<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 26, 1997
Date of Amendment July 17, 1997
PROFESSIONAL BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Commission File Number 0-22344
Texas 74-2072535
(State of other jurisdiction of (I.R.S. employer
incorporation or organization identification number)
10835 Rockley Road, Houston, Texas 77099
(Address of principal executive offices, including ZIP code)
281/721-1800
(Registrant's telephone number, including area code)
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<PAGE> 2
PROFESSIONAL BENEFITS INSURANCE COMPANY
The undersigned registrant hereby amends the following items of its
Annual Report on Form 10-KSB dated March 26, 1997, as set forth in the pages
attached hereto:
Item 1 - DESCRIPTION OF BUSINESS
A sentence was added to the end of the first paragraph of Item
1.
Item 6 - MANAGEMENT DECISION AND ANALYSIS
LIQUITY AND CAPITAL RESOURCES
Explanation of Company's change in mix of insurance premiums
written in 1996.
Item 7 - FINANCIAL STATEMENTS
Independent Account's Report
Independent Accountant's Report, dated March 8, 1996 for the
audit of the December 31, 1995 Financial Statements.
Revised Report and Financial Statements for the fiscal years
ended December 31, 1995 and December 31, 1996.
Description of Depreciation Expense in Note 5 (Real Estate) to
the Revised Report and Financial Statements for the fiscal
years ended December 31, 1995 and December 31, 1996.
Summary Financial Information for the period ended December 31,
1996.
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<PAGE> 3
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROFESSIONAL BENEFITS
INSURANCE COMPANY
(Registrant)
July 17, 1997 By: /s/ JERRY RAY
---------------------------
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<PAGE> 4
PART 1
ITEM 1. DESCRIPTION OF BUSINESS.
Professional Benefits Insurance Company ("Company") is a Texas
domestic stock life insurance company which has been doing business under the
Texas Board of Insurance for seventeen years. Originally incorporated on July
31, 1979 as TDA Life and Health Insurance Company, the corporation changed its
name in 1988 to Professional Benefits Insurance Company. The Company is subject
to Chapters 1, 3 and 21 of the Texas Insurance Code.
The Company provides life and health insurance primarily serving
dental professionals in Texas, but including some professionals in adjoining
and nearby states. Revenues from premiums and other considerations for 1996
totaled $9,602,613 with a net loss (after taxes) of $(457,785) and with total
assets of $5,610,994 as reflected in the 1996 audited Financial Statements.
The Company is a licensed indemnity life insurance company. Product
lines include term life and comprehensive major medical (accident and health)
insurance.
The Company's reinsurance providers and respective A.M. Best Ratings
are as follows:
<TABLE>
<CAPTION>
Company Rating Coverage
<S> <C> <C>
American United Life Insurance Company A+ (Superior) Individual Life Business
Life Reassurance Corp. of America A+ (Superior) Individual & Group Life Business
Washington National Insurance Company A- (Excellent) Disability
Lone Star Life B (Adequate) Income Assurance
Manufacturers Life Co. of America A++ (Superior) Major Medical
BCS Life Insurance Co. A- (Excellent) Medical
IOA Reassurance Pool Company Non-rated Pooling Syn. Medical
Transamerica Occidental Life Insurance Co. A+ (Superior) Individual Life Business
Connecticut General Life Insurance Co. A+ (Superior) Accidental Death
</TABLE>
The maximum retention on one risk is as follows:
<TABLE>
<S> <C>
Accident and Health (major medical) $125,000/year
Life $ 25,000/life
Disability & Income Assurance $ 300/month
</TABLE>
INSURANCE IN FORCE
Total insurance in force is as follows:
<TABLE>
<CAPTION>
INDIVIDUAL LIFE INSURANCE GROUP LIFE INSURANCE
------------------------- --------------------
# OF $ AMOUNT OF # OF $ AMOUNT OF
YEAR POLICIES INSURANCE CERTIFICATES INSURANCE
---- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1996 520 25,110,500 2,860 32,527,500
</TABLE>
<TABLE>
<CAPTION>
INDIVIDUAL ACCIDENT GROUP ACCIDENT
AND HEALTH INSURANCE AND HEALTH INSURANCE
$ AMT OF ANNUAL $ AMT OF ANNUAL
YEAR PREMIUMS PREMIUMS
---- -------------------- --------------------
<S> <C> <C>
1996 $4,494,171 $4,874,676
</TABLE>
2
<PAGE> 5
ITEM 1. DESCRIPTION OF BUSINESS. (CONTINUED)
DESCRIPTION OF STOCK
The Company is authorized to issue 1,022,668 shares of Class A Common
Stock and 73,524 shares of Class B Common Stock, each with a par value of $1.22
per share. As of December 31, 1996, 587,129 shares of Class A Common Stock and
73,524 shares of Class B Common Stock were issued and outstanding.
