<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934
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
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For the transition period from to
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Commission file number 0-23637
THE WMA CORPORATION
(Name of small business issuer in its charter)
Delaware 58-2179041
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11315 Johns Creek Parkway, Duluth, Georgia 30097
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(Address of principal executive offices)
Issuer's telephone number: (770) 248-3311
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock - Par Value $.001
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None
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(Title of class)
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to be best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes X No
The issuer's revenues for 1998 were $12,597,024.
At March 12, 1999, there were 2,495,010 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates computed on the basis of the price at which the stock was sold
was $19,950,100. There is no established market for the shares of common stock.
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TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1 Description of Business 1
ITEM 2 Description of Property 13
ITEM 3 Legal Proceedings 13
ITEM 4 Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5 Market for Common Equity and Related Stockholder Matters 14
ITEM 6 Management's Discussion and Analysis or Plan of Operation 14
ITEM 7 Financial Statements 29
ITEM 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54
PART III
ITEM 9 Directors, Executive Officers, Promoters and Control Persons, Compliance With Sections 16(a) of the
Exchange Act 54
ITEM 10 Executive Compensation 57
ITEM 11 Security Ownership of Certain Beneficial Owners and Management 60
ITEM 12 Certain Relationships and Related Transactions 60
ITEM 13 Exhibits and Reports on Form 8-K 64
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
The WMA Corporation (the "Company") was formed March 9, 1995 by S.
Hubert Humphrey, Jr. ("Mr. Humphrey") under Delaware law under the name WMA
International Corporation. On March 3, 1998, the Company's stockholders approved
the change of its corporate name to The WMA Corporation. The Company owns 100%
of the outstanding stock of WMA Life Insurance Company Limited, a Bermuda life
insurance corporation formed August 2, 1995 ("WMA Life"). The Company also owns
100% of the outstanding stock of WMA Life Holding, Ltd. ("Holding"), a Bermuda
corporation. In December of 1998, Holding was placed in voluntary liquidation in
Bermuda as it had no significant business operations. In January 1999, Holding
was dissolved in Bermuda and net assets in the amount of $7,957 were paid to the
Company. As used in this document, the "Company" means The WMA Corporation and,
unless the context requires otherwise, WMA Life.
The Company, through WMA Life, provides reinsurance for certain life
insurance companies on variable universal life insurance ("VUL") and variable
annuity policies sold through World Marketing Alliance, Inc., a Georgia
corporation, which operates a multi-product independent insurance agency. World
Marketing Alliance, Inc., and certain entities and persons, with which it is
associated primarily for licensing purposes, are referred to herein as "WMA
Agency", unless the context indicates otherwise. Where sales associates of WMA
Agency ("WMA Sales Associates") are required to hold securities licenses for the
sale of variable annuity and VUL products, they become licensed as registered
representatives of WMA Securities, Inc. ("WMA Securities"), a registered
securities broker. S. Hubert Humphrey, Jr. owns substantially all of WMA Agency
and all of WMA Securities. Mr. Humphrey, the Company's president, also
beneficially owns approximately 36.1% of the Company's Common Stock.
The Company commenced reinsurance operations near the end of the second
quarter of 1996. Through 1997, the Company primarily reinsured death benefits
thereby reinsuring mortality risks on VUL policies, but in 1998 it expanded its
most significant reinsurance relationship to assume more of the benefits and
risks associated with the underlying policies. The Company generally now
participates proportionately in the reinsured VUL and variable annuity products
on the same basis as the Ceding Life Companies. In reinsuring these additional
benefits, the Company has increased its insurance risk exposure concerning
mortality, persistency, and investment risk.
The Company has reinsurance agreements with Western Reserve Life
Assurance Company of Ohio ("Western Reserve"), Kemper Investors Life Insurance
Company ("Kemper"), and American Skandia Life Assurance Corporation ("American
Skandia"), all of which are hereinafter collectively referred to as the "Ceding
Life Companies." The Company's largest reinsurance relationship is with Western
Reserve.
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For the year ended December 31, 1998, the Company earned $2.24 million
on revenues of $12.60 million. Total assets and stockholders' equity at December
31, 1998 were $44.88 million and $24.37 million, respectively. As of December
31, 1998, the Company reinsured over 218,000 life insurance and annuity policies
and riders and had life reinsurance in force with an aggregate face value of
$6.12 billion.
The Company was formed principally to provide an opportunity for WMA
Sales Associates to participate indirectly in certain business produced by WMA
Agency. The Company believes that WMA Sales Associates who have an equity
interest in the Company have a greater incentive to place profitable and
persistent business with life insurers whose policies are reinsured by the
Company. To enable certain WMA Sales Associates to purchase the Company's common
stock in its 1995 registered, non-underwritten offering, WMA Agency loaned them
funds to acquire such shares. These shares have been pledged with WMA Agency as
security for these loans and voting proxies have been executed in favor of WMA
Agency. Since Mr. Humphrey owns substantially all of WMA Agency, he is deemed to
beneficially own the 400,311 shares of the Company's common stock pledged as
collateral for these loans. As of December 31, 1998, the outstanding balance of
these loans was $1,117,451. These loans are payable from the borrower's personal
funds in 60 equal monthly installments of principal and interest, in accordance
with the terms of the loans. As of December 31, 1998, WMA Sales Associates and
employees of WMA Agency beneficially and directly owned substantially all of the
outstanding Common Stock of the Company.
Policies Reinsured
The Company, to date, has derived substantially all of its life
insurance reinsurance revenues from VUL policies issued by Western Reserve and
all of its annuity reinsurance revenues from variable annuities issued by
American Skandia and Western Reserve. The Company currently reinsures only VUL
and variable annuity policies and associated riders.
- VUL is a flexible premium adjustable life insurance plan that
offers a form of permanent insurance to the policyholder but
also enables the policyholder, within certain limitations, to
change the face amount or death benefit of the policy and the
timing of the premium payments to meet the policyholder's
situation, even after the policy is written. The death
benefits and cash values in VUL policies vary to reflect
investment experience of a separate account (i.e., a separate
pool of assets, typically mutual funds). The policyholder may
specify, within limits and from time to time, where the assets
in the separate account are to be invested. The policy may
have a guaranteed minimum death benefit while cash values vary
with the investment performance of the separate account. In a
VUL policy, the investment risk is passed on to the
policyholder. From the premium paid by the policyholder, the
insurance company deducts charges for the cost of the
mortality risk and administrative expenses. The balance is
placed in the separate account for investment in accordance
with the policyholder's direction. The net amount of risk on a
VUL policy is often defined as the difference between the
specified face amount of insurance and the value of the assets
in the separate account at any given time.
<PAGE> 5
- Variable annuity contracts provide for flexible premium
payments and guarantee that the annuitant will receive a
series of periodic payments commencing at a specified date.
The amount of the deferred annuity cash values will vary in
accordance with the investment experience of the separate
account much in the same manner as the separate account in a
VUL policy. Variable annuities may provide a guaranteed
minimum death benefit prior to the commencement of annuity
benefit payments.
Types of Reinsurance Arrangements
The Company currently writes three types of reinsurance: monthly
renewable term ("MRT"), coinsurance and modified coinsurance ("ModCo"). During
1998, the Company began reinsuring variable annuity and VUL policies issued by
Western Reserve, on business sold through WMA Agency, on a coinsurance and ModCo
basis.
Monthly Renewable Term. MRT, also referred to as risk premium
reinsurance, is a plan of reinsurance in which the premium rates are not
directly related to the premium rates on the original plan of insurance. Under
MRT reinsurance, the Ceding Life Company reinsures the mortality risk with the
Company. The amount reinsured in any one month is not based on the face amount
of the policy, but rather on a net amount of risk. The net amount of risk is
typically defined as the difference between the death benefit and cash value of
a policy. The Ceding Life Company retains responsibility for establishing the
policy reserves as well as for the payment of all policy benefits, commissions,
and expenses involved in issuing and maintaining the business.
The Company is also subject to a persistency risk, although not part of
the risk transferred. Persistency risk is associated with the possibility that
the Company may not be able to recover its acquisition expenses during the life
of the policies. MRT reinsurance involves limited investment risk, no cash
surrender risk, no policy loans, and little cash strain compared to other forms
of reinsurance.
Coinsurance. Under coinsurance arrangements, reinsurance risk is ceded
to the Company on essentially the same basis as that of the underlying policies
reinsured. The Company receives a proportionate share of gross premiums from the
Ceding Life Companies. The Company then provides expense allowances to the
Ceding Life Companies in recognition of commissions and other expenses
associated with the reinsured policies. These other expenses relate to costs
associated with underwriting, marketing, policy issue and maintenance. The
reserve on the ceded portion of the policy is an obligation of, and held by, the
Company.
Modified Coinsurance. ModCo is a variation of coinsurance. ModCo is
similar to coinsurance except that reserves and assets related to the reserves
that would otherwise be recorded and held by the Company are retained by the
Ceding Life Company. ModCo reinsurance is used primarily for products that
develop cash values, which permits the Ceding Life Company to retain the
associated assets for investment purposes. Under ModCo, the mortality 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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Reinsurance Relationships
The Company provides reinsurance for VUL and variable annuity policies
issued by the Ceding Life Companies and sold through WMA Agency. The following
table indicates the names and types of insurance products currently reinsured by
the Company, the Ceding Life Companies that issue the policies underlying the
reinsurance, and the type of reinsurance applicable to each.
<TABLE>
<CAPTION>
REINSURANCE
NAME OF PRODUCT PRODUCT REINSURANCE INITIAL POLICY COMMENCEMENT
COMPANY REINSURED TYPE TYPE ISSUE DATES DATE
- ------- --------- ---- ---- ----------- ----
<S> <C> <C> <C> <C> <C>
Western Reserve Freedom Equity VUL MRT 1992 to present 7/96
Protector
Western Reserve Financial Freedom VUL MRT 8/97 to 3/98 8/97
Builder
Western Reserve Financial Freedom VUL Coinsurance and ModCo 4/98 to present 4/98
Builder
Western Reserve Freedom Wealth Creator Variable Annuity Coinsurance and ModCo 1/98 to present 1/98
American Skandia Imperium Variable Annuity ModCo 1/97 to present 1/97
Kemper Power VUL VUL MRT 10/96 to present 10/96
</TABLE>
The Company entered into two new reinsurance agreements with Western
Reserve in 1998. The reinsurance written by the Company is on a coinsurance
basis, except the separate accounts of such policies which are reinsured on a
ModCo basis. This type of reinsurance allows the Company to participate in
earnings arising principally from mortality and expense charges, cost of
insurance charges, sales charges associated with surrenders, credited interest
rate spreads, administrative charges and asset based allowances. Effective
January 1, 1998, WMA Life commenced reinsuring, on a coinsurance and modified
coinsurance basis with Western Reserve, 40% of all Freedom Wealth Creator
variable annuity policies sold through WMA Agency. Effective April 1, 1998, WMA
Life commenced reinsuring, on a coinsurance and modified coinsurance basis with
Western Reserve, 20% of all Financial Freedom Builder VUL policies sold through
WMA Agency issued April 1, 1998 and after. Financial Freedom Builder VUL
policies previously reinsured on a MRT basis will continue to remain in force.
If the volume of business written through WMA Agency increases or decreases in
subsequent years, the percentages reinsured may change.
As to reinsurance in force, the new Western Reserve agreements are
unlimited as to their duration and shall remain in effect for so long as the
reinsured policies remain in force. As to the reinsurance of new business, the
agreements have a five-year term. Thereafter, the agreements may be canceled as
to the reinsurance of any new business (i) immediately upon notice by one party
if the other party becomes insolvent, dissolves, ceases to legally exist, or
otherwise ceases to be legally authorized to act as a reinsurer or insurer; (ii)
upon thirty (30) days written notice by a party if the other party has
materially breached the agreement and has failed to cure such breach within such
thirty (30) days; and (iii) when and as agreed upon by the parties in writing.
Either party can also cancel the agreement for any reason after the initial
five-year term, upon giving the other party three hundred sixty five (365) days
advance written notice of cancellation.
<PAGE> 7
Under the new Western Reserve agreements, none of the policies
reinsured under the new agreements are subject to recapture until after a policy
has been in force for thirty-five (35) years after its issuance, except any
annuity contract that has gone into pay-out status or annuitizes, in which event
the Company must pay the reinsured an amount equal to the annuity contract's
annuity value reduced by contingent deferred sales charges specified in the
annuity contract. The process of recapture enables a ceding company to remove
from the reinsurance agreement policies that have been previously ceded to the
reinsurer.
Marketing -- WMA Agency
All of the Company's reinsurance business is generated by the marketing
efforts of WMA Agency, which places business with the Ceding Life Companies. The
Company does not use reinsurance intermediaries or engage in any direct
marketing activities. As a consequence, the Company is dependent upon and
benefits from WMA Agency marketing those products which the Company reinsures.
World Marketing Alliance, Inc. is an independent entity separate and apart from
the Company. During 1998, the Company entered into a Directed Reinsurance
Agreement with WMA Agency which provides that WMA Agency will use its best
efforts to cause the life insurance companies with which it has selling
agreements to enter into reinsurance agreements with the Company covering the
life insurance and annuity products sold through WMA Agency.
As of December 31, 1998, WMA Agency, which began operations in January
of 1991, had 252 employees. As of December 31, 1998, WMA Securities, which began
operations in 1994, had 55 employees. Both companies are located in Duluth,
Georgia, a northern suburb of Atlanta. WMA Agency currently markets a variety of
life insurance and annuity products in addition to VUL and variable annuities.
These products include ordinary life, term life, variable life, universal life,
fixed annuities, equity-indexed annuities, long term care, disability and health
insurance. WMA Agency markets products for numerous life insurance and annuity
companies, among them Kemper, Western Reserve, American Skandia, Fortis Benefits
Investors, Inc., The Midland Life Insurance Company and Pacific Life Insurance
Company.
In 1998, the majority of the Company's reinsurance business was ceded
by Western Reserve. According to information provided by Western Reserve to WMA
Agency for the year 1998, over 64% of the VUL premiums from policies sold by WMA
Agency for Western Reserve came from five states, with 46% coming from
California alone. Similarly, in 1998 over 56% of all variable annuity premiums
from policies sold by WMA Agency for Western Reserve came from five states, with
almost 32% coming from California alone. The Company believes its geographic
distribution of business reinsured bears a similar relationship to WMA Agency's
business.
WMA Agency emphasizes recruiting and team building as a means for WMA
Sales Associates to build their own independent sales organizations. WMA Agency
provides all new WMA Sales Associates with business material such as the
Business Format System(C), which
<PAGE> 8
includes manuals, video tapes and audio tapes instructing WMA Sales Associates
on how to build a large sales organization.
In order to sell VUL and variable annuity products, WMA Sales
Associates must have reasonable grounds for believing that the purchase of such
a product is suitable for the customer based on the facts disclosed by the
customer. WMA Sales Associates use a New Account Agreement in connection with
the sale of products to any customer which provides information with respect to
the customer's financial situation and investment objectives. As part of an
initiative to strengthen its compliance and supervisory program (discussed
below), WMA Securities has recently developed a new set of suitability
guidelines. WMA Sales Associates will be required to utilize these new
guidelines to identify a number of specific factors to be considered in
determining product suitability, including the customer's need for insurance
coverage, age, investment objectives, risk tolerance, financial condition,
existing investment products owned, relationships with other broker-dealers, and
occupation. Although customers' applications for VUL and variable annuity
products submitted by WMA Sales Associates are reviewed by registered
principals, a significant percentage are also reviewed by WMA Securities' home
office personnel to determine whether WMA Sales associates are making proper
evaluations of suitability, to measure training initiatives, and develop trends
to establish future controls and procedures.
WMA Agency contractually controls all marketing and recruiting
literature, pay commissions to WMA Sales Associates and provides training
programs and product materials. WMA Agency also sponsors marketing meetings
throughout the year, an annual convention, incentive trips, and recognition
awards to WMA Sales Associates. The WMA Agency broadcasts a one and one-half
hour motivational and training program weekly via a satellite network. Many
product providers participate in these broadcasts.
Existing WMA Sales Associates recruit both experienced agents and also
individuals without prior experience in the life insurance business. Newly
licensed agents typically remain at their previous occupations until they
acquire sales experience and develop an established insurance income. As a
result, a large portion of the newly appointed WMA Sales Associates are
initially part-time agents.
Upon joining WMA Agency, a new WMA Sales Associate is required to enter
an agency training program which includes a number of courses related to product
training, sales compliance issues and financial service related topics. Most
levels of sales promotion require additional courses and training. Pre-licensing
classes for various state insurance licenses and securities licensing classes
are provided by independent parties approved by WMA Agency.
Regulation of WMA Agency. WMA Agency and WMA Securities are governed by
various regulations relating to the sale and marketing of insurance products and
securities, including VUL and variable annuities. The VUL and variable annuity
products marketed by WMA Agency are treated as securities under federal and
state laws. In order to sell these products, the WMA Sales Associates must be
individually licensed by the National Association of Securities Dealers ("NASD")
and must become affiliated with a registered securities broker-dealer. WMA
Securities is a registered broker-dealer having common ownership with WMA
<PAGE> 9
Agency. All of the WMA Sales Associates who are licensed to sell VUL and
variable annuity products are registered representatives of WMA Securities. WMA
Securities also markets mutual funds and discount brokerage services.
As a registered broker-dealer, WMA Securities operations are subject to
periodic examination and review by both the NASD and the Securities and Exchange
Commission ("SEC"), a federal agency. In September 1997, the Atlanta District
Office of the SEC examined the operations of WMA Securities. On February 3,
1998, WMA Securities received a letter from the SEC setting forth certain
alleged deficiencies and violations of the Securities Exchange Act of 1934
pertaining to net capital requirements, record keeping and other compliance
matters. In response to this letter, WMA Securities subsequently engaged a
consultant to make recommendations to WMA Securities on how to improve its
compliance practice and has notified the SEC in its response that it plans to
implement the consultant's recommendations. WMA Securities has already
implemented or has begun implementing, many of the consultant's recommendations.
