<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 1997
COMMISSION FILE NUMBER: 0-22344
PROFESSIONAL BENEFITS INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2072535
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
10835 Rockley Road
Houston, Texas 77099
(281) 721-1800
(Address, including zip code, and telephone number, including area code,
of registrant's offices)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
None None
Securities registered pursuant to section 12(g) of the Exchange Act:
Common Stock Class A
Check whether the issuer (1) filed all reports required by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $11,414,693
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid-asked prices of such stock, as of a specified date within the
past 60 days (See definition of affiliate in Rule 405). No actual market exists
for the Registrant's shares. Based solely on the most recent sale, Registrant
believes that the Class A Common Stock has a value of approximately $0.00 per
share.
State the number of shares outstanding of the issuer's classes of
common equity as of the latest practicable date. As of December 31, 1997:
587,129 Class A Common Stock and 73,524 Class B Common Stock.
<PAGE> 2
PART 1
ITEM 1. 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 1997 totaled
$11,414,693 with a net loss (after taxes) of $(1,983,921) and with total assets
of $3,458,276 as reflected in the 1997 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
The maximum retention on one risk is as follows:
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>
1997 274 23,036,000 1,146 13,110,000
</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>
1997 $5,427,728 $5,518,754
</TABLE>
Professional Benefits Insurance Company
Page 2
<PAGE> 3
ITEM 1. BUSINESS. (CONTINUED)
DESCRIPTION OF STOCK
The Company is authorized to 1,022,668 shares of Class A Common Stock
and 136,720 shares of Class B Common Stock, each with a par value of $1.22 per
share. As of December 31, 1997, 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 equally 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 15 full time employees and 1 part-time employee.
ITEM 2. DESCRIPTION OF PROPERTIES.
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, 1997 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.
Professional Benefits Insurance Company
Page 3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1997 AND 1996
RESULTS OF OPERATIONS
Changes in Company revenues for 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total Revenues $11,414,693 $ 9,602,613
Change in Revenues
Compared to Preceding Year $ 1,812,080 $ 1,063,366
18.9% 12.5%
</TABLE>
The primary components of the Company's revenue are premium and net investment
income.
Changes in net premium revenue for 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total Premiums $11,210,607 $ 9,126,520
Change in Premiums
Compared to Preceding Year $ 2,084,087 $ 942,351
22.8% 11.5%
</TABLE>
The increase in premium revenue is primarily attributable to rate increases and
new business. Approximately two-thirds of the increase in premium revenue is
attributable to several significant rate increases which became effective at
various times throughout the year. The remaining increase in premium revenue is
attributable to a net increase in written insurance premium.
Components of the changes in net investment income for 1997 and 1996
are shown below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Total Net Investment Income $ 127,452 $ 349,998
Change in Net Investment
Income ($222,546) $ 130,445
(63.6%) 59%
</TABLE>
Professional Benefits Insurance Company
Page 4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1997 AND 1996
(Continued)
The Company's investment philosophy is one of preservation of capital while
providing current income. However, due to significant claims expense the Company
was required to liquidate many of it's investments in order to meet cash flow
requirements. This decrease in investment principle resulted in lower investment
income. Additionally, the amount of investment income for 1996 was larger than
normal. This occurred because of significant gains realized on the sale of
mutual funds during 1996. Compared to 1995, the percentage decrease in
investment income is approximately 40%.
General and administrative expenses for 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
General and Administrative
Expenses $ 2,132,377 $ 2,100,777
Change in General and
Administrative Expenses
Compared to Preceding Year $ 31,600 $ (116,226)
1.5% (5.2%)
</TABLE>
General and administrative expenses have increased slightly from the prior year.
This change was the result of increased legal, actuarial and accounting fees.
Total Commissions expense for 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Total Commissions Expense $1,140,668 $ 676,828
Change in Commissions Expense
Compared to Preceding Year $ 463,840 $ 299,961
68.5% 79.6%
</TABLE>
The increase in commission expense is primarily attributable to the attrition of
older low-commissioned policies, which are being replaced with new business
being written by agents. This new business carries a much higher commission
structure than the old business which is being replaced. Additionally,
commissions are paid on all premium rate increases. Therefore as premiums
increase due to rate increases, commission expense will also increase.
