FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission file number
December 31, 1996 0-2650
WASHINGTON SECURITY LIFE INSURANCE COMPANY
(exact name of registrant as specified in its charter)
(As Amended)
Missouri 44-0666926
(State or other jurisdiction of (IRS Employer ID )
incorporation or organization)
916 Sherwood Drive Lake Bluff, IL 60044-2286
(Address of principal executive offices) (Zip Code)
(847) 615-9255
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The aggregate market value of the Common Stock held by non-
affiliates is not feasible to estimate since the stock is not
listed on an exchange and there is no established public trading
market.
Number of shares of Common Stock Outstanding December 31, 1996
1,104,882 Shares
PART I
Item 1. Business
Washington Security Life Insurance Company ("Registrant",
"Washington" or "Company") incorporated on May 28, 1963, in the
state of Missouri. Registrant is primarily engaged in the
business of life insurance and is licensed to conduct business in
10 states. The name was changed from Frontier Insurance Company
by resolution of the shareholders at their annual meeting on
November 7, 1996. The name change was approved by the Director
of Insurance for the Company's state of domicile on January 8,
1997.
Registrant had three wholly-owned subsidiaries, Frontier
Security Corporation ("FSC"), Home America Corporation ("HAMC")
and International Financial Services Life Insurance Company
("IFS"). Effective April, 1994, Registrant sold IFS. The sale
was funded in August, 1994. FSC was formed in August, 1992, as a
Louisiana corporation, and was a nonoperating subsidiary that has
been terminated. HAMC was acquired in October, 1992, and was an
operating mortgage origination subsidiary. HAMC was sold to
Registrant's former parent, International Mercantile Corporation
("IMC") in November, 1995.
In the fourth quarter of 1995, a contract for the sale of
Registrant was executed between IMC and William D. And Robert E.
Bruce. Under this agreement, filed with an 8-K in the fourth
quarter of 1995, the Bruces received all of IMC's stock of
Registrant for money owed by IMC, which collateralized an IMC
promissory note endorsed by said promissory note. The sale was
subject to the approval of the Missouri Department of Insurance,
which approval was granted on May 23, 1996.
Business Overview - Washington Security Life Insurance
Company
At December 31, 1996 Registrant still was not issuing new
business die to regulatory actions more fully discussed in Item 3
and a voluntary commitment on the Registrant's part to the State
of Missouri. In the 4th quarter of 1994, Registrant entered into
an Assumption Reinsurance Agreement with Mid-South Insurance
Company which transferred all remaining policyholders liabilities
effective October 1, 1994.
Registrant is actively managing its remaining investments
including those assets not currently performing on a satisfactory
basis. Registrant is confident it has positioned itself
appropriately to re-evaluate its option of re-entering the
insurance market.
The following table sets forth certain information
concerning the life insurance business of Registrant for the past
five years.
1996 1995 1994 1993 1992
(000's Omitted)
Gross Amount of
Insurance in Force -0- -0- -0- -0- 199,465
Premium Income* -0- -0- -0- 356 1,374
Gross Amount of New
Business Written -0- -0- -0- -0- 1,203
New Premium
Income* -0- -0- -0- -0- 15
Amount of Insurance
Cede for
Reinsurance -0- -0- -0- -0- 125,321
Reinsurance Premium
Paid -0- -0- -0- 422 943
- --------------------------------
Due to lack of detailed information, the premium amount was
calculated based on ratio analysis.
The following table provides certain information on the
investment portfolio of Registrant.
1996 1995 1994 1993 1992
(000's Omitted)
Annuity Premiums -0- -0- 1,029 7,911 3,343
Invested Assets(2) 1,495 602 5,383 17,694 20,297
Net Investment
Income (1) (2) 15 100 1,069 1,844 1,826
Net Realized
Capital
Gains (Loss) (2) ( 619) (511) ( 401) 675 210
(2)
- ---------------------
(1) Net of investment expense and before income taxes or
extraordinary items.
(2) Consolidated with Home America Mortgage Company and
International Financial Services Life Insurance Company for years
1992-1994
- --------------------
Registrant is in the insurance business (although currently
inactive) and as such is subject to detailed regulation and
supervision in the various states in which it is licensed. The
laws of the various states established supervisory agencies with
broad administrative powers relative to granting and revoking
licenses to transact business, regulating form and content of
policies, reserve requirements, the type and amount of
investments, and prescribing the form and content of required
financial statements. Registrant is required to file detailed
annual reports with such agencies, and its business and accounts
are subject to such examinations by such agencies at any time.
Registrant is required to maintain a minimum of $1,400,000
capital and surplus to maintain its license in Missouri. On
December 31, 1996, Registrant had 1,486,423 of capital and
surplus. The surplus deficiency of 1995 was remedied in the
second quarter of 1996.
Many of the states in which Registrant conducts business
have also enacted regulations concerning members of insurance
holding company systems. Registrant is still a member of an
insurance holding company system (although entirely different
prior to November 1995) and, as such, is governed by those
statutes as well.
As previously disclosed, Registrant discontinued issuing
policies in the fourth quarter of 1994.
Registrant's previous product portfolio primarily consisted
of flexible premium deferred annuities with a guaranteed
crediting rate for the first contract year. All marketing
efforts were discontinued at the time of the Mid-South Insurance
Company Assumption Reinsurance Agreement.
In August, 1993, Registrant downsized by selling a block of
its reserves which resulted in an increase in capital and surplus
to $3,352,091 at the end of the third quarter of 1993. See
"Reinsurance and Third Party Administrator Agreements", below.
Also at this time, the Registrant closed its Jefferson City,
Missouri, administrative offices and contracted with a third
party administrator for these services. The administrator
conducted all the operational services of Registrant except
marketing and investment management. The Registrant felt this
would allow it to better control its operational expenses. With
the Assumption Reinsurance Agreement entered into effective
October 1, 1994, the Company eliminated the remainder of its
policyholder liabilities and terminated its third party
administrative agreement. All of the corporate accounting was
transferred to Registrant's Baton Rouge, Louisiana office. The
Baton Rouge office was closed in July, 1996, and all
administration has been conducted from Registrant's Lake Bluff,
Illinois office since then.
Reinsurance and Third Party Administrator Agreements
On August 3, 1993, Registrant entered into a Reinsurance
Agreement (the "Agreement") with Central Security Life Insurance
Company, a Texas insurance Corporation (the "Reinsurer"),
pursuant to the terms of which Registrant ceded to Reinsurer
accepted from Registrant, reinsurance of certain traditional
life, universal life and health insurance policies issued by
Registrant (the "Policies").
Specifically, the Agreement provided for the purchase,
reinsurance and assumption of the Policies by Reinsurer according
to their respective terms (except for certain "extra contractual
obligations and bad faith damages"), and Reinsurer's succession
to all rights, remedies, defenses, offsets and counterclaims
under the Policies that would have been available to Registrant
had the Agreement not been entered into by the parties.
Reinsurer also agreed to assume all liability for commissions due
and payable to the designated agents of record for the Policies
after the effective date of the Agreement.
