<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR
THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER 0-23637
THE WMA CORPORATION
(Name of small business issuer as specified in its charter)
DELAWARE 58-2179041
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11315 JOHNS CREEK PARKWAY, DULUTH, GEORGIA 30097
(Address of principal executive offices)
(770) 248-3311
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
As of July 31, 2000, there were 2,495,010 shares of common stock ($.001
par value) outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ITEM 1 Financial Statements 3
ITEM 2 Management's Discussion and Analysis or Plan of Operation 10
PART II
ITEM 1 Legal Proceedings 17
ITEM 2 Changes in Securities and Use of Proceeds 17
ITEM 3 Defaults Upon Senior Securities 18
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
</TABLE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE> 3
THE WMA CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities - available for sale (amortized cost of
$5,831,479 and $2,118,705 for 2000 and 1999, respectively) $ 5,765,344 $ 2,054,231
Cash and cash equivalents 5,423,572 3,475,950
Investment income due and accrued 93,006 19,443
Reinsurance balances receivable 2,007,912 2,985,937
Reinsured policy loans 601,684 286,963
Deferred acquisition costs 41,997,619 39,750,100
Prepaid expenses 77,179 346,894
Due from World Marketing Alliance, Inc. 434 --
Fixed assets (net of accumulated depreciation of $78,701 and $55,017
for 2000 and 1999, respectively) 67,974 88,332
Other assets 24,903 --
------------ ------------
Total assets $ 56,059,627 $ 49,007,850
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 6,102,976 $ 4,494,786
Reinsurance balances payable 1,000,707 716,330
Accrued expenses 82,996 110,885
Accrued interest payable 211,656 665,789
Accounts payable 42,745 46,696
Due to World Marketing Alliance, Inc. -- 2,559
Current income taxes payable 150,411 --
Short term debt 4,650,000 1,125,000
Long term debt 5,164,678 9,178,562
Deferred tax liability 5,107,861 4,259,599
------------ ------------
Total liabilities 22,514,030 20,600,206
------------ ------------
Stockholders' equity:
Preferred stock, par value $2.00, 10,000,000
shares authorized; 7% Series A convertible preferred stock;
262,674 shares issued in 2000 525,348 --
Common stock, par value $.001, 50,000,000 shares authorized;
2,500,000 shares issued in 2000 and 1999 2,500 2,500
Additional paid-in capital 22,754,520 20,228,973
Accumulated other comprehensive loss (43,649) (42,552)
Retained earnings 10,356,778 8,268,623
Treasury stock, at cost (4,990 shares for 2000 and 1999) (49,900) (49,900)
------------- ------------
Total stockholders' equity 33,545,597 28,407,644
------------- ------------
Total liabilities and stockholders' equity $ 56,059,627 $ 49,007,850
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 4,086,881 $ 2,075,419 $ 7,763,054 $ 4,111,776
Reinsured policy revenues 3,192,325 3,765,490 6,212,593 6,357,638
Net investment income 148,586 127,551 219,228 284,270
Net realized gain on investments -- 21,626 -- 21,626
------------ ----------- ----------- -----------
Total revenue 7,427,792 5,990,086 14,194,875 10,775,310
Benefits and expenses:
Benefits, claims and settlement expenses 1,844,690 1,323,064 3,680,307 2,480,743
Change in future policy benefits 412,972 4,540 848,525 20,203
Reinsurance premium allowances, net 1,799,013 1,445,936 3,365,409 2,318,540
Amortization of deferred acquisition costs 1,105,138 1,075,526 2,191,281 2,089,818
Professional fees and other expenses 273,822 198,430 587,724 478,192
Interest expense 206,386 300,159 410,376 502,622
Fees to World Marketing Alliance, Inc. 11,553 11,553 23,105 23,105
------------ ------------ ------------ ------------
Total benefits and expenses 5,653,574 4,359,208 11,106,727 7,913,223
------------ ------------ ------------ ------------
Income before income taxes and dividends 1,774,218 1,630,878 3,088,148 2,862,087
Income tax expense (552,502) (552,709) (999,238) (973,110)
------------ ------------ ------------ ------------
Net income 1,221,716 1,078,169 2,088,910 1,888,977
Preferred dividends (754) -- (754) --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,220,962 $ 1,078,169 $ 2,088,156 $ 1,888,977
============ ============ ============ ============
Basic and diluted earnings per share $ 0.49 $ 0.43 $ 0.84 $ 0.76
============ ============ ============ ============
Weighted-average common shares outstanding 2,495,010 2,495,010 2,495,010 2,495,010
============ ============ ============ ============
Weighted-average diluted shares 2,496,453 2,495,010 2,496,453 2,495,010
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THE WMA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,088,910 $ 1,888,977
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Amortization and depreciation 2,214,965 2,201,806
Deferred tax expense 848,262 973,110
Net realized gain on investments -- (21,626)
Change in:
Investment income due and accrued (73,563) 54,092
Reinsurance balances receivable 978,025 (224,647)
Reinsured policy loans (314,721) (79,908)
Deferred acquisition costs (4,438,800) (22,261,502)
Prepaid expenses 269,715 (125,781)
Due from World Marketing Alliance, Inc. (434) 1,978
Other assets (24,903) 164,809
Future policy benefits 1,608,190 1,295,932
Reinsurance balances payable 284,377 6,438,117
Accrued expenses (27,137) 30,149
Accrued interest payable (454,133) 130,096
Accounts payable (3,951) 88,070
Due to World Marketing Alliance, Inc. (2,559) --
Current income tax payable 150,411 --
------------ ------------
Net cash provided by (used in) operating activities 3,101,146 (9,446,328)
------------ ------------
Cash flows from investing activities:
Proceeds from sale and maturity of available for sale securities 39,647 3,656,665
Purchase of available-for-sale securities (3,751,856) --
Purchase of fixed assets (3,326) (50,880)
------------ ------------
Net cash (used in) provided by investing activities (3,715,535) 3,605,785
------------ ------------
Cash flows from financing activities:
Capitalization of interest on short-term debt -- 303,562
Repayment of principal on long-term note (488,884) --
Issuance of preferred stock 3,050,895 --
------------ ------------
Net cash provided by financing activities 2,562,011 303,562
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,947,622 (5,536,981)
Cash and cash equivalents at beginning of period 3,475,950 6,617,710
------------ ------------
Cash and cash equivalents at end of period $ 5,423,572 $ 1,080,729
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 873,668 $ --
============ ============
Income taxes paid $ -- $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THE WMA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-QSB of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The unaudited financial statements should be read in
conjunction with the Company's audited financial statements included in the
Company's 1999 Form 10-KSB/A Annual Report as filed with the Securities and
Exchange Commission.
