SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
Commission File Number 1-8538
WESTBRIDGE CAPITAL CORP.
(Exact name of Registrant as specified in its Charter)
DELAWARE 73-1165000
(State of Incorporation) (I.R.S. Employer Identification No.)
777 Main Street, Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
817-878-3300
(Registrant's Telephone Number, including Area Code)
Not Applicable
(Former Name, Address and Former Fiscal Year, if changed since Last Report)
Indicate, by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO_____
Common Stock - Par Value $.10 6,224,044 Shares Outstanding at November 11, 1997
<PAGE>
4
Form 10-Q
Company or group of companies for which report is filed:
WESTBRIDGE CAPITAL CORP.
This quarterly report, filed pursuant to Rule 13a-13 and 15d-13 of the General
Rules and Regulations under the Securities Exchange Act of 1934, consists of the
following information as specified in Form 10-Q:
Page(s)
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1. Consolidated Balance Sheets at September 30, 1997,
December 31, 1996 and September 30, 1996. 3-4
2. Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996. 5
3. Consolidated Statements of Cash Flows for the Three and
Nine Months Ended September 30, 1997 and 1996. 6-7
4. Notes to Consolidated Financial Statements. 8-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 3 - Defaults Upon Senior Securities 22
Item 6 - Exhibits and Reports on Form 8-K 22
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------ ------------ ------------
(unaudited) (audited) (unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Investments:
Fixed Maturities:
Available-for-sale, at market value
(amortized cost $130,407, $90,370
and $90,541) $ 133,998 $ 91,947 $ 91,022
Equity securities, at market 5,573 1,596 1,594
Mortgage loans on real estate 398 658 671
Investment real estate 816 - -
Policy loans 277 282 271
Short-term investments 2,853 7,722 9,070
------------ ------------ ------------
Total Investments 143,915 102,205 102,628
Cash 6,060 1,013 7,499
Accrued investment income 2,588 1,889 1,589
Receivables from agents, net of allowance
for doubtful accounts 20,915 18,311 18,434
Deferred policy acquisition costs 84,771 83,871 78,701
Leasehold improvements and equipment, at
cost, net of accumulated depreciation and
amortization 1,327 1,311 1,403
Due from reinsurers 2,877 1,456 2,235
Commissions receivable 3,477 3,406 1,951
Deferred debt costs, net of accumulated
amortization 4,438 2,816 2,140
Deferred income taxes, net 1,617 - -
Other assets 5,139 4,438 8,022
------------ ------------ ------------
Total Assets $ 277,124 $ 220,716 $ 224,602
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------ ------------ ------------
(unaudited) (audited) (unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 55,985 $ 54,204 $ 56,039
Claims 53,090 39,186 39,935
------------ ------------ ------------
109,075 93,390 95,974
Accounts payable and accruals 6,181 2,496 2,832
Commission advances payable 6,306 4,368 1,789
Other liabilities 8,908 1,700 6,002
Deferred income taxes, net - 10,299 7,732
Notes payable 13,110 21,210 25,817
Senior subordinated notes, net of unamortized
discount, due 2002 19,422 19,350 19,328
Convertible subordinated notes, due 2004 70,000 - -
------------ ------------ ------------
Total Liabilities 233,002 152,813 159,474
------------ ------------ ------------
Redeemable Preferred Stock 19,000 20,000 20,000
------------ ------------ ------------
Stockholders' Equity:
Common stock ($.10 par value, 30,000,000
shares authorized; 6,224,039, 6,039,994
and 6,020,729 shares issued) 622 604 602
Capital in excess of par value 31,098 29,226 29,184
Unrealized appreciation of investments
carried at market value, net of tax 2,972 1,057 334
Retained (deficit) earnings (9,400) 17,186 15,178
------------ ------------ ------------
25,292 48,073 45,298
Less - Aggregate of shares held in treasury and
investment by affiliate in Westbridge Capital Corp.
common stock (28,600 at September 30, 1997,
December 31, 1996, and September 30, 1996), at cost (170) (170) (170)
------------ ------------ ------------
Total Stockholders' Equity 25,122 47,903 45,128
------------ ------------ ------------
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $ 277,124 $ 220,716 $ 224,602
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
5
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Premiums:
First-year $ 8,618 $ 16,059 $ 30,447 $ 46,939
Renewal 31,832 24,629 91,845 68,199
--------- --------- --------- ---------
40,450 40,688 122,292 115,138
Net investment income 3,207 2,283 7,963 6,590
Fee and service income 4,525 2,440 12,133 6,234
Net realized gain (loss) on investments 223 (28) 355 173
--------- --------- --------- ---------
48,405 45,383 142,743 128,135
--------- --------- --------- ---------
Benefits, claims and expenses:
Benefits and claims 52,544 24,244 109,026 68,790
Amortization of deferred policy
acquisition costs 9,292 6,221 22,622 16,576
Commissions 4,993 2,506 11,960 6,252
General and administrative expenses 8,667 6,235 27,035 19,934
Taxes, licenses and fees 1,533 1,431 4,615 4,495
Interest expense 2,096 1,253 5,022 3,217
--------- --------- --------- ---------
79,125 41,890 180,280 119,264
--------- --------- --------- ---------
(Loss) income before income taxes, equity
in earnings of Freedom Holding
Company and extraordinary item (30,720) 3,493 (37,537) 8,871
(Benefit from) provision for income taxes (10,752) 1,223 (13,138) 3,105
Equity in Freedom Holding Company - - - 74
--------- --------- --------- ---------
(Loss) income before extraordinary item (19,968) 2,270 (24,399) 5,840
Extraordinary loss from early
extinguishment of debt, net of tax - - (1,007) -
========= ========= ========= =========
Net (loss) income $ (19,968) $ 2,270 $ (25,406) $ 5,840
========= ========= ========= =========
Preferred stock dividends 392 412 1,180 1,237
--------- --------- --------- ---------
(Loss) income applicable to
common stockholders $ (20,360) $ 1,858 $ (26,586) $ 4,603
========= ========= ========= =========
Earnings per common share:
Primary:
(Loss)income before extraordinary item $ (3.29) $ .30 $ (4.19) $ .75
Extraordinary item - - (.16) -
========= ========= ========= =========
Net (loss) income $ (3.29) $ .30 $ (4.35) $ .75
========= ========= ========= =========
Fully diluted:
(Loss)income before extraordinary item $ (3.29) $ .27 $ (4.19) $ .69
Extraordinary item - - (.16) -
========= ========= ========= =========
Net (loss) income $ (3.29) $ .27 $ (4.35) $ .69
========= ========= ========= =========
Weighted average shares outstanding:
