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, 2001
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:
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None
Securities Registered Pursuant to Section 12(g) of the Act:
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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 $4,550,000 as of March 1 , 2002.
On March 1, 2002, 6,500,000 shares of Common Stock were outstanding.
ASCENT ASSURANCE, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Number
ITEM 1. Business 2
ITEM 2. Properties 10
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 11
ITEM 6. Selected Consolidated Financial Data 12
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 26
ITEM 8. Financial Statements and Supplementary Data 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 75
PART III
ITEM 10. Directors and Executive Officers of the Registrant 76
ITEM 11. Executive Compensation 76
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 76
ITEM 13. Certain Relationships and Related Transactions 76
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K 77
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".) 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, 2001: Texas - 17 %, Florida - 16%,
Tennessee - 6% and Arkansas - 6%. Since 1999, new business has been produced
only in NFL and FLICA, with FLICA underwriting approximately 77% of new policies
issued. Since April 2000, NFL has reinsured approximately 60% of the risk under
new major medical policies issued by FLICA.
The Company also derives fee and service revenue from (i) tele-survey services,
(ii) printing services and (iii) renewal commissions for prior year sales of
unaffiliated insurance products.
Marketing Distribution System
NationalCare(R) Marketing, Inc. ("NCM"), a wholly-owned subsidiary, is the
principal distribution channel for the Insurance Subsidiaries' products. NCM
maintains an agency force that is organized by geographic region. All members of
NCM's agency force are independent contractors and all compensation received is
based upon sales production and the persistency of such production. NCM's agents
market the Insurance Subsidiaires' 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.
Sales leads for NCM's agents are generated principally by the Company's
tele-survey subsidiary, Precision Dialing Services ("PDS"). By utilizing a
predictive automated dialing system, PDS is able to generate quality sales leads
that maintain the efficiency of NCM's agency force. By providing these sales
leads, NCM believes that its ability to attract experienced agents as well as
new agents entering the business is enhanced.
DESCRIPTION OF PRODUCTS
The Company's operations are comprised of one segment, Accident and Health
insurance. The principal products underwritten by the Insurance Subsidiaries are
medical expense reimbursement and supplemental policies. These products are
designed with flexibility as to benefits, deductibles, coinsurance and premiums.
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 and maximum
benefits. 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 generally
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 also
guaranteed renewable pursuant to 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. 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 97% 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 renewal
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 National Association of Insurance Commissioners ("NAIC") is a voluntary
association of all of the state insurance commissioners in the United States.
The primary function of the NAIC is to develop model laws on key insurance
regulatory issues that can be used as guidelines for individual states in
adopting or enacting insurance legislation. While the NAIC model laws are
accorded substantial deference within the insurance industry, these laws are not
binding on insurance companies unless enacted into state law and variations from
the model laws from state to state are common.
The Insurance Subsidiaries are all domiciled in Texas and are therefore subject
to regulation under Texas laws. The State of Texas has enacted insurance holding
company laws that require registration and periodic reporting by insurance
companies. 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.
Product Approvals. 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.
In addition, state insurance departments generally require the maintenance of
certain minimum loss ratios. The states in which the Company is licensed have
the authority to change the minimum mandated statutory loss ratios to which the
Company is subject, the manner in which these ratios are computed and the manner
in which compliance with these ratios is measured and enforced. Most states in
which the Company writes health insurance products have adopted the loss ratios
recommended by the NAIC. The Company is unable to predict the impact of (i) any
changes in the mandatory statutory loss ratios relating to products offered by
the Company or (ii) any change in the manner in which these minimums are
computed or enforced in the future. 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.
NAIC Accounting Principles. In 1998, the NAIC adopted the Codification of
Statutory Accounting Principles guidance, which replaced 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 Texas Department of Insurance adopted the Codification effective
January 1, 2001. The adoption of the Codification did not materially impact
statutory surplus of the Insurance Subsidiaires.
Risk-Based Capital. The NAIC's Risk-Based Capital for Life and/or Health
Insurers Model Act (the "Model Act") provides a tool for insurance regulators to
determine the levels of statutory capital and surplus an insurer must maintain
in relation to its insurance and investment risks and whether there is a need
for possible regulatory attention. The Model Act (or similar legislation or
regulation) has been adopted in states where the Insurance Subsidiaries are
domiciled. The Model Act provides four levels of regulatory attention, varying
with the ratio of the insurance company's total adjusted capital (defined as the
total of its statutory capital and surplus, asset valuation reserve and certain
other adjustments) to its risk-based capital ("RBC"):
If a company's total adjusted capital is less than 100 percent but greater
than or equal to 75 percent of its RBC, or if a negative trend (as defined
by the NAIC) has occurred and total adjusted capital is less than 125
percent of RBC (the "Company Action Level"), the company must submit a
comprehensive plan aimed at improving its capital position to the
regulatory authority proposing corrective actions.
If a company's total adjusted capital is less than 75 percent but greater
than or equal to 50 percent of its RBC (the "Regulatory Action Level"), the
regulatory authority will perform a special examination of the company and
issue an order specifying the corrective actions that must be followed.
If a company's total adjusted capital is less than 50 percent but greater
than or equal to 35 percent of its RBC (the "Authorized Control Level"),
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control.
If a company's total adjusted capital is less than 35 percent of its RBC
(the "Mandatory Control Level"), the regulatory authority must place the
company under its control.
The 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,
2001 filed with the Texas Department of Insurance reflected total adjusted
capital in excess of Company Action Level RBC.
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, 2001, 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, 2001, the premium writing ratio for FLICA
complied with the limit mandated by Florida law. As FLICA currently produces 77%
of the Company's new business and approximately 38% of such 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. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" 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 in the current 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 2002
without prior approval of the Texas Insurance Commissioner as the companies'
earned surplus is negative. Due to recent statutory losses incurred by the
Insurance Subsidiaries, the Company does not expect to receive any dividends
from the Insurance Subsidiaries for the foreseeable future. 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 $226,000 during the year ended December 31, 2001.
HIPAA. This federal regulation mandates the adoption of standards for the
exchange of electronic health information in an effort to encourage overall
administrative simplification and enhance the effectiveness and the efficiency
of the healthcare industry. Ensuring privacy and security of patient information
- - "accountability" - is a key component of the legislation. The other key
component is "portability", or an individual's right, under certain
circumstances, to maintain their prior satisfaction of waiting periods or
pre-existing coverage limitations when leaving the current group health coverage
plan.
In December 2000, final regulations were issued regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules the Company will now be required to (a) comply
with a variety of requirements concerning its use and disclosure of individuals'
protected health information, (b) establish rigorous internal procedures to
protect health information, and (c) enter into business associate contracts with
other companies that use similar privacy protection procedures. The final rules
do not provide for complete federal preemption of state laws, but, rather,
preempt all contrary state laws unless the state law is more stringent. The
effective date of the rules is April 14, 2003.
In August 2000, proposed rules were published for comment related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, systems controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.
Sanctions for failing to comply with HIPPA standards include criminal penalties
of up to $250,000 per violation and civil sanctions of up to $25,000 per
violation. Due to the complex nature of the privacy regulations, they may be
subject to court challenge, as well as further legislative and regulatory
actions that could alter their effect.
The Company is evaluating the effect of HIPAA and has formed a HIPAA task force
for the purpose of HIPAA compliance. Due to the uncertainty surrounding the
regulatory requirements, the Company cannot be sure that planned systems and
programs will comply adequately with the regulations that are ultimately
approved. Implementation of additional systems and programs may be required, the
cost of which cannot currently be determined. Further, compliance with these
regulations require changes to many operational procedures which may lead to
additional costs that have not yet been identified.
GLBA. The Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley
Act", or "GLBA") contains privacy provisions and introduced 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 July 2001 to provide written notice of its privacy practices
to all of the Company's insureds. In addition, the Company provides 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 promulgated a new model regulation called Privacy of Consumer
Financial and Health Information Regulation which was adopted by numerous state
insurance authorities. The Company believes that it is in compliance with the
privacy regulations that became effective in 2001.
Pending Health Care Reform. The health care industry, as one of the largest
industries in the United States, continues to attract much legislative interest
and public attention. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in some state
legislatures that would effect major changes in the health care system, either
nationally or at the state level. Proposals that have been considered include
cost controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, patients' bills of
rights and requirements that all businesses offer health insurance coverage to
their employees. There can be no assurance that future health care legislation
or other changes in the administration or interpretation of governmental health
care programs will not have a material adverse affect on the business, financial
condition or results of the operations of the Company.
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:
To holders of general unsecured claims and Convertible Notes as of December
10, 1998, 6,077,500 shares, and to management at the Effective Date, 32,500
shares, or in aggregate 94% of the New Common Stock issued on the Effective
Date. Holders of general unsecured claims and Convertible Notes received
their first distribution of shares in partial satisfaction and discharge of
their allowed claims in April 1999. The second distribution was made in
September 1999 and the remaining shares of New Common Stock were
distributed in November 1999.
To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares,
or 4%, of the New Common Stock issued on the Effective Date and Warrants
("New Warrants") to purchase an additional 277,505 shares, or 2%, of the
New Common Stock issued on the Effective Date, on a fully diluted basis.
To holders of Old Common Stock as of December 10, 1998, 130,000 shares, or
2%, of the New Common Stock issued on the Effective Date and New Warrants
to purchase an additional 693,761 shares, or 5%, of the New Common Stock
issued on the Effective Date, on a fully diluted basis. Fractional shares
of New Common Stock were not issued in connection with the Plan. As a
result of this provision, certain holders of Old Common Stock received no
distribution of New Common Stock or New Warrants under the Plan.
To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of
December 10, 1998, 8,090 shares of New Preferred Stock which, together with
the 15,167 additional shares of New Preferred Stock purchased by the CSFB
Affiliate as described above, were convertible into 4,765,165 shares of the
New Common Stock on March 24, 1999. As a result of the New Preferred Stock
received by the CSFB Affiliate, together with the 3,093,998 shares of New
Common Stock received by the CSFB Affiliate in respect of the Convertible
Notes owned by CSFB, the CSFB Affiliate beneficially owned on March 24,
1999 approximately 56.6% of the New Common Stock on an as converted basis,
assuming the exercise of all New Warrants and issuance of New Common Stock
reserved under the 1999 Stock Option Plan as discussed below. The New
Preferred Stock has a stated value of $1,000 per share and a cumulative
annual dividend rate of $102.50 per share payable in January of each year
in cash or by the issuance of additional shares of New Preferred Stock. The
New Preferred Stock is convertible at any time into 204.8897 shares of New
Common Stock at an initial conversion price of $4.88 per share of New
Common Stock, subject to customary anti-dilution adjustments.
Reservation of Additional New Common Stock
In connection with the New Warrants described above, 971,266 shares of New
Common Stock have been reserved for issuance upon the exercise of New Warrants.
The New Warrants are exercisable at an initial exercise price of $9.04 per share
of New Common Stock, subject to customary anti-dilution adjustments, and will
expire on March 24, 2004.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted
number of shares of New Common Stock issued and outstanding on the Effective
Date have been reserved for issuance to employees and directors, and up to
387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock
issued on the Effective Date have been reserved for issuance to the Company's
marketing agents under the Company's 1999 Stock Option Plan, which was approved
by the Company's shareholders.
EMPLOYEES
At December 31, 2001, the Company employed 360 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 1, 2002. The high and low price listed for the Common
Stock and Warrants reflects the OTC Bulletin Board closing bid prices of the
Company's securities. The closing bid price on December 31, 2001 was $0.60.
There were approximately 311 shareholders of record on December 31, 2001,
representing approximately 1,450 beneficial owners.
OTC Bulletin Board
Common Stock Warrants
High Low High Low
2001
Fourth Quarter $1.100 $0.220 $0.031 $0.016
Third Quarter 1.550 1.050 0.031 0.016
Second Quarter 2.000 1.100 0.016 0.016
First Quarter 2.188 0.750 0.063 0.016
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
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
10 - "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 Year Ended Nine Months Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------------
Statement of Operations Data: (in thousands, except per share data)
Premiums $ 125,206 $ 119,908 $ 86,371
Total revenues 155,381 149,586 105,972
(Loss) income before income taxes (2,119) (12,939) 3,231
Net (loss) income (3) (2,119) (18,942) 2,106
Preferred stock dividends 2,932 2,576 1,874
(Loss) income applicable to common
shareholders (5,051) (21,518) 232
(Loss) Earnings Per Share (3):
Basic $ (0.78) $ (3.31) $ (0.04)
Diluted $ (0.78) $ (3.31) $ (0.04)
Weighted Average Shares Outstanding
Basic 6,500 6,500 6,500
Diluted 6,500 6,500 6,510
ASCENT ASSURANCE, INC.
