<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 SEPTEMBER 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 September 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
PART I
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ITEM 1 Financial Statements 3
ITEM 2 Management's Discussion and Analysis or Plan of Operation 10
PART II
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities 20
ITEM 3 Defaults Upon Senior Securities 21
ITEM 4 Submission of Matters to a Vote of Security Holders 21
ITEM 5 Other Information 21
ITEM 6 Exhibits and Reports on Form 8-K 22
</TABLE>
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2
<PAGE> 3
THE WMA CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Fixed maturity securities - available for sale (amortized cost
of $2,123,024 and $9,501,564 for 1999 and 1998, respectively) $ 2,091,718 $ 9,869,679
Cash and cash equivalents 2,711,102 6,617,710
Investment income due and accrued 30,110 136,196
Reinsurance balances receivable 299,524 101,034
Reinsured policy loans 231,741 45,502
Deferred acquisition costs 58,330,715 27,537,866
Deferred organization costs (net of accumulated amortization
of $186,869 and $98,565 at 1999 and 1998, respectively) -- 88,304
Prepaid expenses 345,163 216,746
Due from World Marketing Alliance, Inc. -- 3,507
Fixed assets (net of accumulated depreciation of $43,175 and $7,649 for
1999 and 1998, respectively) 100,174 84,820
Other assets -- 179,810
------------ ------------
Total assets $ 64,140,247 $ 44,881,174
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,651,435 $ 2,624,020
Reinsurance balances due and accrued 17,329,420 5,425,467
Accrued expenses 89,648 105,854
Accounts payable 45,810 70,376
Due to World Marketing Alliance, Inc. 3,878 --
Accrued interest payable 451,985 101,099
Short term debt 5,303,562 10,000,000
Note payable - long term 5,000,000 --
Deferred tax liability 3,782,669 2,181,219
------------ ------------
Total liabilities 36,658,407 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
Additional paid-in capital 20,228,973 20,228,973
Accumulated other comprehensive income (loss) (20,661) 242,977
Retained earnings 7,320,928 3,948,589
Treasury stock, at cost (4,990 shares for 1999 and 1998) (49,900) (49,900)
------------ ------------
Total stockholders' equity 27,481,840 24,373,139
------------ ------------
Total liabilities and stockholders' equity $ 64,140,247 $ 44,881,174
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 2,074,400 $ 1,853,639 $ 6,186,176 $ 5,383,901
Reinsured policy revenues 4,535,519 1,346,430 10,893,157 2,236,421
Net investment income 95,983 258,971 380,253 786,978
Net realized (loss) gain on investments (144,925) 110,424 (123,299) 94,635
----------- ----------- ------------ -----------
Total revenue 6,560,977 3,569,464 17,336,287 8,501,935
Benefits and expenses:
Benefits, claims and settlement expenses 921,420 595,465 3,402,163 2,410,778
Change in future policy benefits (1,358) 6,763 18,845 27,869
Reinsurance premium allowances, net 1,418,235 728,749 3,736,775 1,808,581
Amortization of deferred acquisition costs, net 1,282,089 377,136 3,371,907 933,918
Professional fees and other expenses 249,281 193,518 727,473 378,477
Interest expense 431,022 -- 933,644 --
Consulting fees to World Marketing Alliance, Inc. 12,771 45,767 35,876 224,399
----------- ----------- ------------ -----------
Total benefits and expenses 4,313,460 1,947,398 12,226,683 5,784,022
----------- ----------- ------------ -----------
Income before income taxes 2,247,517 1,622,066 5,109,604 2,717,913
Income tax expense (764,155) (552,035) (1,737,265) (925,685)
----------- ----------- ------------ -----------
Net income $ 1,483,362 $ 1,070,031 $ 3,372,339 $ 1,792,228
=========== =========== ============ ===========
Basic and diluted income per share $ 0.59 $ 0.43 $ 1.35 $ 0.72
=========== =========== ============ ===========
Weighted-average common shares outstanding 2,495,010 2,495,010 2,495,010 2,496,018
=========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,372,339 $ 1,792,228
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization and depreciation 3,495,737 961,246
Deferred tax expense 1,737,265 925,685
Net realized loss (gain) on investments 123,299 (94,635)
Change in:
Investment income due and accrued 106,086 109,033
Reinsurance balances receivable (198,490) 121,991
Reinsured policy loans (186,239) --
Deferred acquisition costs (34,164,756) (16,713,939)
Prepaid expenses (128,417) (679,034)
Due from World Marketing Alliance, Inc. 3,507 (2,607)
Other assets 179,810 783
Future policy benefits 2,027,415 641,557
Reinsurance balances payable 11,903,953 5,171,280
Accrued expenses (16,206) (11,235)
Accounts payable (24,566) 12,959
Accrued interest payable 350,886 --
Due to WMA Management Services, Inc. -- (120,000)
Due to World Marketing Alliance, Inc. 3,878 (1,916)
------------ ------------
Net cash used in operating activities (11,414,499) (7,886,604)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 7,255,209 8,103,247
Purchase of fixed assets (50,880) (2,918)
------------ ------------
Net cash provided by investing activities 7,204,329 8,100,329
------------ ------------
Cash flows from financing activities:
(Decrease) increase of principal due on short-term debt (4,696,438) 5,000,000
Proceeds from long-term note 5,000,000 --
Purchase of treasury stock -- (27,900)
------------ ------------
Net cash provided by financing activities 303,562 4,972,100
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,906,608) 5,185,825
Cash and cash equivalents at beginning of period 6,617,710 1,469,663
------------ ------------
Cash and cash equivalents at end of period $ 2,711,102 $ 6,655,488
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
============ ============
Income taxes paid $ -- $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THE WMA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 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. Operating results for the nine months ended September 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 September 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 September 30, 1999 was $1,484,854
compared to $1,104,412 for the quarter ended September 30, 1998. Total
comprehensive income for the nine months ended September 30, 1999 was $3,108,701
compared to $2,023,689 for the nine months ended September 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.
6
<PAGE> 7
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.
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) EARNINGS PER SHARE
Basic income per share is computed on the weighted-average number of
shares outstanding in accordance with SFAS No. 128, Earnings Per Share. In
August 1999, the Company's stockholders authorized a 1999 stock option plan and
approved the issuance of options to purchase up to 450,000 shares of stock under
such stock option plan. Such stock options have been considered for purposes of
calculating diluted earnings per share, however, based on the per share exercise
price of the options granted, there is no difference between basic and diluted
earnings per share.
