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 March 31, 1998
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.)
110 West Seventh Street, Suite 300, 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 6,260,015 Shares Outstanding at May 7, 1998
<PAGE>
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 March 31, 1998, December 31,
1997 and March 31, 1997. 3-4
2. Consolidated Statement of Operations for the Three Months
Ended March 31, 1998 and 1997. 5
3. Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1997. 6
4. Notes to Consolidated Financial Statements. 7-10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 3 - Defaults Upon Senior Securities 20
Item 6 - Exhibits and Reports on Form 8-K 20
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
-------- --------- --------
(unaudited) (audited) (unaudited)
-------- --------- --------
<S> <C> <C> <C>
Investments:
Fixed Maturities:
Available-for-sale, at market value
(amortized cost $119,167, $122,840
and $79,533) $124,695 $128,749 $ 79,584
Equity securities, at market 5,070 4,770 1,696
Mortgage loans on real estate 329 389 423
Investment real estate 566 566 -
Policy loans 279 284 281
Short-term investments and certificates
of deposit 12,808 12,654 6,294
-------- -------- --------
Total Investments 143,747 147,412 88,278
Cash 461 1,030 202
Accrued investment income 2,383 2,453 1,440
Receivables from agents, net of allowance
for doubtful accounts 17,911 20,503 19,101
Deferred policy acquisition costs 18,644 19,165 87,663
Leasehold improvements and equipment, at
cost, net of accumulated depreciation and
amortization 1,200 1,141 1,285
Due from reinsurers 2,466 3,219 23,131
Commissions receivable 1,809 1,389 4,595
Deferred debt costs, net of accumulated
amortization 3,848 4,046 3,316
Other assets 4,322 2,498 4,954
-------- -------- --------
Total Assets $196,791 $202,856 $233,965
======== ======== ========
</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>
March 31, December 31, March 31,
1998 1997 1997
--------- ---------- ---------
(unaudited) (audited) (unaudited)
--------- ---------- ---------
<S> <C> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 56,073 $ 55,811 $ 55,171
Claims 50,536 51,784 32,136
--------- --------- ---------
106,609 107,595 87,307
Accounts payable and accruals 3,673 3,846 3,072
Commission advances payable 4,745 4,702 7,155
Accrued dividends and interest payable 7,299 4,972 618
Other liabilities 4,858 5,612 16,828
Deferred income taxes, net - - 10,968
Notes payable 11,979 13,100 20,494
Senior subordinated notes, net of unamortized
discount, due 2002 19,473 19,447 19,374
Convertible subordinated notes, due 2004 70,000 70,000 -
--------- --------- ---------
Total Liabilities 228,636 229,274 165,816
--------- --------- ---------
Redeemable Preferred Stock 19,000 19,000 19,400
--------- --------- ---------
Stockholders' Equity:
Common stock ($.10 par value, 30,000,000
shares authorized; 6,195,439, 6,195,439
and 6,127,537 shares issued) 620 620 613
Capital in excess of par value 30,904 30,843 29,815
Unrealized appreciation (depreciation) of investments
carried at market value, net of tax 4,598 4,649 (29)
Retained (deficit) earnings (86,967) (81,530) 18,520
--------- --------- ---------
(50,845) (45,418) 48,919
Less - Aggregate of shares held in treasury and
investment by affiliate in
Westbridge Capital Corp.
