<PAGE> 1
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-24137
PROSPECTUS
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<S> <C> <C>
[Westbridge Capital $65,000,000
Corp.]
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[Westbridge Capital Corp.]
7 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2004
------------------------
Westbridge Capital Corp. ("Westbridge") is offering $65,000,000 principal
amount of 7 1/2% Convertible Subordinated Notes due 2004 (the "Notes"). Interest
on the Notes will be payable semi-annually on May 1 and November 1 of each year,
commencing November 1, 1997. The Notes are convertible at any time prior to
maturity, unless previously redeemed or repurchased, into shares of Common
Stock, par value $.10 per share (the "Common Stock"), of Westbridge, at a
conversion price of $10.92 per share, subject to adjustment under certain
circumstances. The Common Stock is traded on the New York Stock Exchange under
the symbol "WBC." On April 23, 1997, the last reported sale price for the Common
Stock on the New York Stock Exchange was $9 1/4 per share.
The Notes are unsecured and subordinate to all Senior Indebtedness (as
defined herein). At February 28, 1997, Senior Indebtedness was $40.1 million.
The Indenture does not restrict the incurrence of additional indebtedness by
Westbridge or any of its subsidiaries. See "Description of the
Notes -- Subordination." The Notes will mature on May 1, 2004. Westbridge may
redeem the Notes, in whole or in part, on or after May 1, 2000, at the
redemption prices set forth herein, plus accrued but unpaid interest at the date
fixed for redemption. See "Description of the Notes -- Optional Redemption by
Westbridge." Upon a Change of Control (as defined herein), Westbridge will offer
to repurchase each holder's Notes at a purchase price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. See "Description of the Notes -- Repurchase at the Option of Holders
Upon Change of Control."
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
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UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------------------------------------
Per Note................................ 100% 3.25% 96.75%
- --------------------------------------------------------------------------------------------------------------
Total(4)................................ $65,000,000 $2,112,500 $62,887,500
==============================================================================================================
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(1) Plus accrued interest, if any, from the date of issuance.
(2) Westbridge has agreed to indemnify the several Underwriters identified
elsewhere herein against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). For
information regarding such indemnification and additional compensation to
the Underwriters, see "Underwriting."
(3) Before deducting expenses payable by Westbridge, estimated at $560,000.
(4) Westbridge has granted the Underwriters a 45-day option to purchase up to an
additional $9,750,000 principal amount of Notes solely for the purpose of
covering over-allotments, if any. If the Underwriters exercise such option
in full, the Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company would be $74,750,000, $2,429,375 and $72,320,625,
respectively. See "Underwriting."
------------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of the Notes will be made against payment therefor on or about April
29, 1997 at the offices of Forum Capital Markets L.P., Old Greenwich,
Connecticut.
FORUM CAPITAL MARKETS L.P. RAYMOND JAMES & ASSOCIATES, INC.
April 24, 1997
<PAGE> 2
[LOGO]
WESTBRIDGE CAPITAL CORP.
RESPONDING TO CHANGES IN THE HEALTH CARE ENVIRONMENT BY:
MARKETING COMPANY
UNDERWRITTEN HEALTH
INSURANCE PRODUCTS
MARKETING NATIONALLY
RECOGNIZED MANAGED
CARE HEALTH PLANS
Photo of Main Street America family whose health insurance needs the
Company underwrites and to whom the Company markets medical expense and
individual supplemental health insurance.
Photo of individuals to whom the Company markets managed care health plans
on behalf of HMOs and other non-affiliated managed care organizations.
PRODUCTS: Medical Expense
Critical Care/Specified
Disease
MSA Major Medical
PRODUCTS: HMO
PPO
Medicare SELECT
UNDERWRITERS:
National Foundation Life Insurance
Company of America
Freedom Life Insurance Company
of America
National Financial Insurance Company
American Insurance Company of Texas
UNDERWRITERS:
Blue Cross of California
UniCARE Life & Health Insurance Co.
Foundation Health Plans
MEDFIRST Health Plans
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. All
financial information set forth herein is presented in accordance with generally
accepted accounting principles ("GAAP"), unless otherwise noted. See "Glossary
of Insurance Terms" for definitions of certain terms used in this Prospectus.
THE COMPANY
Westbridge Capital Corp. ("Westbridge" and, together with its consolidated
subsidiaries, the "Company") markets medical expense and supplemental health
insurance products and managed care health plans to individuals in 41 states.
Since 1992, the Company has grown through a combination of acquisitions and,
more recently, increased sales of its underwritten products. Primarily as a
result of acquisitions, the Company's total premiums grew from approximately
$56.7 million in 1992 to approximately $98.7 million in 1994. During the first
quarter of 1995, the Company embarked on a strategy of expanding the number of
agents in its marketing distribution system to increase sales of its
underwritten products. As a result of this initiative, the Company's net
annualized written premiums increased from $19.9 million in 1994 to $79.1
million in 1996 with total premiums increasing 59.0% from $98.7 million in 1994
to $156.8 million in 1996. During the middle of 1996, the Company reduced the
marketing of its underwritten products due to statutory capital and surplus
constraints caused by its rapid growth. The Company intends to increase the
marketing of its underwritten products following the sale of the Notes offered
hereby.
The Company has taken advantage of its marketing distribution system to
market certain managed care health plans which are underwritten by health
maintenance organizations ("HMOs") and other non-affiliated managed care
organizations. Through this marketing effort, which generates sales commissions,
the Company's fee and service income has increased from approximately $2.3
million in 1995 to approximately $9.5 million in 1996. Fee and service income
can be generated without regard to the statutory capital and surplus
requirements that apply to the Company's underwritten products.
The Company's strategy is (i) to expand its underwriting and marketing of
medical expense health insurance products in rural areas where managed care
health plans are often unavailable, (ii) to increase its fee and service income
by continuing to expand its marketing of managed care health plans underwritten
primarily by HMOs and other managed care organizations, primarily in urban
markets where managed care health plans are readily available, and (iii) to
focus on cross-selling its underwritten supplemental health insurance products
in connection with its marketing of managed care health plans. The Company
believes that its supplemental health insurance products are attractive to
managed care consumers who are concerned with the choice limitations of managed
care health plans, particularly in the event of serious illness. In addition,
the Company intends to evaluate opportunities for further growth through
acquisitions.
MARKETING DISTRIBUTION SYSTEM
The Company markets health insurance products and managed care health plans
through a distribution system of (i) general agencies in which the Company has a
controlling ownership interest and (ii) independently-owned general agencies
which have entered into exclusive contractual arrangements to sell the Company's
Medical Expense Products (as defined below).
The Company believes that its success in attracting and retaining agents is
based on its unique distribution model which (i) begins with focused
telemarketing to generate high quality sales leads at a relatively low cost,
(ii) includes intensive training programs that yield highly productive agents,
(iii) focuses upon the Company having an ownership interest in its major
distributors to provide incentives for long-term stability and (iv) offers
innovative agent compensation which includes participation in the Company's
restricted stock plan.
The principal general agencies in which the Company has a controlling
ownership interest are LifeStyles Marketing Group, Inc. ("LifeStyles
Marketing"), Senior Benefits, LLC ("Senior Benefits"), Health Care-
3
<PAGE> 4
One Insurance Agency, Inc. ("Health Care-One"), and Health Care-One Marketing
Group, Inc. ("HCO Marketing"). These general agencies market a variety of
insurance products underwritten by the Company, as well as HMO, Preferred
Provider Organization ("PPO") and Medicare SELECT products underwritten by
managed care organizations such as Blue Cross of California and UniCARE Life and
Health Insurance Company ("UniCARE"), each of which are subsidiaries of
WellPoint Health Networks, Inc. ("WellPoint"), Foundation Health National Life
Insurance Company ("Foundation Health") and MEDFIRST Health Plans of Louisiana,
Inc. ("MEDFIRST"). The principal independent general agencies which sell the
Company's products are Cornerstone National Marketing Corporation
("Cornerstone") and National Farm & Ranch Group, Inc. ("Farm & Ranch"), each of
which currently markets the Company's Medical Expense Products.
PRODUCTS
The major underwritten product lines currently being marketed by the
Company are:
- "Medical Expense Products," which include policies providing
reimbursement for various costs of medical and hospital care and offering
reduced deductibles and coinsurance payments to policyholders which use
the Company's contracted PPOs; and
- "Critical Care and Specified Disease Products," which include indemnity
policies for treatment of specified diseases and "event specific" and
"critical care" policies which provide fixed benefits or lump sum
payments upon diagnosis of internal cancer or other catastrophic
diseases.
Within each of these product lines, the Company continues to develop new
policies and products to respond to changes in the health care environment. The
Company has recently developed its "MSA Major Medical Plan" which allows
individuals to take advantage of certain federal tax benefits by purchasing high
deductible major medical insurance together with a medical savings account that
includes a unique package of additional benefits. Additionally, the Company has
developed a new "critical care" product to cross-sell in connection with its
marketing of HMO and PPO products.
Historically, the Company has also underwritten a significant amount of
"Medicare Supplement Products" designed to provide reimbursement for certain
expenses not covered by the Medicare program. However, due to the relatively low
margins for this product, the Company intends to significantly reduce its
underwriting of these products in favor of marketing the Medicare Supplement
Products of other insurers.
The major managed care products underwritten by HMOs and other managed care
organizations which are currently being marketed by the Company are:
- HMO products underwritten by Blue Cross of California, MEDFIRST and
Foundation Health;
- PPO products underwritten by UniCARE; and
- Medicare SELECT products underwritten by UniCARE which utilize the
Company's network of contracted Medicare SELECT providers.
Westbridge was incorporated as a Delaware holding company in September 1982
for its wholly-owned subsidiary, National Foundation Life Insurance Company
("NFL"). NFL has been in the insurance business since 1960. Westbridge's other
insurance subsidiaries consist primarily of National Financial Insurance Company
("NFIC"), American Insurance Company of Texas ("AICT") and Freedom Life
Insurance Company of America ("FLICA," and together with NFL, NFIC and AICT, the
"Insurance Subsidiaries"). The Company's executive offices are located at 777
Main Street, Suite 900, Fort Worth, Texas 76102, and its telephone number is
(817) 878-3300.
4
<PAGE> 5
SUMMARY FINANCIAL AND OPERATING DATA
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YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996(1) 1995 1994(2) 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Premiums............................... $ 156,780 $ 120,093 $ 98,703 $ 68,731 $ 56,731
Net investment income.................. 8,736 7,421 5,764 4,120 3,932
Total revenues......................... 175,146 130,032 106,546 75,292 62,634
Net income............................. 8,261 5,324 6,425 3,531 2,896
Preferred stock dividends.............. 1,650 1,650 1,190 -- --
Income applicable to common
stockholders......................... $ 6,611 $ 3,674 $ 5,235 $ 3,531 $ 2,896
Net income per share:
-- Primary........................... $ 1.08 $ 0.63 $ 1.13 $ 0.78 $ 0.66
-- Fully-diluted..................... $ 0.97 $ 0.65 $ 1.03 $ 0.78 $ 0.66
Weighted average number of shares
outstanding:
-- Primary........................... 6,131,000 5,836,000 4,617,000 4,555,000 4,381,000
-- Fully-diluted..................... 8,540,000 8,204,000 6,267,000 4,555,000 4,381,000
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996(1) 1995 1994(2) 1993 1992
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(IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS)
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SUPPLEMENTARY DATA:
Net annualized written premiums(3)........... $79,127 $60,686 $19,909 $11,602 $ 9,674
Loss ratio(4)................................ 60.1% 58.7% 54.3% 48.2% 46.8%
Expense ratio(5)............................. 36.9% 40.0% 40.1% 48.7% 54.4%
Ratio of earnings to fixed charges(6)........ 3.0x 3.0x 3.0x 2.6x 2.2x
Ratio of earnings to combined fixed charges
and preferred stock dividends(7)........... 2.3x 2.0x 2.3x
Supplemental adjusted ratio of earnings to
fixed charges(6)(8)........................ 1.3x
Book value per share -- fully diluted........ $ 8.09 $ 7.53 $ 6.93 $ 5.09 $ 4.30
Statutory capital and surplus(9)............. $18,648 $24,038 $23,564 $16,066 $14,265
</TABLE>
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<CAPTION>
AT DECEMBER 31, 1996
---------------------------
ACTUAL(1) AS ADJUSTED(5)
--------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Total assets................................................ $220,716 $277,152
Notes payable............................................... 21,210 12,646
Senior subordinated notes................................... 19,350 19,350
Convertible subordinated notes.............................. -- 65,000
Redeemable preferred stock(10).............................. 20,000 20,000
Stockholders' equity........................................ 47,903 47,903
</TABLE>
- ---------------
(see footnotes on following page)
5
<PAGE> 6
(1) Includes operations of FLICA's parent, Freedom Holding Company ("FHC"),
from June 1, 1996. See "Business -- Acquisitions."
(2) Includes operations of NFIC and AICT from April 12, 1994. See
"Business -- Acquisitions."
(3) Represents first-year annualized premiums attributable to policies that
have been underwritten and issued by the Company. Excludes net annualized
premiums for acquired blocks of business and premiums assumed in connection
with coinsurance agreements.
(4) Calculated as a percent of premiums and reflects a changing mix of the
policies issued by the Company between 1992 and 1996. See
"Business -- Products" and "-- Regulation."
(5) Expense amounts include level commissions, amortization of goodwill and
deferred policy acquisition costs ("DPAC"), general insurance expenses and
taxes, licenses and fees for the Company's wholly-owned insurance
subsidiaries. The expense ratio is calculated as a percent of premiums and
excludes the effects of net investment income, fee and service income,
realized gains (losses) and the financial results of the Company's
non-insurance operations.
(6) In computing the ratio of earnings to fixed charges, fixed charges consist
of interest on indebtedness, amortization of debt expense and such portion
of rental expense which is estimated to be representative of the interest
factor, all on a pre-tax basis. Earnings consist of pre-tax income from
continuing operations plus fixed charges.
(7) In computing the ratio of earnings to combined fixed charges and preferred
stock dividends, fixed charges consist of interest on indebtedness,
amortization of debt expense, such portion of rental expense which is
estimated to be representative of the interest factor and required
preferred stock dividends (preferred stock dividends are applicable only to
the years ended December 31, 1996, 1995 and 1994), all on a pre-tax basis.
Earnings consist of pre-tax income from continuing operations plus fixed
charges.
(8) Adjusted to give effect to the receipt of the proceeds of the offering of
the Notes hereby and the initial uses thereof. See "Use of Proceeds."
(9) Calculated in accordance with statutory accounting practices ("SAP") and
applicable solely to the wholly-owned insurance subsidiaries of Westbridge.
(10) At December 31, 1996, consists of 20,000 shares of Westbridge's Series A
Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Series
A Preferred Stock"), which were convertible, at the option of the holders
thereof, into an aggregate of 2,378,120 shares of Common Stock at a
conversion price of $8.41 per share of Common Stock. The Series A Preferred
Stock is exchangeable, at the option of Westbridge, into that principal
amount of Convertible Subordinated Notes due April 12, 2004 of Westbridge
(the "Convertible Subordinated Notes") equal to the aggregate liquidation
preference of the shares of Series A Preferred Stock to be exchanged.
Following the offering of the Notes hereby, the Company intends to call the
Series A Preferred Stock for redemption at a time at which the then current
market price of the Common Stock will provide an incentive to the holders
of the Series A Preferred Stock to convert their shares in accordance with
the terms thereof prior to any such redemption. See "Capitalization" and
"Description of Capital Stock -- Series A Preferred Stock."
6
<PAGE> 7
THE OFFERING
Notes Offered................... $65,000,000 principal amount of 7 1/2%
Convertible Subordinated Notes due 2004 (the
"Notes").
Maturity Date................... May 1, 2004.
Interest Payment Dates.......... May 1 and November 1, commencing November 1,
1997.
Interest........................ 7 1/2% per annum.
Conversion...................... The Notes are convertible at the option of
the holder into Common Stock at any time
prior to maturity, unless previously redeemed
or repurchased, at a conversion price of
$10.92 per share, subject to adjustment in
certain circumstances. See "Description of
the Notes -- Conversion of the Notes."
Redemption at the Option of
Westbridge...................... The Notes are not redeemable prior to May 1,
2000. Thereafter, the Notes are redeemable at
any time and from time to time at the option
of Westbridge, in whole or in part, at the
redemption prices set forth herein, plus
accrued and unpaid interest to the date fixed
for redemption. See "Description of the
Notes -- Optional Redemption by Westbridge."
Repurchase at the Option of
Holders Upon Change of
Control....................... Upon a Change of Control (as defined herein),
Westbridge will offer to repurchase the Notes
at a repurchase price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest to the date of repurchase.
See "Description of the Notes -- Repurchase
at the Option of Holders Upon Change of
Control."
Subordination................... The Notes are unsecured and subordinate to
all existing and future Senior Indebtedness
(as defined herein). At February 28, 1997,
Senior Indebtedness was $40.1 million. The
Indenture does not restrict the incurrence of
additional indebtedness by Westbridge or any
of its subsidiaries. See "Description of the
Notes -- Subordination."
Use of Proceeds................. Westbridge will use approximately $25.0
million of the proceeds of the offering of
Notes hereby to provide additional statutory
capital and surplus to the Insurance
Subsidiaries and to recapture a block of
reinsured insurance policies, with the
remainder to be used for general corporate
purposes. See "Use of Proceeds."
New York Stock Exchange Common
Stock Symbol.................. WBC.
Trading......................... The Notes have been approved for listing on
the New York Stock Exchange, subject to
official notice of issuance.
7
<PAGE> 8
OFFERING RESTRICTIONS
Westbridge, a Delaware corporation, owns, directly or indirectly, all of
the shares of stock of certain life and health insurance companies domiciled in
the States of Arizona, Delaware, Mississippi and Texas. State insurance
regulatory laws require prior approval by state agencies of any acquisition of
control of a domestic insurance company or of any company which controls a
domestic insurance company. An insurance company is considered a "domestic" of
the state in which it is domiciled. "Control" is generally presumed to exist
through the ownership of 10.0% or more of the voting securities of a domestic
insurance company or of any company which controls a domestic insurance company.
Any person acquiring 10.0% or more of the shares of Common Stock of Westbridge
will be presumed to have acquired control of the domestic insurance subsidiaries
unless the relevant insurance commissioner, following application by such person
in each insurance subsidiary's state of domicile, determines otherwise.
Accordingly, any acquisition of 10.0% or more of the Common Stock of Westbridge
would require prior action by all or some of the insurance commissioners of the
above-referenced states.
RISK FACTORS
An investment in the Notes involves certain risks associated with the
Company's business and the industry in which it competes, including (i) the
Company's reliance on its general agencies and the credit risks associated with
advances thereto, (ii) the Company's holding company structure, (iii) statutory
capital and surplus limitations and the impact of such limitations on new
business production, (iv) acquisitions, (v) health care reform, (vi) the
adequacy of the Company's reserves, (vii) the recoverability of DPAC, (viii)
competition, (ix) risk-based capital requirements, (x) mandated loss ratios,
(xi) regulation, (xii) certain anti-takeover provisions in Westbridge's
Certificate of Incorporation and By-laws, (xiii) restrictions on dividends
payable by Westbridge, (xiv) repurchase of the Notes and redemption of other
securities, (xv) subordination of the Notes, and (xvi) the absence of a public
market for the Notes. For a more detailed discussion of these and certain other
risks, see "Risk Factors."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including in the sections
titled "Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business," contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of 1995)
that involves risk and uncertainties, including the Company's plans to (i)
expand its underwriting and marketing of medical expense health insurance
products in rural areas where managed care health plans are often unavailable,
(ii) to increase its fee and service income by continuing to expand its
marketing of managed care health plans underwritten primarily by HMOs and other
managed care organizations, primarily in urban markets where managed care is the
consumer's preferred health-care choice and (iii) to focus on cross-selling its
underwritten supplemental health insurance products in connection with its
marketing of managed care health plans underwritten by HMOs and other managed
care organizations. Actual future results and trends may differ materially
depending on a variety of factors discussed in the section captioned "Risk
Factors" and elsewhere in this Prospectus, including (a) the Company's ability
to raise additional statutory capital and surplus to permit its Insurance
Subsidiaries to increase its marketing and sale of the Company's underwritten
products, (b) the availability and market acceptance of the managed care
products underwritten by HMOs and other managed care organizations, and (c) the
effect of economic and market conditions. Subsequent written or oral statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this Prospectus and
those in the Company's reports previously filed with the Securities and Exchange
Commission (the "Commission").
8
<PAGE> 9
RISK FACTORS
Before purchasing the Notes offered hereby, a prospective investor should
carefully consider the specific risk factors set forth below as well as the
other information set forth elsewhere in this Prospectus.
RELIANCE ON GENERAL AGENCIES; CREDIT RISK
Since prior to 1991, the Company's controlled and independent general
agencies have accounted for substantially all of the Company's first-year
premiums. During 1996, LifeStyles Marketing, Cornerstone, Senior Benefits and
Farm & Ranch each accounted for over 10.0% of the Company's first-year premiums
and together accounted for over 93.0% of the Company's first-year premiums.
LifeStyles Marketing is 51.0% owned by the Company and Senior Benefits is a
wholly-owned subsidiary of the Company. Each of Cornerstone and Farm & Ranch is
an independent general agency which has agreed to market the Company's products
under contracts terminable by either party on 180 days' notice. The Company
believes that its relationships with its general agencies are good. However,
there can be no assurance that such relationships will continue, or if they do
continue, that they will remain profitable for the Company. The loss of, or
significantly reduced sales efforts by, any of these general agencies, and the
failure by the Company to replace such general agencies or otherwise offset such
losses, could have a material adverse affect on the Company's business,
financial condition or results of operations. See "Business -- Marketing." In
the event the Company desires to expand its marketing distribution system, there
can be no assurance that it will be able to form additional general agency
relationships or, if formed, that such relationships will result in increased
sales or profitability for the Company.
In the ordinary course of business, the Company advances commissions on
policies written through its general agencies. The Company is reimbursed for
these advances from the commissions earned over the respective policy's life. In
the event that policies lapse prior to the time the Company has been fully
reimbursed, the general agencies or the individual agents, as the case may be,
are responsible for reimbursing the Company for the outstanding balance of the
commission advance. The Company has not experienced material annual losses on
such commission advances. However, for the year ended December 31, 1996, the
Company charged-off approximately $0.9 million of reimbursable commission
advances which had accumulated in LifeStyles Marketing over a period of five
years. There can be no assurance as to the frequency of occurrence or amount of
any future losses. As of December 31, 1996, outstanding advances totaled $18.3
million to the Company's general agencies and their agents.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES
Westbridge is an insurance holding company, the principal assets of which
consist of its operating subsidiaries. Accordingly, Westbridge is dependent upon
the ability of its operating subsidiaries to pay cash dividends or make other
cash payments to it to provide funds to redeem or make interest payments on the
Notes, to pay dividends on the Series A Preferred Stock and to make its required
debt service payments. The Insurance Subsidiaries are regulated by the insurance
laws of their domiciliary states, which restrict the Insurance Subsidiaries'
ability to pay dividends and to make other payments to Westbridge. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity, Capital Resources and Statutory Capital and Surplus."
As of December 31, 1996, NFL is precluded from paying dividends during 1997
without prior regulatory approval due to negative statutory "earned surplus" as
a result of historical statutory losses. In addition, for the foreseeable
future, NFL has agreed to seek the approval of the Delaware insurance
commissioner prior to making any dividend payments. As of December 31, 1996,
FLICA had the ability to pay NFL, without prior regulatory approval, $1.5
million in dividends during 1997, none of which has been paid. NFIC and AICT are
also precluded from making dividend payments in 1997 without prior written
approval from the Texas insurance commissioner due to net losses on a statutory
basis for the year ended December 31, 1996.
9
<PAGE> 10
STATUTORY CAPITAL AND SURPLUS LIMITATIONS; NEW BUSINESS PRODUCTION
The Company's ability to underwrite insurance products is limited by state
regulation of statutory capital and surplus requirements. As a result of rapid
growth in underwritten health insurance product sales during 1995 and the first
six months of 1996, the Company has experienced a decline in its available
statutory capital and surplus. Accordingly, the Company has reduced the
marketing of its underwritten products since the second quarter of 1996,
consistent with its available statutory capital and surplus. This reduction
resulted in a decrease in first-year premiums from $16.5 million for the three
months ended June 30, 1996 to $14.9 million for the three months ended December
31, 1996. Further decreases in the Company's first-year premiums are expected to
continue until such time as the Company is able to obtain additional statutory
capital and surplus. In the absence of a resumption of growth in sales of the
Company's underwritten products, future renewal premiums are expected to level
off and begin to decline during 1997. Absent other sources of revenue, a decline
in total premiums would result in a reduction in the Company's earnings. The
Company intends to use a portion of the proceeds of the offering of the Notes
hereby to supplement the statutory capital and surplus of the Insurance
Subsidiaries which will permit the Company to increase the marketing of its
underwritten health insurance products. However, the Company does not expect any
resulting growth in sales of the Company's underwritten products to
significantly increase total premiums until the latter part of 1997 or early
1998. No assurance can be given that such additional sources of statutory
capital and surplus will be available to the Company and a failure to obtain
such additional statutory capital and surplus could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, to the extent that the resumption of growth in sales involves the
expansion of the Company's marketing distribution system, such growth could
involve significant cash expenditures by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Regulation."
ACQUISITIONS
For the year ended December 31, 1996, approximately 31.0% of the Company's
premiums related to policies obtained through purchases of closed blocks of
insurance policies and through blocks acquired in the acquisitions of NFIC, AICT
and FLICA. Renewal premiums from these closed blocks of business, as well as
from policies issued by the Company, decline over time due to policy lapses and
cancellations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." To offset this decline, the Company must underwrite
or acquire additional policies. The acquisition of additional policies may
require additional statutory capital and surplus. In addition, both indemnity
and assumption reinsurance and acquisitions are subject to prior regulatory
approval. In the case where indemnity and assumption reinsurance is used, prior
approval from the insurance regulator of each state in which the policies to be
acquired have been written must be obtained before the Company can assume those
policies under assumption reinsurance. See "Business -- Reinsurance." In the
case where the Company seeks to acquire another company, prior approval from the
insurance regulator of the domiciliary state of the company to be acquired, and
the domiciliary state of each insurance subsidiary, must be obtained before the
acquisition can be consummated. There can be no assurance that such regulatory
approval would be obtained. Moreover, due to certain legislative and regulatory
initiatives, it may become more difficult to utilize assumption reinsurance as a
method of acquiring blocks of business in the future. See
"Business -- Regulation." Future acquisitions will also depend on the
availability and suitability of blocks of policies in force and companies to be
acquired and may also require the Company to obtain financing. There can be no
assurance that suitable blocks of policies in force, companies, or financing
would be available to the Company.
HEALTH CARE REFORM
Health care reform has been, and is likely to continue to be, a legislative
focus at both the federal and state level. Such federal or state legislative
reform, if enacted, could, among other things, further restrict the Company's
ability to implement rate increases and could impose limitations on the
profitability of certain of the Company's medical expense and supplemental
health insurance products. Also, to the extent that such legislation guarantees
major medical coverage to all United States residents and/or expands the scope
of basic medical coverage, the demand for specified disease and supplemental
health insurance may be reduced, and
10
<PAGE> 11
certain health insurance policies currently in force could experience high lapse
rates. The Company cannot predict what effect, if any, yet to be enacted health
care legislation or proposals will have on the Company if and when enacted. The
Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. No assurance can be given that enactment
of any federal and/or state health care reforms will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ADEQUACY OF RESERVES
The Company's Critical Care and Specified Disease Products generally
provide readily determinable benefits pursuant to fixed or capped schedules of
indemnities. The substantial majority of these benefits are therefore generally
not subject to increase as a result of inflation. Accordingly, and based on the
Company's morbidity, persistency and benefit payment experience, as well as
information developed, in part, in reliance on actuarial consultants and
industry data, management believes that the amounts and timing of the Company's
future policyholder benefits payable with respect to in force Critical Care and
Specified Disease Products are generally relatively predictable. However,
inflation will affect claim costs on the Company's Medicare Supplement Products
and Medical Expense Products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity, Capital Resources,
and Statutory Capital and Surplus -- Consolidated." As a result, future policy
benefits are less predictable for these products than for Critical Care and
Specified Disease Products. The inability to accurately predict future policy
benefits may adversely affect the adequacy of the Company's policy benefit
reserves. The adequacy of the Company's policy benefit reserves may also be
impacted by the development of new medicines and treatment procedures which may
alter the incidence rates of illness and the treatment methods for illness and
accident victims (such as out-patient versus in-patient care) or prolong the
life expectancy of such victims. Changes in coverage provided by major medical
insurers or government plans may also affect the adequacy of the Company's
reserves if, for example, such developments had the effect of increasing or
decreasing the incidence rate and per claim costs of occurrences against which
the Company insures. An increase in either the incidence rate or the per claim
costs of such occurrences could result in the Company needing to post additional
reserves, which could have a material adverse effect upon its business,
financial condition or results of operations. Although management believes that
the Company's policy benefit reserves are adequate, there can be no assurance
with respect to such adequacy. A material inadequacy in the policy benefit
reserves could have a material adverse effect on the business, financial
condition or results of operations of the Company. For example, if the Company
underestimates expected policyholder benefits, then the policy benefit reserves
would be inadequate to fund such benefits. As a result, the Company would incur
additional expenses when the Company incurs such benefits or when the Company
becomes aware of the inadequacy and increases its reserve. See
"Business -- Reserve Policy and Adequacy."
RECOVERABILITY OF DEFERRED POLICY ACQUISITION COSTS
Under GAAP, DPAC is established to properly spread the acquisition costs
for the production of new business against the expected future revenues from the
policies. DPAC is amortized over future revenues generated by the business to
which the costs are related. This amortization is based on the expected pattern
of future revenues and on the expected persistency of the policies. The actual
amortization of DPAC is adjusted monthly to reflect the actual persistency of
the business. If actual policy terminations are higher than expected, DPAC would
be amortized more rapidly than originally scheduled and the Company's business,
financial condition or results of operations would be adversely affected.
COMPETITION
The Company is engaged in a highly competitive industry. Several hundred
insurance companies sell accident and health insurance, including numerous
insurers which offer competitive protection plans substantially similar to those
offered by the Company. Many of these competitors have considerably greater
financial resources and considerably higher ratings from insurance rating
agencies than the Company. Private insurers and voluntary and cooperative plans
provide various alternatives for meeting hospitalization and
11
<PAGE> 12
medical expenses. Additionally, the federal and state governments provide
through the Medicare and Medicaid programs for the payment of certain costs
associated with medical care. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or
illnesses.
The Company's Medical Expense Products are designed to provide coverage
which is similar to the major medical insurance programs described above, but
are sold primarily to persons not covered in an employer sponsored group. The
Company's Critical Care and Specified Disease Products are designed to provide
coverage which is supplemental to major medical insurance and may be used to
defray nonmedical as well as medical expenses. Since these policies are sold to
complement major medical insurance, the Company competes only indirectly with
these insurers. However, expansion of coverage by other insurers could adversely
affect the Company's business, financial condition or results of operations. The
Company's Medicare Supplement Products are designed to supplement the Medicare
program by reimbursing for expenses not covered by such program. To the extent
that future government programs reduce the availability or attractiveness of
supplemental insurance for such government programs, they could adversely affect
the Company's business, financial condition or results of operations.
Managed care organizations operate in a highly competitive environment and
in an industry that is currently subject to significant changes resulting from
business consolidations, legislative reform, aggressive marketing practices and
market pressures. The Company's ability to increase its fee and service income
by continuing to expand its marketing of Medicare Supplement Products and
managed care health plans underwritten primarily by HMOs and other managed care
organizations may be adversely affected by the changes affecting this industry.
See "Business -- Competition."
RISK-BASED CAPITAL REQUIREMENTS
The National Association of Insurance Commissioners (the "NAIC") has
developed certain risk-based capital ("RBC") statutory requirements for
insurance companies which require remedial action in the event an insurance
company's statutory capital and surplus falls below the specified level. These
requirements are effective on a state by state basis if and when they are
adopted by the state regulators. The States of Delaware and Mississippi have
each adopted the NAIC's RBC guidelines. The State of Texas has developed a
guideline for calculating RBC which varies from the NAIC's requirements. As of
December 31, 1996, the RBC for each of the Insurance Subsidiaries exceeded the
threshold for regulatory intervention. However, as a result of rapid growth in
product sales during 1995 and the first six months of 1996, the Company has
reduced the marketing of its underwritten products since the second quarter of
1996, consistent with its available statutory capital and surplus. The Company
continues to seek additional sources of statutory capital and surplus, however,
there can be no assurance that such efforts will be successful. See
"Business -- Regulation."
MANDATED LOSS RATIOS
The Company's health insurance products are subject to rate regulation by
state insurance departments which generally require that certain minimum loss
ratios be maintained. The states in which the Company is licensed have the
authority to change the minimum mandated statutory loss ratios to which the
Company is subject, the manner in which these ratios are computed and the manner
in which compliance with these ratios is measured and enforced. Most states in
which the Company writes health insurance products have adopted the loss ratios
recommended by the NAIC. The Company is unable to predict the impact of (i) any
changes in the mandatory statutory loss ratios relating to products offered by
the Company or (ii) any change in the manner in which these minimums are
computed or enforced in the future. The Company has not been informed by any
state that it does not meet mandated minimum ratios, and the Company believes
that it is in compliance with all such minimum ratios. In the event the Company
is not in compliance with minimum statutory loss ratios mandated by regulatory
authorities, the Company may be required to reduce or refund premiums, which
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business -- Regulation."
12
<PAGE> 13
REGULATION
The Company is subject to regulation and supervision in all of the
jurisdictions in which it conducts business. Regulatory agencies supervising the
insurance industry are typically granted broad administrative powers relating
to, among other things, the granting and revoking of licenses to transact
business, regulation of trade practices and premiums, licensing of agents,
approval of content and form of policies, maintenance of specified reserves and
statutory capital and surplus, deposits of securities, form and content of
required financial statements, nature of investments and limitations on
dividends to stockholders. The purpose of such regulation and supervision is
primarily to provide safeguards for policyholders rather than to protect the
interests of stockholders. Such regulation may delay the introduction of new
products and may impede, or impose burdensome conditions on, rate increases or
other actions that the Company may wish to take in order to enhance its
operating results. In addition, federal or state legislation or regulations may
be enacted that may prohibit or impose restrictions on the ability to sell
certain types of insurance products or impose other restrictions on the
Company's operations. No assurance can be given that future legislative or
regulatory changes will not adversely effect the Company's business, financial
condition or results of operations. See "Business -- Regulation."
In addition to periodic examinations, state insurance regulatory
authorities from time to time undertake market conduct examinations of the
Company. Although past examinations have not resulted in any significant
adjustments to the Company's operations, and the Company does not believe that
any current examinations will result in any such adjustments, there can be no
assurance that the Company's belief with respect to current examinations is
correct or that future examinations will not result in the imposition of
burdensome conditions on the Company's operations. Certain states in which the
Company conducts business have adopted NAIC model statutes and regulations
relating to the conduct and practices of insurance companies. Any limitations or
other restrictions imposed on the Company, as a result of periodic reviews,
market conduct examinations or otherwise, by regulators of a state which has
adopted the model statutes and regulations may also be imposed by the regulators
in other states which have adopted such statutes and regulations.
Four northeastern states either prohibit sales of policies that offer only
"specified or dread disease" coverage (such as that provided by certain of the
Company's Critical Care and Specified Disease Products) or require that such
coverage be offered in conjunction with other forms of health insurance.
Although, the Company has no knowledge of legislative initiatives which would
limit or prohibit the sale of "specified or dread disease" policies in states in
which the Company operates, there can be no assurance that such states will not
adopt similar prohibitions.