(6) SEGMENT REPORTING
The Company has two reportable segments: non-universal life-type
agreements and universal life-type agreements.* The reportable segments are
determined based on the nature of the reinsurance treaties and the accounting
treatment used for the various reinsurance treaties. The Company reinsures
certain variable universal life policies on a monthly renewable term ("MRT")
basis. MRT reinsurance involves the reinsurance of mortality risk whereby
premiums are not directly related to the premium rates on the original plan of
insurance and the ceding company is liable for the total net amount of risk of
the policies reinsured. The Company's MRT agreements are accounted for under
SFAS No. 60 accounting principles. The Company also reinsures certain variable
annuity contracts and variable universal life policies on a coinsurance and
modified coinsurance basis. Coinsurance involves the reinsurance of mortality
and investment risks on the same basis as that of the underlying policies. The
ceding life companies and the Company share in these risks in the same manner.
The Company's existing coinsurance agreements are accounted for under SFAS No.
97 accounting principles. Items not directly related to the business segments
and unallocated corporate items (i.e., other income, interest expense on
corporate debt and unallocated operating expenses) are shown separately,
consistent with the Company's internal measurement process. Segment assets
reported include those assets directly attributable to the reinsurance treaties
such as reinsurance balances receivable, deferred acquisition costs, policy
loans, prepaid expenses, invested assets and cash. Invested assets are allocated
to the treaties based upon the letters of credit posted in support of the
statutory reserves held which is consistent with the Company's internal
measurement process.
- -----------------
* Non-universal life-type agreements and universal life-type agreements as
referenced in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments, paragraphs 44 and 45.
7
<PAGE> 8
SEGMENT REPORTING
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Amounts shown in thousands) Non-Universal Universal Non-Universal Universal
Life-Type Life-Type Other Totals Life-Type Life-Type Other Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums $2,074 $ 2,074 $1,854 $ 1,854
Reinsured policy revenues 4,535 4,535 1,346 1,346
Benefits, claims and
settlement expenses 489 431 920 621 (19) 602
Reinsurance premium
allowances, net 527 891 1,418 494 235 729
Amortization of deferred
acquisition costs 41 1,241 1,282 15 362 377
------ ------ ------- -------- ------ ------- ----- -------
Underwriting profit 1,017 1,972 2,989 724 768 1,492
Net investment income (expense) 55 61 (20) 96 71 137 51 259
Net realized gain (loss)
on investments (145) (145) 110 110
Other expenses 13 240 440 693 5 31 203 239
------ ------ ------- -------- ------ ------- ----- -------
Segment operating income (loss)
before tax 1,059 1,793 (605) 2,247 790 874 (42) 1,622
Income tax expense (benefit) 360 610 (206) 764 269 297 (14) 552
------ ------ ------- -------- ------ ------- ----- -------
Segment net income (loss) $ 699 1,183 (399) $ 1,483 $ 521 577 (28) $ 1,070
====== ====== ======= ======== ====== ======= ===== =======
Segment assets $6,112 74,367 (16,339) $ 64,140 $6,160 27,689 4,950 $38,799
====== ====== ======= ======== ====== ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Amounts shown in thousands) Non-Universal Universal Non-Universal Universal
Life-Type Life-Type Other Totals Life-Type Life-Type Other Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums $ 6,186 $ 6,186 $5,384 $ 5,384
Reinsured policy revenues 10,893 10,893 2,236 2,236
Benefits, claims and
settlement expenses 2,068 1,353 3,421 2,413 26 2,439
Reinsurance premium
allowances, net 1,579 2,158 3,737 1,445 363 1,808
Amortization of deferred
acquisition costs 136 3,235 3,371 131 803 934
------- ------- ------- ------- ------ ------- ------ -------
Underwriting profit 2,403 4,147 6,550 1,395 1,044 2,439
Net investment income 127 143 110 380 138 137 512 787
Net realized gain (loss)
on investments (123) (123) 95 95
Other expenses 25 359 1,313 1,697 13 94 496 603
------- ------- ------- ------- ------ ------- ------ -------
Segment operating income
(loss) before tax 2,505 3,931 (1,326) 5,110 1,520 1,087 111 2,718
Income tax expense (benefit) 852 1,336 (451) 1,737 517 370 39 926
------- ------- ------- ------- ------ ------- ------ -------
Segment net income (loss) $ 1,653 2,595 (875) $ 3,373 1,003 717 72 $ 1,792
======= ======= ======= ======= ====== ======= ====== =======
Segment assets $ 6,112 74,367 (16,339) $64,140 $6,160 27,689 4,950 $38,799
======= ======= ======= ======= ====== ======= ====== =======
</TABLE>
8
<PAGE> 9
Of the total premiums and reinsured policy revenues above, 89% and 90%
relate to business reinsured by Western Reserve Life Assurance Co. of Ohio
("Western Reserve"), for the three months ended September 30, 1999 and 1998,
respectively. For the nine-month periods ending September 30, 1999 and 1998, 88%
and 90% of the total premiums and reinsured policy revenues shown above relate
to business reinsured by Western Reserve. Of the total underwriting profit
above, 88% and 84% relate to business reinsured by Western Reserve for the three
months ended September 30, 1999 and 1998, respectively. For the nine months
ended September 30, 1999 and 1998, 87% and 83% of the total underwriting profit
above relate to business reinsured by Western Reserve.
(7) RECLASSIFICATION
The Company has reclassified the presentation of certain 1998
information to conform to the 1999 presentation.
(8) SUBSEQUENT EVENTS
WMA Life Insurance Company Limited ("WMA Life") entered into a letter
of intent with Western Reserve to reinsure two new products introduced for sale
in late 1999. The agreement provides for the reinsurance of the WRL Freedom
Protector Term (including riders and supplemental benefits), a term life
insurance product, and the WRL Financial Freedom Accumulator (including riders
and supplemental benefits), a flexible premium whole life insurance product sold
by producers of WMA Securities, Inc. and issued by the reinsured. Western
Reserve will cede and WMA Life will coinsure policies of these plans on a twenty
percent (20%) quota share, commencing with policies issued on or after January
1, 2000. The cession is contingent on WMA Life demonstrating that its unassigned
invested securities, together with anticipated cash flows, are sufficient to
meet expected reinsurance settlements through Year 2000 under the proposed
agreement.