Professional Benefits Insurance Company
Page 5
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR 1997 AND 1996
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
All funds in excess of immediate cash needs are invested in short-term money
market funds and certificates of deposits.
The Company had total assets of $3,458,276 and $5,697,994 for the years ended
December 31, 1997 and 1996, respectively. The Company experienced cash flows
from operations of $(1,820,314) and $(63,301) in the years ended December 31,
1997 and 1996 respectively.
The decrease in operating cash flows of $1,820,314 is due to a high volume of
claims. The increase in claims paid was a result of the increase in the costs of
medical care generally, and the rise in costs of routine hospitalizations, in
particular. In addition, the Company received an atypical number of catastrophic
hospitalization claims.
The Company does not currently meet the minimum capital and surplus levels
needed to conduct insurance business in the jurisdictions in which it is
licensed. This impairment is due to severe claims losses incurred over the
previous fifteen months. Because of the Company's capital and surplus position
on September 17, 1997, the Texas Department of Insurance placed the Company in a
Confidential Order of Supervision. On February 18, 1998, based on the Company's
capital and surplus position, the Company was placed in a Confidential Order of
Conservation issued by the Commissioner of the Texas Department of Insurance.
The Company does not expect to declare any dividends on its stock in the
foreseeable future. No dividends have been declared or paid in the prior two
years.
Professional Benefits Insurance Company
Page 6
<PAGE> 7
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements are filed as part of this Annual Report on
Form 10-KSB (see Exhibit B).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Name Age Since Position
---- --- ----- --------
<S> <C> <C>
A. Directors
James Ople Henry, Jr., DDS 65 1981
William Lloyd Glenn, Jr., DDS 74 1979
Robert Warren Little, DDS 77 1981
Hobert Phillip Lundblade, DDS 68 1979
B. Executive Officers
James Ople Henry, Jr., DDS 65 1995 Chairman
William Lloyd Glenn, Jr., DDS 74 1979 Secretary
Robert Warren Little, DDS 77 1995 Treasurer
C. Other Key Employees
Jerry Campbell 45 1993 Vice-President
Tammy Skains 34 1993 Assistant Vice-
President
</TABLE>
Professional Benefits Insurance Company
Page 7
<PAGE> 8
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED).
D. Business Experience:
WILLIAM L. GLENN, JR., DDS, has been Secretary and a Director of the
Company since its organization in 1979. He has practiced dentistry for
over 50 years. He served from 1964 to 1969 as Vice-President for the
Texas Dental Association. He also served six years as Chairman of the
TDA Council on Constitution Bylaws. He was a founder and Chairman of
the Board of Galveston Savings and Loan Association (a Texas stock
company) from 1975-1983 which was sold while in a strong financial
position. He was also past President of the Rotary Club of Galveston
and of the Southwest Restorative Academy. Dr. Glenn serves on the
Company's Executive Committee.
JAMES O. HENRY, JR., DDS, has been a Director of the Company since 1981
and served as Treasurer from March 1990 through October 1995. He has
served as Chairman of the Board since October 1995. Dr. Henry practiced
dentistry for 15 years and is currently on the Faculty of Baylor
College of Dentistry where he has served as Assistant Dean for 21
years. He was a Director of the First Republic Bank Dallas East in
Dallas, Texas and served as the Secretary-Treasurer of the Texas Dental
Association for 6 years. Dr. Henry serves on the Company's Executive
Committee.
ROBERT W. LITTLE, DDS, has been a Director of the Company since 1981.
Dr. Little has served as Treasurer of the Company since 1995. He has
practiced dentistry for over 39 years. Dr. Little serves on the
Company's Investment Committee and serves on the Company's Executive
Committee.
