwards, net of bankruptcy related tax attribute reductions of approximately $39.8 million for regular tax and $40.2 million for alternative minimum tax purposes, which will expire in 2003 through 2014. NOTE 12 - 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. Effective September 28, 2000, NFL and FLICA redomesticated from the states of Delaware and Mississippi, respectively, to the state of Texas. As a result, NFL, FLICA, NFIC and AICT are Texas domestic companies and are subject to regulation under Texas insurance laws. Under the Texas Insurance Code, the insurance subsidiaries are required to maintain aggregate capital and surplus of $1.4 million. The following states where the companies are licensed require greater amounts of capital and surplus: California $1.5 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, 2000, aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was approximately $5.5 million, $6.0 million, $1.6 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. AICT is wholly owned by NFIC. Accordingly, statutory capital and surplus of NFIC includes the statutory capital and surplus of AICT. Dividends paid by the Insurance Subsidiaries are subject to the regulations of the insurance laws and practices of the Texas Department of Insurance. The Texas Insurance Code allows life and health insurance companies to make dividend payments from surplus profits or earned surplus arising from its business. Earned surplus is defined as unassigned surplus excluding any unrealized gains. Texas life and health 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. Dividends exceeding the applicable threshold are considered extraordinary and require the prior approval of the Texas Insurance Commissioner. The Insurance Subsidiaries are precluded from paying dividends during 2001 without prior approval of the Texas Insurance Commissioner as the companies' earned surplus is negative. On September 30, 2000, NFL transferred its 100% ownership of FLICA to Ascent through an extraordinary dividend approved by the Texas Department of Insurance. Generally, all states require insurance companies to maintain statutory capital and surplus that is reasonable in relation to their existing liabilities and adequate to their financial needs. The Texas Department of Insurance also maintains discretionary powers relative to the declaration and payment of dividends based upon an insurance company's financial position. In light of recent statutory losses incurred by the Insurance Subsidiaries, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future. In December 1990, the Company and NFL entered into an agreement under which NFL issued a surplus certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the surplus certificate bore interest at an agreed upon rate not to exceed 10% and was repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance agreements and (ii) NFL receiving prior approval for repayment from the Delaware Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. In 1999, with the prior approval of the Delaware Insurance Commissioner, NFL converted the remaining $776,961 of the surplus debenture to $600,000 of capital stock and $176,961 of paid in surplus. In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model Act"). The Model Act provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory attention. The Model Act (or similar legislation or regulation) has been adopted in states where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention, varying with the ratio of the insurance company's total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its risk-based capital ("RBC"). If a company's total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, or if a negative trend (as defined by the NAIC) has occurred and total adjusted capital is less than 125 percent of RBC (the "Company Action Level"), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions. If a company's total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. If a company's total adjusted capital is less than 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control. The NAIC's requirements are effective on a state by state basis if, and when, they are adopted by the regulators in the respective states. The Texas Department of Insurance adopted the NAIC's Model Act during 2000. NFL's and FLICA's statutory annual statements for the year ended December 31, 2000 filed with the Texas Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC; however FLICA did not meet the negative trend test (see Note 3). In 1998, NFIC and AICT 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 Texas Department of Insurance in response to losses sustained in 1997 and 1998 as well as the projected inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of new business in 1998. At December 31, 2000, AICT's RBC exceeded Company Action Level RBC; however, NFIC's RBC only exceeded Authorized Control Level RBC. Both NFIC and AICT are in compliance with the terms of the voluntary consent order. Under Florida Statutes Section 624.4095, Florida licensed insurance companies' ratio of actual or projected annual written premiums to current or projected surplus as regards to policyholders ("the premium writing ratio") may not exceed specified levels for gross and net written premiums as defined by the statute. If a company exceeds the premium writing ratio, the Florida Department of Insurance shall suspend the company's certificate of authority in Florida or establish by order maximum gross or net annual premiums to be written by the company consistent with maintaining the ratios specified. At December 31, 2000, the premium writing ratio for FLICA, which currently underwrites insurance policies in Florida, exceeded the limit mandated by Florida law (see Note 3). 