common stock (28,600 at March 31, 1997), at cost - - (170)
--------- --------- ---------
Total Stockholders' (Deficit) Equity (50,845) (45,418) 48,749
--------- --------- ---------
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $ 196,791 $ 202,856 $ 233,965
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
-------- ---------
Revenues:
Premiums:
First-year $ 7,031 $ 12,129
Renewal 30,408 28,691
-------- --------
37,439 40,820
Net investment income 3,166 2,226
Fee and service income 4,062 3,502
Net realized gain (loss) on investments 262 (60)
-------- --------
44,929 46,488
-------- --------
Benefits, claims and expenses:
Benefits and claims 28,436 25,295
Amortization of deferred policy
acquisition costs 1,235 5,240
Commissions 9,491 3,288
General and administrative expenses 7,008 7,322
Reorganization expense 1,016 -
Taxes, licenses and fees 1,288 1,457
Interest expense 2,180 1,224
-------- --------
50,654 43,826
-------- --------
(Loss) income before income taxes (5,725) 2,662
(Benefit) provision for income taxes (759) 932
======== ========
Net (loss) income $ (4,966) $ 1,730
======== ========
Preferred stock dividends 471 396
-------- --------
(Loss) income applicable to
common stockholders $ (5,437) $ 1,334
======== ========
Earnings per common share:
Basic:
Net (loss) income $ (0.88) $ 0.22
======== ========
Diluted:
Net (loss) income $ (0.88) $ 0.20
======== ========
Weighted average shares outstanding:
Basic 6,195 6,056
======== ========
Diluted 6,195 8,674
======== ========
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
March 31,
---------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
(Loss) income applicable to common stockholders $(5,437) $ 1,334
Adjustments to reconcile net (loss) income to net cash
used for operating activities:
Depreciation expense 100 118
Amortization of deferred policy acquisition costs 1,235 5,240
Decrease (increase) in receivables from agents 2,592 (790)
Addition to deferred policy acquisition costs (714) (9,032)
Decrease (increase) in due from reinsurers 753 (21,675)
Increase in commissions receivable (420) (1,189)
Decrease (increase) in deferred debt costs 198 (500)
Increase in other assets (1,824) (516)
Decrease in policy liabilities and accruals (986) (6,083)
(Decrease) increase in accounts payable and accruals (4,361) 689
Increase in accrued dividends and interest payable 1,639 92
Increase in commission advances payable 43 2,787
Increase in other liabilities 4,122 15,546
Increase in deferred income taxes, net - 669
Other, net 180 1,162
------- --------
Net Cash Used For Operating Activities (2,880) (12,148)
------- --------
Cash Flows From Investing Activities:
Proceeds from investments sold:
Fixed maturities, called or matured 3,254 2,673
Fixed maturities, sold 4,227 10,751
Short-term investments, sold or matured - 5,231
Other investments, sold or matured 65 339
Cost of investments acquired (3,955) (6,394)
Additions to leasehold improvements and equipment,
net of retirements (159) (92)
------- --------
Net Cash Provided By Investing Activities 3,432 12,508
------- --------
Cash Flows From Financing Activities:
Issuance of notes payable 1,375 5,873
Repayment of notes payable (2,496) (6,966)
Issuance of common stock - 68
Repurchase and cancellation of common stock - (146)
------- --------
Net Cash Used For Financing Activities (1,121) (1,171)
------- --------
Decrease In Cash During Period (569) (811)
Cash at Beginning Of Period 1,030 1,013
------- --------
Cash at End Of Period $ 461 $ 202
======= ========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the periods for:
Interest $ 292 $ 1,093
Income taxes $ - $ 35
</TABLE>
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 three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of 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 $65.0 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 $5.0 million of its Convertible
Notes in connection with the underwriters' over-allotment option. The net
proceeds of the transaction approximated $67.7 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. 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.
Interest on the Convertible Notes is payable semi-annually on May 1 and November
1 of each year, commencing November 1, 1997. Since November 1997, the Company
has suspended the scheduled interest payments on these Convertible Notes. At
March 31, 1998, approximately $4.8 million of unpaid interest has been accrued
on such Convertible Notes. See NOTE 4 - RECENT DEVELOPMENTS regarding covenant
defaults.
As of May 7, 1998, Westbridge had contributed approximately $39.3 million of the
net proceeds to its Insurance Subsidiaries to enhance statutory capital and
surplus. The Company used approximately $16.4 million in net proceeds for other
general corporate purposes and to settle certain intercompany balances with its
Insurance Subsidiaries. In January 1998, Westbridge used an additional $1.8
million of the net proceeds to collateralize a $1.5 million standby letter of
credit ("LOC") for the purpose of potential future capital contributions to
NFIC. This collateralized LOC expires after a one-year term and future draws
upon this LOC are subject to certain provisions regarding NFIC's statutory
capital and surplus levels.