Periodically, the insurance regulatory framework is subject to review, and
certain state legislatures consider or enact laws that alter, and in many cases
increase, state authority to regulate insurance companies. In recent years, the
NAIC and state regulators have been re-examining existing laws and regulations,
specifically focusing on insurance company investments and solvency issues. In
addition, legislation has been introduced in the U.S. Congress which could
result in the U.S. Government assuming some role in the regulation of the
insurance industry. The Company cannot predict the effect that any NAIC
recommendations or proposed or future federal or state legislation or
regulations may have on the business, financial condition or results of
operations of the Company. See "-- Holding Company Structure; Reliance on
Subsidiaries" and "Business -- Regulation."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions in Westbridge's Certificate of Incorporation (the
"Certificate of Incorporation") and By-Laws (the "By-Laws") could discourage
potential acquisition proposals and could delay or prevent a change in control
of Westbridge. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock, or proxy contests. Such
provisions may also inhibit fluctuations in the market price of the Common Stock
that could result from takeover attempts. See "Description of Capital
Stock -- Delaware Anti-takeover Law and Certain Charter Provisions." In
addition, the Board of Directors, without further
13
<PAGE> 14
stockholder approval, may issue preferred stock with such terms as the Board of
Directors may determine. Such issuance could have the effect of delaying or
preventing a change in control of Westbridge. The issuance of such preferred
stock could also adversely affect the voting power of the holders of Common
Stock. See "Description of Capital Stock -- Preferred Stock." Westbridge is also
afforded the protections of Section 203 of the Delaware General Corporation Law,
which could delay or prevent a change in control of Westbridge or could impede a
merger, consolidation, takeover or other business combination involving
Westbridge or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of Westbridge. See "Description of
Capital Stock -- Delaware Anti-takeover Law and Certain Charter Provisions."
Additionally, state insurance regulatory laws require advance approval by state
agencies of any change in control of certain insurance holding companies. Any
purchaser of 10% or more of the outstanding shares of Common Stock of Westbridge
will be presumed to have acquired control of the Insurance Subsidiaries unless
the relevant insurance commissioner, following application by such purchaser in
each Insurance Subsidiary's state of domicile, determines otherwise. Such
approvals may deter, delay or prevent certain transactions affecting the control
or the ownership of Common Stock, including transactions that could be
advantageous to the stockholders of Westbridge. See "Description of Capital
Stock -- Insurance Regulation Concerning Change of Control."
RESTRICTIONS ON WESTBRIDGE DIVIDENDS
The Preferred Stock Purchase Agreement relating to the issuance and sale of
the Series A Preferred Stock (the "Preferred Stock Purchase Agreement") and the
Indenture, dated as of February 15, 1995, between Westbridge and Liberty Bank
and Trust Company of Oklahoma City, National Association, as Trustee (the
"Senior Subordinated Indenture") relating to Westbridge's Senior Subordinated
Notes each restrict the payment of dividends and other distributions on
Westbridge's capital stock. See "Description of Capital Stock -- Restrictions on
Dividends."
REPURCHASE OF NOTES; REDEMPTION OF OTHER SECURITIES
Upon a Change of Control (as defined), Westbridge will be obligated to
offer to repurchase the Notes from each holder at 100% of the principal amount
plus accrued and unpaid interest to the date of repurchase. See "Description of
the Notes -- Repurchase as the Option of Holders Upon Change of Control." In the
event of a Change of Control, there can be no assurance that Westbridge would
have sufficient funds to pay the repurchase price for all Notes tendered. In
addition, current or future credit agreements and guarantees to which the
Company is a party may contain limitations on such repurchases. If Westbridge
were restricted from making such repurchase and could not obtain the consent of
the lenders or could not refinance the loans, Westbridge would remain restricted
from repurchasing the Notes. In such event, Westbridge's failure to repurchase
the Notes would constitute an event of default under the Indenture relating
thereto (the "Indenture"), which may in turn constitute defaults under other
Company indebtedness, in which case the subordination provisions of the
Indenture would likely restrict payments to holders of the Notes.
The Certificate of Incorporation and the Preferred Stock Purchase Agreement
describe certain events which provide each holder of Series A Preferred Stock or
Convertible Subordinated Notes with the option to require Westbridge to redeem
or repurchase all or any part of the holder's Series A Preferred Stock or
Convertible Subordinated Notes, as the case may be, including events which would
not result in a Change of Control. Following the occurrence of any such event,
there can be no assurance that Westbridge would have sufficient funds to redeem
or repurchase such Series A Preferred Stock or Convertible Subordinated Notes or
that, if Westbridge did redeem or repurchase such Series A Preferred Stock or
Convertible Subordinated Notes, such event would not materially adversely affect
Westbridge's ability to meet its obligations with respect to the Notes.
Westbridge's failure to redeem or repurchase could constitute an event of
default under then existing indebtedness thereby permitting an acceleration of
such indebtedness, in which case the subordination provisions of the Indenture
would likely restrict payments to holders of the Notes.
14
<PAGE> 15
SUBORDINATION
The Notes will be unsecured and subordinated in the right of payment to all
existing and future Senior Indebtedness (as defined), including the principal of
(and any premium, if any) and interest on and all other amounts due on or
payable in connection with Senior Indebtedness. At February 28, 1997, Senior
Indebtedness was $40.1 million, consisting primarily of Westbridge's 11% Senior
Subordinated Notes due 2002 (the "Senior Subordinated Notes"), amounts owed
under the Credit Agreement dated as of December 28, 1995 between Westbridge
Funding Corporation, Westbridge's wholly-owned financing subsidiary ("WFC"), and
Fleet National Bank, as amended (the "Credit Agreement"), which amounts are
guaranteed by Westbridge, and a ceding commission owed in connection with a
reinsurance agreement. The Indenture does not restrict the ability of Westbridge
or its subsidiaries to incur additional indebtedness and the Company may from
time to time issue additional indebtedness constituting Senior Indebtedness. By
reason of such subordination, in the event of liquidation, reorganization,
dissolution or winding up of Westbridge, or upon an assignment for the benefit
of creditors or any other marshaling of Westbridge's assets and liabilities, or
upon other proceedings, the holders of the Senior Subordinated Notes and other
creditors who are holders of Senior Indebtedness must be paid in full before the
holders of the Notes may be paid. This may have the effect of reducing the
amount of such proceeds paid to the holders of the Notes. In addition, under
certain circumstances, no payments may be made with respect to the principal of
or interest on the Notes if there exists (and has not been waived) a payment
default or certain other defaults with respect to Senior Indebtedness. See
"Description of the Notes -- Subordination."
ABSENCE OF PUBLIC MARKET
There is currently no public market for the Notes and there can be no
assurance that an active public market for the Notes will develop. The Notes
have been approved for listing on the New York Stock Exchange, subject to
official notice of issuance.
USE OF PROCEEDS
The net proceeds to be received by Westbridge from the sale of the Notes
offered hereby (after deducting underwriting discounts and commissions and
estimated offering expenses payable by Westbridge) are estimated to be
approximately $62,327,500 ($71,760,625 if the Underwriters' over-allotment
option is exercised in full).
Westbridge intends to utilize such net proceeds (i) to initially contribute
approximately $15.0 million to the Insurance Subsidiaries to provide additional
statutory capital and surplus for their operations, and (ii) to recapture a
block of reinsured insurance policies for approximately $10.0 million (which
amount includes an estimated recapture expense of approximately $0.5 million).
The remainder of such net proceeds will be utilized for general corporate
purposes, which may include without limitation, contributing to the Insurance
Subsidiaries additional statutory capital and surplus from time to time,
expanding the Company's marketing distribution network and acquisitions of
insurance companies or blocks of business. As of the date hereof, the Company is
not actively pursuing any opportunities to acquire additional insurance
companies or blocks of business.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1996 and the capitalization as adjusted to reflect the
sale of $65.0 million aggregate principal amount of Notes offered hereby and the
anticipated use of the proceeds therefrom. The table should be read in
conjunction with the Consolidated Financial Statements of the Company, including
the notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
11% Senior Subordinated Notes due
2002............................... $ 19,350 $ 19,350
7 1/2% Convertible Subordinated
Notes.............................. -- 65,000
Notes payable(1)...................... 21,210 12,646
-------- --------
Total debt............................ 40,560 96,996
-------- --------
Redeemable Preferred Stock ($.10 par
value):
1,000,000 shares authorized; 20,000
shares of Series A Preferred Stock
issued(2).......................... 20,000 20,000
-------- --------
Total redeemable preferred stock...... 20,000 20,000
-------- --------
Stockholders' Equity:
Common stock ($.10 par value)
30,000,000 shares authorized;
6,039,994 shares issued(3)......... 604 604
Capital in excess of par value........ 29,226 29,226
Unrealized appreciation of investments
carried at market value............ 1,057 1,057
Retained earnings..................... 17,186 17,186
Less: Aggregate of treasury shares and
investment by affiliates in Common
Stock (28,600), at cost............ (170) (170)
-------- --------
Total stockholders' equity............ 47,903 47,903
-------- --------
Total capitalization.................. $108,463 $164,899
======== ========
</TABLE>
- ---------------
(1) Adjusted to reflect the recapture of a block of reinsured insurance
policies. See "Use of Proceeds." In connection with the recapture of such
policies, the Company expects to incur a recapture expense of approximately
$500,000 which will be recorded as an extraordinary loss during the fiscal
quarter in which such recapture is completed.
(2) At December 31, 1996, the Series A Preferred Stock was convertible, at the
option of the holders thereof, into 2,378,120 shares of Common Stock at a
conversion price of $8.41 per share of Common Stock. The Series A Preferred
Stock is exchangeable, at the option of Westbridge, into that principal
amount of Convertible Subordinated Notes equal to the aggregate liquidation
preference of the shares of Series A Preferred Stock to be exchanged.
Following the offering of Notes hereby, the Company intends to call the
Series A Preferred Stock for redemption at a time at which the then current
market price of the Common Stock will provide an incentive to the holders of
Series A Preferred Stock to convert their shares in accordance with the
terms thereof prior to any such redemption.
(3) Does not include (i) 336,529 shares issuable upon the exercise of
outstanding options granted under the Company's Employee Incentive Stock
Option Plan (the "1982 Plan"), 1985 Employee Incentive Stock Option Plan (as
amended, the "1985 Plan") and 1992 Stock Option Plan (as amended, the "1992
Plan"), (ii) 376,900 shares reserved for issuance pursuant to the Westbridge
Capital Corp. 1996 Restricted Stock Plan (the "1996 Restricted Stock Plan"),
(iii) shares reserved for issuance pursuant to future grants of options
under the 1992 Plan and future grants of shares under the 1996 Restricted
Stock Plan, (iv) 2,378,120 shares issuable upon conversion of the Series A
Preferred Stock, (v) 255,501 shares issuable upon exercise of certain
outstanding warrants, (vi) 5,952,375 shares issuable upon conversion of the
Notes offered hereby, and (vii) 297,619 shares issuable upon exercise of the
warrants issued as additional compensation to the Underwriters (the
"Underwriters' Warrants," see "Underwriting").
16
<PAGE> 17
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Westbridge's Common Stock is listed on the New York Stock Exchange and
traded under the symbol "WBC." The following table sets forth for the periods
indicated the high and low sales price for the Common Stock, by quarter, as
reported for New York Stock Exchange consolidated transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
2nd Quarter (through April 23, 1997)...................... $10 1/8 $9 1/4
1st Quarter............................................... 12 1/4 9 1/2
1996
4th Quarter............................................... 9 7/8 7 3/4
3rd Quarter............................................... 8 3/4 7 1/2
2nd Quarter............................................... 7 7/8 5 7/8
1st Quarter............................................... 7 1/8 5 1/4
1995
4th Quarter............................................... 6 5/8 5 5/8
3rd Quarter............................................... 6 5/8 5 3/4
2nd Quarter............................................... 7 1/2 5 1/2
1st Quarter............................................... 8 1/8 5 7/8
</TABLE>
On April 23, 1997, the closing price of the Common Stock on the New York
Stock Exchange was $9 1/4 per share. As of April 3, 1997, there were
approximately 2,197 record holders of the Common Stock.
Westbridge has not paid any cash dividends on the Common Stock and does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. Both the Preferred Stock Purchase Agreement relating to the
Series A Preferred Stock and the Senior Subordinated Indenture relating to the
Senior Subordinated Notes, impose certain restrictions upon Westbridge with
respect to the payment of dividends on the Common Stock. See "Risk
Factors -- Restriction on Westbridge Dividends" and "Description of Capital
Stock -- Restrictions on Dividends." For information concerning statutory
limitations on the payment of dividends by the Insurance Subsidiaries to
Westbridge, See "Risk Factors -- Holding Company Structure; Reliance on
Subsidiaries," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity, Capital Resources and Statutory Capital,"
"Business -- Regulation" and Note 11 of Notes to the Consolidated Financial
Statements.
17
<PAGE> 18
SELECTED FINANCIAL AND OPERATING DATA
The information set forth below was selected or derived from the
Consolidated Financial Statements of the Company. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996(1) 1995 1994(2) 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premiums................................ $ 156,780 $ 120,093 $ 98,703 $ 68,731 $ 56,731
Net investment income................... 8,736 7,421 5,764 4,120 3,932
Fee and service income.................. 9,534 2,327 1,728 1,397 1,392
Net realized gains on investments....... 96 182 320 1,030 422
Other income............................ -- 9 31 14 157
--------- --------- --------- --------- ---------
Total revenues................. 175,146 130,032 106,546 75,292 62,634
--------- --------- --------- --------- ---------
Benefits and claims..................... 94,187 70,465 53,623 33,153 26,522
Amortization of deferred policy
acquisition costs..................... 22,907 11,553 9,711 8,159 8,452
Commissions............................. 7,919 11,359 11,224 9,595 8,382
General and administrative expenses..... 27,123 21,926 16,847 14,349 12,663
Taxes, licenses and fees................ 5,951 4,101 3,230 2,724 2,095
Interest expense........................ 4,462 2,432 3,067 2,552 2,536
--------- --------- --------- --------- ---------
Total expenses................. 162,549 121,836 97,702 70,532 60,650
--------- --------- --------- --------- ---------
Provision for income taxes.............. 4,410 2,813 2,764 1,562 532
Equity in Freedom Holding Company....... 74 348 345 333 310
Income before cumulative effect of
change in accounting principle and
extraordinary loss.................... 8,261 5,731 6,425 3,531 1,762
Cumulative effect on prior years of
change in accounting principle(3)..... -- -- -- -- 1,134
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit........................... -- 407 -- -- --
--------- --------- --------- --------- ---------
Net income.............................. 8,261 5,324 6,425 3,531 2,896
Preferred stock dividends............... 1,650 1,650 1,190 -- --
--------- --------- --------- --------- ---------
Income applicable to common
stockholders.......................... $ 6,611 $ 3,674 $ 5,235 $ 3,531 $ 2,896
========= ========= ========= ========= =========
Net income per share:
-- Primary............................ $ 1.08 $ 0.63 $ 1.13 $ 0.78 $ 0.66
-- Fully-diluted...................... $ 0.97 $ 0.65 $ 1.03 $ 0.78 $ 0.66
Weighted average number of shares
outstanding:
-- Primary............................ 6,131,000 5,836,000 4,617,000 4,555,000 4,381,000
-- Fully-diluted...................... 8,540,000 8,204,000 6,267,000 4,555,000 4,381,000
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996(1) 1995 1994(2) 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net annualized written premiums(4)................. $79,127 $60,686 $19,909 $11,602 $ 9,674
Loss ratio(5)...................................... 60.1% 58.7% 54.3% 48.2% 46.8%
Expense ratio(6)................................... 36.9% 40.0% 40.1% 48.7% 54.4%
Ratio of earnings to fixed charges(7).............. 3.0x 3.0x 3.0x 2.6x 2.2x
Ratio of earnings to combined fixed charges and
preferred stock dividends(8)..................... 2.3x 2.0x 2.3x
Supplemental adjusted ratio of earnings to fixed
charges(7)....................................... 1.3x
Book value per share -- fully diluted.............. $ 8.09 $ 7.53 $ 6.93 $ 5.09 $ 4.30
Statutory capital and surplus(9)................... $18,648 $24,038 $23,564 $16,066 $14,265
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1996(1) 1995 1994(2) 1993 1992
-------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and invested assets................. $103,218 $111,516 $108,838 $57,434 $ 59,399
Deferred policy acquisition costs.............. 83,871 56,977 58,654 28,354 30,768
Total assets................................... 220,716 200,999 187,581 97,067 101,915
Notes payable.................................. 21,210 15,807 -- -- --
Senior subordinated notes...................... 19,350 19,264 24,665 19,422 19,210
Redeemable preferred stock(10)................. 20,000 20,000 -- -- --
Stockholders' equity........................... 47,903 42,805 26,355 21,611 18,013
</TABLE>
- ---------------
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996. See
"Business -- Acquisitions."
(2) Includes operations of NFIC and AICT from April 12, 1994. See
"Business -- Acquisitions."
(3) Reflects the effect of the Company's adoption of SFAS 109, "Accounting for
Income Taxes," on a prospective basis as of January 1, 1992.
(4) Represents first-year annualized premiums attributable to policies that
have been underwritten and issued by the Company. Excludes net annualized
premiums for acquired blocks of business and premiums assumed in connection
with coinsurance agreements.
(5) Calculated as a percent of premiums and reflects a changing mix of the
policies issued by the Company between 1992 and 1996. See
"Business -- Products" and "-- Regulation."
(6) Expense amounts include level commissions, amortization of goodwill and
DPAC, general insurance expenses and taxes, licenses and fees for the
Company's wholly-owned insurance subsidiaries. The expense ratio is
calculated as a percent of premiums and excludes the effects of net
investment income, fee and service income, realized gains (losses) and the
financial results of the Company's non-insurance operations.
(7) In computing the ratio of earnings to fixed charges, fixed charges consist
of interest on indebtedness, amortization of debt expense and such portion
of rental expense which is estimated to be representative of the interest
factor, all on a pre-tax basis. Earnings consist of pre-tax income from
continuing operations plus fixed charges.
(8) In computing the ratio of earnings to combined fixed charges and preferred
stock dividends, fixed charges consist of interest on indebtedness,
amortization of debt expense, such portion of rental expense which is
estimated to be representative of the interest factor, and required
preferred stock dividend requirements (preferred stock dividend
requirements are applicable only to the years ended December 31, 1996, 1995
and 1994), all on a pre-tax basis. Earnings consist of pre-tax income from
continuing operations plus fixed charges.
(9) Calculated in accordance with SAP and applicable solely to the wholly-owned
insurance subsidiaries of Westbridge.
(10) At December 31, 1996, consists of 20,000 shares of Series A Preferred
Stock, which were convertible, at the option of the holders thereof, into
an aggregate of 2,378,120 shares of Common Stock at a conversion price of
$8.41 per share of Common Stock. The Series A Preferred Stock is
exchangeable, at the option of Westbridge, into that principal amount of
Convertible Subordinated Notes equal to the aggregate liquidation
preference of the shares of Series A Preferred Stock to be exchanged.
Following the offering of the Notes hereby, the Company intends to call the
Series A Preferred Stock for redemption at a time at which the then current
market price of the Common Stock will provide an incentive to the holders
of the Series A Preferred Stock to convert their shares in accordance with
the terms thereof prior to any such redemption. See "Capitalization" and
"Description of Capital Stock -- Series A Preferred Stock."
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company markets medical expense and supplemental health insurance
products and managed care health plans to individuals in 41 states. Since 1992,
the Company has grown through a combination of acquisitions and, more recently,
increased sales of its underwritten products. Primarily as a result of
acquisitions, the Company's total premiums grew from approximately $56.7 million
in 1992 to approximately $98.7 million in 1994. During the first quarter of
1995, the Company embarked on a strategy of expanding the number of agents in
its marketing distribution system to increase sales of its underwritten
products. As a result of this initiative, the Company's net annualized written
premiums increased from $19.9 million in 1994 to $79.1 million in 1996 with
total premiums increasing 59.0% from $98.7 million in 1994 to $156.8 million in
1996. During the middle of 1996, the Company reduced the marketing of its
underwritten products due to statutory capital and surplus constraints caused by
its rapid growth. The Company intends to increase the marketing of its
underwritten products following the sale of the Notes offered hereby.
The Company has taken advantage of its marketing distribution system to
market certain managed care health plans which are underwritten by HMOs and
other non-affiliated managed care organizations. Through this marketing effort,
which generates sales commissions, the Company's fee and service income has
increased from approximately $2.3 million in 1995 to approximately $9.5 million
in 1996. Fee and service income can be generated without regard to the statutory
capital and surplus requirements that apply to the Company's underwritten
products.
The Company's strategy is (i) to expand its underwriting and marketing of
its Medical Expense Products in rural areas where managed care health plans are
often unavailable, (ii) to increase its fee and service income by continuing to
expand its marketing of managed care health plans underwritten primarily by HMOs
and other managed care organizations, primarily in urban markets where managed
care health plans are readily available, and (iii) to focus on cross-selling its
Critical Care and Specified Disease Products in connection with the managed care
health plans it markets. The Company believes that its Critical Care and
Specified Disease Products are attractive to managed care consumers who are
concerned with the choice limitations of managed care health plans, particularly
in the event of serious illness. In addition, the Company intends to evaluate
opportunities for further growth through acquisitions.
OVERVIEW
The Company derives its revenue primarily from premiums from its insurance
products and, to a significantly lesser extent, from fee and service income,
income earned on invested assets and gains on the sales or redemptions of
invested assets. The Company's primary expenses include benefits and claims in
connection with its insurance products, DPAC, commissions paid on policy
renewals, general and administrative expenses associated with policy and claims
administration, taxes, licenses and fees and interest on its indebtedness. In
addition to the foregoing expenses, Westbridge is obligated to pay dividends on
the Series A Preferred Stock if and when declared by the Board of Directors.
Fee and service income is generated from (i) commissions received by the
Company for sales of managed care products underwritten primarily by HMOs and
other managed care organizations, (ii) telemarketing services provided by
Precision Dialing Services, Inc., an indirect, wholly-owned subsidiary of
Westbridge ("PDS"), and (iii) printing services provided by Westbridge Printing
Services, Inc., an indirect, wholly-owned subsidiary of Westbridge ("WPS").
Benefits and claims are comprised of (i) claims paid, (ii) changes in claim
reserves for claims incurred (whether or not reported) and (iii) changes in
policy benefit reserves based on actuarial assumptions of future benefit
obligations not yet incurred on policies in force.
DPAC consists of expenditures made for the production of new business. Such
expenditures consist principally of the amount by which first-year commission
costs exceed commission costs paid in subsequent
20
<PAGE> 21
policy years and policy issue costs. Also included in DPAC is the cost of
insurance purchased relating to acquired blocks of business. The amortization of
these costs is based on actuarially estimated future premium revenues. The
amortization rate is adjusted monthly to reflect actual experience.
Acquisitions. Over the past four years, the Company has acquired seasoned
blocks of business to supplement its revenue. These acquisitions included (i) a
block of Medicare Supplement Products purchased from American Integrity
Insurance Company ("American Integrity") in September 1992, (ii) a block of
Medicare Supplement Products purchased from Life and Health Insurance Company of
America ("Life and Health") in March 1993, (iii) a block of Critical Care and
Specified Disease Products purchased from Dixie National Life Insurance Company
("Dixie National Life") in February 1994, (iv) a block of policies in all of the
Company's product lines purchased in the acquisition of NFIC and AICT in April
1994, and (v) a block of Critical Care and Specified Disease Products purchased
in the acquisition of FLICA in May 1996.
New Business Production. As a result of rapid growth in underwritten health
insurance product sales during 1995 and the first six months of 1996, the
Company has experienced a decline in its available statutory capital and
surplus. Accordingly, the Company has reduced the marketing of its underwritten
products since the second quarter of 1996, consistent with its available
statutory capital and surplus. This reduction resulted in a decrease in
first-year premiums from $16.5 million for the three months ended June 30, 1996
to $14.9 million for the three months ended December 31, 1996, respectively.
Further decreases in the Company's first-year premiums are expected to continue
until such time as the Company is able to obtain additional statutory capital
and surplus. In the absence of a resumption of growth in sales of the Company's
underwritten products, future renewal premiums are expected to level off and
begin to decline during 1997. Absent other sources of revenue, a decline in
total premiums would result in a reduction in the Company's earnings. The
Company intends to use a portion of the proceeds of the offering of the Notes
hereby to supplement the statutory capital and surplus of the Insurance
Subsidiaries which will permit the Company to increase the marketing of its
underwritten health insurance products. However, the Company does not expect any
resulting growth in sales of the Company's underwritten products to
significantly increase total premiums until the latter part of 1997 or early
1998. No assurance can be given that additional sources of statutory capital and
surplus will be available and a failure to obtain such additional statutory
capital and surplus could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, to the
extent that the resumption of growth in sales involves the expansion of the
Company's marketing distribution system, such growth could involve significant
cash expenditures by the Company. See "Risk Factors -- Capital and Surplus
Limitations; New Business Production."
21
<PAGE> 22
Premium Growth. The following table shows the premiums received by the
Company through internal sales and through acquisitions during the periods
indicated:
<TABLE>
<CAPTION>
PREMIUMS(1)
-----------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Company-issued policies
First-year premiums................... $ 61,049 $ 34,561 $15,019 $ 8,675 $ 9,483
Renewal premiums...................... 47,421 36,417 34,328 36,655 40,345
-------- -------- ------- ------- -------
Total Company-issued policy premiums.. 108,470 70,978 49,347 45,330 49,828
-------- -------- ------- ------- -------
Acquired policies
American Integrity.................... 8,364 9,811 13,200 21,137 6,903
Life and Health....................... 1,820 2,089 2,506 2,264 --
Dixie National Life................... 2,974 3,299 3,907 -- --
NFIC and AICT......................... 26,207 33,110 29,743 -- --
FLICA................................. 7,744 -- -- -- --
Other................................. 1,201 806 -- -- --
-------- -------- ------- ------- -------
Total acquired policy premiums(2)..... 48,310 49,115 49,356 23,401 6,903
-------- -------- ------- ------- -------
Total Premiums.......................... $156,780 $120,093 $98,703 $68,731 $56,731
======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) For a breakdown of premiums by product line, see "Business -- Product
Lines."
(2) Premiums for the acquired policies include first-year premiums of $788,000,
$213,000, $56,000, $63,000 and $69,000 for the years ended December 31,
1996, 1995, 1994, 1993 and 1992, respectively.
Due to the size and the timing of the acquisitions described above, the
Company's results of operations for the years ended December 31, 1996, 1995 and
1994 compared to the corresponding periods in the prior year show significant
increases in certain revenues and expenses. Generally, as a result of the
acquisitions of policies in force, and the transfer of assets and liabilities
relating thereto, the Company receives higher revenues in the form of premiums,
net investment income and net realized gains on investments, and experiences
higher expenses in the form of benefits and claims, amortization of DPAC,
commissions and general and administrative expenses. The Company expects that
the levels of premiums, net investment income, net realized gains on
investments, benefits and claims, amortization of DPAC, commissions and general
and administrative expenses attributable to these acquired policies will
continue to decline over time as the acquired policies lapse.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Premiums. Premiums increased $36.7 million, or 30.6%, from $120.1 million
to $156.8 million. The increase was attributable to first-year and renewal
premiums of Company-issued policies increasing $26.5 million and $11.0 million,
or 76.6% and 30.2%, respectively, offset by a decrease in premiums from acquired
policies of $0.8 million, or 1.6%.
The increase in first-year premiums of Company-issued policies was
attributable to an increase of $17.2 million, or 337.3%, in Medical Expense
premiums produced by non-affiliated general agencies, an increase of $8.9
million, or 75.4%, in Medical Expense premiums produced by LifeStyles Marketing,
and an increase of $3.3 million, or 28.0%, in Medicare Supplement premiums
produced by Senior Benefits. These increases were offset, in part, by a decrease
of $3.2 million in Critical Care and Specified Disease premiums.
The increase in renewal premiums of Company-issued policies was
attributable to an increase of $8.5 million, or 283.3%, in Medicare Supplement
premiums produced by Senior Benefits, an increase of $3.5 million in Medical
Expense premiums produced by non-affiliated general agencies, and an increase of
22
<PAGE> 23
$2.8 million, or 28%, in Medical Expense premiums produced by LifeStyles
Marketing. These increases were offset, in part, by a decrease of $3.3 million
in Critical Care and Specified Disease premiums.
The decrease in premiums of acquired policies was attributable to a
decrease of $6.9 million, or 20.9%, from the policies acquired in the NFIC and
AICT acquisition, and a decrease of $1.4 million, or 14.8%, from the policies
acquired from American Integrity. These decreases were offset, in part, by an
increase of $7.7 million from the policies acquired in the FLICA acquisition.
Net Investment Income. Net investment income increased $1.3 million, or
17.6%, from $7.4 million to $8.7 million. This increase was primarily the result
of an $800,000 increase in interest earned on receivables due from agents. The
remaining increase is due primarily to a higher average investment base which
was offset, in part, by negative cash flows from operations. The higher average
investment base resulted from the acquisition of FLICA during the year and to
amounts borrowed to finance advances to general agencies.
Fee and Service Income. Fee and service income increased $7.2 million, or
313%, from $2.3 million to $9.5 million. The increase was primarily due to an
increase of $6.4 million of commission income on managed care product sales by
the Company's controlled general agencies and an increase of $865,000 of
telemarketing service income earned by PDS.
Benefits and Claims. Benefits and claims expense increased $23.7 million,
or 33.6%, from $70.5 million to $94.2 million. Benefits and claims from
Company-issued policies increased $24.4 million, or 62.7%, and were offset, in
part, by a decrease in benefits and claims from acquired policies of $700,000,
or 2.2%. In connection with the increase in premiums, benefits and claims
increased $8.0 million, or 61.5%, from Medicare Supplement Products marketed by
Senior Benefits, an increase of $5.9 million, or 53.2%, from Medical Expense
Products marketed by LifeStyles Marketing, an increase of $7.9 million, or
232.4%, from Medicare Supplement and Medical Expense Products marketed by
non-affiliated general agencies, and an increase of $2.6 million from Critical
Care and Specified Disease Products marketed by nonaffiliated general agencies.
As a result of continued lapses from a closed block of business, benefits and
claims decreased $3.4 million, or 38.6%, from policies purchased from American
Integrity. The blocks of business acquired from NFIC and AICT reflected an
increase in benefits and claims expense of $2.2 million, or 11.8%, and was
primarily related to disability income products. Additionally, benefits and
claims expense increased $600,000 due to the recent acquisition of FLICA.
Amortization of DPAC. Amortization of DPAC increased $11.3 million, or
97.4%, from $11.6 million to $22.9 million. The increase resulted from the
growth in sales which began in the second quarter of 1995. Amortization of DPAC
increased $3.2 million for Medical Expense Products produced by LifeStyles
Marketing, $3.5 million for Medicare Supplement Products produced by Senior
Benefits, and $2.8 million for Critical Care and Specified Disease Products
produced by non-affiliated general agencies, a portion of which was attributable
to a large group policy which lapsed in 1996. Amortization of DPAC also
increased $4.1 million due to sales of new policies underwritten by NFIC and
AICT. This increase for NFIC and AICT was offset, in part, by a $2.1 million
decrease in amortization of the cost of insurance purchased which was
capitalized in connection with the Company's acquisition of NFIC and AICT.
Further offsetting this increase in amortization of DPAC was a decrease of $2.9
million from discontinued Medicare Supplement Products and Medical Expense
Products. Amortization of DPAC pertaining to FLICA increased $2.3 million
related to the Critical Care and Specified Disease Products produced by
non-affiliated general agencies.
Commissions. Commissions decreased $3.5 million, or 30.7%, from $11.4
million to $7.9 million. This decrease was a reflection of lower overall net
level commission rates on new business production as compared to level
commission rates for products written in prior reporting periods. Before
elimination of intercompany revenues and expenses in consolidation, commissions
decreased $4.3 million in NFL, or 43.9%, and $1.2 million, or 36.4%, in NFIC and
AICT. Offsetting these decreases were increases in commissions of $3.3 million,
or 67.3%, in LifeStyles Marketing, $3.3 million in Health Care-One, which began
operations in the fourth quarter of 1995, $577,000 in Senior Benefits and
$350,000 in American Senior Security Plans. An increase of $3.3 million in
commissions paid to the Company's controlled general agencies was eliminated in
consolidation.
23
<PAGE> 24
General and Administrative Expenses. General and administrative expenses
increased $5.2 million, or 23.7%, from $21.9 million to $27.1 million as a
result of costs associated with expanding marketing operations and servicing a
growing base of policyholders. General and administrative expenses of
approximately $627,000 were incurred during 1996 as a result of acquiring the
remaining interests in Senior Benefits and American Senior Security Plans.
Taxes, Licenses and Fees. Taxes, licenses and fees increased $1.9 million,
or 46.3%, from $4.1 million to $6 million. The increase was primarily due to
growth in premium revenues along with state fees charged for examinations and
various assessments, including guaranty fund assessments.
Interest Expense. Interest expense increased $2.1 million, or 87.5%, from
$2.4 million to $4.5 million. The increase was primarily due to an increase of
$1.4 million associated with a revolving line of credit which became available
to the Company on December 28, 1995 and an increase of $651,000 related to a
reinsurance treaty which was effective July 1, 1996.
Provision for Income Taxes. The provision for income taxes increased $1.6
million, or 57.1%, from $2.8 million to $4.4 million. The increase was the
result of pre-tax income increasing $4.2 million, or 49.4%.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Premiums. Premiums increased $21.4 million, or 21.7%, from $98.7 million to
$120.1 million. This was due to an increase in first-year premiums of $19.6
million, or 130.1%, and an increase in renewal premiums of $1.7 million, or
2.1%.
The increase in first-year premiums resulted from a $7.9 million, or
199.1%, increase in first-year Medicare Supplement premiums generated by Senior
Benefits, a $4.6 million, or 63.1%, increase in first-year Medical Expense
premiums generated by LifeStyles Marketing, an increase of $5 million in
first-year Medical Expense premiums generated by Cornerstone and Farm & Ranch,
each of which began marketing products for the Company in December 1994, and a
$2.1 million, or 87.5%, increase in first-year premiums on policies reinsured
from FLICA.
The increase in renewal premiums is attributable to increases of $3.0
million from Senior Benefits, $1.0 million, or 26.1%, from policies reinsured
from FLICA, and $701,000, or 7.6%, for LifeStyles Marketing Products. These
increases were offset by decreases of $1.2 million, or 21.3%, from discontinued
Medicare Supplement and Medical Expense Products, and $1.2 million in renewal
premiums from acquired policies. The decrease in renewal premiums from acquired
policies is primarily attributable to a $3.4 million, or 25.7%, decrease from
the American Integrity block of business along with decreases of $556,000, or
14.4%, and $416,000, or 16.6%, in renewal premiums from policies acquired from
Dixie National and Life and Health, respectively, offset by a $3.2 million
increase in renewal premiums from NFIC and AICT acquired policies. Because NFIC
and AICT were acquired in April, 1994, revenues from the acquired policies were
recorded for a full year in 1995 compared to approximately nine months in 1994.
Net Investment Income. Net investment income increased $1.7 million, or
29.8%, from $5.7 million to $7.4 million due to a combination of slightly higher
rates of return on the Company's invested assets and the results of having the
invested assets acquired with NFIC and AICT earning income for the Company for a
full year in 1995. Additionally, approximately $400,000 of interest on agents'
debit balances was recorded in 1995, which was not present in 1994.
Fee and Service Income. Fee and service income increased $599,000, or
35.2%, from $1.7 million to $2.3 million due primarily to an increase of
$442,000 of telemarketing services sold to non-affiliated agency operations.
Benefits and Claims. Benefit and claim expense increased $16.9 million, or
31.5%, from $53.6 million to $70.5 million. This was due to increases of $11.5
million in benefit and claim expense on Medicare Supplement Products produced by
Senior Benefits, $3.2 million, or 39.8%, on Medical Expense Products sold by
LifeStyles Marketing, $4 million, or 211%, on policies reinsured from FLICA,
$3.4 million in Medical Expense Products marketed by Cornerstone and Farm &
Ranch, and $791,000, or 64.1%, on pre-1987
24
<PAGE> 25
Medical Expense Products. Offsetting these increases were decreases in benefits
and claims expense of $4.6 million, or 81.3%, for Critical Care and Specified
Disease Products issued directly by the Company and $491,000, or 1.5%, related
to acquired policies.
Benefits and claims expense as a percentage of total premiums rose 4.3% in
1995 compared to 1994. This increase is primarily attributable to two factors.
First, a shift in product mix from defined benefit policies such Critical Care
and Specified Disease Products to Medical Expense Products and Medicare
Supplement Products which have inherently higher benefit ratios. Second,
increased medical provider claims industry-wide contributed to the increase.
Amortization of DPAC. Amortization of DPAC increased $1.8 million, or
18.6%, from $9.7 million to $11.5 million. The increase in amortization of DPAC
resulted from amortization increases of $2.9 million related to Medical Expense
Products sold by LifeStyles Marketing, $1.4 million from discontinued Medicare
Supplement Products and $927,000 from pre-1987 Medical Expense Products. These
increases are offset, in part, by decreases in amortization of DPAC related to
Company-issued Critical Care and Specified Disease Products of $2.0 million and
Critical Care and Specified Disease Products reinsured from FLICA of $1.1
million.