----------------------------------------------------------
December 31, December 31, December 31, March 31,
2001 2000 1999 1999
------------ ------------ ------------ -------------
(in thousands, except per share data)
Balance Sheet Data:
Cash and invested assets $ 116,238 $ 112,235 $ 115,303 $ 129,142
Total assets 162,593 160,478 163,690 169,795
Policy liabilities 98,773 104,084 95,895 95,806
Notes payable (1) 18,603 8,947 7,162 5,088
Total liabilities 129,136 128,698 116,649 119,435
Redeemable convertible preferred
stock (2) 30,635 27,705 23,257 23,257
Stockholders' equity 2,822 4,075 23,784 27,103
Book Value Per Share (3) $ 0.43 $ 0.63 $ 3.66 $ 4.17
(1) In April 2001, the Company borrowed an additional $11 million. See
"Liquidity, Capital Resources, and Statutory Capital and Surplus" at Item
7.
(2) At December 31, 2001, consists of 30,635 shares of New Preferred Stock,
which are convertible, at the option of the holders thereof, into an
aggregate of 6,276,796 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). See "Financial Condition - Deferred Tax Asset" at Item 7.
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
WESTBRIDGE CAPITAL CORP.
------------------------------------------
Three Months
Ended
March 31, Year Ended December 31,
---------------------------
1999 1998 1997
------------ ------------- -----------
(in thousands, except per share data)
Statement of Operations Data
Premiums $ 29,948 $ 135,717 $ 161,097
Total revenues 36,814 166,650 188,904
Extraordinary loss, net of income tax - - 1,007
Net income (loss) 208 (22,285) (97,144)
Preferred stock dividends - 520 1,572
Income (loss) applicable to
common stockholders 208 (22,805) (98,716)
Earnings (Loss) Per Share:
Basic $ 0.03 $ (3.43) $ (16.07)
Diluted $ 0.03 $ (3.43) $ (16.07)
Weighted Average Shares Outstanding:
Basic 7,032 6,640 6,143
Diluted 7,032 6,640 6,143
WESTBRIDGE CAPITAL CORP.
--------------------------------
December 31,
1998 1997
-------------- --------------
(in thousands)
Balance Sheet Data
Total cash and invested assets $ 131,708 $ 148,442
Total assets 169,741 202,856
Policy liabilities 97,987 107,595
Notes payable 95,715 102,547
Total liabilities 219,886 229,274
Redeemable convertible preferred stock
11,935 19,000
Stockholders' (deficit) equity (62,080) (45,418)
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 14 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) tele-survey services, (ii) printing services, and (iii) renewal
commissions received by the Company for prior year sales of insurance products
for unaffiliated insurance carriers.
Critical Accounting Policies. The following discussion provides management's
assessment of financial results and material changes in financial position for
the Company. This discussion is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the U.S. The Company's significant accounting policies
relate to investments, agent receivables, deferred policy acquisition costs,
deferred tax assets, claim reserves, future policy benefit reserves, reinsurance
and statutory accounting practices. These policies are discussed below under
"Financial Condition" and in Notes 2 and 10 to the Company's consolidated
financial statements at Item 8. The application of these accounting policies
requires management to make significant estimates and judgments that affect the
reported amounts of assets, liabilities and expenses in the Company's
consolidated financial statements. Such estimates and judgments are based on
historical experience, changes in laws and regulations, observance of industry
trends and various information received from third parties. While the estimates
and judgments associated with the application of these accounting policies may
be affected by different assumptions or conditions, the Company believes the
estimates and judgments associated with the reported consolidated financial
statement amounts are appropriate in the circumstances. 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
2001 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. In particular, forward-looking statements can be identified by
the use of words such as "may", "will", "should", "expect", "anticipate",
"estimate", "continue", or similar words. 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:
any limitation imposed on the Company's ability to control the impact of
rising health care costs, especially prescription drugs, and rising medical
service utilization rates through product and benefit design, underwriting
criteria, premium rate increases, utilization management and negotiation of
favorable provider contracts;
the impact of changing health care trends on the Company's ability to
accurately estimate claim and settlement expense reserves;
developments in health care reform and other regulatory issues, including
the Health Insurance Portability and Accountability Act of 1996 ("HIPPA")
and increased privacy regulation, and changes in laws and regulations in
key states where the Company operates;
the Company's ability to meet minimum regulatory capital requirements for
its Insurance Subsidiaries;
the ability of the Company to maintain adequate liquidity for its
non-insurance subsidiary operations including financing by NCM of
commission advances to agents;
default by issuers of fixed maturity investments owned by the Company;
and the loss of key management personnel
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 2001, 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. (In
thousands except insurance operating ratios.)
Pro Forma
Ascent Ascent
--------------------------- -----------
2001 2000 1999
------------ ------------- -----------
Premiums $ 125,206 $ 119,908 $ 116,319
Other 3,540 3,335 1,789
------------ ------------- -----------
Total insurance operating revenue 128,746 123,243 118,108
Benefits and claims 93,376 101,940 87,498
Commissions 17,793 17,969 16,264
Increase in deferred acquisition costs (889) (6,818) (5,216)
General and administrative expense 25,339 28,284 23,345
Taxes, licenses and fees 4,245 4,540 4,481
Recognition of premium deficiency - 1,500 -
------------ ------------- -----------
Total insurance operating expenses 139,864 147,415 126,372
------------ ------------- -----------
Insurance operating results (11,118) (24,172) (8,264)
------------ ------------- -----------
Fee and service income 17,376 17,056 15,543
Fee and service expenses 15,702 14,481 13,233
------------ ------------- -----------
Fee and service results 1,674 2,575 2,310
------------ ------------- -----------
Net investment income 8,867 9,741 9,302
Net realized gain (loss) on investments 392 (454) (167)
Interest expense on notes payable (1,934) (629) (403)
Resolution of pre-confirmation contingencies - - 1,235
------------ ------------- -----------
(Loss) income before income taxes (2,119) (12,939) 4,013
Income tax expense - 6,003 1,364
------------ ------------- -----------
Net (loss) income $ (2,119) $ (18,942) $ 2,649
============ ============= ===========
Insurance operating ratios*
Benefits and claims 74.6% 85.0% 75.2%
Commissions 14.2% 15.0% 14.0%
Increase in deferred acquisition costs (0.7%) (5.7%) (4.5%)
Recognition of premium deficiency - 1.3% -
General and administrative expense 19.7% 22.9% 19.8%
Taxes, licenses and fees 3.4% 3.8% 3.9%
*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. The Company's loss before income taxes declined by $10.8 million in
2001 to ($2.1) million as compared to 2000, after increasing to ($12.9) million
in 2000 from income before income taxes of $4.0 million in 1999. Insurance
operating results for both 2001 and 2000 were adversely impacted by losses from
the GPPO comprehensive major medical product, the principal major medical
product marketed by FLICA and NFL from 1998 through June 2000. Losses
attributable to the GPPO product were approximately ($16.7) million for 2001 and
($25.7) million for 2000. As discussed more fully below, the $9.0 million
reduction in GPPO product losses in 2001 as compared to 2000 is principally
attributable to active premium rate increase management and discontinuance of
production. Additional reductions in losses from the GPPO product and continued
sales of new major medical products introduced in July 2000 that meet pricing
targets are key to the Company achieving profitability in 2002.
As a result of losses from the GPPO product, FLICA required significant capital
contributions during 2000 and 2001 to comply with minimum statutory capital and
surplus requirements. In April 2001, Ascent obtained debt financing of $11
million from an affiliate of its largest stockholder. The proceeds of this loan
were used to fund an $11 million capital contribution to FLICA. The $1.3 million
increase in interest expense for 2001 as compared to 2000 is due primarily to
this loan. Adverse claims experience for the GPPO product in excess of
management's current expectations or adverse claims experience for other
insurance products could have a material adverse impact on the Insurance
Subsidiaries' ability to meet minimum statutory capital and surplus requirements
and maintain new business production at current levels and therefore have a
material adverse impact on Ascent's liquidity and capital resources and results
of operations (see "Liquidity, Capital Resources and Statutory Capital and
Surplus" and Item 1 - Business - "Regulation").
The Company reported no income tax benefit for 2001 and incurred income tax
expense for 2000 of $6.0 million due to the establishment of a valuation
allowance beginning December 31, 2000 for all net deferred tax assets. Due to
GPPO product losses during 2000, the Company had reported a cumulative loss
before income taxes of ($9.7) million since the fresh start date of March 31,
1999 through December 31, 2000. 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. This adjustment had no impact on
the Company's cash position and did not impact statutory capital and surplus of
the Insurance Subsidiaries. As more fully discussed below under "Financial
Condition - Deferred Tax Asset", the Company expects to record no future GAAP
income tax benefit or expense until the Company achieves a cumulative pre-tax
income position since the fresh start date of March 31, 1999.
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: comprehensive major
medical, hospital/surgical major medical, supplemental specified disease and
Medicare supplement. Comprehensive 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. Hospital surgical major medical products are similar to comprehensive
major medical products except that benefits are generally limited to
hospital/surgical services and deductibles and coinsurance provisions are
generally higher. 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
-------------------------- ------------
2001 2000 1999
----------- ----------- ------------
Major medical:
First-year $ 28,310 $ 28,082 $ 15,863
Renewal 49,792 37,632 39,891
----------- ----------- ------------
78,102 65,714 55,754
----------- ----------- ------------
Supplemental specified disease:
First-year 1,077 1,394 1,352
Renewal 23,553 26,287 27,917
----------- ----------- ------------
24,630 27,681 29,269
----------- ----------- ------------
Medicare supplement:
Renewal 20,170 23,927 30,560
Other 2,304 2,586 736
- -----
----------- ----------- ------------
Consolidated Premium Revenue $ 125,206 $ 119,908 $ 116,319
=========== =========== ============
Total premiums increased by $5.3 million, or 4.4%, for 2001 and $3.6 million, or
3.1% for 2000 as compared to the corresponding prior year, as new business
production exceeded the expected decline in renewal premiums from older, closed
blocks of business. Comprehensive major medical products comprised 97% of new
business sales for 2001 and represented 62% of consolidated premium revenue for
2001 as compared to 55% for 2000 and 48% for 1999.
In July 2000, the Company began marketing a new comprehensive 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 NCM's career agency force. Annual premiums for new
major medical policies in force at December 31, 2001 were $29.2 million as
compared to $8.7 million at December 31, 2000.
Premium revenue from the unprofitable GPPO major medical product was $36.0
million, $38.2 million and $17.5 million for 2001, 2000 and 1999, respectively.
The Company discontinued marketing this product in June 2000 and has been
continuously implementing significant premium rate increases since that date.
The premium rate increase actions have accelerated the policy lapse rate and
reduced policies in force while increasing the premium received per policy.
Annual premiums for GPPO policies in force declined by $16.6 million, or 37.5%,
to $27.7 million at December 31, 2001 as compared to December 31, 2000 while
policies in force declined by 62.5%. Management expects that premium revenue
from the unprofitable GPPO product will continue to decline in 2002.
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 (see Financial Condition - "Claims
Reserves" and "Future Policy Benefit Reserves"). The 9.8 percentage point
increase in the ratio of consolidated benefits and claims to consolidated
premiums from 1999 to 2000 and subsequent 10.4 percentage point decrease from
2000 to 2001 were principally attributable to the GPPO product. As noted above,
GPPO premiums increased significantly in 2000 as compared to 1999 and the claims
and benefit ratio for 2000 was approximately 120%. In 2001, GPPO premiums
declined slightly, and the claims and benefit ratio dropped by approximately 26
percentage points to 94% due to the implementation of premium rate increases.
The Company expects to further reduce the GPPO claims and benefit ratio during
2002 through the implementation of additional premium rate increases.
Commissions. The commissions to premiums ratio declined by 0.8 percentage point
in 2001, as compared to 2000, due to a higher percentage of renewal premiums to
total premiums. For 2000, the commissions to premium ratio increased over 1999
by 1.0 percentage point as a result of the increase in first year major medical
premiums. Commission rates on first year premiums are significantly higher than
those for renewal premiums.
General and Administrative Expense. The general and administrative expense ratio
declined by approximately three percentage points in 2001, as compared to 2000,
due to non-recurring expenses incurred in 2000 related to the implementation in
May 2000 of the Company's new policy administration and claims data processing
systems.
Net Investment Income and Realized Gains. Net investment income and realized
investment gains and losses totaled $9.3 million for 2001 and 2000 and $9.1
million for 1999. During 2001, interest rates declined which reduced
reinvestment rates; however, the market value of the Company's fixed maturity
bond portfolio increased which resulted in gains from bond sales in the normal
course of business. Conversely, market interest rates were generally higher in
2000; but the market value of the Company's fixed maturity bond portfolio was
lower and the Company realized losses on bond sales.
