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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER 0-23637
THE WMA CORPORATION
(Name of small business issuer in its charter)
DELAWARE 58-2179041
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11315 JOHNS CREEK PARKWAY, DULUTH, GEORGIA 30097
(Address of principal executive offices)
Issuer's telephone number: (770) 248-3311
Check whether the issuer (1) filed all reports required to be filed 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the latest practicable date:
As of March 31, 1999, there were 2,495,010 shares of common stock
(.001 par value) outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
ITEM 1 Financial Statements 3
ITEM 2 Management's Discussion and Analysis or Plan of Operation 8
PART II
ITEM 1 Legal Proceedings 19
ITEM 2 Changes in Securities 19
ITEM 3 Defaults Upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 21
</TABLE>
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THE WMA CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Fixed maturity securities - available for sale (amortized cost of
$9,359,325 and $9,501,564 for 1999 and 1998, respectively) $ 9,559,187 $ 9,869,679
------------ ------------
Total investments 9,559,187 $ 9,869,679
Cash and cash equivalents 1,534,632 6,617,710
Investment income due and accrued 134,790 136,196
Reinsurance balances receivable 299,454 101,034
Deferred acquisition costs 36,513,351 27,537,866
Deferred organization costs (net of accumulated amortization of
$186,869 and $98,565 for 1999 and 1998, respectively) -- 88,304
Prepaid expenses 207,389 216,746
Due from World Marketing Alliance, Inc. 339 3,507
Fixed assets (net of accumulated depreciation of $18,584 and $7,649
for 1999 and 1998, respectively) 113,885 84,820
Other assets 261,408 225,312
------------ ------------
Total assets $ 48,624,435 $ 44,881,174
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 3,104,294 $ 2,624,020
Reinsurance balances payable 7,385,665 5,425,467
Accrued expenses 132,986 105,854
Accrued interest payable 303,562 101,099
Accounts payable 76,797 70,376
Due to World Marketing Alliance, Inc. 3,851 --
Short term debt 10,000,000 10,000,000
Deferred tax liability 2,544,228 2,181,219
------------ ------------
Total liabilities 23,551,383 20,508,035
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Stockholders' equity:
Common stock, par value $.001, 10,000,000 authorized
2,500,000 shares issued in 1999 and 1998 2,500 2,500
Additional paid-in capital 20,228,973 20,228,973
Accumulated other comprehensive income 132,083 242,977
Retained earnings 4,759,396 3,948,589
Treasury stock, at cost (4,990 shares for 1999 and 1998) (49,900) (49,900)
------------ ------------
Total stockholders' equity 25,073,052 24,373,139
------------ ------------
Total liabilities and stockholders' equity $ 48,624,435 $ 44,881,174
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
Revenues:
Premiums $ 2,036,357 $ 1,728,837
Reinsured policy revenues 2,621,867 158,957
Net investment income 156,719 246,402
Net realized gains on investments -- 3,799
------------ ------------
Total revenue 4,814,943 2,137,995
------------ ------------
Benefits and expenses:
Benefits, claims and settlement expenses 1,128,267 857,489
Change in future policy benefits 74,794 17,928
Reinsurance premium allowances, net 872,604 472,505
Amortization of deferred acquisition costs 1,014,292 124,573
Professional fees and other expenses 279,762 120,330
Interest expense 202,463 --
Consulting fees to World Marketing Alliance, Inc. 11,552 69,265
------------ ------------
Total benefits and expenses 3,583,734 1,662,090
------------ ------------
Income before income taxes 1,231,209 475,905
Income tax expense (420,401) (162,339)
------------ ------------
Net income $ 810,808 $ 313,566
============ ============
Basic and diluted income per share $ 0.32 $ 0.13
============ ============
Weighted-average common shares outstanding 2,495,010 2,497,452
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 810,808 $ 313,566
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Amortization and depreciation 1,113,530 133,682
Deferred tax expense 420,401 162,339
Net realized gains on investments -- (3,799)
Change in:
Investment income due and accrued 1,406 (1,786)
Reinsurance receivables (198,420) 183,524
Deferred acquisition costs (9,989,777) (2,179,941)
Prepaid expenses 9,357 (274,523)
Due from World Marketing Alliance, Inc. 3,168 --
Other assets (36,096) (8,816)
Future policy benefits 480,274 204,982
Reinsurance balances payable 1,960,198 962,093
Accrued expenses 27,132 (23,735)
Accounts payable 6,421 295,812
Accrued interest payable 202,463 --
Due to World Marketing Alliance, Inc. 3,851 76,586
------------ ------------
Net cash used in operating activities (5,185,284) (156,217)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 142,206 698,729
Purchase of fixed assets (40,000) --
------------ ------------
Net cash provided by investing activities 102,206 698,729
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock -- (20,900)
------------ ------------
Net cash used in financing activities -- (20,900)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,083,078) 521,612
Cash and cash equivalents at beginning of period 6,617,710 1,469,663
------------ ------------
Cash and cash equivalents at end of period $ 1,534,632 $ 1,991,275
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
============ ============
Income taxes paid $ -- $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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THE WMA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
(2) DEFERRED TAX
Deferred income tax liabilities and related expenses are determined in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109) using an effective federal tax rate of 34%. SFAS No. 109 specifically
excludes recognition of the "small life insurance company deduction" available
under Section 806 of the Internal Revenue Code for qualifying life insurance
companies. This special deduction, for which management believes the Company
will qualify for a number of years, can reduce the effective federal income tax
rate from 34% to less than 20% depending upon the amount of taxable income.
Consequently, the effective tax rate on the Company's earnings may ultimately
prove to be less than the deferred income tax liabilities and related expenses
determined under SFAS No. 109, at March 31, 1999.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130) establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130
effective January 1, 1998. The primary component of the differences between net
income and comprehensive income for the Company is unrealized gains on
securities. Total comprehensive income for the three months ended March 31,
1999 was $699,914 compared to $394,108 for the three months ended March 31,
1998.
(4) ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in investment securities and other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value
of a derivative will be included in either earnings or other comprehensive
income depending on the intended use of the derivative instrument. The
provisions of SFAS No. 133 are effective for all fiscal quarters of fiscal
years beginning after June 15, 1999; however, the Company does not believe such
provisions will have a significant impact on the financial statements upon
adoption.
In December 1997, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. This SOP provides guidance for
determining when an entity should recognize a liability for guaranty fund and
other insurance-related assessments. It also provides guidance on how to
measure the liability. This SOP is effective for 1999. The Company does not
believe the provisions of SOP 97-3 will have a significant impact on the
financial statements upon adoption.
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In April 1998, the AcSEC also issued SOP 98-5, Reporting on the Costs
of Start-Up Activities. This SOP provides guidance regarding the capitalization
and expense treatment of start-up activities, including organization costs.
This SOP is effective for 1999, with any impact upon adoption recorded at the
beginning of the fiscal year in which the SOP is initially adopted. The Company
adopted SOP 98-5 effective January 1, 1999 and as a result, wrote off all
remaining deferred organization costs.