NOTE 4 - RECENT DEVELOPMENTS
During the three months ended March 31, 1998, the Company continued to
experience adverse loss ratios on its Medical Expense and Medicare Supplement
products, as well as declining persistency of inforce policies. The Company has
modified certain product benefits and requested rate increases on these lines of
business in order to mitigate the effect of such adverse claims experience and
has implemented a policyholder conservation program designed to mitigate the
impact of declining persistency. However, the Company expects that it will
continue to incur operating losses until such time as the necessary rate
increases and benefit modifications can be implemented. There can be no
assurance that the full extent of such rate increase requests will be approved.
The Company continues to work with its financial advisor, Houlihan, Lokey,
Howard & Zukin, to develop a strategic plan in anticipation of transactional
alternatives which may include, without limitation, a refinancing,
recapitalization or other corporate reorganization involving a significant
reduction in, or exchange of equity for, outstanding indebtedness. The Company
is also continuing its discussions with the regulatory authorities in its
domiciliary states of Delaware, Texas and Mississippi and with an ad hoc
creditors' committee representing both the holders of the 11% Senior
Subordinated Notes ("Senior Subordinated Notes") due 2002 and the holders of its
Convertible Notes.
Also, as previously reported, the Company has not made the scheduled interest
payments on its Senior Subordinated Notes and its Convertible Notes and the
scheduled dividend payments on its Series A Preferred Stock. The failure to make
the scheduled interest payments resulted in events of default under the
Indentures relating to such Notes and also resulted in an event of default under
the Company's Credit Agreement (as defined herein). Other covenant defaults are
also continuing under the Credit Agreement and the Indenture relating to the
Senior Subordinated Notes. The Company is current with respect to its principal
and interest payments under the Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends 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. At March 31, 1998, approximately $1.3 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
NOTE 5 - EARNINGS PER SHARE
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.
Diluted weighted average shares exclude all convertible securities for loss
periods.
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. The Company adopted SFAS No.
128 for the year ended December 31, 1997 and has restated the earnings per share
computations for the quarter ended March 31, 1997 to conform to this
pronouncement.
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
March 31,
--------------------
1998 1997
-------- -------
(Amounts in 000's, except per share amounts)
<S> <C> <C>
Basic:
(Loss) income available to common shareholders $(5,437) $1,334
======= ======
Average weighted shares outstanding 6,195 6,056
======= ======
Basic earnings per share $ (0.88) $ 0.22
======= ======
Diluted:
(Loss) income available to common shareholders $(5,437) $1,334
Adjustment for conversion of Series A Preferred Stock - 396
------- ------
Adjusted (loss) income available to common shareholders $(5,437) $1,730
======= ======
Average weighted shares outstanding 6,195 6,056
Adjustment for conversion of Series A Preferred Stock - 2,344
Adjustment for restricted stock - 47
Adjustment for options and warrants - 227
------- ------
Adjusted average weighted shares outstanding 6,195 8,674
======= ======
Diluted earnings per share $ (0.88) $ 0.20
======= ======
</TABLE>
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
("SFAS 130"). This pronouncement, effective for calendar year 1998 financial
statements, requires comprehensive income and its components to be reported
either in a separate financial statement, combined and included with the
statement of income or included in a statement of changes in stockholders'
equity. Comprehensive income equals the total of net income and all other
non-owner changes in equity. For the Company, comprehensive income will equal
its reported consolidated net income plus the change in the unrealized
appreciation of marketable securities from the previously reported period.
Currently, this unrealized appreciation of marketable securities, net of tax, is
reported in the Company's Consolidated Balance Sheets as a separate component of
stockholders' equity.
Comprehensive (loss) income is as follows, in thousands:
For the three months ended March 31,
--------------------------
1998 1997
-------- -------
Net (loss) income $(4,966) $ 1,730
Change in unrealized depreciation (51) (1,086)
------- -------
Comprehensive (loss) income $(5,017) $ 644
======= =======
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("SFAS 131"). This pronouncement, also
effective for calendar year 1998 financial statements, requires reporting
segment information consistent with the way executive management of an entity
disaggregates its operations internally to assess performance and make decisions
regarding resource allocations. Among the information to be disclosed, SFAS 131
requires an entity to report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. SFAS 131 also requires
reconciliations of total segment revenues, total segment profit or loss and
total segment assets to the corresponding amounts shown in the entity's
consolidated financial statements. The adoption of SFAS 131 in 1998 will not
change the number or designation of the reportable segments currently disclosed
in the Company's Consolidated Financial Statements.