Primary 6,189 6,138 6,112 6,119
Fully diluted 6,189 8,535 6,112 8,517
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
(Loss) income applicable to common stockholders $ (20,360) $ 1,858 $ (26,586) $ 4,603
Adjustments to reconcile net (loss) income to net
cash used for operating activities:
Depreciation expense 119 117 356 378
Amortization of deferred policy acquisition costs 9,292 6,221 22,622 16,576
Equity in earnings of Freedom Holding Company - - - (74)
Decrease (increase) in receivables from agents 718 1,694 (2,604) (1,728)
Addition to deferred policy acquisition costs (6,586) (12,661) (23,522) (34,539)
Decrease (increase) in due from reinsurers 1,154 3,048 (1,421) 1,294
Decrease (increase) in commissions receivable 2,079 (1,538) (71) (1,951)
Decrease (increase) in deferred debt costs 70 176 (1,622) 109
Decrease (increase) in other assets 1,318 (1,263) (701) (1,301)
Increase in policy liabilities and accruals 22,080 2,040 15,685 5,439
Increase in accounts payable and accruals 147 16 3,685 605
(Decrease) increase in commission advances payable (2,911) 808 1,938 1,789
(Decrease) increase in other liabilities (1,105) (3,273) 7,208 (2,957)
(Decrease) increase in deferred income taxes, net (10,352) 1,305 (11,916) 1,376
Other, net (1,401) 556 (503) 996
--------- --------- --------- ---------
Net Cash Used For Operating Activities (5,738) (896) (17,452) (9,385)
--------- --------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company - - - (3,970)
Proceeds from investments sold:
Fixed maturities, called or matured 6,144 1,206 8,905 6,394
Fixed maturities, sold 2,814 6,857 15,822 37,320
Short-term investments, sold or matured - 74,056 9,740 130,055
Other investments, sold or matured 14 299 367 554
Cost of investments acquired (13,258) (84,847) (73,558) (165,280)
Additions to leasehold improvements and equipment,
net of retirements (175) (17) (372) (191)
--------- --------- --------- ---------
Net Cash(Used For)Provided By Investing Activities (4,461) (2,446) (39,096) 4,882
--------- --------- --------- ---------
Cash Flows From Financing Activities:
Issuance of convertible notes - - 70,000 -
Issuance of notes payable 6,019 11,277 15,102 14,008
Repayment of notes payable (3,273) (3,998) (23,202) (3,998)
Issuance of common stock 51 102 140 104
Repurchase and cancellation of common stock (299) (125) (445) (125)
--------- --------- --------- ---------
Net Cash Provided By Financing Activities 2,498 7,256 61,595 9,989
--------- --------- --------- ---------
(Decrease) increase In Cash During Period (7,701) 3,914 5,047 5,486
Cash at Beginning Of Period 13,761 3,585 1,013 2,013
--------- --------- --------- ---------
Cash at End Of Period $ 6,060 $ 7,499 $ 6,060 $ 7,499
========= ========= ========= =========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the periods for:
Interest $ 880 $ 1,019 $ 3,001 $ 2,636
Income taxes $ 70 $ - $ 118 $ 32
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
One thousand shares of the Company's Series A Convertible Redeemable
Exchangeable Preferred Stock ("Series A Preferred Stock") were converted into
shares of Westbridge's common stock, par value $.10 per share ("Common Stock")
during the nine months ended September 30, 1997. The converted shares of Series
A Preferred Stock had an aggregate liquidation preference of $1,000,000 and were
converted into 118,905 shares of Common Stock.
The Company purchased the outstanding capital stock of Freedom Holding Company
("FHC") in the second quarter of 1996 for a cash purchase price of $6.3 million.
This purchase resulted in the Company receiving assets and assuming liabilities
as follows:
Assets $13,542,000
Liabilities $ 5,780,000
Adjustments to reconcile net income to cash used for operating activities in the
Company's Consolidated Statement of Cash Flows exclude increases relating to the
acquired assets and liabilities of FHC. Accordingly, these adjustments do not
correspond to the changes in the related line items on the Company's
Consolidated Balance Sheets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements for Westbridge
Capital Corp. ("Westbridge" and, together with its consolidated subsidiaries,
the "Company") have been prepared in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X and do not include all of the information
and footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. Certain reclassifications have
been made to 1996 amounts in order to conform to 1997 financial statement
presentation. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Company's Quarterly Reports on Form 10-Q for the three months ended March 31,
1997 and June 30, 1997.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of their business operations, National Foundation Life
Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"),
American Insurance Company of Texas ("AICT"), and Freedom Life Insurance Company
of America ("FLICA"), Westbridge's primary insurance subsidiaries ("Insurance
Subsidiaries"), are involved in various claims disputes and other business
related disputes. In the opinion of management, the disposition of these matters
will have no material adverse effect on the Company's consolidated financial
position.
NOTE 3 - ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES, DUE 2004
On April 29, 1997, the Company completed the sale of $65 million aggregate
principal amount of its 7-1/2% Convertible Subordinated Notes Due 2004 (the
"Convertible Notes") in an underwritten public offering. On May 16, 1997, the
Company completed the sale of an additional $5 million of its Convertible Notes
in connection with the underwriters' over-allotment option. The net proceeds of
the transaction approximated $68 million after deducting underwriting
commissions and other expenses incurred in connection with the sales. Each
$1,000 principal amount of the Convertible Notes is convertible into 91.575
shares of Westbridge Common Stock (6,410,250 shares in the aggregate) at an
initial conversion price of $10.92 per share, subject to certain anti-dilution
adjustments. Interest on the Convertible Notes is payable semi-annually on May 1
and November 1 of each year, commencing November 1, 1997. See NOTE 7 SUBSEQUENT
EVENTS. Also, at the initial closing for the sale of the Convertible Notes,
Westbridge sold to the underwriters, for nominal consideration, warrants to
purchase 297,619 shares of Common Stock in the aggregate at an exercise price of
$10.92 per share, subject to certain anti-dilution provisions. The warrants are
exercisable for a period of four years commencing on April 29, 1998.