The effective date of the Agreement (the "Effective Date")
was July 1, 1993. The nature and amount of the consideration
received by Registrant under the Agreement for the transfer of
the Policies to Reinsurer and the principles followed in
determining the amount of the consideration are summarized as
follows:
In addition to receiving the benefit of Reinsurer's assumption
of essentially all of Registrant's duties, obligations and liabilities
under Policies, Registrant received from Reinsurer an amount equal to:
(a) (i) the sum of $1,311,260 for the traditional life
insurance policies ceded, as adjusted pursuant to the terms of the
Agreement, plus interest on said amount computed at 7% per annum from
July 1, 1993, to the closing date; plus
(a) (ii) the sum of $913,301 for the universal life
insurance policies cede, as adjusted pursuant to the terms of the
Agreement, plus interest on said amount computed at 7% per annum
from July 1, 1993, to closing date; plus
(a) (iii) an amount equal to $280,383 for the remainder
of the business, plus interest on said amount computed at 7% per
annum from July, 1, 1993, to the closing date (total interest on
the amounts in (a) (I), (ii), and (iii) was $25,669); plus
(a) (iv) an amount equal to One Thousand Five Hundred
Dollars ($1,500), times the number of days from July 1, 1993,
to the closing date ($82,500); less
(b) (i) an amount equal to Registrant's statutory reserves
attributable to the Policies, determined as of the Effective Date
($7,129,693), plus interest on said amount computed at 7$ per annum
from July 1, 1993, to the closing date ($175,533), plus
(b) (ii) an amount equal to all unearned premium reserves
attributable to the Policies, determined as of the Effective Date, plus
interest on said amount computed at 7% per annum from July, 1, 1993,
to the closing date ($26,438).
Registrant's equity in the net book value of the Policies
ceded represented approximately 40% of the Registrant's total
assets.
On or about August 3, 1993, Registrant filed with the
Missouri Department of Insurance a Petition for Approval seeking
the Director of Insurance of the State of Missouri's approval of
the Agreement, which approval was subsequently granted.
On September 23, 1993, Registrant entered into a Contract
for Home Office Administrative and Date Processing Services (the
"Contract") with Reinsurer, which Contract was, pursuant to its
terms, effective as of July 1, 1993. Under the terms of the
Contract, Reinsurer agreed to provide Registrant, and perform on
behalf of Registrant, all "Home Office Administrative Services",
defined in the Contract to include the following:
(i) implementation of corporate policy, provision of
guidance in operations, assistance in planning, provision of
quarterly and annual financial statements, and preparation and
filing of all state administrative forms;
(ii) coordination of underwriting functions with all of
Registrant's reinsurers;
(iii) analysis of all claims received and payment
of all valid claims;
(iv) provision of full policyholder services;
(v) provision of filing notices, collection and
deposit of all premiums received;
(vi) through use of proper accounting methods, the full
maintenance of the books and ledgers of Registrant, and the
recordation of all of Registrant's investments;
(vii) provision of agents commission statements and
disbursements of funds pursuant thereto;
(viii) provision of actuarial services in the
preparation of financial statements and administration of "in
force business"; and
(ix) the provision of all data processing services
necessary to the normal operation of Registrant.
The Contract provided for an initial term of one (1) year,
but was automatically renewable for successive one (1) year
periods until terminated pursuant to the terms thereof.
The Contract provided for payment by Registrant of a minimum
monthly fee, plus "Direct Expenses" and "Volume Expenses".
As a result of Registrant's entering into the Contract, and
the consequent cessation of virtually all of Registrant's
administrative functions, it was necessary for Registrant to
cease all administrative operations formerly conducted at its
Jefferson City, Missouri, office at 1511 Christy Drive, and to
essentially close that office. This closure, together with the
related termination of employment of nearly all of Registrant's
administrative staff, occurred on August 27, 1993. The
administrative agreement was canceled in the 4th quarter of 1994.
Assumption Reinsurance Agreement
In December, 1994, Registrant consummated an Assumption
Reinsurance Agreement with Mid-South Insurance Company of
Fayetteville, North Carolina ("Mid-South"). Under the Agreement,
Registrant reinsured all of its annuity policies which
constituted the balance of its policyholder liabilities. The
Agreement called for the Registrant to transfer the statutory
reserves (policyholder liabilities) on these annuity policies to
Mid-South along with an equal amount of assets less a ceding fee
of 5.5% of the reserves. Registrant may have some contingent
liability on several policies due to Missouri Assumption
Reinsurance Regulations which call for policyholder approval of
the assumption. However, Mid-South agreed to hold harmless and
indemnify Registrant from all actions, claims and benefits
arising from any policyholder rejection the assumption.
Sale of International Financial Services Life Insurance
Company
On April 15, 1994, Registrant entered into a Stock Purchase
Agreement (the "Agreement") with Franklin American Corporation, a
Tennessee corporation ("Franklin"), pursuant to the terms of
which Registrant agreed to sell to Franklin, and Franklin agreed
to purchase from Registrant, shares of the common capital stock
of International Financial Services Life Insurance Company
("IFS"), representing all of the issued and outstanding common
stock of IFS.
The nature and the amounts of consideration paid to
Registrant by Franklin for the purchase of the Shares were as
follows: The aggregate purchase price of the Shares equaled the
sum of (a) the current market value of IFS' total assets as of
the fifth business day prior to the closing date less IFS' total
liabilities calculated on a statutory basis as of the closing
date, plus (b) $1,155,000 based on Registrant's providing valid
licenses authorizing IFS to transact the business of insurance
therein was not delivered at closing.
The closing was held in Jefferson City, Missouri, on August
12, 1994. At the closing, Registrant delivered to Franklin the
stock certificates representing 100% of IFS' capital stock
properly endorsed with bank guaranteed signatures for transfer of
record to Franklin.
The consideration payable by Franklin for the Shares was
determined through arm's-length negotiations. Neither Franklin,
nor any of its officers or directors was in any way affiliated
with, or related to, Registrant.
An escrow account of $102,500 was established by Franklin to
cover any state license losses and costs associated with any
controversies in 1996. Registrant accepted the sum of $12,500 as
settlement of the escrow.
Business Overview - Home America Mortgage Company
Home America Mortgage Company ("HAMC") was incorporated in
1986 under the name Realty Mortgage Company and began operations
as a residential mortgage brokerage operation. Registrant
obtained HAMC from The C. J. Brown Corporation in October 1992.
Registrant sold HAMC to Registrant's former parent International
Mercantile Corporation ("IMC") in the fourth quarter 1995. The
sale was subject to the approval of the Missouri Department of
Insurance, which approval was granted on May 23, 1996.
HAMC was operated as a provider of first mortgage
residential home loans. HAMC organized, processed, underwrote,
closed, funded, and delivered qualifying home loans to
established mortgage companies throughout the country. HAMC
released the loan servicing function to these investors in order
to generate fee income and to concentrate solely on the
production aspect of the lending process.
HAMC offered a full menu of mortgage loan products,
including conventional and jumbo fixed rate, balloon and
adjustable loan products. Federal Housing Administration (FHA)
and Veterans Administration (VA) loans were also available.
HAMC was a full service lender having in-house underwriting
capability and closed all loans in its own name. HAMC did draw
on three "warehouse" bank lines totaling $26,000,000 to fund
loans short term until they could be delivered and purchased by
investors.
HAMC earned revenues primarily from three (3) income
streams:
1) Origination fees
2) Servicing - release fees
3) Discount income
Origination fees were upfront fees charged to the customer
which equaled approximately 1% of the anticipated loan amount.
This fee was actually collected at the time of loan closing.