(5) RECLASSIFICATION
The Company has reclassified the presentation of certain 1998
information to conform to the 1999 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The WMA Corporation ("the Company") is a holding company that owns all
of the outstanding capital stock of WMA Life Insurance Company Limited ("WMA
Life"), a Bermuda life insurance corporation. WMA Life Holding, Ltd., a
non-operating Bermuda subsidiary of the Company was dissolved during the first
quarter of 1999. WMA Life began reinsurance operations at the end of the second
quarter of 1996. WMA Life presently provides reinsurance to certain life
insurance companies ("Ceding Life Companies") with respect to variable universal
life ("VUL") and variable annuity policies sold through World Marketing
Alliance, Inc., a Georgia corporation which operates a multi-product independent
insurance agency. World Marketing Alliance, Inc., and certain entities and
persons, with which it is associated primarily for licensing purposes, are
referred to herein as "WMA Agency", unless the context indicates otherwise.
Where securities licenses are required for the sale of variable annuity and VUL
products, such licenses are obtained through WMA Securities, Inc. ("WMA
Securities"), under a dual licensing arrangement with WMA Agency. S. Hubert
Humphrey, Jr. ("Mr. Humphrey") owns substantially all of WMA Agency and all of
WMA Securities. Mr. Humphrey also beneficially owns approximately 36.1% of the
Company's Common Stock.
All of the Company's reinsurance business is generated by the
marketing efforts of WMA Agency which places business with the Ceding Life
Companies. The Company does not use reinsurance intermediaries or engage in any
direct marketing activities. As a consequence, the Company is dependent upon and
benefits from WMA Agency marketing those products, which the Company reinsures.
World Marketing Alliance, Inc. is an independent entity separate and apart from
the Company.
The following tables show, by Ceding Life Company, the percentage of
WMA Agency business reinsured by the Company.
Life Insurance Applications (1)
<TABLE>
<CAPTION>
Ceding Life Company 3/31/99 1998 1997
<S> <C> <C> <C>
Western Reserve Life Assurance Company of Ohio ("Western 80% 81% 85%
Reserve")
American Skandia Life Assurance Corporation ("American N/A N/A N/A
Skandia")
Kemper Investors Life Insurance Company ("Kemper") 4 4 2
Total Subject to Reinsurance 84% 85% 87%
--- --- ---
Total Not Subject to Reinsurance 16 15 13
--- --- ---
Total Applications Submitted 100% 100% 100%
Annuity Applications (1)
<CAPTION>
Ceding Life Company 3/31/99 1998 1997
<S> <C> <C> <C>
Western Reserve 58% 44% 0%
American Skandia 12 16 13
Kemper N/A N/A N/A
--- --- ---
Total Subject to Reinsurance 70% 60% 13%
Total Not Subject to Reinsurance 30 40 87
--- --- ---
Total Applications Submitted 100% 100% 100%
</TABLE>
(1) As reported to WMA Agency by life insurance companies, of
applications for life insurance and annuity policies submitted by WMA
Agency, and that WMA Agency monitors on a regular basis.
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WMA Life's revenues do not and are not expected to, bear any
relationship to the distribution of business placed by the companies with whom
WMA Agency does business as illustrated by the above tables. The reasons WMA
Life's revenue will diverge from the relationships noted above include, but are
not limited to, the nature, mix and pricing of the products reinsured; the terms
of the various reinsurance agreements; and the prescribed generally accepted
accounting for such products and reinsurance structures.
Under a reinsurance agreement, the economic consequences of certain
insurance risks are transferred from the ceding company to the reinsurer.
Depending upon the type of reinsurance agreement, these risks may include:
mortality, persistency, expense, and investment. Key considerations in
evaluating the risks include: industry experience, the ceding company's pricing
and assumptions, the type of product, the Ceding Life Company's underwriting
practices and procedures, the type of distribution system, the ceding company's
recent experience, and the market for the product.
The Ceding Life Companies retain responsibility for the payment of all
claims, surrender values, commissions and expenses involved in issuing and
maintaining the policies. In addition, the Ceding Life Companies administer the
reinsurance contracts and, on a monthly basis, provide WMA Life with information
regarding premiums, reserves, benefits, claims and settlement expenses for
policies reinsured.
At March 31, 1999, WMA Life's reinsurance inforce on life insurance
policies, including riders, constituted 224,005 policies with an aggregate
reinsured amount of $6.71 billion. This is an increase of 15,684 life insurance
policies and riders or 8% and $590 million of inforce face amount, or 10% from
December 31, 1998. As of March 31, 1999, WMA Life had reinsurance inforce with
respect to variable annuities for 12,793 policies with reinsured annuity
contract benefits of $201 million. This is an increase of 2,765 annuity policies
or 28% and $43 million of annuity contract benefits or 27% from December 31,
1998.
The following table indicates the percentage of WMA Life's reinsurance
revenues derived from the Ceding Life Companies:
<TABLE>
<CAPTION>
Ceding Life Company 3/31/99 1998 1997
<S> <C> <C> <C>
Western Reserve 88% 89% 95%
American Skandia 9 9 4
Kemper 3 2 1
--- --- ---
Total 100% 100% 100%
</TABLE>
MRT REINSURANCE
WMA Life's reinsurance indemnity agreements include two Monthly Renewal
Term ("MRT") agreements relating to VUL policies. MRT reinsurance is a variation
of Yearly Renewable Term Insurance. The reinsurance of the VUL policies includes
business previously and currently being sold through WMA Agency and issued by
Western Reserve and Kemper. Under the MRT reinsurance agreements, WMA Life
assumes a portion of the mortality risk related to the VUL policies written by
Western Reserve and Kemper. WMA Life ceased reinsuring Financial Freedom Builder
VUL policies sold after March 31, 1998 on a MRT basis and commencing April 1,
1998, began reinsuring on a coinsurance and modified coinsurance basis with
Western Reserve all Financial Freedom Builder VUL policies sold through WMA
Agency. (See discussion under "Coinsurance and Modified Coinsurance" below.) The
Company will continue to reinsure, in accordance with the terms of the MRT
reinsurance agreement with Western Reserve, all Financial Freedom Builder VUL
policies issued prior to April 1, 1998 as long as those policies continue to
remain in force. Financial activity regarding the MRT agreements is settled on a
monthly basis.
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COINSURANCE AND MODIFIED COINSURANCE
Under a coinsurance arrangement, WMA Life assumes a proportionate
share of the risks and expenses and receives a proportionate share of the
premiums and revenues from the underlying policies. The assumed risks include
mortality, lapses, cash surrenders and investment risk. Additionally, under
coinsurance WMA Life must establish a proportionate share of the policy
reserves. Modified coinsurance ("ModCo") is a variation of coinsurance. ModCo is
similar to coinsurance except that reserves and assets related to the reserves
that would otherwise be recorded and held by the Company are retained by the
Ceding Life Company. ModCo is used primarily for products that develop cash
values, which allows the Ceding Life Company to retain the associated assets for
investment purposes. Under coinsurance and modified coinsurance, the mortality,
persistency, and investment risks are reinsured on the same plan as that of the
original policy. The Ceding Life Companies and the Company share in these risks
in the same manner.