Class A Common Stock carries the right of one vote per share. Each
share of Class A Common Stock will share in dividends and on dissolution
equally with every other share of Class A Common and Class B Common Stock.
Class B Common Stock is non-voting shares (but shares equal in value and
earnings with every other share of Class A Common or Class B Common Stock).
The Articles of Incorporation deny the preemptive right of a holder of stock to
acquire unissued or treasury shares of stock. The right of cumulative voting
is further prohibited by the Articles of Incorporation.
EMPLOYEES
The Company has 26 full time employees and 1 part-time employee.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at 10835 Rockley Road,
Houston, Texas. The Company owns and occupies all of its home office building,
which has approximately 12,840 square feet of usable space. This space is
adequate for the Company's current and planned needs.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is not actively being traded on any market.
As of December 31, 1996 there were 699 persons or entities holding
587,129 shares of Class A Common Stock, and one entity holding 73,524 shares
of Class B Common Stock.
Dividends have not been paid in any of the last two fiscal years.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1996 AND 1995
RESULTS OF OPERATIONS
Changes in Company revenues for 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total Revenues $9,602,613 $8,539,247
Change in Revenues
Compared to Preceding Year $1,063,366 ($85,037)
12.5% (1.0)%
</TABLE>
The primary components of the Company's revenue are premium and net investment
income.
Changes in net premium revenue for 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total Premiums $9,126,520 $8,184,169
Change in Premiums
Compared to Preceding Year $ 942,351 ($197,705)
11.5% (2.4)%
</TABLE>
The increase in premium is due to increased marketing by the Company. The
Company continues to successfully pursue its niche marketing strategy of
targeting associations and the group dental market. Dental premium, on a cash
basis, increased by 206% over the prior year, with group life increasing by
32%.
Components of the changes in net investment income for 1996 and 1995
are shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total Net Investment Income $349,998 $219,553
Change in Net Investment
Income $130,445 $ 64,894
59% 42%
</TABLE>
1
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1996 AND 1995
(Continued)
The Company maintains a mix in its investment portfolio in the following
percentages: investment grade bonds 39.5%, bond mutual funds (government
obligation bonds) 34.2%, and money market funds 26.3%. Investment income
increased in 1996 due to significant gains which were realized from the
liquidation of the Company's equity mutual funds. The Company's investment
philosophy is one of preservation of capital while providing current income.
General and administrative expenses for 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
General and Administrative
Expenses $2,100,777 $2,217,003
Change in General and
Administrative Expenses
Compared to Preceding Year $ (116,226) $ 193,396
(5.2)% 9.6%
</TABLE>
General and administrative expenses have decreased from the prior year due to a
decrease in accounting and actuarial fees. These fees have in aggregate
decreased by $146,000 from the prior year. There were abnormally high
accounting and actuarial fees in 1995 due to regulatory changes in 1995. This
decrease is due to the return to a normal operating and regulatory environment
in 1996.
Total Commissions expense for 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total Commissions Expense $676,828 $376,867
Change in Commissions Expense
Compared to Preceding Year $299,961 $ 45,548
79.6% 13.7%
</TABLE>
Commissions expense increased over 1995 due to increased sales of dental and
major medical insurance. First year commissions on major medical insurance are
higher than those paid in latter years. Therefore commissions on major medical
insurance written in 1996 should moderate in 1997. The commissions associated
with the Company's dental product are significantly higher than commissions for
major medical.
2
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1996 AND 1995
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash for the payment of policy benefits, operating
expenses, commissions and funds for the purchase of assets for investment.
These needs have been met by the Company with funds generated by its
operations, from its reserves and liquid assets. Policy benefits as a
percentage of earned premium was above historical averages in 1996 and 1995.
The Company believes this is primarily due to the cyclical nature of policy
benefits and will correct itself in the normal course of business. As an
additional measure, the Company has imposed premium rate increases on some of
its' policyholders and is evaluating the need to impose further increases on
other policyholders to help cover the portion of the increased cost of policy
benefits which may not be temporary or cyclical in nature.
In addition to the Company's cash needs, the Company must maintain capital and
surplus levels, determined on a statutory accounting basis, in order to conduct
insurance business in the jurisdictions in which it is licensed. The Company is
in compliance with all such requirements.