HAMC produced $798,149 in fees in 1994 and $784,700 in 1993.
Servicing-release fees were those fees paid to HAMC by its
investors in exchange for the release of the "loan servicing
rights" on each loan. These fees differed with each loan program
and loan size. HAMC sometimes used part of this income stream to
offset discount quotes from its investors in order to be
competitive with street rate quotes. HAMC's servicing fees were
$885,237 in 1994 and $1,074,500 for 1993.
Discount income consisted of upfront fees (points) charged
by the lender, which were designed to increase the overall yield
to the lender. Discount income generated in 1994 amounted to
$515,252 and $675,300 in 1993.
HAMC also generated miscellaneous income in 1994, in the
form of underwriting fees, which amounted to $92,798.
Miscellaneous income In 1993, in the form of underwriting and
processing fees, amounted to $53,800 and $10,000 respectively.
Item 2. Properties
During 1992, Registrant leased the main office building at
1511 Christy Lane, Jefferson City, Missouri, from its then parent
International Mercantile Corporation ("IMC"), at an annual rate o
$92,000. The lease expired on December 31, 1992. During 1992,
Registrant subleased portions of the building for terms expiring
December 31, 1992, to IMC. Universal Life Holding Corporation
("ULHC"). ULHC was an affiliate of Registrant. On December 31,
1992, Registrant purchased the building from IMC. The purchase
was a non-cash transaction. Registrant received the building in
exchange for assuming the mortgage and a note receivable from
IMC. Said note was written off as uncollectable as of December
31, 1992.
Mortgage Assumed $953,100
IMC Note (215,025)
Forgiveness of Debt 215,025
Building Cost $953,100
In August of 1993, Registrant ceased all of its
administrative functions being carried on in said office
building. The closure was essentially necessitated by entering
into the comprehensive third party administrative agreement with
Central Security Life Insurance Company, based in Richardson,
Texas. (See "Reinsurance and Third Party Administrator
Agreements", under Item 1 of this Report for a detailed
discussion of this transaction.)
On October 2, 1992, a lease was entered into with the
Missouri Division of Employment Security ("Lessee") for 16,760
net rentable space at an annual rent of $125,700, payable monthly
in payments of $10,475. The lease was still in effect on May
1996 when Registrant sold the building .
In April, 1994, as additional 6,851 net rentable square feet
was leased to the Missouri Department of Natural Resources at an
annual rate of $51,382.50 payable monthly in payments of
$4,281.88. This Registrant also was still in effect when the
building was sold.
On May 15, 1996 the building was sold for a gross amount of
$1.2 million (less $30,000 commission). The mortgage on the
property (approximately $828,000) was assumed by the buyer with
the difference paid in cash to the Registrant which resulted in a
$51,000 capital gain.
During 1994 and 1993, registrant lease office space in Baton
Rouge, Louisiana, from CJB Property Management. Registrant paid
a total of $4,292 and $23,646 in rental to said entity during
1994 and 1993.
Item 3. Legal Proceedings
Administrative Actions Taken by State Departments of
Insurance
As a result of a triennial examination as of September 30,
1992, conducted by the Missouri Department of Insurance,
Registrant was placed under Administrative Supervision. this was
in accordance with section 375.1160 of the Missouri Insurance
Laws governing situations where an insurance company's capital
and surplus is considered hazardous to the public and to
insureds.
As a direct consequence, the Registrant's authority to do
business in the state of Iowa was indefinitely suspended on May
11, 1993. The Registrant's authority to do business in the state
of Illinois was also suspended on July 13, 1993. The Mississippi
Department of Insurance suspended Registrant's authority in that
state on August 23, 1993 and Kansas did likewise on September 1,
1993. The Department of Insurance from the state of Louisiana
issued a Cease and Desist Order to the Registrant on January 25,
1994. these actions were still in effect as of December 31,
1996.
When Registrant entered into a reinsurance Agreement,
referred to in the subsection of item 1 of the report titled
"Reinsurance and Third Party Agreements," an order was issued by
the Insurance Director of the state of Missouri lifting the order
of Administrative Supervision as of August 25, 1993. However, a
voluntary agreement to refrain from the writing of new business
was requested by the Missouri Department of Insurance and
executed by the Registrant in May 1994. This voluntary agreement
was reaffirmed in early 1996 and continues to be in effect.
The Missouri Department of Insurance completed another
examination of the Registrant as of November 30, 1995. Capital
and surplus was determined to be $934,835 which was below the
minimum requirement of $1,200,000. As a result, the Registrant
was again placed under Administrative Supervision on January 25,
1886. The Registrant is now required to maintain $1,400,000 of
capital and surplus.
The Order of Administrative Supervision was lifted on May
23, 1996 concurrently with the approval of a From "A" change of
control application submitted by Robert and William Bruce. The
Form "A" approval and lifting of the supervision was granted
after the Registrant met the revised capital and surplus
requirement of $1,400,000. This was achieved as a result of the
following transactions that occurred in 1996:
- Sale of building in Jefferson City, Missouri
- Capital contribution of $200,00 by the Bruces, and
- Purchase of the future revenue stream of insurance
commissions that could not be included among admissible
assets by the Bruces for $250,000.
SEC Investigation
On May 14, 1993, registrant's former officers were advised
by officials of the Enforcement Division of the United States
Securities and Exchange Commission (the "Commission"), that an
informal investigation of registrant, IMC and ULHC was being
conducted by the Commission.
On or about November 22, 1993, these former executive
officers were advised by telephone that the Commission had
ordered that a formal private investigation of Registrant, IMC
and ULHC be conducted pursuant to Section 20(a) of the Securities
Act of 1933 and Section 21(a) of the Securities Act of 1934.
Registrant's officers, directors, auditors and attorneys
complied with all requests made of the by representatives of the
Commission in connection with the said investigations, including
all request for the production of documents and information
pertaining to Registrant and its affiliates.
Additionally, certain former officers, directors, and others
affiliated with Registrant gave testimony before the Staff of the
Commission.
Following extensive testimony, the Commission notified
Registrant by letter dated October 11, 1994 that the staff of the
Division of Enforcement intended to recommend filing a civil
injunctive action in Federal District Court against Registrant
and its affiliates, for violating Sections 10(b), 14(a), 139(a),
13(b)2(A) and (B) of the Securities and Exchange Act of 1934 and
Rules 10b-5, 13a-1, 13a-13 and 12b-20 thereunder. the staff sold
stated its intention to recommend that registrant and its
affiliates, International Mercantile Corporation and Universal
Life Holding Corporation, pay penalties arising from the failure
of each company to file timely certain periodic reports as
required by the federal securities laws.
In October, 1995, the SEC investigation was completed with
Registrant agreeing to injunctions against future violations. No
fines were imposed.
Bruce and Bruce v. The C. J. Brown Corporation, et al
On March 2, 1995, Robert E. Bruce and William D. Bruce filed
a Complaint in the United States District Court, Western District
of Missouri, Western Division, seeking a declaratory judgment
releasing them of any obligations which they may have had under a
certain Agreement dated August 25, 1994, entered into by the C.
J. Brown Corporation, Life America Corporation ("LAC"), Ronald T.
Benitez, 1122 Corporation and the plaintiffs. That Agreement, to
which neither Registrant nor any of its affiliates was a party,
et forth a series of transactions by which plaintiffs would have
acquired a controlling interest of Registrant and its affiliates.