On May 1, 1997, Westbridge contributed approximately $7 million of the net
proceeds from the sale of the Convertible Notes to recapture a block of
insurance policies that had previously been reinsured consisting of
approximately $9 million in total recapture costs less approximately $2 million
in unearned premium reserves due to NFL and FLICA. See NOTE 4 - EXTRAORDINARY
ITEM. As of September 30, 1997, Westbridge had contributed approximately $33
million of additional proceeds to the Insurance Subsidiaries to enhance
statutory capital and surplus. The Company has used approximately $6 million in
net proceeds to settle certain intercompany balances with its Insurance
Subsidiaries and for other general corporate purposes.
NOTE 4 - EXTRAORDINARY ITEM
For the nine months ended September 30, 1997, the Company recognized an
aggregate of $1,007,000 in extraordinary losses, net of taxes. Of this amount,
(i) $574,000 resulted from the recognition of unamortized financing fees
associated with the prepayment and refinancing of the Company's revolving credit
facility with Fleet National Bank; and (ii) $433,000 resulted from the
termination and recapture of the block of reinsured insurance policies referred
to in Note 3 above.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," (the
"Statement") that revises the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share." The Statement
established two measures of earnings per share: "basic earnings per share" and
"diluted earnings per share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were converted or exercised. The Statement requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with potential dilutive securities outstanding.
The Statement also requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The Statement is effective for interim
and annual periods ending after December 15, 1997. Earlier application is not
permitted. However, an entity may disclose pro forma earnings per share amounts
that would have resulted if the entity had applied the Statement in an earlier
period. The Company intends to adopt SFAS No. 128 in its annual financial
statements for the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would have resulted
assuming the Company had computed its earnings per share in accordance with the
provisions established by SFAS No. 128 for the quarters ended September 30, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
----------------- --------------- ------------------ ----------------
09/30/97 09/30/97 09/30/96 09/30/96
----------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Basic (loss) earnings per share $ (3.29) $ (4.34) $ 0.31 $ 0.77
Diluted (loss) earnings per share $ (3.29) $ (4.34) $ 0.27 $ 0.69
</TABLE>
Diluted weighted average shares exclude all dilutive securities for loss
periods.
NOTE 6- EARNINGS PER SHARE
Primary. Primary (loss) earnings per common share amounts are computed by
dividing net (loss) income, less preferred stock dividends, by the primary
weighted average number of shares outstanding. Primary loss per common share
amounts related to the extraordinary item were computed by dividing the total
extraordinary item, net of tax, by the primary weighted average number of shares
outstanding.
The primary weighted average shares consist of common shares and, as
appropriate, dilutive common stock equivalents outstanding for the period. As a
result, primary weighted average shares do not assume conversion of the Series A
Preferred Stock or the Convertible Notes to common stock. Primary weighted
average shares exclude all common stock equivalents for loss periods.
Fully diluted. Fully diluted per common share amounts assume conversion of the
Series A Preferred Stock and the Convertible Notes, the elimination of the
related preferred stock dividend and the after-tax interest expense, and the
issuance of common stock for all other potentially dilutive securities,
including stock options, warrants and restricted stock.
Fully diluted (loss) earnings per common share are computed by dividing net
(loss) income plus after-tax interest expense related to the Convertible Notes
by the fully diluted weighted average number of shares outstanding. Fully
diluted loss per common share amounts related to the extraordinary item were
computed by dividing the total extraordinary item, net of tax, by the fully
diluted weighted average number of shares outstanding.
The fully diluted weighted average shares consist of common shares and all other
dilutive securities outstanding for the period. Fully diluted weighted average
shares exclude all dilutive securities for loss periods.
See also NOTE 5 - NEW ACCOUNTING PRONOUNCEMENT.
NOTE 7- SUBSEQUENT EVENTS
On November 3, 1997, Westbridge did not make the scheduled interest payments of
$183,333 and $2,654,167 on the Senior Subordinated Notes and the Convertible
Notes, respectively. The failure to make the scheduled interest payments
constituted payment defaults under the Indentures relating to such Notes and
will become events of default thereunder on November 17, 1997. In addition, the
failure to make such interest payments also resulted in an event of default
under the Credit Agreement (as defined below). Other covenant defaults are also
existing under the Credit Agreement and the Indenture relating to the Senior
Subordinated Notes. As a result of the foregoing events of defaults, the holders
of such indebtedness may declare the outstanding principal amount thereof,
together with accrued and unpaid interest thereon, to be due and payable
immediately. If such indebtedness were to be accelerated, the Company does not
have the ability to repay the indebtedness under the outstanding Convertible
Notes, the Senior Subordinated Notes and the Credit Agreement.
The Company did not make the October 31, 1997 dividend payment of $391,875 on
its Series A Preferred Stock. The failure to declare and pay the scheduled
dividend on the Series A Preferred Stock constituted an event of non-compliance
under the terms of the Series A Preferred Stock Agreement and resulted in an
immediate increase to 9.25% from 8.25% in the rate at which dividends accrue on
the Series A Preferred Stock. This increase will remain in effect until such
time as no event of non-compliance exists.
<PAGE>
WESTBRIDGE CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
As is described below, the Company incurred a significant net loss during the
third quarter of 1997. As a result of this loss and operating losses expected in
the fourth quarter, the Company's Insurance Subsidiaries will require
significant additional capital contributions prior to December 31, 1997 to meet
regulatory requirements. Additional capital contributions will also be required
in 1998 to the extent that losses continue.
The Company is evaluating its strategic alternatives in light of the third
quarter loss and has engaged Houlihan Lokey Howard & Zukin, Capital to act as
its financial advisor to assist the Company in formulating and analyzing
strategies and in holding its discussions with various constituencies. The
Company has held a number of discussions with insurance regulatory authorities,
and such discussions are continuing. In addition, the Company has had
preliminary discussions with certain of its creditors and intends to organize
meetings with all of its creditor constituencies as soon as practicable. The
Company is also engaging in preliminary discussions with potential purchasers
concerning a transaction involving the Company and/or its Insurance
Subsidiaries. There can be no assurance that any such transaction will be
effected or that sufficient statutory capital for the Company's Insurance
Subsidiaries can be obtained. Any failure to provide sufficient statutory
capital to the Company's Insurance Subsidiaries could result in regulatory
action.