The Company has been exploring alternatives 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 become due and payable upon the
earlier of: (i) December 31, 1999; or (ii) the closing of the Company's
offerings related to the private sale of preferred and common stock to
institutional and other accredited investors. If sufficient proceeds are not
obtained from the private placement offerings and alternative sources of
financing are not obtainable at an acceptable cost before December 31, 1999, the
Company will be unable to repay amounts borrowed from MSI under this line of
credit agreement. The alternatives have focused on: (i) an extension which
defers the balance of any remaining amounts due under the line of credit until
the closing of the Company's offerings; and (ii) obtaining a $5.8 million term
note to be applied toward the existing outstanding balances on the line of
credit. 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, 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 to recapture a portion of the business ceded to WMA Life during 1998.
The recapture of business, previously ceded to WMA Life, would result in a
material disruption in the Company's earnings, growth and business plan.
The Company has also been discussing with Western Reserve the recapture
of all or a portion of the variable universal life and variable annuity business
ceded to WMA Life during 1999 on a coinsurance and modified coinsurance basis.
In accordance with the terms of the reinsurance agreements amended in 1999, the
Company has been deferring settlements due Western Reserve for business ceded to
the Company during 1999. If sufficient proceeds are not obtained from the
private placement offerings and alternative sources of financing are not
obtainable at an acceptable cost before December 31, 1999, the Company will be
unable to pay the deferred settlements on that date, thereby allowing Western
Reserve the option to recapture business previously ceded during 1999. The
recapture of business, previously ceded to WMA Life would result in a material
disruption in the Company's earnings, growth and business plan.
For further discussion regarding the MSI line of credit, the deferred
reinsurance settlements, and the private placement offerings, refer to the
Liquidity and Capital Resources Section of the Management's Discussion and
Analysis or Plan of Operations.
9
<PAGE> 10
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 September 30, 1999, compared with
December 31, 1998, and its results of operations for the third quarter and nine
months ended September 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>
NINE MONTHS ENDED
Ceding Life Company 9/30/99 1998 1997
- ------------------- ------- ---- ----
<S> <C> <C> <C>
Western Reserve Life Assurance Co. of Ohio ("Western
Reserve") 79% 81% 85%
Kemper Investors Life Insurance Company ("Kemper") 3 4 2
---- ---- ----
Total Subject to Reinsurance 82% 85% 87%
Total Not Subject to Reinsurance 18 15 13
---- ---- ----
Total Applications Submitted 100% 100% 100%
</TABLE>
Annuity Applications(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
9/30/99 1998 1997
------- ---- ----
<S> <C> <C> <C>
Ceding Life Company
- -------------------
Western Reserve 66% 44% 0%
American Skandia Life Assurance Corporation ("American
Skandia") 11 16 13
--- --- ---
Total Subject to Reinsurance 77% 60% 13%
Total Not Subject to Reinsurance 23 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.
10
<PAGE> 11
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 September 30, 1999, WMA Life's reinsurance inforce on life insurance
policies, including riders, constituted 250,963 policies and riders with an
aggregate face amount of $7.65 billion. This is an increase of 42,642 life
insurance policies and riders, or 20%, and $1.53 billion of inforce face amount,
or 25%, from December 31, 1998. At September 30, 1999, WMA Life had reinsurance
inforce with respect to variable annuities for 20,937 policies with reinsured
annuity contract benefits of $310 million. This is an increase of 10,909 annuity
policies, or 109%, and $152 million of annuity contract benefits, or 96%, from
December 31, 1998.
The following table indicates the percentage of WMA Life's reinsurance
revenues derived from the Ceding Life Companies:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
CEDING LIFE COMPANY 9/30/99 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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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 variable annuity and VUL
coinsurance and modified coinsurance agreements effective January 1, 1999 to
defer financial settlements on variable annuities and VUL policies issued during
1999 until December 30, 1999. Beginning April 1, 1999, a reinsurance fee of 9%
per annum accrues on the deferred reinsurance settlement balances. Settlements
on policies issued prior to 1999 under these agreements continue to be settled
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 $58.33 million at September 30, 1999, an increase of
$30.79 million, or 112%, for the first nine months of 1999. During this same
period, first-year life insurance premiums collected totaled $24.52 million, an
increase of $10.16 million, or 71%, and annuity premiums totaled $147.52
million, an increase of $31.25 million, or 27%.
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 $4.65 million at September
30, 1999, an increase of $2.03 million, or 77% for the first nine months of
1999. The liability at September 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 methods and
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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 $2.99 million, or 84%, and $8.83
million, or 104%, for the third quarter and the nine months ended September 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 $221,000, or 12%, and $802,000, or 15%,
for the third quarter and the nine months ended September 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, the
number of policies and riders reinsured on a MRT basis decreased by 10,097, or
6%, from 160,588 at September 30, 1998 to 150,491 at September 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 $3.19
million, or 236%, and $8.65 million, or 386%, for the third quarter and the nine
months ended September 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 $10.89
million Reinsured policy revenues for the nine months ended September 30, 1999,
$3.32 million was attributable to the variable annuity agreements compared to
$850,000 for the same period in 1998, an increase of $2.47 million, or 291%. The
remaining $7.57 million of Reinsured policy revenues for the nine months ended
September 30, 1999, was attributable to the VUL coinsurance and modified
coinsurance agreement as compared to $1.39 million for the same period in 1998,
an increase of $6.18 million, or 445%. 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 $163,000, or 63%, and $407,000, or 52%, for the
third quarter and the nine months ended September 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 $54,000 and $23,000 for the first nine months of 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 and variable annuity coinsurance and modified coinsurance
agreements. The sale of fixed income securities in the third quarter of 1999
resulted in a Net realized loss on investments of $145,000, a decrease of
$255,000, or 232%, for the quarter ended September 30, 1999, as compared to the
same period in 1998. The sale of fixed income securities for the first nine
months of 1999 resulted in a Net realized loss on investments of $123,000, or a
decrease of $218,000, or 229%, as compared to the same period in 1998.
Benefits, Claims and Settlement Expenses. Benefits, claims and
settlement expenses increased by $326,000, or 55%, and $991,000, or 41%, for the
third quarter and the nine months ended September 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
September 30, 1999 was $7.65 billion as compared to $5.76 billion at September
30, 1998, which represents a $1.89 billion, or 33% increase.
Benefits, claims and settlement expenses decreased $402,000, or 30%, to
$921,000 for the three month period ending September 30, 1999 from $1,323,000
for three month period ending June 30, 1999. The decrease was attributable
primarily to lower than expected mortality experience, and, to a lesser extent,
to a reversal of $102,000 due to denied claims reported during prior periods.
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.