WMA Life has a modified coinsurance agreement with American Skandia
and a coinsurance and modified agreement with Western Reserve providing for the
reinsurance of a portion of certain variable annuity policies sold through WMA
Agency. WMA Life also has a coinsurance and modified coinsurance agreement with
Western Reserve reinsuring a portion of certain VUL policies sold through WMA
Agency. Financial activity under the American Skandia agreement is settled on a
monthly basis. Financial activity under these Western Reserve agreements is
settled on a quarterly basis or as otherwise discussed below.
Effective January 1, 1998, WMA Life commenced reinsurance on a
coinsurance and modified coinsurance basis with Western Reserve a portion of all
Freedom Wealth Creator variable annuity policies sold through WMA Agency. This
agreement enables the Company to participate in revenues arising principally
from mortality and expenses charges, sales charges associated with surrenders,
credited interest rate spreads, administrative charges, and asset based
allowances.
Commencing April 1, 1998, WMA Life began reinsuring on a coinsurance
and modified coinsurance basis with Western Reserve a portion of all Financial
Freedom Builder VUL policies sold through WMA Agency. This agreement enables the
Company to participate in revenues arising principally from mortality and
expenses charges, cost of insurance charges, sales charges associated with
surrenders, credited interest rate spreads, administrative charges, and asset
based allowances. Effective January 1, 1999, with regard to policies issued
during 1999, the Company reached an agreement in principle with Western Reserve
to defer financial settlements under this agreement until December 31, 1999. If
the Company does not settle on or before December 31, 1999, Western Reserve will
have the option to recapture the reinsurance placed with WMA Life on the
policies issued during 1999, at which time the deferred reinsurance settlements
otherwise due Western Reserve will be extinguished. In addition to the existing
terms of the agreement, a reinsurance fee of 9% per annum will accrue on the
deferred reinsurance settlement balance beginning April 1, 1999. The deferred
reinsurance settlement balance with regard to policies issued during the first
quarter of 1999 is approximately $3 million. With regard to policies issued
during 1998, financial activity will continue to be settled on a quarterly
basis.
Due to the nature of the VUL products reinsured, the Company is
significantly insulated from the impact of changes in investment yields as the
policyholder retains virtually all of the investment risk. However, on an
overall basis, a decline in investment yields is expected to cause a decrease in
the Company's investment income and revenues under its coinsurance and modified
coinsurance agreements, as the reinsured policy account balances upon which some
of the Company's revenues are calculated would presumably be lower. Accordingly,
the Company's income before income taxes will be smaller. Conversely, an
increase in investment yields is expected to have the opposite effect. If
mortality experience is worse than assumed (i.e., higher claims), it is expected
to cause an increase in Benefits, claims and settlements, and a decrease in
current and future revenues that would have otherwise resulted from the policies
reinsured. Conversely, if mortality experience is better than assumed (i.e.,
lower claims), it is expected to cause an increase in current and future
revenues that would have otherwise resulted from the policies reinsured.
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ACCOUNTING
WMA Life recognizes premiums as earned on MRT reinsurance for the
mortality risk reinsured. Reinsured policy revenues that are reported in the
period reflect policy mortality and expense charges, policy administration
charges, asset-based allowances and deferred sales charges that have been
assessed against the reinsured policy account balances under the coinsurance and
modified coinsurance agreements, as they relate to universal life-type
contracts.
Net investment income is the gross income earned from the invested
assets less the investment management expenses and custodial fees.
WMA Life also defers costs that vary with and are directly associated
with the acquisition of the reinsured policies. These costs include actuarial,
legal and accounting fees, and salaries and expenses incurred directly by WMA
Life and reinsurance commission and expense allowances paid to the Ceding Life
Companies in accordance with the reinsurance agreements. These expenses are
deferred to the extent that such costs are deemed recoverable from future policy
revenues in accordance with Generally Accepted Accounting Principles ("GAAP")
and are recorded as deferred acquisition costs on the balance sheet. Deferred
acquisition costs increased $8.98 million, or 33%, during the first three months
of 1999 to $36.51 million at March 31, 1999.
Deferred acquisition costs are amortized over the lives of the
underlying policies (with regard to the terms of the reinsurance agreement).
Under the MRT agreements, the amortization is in proportion to the ratio of
premiums collected during the then current period to total anticipated premiums.
The rate of amortization is based upon methods that include assumptions, such as
estimates of expected investment yields, mortality, persistency and expenses
applicable at the time the policies are reinsured. The assumptions include
provision for risk of adverse deviation. Original assumptions continue to be
used in subsequent accounting periods to determine changes in the deferred
acquisition costs unless a premium deficiency exists. (A premium deficiency is
recognized if the sum of expected claim costs, unamortized acquisition costs,
and maintenance costs exceeds related unearned premiums. A premium deficiency is
first recognized by charging any unamortized acquisition costs to expense to the
extent required to eliminate the deficiency. If the premium deficiency is
greater than unamortized acquisition costs, a liability shall be accrued for the
excess deficiency.) Although the Company is reinsuring on a coinsurance and
modified coinsurance basis with Western Reserve a portion of all Financial
Freedom Builder VUL policies previously reinsured on a MRT basis, policies
issued prior to April 1, 1998 will continue to be reinsured in accordance with
the MRT reinsurance agreement with Western Reserve. These changes did not result
in premium deficiency.
Under the coinsurance and modified coinsurance agreements, the
amortization of the deferred acquisition cost is in proportion to the ratio of
gross profits recognized during the then current period to total anticipated
gross profits. During each accounting period, assumptions used in calculating
the amortization of the Company's deferred acquisition expense reflect actual
experience for the then current accounting period. Management also reviews on a
periodic basis evolving experience with regard to the Company's assumptions
concerning future experience with regard to mortality, persistency, investment
yields and expenses in determining its estimates of future gross profits. To the
extent management believes variances from expected assumptions are permanent,
rather than temporal, assumptions used with regard to future experience will be
changed. Upon adoption of any change in assumptions used with regard to future
experience, the amortization of the Company's deferred acquisition cost will be
recalculated and be reflected during the then current accounting period.
Life insurance claims settled, claims reported and changes in
estimates of claims incurred but not reported related to reinsured VUL policies
are recorded as Benefits, claims and settlement expenses in the Consolidated
Financial Statements. The change in the liability for future policy benefits is
recorded separately as Change in future policy benefits in the Consolidated
Financial Statements.