The Company had total assets of $5,610,994 and $5,683,464 for the years ended
December 31, 1996 and 1995, respectively. The Company experienced cash flows
from operations of $(63,301) and $(152,744) in the years ended December 31,
1996 and 1995 respectively.
More specifically, four new associations were written during April 1996 which
increased the annual premium by $778,000. In November 1996 a new group was
enrolled which will produce annualized premium of $1,008,000. Additionally, the
Company wrote three large Dental cases along with approximately eighteen
smaller cases. The annual increase in Dental premium for 1996 was $590,000.
Commission payments to agents as well as claims will definitely impact the
Company operations. The commissions for Major Medical and Dental premium will
average about 10.5%. Commissions will not be paid on future rate increases for
individual policies, which represents 85% of the total Major Medical premium.
The claims during the first three quarters of 1996 were normal or slightly
below while the last quarter accelerated above our predicted target loss ratio
due to a few large claims and several claims that averaged between $12K to
$20K.
The general course of the Company has been to offer and write Association Major
Medical and Life coverage while increasing our Group Major Medical and
concentrate more, compared to the past, on increasing Dental coverage to Group
employers. This same philosophy will continue to be the Company's direction.
The impact on future operations is targeted for the Company to successfully
profit from future and existing business in force.
3
<PAGE> 9
[BAIRD, KURTZ & DOBSON LETTERHEAD]
Williams Center Tower
Suite 1700
1 West 3rd Street
Tulsa, Oklahoma 74103-3581
(918) 584-2900
Fax: (918) 584-2931
Independent Accountants' Report
Board of Directors
Professional Benefits Insurance Company
Houston, Texas
We have audited the accompanying consolidated balance sheets of
PROFESSIONAL BENEFITS INSURANCE COMPANY as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years then ended. 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 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. 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
PROFESSIONAL BENEFITS INSURANCE COMPANY as of December 31, 1995 and 1994, and
the results of its operations and its cash flows for each of the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 13, in 1994 the Company changed its method of
accounting for investments.
Tulsa, Oklahoma
March 8, 1996
/s/ Baird, Kurtz & Dobson
-----------------------------------------
<PAGE> 10
PROFESSIONAL BENEFITS INSURANCE COMPANY
ACCOUNTANTS' REPORT AND
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
CAUSON & WESTHOFF
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 11
PROFESSIONAL BENEFITS INSURANCE COMPANY
DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT..............................................................................1
FINANCIAL STATEMENTS
Balance Sheets.........................................................................................2
Statements of Operations...............................................................................3
Statements of Changes in Stockholders' Equity..........................................................4
Statements of Cash Flows...............................................................................5
Notes to Financial Statements.......................................................................6 - 16
</TABLE>
CAUSON & WESTOFF, CPA's
<PAGE> 12
[CAUSON & WESTHOFF LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Professional Benefits Insurance Company
Houston, Texas
We have audited the accompanying balance sheet of PROFESSIONAL BENEFITS
INSURANCE COMPANY as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for year then ended. 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 audit. The financial statements of PROFESSIONAL BENEFITS INSURANCE COMPANY
as of December 31, 1995 were audited by other accountants whose report dated
March 8, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require 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. 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 our audit provides a reasonable basis for
our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of PROFESSIONAL
BENEFITS INSURANCE COMPANY as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 14 to the financial statements, the Company's 1996
policy claim liability previously reported as $1,905,000 should have been
$2,160,000. This discovery was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect this
correction.
Tulsa, Oklahoma
March 7, 1997, except for Note 14, as to which the date is May 29, 1997.