It retained a second consulting firm to conduct a thorough review and assessment
of WMA Securities' compliance and supervisory program, including the initial
consultant's recommendations regarding such program. This firm will also be
advising WMA Securities as to what, if any, further steps that should be taken
to fully implement a program designed to improve WMA Securities' overall
compliance and supervisory procedures as well as remedy the deficiencies cited
by the SEC.
The Company understands that it is not the current policy of the SEC to
issue any written advice as to whether the steps taken by a recipient of a
deficiency letter to address alleged deficiencies are adequate or satisfactory;
therefore, it is unlikely that WMA Securities will receive any indication from
the SEC regarding the adequacy of the corrective action that it has taken or
intends to take, until the SEC conducts a subsequent examination of the
operations of WMA Securities and the alleged deficiencies contained in the
deficiency letter are no longer found to exist. WMA Securities cannot determine
when or if the SEC will conduct a subsequent examination of its operations nor
can it predict the outcome of such examination should it occur.
On May 21, 1998, the SEC issued a formal Order directed at certain
alleged activities of WMA Securities and persons employed by or associated with
WMA Securities. This investigation was initiated to determine whether any
federal securities laws had been violated. The Order alleges that such persons
or others acting in concert with them have, among other things, engaged in acts
or practices involving the sale and promotion of variable life insurance
products, variable annuities and mutual funds which were fraudulent and
deceptive. The Order also alleges that WMA Securities failed to supervise such
persons with a view to preventing the alleged violations. WMA Securities has
neither admitted nor denied the allegations contained in the Order and is
cooperating with the SEC in this investigation. Subpoenas have been issued
pursuant to the Order for the production of documents and the testimony of
several officers of WMA Agency and WMA Securities. If this investigation reveals
one or more violations of the federal securities laws, the Enforcement Division
may recommend the imposition of sanctions against WMA Securities and other
culpable parties. These sanctions, should they be imposed, could take various
forms, including but not limited to, the imposition of monetary penalties which
can be quite substantial depending upon the nature and severity of the
violation, heightened regulatory scrutiny by the SEC and NASD, and the temporary
suspension or
<PAGE> 10
permanent revocation of WMA Securities' registration or of the licenses of WMA
Sales Associates, resulting in the broker-dealer's inability to continue
operations.
There can be no assurance that the SEC's Enforcement Division, after
completing its investigation, will not seek to impose sanctions against WMA
Securities, which if substantial could impair the financial and operating
condition of WMA Securities. If WMA Sales Associates are no longer able to
maintain their licenses with WMA Securities, a disruption of the sale of new VUL
and variable annuity products would result until the WMA Sales Associates could
become registered with another broker-dealer. There can be no assurance,
however, that WMA Sales Associates could register with another broker-dealer or
that WMA Life could reinsure products sold through another broker-dealer.
Consequently, such 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 and WMA Sales Associates for the marketing of new VUL
and variable annuity policies which the Company may then reinsure.
State Investigations of WMA Agency and WMA Securities. In November
1998, WMA Securities entered into a Settlement and Consent Order with the State
of Arizona. Without admitting or denying the allegations, WMA Securities agreed
to a $100,000 administrative fine payable to the State of Arizona. WMA
Securities also agreed to reimburse approximately $1.95 million to 52
individuals who invested in a promissory note program. The promissory note
program was not authorized, approved nor sponsored by WMA Securities. Several
registered representatives in the Arizona branch office location marketed the
promissory notes without the knowledge of WMA Securities or their branch office
manager. WMA Securities had already begun implementing new procedures and
revisions to its current supervisory structure. Several of these enhancements
were specifically identified in the Order.
The California Department of Insurance has initiated an investigation
into the sales activities of certain former and current WMA Sales Associates in
California. The scope of this investigation relates to product suitability and
sales practices relating to the sale of VUL policies to residents of California.
WMA Agency and WMA Securities is cooperating fully with the investigation in an
effort to resolve this inquiry, which is still in the investigatory stage, as
quickly as possible. If the California Department of Insurance determines that
violations of its insurance laws have occurred, it could seek to impose
sanctions ranging from monetary penalties to license suspension or revocation,
or limitation on growth of new sales agents. Because California accounts for a
substantial amount of WMA Agency's total sales production, any sanctions imposed
could have an adverse effect on WMA Agency and the production of new business to
be reinsured by the Company.
The California Department of Corporations issued to WMA Agency, WMA
Securities, and WMA Investment Advisors, Inc. a Cease and Desist Order to
refrain from offers of franchises. WMA Agency, and affiliates, retained local
legal counsel to resolve the matter with the California Department of
Corporations, and contend they do not fall within the scope of franchise
regulations. Nevertheless, WMA Agency now charges a processing fee that falls
within safe harbor provisions of franchise regulations.
<PAGE> 11
Underwriting and Policy Administration
As an automatic treaty reinsurer, the Company relies upon the
underwriting of the Ceding Life Companies on policies that the Company
reinsures. The Company reviews and monitors the underwriting standards and
procedures of the Ceding Life Companies, including rules used for policy
continuations, changes, reentry's, restatements, and conversions.
The Ceding Life Companies administer policies reinsured by the Company
and provide the Company with all information necessary for processing the
reinsurance.
Future Policy Benefits
The provision for future policy benefits reflected in the Company's
Consolidated Financial Statements are calculated based on generally accepted
accounting principles ("GAAP"). Liabilities for future benefits under the MRT
agreements include provisions for expected future claims, claims in the course
of settlement and claims incurred but not reported. The liability is estimated
using methods that include assumptions, such as estimates of expected investment
yields, mortality, terminations, and expenses, applicable at the time the
reinsurance contracts are executed including provision for the risk of adverse
deviation.
Liabilities for future policy benefits under the Company's coinsurance
agreements equal its contractual percentage of each Ceding Life Company's
policyholder obligations, including claims in course of settlement and claims
incurred but not reported.
Liabilities for future policy benefits are reflected in the Company's
Consolidated Financial Statements and are based on information provided by the
Ceding Life Companies. The reserves established by the Company with respect to
individual risks or classes of business may be greater or less than those
established by ceding companies due to the use of different mortality and other
assumptions. Actual mortality experience in a particular period may be greater
than expected mortality experience and, consequently, may adversely affect the
Company's operating results for such period.
Retrocession
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.
As a partial hedge against the unpredictability of claims experience,
effective April 1, 1998 the Company entered into a pool retrocession agreement
simultaneously with the reinsurance of the Western Reserve VUL business on a
coinsurance and modified coinsurance basis. WMA Life retrocedes mortality risk
in excess of its retention limit. Standard mortality risks in excess of $100,000
per life will be retroceded to pool participants which include: American Phoenix
Life and Reassurance Company, Swiss Re Life & Health America, Inc., The Lincoln
National Life Insurance Company, and Transamerica Occidental Life Insurance
Company.
<PAGE> 12
Investments
The Company's investments are assets selected with the objective of
maximizing investment returns consistent with appropriate credit,
diversification, tax and regulatory considerations, while providing sufficient
liquidity to enable the Company to meet its obligations as a reinsurance company
on a timely basis.
The Company utilizes an independent investment advisor and manager, to
invest the Company's assets in accordance with the Company's investment
guidelines. The performance of, and the fees paid to, its investment advisor are
reviewed periodically by the Board of Directors of the Company. Prior to May
1998, the Company's investment manager was Falcon Asset Management, Inc.
("Falcon"). Falcon terminated upon a change-in-control of Falcon. The Company
engaged a new investment manager, Conning Asset Management, Inc. ("Conning") in
June 1998, to take over management of, and to provide advisory services
regarding, its investment portfolio. Neither Falcon nor Conning have any
affiliation with the Company, WMA Agency, or WMA Securities, nor is the Company
aware of any affiliation with the Ceding Life Companies. The performance of, and
the fees paid to its investment advisor are reviewed periodically by the Board
of Directors of the Company. The fees paid to its investment advisor during 1998
were $31,000.
Competition
The Company is dependent upon WMA Agency for marketing the VUL and
variable annuity products the Company reinsures. WMA Agency faces intense
competition in the sale of these products from the agency forces and marketing
organizations of major life insurance companies as well as from companies
marketing investment related products such as mutual funds. Many of WMA Agency's
competitors have substantially greater financial and marketing resources than
WMA Agency. The Company believes that many large insurance companies have begun
devoting significant resources to the development and marketing of VUL and
variable annuity products that directly compete with those products sold through
WMA Agency, which are reinsured by the Company.
Competition for sales agents with demonstrated ability is also intense.
However, the Company believes that WMA Agency has been, and will continue to be,
able to attract, motivate, and retain productive, independent sales agents by
providing innovative products and quality service.
The Company has made a decision to focus its energies on existing WMA
Agency relationships consistent with its business strategies, rather than
developing relationships with other independent entities. This decision has had
a positive impact on the Company in that it has been able to secure reinsurance
agreements more favorable than otherwise attainable due to the leverage it has
as a result of the WMA Agency relationship. As the Company becomes mature and
has more resources available to it, it will likely develop relationships with
non-WMA Agency related entities. At this time, however, the Company lacks the
resources to pursue such a strategy and believes it would be counterproductive
to do so.
<PAGE> 13
Regulation
Bermuda--Insurance Regulation
WMA Life is registered as a long-term insurer under the Insurance Act
1978, as Amended, (the "Insurance Act"), which expression includes the related
regulations promulgated under the said Act which, among other things, imposes on
Bermuda insurance companies solvency and liquidity standards and auditing and
reporting requirements and grants to the Minister of Finance (the "Minister")
powers to supervise, investigate and intervene in the affairs of insurance
companies. A long-term insurer is one which issues life, annuity or accident and
disability contracts for periods of not less than five years. Among the other
significant aspects of the Bermuda insurance regulatory framework are:
- An insurer's registration may be canceled by the Minister on
certain grounds specified in the Insurance Act, including
failure of the insurer to comply with its obligations under
the Insurance Act and, if, in the opinion of the Minister, the
insurer has not been carrying on business in accordance with
sound insurance principles.
- Every registered insurer must appoint an independent auditor
who will annually audit and report on the Statutory Financial
Statements and the Statutory Financial Return of the insurer,
both of which, in the case of WMA Life, are required to be
filed annually with the Registrar of Companies (the
"Registrar"), who is the chief administrative officer under
the Insurance Act. WMA Life's auditor is KPMG Peat Marwick
(Hamilton, Bermuda), the Bermuda "tenant" of KPMG LLP.
- WMA Life must appoint an actuary approved by the Minister and
file with the Annual Statutory Financial Return an actuarial
certificate in the prescribed form. Mr. Edward F. McKernan, an
officer of the Company and WMA Life, was approved August 7,
1995 by Minister of Finance as WMA Life's Actuary.
- An insurer must prepare Annual Statutory Financial Statements
which include, in statutory form, a balance sheet, income
statement, statement of capital and surplus and detailed notes
thereto.
- WMA Life is required to file with the Registrar a Statutory
Financial Return no later than four months from the insurer's
financial year end (unless specifically extended), which
includes, among other matters, a report of an approved
independent auditor on the Annual Statutory Financial
Statements of the insurer; solvency certificate; the Annual
Statutory Financial Statements themselves; and the opinion of
the approved Actuary.
- The Insurance Act requires WMA Life to have a minimum level of
statutory capital and surplus of $250,000. At December 31,
1998, WMA Life's statutory capital and surplus was $5,049,650.
In addition, the Insurance Act provides that the statutory
assets of WMA Life must exceed its statutory liabilities by at
least $250,000. Statutory assets and liabilities refer to
those assets and liabilities established in conformity with
the requirements of the Insurance Act for the statutory
balance sheet.
<PAGE> 14
- An insurer is required to maintain a principal office in
Bermuda and to appoint and maintain a Principal Representative
in Bermuda. WMA Life's Principal Representative and principal
office is CFM Insurance Mangers, Ltd., 3rd Floor, 44 Church
Street, Hamilton HM 12, Bermuda. Among the Principal
Representative's duties is to report to the Minister if the
Principal Representative believes it is likely that the
insurer for whom he acts may become insolvent or that a
reportable event has occurred.
- The payment of dividends by WMA Life to the Company is
restricted by Bermuda law. WMA Life may not declare or pay a
dividend or make a distribution out of contributed surplus if,
among other things, there are reasonable grounds for believing
that (a) WMA Life is, or would after the payment be, unable to
pay its liabilities as they become due; or (b) the realizable
value of WMA Life's assets would thereby be less than the
aggregate of its liabilities and its issued share capital and
share premium accounts. The amount available for distribution
of dividends at December 31, 1998 is $4,799,650. Additionally,
the amount available for distribution of dividends must be
supported by liquid assets. WMA Life meets the requirement as
the amount of invested assets and quoted investments and cash
was greater than $4,799,650.
United States
WMA Life is not admitted as authorized to do business in any state of
the United States. The insurance laws of each state of the United States do not
directly regulate the sale of reinsurance within their jurisdictions by alien
insurers, such as WMA Life. Nevertheless, the sale of reinsurance by alien
reinsurers, such as WMA Life, to insurance companies domiciled or licensed in
United States jurisdictions is indirectly regulated by state "credit for
reinsurance" laws that operate to deny statutory financial statement credit to
ceding insurers unless the alien reinsurer posts acceptable security for ceded
liabilities and agrees to certain contract provisions. The insurance laws of
United States jurisdictions generally exempt the business of reinsurance from
"doing business" laws. The Company does not believe that WMA Life is subject to
the insurance laws of any state in the United States.
Employees
During the first quarter of 1998, employees of WMA Agency performed the
Company's administrative functions. The Company paid WMA Agency a monthly
payroll allocation based upon the amount of time during which WMA Agency
employees provided services to the Company. In the second quarter of 1998, the
Company retained four employees from WMA Agency, two of whom are on a part-time
basis. In the last half of 1998, the Company hired two additional employees. The
Company anticipates hiring at least two employees during 1999.
<PAGE> 15
ITEM 2. DESCRIPTION OF PROPERTY.
As of February 1, 1998, the Company began subleasing, on a triple net
basis, approximately 1,500 square feet of office space in Duluth, Georgia from
WMA Agency through January 20, 2008, at a base annual rental rate of $12.45 per
square foot for the first five years of the lease term which is equivalent to
the rate being paid by WMA Agency to its lessor. This rate will increase by
approximately 13.5% during the last five years of the term. The triple net basis
requires the Company to pay, in addition to the stipulated base rent, its
proportionate share of the taxes, insurance and common area maintenance costs of
the office building. The annual base rent for this space during the first five
years is $18,675. The Company does not own or lease any other properties. Prior
to that date, the Company utilized office facilities in space provided to it by
WMA Agency.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1998, the Company was not a party to any litigation or
arbitration and is not aware of any litigation or arbitration, that is likely to
have a material adverse effect on the Company's consolidated financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 3, 1998, the Company's stockholders, at a special meeting,
approved a recommendation of the Company's Board of Directors to amend the
Company's Certificate of Incorporation to change the Company's name to "The WMA
Corporation" from WMA International Corporation. The vote was 1,777,079 shares
voting FOR the name change, 3,057 shares AGAINST, and 68,829 share votes were
withheld.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
No public trading market existed for the Company's common stock during
1998. In March 1998, the Company applied to the NASDAQ National Market to have
its stock quoted under the trading symbol WMAC. In March 1999, NASDAQ notified
the Company that the Company's application for listing would be closed due to
inactivity. The Company will receive a refund for all fees paid less the $1,000
non-refundable application fee.
At December 31, 1998, the Company had 2,495,010 shares of common stock
outstanding and approximately 800 stockholders of record.
The Company did not pay or declare a dividend in 1998.
<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following analysis of the consolidated results of operations and
financial condition of The WMA Corporation should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto, included
elsewhere herein.
Overview
The Company is a holding company, owning all of the outstanding capital
stock of WMA Life, a Bermuda life insurance corporation. WMA Life commenced
reinsurance operations at the end of the second quarter of 1996. WMA Life is
presently engaged in providing reinsurance to certain insurance companies with
respect to VUL and variable annuity policies sold through WMA Agency. WMA Agency
is separate from the Company.
All of the Company's reinsurance business is generated by the marketing
efforts of WMA Agency, which places business with the Ceding Life Companies. As
a consequence, the Company is dependent upon WMA Agency to market those
products, which the Company reinsures. The following tables show, by Ceding Life
Company, the percentage of WMA Agency business reinsured by the Company.
<TABLE>
<CAPTION>
Life Insurance Applications (1)
Ceding Life Company 1998 1997 1996
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Western Reserve 81% 85% 85%
American Skandia N/A N/A N/A
Kemper 4% 2% 0%
--- --- ---
Total Subject to Reinsurance 85% 87% 85%
Total Not Subject to Reinsurance 15% 13% 15%
--- --- ---
Total Applications Submitted 100% 100% 100%
Annuity Applications (1)
Ceding Life Company 1998 1997 1996
- ------------------- ---- ---- ----
Western Reserve 44% 0% 0%
American Skandia 16% 13% 0%
Kemper N/A N/A N/A
--- --- ---
Total Subject to Reinsurance 60% 13% 0%
Total Not Subject to Reinsurance 40% 87% 100%
--- --- ---
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, that WMA Agency monitors on a regular basis.
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
<PAGE> 17
illustrated by the above tables. The reasons WMA Life's revenue will diverge
from the relationships noted above include, but are not limited to, the nature,
mix and pricing of the products reinsured; the terms of the various reinsurance
agreements; and the prescribed generally accepted accounting for such products
and reinsurance structures.
Under a reinsurance agreement, the economic consequences of certain
insurance risks are transferred from the ceding company to the reinsurer.