HOBERT P. LUNDBLADE, DDS, is a founding Director of the Company and has
served on the Board since its organization in 1979. He has practiced
dentistry for over 40 years. He served as Mayor of Castle Hills, Texas
for over 23 years, and was a former Director of Castle Hills National
Bank in San Antonio, Texas. Dr. Lundblade serves on, and is Chairman
of, the Company's Audit Committee and serves on the Company's
Investment Committee.
JERRY CAMPBELL was hired in May, 1989. He was promoted to his current
position of Vice-President in November, 1996. Mr. Campbell has a total
of 18 years industry experience specializing in underwriting,
reinsurance and compliance.
TAMMY SKAINS was employed by PBIC in May of 1993 as Assistant Director
of Administration. She was promoted to her current position of
Assistant Vice-President in June, 1996. Ms. Skains was employed as the
Administrative/Accounting Supervisor of a local group dental practice
for five years prior to her association with PBIC.
Professional Benefits Insurance Company
Page 8
<PAGE> 9
ITEM 10. EXECUTIVE COMPENSATION.
A. Summary Compensation Table:
1. Annual Compensation For Years 1994 - 1996:
<TABLE>
<CAPTION>
Other Annual
& Long-Term
Names & Position Year Salary Bonuses Compensation
- ---------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C>
Jerry O. Ray 1997 $59,656 $0,000 None
1996 $66,778 $0,000 None
1995 $64,091 $0,000 None
</TABLE>
JERRY O. RAY WAS REMOVED FROM THE PRESIDENCY ON SEPTEMBER 12, 1997 BY VOTE OF
THE BOARD OF DIRECTORS.
2. There are three executive officers of Professional Benefits
Insurance Company, as follows:
<TABLE>
<CAPTION>
CASH COMPENSATION TABLE
Name or Membe Capacities Cash
In Group Which Served Compensation
-------- ------------ ------------
<S> <C> <C>
Three members of group:
Glenn, Henry & Ray See Above $71,681
</TABLE>
B. No cash bonuses were paid to individuals serving as executive for
the year ending 1996: no cash bonuses were paid for the year ending
1997.
C. Pensions
There have been no distributions to officers under pension plans.
The Company contributed $0 during 1997 and 1996, on behalf of all
employees to the Company's 401K plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A. Beneficial Owners
<TABLE>
<CAPTION>
(1) Title (2) Name of (3) Number of (4) Percent of
of Class beneficial Owner Shares Owned Class
-------- ---------------- ------------ -----------
<S> <C> <C> <C>
Class A None owning more than 5% of outstanding shares of Class A Common Stock.
Class B Texas Dental Assoc. 73,524 100%
</TABLE>
Professional Benefits Insurance Company
Page 9
<PAGE> 10
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(CONTINUED).
B. Management (Directors and Officers)
<TABLE>
<CAPTION>
(1) Title of (2) Name of (3) Number of
Class Beneficial Owner Shares Owned
----- ---------------- ------------
<S> <C> <C>
Class A William L. Glenn 4,032
Hobert P. Lundblade 4,124
James O. Henry 1,276
Robert W. Little 3,572
</TABLE>
NOTE: In total, the directors and officers own 13,004 shares,
constituting 2.2% of the outstanding shares of Class A
Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Transactions with Management and Others: None.
B. Certain Business Relationships.
No directors have received any payments from the Company larger
than 5% of the Company's gross revenue during the last year.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following financial statements and independent auditors' report
have been incorporated by reference in Part II, Item 8 of this report:
Independent Auditors' Report
Balance Sheets, December 31, 1997 and 1996
Statements of Earnings, Years ended
December 31, 1997 and 1996
Statements of Stockholders' Equity, Years ended
December 31, 1997 and 1996
Statements of Cash Flows, Years ended
December 31, 1997 and 1996
Notes to Financial Statements
REPORTS ON FORM 8-K
March 1998 Bankruptcy or Receivership Notification
September 1997 Change in Management and/or Directors
EXHIBITS
Financial Data Schedule: Exhibit 27
Professional Benefits Insurance Company
Page 10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this registration statement
to be signed on its behalf of the undersigned, thereunto duly authorized.