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:
2001 2000
---------- ----------
Cash and cash equivalents $ 2,337 $ 2,658
---------- ----------
Fixed Maturities (at market value):
U.S. Government and related agencies 10,823 10,462
State, county and municipal 2,226 1,982
Finance 20,307 23,445
Public utilities 7,452 6,787
Mortgage-backed 10,731 13,302
All other corporate bonds 38,678 44,612
---------- ----------
Total Fixed Maturities 90,217 100,590
---------- ----------
Equity Securities (at market value) 1,569 1,335
Other Invested Assets:
Mortgage loans on real estate - 56
Policy loans 314 342
Short-term investments and certificates of deposit 21,801 7,254
---------- ----------
Total Other Invested Assets 22,115 7,652
---------- ----------
Total Cash and Invested Assets $ 116,238 $ 112,235
========== ==========
The following table summarizes consolidated investment results (excluding
unrealized gains or losses) for the indicated year:
Pro Forma
Ascent Ascent
-------------------- ---------
2001 2000 1999
--------- --------- ---------
Net investment income (1) $ 6,869 $ 7,805 $ 8,016
Net realized (loss) gain on investments 392 (454) (167)
Average gross annual yield on fixed maturities 7.0% 7.2% 7.2%
(1) Excludes interest on receivables from agents of $2.0 million, $1.9 million
and $1.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
The following table indicates by rating the composition of the Company's fixed
maturity securities portfolio, excluding short-term investments and certificates
of deposit, at December 31:
2001 2000
------------------ -------------------
Market Market
Value % Value %
---------- ------- ---------- -------
(in (in
thousands) thousands)
Ratings (1) Investment grade:
U.S. Government and agencies $ 20,451 22.7 $ 22,754 22.6
AAA 2,180 2.4 2,885 2.9
AA 9,160 10.2 8,305 8.3
A 28,318 31.4 38,552 38.3
BBB 29,723 32.9 27,168 27.0
Non-Investment grade:
BB 250 0.3 674 0.7
B and below 135 0.1 252 0.2
---------- ------- ---------- -------
Total fixed maturity securities $ 90,217 100.0 $ 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,
2001, 66.2%, 29.9% and 3.9% of the market value of the Company's fixed maturity
securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.
The scheduled contractual maturities of the Company's fixed maturity securities,
excluding short-term investments and certificates of deposit, at December 31 are
shown in the table below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
2001 2000
------------------- -------------------
Market Market
Value % Value %
---------- ------- ---------- -------
(in (in
thousands) thousands)
Scheduled Maturity
Due in one year or less $ 5,909 6.6 $ 7,073 7.0
Due after one year through five years 27,451 30.4 28,877 28.7
Due after five years through ten years 24,165 26.8 26,327 26.2
Due after ten years 21,961 24.3 25,011 24.9
Mortgage-backed securities 10,731 11.9 13,302 13.2
---------- ------- ---------- -------
Total fixed maturity securities $ 90,217 100.0 $ 100,590 100.0
========== ======= ========== =======
Agent Receivables. In the ordinary course of business, the Company advances
commissions on policies written by its general agencies and their agents. Net
agent receivables were $7.4 million and $8.7 million at December 31, 2001 and
2000, respectively. 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.
The Company routinely establishes a reserve for uncollectible agent's balances
based upon historical experience and projected commission earnings. As of
December 31, 2001 and 2000, the Company's allowance for uncollectible commission
advances was $4.0 million and $3.7 million, respectively.
Deferred Policy Acquisition Costs. Policy acquisition costs consisting of
commissions and other policy issue costs, which vary with and are primarily
related to the production of new business, are deferred and amortized over
periods not to exceed the estimated premium-paying periods of the related
policies. Projected future levels of premium revenue are estimated using
assumptions as to interest, mortality, morbidity and withdrawals consistent with
those used in calculating liabilities for future policy benefits. Deferred
policy acquisition costs totaled $25.6 million and $24.7 million at December 31,
2001 and 2000, respectively.
A premium deficiency exists if the present value of future net cash flows plus
future policy benefit and claims reserves at the calculation date is negative or
less than net deferred policy acquisition costs. The calculation of future 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 losses from the 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. At December 31, 2001,
there was no premium deficiency related to deferred acquisition costs.
Deferred Tax Asset. The Company's net deferred tax asset before valuation
allowance at December 31, 2001 and 2000 was $17.8 million and $18.3 million,
respectively. As the Company reported cumulative pre-tax losses of ($9.7)
million since the fresh start date of March 31, 1999 through December 31, 2000,
principally due to GPPO product losses, applicable GAAP literature required that
the Company's net deferred tax asset be fully reserved as of December 31, 2000.
The Company reported additional pre-tax losses of ($2.1) million in 2001 and has
now reported cumulative pre-tax losses since the fresh start date of ($11.8)
million. Accordingly, the Company has reported no income tax benefit for 2001
and the net deferred tax asset remains fully reserved. The Company expects to
record no income tax benefit or expense until the Company achieves a cumulative
pre-tax income position since the fresh start date of March 31, 1999. Applicable
GAAP literature provides that the deferred tax asset valuation allowance may be
eliminated once the Company is no longer in a cumulative loss position, as
defined.
The principal component of the Company's net deferred tax asset before valuation
allowance is net operating loss carryforwards ("NOLs") which totaled $52.9
million at December 31, 2001 and expire between 2003 and 2016. The establishment
of a valuation allowance for GAAP does not impair the availability of NOLs for
utilization in the Company's federal income tax return. As previously discussed,
pre-tax losses for 2001 and 2000 were principally attributable to the GPPO
product. Management believes that future GPPO product losses can be
significantly reduced through continued active premium rate increase management
and that the Company will utilize substantially all of its tax NOLs within the
carry-forward period.
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 $37.2 million at December 31,
2001 as compared to $42.8 million at December 31, 2000. The process of
estimating claim reserves involves the active participation of experienced
actuarial consultants with input from the underwriting, claims, and finance
departments. The inherent uncertainty in estimating claim reserves is increased
when significant changes occur. Changes impacting the Company include: (1)
changes in economic conditions; (2) changes in state or federal laws and
regulations, particularly insurance reform measures; (3) writings of significant
blocks of new business and (4) significant changes in claims payment patterns as
a result of the implementation of a new claims administration system in May
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 GPPO product,
the principal major medical product marketed from 1998 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 $125,000. 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, 2001, approximately $0.9 million of the $3.1 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
General. The primary sources of cash for the Company's consolidated operations
are premiums and fees from insurance policies, sales and maturity of invested
assets and investment income while the primary uses of cash are payments of
insurance policy benefits, claims and commissions, and general operating
expenses. Net cash used in operations totaled $6.6 million, $4.9 million and
$2.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The increase in cash used by operations since 1999 is primarily due to an
increase in the cash basis ratio of benefits and claims to premiums resulting
from a decrease in the average time expended to pay a claim after the
implementation of the Company's new claims administration system in May 2000.
Ascent is a holding company, the principal assets of which consist of the
capital stock of its subsidiaries and invested assets. Ascent's principal
sources of funds are comprised of dividends from its non-insurance subsidiaries.
The Insurance Subsidiaries are precluded from paying dividends without prior
approval of the Texas Insurance Commissioner as the Insurance Subsidiaries'
earned surplus is negative due to statutory losses incurred in recent years (see
"Business - Regulations" at Item 1). Ascent's principal uses of cash are for
capital contributions to maintain minimum statutory capital and surplus
requirements for the Insurance Subsidiaries and general and administrative
expenses. Ascent funded capital contributions to the Insurance Subsidiaries
totaling approximately $19.3 million, $8.2 million, and $5.9 million during
2001, 2000 and 1999, respectively, as a result of combined statutory losses
incurred by the Insurance Subsidiaries for those years of $12.7 million, $17.0
million and $6.5 million, respectively. As of December 31, 2001, Ascent had
approximately $1.2 million in unrestricted cash and invested assets. In February
2002, Ascent funded contributions totaling $1.8 million to two of its insurance
subsidiaries.
The statutory losses incurred during recent years resulted from (1) significant
losses for the GPPO 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). Adverse claims experience for the GPPO product in excess of
management's current estimates or adverse claims experience for other insurance
products would require Ascent to make capital contributions to the Insurance
Subsidiaries in excess of those currently projected for 2002. Additional
financing would be required by Ascent in order to make any such "excess"
contributions. As a result, adverse claims experience could have a material
adverse effect on the Insurance Subsidiaries' ability to meet minimum statutory
capital and surplus requirements and maintain new business production at current
levels and therefore, have a material adverse impact on Ascent's liquidity and
capital resources and results of operations.
CSFB Financing. Ascent received debt financing to fund an $11 million capital
contribution to FLICA in April 2001 from Credit Suisse First Boston Management
Corporation, ("CSFB"), which is an affiliate of Special Situations Holdings,
Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating
to that loan ("CSFB Credit Agreement") 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. During 2001, Ascent issued
$987,000 in additional notes for payment of interest in kind which increased the
notes payable balance to CSFB at December 31, 2001 to approximately $12 million.
The CSFB Credit Agreement provides for a facility fee of $1.5 million which is
payable upon maturity or upon a change in control, as defined. This facility fee
is being accrued as additional interest payable over the term of the loan.
Ascent's obligations to CSFB 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, Inc. and Ascent Management, Inc., some or all of
which is pledged as collateral for bank financing described below). Ascent's
subsidiaries (other than those listed above) have also guaranteed Ascent's
obligations under the CSFB Credit Agreement. At December 31, 2001, there were no
events of default; however, adverse claims experience in excess of management's
current expectations could result in events of default under the CSFB Credit
Agreement.
Bank Financing. The majority of commission advances to NCM's agents are financed
through Ascent Funding, Inc. ("AFI"), an indirect wholly owned subsidiary of
Ascent. 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 proceeds of which are used to purchase agent
advance receivables from NCM and other affiliates. In connection with this
commission advancing program approximately $4.4 million was outstanding under
the Credit Agreement at December 31, 2001.
The Credit Agreement expires December 5, 2002, at which time the outstanding
principal and interest will be due and payable. Under the terms of the Credit
Agreement, agent advances made within six months of the expiration date (after
June 5, 2002) are not eligible for financing. Failure of the Company to obtain
additional renewals of the Credit Agreement beyond December 2002 could have a
material adverse impact on Ascent's liquidity and capital resources. Lack of
adequate financing would impair the Company's ability to pay competitive
commission advances and reduce new business sales needed to replace the normal
lapsing of existing policies. Therefore, failure by Ascent to maintain new
business sales at current levels would result in declining premium revenue and
could have a material adverse impact on Ascent's results of operations.
AFI's obligations under the Credit Agreement are secured by liens upon
substantially all of AFI's assets. AFI's principal assets at December 31, 2001
are net agent receivables of $7.4 million and a cash collateral account pledged
to LaSalle of $2.6 million. In addition, Ascent 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 December 31, 2001, there were no
events of default under the Credit or Guaranty Agreements. However, adverse
claims experience in excess of management's current expectations 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, 2001, approximately $2.2 million was outstanding under the term
loan facility.
Preferred Stock. Dividends on Ascent's redeemable convertible preferred stock
(which is 100% owned by Special Situations Holdings, Inc. - Westbridge) may be
paid in cash or by issuance of additional shares of preferred stock, at the
Company's option. During 2001, the Company paid preferred stock dividends
through the issuance of 2,930 additional shares of preferred stock. 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.
Inflation. Inflation impacts claim costs and overall operating costs and,
although inflation has been lower in the last few years, hospital and medical
costs have still increased at a higher rate than general inflation, especially
prescription drug costs. New, more expensive and wider use of pharmaceuticals is
inflating health care costs. The Company will continue to establish premium
rates in accordance with trends in hospital and medical costs along with
concentrated efforts in various cost containment programs. However, there can be
no assurance that these efforts will fully offset the impact of inflation or
that increases in premium rates will equal or exceed increasing healthcare
costs.
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 (79.2%) of fixed income securities.
The Company's investment portfolio is exposed to market risk through
fluctuations in interest rates, changes in credit quality and principal
prepayments.
Interest Rate Risk. Interest rate risk is the price sensitivity of a fixed
income security to changes in interest rates. The Company evaluates the
potential changes in interest rates and market prices within the context of
asset and liability management. Asset and liability management involves
forecasting the payout pattern of the Company's liabilities, consisting
primarily of accident and health claim reserves, to determine duration and then
matching the duration of the liabilities to fixed income investments with a
similar duration. Through active portfolio asset and liability management, the
Company believes that interest rate risk is mitigated.
Credit Risk. The company invests primarily in fixed-income securities of the
U.S. Government and its related agencies, investment grade fixed-income
corporate securities and mortgage-backed securities. (See Item 7 - "Management's
Discussion and Analysis of Results of Operations and Financial Conditions" and
Note 3 - "Investments" to the Company's Consolidated Financial Statements.)