Depending upon the type of reinsurance agreement, these risks may include:
mortality, persistency, expense, and investment. Key considerations in
evaluating the risks include: industry experience, the ceding company's pricing,
and assumptions, the type of product, the ceding 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. Financial activity between the Ceding Life
Companies and WMA Life is settled on either a monthly or quarterly basis in
accordance with the terms of the reinsurance agreements.
At December 31, 1998, WMA Life's reinsurance inforce on life insurance
policies including riders constituted 208,321 policies with an aggregate face
amount of $6.12 billion. This is an increase of 53,639 life insurance policies
and riders or 35% and $1.80 billion of inforce face amount, or 42% from December
31, 1997. The relative increase in the aggregate face amount is greater than the
increase in the number of life insurance policies and riders because a new
reinsurance agreement with Western Reserve provides for a specific quota share
percentage of each policy without limit; the MRT agreements limit the maximum
face amount per life to $30,000.
As of December 31, 1998, WMA Life had reinsurance in force with respect
to variable annuities for 10,028 policies with reinsured annuity contract
benefits of $157.70 million. This is an increase of 8,131 policies or 429% and
$126.81 million of annuity contracts benefits, or 411% from December 31, 1997.
The relative increase in the amount of annuity contract benefits is lower than
the increase in the number of annuity policies due to the smaller average policy
size of the new reinsured annuity business with Western Reserve.
The following table indicates the percentage of WMA Life's reinsurance
revenues derived from the Ceding Life Companies:
<TABLE>
<CAPTION>
Ceding Life Company 1998 1997 1996
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Western Reserve 89% 95% 100%
American Skandia 9 4 --
Kemper 2 1 --
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
<PAGE> 18
MRT Reinsurance
WMA Life's reinsurance indemnity agreements include two MRT agreements
relating to VUL policies. MRT reinsurance is a variation of Yearly Renewable
Term Insurance. The reinsurance of the VUL policies includes business previously
and currently being sold through WMA Agency and issued by Western Reserve and
Kemper. Under the MRT reinsurance agreements, WMA Life assumes a portion of the
mortality risk related to the VUL policies written by Western Reserve and
Kemper. WMA Life ceased reinsuring Financial Freedom Builder VUL policies sold
after March 31, 1998 on a MRT basis and commencing April 1, 1998, began
reinsuring Financial Freedom Builder policies on a coinsurance and modified
coinsurance basis. (See discussion under "Coinsurance and Modified Coinsurance"
below.) The Company will continue to reinsure, in accordance with the terms of
the MRT reinsurance agreement with Western Reserve, all Financial Freedom
Builder VUL policies issued prior to April 1, 1998 as long as those policies
remain in force. Settlements made under these agreements are made on a monthly
basis.
Coinsurance and Modified Coinsurance
WMA Life executed a reinsurance agreement on a ModCo basis with
American Skandia during July, 1997, providing for the reinsurance of a portion
of all Imperium variable annuity policies sold by WMA Agency commencing as of
January 1, 1997. The Imperium policies are products exclusively distributed and
sold by WMA Agency. WMA Life assumes a proportionate share of the insurance
risks and expenses and receives a proportionate share of the premiums or
revenues from the Imperium policies. The insurance risks include mortality,
lapses, and cash surrenders and investment risks. ModCo requires that the
reserves and assets related to the reserves that would otherwise be recorded and
held by the Company be retained by American Skandia. Settlement is made under
this agreement on a monthly basis.
Effective January 1, 1998, WMA Life commenced reinsurance on a
coinsurance and modified coinsurance basis with Western Reserve a portion of all
Freedom Wealth Creator variable annuity policies sold through WMA Agency. This
agreement enables the Company to participate in revenues arising principally
from mortality and expense charges, sales charges associated with surrenders,
credited interest rate spreads, administrative charges, and asset based
allowances. Settlement under this agreement is made on a quarterly basis.
Commencing April 1, 1998, WMA Life began reinsuring on a coinsurance
and modified coinsurance basis with Western Reserve a portion of all Financial
Freedom Builder VUL policies sold through WMA Agency. This agreement enables the
Company to participate in revenues arising principally from mortality and
expense charges, cost of insurance charges, sales charges associated with
surrenders, credited interest rate spreads, administrative charges, and asset
based allowances. Coincidental with this agreement, WMA Life ceased reinsuring
the Financial Freedom Builder VUL product on a MRT reinsurance basis for all
policies issued after March 31, 1998. The Company will continue to reinsure all
Financial Freedom Builder VUL policies currently inforce in accordance with the
terms of the MRT reinsurance agreement with Western Reserve. Settlement under
this agreement is made on a quarterly basis.
Under the above agreements with Western Reserve, the Company is
reinsuring such policies on a coinsurance basis, except the separate accounts of
such policies which are reinsured
<PAGE> 19
on a ModCo basis. Western Reserve initially ceded to WMA Life a 20% quota share
of the Financial Freedom Builder VUL policies effective April 1, 1998 and a 40%
quota share of the Freedom Wealth Creator variable annuity policies effective
January 1, 1998. The percentage of reinsurance to be ceded in subsequent years
will be determined before the close of each calendar year. This determination
will be based upon two factors: (i) the expected new or "first year" VUL
"target" premium and variable annuity premium to be collected by Western Reserve
written through WMA Agency for the ensuing calendar year, and (ii) total first
year VUL "target" premiums and variable annuity premium written through WMA
Agency with all insurance companies during a given year. The latter factor is
used to determine Western Reserve's market share of the total new VUL and
variable annuity premium or volume in a given year. VUL "target" premium is an
amount, specific to the insurance product, which varies by issue age, sex, and
issue class, that provides for basic insurance benefits coverage.
The Company's VUL reinsurance percentages will be 20%, 25%, 30%, 35%,
or 40% based on expected first year VUL collected target premium levels of
$50-149 million, $150-199 million, $200-249 million, $250-599 million, or $600
million or more, respectively. These reinsurance percentages will be reduced if
the percentage of Western Reserve's "market share" of WMA Agency first year VUL
collected target premium falls below certain thresholds. Western Reserve's
market share is measured by first year VUL target premium collected by Western
Reserve to total first year VUL target premium written by WMA Agency. These
market share thresholds are 90%, 85%, 80%, 75%, and 70% for first year VUL
collected target premium levels of $50-149 million, $150-199 million, $200-249
million, $250-350 million or more, respectively.
The reinsurance percentages may be reduced 5% for each full 10%
realized market share below the thresholds above. The VUL reinsurance
percentages may also be reduced to the extent WMA Agency's VUL first year target
premium production attributed to any insurance company, other than Western
Reserve, is greater than 10% of total VUL first year target premium written by
WMA Agency. The reinsurance percentage may be reduced 5% for each full 5% in
excess of the 10% limitation.
The Company's variable annuity reinsurance percentages will be 40% or
50% based on expected first year variable annuity collected premium levels of
$100-249 million or $250 million or more, respectively. These reinsurance
percentages may be reduced if the percentage of Western Reserve's market share
of WMA Agency first year variable annuity collected premium falls below certain
thresholds. Western Reserve's market share is measured by first year variable
annuity premiums collected by Western Reserve to total first year variable
annuity premiums written by WMA Agency. These market share thresholds are 45%
and 30% for first year variable annuity collected premium amounts of $100-249
million and $250 million or more, respectively. The reinsurance percentages may
be reduced 5% for each full 5% of realized market share below the thresholds
above, subject to a minimum reinsurance percentage of 25%. The variable annuity
reinsurance percentage may also be reduced 5% if WMA Agency's first year
variable annuity premium growth is 0% or less.
Due to the nature of the VUL and variable annuity products reinsured,
the Company is significantly insulated from the impact of changes in investment
yields as the policyholders retain virtually all of the investment risks.
However, on an overall basis, a decline in investment yields is expected to
cause a decrease in the Company's revenues under its ModCo agreements,
<PAGE> 20
as the account values upon which some of the Company's revenues are calculated
would presumably be lower. Accordingly, the Company's income (loss) before
income taxes will be smaller. Conversely, an increase in investment yields is
expected to have the opposite effect. If mortality experience is worse than
assumed (i.e., higher claims), it is expected to cause a decrease in current and
future revenues that would have otherwise resulted from the policies reinsured.
Conversely, if mortality experience is better than assumed (i.e., lower claims),
it is expected to cause an increase in current and future revenues that would
have otherwise resulted from the policies reinsured.
Accounting
WMA Life recognizes premiums as earned on MRT reinsurance for the
mortality risk reinsured. Reinsured policy revenues reflect policy mortality and
expense charges, policy administration charges, asset-based allowances and
deferred sales charges that have been assessed against the reinsured policy
account balances under the coinsurance and modified coinsurance agreements, as
they relate to universal life-type contracts.
Net investment income is the gross income earned from the invested
assets less the investment management expenses and custodial fees.
WMA Life also recognizes costs that vary with and are directly
associated with the acquisition of the reinsured policies. These costs include
actuarial, legal and accounting fees, and salaries and expenses incurred
directly by WMA Life and reinsurance commission and expense allowances paid to
the Ceding Life Companies in accordance with the reinsurance agreements. These
expenses are deferred to the extent that such costs are deemed recoverable from
future policy revenues in accordance with Generally Accepted Accounting
Principles ("GAAP") and are recorded as deferred acquisition costs on the
balance sheet. Deferred acquisition costs increased $23.04 million during the
year to $27.54 million at December 31, 1998.
Deferred acquisition costs are amortized over the lives of the
underlying policies (with regard to the terms of the reinsurance agreements).
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
provisions for risk of adverse deviation. Original assumptions continue to be
used in subsequent accounting periods to determine changes in the deferred
acquisition costs unless a premium deficiency exists. (A premium deficiency is
recognized if the sum of expected claim costs, unamortized acquisition costs,
and maintenance costs exceed related unearned premiums. A premium deficiency is
first recognized by charging any unamortized acquisition costs to expense to the
extent required to eliminate the deficiency. If the premium deficiency is
greater than unamortized acquisition costs, a liability shall be accrued for the
excess deficiency.) Although the Company is reinsuring on a coinsurance and
modified coinsurance basis with Western Reserve a portion of all Financial
Freedom Builder VUL policies previously reinsured on a MRT basis, policies
issued prior to April 1, 1998 will continue to be reinsured in accordance with
the MRT reinsurance agreement with Western Reserve. These changes do not result
in a premium deficiency.
<PAGE> 21
Under the coinsurance and modified coinsurance agreements, the
amortization of the deferred acquisition cost is in proportion to the ratio of
gross profits recognized during the then current period to total anticipated
gross profits. During each accounting period, assumptions used in calculating
the amortization of the Company's deferred acquisition expense reflect actual
experience for the then current accounting period. Management also reviews on a
periodic basis evolving experience with regard to the Company's assumptions
concerning future experience with regard to mortality, persistency, investment
yields and expenses in determining its estimates of future gross profits. To the
extent management believes variances from expected assumptions are permanent
rather than temporal, assumptions used with regard to future experience will be
changed. Upon adoption of any change in assumptions used with regard to future
experience, the amortization of the Company's deferred acquisition cost will be
recalculated and will be reflected during the then current accounting period.
With regard to the American Skandia ModCo reinsurance, death claims and
surrenders were greater than anticipated. However, the incidence of the excess
claims and surrenders occurred during a brief period, and subsequently returned
to expected levels. As a result of these observations, management believes the
temporary differences are anomalies and do not justify a change in assumptions
used with regard to future experience.
Variances in the Western Reserve variable annuity experience, with
regard to mortality and persistency, from assumed are relatively minor.
Collected expense charges were slightly greater than anticipated, but are
largely attributed to timing differences from the actual incidence expense
charges are recognized and that assumed in the Company's financial models.
Considering WMA Life has insufficient experience to suggest a change in its
assumptions, the Company will monitor the variations from the financial models
to establish historical trends. The increase in expense charges collected, over
that anticipated, had a positive impact on current period revenues, but also
resulted in a greater amortization of the Company's deferred acquisition expense
than would have otherwise occurred. The differences, however, are relatively
small (a net revenue increase of approximately $11,000) and is not considered
material to the Company's financial statements.
The Company's experience regarding the Western Reserve VUL business,
reinsured on a coinsurance and modified coinsurance basis, is very limited
(e.g., four to five months on average) to develop credible experience. Revenues
associated with the business are approximately $150,000 less than expected. This
difference is primarily attributed to collected surrender charges. However,
given the limited age of the policies reinsured, most of the "surrenders" during
this early period may be attributed to lapses which do not generate surrender
charges; "expected" results are more appropriately measured against a more
seasoned base of business.
To date, management believes the assumptions used regarding its
estimate for future gross profits are appropriate for its circumstances.
Life insurance claims settled and the increase in the liability for
future policy benefits, related to MRT reinsured VUL policies, are recorded as
Benefits, claims and settlement expenses on the Consolidated Financial
Statements. The liability for future policy benefits was $2.62 million at
December 31, 1998 compared to $1.29 million at December 31, 1997, an increase of
<PAGE> 22
$1.33 million or 103%. The liability at December 31, 1998 is comprised of two
components: the liabilities related to the coinsurance of variable annuity and
VUL policyholder obligations and liabilities under the Company's MRT reinsurance
agreements. The liability, with regard to the MRT reinsurance, which represents
the present value of future benefits to be paid and related expenses, less the
present value of future net premiums (that portion of the premium required to
provide for all benefits and expenses), is estimated using the same methods and
assumptions used to amortize the deferred acquisition costs under the MRT
agreements. Changes in the liability for future policy benefits that result from
the Company's periodic estimation for financial reporting purposes are
recognized in income in the period in which the change occurs. The liability for
the fixed account portions of the Western Reserve variable annuity and VUL
coinsurance agreements is equal to reinsured policy account balances.
Through year-end 1998, the Company's MRT reinsurance mortality
experience resulted in higher earnings due to fewer claims than otherwise
anticipated. Actual death claims were approximately 70% to 75% of expected death
claims assumed in calculating the Company's liabilities. However, due to the
Company's very limited experience, the results are not credible indicators of
future experience. It is not known whether the Company's experience is temporal,
due to normal random fluctuations, or permanent.
The Company's MRT reinsurance persistency experience, through year-end
1997, was approximately 5% to 10% better than anticipated. Although also subject
to a correction, the Company's persistency experience, through year-end 1998,
reversed and was worse than anticipated by less than 5%. The combined result of
the two years of experience is expected to have little impact on future revenues
from business inforce. However, due to the Company's very limited experience,
the results are not credible indicators of future experience. It is not known
whether the Company's experience is temporal, due to normal random fluctuations,
or permanent.
To date, management believes the assumptions used regarding its
liability for future policy benefits are appropriate for its circumstances.
Professional fees and other expenses include: expenses incurred for
salaries, actuarial, legal, and accounting services received. Amortization of
deferred organization costs and miscellaneous operating expenses are also
included.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997.
Revenues. The Company's revenues increased by $5.80 million, or 85%, to
$12.60 million for the twelve months ended December 31, 1998 from $6.80 million
for the same period in 1997. The increase was primarily attributable to the
coinsurance and modified coinsurance agreements WMA Life entered into with
American Skandia during 1997 and with Western Reserve in 1998. Further, a
revenue increase of $2.06 million was attributable to the growth in premiums
associated with the Western Reserve MRT agreement.
Premiums. Premiums increased by $2.06 million, or 40%, to $7.28 million
for the twelve months ended December 31, 1998 from $5.22 million for the same
period in 1997. The increase
<PAGE> 23
was attributable primarily to the growth in premiums associated with a MRT
reinsurance agreement WMA Life entered into with Western Reserve during the
second quarter of 1996, and to a much lesser extent to a MRT agreement executed
during the fourth quarter of 1996 with Kemper. Policies and riders reinsured on
a MRT basis increased by 1,599, or 1%, to 156,281 at December 31, 1998 from
154,682 at December 31, 1997. The increase in policies in force on a MRT basis
was relatively small due to the discontinuation of Financial Freedom Builder VUL
policies reinsured on a MRT basis and the lapsing of in force policies.
Management expects the MRT in force business to continue to decline as
policyholders terminate their policies either as a result of surrender or
premium lapse. Premium increases are attributable to the increasing duration of
policies inforce, because premiums increase with the advancing age of the
insureds, and the growth of business during 1997. A comparison of the rate of
increase in premiums to the increase in policies inforce will lead to
inconclusive results. Premiums reported for 1997 do not correspond to policies
inforce as of year-end 1997, but rather a block of business which grew at a rate
of 65% during 1997.
Reinsured Policy Revenues. Reinsured policy revenues increased by $3.90
million, to $4.10 million for the twelve months ended December 31, 1998 from
$195,000 for the same period in 1997. Reinsured policy revenues of $195,000 for
the twelve months ended December 31, 1997 were related to the variable annuity
ModCo agreement WMA Life executed with American Skandia during the third quarter
of 1997. Of the $4.10 million Reinsured policy revenues at the end of 1998,
$1.69 million was attributable to the variable annuity ModCo agreement with
American Skandia and to the variable annuity coinsurance and modified
coinsurance agreement WMA Life entered into with Western Reserve beginning
January 1, 1998 and $2.49 million was attributable to the VUL coinsurance and
modified coinsurance agreement WMA Life entered into with Western Reserve
beginning April 1, 1998. These revenues reflect policy cost of insurance
charges, mortality and expense charges, policy administration charges, asset
based allowances and deferred sales charges 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 and Net Realized Gains on Investments. Net
investment income decreased by $136,000, or 13%, to $951,000 for the twelve
months ended December 31, 1998 from $1.09 million for the same period in 1997.