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 13 - 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 October 1999, the Company made cash contributions. The Company's contributions to the 401 (k) plan in 2000, 1999 and 1998 approximated $92,000, $96,000 and $80,000, respectively. 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 4), on March 24, 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999 Plan") in order to further and promote the interest of the Company, its subsidiaries and its shareholders by enabling the Company and its subsidiaries to attract, retain and motivate employees, non-employee directors and consultants (including marketing agents) or those who will become employees, non-employee directors and consultants (including marketing agents), and to align the interests of those individuals and the Company's shareholders. To do this, the 1999 Plan offers equity-based opportunities providing such employees and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and its subsidiaries. The 1999 Plan became effective on the date of its adoption by the Company and will remain in effect until December 31, 2008, except with respect to awards (as that term is defined in the 1999 Plan) then outstanding, unless terminated or suspended by the Board of Directors at that time. After such date no further awards shall be granted under the 1999 Plan. A summary of stock option activity is as follows:
Year Ended December 31, 2000 1999 ------------------ ------------------- Outstanding at January 1 1,096,750 - Granted 42,950 1,106,750 Exercised - - Forfeited / Cancelled (195,100) (10,000) ------------------ ------------------- Outstanding at December 31 944,600 1,096,750 ================== ===================
The weighted average option exercise price was $2.82 and $2.88 for options outstanding at December 31, 2000 and 1999, respectively. The weighted average option exercise price was $1.63 and $2.74, respectively, for options granted and forfeited during 2000. For 1999, the weighted average option exercise price was $2.85 for both options granted and forfeited. The weighted average fair value of options granted during 2000 was $1.57. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following significant weighted-average assumptions used for grants in 2000 and 1999, respectively: dividend yield of 0% for both years; expected volatility of 1.839 and 1.142; risk free interest rate of 6.57% for both years; expected life of 5 years for both years. 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. Compensation cost recognized in the income statement for stock-based employee compensation awards was $0.3 million for both 2000 and 1999. If the fair value of the stock compensation granted had been accounted for under FAS 123, the pro forma net loss for the year ended December 31, 2000 would have been $(19.1) million or $(3.33) per basic share and diluted share. For the nine months ended December 31, 1999, the pro forma net income would have been $2.0 million, or $(.05) per basic share and diluted share. For purposes of pro forma disclosure, the estimated fair value of the stock compensation is amortized to expense over the stock's vesting period. The effect on net income of the stock compensation amortization for the year presented above is not likely to be representative of the effects on reported net income for future years. The following table summarizes information about the stock options outstanding at December 31, 2000:
Weighted Average Remaining Weighted Average Exercise Prices Number Outstanding Contractual Life Exercise Price - - --------------- ------------------ ---------------- -------------- $0.01 270,900 8.25 $0.01 $1.63 38,350 9.25 $1.63 $3.00 135,000 1.25 $3.00 $4.39 500,350 8.25 $4.39 --------------------- -------------------- ---------------- 944,600 7.29 $2.82 ===================== ==================== ================
There were no options exercisable at December 31, 2000. NOTE 14 - 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 premiums ceded to other companies were $4.0 million, $2.6 million and $2.8 million for 2000, 1999 and 1998, respectively. Face amounts of life insurance in force ceded approximated $12.6 million, $6.5 million and $7.3 million at December 31, 2000, 1999 and 1998, respectively. The Company reinsures its risks under its Medical Expense policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $100,000. Risks under its Medicare Supplement policies are not reinsured. The Company's risks under its Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retains fifty percent (50%) of the coverage amount of each of its life insurance policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL's retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates. NOTE 15 - 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, 2000, aggregated $8.9 million. The amounts due by year are as follows: 2001 - $2.0 million; 2002 - $2.0 million; 2003 - $1.6 million; 2004 - $1.0 million; 2005 - $0.9 million; and thereafter - $1.4 million. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $2.1 million, $2.4 million and $3.2 million in 2000, 1999 and 1998, respectively. 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 16 - 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, --------------------------------------------------- 2000 1999 1998 ---- ---- ---- (in thousands) Consolidated statutory capital and surplus $ 13,014 $ 16,990 $ $17,937 Deferred acquisition costs 24,711 19,393 14,177 Future policy benefits and claims (14,338) (9,518) (9,521) Unrealized gain (loss) on investments, net of tax (723) (2,585) 3,037 Income taxes - 3,363 - Non-admitted assets 258 1,490 2,123 Asset valuation reserve 674 687 796 Interest maintenance reserve 780 1,251 1,380 Other (139) (273) 863 Non-insurance subsidiaries and eliminations (20,162) (7,014) (92,872) -------------- --------------- -------------- GAAP stockholders' equity (deficit) $ 4,075 $ 23,784 $ (62,080) ============== =============== ==============