Under the Agreement, plaintiffs would have acquired control of
Registrant by three steps:
First, LAC would redeem from the Bruces all of their share
of LAC in return for all of the shares of Bruce and Bruce Company
owned by LAC; second, the plaintiffs would enter into a Stock
Purchase Agreement with IMC under which Plaintiffs would acquire
x shares of IMC's authorized but unissued stock for 4.1 million
of new assets, which transaction would be subject to approval of
the Missouri Department of Insurance; and third; at the
completion of said transaction, IMC would redeem all of its stock
owned by LAC in exchange for return to LAC of certain assets
comprised primarily of debt and equity instruments of the C. J.
Brown Corporation.
The Missouri Department of Insurance subsequently denied the
plaintiffs' request for a "Form A" approval when it became
apparent that the stock purchase step could not be completed.
Plaintiffs maintained that the Form A disapproval resulted
in an extinction of their obligations.
The Ventana Corporation, et al v. William D. Bruce, et al.
In a petition for Breach of Contract, Damages and Specific
Performance filed in the 19th Judicial Circuit for the Parish of
East Baton Rouge, Louisiana, on March 10, 1995, the Ventana
Corporation (formerly C. J. Brown Corporation) filed an action
against William D. Bruce, Robert E. Bruce and IMC seeking damages
for breach of the Stock Purchase Agreement (Bruce and Bruce v.
The C. J. Brown Corporation, et al., above) and specific
performance of the Stock Purchase Redemption Agreement. See the
result detailed in Bruce and Bruce v. The C. J. Brown Corporation
et al.
The Bruce and Bruce v. the C. J. Brown Corporation et al
action, as well as the Ventana Corporation et al. vs. William D.
Bruce et al., and The Ventana Corporation, a/k/a the C. J. Brown
Corporation were consolidated by the parties pursuant to a
voluntary binding arbitration agreement.
As a result of a hearing under the binding arbitration
agreement, all debt and equity obligations of C. J. Brown and
Life America Corporation were returned to the issuer, and all
stock of IMC was transferred to the Registrant. All litigation
was dismissed, with prejudice, with all parties bearing their own
costs and fees. The parties were to complete this "unwind" by
May 17, 1996. Registrant received $100,000 from the Frontier Oil
and Gas limited partnership and Ventana received Registrant's
limited partnership interest. A final order of completion was
issued and filed by the arbitrator in August 1996.
Jesse E. LeBlanc, II and Ocean Sailing Corporation versus
Frontier Insurance Company, The C. J. Brown Corporation and
Ronald T. Benitez, Civil District Court for the Parish of
Orleans, State of Louisiana, No. 94-1168, Division "J". This
action was brought seeking damages for the alleged wrongful
taking of corporate stock of Travel America, Inc., which stock
was pledged to secure a loan from Registrant which subsequently
went into default. Pursuant to related proceedings initiated by
the Registrant, the subject corporate stock was seized and sold
pursuant to court order. This action effectively seeks to
collaterally attach that prior judicial holding. An exception
based upon the prior action was asserted in this proceeding, and
was denied. Subsequently, prior to the filing of an answer,
plaintiff sought to obtain a default judgment in this case.
Prior to the default judgment becoming final, a timely motion for
a new trial was filed, the effect of which was to preclude any
enforcement of the default judgment. The trial court has
declined to act on the motion for a new trial, as a result of
which an application for supervisory writs was submitted to the
Louisiana Fourth Court of Appeals. The writ application seeks an
order rescinding the default judgment and ordering a new trial de
novo, or alternatively, a remand to the trial court with
instructions to act on the pending motion for a new trial. The
Court of Appeals reversed the trial court's decision and ordered
that Registrant be dismissed.
In re: The Ventana Corporation a/k/a The C. J. Brown
Corporation.
On March 17, 1995, IMC and Registrant's subsidiary Home
America Corporation, filed an involuntary bankruptcy petition
against the Ventana Corporation, formerly known as The C. J.
Brown Corporation. Ronald Brignac, a former director of
Registrant, was the third creditor.
In the petition, IMC claimed that it was the holder of a
promissory note in the principal amount of $1,100,000 and certain
debentures in the aggregate of $750,000. IMC claimed that the
note and debentures were in default by reason on non-payment of
amounts due thereunder. Home America Corporation claimed it was
the holder of a promissory note on the principal amount of
$180,000 made payable by The C. J. Brown Corporation. They also
claimed that the debtor was in default under the note's terms of
payment. Brignac claimed that he was the holder of a promissory
note in the principal sum of approximately $50,000 and that
payments thereunder were also in default. For the result, see
Bruce and Bruce Company v. The C. J. Brown Corporation, et al.
Item 4. Submission of Matters to a Vote of Security
Holders
There was no Annual Meeting of Shareholders during 1995. On
November 7, 1996 pursuant to due notice, the shareholders held an
annual meeting with 94% of all outstanding shares present in
person. A restatement of Articles of Incorporation was
officially ratified. The major changes were the adoption of
Washington Security Life Insurance Company as the corporate name
and an increase to 5,000,000 in the number of authorized shares.
Item 5. Market for Company's Common Stock and Related
Stockholder Matters
Incorporated by reference. See Cross Reference Sheet.
Item 6. Selected Financial Data
Incorporated by reference. See Cross Reference Sheet.
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Incorporated by reference. See Cross Reference Sheet.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference. See Cross Reference Sheet.
Item 9. Changes in Accountants
On September 20, 1993, registrant engaged the specialized
services of Weinberg & Company, P.A., of Boca Raton, Florida, to
perform an audit of Registrant's financial statements for the
years ended December 31, 1992 and December 31, 1993. The audits
covering the years December 31, 1992 and December 31, 1993, were
issued in July, 1994. Weinberg & Company, P.A. (now known ad
Weinberg, Pershes & Company, P.A.) also conducted the annual
audit for the year December 31, 1995 and again in 1996-97 for the
year December 31, 1996.
Part III
Item 10. Directors and Executive Officers of Company
Principal
Occupation
or
Employment Director
for Past Five Of Company
Years and Company Shares
Name Age Directorships Since Owned
Robert E. Bruce* 75 Secretary-Treasurer 8/94 519,017
and Director; also
President and Chief
Actuary, Bruce and
Bruce Company
Consulting Actuaries,
1981 to present;
Secretary-Treasurer,
Employees Life
Company (Mutual),
1973 to present.
William D. Bruce* 68 President and Director; 8/94 519,016
Secretary-Treasurer
Bruce and Bruce
Company Consulting
Actuaries, 1981 to
present; President,
Employees Life
Company (Mutual),
1973 to present.
Edmund J. Kulpins* 60 Executive Vice President, 8/94 None
Employees Life Company
(Mutual), 1997 to present
Paul S. Johnson 77 Attorney, Johnson & 12/94 None
Martin, Director,
Employees Life Company
(Mutual), 1993 to present
Beth A. Pestka 40 Assistant Secretary and 7/96 None
Director, also Chief
Bookkeeper, Bruce and
Bruce Company Consulting
Actuaries
Edward F. Cowman 54 Actuary, Bruce and Bruce 11/96 None
Company Consulting Actuaries
Actuarial Consultant, President
and Actuary, Bankers Mutual
William F. Higley 69 Plan Designer, Bruce and 11/96 None
Bruce Company Consulting Actuaries
Jerry L. Alexander 50 Assistant Actuary, Bruce 11/96 None
and Bruce Company
Consulting Actuaries
Shantilal A. Vora 68 Actuary, Bruce and Bruce 11/96 None
Company consulting Actuaries
Item 11. Executive Compensation
The following table sets forth the cash compensation,
including bonuses and deferred compensation, paid during 1996 to
all executive officers as a group for services rendered in all
capacities to the Company. No individual executive officer
received more than $60,000 in compensation. All salaries
terminated in July 1996 with the resignation of Michael Sause as
President and Randall as treasurer.