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The liability for future policy benefits was $3.10 million at March 31,
1999 in comparison to $2.62 million at December 31, 1998, an increase of
$480,000 or 18%. The liability at March 31, 1999 is comprised of two components:
the liabilities related to the coinsurance of variable annuity and VUL
policyholder obligations and liabilities under the Company's MRT reinsurance
agreements. The liability, with regard to the MRT reinsurance, which represents
the present value of future benefits to be paid and related expenses, less the
present value of future net premiums (that portion of the premium required to
provide for all benefits and expenses), is estimated using the same methods and
assumptions used to amortize the deferred acquisition costs under the MRT
agreements. Changes in the liability for future policy benefits that result from
the Company's periodic estimation for financial reporting purposes are
recognized in income in the period in which the change occurs. The liability for
the fixed account portion of the Western Reserve variable annuity and VUL
coinsurance agreements is equal to reinsured policy account balances. To date,
management believes the assumptions used regarding its liability for future
policy benefits are appropriate for its circumstances.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Revenues. The Company's revenues increased by $2.67 million, or 125%,
to $4.81 million for the three months ended March 31, 1999 from $2.14 million
for the same period in 1998. The increase was primarily attributable to the
coinsurance and modified coinsurance agreements WMA Life entered into with
American Skandia during 1997 and with Western Reserve in 1998. Further, a
revenue increase of $308,000 was attributable to the growth in premiums
associated with the Western Reserve and Kemper MRT agreements.
Premiums. Premiums increased by $308,000, or 18%, to $2.04 million for
the three months ended March 31, 1999 from $1.73 million for the same period in
1998. The increase was attributable primarily to the growth in premiums
associated with a MRT reinsurance agreement WMA Life entered into with Western
Reserve during the second quarter of 1996, and to a much lesser extent to a MRT
agreement executed during the fourth quarter of 1996 with Kemper. Policies and
riders reinsured on a MRT basis decreased by 12,114, or 7%, to 155,090 at March
31, 1999 from 167,204 at March 31, 1998. The decrease in policies in force on a
MRT basis was due to the discontinuation of Western Reserve's Financial Freedom
Builder VUL policies reinsured on a MRT basis after March 31, 1998 and the
lapsing of in force policies. Management expects the MRT in force business to
continue to decline as policyholders terminate their policies either as a result
of surrender or premium lapse. Premium increases are attributable to the
increasing duration of policies inforce, because premiums increase with the
advancing age of the insureds.
Reinsured Policy Revenues. Reinsured policy revenues increased by $2.46
million, to $2.62 million for the three months ended March 31, 1999 from
$159,000 for the same period in 1998. Reinsured policy revenues for the three
months ended March 31, 1998, were related to the American Skandia and Western
Reserve variable annuity agreements. Of the $2.62 million Reinsured policy
revenues at March 31, 1999, $765,000 was attributable to the variable
annuity agreements with American Skandia and Western Reserve, and $1.86 million
was attributable to the VUL coinsurance and modified coinsurance agreement WMA
Life entered into with Western Reserve beginning April 1, 1998. These revenues
reflect policy cost of insurance charges, mortality and expense charges, policy
administration charges, asset based allowances and deferred sales charges under
the coinsurance and modified coinsurance agreements, as they relate to universal
life-type contracts.
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Net Investment Income and Net Realized Gains on Investments. Net
investment income decreased by $89,000, or 36%, to $157,000 for the three months
ended March 31, 1999 from $246,000 for the same period in 1998. Investment
income is earned from the investment in securities (fixed income and equity) and
cash equivalents. Investment expenses of $18,000 and $17,000 for 1999 and 1998,
respectively, related to investment advisor fees and custodial fees, were netted
with gross investment income excluding realized gains and losses. The decrease
in net investment income was primarily due to the reduction in total investments
resulting from the sale of fixed income securities in order to pay the Ceding
Life Companies for reinsurance expense allowances and benefits. The principal
components of these payments are attributable to the Western Reserve VUL
coinsurance and modified coinsurance agreement. The sale of fixed income and
equity securities in the first quarter of 1998 resulted in $4,000 of Net
realized gains on investments. No gains or losses were realized on sales of
investment securities in the first quarter of 1999.
Benefits, Claims and Settlement Expenses. Benefits, claims and
settlement expenses increased by $271,000, or 32%, to $1.13 million for the
three months ended March 31, 1999, from $857,000 for the same period in 1998.
This increase primarily resulted from an increase in volume of in force
business. The amount of business in force at March 31, 1999 was $6.71 billion as
compared to $4.66 billion at March 31, 1998, which represented a $2.05 billion,
or 44% increase.
The Company's profitability, in part, depends on the volume and amount
of death claims incurred. While death claims are reasonably predictable over a
period of many years, claims become less predictable over shorter periods and
are subject to fluctuation from quarter to quarter and year to year. Claims paid
plus those incurred during the first quarter of 1999 were approximately 15%
greater than otherwise expected based upon prior claims activity.
A retrocession pool agreement was entered into simultaneously with the
reinsurance of the Western Reserve VUL business on a coinsurance and modified
coinsurance basis. Under the retrocession pool agreement, WMA Life retrocedes
portions of the mortality risk in excess of its retention limit. Standard
mortality risks in excess of $100,000 per life are retroceded to pool
participants. The retrocession agreement serves to reduce the impact of severe
fluctuations in death claims from quarter to quarter and year to year.
Changes in Future Policy Benefits. The change in future policy benefits
increased by $57,000 to $75,000 for the three months ended March 31, 1999,
from $18,000 for the same period in 1998. The increase is attributable to the
increasing duration of policies in force that are reinsured on a MRT basis and
unearned cost of insurance charges on the VUL business reinsured on a
coinsurance and modified coinsurance basis. The liability for future policy
benefits increased by $1.60 million, or 107%, to $3.10 million at March 31, 1999
from $1.50 million at March 31, 1998.
Reinsurance Premium Allowances, Net. Net reinsurance premium allowances
increased by $400,000, or 85%, to $873,000 for the three months ended March 31,
1999 from $473,000 for the same period in 1998. Gross reinsurance premium
allowances represent a portion of reinsurance premiums paid or allowed by WMA
Life to the Ceding Life Companies for each policy reinsured. A certain portion
of the gross reinsurance allowances, with regard to the production of new
business was related to the Company's share of commissions, underwriting costs
and other expenses from the production of new business incurred by the Ceding
Life Companies on the business reinsured. These amounts have been deferred to
the extent that such costs are deemed recoverable from future policy revenue in
accordance with GAAP. The balance of those amounts not deferred are reflected as
net reinsurance premium allowances and are often a level percentage of
individual policy revenues (e.g., renewal reinsurance allowances). Similar to
the increase in revenues, the increase in net reinsurance premium allowances was
due to an increase in the MRT premiums in force and placement of the variable
annuity and the VUL business reinsured on a coinsurance and modified coinsurance
basis.
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<PAGE> 14
Amortization of Deferred Acquisition Costs, Net. Amortization of
deferred acquisition costs increased by $890,000, or 712%, to $1.01 million for
the three months ended March 31, 1999 from $125,000 for the same period in 1998.
The increase in amortization of deferred acquisition costs was attributable to
increased revenues, primarily reinsured policy revenues, associated with
business reinsured and with the placement of new business.