In order to preserve capital and maintain flexibility while it considers its
strategic alternatives, the Company has elected to withhold its scheduled
November 1997 debt service payments on its publicly-held debt securities and not
to declare the dividend payable on its outstanding preferred stock scheduled for
October 1997. The failure to make the scheduled interest payments constituted
payment defaults under the Indentures relating to such Notes and will become
events of default thereunder on November 17, 1997. In addition, the failure to
make such interest payments also resulted in an event of default under the
Credit Agreement (as defined below). Other covenant defaults are also existing
under the Credit Agreement and the Indenture relating to the Senior Subordinated
Notes. As a result of the foregoing events of defaults, the holders of such
indebtedness may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
indebtedness were to be accelerated, the Company does not have the ability to
repay the indebtedness under the outstanding Convertible Notes, the Senior
Subordinated Notes and the Credit Agreement.
BUSINESS OVERVIEW
The Company markets medical expense and supplemental health insurance products
and managed care health plans to individuals in 38 states. Since 1992, the
Company has grown through a combination of acquisitions and, more recently,
through 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 implemented 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. During the
second quarter of 1997, the Company completed the sale of $70 million aggregate
principal amount of its 7-1/2% Convertible Subordinated Notes due 2004 (the
"Convertible Notes"). The Company intended to use a substantial portion of the
net proceeds from the sale of the Convertible Notes to increase the marketing of
its underwritten products. However, the significant statutory losses incurred
during the three and nine
<PAGE>
months ended September 30, 1997 have resulted in renewed strains on the
statutory capital and surplus of the Company's Insurance Subsidiaries that
adversely affect the Company's ability to increase the marketing of its
underwritten products.
The Company has utilized its marketing distribution system to market certain
managed care health plans that are underwritten by Health Maintenance
Organizations ("HMOs") and other non-affiliated managed care organizations. This
marketing effort generates sales commissions that are included as a component of
fee and service income and the related expense is included as a component of
commissions. 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 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 sale or redemption of invested
assets. The Company's primary expenses include benefits and claims in connection
with its insurance products, deferred policy acquisition costs ("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 its 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. ("PDS"), and (iii) printing services provided by
Westbridge Printing Services, Inc. ("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 associated with the production of new business.
Such expenditures consist principally of the amount by which first-year
commission costs exceed commission costs paid in subsequent 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. Since 1992, the Company has from time to time acquired seasoned
blocks of business to supplement its revenue. These acquisitions included blocks
of: (i) Medicare Supplement products purchased from American Integrity Insurance
Company ("AII") in September 1992, (ii) Medicare Supplement products purchased
from Life and Health Insurance Company of America ("LHI") in March 1993, (iii)
Critical Care and Specified Disease products purchased from Dixie National Life
Insurance Company ("DNL") in February 1994, (iv) policies in all of the
Company's product lines purchased in the acquisition of NFIC and AICT in April
1994, and (v) Critical Care and Specified Disease products purchased in the
acquisition of the remaining 60% ownership interest in Freedom Holding Company,
FLICA's parent, in May 1996.
<PAGE>
Premiums. The following table shows the premiums, in thousands, received by the
Company as a result of internal sales and acquisitions. Certain
reclassifications have been made to 1996 amounts in order to conform to 1997
presentation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First-year premiums $ 8,277 $ 15,900 $ 29,635 $ 45,330
Renewal premiums 20,809 12,068 57,604 30,231
-------- -------- -------- --------
Total Company-issued policies 29,086 27,968 87,239 75,561
-------- -------- -------- --------
Acquired Policies:
AII 1,772 2,029 5,464 6,369
LHI 377 446 1,171 1,388
DNL 706 730 2,140 2,256
NFIC and AICT 5,160 6,002 16,002 20,249
FLICA 3,089 3,219 9,475 8,390
Other 260 294 801 925
-------- -------- -------- --------
Total acquired policies 11,364 12,720 35,053 39,577
-------- -------- -------- --------
Total Premiums $ 40,450 $ 40,688 $122,292 $115,138
======== ======== ======== ========
</TABLE>
Generally, as a result of acquisitions of policies in force and the transfer of
assets and liabilities relating thereto, the Company receives higher revenues in
the form of premiums and net investment income and experiences higher expenses
in the form of benefits and claims, amortization of DPAC, commissions and
general and administrative expenses. The Company expects that 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.
The preceding statement and certain other statements contained in the Notes to
the Consolidated Financial Statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations are forward-looking statements.
These forward-looking statements are based on current expectations that could be
affected by the risks and uncertainties involved in the Company's business.
These risks and uncertainties include, but are not limited to, the effect of
economic and market conditions, the extent of any increase in future claim
submissions, the availability of sufficient statutory capital and surplus, the
ability to increase premium rates on in-force policies to offset higher than
anticipated loss ratios, actions that may be taken by insurance regulatory
authorities and the Company's creditors following recent operating losses, and
the risks described from time to time in the Company's reports to the Securities
and Exchange Commission, which include the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, the Company's Quarterly Reports on Form
10-Q for the quarter ended March 31, 1997 and June 30, 1997, the Company's
Registration Statement on Form S-1 dated as of March 28, 1997, as amended, and
the Prospectus dated April 24, 1997. 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 Quarterly
Report and those in the Company's reports previously filed with the Securities
and Exchange Commission. Copies of these filings may be obtained by contacting
the Company or the SEC.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1997 Compared to Same Periods
Ended September 30, 1996
Premiums
Three months ended September 30, 1997. Premiums decreased $0.3 million, or 0.7%,
from $40.7 million to $40.4 million. This decrease resulted from a decrease in
first-year premiums from Company-issued policies of $7.5 million, or 47.2%, and
from a decrease in renewal premiums from acquired policies of $1.5 million, or
12.0%, and was offset by an increase in renewal premiums from Company-issued
policies of $8.7 million, or 71.9%.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease of $4.9 million, or 44.1%, in Medical Expense
premiums and a decrease of $2.6 million, or 60.5%, in Medicare Supplement
premiums.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $1.1 million, or 18.3%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $0.2 million, or 10.0%, from the policies
acquired from AII, and a decrease of $0.2 million, or 6.5%, from the policies
acquired in the FLICA acquisition.