Approximately 0.4% 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 (over 95% investment grade),
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 50 and 100 basis points from their levels at December
31, 2001, and with all other variables held constant. A 50 and 100 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 $2.1 million and $4.1
million, respectively. Similarly, a 50 and 100 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 $2.1 million and $4.3 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
Reports of Independent Accountants 29
Financial Statements:
Ascent Assurance, Inc. Consolidated Balance Sheets at December 31, 2001 and 2000 31
Ascent Assurance, Inc. Consolidated Statements of Operations for the Years
Ended December 31, 2001 and 2000 and the Nine Months Ended December 31, 1999 32
Westbridge Capital Corp. Consolidated Statement of Operations for the Three Months
Ended March 31, 1999 33
Ascent Assurance, Inc. Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2001 and 2000 and the Nine Months Ended December 31, 1999
34
Westbridge Capital Corp. Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 1999 35
Ascent Assurance, Inc. Consolidated Statements of Changes in Stockholders' Equity for
The Years Ended December 31, 2001 and 2000 and the Nine Months Ended December 31, 1999 36
Westbridge Capital Corp. Consolidated Statement of Changes in Stockholders' Equity for
The Three Months Ended March 31, 1999 37
Ascent Assurance, Inc. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001 and 2000 and the Nine Months Ended December 31, 1999 38
Westbridge Capital Corp. Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 39
Notes to the Consolidated Financial Statements 40
Financial Statement Schedules:
II. Condensed Financial Information of Registrant 64
III. Supplementary Insurance Information 73
IV. Reinsurance 74
V. Valuation and Qualifying Accounts and Reserves 74
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, 2001 and December 31, 2000,
and the results of their operations and their cash flows for the years ended
December 31, 2001 and 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, Texas
March 8, 2002
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, 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
December 31,
---------------------------
2001 2000
------------ ------------
Assets (in thousands, except per share data)
- ------
Investments:
Fixed Maturities:
Available-for-sale, at market value (amortized cost
$90,475 and $104,081) $ 90,217 $ 100,590
Equity securities, at market (cost $1,432 and $1,365) 1,569 1,335
Other investments 314 398
Short-term investments 21,801 7,254
----------- -----------
Total Investments 113,901 109,577
Cash 2,337 2,658
Accrued investment income 1,710 1,965
Receivables from agents, net of allowance for doubtful
accounts of $4,013 and $3,711 7,412 8,737
Deferred policy acquisition costs 25,600 24,711
Property and equipment, net of accumulated depreciation
of $3,904 and $2,683 5,436 6,375
Other assets 6,197 6,455
----------- -----------
Total Assets $ 162,593 $ 160,478
=========== ===========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 61,571 $ 61,306
Claim reserves 37,202 42,778
----------- -----------
Total Policy Liabilities and Accruals 98,773 104,084
Accounts payable and other liabilities 11,760 15,667
Notes payable 18,603 8,947
----------- -----------
Total Liabilities 129,136 128,698
----------- -----------
Commitments and Contingencies
Redeemable convertible preferred stock 30,635 27,705
----------- -----------
Stockholders' Equity
Common stock ($0.01 par value, 30,000,000 shares
authorized; 6,500,000 shares issued) 65 65
Capital in excess of par value 28,017 27,620
Accumulated other comprehensive loss, net of tax (121) (2,324)
Retained Deficit (25,139) (21,286)
----------- -----------
Total Stockholders' Equity 2,822 4,075
----------- -----------
Total Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity $ 162,593 $ 160,478
=========== ===========
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Nine Months Ended
December 31, December 31,
-------------------------- -----------------
2001 2000 1999
----------- ----------- -----------------
Revenues: (in thousands, except per share data)
Premiums:
First-year $ 29,984 $ 30,984 $ 14,350
Renewal 95,222 88,924 72,021
----------- ----------- -----------------
Total Premiums 125,206 119,908 86,371
Net investment income 8,867 9,741 6,740
Fee and service income 20,916 20,391 13,069
Net realized gain (loss) on
investments 392 (454) (208)
----------- ----------- -----------------
Total Revenue 155,381 149,586 105,972
----------- ----------- -----------------
Benefits, claims and expenses:
Benefits and claims 93,376 101,940 65,699
Increase in deferred acquisition costs (889) (6,818) (4,354)
Commissions 21,445 25,010 17,891
General and administrative expense 36,871 35,159 21,034
Taxes, license and fees 4,764 5,105 3,422
Interest expense on notes payable 1,933 629 284
Recognition of premium deficiency - 1,500 -
Resolution of pre-confirmation
contingencies - - (1,235)
----------- ----------- ----------------
Total Expenses 157,500 162,525 102,741
(Loss) income before income taxes (2,119) (12,939) 3,231
Federal income tax expense - 6,003 1,125
----------- ----------- ----------------
Net (Loss) Income (2,119) (18,942) 2,106
Preferred stocks dividends 2,932 2,576 1,874
----------- ----------- -----------------
(Loss) income applicable to common
stockholders $ (5,051) $ (21,518) $ 232
=========== =========== =================
Basic and diluted net (loss) income
per common share $ (0.78) $ (3.31) $ 0.04
=========== =========== =================
Weighted average shares outstanding:
Basic 6,500 6,500 6,500
=========== =========== =================
Diluted 6,500 6,500 6,510
=========== =========== =================
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months
Ended
March 31, 1999
----------------
(In thousands, except
Revenues: per share data)
Premiums:
First-year $ 3,121
Renewal 26,827
----------------
Total Premiums 29,948
Net investment income 2,562
Fee and service income 4,263
Net realized gain on investments 41
----------------
Total Revenue 36,814
----------------
Benefits, claims and expenses:
Benefits and claims 21,799
Increase in deferred acquisition costs (862)
Commissions 6,688
General and administrative expenses 7,229
Taxes, licenses and fees 1,059
Interest expense on notes payable 119
Interest expense on retired/cancelled debt 507
----------------
Total Expenses 36,539
Income before income taxes 275
Federal income tax expense 67
----------------
Net Income 208
Preferred stock dividends -
----------------
Income applicable to common stockholders $ 208
================
Basic and diluted net income per common share $ 0.03
================
Weighted average shares outstanding:
Basic 7,032
================
Diluted 7,032
================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended Nine Months Ended
December 31, December 31,
-------------------------- -----------------
2001 2000 1999
----------- ------------ -----------------
(in thousands)
Net (loss) income $ (2,119) $ (18,942) $ 2,106
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period, net of tax 2,595 1,227 (3,956)
Reclassification adjustment of (gain)
loss on sales of investments
in net income, net of tax (392) 300 105
----------- ------------ -----------------
Comprehensive Income (Loss) $ 84 $ (17,415) $ (1,745)
=========== ============ =================
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three Months
Ended
March 31, 1999
----------------
(in thousands)
Net income $ 208
Other comprehensive income (loss):
Unrealized holding loss arising during period,
net of tax (1,959)
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (27)
----------------
Comprehensive Loss $ (1,778)
================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except 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
============= ========= =========== ============ =========== =============
Net loss (2,119) (2,119)
Preferred stock dividend (2,932) (2,932)
Other comprehensive income, net of tax 2,203 2,203
Decrease in deferred tax asset valuation
allowance attributable to unrealized
gains on investments 1,198 1,198
Amortization of unearned compensation 397 397
------------- --------- ----------- ------------ ----------- -------------
Balance at December 31, 2001 6,500,000 $ 65 $ 28,017 $ (121) $ (25,139) $ 2,822
============= ========= =========== ============ =========== =============
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except 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, 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 Ended Nine Months Ended
December 31, December 31,
-------------------------- -----------------
2001 2000 1999
----------- ----------- -----------------
Cash Flow From Operating Activities: (in thousands)
Net (loss) income $ (2,119) $ (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 255 65 139
Increase in deferred acquisition costs (889) (6,818) (4,354)
Decrease (increase) in receivables from
agents 1,325 (1,675) 1,120
Decrease (increase) in other assets 258 88 (1,200)
(Decrease) increase in policy liabilities
and accruals (5,311) 8,189 89
Decrease (increase) in accounts payable
and accruals (3,907) 2,075 (4,949)
Decrease in deferred income taxes, net - 7,086 261
Other, net 3,836 3,557 1,707
----------- ----------- -----------------
Net Cash Used for Operating Activities (6,552) (4,875) (5,081)
----------- ----------- -----------------
Cash Flow From Investing Activities:
Purchase of fixed maturity investments (24,423) (55,678) (9,001)
Sales of fixed maturity investments 30,826 49,463 17,096
Maturities and calls of fixed maturity
investments 7,074 4,631 1,132
Net (increase)decrease in short term and
other investments (14,531) 3,665 873
Property and equipment purchased (918) (1,443) (4,193)
----------- ----------- -----------------
Net Cash (Used for) Provided by
Investing Activities (1,972) 638 5,907
----------- ----------- -----------------
Cash Flow From Financing Activities:
Issuance of notes payable 11,305 2,873 4,129
Repayment of notes payable (2,635) (1,088) (2,055)
Deferred debt costs (467) - -
----------- ----------- -----------------
Net Cash Provided by Financing Activities 8,203 1,785 2,074
----------- ----------- -----------------
(Decrease) Increase in Cash During Period (321) (2,452) 2,900
Cash at Beginning of Period 2,658 5,110 2,210
----------- ----------- -----------------
Cash at End of Period $ 2,337 $ 2,658 $ 5,110
=========== =========== =================
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months
Ended
March 31, 1999
----------------
Cash Flows From Operating Activities: (in thousands)
Net income $ 208
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Increase in deferred acquisition costs (862)
Decrease in receivables from agents 1,678
Increase in other assets (1,007)
Decrease in policy liabilities and accruals (2,181)
Increase in accounts payable and accruals 4,428
Decrease in deferred income taxes, net (1,070)
Other, net 1,308
----------------
Net Cash Provided By Operating Activities 2,502
----------------
Cash Flows From Investing Activities:
Proceeds from investments sold:
Fixed maturities, called or matured 2,215
Fixed maturities, sold 4,904
Other investments, sold or matured 139
Cost of investments acquired (5,851)
Other (873)
----------------
Net Cash Provided By Investing Activities 534
----------------
Cash Flows From Financing Activities:
Retirement of senior subordinated debentures (15,167)
Issuance of preferred stock 15,167
Issuance of notes payable 911
Repayment of notes payable (2,015)
----------------
Net Cash Used For Financing Activities (1,104)
----------------
Increase In Cash During Period 1,932
Cash At Beginning Of Period 278
----------------
Cash At End Of Period $ 2,210
================
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 14). 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 2001 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 14). 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. In December 2001,
deferred policy acquisition costs and policy liabilities and accruals were both
increased by $650,000 to reflect corrections of the fresh start balance sheet.
These corrections had no impact on Ascent's reorganization book value or
stockholders' equity as subsequently reported.
The effects of the Plan and fresh start reporting on the Company's consolidated
balance sheet as of March 31, 1999 are as follows (in thousands):
Westbridge Issue New Issue New Fresh Start Ascent
03/31/1999 Preferred (a) Common (b) Adjustments(c) 03/31/1999
------------- ------------- ------------ -------------- ------------
Assets
Total investments $ 126,932 $ $ $ $ 126,932
Cash 2,210 2,210
Accrued investment income 2,169 2,169
Agent receivables, net 8,182 8,182
Deferred policy acquisition costs 15,039 15,039
Deferred tax asset, net 1,070 6,277 7,347
Other assets 13,504 (3,088) (2,500) 7,916
------------- ------------- ------------ -------------- ------------
Total assets $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795
============= ============= ============ ============== ============
Liabilities, Preferred Stock & Equity
Policy liabilities and accruals $ 95,806 $ $ $ $ 95,806
Accounts payable and accruals 18,790 (249) 18,541
Notes payable 5,088 5,088
Accrued dividends 1,304 (1,304) -
Accrued interest 10,518 (3,257) (7,261) -
Senior subordinated notes, net 19,523 (19,523) -
Convertible subordinated notes 70,000 (70,000) -
------------- ------------- ------------ -------------- ------------
Total liabilities 221,029 (22,780) (78,565) (249) 119,435
Old Series A preferred stock 11,935 (11,935) -
New Series A preferred stock 23,257 23,257
------------- ------------- ------------ -------------- ------------
Total preferred stock 11,935 23,257 (11,935) - 23,257
Old common stock 703 (703) -
New common stock 65 65
Additional paid in capital 37,641 91,138 (101,741) 27,038
Accumulated other comprehensive
income, net of tax 1,925 (1,925) -
Retained earnings (104,127) (477) (3,088) 107,692 -
------------- ------------- ------------ -------------- ------------
Total equity (63,858) (477) 87,412 4,026 27,103
------------- ------------- ------------ -------------- ------------
Total liabilities, preferred
stock and equity $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795
============= ============= ============ ============== ============
(a) Reflects issuance of 23,257 shares of New Preferred Stock to CSFB for $15.2
million in cash and exchange of Senior Notes held by CSFB, including
accrued interest, for $8.1 million. Includes simultaneous retirement of
Senior Notes held by holders other than CSFB, including accrued interest,
for $15.2 million and write-off of unamortized debt discount of $0.5
million.