CASH COMPENSATION TABLE
Name of
Individual or
Group Capacities Compensation
Executive Officers as a Group (2) $90,000
Directors received $375 for attending Board Meetings through
August 1994. No fees have been paid to the new Directors for
attending Board Meetings since August 1994.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of December 31, 1996 the
only persons known to Registrant to be beneficial owners of more
than five percent (5%) of the outstanding number of shares of
Registrant.
Amount &
Title Nature of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
Common Robert E. Bruce 1,038,033 93.95
Common William D. Bruce 1,038,033 93.95
Item 13. Certain Relationships and Related Transactions
Incorporated by reference. See Cross Reference Sheet.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K
(a) The following financial statements of Registrant,
together with the report of Independent Public Accountants are
hereby incorporated herein.
1. Financial Statements
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Statements of Stockholders' Equity for years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flow for years ended
December 31, 1996, 1995 and 1994
Notes to Financial Statements
2. Financial Statements Schedules
None
(b) reports on Forms 8-K
(c) Exhibits
3(a) Articles of Incorporation of Company
3(b) Articles of Amendment of Company
3(c) Bylaws of Company
10(h) Reinsurance Agreement between Frontier Insurance Company and
Central Security Life Insurance Company dated August 3, 1993*
10(i) Contract for Home Office Administrative and Data Processing
Services between Frontier Insurance Company and Central Security Life
Insurance Company dated September 23, 1993 **
* This item was filed on Form 8-K dated August 18, 1993
(File No. 0-2650) and is incorporated herein by reference.
** This item was filed on Form 8-K dated September 23, 1993
(File No. 0-2650) and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Security and Exchange
Act of 1934, the registrant had duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WASHINGTON SECURITY LIFE INSURANCE COMPANY
DATE: March 27, 1997 BY: W. D. Bruce
William D. Bruce, President
and Director
DATE: March 27, 1997 BY: R. E. Bruce
Robert E. Bruce, Secretary
and Director
Edward F. Cowman Paul S. Johnson
Edward F. Cowman, Director Paul S. Johnson, Director
Edmund J. Kulpins Beth A. Pestka
Edmund J. Kulpins, Director Beth A. Pestka, Director
William F. Higley S. A. Vora
William F. Higley, Director Shantilal A. Vora, Director
Jerry L. Alexander
Jerry L. Alexander, Director
WASHINGTON SECURITY
LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
REPORT
AS OF DECEMBER 31, 1996
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
CONTENTS
INDEPENDENT AUDITORS' REPORT
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER
31, 1996 AND 1995
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Washington Security Life Insurance Company
F/K/A Frontier Insurance Company
We have audited the accompanying balance sheets of Washington Security Life
Insurance Company F/K/A Frontier Insurance Company as of December 31, 1996
and 1995 and the related statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1996, 1995 and 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Washington Security Life
Insurance Company F/K/A Frontier Insurance Company as of December 31, 1996
and 1995, and the results of their operations and their cash flows for the
years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sold all of its insurance operations
and is currently in a dormant state with regard to its insurance activities
which raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WEINBERG, PERSHES & COMPANY, P.A.
Boca Raton, Florida
February 28, 1997
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS
Cash $ 21,893 $ 75,547
Investments 1,209,045 600,008
Accrued investment income 9,454 6,371
Accounts and notes receivable - related
Net of allowance for doubtful accounts of
$131,996 and $3,240,100, respectively - 327,811
Mortgage loans on real estate 123 2,376
Other receivables 98,529 179,774
Total Current Assets 1,339,044 1,191,887
PROPERTY AND EQUIPMENT - NET - 772,743
LAND HELD FOR INVESTMENT 302,313 -
TOTAL ASSETS $ 1,641,357 $ 1,964,630
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Mortgage and note payable - current portion 50,830 37,079
Other liabilities 65,152 220,523
Total Current Liabilities 115,982 257,602
Mortgage and note payable -
Net of current portion 26,483 805,937
Total Liabilities 142,465 1,063,539
SURPLUS NOTES 200,000 -
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 5,000,000
and 3,000,000 shares authorized,
respectively, 1,104,882 shares issued
and outstanding 1,104,882 1,104,882
Capital in excess of par 2,313,414 2,313,414
Deficit (2,119,404) (2,517,205)
Total Stockholders' Equity 1,298,892 901,091
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,641,357 $ 1,964,630
Read accompanying notes to financial statements.
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
REVENUES
Premiums $ - $ - $ 1,003,998
Investment Income 29,289 99,815 689,881
Other revenues 126,667 224,010 719,947
Total Revenues 155,956 323,825 2,413,826
BENEFITS, CLAIMS AND
EXPENSES
Benefits and claims - - 759,683
Underwriting, acquisition,
insurance and administrative
expenses 327,746 574,464 2,222,238
Loss on disposal of
equipment - - 67,905
Total Benefits, Claims and
Expenses 327,746 574,464 3,049,826
Income (Loss) before
loss from subsidiary (171,790) (250,639) (636,000)
Loss from subsidiary - (215,774) (375,951)
Income (Loss) before
income taxes (171,790) (466,413) (1,011,951)
Income tax provision
(benefit) - - (324,173)
Loss before realized
gains and losses,
net of related income
taxes $ (171,790) (466,413) (687,778)
Realized gains and losses,
net of related income
taxes 569,591 (510,892) (401,022)
NET INCOME (LOSS) $ 397,801 $ (977,305) $ (1,088,800)
Income (Loss) per share
Income (Loss) before realized
gains and losses (.16) (.42) (.62)
Realized gains and losses .52 (.46) (.36)
Net Income (Loss) .36 (.88) (.98)
Weighted average number of
shares of common stock 1,104,882 1,104,882 1,104,882
Read accompanying notes to financial statements.
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 397,801 $ (977,305)$(1,088,800)
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Loss from subsidiary - 215,774 375,951
Depreciation 15,005 39,031 102,693
Amortization of acquisition
costs and cost of insurance
purchased - - 262,018
Loss on investments 27,811 510,892 401,022
Allowance for doubtful
accounts - - 661,543
Loss (Gain) on disposal of
building and equipment (435,433) - 67,905
Other Loss (Gains) (161,969) - -
Changes in:
Accrued investment income (3,086) (5,294) 228,427
Accounts and notes receivable 409,056 29,546 (1,183,700)
Current income taxes - 445,138 (168,830)
Other assets 1,102,329 341,300 73,317
Policy liabilities and
accruals - - (11,948,127)
Other liabilities (155,371) (529,640) 553,892
Mortgage loans held for
investor funding 2,253 3,988 131,940
Net Cash Provided by
(Used in) Operating
Activities 1,198,396 73,430 (11,530,749)
Read accompanying notes to financial statements.