PROFESSIONAL BENEFITS INSURANCE COMPANY
Date March 25, 1998 By: /s/ JERRY CAMPBELL
----------------------- ------------------------------------
Jerry Campbell
Vice President
Date March 25, 1998 By: /s/ TAMMY SKAINS
----------------------- ------------------------------------
Tammy Skains
Assistant Vice President
Date March 27, 1998 By: /s/ FERNANDO RAMIREZ
----------------------- ------------------------------------
Fernando Ramirez
Estate Manager
as Department of Insurance
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and dates indicated.
Date March 26, 1998 By: /s/ WILLIAM L. GLENN
---------------------- ----------------------------------
William L. Glenn, DDS, Director
Date March 26, 1998 By: /s/ JAMES O. HENRY, JR.
---------------------- ----------------------------------
James O. Henry, Jr., DDS, Director
Date March 26, 1998 By: /s/ ROBERT W. LITTLE
---------------------- ----------------------------------
Robert W. Little, DDS, Director
Date March 26, 1998 By: /s/ HOBERT P. LUNDBLADE
---------------------- ----------------------------------
Hobert P. Lundblade, DDS, Director
Professional Benefits Insurance Company
Pae 11
<PAGE> 12
PROFESSIONAL BENEFITS INSURANCE
COMPANY
ACCOUNTANTS' REPORT AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE> 13
PROFESSIONAL BENEFITS INSURANCE COMPANY
DECEMBER 31, 1997 AND 1996
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>
<PAGE> 14
[CAUSON & WESTHOFF LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Professional Benefits Insurance Company
Houston, Texas
We have audited the accompanying balance sheets of PROFESSIONAL BENEFITS
INSURANCE COMPANY as of December 31, 1997 and 1996, and the related statements
of operations, stockholders' equity, and cash flows for 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 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 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 PROFESSIONAL BENEFITS
INSURANCE COMPANY as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As indicated in the financial
statements, the Company incurred a net loss of $1,983,921 during the year ended
December 31, 1997. The resulting level of capital and surplus, on a statutory
basis, is below the minimum required by the Texas Department of Insurance, as
discussed in Note 6 to the financial statements. As discussed in Note 13 to the
financial statements, the Company has been placed into conservatorship by the
Commissioner of Insurance of the State of Texas based on the financial condition
of the Company. As of March 3, 1998, the Company is not aware of any alternative
sources of capital to replenish the equity of the Company. The financial
condition of the Company raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments which might result from the outcome of the Company's current
financial condition.
/s/CAUSON & WESTHOFF
Tulsa, Oklahoma
March 3, 1998
<PAGE> 15
PROFESSIONAL BENEFITS INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
INVESTMENTS
Fixed maturities, at market (amortized $ 118,895 $ 1,927,526
cost - $108,356 - 1997 and
$1,935,408 - 1996)
Short-term investments (cost approximating marketing) 1,288,507 830,898
----------- -----------
1,407,402 2,758,424
CASH 208,419 729,252
REINSURANCE RECOVERABLE
Current recoverable 26,179 52,084
Future recoverable 715,012 839,100
ACCRUED INVESTMENT INCOME 1,846 10,763
PREMIUMS DUE AND UNCOLLECTED 184,800 179,836
ACCOUNTS AND NOTE RECEIVABLE 58,051
LAND AND BUILDING, AT COST
(net of accumulated depreciation -
$502,329 - 1997 and $454,906 - 1996) 450,460 497,882
FURNITURE AND EQUIPMENT, AT COST
(net of accumulated depreciation -
$390,187 - 1997 and $328,861 - 1996) 216,131 226,940
GUARANTY FUND ASSESSMENTS 1,277 3,654
DEFERRED TAX BENEFIT 28,000
FEDERAL INCOME TAX RECEIVABLE 239,792 294,000
OTHER ASSETS, AT COST 6,958 20,008
----------- -----------
$ 3,458,276 $ 5,697,994
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits $ 977,231 $ 1,048,334
Policy claims 2,113,810 2,160,000
Premiums received in advance 129,193 185,706
Unearned premiums 31,151 56,324
----------- -----------
3,251,385 3,450,364
Reinsurance payable 42,733 57,463
Other liabilities 257,188 311,397
----------- -----------
3,551,306 3,819,224
----------- -----------
STOCKHOLDERS' EQUITY
Common stock
Class A voting, $1.22 par value; 1,022,668
authorized shares; 587,129 issued and
outstanding in 1997 and 1996 716,297 716,297
Class B nonvoting, $1.22 par value; 136,720