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company is required to adopt SOP 97-3
effective January 1, 1999. Previously issued financial statements should not be
restated unless the SOP is adopted prior to the effective date and during an
interim period. The adoption of SOP 97-3 is not expected to have a material
impact on the Company's results of operations, liquidity or financial position.
NOTE 7 - RECLASSIFICATIONS
Certain reclassifications have been made to 1997 amounts in order to conform to
1998 financial statement presentation.
<PAGE>
WESTBRIDGE CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the three months ended March 31, 1998, the Company continued to
experience adverse loss ratios on its Medical Expense and Medicare Supplement
products, as well as declining persistency of inforce policies. The Company has
modified certain product benefits and requested rate increases on these lines of
business in order to mitigate the effect of such adverse claims experience and
has implemented a policyholder conservation program designed to mitigate the
impact of declining persistency. However, the Company expects that it will
continue to incur operating losses until such time as the necessary rate
increases and benefit modifications can be implemented. There can be no
assurance that the full extent of such rate increase requests will be approved.
The Company continues to work with its financial advisor, Houlihan, Lokey,
Howard & Zukin, to develop a strategic plan in anticipation of transactional
alternatives which may include, without limitation, a refinancing,
recapitalization or other corporate reorganization involving a significant
reduction in, or exchange of equity for, outstanding indebtedness. The Company
is also continuing its discussions with the regulatory authorities in its
domiciliary states of Delaware, Texas and Mississippi and with an ad hoc
creditors' committee representing both the holders of the Senior Subordinated
Notes and the holders of the Convertible Notes.
Also, as previously reported, the Company has not made the scheduled interest
payments on its Senior Subordinated Notes and its Convertible Notes and the
scheduled dividend payments on its Series A Preferred Stock. The failure to make
the scheduled interest payments resulted in events of default under the
Indentures relating to such Notes and also resulted in an event of default under
the Company's Credit Agreement (as defined herein). Other covenant defaults are
also continuing under the Credit Agreement and the Indenture relating to the
Senior Subordinated Notes. The Company is current with respect to its principal
and interest payments under the Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends 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. At March 31, 1998, approximately $1.3 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
BUSINESS 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, amortization of 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 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, and (iii) printing
services.
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.
Under generally accepted accounting principles, a DPAC asset is established to
properly match the costs of writing new business against the expected future
revenues or gross profits from the policies. These costs, which are capitalized
and amortized, consist of first-year commissions in excess of renewal
commissions and certain home office expenses related to selling, policy issue,
and underwriting. The DPAC for accident and health policies and traditional life
policies are amortized over future premium revenues of the business to which the
costs are related. The rate of amortization depends on the expected pattern of
future premium revenues for the block of policies. The scheduled amortization
for a block of policies is established when the policies are issued. However,
the actual amortization of DPAC will reflect the actual persistency and
profitability of the business. For example, if actual policy terminations are
higher than expected or if future losses are anticipated, DPAC could be
amortized more rapidly than originally scheduled or written-off, which would
reduce earnings in the applicable period. Also included in DPAC is the cost of
insurance purchased relating to acquired blocks of business.
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)
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) Specified
Disease products purchased in the acquisition of the remaining 60% ownership
interest in Freedom Holding Company, FLICA's parent, in May 1996.
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 1997 amounts in order to conform to 1998
presentation.
Three Months Ended
March 31,
------- --------
1998 1997
------- --------
First-year premiums $ 6,752 $11,822
Renewal premiums 20,006 17,136
------- -------
Total Company-issued policy premiums 26,758 28,958
------- -------
Acquired Policies:
AII 1,599 1,893
LHI 353 407
DNL 687 717
NFIC and AICT 5,037 5,611
FLICA 3,005 3,234
------- -------
Total acquired policy premiums (1) 10,681 11,862
------- -------
Total Premiums $37,439 $40,820
======= =======
(1) Premiums for acquired policies include first-year premiums of $0.3 million
and $0.3 million, respectively.