The increase in renewal premiums from Company-issued policies was attributable
to an increase of $5.8 million, or 73.1%, in Medical Expense premiums and an
increase of $2.9 million, or 67.4%, in Medicare Supplement premiums.
Nine months ended September 30, 1997. Premiums increased $7.2 million, or 6.3%,
from $115.1 million to $122.3 million. This increase resulted from an increase
in renewal premiums from Company-issued policies of $27.4 million, or 90.7%,
that was offset by a decrease in renewal premiums from acquired policies of $3.7
million, or 9.7%, and decreases in first-year premiums from Company-issued and
acquired policies of $15.6 million and $0.9 million, or 34.4% and 56.3%,
respectively.
The increase in renewal premiums from Company-issued policies was attributable
to an increase of $16.5 million, or 141.0%, in Medical Expense premiums and an
increase of $11.1 million, or 122.0%, in Medicare Supplement premiums and was
offset by a decrease of $0.2 million, or 2.1%, in Critical Care and Specified
Disease premiums.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $4.3 million, or 21.3%, from the policies acquired in the NFIC and
AICT acquisition and to a decrease of $1.4 million, or 12.7%, from the policies
acquired from AII, LHI, and DNL, and was offset by an increase of $2.0 million,
or 29.4%, from the policies acquired in the FLICA acquisition.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease of $9.3 million, or 30.4%, in Medical Expense
premiums and a decrease of $6.3 million, or 45.3%, in Medicare Supplement
premiums.
The decrease in first-year premiums from acquired policies was attributable to a
decrease of $0.9 million, or 56.3%, from the policies acquired in the FLICA
acquisition.
Net Investment Income. Net investment income increased $0.9 million, or 39.1%,
from $2.3 million to $3.2 million for the three months ended September 30, 1997.
Net investment income increased $1.4 million, or 21.2%, from $6.6 million to
$8.0 million for the nine months ended September 30, 1997. These increases were
attributable to a higher average investment base resulting from the net proceeds
received from the Company's sale of its Convertible Notes during the second
quarter.
Fee and Service Income
Three months ended September 30, 1997. Fee and service income increased $2.0
million, or 80.0%, from $2.5 million to $4.5 million. This increase was
primarily attributable to commissions on managed care product sales that were
earned by the Company's controlled general agencies.
Nine months ended September 30, 1997. Fee and service income increased $5.9
million, or 95.2%, from $6.2 million to $12.1 million. This increase was
attributable to an increase of $6.0 million, or 125.0%, relating to commissions
on managed care product sales that were earned by the Company's controlled
general agencies and was offset by a decrease of $0.1 million, or 7.1%, in other
fees.
Benefits and Claims. During the three months ended September 30, 1997, the
Company experienced a continuation of the increase in claim submissions on its
Medical Expense and Medicare Supplement products which, as previously reported,
adversely affected the Company's second quarter results of operations. This
increase continued to significantly exceed the Company's expectations. In
addition, the extent of an existing backlog of pending submitted claims was
quantified during the quarter. The previous backlog of pending submitted claims
has now been eliminated.
The Company has the ability, within the constraints of the loss ratios mandated
by the regulatory authorities and subject to regulatory approval, to raise
premium rates on its products in the event of adverse claims experience. During
the first and second quarters of 1997, the Company implemented certain rate
increases on its Medicare Supplement products. In addition, as of July 1, 1997
the Company implemented certain rate increases and modified certain features on
some of its Medical Expense products. Independent reviews of the Company's claim
reserves as of September 30, 1997 were recently completed. Additionally, an
independent benefit analysis of claims paid was completed which indicated that
significant additional rate increases, which are expected to take more than six
months to fully implement, and further benefit modifications will be required to
offset the current adverse claims experience. However, until such time as the
necessary additional rate increases and benefit modifications can be
implemented, the Company expects that it will continue to incur operating
losses. There can be no assurance that the full extent of such rate increase
requests will be approved.
Three months ended September 30, 1997. Benefits and claims expense increased
$28.3 million, or 116.9%, from $24.2 million to $52.5 million. This increase was
attributable to an increase in benefits and claims expense from Company-issued
and acquired policies of $23.7 million and $4.6 million, or 136.2% and 67.6%,
respectively.
The increase in benefits and claims expense from Company-issued policies was
primarily attributable to an increase of $18.5 million, or 207.9%, from Medical
Expense products, an increase of $3.7 million, or 52.1%, from Medicare
Supplement products, and an increase $1.5 million, or 107.1%, from Critical Care
and Specified Disease products.
The increase in benefits and claims expense from acquired policies was primarily
attributable to an increase of $2.7 million, or 75.0%, from the policies
acquired in the NFIC and AICT acquisition and an increase of $1.9 million, or
380.0%, from the policies acquired in the FLICA acquisition.
Nine months ended September 30, 1997. Benefits and claims expense increased
$40.2 million, or 58.4%, from $68.8 million to $109.0 million. This increase was
attributable to an increase in benefits and claims expense from Company-issued
and acquired policies of $37.6 million and $2.6 million, or 90.0% and 9.6%,
respectively.
The increase in benefits and claims expense from Company-issued policies was
primarily attributable to an increase of $28.4 million, or 143.4%, from Medical
Expense products, an increase of $7.6 million, or 43.2%, from Medicare
Supplement products and an increase of $1.6 million, or 36.4%, from Critical
Care and Specified Disease products.
The increase in benefits and claims expense from acquired policies was primarily
attributable to an increase of $0.7 million, or 4.3%, from the policies acquired
in the NFIC and AICT acquisition, to an increase of $2.2 million, or 73.3%, from
the policies acquired in the FLICA acquisition, and was offset by a decrease of
$0.3 million, or 3.8% from the policies acquired from AII, LHI, and DNL.
Amortization of DPAC. A portion of the Company's quarterly loss resulted from an
increase in amortization of DPAC due to lower persistency as a result of rate
increase activity on inforce business. As management requests additional rate
increases for Medical Expense and Medicare Supplement products in order to
resolve premium pricing disparities and to reduce adverse claim loss ratios, the
Company's earnings may be negatively impacted by further unanticipated increases
in amortization of DPAC during 1997 and 1998.