Investment income is earned from the investment in securities (fixed income and
equity) and cash equivalents. Investment expenses of $52,000 and $65,000 for
1998 and 1997, respectively, related to investment advisor fees and custodial
fees, were netted with gross investment income excluding realized gains and
losses. The decrease in net investment income was primarily due to the reduction
in total investments resulting from the sale of fixed income securities in order
to pay the Ceding Life Companies for reinsurance expense allowances and
benefits. The principal components of these payments are attributable to the
Western Reserve VUL coinsurance and modified coinsurance agreement. The sale of
the fixed income and equity securities in 1998 resulted in an increase of
$267,000 of Net realized gains on investments. No investment securities were
sold in 1997 .
Benefits, Claims and Settlement Expenses. Benefits, claims and
settlement expenses increased by $1.03 million, or 43%, to $3.44 million for the
twelve months ended December 31, 1998 from $2.41 million for the same period in
1997. This increase primarily resulted from an increase in volume of in force
business. The amount of business in force at December 31, 1998,
<PAGE> 24
was $6.12 billion as compared to $4.32 billion at December 31, 1997, which
represented a $1.80 billion, or 42% increase.
The Company's profitability, in part, depends on the volume and amount
of death claims incurred. While death claims are reasonably predictable over a
period of many years, claims become less predictable over shorter periods and
are subject to fluctuation from quarter to quarter and year to year. Claims paid
plus those incurred during 1998 were approximately 5% to 10% lower than
otherwise expected based upon prior claims activity. Estimated additional net
income was $175,000 for the year due to this lower than expected claims
activity. Management believes this activity was unique to third quarter results
and is not indicative of future experience.
A retrocession pool agreement was entered into simultaneously with the
reinsurance of the Western Reserve VUL business on a coinsurance and modified
coinsurance basis. WMA Life retrocedes portions of the mortality risk in excess
of its retention limit. Standard mortality risks in excess of $100,000 per life
are retroceded to pool participants which include: American Phoenix Life and
Reinsurance Company, Swiss Re Life & Health America, Inc., The Lincoln National
Life Insurance Company, and Transamerica Occidental Life Insurance Company. The
retrocession agreement serves to reduce the impact of fluctuations in death
claims from quarter to quarter and year to year.
Reinsurance Premium Allowances, Net. Net reinsurance premium allowances
increased by $1.41 million, or 93%, to $2.92 million for the twelve months ended
December 31, 1998 from $1.51 million for the same period in 1997. 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 primarily related to the Company's share of
commissions, certain development costs and other expenses from such 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 Benefits, claims and
settlement expenses, the increase in net reinsurance premium allowances was due
to an increase in the volume of business 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, Net. Amortization of
deferred acquisition costs increased by $1.48 million to $1.54 million for the
twelve months ended December 31, 1998 from $64,000 for the same period in 1997.
The increase in amortization of deferred acquisition costs was attributable
primarily to increased revenues associated with business reinsured and with the
placement of new business.
The deferred acquisition cost balance is equal to the prior period
deferred acquisition cost balance, plus interest and acquisition costs
capitalized, less amortization as a function of premium revenue. Amortization of
deferred acquisition costs is equal to amortization as a function of premium
revenue, less interest capitalized. During 1997, interest capitalized was nearly
half of the amount of amortization as a function of premium revenue. As each
block of
<PAGE> 25
reinsured policies ages under the MRT reinsurance agreements, amortization as a
function of premium revenue will continue to exceed interest capitalized.
The increase in policy acquisition costs, consisting primarily of
commission and reinsurance expense allowances, under the VUL coinsurance and
modified coinsurance agreement as compared to that under the MRT agreement is
largely attributable to the relative differences in the gross premiums paid
under each agreement, respectively. First year gross premiums paid were $12.51
million under the VUL coinsurance agreement for the twelve month period ending
December 31, 1998 as compared to $1.85 million for first year MRT reinsurance
premiums paid for the same period.
Professional Fees, Management Fees, Consulting Fees, Interest Expense
and Other Expenses. Professional fees, management fees, consulting fees,
interest expense and other expenses increased by $819,000, or 171%, to $1.30
million for the twelve months ended December 31, 1998 from $480,000 for the same
period in 1997. Total expenses for each period included professional fees for
legal, actuarial and accounting expenses incurred, management fees to WMA
Management Services, Inc., consulting fees to World Marketing Alliance, Inc.,
operating expenses and other miscellaneous expenses.
The Company filed an application for a Registration Statement related
to a proposed subscription offering of its common stock during 1998. The Company
subsequently withdrew its application for the Registration Statement during the
fourth quarter of 1998. As a result of the withdrawal, the Company recognized
$343,000 of expenses, primarily relating to legal and accounting fees. These
expenses were related to the proposed offering and are not viewed as normal
operating expenses of the Company. The majority of the remaining expenses were
associated with an increase in the amount of reinsurance business activities and
expenses relating to the administration of the Company.
Management fees decreased during the year due to the termination of the
agreement with WMA Management Services, Inc. as of December 31, 1997. This
agreement was terminated because of the Company's expected employment of its own
personnel during 1998.
Consulting fees to WMA Agency consist of the funding of certain
operating and travel related expenses for the Company. During the first quarter
of 1998, WMA Agency employees performed the Company's administrative functions
until the Company completed the hiring of its employees. The Company paid WMA
Agency a monthly payroll allocation based upon the amount of time during which
WMA Agency employees provided services to the Company. The Company incurred
$352,000 in salaries and related expenses during this period and, due to the
employment of six persons, for the balance of 1998.
Effective February 1, 1998, the Company entered into 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. Effective April 1,
1998, the Company entered into 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 increased by $90,000 due to the interest incurred on
the short-term financing received from Money Services, Inc. (as discussed
below).
<PAGE> 26
Income Taxes. Income taxes increased by $341,000 to $1.16 million for
the twelve months ended December 31, 1998 from $816,000 for the same period in
1997. The Company's effective tax rate was 34% in 1998 and 35% in 1997.
Net Income. As a result of the foregoing, net income for the
twelve-month period ended December 31, 1998, was $2.24 million compared to $1.52
million for the twelve-month period ended December 31, 1997, an increase of
$720,000 or 47%.
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, the Company's Common Stock and short
term financing. Premiums are generally received in advance of related claims
payments. In addition to the need for cash flow to meet operating expenses, the
liquidity requirements of the Company relate primarily to the payment of gross
reinsurance allowances, operating expenses, investment purchases, and
reinsurance claims.
As a result of the coinsurance and modified coinsurance agreements with
Western Reserve, the Company requires substantially greater amounts of cash to
make payments to Western Reserve than it has been required to make under its MRT
agreement. Under the MRT reinsurance agreements, premiums vary in proportion to
expected mortality claims reinsured. The Company's cash inflows under the MRT
agreements equal premiums for the mortality risk reinsured. The Company's cash
outflows equal reinsurance expense allowances and death benefit claims. The
reinsurance expense allowances represent the Company's share of acquisition and
maintenance expenses incurred by the Ceding Life Company that are attributable
to the risks reinsured. With respect to the first policy year, the Company's net
cash outlay is approximately equal to death benefit claims because of the
expense allowance structure; thereafter, in renewal policy years, it is
anticipated no further cash outlays will occur because reinsurance expense
allowances are materially less as a function of premium.
Under the Western Reserve VUL coinsurance and modified coinsurance
agreement, since the Company is reinsuring risks on the same plan as that of the
original policy, reinsurance premiums are materially greater than premiums paid
on the MRT reinsurance--perhaps as much as fifteen times or more. During the
first year in which a policy is reinsured on a coinsurance basis, the Company is
required to reimburse Western Reserve for its share of acquisition costs,
including first year commissions and issuance expenses. Further, under modified
coinsurance, the Company will allow Western Reserve to retain assets related to
reserves in support of reinsured policy benefits (e.g., cash values).
Accordingly, because of the type of reinsurance and the plan reinsured, the net
cash outlays could be as much as, or more than, the first year premium paid.
In recognition of these liquidity requirements, during the first
quarter of 1998 the Company contributed additional capital to WMA Life through a
transfer of assets, and corresponding due and accrued investment income, with an
amortized cost of approximately $10.16 million. During the second and third
quarters of 1998, the Company liquidated its shorter duration fixed income
securities with an amortized cost of $8.16 million. During the fourth
<PAGE> 27
quarter of 1998, the Company liquidated its equity securities. During each of
the third and fourth quarters of 1998, the Company contributed an additional $5
million of cash to WMA Life each quarter from the proceeds of a loan under the
line of credit with Money Services, Inc. ("MSI"), a subsidiary of AEGON USA,
Inc. ("AEGON"). (See discussion of loan below.)
The Company's primary source of liquidity was $6.62 million in cash and
cash equivalents at December 31, 1998, an increase of $5.15 million from
December 31, 1997. The effective duration of the Company's fixed income
portfolio is just over five years, with over 83% of the fixed income securities
having a maturity of less than 10 years. The Company's fixed income portfolio
represents 100% of the total invested assets, and has an average quality rating
of Aa3 by Moody's. The effective duration of the Company's fixed income
portfolio has increased during 1998 due to the selling of the shorter duration
investments in order to pay the Ceding Life Companies for the reinsurance
expense allowances, benefits and claims.
The Company's cash requirements will also 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. Prior to 1998, the Company incurred no expense for
salaries and benefits because it had no employees. The Company has hired six
employees during 1998. The Company incurred no capital expenditures in 1997 or
1998.
For the period ended December 31, 1998, net cash flows used in
operating activities were $13.67 million, compared to net cash used in operating
activities of $560,000 for the period ended December 31, 1997. This increase is
due primarily to additional cash required to reimburse Western Reserve for
reinsurance allowances as a result of the VUL coinsurance and modified
coinsurance agreement executed during 1998 and to a lesser extent to the
variable annuity agreements with American Skandia and Western Reserve. Through
1997, the Company had MRT reinsurance agreements with Western Reserve and
Kemper, and a ModCo agreement with American Skandia. The Company has used its
invested assets during 1998 to reimburse the Ceding Life Companies for
allowances associated with the American Skandia and Western Reserve agreements.
The net cash provided by investing activities for the period ended December 31,
1998 was $8.85 million, compared to net cash used in investing activities of
$1.86 million for the period ended December 31, 1997. The Company received cash
from the issuance of common stock in the first quarter of 1997, which allowed
the Company to purchase additional investments. The net cash provided by
financing activities was $9.97 million for the period ended December 31, 1998
compared to net cash provided by financing activities of $1.91 million for the
period ended December 31, 1997. The Company purchased a small amount of stock
from its shareholders in the first six months of 1998 and during the third
quarter of 1997. The Company received short-term debt financing from MSI during
the third and fourth quarters of 1998 as discussed below.
On September 30, 1998, the Company entered into a $10 million line of
credit agreement with MSI pursuant to the terms of which the Company immediately
borrowed $5 million to cover its immediate cash needs. An additional $5 million
was drawn late in the fourth quarter of 1998. Borrowings under this line of
credit bear interest at the rate of 8% per annum through March 31, 1999,
increasing to 9% thereafter. All outstanding balances of principal and interest
<PAGE> 28
under this line of credit become due and payable on August 1,1999, unless
extended by the lender. This credit line and the borrowings thereunder became
necessary to fund payment obligations to Western Reserve required under the
coinsurance agreements. The Company had planned to finance these payments with
the proceeds of a proposed Subscription Offering of its common stock. On
November 12, 1998, the Company, upon the advice of its financial advisors and
counsel applied to the Securities and Exchange Commission ("SEC") to withdraw
its registration statement relating to this Subscription Offering.
The Company intends to repay the loans outstanding under the line of
credit with proceeds of a private sale of common stock to institutional and
other accredited investors or through alternative sources of financing. If the
stock sale does not occur or sufficient proceeds are not obtained and
alternative sources of financing are not obtainable at an acceptable cost, the
Company would be unable to repay amounts that it had borrowed from MSI under the
line of credit agreement. At the same time, Western Reserve, pursuant to the
terms of the line of credit agreement with MSI, would, upon the Company's
failure to timely repay loans obtained under the line of credit agreement, have
the right, until such loans are paid in full, to (i) recapture business
previously ceded to the Company for reinsurance, and (ii) reduce the Company's
quota share of new business to be reinsured under the new reinsurance agreements
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.
Further, until proceeds from a private sale of common stock to
institutional and other accredited investors becomes available to meet the
Company's continuing obligations to pay reinsurance expense allowances under the
coinsurance agreements with Western Reserve, the Company is arranging
reinsurance facilities to retrocede its in force and new business. If the
Company does not execute such an arrangement during April 1999, the Company
would have the option to negotiate amendments to the coinsurance and modified
coinsurance agreements which would reduce its future cash outlays or seek an
increase in its line of credit with MSI.
The WMA Corporation has no assets other than the stock of WMA Life and
$1.18 million of cash and invested assets. The Company will rely on income from
its invested assets and dividends from WMA Life to meet holding company cash
requirements.
The minimum solvency margin for WMA Life as a long-term insurer under
Bermuda regulations is $250,000. As of December 31, 1998, WMA Life had total
statutory capital and surplus of $5,049,650. The amount available for
distribution of dividends is $4,799,650. Additionally, the amount available for
dividend distribution must be supplied through liquid assets. WMA Life met this
requirement as the amount of invested assets and quoted investments and cash was
greater than $4,799,650.
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 increased existing and obtained additional,
LOCs with Western Reserve as beneficiary, from $2.0 million to $3.7 million in
support of reserve credits as of year-end 1998,
<PAGE> 29
under each of the reinsurance agreements in place with Western Reserve. WMA Life
also has previously secured a LOC of $30,000 in favor of Kemper. The LOCs were
issued by IBJ Schroder, the Company's custodian, and collateralized by the
Company's assets held with the custodian. If determined to be necessary, WMA
Life will develop facilities for future LOCs and trust arrangements in support
of additional reinsurance agreements.
As a result of the 1995 offering, the Company sold 2,000,000 shares
of Common Stock and 500,000 warrants for gross proceeds of $20.5 million
(excluding deferred organization costs of $517,000). The Company believes that
the sources of cash from the 1995 offering and the $10 million loan from MSI
will be sufficient to meet the Company's cash needs through March 1999 with
respect to the administration of WMA Life's current MRT agreements with Western
Reserve and Kemper, its variable annuity coinsurance agreements with American
Skandia and Western Reserve, and its VUL reinsurance agreement with Western
Reserve. The Company plans to repay its outstanding debt to MSI and to provide
additional capital to meet its future cash needs with the proceeds of a private
sale of stock to institutional and other accredited investors. The Company is
also exploring additional sources of financing through debt, reinsurance
arrangements and securitization of its receivables.
YEAR 2000 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. The Company has discussed the Year 2000
issue with the Ceding Life Companies and the steps they have taken to address
the situation. The Company believes its operations will not be affected. The
Company has not been required to expend significant resources to address the
Year 2000 issue and does not anticipate any significant expenditures.
The Company is dependent on the data processing systems of the Ceding
Life Companies for the year 2000 and beyond. Due to this dependence, the failure
of the systems of the Ceding Life Companies to be year 2000 compliant could have
a material adverse effect upon the Company, as a result of business interruption
or loss of revenue sources. There can be no assurance that these systems will be
able to properly process information relating to the year 2000 and beyond. The
Company has also discussed the Year 2000 issue with the Ceding Life Companies,
and in particular Western Reserve, and the steps they have taken, or intend to
take, to address the situation.
The Company is monitoring this risk through continued communications
with the Ceding Life Companies regarding the status of their year 2000
readiness. Since the Company reinsures more business with Western Reserve than
with the other Ceding Life Companies, the Company has requested and received
written advice in mid-1998 as to the status of their year 2000 compliance
program. Western Reserve has advised the Company that their program for their
internal systems to
<PAGE> 30
become year 2000 compliant began in mid-1996 and, though currently not
completed, was to be complete by the end of 1998. Western Reserve has also
advised the Company that it will continue revalidation tests of its internal
systems as well as those systems which interface with their business partners
through 1999. However, that there can be no guarantees that their efforts to
remediate their internal systems will be trouble free and that they will be in
compliance before the year 2000.
Due to the nature of its internal computer systems, the Company does
not incur significant recurring technology costs and has not been, nor is it
expected to be, required to expend significant resource to address the Year 2000
issue. Since the Company will not be required to incur significant costs related
to system replacement but will be involved primarily in monitoring third party
suppliers, the estimated future costs of remediation will primarily consist of
personnel costs.
In the event that the Ceding Life Companies are not year 2000
compliant, the Company's operations could be significantly impacted by the
Company's ability to enter into reinsurance agreements with other companies at
the same or similar terms.
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.
ITEM 7. FINANCIAL STATEMENTS.