(2) DEFERRED TAX
Deferred income tax liabilities and related expenses are determined in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS No. 109) using an effective federal tax rate of 34%. SFAS
No. 109 specifically excludes recognition of the "small life insurance company
deduction" available under Section 806 of the Internal Revenue Code for
qualifying life insurance companies. This special deduction can reduce the
effective federal income tax rate from 34% to less than 20% depending upon the
amount of taxable income. Consequently, the effective tax rate on the Company's
earnings may ultimately prove to be less than the deferred income tax
liabilities and related expenses determined under SFAS No.109, at June 30, 2000.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130), establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The primary component of other
comprehensive income is the unrealized gain (loss) on securities as shown under
the equity section of the consolidated balance sheet. Total other comprehensive
income for the three months ended June 30, 2000 was $1,219,493 compared to
$923,333 for the three months ended June 30, 1999. Total other comprehensive
income for the six months ended June 30, 2000 was $2,087,059 compared to
$1,623,847 for the six months ended June 30, 1999.
(4) 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.
In June 1999, SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 was issued
which deferred the effective date of SFAS No. 133 until June 15, 2000. In June
2000, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of FASB Statement No. 133 was issued. This
statement, effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, amends the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and hedging activities. The Company does not
believe such provisions will have a significant impact on the financial
statements upon adoption.
6
<PAGE> 7
(5) EARNINGS PER SHARE
Basic earnings per share are computed on the weighted-average number of
shares outstanding in accordance with SFAS No. 128, Earnings Per Share. Shares
of convertible preferred stock issued on June 30, 2000, are included in the
calculations of the weighted-average diluted shares outstanding. However, based
on the minor impact of one day's dilution, there is no difference between basic
and diluted earnings per share for each period as shown in the Consolidated
Statements of Income.
(6) SEGMENT REPORTING
The Company has two reportable segments: non-universal life-type agreements
and universal life-type agreements.* The reportable segments are determined
based on the nature of the reinsurance treaties and the accounting treatment
used for the various reinsurance treaties. The Company reinsures certain
variable universal life policies on a monthly renewable term ("MRT") basis. MRT
reinsurance involves the reinsurance of mortality risk whereby premiums are not
directly related to the premium rates on the original plan of insurance; the
ceding company retains all risks associated with policy benefits other than
mortality risk and may retain a portion of the mortality risk. The Company's MRT
agreements are accounted for under SFAS No. 60 accounting principles. The
Company also reinsures certain variable annuity contracts and variable universal
life policies on a coinsurance and modified coinsurance basis. Coinsurance
involves the reinsurance of mortality and investment risks on the same basis as
that of the underlying policies. The ceding life companies and the Company share
in these risks in the same manner. The Company's existing coinsurance agreements
are accounted for under SFAS No. 97 accounting principles. Items not directly
related to the business segments and unallocated corporate items (i.e., other
income, interest expense on corporate debt and unallocated operating expenses)
are shown separately, consistent with the Company's internal measurement
process. Segment assets reported include those assets directly attributable to
the reinsurance treaties such as reinsurance balances receivable, deferred
acquisition costs, policy loans, prepaid expenses, invested assets and cash.
Invested assets are allocated to the treaties based upon the letters of credit
posted in support of the statutory reserves held which is consistent with the
Company's internal measurement process.
--------
* Non-universal life-type agreements and universal life-type agreements as
referenced in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments, paragraphs 44 and 45.
7
<PAGE> 8
SEGMENT REPORTING
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------
Non-Universal Universal
(Amounts shown in thousands) Life-Type Life-Type Other Totals
------------- --------- ------ -------
<S> <C> <C> <C> <C>
Premiums $ 4,087 $ 4,087
Reinsured policy revenues 3,192 3,192
Benefits, claims and settlement expenses(1) 1,986 271 2,257
Reinsurance premium allowances, net 1,391 408 1,799
Amortization of deferred acquisition costs 15 1,090 1,105
------- ------ ------
Underwriting profit 695 1,423 2,118
Net investment income (expense) 237 181 (269) 149
Net realized gain on investments
Other expenses 54 41 398 493
------ ------ ----- -------
Segment operating income (loss) before tax 878 1,563 (667) 1,774
Income tax expense (benefit) 254 431 (132) 553
------- ------ ----- -------
Segment net income (loss) $ 624 1,132 (535) $ 1,221
======= ====== ===== =======
Segment assets $ 9,174 43,855 3,031 $56,060
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------
Non-Universal Universal
(Amounts shown in thousands) Life-Type Life-Type Other Totals
------------- --------- ----- ------
<S> <C> <C> <C> <C>
Premiums $ 2,075 $ 2,075
Reinsured policy revenues 3,765 3,765
Benefits, claims and settlement expenses(1) 715 613 1,328
Reinsurance premium allowances, net 517 929 1,446
Amortization of deferred acquisition costs 48 1,027 1,075
------- ------ -------
Underwriting profit 795 1,196 1,991
Net investment income (expense) 41 45 41 127
Net realized gain on investments 22 22
Other expenses 8 92 410 510
------- ------ ----- -------
Segment operating income (loss) before tax 828 1,149 (347) 1,630
Income tax expense (benefit) 282 391 (120) 553
------- ------ ----- -------
Segment net income (loss) $ 546 758 (227) $ 1,077
======= ====== ===== =======
Segment assets $ 6,088 46,387 3,152 $55,627
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------
Non-Universal Universal
(Amounts shown in thousands) Life-Type Life-Type Other Totals