Commissions. Commissions increased $135,000, or 1.2%, from $11.2 million to
$11.3 million. Commissions increased $587,000 from policies reinsured with FLICA
with an offsetting decrease of $510,000 from acquired policies. Before
elimination of intercompany revenues and expenses in consolidation, commissions
increased $913,000, or 8.3%, in NFL, $847,000, or 35.1%, in NFIC and AICT, and
$1.3 million, or 35.1%, in LifeStyles Marketing. An increase of $2.7 million, or
44.5%, in commissions paid to the Company's controlled general agencies was
eliminated in consolidation.
The increase in commissions before consolidation eliminations for NFL
resulted from increases of $1.3 million for products sold by Senior Benefits,
$383,000, or 18.4%, for products sold by LifeStyles Marketing, and $587,000, or
39.9%, for policies reinsured from FLICA. These increases were offset, in part,
by decreases of $959,000, or 32.8%, for acquired policies and $261,000, or 7.2%,
for Company-issued Critical Care and Specified Disease Products. The increase in
commissions before consolidation eliminations for NFIC and AICT is principally
the result of two items. Approximately $0.5 million of this increase resulted
from recording NFIC and AICT commissions for a full year in 1995, as opposed to
approximately nine months in 1994. Approximately $0.5 million of this increase
resulted from new product sales generated by Cornerstone and Farm & Ranch. These
items were not present or were insignificant in the corresponding period in
1994.
General and Administrative Expenses. General and administrative expenses
increased $5.1 million, or 30.1%, from $16.8 million to $21.9 million. This
increase stems from expenses associated with developing marketing operations to
maintain growth momentum and the effect of the first full fiscal year
administering the NFIC and AICT acquisition.
Taxes, Licenses and Fees. Taxes, licenses and fees increased $871,000, or
27.2%, from $3.2 million to $4.1 million due principally to the increase in
collected premiums and the related tax thereon levied by state governments.
Interest Expense. Interest expense decreased $635,000, or 21.2%, from $3
million to $2.4 million. This decrease is the result of the Company retiring
$25.0 million of 11.7% Senior Subordinated Debentures effective March 30, 1995
along with the issuance of $20.0 million of Senior Subordinated Notes on
February 28, 1995.
Provision for Income Taxes. The provision for income taxes increased
$49,000, or 1.8%, from $2,764,000 to $2,813,000. A decrease in pre-tax income of
$648,000, or 7.3%, was offset by an increase of 300 basis points, or 10%, in the
effective tax rate resulting in the relatively small increase in the provision
for income taxes. The Company received little or no small company tax benefit in
1995 and consequently experienced an increase to the effective tax rate.
25
<PAGE> 26
LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS
Westbridge
Westbridge is an insurance holding company, the principal assets of which
consist of the capital stock of its operating subsidiaries. Accordingly,
Westbridge is dependent upon dividends from its operating subsidiaries, advances
from non-insurance company subsidiaries, principal and interest payments on a
surplus certificate issued by NFL to Westbridge, lease payments on fixed assets
and tax contributions under a tax sharing agreement among Westbridge and its
subsidiaries for funds to meet its obligations, including principal and interest
on its indebtedness and, if and when declared by the Board of Directors,
dividends on the Series A Preferred Stock.
Dividend payments from the Insurance Subsidiaries are regulated by the
insurance laws of their domiciliary states. NFL is domiciled in the State of
Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware
may not declare or pay a dividend or other distribution from any source other
than "earned surplus" without the state insurance commissioner's prior approval.
"Earned surplus" is defined as an amount equal to the unassigned funds of an
insurer as set forth on its most recent statutory annual statement, including
all or part of the surplus arising from unrealized capital gains or revaluation
of assets. NFIC and AICT are domiciled in the State of Texas. An insurer
domiciled in the State of Texas may pay dividends only out of "surplus profits
arising from its business" to the extent of net gains from operations, not
including realized capital gains, for the twelve month period ending as of the
preceding December 31. Moreover, insurers domiciled in either the State of
Delaware or the State of Texas may not pay "extraordinary dividends" without
first providing the state insurance commissioner with 30-days prior notice,
during which time such commissioner may disapprove the payment. An
"extraordinary dividend" is defined as a dividend whose fair market value
together with that of other dividends made within the preceding 12 months
exceeds the greater of (a) 10% of the insurer's surplus as regards policyholders
as of the preceding December 31 or (b) the net gain from operations of such
insurer, not including realized capital gains, for the twelve-month period
ending on the preceding December 31. FLICA is domiciled in the State of
Mississippi. Under Mississippi Insurance Regulations, an insurer domiciled in
the State of Mississippi may pay dividends limited to the lesser of 10% of
statutory capital and surplus or 100% of statutory net income for the preceding
year unless prior written approval of the state insurance commissioner is
obtained.
With respect to ordinary dividends payable by an insurer domiciled in
Delaware, notice of any dividend must be provided to the state insurance
commissioner within five business days following the declaration thereof and at
least ten days prior to the payment thereof. As of December 31, 1996, NFL is
precluded from paying dividends during 1997 without prior regulatory approval
due to negative statutory "earned surplus" as a result of historical statutory
losses. In addition, for the foreseeable future, NFL has agreed to seek the
approval of the Delaware insurance commissioner prior to making any dividend
payments. As of December 31, 1996, FLICA had the ability to pay NFL, without
prior regulatory approval, $1,480,000 in dividends during 1997, none of which
has been paid. NFIC and AICT are precluded from making dividend payments during
1997 without prior written approval from the insurance commissioner due to net
losses on a statutory basis for the year ended December 31, 1996. In the States
of Delaware, Mississippi and Texas, the state insurance commissioner reviews the
dividends paid by each insurer domiciled in such commissioner's state at least
once each year to determine whether they are reasonable in relation to the
insurer's surplus as regards policyholders and quality of earnings. The state
insurance commissioner may issue an order to limit or disallow the payment of
ordinary dividends if such commissioner finds the insurer to be presently or
potentially financially distressed or troubled.
Westbridge periodically advances cash to its subsidiaries as their
continuing operations require and, as of December 31, 1996, such working capital
advances outstanding totaled $2.6 million. Westbridge also holds a receivable
from the surplus certificate issued by NFL which, as of December 31, 1996,
totaled $777,000. Payments of principal due under the surplus certificate
require the prior approval of the Delaware insurance commissioner.
During the year ended December 31, 1996, Westbridge received approximately
$8.5 million, or 91.0%, of its funds from its subsidiaries. Of the funds
received from its subsidiaries, approximately $2.7 million, or
26
<PAGE> 27
32.0%, was received in the form of lease payments on fixed assets, $2.9 million,
or 34.0%, was received from agency operations, $1.1 million, or 13.0%, was
received from advanced commissions on sales of certain managed care products
which were underwritten by HMOs and other managed care organizations, and an
aggregate of $1.8 million, or 21.0% was received from WFC in the form of
dividends, from payments of principal and interest on the surplus certificate
issued by NFL, from repayments of advances to the Company's marketing
subsidiaries and from payments under the Company's tax sharing agreement.
Westbridge's expenses and other obligations consisted primarily of $2.2 million
in annual interest payments on the Senior Subordinated Notes, $1.7 million in
annual dividends on the Series A Preferred Stock, working capital requirements
for its marketing subsidiaries and taxes. For the year ended December 31, 1996,
Westbridge's cash requirements aggregated approximately $9.4 million. The Senior
Subordinated Notes may be redeemed, at the Company's option, without premium, on
or after March 1, 1998 and mature in March 2002. The Series A Preferred Stock
may be redeemed, at the option of the Company, on and after April 12, 1997 and
is subject to mandatory redemption on April 12, 2004. See "Capitalization" and
"Description of Capital Stock -- Series A Preferred Stock."
Westbridge believes that its short-term cash requirements, including
interest on the Senior Subordinated Notes and dividend payments on the Series A
Preferred Stock, will be met through operating cash flows, repayments of
advances from subsidiaries and payments relating to the surplus certificate.
Insurance Subsidiaries
The primary sources of cash for the Insurance Subsidiaries are premiums and
income on invested assets. Additional cash is periodically provided from the
sale of short-term investments and could, if necessary, be provided through the
sale of long-term investments and blocks of business. The Insurance
Subsidiaries' primary uses for cash are benefits and claims, commissions,
general and administrative expenses, taxes, licenses and fees.
In the ordinary course of business, the Company advances commissions on
policies written by its general agencies and their agents. The Company is
reimbursed for these advances from the commissions earned over the respective
policy's life. In the event that policies lapse prior to the time the Company
has been fully reimbursed, the general agency or the individual agents, as the
case may be, are responsible for reimbursing the Company for the outstanding
balance of the commission advance. The Company has not experienced material
annual losses on such commission advances. However, for the year ended December
31, 1996, the Company charged-off approximately $0.9 million of reimbursable
commission advances which had accumulated in LifeStyles Marketing over a period
of five years. There can be no assurance as to the frequency of occurrence or
amount of any future losses. As of December 31, 1996, outstanding advances
totaled $18.3 million to the Company's general agencies and their agents. See
"Risk Factors -- Reliance on General Agencies; Credit Risk."
In order to finance commission advances, the Company's wholly-owned
subsidiary WFC entered into the Credit Agreement which provides WFC with a
two-year $20 million revolving loan facility (the "Receivables Financing"), the
proceeds of which are used by WFC to purchase receivables evidencing commission
advances to agents. WFC's obligations under the Credit Agreement are secured by
liens upon substantially all of WFC's assets. In addition, Westbridge has
guaranteed WFC's obligations under the Credit Agreement and has pledged all of
the issued and outstanding shares of the capital stock of FLICA, NFL, NFIC and
WFC as collateral for its guaranty. As of December 31, 1996, $11.6 million was
outstanding under the Credit Agreement. The Credit Agreement terminates on
January 7, 1998, at which time the outstanding principal and interest thereunder
will be due and payable. The Company expects that the Credit Agreement will be
extended or refinanced at its maturity.
The ability of the Insurance Subsidiaries to underwrite insurance products
is limited by state regulation of statutory capital and surplus requirements. As
a result of rapid growth in product sales during 1995 and the first six months
of 1996, the Company has had to restrain the growth of its underwritten products
since the second quarter of 1996, consistent with its available statutory
capital and surplus. This restraint has limited the Company's premiums and
earnings and will continue to do so until such time as additional statutory
capital
27
<PAGE> 28
and surplus can be obtained by the Company. The Company continues to seek
additional sources of statutory capital and surplus, however, there can be no
assurance that such efforts will be successful. During 1996, the Company entered
into reinsurance arrangements which provided approximately $8.5 million in
additional cash flow. No assurance can be given that the Company will be able to
obtain additional financing or enter into additional reinsurance arrangements.
See "Risk Factors -- Statutory Capital and Surplus Limitations; New Business
Production."
Consolidated
The Company's consolidated net cash used for operations totaled $11.3
million, $21.3 million and $10.6 million in 1996, 1995 and 1994, respectively.
The reduction in cash used by operations in 1996 as compared to 1995 is due
primarily to higher net income from operations and an increase in policyholder
liabilities. The primary reason for the increase in cash used for operations
from 1994 to 1995 was the increase in new business production in 1995.
Net cash provided by investing activities totaled $6.2 million, $0.4
million and $11.5 million in 1996, 1995 and 1994, respectively. The increase in
1996 was attributable to the liquidation of investments to support the increased
new business production which occurred during the first two quarters of 1996.
Net cash provided by financing activities were $4.1 million, $20.0 million
and $24.9 million for the years ended December 1996, 1995 and 1994,
respectively. The net cash provided by financing activities in 1996 resulted
primarily from borrowings under the Receivables Financing. During 1995, the
Company received $29.3 million from the sale of Common Stock and Senior
Subordinated Notes in a public offering and $15.8 million from borrowings
primarily under the Receivables Financing. Offsetting these cash inflows in 1995
was $25.0 million paid to retire Westbridge's 11.7% Senior Subordinated
Debentures due 1996. During 1994, the Company received $20.0 million from the
sale of the Series A Preferred Stock, which was used to fund the acquisition of
NFIC and AICT, and $5 million from the sale by NFL to a non-affiliated party of
$5.0 million par value of Westbridge's Senior Subordinated Debentures due 1996,
which had been held by NFL in its investment portfolio.
The Company believes that its short-term cash requirements will be met
through a combination of operating and investing cash flows and the Receivables
Financing. The Company anticipates that its longer-term cash requirements for
the operation of the business will be met through a combination of operating and
investing cash flows. In order to expand its underwriting and marketing of
Medical Expense Products and Critical Care and Specified Disease Products, the
Company will require additional statutory capital and surplus which is expected
to be provided by the proceeds of the offering of the Notes hereby. In addition,
opportunities for future acquisitions, if any, may also require additional
financing. There can be no assurance that such additional statutory capital and
surplus or financing will be obtained.
The Company had no significant high-yield, unrated or less than investment
grade fixed maturity securities in its investment portfolio as of December 31,
1996, and it is the Company's policy not to exceed more than 5% of total assets
in such securities. Changes in interest rates may affect the market value of the
Company's investment portfolio. The Company's principal objective with respect
to the management of its investment portfolio is to meet its future policyholder
benefit obligations. In the event of material adverse loss experience, the
Company may be required to compromise its investment yield to satisfy such
obligations.
Included in the invested assets of the Company at December 31, 1996 were
real estate mortgage loans with an estimated market value of $0.7 million.
Approximately 98% of these assets relate to property located in Oklahoma and
Texas. Such regional concentration may have a higher investment risk than a more
diversified portfolio. The Company has adopted a policy not to invest in such
assets and, accordingly, the Company has made no mortgage loans or real estate
purchases since 1989.
Inflation will affect claim costs on the Company's Medicare Supplement
Products and Medical Expense Products. Costs associated with a hospital stay and
the amounts reimbursed by the Medicare program are each determined, in part,
based on the rate of inflation. If hospital and other medical costs which are
reimbursed by the Medicare program increase, claim costs on the Medicare
Supplement Products will increase. Similarly, as the hospital and other medical
costs increase, claim costs on the Medical Expense Products will increase.
28
<PAGE> 29
However, with the approval of the relevant state regulatory authority, the
Company has the ability, within the constraints of the loss ratios mandated by
the regulatory authorities, to raise premium rates on its guaranteed renewable
products in the event of adverse claims experience. In addition, the Company has
limited its exposure to inflation by incorporating certain maximum benefits
under its policies. See "Business -- Products."
The NAIC has developed certain RBC statutory requirements for insurance
companies. Under these requirements, insurers whose statutory capital and
surplus fall below the specified level are subject to remedial action. These
guidelines are not effective unless they are adopted by the states. The States
of Delaware and Mississippi have each adopted the NAIC's RBC calculation
guidelines. The State of Texas has developed an RBC calculation which varies
from the NAIC. As of December 31, 1996, the RBC for each of the Insurance
Subsidiaries exceeded the proposed thresholds for required regulatory
intervention. See "Risk Factors -- Risk-Based Capital Requirements" and
"Business -- Regulation."
29
<PAGE> 30
BUSINESS
GENERAL
The Company markets medical expense and supplemental health insurance
products and managed care health plans to individuals in 41 states. Since 1992,
the Company has grown through a combination of acquisitions and, more recently,
increased sales of its underwritten products. Primarily as a result of
acquisitions, the Company's total premiums grew from approximately $56.7 million
in 1992 to approximately $98.7 million in 1994. During the first quarter of
1995, the Company embarked on a strategy of expanding the number of agents in
its marketing distribution system to increase sales of its underwritten
products. As a result of this initiative, the Company's net annualized written
premiums increased from $19.9 million in 1994 to $79.1 million in 1996 with
total premiums increasing 59.0% to $156.8 million in 1996. During the middle of
1996, the Company reduced the marketing of its underwritten products due to
statutory capital and surplus constraints caused by its rapid growth. The
Company intends to increase the marketing of its underwritten products following
the sale of the Notes offered hereby.
The Company has taken advantage of its marketing distribution system to
market certain managed care health plans which are underwritten by HMOs and
other non-affiliated managed care organizations. Through this marketing effort,
which generates sales commissions, the Company's fee and service income has
increased from approximately $2.3 million in 1995 to approximately $9.5 million
in 1996. Fee and service income can be generated without regard to the statutory
capital and surplus requirements that apply to the Company's underwritten
products.
The Company's strategy is (i) to expand its underwriting and marketing of
its Medical Expense Products in rural areas where managed care health plans are
often unavailable, (ii) to increase its fee and service income by continuing to
expand its marketing of managed care health plans underwritten primarily by HMOs
and other managed care organizations, primarily in urban markets where managed
care health plans are readily available, and (iii) to focus on cross-selling its
Critical Care and Specified Disease Products with the managed care health plans
it markets. The Company believes that its Critical Care and Specified Disease
Products are attractive to managed care consumers who are concerned with the
choice limitations of managed care health plans, particularly in the event of
serious illness. In addition, the Company intends to evaluate opportunities for
further growth through acquisitions.
MARKETING DISTRIBUTION SYSTEM
The Company markets health insurance products and managed care health plans
through a distribution system of (i) general agencies in which the Company has a
controlling ownership interest and (ii) independently-owned general agencies
which have entered into exclusive contractual arrangements to sell the Company's
Medical Expense Products.
The Company has generally marketed its underwritten health insurance
products to individuals on a one-on-one basis through agents who are independent
contractors associated with general agencies. The Company's policies are sold to
individuals who are either not covered under group insurance protection normally
available to employees of business organizations or who wish to supplement
existing coverage. In many cases, these individuals are employed by small
business groups. In 1996, the Company began marketing managed care health plans
underwritten primarily by HMOs and other managed care organizations, primarily
in urban markets where managed care health plans are readily available. This
marketing effort has substantially increased the Company's fee and service
income and enables it to cross-sell its underwritten supplemental health
insurance to managed care health plan members.
The Company believes that its success in attracting and retaining agents is
based on its unique distribution model which (i) begins with focused
telemarketing to generate high quality sales leads at a relatively low cost,
(ii) includes intensive training programs that yield highly productive agents,
(iii) focuses upon the Company having an ownership interest in its major
distributors to provide incentives for long-term stability and (iv) offers
innovative agent compensation which includes participation in the Company's
restricted stock plan.
30
<PAGE> 31
Agents' sales contacts generally result from leads generated either by a
general agency or through outside sources. By providing its controlled and
independent general agencies and their agents with sales leads which result in a
high percentage of sales, the Company believes it is especially attractive to
experienced agents as well as new agents entering the business. Consequently,
the Company believes it can more easily attract new agents and retain agents who
are a part of its existing general agencies. By utilizing a predictive automated
dialing system, the Company believes PDS is able to generate a large number of
quality sales leads for approximately two-thirds the cost of the national
industry average.
To provide agents with a detailed understanding of its products and to
assist its agents' sales efforts, the Company provides sales brochures and other
marketing materials (including information about the Company) to its agents. In
addition, the Company requires that every new agent complete a comprehensive
review of the Company's compliance and procedures manual.
The Company has sought to develop its network of controlled general
agencies to provide it with flexibility and long-term stability in its marketing
relationships. To the extent that these general agencies sell commissioned
products of HMOs and other managed care organizations, they provide additional
fee and service income to the Company.
Agent compensation is an important factor in providing incentives for an
agent's decision to market health insurance products offered by or through the
Company over those health insurance products of competing insurers and to
associate with a particular general agency. Agents typically receive commissions
equal to a percentage of premiums paid which varies by policy type. First-year
commissions on the Company's products typically range from 30.0% to 95.0% of
collected premiums. Renewal commissions on the Company's products typically
range from 3.0% to 30.0% of collected premiums. The Company also awards shares
of its restricted stock to managers and agents of its general agencies who meet
specified production, persistency and quality of service criteria. These shares
vest over a five-year period thereby providing agents with a long-term
proprietary interest in maximizing the growth, profitability and overall success
of the Company.
The principal general agencies in which the Company has a controlling
ownership interest are LifeStyles Marketing, Senior Benefits, Health Care-One,
and HCO Marketing. These general agencies market a variety of insurance products
underwritten by the Company, as well as HMO, PPO and Medicare SELECT products
underwritten by independent managed care organizations such as Blue Cross of
California and UniCARE, each of which are subsidiaries of WellPoint, Foundation
Health and MEDFIRST. The principal independent general agencies which sell the
Company's products are Cornerstone and Farm & Ranch, each of which currently
markets the Company's Medical Expense Products.
Controlled General Agencies
LifeStyles Marketing Group, Inc. LifeStyles Marketing was formed in 1988 as
a joint venture by the Company and a non-affiliated insurance agency which was
contracted to sell the Company's Medical Expense Products. The Company owns
51.0% of LifeStyles Marketing and entered into this investment to provide the
Company with commissions received by LifeStyles Marketing for selling
non-affiliated insurance carriers' products which were not then underwritten by
the Company. The Company receives 50% of the profits (and losses) of LifeStyles
Marketing and has agreed to finance LifeStyles Marketing's operations. During
the first quarter of 1995, the Company embarked on a strategy to increase sales
of its underwritten products. As a result of this initiative, the average
submitted annualized premiums produced weekly by LifeStyles Marketing increased
from $0.4 million during the first quarter of 1994 to $1.1 million during the
first quarter of 1996. Due to statutory capital and surplus constraints, the
Company reduced the marketing of its underwritten products in mid-1996 and, as a
result, the average submitted annualized premiums produced weekly by LifeStyles
Marketing decreased to $0.4 million during the first quarter of 1997.
LifeStyles Marketing maintains its sales headquarters in Arlington, Texas
and currently sells the Company's Medical Expense Products and the HMO and PPO
products of UniCARE and Foundation Health. LifeStyles Marketing currently
markets in ten states and intends to begin marketing in Virginia and Michigan in
1997.
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<PAGE> 32
Senior Benefits, LLC. The Company and an Arizona-based agency specializing
in the sale of Medicare Supplement Products formed Senior Benefits in November
1993. The Company initially acquired 50.0% of Senior Benefits to establish a
strong distribution network for its Medicare Supplement Products. The Company
also entered into PPO agreements with Columbia/HCA Healthcare Corporation and
other hospitals and health care providers to complement its "Medicare SELECT"
products. In June 1996, the Company acquired the remaining 50.0% interest of
Senior Benefits. During the first quarter of 1994, 1996 and 1997, the average
submitted annualized premiums produced weekly by Senior Benefits was $0.1
million, $0.7 million and $0.2 million, respectively.
Due to the relatively low margins for Medicare Supplement Products, the
Company intends to significantly reduce its underwriting of these products in
favor of marketing the Medicare Supplement Products of other insurers. In late
1996, Senior Benefits began marketing the Medicare Supplement Products of
UniCARE.
Senior Benefits maintains its sales headquarters in Scottsdale, Arizona
and, according to WellPoint data, is currently the leading marketer of UniCARE's
Medicare SELECT product. Senior Benefits currently markets in two states and
intends to expand its marketing of UniCARE's Medicare SELECT product by selling
this product in Alabama, Georgia, Illinois, North Carolina and Tennessee during
1997.
Health Care-One Insurance Agency, Inc. In late 1995, the Company formed
Health Care-One, with an existing insurance agency specializing in marketing HMO
and PPO products in California for WellPoint's Blue Cross of California
subsidiary. The Company entered into this arrangement to increase its fee and
service income by expanding its marketing of managed care health plans which are
underwritten by HMOs and other managed care organizations. The Company owns 50%
of Health Care-One.
Health Care-One maintains its sales headquarters in San Diego, California
and, according to WellPoint data, is currently the leading marketer of
individual health insurance products and managed care health plans for Blue
Cross of California. During 1997, Health Care-One intends to begin cross
marketing the Company's new "critical care" product to Blue Cross of California
plan members.
Health Care-One Marketing Group, Inc. In 1996, the Company formed HCO
Marketing to further increase its fee and service income by expanding its
marketing of UniCARE's managed care products in states other than California.
The Company owns 80% of HCO Marketing.
HCO Marketing maintains its sales headquarters in San Diego, California
and, according to WellPoint data, is currently the leading marketer of
individual health insurance products and managed care health plans for UniCARE.
During 1997, HCO Marketing intends to expand its marketing of UniCARE's products
by selling its products in Arizona, Illinois, Indiana and Virginia. Also during
1997, HCO Marketing intends to begin marketing MEDFIRST's products in Louisiana.
Freedom Marketing, Inc. The Company formed Freedom Marketing as a
wholly-owned subsidiary in 1996. Freedom Marketing maintains its sales
headquarters in Fort Worth, Texas and currently sells Medical Expense Products
and Critical Care and Specified Disease Products for FLICA. The Company expects
Freedom Marketing to generate significant submitted annualized premiums in 1997.
Independent General Agencies
Cornerstone National Marketing Corporation. Cornerstone is an independent
general agency which specializes in marketing of association group insurance
programs to self employed individuals and small business owners. In October
1994, the Company entered into a Master General Agent's Contract with
Cornerstone pursuant to which Cornerstone agreed to market Medical Expense
Products underwritten exclusively by the Company. The Master General Agent's
Contract is terminable by either party upon 180 days' notice. Cornerstone, which
began selling the Company's products in December 1994, produced average weekly
submitted annualized premiums of $0.9 million and $0.3 million during the first
quarter of 1996 and 1997, respectively.
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<PAGE> 33
Cornerstone maintains its sales headquarters in Arlington, Texas.
Cornerstone currently markets the Company's Medical Expense Products in 11
states and, subject to the Company's ability to resume the growth in sales of
its underwritten products, intends to begin selling such products in four
additional states in 1997.
National Farm & Ranch Group, Inc. Farm & Ranch is an independent general
agency which specializes in the marketing of association group insurance
programs to farmers, ranchers and other persons in the agricultural community.
In December 1994, the Company entered into a Master General Agent's Contract
with Farm & Ranch pursuant to which Farm & Ranch agreed to market Medical
Expense Products underwritten exclusively by the Company. These products have
been endorsed by two nationally recognized agricultural associations. The Master
General Agent's Contract is terminable by either party upon 180 days' notice.
Farm & Ranch, which began selling the Company's products in December 1994,
produced average weekly submitted annualized premiums of $0.4 million and $0.2
million during the first quarter of 1996 and 1997, respectively.
Farm & Ranch maintains its sales headquarters in Fort Worth, Texas. Farm &
Ranch currently markets the Company's Medical Expense Products in 12 states and,
subject to the Company's ability to resume the growth in sales of its
underwritten products, intends to begin selling such products in Illinois,
Indiana and Ohio in 1997.
PRODUCTS
The major underwritten product lines currently being marketed by the
Company are:
- "Medical Expense Products," which include policies providing
reimbursement for various costs of medical and hospital care and offering
reduced deductibles and coinsurance payments to policyholders which use
the Company's contracted PPOs; and
- "Critical Care and Specified Disease Products," which include indemnity
policies for treatment of specified diseases and "event specific" and
"critical care" policies which provide fixed benefits or lump sum
payments upon diagnosis of internal cancer or other catastrophic
diseases.
Within each of these product lines, the Company continues to develop new
policies and products to respond to changes in the health care environment. The
Company has recently developed its "MSA Major Medical Plan" which allows
individuals to take advantage of certain federal tax benefits by purchasing high
deductible major medical insurance together with a medical savings account that
includes a unique package of additional benefits. Additionally, the Company has
developed a new "critical care" product to cross-sell in connection with its
marketing of HMO and PPO products.
Historically, the Company has also underwritten a significant amount of
"Medicare Supplement Products" designed to provide reimbursement for certain
expenses not covered by the Medicare program. However, due to the relatively low
margins for this product, the Company intends to significantly reduce its
underwriting of these products in favor of marketing the Medicare Supplement
Products of other insurers.
The major managed care products underwritten by HMOs and other managed care
organizations which are currently being marketed by the Company are:
- HMO products underwritten by Blue Cross of California, MEDFIRST and
Foundation Health;
- PPO products underwritten by UniCARE; and
- Medicare SELECT products underwritten by UniCARE which utilize the
Company's network of contracted Medicare SELECT providers.
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<PAGE> 34
PREMIUMS BY UNDERWRITTEN PRODUCT LINE
The following table sets forth the premiums received by the Company for
each of its underwritten product lines for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
ACCIDENT AND HEALTH INSURANCE
Medical Expense Products
Direct business
First-year................................................ $ 40,308 $ 16,352 $ 7,219
Renewal................................................... 15,906 9,990 9,267
Acquired business
First-year................................................ -- 133 --
Renewal(1)................................................ 14,057 19,436 18,350
Other
First-year................................................ -- -- 1
Renewal................................................... 1,520 1,926 2,686
-------- -------- -------
Total Medical Expense Products.............................. 71,791 47,837 37,523
-------- -------- -------
Critical Care and Specified Disease Products
Direct business
First-year................................................ 1,227 1,254 1,476
Renewal................................................... 12,520 13,009 13,321
Acquired business
First-year(2)............................................. 788 1 53
Renewal(1)(2)............................................. 15,677 8,900 7,954
Reinsurance assumed
First-year................................................ 1,188 4,437 2,363
Renewal................................................... 2,814 5,474 5,484
-------- -------- -------
Total Critical Care and Specified Disease Products.......... 34,214 33,075 30,651
-------- -------- -------
Medicare Supplement Products
Direct business
First-year................................................ 17,852 12,359 3,952
Renewal................................................... 11,895 3,011 43
Acquired business
First-year................................................ -- 79 3
Renewal(1)................................................ 17,788 20,566 22,996
Other
First-year................................................ 8 -- --
Renewal................................................... 2,343 2,617 3,090
-------- -------- -------
Total Medicare Supplement Products.......................... 49,886 38,632 30,084
-------- -------- -------
Total Accident and Health Insurance......................... 155,891 119,544 98,258
-------- -------- -------
LIFE INSURANCE
Total Life Insurance........................................ 889 549 445
-------- -------- -------
Total Premium Revenue....................................... $156,780 $120,093 $98,703
======== ======== =======
</TABLE>
- ---------------
(1) Includes revenue from policies acquired in the acquisition of NFIC and AICT
from April 12, 1994. See "Business -- Acquisitions."
(2) Includes revenue from policies acquired in the acquisition of FLICA's
parent, FHC, from June 1, 1996. See "Business -- Acquisitions."
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<PAGE> 35
DESCRIPTION OF THE COMPANY'S UNDERWRITTEN PRODUCT LINES
The Company's products are designed with flexibility as to benefits and
premium payments and can be adapted to meet regional sales or competitive needs,
as well as those of the individual policyholders. These products have fixed,
capped or limited benefits and are designed to reduce the potential financial
impact of covered illnesses and injuries.
Set forth below is a summary of the principal products the Company
currently underwrites, as well as those which are no longer sold but continue to
generate premium revenue through renewals.
Medical Expense Products. The Company's Medical Expense Products are
designed to reimburse insureds for expenses incurred for hospital confinement,
surgical expenses, physician services, out-patient benefits and the cost of
medicines immediately following a hospital stay. Out-patient benefits and
maternity benefits are also available. The policies provide a number of options
with respect to deductibles, coinsurance percentages, maximum benefits and
stop-loss limits and offer reduced deductibles and coinsurance payments to
policyholders which use the Company's contracted PPOs. In addition, certain
policies include "inside limits" on benefits during hospital confinement. After
the annual deductible is met, the insured is responsible for a percentage of
eligible expenses up to a specified stop-loss limit. Thereafter, eligible
expenses are covered by the Company up to certain maximum policy limits.
The Company's Medical Expense Products are individually underwritten based
upon medical information provided by the applicant prior to issue. Information
in the application is verified with the applicant through a tape-recorded
telephone conversation or through written correspondence. These policies are
conditionally renewable at the Company's option.
The Company's Medical Expense Products are marketed primarily by LifeStyles
Marketing, Cornerstone, and Farm & Ranch and are sold primarily to members of
non-affiliated associations which consist of self-employed individuals, small
business owners and members of the agricultural community. In addition, the
Company has recently developed its "MSA Major Medical Plan" which allows
individuals to take advantage of certain federal tax benefits by purchasing high
deductible major medical insurance together with a medical savings account and
other unique benefits, including a Westbridge affinity Visa debit card and a
prescription drug consumer card. The Company began marketing the MSA Major
Medical Plan in March 1997.
Critical Care and Specified Disease Products. The Company's Critical Care
and Specified Disease Products include indemnity policies for hospital
confinement and convalescent care for treatment of specified diseases and "event
specific" and "critical care" policies which provide fixed benefits or lump sum
payments upon diagnosis of certain types of internal cancer or other
catastrophic diseases. Benefits are payable directly to the policyholder
following diagnosis of or treatment for a covered illness or injury. The
payments are designed to help reduce the potential financial impact of these
illnesses or injuries and may be used at the policyholder's discretion for any
purpose, including helping to offset non-medical expenses or medical-related
expenses not paid by the policyholder's other health insurance. The amount of
benefits provided under the Company's Critical Care and Specified Disease
Products is not necessarily reflective of the actual cost expected to be
incurred by the insured as a result of the illness or injury. Critical Care and
Specified Disease Products are generally guaranteed renewable.
Critical Care and Specified Disease Products are generally issued by the
Company after an application form is filled out by the agent on behalf of the
prospective insured. Policies are not available to anyone who has been diagnosed
as having the disease prior to the date of policy issuance.
The Company's Critical Care and Specified Disease Products are currently
marketed by LifeStyles Marketing and Freedom Marketing. The Company has recently
introduced a "critical care" product which provides supplemental coverage to HMO
and PPO plan members and allows them to obtain a lump sum payment upon diagnosis
of internal cancer, heart attack, kidney failure or organ transplant. The lump
sum
35
<PAGE> 36
benefit can be used to obtain specialized or experimental treatment not
ordinarily available to HMO and PPO members.
Medicare Supplement Products. The Company's Medicare Supplement Products
provide coverage for many of the medical expenses which the federal Medicare
program does not cover, such as copayments, deductibles and specified losses
which exceed the federal program's maximum benefits. The Company also
underwrites a Medicare SELECT policy which is designed to provide benefits which
supplement Medicare at attractive rates by taking advantage of arrangements with
hospitals, other health care providers and PPOs. These arrangements typically
provide that a hospital or health care provider will agree to waive Medicare's
Part A initial deductible, thereby reducing the total benefit expenses
associated with a hospital stay. The Company's Medicare Supplement Products are
guaranteed renewable.
The Omnibus Budget Reconciliation Act of 1990 mandated, among other things,
standardized policy features in Medicare Supplement plans and, in response, the
NAIC created ten model Medicare Supplement plans. In states that have adopted
the NAIC model, only those 10 plans can be sold. In November 1993, the Company
began underwriting four of the model plans.
The Company's Medicare Supplement Products are currently marketed primarily
by Senior Benefits. However, due to the relatively low margins for this product,
the Company intends to significantly reduce its underwriting of these products
in favor of marketing the Medicare Supplement Products of other insurers.
Life Insurance
The Company began marketing its EZ-100 life plan in 1995. EZ-100 is an
individually underwritten whole life insurance product designed to serve as a
complement to accident and health insurance products. EZ-100 is issued in face
amounts ranging from $3,000 to $20,000, and may be marketed by any of the
Company's general agencies.
While the Company substantially discontinued active sales of ordinary life
insurance products in 1979, it continues to receive renewal premiums on ordinary
life policies in force sold prior to that date.
ACQUISITIONS
The Company believes that conditions in the accident and health insurance
industry have created, and will continue to create in the short term,
opportunities to acquire health insurance companies and blocks of insurance
policies at a lower cost than would be required to produce such business. Larger
companies are reducing administrative costs by divesting blocks of business
which are outside such companies' core product lines. In addition, smaller
companies are finding it difficult to remain competitive. The Company has
completed several acquisitions since 1992 and intends to evaluate opportunities
for further growth through acquisitions as such opportunities become available.
The Company is not currently actively pursuing any opportunities to acquire
additional insurance companies or blocks of business.
In September 1992, the Company purchased a block of Medicare Supplement
policies from American Integrity having annualized premiums of approximately
$42.0 million. The purchase was accomplished through a combination of indemnity
and assumption reinsurance agreements.
In March 1993, the Company purchased an additional block of Medicare
Supplement policies from Life and Health having annualized premiums of
approximately $4.0 million. The purchase was accomplished through a combination
of indemnity and assumption reinsurance agreements.
In February 1994, the Company purchased a closed block of cancer indemnity
insurance from Dixie National Life with annualized premiums of approximately
$4.5 million. The acquisition was completed by way of assumption reinsurance
agreements and did not require additional financing.
In April 1994, the Company completed the acquisition of NFIC and AICT. At
that time, the acquired companies' combined health insurance policies in force
consisted of approximately 102,000 policies with approximately $45.0 million in
annualized premiums in business lines substantially similar to those of the
Company. Both acquired companies ceased writing new business in the first six
months in 1992. However, in
36
<PAGE> 37
1995 the Company began underwriting certain Medical Expense Products and certain
Medicare Supplement Products through NFIC and AICT.
