<PAGE> 1
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 JUNE 30, 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 June 30, 1999, there were 2,495,010 shares of common stock
(.001 par value) outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ]
No [X]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
PAGE NO.
<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 17
ITEM 2 Changes in Securities 17
ITEM 3 Defaults Upon Senior Securities 18
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 19
</TABLE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
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THE WMA CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities - available for sale (amortized cost
of $5,866,493 and $9,501,564 for 1999 and 1998, respectively) $ 5,832,927 $ 9,869,679
Cash and cash equivalents 1,080,729 6,617,710
Investment income due and accrued 82,104 136,196
Reinsurance balances receivable 325,681 101,034
Deferred acquisition costs 47,709,550 27,537,866
Deferred organization costs (net of accumulated amortization
of $186,689 and $98,565 at 1999 and 1998, respectively) -- 88,304
Prepaid expenses 342,527 216,746
Due from World Marketing Alliance, Inc. 1,529 3,507
Fixed assets (net of accumulated depreciation of $31,333 and $7,649
for 1999 and 1998, respectively) 112,016 84,820
Other assets 140,411 225,312
------------ ------------
Total assets $ 55,627,474 $ 44,881,174
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 3,919,952 $ 2,624,020
Reinsurance balances due and accrued 11,863,584 5,425,467
Accrued expenses 136,003 105,854
Accounts payable 158,446 70,376
Accrued interest payable 231,195 101,099
Short term debt 10,303,562 10,000,000
Deferred tax liability 3,017,746 2,181,219
------------ ------------
Total liabilities 29,630,488 20,508,035
------------ ------------
Stockholders' equity:
Common stock, par value $.001, 50,000,000 authorized: 2,500,000
shares issued in 1999 and 1998 2,500 2,500
Preferred stock, par value $ 2.00, 10,000,000 authorized: no
shares issued in 1999 or 1998 -- --
Additional paid-in capital 20,228,973 20,228,973
Accumulated other comprehensive income (loss) (22,153) 242,977
Retained earnings 5,837,566 3,948,589
Treasury stock, at cost (4,990 shares for 1999 and 1998) (49,900) (49,900)
------------ ------------
Total stockholders' equity 25,996,986 24,373,139
------------ ------------
Total liabilities and stockholders' equity $ 55,627,474 $ 44,881,174
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 2,075,419 $ 1,801,425 $ 4,111,776 $ 3,530,262
Reinsured policy revenues 3,765,490 731,034 6,357,638 889,991
Net investment income 127,551 275,774 284,270 522,176
Net realized gain (loss) on investments 21,626 (13,757) 21,626 (9,958)
----------- ----------- ------------ -----------
Total revenue 5,990,086 2,794,476 10,775,310 4,932,471
Benefits and expenses:
Benefits, claims and settlement expenses 1,323,064 957,824 2,480,743 1,815,313
Change in future policy benefits 4,540 3,178 20,203 21,106
Reinsurance premium allowances, net 1,445,936 536,094 2,318,540 1,008,599
Amortization of deferred acquisition costs 1,075,526 503,442 2,089,818 628,015
Professional fees and other expenses 198,430 64,631 478,192 184,961
Interest expense 300,159 -- 502,622 --
Consulting fees to World Marketing Alliance, Inc. 11,553 109,367 23,105 178,632
----------- ----------- ------------ -----------
Total benefits and expenses 4,359,208 2,174,536 7,913,223 3,836,626
----------- ----------- ------------ -----------
Income before income taxes 1,630,878 619,940 2,862,087 1,095,845
Income tax expense (552,709) (211,311) (973,110) (373,650)
----------- ----------- ------------ -----------
Net income $ 1,078,169 $ 408,629 $ 1,888,977 $ 722,195
=========== =========== ============ ===========
Basic and diluted income per share $ 0.43 $ 0.16 $ 0.76 $ 0.29
=========== =========== ============ ===========
Weighted-average common shares outstanding 2,495,010 2,495,593 2,495,010 2,496,523
=========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,888,977 $ 722,195
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization and depreciation 2,201,806 646,233
Deferred tax expense 973,110 373,650
Net realized (gain) loss on investments (21,626) 9,958
Change in:
Investment income due and accrued 54,092 12,539
Reinsurance balances receivable (224,647) 105,096
Deferred acquisition costs (22,261,502) (9,522,702)
Prepaid expenses (125,781) (641,375)
Other assets 84,901 783
Due from World Marketing Alliance Inc. 1,978 --
Future policy benefits 1,295,932 635,792
Reinsurance balances due and accrued 6,438,117 5,491,925
Accrued expenses 30,149 (20,735)
Accounts payable 88,070 316,092
Accrued interest payable 130,096 --
Due to WMA Management Services, Inc. -- (120,000)
Due to World Marketing Alliance, Inc. -- 96,830
------------ -----------
Net cash used in operating activities (9,446,328) (1,893,719)
------------ -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 3,656,665 1,617,333
Purchase of fixed assets (50,880) --
------------ -----------
Net cash provided by investing activities 3,605,785 1,617,333
------------ -----------
Cash flows from financing activities:
Capitalization of interest on short term debt 303,562 --
Purchase of treasury stock -- (27,900)
------------ -----------
Net cash provided by (used in) financing activities 303,562 (27,900)
------------ -----------
Net decrease in cash and cash equivalents (5,536,981) (304,286)
Cash and cash equivalents at beginning of period 6,617,710 1,469,663
------------ -----------
Cash and cash equivalents at end of period $ 1,080,729 $ 1,165,377
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
============ ===========
Income taxes paid $ -- $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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THE WMA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 10QSB 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. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The unaudited financial statements should be read in
conjunction with the Company's audited financial statements included in the
Company's 1998 Form 10-KSB Annual Report as filed with the Securities and
Exchange Commission.