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.
Forward-Looking Information. 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 inforce 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 ("SEC"), which
include the Company's Annual Report on Form 10-K for the year ended December 31,
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 SEC. Copies of these filings may be obtained
by contacting the Company or the SEC.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Premiums. Premiums decreased $3.4 million, or 8.3%, from $40.8 million to $37.4
million as a result of declining persistency of inforce policies and a reduction
in the Company's marketing efforts. This decrease resulted from a decrease in
first-year premiums from Company-issued policies of $5.1 million, or 42.9%, and
from a decrease in renewal premiums from acquired policies of $1.2 million, or
10.1%, and was offset by an increase in renewal premiums from Company-issued
policies of $2.9 million, or 17.2%.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease of $2.4 million, or 29.6%, in Medical Expense
premiums, a decrease of $2.6 million, or 76.5%, in Medicare Supplement premiums,
and a decrease of $0.1 million in other premiums.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $0.6 million, or 10.7%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $0.3 million, or 15.8%, from the policies
acquired from AII, and a decrease of $0.3 million, or 9.1%, from the policies
acquired from FLICA and other acquisitions.
The increase in renewal premiums from Company-issued policies was attributable
to an increase of $2.2 million, or 28.9%, in Medical Expense premiums, an
increase of $0.6 million, or 10.0%, in Medicare Supplement premiums and an
increase of $0.1 million, or 3.2%, in Specified Disease premiums.
Net Investment Income. Net investment income increased $1.0 million, or 45.5%,
from $2.2 million to $3.2 million for the three months ended March 31, 1998.
This increase was 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 of 1997 and from higher average portfolio yields.
Fee and Service Income. Fee and service income increased $0.6 million, or 17.1%,
from $3.5 million to $4.1 million. This increase was primarily attributable to
commissions on managed care product sales that were earned by the Company's
controlled general agencies.
Benefits and Claims. During the three months ended March 31, 1998, the Company
continued to experience adverse loss ratios on its Medical Expense and Medicare
Supplement products, as well as declining persistency of inforce policies. 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. As a result of
the losses sustained on this unprofitable business, the Company has modified
certain product benefits and requested rate increases on these lines of business
in order to mitigate the effect of such adverse claims experience and has
implemented a policyholder conservation program designed to mitigate the impact
of declining persistency. However, the Company expects that it will continue to
incur operating losses until such time as the necessary rate increases and
benefit modifications can be implemented. There can be no assurance that the
full extent of such rate increase requests will be approved.
Benefits and claims expense increased $3.1 million, or 12.3%, from $25.3 million
to $28.4 million. This increase was attributable to an increase in benefits and
claims expense from Company-issued and acquired policies of $2.9 million and
$0.2 million, or 17.3% and 2.4%, respectively.
The increase in benefits and claims expense from Company-issued policies was
primarily attributable to an increase of $3.5 million, or 40.2%, from Medical
Expense products, an increase of $0.1 million, or 6.7%, from Specified Disease
products, and was offset by a decrease of $0.7 million, or 10.6%, from Medicare
Supplement and other products. Although the Medicare Supplement loss ratios
increased for the three months ended March 31, 1998, the total dollar amount of
the related claims expense decreased in connection with a declining base of
Medicare Supplement premiums.
The increase in benefits and claims expense from acquired policies was primarily
attributable to an increase of $0.5 million, or 11.6%, from the policies
acquired in the NFIC and AICT acquisition, an increase of $0.6 million, or
60.0%, from the policies acquired from LHI and DNL, and was offset by a decrease
of $0.9 million, or 28.1%, from the policies acquired from AII and FLICA.
Amortization of DPAC. As previously described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, the Company recognized a $65.0
million non-cash charge of DPAC during the fourth quarter of 1997. In light of
this charge and until profitability can be restored on these lines of business,
the Company is recording commission expense on a current basis that would
ordinarily be deferred and amortized as a component of DPAC. As a result,
current period DPAC amortization is lower than prior periods and commission
expense is higher than prior periods.