Three months ended September 30, 1997. Amortization of DPAC increased $3.0
million, or 48.4%, from $6.2 million to $9.2 million. This increase was
attributable to $2.5 and $2.2 million, or 86.2% and 200.0%, from Company-issued
Medical Expense and Medicare Supplement products, respectively. This increase
was offset by a decrease of $1.4 million, or 100.0% from acquired policies and a
decrease of $0.3 million from Company-issued Critical Care and Specified Disease
products.
Nine months ended September 30, 1997. Amortization of DPAC increased $6.0
million, or 36.1%, from $16.6 million to $22.6 million. This increase was
attributable to $5.6 and $3.3 million, or 75.7% and 117.9%, from Company-issued
Medical Expense and Medicare Supplement products, respectively. This increase
was offset by a decrease of $2.3 million, or 51.1% from acquired policies and a
decrease of $0.6 million from Company-issued Critical Care and Specified Disease
products.
Commissions
Three months ended September 30, 1997. Commissions increased $2.5 million, or
100.0%, from $2.5 million to $5.0 million. This increase was attributable to an
increase in commissions on sales of non-affiliated insurance products of $3.5
million that was offset by a $0.7 million, or 53.8%, decrease in commissions on
sales of Company-issued policies. This increase was further offset by a decrease
of $0.3 million, or 20.0%, in commissions on sales of acquired policies.
Nine months ended September 30, 1997. Commissions increased $5.7 million, or
90.5%, from $6.3 million to $12.0 million. This increase was attributable to an
increase in commissions on sales of non-affiliated insurance products of $7.9
million that was offset by a $1.5 million, or 37.5%, decrease in commissions on
sales of Company-issued policies. This increase was further offset by a decrease
of $0.7 million, or 15.2%, in commissions on sales of acquired policies.
General and Administrative Expenses
Three months ended September 30, 1997. General and administrative expenses
increased $2.5 million, or 40.3%, from $6.2 million to $8.7 million. This
increase was primarily attributable to increases in the allowance for doubtful
agent receivables as well as a change in estimate for the recognition of
deferred compensation expense. In addition, fewer policies were eligible for
deferral of acquisition costs as a result of the reduction in the Company's
marketing efforts for its underwritten insurance products beginning in the
second quarter of 1996.
Nine months ended September 30, 1997. General and administrative expenses
increased $7.1 million, or 35.7%, from $19.9 million to $27.0 million. This
increase was primarily attributable to nonrecurring reorganization expenses,
increases in the allowance for doubtful agent receivables, and a change in
estimate for the recognition of deferred compensation expense. In addition,
fewer policies were eligible for deferral of acquisition costs as a result of
the reduction in the Company's marketing efforts for its underwritten insurance
products beginning in the second quarter of 1996.
Taxes, Licenses and Fees. Taxes, licenses and fees were relatively unchanged as
increases in premium taxes were offset by decreases in state levied fees and
special assessments for both the three months and nine months ended September
30, 1997.
Interest Expense. Interest expense increased $0.8 million, or 61.5%, from $1.3
million to $2.1 million for the three months ended September 30, 1997. Interest
expense increased $1.8 million, or 56.3%, from $3.2 million to $5.0 million for
the nine months ended September 30, 1997. This increase is attributable to the
accrued interest expense related to the issuance of $70 million aggregate
principal of the Company's 7-1/2% Convertible Notes.
(Benefit from) Provision for Income Taxes. The Company reported a net loss for
the three and nine months ending September 30, 1997. The (benefit from)
provision for income taxes is calculated by applying the 35% statutory federal
tax rate to the Company's pre-tax (loss) income for the reporting period.
Accordingly, the decrease in the (benefit from) provision for income taxes for
both the three and nine months ended September 30, 1997 is directly attributable
to the net loss recorded for the periods.
Extraordinary Item. The Company recognized an extraordinary loss on the early
extinguishment of debt in the amount of $1.0 million, net of taxes, for the nine
months ended September 30, 1997. This extraordinary charge is comprised of (i)
$0.4 million, net of taxes, related to the termination and recapture of a block
of reinsured insurance policies and (ii) $0.6 million, net of taxes, related to
the recognition of unamortized financing fees associated with the repayment and
refinancing of the Company's revolving credit facility with Fleet National Bank.
FINANCIAL CONDITION
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 and invested assets.
Accordingly, Westbridge's sources of funds are comprised of dividends from its
operating subsidiaries, advances from non-insurance company subsidiaries, lease
payments on fixed assets and tax contributions under a tax sharing agreement
among Westbridge and its subsidiaries. Westbridge's primary obligations include
principal and interest on its indebtedness and, if and when declared by the
Board of Directors, dividends on its Series A Preferred Stock.
Dividends paid by the Insurance Subsidiaries are determined by and subject to
the regulations of the insurance laws and practices of the insurance departments
of their respective state of domicile. NFL, a Delaware domestic company, may not
declare or pay dividends from any source other than earned surplus without the
Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines
earned surplus as the amount equal to the unassigned funds as set forth in NFL's
most recent statutory annual statement including surplus arising from unrealized
gains or revaluation of assets. Delaware life insurance companies may generally
pay ordinary dividends or make distributions of cash or other property within
any twelve month period with a fair market value equal to or less than the
greater of 10% of surplus as regards policyholders as of the preceding December
31 or the net gain from operations for the twelve month period ending on the
preceding December 31. During 1997, NFL is precluded from paying dividends
without the prior approval of the Delaware Insurance Commissioner as the
company's earned surplus is negative. Further, NFL has agreed to file for the
prior approval of any dividends declared or paid for the foreseeable future.
NFIC and AICT, Texas domestic companies, may make dividend payments from surplus
profits or earned surplus arising from its business. The Texas Insurance Code
defines earned surplus as unassigned surplus not including any unrealized gains.
Texas life insurance companies may generally pay ordinary dividends or make
distributions of cash or other property within any twelve month period with a
fair market value equal to or less than the greater of 10% of surplus as regards
policyholders as of the preceding December 31 or the net gain from operations
for the twelve month period ending on the preceding December 31. Any dividend
exceeding the applicable threshold is considered extraordinary and requires
prior approval of the Texas Insurance Commissioner. To date, no dividends have
been declared or paid by NFIC or AICT.