(b) Reflects issuance of 6,500,000 shares of New Common Stock in exchange for
Convertible Notes, Old Preferred Stock , Old Common Stock and settlement of
general unsecured claims. Includes 32,500 shares of New Common Stock issued
to management on the Effective Date, and includes write-off of unamortized
debt issuance costs of $3.1 million.
(c) Reflects adjustments to record assets and liabilities at fair market value
and to set retained earnings to zero.
The following significant accounting policies are applicable to the financial
statements of both Ascent and Westbridge, unless otherwise indicated.
Cash Equivalents. Cash equivalents consists of highly liquid instruments with
maturities at the time of acquisition of three months or less. Cash equivalents
are stated at cost, which approximates market.
Short-Term Investments. Short-term investments are stated at cost, which
approximates market.
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.
Agent Receivables. In the ordinary course of business, the Company advances
commissions on policies written by its general agencies and their agents. Net
agent receivables were $7.4 million and $8.7 million at December 31, 2001 and
2000, respectively. 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.
The Company routinely establishes a reserve for uncollectible agent's balances
based upon historical experience and projected commission earnings. As of
December 31, 2001 and 2000, the Company's allowance for uncollectible commission
advances was $4.0 million and $3.7 million, respectively.
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. Changes impacting the Company include: (1)
changes in economic conditions; (2) changes in state or federal laws and
regulations, particularly insurance reform measures; (3) writings of significant
blocks of new business and (4) significant changes in claims payment patterns as
a result of the implementation of a new claims administration system in May
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.
Notes Payable. Notes payable are stated at cost, which approximates market.
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, 2001 and 2000 is fully reserved as discussed at Note 9.
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.
For the years 2001 and 2000, stock options of 1,085,850 and 944,600,
respectively, that could potentially dilute basic earnings per share in the
future were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive.
The following tables reflect the calculation of basic and diluted earnings per
share:
Year Ended Nine Months Ended
December 31, December 31,
------------------------ -----------------
Ascent Assurance, Inc. 2001 2000 1999
----------- ----------- -----------------
(in thousands, except per share data)
Basic:
(Loss) income available to common shareholders $ (5,051) $ (21,518) $ 232
=========== =========== =================
Weighted average shares outstanding 6,500 6,500 6,500
=========== =========== =================
Basic (loss) earnings per share $ (0.78) $ (3.31) $ 0.04
=========== =========== =================
Diluted:
(Loss) income available to common shareholders $ (5,051) $ (21,518) $ 232
=========== =========== =================
Weighted average shares outstanding 6,500 6,500 6,510
=========== =========== =================
Diluted (loss) earnings per share $ (0.78) $ (3.31) $ 0.04
=========== =========== =================
Three Months
Ended
Westbridge Capital Corp. March 31, 1999
--------------
Basic:
Income available to common shareholders $ 208
==============
Weighted average shares outstanding 7,032
==============
Basic earnings per share $ 0.03
==============
Diluted:
Income available to common shareholders $ 208
==============
Weighted average shares outstanding 7,032
==============
Diluted earnings per share $ 0.03
==============
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. Important factors known to
management that could cause actual results to differ materially from those
contemplated by estimates include, but are not limited to:
any limitation imposed on the Company's ability to control the impact of
rising health care costs, especially prescription drugs, and rising medical
service utilization rates through product and benefit design, underwriting
criteria, premium rate increases, utilization management and negotiation of
favorable provider contracts;
the impact of changing health care trends on the Company's ability to
accurately estimate claim and settlement expense reserves;
developments in health care reform and other regulatory issues, including
the Health Insurance Portability and Accountability Act of 1996 and
increased privacy regulation, and changes in laws and regulations in key
states where the Company operates;
the company's ability to meet minimum regulatory capital requirements for
its Insurance Subsidiaries;
ability of the Company to maintain adequate liquidity for its non-insurance
subsidiary operations, including financing by NCM of commission advances to
agents;
default by issuers of fixed maturity investments owned by the Company;
and the loss of key management personnel.
Recently Issued Accounting Pronouncements. In 1998, the NAIC adopted the
Codification of Statutory Accounting Principles guidance replaced the 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 Department of the State of domicile of the Company's
Insurance Subsidiaries adopted the Codification effective January 1, 2001.
Codification did not materially impact the statutory surplus of the Company's
Insurance Subsidiaries.
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.
In June 2001, the FASB issued SFAS No.141, "Business Combinations" (SFAS 141").
This statement supercedes APB Opinion No. 16, "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises", and establishes accounting and reporting standards for business
combinations. Under the statement, all business combinations in the scope of the
statement are to be accounted for using one method, the purchase method. The
provisions of the statement apply to all business combinations initiated after
June 30, 2001. As the Company has not been a part of any business combination
initiated after the effective date, the Company's financial statements are not
affected by SFAS 141.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal
years beginning after December 15, 2001. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. SFAS 142 (1) prohibits the amortization of goodwill and
indefinite-lived intangible assets, (2) requires testing of goodwill and
indefinite-lived intangible assets on an annual basis for impairment (and more
frequently if the occurrence of an event or circumstance indicates an
impairment), (3) requires that reporting units be identified for the purpose of
assessing potential future impairments of goodwill and (4) removes the
forty-year limitation on the amortization period of intangible assets that have
finite lives. The Company will adopt SFAS 142 on January 1, 2002. The Company
does not expect to recognize an impairment loss upon adoption of SFAS 142. The
Company has no goodwill or indefinite-lived intangible assets. The Company has
identified intangible assets totaling $3.0 million included in deferred policy
acquisition costs representing the estimated present value of future profits of
certain insurance policies acquired prior to March 1999. The Company has
determined that there is no indication of impairment related to these assets and
that the useful lives assigned to the assets are appropriate. Going forward, the
Company will test these intangibles for impairment annually or more frequently
if the occurrence of an event or circumstances indicates impairment.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 will be effective for financial statements issued
for fiscal years beginning after June 15, 2002. An entity shall recognize the
cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. The Company does not expect the adoption of the statement to
materially impact the Company's results of operations and financial position.
In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The Statement requires that long-lived assets
to be disposed of other than by sale be considered held and used until they are
disposed of. SFAS No. 144 requires that long-lived assets to be disposed of by
sale be accounted for under the requirements of SFAS No. 121. SFAS No. 121
requires that such assets be measured at the lower of carrying amounts or fair
value less cost to sell and to cease depreciation (amortization). SFAS No. 144
requires a probability-weighted cash flow estimation approach in situations
where alternative courses of action to recover the carrying amount of a
long-lived asset are under consideration or a range of possible future cash flow
amounts are estimated. As a result, discontinued operations will no longer be
measured on a net realizable basis, and future operating losses will no longer
be recognized before they occur. Additionally, goodwill will be removed from the
scope SFAS No. 121. As a result goodwill will no longer be required to be
allocated to long-lived assets to be tested for impairment. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company
does not expect the adoption of the statement to materially impact the Company's
results of operations and financial position.
NOTE 3 - INVESTMENTS
Major categories of investment income are summarized as follows:
Westbridge
Ascent Assurance, Inc. Capital Corp.
--------------------------------------------- --------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31
------------------------- ----------------- --------------
2001 2000 1999 1999
----------- ----------- ----------------- --------------
(in thousands)
Fixed maturities $ 6,424 $ 7,088 $ 5,368 $ 2,125
Short-term investments 458 741 291 86
Interest on receivables from agents 1,998 1,936 941 345
Other 138 189 201 73
----------- ----------- ----------------- --------------
9,018 9,954 6,801 2,629
Less: Investment expenses 151 213 61 67
----------- ----------- ----------------- --------------
Net investment income $ 8,867 $ 9,741 $ 6,740 $ 2,562
=========== =========== ================= ==============
Realized gain (loss) on investments are summarized as follows:
Westbridge
Ascent Assurance, Inc. Capital Corp.
--------------------------------------------- -------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31
------------------------- ----------------- --------------
2001 2000 1999 1999
------------ ----------- ----------------- --------------
(in thousands)
Fixed maturities $ 392 $ (454) $ (162) $ 40
Equity securities - - (37) 1
Other - - (9) -
------------ ----------- ----------------- --------------
Realized gain (loss)on investments $ 392 $ (454) $ (208) $ 41
============ =========== ================= ==============
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:
--------------------------
Year Ended
December 31,
--------------------------
2001 2000
----------- -----------
(in thousands)
Balance at beginning of period $ (2,324) $ (3,851)
Unrealized appreciation, net of tax, on
fixed maturities available-for-sale 2,046 1,513
Unrealized appreciation, net of tax , on
equity securities and other investments 157 14
----------- -----------
Balance at end of period $ (121) $ (2,324)
=========== ===========
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, 2001 Available-for-Sale Cost Gains Losses Value
- ------------------------------------ ---- ----- ------ -----
(in thousands)
U.S. Government and governmental
agencies and authorities $ 10,581 $ 273 $ 31 $ 10,823
States, municipalities, and political
subdivisions 2,197 33 4 2,226
Finance companies 20,025 373 91 20,307
Public utilities 7,651 62 261 7,452
Mortgage-backed securities 10,754 87 110 10,731
All other corporate bonds 39,267 527 1,116 38,678
----------- ------------ ----------- -----------
Balance at December 31, 2001 $ 90,475 $ 1,355 $ 1,613 $ 90,217
=========== ============ =========== ===========
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
=========== ============ =========== ===========
The amortized cost and estimated market value of investments in
available-for-sale fixed maturities as of December 31, 2001, 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 $ 5,846 $ 5,909
Due after one year through five years 26,972 27,451
Due after five years through ten years 24,005 24,165
Due after ten years 22,898 21,961
Mortgage-backed securities 10,754 10,731
----------- -----------
$ 90,475 $ 90,217
=========== ===========
A summary of unrealized depreciation 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, is
as follows:
December 31,
--------------------------
2001 2000
----------- -----------
(in thousands)
Amortized cost $ 91,907 $ 105,446
Estimated market value 91,786 101,925
----------- -----------
Deficit of market value to amortized cost (121) (3,521)
Estimated tax benefit - (1,197)
----------- -----------
Unrealized depreciation, net of tax $ (121) $ (2,324)
=========== ===========
At December 31, 2000, the estimated tax benefit related to unrealized investment
losses has been fully reserved (see Note 9).
Proceeds from sales and maturities of investments in fixed maturity securities
were approximately $37.9 million and $54.1 million for 2001 and 2000
respectively, $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 $0.7
million and gross losses of $0.3 million were realized on fixed maturity
investment sales during 2001. 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, 2001 and 2000, are high-yield,
unrated or less than investment grade corporate debt securities comprising
approximately 0.4% and 0.9% of fixed maturities at December 31, 2001 and 2000,
respectively.
Investment securities on deposit with insurance regulators in accordance with
statutory requirements at December 31, 2001 and 2000 had a par value totaling
$26.4 million and $27.2 million, respectively. At December 31, 2001 and 2000,
the Company had pledged short-term investments totaling $2.6 million in
connection with its receivables financing program (see Note 6).
NOTE 4 - FUTURE POLICY BENEFITS
Future policy benefits for Accident and Health insurance products have been
calculated using assumptions (which generally contemplate the risk of adverse
deviation) for withdrawals, interest, mortality and morbidity appropriate at the
time the policies were issued. The more material assumptions are as follows:
Withdrawals Issues through 1980 are based on industry experience; 1981
through 2001 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 5 - CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending claim
reserve balances, on a gross-of-reinsurance basis, for 2001, 2000 and 1999, to
the amounts reported in the Company's balance sheet:
Westbridge
Ascent Assurance, Inc. Capital Corp.
------------------------------------------------- -------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31
---------------------------- ----------------- --------------
2001 2000 1999 1999
------------ ------------ ----------------- --------------
(in thousands)
Balance, beginning of the year (gross) $ 42,778 $ 38,776 $ 41,068 $ 44,116
Less: reinsurance recoverables on claim
reserves 2,491 1,501 1,871 1,765
------------ ------------ ----------------- --------------
Net Balance at beginning of period 40,287 37,275 39,197 42,351
Incurred related to:
Current year 94,527 94,516 60,255 19,401
Prior years (1,785) 1,550 2,213 1,596
------------ ------------ ----------------- --------------
Total incurred 92,742 96,066 62,468 20,997
------------ ------------ ----------------- --------------
Paid related to:
Current year 66,250 61,834 47,300 5,277
Prior years 31,577 31,220 17,090 18,874
------------ ------------ ----------------- --------------
Total incurred 97,827 93,054 64,390 24,151
------------ ------------ ----------------- --------------
Balance at end of period 35,202 40,287 37,275 39,197
Plus: reinsurance recoverables on claim
reserves 2,000 2,491 1,501 1,871
------------ ------------ ----------------- --------------
Balance at end of period (gross) $ 37,202 $ 42,778 $ 38,776 $ 41,068
============ ============ ================= ==============
Included in reinsurance recoverables on claim reserves is approximately $0.9
million, $1.5 million, $0.5 million and $0.9 million relating to paid claims as
of December 31, 2001, 2000, 1999 and March 31, 1999, respectively.