(2) DEFERRED TAX
Deferred income tax liabilities and related expenses are determined
in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (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
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 June 30, 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 difference between net income and
comprehensive income for the Company is unrealized gains on securities. Total
comprehensive income for the quarter ended June 30, 1999 was $923,933 compared
to $525,167 for the quarter ended June 30, 1998. Total comprehensive income for
the six months ended June 30, 1999 was $1,623,847 compared to $919,275 for the
six months ended June 30, 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. In June
1999, FASB issued Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133 (SFAS No. 137). This statement defers
the effective date of SFAS No. 133. The provisions of SFAS No. 137 are effective
for all fiscal quarters of fiscal years beginning after June 15, 2000; 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. The Company adopted SOP 97-3 effective January 1, 1999.
The provisions of SOP 97-3 do not have a significant impact on the financial
statements of the Company.
6
<PAGE> 7
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 $88,304 of
remaining deferred organization costs during the first quarter of 1999.
(5) RECLASSIFICATION
The Company has reclassified the presentation of certain 1998
information to conform to the 1999 presentation.
(6) SUBSEQUENT EVENTS
The Company has been negotiating to restructure its line of credit
with Money Services, Inc. ("MSI"), of which all outstanding balances of
principal and interest under this line of credit became due and payable on
August 1, 1999. The negotiations are expected to conclude soon. The negotiations
have focused on: (i) obtaining a five year, $5 million term note to be applied
toward the existing outstanding balances on the line of credit; (ii) possibly
lowering the existing 9% interest rate; (iii) allowing for conversion of all or
a portion of the note to Common Stock; and (iv) deferring the balance of any
remaining amounts due under the line of credit until the earlier of December 31,
1999 or the closing of Company's offerings related to the private sale of
preferred and common stock to institutional and other accredited investors.
There can be no assurance that the Company's goals in these negotiations will be
achieved.
The Company has proceeded with a private placement offering up to
1,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock")
to a limited number of independent sales associates contractually associated
with World Marketing Alliance, Inc. ("WMA Agency"), WMA Agency employees and
certain other investors acceptable to the Company that qualify as "accredited
investors" within the meaning of Rule 501 of Regulation D under The Securities
Act of 1933. Additionally, the Company has proceeded with a private placement
offering up to 4,333,333 shares of Common Stock (the "Common Stock Offering") to
certain institutional investors, which if completed will be closed following
the Preferred Stock offering. Upon closing of the Common Stock Offering
(assuming net proceeds to the Company of at least $10 million), the Preferred
Stock will convert to shares of Common Stock. The Company reserves the right,
in its absolute discretion, to decline to offer Preferred Stock or Common Stock
to any and all prospective investors, as the case may be, who may be willing to
accept an offer to sell. There can be no assurance the Company will sell any
shares of Preferred Stock in the Preferred Stock offering or Common Stock in the
Common Stock Offering.
For further discussion regarding the MSI line of credit and the private
placement offerings, refer to the Liquidity and Capital Resources section of the
Management's Discussion and Analysis or Plan of Operation.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis or Plan of Operation ("MD&A") addresses the
financial condition of the Company as of June 30, 1999, compared with December
31, 1998, and its results of operations for the second quarter and six months
ended June 30, 1999 compared with the equivalent 1998 periods. This discussion
should be read in conjunction with the MD&A in the Company's 1998 Form 10-KSB
Annual Report.
OVERVIEW
The WMA Corporation (the "Company") is a holding company, owning all of
the outstanding capital stock of WMA Life Insurance Company Limited ("WMA
Life"), a Bermuda life insurance corporation. 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 affiliated entities and persons that are involved in the marketing and
sale of life insurance, annuities and other financial services, 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., a registered securities
broker-dealer ("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.
WMA Agency and WMA Securities are independent entities 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>
SIX MONTHS ENDED
Ceding Life Company 6/30/99 1998 1997
- ------------------- ------- ---- ----
<S> <C> <C> <C>
Western Reserve Life Assurance Company of Ohio ("Western
Reserve") 80% 81% 85%
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%
</TABLE>
Annuity Applications(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
Ceding Life Company 6/30/99 1998 1997
- ------------------- ------- ---- ----
<S> <C> <C> <C>
Western Reserve 65% 44% 0%
American Skandia Life Assurance Corporation ("American
Skandia") 11 16 13
--- --- ---
Total Subject to Reinsurance 76% 60% 13%
Total Not Subject to Reinsurance 24 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.
8
<PAGE> 9
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 revenues 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 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 June 30, 1999, WMA Life's reinsurance inforce on life insurance
policies, including riders, constituted 240,069 policies and riders with an
aggregate face amount of $7.23 billion. This is an increase of 31,748 life
insurance policies and riders, or 15%, and $1.11 billion of in force face
amount, or 18%, from December 31, 1998. At June 30, 1999, WMA Life had
reinsurance inforce with respect to variable annuities for 17,312 policies with
reinsured annuity contract benefits of $263 million. This is an increase of
7,284 annuity policies, or 73%, and $105 million of annuity contract benefits,
or 66%, from December 31, 1998.