In May 1996, the Company acquired the 60% ownership interest in FHC which
it did not then own. The Company previously coinsured a majority of the existing
business of FLICA, FHC's wholly-owned subsidiary.
HOME OFFICE OPERATIONS
Except for Health Care-One, HCO Marketing, LifeStyles Marketing, PDS,
Senior Benefits, and WPS, none of the Company's subsidiaries has any branch
offices and, other than incidental travel by employees, the subsidiaries conduct
their entire operations at the Fort Worth office (the "Home Office"). The
functions carried out at the Home Office include policy issue and underwriting,
policyowner service, claims processing, agency service and other administrative
functions such as data processing, legal, accounting and actuarial.
The Company's policy issue and underwriting departments review policy
applications. The industry practice does not require physical examinations and
tests before a policy is issued. However, the Company's underwriting personnel
will generally telephone an applicant for a Medical Expense Product to verify
the information set forth in the policy application and the policy benefits
being sold, and will often contact the applicant's physician in the verification
process. These telephone calls are recorded. Applicants for the Critical Care
and Specified Disease Products must certify in writing that they meet certain
health standards established by the Company before the policy will be issued.
Most applicants for the Company's Medicare Supplement Products fill out an
application and, based on the historical health information certified therein,
the Company makes a determination whether to issue the policy. Certain
applicants, during a six-month "window" after reaching age 65, are not required
to provide historical health information.
The Company's policyowner service department and agency service department
are responsible for responding to policyowner and agent requests for information
or services. The claims processing department reviews benefit claims submitted
by policyowners, determines the benefits payable and processes the claim
payments.
RESERVE POLICY AND ADEQUACY
The Company's reserves consist of two separate components: the claim
reserves and the policy benefit reserves. The claim reserves are established by
the Company for benefit payments which have already been incurred by the
policyholder but which have not been paid by the Company. The Company's
consulting actuary estimates these reserves based upon analysis of claim
inventories, loss ratios and claim lag studies. These estimates are developed in
the aggregate for claims incurred (whether or not reported). The claim reserves
include an amount which will not be paid out until subsequent reporting periods,
but which is recorded in the current period for reporting purposes. Policy
benefit reserves are established by the Company for benefit payments which have
not been incurred but which are estimated to be incurred in the future. The
policy benefit reserves accounted for approximately 58% of the Company's total
reserves as of December 31, 1996. The policy benefit reserves are calculated
according to the net level premium reserve method, and are equal to the
discounted present value of the Company's expected future policyholder benefits,
minus the discounted present value of its expected future net premiums. These
present value determinations are based upon assumed fixed investment yields, the
age of the policy insured(s) at the time of policy issuance, expected morbidity
and persistency rates, and expected future policyholder benefits. Except for
purposes of reporting to insurance regulatory authorities and for tax filing,
the Company's claim reserves and policy benefit reserves are determined in
accordance with GAAP.
In determining the morbidity, persistency rate, claim cost and other
assumptions used in determining the Company's policy benefit reserves, the
Company relies primarily upon its own benefit payment history and upon
information developed in conjunction with actuarial consultants and industry
data. The Company's persistency rates have a direct impact upon its policy
benefit reserves, because the determinations for this reserve are, in part, a
function of the number of policies in force and expected to remain in force to
maturity. If persistency is higher or lower than expected, future policyholder
benefits will also be higher or lower because
37
<PAGE> 38
of the different than expected number of policies in force, and accordingly, the
policy benefit reserves will be increased or decreased.
The Company's reserve requirements are also interrelated with product
pricing and profitability. The Company must price its products at a level
sufficient to fund its policyholder benefits and still remain profitable.
Because the Company's policyholder benefits represent the single largest
category of its operating expenses, inaccuracies in the assumptions used to
estimate the amount of such benefits can result in the Company failing to price
its products appropriately and to generate sufficient premiums to fund the
payment thereof. Because the discount factor used in calculating the Company's
policy benefit reserves is based upon the rate of return of the Company's
investments designed to fund this reserve, the amount of the reserve is
dependent upon the yield on these investments. Provided that there is not
material adverse experience with respect to these benefits, changes in future
market interest rates will not have an impact on the profitability of policies
already sold. Because fluctuations in future market interest rates affect the
Company's yield on new investments, they also affect the discount factor used to
establish, and thus the amount of, its policy benefit reserves for new sales. In
addition, because an increase in the policy benefit reserves in any period is
treated as an expense for income statement purposes, market interest rate
fluctuations can directly affect the Company's profitability for policies sold
in such period. It is not possible to predict future market interest rate
fluctuations.
In accordance with GAAP, the Company's actuarial assumptions are generally
fixed at the time they are made, and absent materially adverse benefit
experience, they are not generally adjusted. Nonetheless, the Company monitors
the adequacy of its policy benefit reserves on an ongoing basis by periodically
analyzing the accuracy of its actuarial assumptions.
The adequacy of the Company's policy benefit reserves may also be impacted
by the development of new medicines and treatment procedures which may alter the
incidence rates of illness and the treatment methods for illness and accident
victims (such as out-patient versus in-patient care) or prolong the life
expectancy of such victims. Changes in coverage provided by major medical
insurers or government plans may also affect the adequacy of the Company's
reserves if, for example, such developments had the effect of increasing or
decreasing the incidence rate and per claim costs of occurrences against which
the Company insures. An increase in either the incidence rate or the per claim
costs of such occurrences could result in the Company needing to post additional
reserves, which could have a material adverse effect upon its business,
financial condition or results of operations. See "Risk Factors -- Adequacy of
Reserves."
The Insurance Subsidiaries are required to report their results of
operations and financial position to state regulatory agencies based upon SAP.
Under SAP, certain assumptions used in determining the policy benefit reserves,
such as claim costs and investment result assumptions, are often more
conservative than those appropriate for use by the Company under GAAP. In
particular, SAP interest rate assumptions for investment results are fixed by
statute and are generally lower than those used by the Company under GAAP.
Another significant difference is that under SAP, unlike GAAP, the Company is
required to expense all sales and other policy acquisition expenses as they are
incurred, rather than capitalizing and amortizing them over the expected life of
the policy. Although the effect of this requirement is moderated by the
allowance under SAP of an accounting procedure known as the "two year
preliminary term" reserve valuation method, which allows the Company to defer
any accumulation of policy benefit reserves until after the second policy year,
the immediate charge off of sales and acquisition expenses and the sometimes
conservative claim cost and other valuation assumptions under SAP generally
cause a lag between the sale of a policy and the emergence of reported earnings.
Because this lag can reduce the Company's gain from operations on a SAP basis,
it can have the effect of reducing the amount of funds available for dividend
distributions to stockholders.
REGULATION
The Company is subject to regulation and supervision in all jurisdictions
in which it conducts business. In general, state insurance laws establish
supervisory agencies with broad administrative powers relating to, among other
things, the granting and revoking of licenses to transact business, regulation
of trade practices and premiums, licensing of agents, approval of content and
form of policies, maintenance of specified reserves and statutory capital and
surplus, deposits of securities, form and content of required financial
statements, nature
38
<PAGE> 39
of investments and limitations on dividends to stockholders. The purpose of such
regulation and supervision is primarily to provide safeguards for policyholders
rather than to protect the interests of stockholders.
The Company's health insurance products are subject to rate regulation by
state insurance departments which generally require that certain minimum loss
ratios be maintained. The states in which the Company is licensed have the
authority to change the minimum mandated statutory loss ratios to which the
Company is subject, the manner in which these ratios are computed and the manner
in which compliance with these ratios is measured and enforced. Most states in
which the Company writes health insurance products have adopted the loss ratios
recommended by the NAIC. The Company is unable to predict the impact of (i) any
changes in the mandatory statutory loss ratios relating to products offered by
the Company or (ii) any change in the manner in which these minimums are
computed or enforced in the future. The Company has not been informed by any
state that it does not meet mandated minimum ratios and the Company believes
that it is in compliance with all such minimum ratios. In the event the Company
is not in compliance with minimum statutory loss ratios mandated by regulatory
authorities, the Company may be required to reduce or refund premiums, which
event could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Mandated Loss Ratios."
The NAIC has developed RBC statutory requirements for insurance companies
which require remedial action in the event an insurance company's statutory
capital and surplus falls below the specified level. The RBC formula establishes
capital requirements for four categories of risk: asset risk; insurance risk;
interest rate risk; and business risk. The NAIC's RBC formula may be used by
regulators as an analytical tool to monitor the adequacy of capital of insurers.
Under the model law, if an insurer's RBC, as determined under the RBC formula,
falls below specified RBC levels, the insurer would be subject to different
degrees of regulatory action depending upon the RBC level. At the initial
problem level, the "Company Action Level," the insurer would be required to
identify and propose actions to correct the risk-based capital deficiency and to
provide the regulator with financial projections assuming both the absence and
the presence of corrective action (collectively, an "RBC Plan"). At the second
problem level, the "Regulatory Action Level," the insurer would be required to
submit an RBC Plan and would be subject to such examination or analysis and to
such orders specifying required corrective action as the insurance regulator
deems necessary. At the third problem level, the "Authorized Control Level," the
regulator may place the insurer under regulatory control if the regulator
decides that would be in the best interests of policyholders, creditors and the
public. At the fourth problem level, the "Mandatory Control Level," the model
law requires the regulator to place the insurer under regulatory control. The
NAIC's requirements are effective on a state by state basis if and when they are
adopted by the regulators in the respective states. The States of Delaware and
Mississippi have each adopted the NAIC's RBC guidelines. The State of Texas has
developed a guideline for calculating RBC which varies from the NAIC's
requirements. As of December 31, 1996, each Insurance Subsidiary's RBC exceeded
the "Company Action Level."
Under applicable Delaware law, NFL must maintain minimum aggregate
statutory capital and surplus of $550,000. Under applicable Texas law, NFIC and
AICT must each maintain minimum aggregate statutory capital and surplus of $1.4
million. Under Mississippi law, FLICA is required to maintain minimum statutory
capital and surplus of $1 million. The State of Georgia requires licensed
out-of-state insurers to maintain minimum statutory capital of $1.5 million and
the Commonwealth of Kentucky requires minimum statutory surplus of $2 million,
which levels are higher than those of any other states in which the Insurance
Subsidiaries are currently licensed. Accordingly, the minimum aggregate
statutory capital and surplus which each of NFL, NFIC and AICT must maintain is
$3.5 million. FLICA must maintain a minimum of $4.0 million. At December 31,
1996, aggregate statutory capital and surplus for NFL, NFIC, AICT and FLICA was
$14.4 million, $7.8 million, $8.2 million, and $14.8 million, respectively.
According to SAP (as opposed to GAAP), costs associated with the issuance of new
policies are charged to statutory surplus. These costs consist primarily of
sales commissions and issuance costs. An increase in first-year sales of
insurance products tend to reduce statutory surplus. Statutory net income (loss)
for NFL, NFIC, AICT and FLICA for the year ended December 31, 1996 was $1.7
million, $(2.2) million, $(0.1) million, and $7.0 million, respectively. FLICA
is an indirect wholly-owned subsidiary of NFL, and AICT is a wholly-owned
subsidiary
39
<PAGE> 40
of NFIC. Accordingly, the statutory capital and surplus of NFL and NFIC includes
the statutory capital and surplus of their respective subsidiary.
As part of their routine regulatory oversight process, state insurance
regulators periodically conduct detailed examinations of the books, records, and
operations of insurers. In 1996, an examination of NFL was concluded for the
years 1993 through 1995 by the insurance department of the State of Delaware. In
1995, an examination for NFIC and AICT was concluded by the insurance department
of the State of Texas for the years 1991 through 1993. These examinations did
not result in any significant adjustments to the statutory financial statements
for the years under examination. In addition to conducting these examinations,
state insurance regulatory authorities also conduct separate market conduct
examinations. These examinations focus on an insurer's claims practices,
policyholder complaints, policy forms, advertising practices and other marketing
aspects. None of these examinations has resulted in any significant adjustments
to the Company's operations.
Many states have enacted insurance holding company laws that require
registration and periodic reporting by insurance companies within their
jurisdictions. Such legislation typically places restrictions on, or requires
prior notice or approval of, certain transactions within the holding company
system, including, without limitation, dividend payments from insurance
subsidiaries and the terms of loans and transfers of assets within the holding
company structure.
Generally, before the Company is permitted to market an insurance product
in a particular state, it must obtain regulatory approval from that state and
adhere to that state's insurance laws and regulations which include, among other
things, specific requirements regarding the form, language, premium rates and
policy benefits of that product. Consequently, although the Company's policies
generally provide for the same basic types and levels of coverage in each of the
states in which they are marketed, the policies are not precisely identical in
each state or other jurisdiction in which they are sold. Such regulation may
delay the introduction of new products and may impede, or impose burdensome
conditions on, rate increases or other actions that the Company may wish to take
in order to enhance its operating results. In addition, federal or state
legislation or regulations may be enacted that may prohibit or impose
restrictions on the ability to sell certain types of insurance products or
impose other restrictions on the Company's operations. No assurances can be
given that future legislative or regulatory changes will not adversely affect
the Company's business, financial condition or results of operations.
In addition to periodic examinations, state insurance regulatory
authorities from time to time undertake market conduct examinations of the
Company. Although past examinations have not resulted in any significant
adjustments to the Company's operations, and the Company does not believe that
any current examinations will result in any such adjustments, there can be no
assurance that the Company's belief with respect to current examinations is
correct or that future examinations will not result in the imposition of
burdensome conditions on the Company's operations. Certain states in which the
Company conducts business have adopted NAIC model statutes and regulations
relating to the conduct and practices of insurance companies. Any limitations or
other restrictions imposed on the Company, as a result of periodic reviews,
market conduct examinations or otherwise, by regulators of a state which has
adopted the model statutes and regulations may also be imposed by the regulators
in other states which have adopted such statutes and regulations.
Four states, Connecticut, Massachusetts, New Jersey and New York, have
adopted statutes or insurance department regulations that either prohibit sales
of policies that offer only "specified or dread disease" coverage (such as that
provided by certain of the Company's Critical Care and Specified Disease
Products) or require that such coverage be offered in conjunction with other
forms of health insurance. The Company has never written insurance in those
states and does not currently intend to enter those markets. The Company has no
knowledge of legislative initiatives which would limit or prohibit the sale of
"specified or dread disease" policies in other states in which the Company
operates.
The Company may be required, under the solvency or guaranty laws of most
states in which it does business, to pay assessments (up to prescribed limits)
to fund policyholder losses or liabilities of insurance companies that become
insolvent. Insurance company insolvencies increase the possibility that such
assess-
40
<PAGE> 41
ments may be required. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes. The incurrence
and amount of such assessments may increase in the future without notice. The
Company pays the amount of such assessments as they are incurred. Assessments
which cannot be offset against future premium taxes are charged to expense.
Assessments which qualify for offset against future premium taxes are
capitalized and are offset against such future premium taxes. The Company paid
approximately $21,000 during the year ended December 31, 1996, as a result of
such assessments. The likelihood and amount of any other future assessments
cannot be estimated and are beyond the control of the Company.
Although the U.S. Government generally does not directly regulate the
insurance business, federal initiatives often impact the insurance business in a
variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include controls on the cost of medical care,
medical entitlement programs (e.g., Medicare) and minimum solvency requirements
for insurers.
The NAIC has recently taken action on the subject of assumption
reinsurance. The Assumption Reinsurance Model Act was adopted in 1993 and is
similar but, in certain respects, less restrictive than the federal bill. The
Model Act provides a 25-month notice period and may allow a transfer after the
expiration of such period even if the assuming insurer does not have a higher
rating than the transferring insurer. The Model Act will have no legal effect
until formally adopted by the states, although it can be expected to be relied
upon by regulators in states without statutes, regulations or other defined
rules expressly governing assumption reinsurance.
INVESTMENT POLICY AND RESULTS
Investment income is an important source of revenue and the Company's
return on invested assets has a material effect on the Company's net income. The
Company's investment policy is subject to the requirements of regulatory
authorities regarding maintenance of minimum statutory reserves in order to meet
future policy obligations for policies in force. Statutory reserves may only
consist of certain types of admitted investments and the percentage mix of those
assets is regulated by statute. In addition, certain assets are held on deposit
in specified states and invested in specified securities in order to comply with
state law. Although the Company closely monitors its investment portfolio,
available yields on newly-invested funds and gains or losses on existing
investments depend primarily on general market conditions. The Company's
investment portfolio is managed by Conseco Capital Management, Inc.
Investment policy is determined by the Investment Committees of Westbridge
and the Insurance Subsidiaries in accordance with guidelines set forth by their
respective Boards of Directors. The current policy of Westbridge and each of the
Insurance Subsidiaries is to balance the portfolio between long- and short-term
investments so as to achieve long-term returns consistent with the preservation
of capital and maintenance of adequate liquidity to meet the payment of the
Company's policy benefits and claims, interest on its indebtedness and dividends
on the Series A Preferred Stock. The current schedule of maturities of the
Company's invested assets corresponds with the Company's expectations regarding
anticipated cash flow payments based on the Company's policy benefit and claim
cycle, which the Company believes is medium term in nature. The Company invests
primarily in fixed-income securities of the U.S. Government and its related
agencies, investment grade fixed-income corporate securities and mortgage-backed
securities. Also, up to 5% of the Company's assets may be invested in higher
yielding non-investment grade securities. Although the Company's consolidated
balance sheet at December 31, 1996 shows invested assets in real estate and
mortgage loans, the Company's investment policy excludes the investment of new
funds in real estate or mortgage loans. Since 1989 the Company has acquired no
such assets in its portfolio.
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<PAGE> 42
The following table sets forth a summary of consolidated cash and invested
assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $ 1,013 $ 2,013 $ 2,871
-------- -------- --------
Bonds:
U.S. Government and related agencies...................... 26,108 35,658 39,753
State, county and municipal............................... 518 1,632 1,450
Public utilities.......................................... 11,016 8,700 8,778
Industrial and miscellaneous.............................. 53,955 40,490 40,783
-------- -------- --------
Total Bonds....................................... 91,597 86,480 90,764
-------- -------- --------
Preferred stock............................................. 147 356 343
-------- -------- --------
Common stock................................................ 1,449 183 126
-------- -------- --------
Investment in Freedom Holding Company(1).................... -- 6,173 5,945
-------- -------- --------
Other Invested Assets:
Mortgage loans on real estate............................. 658 639 768
Policy loans.............................................. 282 285 291
Certificates of deposit and short-term investments........ 8,072 15,246 7,589
Investment real estate.................................... -- 141 141
-------- -------- --------
Total Other Invested Assets....................... 9,012 16,311 8,789
-------- -------- --------
Total Cash and Invested Assets.................... $103,218 $111,516 $108,838
======== ======== ========
</TABLE>
- ---------------
(1) Represents the Company's 40% ownership interest prior to May 31, 1996. On
May 31, 1996, the Company purchased the remaining 60% ownership interest of
FLICA's parent, FHC. Subsequent to that date, the Company has consolidated
the accounts of FHC in accordance with GAAP.
Included in the invested assets of the Company outlined in the preceding
table are certain high-yield debt securities which are below a "BBB" or
equivalent rating. These high-yield debt securities amounted to less than 1.5%,
0.7% and 0.1% of the Company's total cash and invested assets at December 31,
1996, 1995 and 1994, respectively.
The following table summarizes consolidated investment results for the
periods shown:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C> <C>
Total invested assets, cash and cash equivalents........... $103,218 $111,516 $108,838
Net investment income(1)................................... 7,535 7,021 5,764
Realized gains on investments.............................. 96 182 320
Average annual yield on total investments.................. 7.2% 7.0% 6.4%
</TABLE>
- ---------------
(1) Excludes interest on receivables from agents of $1,201,000, $400,000 and $0
for the years ended December 31, 1996, 1995 and 1994, respectively.
42
<PAGE> 43
The following table summarizes the Company's fixed maturity securities,
excluding short-term investments, at December 31, 1996.
FIXED MATURITY SECURITIES
<TABLE>
<CAPTION>
ESTIMATED MARKET
BOOK VALUE(1) VALUE(2)
---------------- ----------------
TOTAL % TOTAL %
------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Government and governmental agencies and
authorities (except mortgage-backed)............... $12,987 14.1 $12,987 14.1
States, municipalities and political subdivisions..... 518 0.5 518 0.5
Finance............................................... 24,873 27.1 24,873 27.1
Public utilities...................................... 11,016 12.0 11,016 12.0
Mortgage-backed....................................... 13,121 14.3 13,121 14.3
All other corporate bonds............................. 29,082 31.6 29,082 31.6
Certificates of deposit............................... 350 0.4 350 0.4
------- ----- ------- -----
Total fixed maturity securities............... $91,947 100.0 $91,947 100.0
======= ===== ======= =====
</TABLE>
- ---------------
(1) At December 31, 1996, all of the Company's fixed maturity securities were
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
The Company's fixed maturity investment portfolio at December 31, 1996 was
composed primarily of debt securities of the U.S. Government, corporations and
mortgage-backed securities. Investments in the debt securities of corporations
are principally in publicly-traded bonds.
Mortgage-backed securities represented approximately 14.3% of the estimated
market value of the Company's total invested assets as of December 31, 1996.
Mortgage-backed securities investors are compensated primarily for reinvestment
risk rather than credit quality risk. During periods of significant interest
rate volatility, the underlying mortgages may prepay more quickly or more slowly
than anticipated. If the repayment of principal occurs earlier than anticipated
during periods of declining interest rates, investment income may decline due to
the reinvestment of these funds at the lower current market rates.
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<PAGE> 44
The following table indicates by rating the composition of the Company's
fixed maturity securities portfolio, excluding short-term investments, as of
December 31, 1996.
COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
<TABLE>
<CAPTION>
ESTIMATED MARKET
BOOK VALUE(1) VALUE(2)
---------------- ----------------
RATINGS(3) TOTAL % TOTAL %
---------- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Investment grade:
U.S. Government and agencies.......................... $26,108 28.4 $26,108 28.4
AAA................................................... 3,975 4.3 3,975 4.3
AA.................................................... 6,427 7.0 6,427 7.0
A..................................................... 29,074 31.6 29,074 31.6
BBB................................................... 24,902 27.1 24,902 27.1
Non-Investment grade:
BB.................................................... 711 0.8 711 0.8
B..................................................... 750 0.8 750 0.8
------- ----- ------- -----
Total fixed maturity securities............... $91,947 100.0 $91,947 100.0
======= ===== ======= =====
</TABLE>
- ---------------
(1) At December 31, 1996, all of the Company's fixed maturity securities were
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
(3) Ratings are the lower of those assigned primarily by Standard & Poor's and
Moody's when available, and shown in the table using the Standard & Poor's
rating scale. Unrated securities are assigned ratings based on the
applicable NAIC rating or the rating assigned to comparable debt outstanding
of the same issuer. NAIC 1 fixed maturity securities have been classified as
"A," and NAIC 2 fixed maturity securities have been classified as "BBB."
The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations," which are used by insurers when preparing their annual statutory
reports. The NAIC assigns designations to publicly-traded as well as
privately-placed securities. The ratings assigned by the NAIC range from Class 1
to Class 6 with Class 1 as the highest quality rating. The following table sets
forth the book and estimated market value of the Company's fixed maturity
securities according to NAIC Designations and Standard & Poor's ratings as of
December 31, 1996.
NAIC DESIGNATIONS
<TABLE>
<CAPTION>
ESTIMATED MARKET
BOOK VALUE(1) VALUE(2)
---------------- ----------------
NAIC DESIGNATION(3) TOTAL % TOTAL %
------------------- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
NAIC 1 (AAA, AA, A)..................................... $65,584 71.3 $65,584 71.3
NAIC 2 (BBB)............................................ 24,902 27.1 24,902 27.1
NAIC 3 (BB) and below................................... 1,461 1.6 1,461 1.6
------- ----- ------- -----
Total fixed maturity securities............... $91,947 100.0 $91,947 100.0
======= ===== ======= =====
</TABLE>
- ---------------
(1) At December 31, 1996, all of the Company's fixed maturity securities were
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
(3) Generally comparable to Standard & Poor's ratings. Comparisons between NAIC
Designations and Standard & Poor's ratings are as published by the NAIC.
44
<PAGE> 45
The scheduled maturities of the Company's fixed maturity securities,
excluding short-term investments, as of December 31, 1996 were as follows:
COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
<TABLE>
<CAPTION>
ESTIMATED MARKET
BOOK VALUE(1) VALUE(2)
---------------- ----------------
SCHEDULED MATURITY TOTAL % TOTAL %
------------------ ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Due in one year or less................................. $ 2,602 2.8 $ 2,602 2.8
Due after one year through five years................... 25,395 27.6 25,395 27.6
Due after five years through ten years.................. 29,621 32.2 29,621 32.2
Due after ten years..................................... 21,208 23.1 21,208 23.1
Mortgage and asset backed securities.................... 13,121 14.3 13,121 14.3
------- ----- ------- -----
Total fixed maturity securities............... $91,947 100.0 $91,947 100.0
======= ===== ======= =====
</TABLE>
- ---------------
(1) At December 31, 1996, all of the Company's fixed maturity securities were
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
REINSURANCE
Ceded. As is customary in the insurance industry, the Company cedes
reinsurance to other insurance companies. Cession of reinsurance is utilized by
an insurer to limit its maximum loss thereby providing a greater diversification
of risk and minimizing exposures on larger risks. Reinsurance does not discharge
the primary liability of the original insurer with respect to such insurance
(except for assumption reinsurance described below) but the Company, in
accordance with prevailing insurance industry practice, reports reserves and
claims after adjustment for reserves and claims ceded to other companies through
reinsurance.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Coinsurance Agreement") effective July 1,
1996 on the in-force Cancer, Heart and Intensive Care policies. The Coinsurance
Agreement provided an initial ceding commission of $10.5 million, of which $8.4
million was received in cash. This ceding commission allowance will be repaid,
inclusive of interest at 12.5%, as statutory profits are generated from the
reinsured block of business. For the year ended December 31, 1996, the amount
repaid was approximately $1.9 million. The ceding allowance payable at December
31, 1996, totaled $8.6 million. The Company must maintain in trust, investments
with a fair market value equal to 90.0% of the active life reserves on the
reinsured business was approximately $14.7 million at December 31, 1996. Upon
repayment of the initial ceding commission, statutory profits on the block of
business will be shared on a 50/50 quota share basis. The policies covered by
the Coinsurance Agreement are subject to recapture at any time, at the option of
the Company, upon repayment of the then outstanding ceding commission allowance
and payment of the applicable recapture fee.
The Company generally does not cede risks associated with its Medicare
Supplement Products or its life insurance products. However, 100% of the
Company's risks under its Accidental Death policies currently in force are
reinsured. The Company also reinsures its risks under the Medical Expense
Products on an excess of loss basis so that its maximum payment to any one
beneficiary during any one-year period is limited ($100,000 in 1996) for any
accident or illness. In accordance with industry practice, the reinsurance
agreements in force with respect to these policies are terminable by either
party with respect to claims incurred after the termination date and the
expiration dates.
Assumed. In the past, the Company has utilized coinsurance agreements to
assume premiums and increase revenues. NFL and FLICA were party to such
arrangements prior to NFL's acquisition of FHC. In 1996, prior to this
acquisition, $4.0 million in premiums were assumed by NFL. Subsequent to the
acquisition, those coinsurance arrangements were canceled.
45
<PAGE> 46
Use in Acquisitions. Over the past four years, the Company has acquired
blocks of policies in force from American Integrity, Life and Health and Dixie
National Life through the use of indemnity and assumption reinsurance. Using
this process, the Company first acquires policies by insuring the risks of
policies ceded by other insurers in the manner described above. Following such
acquisition, the Company applies to each relevant state regulatory authority for
approval to convert the indemnity reinsurance to assumption reinsurance. As
regulatory approval from each state is obtained, the Company issues assumption
certificates to policyholders in the approving state to provide notice of the
Company's assumption of the primary obligation under the insurance policies
assumed. There can be no assurance that regulatory approval will be granted by
each relevant state, or as to the time required to obtain such approval.
HEALTH CARE REFORM
Health care reform has been and continues to be a legislative focus at both
the federal and state level. Such federal or state legislative reform, if
enacted, could, among other things, further restrict the Company's ability to
implement rate increases and could impose limitations on the profitability of
certain of the Company's insurance products. Also, to the extent that such
legislation guarantees major medical coverage to all United States residents
and/or expands the scope of basic coverage, the demand for specified disease and
supplemental insurance may be reduced, and certain health insurance business
currently in force could experience high lapse rates. The Company cannot predict
what effect, if any, yet to be enacted health care legislation or proposals will
have on the Company if and when enacted. The Company believes that the current
political environment in which it operates will result in continued legislative
scrutiny of health care reform and may lead to additional legislative
initiatives. No assurance can be given that enactment of any federal and/or
state health care reforms will not have a material effect on the Company's
business, financial condition or results of operations.
COMPETITION
The supplemental accident and health insurance industry in the United
States is highly competitive. Although this market is fragmented, the Company
competes with a large number of other insurers, some of which have been in
business for a longer period of time and some of which have higher ratings by
A.M. Best Company, Inc. ("A.M. Best") and substantially greater financial and
other resources than the Company. A.M. Best, a nationally recognized insurance
rating agency, assigns a rating which measures each company's relative financial
strength and ability to meet its contractual obligations. In the markets in
which the Company sells its products, the Company believes that its A.M. Best
rating is not a significant factor affecting its ability to sell its insurance
products.
Private insurers and voluntary and cooperative plans, such as Blue Cross
and Blue Shield and HMOs, provide various alternatives for defraying
hospitalization and medical expenses. Much of this insurance is sold on a group
basis to employer sponsored groups. The federal and state governments also
provide programs for the payment of the costs associated with medical care
through Medicare and Medicaid. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or
illnesses. The Company's Medical Expense Products are designed to provide
coverage which is similar to these major medical insurance programs but are sold
primarily to persons not covered by an employer sponsored group.
The Company's Critical Care and Specified Disease Products are designed to
provide coverage which is supplemental to major medical insurance and may be
used to defray nonmedical as well as medical expenses. Since these policies are
sold to complement major medical insurance, the Company competes only indirectly
with these insurers providing major medical insurance. However, expansion of
coverage by other insurers could adversely affect the Company's business,
financial condition or results of operations. Medicare Supplement Products are
designed to supplement the Medicare program by reimbursing for expenses not
covered by such program. To the extent that future government programs reduce
the availability or attractiveness of supplemental insurance for such government
programs, they could adversely affect the Company's business, financial
condition or results of operations.
46
<PAGE> 47
The Company competes directly with other insurers offering similar products
and believes that its current benefits and premium rates are generally
competitive with those offered by other companies. Management believes that
service to policyholders and prompt and fair payment of claims continue to be
important factors in the Company's ability to remain competitive.
In addition to product and service competition, there is also very strong
competition within the supplemental accident and health insurance market for
qualified, effective agents. The recruitment and retention of such agents is
extremely important to the success and growth of the Company's business.
Management believes that the Company is competitive with respect to the
recruitment and training of agents. However, there can be no assurance that the
Company's controlled general agencies will be able to continue to recruit or
retain qualified, effective agents. The inability of the Company to adequately
recruit and retain agents could have a material adverse effect upon the
Company's business, financial condition or results of operations.
Managed care organizations operate in a highly competitive environment and
in an industry that it currently subject to significant changes resulting from
business consolidations, legislative reform, aggressive marketing practices and
market pressures. The Company's ability to increase its fee and service income
by continuing to expand its marketing of managed care products underwritten
primarily by HMOs and other managed care organizations may be adversely affected
by the changes affecting this industry.
EMPLOYEES
At December 31, 1996, the Company employed 386 persons. The Company has not
experienced any work stoppages, strikes or business interruptions as a result of
labor disputes involving its employees, and the Company considers its relations
with its employees to be good.
FACILITIES
The Company maintains its principal offices at 777 Main Street, Fort Worth,
Texas, in facilities which are leased by the Company under a lease agreement
which expires in June 2001. WPS, the Company's wholly-owned printing subsidiary
which prints all policies, forms and brochures of the Insurance Subsidiaries,
maintains its manufacturing facility at 7333 Jack Newell Boulevard North, Fort
Worth, Texas, under a lease agreement which expires in October 2005. The Company
also leases sales offices for certain of its affiliated marketing agencies in
Arizona, California and Texas. The Company believes that its existing facilities
will meet its existing needs and that the leases relating to such properties can
be renewed or replaced on reasonable terms if necessary.
LITIGATION
In the normal course of its business operations, the Company is involved in
various claims and other business related disputes. In the opinion of
management, the Company is not party to any pending litigation the disposition
of which would have a material adverse effect on the Company's business,
financial condition or results of operations.
47
<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS. Westbridge's executive officers are as follows:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE POSITION WITH THE COMPANY THE COMPANY
---- --- ------------------------- -----------
<S> <C> <C> <C>
Martin E. Kantor..................... 74 Chairman of the Board and Chief 20
Executive Officer
James W. Thigpen..................... 60 President and Chief Operating Officer 15
Patrick J. Mitchell.................. 38 Executive Vice President, Chief 2
Financial Officer and Treasurer
Stephen D. Davidson.................. 41 Executive Vice President and Chief 3
Marketing Officer
Dennis A. Weverka.................... 52 Executive Vice President 16
Margaret A. Megless.................. 45 Vice President 20
Michael D. Norris.................... 50 Vice President and Secretary 14
</TABLE>
Mr. Kantor has served as Chairman of the Board and Chief Executive Officer
of Westbridge since January 1993, and had served as Chairman of the Board,
President and Chief Operating Officer of Westbridge since prior to 1992. Mr.
Kantor has also served as Chairman of the Board of NFL since prior to 1992 and
also became Chief Executive Officer of NFL in 1985. Following the acquisition of
each of NFIC, AICT and FLICA, Mr. Kantor was appointed Chairman of the Board and
Chief Executive Officer of each entity.
Mr. Thigpen has served as President and Chief Operating Officer of
Westbridge since January 1993, and had served as Executive Vice President of
Westbridge since prior to 1992. Mr. Thigpen has also served as President and
Chief Operating Officer of NFL since prior to 1992. Following the acquisition of
each of NFIC, AICT and FLICA, Mr. Thigpen was appointed President and Chief
Operating Officer of each entity.
Mr. Mitchell joined Westbridge as Vice President, Chief Financial Officer
and Treasurer in August 1995 and has served as Executive Vice President, Chief
Financial Officer and Treasurer since May 1996. Mr. Mitchell is also Senior Vice
President, Treasurer and director of NFL, NFIC and AICT. Following the
acquisition of FLICA, Mr. Mitchell was appointed Senior Vice President,
Treasurer and director of FLICA. Prior to joining Westbridge, Mr. Mitchell
served as Vice President, Finance for Bankers Life and Casualty Company. From
1989 to 1993, Mr. Mitchell was Assistant Vice President, Finance for Reliance
Standard Life Insurance Company.
Mr. Davidson has served as Executive Vice President and Chief Marketing
Officer of Westbridge since May 1996. Mr. Davidson had served as Vice President
and Chief Marketing Officer of Westbridge prior to May 1996. Mr. Davidson also
serves as Senior Vice President of NFL, NFIC and AICT since joining the Company
in August 1994. Following the acquisition of FLICA, Mr. Davidson was appointed
Senior Vice President of FLICA. Mr. Davidson served as President of Senior
Benefits, from 1992 to 1994 and as Vice President of Marketing for Pioneer Life
Insurance Company, Rockford, Illinois, from 1989 to 1992.
Mr. Weverka has served as Executive Vice President, Administration of
Westbridge since May 1996. From August 1994 to May 1996, Mr. Weverka served as
Vice President, Corporate Planning and Development. Mr. Weverka joined the
Company in August 1981 and has served as a Senior Vice President of NFL since
prior to 1992. Following the acquisition of each of NFIC and AICT, Mr. Weverka
was appointed Senior Vice President of each entity, and in June 1994 was
appointed a director of NFL, NFIC and AICT. Following the acquisition of FLICA,
Mr. Weverka was appointed director and Senior Vice President of FLICA.
Ms. Megless has served as Vice President, Information Systems of Westbridge
since August 1994 and as Senior Vice President, Information Systems of NFL since
1992. Following the acquisition of each of NFIC and AICT, Ms. Megless was
appointed Senior Vice President of each entity, and in June 1994 was appointed a
director of NFL, NFIC and AICT. Following the acquisition of FLICA, Ms. Megless
was appointed a
48
<PAGE> 49
director and Senior Vice President of FLICA. Ms. Megless joined the Company in
January 1977 and served as Vice President, Information Systems of NFL from 1984
to 1992.