NOTE 6 - FINANCING ACTIVITIES
CSFB Financing. Ascent received debt financing to fund an $11 million capital
contribution to FLICA in April 2001 from Credit Suisse First Boston Management
Corporation, ("CSFB"), which is an affiliate of Special Situations Holdings,
Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating
to that loan ("CSFB Credit Agreement") 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. During 2001, Ascent issued
$987,000 in additional notes for payment of interest in kind which increased the
notes payable balance to CSFB at December 31, 2001 to approximately $12 million.
The CSFB Credit Agreement provides for a facility fee of $1.5 million which is
payable upon maturity or upon a change in control, as defined. This facility fee
is being accrued as additional interest payable over the term of the loan.
Ascent's obligations to CSFB 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 bank financing described below).
Ascent's subsidiaries (other than those listed above) have also guaranteed
Ascent's obligations under the CSFB Credit Agreement. At December 31, 2001,
there were no events of default; however, adverse claims experience in excess of
management's current expectations could result in events of default under the
CSFB Credit Agreement.
Bank Financing. The majority of commission advances to NCM's agents are financed
through Ascent Funding, Inc. ("AFI"), an indirect wholly owned subsidiary of
Ascent. AFI has entered into a Credit Agreement (the "Credit Agreement") with
LaSalle which currently provides AFI with a $7.5 million revolving loan
facility, the proceeds of which are used to purchase agent advance receivables
from NCM and other affiliates. As of December 31, 2001, $4.4 million was
outstanding under the Credit Agreement (weighted average interest rate of 7.7%).
AFI incurs a commitment fee on the unused portion of the Credit Agreement at a
rate of 0.50% per annum. Interest of $0.4 million, $0.5 million and $0.3 million
was expensed and paid in 2001, 2000 and 1999, respectively.
The Credit Agreement expires December 5, 2002, at which time the outstanding
principal and interest will be due and payable. Under the terms of the Credit
Agreement, agent advances made within six months of the expiration date (after
June 5, 2002) are not eligible for financing. Failure of the Company to obtain
additional renewals of the Credit Agreement beyond December 2002 could have a
material adverse impact on Ascent's liquidity and capital resources. Lack of
adequate financing would impair the Company's ability to pay competitive
commission advances and reduce new business sales needed to replace the normal
lapsing of existing policies. Therefore, failure by Ascent to maintain new
business sales at current levels would result in declining premium revenue and
could have a material adverse impact on Ascent's results of operations.
AFI's obligations under the Credit Agreement are secured by liens upon
substantially all of AFI's assets. AFI's principal assets at December 31, 2001
are net agent receivables of $7.4 million and a short-term investment account,
pledged to LaSalle, of $2.6 million. In addition, Ascent 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 December 31,
2001, there were no events of default under the Credit or Guaranty Agreements.
However, adverse claims experience in excess of management's current
expectations could result in events of default under the Guaranty Agreement,
Credit Agreement and the term loan facility discussed below.
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, 2001, $2.2 million was
outstanding under the term loan facility (weighted average interest rate of
6.16%). Interest of $0.2 million was expensed and paid in 2001 and 2000.
Interest of $0.1 million was capitalized and paid in 1999.
NOTE 7 - PREFERRED STOCK
The Company has authorized 40,000 shares of non-voting preferred stock. At
December 31, 2001, 30,635 shares of preferred stock were outstanding, all of
which are owned by Special Situations Holdings, Inc. - Westbridge, Ascent's
largest common stockholder.
The following summarizes the significant terms of the preferred stock:
Stated value of $1,000 per share.
Cumulative annual dividend rate of $102.50 per share payable, at a minimum,
annually in arrears by the last day of January in each year by issuance of
cash or additional shares of preferred stock.
Each share of preferred stock is convertible at any time in 204.8897 shares
of common stock at an initial conversion price of $4.88 per share, subject
to customary anti-dilution adjustments.
The preferred stock is mandatorily redeemable in cash on March 24, 2004 in an
amount equal to the stated value per share plus all accrued and unpaid dividends
thereon to the date of redemption.
During 2001, Ascent paid preferred stock dividends through the issuance of 2,930
additional shares of preferred stock and $1,603 in distributions of cash. 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 issuance of 1,873 additional shares of preferred stock and a $965
distribution of cash.
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS ("DPAC")
A summary of DPAC follows (in thousands):
Westbridge
Ascent Assurance, Inc. Capital Corp.
------------------------------------------------ ---------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31,
--------------------------- ----------------- ---------------
2001 2000 1999 1999
----------- ------------ ----------------- ---------------
Balance at beginning of period $ 24,711 $ 19,393 $ 15,039 $ 14,177
Deferrals 8,563 9,816 5,832 1,148
Adjustment of Fresh Start Balance Sheet 645 - - -
Recognition of premium deficiency - (1,500) - -
Amortization expense (8,319) (2,998) (1,478) (286)
----------- ------------ ----------------- ---------------
Balance at end of period $ 25,600 $ 24,711 $ 19,393 $ 15,039
=========== ============ ================= ===============
The Company routinely evaluates the recoverability of deferred acquisition costs
in accordance with GAAP. In general, a premium deficiency exists if the present
value of future net cash 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 net cash flows includes assumptions as to
future rate increases and persistency. As a result of losses in 2000 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.
NOTE 9 - INCOME TAXES
The provision for (benefit from) income taxes is calculated as the amount of
income taxes expected to be payable for the current year plus (or minus) the
deferred income tax expense (or benefit) represented by the change in the
deferred income tax accounts at the beginning and end of the year. The effect of
changes in tax rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation allowance, reducing any recognized
deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized.
No taxes were paid in 2001. Taxes (recovered) paid in 2000 and 1999 were $(1.2)
million and $80,000 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 consolidated
return in 2000.
The provision for (benefit from) U.S. federal income taxes charged to continuing
operations was as follows:
Westbridge
Ascent Assurance, Inc. Capital Corp.
--------------------------------------------- --------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31
------------------------- ----------------- --------------
2001 2000 1999 1999
----------- ----------- ----------------- --------------
(in thousands)
Current $ - $ (206) $ (1,199) $ 67
Deferred - 6,209 2,324 -
----------- ----------- ----------------- --------------
Total provision for income taxes $ - $ 6,003 $ 1,125 $ 67
=========== =========== ================= ==============
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:
Westbridge
Ascent Assurance, Inc. Capital Corp.
--------------------------------------------- --------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31
------------------------- ----------------- --------------
2001 2000 1999 1999
----------- ----------- ----------------- --------------
Statutory tax rate (34%) (34%) 34% 34%
Change in valuation allowance 35% 80% - -
Unutilized loss carry-forwards - - 2% (9%)
Other items, net (1%) - (1%) (1%)
----------- ----------- ----------------- --------------
Effective tax rate - 46% 35% 24%
=========== =========== ================= ==============
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,
---------------------------
2001 2000
----------- -----------
(in thousands)
Deferred Tax Assets:
Unrealized loss on investments $ - $ 1,198
Policy reserves 4,116 6,792
Net operating loss carryforwards 17,939 13,538
Other deferred tax assets 1,800 3,055
----------- -----------
Total deferred tax asset $ 23,855 $ 24,583
----------- -----------
Deferred Tax Liabilities:
Deferred policy acquisition costs $ 2,533 $ 1,361
Other deferred tax liabilities 3,481 4,959
----------- -----------
Total deferred tax liability $ 6,014 $ 6,320
----------- -----------
Net Deferred Tax Asset Before Valuation
allowance $ 17,841 $ 18,263
Less Valuation Allowance (17,841) (18,263)
----------- -----------
Net Deferred Tax Asset $ - $ -
=========== ===========
As of December 31, 2001, 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 2001 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, 2001 are as follows:
Westbridge
Ascent Assurance, Inc. Capital Corp.
--------------------------------------------- ---------------
Year Ended Nine Months Ended Three Months
December 31, December 31, Ended March 31,
------------------------- ----------------- ---------------
2001 2000 1999 1999
----------- ----------- ----------------- ---------------
(in thousands)
Valuation allowance, beginning of
year $ (18,263) $ (16,949) $ (16,949) $ (36,449)
Decrease related to permanent
limitations of net operating loss
carry-forwards - 9,081 - 19,500
Decrease attributable to unrealized
gains on investments 1,198 - - -
Increase charged to income (776) (10,395) - -
----------- ----------- ----------------- ---------------
Valuation allowance, end of year $ (17,841) $ (18,263) $ (16,949) $ (16,949)
=========== =========== ================= ===============
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, 2001, 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 both December 31, 2001 and 2000, NFL had approximately $7.8 million in its
shareholders surplus account from which it could make distributions to the
Company without incurring any federal tax liability. The amount of dividends
which may be paid by NFL to the Company is limited by statutory regulations.
At December 31, 2001, the Company and its wholly owned subsidiaries have
aggregate net operating loss carryforwards, net of bankruptcy related tax
attribute reductions, of approximately $52.9 million for regular tax and $53.3
million for alternative minimum tax purposes, which will expire in 2003 through
2016.
NOTE 10 - STATUTORY CAPITAL AND SURPLUS
Under the applicable laws of the states in which insurance companies are
licensed, the companies are required to maintain minimum amounts of capital and
surplus. 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, 2001,
aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was
approximately $6.5 million, $8.8 million, $1.6 million and $1.8 million,
respectively. Although NFIC's capital and surplus is less than $5.0 million at
December 31, 2001, 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.
As a result of losses from the GPPO comprehensive major medical product, FLICA
required significant capital contributions during 2000 and 2001 to comply with
minimum statutory capital and surplus requirements. In April 2001, Ascent
obtained debt financing of $11 million from an affiliate of its largest
stockholder. The proceeds of this loan were used to fund an $11 million capital
contribution to FLICA. Adverse claims experience for the GPPO product in excess
of management's current expectations or adverse claims experience for other
insurance products could have a material adverse impact on the Insurance
Subsidiaries' ability to meet minimum statutory capital and surplus requirements
and maintain new business production at current levels and therefore have a
material adverse impact on Ascent's liquidity and capital resources and results
of operations.
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. Due to recent statutory losses incurred by the Insurance Subsidiaries,
the Company does not expect to receive any dividends from the Insurance
Subsidiaries for the foreseeable future.
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 will perform a special
examination of the company and issue an order specifying the corrective actions
that must be followed. If a Company's total adjusted capital is less than 50
percent but greater than or equal to 35 percent of its RBC (the "Authorized
Control Level"), the regulatory authority may take any action it deems
necessary, including placing the company under regulatory control. If a
company's total adjusted capital is less than 35 percent of its RBC (the
"Mandatory Control Level"), the regulatory authority must place the company
under its control. The NAIC's requirements are effective on a state by state
basis if, and when, they are adopted by the regulators in the respective states.
The 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,
2001 filed with the Texas Department of Insurance reflect total adjusted capital
in excess of Company Action Level RBC.
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, 2001, 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, 2001,
the premium writing ratio for FLICA, which currently underwrites insurance
policies in Florida, met the limit mandated by Florida law.
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 the NAIC Codification of Statutory Accounting
practices as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
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 and net income (loss) is as follows:
December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Consolidated statutory capital and surplus $ 16,960 $ 13,014 $ 16,990
Deferred acquisition costs 25,600 24,711 19,393
Future policy benefits and claims (7,049) (14,338) (9,518)
Unrealized gain (loss) on investments, net of tax 925 (723) (2,585)
Income taxes (892) - 3,363
Non-admitted assets 9 258 1,490
Asset valuation reserve 494 674 687
Interest maintenance reserve 1,389 780 1,251
Other 303 (139) (273)
Capital contributions to insurance subsidiaries (38,189) (21,362) (8,962)
Non-insurance subsidiaries and eliminations 3,272 1,200 1,948
----------- ----------- -----------
GAAP stockholders' equity $ 2,822 $ 4,075 $ 23,784
=========== =========== ===========
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Consolidated statutory net income $ (12,725) $ (16,956) $ (6,486)
Deferred acquisition costs, net of amortization 889 6,818 5,217
Future policy benefits and claims 4,804 (5,761) 228
Recognition of premium deficiency - (1,500) -
Income taxes (1,835) (4,754) (4,366)
Other 1,364 261 (384)
Non-insurance subsidiaries and eliminations 5,384 2,950 8,105
----------- ----------- -----------
GAAP net (loss) income $ (2,119) $ (18,942) $ 2,314
=========== =========== ===========
NOTE 11 - EMPLOYEE BENEFIT PLANS
In September 1986, the Company established a retirement savings plan ("401(k)
plan") for its employees. As amended in August 1999, all employees are eligible
to participate in the 401(k) plan upon completion of six months of service. The
401(k) plan is qualified under Section 401(a) of the Internal Revenue Code
("IRC") and the trust established to hold the assets of the 401(k) plan is
tax-exempt under Section 501 (a) of the IRC. Ascent Assurance, Inc. is the plan
administrator, and may amend, terminate or suspend contributions to the plan at
any time it may deem advisable. Employees who elect to participate may
contribute up to 10% of pre-tax compensation, including commissions, bonuses and
overtime. The Company may make discretionary contributions, determined by the
Company's Board of Directors, up to 50% of the employees' first 3% of deferred
compensation. Certain IRC required limitations may be imposed for participants
who are treated as "highly compensated employees" for purposes of the IRC.