The following table indicates the percentage of WMA Life's reinsurance
revenues derived from the Ceding Life Companies:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
CEDING LIFE COMPANY 6/30/99 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
Renewable 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.
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 the reserves and the assets related to the reserves,
which 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.
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<PAGE> 10
WMA Life has a modified coinsurance agreement with American Skandia and
a coinsurance and modified coinsurance 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.
The Company and Western Reserve amended the VUL coinsurance and
modified coinsurance agreement to defer financial settlements on VUL policies
issued during 1999 until December 31, 1999. Beginning April 1, 1999, a
reinsurance fee of 9% per annum accrues on the deferred reinsurance settlement
balance. Settlements on policies issued prior to 1999 under this agreement will
continue to be paid on a quarterly basis. (See further discussion under
Liquidity and Capital Resources.)
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 defers costs that vary with and are directly associated with
the acquisition of the reinsured policies. 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 were $47.71 million at June 30, 1999, an increase of $20.17
million, or 73%, for the first six months of 1999 from December 31, 1998. During
this same period, first-year life insurance premiums collected totaled $15.83
million, an increase of $12.08 million, or 422%, and annuity premiums totaled
$90.38 million, an increase of $35.34 million, or 64%, compared to the six month
period ended June 30, 1998.
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.
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 estimate 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 will 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 on 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.
The liability for future policy benefits was $3.92 million at June 30,
1999, an increase of $1.30 million, or 50%, for the first six months of 1999
from December 31, 1998. The liability at June 30, 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
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<PAGE> 11
methods and assumptions used to amortize the deferred acquisition costs under
the MRT agreements. The liability for the fixed account portions 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
Revenues. Revenues increased by $3.20 million, or 115%, and $5.84
million or 118%, for the second quarter and the six months ended June 30, 1999,
respectively, as compared to the same periods in 1998. The increase was
primarily attributable to the growth in revenues associated with the coinsurance
and modified coinsurance agreements. To a lesser extent, the increase was
attributable to the growth in premiums associated with the MRT agreements.
Premiums. Premiums increased by $274,000, or 15%, and $581,000, or 16%,
for the second quarter and the six months ended June 30, 1999, respectively, as
compared to the same periods in 1998. The increase in premiums was primarily
attributable to the increasing duration of the policies in force because
premiums increase with the advancing age of the insured. However, policies and
riders reinsured on a MRT basis decreased by 10,389, or 6%, from 163,552 at June
30, 1998 to 153,163 at June 30, 1999 due to the discontinuation of Western
Reserve's Financial Freedom Builder VUL policies reinsured on a MRT basis, for
policies issued after March 31, 1998, and the lapsing of in force policies.
Management expects the MRT inforce business to continue to decline as
policyholders terminate their policies either as a result of surrender or
premium lapse.
Reinsured Policy Revenues. Reinsured policy revenues increased by $3.03
million, or 415%, and $5.47 million, or 615%, for the second quarter and the six
months ended June 30, 1999, respectively, as compared to the same periods of
1998. The revenue increase was largely attributable to the VUL coinsurance and
modified coinsurance agreement with Western Reserve and also to the variable
annuity agreements with Western Reserve and American Skandia. Of the $6.36
million Reinsured policy revenues for the six months ended June 30, 1999, $1.82
million was attributable to the variable annuity agreements compared to $469,000
for the same period in 1998, an increase of $1.35 million, or 288%. The
remaining $4.54 million of Reinsured policy revenues for the six months ended
June 30, 1999, was attributable to the VUL coinsurance and modified coinsurance
agreement as compared to $421,000 for the same period in 1998, an increase of
$4.12 million, or 978%. 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.
Net Investment Income and Net Realized Gain (Loss) on Investments. Net
investment income decreased by $148,000, or 54%, and $238,000, or 46%, for the
second quarter and the six months ended June 30, 1999, respectively, as compared
to the same periods in 1998. Investment income is earned from the investment in
securities (fixed income and equity) and cash equivalents. Investment expenses
of $34,000 and $30,000 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 securities in the second quarter
of 1999 resulted in an increase in Net realized gain on investments of $35,000,
or 250%, and $32,000, or 320%, for the quarter and the six months ended June 30,
1999, respectively, as compared to the same periods in 1998.
Benefits, Claims and Settlement Expenses. Benefits, claims and
settlement expenses increased by $365,000, or 38%, and $665,000, or 37%, for the
second quarter and the six months ended June 30, 1999, respectively, as compared
to the same periods in 1998. This increase primarily resulted from an increase
in volume of in force business. The amount of in force business at June 30, 1999
was $7.23 billion as compared to $5.23 billion at June 30, 1998, which
represents a $2 billion, or 38% increase.
Changes in Future Policy Benefits. The Change in future policy benefits
increased by $1,000, or 43%, and decreased by $1,000, or 4%, for the second
quarter and the six months ended June 30, 1999, respectively, as compared to the
same periods in 1998. The increase in the liability for future policy benefits
related to MRT policies has been relatively static from period to period,
especially due to the discontinuation of new VUL business reinsured on a MRT
basis that is now being reinsured on a coinsurance and modified coinsurance
basis. The liabilities under the Company's MRT reinsurance agreements increased
$31,000, or 15%, from June 30, 1998 to June 30, 1999.