<PAGE> 13
PROFESSIONAL BENEFITS INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INVESTMENTS
Fixed maturities, at market (amortized $1,927,526 $1,220,642
cost - $1,935,408 - 1996 and
$1,230,621 - 1995)
Common stock mutual funds, at market 856,389
Short-term investments (cost approximating
market) 830,898 1,420,523
---------- ----------
2,758,424 3,497,554
CASH 729,252 37,252
REINSURANCE RECOVERABLE
Current recoverable 52,084 16,590
Future recoverable 839,100 990,166
ACCRUED INVESTMENT INCOME 10,763 47,643
PREMIUMS DUE AND UNCOLLECTED 179,836 28,551
ACCOUNTS AND NOTE RECEIVABLE 58,051 36,584
LAND AND BUILDING, AT COST
(net of accumulated depreciation -
$454,906 - 1996 and $376,794 - 1995) 497,882 575,994
FURNITURE AND EQUIPMENT, AT COST
(net of accumulated depreciation -
$328,861 - 1996 and $529,326 - 1995) 226,940 217,139
GUARANTY FUND ASSESSMENTS 3,654 10,361
DEFERRED TAX BENEFIT 28,000
FEDERAL INCOME TAX RECEIVABLE 294,000 188,000
OTHER ASSETS, AT COST 20,008 37,630
---------- ----------
$5,697,994 $5,683,464
========== ==========
</TABLE>
See Notes to Financial Statements
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CAUSON & WESTOFF, CPA's
<PAGE> 14
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES
Future policy benefits $1,048,334 $1,052,509
Policy claims 2,160,000 1,623,000
Premiums received in advance 185,706 100,488
Unearned premiums 56,324
----------- -----------
3,450,364 2,775,997
Reinsurance payable 57,463 31,820
Deferred tax liability 5,000
Other liabilities 311,397 300,951
----------- -----------
3,819,224 3,113,768
----------- -----------
STOCKHOLDERS' EQUITY
Common stock
Class A voting, $1.22 par value; 1,022,668
authorized shares; 587,129 issued and
outstanding in 1996 and 1995 716,297 716,297
Class B nonvoting, $1.22 par value; 136,720
authorized shares; 73,524 issued and
outstanding in 1996 and 1995 89,699 89,699
Additional paid-in capital 536,214 536,214
Unrealized gain (loss) on investments
(net of deferred income tax benefits (liabilities)
of $2,600 - 1996; $(21,200) - 1995) (5,182) 41,959
Retained earnings 541,742 1,185,527
----------- -----------
1,878,770 2,569,696
----------- -----------
$ 5,697,994 $ 5,683,464
=========== ===========
</TABLE>
<PAGE> 15
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES
Premiums earned $ 9,617,689 $ 8,725,826
Reinsurance ceded (491,169) (541,657)
------------ -----------
Net premiums earned 9,126,520 8,184,169
Net investment income 349,998 219,553
Other income 126,095 135,525
------------ -----------
9,602,613 8,539,247
------------ -----------
BENEFITS, CLAIMS, AND EXPENSES
Benefits and claims 8,037,007 6,895,595
Reinsurance recoverable (278,214) (382,488)
------------ -----------
Net benefits and claims 7,758,793 6,513,107
Commissions 676,828 376,867
Underwriting, acquisition, insurance, and
administrative expenses 2,100,777 2,217,003
------------ -----------
10,536,398 9,106,977
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (933,785) (567,730)
INCOME TAX PROVISION (CREDIT) (290,000) (185,000)
------------ -----------
NET INCOME (LOSS) $ (643,785) $ (382,730)
============ ===========
NET INCOME PER SHARE $ (.97) $ (.58)
============ ===========
</TABLE>
See Notes to Financial Statements
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CAUSON & WESTOFF, CPA's
<PAGE> 16
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
TOTAL CLASS A CLASS B
STOCKHOLDERS ------------------ ----------------
EQUITY SHARES AMOUNT SHARES AMOUNT
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 2,802,794 587,329 $ 716,594 73,524 $89,699
NET INCOME (382,730)
TRANSFERS (200) (297)
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $77,000 149,632
----------- -------- --------- ------ -------
BALANCE, DECEMBER 31, 1995 2,569,696 587,129 716,297 73,524 89,699
NET INCOME (643,785)
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $24,000 (47,141)
----------- -------- --------- ------ -------
BALANCE, DECEMBER 31, 1996 $ 1,878,770 587,129 $ 716,297 73,524 $89,699
=========== ======== ========= ====== =======
<CAPTION>
UNREALIZED
PAID-IN DEPRECIATION ON RETAINED
CAPITAL INVESTMENTS EARNINGS
------- --------------- --------
<S> <S> <C> <C>
BALANCE, DECEMBER 31, 1994 $536,464 $(107,673) $ 1,567,710
NET INCOME (382,730)
TRANSFERS (250) 547
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $77,000 149,632
-------- ------------ ----------
536,214 41,959 1,185,527
BALANCE, DECEMBER 31, 1995
(643,785)
NET INCOME
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $24,000 (47,141)
-------- ------------ ----------
BALANCE, DECEMBER 31, 1996 $536,214 $ (5,182) $ 541,742
======== ============ ==========
</TABLE>
See Notes to Financial Statements
-4-
CAUSON & WESTOFF, CPA's
<PAGE> 17
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Gross premiums $ 9,607,947 $ 8,637,588
Reinsurance ceded (465,526) (549,699)
Net investment income 230,372 193,106
Other income 90,831 130,002
Gross benefits and claims (7,504,182) (6,703,021)
Reinsurance recoveries 393,786 335,097
Commissions (726,699) (374,904)
Underwriting, acquisition, insurance, and
administrative expenses (1,873,455) (1,802,913)
Income taxes 188,000 (18,000)
Deposits (4,375)
----------- -----------
Net cash provided by (used in) (63,301) (152,744)
----------- -----------
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturing of investments 2,215,013 978,787
Proceeds from the sale of furniture and
equipment 757
Purchase of investments (1,389,720) (940,000)
Purchase of furniture and equipment (69,992) (106,492)
----------- -----------
Net cash provided by (used in)
investing activities 755,301 (66,948)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH 692,000 (219,692)
CASH, BEGINNING OF YEAR 37,252 256,944
----------- -----------
CASH, END OF YEAR $ 729,252 $ 37,252
=========== ===========
</TABLE>
See Notes to Financial Statements
-5-
CAUSON & WESTOFF, CPA's
<PAGE> 18
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Professional Benefits Insurance Company is a stock life, accident, and
health insurance company organized under the laws of the state of Texas. The
Company's principal lines of business consist primarily of marketing,
underwriting, and servicing of group accident and health insurance policies.