Year Ended December 31, --------------------------------------------------- 2000 1999 1998 (in thousands) Consolidated statutory net income $ (16,956) $ (6,486) $ (8,108) Deferred acquisition costs, net of amortization 6,818 5,217 (41) Future policy benefits and claims (5,761) 228 806 Recognition of premium deficiency (1,500) - (4,948) Income taxes (4,754) (4,366) 1,250 Other 261 (384) (468) Non-insurance subsidiaries and eliminations 2,950 8,105 (10,776) -------------- -------------- --------------- GAAP net (loss) income $ (18,942) $ 2,314 $ (22,285) ============== ============== ===============
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for each of the Company's last two years of operations is as follows:
Ascent Quarter Ended -------------------------------------------------------------------- March June September December 2000 2000 2000 2000 ---- ---- ---- ---- Premium income $ 29,005 $ 29,228 $ 30,831 $ 30,844 Net investment income 2,078 2,266 2,626 2,771 Net realized gain (loss) on investments 17 (254) 28 (245) Fee, service and other income 4,896 5,294 5,207 4,994 ------------- -------------- -------------- -------------- Total revenues $ 35,996 $ 36,534 $ 38,692 $ 38,364 ============= ============== ============== ============== Loss before income taxes $ (1,258) $ (918) $ (1,193) $ (9,570)(1) Net loss (830) (606) (787) (16,719)(2) Preferred stock dividend 651 651 651 622 Loss applicable to common stockholders (1,481) (1,257) (1,438) (17,341) Loss per share: Basic $ (0.23) $ (0.19) $ (0.22) $ (2.67) Diluted $ (0.23) $ (0.19) $ (0.22) $ (2.67)
Westbridge Ascent Quarter Ended Quarter Ended --------------- ------------------------------------------------------- March June September December 1999 1999 1999 1999 ---- ---- ---- ---- Premium income $ 29,948 $ 29,574 $ 28,512 $ 28,285 Net investment income 2,562 2,333 2,222 2,185 Net realized gain (loss) on investments 41 (63) (107) (38) Fee, service and other income 4,263 4,196 4,506 4,367 --------------- --------------- --------------- --------------- Total revenues $ 36,814 $ 36,040 $ 35,133 $ 34,799 =============== =============== =============== =============== Income before income taxes $ 275 $ 1,622 $ 1,071 $ 538 Net income 208 1,054 707 345 Preferred stock dividend - 647 596 631 Income (loss) applicable to common stockholders 208 407 111 (286) Earnings (loss) per share: Basic $ 0.03 $ 0.06 $ 0.02 $ (0.04) Diluted $ 0.03 $ 0.06 $ 0.02 $ (0.04)
(1) Increase in losses for the fourth quarter of 2000 due to adverse claims experience for major medical products (see Note 3) and recognition of premium deficiency (see Note 10). (2) Includes $10.4 million non-cash charge for increase in deferred tax asset valuation allowance (see Note 11). SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (in thousands)
December 31, December 31, 2000 1999 ---- ---- Assets: Cash $ 1,407 $ 4,027 Short-term investments 1,682 4,686 Fixed maturities, at market value 1,193 - Investment in consolidated subsidiaries 37,168 45,021 Accrued investment income 29 3 Deferred tax assets - 646 Other assets 52 50 --------------- -------------- Total Assets $ 41,531 $ 54,433 =============== ============== Liabilities: Dividends payable $ - $ 1,874 Payable to subsidiaries 7,155 2,157 Other liabilities 2,596 3,361 --------------- -------------- Total Liabilities 9,751 7,392 --------------- -------------- Redeemable Convertible Preferred Stock 27,705 23,257 --------------- -------------- Stockholders' Equity: Common stock 65 65 Capital in excess of par value 27,620 27,338 Accumulated other comprehensive loss, net of tax (2,324) (3,851) Retained (Deficit) Earnings (21,286) 232 --------------- -------------- Total Stockholders' Equity 4,075 22,784 --------------- -------------- Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity $ 41,531 $ 54,433 =============== ==============
The financial statement should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (in thousands)
Year Nine Months Ended Ended December 31, December 31, 2000 1999 ---- ---- Net investment income $ 308 $ 509 Realized gain (loss) on investments 24 (376) Inter-company interest on Surplus Certificates - 58 Other Income - 3 --------------- ------------- 332 194 --------------- ------------- Resolution of pre-confirmation contingencies - (1,235) Inter-company interest on advances to subsidiaries 109 (22) General and administrative expenses 218 (237) Taxes, licenses and fees 119 (1) --------------- ------------- 446 (1,495) --------------- ------------- Income before income taxes and equity in undistributed net earnings of subsidiaries (114) 1,689 (Expense) benefit from income taxes (2,773) 629 --------------- ------------- (2,887) 2,318 Equity in undistributed net loss of subsidiaries (16,055) (212) --------------- ------------- Net (loss) income (18,942) 2,106 Preferred stock dividends 2,576 1,874 --------------- ------------- (Loss) income applicable to common stockholders $ (21,518) $ 232 =============== =============
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 STATEMENTS OF INCOME (in thousands)
Three Months Year Ended Ended March 31, December 31, 1999 1998 ---- ---- Net investment income $ 209 $ 1,090 Realized gains on investments 12 475 Inter-company income derived from: Interest on Surplus Certificates 20 78 Rental of leasehold improvements and equipment - 397 Interest on advances to subsidiaries 110 254 Other income - 121 ------------- ------------- 351 2,415 ------------- ------------- General and administrative expenses (112) 2,319 Reorganization expense - 7,856 Taxes, licenses and fees 24 45 Interest expense 507 5,933 ------------- ------------- 419 16,153 ------------- ------------- Loss before income taxes and equity in undistributed net earnings of subsidiaries and FHC (68) (13,738) (Benefit from) provision for income taxes - (235) ------------- ------------- (68) (13,503) Equity in undistributed net earnings (losses) of subsidiaries and FHC 276 (8,782) ------------- ------------- Net income (loss) 208 (22,285) Preferred stock dividends - 520 ------------- ------------- Income (loss) applicable to common stockholders $ 208 $ (22,805) ============= =============