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<PAGE> 12
Reinsurance Premium Allowances Net. Net reinsurance premium allowances
increased by $910,000, or 170%, and $1.31 million, or 130%, for the second
quarter and the six months ended June 30, 1999, respectively, as compared to the
same periods 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.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs increased by $572,000, or 114%, and $1.46 million, or 232%,
for the second quarter and the six months ended June 30, 1999, respectively, as
compared to the same periods 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.
Professional Fees and Other Expenses. Professional fees and other
expenses increased by $134,000, or 206%, and $293,000, or 158%, for the second
quarter and the six months ended June 30, 1999, respectively, as compared to the
same periods in 1998. Expenses include professional fees for legal, actuarial
and accounting expenses incurred, operating expenses, and other miscellaneous
expenses. The increase in expenses was primarily associated with an increase in
the amount of reinsurance business activities and expenses relating to the
administration of the Company. Salary expenses are included in the first six
months 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.)
Consulting Fees to World Marketing Alliance Inc. Consulting fees to
World Marketing Alliance, Inc. decreased by $97,000, or 89%, and $156,000, or
87%, for the second quarter and the six months ended June 30, 1999,
respectively, as compared to the same periods of 1998. Consulting fees to WMA
Agency consist of the funding of certain operating and travel-related expenses
for the Company. During the first six months of 1998, WMA Agency employees
performed administrative functions for the Company until the Company completed
the hiring of its employees. The Company paid WMA Agency a monthly payroll
allocation based upon the amount of time the WMA Agency employees provided
services to the Company. The Company incurred $82,000 and $134,000 in salaries
and related expenses from WMA Agency during the second quarter and six months
ended June 30, 1998, respectively.
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 $300,000 and $503,000
for the second quarter and the six months ended June 30, 1999, respectively, as
compared to the same periods in 1998. This increase was due to interest incurred
on the short-term financing received from Money Services, Inc., and to the
reinsurance fee associated with the deferred settlements on the VUL policies.
(See further discussion under Liquidity and Capital Resources.)
Income Taxes. Income taxes increased by $341,000, or 162%, and
$599,000, or 160%, for the second quarter and the six months ended June 30,
1999, respectively, as compared to the same periods in 1998 due to higher levels
of 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 quarter
ended June 30, 1999 was $1.08 million compared to $409,000, an increase of
$699,000, or 164%, for the comparable period ended June 30, 1998. Net income for
the six months ended June 30, 1999 was $1.89 million compared to $722,000, an
increase of $1.17 million, or 162%, for the six months ended June 30, 1998.
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<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The principal sources 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. 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, investment purchases, and
reinsurance claims.
Premiums are generally received in advance of related claims payments.
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.
Under the coinsurance and modified coinsurance agreements, since the
Company is reinsuring risks on essentially the same plan as that of the original
policy, reinsurance premiums are materially greater than premiums paid on the
MRT reinsurance. During the first year in which a policy is reinsured on a
coinsurance basis, the Company is required to reimburse the Ceding Life Company
for its share of acquisition costs, including first year commissions and
issuance expenses. Thereafter, the Company reimburses the Ceding Life Company
for its share of renewal commissions and maintenance expenses. Further, under
modified coinsurance, the Company will allow the Ceding Life Company 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 premiums
paid for life insurance, and as much as 10% of annuity premiums.
The Company's cash requirements for operating and investment expenses
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 second quarter of 1999.
For the six-month period ended June 30, 1999, net cash flows used in
operating activities were $9.45 million, compared to $1.90 million for the same
period ended June 30, 1998. This increase was due primarily to additional cash
required to reimburse Western Reserve for first-year reinsurance allowances as
a result of the VUL coinsurance and modified coinsurance agreement, which
became effective April 1, 1998. Further, the period ended June 30, 1999
reflects activity associated with reinsured VUL policies issued over the
preceding twelve months, as compared to only three months of similar activity
for the period ending June 30, 1998. The increase in cash flows also reflects,
to a lesser extent, increases in business written under the variable annuity
agreements with American Skandia and Western Reserve. Annuity premiums
reinsured increased by $35.34 million, or 64%, for the six-month period ended
June 30, 1999, as compared to the six-month period ended June 30, 1998.
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 borrowed $10 million to cover
its cash needs. Through March 31, 1999, interest accrued at the rate of 8% on
amounts drawn under this line of credit. On April 1, 1999, accrued interest
through March 31, 1999 was added to the outstanding principal balance and the
interest rate increased from 8% to 9%. As of June 30, 1999, the Company had an
outstanding principal balance of $10,303,562 million and accrued interest of
$231,195. All outstanding balances of principal and interest under this line of
credit became due and payable on August 1, 1999.
The Company has been negotiating with MSI to restructure the line of
credit, which is expected to conclude soon. The negotiations have focused on:
(i) obtaining a five year, $5 million term note to be applied toward the
existing outstanding balances on the line of credit; (ii) possibly lowering the
existing 9% interest rate; (iii) allowing for conversion of all or a portion of
the note to Common Stock; and (iv) deferring the balance of any remaining
amounts due under the line of credit until the earlier of December 31, 1999 or
the closing of the Company's offerings related to the private sale of preferred
and common stock to institutional and other accredited investors. There can be
no assurance that the Company's goals in these negotiations will be achieved.