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale and
maturity of investments - - 10,550,906
Purchase of investments (609,035) - -
Purchase of property and
equipment - (108,024) (34,001)
Sale of licenses - - 976,000
Advances to affiliate and
related parties - 29,546 41,561
Capital Contributions by
shareholders 200,000 - -
Purchase of preferred stock
in subsidiary - - (275,000)
Net Cash (Used in)
Provided by investing
activities (409,035) (78,478) 11,259,466
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayments on mortgages and
notes (843,015) (31,488) (45,908)
Net Cash (Used In)
Financing Activities (843,015) (31,488) (45,908)
(Decrease) Increase in
cash (53,654) (36,536) (317,191)
CASH - BEGINNING OF YEAR 75,547 112,083 429,274
CASH - END OF YEAR $ 21,893 $ 75,547 $ 112,083
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
1996 1995 1994
Cash paid during the years for:
Interest $ 42,896 $ 63,095 $ 432,593
Read accompanying notes to consolidated financial statements
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
During 1994, the Company purchased fixed assets of $32,935 on an
installment loan.
In 1995, the Company sold Home America Mortgage Company for a note
receivable in the amount of $600,000 which had been reduced to $226,000,
the net value of the underlying asset offered as collateral. In 1996,
the note was cancelled in exchange for the asset.
During 1995, the Company transferred mortgage loans on real estate
totalling approximately $274,000 to its attorneys, in payment for
services rendered.
During 1995, in conjunction with the sale of Home America Mortgage
Company, the Company transferred a mortgage of approximately $316,000 to
its former parent in exchange for current and future commissions on
certain insurance contracts.
Read accompanying notes to consolidated financial statements
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
NOTE 1 - GOING CONCERN
The Company's financial statements are presented on a going
concern basis which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of
business. As discussed in Note 2, the Company has sold all of
its insurance operations and is currently in a dormant state
with regard to its insurance activities. The Company's plans
for raising additional sources of cash primarily rely on
selling investment property and capital infusions by
investors or major stockholders. No assurances can be made
that the Company can obtain additional sources of cash or
commence future insurance operations. At December 31, 1996,
capital and surplus under generally accepted accounting
principles and statutory principles aggregated $1,498,892 and
$1,365,647, respectively.
The Company's continued existence is dependent upon its
ability to raise capital and commence insurance operations as
set forth above. The Company must obtain and maintain a
capital and surplus under the statutory basis of accounting in
the amount of $1,400,000 in order to continue as a life
insurance company.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization
Washington Security Life Insurance Company ("Washington" or
"the Company") F/K/A Frontier Insurance Company ("Frontier")
is a corporation organized in Missouri on May 28, 1963. The
Company, formerly known as Frontier Insurance Company, changed
its name on November 7, 1996. The Missouri Department of
Insurance approved the name change on January 8, 1997.
The Company is a stock life insurance company that marketed
life insurance and annuity products. The Company operated
Home America Mortgage Company ("HAMC"), a mortgage origination
business. The Company sold HAMC during 1995 (See Note 3).
The Company also operated International Financial Services
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Life Insurance Corporation ("IFSLIC"), which marketed annuity
insurance products. The Company sold IFSLIC in October 1994.
At the date of this report, the Company has sold all of its
insurance operations and is currently in a dormant state with
regard to its insurance activities.
Prior to 1996, the Company was involved in a holding company
structure. The Company's parent, International Mercantile
Corporation ("IMC") owned a 62% direct interest in the Company
prior to 1996. IMC was owned 61% by Life America ("Life
America"). Life America was 80% owned by the Ventana
Corporation A/K/A the C.J. Brown Corporation ("Ventana"). A
lawsuit was settled in 1996 between the Company, IMC and
Ventana in which the Company received 1,758,000 shares of IMC
common stock and title to property in Baton Rouge, LA for
cancellation of debt paper of Ventana and HAMC. See Note 13
in regard to binding arbitration.
As of December 31, 1996, the Company is no longer involved in
a holding company structure, nor does the Company have any
subsidiaries.
B. Investments
Generally, investments are carried at cost. Investments with
impairment in value, which is other than temporary, are
written down to estimated realizable values. The write downs
are included in realized investment gains (losses) in the
statements of operations. The cost of securities sold is
based on the specific identification method.
C. Income Taxes
Deferred income taxes are provided for timing differences
between financial statement income and income reported for tax
purposes.
D. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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 revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
E. Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided on the accelerated and straight line methods based on
the estimated useful lives of the respective assets.
Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. When items of
property or equipment are sold or retired, the related cost
and accumulated depreciation are removed from the accounts and
any gain or loss is included in the results of operations.
The Company sold its remaining property and equipment during
1996.
F. Income (Loss) Per Share
Income (Loss) per share on common stock is based on the
weighted average number of shares outstanding.
G. Fair Values of Financial Instruments
The Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial
instruments where it is practicable to estimate that value.
The carrying amounts of the Company's financial instruments,
including cash, investments, receivables, accounts payable and
accrued liabilities, approximates fair value due to the
relatively short period to maturity for these instruments.
The carrying value of the Company's note payable approximates
fair value based on the current rates offered to the Company
for debt of the same remaining maturities.
H. Statement of Cash Flows
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
NOTE 3 - SALE OF SUBSIDIARY AND OTHER ASSETS
Effective November 17, 1995, the Company, two of its
directors, IMC (former parent of the Company), and an
unrelated corporation consummated the following transactions:
A The Company sold 100% of the stock of its mortgage
subsidiary, Home America Mortgage Company (HAMC) to IMC
for $600,000, payable over 270 months with interest at
7%. Collateral for this note included a pledge of 100%
of the stock in HAMC, assignment of a note in first
mortgage in the principal amount of $200,000 held by HAMC
on real property owned by a related party to the
transaction, a mortgage on property held for development
owned by HAMC, and a pledge of certain cooperative
promissory notes in the principal amount of $300,000.
B As part of the agreement, the Company and IMC agreed to
cancel and transfer to one another all inter-company
obligations, an assignment to the Company of accrued
rights to commissions on certain insurance contracts, and
certain obligations due from a related party and entitles
controlled by that related party which had been reserved
as uncollectible in the financial statements of the
various companies in prior years.
C Also as part of the agreement, two directors of the
Company purchased 780,010 shares of stock in the Company
that had been pledged as collateral by IMC on a
$1,200,000 note with a current balance of approximately
$380,000 in exchange for the directors' payment of the
remaining note liability through a company related to the
directors. Prior to the transaction, these shares had
represented 71% of the outstanding shares of the Company.
The State of Missouri had valued the $600,000 note at $226,000
for statutory purposes as of November 30, 1995. During 1996,
the note was in default and as part of binding arbitration
proceedings (See Note 13), the Company received in full
satisfaction of the $600,000 note title to real property held
by HAMC. The Company had established an allowance for
uncollectability of $374,000 on the note.
The Company settled a disagreement with the purchaser of
IFSLIC by returning $90,000 in 1996. The amount is included
in realized gains and losses.
NOTE 4 - COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Washington Security Life Insurance Company F/K/A Frontier
Insurance Company is a Missouri domiciled stock life insurance
company, and as such is limited in distributions of dividends
to its stockholders to amounts in excess of minimum statutory
capital requirements, as determined under statutory accounting
principles. Under the State of Missouri Insurance Code, the
Company must maintain minimum capital and surplus on a
statutory basis of $1,400,000 (See NOTES 1 and 12B).