The December 31, 1998 Financial Statements follow on the next page.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The WMA Corporation:
We have audited the accompanying consolidated balance sheets of The WMA
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
WMA Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows, for each of the
years in the three-year period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
March 12, 1999
<PAGE> 32
THE WMA CORPORATION
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Fixed maturity securities - available for sale (amortized
cost of $9,501,564 and $17,686,390 for 1998 and 1997,
respectively) $ 9,869,679 $ 17,782,055
Equity securities - available for sale (cost of $487,733
for 1997) -- 630,929
------------ ------------
Total investments 9,869,679 18,412,984
Cash and cash equivalents 6,617,710 1,469,663
Investment income due and accrued 136,196 257,629
Reinsurance balances receivable 101,034 183,524
Deferred acquisition costs 27,537,866 4,503,338
Deferred organization costs (net of accumulated
amortization of $98,565 and $62,128 at December 31,
1998 and 1997, respectively) 88,304 124,741
Prepaid expenses 216,746 113,243
Due from World Marketing Alliance, Inc. 3,507 --
Fixed assets (net of accumulated depreciation of $7,649) 84,820 --
Other assets 225,312 783
------------ ------------
Total assets $ 44,881,174 $ 25,065,905
============ ============
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits $ 2,624,020 $ 1,293,917
Reinsurance balances payable 5,425,467 434,443
Accrued expenses 105,854 53,735
Accrued interest payable 101,099 --
Accounts payable 70,376 105,108
Due to WMA Management Services, Inc. -- 120,000
Due to World Marketing Alliance, Inc. -- 1,916
Short term debt 10,000,000 --
Deferred tax liability 2,181,219 980,411
------------ ------------
Total liabilities 20,508,035 2,989,530
------------ ------------
Stockholders' equity:
Common stock, par value $.001, 10,000,000
authorized; 2,500,000 shares issued in 1998 and 1997,
respectively 2,500 2,500
Additional paid-in capital 20,228,973 20,228,973
Accumulated other comprehensive income 242,977 157,670
Retained earnings 3,948,589 1,709,232
Treasury stock, at cost (4,990 and 2,200 shares for
1998 and 1997, respectively) (49,900) (22,000)
------------ ------------
Total stockholders' equity 24,373,139 22,076,375
------------ ------------
Total liabilities and stockholders' equity $ 44,881,174 $ 25,065,905
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 33
THE WMA CORPORATION
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums $ 7,280,489 $5,217,365 $2,007,391
Reinsured policy revenues 4,098,371 195,124 --
Net investment income 951,101 1,087,465 624,883
Net realized gains on investments 267,063 -- 1,752
Other income -- 300,000 --
----------- ---------- ----------
Total revenue 12,597,024 6,799,954 2,634,026
----------- ---------- ----------
Benefits and expenses:
Benefits, claims, and settlement expenses 3,442,631 2,408,842 976,635
Reinsurance premium allowances, net 2,917,483 1,511,858 576,297
Amortization of deferred acquisition costs 1,541,439 63,629 6,414
Professional fees and other expenses 957,446 292,275 185,159
Interest expense 101,099 10,971 43,491
Management fees to WMA Management Services,
Inc -- 120,000 119,119
Consulting fees to World Marketing Alliance, Inc. 240,708 57,135 69,751
----------- ---------- ----------
Total benefits and expenses 9,200,806 4,464,710 1,976,866
----------- ---------- ----------
Income before income taxes 3,396,218 2,335,244 657,160
Income tax expense 1,156,861 815,743 112,808
----------- ---------- ----------
Net income after income taxes $ 2,239,357 $1,519,501 $ 544,352
=========== ========== ==========
Basic and diluted income per share $ 0.90 $ 0.63 $ 0.44
=========== ========== ==========
Weighted-average common shares outstanding 2,495,766 2,394,769 1,246,500
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
THE WMA CORPORATION
Consolidated Statements of Stockholder's Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Accumulated Retained
other earnings
Comprehensive Number of Common Additional comprehensive (accumulated Treasury
income shares stock paid-in capital income deficit) stock
------------- ---------- ----------- --------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 500,000 $ 500 $ 249,500 -- ($ 354,621) --
Common stock issued 1,805,550 1,806 18,553,694 -- -- --
Comprehensive income
Net income $ 544,352 -- -- -- -- 544,352 --
Other comprehensive
income (loss), net of tax (125,641) -- -- -- (125,641) -- --
-----------
Total comprehensive income $ 418,711
===========
Deferred offering costs -- (516,527) -- -- -- (516,527)
--------- ----------- ------------ -------- ---------- --------
Balance, December 31, 1996 2,305,550 2 ,306 18,286,667 (125,641) 189,731 --
Common stock issued 194,450 194 1,944,306 -- -- --
Comprehensive income
Net income $ 1,519,501 -- -- -- -- 1,519,501 --
Other comprehensive
income, net of tax 283,311 -- -- -- 283,311 -- --
-----------
Total comprehensive income $ 1,802,812
===========
Purchase of treasury stock
(2,200 shares and 2,000
warrants) -- -- (2,000) -- -- (22,000)
--------- ----------- ------------ -------- ---------- --------
Balance, December 31, 1997 2,500,000 2,500 20,228,973 157,670 1,709,232 (22,000)
========= =========== ============ ======== ========== ========
Comprehensive income
Net income $ 2,239,357 2,239,357
Other comprehensive
income, net of tax 85,307 85,307
-----------
Total comprehensive income $ 2,324,664
===========
Purchase of treasury stock
(2,790 shares) -- -- -- -- -- (27,900)
--------- ----------- ------------ -------- ---------- --------
Balance, December 31, 1998 2,500,000 $ 2,500 $ 20,228,973 $ 242,977 $ 3,948,589 ($ 49,900)
========= =========== ============ ========= =========== ========
<CAPTION>
Total
stockholders'
equity (deficit)
---------------
<S> <C>
Balance, January 1, 1996 ($ 104,621)
Common stock issued 18,555,500
Comprehensive income
Net income 544,352
Other comprehensive
income (loss), net of tax (125,641)
Total comprehensive income
Deferred offering costs
Balance, December 31, 1996 18,353,063
Common stock issued 1,944,500
Comprehensive income
Net income 1,519,501
Other comprehensive
income, net of tax 283,311
Total comprehensive income
Purchase of treasury stock
(2,200 shares and 2,000
warrants) (24,000)
Balance, December 31, 1997 22,076,375
Comprehensive income
Net income 2,239,357
Other comprehensive
income, net of tax 85,307
Total comprehensive income
Purchase of treasury stock
(2,790 shares) (27,900)
Balance, December 31, 1998 $ 24,373,139
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 35
THE WMA CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating expenses
Net income $ 2,239,357 $ 1,519,501 $ 544,352
Adjustment to reconcile net income to net cash
(used in) provided by operating activities:
Amortization and depreciation 1,585,525 100,065 32,106
Deferred tax expense 1,156,861 815,743 112,808
Net realized gains on investments (267,063) -- (1,752)
Change in:
Investment income due and accrued 121,433 (76,364) (181,265)
Reinsurance balances receivable 82,490 (153,128) (30,396)
Deferred acquisition costs (24,575,967) (3,834,638) (738,743)
Prepaid expenses (103,503) (113,243) --
Due from World Marketing Alliance, Inc. (3,507) -- --
Other assets (224,529) 26,078 (26,861)
Future policy benefits 1,330,103 679,440 614,477
Reinsurance balances payable 4,991,024 434,443 --
Accrued expenses 52,119 (33,028) 86,763
Accrued interest payable 101,099 -- (12,995)
Accounts payable (34,732) 24,335 (44,103)
Due to WMA Management Services, Inc. (120,000) 64,780 55,220
Due to World Marketing Alliance, Inc. (1,916) (14,006) 15,922
------------ ----------- ------------
Net cash (used in) provided by operating
activities (13,671,206) (560,022) 427,285
------------ ----------- ------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 8,939,622 5,363,904 4,784,752
Purchase of available-for-sale securities -- (7,219,502) (21,130,856)
Purchase of fixed assets (92,469) -- --
------------ ----------- ------------
Net cash provided by (used in) investing
activities 8,847,153 (1,855,598) (16,346,104)
------------ ----------- ------------
Cash flows from financing activities:
Issuance of common stock -- 1,944,500 18,555,500
Purchase of treasury stock and warrants (27,900) (24,000) --
Proceeds from short term financing 10,000,000 -- --
Repayments of borrowings under note payable -- -- (748,679)
Offering costs -- -- (217,989)
Organization costs -- -- (10,512)
(Decrease) increase in due to stockholders -- (15,418) 15,418
------------ ----------- ------------
Net cash provided by financing activities 9,972,100 1,905,082 17,593,738
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents 5,148,047 (510,538) 1,673,167
Cash and cash equivalents at beginning of period 1,469,663 1,980,201 307,034
------------ ----------- ------------
Cash and cash equivalents at end of period $ 6,617,710 $ 1,469,663 $ 1,980,201
============ =========== ============
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 10,971 $ 56,032
============ =========== ============
Income taxes paid $ -- $ -- $ --
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 36
THE WMA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization
The WMA Corporation (formerly known as WMA International Corporation) is
an insurance holding company originally formed March 9, 1995.
The consolidated financial statements include the assets, liabilities,
and results of operations of The WMA Corporation ("WMA Corporation") and
its wholly owned subsidiaries, WMA Life Holding, Ltd. ("Holding"), a
Bermuda domiciled insurance holding company, and WMA Life Insurance
Company Limited ("WMA Life"), a Bermuda domiciled life reinsurance
company (collectively, the "Company"). As of December 31, 1998, Holding
was placed in voluntary liquidation in Bermuda. In January 1999, Holding
was dissolved in Bermuda and net assets in the amount of $7,957 were paid
to WMA Corporation.
The Company provides reinsurance for certain national life insurance
companies on variable universal life ("VUL") insurance and variable
annuity policies sold through World Marketing Alliance, Inc. ("WMA
Agency"), a sales and marketing organization. Such policies are sold
throughout the United States. S. Hubert Humphrey, Jr., a major
shareholder of WMA Corporation, owns a controlling interest in WMA Agency
and WMA Management Services, Inc. ("WMA Management"), which provided
operating assistance to the Company for a fee through December 31, 1997.
WMA Management was primarily responsible for the maintenance of the
financial records of the Company. The management services agreement was
terminated as of December 31, 1997. Effective April 1, 1998, the Company
entered into a Corporate Services Agreement with WMA Agency pursuant to
which WMA Agency provides corporate services and supplies to the Company
for a fixed monthly fee of $2,250, adjustable annually.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the ceding
company, for all or a portion of the insurance risks underwritten by the
ceding company. The reinsurer, in turn, assumes a portion of the
underwritten risk in exchange for a portion of the premium collected. The
Company currently assumes portions of mortality and other risks relating
to life insurance and annuity policies in order to share in the net
profits generated through the sale of such policies by WMA Agency.
(2) Summary of Significant Accounting Policies
Consolidation and Basis of Presentation. The consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles prescribed for stock life insurance
companies. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Accounts that the
<PAGE> 37
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Company deems to be sensitive to changes in estimates include deferred
policy acquisition costs and future policy benefits. In all instances,
actual results could differ from estimates.
The accompanying financial statements consolidate the accounts of WMA
Corporation and its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Investments. The Company classifies all fixed maturity securities and
equity securities as "available for sale." Such securities are reported
at fair value. Fixed maturities available for sale are so classified
based upon the possibility that such securities could be sold prior to
maturity if that action enables the Company to execute its investment
philosophy and appropriately match investment results to operating and
liquidity needs. Unrealized gains and losses on marketable equity
securities and fixed maturity securities available for sale, less
applicable deferred income taxes, are reported as a separate component of
accumulated other comprehensive income within stockholders' equity.
Although no impairments in value have occurred which would require
adjustment to the carrying value of securities, any such impairment
identified in the future would result in a reduction of the carrying
value of the individual security to its fair value as the new cost basis
and reflection of a corresponding write down amount as a realized capital
loss in the consolidated statements of operations. The Company's policy
is to recognize such an impairment when the projected cash flows of these
securities have been reduced on other than a temporary basis so that the
realizable value is reduced to an amount less than the carrying value.
Investment income is recognized as it accrues or is legally due. Income
on mortgage-backed securities includes amortization and accretion of
purchase premiums and discounts using a method that approximates a level
yield, taking into consideration assumed prepayment patterns. The
retrospective adjustment method is used to adjust for prepayment
activity. Realized gains and losses on sales of investments are included
in net income, as are write-downs of securities where declines in value
are deemed to be other than temporary in nature. The cost of investment
securities sold is determined based upon the specific identification
method.
The Company does not participate in investments defined as derivatives
under Statement of Financial Accounting Standards No. 119, Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments.
Fair Value Disclosures. The carrying values of cash and cash equivalents,
reinsurance receivables and payables, short-term debt, accrued expenses
and accounts payable approximate their fair values due to the short-term
nature of these accounts. The carrying value of future policy benefits
approximates its fair value as credited interest approximates current
market rates. See Note 3 for fair value information covering the
Company's investment portfolio.
Additional Information Regarding Statements of Cash Flows. Cash and cash
equivalents include cash on hand and on deposit purchased with an
original maturity of three months or less.
Deferred Policy Acquisition Costs. Costs of acquiring new business,
which vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are deemed
recoverable from future revenues. Such costs include reinsurance
commission and expense allowances paid to ceding companies, and certain
other underwriting costs such as actuarial, legal and accounting fees.
<PAGE> 38
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Deferred acquisition costs are amortized over the lives of the underlying
policies (with regard to the terms of the reinsurance agreement), in
proportion to the ratio of revenues collected during the then current
period to total anticipated revenues. On those policies under a monthly
renewable term agreement, revenues represent premiums recognized for the
mortality risk reinsured.
Such premiums are estimated using the same assumptions used for computing
liabilities for future policy benefits. Such assumptions include
estimates of expected investment yields, mortality, persistency and
expenses applicable at the time the policies are reinsured. For policies
under a coinsurance or modified coinsurance agreement, revenues represent
gross profits associated with mortality charges, investment margins,
surrender charges, and expense loads.
Reinsurance Premium Allowances. Allowances represent a percentage of each
reinsurance premium which is paid or allowed by WMA Life to the ceding
company for each policy reinsured in recognition of commissions and other
expenses associated with the reinsured policies. These other expenses
relate to costs associated with underwriting, marketing, policy issue,
and maintenance. The reinsurance expense allowances represent the
Company's share of acquisition and maintenance expenses incurred by the
ceding company that are attributable to the risks reinsured. Allowances
are shown net of amounts deferred as policy acquisition costs.
Fixed Assets. Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on the straight-line basis over
the estimated useful lives of the related assets, which range from three
to seven years.
Future Policy Benefits. Liabilities for future benefits on life policies
are established in an amount adequate to meet the estimated future
obligations on policies in force. Liabilities for future policy benefits
under long-term life insurance policies have been computed based on
estimates of investment yields, mortality and withdrawal rates expected
at the time the policies are reinsured, and other assumptions including
estimates for incurred but not reported losses. These assumptions include
a margin for adverse deviation and vary with the characteristics of the
plan of insurance, year of issue, age of insured, and other appropriate
factors. The assumptions for estimated investment yields are based upon
various factors including then current yields on the Company's investment
portfolio and market rates for new investment money. Interest rates used
in estimating future policy benefits range from 6.0% to 7.0%. The
mortality and withdrawal assumptions are based on the Company's and
industry experience and industry standards. Policy and contract reserves
are included in future policy benefits on the consolidated balance sheet.
Liabilities for future policy benefits under the coinsurance and modified
coinsurance agreements equal reinsured policy account balances on
underlying variable universal life policies and variable annuity
contracts. With regard to the separate account benefits reinsured on a
modified coinsurance basis, the Company records such liabilities as an
offset to related assets as its intentions and rights under the
agreements with the ceding companies meet the appropriate conditions
governing rights of setoff. Liabilities for the fixed account portion of
the variable annuity contracts and variable universal life insurance
policies reinsured on a coinsurance basis are recorded as future policy
benefits.
Income Taxes. The Company uses the asset and liability method to record
deferred income taxes. Accordingly, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
<PAGE> 39
THE WMA CORPORATION
Notes to Consolidated Financial Statements
of existing assets and liabilities and their respective tax bases, using
enacted tax rates expected to apply when such temporary differences are
expected to reverse.
Recognition of Revenues and Related Expenses. Reinsurance premiums
received under the monthly renewable term agreements are recognized as
revenue over the premium paying periods of the reinsured policies.
Benefits and expenses are associated with earned premiums so that profits
are recognized over the life of the related contract. This association is
accomplished through the provision for future policy benefits and the
amortization of deferred policy acquisition costs.
Other revenue consists of non-recurring items other than reinsurance
premiums or investment earnings and is recognized upon completion of the
related earnings process. During the year ended December 31, 1997, other
income related to a one-time payment from a ceding company to compensate
the Company for delays in the introduction of a reinsured product.
Reinsured Policy Revenues. Reinsured policy revenues represent the policy
mortality and expense charges, cost of insurance charges net of
retrocession reinsurance premiums, 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.
Income Per Share. Basic income per share is computed based on the
weighted-average number of common shares outstanding during the period,
in accordance with Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share. The Company has no dilutive potential common
shares outstanding, and thus basic and diluted income per share is the
same.
Deferred Offering Costs. Costs relating to the common stock offering were
deferred at December 31, 1995 and were offset against the proceeds of the
offering during 1996.
Deferred Organization Costs. Costs of organizing the Company have been
capitalized and are being amortized over five years on the straight-line
method.
Comprehensive Income. On January 1, 1998 the Company adopted SFAS 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. Comprehensive income
consists of net income and net unrealized gains (losses) on securities
and is presented in the consolidated statements of stockholders' equity
and comprehensive income. "Other comprehensive income" refers to
revenues, expenses, gains, and losses that are included in comprehensive
income but excluded from earnings under current accounting standards. The
Statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position
or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Segment Reporting. On January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes new standards for the disclosures made by public
companies to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
<PAGE> 40
THE WMA CORPORATION
Notes to Consolidated Financial Statements
In general, financial information is required to be reported on the basis
that it is used internally for management reporting and evaluation. The
Statement requires only additional disclosures in the notes to the
consolidated financial statements, it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS
No. 131.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in investment securities and other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative will be included in either
earnings or other comprehensive income depending on the intended use of
the derivative instrument. The provisions of SFAS No. 133 are effective
for all fiscal quarters of fiscal years beginning after June 15, 1999;
however, the Company does not believe such provisions will have a
significant impact on the financial statements upon adoption.
In December 1997, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments. This SOP provides
guidance for determining when an entity should recognize a liability for
guaranty fund and other insurance-related assessments. It also provides
guidance on how to measure the liability. This SOP is effective for 1999.
The Company does not believe the provisions of SOP 97-3 will have a
significant impact on the financial statements upon adoption.
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. In accordance with the provisions of SOP 98-5, the
Company will expense remaining deferred organization costs as required in
1999.
Reclassification. The Company has reclassified the presentation of
certain 1997 and 1996 information to conform to the 1998 presentation.