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<PAGE> 14
The Company has proceeded with a private placement offering up to
1,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock")
to a limited number of independent sales associates contractually associated
with WMA Agency, WMA Agency employees and certain other investors acceptable to
the Company that qualify as "accredited investors" within the meaning of Rule
501 of Regulation D under The Securities Act of 1933. Additionally, the Company
has proceeded with a private placement offering up to 4,333,333 shares of Common
Stock (the "Common Stock Offering") to certain institutional investors, which if
completed will be closed following the Preferred Stock offering. Upon closing of
the Common Stock Offering (assuming net proceeds to the Company of at least $10
million), the Preferred Stock will convert to shares of Common Stock. The
Company reserves the right, in its absolute discretion, to decline to offer
Preferred Stock or Common Stock to any and all prospective investors, as the
case may be, who may be willing to accept an offer to sell. There can be no
assurance the Company will sell any shares of Preferred Stock in the Preferred
Stock offering or Common Stock in the Common Stock Offering.
If sufficient proceeds are not obtained from the private placement
offerings 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. 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.
Effective January 1, 1999, with regard to VUL policies issued during
1999, the Company and Western Reserve amended the VUL coinsurance and modified
coinsurance agreement to defer financial settlements until December 31, 1999. If
the Company does not settle 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 at an effective annual rate of 9% will accrue
on the deferred reinsurance settlement balance beginning April 1, 1999. As of
June 30, 1999, approximately $8 million of the Reinsurance balances due and
accrued were deferred under this agreement. With regard to policies issued
during 1998, financial activity will continue to be settled on a quarterly
basis.
The Company's primary source of liquidity was $1.08 million in cash and
cash equivalents at June 30, 1999, a decrease of $85,000 from June 30, 1998. The
effective duration of the Company's fixed income portfolio is 4.3 years, with
over 94% 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.
In addition to the financing activities described above, 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 six-month period ended June 30,
1999 was $3.61 million, compared to $1.62 million for the same period ended
June 30, 1998. Net cash provided by financing activities for the six-month
period ended June 30, 1999 was $303,562, due to the capitalization of interest
on short term debt in the second quarter of 1999, as compared to $27,900 used
in financing activities for the same period ended June 30, 1998, which was due
to the purchase of a small amount of stock from its shareholders in the first
quarter of 1998.
The WMA Corporation is a holding company with no direct operations, and
its principal asset is the capital stock of WMA Life and $886,000 of cash and
invested assets. The Company relies primarily on funds retained at the holding
company level and potential dividends from WMA Life to meet ongoing cash
requirements of the holding company. The ability of WMA Life to pay dividends to
the Company is subject to, among other things, regulatory restrictions under the
insurance laws of Bermuda. As of June 30, 1999, WMA Life had the statutory
capacity to pay $5.20 million in dividends.
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<PAGE> 15
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 $3.70 million in support of reserve credits. WMA Life
also has previously secured a LOC of $140,000 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.
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 its existing
sources of cash, together with the net proceeds from the sale of all Preferred
Stock and Common Stock shares offered to institutional and other accredited
investors, will be sufficient to meet the Company's cash needs for its current
business through the end of 2000. If sufficient proceeds are not available from
the sale of Preferred Stock and Common Stock in the private offerings, or if the
Company's cash requirements are greater than anticipated, the Company will have
to resort to other methods of raising the necessary capital to finance its
capital and liquidity needs, such as retrocessions of reinsured business,
borrowing from financial institutions or the sale of additional securities in
other private or public offerings. There can be no assurance that such
alternatives would be available to the Company at an acceptable cost, if at all.
If alternative sources of financing cannot be obtained at an acceptable cost,
the Company may seek to terminate or amend one or more reinsurance agreements in
light of its inability to meet its requirements under such agreements. The
termination or amendment of one or more reinsurance agreements would result in a
material disruption in the Company's growth and business plan.
YEAR 2000 COMPLIANCE
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. Additionally, 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.
The Company has solicited and received written notice 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, who has
advised the Company that as of January 1, 1999, substantially all of their
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.
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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.
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 capital on acceptable terms and other factors discussed in this
report. These forward-looking statements are subject to change and uncertainty
which are, in many instances, beyond the Company's control and have been made
based upon management's expectations and beliefs concerning future developments
and their potential effect on the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of certain factors, including those described
in the forward-looking statements.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
At June 30, 1999, neither the Company nor its subsidiary were involved
in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
Stock Options
On June 15, 1999, the Company's Board of Directors, subject to
ratification of the stockholders of the Company at its 1999 annual meeting,
authorized a 1999 stock option plan for the directors, officers and employees of
the Company (the "Plan") that contemplates the issuance of up to 450,000 shares
of the Company's authorized, but unissued, Common Stock upon the exercise of
options granted under the Plan. On the same date, the Board of Directors also
granted options to purchase up to 450,000 shares of Common Stock under the Plan
to several directors, officers and employees of the Company, including 300,000
shares to Mr. Humphrey, a director and President of the Company. The Board of
Directors granted these options to Mr. Humphrey as further recognition of his
contributions to the growth of the Company.