The following table summarizes pertinent statutory information
about the Company for the years ended December 31, 1996, 1995
and 1994, respectively, as reported in the Company's annual
statements, as filed.
1996 1995 1994
Total Assets $ 1,519,041 $ 1,575,095 $ 3,012,026
Total Liabilities 32,618 300,013 1,050,433
Total Surplus 1,486,423 1,275,082 1,961,593
Net (loss) income (894,115) (2,040,257) (740,956)
Reserves for future
policy benefits - - -
Life insurance
in force $ - $ - $ -
On November 7, 1996, the Company increased the authorized
number of common shares from 3,000,000 to 5,000,000.
NOTE 5 - INVESTMENT OPERATIONS
Realized gains (losses) and change in unrealized appreciation
(depreciation) investments, including investment in parent,
are shown below:
FIXED NET GAINS
MATURITIES OTHER (LOSSES)
1996
Realized $ - $ 569,591 $ 569,591
Unrealized - - -
Combined $ - $ 569,591 $ 569,591
1995
Realized $ - $(510,892) $ (510,892)
Unrealized - - -
Combined $ - $(510,892) $ (510,892)
1994
Realized $ (339,835) $ (61,187) $ (401,022)
Unrealized - - -
Combined $ (339,835) $ (61,187) $ (401,022)
Major categories of investment income are summarized as
follows:
1996 1995 1994
Fixed maturities $ 2,568 $ 35,845 $ 498,007
Preferred stocks - 14,833 -
Mortgage loans 109 4,635 63,019
Short-term investments 26,612 5,557 4,915
Long-term and other - 38,945 149,391
29,289 99,815 715,332
Investment (expense) ( - ) ( - ) (25,451)
Net Investment Income $ 29,289 $ 99,815 $ 689,881
Amortized cost, market value, and unrealized gains and losses
for major investment categories are summarized as follows:
DECEMBER 31, 1996
AMORTIZED MARKET UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
Mortgage loans on
real estate $ 123 $ 123 $ - $ -
Investments 1,209,045 1,225,171 16,126 -
$ 1,209,168 $ 1,225,294 $ 16,126 $ -
DECEMBER 31, 1995
AMORTIZED MARKET UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
Mortgage loans on
real estate $ 2,376 $ 2,376 $ - $ -
Short-term investments 600,008 600,008 - -
$ 602,384 $ 602,384 $ - $ -
Maturities of investment securities at December 31, 1995 are
as follows:
AMORTIZED MARKET
COST VALUE
One year or less $ 1,209,045 $ 1,225,171
Other mortgages 123 123
$ 1,209,168 $ 1,225,294
Proceeds from sales of debt securities, including GNMA
mortgage loan pools, were -0-, -0- and $11,154,562 for 1996,
1995 and 1994, respectively. Resultant gross gains of -0-, -
0- and $6,453 and gross losses of -0-, -0- and $407,945 were
realized for 1996, 1995 and 1994, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1995
Building $ - $ 899,356
Less: Accumulated depreciation - 126,613
PROPERTY AND EQUIPMENT - NET $ - $ 772,743
Depreciation expense for the years ended December 31, 1996,
1995 and 1994 was $15,005, $39,031 and $102,693, respectively.
In 1996, the Company sold a building for approximately
$1,230,000, received net proceeds of approximately $368,000
(See Note 7), and realized a profit of $435,433 which is
included in realized gains and losses.
NOTE 7 - MORTGAGE AND NOTE PAYABLE
The following is a summary of mortgage and notes payable at
December 31, 1996 and 1995:
1995 1994
Note payable - bank, secured by land,
payable in monthly installments of
$4,583 including interest at 1% over
the bank's prime rate (10.75% at
December 31, 1996), balloon
payment due May 1998. $ 77,313 $ -
Mortgage payable - bank, secured by
real estate, payable in monthly
installments of $8,598 including
interest at 8% due May 2009. The
building was sold during 1996
(See Note 6). - 843,016
TOTAL MORTGAGE AND NOTE PAYABLE $ 77,313 $ 843,016
The aggregate amount of note payable maturing in each of the
two years subsequent to December 31, 1996 is as follows:
1997 $ 50,830
1998 26,483
TOTAL $ 77,313
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan to invest in
the common stock of IMC for the benefit of substantially all
employees. Annual expense is determined by the Board of
Directors and totalled $ -0-, -0- and $79,174 for the years
ended December 31, 1996, 1995 and 1994, respectively.
NOTE 9 - DEFINED CONTRIBUTION EMPLOYEE PLAN
The Company has a defined contribution employee plan (401(K)
Plan). Qualified employees may elect to contribute to the
plan up to a maximum of 20% of the employee's annual salary.
The Company will match 50% of the contribution of each
individual, not to exceed 3% of the employee's gross annual
income. The Company's expense under this plan was -0-, $1,558
and $1,856 for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
On February 25, 1992, the Company loaned $75,000 to a company
controlled by a consultant to the Company. The note was
secured by an interest in an oil well and various equipment.
The note called for monthly payments of $1,500 per month for
the first three months and beginning August 1, 1992, the
monthly payment increased to $3,000 until the note was paid in
full. The note bore interest at 12.5%. The Company received
virtually no payments on the note and in 1993 foreclosed on
the collateral. The equipment was sold to a former board
member for approximately $35,000 in cash and a note for
$38,809. No payments were received on the note and the
balance was written off in 1995.
The Company loaned $199,000 to a company whose President was
a consultant to the Company. The note was secured by an
interest in an oil well. The note called for monthly payments
of $3,000 beginning May 10, 1992 with interest at 12.5%. The
outstanding principal and unpaid interest was due on March 20,
1993. The Company received no interest on this note and in
1993 foreclosed on the collateral. In December 1993, the
interest in the oil well was received in foreclosure and was
contributed as part of the capital contribution to a limited
partnership (See Note 11).
On May 26, 1992, the Company entered into a joint venture
agreement with a company controlled by a former consultant to
the Company. The Company contributed a total of $571,950 to
the joint venture. The agreement called for the Company to
receive 70% of the net cash flow until the entire contribution
and interest has been paid in full at which time the Company
would receive 30% interest in the net cash flow. On December
10, 1993, the Company contributed their interest valued at
$521,340 in the joint venture to the limited partnership,
described above (See Note 11).
In 1996, the Company received a payment of $75,000 as full
settlement of amounts due from the limited partnership (See
NOTE 11).
In November 1995, the Company sold HAMC for a note in the
amount of $600,000 to its former parent (IMC). The Company
and IMC agreed to modify the transaction in 1996 (See NOTE 3).
On October 16, 1992, the Company loaned a corporation $210,000
which was secured by a first mortgage on property and a pledge
by the corporation of its security interest in another corporation.
The mortgage called for monthly installments of $2,027, including
interest at 10%, beginning November 16, 1993
with a balloon payment due on October 16, 1997 in the amount
of $189,031. The principal of the corporation was a former
board member. As of December 31, 1994, the mortgage note was
delinquent and in 1995, the Company foreclosed on the property
and transferred the property to the Company's attorneys in
payment of legal fees.