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Claims paid plus those incurred in the third quarter of 1999 were approximately
25% lower than otherwise expected based upon prior claims activity. Estimated
additional net income was $270,000 for the third quarter due to this lower than
expected claims activity. A review of October 1999 claims activity indicates
there has not been a delay in reporting of claims incurred. However, management
believes this activity is unique to third quarter results and is not indicative
of future experience.
Changes in Future Policy Benefits. The Change in future policy benefits
decreased by $8,000, or 114%, and decreased by $9,000, or 32%, for the third
quarter and the nine months ended September 30, 1999, respectively, as compared
to the same periods in 1998. The change 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
$23,000, or 11%, from September 30, 1998 to September 30, 1999.
Reinsurance Premium Allowances Net. Net reinsurance premium allowances
increased by $689,000, or 95%, and $1.93 million, or 107%, for the third quarter
and the nine months ended September 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 $905,000, or 240%, and $2.44 million, or 262%,
for the third quarter and the nine months ended September 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 $56,000, or 29%, and $349,000, or 92%, for the third
quarter and the nine months ended September 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 nine months of 1999, but not for the corresponding period 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 $33,000, or 72%, and $188,000, or
84%, for the third quarter and the nine months ended September 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 seven 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 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 $431,000 and $934,000
for the third quarter and the nine months ended September 30, 1999. This
increase was due to interest incurred on the short-term financing received from
Money Services, Inc. ("MSI"), a five-year term note issued to MSI, and to the
reinsurance fees associated with the deferred settlements on the variable
annuity and VUL policies. (See further discussion under Liquidity and Capital
Resources.)
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Income Taxes. Income taxes increased by $212,000, or 38%, and $811,000,
or 88%, for the third quarter and the nine months ended September 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 September 30, 1999 was $1.48 million compared to $1.07 million, an
increase of $413,000, or 39%, for the comparable period ended September 30,
1998. Net income for the nine months ended September 30, 1999 was $3.37 million
compared to $1.79 million, an increase of $1.58 million, or 88%, for the nine
months ended September 30, 1998.
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.
For the nine-month period ended September 30, 1999, net cash flows used
in operating activities were $11.41 million, compared to $7.89 million for the
same period ended September 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 and variable annuity coinsurance and modified
coinsurance agreements, which became effective in 1998. Further, the period
ended September 30, 1999 reflects activity associated with reinsured VUL
policies issued over the preceding eighteen months, as compared to only six
months of similar activity for the period ending September 30, 1998. First year
life insurance premiums reinsured under the coinsurance and modified coinsurance
agreement, increased by $31.52 million, or 238%, for the nine month period ended
September 30, 1999, as compared to the nine-month period ended September 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 $57.50 million, or 64%,
for the nine-month period ended September 30, 1999, as compared to the
nine-month period ended September 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%. On July 30, 1999, $5 million from
proceeds made available from the
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issuance of a five-year term note to MSI (discussed below) were applied to
reduce the outstanding principal balance. All remaining balances of principal
and interest under this line of credit become due and payable upon the earlier
of: (i) December 31, 1999; or (ii) the closing of the Company's offerings
related to the private sale of preferred and common stock to institutional and
other accredited investors. As of September 30, 1999, the Company had an
outstanding principal balance of $5,303,562 million and accrued interest of
$387,259 in regard to the line of credit.
On July 30, 1999, the Company issued a $5 million, five year term note
to MSI due on July 29, 2004. Interest is payable at 7.5% per annum (except in
the event of redemption), on the 29th of each succeeding January and July
through and including July 29, 2004. MSI may convert, after December 31, 1999
and prior to July 29, 2004, the outstanding principal balance of this note into
Common Stock of the Company. Upon conversion, the number of shares of Common
Stock which may be obtained per each $100.00 of the outstanding principal amount
of the note shall be the greater of (a) 4.17 shares; or (b) 62.5 divided by the
average price per share of Common Stock sold by the Company in private
placements of its Common Stock in 1999. The note may be redeemed after July 29,
2002, in whole or in part, at the Company's option, at the redemption price,
which shall include all accrued but unpaid interest to the date of redemption.
If the note is redeemed prior to July 29, 2004, interest shall accrue on the
outstanding principal amount at the rate of 9% per annum from the date of the
note through the date of redemption. As of September 30, 1999, the Company had
an outstanding principal balance of $5,000,000 million and accrued interest of
$64,726 in regard to the term note.
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 before December 31, 1999, 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 meet 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.
Since Company's management is not anticipating it will secure
sufficient proceeds from the private placement offerings before December 31,
1999, the Company has been exploring alternatives to restructure its line of
credit with MSI. The alternatives have focused on: (i) an extension which defers
the balance of any remaining amounts due under the line of credit until the
closing of the Company's offerings, and (ii) obtaining a $5.8 million term note
to be applied toward the existing outstanding balances on the line of credit.
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, 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
to recapture a portion of the business ceded to WMA Life during 1998. The
recapture of business previously ceded to WMA Life would result in a material
disruption in the Company's earnings, growth and business plan.
Effective January 1, 1999, with regard to variable annuities and VUL
policies issued during 1999, the Company and Western Reserve amended the
variable annuity and VUL coinsurance and modified coinsurance agreements to
defer financial settlements until December 30, 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
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reinsurance settlements otherwise due Western Reserve will be extinguished. In
addition to the existing terms of the agreements, a reinsurance fee at an
effective annual rate of 9% accrues on the deferred reinsurance settlement
balances beginning April 1, 1999. As of September 30, 1999, approximately $13
million of the Reinsurance balances due and accrued were deferred under the VUL
coinsurance and modified coinsurance agreement. Approximately $3 million of the
Reinsured balances due and accrued were deferred as of September 30, 1999 under
the variable annuity coinsurance and modified coinsurance agreement. With regard
to variable annuities and VUL policies issued during 1998, financial activity
will continue to be settled on a quarterly basis.
If sufficient proceeds are not obtained from the private placement
offering and alternative sources of financing are not obtainable at an
acceptable cost before December 31, 1999, the Company would be unable to settle
the deferred reinsurance balances under the variable annuity and VUL coinsurance
and modified coinsurance agreements with Western Reserve. Western Reserve,
pursuant to the terms of the agreement would, upon the company's failure to
timely settle the deferred reinsurance balances, have the right to recapture
variable annuity and VUL policies issued during 1999 and previously ceded to the
company. Company management estimates that if, in accordance with the terms of
the agreements, Western Reserve were to recapture these policies for the
nine-month period ended September 30, 1999, net income would be reduced
approximately $700,000 or 21%. Further, recapture of business previously ceded
to WMA Life would result in a material disruption in the Company's earnings,
growth and business plan.