FLICA, a Mississippi domestic company, may make dividend payments only from its
actual net surplus computed as required by law in its statutory annual
statement. Mississippi life insurance companies may generally pay ordinary
dividends or make distributions of cash or other property within any twelve
month period with a fair market value not exceeding the lesser of 10% of surplus
as regards policyholders as of the preceding December 31 or the net gain from
operations for the twelve month period ending on the preceding December 31. Any
dividend exceeding the applicable threshold amount requires prior approval of
the Mississippi Insurance Commissioner. To date, no dividends have been declared
or paid by FLICA.
Generally, all states require insurance companies to maintain capital and
surplus which is reasonable in relation to their existing liabilities and
adequate to their financial needs. Delaware, Texas and Mississippi also maintain
discretionary powers relative to the declaration and payment of dividends based
upon an insurance company's financial position. In light of the significant
statutory losses incurred during the three and nine months ended September 30,
1997, Westbridge does not expect to receive any dividends from its Insurance
Subsidiaries for the foreseeable future.
Westbridge did not make the November 3, 1997 interest payments on the Senior
Subordinated Notes or the Convertible Notes, or the October 31, 1997 dividend
payment on its Series A Cumulative Convertible Redeemable Exchangeable Preferred
Stock (the "Series A Preferred Stock"). The failure to make the scheduled
interest payments constituted payment defaults under the Indentures relating to
such Notes and will become events of default thereunder on November 17, 1997. In
addition, the failure to make such interest payments also resulted in an event
of default under the Credit Agreement (as defined below). Other covenant
defaults are also existing under the Credit Agreement and the Indenture relating
to the Senior Subordinated Notes. As a result of the foregoing events of
defaults, the holders of such indebtedness may declare the outstanding principal
amount thereof, together with accrued and unpaid interest thereon, to be due and
payable immediately. If such indebtedness were to be accelerated, the Company
does not have the ability to repay the indebtedness under the outstanding
Convertible Notes, the Senior Subordinated Notes and the Credit Agreement.
The failure to declare and pay the scheduled dividend on the Series A Preferred
Stock constituted an event of non-compliance under the terms of the Series A
Preferred Stock Agreement and resulted in an immediate increase to 9.25% from
8.25% in the rate at which dividends accrue on the Series A Preferred Stock.
This increase will remain in effect until such time as no event of
non-compliance exists. In addition, if the failure to declare and pay dividends
continues for six consecutive quarters, the holders of the Series A Preferred
Stock shall have the right to elect two directors to the Company's Board of
Directors.
As of October 31, 1997, Westbridge had approximately $22 million in cash and
invested assets remaining from the net proceeds of the sale of the Convertible
Notes. The Company has had preliminary discussions with certain of its creditors
and intends to organize meetings with all of its creditor constituencies as soon
as practicable. In addition, the Company is engaging in preliminary discussions
with potential purchasers concerning a transaction involving the Company and/or
its Insurance Subsidiaries. There can be no assurance that any such transaction
will be effected.
The Convertible Notes may not be redeemed prior to May 1, 2000 and, thereafter,
may be redeemed at the Company's option at a specified declining premium. The
Convertible Notes mature on May 1, 2004. 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 any
time at the Company's option and is subject to mandatory redemption on April 12,
2004.
Insurance Subsidiaries
The primary sources of cash for the Insurance Subsidiaries are premiums and
income on invested assets. Additional cash is periodically provided by advances
from Westbridge and 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.
During the three months ended September 30, 1997, the Company experienced a
continuation of the increase in claim submissions on its Medical Expense and
Medicare Supplement products which, as previously reported, adversely affected
the Company's second quarter results of operations. This increase continued to
significantly exceed the Company's expectations. In addition, the extent of an
existing backlog of pending submitted claims was quantified during the quarter.
The previous backlog of pending submitted claims has now been eliminated. As a
result of the increase in claims submissions, the Company expects that it will
continue to incur operating losses until such time as the necessary rate
increases can be implemented.
The Company has the ability, within the constraints of the loss ratios mandated
by the regulatory authorities and subject to regulatory approval, to raise
premium rates on its products in the event of adverse claims experience. During
the first and second quarters of 1997, the Company implemented certain rate
increases on its Medicare Supplement products. In addition, as of July 1, 1997
the Company implemented certain rate increases and modified certain features on
some of its Medical Expense products. Independent reviews of the Company's claim
reserves as of September 30, 1997 were recently completed. Additionally, an
independent benefit analysis of claims paid was completed which indicated that
significant additional rate increases, which are expected to take more than six
months to fully implement, and further benefit modifications will be required to
offset the current adverse claims experience. There can be no assurance that the
full extent of such rate increase requests will be approved.
The Company has also determined that, due to the third quarter operating losses
and operating losses expected in the fourth quarter, the Company's Insurance
Subsidiaries will require significant additional capital contributions prior to
December 31, 1997 to meet regulatory requirements. Furthermore, the ability of
the Insurance Subsidiaries to underwrite insurance products is limited by state
regulation of statutory capital and surplus requirements. There can be no
assurance that sufficient statutory capital to satisfy the minimum regulatory
requirements and to underwrite new business can be obtained. Any failure to
provide sufficient statutory capital to the Company's Insurance Subsidiaries
could result in regulatory action. The Company's discussions with insurance
regulatory authorities are continuing.
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. For the three and nine months ended September 30, 1997, the
Company has recorded a provision for uncollectible commission advances totaling
$1.5 million and $2.1 million, respectively. This increase relates to the
Company's projections of future renewal commissions that indicate an expected
short-fall in amounts necessary to satisfy and retire the outstanding
receivables as a result of increases in lapse rates on policies supporting the
receivables. Future rate increases may result in additional lapses that would
lead to additional uncollectible receivables.