authorized shares; 73,524 issued and
outstanding in 1997 and 1996 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 $(3,600) - 1997; $2,600 - 1996) 6,939 (5,182)
Retained earnings (deficit) (1,442,179) 541,742
----------- -----------
(93,030) 1,878,770
----------- -----------
----------- -----------
$ 3,458,276 $ 5,697,994
=========== ===========
</TABLE>
See Notes to Financial Statements
- 2 -
<PAGE> 16
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Premiums earned $ 11,866,905 $ 9,617,689
Reinsurance ceded (656,298) (491,169)
------------ ------------
Net premiums earned 11,210,607 9,126,520
Net investment income 127,452 349,998
Other income 76,634 126,095
------------ ------------
11,414,693 9,602,613
------------ ------------
BENEFITS, CLAIMS, AND EXPENSES
Benefits and claims 11,209,525 8,037,007
Reinsurance recoverable (801,010) (278,214)
------------ ------------
Net benefits and claims 10,408,515 7,758,793
Commissions 1,140,668 676,828
Underwriting, acquisition, insurance, and
administrative expenses 2,132,377 2,100,777
------------ ------------
13,681,560 10,536,398
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (2,266,867) (933,785)
INCOME TAX PROVISION (CREDIT) (282,946) (290,000)
------------ ------------
NET INCOME (LOSS) $ (1,983,921) $ (643,785)
============ ============
NET INCOME (LOSS) PER SHARE $ (3.00) $ (.97)
============ ============
</TABLE>
See Notes to Financial Statements
- 3 -
<PAGE> 17
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------
TOTAL CLASS A CLASS B
STOCKHOLDERS' -----------------------------------------------------
EQUITY SHARES AMOUNT SHARES AMOUNT
------------ --------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
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
----------- ------- ----------- ------ -----------
NET INCOME (1,983,921)
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $6,200 12,121
----------- ------- ----------- ------ -----------
BALANCE, DECEMBER 31, 1997 $ (93,030) 587,129 $ 716,297 73,524 $ 89,699
=========== ======= =========== ====== ===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
PAID-IN DEPRECIATION ON RETAINED
CAPITAL INVESTMENTS EARNINGS
----------- --------------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 536,214 $ 41,959 $ 1,185,527
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 536,214 (5,182) 541,742
----------- ----------- -----------
(1,983,921)
NET INCOME
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON AVAILABLE-FOR-SALE
SECURITIES, NET OF INCOME TAXES OF $6,200 12,121
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 536,214 $ 6,939 $(1,442,179)
=========== =========== ===========
</TABLE>
- 4 -
See Notes to Financial Statements
<PAGE> 18
PROFESSIONAL BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Gross premiums $ 11,780,254 $ 9,607,947
Reinsurance ceded (671,028) (465,526)
Net investment income 154,193 230,372
Other income 140,357 90,831
Gross benefits and claims (11,326,818) (7,504,182)
Reinsurance recoveries 951,003 393,786
Commissions (1,124,410) (726,699)
Underwriting, acquisition, insurance, and
administrative expenses (2,077,146) (1,873,455)
Income taxes 353,281 188,000
Deposits (4,375)
------------ ------------
Net cash provided by (used in)
operating activities (1,820,314) (63,301)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturing of investments 3,661,860 2,215,013
Proceeds from the sale of furniture and
equipment 1,273
Purchase of investments (2,310,341) (1,389,720)
Purchase of furniture and equipment (53,311) (69,992)
------------ ------------
Net cash provided by (used in)
investing activities 1,299,481 755,301
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH (520,833) 692,000
CASH, BEGINNING OF YEAR 729,252 37,252
------------ ------------
CASH, END OF YEAR $ 208,419 $ 729,252
============ ============
</TABLE>
See Notes to Financial Statements
- 5 -
<PAGE> 19
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 -
<PAGE> 20
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
INVESTMENTS (Continued)
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 -
<PAGE> 21
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 1997 and 1996 was $47,422 and $78,112,
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 1997 and 1996 was $63,260 and $56,438,
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, as explained in Note 7. 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 -