Considering Company's management is not anticipating it will secure
sufficient proceeds from the private placement offerings before December 31,
1999, the Company has been discussing with Western Reserve the recapture of the
variable annuity and VUL policies issued during 1999, and reinsured with WMA
Life. During these discussions, the Company and Western Reserve have explored
certain alternatives to the recapture of all policies issued during 1999, and
reinsured by WMA Life. The proposed alternatives include (i) amending the VUL
coinsurance and modified coinsurance agreement to entitle WMA Life to retain the
mortality risk previously ceded by Western Reserve, and (ii) reducing the quota
share on the variable annuity coinsurance and modified coinsurance agreement to
a level that can be supported by the Company's invested securities and future
cash flows. While these alternatives could slightly reduce the charge to
earnings that may otherwise occur upon recapture of all policies issued and
reinsured during 1999 under these agreements, there can be no assurance that
these proposals will be acceptable to either the Company or Western Reserve.
The Company's primary source of liquidity was $2.71 million in cash and
cash equivalents at September 30, 1999, a decrease of $3.94 million from
September 30, 1998. The effective duration of the Company's fixed income
portfolio is 3.8 years, with 100% of the fixed income securities having an
effective 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 Aa2 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 nine-month period ended September
30, 1999 was $7.20 million, compared to $8.10 million for the same period ended
September 30, 1998. Net cash provided by financing activities for the nine-month
period ended September 30, 1999 was $303,562, due to the capitalization of
interest on short term debt in the second quarter of 1999 and to the issuance of
a $5 million term note of which the proceeds were applied to reduce the
outstanding principal balance of the short-term debt during the third quarter of
1999. For the same period ended September 30, 1998, $4.97 million used in
financing activities was due primarily to the issuance of short-term debt in the
third 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 $209,000 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 September 30, 1999, WMA Life had the statutory
capacity to pay $4.59 million in dividends.
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. In September
1999, IBJ Whitehall notified the Company that they were exiting the custody
business. As a result, the Company has been actively searching for a new
custodian. Negotiations have begun with a new custodian and conversion of the
custody accounts is expected to be complete by the end of 1999.
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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 earnings, 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 all of their mission-critical systems are year 2000
compliant and ready. 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 third partners throughout 1999. However,
there can be no guarantees that their efforts to remediate their internal
systems will be trouble free.
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.
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
18
<PAGE> 19
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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE> 20
PART II
ITEM 1. LEGAL PROCEEDINGS.
At September 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.
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.
The stockholders ratified and approved the Plan and the issuance of
options at the Annual Meeting.
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.
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.
Each Warrant issued in 1999 entitles the holder to purchase one share
of Common Stock. The Board of Directors limited the number of shares, which can
be issued upon exercise of a Warrant, 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. 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.
The stockholders ratified and approved the issuance of Warrants at the
Annual Meeting.
20
<PAGE> 21
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.
The Company's Annual Meeting of stockholders was held in Duluth,
Georgia on August 16, 1999. The purpose of the meeting was to elect five
directors; to ratify and approve the Company's stock option plan (the "Plan")
and the grant of options to certain officers and employees of the Company; to
ratify and approve the Company's authorization to issue Warrants to purchase the
Company's Common Stock and the issuance of Warrants to certain key independent
sales agents and employees of affiliated companies; to consider and act upon the
selection of KPMG LLP as independent auditors of the Company for 1999; and to
transact such other business as may properly come before the Annual Meeting.
Set forth below are the results of the election of the Directors of the
Company:
<TABLE>
<CAPTION>
Name of Nominee Votes "FOR" Votes "AGAINST" ABSTENTIONS
<S> <C> <C> <C>
S. Hubert Humphrey, Jr. 1,367,185 5,000 None
Thomas W. Montgomery 1,367,185 5,000 None
Edward F. McKernan 1,367,185 5,000 None
C. Simon Scupham 1,367,185 5,000 None
Joseph F. Barone 1,367,185 5,000 None
</TABLE>
The ratification and approval of the Plan and the grant of options was
approved by 1,372,185 FOR, none AGAINST, and none ABSTAINING.
The ratification and approval of the issuance of Warrants was approved
by 1,372,140 FOR, 26 AGAINST, and 19 ABSTAINING.
The ratification of the selection of KPMG LLP as the Company's
independent auditors for 1999 was approved by 1,372,166 FOR, none AGAINST, and
19 ABSTAINING.
No other business came before the meeting which required a vote of the
stockholders.
ITEM 5. OTHER INFORMATION.
On December 18, 1998, the California Department of Corporations issued
to WMA Agency, WMA Securities and WMA Investment Advisors, Inc. ("WMA Investment
Advisors"), a Desist and Refrain Order ("Order") to refrain from further offers
or sales of franchises in 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 it believes will fall
within an exemption to the California franchise law, if it is otherwise
determined to be applicable. An administrative judge recently issued a decision
in which the Order was upheld. WMA Agency has represented to the Company that in
response to what WMA Agency and its legal counsel believe to be an incorrect
decision, WMA Agency is now seeking judicial relief by filing a motion in the
appropriate court seeking to have the Order set aside. If the Order is
ultimately upheld after all rights of appeal have been exhausted or have
expired, 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. If WMA Agency is fined or its business practices are
modified, such a 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, WMA Securities, and WMA Sales Associates for the
marketing of new VUL and variable annuity policies which the Company may then
reinsure.
21
<PAGE> 22
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>
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 Variable Annuity Reinsurance
Agreement between Western Reserve Life Assurance Co. of Ohio and WMA
Life Insurance Company Limited effective January 1, 1999 (Attached)
10.2 Third Amendment of Revolving Line of Credit Promissory Note between The
WMA Corporation and Money Services, Inc. dated July 30, 1999 (Attached)
10.3 Five Year Term Note issued by The WMA Corporation on July 30, 1999 to
Money Services, Inc. in the principal sum of $5,000,000 (Attached)
27.1 Financial Data Schedule (Attached) (for SEC use only)
FOOTNOTES
(1) Filed on May 19, 1999 as an Exhibit to the Proxy Statement and
incorporated herein by reference pursuant to Rule 12b-32.
</TABLE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE> 23
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
By /s/ Edward F. McKernan Date: November 15, 1999
---------------------------
Edward F. McKernan, Senior Vice
President, Chief Financial Officer,
Actuary, and Director
23
<PAGE> 1
EXHIBIT 10.1
Amendment Number 1 to the
Automatic Variable Annuity Reinsurance Agreement
(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, Paragraphs 3 and 4, are revised to read as follows:
3. 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.