The financial statement should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Year Nine Months Ended Ended December 31, December 31, 2000 1999 ---- ---- Net (loss) income $ (18,942) $ 2,106 Other comprehensive income (loss): Unrealized holding gain (loss) arising during period, net of tax 22 (245) Reclassification adjustment of (gain) loss on sales of investments included in net income, net of tax (16) 245 Other comprehensive income (loss) on investment in subsidiaries: Unrealized holding gain (loss) arising during period, net of tax 1,805 (3,711) Reclassification adjustment of gain on sales of investments included in net income, net of tax (284) (140) -------------- ------------ Comprehensive loss $ (17,415) $ (1,745) ============== ============
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.) STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Three Months Year Ended Ended March 31, December 31, 1999 1998 ---- ---- Net income (loss) $ 208 $ (22,285) Other comprehensive income (loss): Unrealized holding (loss) gain arising during period, net of tax (331) 6 Reclassification adjustment of gain on sales of investments included in net income, net of tax (8) (308) Other comprehensive income (loss) on investment in subsidiaries: Unrealized holding (loss) gain arising during period, net of tax (1,628) 528 Reclassification adjustment of gain on sales of investments included in net income, net of tax (19) (964) -------------- ------------- Comprehensive loss $ (1,778) $ (23,023) ============== =============
The financial statement should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II ASCENT ASSURANCE, INC. (PARENT COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except per share date)
Accumulated Capital Other Retained Total Common Stock in Excess Comprehensive (Deficit) Stockholders' ------------ 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 ============= ======== ============= ============ ========== ============== Net loss (18,942) (18,942) Preferred stock dividend (2,576) (2,576) Other comprehensive loss, net of tax 1,527 1,527 Amortization of unearned compensation 282 282 ------------- -------- ------------- ------------ ----------- -------------- Balance at December 31, 2000 6,500,000 $ 65 $ 27,620 $ (2,324) $ (21,286) $ 4,075 ============= ======== ============= ============ ============ ==============
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. SCHEDULE II WESTBRIDGE CPAITAL CORP. (now ASCENT ASSURANCE, INC.) (PARENT COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except per share date)
Accumulated Capital Other Retained Total Common Stock in Excess Comprehensive (Deficit) Stockholders' ------------ Shares Amount of Par Value Income (Loss) Earnings Equity 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)
Year Nine Months Ended Ended December 31, December 31, 2000 1999 ---- ---- Cash Flow From Operating Activities: Net (loss) income $ (18,942) $ 2,106 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed net income of subsidiaries 16,055 212 (Increase) decrease in accrued investment income (26) 168 Increase in deferred tax asset 646 (646) Increase in other assets (2) (25) Decrease in other liabilities (765) (3,048) Increase in payables to subsidiaries 4,999 5,733 Dividends received from subsidiaries - 300 Other, net 1,685 (2,263) ------------- ------------- Net Cash Provided by Operating Activities 3,650 2,537 ------------- ------------- Cash Flow From Investing Activities: Proceeds from sale of fixed maturity investments 246 3,938 Cost of fixed maturity investments acquired (2,660) (699) Proceeds from sale of equity securities - 873 Net change in short-term investments 3,004 (2,780) Capital contributions to subsidiaries (6,860) (500) ------------- ------------- Net Cash (Used For) Provided by Investing Activities (6,270) 832 ------------- ------------- Cash Flow From Financing Activities: Net Cash Provided by Financing Activities - - ------------- ------------- (Decrease) increase in Cash During the Period (2,620) 3,369 Cash at Beginning of Period 4,027 658 ------------- ------------- Cash at End of Period $ 1,407 $ 4,027 ============= =============
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.) STATEMENT OF CASH FLOWS (in thousands)
Three Months Year Ended Ended March 31, December 31, 1999 1998 ---- ---- Cash Flows From Operating Activities: Net income (loss) $ 208 $ (22,285) Adjustments to reconcile net income (loss) to cash used for operating activities: Equity in undistributed net (income) loss of subsidiaries (276) 8,782 Depreciation expense - 89 Accrued investment income 42 75 Decrease (increase) in other assets 3,063 (1,062) (Decrease) increase in other liabilities (13,102) 6,263 Increase in interest and dividend payable - 5,934 Other, net 9,589 595 -------------- --------------- Net Cash Used For Operating Activities (476) (1,609) -------------- --------------- Cash Flows From Investing Activities: Proceeds from sale of investments 2,455 5,176 Net change in short-term investments (1,403) 1,811 Additions to leasehold improvements and equipment, net of retirements - (27) (Increase) decrease in other assets - (283) Capital contributions to subsidiaries (400) (6,321) -------------- --------------- Net Cash Provided by (Used For) Investing Activities 652 356 -------------- --------------- Cash Flows From Financing Activities: Retirement of senior subordinated debentures (15,167) - Issuance of preferred stock 15,167 - Decrease (increase) in other assets - 732 -------------- --------------- Net Cash Provided by Financing Activities - 732 -------------- --------------- Increase (decrease) in Cash During the Period 176 (521) Cash at Beginning of Period 482 1,003 -------------- --------------- Cash at End of Period $ 658 $ 482 ============== ===============