<PAGE> 22
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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, 1997
---------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C>
Fixed-maturity securities $ 108,356 $ 10,539 $ $ 118,895
Short-term investments 1,288,507 1,288,507
---------- ---------- ---------- ----------
$1,396,863 $ 10,539 $ $1,407,402
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------
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>
- 9 -
<PAGE> 23
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (Continued)
Maturities of fixed-maturity securities at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
--------- -----------
<S> <C> <C>
One year or less $108,356 $118,895
After one through five years
After five through ten years
-------- --------
$108,356 $118,895
======== ========
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Fixed maturities $ 24,342 $ 57,423
Common stock mutual funds 206,083
Short-term investments 103,110 86,492
--------- ---------
$ 127,452 $ 349,998
========= =========
</TABLE>
The Company has certificates of deposits totaling $700,000 on deposit with
regulatory authorities to meet statutory requirements as of December 31, 1997
and 1996.
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 $ 977,231 and $1,048,334
and policy claims of $2,113,810 and $2,160,000 at December 31, 1997 and 1996,
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 -
<PAGE> 24
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (Continued)
REVENUES FROM GROUP ACCIDENT AND HEALTH INSURANCE
The Company derived approximately 50% and 75% of its revenues in 1997 and
1996, respectfully, from sales of group accident and health insurance,
principally to trade associations located in the southwest United States.
NOTE 4: 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.
NOTE 5: LEASES
The Company entered into a capital lease for computer equipment effective
January 1, 1995.
Future minimum lease payments as of December 31, 1997, were:
<TABLE>
<S> <C>
1998 $ 19,463
1999 19,463
---------
Future minimum lease payments 38,926
Less amount representing interest 6,086
---------
$ 32,840
=========
</TABLE>
- 11 -
<PAGE> 25
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 6: 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>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Net Income (Loss) $(1,958,347) $ (562,960)
============ ===========
Stockholders' Equity (Deficit) $ (375,826) $ 1,572,531
=========== ===========
</TABLE>
NOTE 7: INCOME TAXES
The tax effects of temporary differences related to deferred taxes
shown on the balance sheets were:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Discounted future claims $ 26,600 $ 23,000
Policy acquisition costs 1,600 2,000
Unrealized loss on investments 2,600
Accumulated depreciation 3,000 1,400
Net operating loss carryforward 473,500
Other 1,100
--------- ---------
505,800 29,000
--------- ---------
Deferred tax liabilities:
Unrealized gain on investments (3,600)
Other (1,000)
--------- ---------
(3,600) (1,000)
--------- ---------
Valuation allowance (502,200)
--------- ---------
Net deferred tax asset $ 0 $ 28,000
========= =========
</TABLE>
- 12 -
<PAGE> 26
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7: INCOME TAXES (Continued)
Based on the Company's current going concern issue, as discussed in Note 13,
it appears it is more likely than not the deferred tax asset will not be
realized. A 100% allowance has been applied to the net deferred tax asset.
The provision for income taxes includes these components:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax currently receivable $(239,792) $(294,000)
Deferred income tax liability 4,000
Additional tax adjustments (43,154)
--------- ---------
$(282,946) $(290,000)
========= =========
</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>
1997 1996
--------- ---------
<S> <C> <C>
Computed at the statutory rate of 34% $(770,735) $(294,000)
Increase (decrease) in tax resulting from:
Net operating loss carryforward 473,500
Additional tax adjustments 43,154
Nondeductible expenses 4,000
Other Statutory/GAAP differences (28,865)
--------- ---------
$(282,946) $(290,000)
========= =========
</TABLE>
Deferred income taxes related to the change in unrealized appreciation
(depreciation) on available-for-sale securities, shown in stockholders' equity,
were $(3,600) and $2,600 for 1997 and 1996, respectively.