Participants vest 25% after one year of service, 50% after two years of service,
75% after three years of service and 100% after 4 years of service. Employee
contributions are invested in any of ten investment funds at the discretion of
the employee. Generally, the Company contributions are in the form of common
stock. During the period of July 1998 through October 1999, the Company made
cash contributions. The Company's contributions to the 401 (k) plan in 2001,
2000 and 1999 approximated $81,000, $92,000 and $96,000, 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 (see Note 14).
1999 Stock Option Plan 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 (see Note 14). Pursuant to the 1999 Plan,
1,251,685 shares of common stock are reserved for issuance to employees and
directors and 387,119 shares are reserved for issuance to the Company's
marketing agents. The maximum term of an award under the 1999 Plan is 10 years.
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,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Outstanding at January 1 944,600 1,096,750 -
Granted 155,750 42,950 1,106,750
Exercised - - -
Forfeit / Cancelled (14,500) (195,100) (10,000)
-------------- -------------- --------------
Outstanding at December 31 1,085,850 944,600 1,096,750
============== ============== ==============
The weighted average option exercise price was $2.63, $2.82 and $2.88 for
options outstanding at December 31, 2001, 2000 and 1999, respectively. For
options granted, weighted average exercise price was $1.49, $1.63 and $2.85 for
2001, 2000 and 1999. For options forfeited, the weighted average exercise price
was $2.77, $2.74 and $2.85, respectively.
The weighted average fair value of options granted during 2001, 2000 and 1999
was $1.26, $1.57 and $2.85. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following significant weighted-average assumptions used for grants in 2001, 2000
and 1999, respectively: dividend yield of 0% for all years; expected volatility
of 1.218, 1.839 and 1.142; risk free interest rate of 4.65% for 2001, 6.57% for
2000 and 1999; expected life of 5 years for all 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 $0.4 million in 2001, and $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 would have been ($2.5) million or ($0.84) per
basic share and diluted share for 2001 and ($19.1) million or ($3.33) per basic
share and diluted share for 2000. 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, 2001:
Options Outstanding Options Exercisable
- ------------------------------------------------ -----------------------------
Weighted Average
Weighted Average Number Remaining # Shares Weighted Average
Exercise Prices Outstanding Contractual Life Exercisable Exercise Price
- ---------------- ----------- ---------------- ----------- ----------------
$0.01 270,900 7.25 135,000 $0.01
$1.49 155,750 9.75 - -
$1.63 29,850 8.25 - -
$3.00 135,000 .25 135,000 $3.00
$4.39 494,350 7.25 - -
------------ ---------------- ----------- ----------------
1,085,850 6.74 270,000 $1.51
============ ================ =========== ================
NOTE 12 - REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on
both life and accident and health business. Reinsurance agreements are used to
limit maximum losses and provide greater diversity of risk. The Company remains
liable to policyholders to the extent the reinsuring companies are unable to
meet their treaty obligations. Total premiums ceded to other companies were $2.8
million, $4.0 million and $2.6 million for 2001, 2000 and 1999, respectively.
Face amounts of life insurance in force ceded approximated $16.6 million, $12.6
million and $6.5 million at December 31, 2001, 2000 and 1999, 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 $125,000. 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 13 - COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating leases,
relating primarily to office facilities and data processing equipment having a
remaining term in excess of one year, at December 31, 2001, aggregated $7.4
million. The amounts due by year are as follows: 2002 - $2.2 million; 2003 -
$1.8 million; 2004 - $1.1 million; 2005 - $1.0 million; 2006 - $0.4 million; and
thereafter - $ 0.9 million. Aggregate rental expense included in the
consolidated financial statements for all operating leases approximated $2.0
million, $2.1 million and $2.4 million in 2001, 2000 and 1999, respectively.
In the normal course of their business operations, the Insurance Subsidiaries,
continue to be involved in various claims, lawsuits (alleging actual as well as
substantial exemplary damages) and regulatory matters. In the opinion of
management, the disposition of these or any other legal matters will not have a
material adverse effect on the Company's business, consolidated financial
position or results of operations.
The Company's Insurance Subsidiaries are subject to extensive governmental
regulation and supervision at both federal and state levels. Such regulation
includes premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy, transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have
significant impact on the Company's results of operations.
NOTE 14 - REORGANIZATION EFFECTIVE MARCH 24, 1999
On September 16, 1998, Westbridge Capital Corp., ("Westbridge") commenced its
reorganization by filing a voluntary petition for relief under Chapter 11, Title
11 of the United States Code in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"), along with a disclosure statement
(as amended, the "Disclosure Statement") and a proposed plan of reorganization
(as amended, the "Plan"). The filing of the Disclosure Statement and Plan
culminated months of negotiations between Westbridge and an ad hoc committee
(the "Creditors' Committee") of holders of its 11% Senior Subordinated Notes due
2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004
(the "Convertible Notes"). The Disclosure Statement was approved by entry of an
order by the Bankruptcy Court on October 30, 1998. Following the approval of the
Plan by the holders of allowed claims and equity interests, the Bankruptcy Court
confirmed the Plan on December 17, 1998. The Plan became effective March 24,
1999 (the "Effective Date").
On the Effective Date, Westbridge's certificate of incorporation and by-laws
were amended and restated in their entirety and pursuant thereto, Westbridge
changed its corporate name to "Ascent Assurance, Inc." ("Ascent"). References
herein to the "Company" shall mean for all periods on or prior to March 31,
1999, Westbridge and its subsidiaries, and for all periods on or after the close
of business on March 31, 1999, Ascent and its subsidiaries.
The following summary of the Plan omits certain information set forth in the
Plan. Any statements contained herein concerning the Plan are not necessarily
complete, and in each such instance reference is made to the Plan, a copy of
which is incorporated by reference to Exhibit 2 of Westbridge's Current Report
on Form 8-K which was filed with the Securities and Exchange Commission on
December 29, 1998. Each such statement is qualified in its entirety by such
reference. The Plan provided for the recapitalization of certain old debt and
equity interests in Westbridge and the issuance of new equity securities and
warrants. Key terms of the Plan included the following:
Cancellation of Existing Securities. Pursuant to the Plan, the following
securities of Westbridge were canceled as of the Effective Date: (i) $23.3
million aggregate principal amount and all accrued and unpaid interest on, the
Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and
unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate
liquidation preference of and all accrued and unpaid dividends on, Westbridge's
Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred
Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old
Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi)
all outstanding unexercised stock options to purchase Old Common Stock, and
(vii) all unvested grants of restricted Old Common Stock.
New Equity Capital Structure Pursuant to Ascent's Amended and Restated
Certificate of Incorporation, the total number of shares of capital stock Ascent
has the authority to issue is 30,040,000, consisting of 30,000,000 shares of
common stock, par value $.01 per share (the "New Common Stock") and 40,000
shares of preferred stock, par value $.01 per share, all of which are designated
Series A Convertible Preferred Stock (the "New Preferred Stock").
DISTRIBUTIONS UNDER THE PLAN
Cash Distribution
To the holders of Senior Notes other than Credit Suisse First Boston Corporation
("CSFB"), cash payments totaling approximately $15.2 million, which equaled the
total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors
other than CSFB, were distributed subject to completion of the exchange of
securities as contemplated by the Plan. In order to provide the Company with
sufficient funds to make the cash distribution to the holders of the Allowed 11%
Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate")
purchased all of the shares of the New Preferred Stock which were not otherwise
distributed under the Plan.
Issuance of New Securities
Pursuant to the Plan and the purchase of New Preferred Stock, 6,500,000 shares
of New Common Stock and 23,257 shares of New Preferred Stock were issued,
subject to the completion of the exchange requirements as contemplated by the
Plan, on the Effective Date as follows:
To holders of general unsecured claims and Convertible Notes as of December
10, 1998 6,077,500 shares, and to management at the Effective Date, 32,500
shares, or in aggregate 94% of the New Common Stock issued on the Effective
Date. Holders of general unsecured claims and Convertible Notes received
their first distribution of shares in partial satisfaction and discharge of
the allowed claims in April 1999. The second distribution was made in
September 1999 and the remaining shares of New Common Stock were
distributed in November 1999.
To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares,
or 4%, of the New Common Stock issued on the Effective Date and Warrants
("New Warrants") to purchase an additional 277,505 shares, or 2%, of the
New Common Stock issued on the Effective Date, on a fully diluted basis.
To holders of Old Common Stock as of December 10, 1998, 130,000 shares or
2%, of the New Common Stock issued on the Effective Date and New Warrants
to purchase an additional 693,761 shares, or 5%, of the New Common Stock
issued on the Effective Date, on a fully diluted basis. Fractional shares
of New Common Stock were not issued in connection with the Plan. As a
result of this provision, certain holders of Old Common Stock received no
distribution of New Common Stock or New Warrants under the Plan.
To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of
December 10, 1998, 8,090 shares of New Preferred Stock which, together with
the 15,167 additional shares of New Preferred Stock purchased by the CSFB
Affiliate as described above, are convertible into 4,765,165 shares of the
New Common Stock. As a result of the New Preferred Stock received by the
CSFB Affiliate, together with the 3,093,998 shares of New Common Stock
received by the CSFB Affiliate in respect of the Convertible Notes owned by
CSFB, the CSFB Affiliate beneficially owns approximately 56.6% of the New
Common Stock on an as converted basis, assuming the exercise of all New
Warrants and issuance of New Common Stock reserved under the 1999 Stock
Option Plan as discussed below. The New Preferred Stock has a stated value
of $1,000 per share and a cumulative annual dividend rate of $102.50 per
share payable no later than 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.
Description of Cancelled Securities
Prior to the Effective Date of the Plan, the Company had the following
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 described above, holders of Allowed 11% Senior Note Claims held by
creditors other than CSFB received cash payments totaling $15.2 million.
As more fully described above, 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.
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 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for each of the Company's last two
years of operations is as follows:
Quarter Ended
--------------------------------------------------------
March June September December
2001 2001 2001 2001
---------- ----------- ----------- -----------
(in thousands)
Premium income $ 31,974 $ 31,941 $ 31,672 $ 29,619
Net investment income 2,322 2,294 2,186 2,065
Net realized gain (loss) on 42 52 211 87
investment
Fee, service and other income 5,609 5,362 4,852 5,093
----------- ----------- ----------- -----------
Total revenues $ 39,947 $ 39,649 $ 38,921 $ 36,864
=========== =========== =========== ===========
(Loss) income before income
taxes $ (1,051) $ (764) $ 244 $ (548)
Net (loss) income (1,051) (764) 244 (548)
Preferred stock dividend 710 710 746 766
Loss applicable to common
stockholders (1,761) (1,474) (502) (1,314)
Loss per share:
Basic $ (0.27) $ (0.23) $ (0.08) $ (0.20)
Diluted $ (0.27) $ (0.23) $ (0.08) $ (0.20)
Quarter Ended
--------------------------------------------------------
March June September December
2000 2000 2000 2000
----------- ----------- ----------- -----------
(in thousands)
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
=========== =========== =========== ===========
Income before income taxes $ (1,258) $ (918) $ (1,193) $ (9,570) (1)
Net income (830) (606) (787) (16,719) (2)
Preferred stock dividend 651 651 651 622
Income (loss) applicable to
common stockholders (1,481) (1,257) (1,438) (17,341)
Earnings (loss) per share:
Basic $ (0.23) $ (0.19) $ (0.22) $ (2.67)
Diluted $ (0.23) $ (0.19) $ (0.22) $ (2.67)
(1) Increase in losses for the fourth quarter of 2000 due to adverse claims
experience for major medical products and recognition of premium deficiency
(see Note 8).
(2) Includes $10.4 million non-cash charge for increase in deferred tax asset
valuation allowance (see Note 9).