Options issued under the Plan are non-transferable (except by will or
the laws of descent and distribution in the event of death), shall have a term
of five (5) years, and become exercisable on the third anniversary of an
optionee's date of hire, appointment or election, provided the optionee at that
time has been a director, officer or employee of the Company for at least one
year after the date of grant. Upon termination of an optionee's service as
director, officer, or employee of the Company for reasons other than retirement,
death or permanent and total disability, the option and the optionee's rights
thereunder shall terminate. No option may be granted after June 1, 2009, the
expiration date of the Plan, although the exercise period of previously granted
options may extend beyond that date. Options become immediately exercisable upon
a change in control of the Company, as defined in the Plan. The per share
exercise price of options granted under the Plan is the price per share of
shares to be offered in its Common Stock offering in 1999, or if there is no
such offering, the fair market value per share determined by the Board of
Directors. The Plan will be administered by the Audit and Compensation Committee
created by the Board of Directors. The Board of Directors may amend or terminate
the Plan at any time except that stockholder approval of any amendment must be
obtained whenever necessary to comply with applicable legal requirements. The
Company will receive no monetary consideration for granting these options.
The Board of Directors limited the number of shares, which can be
purchased upon exercise of the options granted in 1999, to a formula amount
determined by multiplying the number of shares by a fraction, the numerator of
which is the proceeds received by the Company from the sale of the Company's
Preferred Stock or Common Stock on or before December 31, 1999, and the
denominator of which is $75,000,000. The Board of Directors felt this limitation
would encourage the officers of the Company to direct their attention to the
Company's capital needs. The shares owned by the optionees upon exercise of
their options will not be registered and shall be considered restricted shares
which may only be resold pursuant to an effective registration statement, an
exemption from registration, or Rule 144.
If the stockholders do not approve the Plan, all outstanding options
will be rescinded.
Warrants
On June 15, 1999, the Company's Board of Directors, subject to
ratification of the stockholders of the Company at its 1999 annual meeting,
authorized the issuance of warrants to purchase up to 300,000 shares of the
Company's Common Stock ("Warrants") to key management employees of and
independent sales agents contractually associated with WMA Agency and its
affiliated corporations as consideration for the agreement of WMA Agency to use
its "best efforts" to encourage life insurance companies whose policies it sells
to reinsure such policies with the Company. There will be no monetary
consideration given to the Company for the issuance of the Warrants. No Warrants
will be issued to directors of the Company.
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The Warrants will have a six-year term and will be non-transferable
except by will and by the applicable laws of descent and distribution. The
exercise price per share of the Warrants issued in 1999 will be the price per
share as provided in the Company's Common Stock offering in 1999, or if there is
no such offering, the fair market value per share determined by the Board of
Directors. Thereafter, the price will be the fair market per share value of the
Company's Common Stock on the date of issue. Twenty percent (20%) of a Warrant
may be exercised for each year after the date in which the Warrant holder has
been continuously employed by, or contractually associated with, WMA Agency or
any of its affiliates. Warrants may only be exercised during the period
commencing on the first anniversary date of issuance and ending on the sixth
anniversary date of issuance. A Warrant may not be exercised in any year of the
exercise period unless the following conditions are satisfied: (1) the Warrant
holder is an employee of, or independent sales agent contractually associated
with, WMA Agency or any of its affiliates on the date of each exercise, and (2)
the new business production levels established by the Board of Directors for
such year have been attained, based upon actual new business production for the
immediately preceding year. If the new business production level is not attained
by the Company in a given year, the portion of the shares exercisable under the
Warrant with respect to such year will be forfeited and no longer exercisable.
The Board of Directors believes that the above limitations upon the exercise of
the Warrants will encourage the management of WMA Agency to assist the Company
in achieving targeted growth in its reinsurance business. Neither the Warrants
nor the Common Stock to be issued upon exercise of the Warrants will be
registered. The Common Stock shall be considered restricted shares, which may
only be resold pursuant to an effective registration statement, an exemption
from registration, or Rule 144. There are no registration rights contained in
the terms of the Warrant.
If the stockholders do not approve the issuance of Warrants, all
outstanding Warrants will be rescinded.
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.
In June 1999, the Company held a special meeting of the stockholders
where the stockholders agreed to amend the Certificate of Incorporation of the
Company to create a new class of 10,000,000 authorized shares of preferred stock
and to increase the number of authorized shares of common stock from 10,000,000
to 50,000,000. The proposal passed with an affirmative vote of 56.2% of all
shares entitled to vote at the meeting. The Company's Annual Meeting of
stockholders is scheduled for August 16, 1999.
ITEM 5. OTHER INFORMATION.
None other than as previously stated herein.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports were required to be filed on Form 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1.1 Amendment to Certificate of Incorporation increasing the number of
authorized shares of common stock and creating a new class of
authorized shares of preferred stock (Attached)
4.1 1999 Stock Option Plan and Stock Option Agreement Form (1)
4.2 Form of Warrant (1)
10.1 Amendment Number 1 to the Automatic Flexible Premium Variable Life
Reinsurance Agreement Number 2 between Western Reserve Life Assurance
Company of Ohio and WMA Life Insurance Company Limited effective
January 1, 1999 (Attached)
27.1 Financial Data Schedule (Attached) (for SEC use only)
</TABLE>
FOOTNOTES
(1) Filed on May 19, 1999 as an Exhibit to the Proxy Statement 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>
By (Signature/Title) /s/ Edward F. McKernan (SEAL) Date: August 16, 1999
--------------------------------------
<S> <C> <C>
Edward F. McKernan, Senior Vice
President, Chief Financial Officer,
Actuary, and Director
</TABLE>
20
<PAGE> 1
Exhibit 3.1.1
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
- - FIRST: That at a meeting of the Board of Directors of The WMA Corporation
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment
to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered "4" so that, as amended,
said Article shall be and read as follows:
4. The capital stock of the Corporation shall consist of 50,000,000
shares of common stock, par value One Tenth of One Cent ($.001) and
10,000,000 shares of preferred stock, par value of Two Dollars ($2.00).