------------ --------- ----- -------
<S> <C> <C> <C> <C>
Premiums $ 7,763 $ 7,763
Reinsured policy revenues 6,213 6,213
Benefits, claims and settlement expenses(1) 4,012 517 4,529
Reinsurance premium allowances, net 2,611 755 3,366
Amortization of deferred acquisition costs 55 2,136 2,191
------- ------ -------
Underwriting profit 1,085 2,805 3,890
Net investment income (expense) 292 241 (314) 219
Net realized gain on investments
Other expenses 60 90 872 1,022
------- ------ ------ -------
Segment operating income (loss) before tax 1,317 2,956 (1,186) 3,087
Income tax expense (benefit) 403 904 (308) 999
------- ------ ------ -------
Segment net income (loss) $ 914 2,052 (878) $ 2,088
======= ====== ====== =======
Segment assets $ 9,174 43,855 3,031 $56,060
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------------
Non-Universal Universal
(Amounts shown in thousands) Life-Type Life-Type Other Totals
------------- --------- ----- ------
<S> <C> <C> <C> <C>
Premiums $ 4,112 $ 4,112
Reinsured policy revenues 6,358 6,358
Benefits, claims and settlement expenses(1) 1,579 922 2,501
Reinsurance premium allowances, net 1,052 1,267 2,319
Amortization of deferred acquisition costs 96 1,994 2,090
------- ------ -------
Underwriting profit 1,385 2,175 3,560
Net investment income (expense) 73 81 130 284
Net realized gain on investments 22 22
Other expenses 13 119 872 1,004
------- ------ ----- -------
Segment operating income (loss) before tax 1,445 2,137 (720) 2,862
Income tax expense (benefit) 491 727 (245) 973
------- ------ ----- -------
Segment net income (loss) $ 954 1,410 (475) $ 1,889
======= ====== ====== =======
Segment assets $ 6,088 46,387 3,152 $55,627
======= ====== ====== =======
</TABLE>
--------
1 Benefits, claims and settlement expenses include Change in future policy
benefits.
8
<PAGE> 9
Of the total premiums and reinsured policy revenues above, 87% and 88%
relates to business reinsured by Western Reserve Life Assurance Co. of Ohio
("Western Reserve") for the quarter and six months ended June 30, 2000 and 1999,
respectively. Of the total underwriting profit above, 77% and 85% relates to
business reinsured by Western Reserve for the quarter ended June 30, 2000 and
1999, respectively. For the six months ended June 30, 2000 and 1999, 78% and 85%
of the total underwriting profit above relates to business reinsured by Western
Reserve, respectively. The Company estimates that approximately 44% of VUL
premiums and 32% of variable annuity premiums, written through Western Reserve
and sold by WMA Sales Associates, originated in California for the six months
ended June 30, 2000.
(7) RECLASSIFICATION
The Company has reclassified the presentation of certain 1999 information
to conform to the 2000 presentation.
(8) SUBSEQUENT EVENTS
On July 28, 2000, the Company made payments of $187,500 on the outstanding
term note and $3 million on the outstanding line of credit with Money Services,
Inc.
On August 1, 2000, the Company issued an additional 3,373 shares of Series
A convertible preferred stock under a private placement offering, at which time
the offering was subsequently closed.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis or Plan of Operation ("MD&A") addresses the
financial condition of the Company as of June 30,2000, compared with December
31, 1999, and its results of operations for the three months and six months
ended June 30, 2000 compared with the equivalent 1999 periods. This discussion
should be read in conjunction with the MD&A in the Company's 1999 Form 10-KSB/A
Annual Report.
OVERVIEW
The WMA Corporation (the "Company") is a holding company, owning all of the
outstanding capital stock of WMA Life Insurance Company Limited ("WMA Life"), a
Bermuda life insurance corporation. WMA Life began reinsurance operations in
1996. The term "Company", as used in this document, refers to The WMA
Corporation and WMA Life unless context requires otherwise. WMA Life presently
provides reinsurance to certain life insurance companies ("Ceding Life
Companies") with respect to variable universal life ("VUL") and variable annuity
policies.
The Company, through its subsidiary, WMA Life, reinsures certain life
insurance policies and annuities sold by "WMA Sales Associates", a network of
independent agents associated with "WMA Agency." Unless the context indicates
otherwise, "WMA Agency" refers to World Marketing Alliance, Inc., an insurance
agency and Georgia corporation, which operates an international financial
services, sales and marketing organization and certain entities and persons with
which it is associated primarily for licensing purposes. "WMA Sales Associates"
are independent agents who market financial services products through WMA Agency
and often hold licenses as registered representatives for the sale of certain
securities products through another affiliate, WMA Securities, Inc. (WMA
Securities), a registered securities broker-dealer. S. Hubert Humphrey, Jr.
beneficially owns approximately 36.1% of the Company's common stock. He also
owns substantially all of World Financial Group, Inc., a holding company that
owns all of WMA Agency and WMA Securities.
All of the Company's reinsurance business is generated by the marketing
efforts of WMA Agency, through business placed 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 WMA Agency
to market those products that the Company reinsures. The following tables show,
by Ceding Life Company, the percentage of WMA Agency business reinsured by the
Company.
LIFE INSURANCE APPLICATIONS(1)
------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
CEDING LIFE COMPANY ENDED
------------------- 6/30/00 1999 1998
---------- ------ ------
<S> <C> <C> <C>
Western Reserve Assurance Co. of Ohio ("Western Reserve") 74% 78% 81%
Kemper Investors Life Insurance Co. ("Kemper") 1 3 4
---- ---- ----
Total % Subject to Reinsurance 75% 81% 85%
Total % Not Subject to Reinsurance 25 19 15
---- ---- ----
Total % Applications Submitted 100% 100% 100%
</TABLE>
ANNUITY APPLICATIONS(1)
-----------------------
<TABLE>
<CAPTION>
SIX MONTHS
CEDING LIFE COMPANY ENDED
------------------- 6/30/00 1999 1998
---------- ------ ------
<S> <C> <C> <C>
Western Reserve 69% 66% 44%
American Skandia Life Assurance Corporation ("American Skandia") 11 12 16
--- --- ---
Total % Subject to Reinsurance 80% 78% 60%
Total % Not Subject to Reinsurance 20 22 40
--- --- ---
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 Sales Associates, that
are monitored by WMA Agency on a regular basis.