The deferred acquisition cost balance is equal to the prior period
deferred acquisition cost balance, plus interest and acquisition costs
capitalized, less amortization as a function of premium and reinsured policy
revenues. Amortization of deferred acquisition costs is equal to amortization as
a function of revenue, less interest capitalized. In the early months of a
reinsurance agreement, interest capitalized can be a significant offset to the
amortization of deferred acquisition costs. As each block of reinsured policies
ages under the reinsurance agreements, amortization as a function of premium and
reinsured policy revenues will continue to exceed interest capitalized.
The increase in policy acquisition costs, consisting primarily of
commission and reinsurance expense allowances, under the VUL coinsurance and
modified coinsurance agreement as compared to that under the MRT agreement is
largely attributable to the relative differences in the gross premiums paid
under each agreement, respectively. First year gross premiums paid were $6.97
million under the VUL coinsurance agreement for the three month period ending
March 31, 1999 as compared to $224,000 for the first year MRT reinsurance
premiums paid for the same period.
Professional Fees and Other Expenses. Professional fees and other
expenses increased by $160,000, or 133%, to $280,000 for the three months ended
March 31, 1999 from $120,000 for the same period in 1998. Expenses for each
period include professional fees for legal, actuarial and accounting expenses
incurred, operating expenses and other miscellaneous expenses. Salary expenses
are included in the first quarter of 1999 but not in 1998 due to the Company's
utilization of WMA Agency's employees for administrative functions in 1998. (See
discussion below.) The increase in professional fees and other expenses is also
due to the remaining deferred organization costs of $88,000 being amortized in
the first quarter of 1999. This write-off was recorded in accordance with the
adoption of SOP 98-5 as discussed in the Notes to Consolidated Financial
Statements. Additionally, a loss of approximately $5,000 was incurred due to
the dissolution of WMA Life Holding, Ltd.
Consulting Fees to World Marketing Alliance, Inc. Consulting fees to
World Marketing Alliance, Inc. decreased by $58,000, or 83%, to $11,000 for the
three month period ended March 31, 1999 from $69,000 for the same period in
1998. Consulting fees to WMA Agency consist of the funding of certain operating
and travel related expenses for the Company. During the first quarter of 1998,
WMA Agency employees performed the Company's administrative functions until the
Company completed the hiring of its employees. The Company paid WMA Agency a
monthly payroll allocation based upon the amount of time during which WMA Agency
employees provided services to the Company. The Company incurred $52,000 in
salaries and related expenses during this period in 1998.
The Company has a Sublease Agreement with WMA Agency, pursuant to
which the Company pays annual rent of $18,675 to WMA Agency for 1,500 square
feet of office space. The Company also has a Corporate Services Agreement with
WMA Agency pursuant to which WMA Agency provides corporate services to the
Company for a fixed monthly fee of $2,250, adjusted annually.
Interest Expense. Interest expense increased by $202,000 due to the
interest incurred on the short-term financing received from Money Services,
Inc. (as discussed below).
Income Taxes. Income taxes increased by $258,000 to $420,000 for the
three months ended March 31, 1999 from $162,000 for the same period in 1998 due
to higher income before income taxes. The Company's effective tax rate was 34%
in 1999 and 1998.
Net Income. As a result of the foregoing, net income for the
three-month period ended March 31, 1999, was $811,000 compared to $314,000 for
the three-month period ended March 31, 1998, an increase of $497,000 or 158%.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The principal source of the Company's cash flow have been premiums
received from Ceding Life Companies, investment income, maturing investments and
proceeds from sales of invested assets, issuance of the Company's Common Stock
and short term financing. Premiums are generally received in advance of related
claims payments. In addition to the need for cash flow to meet operating
expenses, the liquidity requirements of the Company relate primarily to the
payment of gross reinsurance allowances, operating expenses, investment
purchases, and reinsurance claims.
As a result of the coinsurance and modified coinsurance agreements
with Western Reserve, the Company requires substantially greater amounts of cash
to make payments to Western Reserve than it has been required to make under its
MRT agreement. Under the MRT reinsurance agreements, premiums vary in proportion
to the expected mortality claims reinsured. The Company's cash inflows under the
MRT agreements equal premiums for the mortality risk reinsured. The Company's
cash outflows equal reinsurance expense allowances and death benefit claims. The
reinsurance expense allowances represent the Company's share of acquisition and
maintenance expenses incurred by the Ceding Life Company that are attributable
to the risks reinsured. With respect to the first policy year, the Company's net
cash outlay is approximately equal to death benefit claims because of the
expense allowance structure; thereafter, in renewal policy years, it is
anticipated no further cash outlays will occur because reinsurance expense
allowances are materially less as a function of premium.
Under the Western Reserve VUL coinsurance and modified coinsurance
agreement, since the Company is reinsuring risks on the same plan as that of the
original policy, reinsurance premiums are materially greater than premiums paid
on the MRT reinsurance--perhaps as much as fifteen times or more. During the
first year in which a policy is reinsured on a coinsurance basis, the Company is
required to reimburse Western Reserve for its share of acquisition costs,
including first year commissions and issuance expenses. Further, under modified
coinsurance, the Company will allow Western Reserve to retain assets related to
reserves in support of reinsured policy benefits (e.g., cash values).
Accordingly, because of the type of reinsurance and the plan reinsured, the net
cash outlays could be as much as, or more than, the first year premium paid.
The Company's primary source of liquidity was $1.53 million in cash
and cash equivalents at March 31, 1999, a decrease of $5.08 million from March
31, 1998. The effective duration of the Company's fixed income portfolio is five
years, with over 83% of the fixed income securities having a maturity of less
than 10 years. The Company's fixed income portfolio represents 100% of the total
invested assets, and has an average quality rating of Aa3 by Moody's.
The Company's cash requirements consist of: salaries and benefits;
management service fees; investment management and custodial account fees;
accounting and consulting services fees; expenses related to regulatory issues
and compliance with corporate and tax matters; and other incidental
administrative expenses. The Company incurred no capital expenditures during the
first quarter of 1999.
For the period ended March 31, 1999, net cash flows used in operating
activities were $5.19 million, compared to net cash used in operating activities
of $156,000 for the period ended March 31, 1998. This increase is due primarily
to additional cash required to reimburse Western Reserve for reinsurance
allowances as a result of the VUL coinsurance and modified coinsurance agreement
executed during 1998 and to a lesser extent to the variable annuity agreements
with American Skandia and Western Reserve. The Company has used its principal
paydowns from its mortgage-backed securities and sales of its fixed securities
to reimburse the Ceding Life Companies for allowances associated with the
American Skandia and Western Reserve agreements. The net cash provided by
investing activities for the period ended March 31, 1999 was $102,000, compared
to net cash provided by investing activities of $699,000 for the period ended
March 31, 1998. No cash was used in financing activities for the period ended
March 31, 1999 compared to net cash used in financing activities of $21,000 for
the period ended March 31, 1998. The Company purchased a small amount of stock
from its shareholders in the first quarter of 1998.
15
<PAGE> 16
On September 30, 1998, the Company entered into a $10 million line of
credit agreement with Money Services, Inc. ("MSI"), a subsidiary of AEGON USA,
Inc., pursuant to the terms of which the Company immediately borrowed $5 million
to covers its immediate cash needs. An additional $5 million was drawn late in
the fourth quarter of 1998. Borrowings under this line of credit bear interest
at the rate of 8% per annum through March 31, 1999, increasing to 9% thereafter.