(3) Investments
Major categories of net investment income consist of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Fixed maturity and equity securities $ 939,180 1,035,453 274,941
Short-term investments 63,957 117,035 384,997
----------- ---------- --------
1,003,137 1,152,488 659,938
Investment expense (52,036) (65,023) (35,055)
----------- ---------- --------
Net investment income $ 951,101 1,087,465 624,883
=========== ========== ========
</TABLE>
<PAGE> 41
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Gross losses of $35,718 were realized on sales of fixed maturity
securities for the year ended December 31, 1998. Gross gains of $116,230
and $1,752 were realized on sales of fixed maturity securities for the
years ended December 31, 1998 and 1996, respectively. Gross gains of
$186,551 were realized on sales of equity securities for the year ended
December 31, 1998.
The amortized cost, unrealized gains and losses, and estimated fair
values of investment securities at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1998 cost gains losses value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale:
Fixed maturities:
U.S. Government and agencies $ 822,586 60,131 -- 882,717
Commercial and industrial 6,114,461 234,985 -- 6,349,446
Public utilities 797,996 54,642 -- 852,638
Mortgage-backed securities 1,766,521 35,083 16,726 1,784,878
----------- ------- ---------- ----------
$ 9,501,564 384,841 16,726 9,869,679
=========== ======= ========== ==========
1997
Available for sale:
Fixed maturities:
U.S. Government and agencies $ 5,846,323 50,622 -- 5,896,945
Commercial and industrial 8,813,657 103,456 59,698 8,857,415
Public utilities 797,949 11,300 6,554 802,695
Mortgage-backed securities 2,228,461 26,960 30,421 2,225,000
----------- ------- ---------- ----------
17,686,390 192,338 96,673 17,782,055
Equity securities 487,733 143,196 -- 630,929
----------- ------- ---------- ----------
$18,174,123 335,534 96,673 18,412,984
=========== ======= ========== ==========
</TABLE>
There were no investments in any entity in excess of 10% of stockholders'
equity at December 31, 1998. Fixed maturity securities are valued based
upon quoted market prices.
At December 31, 1998, the contractual maturities of investments in fixed
maturity securities were as follows:
<TABLE>
<CAPTION>
Amortized cost Fair value
-------------- ----------
<S> <C> <C>
Available for sale:
Due in one year or less $ 197,064 204,750
Due after one year through five years 3,377,305 3,466,819
Due after five years through ten years 3,835,354 4,065,198
Due after ten years 325,320 348,034
Mortgage-backed securities 1,766,521 1,784,878
---------- ---------
$9,501,564 9,869,679
========== =========
</TABLE>
Expected maturities will differ from contractual maturities because some
issuers have the right to call or prepay obligations with or without call
or prepayment penalties.
<PAGE> 42
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Changes in net unrealized gains and losses were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities available for sale $ 272,450 277,314 (181,649)
Equity securities (143,196) 151,913 (8,717)
--------- -------- --------
$ 129,254 429,227 (190,366)
========= ======== ========
</TABLE>
(4) Reinsurance
As of December 31, 1998, the Company has five reinsurance contracts and
one retrocession agreement in place. During 1998, the Company entered
into two coinsurance and modified coinsurance agreements with Western
Reserve Life Assurance Co. of Ohio ("Western Reserve"). Effective January
1, 1998, the Company began reinsuring a portion of all Freedom Wealth
Creator variable annuity contracts sold by WMA Agency sales associates
issued through Western Reserve. Effective April 1, 1998, the Company
began reinsuring a portion of all Financial Freedom Builder variable
universal life polices sold by WMA Agency sales associates issued through
Western Reserve. Prior to 1998, the Company entered into monthly
renewable term agreements with Western Reserve and Kemper Investors Life
Insurance Company, and a modified coinsurance agreement with American
Skandia Life Assurance Corporation.
All policies reinsured under these agreements are self-administered by
the ceding companies. The ceding companies provide the Company with all
information necessary for processing the reinsurance, including claims.
Retrocession reinsurance agreements do not relieve the Company from its
obligations to ceding companies. Failure of retrocessionaires to honor
their obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectible. As of April
1, 1998, the Company entered into a pool retrocession agreement with
American Phoenix Life and Reinsurance Company, Swiss Re Life & Health
America, Inc., The Lincoln National Life Insurance Company, and
Transamerica Occidental Life Insurance Company. The Company retrocedes
("reinsures") standard mortality risks in excess of $100,000 per life to
this pool. The retrocession agreement serves to reduce the impact of
fluctuations in death claims from period to period and limits the
Company's exposure on any one policy reinsured.
The net effect of all reinsurance agreements on premiums and policy
revenues is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reinsurance assumed $ 11,406,682 5,412,489 2,007,391
Reinsurance ceded (27,822) -- --
------------ --------- ---------
Net premiums and policy revenues $ 11,378,860 5,412,489 2,007,391
============ ========= =========
</TABLE>
<PAGE> 43
THE WMA CORPORATION
Notes to Consolidated Financial Statements
The net effect of all reinsurance agreements on benefits, claims and
settlement expenses is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reinsurance assumed $3,442,631 2,408,842 976,635
Reinsurance ceded -- -- --
---------- --------- -------
Net benefits, claims and settlement
expenses $3,442,631 2,408,842 976,635
========== ========= =======
</TABLE>
The impact of reinsurance on life insurance in force is shown in the
following schedule (in millions):
<TABLE>
<CAPTION>
Life insurance in force Direct Assumed Ceded Net
----------------------- ------ ------- ----- ---
<S> <C> <C> <C> <C>
December 31, 1998 -- 6,117 49 6,068
December 31, 1997 -- 4,162 -- 4,162
December 31, 1996 -- 2,673 -- 2,673
</TABLE>
(5) Deferred Policy Acquisition Costs
The following reflects the amounts of policy acquisition costs deferred
and amortized:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred acquisition cost:
Assumed $ 27,537,866 4,503,338
Retroceded -- --
------------ -----------
Net $ 27,537,866 4,503,338
============ ===========
Beginning of year $ 4,503,338 $ 732,329
Capitalized:
Assumed 24,575,967 3,834,638
Retroceded -- --
Amortized:
Assumed (1,541,439) (63,629)
Retroceded -- --
------------ -----------
End of year $ 27,537,866 4,503,338
============ ===========
</TABLE>
The retrocession agreement is a yearly renewable term agreement, however
the retrocession premiums are offset against reinsured policy revenues of
the Western Reserve variable universal life coinsurance and modified
coinsurance agreement. Consequently, retrocession premiums, benefit
claims and allowances lose their identity in calculating estimated gross
profits as used in amortizing capitalized acquisition costs. As such,
there is no separate reportable deferred acquisition costs or associated
amortization.
<PAGE> 44
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Included within capitalized amounts above are certain expenses that were
paid to WMA Management and WMA Agency for consulting services relating to
the acquisition of reinsured policies. Consulting services included
activities relating to pricing reinsurance, drafting agreements,
negotiating terms and reinsurance product development. Such amounts
totaled $41,129 and $17,914 for the years ended December 31, 1998 and
1997, respectively.
(6) Income Tax
Under current Bermuda law, WMA Life is not required to pay any taxes in
Bermuda on either income or capital gains. WMA Life has received an
undertaking from the Minister of Finance in Bermuda that in the event of
any such taxes being imposed, WMA Life will be exempted from taxation
until the year 2016.
Effective January 1, 1996, WMA Life made an irrevocable election under
section 953(d) of the Internal Revenue Code of 1986, as amended, to be
treated as a domestic insurance company for United Stated Federal income
tax purposes. As a result of this "domestic" election, WMA Life is
subject to U.S. taxation on its worldwide income as if it was an U.S.
corporation.
The Company determines its income tax expense and liability in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes.
Total income taxes (benefit) for the years ended December 31, 1998, 1997
and 1996 were allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax attributable to:
Income from continuing operations $ 1,156,861 815,743 112,808
=========== ======= ========
Unrealized gains (losses) on securities
available for sale $ (43,947) 145,948 (64,725)
=========== ======= ========
</TABLE>
The Federal income tax expense from continuing operations for the years
ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
<S> <C> <C>
Current $ -- 29,363 --
Deferred 1,156,861 786,380 112,808
---------- ------- -------
Total $1,156,861 815,743 112,808
========== ======= =======
</TABLE>
The income tax expense from continuing operations for the years ended
December 31, 1998, 1997, and 1996 differed from the amounts computed by
applying the U.S. Federal income tax rate of 34 percent to income before
income taxes as a result of the following:
<PAGE> 45
THE WMA CORPORATION
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
<S> <C> <C> <C>
Computed expected tax expense $1,154,714 793,983 223,434
Change in valuation allowance -- -- (117,307)
Other, net 2,147 21,760 6,681
---------- ------- --------
Total $1,156,861 815,743 112,808
========== ======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and Federal income tax purposes. The net
deferred tax liability at December 31, 1998 and 1997 is composed of the
following amounts:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred organizational costs $ 1,294 5,888
Reserve differences 5,089,257 654,839
Net operating loss carryforward 2,316,168 76,584
---------- ---------
Gross deferred tax assets: 7,406,719 737,311
Deferred tax liabilities:
Policy benefit reserves 99,893 105,363
Deferred acquisition costs 9,362,874 1,531,135
Unrealized gains on securities held for sale 125,171 81,224
---------- ---------
Gross deferred tax liabilities 9,587,938 1,717,722
---------- ---------
Net deferred tax liabilities $2,181,219 980,411
========== =========
</TABLE>
There were no valuation allowances for deferred tax assets as of December
31, 1998 and 1997 since it is management's belief that it is more likely
than not that the deferred tax assets will be realized. This assessment
is made based on the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies. However,
the amount of the deferred tax asset could be reduced in the near term if
estimates of future taxable income are reduced. At December 31, 1998, the
Company has net operating loss carryforwards for federal income tax
purposes of $6,812,000, which begin to expire in 2012.
(7) Related Party Transactions
The Company, from time to time, has entered into transactions with WMA
Agency or its affiliates, which are controlled by S. Hubert Humphrey,
Jr., the beneficial owner of approximately 36.1% of the Company's
outstanding common stock. Mr. Humphrey and certain directors and officers
of the Company are also employees of WMA Agency. The Company had a
management agreement with WMA Management for management and consulting
services relating to the day-to-day activities of the Company from
December 1995 until December 1997. These management and consulting
services included personnel costs relating to the use of certain
employees of WMA Agency and WMA Management to perform the day-to-day
activities of the Company.
<PAGE> 46
THE WMA CORPORATION
Notes to Consolidated Financial Statements
For the year ended December 31, 1997, the Company incurred $120,000 of
costs for these services. This management agreement was terminated as of
December 31, 1997.
For the first quarter of 1998, employees of WMA Agency performed the
Company's administrative functions. The Company paid WMA Agency a monthly
payroll allocation based upon the amount of time during which WMA Agency
employees provided services to the Company. The Company also received
certain other services from WMA Agency, including the funding of certain
operating and travel related expenses, as it had in 1997 and 1996.
Effective April 1, 1998, the Company entered into a Corporate Services
Agreement with WMA Agency pursuant to which WMA Agency provides corporate
services and supplies to the Company for a fixed monthly fee of $2,250,
adjustable annually. Such services include facilities maintenance,
security, human resources, mail services, utilities, postage, telephone
and copier expense. The Company incurred $240,708, $57,135 and $69,751 of
costs for these services from WMA Agency for the years ended December 31,
1998, 1997 and 1996, respectively. The Company has reimbursed WMA Agency
for all such expenditures.
A portion of amounts paid to WMA Management and to WMA Agency were
deferred as policy acquisition costs for expenses associated with the
development of the reinsurance agreements. Amounts deferred for the years
ended December 31, 1998 and 1997, were $41,129 and $17,914, respectively.
The Company's officers do not, and are not required to, devote their time
exclusively to the business of the Company, nor are they subject to
non-competition agreements. As a consequence, they could legally engage
in activities which could be adverse to the best interests of the
Company, subject to their fiduciary obligations to the Company under
applicable corporate law.
Commission for sales of life insurance and annuity contracts reinsured by
the Company are paid to WMA Agency and WMA Sales Associates by the ceding
companies. Mr. Humphrey receives direct compensation from WMA Agency and
receives virtually no direct compensation from the Company. In addition,
since Mr. Humphrey and certain of the directors are also executive
officers and employees of companies constituting WMA Agency, the
interests of WMA Agency with respect to the commissions received on life
insurance sales by WMA Agency from the ceding companies (and indirectly
under reinsurance agreements from the Company) may conflict with the
interests of the Company in negotiating reinsurance agreements beneficial
to the Company.
On August 2, 1995, WMA Life entered into an agreement with CFM Insurance
Managers, Ltd. ("CFM"), a Bermuda corporation providing professional
management services to international companies operating in Bermuda. C.
Simon Scupham, a director of the Company, is the President of CFM.
Pursuant to this agreement, CFM acts as the Principal Representative for
WMA Life in Bermuda. This agreement is for an unlimited duration, but may
be terminated by either party upon 90 days prior written notice or upon
30 days prior written notice under specified circumstances. During the
years ended December 31, 1998, 1997 and 1996, the Company paid to CFM a
$60,000 annual fee pursuant to its agreement with the Company.
In 1995, Mr. Humphrey pledged 500,000 of his shares of the Company's
Common Stock in connection with a loan made by Money Services, Inc. to
WMA Agency ("Agency Loan"). Money Services, Inc. is a subsidiary of AEGON
USA, Inc., as is Western Reserve, for whom the Company provides
reinsurance.
<PAGE> 47
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Western Reserve underwrites the largest proportion of VUL business sold
by WMA Agency, a large percentage of which was reinsured by the Company
in 1998 and 1997.
Part of the loan proceeds were allocated for use by WMA Agency to make
loans to certain of its WMA Sales Associates (the "Agent Loans") to
acquire shares of common stock in the 1995 offering. As of December 31,
1998, the outstanding principal amount of the Agent Loans was $1,117,451.
As security for the Agent Loans, 400,311 WMA Sales Associates' shares of
common stock are pledged to WMA Agency. Each pledge is accompanied by an
irrevocable proxy which grants to WMA Agency or its nominee the right to
exercise, in its sole and absolute discretion, all voting power relating
to the pledged shares until all indebtedness owed by the borrower to WMA
Agency is no longer outstanding
The Agency Loan, which was in the initial principal amount of $2,250,000
in 1995, was subsequently consolidated into a WMA Agency line of credit
facility and the maximum available amount was increased to $7,750,000. On
November 30, 1997, this line of credit facility was increased to an
amount of $14,750,000. As advised by WMA Agency, on March 19, 1999 this
line of credit was increased to a maximum available amount of
$17,750,000. Mr. Humphrey's pledge of his shares of Common Stock is one
of the various forms of collateral for this line of credit, which as of
March 30, 1999 had an outstanding balance of approximately $17 million.
Upon default on this credit line, the lender, Money Services, Inc., would
have the right to take title to the pledged shares and to exercise voting
control. Amounts outstanding under this line of credit are being
amortized over a fifteen year period ending November 1, 2012 with
principal and interest payable monthly by WMA Agency. Interest is
calculated in arrears based on AEGON USA's cost of its five year senior
debt instruments, which is, in turn, based upon five year U.S. Treasury
Notes, plus an underwriters override. Interest on the line of credit is
adjusted every five years.
(8) Statutory Restrictions
WMA Corporation's subsidiary, WMA Life, is a Bermuda-domiciled insurance
company, and as such, is subject to the restrictions of the Bermuda
Insurance Act of 1978 ("the Insurance Act"). The most significant of
these restrictions is that WMA Life must maintain a minimum of $250,000
capital and surplus. In addition, WMA Life must maintain a solvency
margin, defined as the excess of statutory assets over statutory
liabilities, of at least $250,000. Statutory assets and liabilities refer
to those assets and liabilities established in conforming to the
requirements of the Insurance Act for the statutory balance sheet. The
payment of dividends by WMA Life to the Company is restricted by Bermuda
law. WMA Life may not declare or pay a dividend or make a distribution
out of contributed surplus if, among other things, there are reasonable
grounds for believing that (a) WMA Life is, or would after the payment
be, unable to pay its liabilities as they become due; or (b) the
realizable value of WMA Life's assets would thereby be less than the
aggregate of its liabilities and its issued share capital and share
premium accounts. The amount available for distribution of dividends at
December 31, 1998 is $4,799,650. Additionally, the amount available for
distribution of dividends must be supported by liquid assets. As of
December 31, 1998, WMA Life met this requirement as the amount of
invested assets and quoted investments and cash was greater than
$4,799,650.
<PAGE> 48
THE WMA CORPORATION
Notes to Consolidated Financial Statements
(9) Capital Infusion
Pursuant to a registration statement filed with the Securities and
Exchange Commission, during 1995, the Company sold 500,000 common stock
warrants at $1 per warrant entitling the owner to purchase one share of
common stock at $10 per share and was authorized to sell up to 1,500,000
shares of common stock ($0.001 par value) for $10 a share. As of December
31, 1996, 1,393,808 shares of common stock had been sold and 411,742 of
the common stock warrants had been exercised. During the year ended
December 31, 1997, the remaining 88,258 common stock warrants were
exercised and an additional 106,192 shares of common stock were sold for
$10 a share. During 1997, the Company repurchased 2,200 outstanding
shares and 2,000 warrants from individual stockholders under the buy back
provisions of the stockholder agreement. The buy back of the warrants was
reflected as a return of paid-in capital in the accompanying statement of
stockholders' equity and comprehensive income and the repurchase of
common shares was recorded as treasury stock at the repurchase price of
$10 per share. During 1998, the Company repurchased an additional 2,790
outstanding shares from individual stockholders which was recorded as
treasury stock at the repurchase price of $10 per share.