10
<PAGE> 11
WMA Life's revenues do not, and are not expected to, bear any relationship
to the distribution of business placed by the companies with whom WMA Agency
does business as illustrated by the above tables. The reasons WMA Life's
revenues will diverge from the relationships noted above include, but are not
limited to, the nature, mix and pricing of the products reinsured; the terms of
the various reinsurance agreements; and the prescribed generally accepted
accounting for such products and reinsurance structures (e.g., Monthly Renewable
Term reinsurance versus coinsurance).
Under a reinsurance agreement, the economic consequences of certain
insurance risks are transferred from the ceding company to the reinsurer.
Depending upon the type of reinsurance agreement, these risks may include:
mortality, persistency, expense and investment. Key considerations in evaluating
the risks include: industry experience, the ceding company's pricing and
assumptions, the type of product, the ceding company's underwriting practices
and procedures, the type of distribution system, the ceding company's recent
experience and the market for the product.
The Ceding Life Companies retain responsibility for the payment of all
claims, surrender values, commissions and expenses involved in issuing and
maintaining the policies. In addition, the Ceding Life Companies administer the
reinsurance contracts and, on a monthly basis, provide WMA Life with information
regarding premiums, reserves, benefits, claims and settlement expenses for
policies reinsured.
At June 30, 2000, WMA Life's reinsurance inforce on life insurance
constituted 288,184 policies, including riders, with an aggregate face amount of
$9.07 billion. This is an increase of 27,828 life insurance policies and riders,
or 11%, and $1.04 billion of inforce face amount, or 13%, from December 31,
1999.
At June 30, 2000, WMA Life had reinsurance inforce with respect to variable
annuities for 37,594 policies with reinsured annuity contract benefits of $355
million. This is an increase of 13,111 annuity policies, or 54 %, and $30
million of annuity contract benefits, or 9%, from December 31, 1999. Aside from
the weak investment performance of the separate accounts for the policies
reinsured through the first six months of 2000, the increase in the amount of
annuity contract benefits was smaller than the number of policies reinsured
because the variable annuity reinsurance percentage was reduced for policies
issued during 1999 and 2000 under the Western Reserve agreement and during 2000
under the American Skandia agreement.
The following table indicates the percentage of WMA Life's reinsurance
revenues derived from the Ceding Life Companies:
<TABLE>
<CAPTION>
SIX MONTHS
CEDING LIFE COMPANY ENDED
------------------- 6/30/00 1999 1998
---------- ------ ------
<S> <C> <C> <C>
Western Reserve 87% 88% 89%
American Skandia 11 9 9
Kemper 2 3 2
---- ---- ----
Total 100% 100% 100%
</TABLE>
MONTHLY RENEWABLE TERM REINSURANCE
WMA Life's reinsurance indemnity agreements include three Monthly Renewable
Term ("MRT") agreements relating to VUL policies. MRT reinsurance is a variation
of Yearly Renewable Term Insurance. The reinsurance of the VUL policies includes
business previously and currently being sold by WMA Sales Associates 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.
11
<PAGE> 12
COINSURANCE AND MODIFIED COINSURANCE
Under a coinsurance arrangement, WMA Life assumes a proportionate share of
the risks and expenses and receives a proportionate share of the premiums and
revenues from the underlying policies. The assumed risks include mortality,
lapses, cash surrenders and investment risk. Additionally, under coinsurance WMA
Life must establish a proportionate share of the policy reserves. Modified
coinsurance ("ModCo") is a variation of coinsurance whereby the reserves and the
assets related to the reserves, which would otherwise be recorded and held by
the reinsurer, are retained by the ceding company. ModCo is used primarily for
products that develop cash values which allows the ceding company to retain the
associated assets for investment purposes. Under coinsurance and ModCo, the
mortality, persistency and investment risks are reinsured on the same plan as
that of the original policy. The ceding company and the reinsurer share in these
risks in the same manner.
WMA Life has a modified coinsurance agreement with American Skandia and a
coinsurance and modified coinsurance agreement with Western Reserve providing
for the reinsurance of a portion of certain variable annuity policies sold by
WMA Sales Associates. WMA Life also has a coinsurance and modified coinsurance
agreement with Western Reserve reinsuring a portion of certain VUL policies.
ACCOUNTING
WMA Life generally recognizes premiums as earned on MRT reinsurance for the
mortality risk reinsured. Reinsured policy revenues that are reported in the
period reflect policy mortality and expense charges, policy administration
charges, asset based allowances and deferred sales charges that have been
assessed against the reinsured policy account balances under the coinsurance and
modified coinsurance agreements, as they relate to universal life-type
contracts.
Net investment income is the gross income earned from the invested assets
less the investment management expenses and custodial fees.
WMA Life defers costs that vary with and are directly associated with the
acquisition of the reinsured policies. These expenses are deferred to the extent
that such costs are deemed recoverable from future policy revenues in accordance
with generally accepted accounting principles ("GAAP") and are recorded as
deferred acquisition costs on the balance sheet. Deferred acquisition costs were
$42 million at June 30, 2000, an increase of $2.25 million, or 6%, from December
31, 1999.
Deferred acquisition costs are amortized over the lives of the underlying
policies (with regard to the terms of the reinsurance agreement). Under the MRT
agreements, the amortization is in proportion to the ratio of premiums collected
during the then current period to total anticipated premiums. The rate of
amortization is based upon assumptions applicable at the time the policies are
reinsured, such as estimates of expected investment yields, mortality,
persistency and expenses. The assumptions include provision for risk of adverse
deviation. (These same assumptions are used in calculating the liability for
future policy benefits, with regard to the MRT reinsurance.)