As of March 31, 1999, the Company had an outstanding principal balance of $10
million and accrued interest of $303,562. All unpaid accrued interest as of
March 31, 1999 will be added to the outstanding principal balance as of April 1,
1999. All outstanding balances of principal and interest under this line of
credit become due and payable on August 1, 1999, unless extended by the lender.
This credit line and the borrowings thereunder became necessary to fund payment
obligations to Western Reserve required under the coinsurance agreements.
The Company intends to repay the loans outstanding under the line of
credit with proceeds of a private sale of preferred and common stock to
institutional and other accredited investors or through alternative sources of
financing. If the stock sales does not occur or sufficient proceeds are not
obtained and alternative sources of financing are not obtainable at an
acceptable cost, the Company would be unable to repay amounts that it had
borrowed from MSI under the line of credit agreement. At the same time, Western
Reserve, pursuant to the terms of the line of credit agreement with MSI, would,
upon the Company's failure to timely repay loans obtained under the line of
credit agreement, have the right, until such loans are paid in full, to (i)
recapture business previously ceded to the Company for reinsurance, and (ii)
reduce the Company's quota share of new business to be reinsured under its
reinsurance agreements with WMA Life to a level where the Company's available
cash could meets its continuing obligations under the reinsurance agreements,
which reduction could be to zero. In such a case, Western Reserve would no
longer be required to cede new policies to the Company for reinsurance under the
agreements.
Further, anticipating that proceeds from a private sale of preferred
and common stock to institutional and other accredited investors will become
available to meet the Company's continuing obligations, including payment of
reinsurance expense allowances under the coinsurance and modified coinsurance
agreements with Western Reserve, the Company reached an agreement in principle
with Western Reserve to amend the VUL coinsurance and modified coinsurance
agreement, effective January 1, 1999, to defer financial settlements until
December 31, 1999. As of March 31, 1999, approximately $3 million of its
Insurance balances payable will be deferred under this agreement.
(See discussion under Coinsurance and Modified Coinsurance.)
The WMA Corporation has no assets other than the stock of WMA Life and
$1 million of cash and invested assets. The Company will rely on income from its
invested assets and dividends from WMA Life to meet holding company cash
requirements.
The minimum solvency margin for WMA Life as a long-term insurer under
Bermuda regulations is $250,000. As of December 31, 1998, WMA Life had total
statutory capital and surplus of $19.71 million. The amount available for
distribution of dividends is $15.29, which must be supplied through liquid
assets. WMA Life's quoted investments and cash was greater than $15.29 million.
Under the Company's reinsurance agreements, the Company is required to
provide security through a Letter of Credit ("LOC") for the benefit of the
Ceding Life Companies. The Company has three LOCs with Western Reserve as
beneficiary under each of the reinsurance agreements in place with Western
Reserve for a total of $3.7 million in support of reserve credits. WMA Life also
has previously secured a LOC of $30,000 in favor of Kemper. The LOCs were issued
by IBJ Whitehall Bank & Trust Company, the Company's custodian, and
collateralized by the Company's assets held with the custodian. If determined
to be necessary, WMA Life will develop facilities for future LOCs and trust
arrangements in support of additional reinsurance agreements.
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<PAGE> 17
As a result of the 1995 offering, the Company sold $2,000,000 shares of
Common Stock and 500,000 warrants for gross proceeds of $20.5 million (excluding
deferred organization costs of $517,000). The Company believes that the sources
of cash from the 1995 offering, the $10 million loan from MSI, and the amended
VUL coinsurance and modified coinsurance agreement with Western Reserve will be
sufficient to meet the Company's cash needs through July 1999 with respect to
the administration of WMA Life's current MRT agreements with Western Reserve and
Kemper, its variable annuity coinsurance agreements with American Skandia and
Western Reserve, and its VUL reinsurance agreement with Western Reserve. The
Company plans to repay its outstanding debt to MSI and to provide additional
capital to meet its future cash needs with the proceeds of a private sale of
stock to institutional and other accredited investors. The Company is also
exploring additional sources of financing through debt, reinsurance arrangements
and securitization of its receivables.
YEAR 2000 ISSUE
The Company has performed an initial assessment of its internal
business systems and believes its systems, primarily its computer systems, will
process date information accurately and without interruption when required to
process dates in the year 1999 and beyond. This assessment has focused primarily
on the Company's computer systems as the Company's business centers around the
processing of financial data and is not significantly impacted by embedded
technology such as micro controllers. The Company has discussed the year 2000
issue with the Ceding Life Companies and the steps they have taken to address
the situation. The Company believes its operations will not be affected. The
Company has not been required to expend significant resources to address the
year 2000 issue and does not anticipate any significant expenditures.
The Company is dependent on the data processing systems of the Ceding
Life Companies for the year 2000 and beyond. Due to this dependence, the failure
of the systems of the Ceding Life Companies to be year 2000 compliant could have
a material adverse effect upon the Company, as a result of business interruption
or loss of revenue sources. There can be no assurance that these systems will
be able to properly process information relating to the year 2000 and beyond.
The Company has also discussed the year 2000 issue with the Ceding Life
Companies, and in particular Western Reserve, and the steps they have taken, or
intend to take, to address the situation.
The Company is monitoring this risk through continued communications with the
Ceding Life Companies regarding the status of their year 2000 readiness. The
Company has received written advice from the Ceding Life Companies as to the
status of their year 2000 compliance programs. The Company's largest reinsurance
relationship is with Western Reserve, which has advised the Company that as of
January 1, 1999, substantially all of Western Reserve's mission-critical systems
are year 2000 compliant. Western Reserve has also advised the Company that it
will continue validation and revalidation testing of its internal systems as
well as those systems which interface with their business partners throughout
1999. However, there can be no guarantees that their efforts to remediate their
internal systems will be trouble free and that they will be in compliance before
the year 2000.
Due to the nature of its internal computer systems, the Company does
not incur significant recurring technology costs and has not been, nor is it
expected to be, required to expend significant resource to address the year 2000
issue. Since the Company will not be required to incur significant costs related
to system replacement but will be involved primarily in monitoring third party
suppliers, the estimated future costs of remediation will primarily consist of
personnel costs.
In the event that the Ceding Life Companies are not year 2000
compliant, the Company's operations could be significantly impacted by the
Company's ability to enter into reinsurance agreements with other companies at
the same or similar terms.