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article 4, to provide for the issuance of
the shares of preferred stock in series, and by filing a certificate
pursuant to the Delaware General Corporation Law, to establish from time to
time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of
payment of dividends on shares of that series;
(e) Whether that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such
voting rights;
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION PAGE 1
<PAGE> 2
(d) Whether that series shall have conversion privileges, and,
if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events
as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption,
including the date or date upon or after which they shall be
redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions
and at different redemption dates;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so,
the terms and amount of such sinking fund;
(g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding
up of the corporation, and the relative rights of priority,
if any, of payment of shares of that series;
(h) Any other relative rights, preferences and limitations of
that series.
Dividends on outstanding shares of preferred stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the common shares with respect to the
same dividend period. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the assets available for
distribution to holders of shares of preferred stock of all series shall be
insufficient to pay such holders the full preferential amount to which they are
entitled, then such assets shall be distributed ratably among the shares of all
series of preferred stock in accordance with the respective preferential
amounts (including unpaid cumulative dividends, if any) payable with respect
thereto.
This amendment shall become effective upon approval of the
stockholders of the Corporation and filing the necessary document with the
Secretary of State of Delaware, all in accordance with Delaware law.
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION PAGE 2
<PAGE> 3
FURTHER RESOLVED, that the officers of the Corporation be,
and each of them hereby is, authorized and directed to submit the
proposed amendment to the stockholders of the Corporation at the
earliest opportunity for their approval and to take such further
actions as they may deem necessary in order to carry out the intent
and purpose of these resolutions.
- - SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation
was duly called and held, upon notice in accordance with Section 222
of the General Corporation Law of the State of Delaware at which
meeting the necessary number of shares as required by statute were
voted in favor of the amendment.
- - THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State
of Delaware.
- - FOURTH: That the capital of said corporation shall not be reduced
under or by reason of said amendment.
BY: /s/ Thomas W. Montgomery, Sec.
---------------------------------------
(Authorized Officer)
NAME: Thomas W. Montgomery
-------------------------------------
(Type or Print)
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION PAGE 3
<PAGE> 1
Exhibit 10.1
Amendment Number 1 to the
Automatic Flexible Premium Variable Life Reinsurance Agreement Number 2
(Referred to as the Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
of Largo, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
of Hamilton, Bermuda
(referred to as the Reinsurer)
Effective January 1, 1999
Article II, DEFINITIONS, "Recapture Fee", "Reinsurance Fee" and "Reinsurance
Fee Accrual Rate", is added to read as follows:
"RECAPTURE FEE" is that amount the Reinsured agrees to pay the
Reinsurer if it elects to recapture Reinsured Policies.
"REINSURANCE FEE" is an amount due and payable to the Reinsured on any
amount not otherwise paid and settled within two (2) weeks after
receipt by Reinsurer of the quarterly report, from its respective
calendar quarter-end to the date such amount is paid and settled.
"REINSURANCE FEE ACCRUAL RATE" means an effective annual rate of nine
percent (9%).
Article III, LIABILITY, Paragraph's 5 and 6, are replaced with the following:
5. On an ongoing basis the liability of the Reinsurer, reinsurance
premiums, benefits and other items due to or from each party shall be
accounted for on the basis of the quarterly reports prepared by the
Reinsured in the form of Schedules C1 and C2 and sent to Reinsurer via
facsimile transmission or such other medium mutually acceptable to
both parties. Also included will be any adjustments made necessary by
changes in reinsurance effective during the previous quarter, or
changes due to any agreed upon errors on a previous report.
<PAGE> 2
During 1999, payment of any amount due to be paid by the Reinsurer or
the Reinsured shall be determined on a net basis and shall be paid, in
United States currency, (i) not later than December 30, 1999, for
settlement with regard to Reinsured Policies issued after December 31,
1998 and before October 1, 1999, including any applicable Reinsurance
Fee, and (ii) within two (2) weeks after receipt by Reinsurer of the
quarterly report for all other Reinsured Policies. During year 2000
and thereafter, payment of any amount due to be paid by the Reinsurer
or the Reinsured shall be paid within two (2) weeks after receipt by
Reinsurer of the quarterly report for all Reinsured Policies.
6. The settlement, as shown in Schedule C1 and C2 will include interest
on premiums received, net transfers, mortality and expense charges,
and asset based allowances as shown in Schedule E1, and interest on
commission and expense allowances, and interest on benefits from the
Fixed Account, as shown in Schedule D1 accruing from the fifteenth
(15th) of the month to the end of its respective calendar quarter. The
interest rate(s) used will be the Settlement Interest Rate of the
month named on the Schedules D1 and E1. A Reinsurance Fee shall
accrue, at the Reinsurance Fee Accrual Rate, on any amount not settled
within two (2) weeks after receipt by Reinsurer of the quarterly
report, from its respective calendar quarter-end to the date such
amount is paid and settled.