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 reviews, on a periodic basis, evolving experience with regard to
the Company's assumptions, concerning future experience with regard to
mortality, persistency, investment yields and expenses, in determining its
estimate of future gross profits. If management believes that variances from
expected assumptions are permanent, 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 reflected during the then current
accounting period.
Life insurance claims settled, claims reported and changes in estimates of
claims incurred but not reported related to reinsured VUL policies are recorded
as Benefits, claims and settlement expenses on the Consolidated Financial
Statements. The change in the liability for future policy benefits is recorded
separately as Change in future policy benefits in the Consolidated Financial
Statements.
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<PAGE> 13
The liability for future policy benefits was $6.10 million at June 30,
2000, an increase of $1.61 million, or 36%, from December 31, 1999. The
liability at June 30, 2000 is comprised of two components: (i) liabilities under
the Company's MRT reinsurance agreements, and (ii) liabilities related to the
coinsurance of VUL policies and variable annuity policyholder obligations. The
liability, with regard to the MRT reinsurance, 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). The liability for the fixed account portions of the
Western Reserve VUL and variable annuity coinsurance agreements is equal to
reinsured policy account balances. To date, management believes the assumptions
used regarding its liability for future policy benefits are appropriate for its
circumstances.
RESULTS OF OPERATIONS
Quarter and Six Months Ended June 30, 2000 Compared to Quarter and Six Months
ended June 30, 1999.
Revenues. Revenues increased by $1.44 million, or 24%, and $3.42 million,
or 32%, for the quarter and the six months ended June 30, 2000, respectively,
compared to the same periods in 1999. The increase was primarily attributable to
the growth in premiums associated with the MRT agreements.
Premiums. Premiums increased by $2.01 million, or 97%, and $3.65 million,
or 89%, for the quarter and the six months ended June 30, 2000, respectively,
compared to the same periods in 1999. The majority of the premium increase is
attributable to a new MRT agreement with Western Reserve, that became effective
October 1, 1999, to reinsure 20% of the Financial Freedom Builder (FFB) VUL
policies sold by WMA Sales Associates and issued after January 1, 1999. For the
quarter and the six months ended June 30, 2000, the increase in premiums due to
the new MRT agreement was $1.89 million, and $3.40 million, respectively. The
remaining increase in premiums was primarily attributable to the increasing
duration of the policies in force since the reinsurance premiums increase with
the age of the insured.
Reinsured Policy Revenues. Reinsured policy revenues decreased by $573,000,
or 15%, and $145,000, or 2%, for the quarter and the six months ended June 30,
2000, respectively, compared to the same periods in 1999. These revenues reflect
policy cost of insurance charges, mortality and expense charges, policy
administration, asset based allowances and deferred sales charges under the
coinsurance and modified coinsurance agreements, as they relate to universal
life-type contracts.
Of the $6.21 million Reinsured policy revenues for the six months ended
June 30, 2000, $3.05 million was attributable to the VUL coinsurance and
modified coinsurance agreement with Western Reserve. Reinsured policy revenues
of $3.05 million attributable to the VUL agreement for the six months ended June
30, 2000 compare to $4.54 million for the six months ended June 30, 1999,
reflecting a decrease of $1.48 million, or 33%. Revenues for the six months
ended June 30, 1999 included $1.55 million of revenues associated with VUL
policies issued and reinsured during 1999, which are no longer reinsured by the
Company on a coinsurance and modified coinsurance basis. Thus, although revenues
are increasing on business in force associated with policies issued and
reinsured during 1998, the comparative decrease reflects the recapture,
effective October 1, 1999, of VUL policies issued and reinsured during 1999.
(The process of recapture enables a ceding company to remove policies, or a
portion of the policies, from the reinsurance agreement previously ceded to the
reinsurer.) VUL Reinsured policy revenues through the third quarter of 2000 will
likely be less than those reported for the same period during 1999 as a result
of the recapture and the discontinuation of new VUL policies reinsured on a
coinsurance and modified coinsurance basis.
The remaining $3.16 million of Reinsured policy revenues are attributable
to the variable annuity reinsurance agreements which compare to $1.82 million
for the six months ended June 30, 1999, an increase of $1.34 million, or 74%.
Although mitigated by the recapture of certain variable annuity business by
Western Reserve during 1999, the increase in revenues is primarily attributable
to the remaining business in force and new business subsequently reinsured under
the Western Reserve and American Skandia coinsurance and modified coinsurance
agreements. Revenues for the six months ended June 30, 1999 included $263,000 of
revenues associated with a portion of the Western Reserve variable annuity
policies no longer reinsured by the Company. (Effective October 1, 1999, Western
Reserve recaptured 75% of the variable annuity policies issued and reinsured by
the Company from January 1, 1999 through September 30, 1999.) Considering the
Company will be reinsuring a smaller percentage of the Western Reserve variable
annuity policies issued during 1999 and 2000, and American Skandia variable
annuity policies issued during 2000, future variable annuity Reinsured policy
revenue increases could exhibit a smaller rate of growth.
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<PAGE> 14
\
Net Investment Income and Net Realized Gain (Loss) on Investments. Net
investment income increased by $21,000, or 16%, and decreased by $65,000, or
23%, for the quarter and the six months ended June 30, 2000, respectively,
compared to the same periods in 1999. Investment income is earned from the
investment in fixed income securities and cash equivalents. Investment expenses
of $35,000 and $34,000 for the six months ending June 30, 2000 and 1999,
respectively, related to investment advisor fees and custodial fees, and were
netted with gross investment income excluding realized gains and losses. The
increase in net investment income was primarily due to the purchase of fixed
income securities. There were no net realized gains or losses on investments
reported for the periods ended June 30, 2000. The sale of fixed income
securities for the quarter ended June 30, 1999 resulted in a Net realized gain
on investments of $22,000. Net realized gains are the result of selling
securities after a decrease in market yields after their purchase; an increase
in market yields cause a decrease in the market value of invested securities.