Mr. Norris has served as Secretary of Westbridge since prior to 1992 and
was appointed Vice President of Westbridge in August 1994. Mr. Norris has also
served as Senior Vice President, General Counsel and Secretary of NFL since
prior to 1992. Following the acquisition of each of NFIC and AICT, Mr. Norris
was appointed Senior Vice President, Secretary and Generfal Counsel of each
entity, and in June 1994 was appointed a director of NFL, NFIC and AICT.
Following the acquisition of FLICA, Mr. Norris was appointed a director, Senior
Vice President, Secretary and General Counsel of FLICA. Mr. Norris was Counsel
for the Oklahoma Insurance Department, Oklahoma City, Oklahoma for two years
prior to joining NFL in March 1983.
DIRECTORS. The members of Westbridge's Board of Directors are as follows:
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR
NAME AGE SINCE
- ---- --- ---------
<S> <C> <C>
Marvin H. Berkeley.......................................... 74 1982
Arthur W. Feinberg.......................................... 73 1984
George M. Garfunkel......................................... 58 1994
Martin E. Kantor............................................ 74 1982
Peter J. Millock............................................ 50 1996
Glenn O. Phillips........................................... 67 1987
Joseph C. Sibigtroth........................................ 81 1984
Barry L. Stevens............................................ 50 1997
James W. Thigpen............................................ 60 1985
Barth P. Walker............................................. 82 1982
</TABLE>
The Board of Directors is classified into three classes, each of which
serves for three years with one class being elected each year. Messrs. Feinberg,
Garfunkel and Millock serve as directors for a term expiring at the 1997 Annual
Meeting of Stockholders, Messrs. Kantor, Sibigtroth and Walker serve as
directors for a term expiring at the 1998 Annual Meeting of Stockholders and
Messrs. Berkeley, Phillips and Thigpen serve as directors for a term expiring at
the 1999 Annual Meeting of Stockholders.
For information with respect to Messrs. Kantor and Thigpen, see
"-- Executive Officers."
Dr. Berkeley has served as Professor of Management of the University of
North Texas, Denton, Texas, since prior to 1992, and is former Dean of the
College of Business Administration of the University of North Texas. Dr.
Berkeley is also a director of Irving National BancShares, Inc., Irving, Texas.
Dr. Berkeley is a former advisory director of Enersyst Development Center, Inc.,
a former director of John Watson Landscape Illumination, Inc., and a former
Governor of International Insurance Society, Inc.
Dr. Feinberg has served as the Chief of Geriatric Medicine of the
Department of Medicine of North Shore University Hospital, Manhasset, New York
since prior to 1992. Dr. Feinberg also has been a Professor of Clinical Medicine
at Cornell University Medical College since prior to 1992. Dr. Feinberg was
formerly a Regent and Chairman of the Board of Governors of the American College
of Physicians.
Mr. Garfunkel is a founding partner of the Great Neck, New York law firm of
Garfunkel, Wild & Travis, P.C., which specializes in the representation of
clients in the health care industry. He is also a director of Berkshire Taconic
Community Foundation Inc.
Mr. Millock has served as counsel in private practice with the law firm of
Nixon, Hargrave, Devans & Doyle, Albany, New York, since 1995. Prior to 1995,
Mr. Millock served as General Counsel and Chief Legal Officer of the New York
State Department of Health for 15 years. He is also an Associate Professor for
the State University of New York, School of Public Health.
49
<PAGE> 50
Mr. Phillips is an Insurance Consultant and has served as Partner with
Professional Insurance Group since December 1994. Mr. Phillips served as a
Consultant for the National Registry Corp. from June 1994 through 1995 and as
President and Director of Financial Services of America from 1991 through 1994.
Mr. Sibigtroth is a retired Consulting Actuary and had been a private
consulting actuary since prior to 1992. Mr. Sibigtroth previously served as
Chairman of both the Mortality and Morbidity Committees of the American Society
of Actuaries, and as Treasurer of the New York State Guaranty Corporation.
Mr. Stevens has been the Director of the Bureau of Investments for the
Treasury Department, State of Michigan, since February 1989. From January 1985
to February 1989, Mr. Stevens served as the Assistant Director, Bureau of
Investments for the Treasury Department, State of Michigan. Prior to 1985, Mr.
Stevens served as Senior Equity Analyst and Administrator of the Equity
Division, Treasury Department, State of Michigan.
Mr. Walker has been a senior member of Walker & Walker, a law firm in
Oklahoma City, Oklahoma since prior to 1992.
The Board of Directors met four times during 1996. Each member of the Board
of Directors attended at least 75% of the Board of Directors meetings and
meetings of any committee of the Board of Directors on which such director
served during 1996.
BOARD COMMITTEES
Executive Committee. The Board of Directors formed an Executive Committee
on June 22, 1995. The Executive Committee is composed of Mr. Garfunkel
(Chairman), Dr. Feinberg and Mr. Kantor. The Executive Committee possesses all
the powers and authority of the Board of Directors in the management and
direction of the business and affairs of the Company, except as limited by law.
The Executive Committee met once during 1996.
Audit Committee. The Audit Committee of the Board of Directors is composed
of Mr. Walker (Chairman), Dr. Berkeley, and Mr. Sibigtroth. The Audit Committee,
which met twice during 1996, recommends to the Board of Directors the firm to be
employed as the Company's independent accountants, reviews details of each audit
engagement and audit reports, including all management reports by the
independent accountants regarding internal controls, and reviews resolution of
any material matters with respect to appropriate accounting principles and
practices to be used in preparation of the Company's financial statements.
Compensation Committee. The Board of Directors formed a Compensation
Committee on May 30, 1996. The Compensation Committee is composed of Mr.
Phillips (Chairman), Mr. Garfunkel and Dr. Feinberg. The Compensation Committee
has responsibility for reviewing and approving salaries, bonuses and other
compensation and benefits of executive officers, and advising management
regarding benefits and other terms and conditions of compensation for executive
officers. The Compensation Committee met twice during 1996.
Nominating Committee. The Board of Directors does not have a nominating
committee.
50
<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth information on cash and other compensation
paid or accrued for each of the fiscal years ended December 31, 1996, 1995 and
1994 to each of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company (the "Named Executive Officers"),
for services rendered by the Named Executive Officers in all capacities to the
Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARDS/SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION*
--------------------------- ---- -------- ------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Martin E. Kantor 1996 $477,462 $ -- -- $2,850
Chairman of the Board and 1995 $403,615 $50,000 -- $2,772
Chief Executive Officer 1994 $366,923 $60,000 -- $2,310
James W. Thigpen 1996 $387,692 $ -- -- $2,375
President and Chief 1995 $346,638 $50,000 -- $2,310
Operating Officer 1994 $305,869 $60,000 -- $2,310
Stephen D. Davidson 1996 $255,048 $ -- -- $2,375
Executive Vice President and 1995 $183,462 $40,000 30,000 $2,310
Chief Marketing Officer 1994 $107,821 $30,000 25,000 $ 846
Patrick J. Mitchell 1996 $204,519 $ -- -- $1,425
Executive Vice President, 1995 $ 55,819 $25,000 25,000 $ --
Chief Financial Officer 1994 $ -- $ -- -- $ --
and Treasurer
Dennis A. Weverka 1996 $173,962 $ -- -- $2,375
Executive Vice President 1995 $158,231 $15,000 10,000 $2,643
1994 $142,942 $30,000 -- $2,310
</TABLE>
- ---------------
* Amounts shown represent matching contributions of the Company credited to the
respective Named Executive Officer under the Company's 401(k) plan.
Each director of Westbridge who is not a salaried employee or consultant of
the Company (a "Non-Employee Director") receives $2,500 per meeting of the Board
of Directors attended. Additionally, all Audit Committee members who attend
special Audit Committee meetings which do not coincide with meetings of the
Board of Directors receive $1,000 per special Audit Committee meeting attended.
All directors are reimbursed for their expenses incurred in attending meetings
of the Board of Directors and of committees of the Board of Directors.
Additionally, Dr. Feinberg received $6,000 in consultation fees from the Company
in 1996.
Each Non-Employee Director is also entitled to receive automatic,
non-discretionary and fixed annual grants of stock options under the 1992 Plan,
subject to the availability of shares of Common Stock issuable under the 1992
Plan. Pursuant to the 1992 Plan, a stock option to acquire 5,000 shares of
Common Stock was granted to each Non-Employee Director serving as a member of
the Board of Directors on January 14, 1993. Thereafter, a stock option to
acquire 1,000 shares of Common Stock was and will automatically be granted each
succeeding year (immediately following Westbridge's annual meeting of
stockholders) to each Non-Employee Director serving as a member of the Board of
Directors at such time. Additionally, each Non-Employee Director, upon becoming
a member of the Board of Directors for the first time, is entitled to receive a
stock option to purchase 5,000 shares of Common Stock. The option price per
share is the average of the mean high and low trading prices for the Common
Stock for the fifth through the ninth trading day following the relevant grant
date. Each option becomes exercisable on the first anniversary of the date of
grant and may thereafter be exercised in whole or in part during the term of the
option by payment of the full option price for the number of underlying shares
to be acquired upon any such exercise. Each option will expire seven years after
the date on which the option is granted, subject to earlier termination upon an
optionee's termination of service as a director, other than as a result of
retirement, death or disability. During 1996, a stock option to
51
<PAGE> 52
acquire 4,000 shares of Common Stock was granted to Mr. Millock. There were no
other stock options granted to any of the Named Executive Officers or
Non-Employee Directors under the 1992 Plan.
Each Non-Employee Director who has not been an employee during the one year
period immediately preceding (a) the initial grant date (as defined below and
with respect to any initial grant to such member) and (b) any annual grant date
(as defined below and with respect to any annual grant to such member) (an
"Eligible Director") shall automatically participate in the fixed formula grant
portion of the 1996 Restricted Stock Plan. Each Eligible Director shall
automatically be granted 5,000 shares of restricted Common Stock immediately
following the Company's annual stockholders meeting at which the Eligible
Director is first elected to the Board of Directors (the "Initial Grant Date"),
commencing with the 1996 Annual Meeting (each, an "Initial Grant"). In addition,
each Eligible Director who does not receive the grant described in the preceding
sentence shall automatically be granted 1,000 shares of restricted Common Stock
each year, immediately following the Company's annual stockholders meeting in
such year (the "Annual Grant Date") commencing with the 1996 Annual Meeting
(each, an "Annual Grant"). All shares of restricted Common Stock granted to
Eligible Directors shall become 100% vested on the first anniversary of the
Initial Grant Date or the Annual Grant Date that relates to any such award.
During 1996, each Non-Employee Director (other than Messrs. Millock and Stevens)
received a grant of 1,000 shares of restricted Common Stock pursuant to
Westbridge's 1996 Restricted Stock Plan.
STOCK OPTIONS
The following table sets forth information as to the Named Executive
Officers, the exercise of stock options during the last fiscal year and the
value of unexercised options as of the end of the last fiscal year all of which
were exercisable as of such date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
NAME ON EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
---- ----------- -------- --------------------------- ---------------------------
(A) (B) (C) (D) (E)
- ---------------------------------------- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Martin E. Kantor........................ -- $ -- -- $ --
James W. Thigpen........................ 12,500 $75,000 34,500/0 $238,638/$0
Patrick J. Mitchell..................... -- $ -- 25,000/0 $108,750/$0
Stephen D. Davidson..................... -- $ -- 65,000/0 $219,700/$0
Dennis A. Weverka....................... -- $ -- 26,265/0 $131,927/$0
</TABLE>
The values listed in columns (c) and (e) represent the difference between
the estimated market value of the Common Stock and the exercise price of the
options at exercise and December 31, 1996, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into a separate employment agreement with each of
Martin E. Kantor and James W. Thigpen (each, an "Employee" and collectively, the
"Employees"), pursuant to which Mr. Kantor is employed as the Chairman of the
Board and Chief Executive Officer of each of Westbridge and NFL and Mr. Thigpen
is employed as the President and Chief Operating Officer of each of Westbridge
and NFL (the "Employment Agreements"). Westbridge has agreed to employ each of
the Employees for a period commencing on April 1, 1996, and ending on the fifth
anniversary of such date. Each Employee's employment period will be
automatically extended each year thereafter unless an Employee, with respect to
his own employment, or Westbridge gives notice to the contrary.
Effective January 1, 1997, Mr. Kantor's base salary is $492,000 per annum
and Mr. Thigpen's base salary is $400,000 per annum. Each Employee's base salary
will be reviewed annually for increase in the sole
52
<PAGE> 53
discretion of the Board of Directors of the Company. The Employees are also
entitled to participate in and receive all benefits under any and all bonus,
short- or long-term incentive, savings and retirement plans, and welfare benefit
plans, practices, policies and programs maintained or provided by the Company
and/or its subsidiaries for the benefit of senior executives.
If an Employee's employment is terminated by reason of death, or by the
Company due to "disability" (as defined in the Employment Agreements), such
Employee or his legal representative will be entitled to, among other things,
(a)(i) in the case of death, (x) his base salary for a period of three months
after the date of death, plus (y) a death benefit in an amount equal to three
times the base salary at the rate in effect on the date of termination less any
amounts paid to the Employee's beneficiary(ies) pursuant to the group and/or
other corporate life insurance policies maintained by Westbridge or NFL, and
(ii) in the case of disability, his base salary for 36 months after the date of
termination; (b) certain accrued benefits and a pro rata bonus payment for the
year in which such death or disability occurs, and (c) immediate and accelerated
vesting of all restricted stock grants previously awarded to the Employee. If an
Employee's employment is terminated by the Company without cause, or by the
Employee for "good reason" (as defined in the Employment Agreements and which,
in the case of Mr. Kantor's Employment Agreement, includes the occurrence of a
"change in control" as defined therein), such Employee will be entitled to (a) a
lump sum payment equal to three times the sum of (i) his base salary, and (ii)
the highest annual bonus awarded to him, (b) certain accrued benefits, (c)
continuation of the health and welfare benefits, and (d) immediate and
accelerated vesting of all restricted stock grants previously awarded to the
Employee. If an Employee's employment is terminated for "cause" (as defined in
the Employment Agreements), such Employee will be entitled to, among other
things, (a) his base salary through the date of termination and (b) certain
accrued benefits. If an Employee voluntarily terminates his employment (other
than due to death, disability, or for "good reason"), such Employee will be
entitled to, among other things, (a) his base salary through the date of
termination, (b) certain accrued benefits, and (c) continuation of the health
and welfare benefits. In addition to the foregoing, if Mr. Kantor's employment
is terminated other than for cause, Mr. Kantor will be entitled to repayment,
within thirty business days after the date of termination, of the outstanding
principal amount (and any accrued, but unpaid, interest through the date of
repayment) of any loans (including the Senior Note) (as defined under the
caption "Certain Transactions" below), or other advances made by the him to
Westbridge, NFL or any affiliate of either such entity.
If any payment or distribution by Westbridge or any subsidiary or affiliate
to an Employee would be subject to any "golden parachute payment" excise tax or
similar tax, and if, and only if, such payments less the excise tax or similar
tax is less than the maximum amount of payments which could be payable to the
Employee without the imposition of the excise tax or similar tax, then and only
then, and only to the extent necessary to eliminate the imposition of the excise
tax or similar tax (and after taking into account any reduction in the payments
provided by reason of section 280G of the Internal Revenue Code of 1986, as
amended (the "Code") in any other plan, arrangement or agreement), (A) any cash
payments under the Employment Agreement shall first be reduced (if necessary, to
zero), and (B) all other non-cash payments under the Employment Agreement shall
next be reduced.
If an Employee's employment is terminated by Westbridge for cause or if an
Employee voluntarily terminates his employment without good reason, for a period
of eighteen months, such Employee shall not (i) solicit or take away the
patronage of (a) any customers or agents of Westbridge, NFL or any affiliate of
either as of the date of such termination, or (b) any prospective customers or
agents of Westbridge or any affiliate whose business Westbridge and/or NFL was
actively soliciting on the date of such termination, and with which the Employee
had business contact while employed by Westbridge and NFL, or (ii) directly or
indirectly, induce or solicit any employees or agents of Westbridge, NFL or any
affiliate of either to leave or terminate their employment or agency
relationship with Westbridge or NFL.
If a claim for payment or benefits under the Employment Agreements is
disputed, the Executives will be reimbursed for all attorney fees and expenses
incurred in pursuing such claim, provided that the Executives are successful as
to at least part of the disputed claim by reason of litigation, arbitration or
settlement. In addition, the Employment Agreements provide that if the
Executives are made a party or are threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
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<PAGE> 54
reason of the fact that either is or was a director or officer of Westbridge or
any subsidiary or is or was serving at the request of Westbridge or any
subsidiary as a director, officer, member, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including, without limitation, service with respect to employee benefit plans,
each will be indemnified and held harmless by Westbridge or a subsidiary of
Westbridge to the fullest extent authorized by applicable law against all
expenses incurred or suffered by the Executives. This indemnification will
continue as to the Executives even if the Executives have ceased to be an
officer, director or agent, or are no longer employed by Westbridge or any
subsidiary.
Westbridge has also entered into a separate agreement with each of Stephen
D. Davidson, Margaret A. Megless, Patrick J. Mitchell and Dennis A. Weverka,
pursuant to which each such person is entitled to participate in and receive all
benefits provided to senior officers of Westbridge and to receive a severance
payment upon the termination of his or her employment by the Company for reasons
other than cause, as applicable. The amount of severance payable to Mr. Davidson
would equal the aggregate salary and bonus paid to Mr. Davidson during the
calendar year preceding any such termination of employment; provided, that if
such aggregate amount is less than $400,000, then an additional amount not to
exceed $400,000 minus the aggregate paid in respect of such preceding year's
salary and bonus, shall be paid to Mr. Davidson based on the difference between
the then current market price of the Common Stock and the exercise price of
certain options to acquire Common Stock then held by Mr. Davidson. The amount of
severance payable to each of Ms. Megless, Mr. Mitchell, and Mr. Weverka would
equal the aggregate salary (excluding bonus) paid to such person during the
calendar year preceding any such termination of employment. Pursuant to the
agreement with Mr. Davidson, Mr. Davidson is employed as the President of the
Company's wholly-owned subsidiary, Westbridge Marketing Corporation, for a
period commencing on January 1, 1996 and ending on the fifth anniversary on such
date. Effective January 1, 1997, Mr. Davidson's base salary is $262,500 per
annum.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of Westbridge's Compensation Committee on May 30,
1996, Westbridge's Board of Directors determined the compensation for
Westbridge's executive officers. Martin E. Kantor, who served as Chairman of the
Board, Director and Chief Executive Officer of Westbridge during 1996, and James
W. Thigpen, who served as Director, President and Chief Operating Officer of
Westbridge during 1996, participated in deliberations of the Board of Directors
concerning executive officer compensation. See "Certain Transactions" for a
description of transactions between Westbridge and Messrs. Thigpen and Kantor.
Since its formation, the Compensation Committee has consisted of Messrs.
Phillips (Chairman) and Garfunkel and Dr. Feinberg, all of whom are outside
directors.
CERTAIN TRANSACTIONS
As of March 25, 1997, James W. Thigpen, President and Chief Operating
Officer of Westbridge, was indebted to the Company in the aggregate amount of
$97,500. Such indebtedness is in the form of interest-free salary advances, the
most recent of which occurred on April 1, 1991 in the amount of $70,000. Since
January 1, 1996, the largest aggregate amount of indebtedness was $104,500. Mr.
Thigpen has agreed to repay the full amount of this indebtedness on or prior to
December 31, 1999.
On December 13, 1995, Mr. Kantor, the Chairman of the Board and Chief
Executive Officer of Westbridge, made a $1.0 million loan to Westbridge which is
evidenced by a 10% Senior Note due December 22, 2002 (the "Senior Note"). In
connection with the loan, Mr. Kantor received a warrant to purchase 135,501
shares of Westbridge's Common Stock at an exercise price of $7.38 per share,
subject to certain adjustments (the "Warrant"). The Senior Note is subject to
mandatory prepayment upon the termination of Mr. Kantor's employment with
Westbridge other than for cause. Mr. Kantor's exercise of the Warrant is subject
to significant restrictions, including the approval of holders of Westbridge's
Common Stock and Series A Preferred Stock.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 7, 1997 (except as noted below),
certain information with respect to the beneficial ownership of Common Stock
(Westbridge's only class of voting securities) by (i) each person who is known
to Westbridge to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each of Westbridge's Directors, all nominees as
directors and each of the Named Executive Officers, and (iii) all Executive
Officers and Directors as a group. To Westbridge's knowledge and unless
otherwise noted, the persons listed below each have sole voting and investment
power as to all shares indicated as owned by them. Unless otherwise indicated,
the address of each stockholder listed is at Westbridge's principal place of
business.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES OWNED PERCENT
- ---- ------------ -------
<S> <C> <C>
President & Fellows of Harvard
College(1)............................ 594,530 8.91%
Heartland Advisors, Inc.(2)............. 388,800 6.40
Edwin S. Marks(3)....................... 346,100 5.70
Marvin H. Berkeley(4)................... 18,200 *
Stephen D. Davidson(4)(5)............... 67,343 1.10
Arthur W. Feinberg(4)................... 19,098 *
George M. Garfunkel(4)(6)............... 454,568 7.48
Martin E. Kantor(5)(7).................. 707,559 11.65
Peter J. Millock........................ 0 *
Patrick J. Mitchell(4)(5)............... 25,270 *
Glenn O. Phillips(4).................... 7,500 *
Joseph C. Sibigtroth(4)................. 8,000 *
Barry L. Stevens(8)..................... 6,000 *
James W. Thigpen(4)(5).................. 142,718 2.35
Barth P. Walker(4)(9)................... 10,379 *
Dennis A. Weverka(4)(5)................. 62,360 1.03
All Executive Officers and Directors as
a group(5)(10)........................ 1,748,728 28.78
</TABLE>
- ---------------
* Less than 1%
(1) Based upon information provided by the stockholder and represents the
aggregate number of shares of Common Stock into which the shares of the
Series A Preferred Stock held by such holder is convertible. Each share of
Series A Preferred Stock is convertible into 118.906 shares of Common
Stock. The stockholder's address is c/o Harvard Management Company, Inc.,
600 Atlantic Avenue, Boston, MA 02210-2203.
(2) Based upon the stockholder's Schedule 13G dated February 7, 1997, the
shares are held in investment advisory accounts of Heartland Advisors, Inc.
Therefore, various persons have the right to receive or the power to direct
the receipt of dividends from, or the proceeds from the sale of, the
shares. The stockholder's address is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202.
(3) Based upon the stockholder's Schedule 13D dated January 21, 1997, Mr. Marks
has sole voting and dispositive power with respect to 175,700 of the
346,100 total shares indicated above. Mr. Marks has shared voting and
dispositive power with respect to the remaining 170,400 shares beneficially
owned by Nancy A. Marks and the Marks Family Foundation. The stockholder's
address is 15 Eagle Point Drive, Great Neck, New York 11024.
(4) The number of shares beneficially owned by Messrs. Berkeley, Davidson,
Feinberg, Garfunkel, Mitchell, Phillips, Sibigtroth, Thigpen, Walker and
Weverka, includes: 7,000; 65,000; 7,000; 6,000; 25,000; 7,000; 7,000;
10,000; 7,000; and 26,265 shares, respectively, subject to stock options
granted and exercisable within sixty (60) days under the 1982 Plan, the
1985 Plan and the 1992 Plan.
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<PAGE> 56
(5) The number of shares beneficially owned by Messrs. Davidson, Kantor,
Mitchell, Thigpen and Weverka, includes: 808; 6,597; 170; 6,618; and 5,104
shares, respectively, which are owned through participation in the
Company's 401(k) plan and are determined as of November 30, 1996 (the most
recent date as of which such information is available).
(6) Based upon information supplied by Mr. Garfunkel. Includes 440,408 shares
beneficially owned by Mr. Garfunkel as trustee under various trusts
established by Mr. Kantor and referred to in Note (7), over which Mr.
Garfunkel has sole voting and investment power.
(7) Based upon information supplied by Mr. Kantor. Mr. Kantor has sole voting
and dispositive power as to the shares indicated above. Excludes 440,408
shares (7.25%) held in trusts established by Mr. Kantor for the benefit of
his children and grandchildren over which he has no voting or investment
power and as to which Mr. Kantor disclaims beneficial ownership.
(8) Mr. Stevens was elected a Director effective March 27, 1997 and the
information as to his beneficial ownership of Common Stock is as of such
date.
(9) Excludes 238,606 shares (3.91%) held in trusts established by Mr. Walker
for the benefit of his children and grandchildren over which he has no
voting or investment power and as to which Mr. Walker disclaims beneficial
ownership.
(10) The number of shares owned by all Executive Officers and Directors as a
group (i) includes an aggregate of 236,029 shares (3.89%) subject to stock
options granted and exercisable within sixty (60) days to all Executive
Officers and Directors as a group under each of the 1982 Plan, the 1985
Plan and the 1992 Plan and 25,229 shares owned through participation in the
Company's 401(k) plan and (ii) excludes 6,000 shares beneficially owned by
Mr. Stevens, who was elected a Director after March 7, 1997.
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<PAGE> 57
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture (the "Indenture") between
Westbridge and First Union National Bank, as Trustee (the "Trustee"), a copy of
the form of which has been filed as an Exhibit to the Registration Statement on
Form S-1 (the "Registration Statement") of which this Prospectus forms a part.
The following are summaries of certain terms applicable to the Notes and do not
purport to be complete. The summaries are subject to, and qualified in their
entirety by reference to, the provisions of the Indenture, including the
definitions of certain terms. Whenever reference is made to defined terms of the
Indenture, such defined terms are incorporated herein by reference.
GENERAL
The Notes will be unsecured general obligations of Westbridge, subordinate
in right of payment to certain obligations of the Company as described under
"-- Subordination" and convertible into Common Stock as described under
"-- Conversion of the Notes." The Notes will be limited to an aggregate
principal amount of $65,000,000 ($74,750,000 if the Underwriters' over-allotment
option is exercised in full), and will mature on May 1, 2004 (the "Maturity
Date"). Interest on the Notes shall accrue from the date of original issuance,
or from the most recent interest payment date to which interest has been paid or
duly provided for, and shall be payable semi-annually in arrears on May 1 and
November 1 of each year, commencing November 1, 1997 (each, an "Interest Payment
Date"), or, if any such day is not a business day, on the next succeeding
business day, at the rate per annum stated on the front cover of this
Prospectus. Interest will be payable to the person in whose name the Notes are
registered ("Holders") on April 15 and October 15 preceding each Interest
Payment Date (each, a "Regular Record Date"). Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for conversion, registration of transfer and
exchange at the office or agency of Westbridge maintained for that purpose in
New York, New York or Newark, New Jersey. In addition, payment of interest may,
at the option of Westbridge, be made by check mailed to the address of the
person entitled thereto as it appears in the register of holders of Notes (the
"Note Register").
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any transfer or exchange of Notes, but, subject to certain
exceptions set forth in the Indenture, Westbridge may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
The Indenture does not contain any restrictions on the payment of dividends
or on the repurchase of securities by Westbridge or any financial covenants, nor
does the Indenture require Westbridge to maintain any sinking fund or other
reserve for the payment of the Notes.
CONVERSION OF THE NOTES
The Notes are convertible at any time prior to the Maturity Date (subject
to earlier redemption or repurchase, as described below) into shares of Common
Stock at the Conversion Price, subject to adjustment under certain circumstances
as described below. The right to convert Notes called for redemption will
terminate at the close of business on the first business day prior to the date
fixed for redemption, unless Westbridge shall default on payment of the
redemption price. A Holder who surrenders a Note (or portion thereof) for
conversion between the close of business on a Regular Record Date and the next
Interest Payment Date will receive interest on such Interest Payment Date with
respect to the Note (or portion thereof) so converted through such Interest
Payment Date. Except as provided above, no payment of interest on converted
Notes will be payable by Westbridge on any Interest Payment Date subsequent to
the date of conversion, and no adjustment will be made upon conversion of any
Note for interest accrued thereon or dividends paid on Common Stock issued.
The Conversion Price is subject to adjustment as set forth in the Indenture
upon the occurrence of certain events, including: (i) the issuance of Common
Stock as a dividend or other distribution on any class of capital
57
<PAGE> 58
stock of Westbridge; (ii) a subdivision or combination of outstanding shares of
Common Stock; (iii) the issuance or distribution of capital stock of Westbridge
or the issuance or distribution of options, rights, warrants or convertible or
exchangeable securities entitling the holder thereof to subscribe for, purchase,
convert into or exchange for capital stock of Westbridge at less than the
current market price of such capital stock on the date of issuance or
distribution, but in each case only if such issuance or distribution is made
generally to holders of Common Stock or of a class or series of outstanding
capital stock convertible into or exchangeable or exercisable for Common Stock;
(iv) the dividend or other distribution to holders of Common Stock, or of a
class or series of capital stock convertible into or exchangeable or exercisable
for Common Stock, generally of evidences of indebtedness of Westbridge or assets
(including securities, but excluding issuances, dividends and distributions
referred to above, dividends and distributions in connection with the
liquidation, dissolution or winding up of Westbridge and distributions of cash
referred to below); and (v) distributions of cash (other than in connection with
the liquidation or dissolution of Westbridge) to holders of Common Stock, or of
a class or series of capital stock convertible into or exchangeable or
exercisable for Common Stock, generally to the extent the amount of such cash,
combined with all such cash distributions made within the preceding 12 months
with respect to which no adjustment has been made exceeds 10% of Westbridge's
market capitalization (being the product of the current market price of the
Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the record date for such distribution.
Notwithstanding the foregoing, (a) if the options, rights or warrants or
convertible or exchangeable securities described in clause (iii) of the
preceding paragraph are exercisable only upon the occurrence of certain
triggering events, then the Conversion Price will not be adjusted until such
triggering events occur and (b) if such options, rights or warrants or
convertible or exchangeable securities expire unexercised, the Conversion Price
will be readjusted to take into account only the actual number of such options,
rights or warrants or convertible or exchangeable securities which were
exercised. In addition, the provisions of the preceding paragraph will not apply
to the issuance of Common Stock upon (i) the exercise of the Company's
outstanding stock options under any stock-based employee compensation plan now
existing or hereafter adopted, (ii) conversion or exchange of shares of Series A
Preferred Stock, conversion of the Convertible Subordinated Notes or conversion
of the Notes in accordance with their terms, or (iii) exercise or conversion of
warrants or convertible notes issued by the Company prior to the date of the
original issuance of the Notes, unless the exercise or conversion price thereof
is changed after the date of the Indenture (other than solely by operation of
the anti-dilution provision thereof).
No adjustment will be made to the Conversion Price until cumulative
adjustments to the Conversion Price amount to at least 1% of the Conversion
Price, as last adjusted. Except as stated above, the Conversion Price will not
be adjusted for the issuance of Common Stock or any securities convertible into
or exchangeable for Common Stock or carrying the right to purchase any of the
foregoing, or the payment of dividends on the Common Stock. Westbridge from time
to time may reduce the Conversion Price if the Board of Directors of Westbridge
has made a determination that such reduction would be in the best interests of
Westbridge, which determination shall be conclusive.
In the event of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination to which Westbridge is a party or a
sale or conveyance to another entity of the property and assets of Westbridge as
an entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock will be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, each Holder will have the right thereafter to convert such
Holder's Notes into the kind and amount of shares of stock, other securities or
other property or assets which the Holder would have owned or have been entitled
to receive immediately upon such consolidation, merger, combination, sale or
conveyance had such Note been converted into Common Stock immediately prior to
the effective date of such reclassification, change, consolidation, merger,
combination, sale or conveyance. Certain of the foregoing events may also
constitute or result in a Change of Control requiring Westbridge to offer to
repurchase the Notes. See "-- Repurchase at the Option of Holders Upon Change of
Control."
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<PAGE> 59
Fractional shares of Common Stock will not be issued upon conversion. A
person otherwise entitled to a fractional share of Common Stock upon conversion
will receive cash equal to the equivalent fraction of the current market price
of a share of Common Stock on the business day prior to conversion.
OPTIONAL REDEMPTION BY WESTBRIDGE
The Notes are not redeemable at the option of Westbridge prior to May 1,
2000. Thereafter, the Notes will be redeemable, in whole or from time to time in
part, upon not less than 30 days' nor more than 60 days' prior notice of
redemption to each Holder at such Holder's last address as it appears in the
Note Register, at the redemption prices established for the Notes, together with
accrued but unpaid interest, if any, to the date fixed for redemption. The
redemption prices for the Notes (expressed as percentages of principal amount)
are as follows:
<TABLE>
<CAPTION>
FOR THE REDEMPTION
12 MONTHS AFTER MAY 1, PRICE
---------------------- ----------
<S> <C>
2000....................................... 103.75%
2001....................................... 102.50%
2002....................................... 101.25%
2003 and thereafter........................ 100.00%
</TABLE>
If less than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are quoted or listed,
or if not quoted or listed, by lot or such other method that complies with
applicable legal requirements and that the Trustee shall deem fair and
appropriate. The Trustee may select for redemption portions of the principal
amount of Notes that have a denomination larger than $1,000. Notes and portions
thereof will be redeemed in the amount of $1,000 or integral multiples of
$1,000. The Trustee will make the selection from Notes outstanding and not
previously called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL
Upon a Change of Control, Westbridge will offer to repurchase each Holder's
Notes pursuant to an offer (the "Change of Control Offer") at a purchase price
equal to 100% of the principal amount of such Holder's Notes, plus accrued but
unpaid interest, if any, to the date of purchase.
A "Change of Control" means the occurrence of any of the following events
after the date of the Indenture: (i) any person (including, without limitation,
any "person" within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") becomes the direct or
indirect beneficial owner of shares of capital stock of Westbridge representing
greater than 50% of the combined voting power of all outstanding shares of
capital stock of Westbridge entitled to vote in the election of directors under
ordinary circumstances; (ii) the Company consolidates with or merges into any
other entity and the outstanding Common Stock is changed or exchanged as a
result; (iii) the Company sells, conveys, transfers or leases all or
substantially all of its assets to any other entity; (iv) at any time Continuing
Directors do not constitute a majority of the Board of Directors of Westbridge
then in office; or (v) on any day (a "Calculation Date") the Company makes any
distribution or distributions of cash, property, or securities (other than
regular quarterly dividends, Common Stock, preferred stock which is
substantially equivalent to Common Stock or rights to acquire Common Stock or
preferred stock which is substantially equivalent to Common Stock) to holders of
Common Stock, or the Company or any of its subsidiaries purchases or otherwise
acquires Common Stock, and the sum of the fair market value of such distribution
or purchase on the Calculation Date, plus the fair market value, when made, of
all other such distributions and purchases which have occurred during the 12
month period ending on the Calculation Date, in each case expressed as a
percentage of the aggregate market price of all of the shares of Common Stock
outstanding at the close of business on the last day prior to the date of each
such distribution or purchase, exceeds 50%. "Continuing Director" means at any
date a member of Westbridge's Board of Directors (i) who is a member of such
board on the date of the Indenture or (ii) who was nominated or elected by at
least two-thirds of the directors who were Continuing Directors at the time of
such nomination or election or whose election to Westbridge's Board
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<PAGE> 60
of Directors was recommended or endorsed by at least two-thirds of the directors
who were Continuing Directors at the time of such election under this
definition. If the present Board of Directors were to approve a new director or
directors and then resign, no Change of Control would occur even though the
present Board of Directors would thereafter cease to be in office.
Within 30 days after any Change of Control, unless Westbridge has
previously given a notice of optional redemption by Westbridge of all of the
Notes, Westbridge will give a notice of the Change of Control Offer to each
Holder at such Holder's last address as it appears on the Note Register which
will include: (i) a statement that a Change of Control has occurred and that
Westbridge is offering to repurchase all of such Holder's Notes; (ii) a brief
description of such Change of Control; (iii) the repurchase price (the "Change
of Control Payment"); (iv) the expiration date of the Change of Control Offer,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is given; (v) the date such purchase will be effected, which must be no
later than 30 days after expiration date of the Change of Control Offer; (vi) a
statement that unless Westbridge defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control Payment
Date; (vii) the Conversion Price; (viii) the name and address of the paying
agent and conversion agent; (ix) a statement that Notes must be surrendered to
the paying agent to collect the Change of Control Payment; and (x) any other
information required by law and any other procedures that a Holder must follow
in order to have such Notes repurchased.