(10) Commitments and Contingent Liabilities
From time to time, the Company may be subject to reinsurance-related
litigation and arbitration in the normal course of business. Management
does not believe that the Company is a party to any such pending
litigation or arbitration which would have a material adverse effect on
its future operations.
The Company has obtained letters of credit in favor of unaffiliated
insurance companies from which the Company assumes business. The posting
of a letter of credit allows the ceding company to take statutory reserve
credit for reinsurance ceded which would otherwise not be available as
WMA Life is not "authorized" (essentially licensed) by the ceding
company's state of domicile. At December 31, 1998, the amount of the
outstanding letters of credit was $3,730,000. The letters of credit were
issued by the Company's custodian and collateralized by the Company's
investments held with the custodian.
The Company currently leases office space from WMA Agency under a lease
agreement which expires in 2008. The agreement requires the Company to
pay during the first five years of the lease term an amount equivalent to
the rate paid by WMA Agency to its lessor. The rate paid is subject to
increase during the last five years of the lease term. Total rent expense
for the year ended December 31, 1998 was $18,675. The following is a
schedule of future minimum lease payments as of December 31, 1998:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999 $ 18,675
2000 18,675
2001 18,675
2002 18,675
2003 18,675
Thereafter 76,256
---------
$ 169,631
=========
</TABLE>
<PAGE> 49
THE WMA CORPORATION
Notes to Consolidated Financial Statements
(11) Short Term Debt
During 1998, the Company received short-term debt financing from Money
Services, Inc. (MSI). On September 30, 1998, the Company entered into a
$10,000,000 line of credit agreement with Money Services, Inc. under
which the Company immediately borrowed $5,000,000 to cover its immediate
cash needs. During the fourth quarter of 1998, the Company drew down the
remaining $5,000,000. Borrowings under this line of credit bear interest
at the rate of 8% per annum through March 31, 1999. Effective April 1,
1999, the outstanding interest balance at March 31, 1999 becomes
capitalized and the outstanding principal and accrued interest at such
time bears interest at the rate of 9% per annum. All outstanding balances
of principal and interest under this line of credit become due and
payable on August 1, 1999, unless extended by the lender.
The Company intends to repay the loans outstanding under the line of
credit with proceeds of a private sale of common stock to institutional
and other accredited investors or through alternative sources of
financing. If the stock sale does not occur or sufficient proceeds are
not obtained and alternative sources of financing are not obtainable at
an acceptable cost, the Company would be unable to repay amounts that it
had borrowed from MSI under the line of credit agreement. At the same
time, Western Reserve, pursuant to the terms of the line of credit
agreement with MSI, would, upon the Company's failure to timely repay
loans obtained under the line of credit agreement, have the right, until
such loans are paid in full, to (i) recapture business previously ceded
to the Company for reinsurance, and (ii) reduce the Company's quota share
of new business to be reinsured under reinsurance agreements to a level
where the Company's available cash could meet its continuing obligations
under the reinsurance agreements, which reduction in quota share
percentage 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 existing agreements.
Further, until proceeds from a private sale of common stock to
institutional and other accredited investors become available, to meet
the Company's continuing obligations to pay reinsurance expense
allowances under the coinsurance agreements with Western Reserve, the
Company is arranging reinsurance facilities to retrocede its in force and
new business. If the Company does not execute such an arrangement during
April of 1999, the Company would have the option to negotiate amendments
to the coinsurance and modified coinsurance agreements which would reduce
its future cash outlays or seek an increase in its line of credit with
MSI.
(12) Comprehensive Income
The following table sets forth the amounts of other comprehensive income
along with the related tax effects allocated to each component of other
comprehensive income for the years ended December 31, 1998, 1997, and
1996:
<PAGE> 50
THE WMA CORPORATION
Notes to Consolidated Financial Statements
Unrealized Gains on Securities
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ------------ -----------
<S> <C> <C> <C>
1998
Net unrealized holding gains arising
during period $ 396,316 (134,747) 261,569
Less: reclassification adjustment for
gains realized in net income 267,063 (90,801) 176,262
--------- -------- --------
Other comprehensive income $ 129,253 (43,946) 85,307
========= ======== ========
1997
Net unrealized holding gains arising
during period $ 429,259 (145,948) 283,311
Less: reclassification adjustment for
gains realized in net income -- -- --
--------- -------- --------
Other comprehensive income $ 429,259 (145,948) 283,311
========= ======== ========
1996
Net unrealized holding losses
arising during period $(188,614) 64,129 (124,485)
Less: reclassification adjustment for
gains realized in net income 1,752 (596) 1,156
--------- -------- --------
Other comprehensive income $(190,366) 64,725 (125,641)
========= ======== ========
</TABLE>
(13) 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 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 FAS 60 accounting principles. The
Company reinsures 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 FAS 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
<PAGE> 51
THE WMA CORPORATION
Notes to Consolidated Financial Statements
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.
<TABLE>
<CAPTION>
Non-
Universal Universal
Year-Ended December 31, 1998 Life-Type Life-Type Other Totals
---------------------------- --------- --------- ----- ------
<S> <C> <C> <C> <C>
Premiums $7,280,489 7,280,489
Reinsured policy revenues 4,098,371 4,098,371
Benefits, claims, and settlement expenses 3,416,315 26,316 3,442,631
Reinsurance premium allowances, net 1,943,321 974,162 2,917,483
Amortization of deferred acquisition costs 148,486 1,392,953 1,541,439
---------- ---------- ---------- ----------
Underwriting profit 1,772,367 1,704,940 3,477,307
Net investment income 142,071 75,569 733,461 951,101
Net realized gains on investments 267,063 267,063
Other expenses 18,538 121,371 1,159,344 1,299,253
---------- ---------- ---------- ----------
Segment operating income (loss) before
tax 1,895,900 1,659,138 (158,820) 3,396,218
Income tax expense (benefit) 644,606 564,107 (51,852) 1,156,861
---------- ---------- ---------- ----------
Segment net income (loss) after income
taxes $1,251,294 1,095,031 (106,968) 2,239,357
========== ========== ========== ==========
Segment assets $5,526,761 31,774,119 7,580,293 44,881,174
========== ========== ========== ==========
<CAPTION>
Non-
Universal Universal
Year-Ended December 31, 1997 Life-Type Life-Type Other Totals
---------------------------- --------- --------- ----- ------
<S> <C> <C> <C> <C>
Premiums $5,217,365 5,217,365
Reinsured policy revenues 195,124 195,124
Benefits, claims, and settlement expenses 2,408,842 2,408,842
Reinsurance premium allowances, net 1,491,878 19,980 1,511,858
Amortization of deferred acquisition costs (24,397) 88,026 63,629
---------- ---------- ----------
Underwriting profit 1,341,042 87,118 1,428,160
Net investment income 108,154 979,311 1,087,465
Other income 300,000 300,000
Other expenses -- 9,429 470,952 480,381
---------- ---------- ---------- ----------
Segment operating income before tax 1,449,196 77,689 808,359 2,335,244
Income tax expense 492,727 26,414 296,602 815,743
---------- ---------- ---------- ----------
Segment net income after income taxes $ 956,469 51,275 511,757 1,519,501
========== ========== ========== ==========
Segment assets $4,645,261 2,843,360 17,577,284 25,065,905
========== ========== ========== ==========
</TABLE>
<PAGE> 52
THE WMA CORPORATION
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Non-
Universal
Year-Ended December 31, 1996 Life-Type Other Totals
---------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Premiums $2,007,391 2,007,391
Benefits, claims, and settlement expenses 976,635 976,635
Reinsurance premium allowances, net 576,297 576,297
Amortization of deferred acquisition costs 6,414 6,414
---------- ----------
Underwriting profit 448,045 448,045
Net investment income 44,758 580,125 624,883
Net realized gains on investments 1,752 1,752
Other expenses -- 417,520 417,520
---------- ---------- ----------
Segment operating income before tax 492,803 164,357 657,160
Income tax expense (benefit) 167,553 (54,745) 112,808
---------- ---------- ----------
Segment net income after income taxes $ 325,250 219,102 544,352
========== ========== ==========
Segment assets $1,920,028 17,349,691 19,269,719
========== ========== ==========
</TABLE>
Of the total premiums and reinsured policy revenues above, 89%, 95%, and
100% relates to Western Reserve, for 1998, 1997, and 1996, respectively.
Of the total underwriting profit above, 83%, 91%, and 100% relates to
Western Reserve, for 1998, 1997, and 1996, respectively.
The Company estimates that for 1998 approximately 46% of variable
universal life premiums and 32% of variable annuity premiums, written
through Western Reserve and sold by WMA Agency, originated in California.
* Non-universal life-type agreements and universal life-type agreements
as referenced in FAS 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.
(14) Year 2000
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. The Company is
dependent on the data processing systems of the Ceding Life Companies for
the year 2000 and beyond. Due to this dependence, the failure of the
systems of the Ceding Life Companies to be year 2000 compliant could have
a material adverse effect upon the Company, as a result of business
interruption or loss of revenue sources. There can be no assurance that
these systems will be able to properly process information relating to
the year 2000 and beyond. The Company has also discussed the Year 2000
issue with the Ceding Life Companies, and in particular Western Reserve,
and the steps they have taken, or intend to take, to address the
situation. The Company has not been required to expend significant
resources to address the Year 2000 issue and does not anticipate any
significant expenditures.
<PAGE> 53
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Snyder, Camp, Stewart & Company, LLP was previously the principal
accountants for WMA International Corporation. On December 4, 1996, that firm's
appointment as principal accountants was terminated and KPMG Peat Marwick LLP
was engaged as principal accountants. The decision to change accountants was
approved by the Board of Directors.
In connection with the audit of the period from inception (March 9,
1995) through December 31, 1995, and the subsequent interim period through
December 4, 1996, there were no disagreements with Snyder, Camp, Stewart &
Company, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit report of Snyder, Camp, Stewart & Company, LLP on the
financial statements of WMA International Corporation as of December 31, 1995
and for the period from inception (March 9, 1995) through December 31, 1995, did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The executive officers and directors of the Company as of December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
S. Hubert Humphrey, Jr.............. 56 President and Director of the Company and President of
WMA Life
Thomas W. Montgomery................ 49 Executive Vice President, Secretary and Director of the
Company and Vice President of WMA Life
Edward F. McKernan.................. 43 Senior Vice President, Chief Financial Officer, Actuary
and Director of the Company, and Vice President and
Actuary of WMA Life
C. Simon Scupham.................... 45 Director
Joseph F. Barone.................... 62 Director
</TABLE>
<PAGE> 54
The following is certain additional information concerning each of the
executive officers and directors of the Company.
Mr. Humphrey serves as President and Director of the Company and of all
of the Company's subsidiaries. Mr. Humphrey is also a Director, President and
CEO of WMA Agency, a corporation engaged in business as an insurance agency,
which has, for licensing purposes, interests in certain related entities and is
associated with persons involved in the marketing and sale of insurance,
annuities and other financial services products. Mr. Humphrey also holds various
positions with the following companies affiliated with WMA Agency: a Director
and President of WMA Management Services, Inc., a corporation engaged in
providing executive management services; a Director of WMA Investment Advisors,
Inc., a registered investment adviser engaged in providing investment advice to
customers; a Director and President of WMA Advisory Services, Inc., a registered
investment adviser engaged in providing asset allocation modeling investment
advisory services, and the owner of WMA Securities, a securities brokerage firm;
and WMA Consumer Services, Inc., a consumer financial services firm.
Mr. Humphrey has been involved in the financial services field for 19
years. Until November 1, 1991, he was associated as an independent sales
contractor with the A. L. Williams Agency, a nationwide financial services
company. The A. L. Williams Agency was acquired by Primerica Financial Services,
Inc. ("PFS") in 1989. Mr. Humphrey left PFS in November of 1991 to form WMA
Agency which began operations on December 1, 1991. Mr. Humphrey was also a
Director, President, and owner of Williams, Humphrey & Associates, Inc., an
insurance agency, from 1978 until November 25, 1991.
Mr. Montgomery holds the position of Director and Executive Vice
President of the Company and Vice President of all of the Company's
subsidiaries. Mr. Montgomery is also an Executive Vice President of WMA Agency;
a Director, Vice President and Secretary of WMA Management Services, Inc., a
corporation engaged in providing executive management services; a Director of
WMA Investment Advisors, Inc., a corporation engaged in providing investment
advice to customers; a Director and Vice President of WMA Advisory Services,
Inc., a corporation engaged in providing asset allocation modeling investment
advisory services; and a Director and President of WMA Consumer Services, Inc.,
a consumer financial services firm.
Mr. Montgomery is a certified public accountant, and is a former audit
and tax partner in the accounting firms of Richter & Company, P.C. and Davis,
Crittenden, Richter & Fletcher, where he worked from 1973 to 1994 after
graduation from Norman College and Florida State University. As a certified
public accountant, Mr. Montgomery represented Mr. Humphrey and his various
business interests including WMA Agency between 1981 and 1994.
Mr. McKernan became Senior Vice President and Actuary of the Company in
April 1996 and was elected a Director of the Company in August 1997. He was
named Chief Financial Officer of the Company in December 1997. Mr. McKernan, an
actuary, has been a Vice President and Actuary of WMA Life since April 1996. He
has also been Senior Vice President and Actuary of World Marketing Alliance,
Inc. since April 1996. Immediately prior to joining
<PAGE> 55
the Company, Mr. McKernan had been a Senior Manager for three years in the Life
Actuarial Consulting Practice of KPMG Peat Marwick LLP. From August 1990 through
September 1993, Mr. McKernan was the Marketing Actuary of U.S. Operations for
Seaboard Life Insurance Company. Prior to his tenure with this firm, Mr.
McKernan was employed by Tillinghast, a Towers Perrin company, as a consultant,
which is an international actuarial consulting firm. He is a Fellow of the
Society of Actuaries (1988) and a Member of the American Academy of Actuaries
(1985).
Mr. Scupham was elected a Director of the Company in April 1996. Since
1988, he has been the President of CFM Insurance Managers, Ltd., ("CFM") a
Bermuda corporation incorporated in 1988 that provides professional management
services to international companies operating in Bermuda. He is a qualified
Chartered Accountant (CA) and Associate Fellow of the Institute of Mathematics
and its Applications. Mr. Scupham is also President of Mutual Risk Management
(Bermuda) Ltd., the parent company of CFM Insurance Managers, Ltd., and
Shoreline Mutual Management (Bermuda) Limited. Prior to joining CFM, Mr. Scupham
served as the director of Bermuda operations for the Kemper Group.
Mr. Barone became a Director of the Company in June 1998. Since July
1997, he has been Managing Director - Research of The Firemark Group of
Morristown, New Jersey, a private merchant-banking firm. From January 1992
through June 1997, he was associated with Swiss Re Insurance as a Senior Vice
President. From 1981 through 1991, he was a Managing Director of Investment
Banking for the insurance industry at Bear Stearns & Company, Inc. Mr. Barone is
a member of the New York Society of Security Analysts and the Association of
Insurance and Financial Analysts. He is a Chartered Financial Analyst.
ITEM 10. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
--------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
S. Hubert Humphrey, Jr. 1998 0 0 $ 240,708
President and Chief 1997 0 0 177,135
Executive Officer 1996 0 0 188,870
Thomas W. Montgomery 1998 0 0 0
Executive Vice President and Secretary 1997 0 0 0
1996 0 0 0
Edward F. McKernan 1998 $78,806 0 0
Senior Vice President and Actuary 1997 0 0 0
Chief Financial Officer 1996 0 0 0
</TABLE>
(1) Amounts shown represent payments made by the Company to entities
controlled by Mr. Humphrey pursuant to written agreements between
these entities and the Company. Such payments, while not paid
directly to Mr. Humphrey may be deemed to be indirect compensation
to Mr. Humphrey.
<PAGE> 56
For the years reflected in the above table, no direct compensation was
awarded to, earned by or paid to any of the directors and executive officers of
the Company, except for Mr. McKernan, nor were there any employee agreements.
Prior to 1998, the Company has relied upon WMA Agency, WMA Management, and third
party providers for all managerial and administrative services. During 1998, the
Company employed its own personnel but continues to reimburse WMA Agency for
expenses incurred on its behalf. For the year ended December 31, 1998, all of
the $240,708 was reimbursed to WMA Agency for expenses paid on the Company's
behalf. These expenses related to outside service providers, travel and
miscellaneous operating expenses. For 1997 and 1996, such amounts were $57,135
and $69,751, respectively. The remaining balances from the amounts shown in the
above table are primarily the result of personnel costs relating to the use of
certain employees of WMA Agency and WMA Management Services, Inc. to perform the
day-to-day activities of the Company in prior years. During 1998, Messrs.
Humphrey, Montgomery and McKernan devoted approximately 2%, 4%, and 50% of their
time, respectively to the Company's business, which the Board of Directors
deemed appropriate for the Company's business activities.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership as of December
31, 1998, of those persons, known by the Company to beneficially own more than
5% of its Common Stock. There is presently no public market for shares of the
Common Stock. The determination of "beneficial ownership" is made pursuant to
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "1934
Act"). Such Rule provides that shares shall be deemed to be "beneficially owned"
where a person or group has, either solely or in conjunction with others, the
power to vote or direct the voting of shares and/or the power to dispose, or to
direct the disposition of shares; or where a person or group has the right to
acquire any such power within 60 days after the date such "beneficial ownership"
is determined. Furthermore, shares not outstanding which are subject to options
or warrants are deemed to be outstanding for the purpose of computing the
percentage of outstanding shares owned by the persons shown in the tables below.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF
BENEFICIAL OWNER NUMBER OF SHARES CLASS
---------------- ---------------- -----------
<S> <C> <C>
S. Hubert Humphrey, Jr. 900,311(1) 36.1%
Richard L. Thawley 200,000 (2) 8.0%
1110 W. Kettleman Lane, Ste. 240
Lodi, CA 95240
Monte Holm 153,500 (3) 6.2%
2004 Calle de Espana
Las Vegas, NV 89102
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 57
(1)Includes 400,311 shares of Common Stock, for which WMA Agency (of which Mr.