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(in thousands)
December 31,
-------------------------
2001 2000
----------- -----------
Assets:
Cash $ 897 $ 1,407
Short-term investments 299 1,682
Fixed maturities, at market value - 1,193
Equity securities, at market value 21
Investment in consolidated subsidiaries 48,622 37,168
Accrued investment income - 29
Receivables from affiliates 655 -
Other assets 403 52
----------- -----------
Total Assets $ 50,897 $ 41,531
=========== ===========
Liabilities:
Note payable $ 11,987 $ -
Payable to subsidiaries 3,175 7,155
Other liabilities 2,278 2,596
----------- -----------
Total Liabilities 17,440 9,751
----------- -----------
Redeemable Convertible Preferred Stock 30,635 27,705
----------- -----------
Stockholders' Equity:
Common stock 65 65
Capital in excess of par value 28,017 27,620
Accumulated other comprehensive loss, net of tax (121) (2,324)
Retained Deficit (25,139) (21,286)
----------- -----------
Total Stockholders' Equity 2,822 4,075
----------- -----------
Total Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity $ 50,897 $ 41,531
=========== ===========
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 Ended Nine Months Ended
December 31, December 31,
------------------------- -----------------
2001 2000 1999
----------- ----------- -----------------
(in thousands)
Net investment income $ 56 $ 308 $ 509
Realized gain (loss) on investments 56 24 (376)
Inter-company interest on Surplus Certificates - - 58
Other income - - 3
----------- ----------- -----------------
112 332 194
----------- ----------- -----------------
Resolution of pre-confirmation contingencies - - (1,235)
Inter-company interest on advances to
subsidiaries 20 109 (22)
General and administrative expenses 781 218 (237)
Interest expense on notes payable 1,338 - -
Taxes, licenses and fees 192 119 (1)
----------- ----------- -----------------
2,331 446 (1,495)
----------- ----------- -----------------
(Loss) income before income taxes and equity
in undistributed net earning of subsidiaries (2,219) (114) 1,689
Expense (benefit) from income taxes - 2,773 (629)
----------- ----------- -----------------
(2,219) (2,887) 2,318
Equity in undistributed net income (loss) of
subsidiaries 100 (16,055) (212)
----------- ----------- -----------------
Net (loss) income (2,119) (18,942) 2,106
Preferred stock dividends 2,932 2,576 1,874
----------- ----------- -----------------
(Loss) income applicable to common
stockholders $ (5,051) $ (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 STATEMENT OF INCOME
(in thousands)
Three Months
Ended
March 31,
----------
1999
----------
Net investment income $ 209
Realized gains on investments 12
Intercompany interest income on surplus certificates 20
Interest on advances to subsidiaries 110
----------
351
----------
General and administrative expenses (112)
Taxes, licenses and fees 24
Interest expense 507
----------
419
----------
Loss before income taxes and equity in undistributed
net earnings of subsidiaries (68)
Provision for income taxes -
----------
(68)
Equity in undistributed net earnings of
subsidiaries 276
----------
Net income 208
Preferred stock dividends -
----------
Income applicable to common stockholders $ 208
==========
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 Ended Nine Months Ended
December 31, December 31,
------------------------- -----------------
2001 2000 1999
----------- ----------- -----------------
(in thousands)
Net (loss) income $ (2,119) $ (18,942) $ 2,106
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during
period, net of tax 50 22 (245)
Reclassification adjustment of (gain) loss on
sales of investments included in net income,
net of tax (56) (16) 245
Other comprehensive income (loss) on investment in subsidiaries:
Unrealized holding gain (loss) during period,
net of tax 2,545 1,805 (3,711)
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (336) (284) (140)
----------- ----------- -----------------
Comprehensive income (loss) $ 84 $ (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.)
STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Three Months
Ended
March 31,
-------------
1999
-------------
Net income $ 208
Other comprehensive income (loss):
Unrealized holding loss arising during period, net
of tax (331)
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (8)
Other comprehensive income (loss) on investment in
Subsidiaries:
Unrealized holding loss arising during period, net
of tax (1,628)
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (19)
-------------
Comprehensive loss $ (1,778)
=============
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 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 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
============= ======== ============= ============= ========== =============
Net loss (2,119) (2,119)
Preferred stock dividend (2,932) (2,932)
Other comprehensive loss, net of tax 2,203 2,203
Decrease in deferred tax asset valuation
allowance attributable to unrealized
gains on investments 1,198 1,198
Amortization of unearned compensation 397 397
------------- -------- ------------- ------------- ---------- -------------
Balance at December 31, 2001 6,500,000 $ 65 $ 28,017 $ (121) $(25,139) $ 2,822
============= ======== ============= ============= ========== =============
The financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
SCHEDULE II
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) (PARENT COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except 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, 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 Ended Year Ended Nine Months Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
Cash Flow from Operating Activities:
Net (loss) income $ (2,119) $ (18,942) $ 2,106
Adjustments to reconcile net (loss) income to
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries (100) 16,055 212
(Increase) decrease in accrued investment
income 29 (26) 168
Increase in deferred tax asset - 646 (646)
Increase in receivables from subsidiaries (655) - -
Increase in other assets (351) (2) (25)
Decrease in other liabilities (318) (765) (3,048)
Increase in payables to subsidiaries (3,980) 4,999 5,733
Dividends received from subsidiaries 6,971 - 300
Other, net 3,238 1,685 (2,263)
----------------- ----------------- -----------------
Net Cash Provided by Operating Activities 2,715 3,650 2,537
----------------- ----------------- -----------------
Cash Flow from Investing Activities:
Proceeds from sale of fixed maturity
investments 1,240 246 3,938
Cost of fixed maturity investments acquired - (2,660) (699)
Net change in short-term and other
investments 1,362 3,004 (1,907)
Capital contributions to subsidiaries (16,827) (6,860) (500)
----------------- ------------------ -----------------
Net Cash (Used For) Provided by Investing
Activities (14,225) (6,270) 832
----------------- ------------------ -----------------
Cash Flow from Financing Activities:
Issuance of note payable 11,000 - -
----------------- ------------------ -----------------
Net Cash Provided by Financing Activities 11,000 - -
----------------- ------------------ -----------------
(Decrease) Increase in Cash During the Period (510) (2,620) 3,369
Cash at Beginning of Period 1,407 4,027 658
----------------- ------------------ -----------------
Cash at End of Period $ 897 $ 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
Ended
March 31,
------------
1999
------------
Cash Flows From Operating Activities:
Net income $ 208
Adjustments to reconcile net income to cash
used for operating activities:
Equity in undistributed net (income) loss of subsidiaries (276)
Accrued investment income 42
Decrease (increase) in other assets 3,063
(Decrease) increase in other liabilities (13,102)
Other, net 9,589
------------
Net Cash Used For Operating Activities (476)
------------
Cash Flows From Investing Activities:
Proceeds from sale of investments 2,455
Net change in short-term investments (1,403)
Capital contributions to subsidiaries (400)
------------
Net Cash Provided by Investing Activities 652
------------
Cash Flows From Financing Activities:
Retirement of senior subordinated debentures (15,167)
Issuance of preferred stock 15,167
------------
Net Cash Provided by Financing Activities -
------------
Increase in Cash During the Period 176
Cash at Beginning of Period 482
------------
Cash at End of Period $ 658
============
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, 2001:
Total $ 25,600 $61,571 $37,202 $125,206 $ 8,867 $ 93,376 $ 8,319 $ 55,805 $ 125,515
=========== ======== ======== ======== ========== ======== ============ ========== ===========
Year Ended December 31, 2000:
Total $ 24,711 $61,306 $42,778 $119,908 $ 9,741 $101,940 $ 2,998 $ 67,683 $ 120,667
=========== ======== ======== ======== ========== ======== ============ ========== ===========
Nine Months Ended December 31, 1999
Total $ 19,393 $57,119 $38,776 $ 86,371 $ 6,740 $ 65,699 $ 1,478 $ 35,564 $ 85,694
=========== ======== ======== ======== ========== ======== ============ ========== ===========
WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, 1999:
Total $ 15,039 $54,738 $41,068 $ 29,948 $ 2,562 $ 21,799 $ 286 $ 14,454 $ 23,878
=========== ======== ======== ======== ========== ======== ============ ========== ===========
* 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, 2001
Life insurance in force $ 53,128 16,577 - 36,551
============== =============== =============== ===============
Premiums:
Life $ 572 63 - 509 -
Accident and health 125,846 2,709 1,170 124,307 0.94%
Other 390 - - 390 -
-------------- --------------- --------------- ---------------
Total premiums $ 126,808 2,772 1,170 125,206 0.93%
============== =============== =============== ===============
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%
============== =============== ============== ===============
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, 2001:
Allowance for doubtful agents'
receivables $ 3,711 $ 824 $ (522) $ - $ 4,013
================= ================= ================= =============== =================
Year Ended December 31, 2000:
Allowance for doubtful agents'
receivables $ 6,060 $ (722) $ (1,627) $ - $ 3,711
================= ================= ================= =============== =================
Nine Months Ended December 31, 1999:
Allowance for doubtful agents'
receivables $ 5,125 $ 123 $ (1,356) $ 2,168 $ 6,060
================= ================= ================= =============== =================
WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, 1999:
Allowance for doubtful agents'
receivables $ 5,176 $ 195 $ (246) $ - $ 5,125
================= ================= ================= =============== =================
* 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 2002
Annual Meeting of Stockholders, which will be filed on or before April 30, 2002.
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 2002 Annual Meeting of Stockholders, which will be filed on or
before April 30, 2002.
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 2002 Annual Meeting of Stockholders, which
will be filed on or before April 30, 2002.
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 2002 Annual
Meeting of Stockholders, which will be filed on or before April 30, 2002.
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).
3.3 Amendment to the By-Laws of the Company, effective as of April 5, 2000
(incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000).
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
(incorporated by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.23Fifth Amendment to Guaranty Agreement, dated as of November 30, 2000, by
and among Ascent Assurance, Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.24Third Amendment to Credit Agreement, dated as of November 30, 2000, by and
among Ascent Funding, Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.24 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.25First Amendment to Security Agreement, dated as of November 30, 2000, by
and among Ascent Management, Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.25 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.26Credit Agreement dated April 17, 2001 between Ascent Assurance, Inc. and
Credit Suisse First Boston Management Corporation (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K filed April 25, 2001).
10.27Guaranty and Security Agreement dated April 17, 2001 among Foundation
Financial Services, Inc., NationalCare(R) Marketing,Inc., LifeStyles
Marketing Group, Inc., Precision Dialing Services, Inc., Senior Benefits
L.L.C. and Westbridge Printing Services, Inc., and Credit Suisse First
Boston Management Corporation (incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K filed April 25, 2001).
10.28Pledge Agreement dated April 17, 2001 between Ascent Assurance, Inc. and
Credit Suisse First Boston Management Corporation (incorporated by
reference to Exhibit 10.3 to the Company's Form 8-K filed April 25, 2001).
10.29Sixth Amendment to Guaranty Agreement and Waiver dated April 17, 2001
between Ascent Assurance, Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
April 25, 2001).
10.30Fourth Amendment to Credit Agreement dated April 17, 2001 between Ascent
Funding, Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 10.5 to the Company's Form 8-K filed April 25, 2001).
10.31* Fifth Amendment to Credit Agreement dated November 27, 2001 between
Ascent Funding, Inc. and LaSalle Bank National Association.
10.32* Employment Agreement, dated as of September 16, 2001, by and among the
Company, Ascent Management, Inc., and Mr. Patrick J. Mitchell.
10.33* Employment Agreement, dated as of September 16, 2001, by and among the
Company, Ascent Management, Inc., and Mr. Patrick H. O'Neill.
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 last quarter of the year ended
December 31, 2001.
- ------------------------
* 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 8th day of March,
2002.
ASCENT ASSURANCE, INC.
/s/ Cynthia B. Koenig
-------------------------------------------------
Cynthia B. Koenig
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ---------------------------- --------------------------------- -----------------
/s/ Patrick J. Mitchell Director, Chairman of the Board March 8, 2002
- --------------------------
(Patrick J. Mitchell) and Chief Executive Officer
(Principal Executive Officer)
/s/ John H. Gutfreund Director March 8, 2002
- --------------------------
(John H. Gutfreund)
/s/ Richard H. Hershman Director March 8, 2002
- --------------------------
(Richard H. Hershman)
/s/ Michael A. Kramer Director March 8, 2002
- --------------------------
(Michael A. Kramer)
/s/ Robert A. Peiser Director March 8, 2002
- --------------------------
(Robert A. Peiser)
/s/ James K. Steen Director March 8, 2002
- --------------------------
(James K. Steen)
/s/ Paul E. Suckow Director March 8, 2002
- --------------------------
(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
* 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. Ascent Funding, Inc. (Delaware) 100%
6. Foundation Financial Services, Inc. (Nevada) 100%
7. NationalCare(R)Marketing, Inc. (Delaware) 100%
8. Westbridge Printing Services, Inc. (Delaware) 100%
9. Ascent Management, Inc. (Delaware) 100%
10. Precision Dialing Services, Inc. (Delaware) 100%
11. Senior Benefits, LLC (Arizona) 100%
12. LifeStyles Marketing Group, Inc. (Delaware) 100%
13. Health Care-One Insurance Agency, Inc. (California) 50%
14. Pacific Casualty Company, Inc. (Hawaii) 100%
15. 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 (Ascent) of our reports dated March 8, 2002 and March 29, 2000
relating to the financial statements and financial statement schedules of Ascent
and Westbridge Capital Corp. and its subsidiaries, respectively, which appear in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
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PricewaterhouseCoopers LLP
Dallas, Texas
March 8, 2002