Benefits, Claims and Settlement Expenses. Benefits, claims and settlement
expenses increased by $522,000, or 39%, and $1.20 million, or 48%, for the
quarter and the six months ended June 30, 2000, respectively, compared to the
same periods in 1999. This increase primarily resulted from an increase in the
volume of in force business and the increasing age of the business inforce. The
amount of in force business at June 30, 2000 was $9.07 billion as compared to
$7.23 billion at June 30, 1999, which represents a $1.84 billion, or 25%
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 in the second quarter of 2000 were approximately 9% higher
than otherwise expected based upon management estimates and prior claims
activity. Management estimates net income was reduced by $115,000 for the second
quarter due to the higher than expected claims. Management believes this
activity is not indicative of future experience, as there is no sustained
pattern of demonstrative loss and because of normal random fluctuation in claims
activity.
Change in Future Policy Benefits. Change in future policy benefits
increased by $408,000 from $5,000, and by $828,000 from $20,000, for the quarter
and the six months ended June 30, 2000, respectively, compared to the same
periods in 1999. The liability for future policy benefits under the Company's
MRT reinsurance agreements increased by $2.07 million, or 160%, at June 30, 2000
compared to June 30, 1999. This increase resulted primarily from the new MRT
agreement the Company entered into with Western Reserve in the fourth quarter of
1999 to reinsure 20% of the FFB VUL policies issued January 1,1999 and
thereafter.
Reinsurance Premium Allowances, Net. Net reinsurance premium allowances
increased by $353,000, or 24%, and $1.05 million, or 45%, for the quarter and
the six months ended June 30, 2000, respectively, compared to the same periods
in 1999. Gross reinsurance premium allowances represent a portion of reinsurance
premiums paid or allowed by WMA Life to the Ceding Life Companies for each
policy reinsured. A certain portion of the gross reinsurance allowances, with
regard to the production of new business was related to the Company's share of
commissions, underwriting costs and other expenses from the production of new
business incurred by the Ceding Life Companies on the business reinsured. These
amounts have been deferred to the extent that such costs are deemed recoverable
from future policy revenue in accordance with GAAP. The balance of those amounts
not deferred are reflected as net reinsurance premium allowances and are often a
level percentage of individual policy revenues. Similar to the increase in
revenues, the increase in net reinsurance premium allowances was due to an
increase in the MRT premiums in force, placement of the variable annuity
business reinsured on a coinsurance and modified coinsurance basis, and the
business placed under the new MRT agreement.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs increased by $30,000, or 3%, and $101,000, or 5%, for the
quarter and the six months ended June 30, 2000, respectively, compared to the
same periods in 1999. The increase in amortization of deferred acquisition costs
was attributable to increased revenues and to gross profits associated with the
coinsurance and modified coinsurance business.
Professional Fees and Other Expenses. Professional fees and other expenses
increased by $75,000, or 38%, and $110,000, or 23%, for the quarter and the six
months ended June 30, 2000, respectively, compared to the same periods in 1999.
Expenses include professional fees for legal, actuarial and accounting expenses
incurred, operating expenses, and other miscellaneous expenses. The increase in
expenses was primarily associated with an increase in the amount of reinsurance
business activities and expenses relating to the administration of the Company.
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<PAGE> 15
Interest Expense. Interest expense decreased by $94,000 and $92,000 for the
quarter and the six months ended June 30, 2000, respectively, compared to the
same periods in 1999. The decrease was due to the restructuring of the $5
million debt owing to Money Services, Inc. which resulted in a decrease in
interest rates from 9% to 7.5%. The decrease in interest expense is also
attributable, to a lesser extent, to debt principal repayment of $489,000. See
"Liquidity and Capital Resources" section below.
Fees to World Marketing Alliance, Inc. Fees to World Marketing Alliance,
Inc. remained the same for the periods ended June 30, 2000 and June 30, 1999.
Fees to World Marketing Alliance, Inc. consist of corporate services, rent
expenses and the funding of certain operating and travel-related expenses for
the Company. The Company has a sublease agreement with World Marketing Alliance,
Inc. pursuant to which the Company pays annual rent of $18,675 for 1,500 square
feet of office space. The Company also has a Corporate Services Agreement
whereby WMA Agency provides corporate services to the Company for a fixed
monthly fee of $2,250, adjusted annually.
Income Tax Expense. Income taxes remained constant for the quarter and
increased by $26,000, or 3%, for the six months ended June 30, 2000,
respectively, compared to the same periods in 1999 due to higher levels of
Income before income taxes. The Company's effective tax rates were 31% and 34%
for the quarter ended June 30, 2000 and 1999, respectively. The effective tax
rates for the six months ended June 30, 2000 and 1999 were 32% and 34%,
respectively. Due to the reduction in business reinsured under the Company's
coinsurance and modified coinsurance agreements, taxable income calculated on a
statutory basis is emerging during 2000. As a result, the effective tax rate is
less than 34% because of the "small life insurance company deduction" available
to the Company on current taxable income. For the six months ended June 30,
2000, an Income tax expense of $150,000 is currently payable. The remaining
Income tax expense for the six months ended June 30, 2000 and all of the Income
tax expense for the six months ended June 30, 1999 were deferred in accordance
with GAAP. (See Note 2-Deferred Tax in the Notes to Consolidated Financial
Statements.)
Net Income. As a result of the foregoing, Net income for the quarter ended
June 30, 2000 was $1.22 million compared to $1.08 million for the quarter ended
June 30, 1999, an increase of $144,000, or 13%. Net income for the six months
ended June 30, 2000 was $2.09 million compared to $1.89 million for the six
months ended June 30, 1999, an increase of $200,000, or 11%.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of the Company's cash flow have been premiums and
policy revenue received from Ceding Life Companies, investment income, proceeds
from sales of invested assets, issuance of the Company's common and preferred
stock and short and long term financing. In addition to the need for cash flow
to meet operating expenses, the liquidity requirements of the Company relate
primarily to the payment of gross reinsurance allowances, investment purchases,
debt service, and reinsurance claims.