In October 1992, the Company loaned an individual $325,000 for
the purchase of residential real estate. The loan was secured
by a first mortgage on the real estate. The note called for
monthly payments of $2,377 including interest at 8% with a
balloon payment in the amount of $310,404 due on November 1,
1997. As part of the sale of HAMC, in 1995, the Company
transferred the mortgage to IMC.
IMC had a term loan from a bank which was secured by common
stock of the Company, the assignment of the life insurance
policies on two former officers, and the personal guarantees
of the former officers. The loan was payable in monthly
installments of $5,000 per month and was due in 1996. The
loan was purchased by a company controlled by two current
board members, and in 1995 the loan was forgiven in exchange
for the Company's common stock held by IMC (See NOTE 3).
The principal shareholders contributed under surplus
contribution notes $200,000 to the Company during 1996. The
surplus notes bear interest at 7% per annum and are payable
from surplus funds in excess of surplus and capital statutory
requirements.
See NOTES 11, 12 and 13 for additional related party
transactions.
NOTE 11 - LIMITED PARTNERSHIP AGREEMENT - RELATED PARTY
In December 1993, the Company entered into a partnership
agreement with a subsidiary of Ventana. The Company was named
the sole limited partner and the Ventana subsidiary became the
general partner. The Company contributed to the partnership
its various interests in exploration, drilling, and production
relating to oil, gas, and other mineral deposits. The Company
had acquired its interests in the partnerships either by
virtue of direct investment or as a result of foreclosure
proceedings relating to loans made to joint ventures
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
NOTE 11 - LIMITED PARTNERSHIP AGREEMENT - RELATED PARTY (CONTINUED)
collateralized by the underlying mining interests. In
addition, the Company contributed its preferred stock
positions in Atlantic Financial Corp. and Sterling Exploration
Corp. totaling $350,000. The total to be repaid was
approximately $686,000 as of December 31, 1995 plus interest.
The Company had received independent engineering and mining
evaluations of the mining properties indicating insufficient
cash flow from operations to liquidate the investments.
Therefore, an allowance for uncollectibility in the amount of
$578,000 was recorded as of December 31, 1995.
In 1996, the Company received a payment as settlement of
amounts due from the limited partnership resulting in a loss
of $27,811, which is included in realized gains and losses.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
A. Litigation
On March 17, 1995, the HAMC was party to a petition filed in
the United States Bankruptcy Court in Louisiana requesting
that Ventana be placed in involuntary bankruptcy. The
Company's involvement related to a note held by HAMC in the
principal sum of $180,000. The principal balance and all
accrued interest was past due and the petition alleged that
Ventana was in default. The litigation was settled during
1996 (See Note 13).
In 1994, an action was brought by the brother of a former
consultant in connection with the seizure and subsequent sale
of corporate stock that had been pledged to secure a loan from
the Company which subsequently went into default. The action
resulted in a default judgement against the Company in 1995.
The lawsuit was dismissed in 1996 and had no material effect
on the Company.
The Company is a defendant from time to time in claims and
lawsuits arising out of the normal course of its business,
none of which are expected to have a material adverse effect
on its business.
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
B. Orders of Suspension
The Commissioners and Directors of the Insurance Departments
of several states has suspended the Company's authority to
transact new business in their states until the Company
demonstrates that it is not in violation of their various
state's regulations, especially with regard to current capital
and surplus requirements. These suspensions, issued at
various dates from May 13, 1993 forward, are still in effect
as of the date of this report.
On January 25, 1996, the Company was placed under
administrative supervision by the Department of Insurance of
the State of Missouri. On May 23, 1996, the administrative
supervision was ended.
C. Securities and Exchange Commission
On November 22, 1993, the Company was informed that a formal
investigation of the conduct of their businesses had been
initiated by the Enforcement Branch of the Securities and
Exchange Commission ("SEC" or "Commission").
The Company voluntarily supplied the Commission with all
documents as requested. The Company's Board of Directors
authorized and instructed management to comply with the
requests of the Commission, which the Company had done.
On October 11, 1994, the Commission notified the Company that
it intended to recommend the filing of a civil injunctive
action against the Company for violating various sections of
the Securities laws. The Company responded to the Commission
on November 30, 1994 agreeing to consent to an injunction
against future violations of Federal Securities Regulations
and agreed to pay a $60,000 fine, which was paid in 1995.
NOTE 13 - BINDING ARBITRATION
Prior years' litigation under Bruce and Bruce Company versus
The C.J. Brown Corporation, et al, The Ventana Corporation et
al versus William D. Bruce et al and the Petition to place
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
NOTE 13 - BINDING ARBITRATION (CONTINUED)
C.J. Brown Corporation (a/k/a The Ventana Corporation) in
bankruptcy were consolidated into a single hearing under
binding arbitration.
On April 18, 1996, the parties agreed that all suits would be
terminated. The Bruces received a return of their shares in
Bruce and Bruce Company. Various intercompany debt was
cancelled and the Company received 1,758,000 shares of IMC
common stock and all rights to commissions payable to IMC on
assumption reinsurance. The Company also received title to
property in Baton Rouge, Louisiana. This property was
transferred at a value of $226,000 for cancellation of the
$600,000 IMC note (See Note 3). The Company also received
$75,000 for its limited partnership interest. Court orders
were entered on June 4, June 24 and August 2, 1996 dismissing,
with prejudice, the three respective pieces of litigation.
The Company subsequently sold the rights to the assumption
reinsurances commissions for a one time payment of $250,000,
which is included in realized gains and losses.
NOTE 14 - STATE EXAMINATION
During 1995, the Insurance Department of the State of Missouri
completed an examination of the Company for the period ended
November 30, 1995. As a result of this examination, various
assets carried on the Company balance sheet were adjusted as
"non-admitted" for regulatory purposes yielding a charge
against surplus in the amount of approximately $1,194,000 at
November 30, 1995. The Company is required to maintain capital
and surplus of $1,400,000 under the State of Missouri
Insurance Code. As of December 31, 1996, the Company had
total surplus of $1,365,647 and therefore was not in
comliance with statutory requirement (See Note 4).
WASHINGTON SECURITY LIFE INSURANCE COMPANY
F/K/A FRONTIER INSURANCE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY FOR YEARS ENDING
DECEMBER 31, 1996 1995 and 1994
COMMON STOCK CAPITAL IN RETAINED TOTAL
NUMBER OF $1.00 EXCESS OF EARNINGS STOCKHOLDER
SHARES PAR VALUE PAR (DEFICIT) EQUITY
BALANCE
DECEMBER 31, 1993 1,104,882 $1,104,882 $2,313,414 $(451,100) $2,967,196
AS RESTATED
NET(LOSS)FOR THE YEAR ENDED DECEMBER 31, 1994
- - - (1,088,800) (1,088,800)
BALANCE
DECEMBER 31, 1994 1,104,882 1,104,882 2,313,414 (1,539,900) 1,878,396
NET (LOSS) FOR THE YEAR ENDED
DECEMBER 31, 1995 - - - (977,305) ( 977,305)
BALANCE
DECEMBER 31, 1995 1,104,882 1,104,882 2,313,414 (2,517,205) 901,091
NET INCOME FOR THE YEAR ENDED
DECEMBER 31, 1996 - - - 397,801 397,801
BALANCE
DECEMBER 31, 1996 1,104,882 1,104,882 $2,313,414 $2,119,404 $1,298,892
Read accompanying notes to financial statements.