Article XI, REINSURANCE RESERVES, Paragraph's 6 and 7, are replaced with the
following:
6. The Letter(s) of Credit in favor of the Reinsured will be an amount
which:
(i) through December 30, 1999, must equal or exceed the
reinsurance credits taken or reasonably estimated to be taken
by the Reinsured in connection with this Agreement under
Exhibit 8, and under Exhibit 11, Part 1, Column 3, Line 4c,
and any other liabilities held for the Reinsured Policies
issued prior to January 1, 1999, and reported on the
Reinsured's statutory financial statements; and
(ii) after December 30, 1999, must equal or exceed the reinsurance
credits taken or reasonably estimated to be taken by the
Reinsured in connection with this Agreement under Exhibit 8,
and under Exhibit 11, Part 1, Column 3, Line 4c, and any
other liabilities held for the Reinsured Policies, and
reported on the Reinsured's statutory financial statements.
2
<PAGE> 3
Subject to the approval of the State of Ohio Department of Insurance,
the amount of the Letter of Credit may be reduced by the quota share
percentage of the excess of the Separate Account Value over the
Separate Account Statutory Reserve. Should the reinsurance credit not
be allowed, as a result of this reduction in any applicable
jurisdiction, the Letter of Credit will be restored to the value that
it would have been without this reduction.
7. The Letter(s) of Credit shall be substantially in the form set forth
in Exhibit B or in such other form as the Ohio Insurance Department or
other applicable state Insurance Department may require or permit. The
terms of the Letter(s) of Credit shall provide that: it is not
conditioned on the delivery of any other documents or materials; it is
irrevocable without the consent of the Reinsured; it is automatically
renewable as provided in Exhibit B; and its initial term is for a
period of not less than one (1) year. Such Letter(s) of Credit may be
drawn upon at any time, notwithstanding any other provisions in this
Agreement, but shall be utilized by the Reinsured or its successors
only for one or more of the following reasons:
(i) through December 30, 1999, to fund an account on behalf of
the Reinsured in an amount at least equal to the deduction,
for reinsurance ceded, from the Reinsured's reserves and
liabilities for Reinsured Plans issued prior to January 1,
1999, as specified in this Article; and
(ii) after December 30, 1999, to fund an account on behalf of the
Reinsured in an amount at least equal to the deduction, for
reinsurance ceded, from the Reinsured's reserves and
liabilities for all Reinsured Plans, as specified in this
Article; and(iii) to pay any other amounts the Reinsured
claims are due under this Agreement.
Article XVI, RECAPTURE, Paragraph 1, is replaced with the following:
1. Business reinsured under this Agreement will not be eligible
for recapture, except the Reinsured reserves the right to
recapture:
(i) any business that has been in force thirty-five (35)
years after the policy issue date; or
3
<PAGE> 4
(ii) Reinsured Policies issued from January 1, 1999,
through September 30, 1999 if (a) the Reinsured
provides the Reinsurer a ten (10) day notice of
recapture by December 20, 1999, and (b) the
Reinsurer fails to settle and pay amounts due,
including applicable Reinsurance Fees, with regard
to such policies upon the latter of December 30,
1999, or ten (10) days following notice thereof.
Upon recapture in accordance with this provision,
the Reinsured must pay the Reinsurer a Recapture Fee
equal to the settlement amounts due the Reinsured,
including applicable Reinsurance Fees; the Reinsured
may offset the Recapture Fee against amounts due
with regard to the recaptured business.
Furthermore, should a state regulatory body rule that this
Agreement is not valid for any reason, and there is no
remedial action available to correct the situation, the
Reinsured reserves the right to recapture that portion of the
business that was reinsured. Any adjustment in values as a
result of recapture will be agreed upon at the time of the
recapture. If agreement cannot be reached, any claims will be
settled in accordance with the provision of Article XVII,
Arbitration.
* * * * *
Except as expressed herein, all terms, covenants and provisions of the
Automatic Flexible Premium Variable Life Reinsurance Agreement Number
2 not in conflict with the provisions of this amendment shall remain
unaltered and in full force and effect.
In witness of the above, the Reinsured and the Reinsurer, by their
respective officers have executed this amendment in duplicate at the
dates and places indicated and shall be effective as of January 1,
1999.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO COMPANY LIMITED
at St. Petersburg, FL at Duluth, GA
---------------------------- --------------------------
on June 23, 1999. on June 18, 1999.
---------------------------- --------------------------
By: /s/ Larry Kirkland By: /s/ Thomas W. Montgomery
---------------------------- --------------------------
Title: V.P. and Managing Actuary Title: Vice President
By: /s/ Charles T. Boswell By: /s/ Edward F. McKernan
---------------------------- --------------------------
Title: V.P. Title: Vice President
4
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WMA CORPORATION FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 5,832,927
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,832,927
<CASH> 1,080,729
<RECOVER-REINSURE> 325,681
<DEFERRED-ACQUISITION> 47,709,550
<TOTAL-ASSETS> 55,627,474
<POLICY-LOSSES> 3,919,952
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 10,303,562
0
0
<COMMON> 2,500
<OTHER-SE> 25,994,486
<TOTAL-LIABILITY-AND-EQUITY> 55,627,474
4,111,776
<INVESTMENT-INCOME> 284,270
<INVESTMENT-GAINS> 21,626
<OTHER-INCOME> 6,357,638
<BENEFITS> 2,500,946
<UNDERWRITING-AMORTIZATION> 2,089,818
<UNDERWRITING-OTHER> 2,318,540
<INCOME-PRETAX> 2,862,087
<INCOME-TAX> 973,110
<INCOME-CONTINUING> 1,888,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,888,977
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.76
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