17
<PAGE> 18
FORWARD-LOOKING STATEMENTS
Certain statements made in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to the safe harbor provisions of that Act. These statements include,
but are not limited to, statements relating to increases in reinsurance revenues
and net income in future periods resulting from, among other things, the Company
expanding the types of reinsurance written, expanded reinsurance capacity and
investment results. Because such forward-looking statements involve risks, both
known and unknown, and uncertainties, there are important factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements, including but not limited to: changes in the
Company's relationship with WMA Agency, adverse reinsurance experience,
increased competition from within the insurance industry, the extent to which
the Company is able to develop new reinsurance programs and markets for its
reinsurance, changes in the control of the Company, the Company's cash
requirements, the outcome of regulatory examinations and investigations, and the
availability of capital on acceptable terms and other factors discussed in this
report.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
At March 31, 1999, neither the Company nor its subsidiaries were
involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
There have been no changes or modifications to the rights of the
holders of any class of registered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults in the payment of principal or interest of
any indebtedness of the issuer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the stockholders during the period
covered by this point.
ITEM 5. OTHER INFORMATION.
The Company reinsures VUL and variable annuity products marketed by
WMA Agency. These products are treated as securities under federal and state
securities laws. In order to sell these products, the WMA Sales Associates must
be individually licensed by the National Association of Securities Dealers
("NASD") and must become affiliated with a registered securities broker-dealer.
WMA Securities is a registered broker-dealer, which is owned by Mr. Humphrey,
who also owns substantially all of the WMA Agency and is the principal
stockholder of the Company. All of the WMA Sales Associates who are licensed to
sell VUL and variable annuity products are registered representatives of WMA
Securities.
As a registered broker-dealer, WMA Securities' operations are subject
to periodic examination and review by both the NASD and the Securities and
Exchange Commission ("SEC"), a federal agency. In September 1997, the Atlanta
District Office of the SEC examined the operations of WMA Securities. On
February 3, 1998, WMA Securities received a letter from the SEC setting forth
certain alleged deficiencies and violations of the Securities Exchange Act of
1934 pertaining to net capital requirements, record keeping and other compliance
matters. In response to this letter, WMA Securities subsequently engaged a
consultant to make recommendations to WMA Securities on how to improve its
compliance practice and notified the SEC in its response that it plans to
implement the consultant's recommendations. WMA Securities has already
implemented many of the consultant's recommendations. It retained a second
consulting firm to conduct a thorough review and assessment of WMA Securities'
compliance and supervisory program, including the initial consultant's
recommendations regarding such program. This firm is advising WMA Securities as
to what, if any, further steps that should be taken to fully implement a program
designed to improve WMA Securities' overall compliance and supervisory
procedures as well as remedy the deficiencies cited by the SEC.
The Company understands that it is not the current policy of the SEC
to issue any written advice as to whether the steps taken by a recipient of a
deficiency letter to address alleged deficiencies are adequate or satisfactory;
therefore, it is unlikely that WMA Securities will receive any indication from
the SEC regarding the adequacy of the corrective action that it has taken or
intends to take, until the SEC conducts a subsequent examination of the
operations of WMA Securities and the alleged deficiencies contained in the
deficiency letter are no longer found to exist. WMA Securities cannot determine
when or if the SEC will conduct a subsequent examination of its operations nor
can it predict the outcome of such examination should it occur.
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<PAGE> 20
On May 21, 1998, the SEC issued a formal Order of Investigation
("Order") directed at certain alleged activities of WMA Securities and persons
employed by or associated with WMA Securities. This investigation was initiated
to determine whether any federal securities laws had been violated. The Order
alleges that such persons or others acting in concert with them have, among
other things, engaged in acts or practices involving the sale and promotion of
variable life insurance products, variable annuities and mutual funds which were
fraudulent and deceptive. The Order also alleges that WMA Securities failed to
supervise such persons with a view to preventing the alleged violations. WMA
Securities has neither admitted not denied the allegations contained in the
Order and is cooperating with the SEC in this investigation. Subpoenas were
issued pursuant to the Order for the production of documents and the testimony
of several officers of WMA Agency and WMA Securities. If this investigation
reveals one or more violations of the federal securities laws, the Enforcement
Division may recommend the imposition of sanctions against WMA Securities and
other culpable parties. These sanctions, should they be imposed, could take
various forms, including but not limited to, the imposition of monetary
penalties which can be quite substantial depending upon the nature and severity
of the violation, heightened regulatory scrutiny by the SEC and NASD, and the
temporary suspension or permanent revocation of WMA Securities' registration or
of the licenses of WMA Sales Associates, resulting in the broker-dealer's
inability to continue operations.
There can be no assurance that the SEC Enforcement Division, after
completing its investigation, will not seek to impose sanctions against WMA
Securities, which if substantial could impair the financial and operating
condition of WMA Securities. If WMA Sales Associates are no longer able to
maintain their licenses with WMA Securities, a disruption of the sale of new VUL
and variable annuity products would result until the WMA Sales Associates could
become registered with another broker-dealer. There can be no assurance,
however, that WMA Sales Associates could register with another broker-dealer or
that WMA Life could reinsure products sold through another broker-dealer.
Consequently, such disruption could cause a significant interruption in the
production of new business reinsured by the Company due to the Company's
dependence upon WMA Agency and WMA Sales Associates for the marketing of new VUL
and variable annuity policies which the Company may then reinsure.
On March 22, 1999 NASD Regulation in Washington, DC notified WMA
Securities that the enforcement division was conducting an inquiry into the
reports filed by WMA Securities under NASD Rule 3070. WMA Securities previously
notified the NASD that it had not timely filed all reportable violations
relating to its registered representatives. While WMA Securities has corrected
the reasons which caused this situation to occur, it is possible that a result
of this inquiry by the NASD could be the imposition of sanctions, including
monetary penalties, against WMA Securities.
The California Department of Insurance initiated an investigation into
the sales activities of certain former and current WMA Sales Associates in
California. The scope of this investigation relates to product suitability and
sales practices relating to the sale of VUL policies to residents of California.
WMA Agency and WMA Securities are cooperating fully with the investigation in an
effort to resolve this inquiry, which is still in the investigatory stage, as
quickly as possible. If the California Department of Insurance determines that
violations of its insurance laws have occurred, it could seek to impose
sanctions ranging from monetary penalties to license suspension or revocation,
or limitation on growth of new sales agents. Because California accounts for a
substantial amount of WMA Agency's total sales production, any sanctions imposed
could have an adverse effect on WMA Agency and the production of new business to
be reinsured by the Company.
On December 18, 1998, the California Department of Corporations issued
to WMA Agency, WMA Securities, and WMA Investment Advisors, Inc. a Desist and
Refrain Order to refrain from further offers or sales of franchises in the State
of California. WMA Agency and affiliates, have challenged this Order on the
grounds that their activities do not fall within the scope of the California
franchise laws and are pursuing available administrative remedies in an effort
to resolve this issue. While legal counsel to WMA Agency does not believe that
the Order was validly issued, WMA Agency has reduced its initial processing fee
charged to individuals to an amount that falls within an exemption to the
California franchise law, if it is otherwise determined to be applicable. While
considered unlikely, if the Order is ultimately upheld after all rights of
appeal have been made, monetary penalties could be imposed on WMA Agency and its
affiliates and the manner in which they conduct certain of their business
activities could have to be modified.