In the event Westbridge is required to make a Change of Control Offer,
Westbridge will comply with any applicable securities laws and regulations,
including, to the extent applicable, Section 14(e) of, and Rule 14e-1 and any
other tender offer rules under, the Exchange Act which may then be applicable in
connection with any offer by Westbridge to purchase Notes at the option of the
Holders.
Westbridge, could, in the future, enter into certain transactions,
including certain recapitalizations of Westbridge, that would not constitute a
Change of Control, but that would increase the amount of Senior Indebtedness (or
any other indebtedness) outstanding at such time. The incurrence of significant
amounts of additional indebtedness could have an adverse effect on Westbridge's
ability to service its indebtedness, including the Notes. If a Change of Control
were to occur, there can be no assurance that Westbridge would have sufficient
funds at the time of such event to pay the Change of Control Payment for all
Notes tendered by the Holders.
Certain of Westbridge's existing and future agreements relating to its
indebtedness could prohibit the purchase by Westbridge of the Notes pursuant to
the exercise by a Holder of the foregoing option, depending on the financial
circumstances of Westbridge at the time any such purchase may occur, because
such purchase could cause a breach of certain covenants contained in such
agreements. Such a breach may constitute an event of default under such
indebtedness and thereby restrict Westbridge's ability to purchase the Notes.
See "-- Subordination."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
will be, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Indebtedness (as defined
below). Upon any payment or distribution of assets or securities of Westbridge
to creditors upon any dissolution, winding up, liquidation, reorganization or
upon an assignment for the benefit of creditors or any other marshaling of the
assets and liabilities of Westbridge or upon other proceedings, the holders of
all Senior Indebtedness will first be entitled to receive payment in full of all
amounts due or to become due thereon before a Holder will be entitled to (i)
receive any payment in respect of the principal of or interest on the Notes or
(ii) retain any assets so paid or distributed in respect thereof. In the event
that notwithstanding the foregoing, the Trustee or a Holder is entitled to
receive any payment or distribution of assets or securities of Westbridge of any
kind or character (excluding securities of Westbridge as reorganized or
readjusted or securities of Westbridge or any other corporation provided for by
a plan of reorganization or readjustment, which are subordinate in right of
payment to all Senior Indebtedness to the same extent as the Notes), then such
payment or distribution will be required to be paid over or delivered forthwith
directly to the holders of
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<PAGE> 61
Senior Indebtedness or their representative(s) or the trustee(s) under any
indenture pursuant to which any instruments evidencing any Senior Indebtedness
may have been issued, for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay the Senior Indebtedness then
due in full.
Westbridge also may not make any payment upon or in respect of the Notes
(except in such subordinated securities) if (a) a default in the payment of the
principal of, premium, if any, or interest on Designated Senior Debt (as herein
defined) occurs and is continuing beyond any applicable period of grace, or (b)
the Trustee has received a written notice (a "Payment Blockage Notice") that a
nonpayment default has occurred and is continuing with respect to such
Designated Senior Debt that permits such holders to accelerate its maturity of
such Designated Senior Debt. Payments on the Notes shall be resumed, (i) in the
case of a payment default in respect of any Designated Senior Debt, on the date
on which such default is cured or waived, and (ii) in the case of a nonpayment
default in respect of any Designated Senior Debt, on the earlier of (a) the date
on which such nonpayment default is cured or waived, or (b) 120 days after the
date on which the applicable Payment Blockage Notice is received, in each case,
unless the maturity of any Designated Senior Debt has been accelerated and the
Company has defaulted with respect to the payment of such Designated Senior
Debt. No new period of payment blockage may be commenced within 360 days after
the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived for
a period of not less than 180 days. "Designated Senior Debt" as defined in the
Indenture means (i) the Senior Subordinated Notes, (ii) any Senior Indebtedness
under the Credit Agreement or the Guaranty Agreement relating thereto, and (iii)
any other Senior Indebtedness the principal amount of which is $10.0 million or
more and which has been designated by the Company as "Designated Senior Debt."
Because of these subordination provisions, in the event of an insolvency of
Westbridge, Holders may recover less, ratably, than holders of Senior
Indebtedness.
"Senior Indebtedness" as defined in the Indenture means the principal of,
premium, if any, and interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to
Westbridge, whether or not such claim for post-petition interest is allowed in
such proceeding) on (i) existing indebtedness of Westbridge which is for money
borrowed (other than the Notes) or evidenced by notes or other written
obligations given in connection with the acquisition of any business, properties
or assets of any kind (including purchase-money obligations); (ii) obligations
of Westbridge as lessee under capitalized leases and leases of property made as
part of any sale and leaseback transactions; (iii) indebtedness of others of any
of the kinds described in the preceding clauses (i) and (ii) assumed or
guaranteed by Westbridge, including the amounts guaranteed by Westbridge under
the Guaranty Agreement dated as of December 28, 1995 by Westbridge in favor of
Fleet National Bank and entered into in connection with the Credit Agreement;
(iv) renewals, extensions and refundings of, and indebtedness and obligations of
a successor corporation issued in exchange for or in replacement of,
indebtedness or obligations of the kinds described in the preceding clauses (i)
through (iii); and (v) future indebtedness of Westbridge described in clause (i)
above, and renewals, extensions and refundings thereof, if the instrument
creating or evidencing such future indebtedness provides that such indebtedness
is superior in right of payment to the Notes. Notwithstanding the foregoing,
Senior Indebtedness shall not include (a) any future indebtedness of the kind
described in clause (i) above if and to the extent such indebtedness is
convertible into shares of Common Stock or other equity securities of the
Company, and the Notes shall rank pari passu with any such convertible
indebtedness unless the instrument creating or evidencing such convertible
indebtedness provides that such convertible indebtedness is junior in right of
payment to the Notes or (b) indebtedness or amounts owed (except to banks and
other financial institutions) for compensation to employees, or for goods or
materials purchased, or services utilized, in the ordinary course of business of
Westbridge or of any other person from whom such indebtedness or amount was
assumed or for whom such indebtedness was guaranteed.
The Notes are unsecured obligations of Westbridge, and, accordingly, will
rank pari passu with all obligations of Westbridge that arise by operation of
law or are imposed by any judicial or governmental authority. The Notes are
obligations exclusively of Westbridge, and accordingly, will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease
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obligations) of its subsidiaries. The right of Westbridge, and, therefore, the
right of creditors of Westbridge (including Holders) to receive assets of any
such subsidiary upon the liquidation or reorganization of such subsidiary or
otherwise, as a practical matter, will be effectively subordinated to the claims
of such subsidiary's creditors, except to the extent Westbridge is itself
recognized as a creditor of such subsidiary or such other creditors have agreed
to subordinate their claims to the payment of the Notes, in which case the
claims of Westbridge would still be subordinate to any secured claim on the
assets of such subsidiary and any indebtedness of such subsidiary senior to that
held by Westbridge.
At February 28, 1997, Senior Indebtedness was $40.1 million. Westbridge may
from time to time incur additional indebtedness constituting Senior
Indebtedness. The Indenture does not restrict the incurrence of additional
Senior Indebtedness by Westbridge or its subsidiaries.
MERGER AND CONSOLIDATION
Westbridge may not consolidate with or merge into any other entity or
lease, convey or transfer all or substantially all of its properties and assets
to, another entity, person or entity unless (i) the successor or transferee is a
corporation organized and existing under the laws of the United States, any
state thereof or the District of Columbia, (ii) the successor assumes the due
and punctual payment of the principal of and interest on all the Notes and the
performance of every covenant by Westbridge in the Indenture, (iii) after such
transaction no Event of Default exists, and no event has occurred and is
continuing which after notice or lapse of time or both, would become an Event of
Default, and (iv) Westbridge has delivered to the Trustee an officers'
certificate and an opinion of counsel as set forth in the Indenture.
DEFEASANCE
The Indenture will provide that, on or after May 1, 2003 or at any time
after a notice of redemption has been delivered to Holders, Westbridge, at its
option, (a) will be discharged from any and all obligations with respect to the
Notes (except for, among other things, certain obligations which include the
rights of Holders of Outstanding Notes to convert the Notes into Common Stock,
receive payments out of amounts deposited in trust with the Trustee in respect
of the principal of, premium, if any, and interest on such Notes when such
payments are due, replacing stolen, lost or mutilated Notes, maintaining paying
agencies and holding monies for payment in trust) or (b) need not comply with
certain restrictive covenants of the Indenture (as described above under "Merger
and Consolidation"), in each case upon the deposit with the Trustee, in trust,
of money, or U.S. Government Obligations, or a combination thereof, which
through the payment of interest thereon and principal thereof in accordance with
their terms will provide money in an amount sufficient to pay all the principal
of, premium, if any, and interest on the Notes on the dates such payments are
due in accordance with the terms of the Notes to their stated maturities or to
and including a redemption date which has been irrevocably designated by
Westbridge for redemption of the Notes. To exercise any such option, Westbridge
is required to meet certain conditions, including delivering to the Trustee an
opinion of counsel to the effect that the deposit and related defeasance would
not cause the Holders to recognize income, gain or loss for Federal income tax
purposes.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (i) failure to
pay principal, or premium, if any, of the Notes when due and payable at
maturity, upon redemption or otherwise, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (ii) failure to pay
any interest on any Notes when it becomes due and payable, continued for ten
Business Days, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (iii) failure to perform any other covenant or
restriction of Westbridge in the Indenture, continued for 30 days after written
notice to Westbridge as provided in the Indenture; (iv) certain events of
bankruptcy, insolvency or reorganization of Westbridge or any Significant
Subsidiary of Westbridge; (v) failure to perform any covenant or restriction of
Westbridge or its subsidiaries under any bond, debenture, note or other
indebtedness for borrowed money or any mortgage, indenture or instrument under
which there may be issued, secured or evidenced any indebtedness for borrowed
money, which failure shall have resulted in such indebtedness in an aggregate
amount exceeding $10.0 million
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becoming or being declared due or payable prior to the date on which it would
otherwise have become due and payable or such obligations being accelerated,
without such acceleration having been rescinded or annulled within a period of
30 days after notice of such failure shall have been given to Westbridge, or
(vi) a judgment or order for the payment of an amount equal to at least $10.0
million is rendered against Westbridge or any subsidiary of Westbridge and is
not vacated, discharged, stayed or bonded pending appeal within 30 days thereof.
If an Event of Default occurs and is continuing, either the Trustee or
Holders of at least 25% in aggregate principal amount of the outstanding Notes
may accelerate the maturity of all Notes; provided, however, that if an Event of
Default under clause (iv) of the definition of Event of Default occurs, all
unpaid principal of, premium, if any, and interest on all outstanding Notes will
automatically become due and payable without declaration or other act on the
part of the Trustee or any Holders. After acceleration, but before a judgment or
decree based on acceleration, Holders of a majority in aggregate principal
amount of outstanding Notes may, under certain circumstances, rescind and annul
the acceleration if all Events of Default, other than the nonpayment of
principal amounts which became due by acceleration, have been cured or waived,
and certain other payments have been made by Westbridge, as provided in the
Indenture.
No Holder will have any right to institute any proceeding with respect to
the Indenture or for the appointment of a receiver or trustee, or for any remedy
under the Indenture unless such holder previously has given to the Trustee
written notice of a continuing Event of Default and unless Holders of at least
25% in aggregate principal amount of the outstanding Notes have made written
requests and offered reasonable indemnity to the Trustee, to institute
proceedings as trustee, and the Trustee has not received from the Holders of a
majority in aggregate principal amount of the outstanding Notes a direction
inconsistent with the request, and the Trustee has failed to institute such
proceedings, within 60 days. However, these limitations do not apply to a suit
instituted by a Holder for the enforcement of payment of the principal or
interest on such Notes on or after the respective due dates expressed in such
Notes. Holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred to the Trustee (subject to certain exceptions).
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable security or indemnity.
The Trustee will, within 90 days after the occurrence of a default, mail to
all Holders notice of all defaults known to it, but except in the case of a
default in the payment of the principal of or interest on any of the Notes, the
Trustee shall be protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the interests of such
Holders. Westbridge will be required to furnish to the Trustee annually a
statement of the performance by Westbridge of certain of its obligations under
the Indenture and as to any default in the performance of the obligations.
MODIFICATIONS, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by Westbridge and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the then outstanding Notes held by persons other than affiliates of
Westbridge; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Note affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any Note, or reduce the principal amount thereof or the rate of interest
thereon; (ii) change the place of payment where, or the coin or currency in
which, any Note or the interest thereon is payable; (iii) impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof; (iv) modify the provisions of the Indenture with respect to
the subordination of the Notes in a manner adverse to the Holders; (v) reduce
the percentage in principal amount of the Outstanding Notes, the consent of
whose Holders is required for any supplement or waiver; (vi) reduce the vote of
Holders necessary to waive certain defaults or compliance with certain
provisions of the Indenture;
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(vii) modify the provisions of the Indenture with respect to Westbridge's
obligations to repurchase the Notes in a manner adverse to the Holders; or
(viii) modify the provisions of the Indenture with respect to a Holder's right
to exchange or convert the Notes in a manner adverse to such Holder.
Amendments and supplements of the Indenture may be made by Westbridge and
the Trustee without the consent of any Holder, in part, (i) to evidence the
succession of another corporation to the Company and the assumption by any such
successor of the covenants of the Company herein and in the Notes; or (ii) to
add to the covenants of the Company for the benefit of the Holders, or to
surrender any right or power herein conferred upon the Company; or (iii) to cure
any ambiguity, to correct or supplement any provision herein which may be
inconsistent with any other provision herein, or to make any other provisions
with respect to matters or questions arising under this Indenture which shall
not be inconsistent with the provisions of this Indenture, provided such action
shall not adversely affect the interests of the Holders in any material respect.
Holders of a majority in aggregate principal amount of Outstanding Notes
may on behalf of the Holders waive any past defaults, other than a default (i)
in payment of the principal, premium, if any, or interest on any Notes or (ii)
in respect of a covenant or provision in the Indenture which pursuant to the
Indenture cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
such State's conflict of law principles.
TRUSTEE
First Union National Bank will be the Trustee under the Indenture and the
paying agent and registrar for the Notes. The Indenture will provide that
Westbridge will indemnify the Trustee against any loss, liability or expense
incurred without negligence or wilful misconduct on the part of the Trustee in
connection with the acceptance or administration of the trust created by the
Indenture. Westbridge and its subsidiaries may maintain deposit accounts and
conduct other banking transactions with the Trustee or its affiliates in the
ordinary course of business, and the Trustee and its affiliates may from time to
time in the future provide Westbridge and its subsidiaries with banking and
financial services in the ordinary course of their business.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Westbridge consists of 30,000,000 shares of
Common Stock, par value $.10 per share, and 1,000,000 shares of Preferred Stock,
par value $.10 per share. As of December 31, 1996, 6,039,994, shares of Common
Stock and 20,000 shares of Series A Preferred Stock (with an aggregate
liquidation preference of $20.0 million) were outstanding. All of the shares of
Common Stock and Preferred Stock outstanding are validly issued, fully paid and
nonassessable.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share in all
matters to be voted on by the stockholders, including elections of directors,
and, except as otherwise required by law or provided with respect to the Series
A Preferred Stock, the holders of such shares exclusively possess all voting
power. See "-- Preferred Stock -- Series A Preferred Stock." Holders of Common
Stock are not entitled to cumulate their votes.
Subject to certain preferential rights of the Series A Preferred Stock, and
any other outstanding series of Preferred Stock created by the Board of
Directors from time to time, holders of Common Stock are entitled to dividends
and other distributions as and when declared by the Board of Directors out of
assets legally available therefor, and upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock would be entitled to
share equally in the distribution of all of the Company's assets. The holders of
Common Stock have no preemptive rights to purchase shares of Common Stock of the
Company.
The transfer agent and registrar for the Company's Common Stock is Liberty
Bank and Trust Company of Oklahoma City, National Association, 100 Broadway,
Oklahoma City, Oklahoma 73102.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to issue shares of Preferred Stock in one or more series and,
within certain limitations, to determine the dividend rights, dividend rate,
rights and terms of redemption, liquidation preferences, sinking fund terms,
conversion and voting rights of any series of Preferred Stock, the number of
shares constituting any such series, the designation thereof and the price
therefor.
The Company believes that the ability of its Board of Directors to issue
one or more series of Preferred Stock will provide the Company with flexibility
in structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as Common Stock, will be available for issuance without further action by
the Company's stockholders, unless such action is required by applicable law or
the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. The New York Stock Exchange
currently requires stockholder approval to issue additional shares in several
instances, including issuances of shares which would possess at least 20% of the
voting power outstanding or represents at least 20% of the number of shares of
Common Stock outstanding before such issuance.
SERIES A PREFERRED STOCK
Set forth below is a summary of the principal terms of the Series A
Preferred Stock. Such summary is qualified in its entirety by reference to the
text of the Certificate of Incorporation and to the Preferred Stock Purchase
Agreement, dated as of April 1, 1994 (the "Preferred Stock Purchase Agreement"),
between Westbridge and the purchasers named therein, each of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part and is incorporated herein by reference.
The shares of Series A Preferred Stock are not entitled to any voting
rights, except as required by law. However, if payment of dividends on the
Series A Preferred Stock is in arrears for six quarterly dividend periods,
holders of Series A Preferred Stock will be entitled to elect two directors to
the Board of Directors of
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Westbridge to serve until such time as the past-due dividends have been paid. In
addition, pursuant to the terms of the Preferred Stock Purchase Agreement, the
initial purchasers of the Series A Preferred Stock have received certain consent
rights which remain in effect so long as one or more of the original purchasers
own in the aggregate Series A Preferred Stock and Convertible Subordinated Notes
having an aggregate liquidation preference and principal amount equal to at
least 50.0% of the aggregate liquidation preference of Series A Preferred Stock
originally issued. Such consent rights require, among other things, that
Westbridge obtain the consent of original purchasers holding in the aggregate
Series A Preferred Stock and Convertible Subordinated Notes representing a
majority of the Series A Preferred Stock (measured by liquidation preference)
and Convertible Subordinated Notes (measured by principal amount) then held by
all original purchasers prior to (i) declaring or paying certain dividends, or
making certain other payments or distributions, on any shares of capital stock
of Westbridge other than the Series A Preferred Stock; (ii) purchasing,
redeeming or retiring any shares of capital stock of Westbridge (other than
Series A Preferred Stock) or any rights, options or warrants (other than the
Warrants) to purchase or acquire, or other securities convertible into or
exchangeable for, shares of capital stock of the Company; (iii) selling,
leasing, transferring or otherwise disposing of any asset (including, without
limitation, shares of capital stock or any other ownership interest in any
subsidiary) other than in the ordinary course of business; (iv) issuing any
shares of Common Stock or any rights, options or warrants to purchase, or other
securities convertible into or exchangeable for, shares of Common Stock;
provided, however, that no separate vote of the original purchasers shall be
required in the case of shares of Common Stock issued, among other things,
through an underwritten offering registered pursuant to the Securities Act or as
consideration for the acquisition of any business or block of insurance business
by the Company; (v) entering into, or permitting any subsidiary to enter into,
any business which is substantially different from and/or not connected with the
business in which Westbridge or any of its subsidiaries was engaged on the date
of issuance of the Series A Preferred Stock; (vi) entering into certain
transactions with affiliates of Westbridge, other than subsidiaries and except
in the ordinary course of business and on terms no less favorable than would be
obtained in arm's-length transactions between unrelated third parties; or (vii)
amending the Certificate of Incorporation in such a manner as would adversely
affect the preferences or rights of the Series A Preferred Stock. There are
certain other exceptions to the foregoing restrictions which are set forth in
the Certificate of Incorporation. Each share of Series A Preferred Stock has a
liquidation preference of $1,000 per share and is entitled to receive cumulative
dividends, out of funds legally available therefor, at an annual rate of 8.25%.
The dividend rate is subject to a one percentage point increase if certain
Events of Noncompliance (as defined in the Certificate of Incorporation) occur.
Once the Event of Noncompliance has been cured, the dividend rate will revert to
8.25%. Each share of Series A Preferred Stock is convertible into 118.906 shares
of Common Stock at a conversion price of $8.41 per share of Common Stock. As of
March 7, 1997, the shares of Series A Preferred Stock were convertible into
shares of Common Stock which, on an as converted basis, would represent
approximately 27.6% of the Common Stock outstanding. The conversion price is
subject to customary anti-dilution adjustments and other adjustments in the
event that certain Events of Noncompliance have occurred and are continuing. The
shares of Series A Preferred Stock may, at the option of Westbridge, be
exchanged for that principal amount of Convertible Subordinated Notes equal to
the aggregate liquidation preference of the shares to be exchanged. Westbridge
is required to redeem any and all shares of Series A Preferred Stock, or any
principal amount of Convertible Subordinated Notes issued in exchange therefor,
outstanding on April 12, 2004 and may, on or after April 12, 1997, redeem all or
any portion of the shares of Series A Preferred Stock or principal amount of
Convertible Subordinated Notes then outstanding at the redemption prices set
forth in the Certificate of Incorporation or the indenture relating to the
Convertible Subordinated Notes, as the case may be.
Following the offering of Notes hereby, the Company intends to call the
Series A Preferred Stock for redemption at a time at which the then current
market price of the Common Stock will provide an incentive to the holders of the
Series A Preferred Stock to convert their shares in accordance with the terms
thereof prior to any such redemption.
RESTRICTIONS ON DIVIDENDS
The Preferred Stock Purchase Agreement provides that for so long as one or
more of the original purchasers own in the aggregate Series A Preferred Stock
and Convertible Subordinated Notes having an
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aggregate liquidation preference and principal amount equal to at least $10.0
million, then without first obtaining the consent or approval of original
purchasers holding in the aggregate Series A Preferred Stock and Convertible
Subordinated Notes representing a majority of the Series A Preferred Stock
(measured by liquidation preference) and Convertible Subordinated Notes
(measured by principal amount) then held by the original purchasers, Westbridge
shall not: (i) declare or pay dividends or make any other payment or
distribution, on any shares of capital stock of Westbridge other than the Series
A Preferred Stock; except, that no approval or consent of the original
purchasers shall be required for dividends or other distributions payable (x) in
cash in an amount in any year not exceeding $0.5 million or (y) in capital stock
of Westbridge. Westbridge has not paid any cash dividends on the Common Stock
and does not anticipate declaring or paying cash dividends in the foreseeable
future.
The Senior Subordinated Indenture prohibits the payment of dividends and
other distributions on Westbridge's capital stock (except for dividends payable
on the Series A Preferred Stock and dividends payable in capital stock of
Westbridge) and the purchase of capital stock (except for the redemption or
exchange of the Series A Preferred Stock), unless after giving effect thereto,
the aggregate amount expended for those purposes subsequent to March 15, 1995,
does not exceed the sum of (i) $3.0 million, plus (ii) 50% of Westbridge's
aggregate Consolidated Net Income (excluding unrealized gains and losses on
securities marked to market to the extent they were included in such
Consolidated Net Income) (as defined in the Senior Subordinated Indenture) for
each fiscal year commencing subsequent to December 31, 1994, plus (iii) 100% of
the aggregate net proceeds received by Westbridge on account of any capital
stock issued by Westbridge (other than to a subsidiary) subsequent to January 1,
1995, (including the aggregate net cash proceeds received by Westbridge on
disposition of any property received by Westbridge from such sales), plus (iv)
100% of the aggregate net proceeds received by Westbridge on account of any
Indebtedness (as defined in the Senior Subordinated Indenture) convertible into
capital stock of Westbridge issued by Westbridge (other than to a subsidiary)
subsequent to January 1, 1995, (including the aggregate net cash proceeds
received by Westbridge on disposition of any property received by Westbridge
from such sales), to the extent such Indebtedness has been converted into such
capital stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the Delaware General Corporation Law, as amended ("Section
203"), provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date that such stockholder becomes an "interested
stockholder" unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an "interested stockholder," (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." Except as otherwise specified in
Section 203, an "interested stockholder" is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring the Company to negotiate in advance
with the Board of Directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approve either the
business combination or the transaction which results
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in the stockholder becoming an interested stockholder. Such provisions also may
have the effect of preventing changes in the management of the Company. It is
possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
The Certificate of Incorporation and By-Laws contain certain provisions
relating to corporate governance and to the rights of stockholders which may be
deemed to have potential anti-takeover effects in that such provisions may delay
or prevent a change of control of the Company. These provisions: (i) classify
the Board of Directors into three classes, each of which serve for three years,
with one class being elected each year; (ii) provide that the number of
directors of the Company shall be fixed by the By-Laws and may be increased or
decreased from time to time in such manner as may be prescribed in the By-Laws;
(iii) require that advance notice of stockholder nominations be given in the
manner provided for in the By-Laws; (iv) provide that directors may be removed
only for cause and only with the approval of the holders of at least 80% of the
voting power of the then outstanding shares of capital stock of the Company
entitled to vote generally in the election of directors ("Voting Stock"), voting
together as a single class; (v) require that stockholder action be taken at an
annual meeting of stockholders or a special meeting of stockholders, which may
be called only by the Chairman of the Board, the President or by resolution of
the Board of Directors, and prohibit stockholder action by written consent; and
(vi) provide that the stockholder vote required to alter, amend, or repeal the
foregoing provisions of the Certificate of Incorporation or the By-Law
Amendments (as defined below), or to adopt any provision inconsistent therewith,
shall be 80% of the Voting Stock, voting together as a single class.
Further, the By-Laws contain related provisions that, among other things,
(i) provide that advance notice of stockholder nominations of directors and of
stockholder proposals of business to be conducted at annual meetings of
stockholders be given and that certain information be provided with respect to
such nominations or proposals in the manner provided in the By-Laws; (ii)
provide that the number of directors of the Company be fixed exclusively by the
Board of Directors within the range established in the By-Laws; and (iii)
provide that any vacancy on the Board of Directors shall be filled only by the
remaining directors then in office, though less than a quorum, and that
directors so appointed will serve for the remainder of the full term of the
class in which the vacancy occurred rather than until the next annual meeting of
stockholders.
Although the Board of Directors has no intention at the present time of
doing so, it could issue additional series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a merger, tender
offer or other takeover attempt. The Board of Directors will make any
determination to issue such shares based on its judgment as to the best
interests of the Company and its stockholders. The Board of Directors, in so
acting, could issue Preferred Stock having terms that could discourage an
acquisition attempt through which an acquiror may be able to change the
composition of the Board of Directors, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.
INSURANCE REGULATION CONCERNING CHANGE OF CONTROL
State insurance regulatory laws intended primarily for the protection of
policyholders contain provisions that require advance approval by state agencies
of any change in control of an insurance company that is domiciled (or, in some
cases, having such substantial business that it is deemed commercially
domiciled) in that state. "Control" is generally presumed to exist through the
ownership of 10% or more of the voting securities of a domestic insurance
company or of any company which controls a domestic insurance company. In
addition, many state insurance regulatory laws contain provisions that may
require pre-notification to state agencies of a change in control of a
nondomestic admitted insurance company in that state. While such pre-
notification statutes do not authorize the state agency to disapprove the change
of control, such statutes do authorize the issuance of a cease and desist order
with respect to the nondomestic admitted insurer if certain conditions exist
such as undue market concentration. Any future transactions that would
constitute a change in control of the Company would generally require prior
approval by the state insurance departments of Arizona, Delaware, Mississippi
and Texas and may require the pre-acquisition notification in those states which
have adopted pre-acquisition notification provisions and wherein the insurers
are admitted to transact business. Such requirements may deter, delay or prevent
certain transactions affecting the control of or the
68
<PAGE> 69
ownership of Common Stock, including transactions that could be advantageous to
the stockholders of the Company.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware Law, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions of the Certificate of Incorporation described above apply to an
officer of the Company only if he or she is a director of the Company and is
acting in his or her capacity as director, and do not apply to officers of the
Company who are not directors.
69
<PAGE> 70
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary is a general discussion of certain federal income tax
consequences of purchasing, holding, converting and disposing of the Notes. This
summary is based on laws, regulations, rulings and judicial decisions now in
effect, all of which are subject to change, possibly with retroactive effect.
This summary is presented for informational purposes only and relates only to
persons who purchase the Notes pursuant to this Prospectus, who hold the Notes
or shares of Common Stock issued on conversion of the Notes as "capital assets"
within the meaning of section 1221 of the Code and who are United States Holders
of the Notes. For purposes of this discussion a "United States Holder" means a
beneficial owner of Notes that is an individual citizen or resident of the
United States, a corporation or partnership organized under the laws of the
United States or of any state or political subdivision thereof, an estate, trust
or other person or entity the income of which is includible in gross income for
tax purposes regardless of its source, or any other holder who is subject to tax
on a net income basis with respect to the Notes.
This summary does not purport to deal with all potential federal income tax
considerations, does not discuss state, local or foreign tax consequences and
does not cover special rules applicable to taxpayers who may fall into special
classes, such as non-resident alien individuals, foreign corporations or other
non-United States persons, financial institutions, insurance companies, mutual
funds, subchapter S corporations, trusts, exempt institutions, broker/dealers,
taxpayers who may be subject to the alternative minimum tax and taxpayers who
hold the Notes as part of a hedging "straddle" or "conversion" transaction.
INTEREST
Interest on a Note will be generally taxable to a Holder as ordinary income
at the time it is paid or accrued in accordance with the Holder's method of
accounting for tax purposes. The rules relating to original issue discount will
not be applicable to the Notes as the issue price of the Notes will not be less
than their stated redemption price at maturity.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for income tax purposes on a
conversion of the Notes into shares of Common Stock. Cash paid in lieu of a
fractional share of Common Stock, however, will result in taxable gain (or
loss), which will be capital gain (or loss) to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted basis of the
Note allocable to such fractional share. The adjusted basis of shares of Common
Stock received on conversion will equal the adjusted basis of the Note
converted, reduced by the portion of adjusted basis allocated to any fractional
share of Common Stock exchanged for cash. The holding period of an investor in
Common Stock received on conversion will include the period during which the
converted Note was held. Any interest deemed paid to a Holder in connection with
a conversion will be taxable as ordinary income.
Adjustment of Conversion Price. The conversion price of the Notes is
subject to adjustment under certain circumstances. See "Description of
Notes -- Conversion of the Notes." Pursuant to Treasury Regulations promulgated
under Section 305 of the Code, a Holder may be treated as having received a
constructive distribution from Westbridge, resulting in ordinary income to the
extent of Westbridge's earnings and profits as of the end of the taxable year
(subject to a possible dividends received deduction in the case of corporate
Holders), upon an adjustment of the conversion price of the Notes if (i) the
adjustment results in an increase in the Holder's proportionate interest in the
assets or earnings and profits of Westbridge and (ii) the adjustment is not made
pursuant to a bona fide, reasonable anti-dilution formula. An adjustment made to
compensate for certain taxable distributions to holders of Common Stock would
not be considered an adjustment made pursuant to such a formula. In addition,
the failure to fully adjust the conversion price of the Notes to reflect
distributions of stock dividends to holders of Common Stock may result in a
taxable dividend to such holders of Common Stock.
Distributions on Common Stock. Distributions on the Common Stock into which
Notes have been converted will be taxable as dividends to the extent of
Westbridge's current and/or accumulated earnings and
70
<PAGE> 71
profits, as determined under United States federal income tax principles. Such
dividends may be eligible for the dividends received deduction in the case of
Holders which are corporations, subject to applicable limitations. To the extent
that the amount of any distribution exceeds Westbridge's current and accumulated
earnings and profits for a taxable year, the distribution will first be treated
as a tax-free return of capital, causing a reduction in the adjusted basis of
the Common Stock (thereby increasing the amount of gain, or decreasing the
amount of loss, to be recognized by the investor on a subsequent disposition of
the Common Stock), and the balance in excess of adjusted basis will be taxed as
capital gain.
DISPOSITION OF NOTES OR COMMON STOCK
Each Holder generally will recognize gain or loss upon the sale,
redemption, repurchase, retirement or other disposition of such holder's Notes
measured by the difference, if any, between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the Holder's adjusted tax basis in such Notes, which generally will be the
Holder's cost. Each holder of Common Stock into which the Notes are converted
generally will recognize gain or loss upon the sale or other disposition of the
Common Stock measured under rules similar to those described in the preceding
sentence for the Notes. Special rules may apply to redemptions of Common Stock
which may result in different treatment. Any such gain or loss recognized on the
sale, redemption, repurchase, retirement or other disposition of a Note or share
of Common Stock should be capital gain or loss and would be long-term capital
gain or loss if the Notes or the Common Stock had been held for more than one
year at the time of the sale or exchange. A Holder's initial basis in a Note
will be the cash price paid for the Notes. Any interest payment received by a
Holder in connection with a redemption, repurchase, retirement or other
disposition of Notes will be taxed as ordinary income. Certain pending
legislative proposal would treat as a sale or exchange the entering into of one
or more transactions that tend to "hedge" the economic risks of owning stock or
debt. It is not possible to predict whether any of the pending proposals will be
enacted and, if enacted, what their form or effective dates may be. Potential
Holders are urged to consult their tax advisors concerning these proposals.
BACKUP WITHHOLDING
A Holder of Notes or Common Stock may be subject to "back-up withholding"
at a rate of 31% with respect to certain "reportable payments," including
interest payments, dividend payments and, under certain circumstances, principal
payments on the Notes. These back-up withholding rules apply if the holder,
among other things, (i) fails to furnish a social security number or other
taxpayer identification number ("TIN") certified under penalties of perjury
within a reasonable time after request, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividends, (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to back-up withholding or (v) does not certify its foreign or other
exempt status. A Holder who does not provide the Company with such Holder's
correct TIN also may be subject to penalties imposed by the Internal Revenue
Service. Any amount withheld from a payment to a Holder under the back-up
withholding rules is creditable against the Holder's federal income tax
liability, provided the required information is furnished to the Internal
Revenue Service. Back-up withholding will not apply, however, with respect to
payments made to certain Holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemption from back-up
withholding is properly established. Westbridge will report to Holders of Notes
and Common Stock and to the Internal Revenue Service the amount of any
"reportable payments" required to be reported by Westbridge under U.S. Treasury
Regulations for each calendar year and the amount of tax withheld, if any, with
respect to such payments.
THE U.S. FEDERAL INCOME TAX DISCUSSION ABOVE IS INTENDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER. PROSPECTIVE
PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION TO THEM OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS RELEVANT TO
THEIR PARTICULAR CIRCUMSTANCES.
71
<PAGE> 72
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement") among Westbridge and the Underwriters named below (the
"Underwriters"), Westbridge has agreed to sell $65 million principal amount of
the Notes to the Underwriters, and the Underwriters have severally agreed to
purchase the principal amount of Notes set forth opposite their respective names
in the table below.
<TABLE>
<CAPTION>
AMOUNT OF
UNDERWRITER NOTES
----------- -----------
<S> <C>
Forum Capital Markets L.P................................... $39,000,000
Raymond James & Associates, Inc............................. $26,000,000
-----------
Total............................................. $65,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Notes are subject to certain conditions. The
Underwriters are committed to purchase all the Notes if any of the Notes are
purchased.
Westbridge has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of 1.95% of the principal amount of Notes.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of 0.25% of the principal amount of Notes to other dealers. After the
commencement of this offering, the public offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by the
Underwriters.
Westbridge has granted to the Underwriters an option, expiring 45 days
after the date of this Prospectus, to purchase from Westbridge up to a $9.75
million additional principal amount of Notes at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the Notes to be
purchased by it shown in the above table bears to $65 million, and Westbridge
will be obligated, pursuant to the option, to sell such additional Notes to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments, if any, made in connection with this offering of the Notes
hereby.
Westbridge has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the offering of the Notes
hereby, including liabilities under the Securities Act, or to contribute to
certain payments that the Underwriters may be required to make in respect
thereof.
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
At the closing of the offering of the Notes hereby, Westbridge will sell to
the Underwriters, for nominal consideration, the Underwriters' Warrants, which
will entitle the Underwriters to purchase, in the aggregate, 297,619 shares of
Common Stock at an exercise price of $10.92 per share for a period of four years
commencing on the first anniversary of the such closing. The Underwriters'
Warrants contain anti-dilution provisions providing for adjustment of the
exercise price and number of securities issuable upon exercise of the
Underwriters' Warrants upon the occurrence of certain events. The Underwriters'
Warrants grant to the holders thereof certain rights with respect to
registration under the Securities Act of the shares of Common Stock issuable
upon exercise of the Underwriters' Warrants.