Premiums are generally received in advance of related benefits and claims
payments. Under the MRT reinsurance agreements, premiums vary in proportion to
the expected mortality claims reinsured. The Company's cash inflows under the
MRT agreements are premiums for the mortality risk reinsured. The Company's cash
outflows are reinsurance expense allowances, policy benefits 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.
The Company's cash requirements for operating and investment expenses
consist of: salaries and benefits; management service fees; investment
management and custodial account fees; accounting and consulting service fees;
expenses related to regulatory issues and compliance with corporate and tax
matters; and other incidental administrative expenses.
For the six-month period ended June 30, 2000, net cash provided by
operating activities was $3.10 million, compared to $9.45 million used in
operating activities for the same period ended June 30, 1999. The reversal of
the net cash flows was primarily due to less cash required to reimburse Western
Reserve and American Skandia for first-year reinsurance allowances because of
the reduction in the percentage of the variable annuity business reinsured and
the cessation of reinsuring new and certain inforce Western Reserve VUL business
on a coinsurance and modified coinsurance basis.
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<PAGE> 16
The Company has established a $10 million line of credit with Money
Services, Inc. (MSI), a subsidiary of AEGON USA, Inc. As of June 30, 2000 the
total amount due under this line of credit included an outstanding principal
balance of $4.81 million and accrued interest of $54,000. Interest accrues at
the rate of 9% per annum. Under the terms of the line of credit, as amended,
payments on the outstanding balance and related accrued interest are due on the
45th day after the close of each calendar quarter until the entire outstanding
balance and accrued interest in paid in full. A payment of $663,000 was made on
May 15, 2000 and $3 million on July 28, 2000. The July payment was made pursuant
to the amended terms of the line of credit with funds raised from the Company's
placement of preferred stock. Additional estimated payments of $900,000 and
$750,000 are scheduled to be paid on August 15, 2000 and November 15, 2000,
respectively. At June 30, 2000, the anticipated payment amounts for the
remaining two quarters of 2000, which represent the current maturities of the
long-term debt, are classified as short-term debt.
On July 30, 1999, the Company issued a $5 million, five year term note to
MSI due on July 29, 2004. Interest is payable at 7.5% per annum (except in the
event of redemption), on the 29th of each succeeding January and July through
and including July 29, 2004. As of June 30, 2000, the Company had an outstanding
principal balance of $5 million and accrued interest of $157,000 in regard to
the term note.
During 1999, the Company proceeded with a private placement offering up to
1,000,000 shares of Series A convertible preferred stock (the "Preferred Stock")
to a limited number of WMA Sales Associates, WMA Agency employees and certain
other investors acceptable to the Company that qualified as "accredited
investors" within the meaning of Rule 501 of Regulation D under The Securities
Act of 1933. As of June 30, 2000, the Company closed the sale on 262,674 shares
of preferred stock, which included 5,574 shares issued to the investment banking
firms who handled the placement, resulting in approximately $4 million in gross
proceeds to the Company.
Additionally, the Company proceeded with a private placement offering up to
4,333,333 shares of Common Stock (the "Common Stock Offering") to certain
institutional investors. Company management does not expect to place the
majority of the shares offered in its Common Stock offering, if any, and intends
to close the offering by August 31, 2000 if no new interest develops. Upon
closing of the Common Stock Offering (assuming net proceeds to the Company of at
least $10 million), the Preferred Stock will convert to shares of Common Stock.
The Company reserves the right, in its absolute discretion, to decline to offer
Common Stock to any and all prospective investors, as the case may be, who may
be willing to accept an offer to sell.
Not withstanding additional capital contributions, which would otherwise
allow the Company to expand its reinsurance capacity, the Company projects to
realize net positive cash flows from its reinsurance operations during year
2000. Nevertheless, measured by policies, the variable annuity new business
reinsured during the six months ended June 30, 2000 increased 82% compared to
the same period in 1999. If this growth rate is sustained, which is considerably
greater than that previously anticipated, negative cash flows may result due to
an increase in the cash required to pay the Ceding Life Company's reinsurance
allowances for the business reinsured. In this event, if sufficient proceeds are
not obtained from the Company's private placement offerings, and alternative
sources of financing are not obtainable at an acceptable cost, the company would
be compelled to attempt to negotiate additional amendments to the coinsurance
and modified coinsurance agreement which would reduce its future cash outlays.
The Company's primary source of liquidity was $5.42 million in cash and
cash equivalents at June 30, 2000, an increase of $4.34 million from June 30,
1999. The effective duration of the Company's fixed income portfolio is 3.5
years, with 100% of the fixed income securities having an effective maturity of
less than 10 years. The Company's fixed income portfolio represents all of the
total invested assets, and has an average quality rating of Aa3 by Moody's.
For the six months ended June 30, 2000, the net cash used in investing
activities was $3.72 million, compared to $3.61 million provided by investing
activities for the same period ended June 30, 1999. The Company purchased $1.82
million of additional fixed income securities during the second quarter of 2000.
As a result, the percentage of corporate fixed income securities held in the
Company's portfolio increased from 14% at December 31, 1999 to 36% at June 30,
2000. Net cash provided by investing activities in the second quarter of 1999
resulted from principal pay-downs on its asset and mortgage-backed securities
and from sales of its fixed income securities to reimburse the Ceding Life
Companies for allowances associated with the reinsurance agreements.
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The WMA Corporation is a holding company with no direct operations, and its
principal asset is the capital stock of WMA Life and $4.03 million in cash and
invested assets. The Company relies primarily on funds retained at the holding
company level and potential dividends from WMA Life to meet ongoing cash
requirements of the holding company. The ability of WMA Life to pay dividends to
the Company is subject to, among other things, regulatory restrictions under the
insurance laws of Bermuda. At June 30, 2000, WMA Life had the statutory capacity
to pay $6.91 million in dividends. As approved by the Board of Directors in May
2000, WMA Life paid a dividend of $1.10 million to the Company to meet current
cash requirements, including payment of principal and interest on the loans from
MSI for the benefit of WMA Life. During 2000, the Company will rely primarily on
dividends from WMA Life to meet ongoing cash requirements.