The Company also markets, underwrites, and services dental, disability,
professional overhead, and group life insurance policies. This insurance is
primarily sold to members of various professional organizations throughout the
southwest United States.
The Company also prepares financial statements on the basis of statutory
accounting principles for the purpose of filing with state insurance
departments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity investments, all of which are considered to be
available-for-sale, are reported at fair value, with net unrealized gains and
losses included in equity, net of applicable income taxes. Unrealized losses
which are other than temporary are recognized in earnings. Premiums and
discounts are amortized and accreted, respectively, to interest income using
the level-yield method over the period to maturity. Realized gains and losses
are included in net investment income.
-6-
CAUSON & WESTOFF, CPA's
<PAGE> 19
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
INVESTMENTS (Continued)
Common stock mutual funds were entirely disposed during 1996. The realized
gain on the disposal thereof is included in net investment income. In 1995,
common stock mutual funds were recorded at current market value. Net unrealized
gains and losses were included in equity, net of applicable income taxes.
Short-term investments represent investments in short-term money market
funds and certificates of deposit which mature at specific future dates of less
than one year. Interest on certificates of deposit and other short-term
investments is recorded as revenue when it is earned.
Realized gains and losses are recognized on the specific identification
basis.
RECOGNITION OF PREMIUM REVENUES, RELATED EXPENSES, AND FUTURE POLICY BENEFITS
Premiums on life insurance policies are reported as earned when due. The
liabilities for future policy benefits and expenses are computed using the
Commissioner's reserve valuation method including assumptions as to investment
yields and mortality. Policies issued prior to 1985 are based upon the 1958
Commissioner's standard ordinary mortality table, assuming interest rates from
3% to 4.5%. Policies issued during 1985 and thereafter are based upon the 1980
Commissioner's standard ordinary mortality table, assuming interest rates from
4.5% to 5.5%. There is no material difference between future life insurance
policy benefit liabilities for financial reporting and statutory purposes
inasmuch as such policies consist only of term coverages with no cash values
accruing.
Premiums for accident and health policies are recognized ratably over the
period of insurance coverage. The liabilities for insurance claims are
determined using statistical analyses and represent estimates of the ultimate
net cost of all reported and unreported claims which are unpaid at year end,
including provisions for extended benefits. Although it is not possible to
measure the degree of variability inherent in such estimates, management
believes the liabilities for insurance claims are adequate. The estimates are
reviewed periodically by management, and, as adjustments to these liabilities
become necessary, such adjustments are reflected in current operations.
-7-
CAUSON & WESTOFF, CPA's
<PAGE> 20
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company retains a maximum of $125,000
of coverage per individual on major medical policies and $25,000 of coverage
per individual life policies. The Company maintains a separate major medical
reinsurance treaty with a $0 deductible (zero retention) to cover organ
transplants.
REAL ESTATE
Real estate is recorded at cost and represents the Company's home office,
land and building. Depreciation has been provided on the straight-line method
over the useful life of the building. Maintenance and repairs which do not
materially extend the useful life are charged to expense as incurred.
Depreciation expense recognized during 1996 and 1995 was $78,112 and $35,031,
respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is provided on
the straight-line method over estimated useful lives of three to seven years.