Forum Capital Markets L.P., on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase shares of Common Stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of Common
Stock in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit Forum Capital Markets L.P.,
on behalf of the Underwriters, to reclaim a selling concession from a syndicate
member when the Notes originally sold by such syndicate member are purchased
72
<PAGE> 73
in a syndicate covering transaction to cover syndicate short positions. Such
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Notes and the Common Stock issuable upon the conversion
thereof will be passed upon for the Company by Milbank, Tweed, Hadley & McCloy,
New York, New York. Certain legal matters relating to the offering of Notes
offered hereby will be passed upon for the Underwriters by Kelley Drye & Warren
LLP, New York, New York and Stamford, Connecticut.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1995, and
for each of the years in the three-year period ended December 31, 1996, and the
financial statement schedules included in the Registration Statement, have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
Westbridge is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by Westbridge can be inspected without charge and copied upon
payment of prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices: 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission also maintains a Web site (http://www.sec.gov) that
contains electronically filed reports, proxy statements and other information
regarding the Company. Reports and other information concerning Westbridge also
may be inspected at the offices of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
Westbridge has filed with the Commission the Registration Statement under
the Securities Act with respect to the offering of Notes hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to Westbridge and the offering of Notes hereby, reference is hereby made
to such Registration Statement, exhibits and schedules.
73
<PAGE> 74
GLOSSARY OF INSURANCE TERMS
The following Glossary includes definitions of certain general insurance
terms, as well as certain terms which relate specifically to the Company.
<TABLE>
<S> <C>
agent: An independent contractor representative of an insurer
licensed to sell and service the insurer's products.
amortization of DPAC: Amortization of DPAC for a particular period expressed as a
percentage of premiums earned for that period, all amounts
determined in accordance with GAAP.
assumption reinsurance: A transfer of policies from one insurance company to another
where there is a novation of the existing policies and the
assuming insurer is substituted for the transferring
insurer. The transferring insurer is released from any
obligations to the policyholder under the policy.
benefits: All amounts payable pursuant to the Company's policies,
including base policy benefits and the benefits payable by
the Company by virtue of a return of premium rider.
claim: A demand by the policyholder for payment by the Company of a
base policy benefit.
coinsurance: Where two or more insurers share all losses covered by a
policy in a proportion agreed upon in advance.
commission: Compensation paid by an insurer to its agents or to brokers
for placing insurance coverage with the insurer, usually
determined as a percentage of premiums earned by the insurer
with respect to policies written by those agents or brokers.
copayment: The amount paid by a covered person toward a claim after the
deductible has been met.
deductible: The portion of an insured loss to be borne by the insured
before he is entitled to any recovery from the insurer.
deferred policy acquisition costs (DPAC): An asset of an insurer, determined in accordance with GAAP,
that consists of expenses incurred by the insurer that are
related to, and vary with, the production of new sales. This
asset consists of the portion of first-year commissions in
excess of renewal commissions and certain underwriting,
policy issue and selling expenses, all of which are
capitalized and amortized over the expected term of the
policy. This asset does not exist under SAP, which require
that these items be expensed in the period in which they are
incurred.
first-year premiums: During any fiscal period, the premiums recorded in the first
12 months following the issuance of a policy.
GAAP: Generally accepted accounting principles in the United
States.
guaranteed renewable policy: An insurance policy that the policyholder has the absolute
right to continue in force for the duration of his life or
for a specified period of time by the timely payment of
premiums. The insurer is contractually prohibited during
such period, absent policyholder agreement, from changing
any provision of a guaranteed renewable policy, other than
the amount of premiums payable by the insured.
loss ratio: The sum of the Company's policyholder benefits and claims
for a particular period plus the increase in its policy
benefit reserves during that period expressed as a
percentage of its premiums earned for that period.
</TABLE>
74
<PAGE> 75
<TABLE>
<S> <C>
morbidity: The relative incidence of disease.
mortality: The relative incidence of death.
NAIC: The National Association of Insurance Commissioners, an
association of all state insurance commissioners formed to
promote uniformity in regulation. Statutory accounting
practices are largely based on NAIC policies.
net annualized written premiums: The first-year annualized premiums attributable to policies
that have been underwritten and issued by the Company.
policy: An individual contract of insurance or a certificate of
coverage issued by an insurer to a policyholder evidencing
the agreement of the insurer to provide the benefit
described therein.
policyholder: The individual who applies to the Company for coverage and
in whose name a policy or a certificate of coverage is
issued. The policyholder will receive the benefits payable
under the policy unless he assigns them to someone else or
he designates a beneficiary.
policyholder benefits: The total amount of benefits paid under the Company's
policies during a particular period plus the increase (or
minus the decrease) in its unpaid claim reserves (including
the IBNR claim reserves and the ICOS claim reserves).
premiums: The amount payable to an insurer by its policyholders in
consideration of the coverage period under its insurance
policies.
recapture: The action of a ceding insurance company taking back from a
reinsurer insurance previously ceded.
reinsurance: The acceptance by one or more insurers, of a portion or all
of the risk underwritten by another insurer.
renewal premiums: During any fiscal period, the premiums recorded from and
after the 13th month following the issuance of a policy.
statutory accounting practices (SAP): Accounting practices prescribed or permitted by the relevant
state insurance regulatory authorities.
statutory capital and surplus: The amount remaining after all of an insurer's liabilities
as of a particular date are subtracted from all of its
assets as of that date, all amounts determined in accordance
with SAP.
submitted annualized premiums: The first-year annualized premiums attributable to policies
submitted to the Company for underwriting.
surplus: The amount by which admitted assets exceed liabilities and
paid-in capital, all amounts as determined in accordance
with SAP.
underwriting: An insurer's process of reviewing an application for
insurance coverage, deciding whether and on what basis to
award all or part of the coverage requested, and determining
the applicable premium; also refers to the granting of such
coverage.
</TABLE>
75
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
and Stockholders of
Westbridge Capital Corp.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Westbridge Capital
Corp. and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 14, 1997
F-2
<PAGE> 78
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Investments:
Fixed maturities:
Available-for-sale, at market value (amortized cost
$90,370 and $83,160).................................. $ 91,947 $ 86,780
Equity securities, at market.............................. 1,596 539
Investment in Freedom Holding Company, on the equity
basis.................................................. -- 6,173
Mortgage loans on real estate............................. 658 639
Investment real estate.................................... -- 141
Policy loans.............................................. 282 285
Short-term investments.................................... 7,722 14,946
-------- --------
Total Investments................................. 102,205 109,503
Cash...................................................... 1,013 2,013
Accrued investment income................................. 1,889 1,711
Receivables from agents, net of $1,729 and $1,187
allowance for doubtful accounts........................ 18,311 16,706
Deferred policy acquisition costs......................... 83,871 56,977
Leasehold improvements and equipment, at cost, net of
accumulated depreciation and amortization of $4,211 and
$3,905................................................. 1,311 1,590
Other assets.............................................. 12,116 12,499
-------- --------
Total Assets...................................... $220,716 $200,999
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits................................. $ 54,204 $ 46,620
Claims................................................. 39,186 39,063
-------- --------
93,390 85,683
Accumulated policyholders' funds............................ 393 373
Other liabilities........................................... 8,171 11,226
Deferred income taxes....................................... 10,299 5,841
Notes payable............................................... 21,210 15,807
Senior subordinated notes, net of unamortized discount, due
2002...................................................... 19,350 19,264
-------- --------
Total Liabilities................................. 152,813 138,194
-------- --------
Redeemable Preferred Stock.................................. 20,000 20,000
-------- --------
Stockholders' Equity:
Common stock, ($.10 par value, 30,000,000 shares
authorized; 6,039,994, and 5,992,458 shares issued).... 604 599
Capital in excess of par value............................ 29,226 29,208
Unrealized appreciation of investments carried at market
value, net of tax...................................... 1,057 2,593
Retained earnings......................................... 17,186 10,575
-------- --------
48,073 42,975
Less -- Aggregate of shares held in treasury and
investment by affiliate in Westbridge Capital Corp.
common stock (28,600 at December 31, 1996 and 1995, at
cost).................................................. (170) (170)
-------- --------
Total Stockholders' Equity........................ 47,903 42,805
-------- --------
Commitments and contingencies:
Total Liabilities, Redeemable Preferred Stock and
Stockholders' Equity............................. $220,716 $200,999
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 79
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Premiums:
First-year........................................... $ 61,843 $ 34,774 $ 15,111
Renewal.............................................. 94,937 85,319 83,592
--------- --------- ---------
156,780 120,093 98,703
Net investment income................................ 8,736 7,421 5,764
Fee and service income............................... 9,534 2,327 1,728
Net realized gain on investments..................... 96 182 320
Other income......................................... -- 9 31
--------- --------- ---------
175,146 130,032 106,546
--------- --------- ---------
Benefits, claims and expenses:
Benefits and claims..................................... 94,187 70,465 53,623
Amortization of deferred policy acquisition costs....... 22,907 11,553 9,711
Commissions............................................. 7,919 11,359 11,224
General and administrative expenses..................... 27,123 21,926 16,847
Taxes, licenses and fees................................ 5,951 4,101 3,230
Interest expense........................................ 4,462 2,432 3,067
--------- --------- ---------
162,549 121,836 97,702
--------- --------- ---------
Income before income taxes, equity in earnings of Freedom
Holding Company and extraordinary item.................. 12,597 8,196 8,844
Provision for income taxes................................ 4,410 2,813 2,764
Equity in earnings of Freedom Holding Company............. 74 348 345
--------- --------- ---------
Income before extraordinary item.......................... 8,261 5,731 6,425
Extraordinary loss from early extinguishment of debt...... -- 407 --
--------- --------- ---------
Net income...................................... 8,261 5,324 6,425
Preferred stock dividends................................. 1,650 1,650 1,190
--------- --------- ---------
Income applicable to common stockholders.................. $ 6,611 $ 3,674 $ 5,235
========= ========= =========
Earnings Per Common Share:
Primary:
Income before extraordinary item..................... $ 1.08 $ 0.70 $ 1.13
Extraordinary item................................... -- (0.07) --
--------- --------- ---------
Net earnings.................................... $ 1.08 $ 0.63 $ 1.13
========= ========= =========
Fully Diluted:
Income before extraordinary item........................ $ 0.97 $ 0.70 $ 1.03
Extraordinary item...................................... -- (0.05) --
--------- --------- ---------
Net earnings.................................... $ 0.97 $ 0.65 $ 1.03
========= ========= =========
Weighted Average Shares Outstanding:
Primary................................................. 6,131,000 5,836,000 4,617,000
========= ========= =========
Fully Diluted........................................... 8,540,000 8,204,000 6,267,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 80
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income applicable to common stockholders............ $ 6,611 $ 3,674 $ 5,235
Adjustments to reconcile net income applicable to common
stockholders to cash provided by (used for) operating
activities:
Increase (decrease) in policy liabilities and
accruals........................................... 2,995 (5,194) (6,700)
Amortization of deferred policy acquisition costs.... 22,907 11,553 9,711
Increase in deferred income taxes.................... 3,708 2,610 905
Additions to deferred policy acquisition costs....... (45,138) (23,279) (12,582)
Depreciation expense................................. 497 486 325
Increase in receivables from agents.................. (1,371) (9,353) (2,403)
Decrease (increase) in other assets.................. 2,402 (2,902) (6,257)
Equity in earnings of Freedom Holding Company........ (74) (348) (345)
Net realized gain on investments..................... (96) (182) (320)
(Decrease) increase in other liabilities............. (3,353) 2,548 1,013
Other, net........................................... (422) (900) 798
--------- -------- --------
Net Cash Used For Operating Activities.................... (11,334) (21,287) (10,620)
--------- -------- --------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company.................. (3,970) -- --
Acquisition of NFIC and AICT............................ -- -- (20,178)
Proceeds from investments sold:
Fixed maturities, classified as held-to-maturity,
called or matured.................................. -- 2,629 4,357
Fixed maturities, classified as available-for-sale,
called or matured.................................. 8,529 468 1,544
Fixed maturities, classified as available-for-sale,
sold............................................... 49,340 6,585 7,275
Short-term investments sold or matured............... 155,877 15,058 45,020
Other investments sold or matured.................... 556 136 98
Cost of investments acquired......................... (203,849) (23,629) (50,039)
Notes receivable from related parties................ -- -- 1,381
Additions to leasehold improvements and equipment,
net of retirements................................. (218) (861) (976)
--------- -------- --------
Net Cash Provided By (Used For) Investing Activities...... 6,265 386 (11,518)
--------- -------- --------
Cash Flows From Financing Activities:
Effective issuance of senior subordinated debentures, at
par.................................................. -- -- 5,000
Redemption of senior subordinated debentures............ -- (25,000) --
Issuance of redeemable preferred stock.................. -- -- 20,000
Issuance of subordinated notes.......................... -- 19,200 --
Issuance of notes payable............................... 16,144 15,807 --
Issuance of common stock................................ 140 10,108 395
Issuance of common stock warrants....................... -- 74 --
Purchase and cancellation of common stock............... (125) (146) (534)
Repayment of notes payable.............................. (12,090) -- --
--------- -------- --------
Net Cash Provided By Financing Activities................. 4,069 20,043 24,861
--------- -------- --------
(Decrease) Increase In Cash During Period................. (1,000) (858) 2,723
Cash At Beginning Of Period............................... 2,013 2,871 148
--------- -------- --------
Cash At End Of Period..................................... $ 1,013 $ 2,013 $ 2,871
========= ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest............................................. $ 3,861 $ 2,336 $ 2,678
Income taxes......................................... $ 982 $ 960 $ 2,090
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 81
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
In the second quarter of 1996, the Company purchased the remaining
outstanding capital stock of an insurance holding company that it did not
already own, for a cash purchase price of $6.3 million. This purchase resulted
in the Company receiving assets and assuming liabilities as follows:
<TABLE>
<S> <C>
Assets...................................................... $13,542,000
Liabilities................................................. $ 5,780,000
</TABLE>
Adjustments to reconcile net income to cash used for operating activities
in the Company's Consolidated Statements of Cash Flows exclude increases
relating to the acquired assets and liabilities of this insurance holding
company. Accordingly, these adjustments do not correspond to the changes in the
related line items on the Company's Consolidated Balance Sheets.
The Company purchased the outstanding capital stock of a health insurer and
its subsidiary in the second quarter of 1994 for a cash purchase price of $20.1
million. This purchase resulted in the Company receiving assets and assuming
liabilities as follows:
<TABLE>
<S> <C>
Assets...................................................... $61,293,000
Liabilities................................................. $72,199,000
</TABLE>
The Company also purchased a block of Supplemental Health insurance in the
first quarter of 1994. This purchase resulted in the Company disbursing
investments and assuming liabilities as follows:
<TABLE>
<S> <C>
Investments................................................. $ 545,000
Policy Liabilities.......................................... $ 2,625,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 82
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL UNREALIZED
IN EXCESS APPRECIATION TOTAL
OF (DEPRECIATION) RETAINED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE OF INVESTMENTS EARNINGS SHARES AMOUNT EQUITY
--------- ------ --------- -------------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994...... 4,273,467 $427 $19,483 $ 205 $ 1,666 28,600 $ (170) $21,611
Net income...................... 6,425 6,425
Preferred stock dividend........ (1,190) (1,190)
Unrealized depreciation of
investments................... (352) (352)
Issuance of shares under stock
option plans.................. 219,648 22 373 395
Shares purchased and cancelled
under stock option plans...... (62,657) (6) (528) (534)
--------- ---- ------- ------- ------- ------ ------- -------
Balance at December 31, 1994.... 4,430,458 443 19,328 (147) 6,901 28,600 (170) 26,355
Net income...................... 5,324 5,324
Preferred stock dividend........ (1,650) (1,650)
Unrealized appreciation of
investments................... 2,740 2,740
Issuance of shares under stock
option plans.................. 85,300 8 230 238
Issuance of shares from an
underwritten public
offering...................... 1,500,000 150 9,720 9,870
Shares purchased and cancelled
under stock option plans...... (23,300) (2) (144) (146)
Issuance of stock warrants...... 74 74
--------- ---- ------- ------- ------- ------ ------- -------
Balance at December 31, 1995.... 5,992,458 599 29,208 2,593 10,575 28,600 (170) 42,805
Net income...................... 8,261 8,261
Preferred stock dividend........ (1,650) (1,650)
Unrealized depreciation of
investments................... (1,536) (1,536)
Issuance of shares under stock
option plans.................. 62,965 6 134 140
Issuance of restricted shares... 8 8
Shares purchased and cancelled
under stock option plans...... (15,429) (1) (124) (125)
--------- ---- ------- ------- ------- ------ ------- -------
Balance at December 31, 1996.... 6,039,994 $604 $29,226 $ 1,057 $17,186 28,600 $ (170) $47,903
========= ==== ======= ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 83
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Westbridge Capital Corp. ("the Company"), and its wholly-owned
subsidiaries, National Foundation Life Insurance Company ("NFL"), Freedom Life
Insurance Company of America ("FLICA"), National Financial Insurance Company
("NFIC"), American Insurance Company of Texas ("AICT"), Freedom Holding Company
("FHC"), Foundation Financial Services, Inc. ("FFS"), Westbridge Marketing
Corporation ("WMC"), Westbridge Financial Corp. ("Westbridge Financial"),
Westbridge Printing Services, Inc. ("WPS"), Precision Dialing Services, Inc.
("PDS"), Westbridge National Life Insurance Company ("WNL"), Flex-Plan Systems,
Inc. ("FPS"), Westbridge Funding Corporation ("WFC"), (formerly known as
National Legal Services Company, Inc.), Senior Benefits, LLC ("Senior Benefits")
and American Senior Security Plans, LLC ("ASSP"). The consolidated financial
statements also include the accounts of the Company's 80%-owned subsidiary
Health Care-One Marketing Group, Inc. ("Health Care Marketing") as well as its
51%-owned subsidiary, LifeStyles Marketing Group, Inc. ("LifeStyles Marketing")
and its 50%-owned subsidiary, Health Care-One Insurance Agency, Inc. ("Health
Care-One"). The Company's decision to consolidate the accounts of Health
Care-One is based on the extent to which the Company exercises control over
Health Care-One. The Company has agreed to provide 100% of the financing
required to support the marketing efforts of Health Care-One and also has
significant input in its management. All significant intercompany accounts and
transactions have been eliminated.
NATURE OF OPERATIONS. The Company, through its subsidiaries and affiliates,
markets medical expense and supplemental health insurance products and managed
care health plans in 41 states. The major underwritten product lines currently
being marketed by the Company are Medical Expense Products and Critical Care and
Specified Disease Products. In the past, the Company also underwrote a
significant amount of Medicare Supplement Products. The Company also markets
certain managed care health plans which are underwritten by health maintenance
organizations ("HMOs") and other non-affiliated managed care organizations.
ACCOUNTING PRINCIPLES AND REGULATORY MATTERS. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP"). These principles differ from statutory accounting
principles, which must be used by NFL, FLICA, NFIC and AICT (together, the
"Insurance Subsidiaries"), when reporting to state insurance departments. The
Insurance Subsidiaries are subject to oversight by insurance regulators of
Delaware, Mississippi, Texas and other states in which they are authorized to
conduct business. These regulators perform triennial examinations of the
statutory financial statements and, as a result, may propose adjustment to such
statements.
INVESTMENTS. In 1994, the Company's fixed maturity portfolio was segregated
into two components: fixed maturities held-to-maturity and fixed maturities
available-for-sale. During 1995, the Company's held-to-maturity portfolio was
reclassified as available-for-sale; therefore, fixed maturities
available-for-sale are carried at market value. Changes in aggregate unrealized
appreciation or depreciation on fixed maturities available for sale are reported
directly in stockholders' equity, net of applicable deferred income taxes.
Equity securities (common and nonredeemable preferred stocks) are carried at
market value. The Company's 40% equity investment in FHC was accounted for on
the equity basis (i.e., cost adjusted for equity in post-acquisition earnings
and amortization of excess cost) in 1995 and on a consolidated basis for the
period subsequent to the acquisition of the remaining 60% of FLICA's parent FHC
on May 31, 1996. Changes in market values of equity securities, after deferred
income tax effects, are reflected as unrealized appreciation or depreciation
directly in stockholders' equity and, accordingly, have no effect on current
operations. Mortgage loans on real estate and policy loans are carried at the
unpaid principal balance. Accrual of interest income ceases when loans are
ninety days or more past due. Foreclosed assets are carried at the lower of fair
value or unpaid principal balance, less necessary costs to effect foreclosure.
Realized gains and losses on sales of investments are recognized in current
operations on the specific identification basis.
F-8
<PAGE> 84
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS ("DPAC"). Policy acquisition costs
consisting of commissions and other policy issue costs, which vary with and are
primarily related to the production of new business, are deferred and amortized
over periods not to exceed the estimated premium-paying periods of the related
policies. Also included in deferred policy acquisition costs is the cost of
insurance purchased on acquired business. The amortization of these costs is
based on actuarially estimated future premium revenues, and the amortization
rate is adjusted monthly to reflect actual experience. Projected future levels
of premium revenue are estimated using assumptions as to interest, mortality,
morbidity and withdrawals consistent with those used in calculating liabilities
for future policy benefits.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT. Leasehold improvements and equipment
are stated at cost less accumulated depreciation and amortization. Depreciation
of equipment is computed using the straight-line method over the estimated
useful lives (three to seven years) of the assets. Leasehold improvements are
amortized over the estimated useful lives of the related assets or the period of
the lease, whichever is shorter. Maintenance and repairs are expensed as
incurred and renewals, and betterments which materially extend the useful life
of the underlying assets are capitalized.
FUTURE POLICY BENEFITS AND CLAIMS. Liabilities for future policy benefits
not yet incurred are computed primarily using the net level premium method
including actuarial assumptions as to investment yield, mortality, morbidity and
withdrawals.
Claims represent the estimated liabilities on claims reported plus claims
incurred but not yet reported. These liabilities are subject to the impact of
future changes in claim experience and, as adjustments become necessary, they
are reflected in current operations.
RECOGNITION OF REVENUE. Life insurance and accident and health premiums are
recognized as revenue when received. Benefits and expenses are associated with
related premiums so as to result in a proper matching of revenues with expenses.
Fee and service income and investment income are recognized when earned.
USE OF ESTIMATES. 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INCOME TAXES. The Company records income taxes based on the asset and
liability approach which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequence of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
EARNINGS PER SHARE. Primary net income per share of Common Stock is
determined by dividing net income, less dividends on the issued and outstanding
shares of Series A Preferred Stock, by primary weighted-average shares
outstanding. Fully diluted net income per share is computed by dividing net
income before dividends by fully diluted weighted average shares outstanding,
which assumes conversion of the Series A Preferred Stock. At the December 31,
1994, the Series A Preferred Stock was convertible at $8.75 per share, resulting
in 2,285,720 additional shares. The additional average shares outstanding were
measured from the April 12, 1994 issue date, through December 31, 1994. At
December 31, 1995, as a result of the February 28, 1995 Common Stock issuance,
the conversion price was adjusted to $8.41 per share resulting in 2,378,120
additional shares.
RECLASSIFICATIONS. Certain reclassifications have been made to 1995 and
1994 amounts in order to conform to 1996 financial statement presentation.
F-9
<PAGE> 85
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENTS
Major categories of investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Fixed maturities........................ $6,607 $6,542 $5,064
Mortgage loans on real estate........... 62 71 83
Short-term investments.................. 513 250 489
Interest on receivables from agents..... 1,201 400 --
Other................................... 584 424 308
------ ------ ------
8,967 7,687 5,944
Less: Investment expenses............. 231 266 180
------ ------ ------
Net investment income................. $8,736 $7,421 $5,764
====== ====== ======
</TABLE>
Realized gains (losses) on investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Fixed maturities........................ $(146) $185 $320
Equities................................ 238 -- --
Short-term investments.................. -- (3) --
Other long-term investments............. 4 -- --
----- ---- ----
Realized gains on investments........... $ 96 $182 $320
===== ==== ====
</TABLE>
Unrealized appreciation on investments reflected directly in stockholders'
equity is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- ------
<S> <C> <C>
Balance at beginning of year............ $ 2,593 $ (147)
Unrealized (depreciation) appreciation,
net of tax, on fixed maturities
available-for-sale.................... (1,328) 2,735
Unrealized (depreciation) appreciation,
net of tax, on equity securities and
other investments..................... (208) 5
------- ------
Balance at end of year.................. $ 1,057 $2,593
======= ======
</TABLE>
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (the "Statement"). This Statement requires all debt
securities and certain equity securities to be classified in three categories
and accounted for as follows:
- - Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
F-10
<PAGE> 86
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- - Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity.
The Company does not engage in "trading" of securities, and accordingly,
all of the applicable investments have been categorized as held-to-maturity
securities or as available-for-sale securities at December 31, 1994 and as
available-for-sale securities at December 31, 1996 and 1995.
In accordance with the Statement, the cumulative effect of recording the
difference between estimated market value and amortized cost at January 1, 1994
of securities classified as available-for-sale to a separate component of
stockholders' equity has been treated as a change in accounting principle and no
restatement of prior year financial statements has been made. Additionally, in
accordance with the statement, all investments categorized as held-to-maturity
were transferred to the available-for-sale category at December 31, 1995.
Estimated market values represent the closing sales prices of marketable
securities. Estimated market values are based on the credit quality and duration
of marketable securities deemed comparable by the Company, which may be of
another issuer.
The amortized cost and estimated market values of investments in fixed
maturities as of December 31, 1996 and 1995, are summarized by category as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and governmental
agencies and authorities.............. $12,813 $ 227 $ 53 $12,987
States, municipalities, and political
subdivisions.......................... 518 -- -- 518
Finance companies....................... 24,545 487 159 24,873
Public utilities........................ 10,818 215 17 11,016
Mortgage-backed securities.............. 12,950 234 63 13,121
All other corporate bonds............... 28,376 879 173 29,082
Certificates of deposit................. 350 -- -- 350
------- ------ ---- -------
Balance at December 31, 1996............ $90,370 $2,042 $465 $91,947
======= ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and governmental
agencies and authorities.............. $23,365 $1,226 $ 8 $24,583
States, municipalities, and political
subdivisions.......................... 1,510 122 -- 1,632
Mortgage-backed securities.............. 10,756 390 71 11,075
Public utilities........................ 8,241 519 60 8,700
Finance companies....................... 18,224 719 198 18,745
All other corporate bonds............... 20,764 1,236 255 21,745
Certificates of deposit................. 300 -- -- 300
------- ------ ---- -------
Balance at December 31, 1995............ $83,160 $4,212 $592 $86,780
======= ====== ==== =======
</TABLE>
F-11
<PAGE> 87
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of investments in
available-for-sale fixed maturities as of December 31, 1996, are shown below, in
thousands, summarized by year to maturity. Mortgage-backed securities are listed
separately. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................. $ 2,585 $ 2,602
Due after one year through five years... 25,131 25,395
Due after five years through ten
years................................. 29,131 29,621
Due after ten years..................... 20,573 21,208
Mortgage-backed securities.............. 12,950 13,121
------- -------
$90,370 $91,947
======= =======
</TABLE>
A summary of unrealized appreciation reflected directly in stockholders'
equity at December 31, 1996 and 1995, on investments in fixed maturities
available-for-sale, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Amortized cost.......................... $90,370 $83,160
Estimated market value.................. 91,947 86,780
------- -------
Excess of market value to amortized
cost.................................. 1,577 3,620
Estimated tax........................... 552 1,267
------- -------
Unrealized appreciation, net of tax..... $ 1,025 $ 2,353
======= =======
</TABLE>
Proceeds from sales of investments in fixed maturity securities were
$57,869,000 in 1996 and $9,682,000 in 1995. Gross gains of $793,000 and gross
losses of $697,000 were realized on 1996 investment sales. Gross gains of
$255,000 and gross losses of $73,000 were realized on 1995 investment sales. The
specific identification method is utilized to determine realized gains and
losses on sales of investments.
Included in fixed maturities at December 31, 1996 and 1995, are high-yield,
unrated or less than investment grade corporate debt securities comprising less
than 1.5% and 0.7% of total cash and invested assets at December 31, 1996 and
1995, respectively.
Securities on deposit with insurance regulators in accordance with
statutory requirements at December 31, 1996 and 1995 had a par value totaling
$21,870,000 and $19,920,000, respectively.
In connection with the Credit Agreement (see NOTE 6 -- FINANCING
ACTIVITIES, Credit Agreement), the Company has funds that are restricted as to
withdrawal and as to use for current operations consisting of cash of $0.3
million and short-term investments of $4.9 million as of December 31, 1996.
These balances are held as collateral for the amounts borrowed under the Credit
Agreement.
NOTE 3 -- ACQUISITIONS
ACQUISITION OF REMAINING INTEREST OF FHC
On May 31, 1996, the Company completed the acquisition of the 60% of
Freedom Holding Company ("FHC") it did not already own. FHC is a holding company
which owns 100% of FLICA, a Mississippi domiciled insurer licensed in 34 states.
The purchase price was $6.3 million in cash, and the transaction was accounted
for under the purchase method. Prior to the acquisition, the Company accounted
for its 40%
F-12
<PAGE> 88
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment in FHC using the equity method. The Company's portion of FHC's
earnings prior to the acquisition in 1996 accounted for using the equity method
was $74,000 in 1996, $348,000 in 1995 and $345,000 in 1994. The Company received
a $120,000 dividend in 1995 from FHC.
Beginning June 1, 1996, the results of operations of FHC have been
reflected in the Company's Consolidated Statements of Operations and of Cash
Flows. The present value of future profits associated with the purchase are
being amortized in relation to premium revenues over the remaining life of the
business. At the time of the acquisition, the Company, through an insurance
subsidiary, reinsured the majority of business underwritten by FLICA. Subsequent
to the acquisition of the remaining interest of FHC, the coinsurance agreements
between FLICA and NFL were cancelled. The acquisition did not have a material
pro-forma impact on operations.
ACQUISITION OF NFIC AND AICT
On April 12, 1994, Westbridge consummated the acquisition (the
"Acquisition") of all of the outstanding capital stock of NFIC and its
wholly-owned subsidiary AICT. The purchase price for the Acquisition
approximated $20.1 million, and was paid in cash. The Acquisition was accounted
for under the purchase method and, accordingly, the operating results of NFIC
and AICT have been included in the consolidated operating results since the date
of Acquisition.
During 1995, the Company revised the assumptions used in calculating the
future policy benefits and claims liabilities for NFIC and AICT. These changes
resulted in a net purchase accounting adjustment of approximately $13.4 million.
The funds used to acquire NFIC and AICT were provided by the issuance of
Series A Preferred Stock (see NOTE 8).
The following summary, prepared on a pro-forma basis, combines the
consolidated results of operations of NFIC and AICT with the operations of the
Company, after including the impact of certain adjustments, such as amortization
of deferred acquisition costs, dividends on the Series A Preferred Stock, and
factually supportable expense reductions resulting from the consolidation of
administrative operations. The following results assume the Acquisition occurred
as of the beginning of the respective period.
PRO-FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Total Revenues.......................... $115,466
Income applicable to common
stockholders.......................... 5,483
Net income per common share:
Primary............................... $ 1.19
Fully diluted......................... $ 1.03
</TABLE>
The pro-forma financial information is presented for informational purposes
only and is not necessarily indicative of what actually would have occurred if
the Acquisition had been in effect for the entire period presented. In addition,
the pro-forma financial information is not intended to be a projection of future
results.
F-13
<PAGE> 89
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION OF A BLOCK OF CANCER AND SPECIFIED DISEASE INSURANCE BUSINESS
On February 8, 1994, NFL completed its purchase of a block of Critical Care
and Specified Disease Insurance from Dixie National Life Insurance Company. The
purchase price for the block was $2,125,000. This acquisition has been accounted
for using the purchase method of accounting.
NOTE 4 -- MARKETING OPERATIONS
LIFESTYLES MARKETING GROUP, INC. JOINT VENTURE
In September 1987, NFL consummated an agency contract with LifeStyles
Agency of Arlington, Texas ("LifeStyles Marketing") granting its agency force
the exclusive right, subject to territorial production requirements, to sell
NFL's Medical Expense Products developed in 1987 and 1988. During the second
quarter of 1988, the Company agreed with the owners of LifeStyles Marketing to
restructure the insurance agency as a joint venture. Under the terms of the
definitive agreement consummated in November 1988, WMC, a wholly-owned
subsidiary of the Company, holds a 51%-voting interest in the entity, LifeStyles
Marketing.
The Company provides financing to LifeStyles Marketing in its expansion
efforts. LifeStyles Marketing's revenues and expenses during 1996 approximated
$13,295,000 and $12,373,000, respectively. Revenues and expenses were $9,115,000
and $8,397,000 in 1995 and $7,246,000 and $7,130,000 in 1994, respectively. Of
the revenues received, $11,098,000 were derived from NFL in the form of
commission income on insurance products sold for NFL during 1996, $7,664,000 in
1995 and $5,561,000 in 1994. Through December 31, 1996, the Company had loaned
LifeStyles Marketing approximately $5,193,000 in the form of advances which
accrue interest at prime plus 1%. Prime equaled 8.25% at December 31, 1996.
These advances will be repaid in the future through positive cash flows
generated from renewal commissions, from advanced commissions from
non-affiliated insurance carriers, and if and when profits are recognized from
continuing operations.
Under the terms of the joint venture agreement, profits and losses of
LifeStyles Marketing are to be allocated 50% to WMC and 50% to the minority
shareholders. However, because of the Company's voting and financial control,
the operations of the joint venture are consolidated with the Company's
operations and, accordingly, all significant intercompany accounts and
transactions are eliminated.
The minority interest share of pre-tax income recognized by the Company is
$247,000 at December 31, 1996. The Company had, prior to 1996 recognized 100% of
the cumulative losses of LifeStyles Marketing. During 1996, those cumulative
losses were fully recovered through earnings.
SENIOR BENEFITS, LLC
In November 1993, the Company acquired a 50% ownership interest in Senior
Benefits. In June 1996, the Company acquired the remaining 50% ownership
interest in Senior Benefits. Senior Benefits' revenue and expenses were
$1,593,000 and $1,358,000 during 1996, and $1,005,000 and $1,105,000 during 1995
and $278,000 and $547,000 during 1994, respectively. Senior Benefits primarily
markets Medicare Supplement products for NFL and began marketing products in
late 1996 for non-affiliated insurance carriers. Of the revenues received,
$770,000 were derived from NFL in the form of commission income on insurance
products sold during 1996 ($982,000 in 1995 and $271,000 in 1994.) Through
December 31, 1996, the Company had loaned Senior Benefits approximately $579,000
in the form of working capital advances. These advances will be repaid in the
future through positive cash flows generated from renewal commissions, from
advanced commissions from non-affiliated insurance carriers, and if and when
profits are recognized from continuing operations.
F-14
<PAGE> 90
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEALTH CARE-ONE INSURANCE AGENCY, INC.
In 1995, the Company formed a joint venture and holds a 50% interest in
Health Care-One, which markets insurance products for non-affiliated insurance
carriers. The Company is providing financing to Health Care-One during the
start-up phase of operations. Health Care-One's revenue and expenses were
$4,365,000 and $4,121,000 respectively, in 1996. Health Care-One's operations
were not significant in 1995. Through December 31, 1996, the Company had loaned
Health Care-One approximately $1,230,000 in the form of first-year commission
advances. These advances will be repaid in the future through positive cash
flows generated from renewal commissions, from advanced commissions from
non-affiliated insurance carriers, and if and when profits are recognized from
continuing operations. The minority interest in pre-tax income subject to
profit-sharing and recognized by the Company is $44,000 at December 31, 1996.
HEALTH CARE-ONE MARKETING GROUP, INC.
In February 1996, the Company formed a joint venture and holds an 80%
ownership interest in Health Care Marketing. Health Care Marketing commenced
operations in March 1996. Health Care Marketing's operations were not
significant in 1996. The Company will advance money to Health Care Marketing to
fund operations. These advances will be repaid in the future through positive
cash flows generated from renewal commissions, from advanced commissions from
non-affiliated insurance carriers, and if and when profits are recognized from
continuing operations.
NOTE 5 -- FUTURE POLICY BENEFITS
Future policy benefits have been calculated using assumptions (which
generally contemplate the risk of adverse deviation) for withdrawals, interest,
mortality and morbidity appropriate at the time the policies were issued. The
more material assumptions pertinent thereto are as follows:
LIFE PRODUCTS
Withdrawals Standard industry tables are used for issues through 1975. Company
experience is used for issues subsequent to 1975.
Interest Level 4% for issues through 1965; level 4.5% for 1966 through 1969
issues, and 6% graded to 4.5% in 25 years for 1970 through 1981
issues. Issues for 1982 through 1987 are 10% graded to 7% at year
10. ART issues in 1988 and later are 8.5% for 5 years graded to
7.5% in year 20. Participating policies are 4.5% for issues
through 1965; 5% for 1966 through 1969 issues, and graded from 6%
to 5% in 25 years for issues subsequent to 1969; 1995 and later
issues are 6% level.