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. In February 2000, the Company entered into a custodial
agreement with Comerica Bank (Comerica) under which the Company transferred its
assets to Comerica. Comerica subsequently issued LOCs to Kemper and Western
Reserve in the amounts of $140,000 and $4.75 million, respectively. The LOC's
are collateralized by the Company's assets held by Comerica.
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. Such statements often include the words "believes,"
"expects," "assumes," "proposed," "anticipates," "intends," "plans,"
"estimates," "projects," or similar expressions. 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, rate of growth in the Company's reinsured
business, the outcome of WMA Agency's and WMA Securities' regulatory
examinations and investigations, and the availability capital on acceptable
terms and other factors discussed in this report. These forward-looking
statements are subject to change and uncertainty which are, in many instances,
beyond the Company's control and have been made based upon management's
expectations and beliefs concerning future developments and their potential
effect on the Company. There can be no assurance that future developments will
be in accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. Actual
results could differ materially from those expected by the Company, depending on
the outcome of certain factors, including those described in the forward-looking
statements.
PART II
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2000, the Company was not a party to any litigation or
arbitration. Except as disclosed below in Item 5. Other Information, the Company
is not aware of any litigation or arbitration that is likely to have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Preferred Stock
On June 30, 2000, the Company closed the sale on 262,674 shares of Series A
convertible preferred stock which included 5,574 shares issued to the
investment banking firms who handled the placement, resulting in approximately
$4 million in gross proceeds to the Company. On August 1, 2000, the Company
issued an additional 3,373 shares of convertible preferred stock at which time
the offering was subsequently closed. The preferred stock is designated
non-voting, unregistered Series A convertible preferred stock with a par value
of $2.00. The preferred stock has a liquidation preference equal to $2.00 per
share in the event of any liquidation, dissolution, or winding up of the affairs
of the Company. The shares of preferred stock will be converted automatically
into common stock upon the earlier of (i) the closing of any Qualifying Sale of
shares of common stock or (ii) January 1, 2002. A Qualifying Sale is defined as
net proceeds to the Company of at least $10 million from the sale of shares of
common stock.
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Stock Options
On May 12, 2000, the Company's Board of Directors, subject to ratification
of the stockholders of the Company at its 2000 annual meeting, amended the 1999
stock option plan for the directors, officers and employees of the Company (the
"Plan"). The amendment limits the number of shares which can be purchased upon
exercise of the options to an amount to be determined by the amount of capital
raised by the Company from the sale of stock during the period from January 1,
2000 through January 1, 2002. If less than $15 million is raised through the
sale of stock, the outstanding options would lapse and no options would be
exercisable. If more than $75 million is raised through the sale of stock, the
number of shares exercisable would be one times the number of shares subject to
the option. If an amount between $15 million and $75 million is raised through
the sale of stock during the same period, the number of shares exercisable would
be a formula amount as shown below:
Number of shares
to be issued = Number of shares x Proceeds raised from sale of
subject to the option stock
-----------------------------
$75,000,000
The Plan will be administered by the Audit and Compensation Committee
created by the Board of Directors. The Board of Directors may amend or terminate
the Plan at any time except that stockholder approval of any amendment must be
obtained whenever necessary to comply with applicable legal requirements. The
Company will receive no monetary consideration for granting these options.
The Board of Directors felt this limitation would encourage the officers of
the Company to continue to direct their attention to the Company's capital
needs. The shares owned by the optionees upon exercise of their options will not
be registered and shall be considered restricted shares which may only be resold
pursuant to an effective registration statement, an exemption from registration,
or Rule 144.
Warrants
On May 12, 2000, the Company's Board of Directors, subject to ratification
of the stockholders of the Company at its 1999 annual meeting, amended the
outstanding Warrants to limit the number of shares that can be issued upon
exercise of the Warrant to an amount to be determined by the amount of capital
raised by the Company from the sale of stock during the period from January 1,
2000 through January 1, 2002. If less than $15 million is raised through the
sale of stock, the outstanding options would lapse and no options would be
exercisable. If more than $75 million is raised through the sale of stock, the
number of shares exercisable would be one times the number of shares subject to
the option. If an amount between $15 million and $75 million is raised through
the sale of stock during the same period, the number of shares exercisable would
be a formula amount as shown below:
Number of shares
to be issued = Number of shares x Proceeds raised from sale of
exercisable on Warrant stock
----------------------------
$75,000,000
The Warrants were issued to key management employees of WMA Agency and its
affiliated corporations as consideration for the agreement of WMA Agency to use
its "best efforts" to encourage life insurance companies whose policies it sells
to reinsure such policies with the Company. There will be no monetary
consideration given to the Company for the issuance of the Warrants. No Warrants
will be issued to directors of the Company.
Neither the Warrants nor the Common Stock to be issued upon exercise of the
Warrants will be registered. The Common Stock shall be considered restricted
shares, which may only be resold pursuant to an effective registration
statement, an exemption from registration, or Rule 144. There are no
registration rights contained in the terms of the Warrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults in the payment of principal or interest of any
indebtedness of the issuer.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended June 30, 2000.
ITEM 5. OTHER INFORMATION
In the past two years, WMA Agency and WMA Securities have been, and
continue to be, subject to investigations of their compliance and supervisory
programs by the Securities and Exchange Commission, the National Association of
Securities Dealers, the California Department of Corporations, the Washington
Department of Insurance, the Maryland Insurance Administration and by securities
regulatory authorities in Nevada, Florida, Ohio, Massachusetts, Nebraska and
Texas. Pursuant to the Company's request, neither WMA Securities nor WMA Agency,
have advised the Company of any material changes in the status of the foregoing
regulatory investigations during the current period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The Company filed an 8-K report on July 11, 2000 relating to the shares of
preferred stock sold in the private placement to accredited investors.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
27.1 Financial Data Schedule (Attached) (for SEC use only)
</TABLE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE WMA CORPORATION (Registrant)
By: /s/ Edward F. McKernan Date: August 14, 2000
----------------------
Edward F. McKernan
Senior Vice President, Chief Financial Officer,
Actuary, and Director
20