- 13 -
<PAGE> 27
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8: 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 1997, or 1996.
NOTE 9: 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>
1997 1996
------ ------
<S> <C> <C>
Options outstanding, beginning of year 30,000 60,000
Granted 30,000
Expired 60,000
Exercised
Rescinded 10,000
------ ------
Options outstanding, end of year 20,000 30,000
====== ======
</TABLE>
NOTE 10: COMMISSIONS
Commission 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. Commission expense was
$1,140,668 and $676,828 in 1997 and 1996, respectively. The increase in
commission expense is primarily attributable to the attrition of older
low-commissioned policies which are being replaced with new business. The new
business carries a significantly higher commission structure than business which
is being replaced.
- 14 -
<PAGE> 28
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 11: ADDITIONAL CASH FLOW INFORMATION
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) $(1,983,921) $ (643,785)
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 110,269 138,303
Amortization from investments 410 726
Realized (gain) loss from investments 17,414 (157,232)
Provision for deferred income taxes 21,800 (9,800)
Decrease (increase) in receivables 58,050 (21,466)
Decrease (increase) in premiums due (4,965) (151,284)
Decrease (increase) in accrued investment income 8,917 36,880
Decrease (increase) in amounts recoverable and
due from reinsurers and other assets 165,422 139,899
Increase (decrease) in future policy benefits (71,103) (4,175)
Increase (decrease) in other policy claims and
benefits payable (46,190) 537,000
Increase (decrease) in unearned premiums and advance (81,686)
premiums 141,542
Increase (decrease) current income taxes payable or
receivable 54,208 (106,000)
Increase (decrease) in accounts payable, accrued
expenses, and amounts due reinsurers (68,939) 36,091
----------- -----------
Net cash provided by (used in) operations $(1,820,314) $ (63,301)
=========== ===========
</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 -
<PAGE> 29
PROFESSIONAL BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13: SUBSEQUENT EVENTS AND GOING CONCERN MATTERS
On February 18, 1998, the Company was placed into conservatorship by the
Commissioner of Insurance of the State of Texas. This action was the direct
result of recurring losses from operations which have reduced the Company's
statutory capital and surplus to a level below the minimum required by the Texas
Department of Insurance. Under the provisions of Texas Insurance Code, Article
21.28-A, the conservator was directed to take charge of the Company and all the
property, books, records, and effects thereof, and to conduct the business
thereof. As of March 3, 1998, no arrangements have been made to obtain the
capital which would be necessary to raise the Company's statutory capital and
surplus to a level above the minimums required by the Texas Department of
Insurance. The financial condition of the Company raises substantial doubt about
the Company's ability to continue as a going concern.
- 16 -
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
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, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 118,895
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 450,460
<TOTAL-INVEST> 1,407,402
<CASH> 1,496,926
<RECOVER-REINSURE> 26,179
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 3,458,276
<POLICY-LOSSES> 977,231
<UNEARNED-PREMIUMS> 31,151
<POLICY-OTHER> 2,113,810
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 805,996
<OTHER-SE> (899,026)
<TOTAL-LIABILITY-AND-EQUITY> 3,458,276
11,210,607
<INVESTMENT-INCOME> 127,452
<INVESTMENT-GAINS> (17,010)
<OTHER-INCOME> 76,634
<BENEFITS> 10,408,515
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 2,132,377
<INCOME-PRETAX> (2,266,867)
<INCOME-TAX> (282,946)
<INCOME-CONTINUING> (1,983,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,983,921)
<EPS-PRIMARY> (3.00)
<EPS-DILUTED> (2.91)
<RESERVE-OPEN> 3,208,334
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,091,041
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