The Company finances its obligations to make commission advances through
Westbridge Funding Corporation ("WFC"), an indirect wholly-owned subsidiary of
Westbridge. On June 6, 1997, WFC entered into a Credit Agreement dated as of
such date with LaSalle National Bank (the "Credit Agreement"). See NOTE 3
"EXTRAORDINARY ITEM." This Credit Agreement provides WFC with a two-year, $20
million revolving loan facility (the "Receivables Financing"), the proceeds of
which are used to purchase agent advance receivables from the Insurance
Subsidiaries and certain affiliated marketing companies. WFC's obligations under
the Credit Agreement are secured by liens upon substantially all of WFC's
assets. As of September 30, 1997, $13.1 million was outstanding under the Credit
Agreement. The Credit Agreement terminates on June 6, 1999, at which time the
outstanding principal and interest thereunder will be due and payable. As
referred to above, there is currently an event of default as well as certain
technical defaults existing under the Credit Agreement. The Company is in
discussions with LaSalle National Bank concerning these defaults.
WFC's obligations under the Credit Agreement have been guaranteed by Westbridge
under the Guaranty Agreement, and the Company has pledged all of the issued and
outstanding shares of the capital stock of WFC, NFL and NFIC as collateral for
that guaranty.
Consolidated
The Company's consolidated net cash used for operations totaled $17.5 million
and $9.4 million for the nine months ended September 30, 1997 and 1996,
respectively. The increase in the amount of net cash used for operations was
primarily the result of the increase in the number of claims processed during
the first nine months of 1997 coupled with the increase in certain medical costs
covered by the Company's Medical Expense and Medicare Supplement products as a
result of medical cost inflation. Additional increases in consolidated net cash
used for operations related to amounts remitted to reinsurers under certain
reinsurance arrangements. These increases in the consolidated net cash used for
operations were offset, in part, by lower levels of additions to DPAC as a
result of the Company's reduction of its marketing efforts for its underwritten
products beginning in the second quarter of 1996.
Net cash (used for) provided by investing activities for the nine months ended
September 30, 1997 and September 30, 1996 totaled $(39.1) million and $4.9
million, respectively. The increase in the cash outflow represents the
investment of the net proceeds from the issuance of the Convertible Notes. Cash
inflows for the nine months ended September 30, 1996 were utilized to fund
operating cash requirements.
Net cash provided by financing activities totaled $61.6 million and $10.0
million for the nine months ended September 30, 1997 and 1996, respectively. For
the nine months ended September 30, 1997, cash inflows were provided by issuance
of $70.0 million aggregate principal of Convertible Notes offset, in part, by
cash payments of $7.0 million to retire a note payable associated with a
recaptured reinsurance agreement, $1.0 million to retire a note with a related
party and $0.1 million in net borrowings and repayments associated with the
Receivables Financing program. For the nine months ended September 30, 1996,
cash was provided by borrowings under the receivables financing program with
Fleet National Bank.
The Company will require additional capital to satisfy its short-term and
long-term cash requirements and there can be no assurance that sufficient
additional capital can be obtained. The Company is evaluating its strategic
alternatives and has engaged Houlihan Lokey Howard & Zukin, Capital to act as
its financial advisor to assist the Company in formulating and analyzing
strategies and in holding its discussions with various constituencies.
The Company had no significant high-yield, unrated or less than investment grade
fixed maturity securities in its investment portfolio as of September 30, 1997,
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 the Company was forced to liquidate
investments prior to maturity, investment yields could be compromised. The
Company has adopted a policy not to invest in real estate mortgage loans and,
accordingly, the Company has not purchased any real estate mortgage loans 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 that 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. The
Company has somewhat mitigated its exposure to inflation by incorporating
certain limitations on the maximum benefits which may be paid under its policies
and by filing for premium rate increases as necessary.
The National Association of Insurance Commissioners ("NAIC") has developed
certain Risk-Based Capital ("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 a RBC calculation that varies from
the NAIC. The RBC statutory requirements are only in effect based on the
Insurance Subsidiaries year-end financial position and results of operations.
The RBC for each of the Insurance Subsidiaries exceeded the proposed thresholds
for required regulatory intervention as of December 31, 1996. However, as a
result of the statutory losses sustained for the nine months ended September 30,
1996 and the expected statutory losses for the fourth quarter of 1997, the
Company expects the RBC for NFL and NFIC to fall below the proposed thresholds
for required regulatory intervention unless additional capital can be obtained
for those entities prior to December 31, 1997.
<PAGE>
PART II
Item 1 - Legal Proceedings (See Part I - Note 2 to the Consolidated Financial
Statements).
Item 3 - Defaults Upon Senior Securities
(a) Debt Securities
On November 3, 1997, Westbridge did not make the scheduled
interest payments of $183,333 and $2,654,167 on the Senior
Subordinated Notes and the Convertible Notes, respectively. The
failure to make the scheduled interest payments constituted
payment defaults under the Indentures relating to such Notes and
will become events of default thereunder on November 17, 1997. In
addition, the failure to make such interest payments also
resulted in an event of default under the Credit Agreement. As a
result of the foregoing events of defaults, the holders of such
indebtedness may declare the outstanding principal amount
thereof, together with accrued and unpaid interest thereon, to be
due and payable immediately. If such indebtedness were to be
accelerated, the Company does not have the ability to repay the
indebtedness under the outstanding Convertible Notes, the Senior
Subordinated Notes and the Credit Agreement.
(b) Preferred Stock
The Company did not make the October 31, 1997 dividend payment of
$391,875 on its Series A Preferred Stock.
The Company is evaluating its strategic alternatives and has
engaged Houlihan Lokey Howard & Zukin, Capital to act as its
financial advisor to assist the Company in its discussions with
creditors, potential purchasers and insurance regulatory
authorities. The Company has had preliminary discussions with
certain of its creditors and intends to organize meetings with
all of its creditor constituencies as soon as practicable. The
Company's discussions with insurance regulatory authorities are
continuing.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule, (included in electronic
filing only).
(b) Reports on Form 8-K
No Form 8-K was required to be filed during the period.
<PAGE>
Form 10-Q
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTBRIDGE CAPITAL CORP.
/s/Patrick J. Mitchell
Patrick J. Mitchell
President, Chief Operating Officer,
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
Dated at Fort Worth, Texas
November 13, 1997
<PAGE>
23
Form 10-Q
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTBRIDGE CAPITAL CORP.
/s/Patrick J. Mitchell
Patrick J. Mitchell
President, Chief Operating Officer,
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
Dated at Fort Worth, Texas
November 13, 1997
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