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. Year Ended December 31, 2000: Insurance operations $ 23,853 $ 61,306 $ 42,778 $119,908 $ 7,387 $ 101,940 $ 2,998 $ 42,575 $ 120,667 ========= Other activities 858 - - - 2,046 - - 24,771 Corporate (parent company) - - - - 308 - - 337 ----------- ---------- ---------- --------- ---------- ---------- ------------ --------- Total $ 24,711 $ 61,306 $ 42,778 $119,908 $ 9,741 $ 101,940 $ 2,998 $ 67,683 =========== ========== ========== ========= ========== ========== ============ ========= Nine Months Ended December 31, 1999 Insurance operations $ 19,393 $ 57,119 $ 38,776 $ 86,371 $ 5,223 $ 65,699 $ 1,478 $ 26,488 $ 85,694 ========= 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 $ 23,878 ========= 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 $ 132,781 ========= 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 =========== ========== ========== ========= ========== ========== ============ ==========
* Premiums Written - Amounts do not apply to life insurance/other. SCHEDULE IV REINSURANCE (in thousands, except percentages)
Percentage of Ceded to Assumed Amount Gross Other From Other Net Assumed to Amount Companies Companies Amount Net --------------- --------------- --------------- --------------- --------------- ASCENT ASSURANCE, INC. Year Ended December 31, 2000 Life insurance in force $ 46,744 $ 12,553 $ - $ 34,191 - =============== =============== =============== =============== Premiums: Life $ 497 $ 12 $ - $ 485 - Accident and health 121,601 3,939 1,257 118,919 1.05% Other 504 - - 504 - --------------- --------------- --------------- --------------- Total premiums $ 122,602 $ 3,951 $ 1,257 $ 119,908 1.05% =============== =============== =============== =============== 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% =============== =============== =============== ===============
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
Additions (Reductions) Balance at Charged to Balance at Beginning Costs and Deductions End Of of Period Expenses (Charge Offs) Other* Period ---------------- ---------------- ------------------- ------------------- --------------- ASCENT ASSURANCE, INC. Year Ended December 31, 2000: Allowance for doubtful agents' balances $ 6,060 $ (722) $ (1,627) $ - $ 3,711 ================ ================ =================== =================== =============== 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 ================ ================ =================== =================== ===============
* 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 2001 Annual Meeting of Stockholders, which will be filed on or before April 30, 2001. 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 2001 Annual Meeting of Stockholders, which will be filed on or before April 30, 2001. 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 2001 Annual Meeting of Stockholders, which will be filed on or before April 30, 2001. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transactions is incorporated herein by reference to "Principal Stockholders" and "Election of Directors" from the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders, which will be filed on or before April 30, 2001. 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). 10.18Third Amendment to Guaranty Agreement dated April 17, 2000 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.19Extension of 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 10.8 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.20Extension of Employment Agreement, dated as of September 15, 1998, by and among the Company, Westrbridge Management Corp. and Mr. Patrick H. O'Neill (incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.21Fourth Amendment to Guaranty Agreement dated August 10, 2000 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.22First Amendment to Pledge Agreement, dated as of November 30, 2000, by and among Ascent Assurance, Inc. and LaSalle Bank National Association. 10.23Fifth Amendment to Guaranty Agreement, dated as of November 30, 2000, by and among Ascent Assurance, Inc. and LaSalle Bank National Association. 10.24Third Amendment to Credit Agreement, dated as of November 30, 2000, by and among Ascent Funding, Inc. and LaSalle Bank National Association. 10.25First Amendment to Security Agreement, dated as of November 30, 2000, by and among Ascent Management, Inc. and LaSalle Bank National Association. 21.1* List of Subsidiaries of Ascent Assurance, Inc. 24.1* Consent of PricewaterhouseCoopers LLP (b) Report on Form 8-K. No reports on Form 8-K were filed during the year ended December 31, 2000. - - ------------------------ * 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 17th day of April, 2001. 