Depreciation expense recognized during 1996 and 1995 was $56,438 and $44,676,
respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effect of
temporary differences between the financial reporting and tax bases of assets
and liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized. Such temporary differences are principally related to the deferral of
accrued premiums and losses as defined under the Internal Revenue Code, and
depreciation, as well as unrealized gains and losses, on investments.
-8-
CAUSON & WESTOFF, CPA's
<PAGE> 21
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during each year. Stock options are common stock equivalents but have no
material impact on the total weighted number of shares outstanding.
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of fixed-maturity securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Fixed-maturity securities
U. S. Treasury bond funds $ 899,382 $ 1,573 $ $ 900,955
U. S. Treasury and other U.S.
government corporations and
agencies 746,065 (9,124) 736,941
Mortgage-backed securities (FHLMC) 289,961 (331) 289,630
---------- --------- ----------- ----------
1,935,408 1,573 (9,455) 1,927,526
Short-term investments 830,898 830,898
---------- --------- ----------- ----------
$2,766,306 $ 1,573 $ (9,455) $2.758,424
========== ========= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Fixed-maturity securities
U. S. Treasury and other U.S.
government corporations and
agencies $ 873,633 $ 9,586 $ $ 883,219
Mortgage-backed securities (FHLMC) 356,988 (19,565) 337,423
1,230,621 9,586 (19,565) 1,220,642
Common stock mutual funds 783,251 73,138 856,389
--------- --------- ------------- ---------
2,013,872 82,724 (19,565) 2,077,031
Short-term investments 1,420,523 1,420,523
$ 3,434,395 $ 82,724 $ (19,565) $3,497,554
=========== ========= ============ ==========
</TABLE>
-9-
CAUSON & WESTOFF, CPA's
<PAGE> 22
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (Continued)
Maturities of fixed-maturity securities at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
--------- ------------
<S> <C> <C>
One year or less $ 899,382 $ 900,955
After one through five years 746,065 736,941
After five through ten years
Mortgage-backed securities not due
on a single maturity date 289,961 289,630
----------- -----------
$ 1,935,408 $ 1,927,526
=========== ===========
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Fixed maturities $ 57,423 $ 76,574
Common stock mutual funds 206,083 66,430
Short-term investments 86,492 76,549
----------- -----------
$ 349,998 $ 219,553
=========== ===========
</TABLE>
The Company has certificates of deposits totaling $700,000 and $600,00 on
deposit with regulatory authorities to meet statutory requirements as of
December 31, 1996 and 1995, respectively.
NOTE 3: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Those matters include the following:
INSURANCE CLAIM LIABILITIES
The Company has recorded future policy benefits of $1,048,334 and
$1,052,509 and policy claims of $2,160,000 and $1,623,000 at December 31, 1996
and 1995, respectfully. Management currently believes the accruals for
liabilities associated with the insurance claims are adequate. However, the
ultimate claim expense will depend on actual claims paid. Consequently, it is
possible the estimated liability accrued for claims during the policy period
covered by the financial statements may materially change.
-10-
CAUSON & WESTOFF, CPA's
<PAGE> 23
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (Continued)
REVENUES FROM TRADE ASSOCIATIONS
The Company sells group accident and health insurance to trade
associations. Approximately 31%, 14%, and 24% of the Company's premium revenues
for the year ended December 31, 1996, and approximately 33%, 30%, and 19% of
the Company's premium revenues for the year ended December 31, 1995, were from
three unrelated individual associations.
REVENUES FROM GROUP ACCIDENT AND HEALTH INSURANCE
The Company derived approximately 75% and 90% of its revenues in 1996 and
1995, respectfully, from sales of group accident and health insurance,
principally to trade associations located in the southwest United States.
NOTE 4: PRINCIPLES OF CONSOLIDATIONS
The 1995 financial statements presented herein were consolidated to include
the accounts of the Company and its 100% owned subsidiary, Direct Reimbursement
Services, Inc. The accounts of Direct Reimbursement Services, Inc. reflected no
assets, liabilities, revenues, expenses or cash flows as of and for the year
ended December 31, 1995. Therefore, the consolidated statements were identical
to the Company's financial statements before consolidation. During 1996, Direct
Reimbursement Services, Inc. was officially dissolved. Therefore, the December
31, 1996 data reflected in these financial statements are Company balances, are
not consolidated, and are comparable to the December 31, 1995 data presented
herein.
NOTE 5: REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts, if
any, deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies.