4. 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 XII, REINSURANCE RESERVES, Paragraph's 6 and 7, are revised to read as
follows:
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 4, 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 4, Line 4c, and any other
liabilities held for the Reinsured Policies, and reported on
the Reinsured's statutory financial statements.
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.
2
<PAGE> 3
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 Paragraph 6 of 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 Paragraph
6 of this Article; and
(iii) to pay any other amounts the Reinsured claims are due under
this Agreement.
Article XIV, RECAPTURE, Paragraph 1, is revised to read as follows:
1. With the exception of the provision in Article IX,
Annuitization, 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
(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.
3
<PAGE> 4
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 Variable Annuity Reinsurance Agreement 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, Georgia
----------------------------- ---------------------
on November 12 , 1999. on November 15 , 1999.
------------------ ---------------------
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
----------------------------- ----------------------------
Title: VP and Managing Actuary Title: Vice President
By: /s/ Alan Yaeger By: /s/ Thomas W. Montgomery
----------------------------- ----------------------------
Title: EVP Title: Vice President
4
<PAGE> 1
EXHIBIT 10.2
THIRD AMENDMENT OF REVOLVING LINE OF CREDIT PROMISSORY NOTE
THIS THIRD AMENDMENT OF REVOLVING LINE OF CREDIT PROMISSORY NOTE (this
"Agreement") is made and entered effective as of the 30th day of July, 1999, by
and between THE WMA CORPORATION, a Delaware corporation (hereinafter referred to
as "Borrower") and MONEY SERVICES, INC., a Delaware corporation (hereinafter
referred to as "Lender").
ARTICLE A - BACKGROUND AND CONSIDERATION
A-1. BACKGROUND. On September 30, 1998, Borrower incurred certain
indebtedness (the "Loan") owing to Lender, and to evidence the Loan executed and
delivered to Lender that certain Revolving Line of Credit Promissory Note dated
September 30, 1998, in the face principal amount of $10,000,000.00 (the "Note").
The Note was further evidenced by that certain Revolving Line of Credit Loan
Agreement by and between Borrower and Lender dated September 30, 1998, as
thereafter amended by a certain First Amendment of Revolving Line of Credit
Agreement and Revolving Line of Credit Promissory Note dated January 29, 1999
and a certain Second Amendment of Revolving Line of Credit Promissory Note dated
March 31, 1999 (collectively the "Loan Agreement"). The Note and Loan Agreement,
together with any and all other documents, if any, to or of which Lender is a
party or beneficiary evidencing, securing or otherwise relating to the Loan, are
hereinafter referred to collectively as the "Loan Documents". Borrower is in the
process of raising additional capital in the form of equity private placements
of shares of Series A Convertible Preferred Stock and shares of Common Stock
("Equity Private Placements"), a portion of the proceeds of which will be
applied toward repayment of the Note. Borrower also intends to sell a new
$5,000,000 five year term note ("Term Note"), as more particularly described in
Section C-1 hereof, to Lender or an affiliate of Lender, the proceeds of which
Borrower will also apply towards repayment of the Note. Borrower and Lender have
agreed to (i) extend the maturity date of the Note; and (ii) provide for the
repayment of a portion of same from the closing of the sale of the Term Note.
A-2. CONSIDERATION. For and in consideration of the sum of $10.00 and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Lender do hereby agree as set forth herein
below.
ARTICLE B - AGREEMENT
B-1. AMENDMENT OF CERTAIN NOTE PROVISIONS. Borrower and Lender do
hereby amend the Note as follows:
B-2. EXTENSION OF MATURITY DATE/SOURCE OF REPAYMENT. The second full
paragraph of the Note is hereby deleted in its entirety and the following new
paragraph is substituted in lieu thereof:
THIRD AMENDMENT OF REVOLVING
LINE OF CREDIT PROMISSORY NOTE PAGE 1
<PAGE> 2
"The entire outstanding principal balance hereof, together with all
accrued but unpaid interest thereon, less $5,000,000 (the amount of the Term
Note as hereinafter defined), shall be due and payable in full upon the earlier
of (i) December 31, 1999 or (ii) the closing of the Equity Private Placements
(as hereinafter defined). For purposes of this Note, the term "Equity Private
Placements" means the sale by Borrower, pursuant to private placement
exemptions, of shares of Borrower's Series A Convertible Preferred Stock and/or
shares of Borrower's Common Stock. The sum of $5,000,000 shall be due and
payable by Borrower immediately upon the closing of the sale of the Term Note to
Lender or an affiliate of Lender. For purposes of this Note, the term "Term
Note" shall have the meaning set forth in Section C-1 of that certain Third
Amendment of Revolving Line of Credit Promissory Note dated July 30, 1999 by any
between Borrower and Lender".
ARTICLE C - ISSUANCE OF NEW TERM NOTE
C-1. Borrower hereby agrees to issue to Lender, or an affiliate of
Lender, a new $5,000,000 five year term note ("Term Note") which shall contain
the terms and conditions set forth in Exhibit A attached hereto, and, upon
closing of the sale of such Term Note, to immediately apply the proceeds
therefrom to reduce the then outstanding balance of the Note.
ARTICLE D - GENERAL CONDITIONS
D-1. NO WAIVER OR IMPLICATION. Borrower hereby agrees that nothing
herein shall constitute a waiver by Lender of any default, whether known or
unknown, which may exist under the Note or any other Loan Document. Borrower
hereby further agrees that no action, inaction or agreement by Lender,
including, without limitation, any indulgence, waiver, consent or agreement of
modification which may have occurred or been granted or entered into with
respect to non-payment of the Loan or any portion thereof, or with respect to
matters involving security for the Loan, shall require or imply any future
indulgence, waiver, consent or agreement by Lender. Borrower hereby acknowledges
and agrees that Lender has made no agreement, and is in no way obligated, to
grant any future indulgence, waiver or consent or to enter into any further
agreement of modification with respect to the Loan or any matter relating to the
Loan.
D-2. SUCCESSORS AND ASSIGNS. This Third Amendment of Revolving Line of
Credit Promissory Note shall be binding upon and shall insure to the benefit of
the parties hereto, their respective heirs, successors, successors-in-title and
assigns.
D-3. MISCELLANEOUS. All personal pronouns used herein whether used in
the masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and vice versa. Titles of articles and
sections as set forth herein are for convenience only and in no way define,
THIRD AMENDMENT OF REVOLVING
LINE OF CREDIT PROMISSORY NOTE PAGE 2
<PAGE> 3
limit, amplify or describe the scope or intent of any provision hereof.