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 April 17, 2001 - - --------------------------- (Patrick J. Mitchell) and Chief Executive Officer (Principal Executive Officer) /s/ John H. Gutfreund Director April 17, 2001 - - --------------------------- (John H. Gutfreund) /s/ Richard H. Hershman Director April 17, 2001 - - --------------------------- (Richard H. Hershman) /s/ Michael A. Kramer Director April 17, 2001 - - --------------------------- (Michael A. Kramer) /s/ Robert A. Peiser Director April 17, 2001 - - --------------------------- (Robert A. Peiser) /s/ James K. Steen Director April 17, 2001 - - --------------------------- (James K. Steen) /s/ Paul E. Suckow Director April 17, 2001 - - --------------------------- (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 (Texas) 100% 2. American Insurance Company of Texas (Texas) 100% 3. National Financial Insurance Company (Texas) 100% 4. Freedom Life Insurance Company of America (Texas) 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. LifeStyles Marketing Group, Inc. (Delaware) 100% 16. Health Care-One Insurance Agency, Inc. (California) 50% 17. Pacific Casualty Company, Inc. (Hawaii) 100% 18. HPI Marketing, Inc. (Delaware) 100% Exhibit 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-82155) of Ascent Assurance, Inc. and its subsidiaries of our reports dated April 17, 2001 and March 29, 2000 appearing on pages 27 and 28 of this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dallas, Texas April 17, 2001 - - -------- (1) Includes operations of FLICA's parent, FHC, from June 1, 1996. (1) Excludes interest on receivables from agents of $1.9 million, $1.3 million and $2.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. EX-10.22 2 exh10_22.txt 1ST AMENDMENT TO PLEDGE AGREEMENT FIRST AMENDMENT TO PLEDGE AGREEMENT This First Amendment to Pledge Agreement (the "Amendment") is made as of this 30th day of November, 2000, to be effective as of September 30, 2000, by and among ASCENT ASSURANCE, INC., formerly Westbridge Capital Corp., (the "Pledgor"), and LASALLE BANK NATIONAL ASSOCIATION, formerly LaSalle National Bank, ("Bank"). W I T N E S S E T H WHEREAS, Pledgor executed and delivered that certain Pledge Agreement, dated as of June 26, 1997 in favor of Bank with respect to 100% of the issued and outstanding shares of the capital stock of National Financial Insurance Company ("NFIC") and National Foundation Life Insurance Company ("NFL"); and WHEREAS, Pledgor delivered the Pledge Agreement pursuant to (i) that certain Credit Agreement, dated as of June 6, 1997 between Ascent Funding, Inc. (formerly Westbridge Funding Corporation) and the Bank (the "Credit Agreement") and (ii) that certain Guaranty Agreement, dated as of June 26, 1997 by Pledgor in favor the Bank (the "Guaranty Agreement"); and WHEREAS, NFL has requested and the Texas Insurance Commissioner has approved an extraordinary distribution of approximately $4,131,000 to Pledgor, consisting of 100% of the issued and outstanding common capital stock of Freedom Holding Company ("FHC") and its wholly owned subsidiary, Freedom Life Insurance Company of America ("FLICA"); and WHEREAS, as a result of such extraordinary distribution, FHC is a direct subsidiary and FLICA is an indirect subsidiary of Pledgor, and, through an additional restructuring of FHC, FLICA shall become a direct subsidiary of Pledgor; and WHEREAS, Pledgor has agreed to pledge all of the outstanding capital stock of FHC, FLICA, NFL and NFIC (collectively, the "Pledged Subsidiary") to Bank, subject to obtaining the required Pledge Approvals, and any additional shares of the capital stock or series of any Pledged Subsidiary which Pledgor may from time to time acquire in any way at any time hereafter, including due to the restructuring of FLICA; and WHEREAS, the parties desire to amend the Pledge Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms ------------ - shall have the meaning given to them in the Pledge Agreement. SECTION 2. AMENDMENTS TO PLEDGE AGREEMENT. ---------- -- ------ ---------- 2.1 Attachment A to the Pledge Agreement is hereby deleted in its entirety and replaced by inserting the following in its stead: Attachment A Name of Issuer No. of Shares Certificate No.(s) National Financial Insurance 125,000 3 Company National Foundation Life 2,600,000 1 Insurance Company Freedom Holding Company 2,000,000 11 Freedom Life Insurance Company of America 1,761,816 1 SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is ---------- ---------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 The Bank shall have received copies of this Amendment duly executed by the Pledgor. 3.2 The Bank shall have received the stock certificates representing all of the outstanding capital stock of each Pledged Subsidiary (with stock powers signed in blank). 3.3 Pledgor shall have received the required Pledge Approval (as defined in the Guaranty Agreement) with respect to the pledge of all of the outstanding capital stock of FHC and FLICA to Bank. 3.4 The Bank shall have received such other documents, certificates and assurances as it shall reasonably request, all of which have been delivered on or prior to the date hereof. SECTION 4. REAFFIRMATION OF PLEDGOR. Pledgor hereby ratifies and reaffirms that certain Pledge Agreement and each of the terms and provisions contained therein, and agrees that the Pledge Agreement continues in full force and effect following the execution and delivery of this Amendment. Pledgor represents and warrants to Bank that the Pledge Agreement was, on the date of the execution and delivery thereof, and continues to be, the valid and binding obligation of Pledgor enforceable in accordance with its terms and that Pledgor has no claims or defenses to the enforcement of the rights and remedies of Bank under the Pledge Agreement. Pledgor further agrees to immediately pledge and deliver to Bank any Additional Pledged Shares or Pledged Securities (including the delivery and execution of all certificates and/or other instruments or documents representing each item thereof) which Pledgor may acquire in any way at any time after the effective date hereof in connection with the restructuring of FLICA as a direct subsidiary of Pledgor. SECTION 5. COUNTERPARTS. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. ASCENT ASSURANCE, INC. By: /s/Patrick J. Mitchell Name: Patrick J. Mitchell Title: Chairman of the Board and CEO LASALLE BANK NATIONAL ASSOCIATION By: /s/Janet R. Gates Name: Janet R. Gates Title: Senior Vice President EX-10.23 3 exh10_23.txt 5TH AMENDMENT TO GUARANTY AGREEMENT FIFTH AMENDMENT TO GUARANTY AGREEMENT This Fifth Amendment to Guaranty Agreement (the "Amendment") is made as of this 30th day of November, 2000, to be effective as of September 30, 2000, by and among ASCENT ASSURANCE, INC. (the "Guarantor"), and LASALLE BANK NATIONAL ASSOCIATION (the "Bank"). W I T N E S S E T H WHEREAS, the Guarantor delivered a Guaranty Agreement in favor of the Bank, dated as of June 26, 1997, as amended by that certain First Amendment to Guaranty Agreement, dated as of March 24, 1999, as further amended by that certain Second Amendment to Guaranty Agreement, dated as of July 20, 1999, as further amended by that certain Third Amendment to Guaranty Agreement, dated as of April 17, 2000 and as further amended by that certain Fourth Amendment to Guaranty Agreement, dated as of August 10, 2000 (collectively, the "Guaranty Agreement"); WHEREAS, the Guarantor delivered the Guaranty Agreement pursuant to that certain Credit Agreement, dated as of June 6, 1997 between Ascent Funding, Inc. (formerly Westbridge Funding Corporation) and the Bank (as amended from time to time, the "Credit Agreement"); and WHEREAS, National Foundation Life Insurance Company ("NFL") has requested and the Texas Insurance Commissioner has approved an extraordinary distribution of approximately $4,131,000 to Guarantor, consisting of 100% of the issued and outstanding common capital stock of Freedom Holding Company ("FHC") and its wholly owned subsidiary, Freedom Life Insurance Company of America ("FLICA"); and WHEREAS, as a result of such extraordinary distribution, FHC is currently a direct subsidiary and FLICA is an indirect subsidiary of Guarantor, and, through an additional restructuring of FHC, FLICA shall become a direct subsidiary of Guarantor; and WHEREAS, the parties desire to further amend the Guaranty Agreement, as more fully set forth herein to, among other things, provide for the restructuring of FLICA. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms ----------- shall have the meaning given to them in the Guaranty Agreement. SECTION 2. AMENDMENTS TO GUARANTY AGREEMENT. ---------- -- -------- ---------- 2.1 The definition of "FLICA" in Section 1.2 of the Guaranty Agreement is hereby deleted in its entirety and replaced by inserting the following in its stead: "FLICA" means Freedom Life Insurance Company of America, a Texas corporation." 2.2 The definition of "NFL" in Section 1.2 of the Guaranty Agreement is hereby deleted in its entirety and replaced by inserting the following in its stead: "NFL" means National Foundation Life Insurance Company, a Texas corporation." 2.3 Section 6.6 of the Guaranty Agreement is hereby amended by deleting the first sentence in its entirety and inserting the following in its stead: "At any time that the Obligations remain outstanding, permit the RBC Ratio of any Insurance Subsidiary (excluding NFIC) to be less than 105% of the "Company Action Level RBC." 2.4 Schedule 6.8 of the Guaranty Agreement is hereby deleted in its entirety and replaced by inserting the following in its stead: " Minimum Statutory Surplus Requirements (in Million $) -------------------------------- --------------------------------------- Insurance Subsidiary Minimum Statutory Surplus Requirement -------------------------------- --------------------------------------- NFL $5.2 -------------------------------- --------------------------------------- NFIC $1.4 -------------------------------- --------------------------------------- AIC $1.4 -------------------------------- --------------------------------------- FLICA $5.0 -------------------------------- --------------------------------------- ,, SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon satisfaction of the following conditions precedent: 3.1 The Bank shall have received copies of this Amendment duly executed by the Guarantor. 3.2 The Bank shall have received copies of the First Amendment to Pledge Agreement duly executed by the Guarantor. 3.3 The Bank shall have received copies of the Third Amendment to Credit Agreement duly executed by the Borrower. 3.4 The Bank shall have received such other documents, certificates and assurances as it shall reasonably request, all of which have been delivered on or prior to the date hereof. SECTION 6. REAFFIRMATION OF THE GUARANTOR. The Guarantor hereby ratifies and reaffirms that certain Guaranty Agreement and each of the terms and provisions contained therein, and agrees that the Guaranty Agreement continues in full force and effect following the execution and delivery of this Amendment. The Guarantor represents and warrants to the Bank that the Guaranty Agreement was, on the date of the execution and delivery thereof, and continues to be, the valid and binding obligation of the Guarantor enforceable in accordance with its terms and that the Guarantor has no claims or defenses to the enforcement of the rights and remedies of the Bank under the Guaranty Agreement. SECTION 7. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. ASCENT ASSURANCE, INC. By: /s/Patrick J. Mitchell Name: Patrick J. Mitchell Title: Chairman of the Board and CEO LASALLE BANK NATIONAL ASSOCIATION By: /s/Janet R. Gates Name: Janet R. Gates Title: Senior Vice President EX-10.24 4 exh10_24.txt 3RD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT TO CREDIT AGREEMENT This Third Amendment to Credit Agreement (the "Amendment") is made as of this 30th day of November, 2000, to be effective as of September 30, 2000, by and among ASCENT FUNDING, INC. (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION (the "Bank"). W I T N E S S E T H: WHEREAS, the Borrower and the Bank are parties to that certain Credit Agreement, dated as of June 6, 1997, as amended by that certain First Amendment to Credit Agreement, dated as of September 8, 1998, and as further amended by that certain Second Amendment to Credit Agreement, dated as of August 12, 1999 (collectively, the "Credit Agreement); and WHEREAS, there has been a redomestication of National Foundation Life Insurance Company and Freedom Life Insurance Company of America from Delaware and Mississippi, respectively, to Texas; and WHEREAS, the parties desire to further amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION I. DEFINITIONS. Unless otherwise defined herein, all capitalized terms ------------ shall have the meaning given to them in the Credit Agreement. SECTION II. AMENDMENTS TO CREDIT AGREEMENT. 