-11-
CAUSON & WESTOFF, CPA's
<PAGE> 24
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6: LEASES
The Company entered into a capital lease for computer equipment effective
January 1, 1995.
Future minimum lease payments as of December 31, 1996, were:
<TABLE>
<S> <C>
1997 $ 19,463
1998 19,463
1999 19,463
--------
Future minimum lease payments 58,389
Less amount representing interest 12,814
--------
$ 45,575
========
</TABLE>
NOTE 7: STOCKHOLDERS' EQUITY AND RESTRICTIONS
Generally, dividends to stockholders are limited to amounts which exceed
minimum capital and surplus requirements determined in accordance with
statutory accounting principles. Under the Texas Insurance Code, the Company
must maintain minimum capital of the greater of $100,000 or par value of the
outstanding common stock and minimum surplus of $100,000.
The Company must additionally comply with minimum statutory capital and
surplus requirements in the various states in which it is currently licensed.
These minimum combined statutory capital and surplus requirements range between
$500,000 and $1,200,000.
Net income and stockholders' equity, as determined in accordance with
statutory accounting practices based upon audited reports, are as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Net Income (Loss) $ (562,960) $ (365,165)
=========== ===========
Stockholders' Equity $ 1,572,531 $ 2,165,665
=========== ============
</TABLE>
-12-
CAUSON & WESTOFF, CPA's
<PAGE> 25
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: INCOME TAXES
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Deferred tax assets:
Discounted future claims $ 23,000 $ 18,500
Policy acquisition costs 2,000 1,700
Unrealized loss on investments 2,600
Accumulated depreciation 1,400
Other 500
-------- --------
29,000 20,700
-------- --------
Deferred tax liabilities:
Unrealized gain on investments (21,200)
Accumulated depreciation (4,500)
Other (1,000)
-------- --------
(1,000) (25,700)
-------- --------
Net deferred tax asset (liability) $ 28,000 $ (5,000)
======== ========
</TABLE>
The provision for income taxes includes these components:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Tax currently receivable $ (294,000) $ (188,000)
Deferred income tax liability 4,000 3,000
----------- ----------
$ (290,000) $ (185,000)
=========== ==========
</TABLE>
A reconciliation of the income tax expense (refund) at the statutory rate
to income tax expense at the Company's effective tax rate is shown below:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Computed at the statutory rate of 34% $ (294,000) $ (193,028)
Increase (decrease) in tax resulting from:
Nondeductible expenses 4,000 3,000
Other 5,028
----------- ----------
$ (290,000) $ (185,000)
=========== ==========
</TABLE>
Deferred income taxes related to the change in unrealized appreciation
(depreciation) on available-for-sale securities, shown in stockholders' equity,
were $2,600 and $(21,200) for 1996 and 1995, respectively.
-13-
CAUSON & WESTOFF, CPA's
<PAGE> 26
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9: DEFINED CONTRIBUTION EMPLOYEE BENEFIT PLAN
The Company has a noncontributory 401(k) plan which provides for employer
contributions to be made only from current or accumulated net profits not to
exceed the maximum amount deductible for federal income tax purposes. To be
eligible for participation, an employee must be at least 21 years of age and
have accumulated 1,000 hours of service as of the anniversary date of the plan
nearest the date eligibility requirements are met. Participant interests in
employer contributions are vested over a period from two to six years. No
contributions were made by the Company in 1996. Contributions of $7,366 were
made by the Company in 1995.
NOTE 10: STOCK OPTIONS
On July 14, 1990, the Board of Directors of Professional Benefits Insurance
Company authorized the granting of stock options to Board members and certain
key employees. The stock options were immediately exercisable upon grant and
enable the grantees to purchase Class A common stock at a price of $2 per
share. The July 14, 1990 stock options expired during 1996. On December 30,
1996, the Board of Directors authorized the granting of 5,000 new stock options
to each of the Directors. The new options are exercisable at the same price and
terms as the expired options. The new options are currently scheduled to expire
December 30, 2001.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Options outstanding, beginning of year 60,000 85,000
Granted 30,000
Expired 60,000 25,000
Exercised ------ ------
Options outstanding, end of year 30,000 60,000
====== ======
</TABLE>
-14-
CAUSON & WESTOFF, CPA's
<PAGE> 27
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11: ADDITIONAL CASH FLOW INFORMATION
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss) $(643,785) $(382,730)
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 138,303 79,372
Amortization from investments 726 (731)
Realized gain from investments (157,232)
Provision for deferred income taxes (9,800) 3,000
Decrease (increase) in receivables (21,466) (5,523)
Decrease (increase) in premiums due (151,284) 4,768
Decrease (increase) in accrued investment income 36,880 (25,716)
Decrease (increase) in amounts recoverable and 139,899 134,765
due from reinsurers and other assets
Increase (decrease) in future policy benefits (4,175) 3,574
Increase (decrease) in other policy claims and
benefits payable 537,000 189,000
Increase (decrease) in unearned premiums and advance
premiums 141,542 (88,238)
Increase (decrease) current income taxes payable or
receivable (106,000) (206,000)
Decrease in accounts payable, accrued expenses,
and amounts due reinsurers 36,091 141,715
--------- ---------
Net cash provided by (used in) operations $ (63,301) $(152,744)
========= =========
</TABLE>
NOTE 12: CONTINGENCIES
The Company is a defendant in, and is threatened with, various legal
proceedings with respect to claims arising from insurance coverages. Such
litigation is taken into account in establishing claim reserves. Management,
after consultation with legal counsel, is of the opinion that the ultimate
liability, to the extent not provided for, is not likely to have a material
effect on the financial position or results of operations of the Company.