Amortization of DPAC decreased $4.0 million, or 76.9%, from $5.2 million to $1.2
million. This variance was attributable to decreases of $3.0, $1.0 million and
$0.2 million, from Company-issued Medical Expense, Medicare Supplement products,
and acquired policies, respectively. This decrease was offset by an increase of
$0.2 million, or 66.7%, from Company-issued Specified Disease products.
Commissions. Commissions increased $6.2 million, or 187.9%, from $3.3 million to
$9.5 million. This variance was attributable to a decrease in the commissions
that would ordinarily be deferred and amortized as a component of DPAC, which
are being expensed as commissions on a current basis. The increase was
attributable to an increase in commissions of $5.8 million on Company-issued
policies and $0.6 million, or 25.0%, on sales of non-affiliated insurance
products, and was offset by a decrease in commissions on sales of acquired
policies of $0.2 million, or 13.3%.
General and Administrative Expenses. General and administrative expenses
decreased $0.3 million, or 4.1%, from $7.3 million to $7.0 million. This
decrease was primarily attributable to corporate overhead reductions beginning
in the fourth quarter of 1997.
Reorganization Expense. As more fully described in "Recent Developments", the
Company has hired a financial advisor to explore its strategic alternatives. The
Company is responsible for paying the fees of its financial advisor and legal
counsel and has agreed to pay the fees of the financial advisors and legal
counsel to an ad hoc creditors' committee in connection with the efforts to
formulate and evaluate transactional alternatives. During the first quarter of
1998, the Company incurred approximately $1.0 million in expenses related to
these efforts. The Company did not incur any reorganization expenses during the
first quarter ended March 31, 1997.
Taxes, Licenses and Fees. Taxes, licenses and fees decreased $0.2 million, or
13.3% from $1.5 million to $1.3 million due to the declining premium base for
which premium taxes are levied.
Interest Expense. Interest expense increased $1.0 million, or 83.3%, from $1.2
million to $2.2 million. This increase is attributable to the accrued interest
expense related to the issuance of $70.0 million aggregate principal of the
Company's Convertible Notes.
(Benefit from) Provision for Income Taxes. During 1997, the provision for income
taxes was calculated by applying the 35% statutory federal tax rate to the
Company's pre-tax income for three months ended March 31, 1997. The change in
the (benefit from) provision for income taxes during 1998 is directly
attributable to the net loss recorded by the Company for the three months ended
March 31, 1998. As a result, a net operating loss carryforward ("NOLs") was
generated that will be available for offset against taxable income generated in
future reporting periods. The Company has determined that it is more likely than
not that it will be unable to utilize all of these NOLs prior to the related
expiration dates. In this connection, the Company has recorded a valuation
allowance that significantly reduces its benefit from income taxes for the
current year from the amount that would have been derived by applying the 35%
statutory federal tax rate to the Company's pre-tax loss for three months ended
March 31, 1998.
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 and management fees 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.
In addition, for the three months ended March 31, 1998, Westbridge made capital
contributions totaling approximately $1.1 million to its Insurance Subsidiaries.
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 1998, NFL is precluded from paying dividends
without the prior approval of the Delaware Insurance Commissioner as its earned
surplus is negative. Further, NFL has agreed to obtain prior approval for any
future dividends.
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. NFIC's and AICT's earned
surplus is negative, and as such, each company is precluded from paying
dividends during 1998 without the prior approval of the Texas Insurance
Commissioner.
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. FLICA is precluded from paying dividends
to NFL during 1998 without the prior approval of the Mississippi Insurance
Commissioner as it recorded a net loss from operations for the year ended
December 31, 1997.
Generally, all states require insurance companies to maintain capital and
surplus that 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 statutory losses
incurred by the Insurance Subsidiaries during 1997 and for the three months
ended March 31, 1998, Westbridge does not expect to receive any dividends from
its Insurance Subsidiaries for the foreseeable future.