IN WITNESS WHEREOF, Borrower and Lender have hereunto set their hands
and affixed their seals as of the day and year first above written.
BORROWER:
THE WMA CORPORATION
A DELAWARE CORPORATION
By: /s/ Thomas W. Montgomery
-----------------------------------------
Name: Thomas W. Montgomery
Title: Executive Vice President
(CORPORATE SEAL)
LENDER:
MONEY SERVICES, INC., A DELAWARE
CORPORATION
By: /s/ Patrick De Palma
-----------------------------------------
Name: Patrick De Palma
Title: President
(CORPORATE SEAL)
THIRD AMENDMENT OF REVOLVING
LINE OF CREDIT PROMISSORY NOTE PAGE 3
<PAGE> 1
EXHIBIT 10.3
RESTRICTIVE LEGEND
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER ANY STATE SECURITIES LAWS (COLLECTIVELY THE "ACTS") AND THEREFORE IS A
"RESTRICTED SECURITY" WITHIN THE MEANING OF SAID ACTS. THIS NOTE MAY NOT BE
OFFERED, SOLD, EXCHANGED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF: (1) A REGISTRATION STATEMENT BEING THEN IN EFFECT UNDER THE
APPLICABLE ACTS; OR (2) A WRITTEN OPINION OF COUNSEL, ACCEPTABLE TO THE MAKER,
THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACTS IS AVAILABLE. THE HOLDER OF
THIS NOTE, BY ITS ACCEPTANCE HEREOF, REPRESENTS THAT IT IS ACQUIRING THIS NOTE
FOR INVESTMENT AND NOT WITH A VIEW TO ANY SALE OR DISTRIBUTION THEREOF.
THIS NOTE SHALL NOT BE TRANSFERRED UPON THE MAKER'S BOOKS AND RECORDS EXCEPT
UPON COMPLIANCE WITH THE FOREGOING AND THE TERMS OF THIS NOTE.
THE WMA CORPORATION
July 30 , 1999
FIVE YEAR TERM NOTE
Due July 29, 2004
$5,000,000.00
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, THE WMA CORPORATION, a Delaware
corporation (hereinafter referred to as "Maker"), promises to pay on or before
July 29, 2004 (the "Maturity Date") to the order of MONEY SERVICES, INC., a
Delaware corporation (hereinafter referred to as "Payee"; Payee, and any
subsequent holder(s) hereof, being hereinafter referred to collectively as
"Holder"), without grace except as otherwise provided herein, at the office of
Payee at Cedar Rapids, Iowa, or at such other place as Holder may designate to
Maker in writing from time to time, the principal amount of Five Million and
00/100s ($5,000,000.00) Dollars, together with simple interest on so much
thereof as is from time to time outstanding and unpaid, from the date hereof,
payable at the rate of seven and one-half percent (7 1/2%) per annum (except as
hereinafter provided in the event of redemption), on the twenty ninth day of
each succeeding January and July through and including the Maturity Date, in
lawful money of the United States of America, which shall at the time of payment
be legal tender in payment of all debts and dues, public and private.
Conversion. The Holder of this Note may, at any time after December 31,
1999 and prior to the Maturity Date, convert the then outstanding principal
balance of this Note into common stock of the Maker. The number of shares of
common stock of the Maker which may be obtained upon conversion per each $100.00
of principal amount of the Note then outstanding shall be the greater of (a)
4.17 shares;
<PAGE> 2
or (b) 62.5 divided by the average price per share of common stock sold by Maker
in private placements of its common stock in 1999 ("applicable conversion
ratio"); provided that if the Maker has called this Note for redemption, the
right to convert shall terminate at the close of business on the second business
day prior to the day fixed as the date for the redemption.
To convert this Note, the Holder must surrender the same at the office
of the Maker, accompanied by a written notice of conversion and by a written
instrument of transfer in a form satisfactory to the Maker, properly completed
and executed by the registered Holder hereof or a duly authorized attorney.
Fractional Shares. In lieu of issuing any fraction of a share or scrip
upon the conversion of this Note, the Maker shall pay to the Holder hereof, for
any fraction of a share otherwise issuable upon the conversion, cash equal to
the value of the fractional share based upon the applicable conversion ratio.
Adjustments to conversion. If the Maker at any time pays to the Holder
of its common stock a dividend in common stock, the number of shares of common
stock issuable upon the conversion of this Note shall be proportionally
increased, effective at the close of business on the record date for
determination of the Holder of the common stock entitled to the dividend.
If the Maker, at any time subdivides or combines in a larger or smaller
number of shares its outstanding shares of common stock, then the number of
shares of common stock issuable upon the conversion of this Note shall be
proportionally increased in the case of a subdivision and decreased in the case
of a combination, effective in either case at the close of business on the date
that the subdivision or combination becomes effective.
If the Maker is recapitalized, consolidated with or merged into any
other corporation, or sells or conveys to any other corporation all or
substantially all of its property as an entity, provision shall be made as part
of the terms of any such transaction so that the Holder of this Note may
receive, in lieu of the common stock otherwise issuable to them upon conversion
hereof, at the same conversion ratio, the same kind and amount of securities or
assets as may be distributable upon the recapitalization, consolidation, merger,
sale, or conveyance with respect to the common stock.
Redemption. This Note may be redeemed after July 29, 2002, in whole or
in part, at Maker's option, at any time thereafter, at the office of the Maker,
upon the notice referred to below, at the redemption price (expressed in
percentages of the principal amount of the Note) which shall include all accrued
but unpaid interest to the date of redemption. In the event this Note is
redeemed prior to the Maturity Date, interest shall accrue on the outstanding
principal amount from the date hereof through the date of redemption at the rate
of nine percent (9%) per annum. All unpaid accrued interest, together with the
then outstanding principal balance, shall be due and payable on the date of
redemption.
The following table sets forth the redemption price as of the dates
indicated, but such price does not include any accrued interest [at the stated
rate of seven and one-half percent (7 1/2%)], due and
THE WMA CORPORATION
FIVE YEAR TERM NOTE PAGE 2
<PAGE> 3
unpaid, which unpaid interest must also be paid in full together with the
redemption price obtained by interpolation from the following table.