-15-
CAUSON & WESTOFF, CPA's
<PAGE> 28
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: COMMISSIONS
Commissions expense is calculated as a percentage of written premium.
Commission rates vary based on the type of insurance policy written and for
first year policies versus subsequent renewals. As discussed in Note 3, the
Company's mix between accident and health insurance and other insurance changed
during 1996 to reflect a larger percentage of other types of insurance. A large
component of the other insurance during the 1996 is dental insurance. Dental
insurance has a higher commission structure than other policy lines which the
Company markets. The mix of first year premium as a percentage of total premium
was 40% and 21% in 1996 and 1995, respectively. Commission expense was $676,828
and $376,867 in 1996 and 1995, respectively
NOTE 14: SUBSEQUENT EVENTS
Subsequent to March 7, 1997 it was discovered the estimated loss reserves
were materially understated as of December 31, 1996. The originally reported
policy claim liability was $1,905,000. The Company's independent actuary
reviewed the actual claim payments related to 1996 through April 30, 1997 and
determined an estimated deficiency of $255,000 at December 31, 1996. Company
management determined this amount should be reflected in restated 1996
financial statements. Additionally, the necessary changes to claim expense,
income tax expense(refund) and income tax recoveries have been reflected in
these restated financial statements.
-16-
CAUSON & WESTOFF, CPA's
<PAGE> 29
PROFESSIONAL BENEFITS INSURANCE COMPANY
This schedule contains summary financial information extracted from the balance
sheets and statements of operations from the Company's report on Form 10-KSB
for the period ended December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
<TABLE>
<S> <C>
Fixed maturities held for sale 1,927,526
Fixed maturities held to maturity - carrying value 0
Fixed maturities held to maturity - market value 0
Investment in equity securities 0
Mortgage loans on real estate 0
Investment in real estate 497,882
Total investments 2,758,424
Cash and cash equivalents 1,560,150
Reinsurance recoverable on paid losses 52,084
Deferred policy acquisition costs 0
Total assets 5,697,994
Policy liabilities - future benefits, losses, claims 1,048,334
Policy liabilities - unearned premiums 56,324
Policy liabilities - other claims and benefits 2,160,000
Other policyholder funds 0
Notes payable, bonds, mortgages and similar debt 0
Preferred stocks mandatory redemption 0
Preferred stock - not mandatory 0
Common stock 805,996
Other stockholders' equity 1,072,774
Total liabilities and stockholders' equity 5,697,994
Premiums 9,126,520
Net investment income 349,998
Realized investment gains and losses 196,835
Other income 126,095
Benefits, claims, losses and settlement expenses 7,758,793
Underwriting acquisition and insurance expenses - amortization of
deferred policy acquisition costs 0
Underwriting acquisition and insurance expense - other 2,100,777
Income or (loss) before income taxes (933,785)
Income tax expense/(credit) (290,000)
Income/(loss) continuing operations (643,785)
Discontinued operations 0
Extraordinary items 0
Cumulative effect - changes in accounting principles 0
Net income or (loss) (643,785)
Earnings per share - primary (.97)
Earnings per share - fully diluted (.93)
Reserves for unpaid claims - beginning of year 2,675,509
Provision for insured events - current year 625,988
Provision for insured events - prior years 0
Payments of claims - current year 2,401,031
Payments of claims - prior years 4,731,774
Reserves for unpaid claims - end of year 3,208,334
Deficiency/redundancy in restated reserve 93,163
</TABLE>
