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
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
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
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
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 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
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
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
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.)
*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
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules Covered by the Following Report of Independent Accountants.
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
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
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
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)
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)
See the Notes to the Consolidated Financial Statements
ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP. (now ASCENT ASSURANCE, INC.) CONSOLIDATED STATEMENT OF CASH FLOWS
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):
(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:
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:
Realized gain (loss) on investments are summarized as follows:
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:
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:
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):
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:
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:
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:
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:
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:
(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)
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, ---------- ----------
Net investment income $ 209 Realized gains on investments 12 Intercompany interest income on surplus certificates 20 Interest on advances to subsidiaries 110 ---------- ----------
General and administrative expenses (112) Taxes, licenses and fees 24 Interest expense 507 ---------- ----------
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)
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, ------------- -------------
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)
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)
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)
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, ------------ ------------
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)
* Premiums Written - Amounts do not apply to life insurance/other.
SCHEDULE IV
REINSURANCE
(in thousands, except percentages)
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
* Represents reclassification of allowance netted against receivable.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
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
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
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
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
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 - --------------------------------
PricewaterhouseCoopers LLP Dallas, Texas March 8, 2002