<TABLE>
<CAPTION>
Redemption Dates: Redemption Price
(Percentage of Principal Amount):
<S> <C>
July 30, 2002...................................................................................................105.04
January 29, 2003................................................................................................106.01
July 29, 2003...................................................................................................107.04
January 29, 2004................................................................................................108.10
July 28, 2004...................................................................................................109.22
July 29, 2004...................................................................................................100.00
</TABLE>
Notice of Redemption, etc.. Notice of redemption shall be mailed to the
Holder of the Note not less than 30 nor more than 60 days prior to the date
fixed for redemption at the last address appearing upon the records of the
Maker. If this Note is redeemed in part, the Maker shall, without charge to the
Holder of hereof, either (1) execute and deliver to the Holder a note for the
unredeemed balance of the principal amount hereof, or (2) make note hereon of
the principal amount called for redemption and redeemed, upon surrender of this
Note at the office of the Maker. Following the date fixed for redemption,
interest shall be payable only on the portion of this Note not called for
redemption.
Exchange. The Holder of this Note may, at any time on or before the
Maturity Date or the date fixed for its redemption, by surrendering this Note to
the Maker at its office, exchange this Note for another Note or Notes of a like
principal amount and of like tenor, date and maturity in denominations of
$1,000,000 or any multiple of that amount.
Transfer. This Note may be transferred only at the office of the Maker
by the surrender hereof for cancellation, and upon the payment of any stamp tax
or other governmental charge connected with the transfer. If this Note is
transferred, a new Note or Notes of like tenor, date and maturity shall be
issued to the transferee.
Registered owner. The Maker may treat the person whose name appears
hereon or the transferee thereof as provided above, as the absolute owner of
this Note for the purpose of receiving payment of, or on account of, the
principal and interest due on this Note and for all other purposes, and it shall
not be affected by any notice to the contrary.
Default. It is hereby expressly agreed that should any default be made
in the payment of principal or interest as stipulated above, then after the
expiration of any applicable grace period, and in such event, the principal
indebtedness evidenced hereby, together with all unpaid interest accrued
thereon, shall, at the option of Holder and without further notice to Maker, at
once become due and payable and may be collected forthwith, regardless of the
stipulated Maturity Date. If the Maker shall fail to make timely payment of
principal or interest on this Note, such failure shall constitute a default
hereunder. Maker shall have five (5) business days following receipt of written
notice thereof from Holder arising out of
THE WMA CORPORATION
FIVE YEAR TERM NOTE PAGE 3
<PAGE> 4
the non-payment of money within which to cure such default. After the expiration
of such notice and cure period, interest shall accrue on the outstanding
principal balance of this Note and for so long as such default continues,
regardless of whether or not there has been an acceleration of the indebtedness
evidenced hereby as set forth herein, at the rate equal to the maximum rate
allowed to be charged Maker under Iowa law, or, in the event no such maximum
rate is then established, at the rate of eighteen (18%) percent per annum. All
such interest shall be paid at the time of and as a condition precedent to the
curing of any such default. Time is of the essence of this Note. In the event
this Note, or any part hereof, is collected by or through an attorney-at-law,
Maker agrees to pay all costs of collection including, but not limited to,
reasonable attorneys' fees actually incurred by Holder.
Waivers. Presentment for payment, demand, protest and notice of demand,
protest and non-payment and all other notices are hereby waived by Maker. No
failure to accelerate the debt evidenced hereby by reason of default hereunder,
acceptance of a past due interest payment, or indulgences granted from time to
time shall be construed (i) as a novation of this Note or as a reinstatement of
the indebtedness evidenced hereby or as a waiver of such right of acceleration
or of the right of Holder hereafter to insist upon strict compliance with the
terms of this Note, or (ii) to prevent the exercise of such right of
acceleration or any other right granted hereunder or by the laws of the State of
Iowa; and Maker hereby expressly waives the benefit of any statute or rule of
law or equity now provided, or which may hereafter be provided, which would
produce a result contrary to or in conflict with the foregoing. No extension of
the time for the payment of this Note or any interest payment due hereunder,
made by agreement with any person now or hereafter liable for the payment of
this Note shall operate to release, discharge, modify, change, or affect the
original liability of Maker under this Note, either in whole or in part, unless
Holder agrees otherwise in writing. This Note may not be changed orally, but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification, or discharge is sought.
Enforceability. If from any circumstances whatsoever, fulfillment of
any provision of this Note or of any other instrument evidencing or securing the
indebtedness evidenced hereby, at the time performance of such provision shall
be due, shall involve transcending the limit of validity presently prescribed by
any applicable usury statute or any other applicable law, with regard to
obligations of like character and amount, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, so that in no event
shall any exaction be possible under this Note or under any other instrument
evidencing or securing the indebtedness evidenced hereby, that is in excess of
the current limit of such validity, but such obligation shall be fulfilled to
the limit of such validity. This Note shall be binding upon and enure to the
benefit of Maker and Holder, their respective successors, legal representatives
and assigns, whether by voluntary action of the parties or by operation of law.
Applicable Law. This Note is intended as a contract under and shall be
construed and enforceable in accordance with the laws of the State of Iowa.
Maker hereby submits to personal jurisdiction in the County of Linn, State of
Iowa for the enforcement of this Note.
Notice. All notices required to be given under the terms of this Note
shall be address:
THE WMA CORPORATION
FIVE YEAR TERM NOTE PAGE 4
<PAGE> 5
To Maker at: The WMA Corporation
11315 Johns Creek Parkway
Duluth, Georgia 30097
Attention: S. Hubert Humphrey, Jr.
To Holder at: Money Services, Inc.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
Attention: General Counsel
IN WITNESS WHEREOF, Maker has caused this Note to be executed under
Seal on the date first above written.
THE WMA CORPORATION,
a Delaware corporation
By: /s/ Thomas W. Montgomery
-------------------------------
Thomas W. Montgomery
Executive Vice President
(CORPORATE SEAL)
THE WMA CORPORATION
FIVE YEAR TERM NOTE PAGE 5
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WMA CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 2,091,718
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,091,718
<CASH> 2,711,102
<RECOVER-REINSURE> 299,524
<DEFERRED-ACQUISITION> 58,330,715
<TOTAL-ASSETS> 64,140,247
<POLICY-LOSSES> 4,651,435
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 10,303,562
0
0
<COMMON> 2,500
<OTHER-SE> 27,479,340
<TOTAL-LIABILITY-AND-EQUITY> 64,140,247
6,186,176
<INVESTMENT-INCOME> 380,243
<INVESTMENT-GAINS> (123,299)
<OTHER-INCOME> 10,893,157
<BENEFITS> 3,421,008
<UNDERWRITING-AMORTIZATION> 3,371,907
<UNDERWRITING-OTHER> 3,736,775
<INCOME-PRETAX> 5,109,604
<INCOME-TAX> 1,737,265
<INCOME-CONTINUING> 3,372,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,372,339
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