In the past two years, WMA Securities and WMA Agency have been subject
of investigations of their compliance and supervisory programs with respect to
the sales and marketing activities of certain WMA Sales Associates by the
Washington Department of Insurance and by other regulatory authorities in Ohio,
Georgia and Florida. Although WMA Securities has implemented a new compliance
and supervisory program, there can be no assurance that these actions will be
adequate or appropriately responsive to the concerns of regulators.
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<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports were required to be filed on Form 8-K.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation (1)
3.1.1 Amendment to Articles of Incorporation changing name of
Company to "The WMA Corporation" (2)
3.2 By-laws (1)
3.2.1 Amendment to By-Laws re Related Party Transactions (3)
10.1 Sublease Agreement between World Marketing Alliance, Inc. and
The WMA Corporation dated January 21, 1998 (5)
10.2 Corporate Services Agreement with World Marketing Alliance, Inc.
and The WMA Corporation dated April 1, 1998 (4)
10.3 Revolving Line of Credit Loan Agreement between The WMA Corporation
and Money Services, Inc. dated September 30, 1998 (6)
10.4 Revolving Line of Credit Promissory Note issued by The WMA
Corporation on September 30, 1998 to Money Services, Inc.
in the principal sum of $10,000,000 (6)
10.5 First Amendment of Revolving Line of Credit Promissory Note
between The WMA Corporation and Money Services, Inc. dated January
29, 1999 (Attached)
10.6 Second Amendment of Revolving Line of Credit Promissory Note
between The WMA Corporation and Money Services, Inc. dated March 31,
1999 (To be filed by amendment)
27.1 Financial Data Schedule (for SEC use only)
[FOOTNOTES ON NEXT PAGE]
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FOOTNOTES TO PRECEDING PAGE:
(1) Filed on June 28, 1995 as part of the Registration Statement and
incorporated herein by reference pursuant to Rule 12b-32.
(2) Filed on May 15, 1998 as an Exhibit to Form 10-QSB for the period
ended March 31, 1998 and incorporated herein by reference pursuant to
Rule 12b-32.
(3) Filed on June 9, 1998 as an Exhibit to the Registration Statement and
incorporated herein by reference pursuant to Rule 12b-32.
(4) Filed on August 20, 1998 as an Exhibit to Form 10-QSB for the period
ended June 30, 1998 and incorporated herein by reference pursuant to
Rule 12b-32.
(5) Filed on October 1, 1998 as an Exhibit to Amended Form 10-KSB/A for the
fiscal year ended December 31, 1997 and incorporated herein by
reference pursuant to Rule 12b-32.
(6) Filed on November 16, 1998 as an Exhibit to Form 10-QSB for the period
ended September 30, 1998 and incorporated herein by reference pursuant
to Rule 12b-32.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) The WMA Corporation
<TABLE>
<S> <C> <C>
By (Signature/Title) /s/ Edward F. McKernan (SEAL) Date: May 17, 1999
----------------------------------
Edward F. McKernan, Senior Vice
President, Chief Financial Officer,
Actuary, and Director
</TABLE>
23
<PAGE> 1
Exhibit 10.5
FIRST AMENDMENT OF REVOLVING LINE
OF CREDIT AGREEMENT AND REVOLVING
LINE OF CREDIT PROMISSORY NOTE
THIS AGREEMENT (this Agreement) is made and entered into this
29th day of January, 1999, by and between MONEY SERVICES, INC., a Delaware
corporation (hereinafter referred to as the "Lender"). THE WMA CORPORATION, a
Delaware corporation (hereinafter referred to as the "Borrower")
W I T N E S S E T H:
WHEREAS, Lender and Borrower have heretofore executed and
delivered that certain Revolving Line of Credit Agreement dated September 30,
1998 (hereinafter referred to as the "Loan Agreement") wherein Lender agreed to
extend credit to Borrower in an amount not to exceed the aggregate sum of
$10,000,000 (hereinafter referred to as the "Loan Indebtedness");
WHEREAS, the Loan Indebtedness is evidenced by that certain
Revolving Line of Credit Promissory Note dated September 30, 1998 from Borrower
payable to the order of Lender in the original face principal amount of
$10,000,000 (hereinafter referred to as the "Note");
WHEREAS, Borrower has requested and Lender has agreed to extend
the maturity date of the Note as hereinafter set forth.
NOW, THEREFORE, for and in consideration of the sum of Ten and
No/100 ($10.00) Dollars in hand paid by Borrower to Lender, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Lender and Borrower do hereby agree as follows:
1. The second full paragraph of the Note is hereby deleted in
its entirety and the following new paragraph is inserted in lieu thereof:
"The entire outstanding principal balance hereof, together with
all accrued but unpaid interest thereon, shall be due and payable in full on
April 1, 1999.
2. All references in the Loan Agreement to the Note shall
mean the Note, as modified by this Agreement.
3. Borrower hereby agrees that no action, inaction or
agreement by Lender, including without limitation, any indulgence, waiver or
agreement to extend time for the performance by Borrower, which may have
occurred with respect to any matter relating to the credit extended pursuant to
the Loan Agreement, as hereby amended, shall require or imply any future
indulgence or waiver by Lender or any further agreement by Lender shall extend
any time for performance by the Borrower.
<PAGE> 2
4. Borrower does hereby reaffirm and restate, as of the date
hereof, all covenants, representations, and warranties set forth in the Loan
Agreement.
5. Except as expressly amended and modified herein, all
terms, covenants and provisions of the Note and Loan Agreement shall remain
unaltered and in full force and effect, and the parties hereto do hereby
expressly ratify and confirm the Note and Loan Agreement as modified herein.
6. Nothing herein contained shall affect or be construed to
affect the lien of the Loan documents nor shall this Agreement constitute a
novation of the Loan Indebtedness.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement under seal as of the day and year first above written.
LENDER:
MONEY SERVICES, INC., a Delaware corporation
By: /s/ Patrick De Palma
----------------------------------------
PATRICK DE PALMA
President
(CORPORATE SEAL)
BORROWER:
THE WMA CORPORATION
a Delaware corporation
By: /s/ Thomas W. Montgomery
-----------------------------------------
THOMAS W. MONTGOMERY
Executive Vice President
(CORPORATE SEAL)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WMA CORPORATION FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 9,559,187
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,559,187
<CASH> 1,534,632
<RECOVER-REINSURE> 299,454
<DEFERRED-ACQUISITION> 36,513,351
<TOTAL-ASSETS> 48,624,435
<POLICY-LOSSES> 3,104,294
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
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<NOTES-PAYABLE> 10,000,000
0
0
<COMMON> 2,500
<OTHER-SE> 24,070,552
<TOTAL-LIABILITY-AND-EQUITY> 48,624,435
2,036,357
<INVESTMENT-INCOME> 156,719
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<OTHER-INCOME> 2,621,867
<BENEFITS> 1,203,061
<UNDERWRITING-AMORTIZATION> 1,014,292
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<INCOME-PRETAX> 1,231,209
<INCOME-TAX> 420,401
<INCOME-CONTINUING> 810,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 810,808
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
<RESERVE-OPEN> 0
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</TABLE>