Also, as previously reported, the Company has not made the scheduled interest
payments on its Senior Subordinated Notes and its Convertible Notes and the
scheduled dividend payments on its Series A Preferred Stock. The failure to make
the scheduled interest payments resulted in events of default under the
Indentures relating to such Notes and also resulted in an event of default under
the Company's Credit Agreement. Other covenant defaults are also continuing
under the Credit Agreement and the Indenture relating to the Senior Subordinated
Notes. The Company is current with respect to its principal and interest
payments under the Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends 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. At March 31, 1998, approximately $1.3 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
As of May 7, 1998, Westbridge had approximately $12.0 million in cash and
invested assets remaining from the net proceeds of the sale of the Convertible
Notes. The Company continues to work with its financial advisor, Houlihan,
Lokey, Howard & Zukin, and with an ad hoc creditors' committee representing both
the holders of its Senior Subordinated Notes and the holders of its Convertible
Notes to develop a strategic business plan in anticipation of transaction
alternatives, which may include, without limitation, a refinancing,
recapitalization or other corporate reorganization involving a significant
reduction in, or exchange of equity for, outstanding indebtedness. In addition,
the Company continues to work closely with the insurance regulatory authorities
in its domiciliary states of Delaware, Texas and Mississippi.
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, and taxes, licenses
and fees.
During the three months ended March 31, 1998, the Company continued to
experience adverse loss ratios on its Medical Expense and Medicare Supplement
products, as well as declining persistency of inforce policies. 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. As a result of
the losses sustained on this unprofitable business, the Company has modified
certain product benefits and requested rate increases on these lines of business
in order to mitigate the effect of such adverse claims experience and has
implemented a policyholder conservation program designed to mitigate the impact
of declining persistency. However, the Company expects that it will continue to
incur operating losses until such time as the necessary rate increases and
benefit modifications can be implemented. There can be no assurance that the
full extent of such rate increase requests will be approved.
For the three months ended March 31, 1998, the Insurance Subsidiaries received
capital contributions totaling approximately $1.1 million from Westbridge. To
the extent that the Insurance Subsidiaries experience further statutory
operating losses during 1998, additional capital will be required.
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 months ended March 31, 1998 and 1997, the
Company has recorded a provision for uncollectible commission advances totaling
$0.3 million and $-0-, respectively.
The Company finances the majority of 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"). This
Credit Agreement provides WFC with a three-year, $20.0 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. In connection with this
commission advancing program, at March 31, 1998, the Company's receivables from
subagents totaled approximately $13.2 million and approximately $12.0 million
was outstanding under the Credit Agreement. The Credit Agreement terminates on
June 5, 2000, at which time the outstanding principal and interest thereunder
will be due and payable. As referred to above, there are currently certain
events of default existing under the Credit Agreement. The Company is in
discussions with LaSalle National Bank concerning these defaults; however, the
Company is current with respect to its principal and interest payments under
this Credit Agreement.
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.
The Company also receives commission advances from an unaffiliated managed care
organization and in turn advances commissions to its general agencies and their
agents. At March 31, 1998, the Company's receivables from its subagents related
to these advances totaled approximately $4.7 million, and the Company owed
approximately $4.7 million to an unaffiliated managed care organization.
Consolidated
The Company's consolidated net cash used for operations totaled $2.9 million and
$12.1 million for the three months ended March 31, 1998 and 1997, respectively.
The variance in the amount of net cash used for operations between 1998 and 1997
was primarily the result of amounts remitted to reinsurers during 1997 under
certain reinsurance arrangements. In addition, the Company's reduction of its
marketing efforts for its underwritten products resulted in a decrease in net
cash used for operations related to the funding of agents' debit balances.
Net cash provided by investing activities for the three months ended March 31,
1998 and 1997 totaled $3.4 million and $12.5 million, respectively. The decrease
in net cash provided by investing activities between 1998 and 1997 was primarily
the result of the decrease in net cash used for operating activities for the
same period. As a result, there was a reduction in the amount of invested assets
that were liquidated to fund operating cash requirements.
Net cash used for financing activities totaled $1.1 million and $1.2 million for
the three months ended March 31, 1998 and 1997, respectively. Cash flows for
financing activities remained relatively unchanged between 1998 and 1997 and
relate primarily to the net borrowings and repayments associated with the
Company's Receivables Financing program.
The Company will require additional capital or a refinancing, recapitalization
or other reorganization involving a significant reduction in, or exchange of
equity for, outstanding indebtedness 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
with its financial advisor.