Mortality Based on modifications of the 1955-1960 Select and Ultimate Basic
Tables and, for certain issues from 1975 through 1981,
modifications of the 1958 CSO. Issues for 1981 through 1994 use
modifications of the 1965-1970 Select and Ultimate Basic Tables.
Issues subsequent to 1994 use modifications of the 1975-1980
Ultimate Basic Tables.
ACCIDENT AND HEALTH PRODUCTS
Withdrawals Issues through 1980 are based on industry experience; 1981 through
1996 issues are based on industry experience and Company
experience, where available. Policies acquired in acquisitions
are based on recent experience of the blocks acquired.
Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most 1981
through 1992 issues are 10% graded to 7% in 10 years except for
certain NationalCare and Supplemental Hospital Income issues which
are 8% graded to 6% in 8 years and LifeStyles Products which are
9% graded to 7%
F-15
<PAGE> 91
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in 10 years. 1993 and later issues are 7% level. Policies acquired
from AII in 1992 are 6.4% level. Policies acquired from LHI in
1993 and DNL in 1994 are 6% level. Policies acquired in the
Acquisition of NFIC and AICT are 7% level.
Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues
subsequent to 1980 through 1992 use the 1965-1970 Ultimate Table.
1993 and later issues use the 1975-1980 Ultimate Table. Policies
acquired in acquisitions use the 1965-1970 Ultimate Table.
Morbidity Based on industry tables published in 1974 by Tillinghast, Nelson
and Warren, Inc., as well as other population statistics and
morbidity studies.
NOTE 6 -- FINANCING ACTIVITIES
COMMON STOCK OFFERING
On February 28, 1995, the Company issued 1,500,000 shares of its Common
Stock in an underwritten public offering. The Shares of Common Stock were issued
at a price of $7.00 per share, less an underwriting discount of $.42 per share.
As a result of the issuance of the Common Stock, the conversion rate of the
Series A Preferred Stock has been adjusted. The Series A Preferred Stock is now
convertible into 2,378,120 shares of Common Stock at a conversion price of $8.41
per share.
SUBORDINATED NOTES
On February 28, 1995, the Company issued $20,000,000 aggregate principal
amount of its 11% Senior Subordinated Notes due 2002 (the "Notes") in an
underwritten public offering. The Notes were issued at par, less an underwriting
discount of 4%.
The Company may redeem the Notes at any time on or after March 1, 1998,
upon 30-days written notice, at par plus accrued interest. Following the death
of any holder of the Notes and the request for repayment, the Company will repay
such holder's Notes at par plus accrued interest. The Company is not obligated
to redeem more than $50,000 in principal amount per holder per calendar year or
in aggregate for all holders more than $250,000 in principal amount per calendar
year. The Notes contain certain covenants which limit the Company's ability to,
(i) incur certain types of indebtedness, (ii) pay dividends or make
distributions to holders of the Company's equity securities, or (iii)
consolidate, merge, or transfer all or substantially all of the Company's
assets. The Notes also contain covenants which require the Company to maintain,
(i) a minimum amount of liquid assets, (ii) a minimum consolidated net worth,
and (iii) a minimum fixed charge ratio.
SUBORDINATED DEBENTURES
In March 1986, the Company completed a public offering of 25,000 Units
consisting of $25 million principal amount of 11.70% Senior Subordinated
Debentures due 1996 (the "Debentures") and warrants to purchase 800,000 shares
of the Company's Common Stock (the "Warrants") at $12.25 per share. The Warrants
expired unexercised on March 15, 1991.
In August 1987, NFL purchased, in an open market transaction, $5 million
par value of the Debentures. For GAAP reporting purposes, the purchased
Debentures were no longer treated as part of the Company's consolidated debt.
In February 1994, NFL sold at par value, to an unrelated party, the $5
million par value of the Debentures held in its portfolio. This transaction has
been accounted for, on a consolidated basis as an issuance of debt.
Concurrent with the Common Stock and Note offerings, on February 29, 1995,
the Company placed funds in escrow sufficient to cover all remaining principal
and interest payments on its outstanding 11.7%
F-16
<PAGE> 92
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Debentures due 1996, which were called for redemption on
March 30, 1995. The redemption price was par plus accrued interest. This
redemption prior to scheduled maturity resulted in a loss from early
extinguishment of debt. The loss related to amortization of the remaining
original issue discount and write-off of deferred financing costs, offset in
part by interest earned on the funds in escrow. This loss is reported as an
extraordinary item on the accompanying statement of operations.
SENIOR NOTE
On December 22, 1995, the Company issued a $1 million principal amount 10%
Senior Note due 2002 (the "Senior Note") to the Chairman of the Board of
Directors, a related party. The Senior Note was issued at par. In connection
with the Senior Note issuance, the Company also issued a Common Stock purchase
Warrant for 135,501 shares of Common Stock at an exercise price of $7.38 per
share.
Interest payments on the Senior Note prior to the third anniversary of the
commencement date are added to the principal amount of the Senior Note.
Subsequent to the third anniversary date, interest payments on the accumulated
interest and principal are due on a semi-annual basis. The Senior Note may be
prepaid in whole or in part without premium or penalty. Following the death of
the holder of the Senior Note and request for payment, the Company will repay
the Senior Note within one year of notification provided that the Company is,
or, after giving effect to such prepayment would not be in default under any
Senior Indebtedness.
CREDIT ARRANGEMENT
The Company has a $20 million Credit Agreement (the "Agreement") which is
secured by receivable balances from insurance agents which expires on January 7,
1998. A commitment fee of 1/2 of 1% is applied against the unused portion. At
the Company's option, interest under the Agreement may be based on prime rate or
LIBOR plus an applicable margin. The rate in effect at December 31, 1996, was
approximately 8.5%. The Company had approximately $11.6 million outstanding
under the Agreement at December 31, 1996. The Agreement required the Company,
among other things, to maintain minimum levels of statutory surplus, tangible
net worth and certain minimum financial ratios. (See discussion of restricted
funds in NOTE 2 -- INVESTMENTS).
CEDING ALLOWANCE PAYABLE
In connection with a Coinsurance Funds Withheld Reinsurance Agreement (see
NOTE 13), $8.6 million in ceding allowance is due to a reinsurer at December 31,
1996. This amount is repaid, inclusive of interest at 12.5%, as statutory
profits emerge on the reinsured block of business. The policies covered by this
Agreement are subject to recapture at any time, at the option of the Company,
upon repayment of the then outstanding ceding allowance and payment of the
applicable recapture fee.
F-17
<PAGE> 93
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending
claim reserve balances, on a gross-of-reinsurance basis, for 1996, 1995 and
1994, to the amounts reported in the Company's balance sheet (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at January 1 (Gross).......................... $39,063 $41,387 $12,794
Less: reinsurance recoverables...................... 3,419 1,457 65
------- ------- -------
Net balance at January 1.............................. 35,644 39,930 12,729
Incurred related to:
Current year........................................ 80,821 67,239 59,830
Prior years......................................... 14,242 2,698 (1,381)
------- ------- -------
Total incurred.............................. 95,063 69,937 58,449
------- ------- -------
Current year reserves acquired........................ 788 -- 33,032
Paid related to:
Current year........................................ 68,199 46,755 42,919
Prior years......................................... 25,297 27,468 10,655
Current year acquired business...................... 269 -- 10,706
------- ------- -------
Total paid.................................. 93,765 74,223 64,280
------- ------- -------
Balance at December 31................................ 37,730 35,644 39,930
Plus: reinsurance recoverables...................... 1,456 3,419 1,457
------- ------- -------
Balance at December 31 (Gross)........................ $39,186 $39,063 $41,387
======= ======= =======
</TABLE>
NOTE 8 -- REDEEMABLE PREFERRED STOCK
On April 12, 1994, the Company issued 20,000 shares of Series A Cumulative
Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred
Stock"), at a price of $1,000 per share. The Series A Preferred Stock was issued
in a private placement and was subsequently registered with the Securities and
Exchange Commission under a registration statement which was declared effective
in October 1994. The following summarizes the significant terms of the Series A
Preferred Stock:
- Liquidation preference of $1,000 per share.
- Cumulative annual dividend rate of 8.25%, subject to increase upon
non-compliance by the Company with certain restrictions.
- At December 31, 1994, the Series A Preferred Stock was convertible by the
holders thereof into the 2,285,720 shares of the Company's Common Stock
at a conversion price of $8.75 per share. As a result of the Common Stock
offering in 1995, the conversion price was adjusted to $8.41 per share.
The Series A Preferred Stock were convertible into 2,378,120 shares of
Common Stock as of December 31, 1995 and 1996.
- On or after April 12, 1995, the Series A Preferred Stock may, at the
option of the Company, be exchanged for an amount of Convertible
Subordinated Notes due April 12, 2004, equal to the aggregate liquidation
preference of the Series A Preferred Stock being exchanged. The
Convertible Subordinated Notes would bear interest at 8.25% and be
convertible into Common Stock at a price of $8.41 per share, in each
case, subject to certain adjustments.
F-18
<PAGE> 94
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The Company is required to redeem all shares of Series A Preferred Stock,
or any Convertible Subordinated Notes outstanding on April 12, 2004.
- The Company may redeem any and all shares of Series A Preferred Stock
outstanding on or after April 12, 1997.
In connection with the issuance of the Series A Preferred Stock, the
placement agent was granted a warrant to purchase 120,000 shares at $8.75 per
share, subject to certain adjustments. As a result of the February 28, 1995
Common Stock issuance, the conversion price of the Warrant was adjusted to $8.41
per share.
NOTE 9 -- DEFERRED POLICY ACQUISITION COSTS
A summary of DPAC by major product line of insurance follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ----------------
ACCIDENT ACCIDENT ACCIDENT
AND AND AND
LIFE HEALTH LIFE HEALTH LIFE HEALTH
----- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year..................... $ 205 $ 56,772 $ 31 $ 58,623 $ 36 $28,318
Deferrals:
Commissions.............. 430 39,423 122 16,517 2 7,465
Issue costs.............. 63 5,222 30 6,484 3 1,535
----- -------- ---- -------- ---- -------
698 101,417 183 81,624 41 37,318
Cost of insurance
purchased................ -- 4,663 -- 126 -- 31,006
Purchase accounting
adjustment............... -- -- -- (13,403) -- --
Amortization expense....... (129) (22,778) 22 (11,575) (10) (9,701)
----- -------- ---- -------- ---- -------
Balance at end of year..... $ 569 $ 83,302 $205 $ 56,772 $ 31 $58,623
===== ======== ==== ======== ==== =======
</TABLE>
The cost of insurance purchased in 1996 is related to the acquisition of
the remaining 60% ownership interest in FHC and its wholly-owned insurance
subsidiary, FLICA, which was not previously owned by the Company. This amount is
being amortized in relation to premium revenue over the remaining life of the
business. Interest accrues on the unamortized balance at 7% per year.
Amortization of this cost of insurance purchased was approximately $346,000 in
1996, net of interest accretion of $180,000.
The cost of insurance purchased in 1994 is related to the purchase of NFIC
and AICT and is being amortized in relation to premium revenues over the
remaining life of the business. Interest accrues on the unamortized balance at
7% per year. Amortization of this cost of insurance purchased was approximately
$1.8 million, $2.3 million and $3 million in 1996, 1995 and 1994, respectively,
net of interest accretion of $0.5 million, $1.3 million and $1.5 million.
During 1995, the Company recorded purchase accounting adjustments to the
allocation of the purchase price of NFIC and AICT as these adjustments fell
within the allocation period following the acquisition, in accordance with
Statement of Financial Accounting Standard No. 38 "Accounting for Preacquisition
Contingencies of Purchased Enterprises."
The estimated amortization of the cost of insurance purchased is 15% to 20%
of each years' beginning balance for a period of five years subsequent to the
date of acquisition.
F-19
<PAGE> 95
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES
The provision for income taxes is calculated as the amount of income taxes
expected to be payable for the current year plus (or minus) the deferred income
tax expense (or benefit) represented by the change in the deferred income tax
accounts at the beginning and end of the year. The effect of changes in tax
rates and federal income tax laws are reflected in income from continuing
operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and
future deductible temporary differences (assets) are separately calculated and
recorded when such differences arise. A valuation allowance, reducing any
recognized deferred tax asset, must be recorded if it is determined that it is
more likely than not that such deferred tax asset will not be realized.
The Company and its wholly-owned subsidiaries, other than NFIC, AICT and
FLICA, file a consolidated federal income tax return. NFIC, AICT and FLICA file
separate federal income tax returns.
The provision for (benefit from) U.S. federal income taxes charged to
continuing operations was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current.................................................. $ (804) $1,032 $1,581
Deferred................................................. 5,214 1,781 1,183
------ ------ ------
Total provision for income taxes......................... $4,410 $2,813 $2,764
====== ====== ======
</TABLE>
Provision has not been made for state and foreign income tax expense since
such expense is minimal.
The differences between the effective tax rate and the amount derived by
multiplying the income before income tax expense by the Federal income tax rate
for the Company's last three years follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34% 34% 34%
Small life insurance company deduction calculated as a
percentage of life insurance company income............... -- -- (5%)
Unutilized loss carryforwards of non-life companies......... -- -- 2%
Equity earnings of unconsolidated subsidiary................ -- (1%) (1%)
Other items, net............................................ 1% -- --
---- ---- ----
Effective tax rate.......................................... 35% 33% 30%
==== ==== ====
</TABLE>
F-20
<PAGE> 96
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are recorded for temporary differences between the financial
reporting basis and the federal income tax basis of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Deferred Tax Liabilities:
Deferred policy acquisition costs......................... $18,581 $ 8,683
Invested assets........................................... 231 604
Unrealized gain on investments............................ 553 1,300
Other deferred tax liabilities............................ 1,822 1,950
------- -------
Total deferred tax liability...................... 21,187 12,537
------- -------
Deferred Tax Assets:
Policy reserves........................................... 7,196 3,296
Net operating loss carryforwards.......................... 8,296 6,960
Tax credit carryforwards.................................. 11 11
Other deferred tax assets................................. 263 1,307
Valuation allowance....................................... (4,878) (4,878)
------- -------
Total deferred tax asset.......................... 10,888 6,696
------- -------
Net deferred tax liability.................................. $10,299 $ 5,841
======= =======
</TABLE>
A valuation allowance has been provided for 1996 and 1995, respectively,
for the tax effect of a portion of the non-life loss carryovers since it is more
likely than not that such benefits will not be realized.
Under the provisions of pre-1984 life insurance tax regulations, NFL was
taxed on the lesser of taxable investment income or income from operations, plus
one-half of any excess of income from operations over taxable investment income.
One-half of the excess (if any) of the income from operations over taxable
investment income, an amount which was not currently subject to taxation, plus
special deductions allowed in computing the income from operations, were placed
in a special memorandum tax account known as the policyholders' surplus account.
The aggregate accumulation in the account at December 31, 1996, approximated
$2.5 million. Federal income taxes will become payable on this account at the
then current tax rate when and to the extent that the account exceeds a specific
maximum, or when and if distributions to stockholders, other than stock
dividends and other limited exceptions, are made in excess of the accumulated
previously taxed income. The Company does not anticipate any transactions that
would cause any part of the amount to become taxable and, accordingly, deferred
taxes which would approximate $875,000, have not been provided on such amount.
At December 31, 1996, NFL has approximately $12,782,000 in its shareholders
surplus account from which it could make distributions to the Company without
incurring any federal tax liability. The amount of dividends which may be paid
by NFL to the Company is limited by statutory regulations.
At December 31, 1996, the Company and its wholly-owned subsidiaries have
aggregate net operating loss carryforwards of approximately $24,411,000 and
$13,619,000 for regular tax and alternative minimum tax purposes, respectively,
which expire in 2001 through 2011.
NOTE 11 -- STATUTORY CAPITAL AND SURPLUS
Under applicable Delaware law, NFL must maintain minimum aggregate
statutory capital and surplus of $550,000. Under applicable Texas law, NFIC and
AICT must each maintain minimum aggregate statutory
F-21
<PAGE> 97
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital and surplus of $1.4 million. Under Mississippi law, FLICA is required to
maintain minimum statutory capital and surplus of $1 million. The State of
Georgia requires licensed out-of-state insurers to maintain minimum capital of
$1.5 million, and the Commonwealth of Kentucky requires minimum surplus of $2
million. These levels are higher than the requirements of any other states in
which the Insurance Subsidiaries are currently licensed. Accordingly, the
minimum aggregate statutory capital and surplus which NFL, NFIC and AICT must
each maintain is $3.5 million. FLICA must maintain a minimum of $4 million. At
December 31, 1996, aggregate statutory capital and surplus for NFL, NFIC, AICT
and FLICA was $14.4 million, $7.8 million, $8.2 million and $14.9 million,
respectively. Statutory net income (loss) for NFL, NFIC, AICT and FLICA for the
year ended December 31, 1996, was $1.7 million, $(2.2) million, $(0.1) million
and $7 million, respectively. FLICA through its parent FHC, is wholly-owned by
NFL, and AICT is wholly-owned by NFIC. Accordingly, statutory capital and
surplus of the parent includes the statutory capital and surplus of the
respective subsidiary.
Dividend payments from Westbridge's principal Insurance Subsidiaries are
regulated by the insurance laws of their domiciliary states. NFL is domiciled in
Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware
may not declare or pay a dividend or other distribution from any source other
than "earned surplus" without the state insurance commissioner's prior approval.
"Earned surplus" is defined as an amount equal to the unassigned funds of an
insurer as set forth on its most recent statutory annual statement, including
all or part of the surplus arising from unrealized capital gains or revaluation
of assets. NFIC and AICT are domiciled in Texas. An insurer domiciled in Texas
may pay dividends only out of "surplus profits arising from its business" to the
extent of net gains from operations, not including realized capital gains, for
the twelve month period ending as of the preceding December 31. Moreover,
insurers domiciled in either Delaware or Texas may not pay "extraordinary
dividends" without first providing the state insurance commissioner with 30-days
prior notice, during which time such commissioner may disapprove the payment. An
"extraordinary dividend" is defined as a dividend whose fair market value
together with that of other dividends made within the preceding 12-months
exceeds the greater of (a) ten percent of the insurer's surplus as regards
policyholders as of the preceding December 31 or (b) the net gain from
operations of such insurer, not including realized capital gains, for the
12-month period ending on the preceding December 31. FLICA is domiciled in
Mississippi. Under Mississippi Insurance Regulations, an insurer domiciled in
Mississippi may pay dividends limited to the lessor of 10% of statutory capital
and surplus or 100% of the statutory net income for the preceding year unless
prior written approval of the Commissioner is obtained. In September 1994, NFL
paid to Westbridge an "extraordinary dividend" in the amount of $2 million. With
respect to ordinary dividends payable by an insurer domiciled in Delaware,
notice of any dividend must be provided to the state insurance commissioner
within five business days following the declaration thereof and at least ten
days prior to the payment thereof.
As of December 31, 1996, NFL is precluded from paying dividends during 1997
without prior regulatory approval due to negative statutory "earned surplus" as
a result of historical statutory losses. For the foreseeable future, NFL has
agreed to seek the approval of the Delaware insurance commissioner prior to
making any dividend payments. As of December 31, 1996, NFIC and AICT are
precluded from paying dividends during 1997 without prior regulatory approval
due to statutory losses for the year ended December 31, 1996. FLICA has the
ability to pay NFL, without prior regulatory approval, $1,480,000 in dividends
during 1997, none of which has been paid.
In Delaware, Mississippi and Texas, the state insurance commissioner
reviews the dividends paid by each insurer domiciled in such commissioner's
state at least once each year to determine whether they are reasonable in
relation to the insurer's surplus as regards policyholders and quality of
earnings. The state insurance commissioner may issue an order to limit or
disallow the payment of ordinary dividends if such commissioner finds the
insurer to be presently or potentially financially distressed or troubled.
F-22
<PAGE> 98
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1990, the Company and NFL entered into an agreement under which
NFL issued a surplus certificate to the Company in the principal amount of
$2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid
aggregate principal under the surplus certificate bears interest at an agreed
upon rate not to exceed 10% and is repayable, in whole or in part, upon (i)
NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any
reinsurance agreements, and (ii) NFL receiving prior approval for repayment from
the Delaware State Insurance Commissioner. During 1993 and 1994, NFL received
such approval and repaid $2,086,000 to the Company. No principal payments were
made in 1995 or 1996. The unpaid aggregate principal under this surplus
certificate was $777,000 as of December 31, 1996 and 1995.
The statutory financial statements of the Insurance Subsidiaries are
prepared using accounting methods which are prescribed or permitted by the
insurance department of the respective companies' state of domicile. Prescribed
statutory accounting practices include a variety of publications of the NAIC as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company employed no permitted statutory accounting practices
that individually or in the aggregate materially affected statutory surplus or
risk-based capital at December 31, 1996 or 1995.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Company applies ABP Opinion No. 25 and related interpretations in
accounting for its stock options plans, which are described below. Accordingly,
no compensation cost has been recognized for its qualified stock option plans.
If compensation cost for the Company's stock option plans had been determined
based on the estimated market value at the grant dates for awards under those
plans consistent with the method provided by SFAS No. 123, the Company's net
income and earnings per share would have been reflected by the following pro
forma amounts for the year ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net income, as reported..................................... $8,261,000 $5,324,000
Net income, pro forma....................................... $8,037,000 $5,270,000
Primary earnings per share, as reported..................... $ 1.08 $ 0.63
Primary earnings per share, pro forma....................... $ 1.04 $ 0.62
Fully diluted earnings per share, as reported............... $ 0.97 $ 0.65
Fully diluted earnings per share, pro forma................. $ 0.94 $ 0.64
</TABLE>
The market value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1996 and 1995:
<TABLE>
<S> <C>
Dividend yield.............................................. 0%
Expected volatility......................................... 70.00%
Risk-free rate of return.................................... 5.80%
Expected life............................................... 5.0 years
</TABLE>
The Company adopted, as of July 1, 1982, an employee incentive stock option
plan (the "ISO Plan"). The ISO Plan authorizes the Company's Board of Directors
to issue to key full-time employees of the Company, or any of its subsidiaries,
non-transferrable options to purchase up to 580,000 (as adjusted to give effect
for stock dividends paid in 1983) shares, in the aggregate, of the Company's
Common Stock. Options granted under the ISO Plan are intended to qualify as
either "incentive stock options" under Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), or as non-qualified stock options as defined
under the Code. The ISO Plan provides that the option price per share will be no
less than the estimated
F-23
<PAGE> 99
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value for a share of the Company's Common Stock on the date of grant. To
date, all option prices have been equal to the estimated market value of the
stock on the date of grant. The ISO plan also provides that shares available
upon the exercise of options granted under the ISO Plan may be paid for with
cash or by tendering shares of Common Stock owned by optionee(s), or a
combination of the foregoing. All vested options outstanding are exercisable for
a period not to exceed ten years from the date the option was granted, except
that no option becomes exercisable until at least one year after its grant. In
addition, the ISO Plan provides that no one owning 10% of the total combined
voting power of all classes of the Company's stock, or of the stock of any
subsidiary, is eligible to be awarded options under the ISO Plan.
The Company also adopted, as of September 5, 1985, a second employee stock
option plan (as amended, the "1985 Plan"). The 1985 Plan provides for the
granting, to eligible employees of the Company or its subsidiaries, of stock
options to purchase up to a total of 200,000 shares of the Company's Common
Stock. Options granted under the 1985 Plan are treated as "non-qualified stock
options" for purposes of the Code and the option price per share shall not be
less than 90% of the estimated market value of the Company's Common Stock on the
date of grant. All options outstanding are exercisable within seven years from
the date the option was granted, except that no option is exercisable until at
least one year after its grant.
A third employee stock option plan was adopted as of March 26, 1992 (as
amended, the "1992 Plan"). The 1992 Plan provides for the granting, to eligible
employees of the Company or its subsidiaries, of stock options to purchase up to
a total of 300,000 shares of the Company's Common Stock. Options granted under
the 1992 Plan are treated as "non-qualified stock options" for purposes of the
Code and the option price per share shall not be less than 90% of the estimated
market value of the Company's Common Stock on the date of grant. All options
outstanding are exercisable within seven years from the date the option was
granted, except that no option is exercisable until at least one year after its
grant.
On April 19, 1996, the Company adopted a Restricted Stock Plan (the "1996
Plan"). This 1996 Plan provides for the granting of up to 1,000,000 shares of
Common Stock subject to certain restrictions and adjustments. The restricted
shares are subject to vesting requirements ("the restriction period") ranging
from six months for non-employee directors to sixty months for employees or
other authorized grantees. During the restriction period, the grantee may not
sell, assign, transfer, pledge, encumber or otherwise dispose of or hypothecate
such an award. Upon satisfaction of the vesting schedule and any other
applicable restrictions, terms or conditions, the grantee will be entitled to
receive the shares. There were no awards or grants of restricted shares during
1996 to employees. Non-employee directors were granted a total of 6,000
restricted shares during 1996.
F-24
<PAGE> 100
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Company's stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year............. 411,994 375,294 554,917
Options granted during the year:
Price granted at $5.40............................. -- 116,000 --
Price granted at $5.60............................. -- 6,000 --
Price granted at $6.84............................. -- -- 5,000
Price granted at $7.20............................. -- -- 5,000
Price granted at $7.65............................. -- -- 25,000
Price granted at $7.71............................. -- -- 5,000
Price granted at $8.25............................. 4,000 -- --
Options exercised during the year:
Price ranging from $1.88 to $5.18.................. (62,965) (85,300) (219,623)
Options canceled during the year:
Price ranging from $1.88 to $5.40.................. (16,500) -- --
------- ------- --------
Options outstanding at end of year................. 336,529 411,994 375,294
======= ======= ========
</TABLE>
At December 31, 1996, options for 76,529 shares were exercisable under the
stock options plans at a price ranging from $1.88 to $2.50 and options for
256,000 shares were exercisable at a price ranging from $5.18 to $7.71. Also, at
December 31, 1996, 1995 and 1994, options for 10,000, 6,000 and 128,000 shares,
respectively, remained available for future grant under the plans.
In September 1986, the Company established a retirement savings plan for
its employees. The plan permits all employees who have been with the Company for
at least one year to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. The plan allows employees to defer up to 3%
of their salary with partially matching discretionary Company contributions
determined by the Company's Board of Directors. Employee contributions are
invested in any of five investment funds at the discretion of the employee.
Company contributions are in the form of the Company's Common Stock. The
Company's contributions to the plan in 1996, 1995 and 1994 approximated
$102,000, $79,000, and $98,000, respectively.
NOTE 13 -- REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers
on both life and accident and health business. Reinsurance agreements are used
to limit maximum losses and provide greater diversity of risk. The Company
remains liable to policyholders to the extent the reinsuring companies are
unable to meet their treaty obligations. Total accident and health premiums of
$4,063,000, $2,807,000, and $1,703,000, were paid to reinsurers in 1996, 1995,
and 1994, respectively. Face amounts of life insurance in force approximated
$86,978,000, $43,441,000 and $21,814,000 at December 31, 1996, 1995 and 1994,
respectively. No life insurance was reinsured as of December 31, 1996, 1995 and
1994, respectively.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Agreement") effective July 1, 1996 on the
inforce Critical Care and Specified Disease business. The Agreement provided an
initial ceding commission of $10.5 million, of which $8.4 million was received
in cash. This ceding commission allowance will be repaid, inclusive of interest
at 12.5%, as statutory profits emerge from the reinsured block of business. For
the year ended December 31, 1996, the repayment approximated $1.9 million. The
ceding allowance payable at December 31, 1996, totaled $8.6 million, (see NOTE
6). The Company must maintain in trust, investments with an estimated market
value equal to 90% of the active life reserves on the reinsured business, which
at December 31, 1996, approximated $14.7 million.
F-25
<PAGE> 101
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon repayment of the initial ceding commission, statutory profits on the block
of business will be shared on a 50/50 quota share basis. The Agreement is
subject to recapture at anytime at the option of the Company.
In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a
wholly-owned subsidiary of FHC. Under the terms of the treaty, NFL assumed a 90%
pro-rata share of certain Critical Care and Specified Disease business. For the
years ended December 31, 1996, 1995 and 1994, $2,329,000, $5,058,000, and
$1,640,000, respectively, of assumed premiums under this coinsurance treaty are
included as premium revenue in the Consolidated Financial Statements. This
coinsurance treaty was cancelled subsequent to the acquisition of the remaining
interest of FLICA's parent FHC, on May 31, 1996.
In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the
terms of the treaty, NFL assumed a 50% pro-rata share of all insurance business
written by FLICA from January 1, 1987 through December 31, 1988. In November
1988 (see NOTE 3), the coinsurance treaty was amended to extend through 1997.
For the years ended December 31, 1996, 1995 and 1994, $1,673,000, $4,272,000,
and $4,607,000, respectively, of assumed premiums under the coinsurance treaty
are included as revenue in the consolidated financial statements. This
coinsurance treaty was cancelled subsequent to the acquisition of the remaining
interest of FLICA's parent FHC, on May 31, 1996.
In March 1990, NFL entered into a coinsurance treaty with Paramount Life
Insurance Company ("Paramount"). Under the terms of the treaty, which was in
effect from April 1, 1990 through May 31, 1995, NFL assumed 90% of the Critical
Care and Specified Disease policies written by Paramount. The treaty effectively
ended upon the purchase of this block of business by NFL from Paramount. For the
year ended December 31, 1996, 1995 and 1994, $0, $582,000 and $1,601,000,
respectively, of assumed premiums under this coinsurance treaty were recorded as
revenue.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating
leases, relating primarily to office facilities and data processing equipment
having a remaining term in excess of one year, at December 31, 1996, aggregated
$13,607,000. The amounts due by year are as follows: 1997 -- $3,024,000; 1998 --
$2,808,000; 1999 -- $2,402,000; 2000 -- $1,987,000; 2001 -- $1,155,000; and
thereafter -- $2,231,000. Aggregate rental expense included in the consolidated
financial statements for all operating leases approximated $4,166,000,
$3,413,000, and $2,953,000 in 1996, 1995 and 1994, respectively.
In the normal course of their business operations, the Insurance
Subsidiaries, continue to be involved in various claims, lawsuits (alleging
actual as well as substantial exemplary damages) and regulatory matters. In the
opinion of management, the disposition of these or any other legal matters will
not have a material adverse effect on the Company's business, consolidated
financial position or results of operations.
In the ordinary course of business, the Company has advanced commissions
and made loans to agents collateralized by future commissions. First-year
commission advances to agents are recorded as receivables from agents and
totaled $18.3 million as of December 31, 1996. Westbridge holds a secured
promissory note (the "Elkins Note"), from NFC Marketing, Inc. ("NFC"), an
Arkansas corporation which is wholly-owned by Elkins. The balance of this note
recorded on the books of the Company at December 31, 1996 is approximately
$702,000. The note, which was renegotiated in October 1994, represents principal
and accrued interest on a loan made by Westbridge to NFC for the purpose of
expanding its marketing efforts. The Company collects $20,000 per month until
this note and the related accrued interest is satisfied. Payment of the
principal and interest under the Elkins Note has been guaranteed by Elkins. In
addition, under the terms of a Security Agreement delivered to Westbridge by
NFC, following a default, Westbridge has the right to apply monies, balances,
credit or collections which it may hold for NFC on deposit, or which might
otherwise be payable to NFC by NFL (including, among other things, agents'
commissions payable by NFL to NFC), to offset the unpaid balance of the Elkins
Note.
F-26
<PAGE> 102
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- RECONCILIATION TO STATUTORY REPORTING
A reconciliation of net income as reported by the Insurance Subsidiaries
under practices prescribed or permitted by regulatory authorities and that
reported herein by the Company on a consolidated GAAP basis follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net income (loss) as reported by the insurance
subsidiaries on a regulatory basis.................... $ 870 $(6,296) $ 3,043
Additions to (deductions from) regulatory basis:
Future policy benefits and claims..................... (2,016) 166 1,264
FHC pre-acquisition statutory earnings................ (1,388) -- --
Deferred policy acquisition and development costs, net
of amortization.................................... 22,434 15,329 6,967
Deferred and uncollected premiums..................... (1,719) 138 (601)
Coinsurance Funds Withheld reinsurance treaty......... (7,336) -- --
Income taxes.......................................... (4,214) (2,837) (2,505)
Operations of affiliates.............................. 2,001 (1,355) (2,669)
Other, net............................................ (371) 179 926
------- ------- -------
Consolidated net income as reported herein on a GAAP
basis................................................. $ 8,261 $ 5,324 $ 6,425
======= ======= =======
</TABLE>
A reconciliation of capital and surplus reported by the Insurance
Subsidiaries under regulatory practices to stockholders' equity as reported
herein by Westbridge on a consolidated GAAP basis follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Capital and surplus as reported by the Insurance
Subsidiaries on a regulatory basis................. $ 18,648 $ 24,038 $ 23,564
Additions to (deductions from) a regulatory basis:
Future policy benefits and claims.................. 10 (9,723) (23,298)
Deferred policy acquisition and development
costs........................................... 83,952 34,333 55,305
Nonadmitted assets................................. 4,818 1,124 8,127
Coinsurance Funds Withheld reinsurance treaty...... (8,831) -- --
Income taxes....................................... (12,706) (9,447) (10,038)
Deferred, uncollected and advance premiums......... (12,651) 241 704
Asset valuation reserve............................ 1,157 823 1,644
Stockholders' equity of affiliates................. (31,494) (8,506) (41,071)
Other, net......................................... 5,000 9,922 11,418
-------- -------- --------
Consolidated stockholders' equity as reported herein
on a GAAP basis.................................... $ 47,903 $ 42,805 $ 26,355
======== ======== ========
</TABLE>
F-27
<PAGE> 103
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for each of the Company's last two
years of operations is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
------- ------- --------- --------
<S> <C> <C> <C> <C>
1996
Premium income................................... $35,410 $39,040 $40,688 $41,642
Net investment income............................ 2,116 2,191 2,283 2,146
Net realized gains (losses) on investments....... 85 116 (28) (77)
Fee, service and other income.................... 1,777 2,017 2,440 3,300
Benefits, claims and other expenses.............. 37,040 40,334 41,890 43,285
Preferred stock dividend......................... 413 412 412 413
Income applicable to common stockholders......... 1,160 1,585 1,858 2,008
Earnings per share:
Primary....................................... $ 0.19 $ 0.26 $ 0.30 $ 0.33
Fully diluted................................. $ 0.19 $ 0.23 $ 0.27 $ 0.28
1995
Premium income................................... $27,934 $28,876 $30,554 $32,729
Net investment income............................ 1,820 1,764 1,722 2,115
Net realized gains (losses) on investments....... (61) (11) 37 217
Fee, service and other income.................... 438 457 665 776
Benefits, claims and other expenses.............. 29,169 29,069 30,386 33,212
Net income before extraordinary item............. 724 1,418 1,796 1,793
Extraordinary loss from early extinguishment of
debt, net of income tax benefit............... 407 -- -- --
Preferred stock dividend......................... 413 412 413 412
Income (loss) applicable to common
stockholders.................................. (96) 1,006 1,383 1,381
Earnings per share:
Primary:
Income before extraordinary item.............. $ 0.06 $ 0.17 $ 0.23 $ 0.23
Extraordinary item............................ (0.08) -- -- --
Net earnings............................. $ (0.02) $ 0.17 $ 0.23 $ 0.23
Fully diluted:
Income before extraordinary item.............. $ 0.10 $ 0.17 $ 0.21 $ 0.21
Extraordinary item............................ (0.06) -- -- --
Net earnings............................. $ 0.04 $ 0.17 $ 0.21 $ 0.21
</TABLE>
F-28
<PAGE> 104
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN SO
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 15
Capitalization........................ 16
Price Range of Common Stock and
Dividend Policy..................... 17
Selected Financial and Operating
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 30
Management............................ 48
Principal Stockholders................ 55
Description of the Notes.............. 57
Description of Capital Stock.......... 65
Certain United States Federal Income
Tax Considerations.................. 70
Underwriting.......................... 72
Legal Matters......................... 73
Experts............................... 73
Available Information................. 73
Glossary of Insurance Terms........... 74
Financial Statements.................. F-1
</TABLE>
$65,000,000
[WESTBRIDGE CAPITAL CORP. LOGO]
[WESTBRIDGE CAPITAL CORP.]
7 1/2% CONVERTIBLE SUBORDINATED NOTES
DUE 2004
---------------------
PROSPECTUS
---------------------
FORUM CAPITAL MARKETS L.P.
RAYMOND JAMES &
ASSOCIATES, INC.
April 24, 1997