2.1 The definition of "FLICA" in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following in its stead: " "FLICA" means Freedom Life Insurance Company of America, a Texas ----- Corporation." 2.2 The definition of "NFL" in Section 1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following in its stead: "NFL" means National Foundation Life Insurance Company, a Texas --- Corporation." 2.3 The definition of "Revolving Loan Termination Date" in Section 1.1 of the Credit Agreement is hereby amended by deleting "June 5, 2001" and inserting "June 5, 2002" in its stead. 2.4 Section 3.4 of the Credit Agreement is hereby amended by inserting ", FLICA" after "NFL" and before "and NFIC" in the fourth line of Section 3.4. 2.5 Section 7.10 of the Credit Agreement is hereby deleted in its entirety and replaced by inserting the following in its stead: "Minimum Consolidated GAAP Net Worth. At any time during the term hereof, permit Consolidated GAAP Net Worth of the Borrower and its Subsidiaries to be less than an amount equal to the sum of (a) $5,500,000, plus (b) 50% of any cumulative positive Net Income of the Borrower and its Subsidiaries for each fiscal quarter following the fiscal quarter ending December 31, 2000 plus (c) Deferred Revenues as of the end of the most recent fiscal quarter." SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is ---------- ---------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 The Bank shall have received copies of this Amendment duly executed by the Borrower. 3.2 The Bank shall have received a renewal fee of $10,000 (the "Renewal Fee"), which Renewal Fee shall be deemed fully earned and payable as of the date hereof. 3.3 The Bank shall have received such other documents, certificates and assurances as it shall reasonably request, all of which have been delivered on or prior to the date hereof. SECTION IV. REAFFIRMATION OF THE BORROWER. The Borrower hereby represents and warrants to the Bank that (i) the warranties set forth in Article 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such warranties relate to a specific date, or (b) changes thereto are a result of transactions for which the Bank has granted its consent; (ii) the Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Event of Default has occurred and is continuing or has not previously been waived. SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Credit Agreement ---- ----- --- ------ and all other Loan Documents shall remain in full force and effect. SECTION VI. COUNTERPARTS. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. ASCENT FUNDING, INC. By: /s/Patrick J. Mitchell Name: Patrick J. Mitchell Title: Chairman of the Board and CEO LASALLE BANK NATIONAL ASSOCIATION By: /s/Janet R. Gates Name: Janet R. Gates Title: Senior Vice President EX-10.25 5 exh10_25.txt 1ST AMENDMENT TO SECURITY AGREEMENT FIRST AMENDMENT TO SECURITY AGREEMENT This First Amendment to Security Agreement (the "Amendment") is made as of this 30th day of November, 2000, to be effective as of September 30, 2000, by and among ASCENT MANAGEMENT, INC. (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION (the "Bank"). W I T N E S S E T H: WHEREAS, the Borrower and the Bank are parties to that certain Security Agreement, dated as of July 21, 1999 (the "Security Agreement); and WHEREAS, the parties desire to amend the Security Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION I. DEFINITIONS. Unless otherwise defined herein, all capitalized terms ------------ shall have the meaning given to them in the Security Agreement. SECTION II. AMENDMENTS TO SECURITY AGREEMENT. ---------- -- -------- ---------- 2.1 Section 8 of the Security Agreement is hereby amended by deleting the reference to the amount of "$2,000,000" and inserting in its stead the amount of "$2,500,000." SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is ---------- ---------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 The Bank shall have received copies of this Amendment duly executed by the Borrower. 3.2 The Bank shall have received such other documents, certificates and assurances as it shall reasonably request, all of which have been delivered on or prior to the date hereof. SECTION IV. REAFFIRMATION OF THE BORROWER. The Borrower hereby represents and warrants to the Bank that (i) the warranties set forth in Section 7 of the Security Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such warranties relate to a specific date, or (b) changes thereto are a result of transactions for which the Bank has granted its consent; (ii) the Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Security Agreement as hereby amended; and (iii) upon execution hereof no Event of Default has occurred and is continuing or has not previously been waived. SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Security ---- ----- --- ------ Agreement shall remain in full force and effect. SECTION VI. COUNTERPARTS. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. ASCENT MANAGEMENT, INC. By: /s/Patrick J. Mitchell Name: Patrick J. Mitchell Title: Chairman of the Board and CEO LASALLE BANK NATIONAL ASSOCIATION By: /s/Janet R. Gates Name: Janet R. Gates Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----