The Company had no significant high-yield, unrated or less than investment grade
fixed maturity securities in its investment portfolio as of March 31, 1998, 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.
Inflation will affect claim costs on the Company's Medicare Supplement 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.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health
Insurers Model Act ("the Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of statutory capital and surplus an
insurer must maintain in relation to its insurance and investment risks and
whether there is a need for possible regulatory attention. The Model Act (or
similar legislation or regulation) has been adopted in states where the
Insurance Subsidiaries are domiciled.
The Model Act provides four levels of regulatory attention, varying with the
ratio of the insurance company's total adjusted capital (defined as the total of
its statutory capital and surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan aimed at improving its
capital position to the regulatory authority proposing corrective actions. If a
company's total adjusted capital is less than 75 percent but greater than or
equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory
authority will perform a special examination of the company and issue an order
specifying the corrective actions that must be followed. If a company's total
adjusted capital is less than 50 percent but greater than or equal to 35 percent
of its RBC (the "Authorized Control Level"), the regulatory authority may take
any action it deems necessary, including placing the company under regulatory
control. If a company's total adjusted capital is less than 35 percent of its
RBC (the "Mandatory Control Level"), the regulatory authority must place the
company under its 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 Insurance Departments of the States of Delaware and Mississippi have
each adopted the NAIC's Model Act. At March 31, 1998, total adjusted capital for
NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company,
exceeded the respective Company Action Levels.
The Texas Department of Insurance ("TDI") has adopted its own RBC requirements,
the stated purpose of which is to require a minimum level of capital and surplus
to absorb the financial, underwriting and investment risks assumed by an
insurer. Texas' RBC requirements differ from those adopted by the NAIC in two
principal respects: (i) they use different elements to determine minimum RBC
levels in their calculation formulas and (ii) they do not stipulate "Action
Levels" (like those adopted by the NAIC) where corrective actions are required.
However, the Commissioner of the TDI does have the power to take similar
corrective actions if a company does not maintain the required minimum level of
statutory capital and surplus. NFIC and AICT are domiciled in Texas and must
comply with Texas RBC requirements. At March 31, 1998, AICT's RBC exceeded the
minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum
level prescribed by the TDI.
As a result of the statutory losses sustained by the Insurance Subsidiaries
during 1997 and the three months ended March 31, 1998, certain intercompany and
large cash transactions are subject to the approval of the domiciliary states.
<PAGE>
PART II
Item 1 - Legal Proceedings (See Part I - Note 2 to the Consolidated Financial
Statements).
On December 17, 1997, a purported class action complaint, naming the
Company, two current directors of the Company, one former director of
the Company and two underwriters of the Company's Convertible Notes as
defendants, was filed in the United States District Court for the
Northern District of Texas on behalf of persons who purchased
securities of the Company during the period October 31, 1996 through
October 31, 1997. The complaint alleges that the Company materially
overstated its earnings due to the Company's establishment of
inadequate reserves for pending insurance claims. The plaintiff seeks
unspecified money damages and certain costs and expenses. On April 30,
1998, the defendants filed separate motions to dismiss the complaint.
On May 12, 1998, the plaintiff notified Westbridge's legal counsel
that he intends to file an amended complaint on or before June 15,
1998. Management believes that the lawsuit is without merit and it
intends to defend this action vigorously.
Item 3 - Defaults Upon Senior Securities
(a) Debt Securities
Effective November 3, 1997, Westbridge suspended the scheduled
interest payments on its Senior Subordinated Notes and its
Convertible Notes. The failure to make the scheduled interest
payments resulted in an event of default under the Indentures
relating to such Notes and also resulted in an event of default
under the Credit Agreement. As a result of the existing 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 Notes 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. At March 31, 1998, approximately $1.1 million and $4.8
million of unpaid interest has been accrued on such Senior
Subordinated Notes and Convertible Notes, respectively.
(b) Preferred Stock
Effective October 31, 1997, Westbridge suspended payment of the
scheduled dividends on its Series A Preferred Stock. At March 31,
1998, approximately $1.3 million of cumulative, unpaid dividends
were accrued.
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
May 14, 1998
<PAGE>
21
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
May 14, 1998
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