Humphrey is the principal stockholder) holds proxies of Common Stock obtained in
connection with loans made to certain agents of WMA Agency.
(2) Mr. Thawley owns 108,200 shares individually of record. 91,800 shares are
owned by an IRA rollover trust for the benefit of Mr. Thawley and his wife.
(3)Mr. Holm owns 3,500 shares individually of record and 40,000 shares jointly
of record with his wife. 110,000 shares are held of record by seven trusts
created by Mr. Holm and his wife.
Mr. Thawley and Mr. Holm are independent sales associates of WMA Agency.
The following table sets forth as of December 31, 1998 the amount of
Common Stock beneficially owned by the directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES(1) PERCENT OF CLASS
------------------------------------ ------------------- ----------------
<S> <C> <C>
S. Hubert Humphrey, Jr. 900,311(2) 36.1%
Thomas W. Montgomery 9,908 0.4
Edward F. McKernan 5,000 0.2
C. Simon Scupham None 0
Joseph F. Barone None 0
All directors and executive officers as a Group (5 915,219 36.7%
persons)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All shares are owned individually of record unless otherwise indicated
below.
(2) Includes 400,311 shares of Common Stock, for which WMA Agency (of which
Mr. Humphrey is the principal stockholder) holds voting proxies. Mr.
Humphrey has pledged all of the above shares of Common Stock as security
for several loans.
Pledge of Shares
In 1995, Mr. Humphrey pledged 500,000 of his shares of the Company's
Common Stock in connection with a loan made by Money Services, Inc. to WMA
Agency ("Agency Loan"). Money Services, Inc. is a subsidiary of AEGON USA, Inc.,
as is Western Reserve, for whom the Company provides reinsurance. (See Item 1.
"Description of Business - Reinsurance Relationships".) Western Reserve
underwrites the largest proportion of VUL business sold by WMA Agency, a large
percentage of which was reinsured by the Company in 1998, 1997, and 1996. (See
Item 6, "Management's Discussion and Analysis or Plan of Operation - Overview".)
Part of the loan proceeds were allocated for use by WMA Agency to make
loans to certain of its WMA Sales Associates (the "Agent Loans") to acquire
shares of common stock in the 1995 offering. As of December 31, 1998, the
outstanding principal amount of the Agent Loans was $1,117,451. As security for
the Agent Loans, 400,311 WMA Sales Associates' shares of common stock are
pledged to WMA Agency. Each pledge is accompanied by an irrevocable proxy which
grants to WMA Agency or its nominee the right to exercise, in its sole and
absolute discretion, all voting power relating to the pledged shares until all
indebtedness owed by the borrower to WMA Agency is no longer outstanding.
<PAGE> 58
The Agency Loan, which was in the initial principal amount of
$2,250,000 in 1995, was subsequently consolidated into a WMA Agency line of
credit facility and the maximum available amount was increased to $7,750,000. On
November 30, 1997, this line of credit facility was increased to an amount of
$14,750,000. As advised by WMA Agency, this line of credit was increased on
March 19, 1999 to $17,750,000. Mr. Humphrey's pledge of his shares of Common
Stock is one of the various forms of collateral for this line of credit, which
as of March 30, 1999 had an outstanding balance of approximately $17 million.
Upon default on this credit line, the lender, Money Services, Inc., a subsidiary
of AEGON USA, Inc., would have the right to take title to the pledged shares and
to exercise voting control. This line of credit is being amortized over a
fifteen year period ending November 1, 2012 with principal and interest payable
monthly by WMA Agency. Interest is calculated in arrears based on AEGON USA's
cost of its five year senior debt instruments, which is, in turn, based upon
five year U.S. Treasury Notes, plus an underwriters override. Interest on the
line of credit is adjusted every five years.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Conflicts of Interest
Mr. Humphrey, the Company's Chief Executive Officer, is the beneficial
owner of approximately 36.1% of the Company's Common Shares outstanding. Mr.
Humphrey, together with his wife, Norma P. Humphrey, owns substantially all the
outstanding shares of World Marketing Alliance, Inc., and certain affiliated
entities constituting WMA Agency which recruit train and supervise the sales
force responsible for selling life insurance and annuity contracts reinsured by
the Company. In addition, Mr. Humphrey and certain directors and officers of the
Company are also employees of WMA Agency. (See Item 9 above.) The Company has
and may continue to enter into transactions from time to time with WMA Agency,
Mr. Humphrey, other officers or directors of the Company or their affiliates.
Such transactions necessarily involve conflicts of interest, and the terms of
such transactions may not necessarily be equivalent to the terms of transactions
entered into between unrelated parties pursuant to arms length negotiations.
The Company's officers do not, and are not required to, devote their
time exclusively to the business of the Company, nor are they subject to
non-competition agreements. As a consequence, they could legally engage in
activities which could be adverse to the best interests of the Company, subject
to their fiduciary obligations to the Company under applicable corporate law.
In view of the substantial relationships among the Company, WMA Agency,
and Mr. Humphrey, conflicts of interest will exist or arise with respect to
existing and future business dealings, including, without limitation: the terms
of WMA Agency's selling agreements (including commission arrangements) and the
Company's reinsurance relationships with life insurance companies; the relative
commitment of time and energy of Mr. Humphrey and the other common executive
officers of WMA Agency and the Company; agreements between the Company and WMA
Agency; potential acquisitions of properties or businesses; the issuance of
<PAGE> 59
additional securities by the Company; the election of the Company's directors;
and the payment of dividends by the Company.
The Company's Board of Directors recently amended the Company's by-laws
to require transactions in which a director or executive officer has a direct or
indirect material interest to be approved by a majority of the Board of
Directors, including two independent and disinterested directors, after full
disclosure, or by the vote of the holders of a majority of the shares of Common
Stock outstanding. The Company is currently seeking potential candidates to
serve as an "independent" director. There can be no assurance that any conflicts
of interest will be resolved in favor of the Company.
Conflicts with WMA Agency
Commissions for sales of life insurance and annuity contracts reinsured
by the Company are paid to WMA Agency and WMA Sales Associates by the Ceding
Life Companies. Mr. Humphrey and Mr. Montgomery receive direct compensation from
WMA Agency and receive virtually no direct compensation from the Company. In
addition, Mr. Humphrey, Mr. Montgomery, and certain of the directors of the
Company are also executive officers and employees of companies constituting WMA
Agency. As a result of such relationships, the interests of WMA Agency, with
respect to the commissions received on life insurance sales by WMA Agency from
the Ceding Life Companies (and indirectly under coinsurance agreements from the
Company), may conflict with the interests of the Company in negotiating
reinsurance agreements beneficial to the Company.
Directed Reinsurance Agreement with WMA Agency
On June 8, 1998, the Company entered into a Directed Reinsurance
Agreement with WMA Agency which provides that WMA Agency will use its best
efforts to cause any life insurance company with which WMA Agency has selling
agreements ("Life Companies") to enter into reinsurance agreements with the
Company covering the life insurance products sold through WMA Agency (the
"Directed Reinsurance Agreement").
The Directed Reinsurance Agreement provides that: (i) WMA Agency may
not enter into a selling agreement with a Life Company prior to allowing the
Company the opportunity to provide the terms and conditions of reinsurance which
the Company desires to include in such selling agreement; and (ii) WMA Agency
must give the Company 120 days' notice of the termination of any selling
agreement with a Life Company or of its intention to discontinue the sale of any
life insurance product. As further consideration, the Directed Reinsurance
Agreement also provides that whenever the Company offers for sale additional
shares of its Common Stock to the public at large, it shall offer no less than
25% of such offering to WMA Sales Associates and other persons designated by WMA
Agency in a concurrent offering or otherwise, unless the underwriter of the
public offering shall be of the opinion that such directed offering to WMA Sales
Associates would substantially impair the underwritten offering, in which event,
the percentage of directed shares would be reduced or eliminated as required by
the underwriter. The Directed Reinsurance Agreement expires after the earlier
of: (a) ten years; (b)
<PAGE> 60
material breach by either party; or (c) the occurrence of any circumstances that
adversely affects the ability of WMA Agency or the Company to perform its
obligations under the agreement.
The Company believes that this agreement will give it the ability to
continue its existing arrangement with the existing Life Companies for at least
ten years and provide partial protection against a change in control of WMA
Agency during the same period. The agreement also enables the Company to have
the opportunity to provide reinsurance to life insurance companies with whom WMA
Agency may enter into sales agreements in the future.
Management and Related Services
The Company had a management agreement through December 31, 1997 with
WMA Management, which is owned 100% by Mr. Humphrey, who is its director and
President. WMA Management was responsible for the day-to-day activities of the
Company. For these services, WMA Management received an annual fee of $120,000
for services rendered in 1997 and $119,119 in 1996. Due to the Company's
expected employment of its own personnel in 1998, the management agreement was
terminated as of December 31, 1997. During 1998, WMA Management did not provide
any such consulting services for the Company.
For the first quarter of 1998, employees of WMA Agency performed the
Company's administrative functions. The Company paid WMA Agency a monthly
payroll allocation based upon the amount of time during which WMA Agency
employees provided services to the Company. The Company also received other
services from WMA Agency, including the funding of certain operating and travel
related expenses, as it had in 1997 and 1996.
Effective April 1, 1998, the Company entered into a Corporate Services
Agreement with WMA Agency pursuant to which WMA Agency provides corporate
services and supplies to the Company for a fixed monthly fee of $2,250,
adjustable annually. Such services include facilities maintenance, security,
human resources, mail services, utilities, postage, telephone and copier
expense. The Company incurred $240,708, $57,135 and $69,751 of costs for these
services from WMA Agency for the years ended December 31, 1998, 1997, and 1996,
respectively. The Company has reimbursed WMA Agency for all such expenditures.
Principal Representative Agreement
On August 2, 1995, WMA Life entered into an agreement with CFM, a
Bermuda corporation providing professional management services to international
companies operating in Bermuda. C. Simon Scupham, a director of the Company, is
the President of CFM. Pursuant to this agreement, CFM acts as the Principal
Representative for WMA Life in Bermuda. This agreement is for an unlimited
duration, but may be terminated by either party upon 90 days prior written
notice or upon 30 days prior written notice under specified circumstances. The
Company paid CFM $60,000 in fees during 1998, 1997, and 1996 pursuant to its
agreement with the Company.
<PAGE> 61
Lease Agreement with WMA Agency
Effective February 1, 1998, the Company entered into an agreement with
WMA Agency to sublease on a triple net basis, approximately 1,500 square feet of
office space for the Company's offices in Duluth, Georgia. The initial term of
the sublease is ten years at an annual base rent of $18,675 for the first five
years of the lease term, which annual base rent will increase by approximately
13.5% thereafter. A "triple net" lease means that the Company as the subtenant,
in addition to being required to pay the stipulated rent, must also pay its
proportionate share of the taxes, insurance and common space maintenance cost
applicable to the entire building being leased by WMA Agency from AEGON, USA,
Inc. ("AEGON").
Pledge of Shares
The Company's major shareholder, S. Hubert Humphrey, Jr., in 1995
pledged all of his shares of the Company's common stock in connection with a
loan made to WMA Agency ("the Agency Loan"). Part of the Agency Loan proceeds
were allocated for use by WMA Agency to make loans to certain WMA Sales
Associates (the "Agent Loans") to finance 20% of the cost to acquire shares of
common stock in the 1995 offering. As of December 31, 1998, the outstanding
principal amount of the Agent Loans was $1,117,451. The WMA Sales Associates'
shares of common stock are pledged to WMA Agency as security for these Agent
Loans. The Agent Loans are payable in 60 equal monthly payments of principal and
interest and may not be prepaid. The shares acquired by the WMA Sales Associates
are non-transferable during the loan term. Proxies have been executed in favor
of WMA Agency for voting such shares of common stock for so long as the Agent
Loans are outstanding. By virtue of his ownership of WMA Agency, Mr. Humphrey is
considered to be the beneficial owner of the 400,311 shares o and is able to
control the proxies relating to them.
The Agency Loan, which was in the initial principal amount of
$2,250,000 in 1995, was subsequently consolidated into a WMA Agency line of
credit facility, and the maximum available was increased to $7,750,000. On
November 30, 1997, this line of credit facility was increased to an amount of
$14,750,000. As advised by WMA Agency, on March 19, 1999, this line of credit
was increased to a maximum available amount of $17,750,000. Mr. Humphrey's
pledge of his shares of Common Stock is one of the various forms of collateral
for this line of credit, which as of March 30, 1999 had an outstanding balance
of approximately $17 million. Upon default on this credit line, the lender,
Money Services, Inc., would have the right to take title to the pledged shares
and to exercise voting control. This line of credit is being amortized over a
fifteen year period ending November 1, 2012 with principal and interest payable
monthly. Interest is calculated in arrears based on AEGON's cost of its five
year senior debt instruments, which is, in turn, based upon five year U.S.
Treasury Notes, plus an underwriters override. Interest on the line of credit is
adjusted every five years.
Future Conflicts of Interest
The Company has in the past and may from time to time in the future
enter into other transactions with WMA Agency and other affiliates of its
directors and officers, provided that
<PAGE> 62
the terms thereof are, in the view of the Board of Directors, no less favorable
to the Company than could be obtained from a third party.
Lack of Separate Legal Representation
During 1998, counsel for the Company, Merritt & Tenney, LLP, of
Atlanta, Georgia, also represented WMA Agency, WMA Securities and Mr. Humphrey.
Should a conflict of interest result from this lack of separate legal
representation, the independent and disinterested directors shall select
independent counsel to represent the Company and to advise the Company with
respect to the conflict of interest.
<PAGE> 63
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
No reports were required to be filed on Form 8-K.
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Articles of Incorporation (1)
3.1.1 Amendment to Articles of Incorporation changing name of
Company to "The WMA Corporation" (2)
3.2 Bylaws (1)
3.2.1 Amendment to By-Laws re Related Party Transactions (3)
10.1 Automatic Variable Annuity Reinsurance Agreement between
Western Reserve Life Assurance Company of Ohio and WMA Life
Insurance Company Limited effective January 1, 1998 (4)
10.2 Sublease Agreement between World Marketing Alliance, Inc. and
The WMA Corporation dated January 21, 1998 (5)
10.3 Corporate Services Agreement with World Marketing Alliance,
Inc. and The WMA Corporation dated April 1, 1998 (4)
10.4 Automatic Variable Universal Life Reinsurance Agreement
between Western Reserve Life Assurance Company of Ohio and WMA
Life Insurance Company Limited effective April 1, 1998 (4)
10.5 Directed Reinsurance Agreement between WMA Life Insurance
Company Limited and World Marketing Alliance, Inc. dated June
8, 1998 (6)
10.6 Revolving Line of Credit Loan Agreement between The WMA
Corporation and Money Services, Inc. dated September 30, 1998
(6)
10.7 Revolving Line of Credit Promissory Note issued by The WMA
Corporation on September 30, 1998 to Money Services, Inc. in
the principal sum of $10,000,000 (6)
27.1 Financial Data Schedule (Attached) (for SEC use only)
<PAGE> 64
FOOTNOTES TO PRECEDING PAGE:
(1) Filed on June 28, 1995 as part of the Registration Statement and
incorporated herein by reference pursuant to Rule 12b-32.
(2) Filed on May 15, 1998 as an Exhibit to Form 10-QSB for the period ended
March 31, 1998 and incorporated herein by reference pursuant to Rule
12b-32.
(3) Filed on June 9, 1998 as an Exhibit to the Registration Statement and
incorporated herein by reference pursuant to Rule 12b-32.
(4) Filed on August 20, 1998 as an Exhibit to Form 10-QSB for the period
ended June 30, 1998 and incorporated herein by reference pursuant to
Rule 12b-32.
(5) Filed on October 1, 1998 as an Exhibit to Amended Form 10-KSB/A for the
fiscal year ended December 31, 1997 and incorporated herein by
reference pursuant to Rule 12b-32.
(6) Filed on November 16, 1998 as an Exhibit to Form 10-QSB for the period
ended September 30, 1998 and incorporated herein by reference pursuant
to Rule 12b-32.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 65
SIGNATURES
In accordance with section 13 or 15(d) 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 (Signature and Title) /s/ S. Hubert Humphrey, Jr.
-------------------------------------------------------
S. Hubert Humphrey Jr., President and Director
Date: March 31, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By (Signature and Title) /s/ S. Hubert Humphrey, Jr.
-------------------------------------------------------
S. Hubert Humphrey Jr., President and Director
Date: March 31, 1999
By (Signature and Title) /s/ Thomas W. Montgomery
-------------------------------------------------------
Thomas W. Montgomery, Executive Vice President,
Secretary and Director
Date: March 31, 1999
By (Signature and Title) /s/ Edward F. McKernan
-------------------------------------------------------
Edward F. McKernan, Senior Vice President, Chief
Financial Officer, Actuary and Director
Date: March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WMA CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 9,869,679
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,869,679
<CASH> 6,617,710
<RECOVER-REINSURE> 101,034
<DEFERRED-ACQUISITION> 27,537,866
<TOTAL-ASSETS> 44,881,174
<POLICY-LOSSES> 2,624,020
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
2,500
<COMMON> 24,370,639
<OTHER-SE> 44,881,174
<TOTAL-LIABILITY-AND-EQUITY> 7,280,489
951,101
<INVESTMENT-INCOME> 267,063
<INVESTMENT-GAINS> 4,098,371
<OTHER-INCOME> 3,442,631
<BENEFITS> 1,541,439
<UNDERWRITING-AMORTIZATION> 2,917,483
<UNDERWRITING-OTHER> 3,396,218
<INCOME-PRETAX> 1,156,861
<INCOME-TAX> 2,239,357
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,239,357
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
