SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1997
Commission File Number 1-8538
WESTBRIDGE CAPITAL CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 73-1165000
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
777 Main Street, Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(817) 878-3300
Registrant's Shareholder and Investor Relations Telephone Number:
(817) 878-3850
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock (par value $.10) New York Stock Exchange
$20,000,000 11.0% Senior Subordinated Notes Due 2002,
New York Stock Exchange
$70,000,000 7-1/2% Convertible Subordinated Notes Due 2004,
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive Proxy Statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
Registrant amounted to $3,087,892 as of March 9, 1998.
At March 9, 1998, 6,224,344 shares of Common Stock were outstanding.
<PAGE>
2
WESTBRIDGE CAPITAL CORP.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. Business 3
ITEM 2. Properties 19
ITEM 3. Legal Proceedings 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 20
ITEM 6. Selected Financial Data 20
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
ITEM 8. Financial Statements and Supplementary Data 34
ITEM 9. Changes in and Disagreements on Accounting and Financial
Disclosure 74
PART III
ITEM 10 Directors and Executive Officers of the Registrant 74
ITEM 11 Executive Compensation 77
ITEM 12 Security Ownership of Certain Beneficial Owners and Management 82
ITEM 13 Certain Relationships and Related Transactions 84
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 85
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Westbridge Capital Corp. is an insurance holding company engaged in the
development, marketing, underwriting and administration of medical expense and
supplemental health insurance products primarily to self-employed individuals
and small business owners in both urban and rural markets. As used herein the
terms "Westbridge" or the "Company" refer to Westbridge and its consolidated
subsidiaries, unless the context requires otherwise. The Company's revenues
result primarily from (i) operating insurance companies (the "Insurance
Subsidiaries") and (ii) general insurance agencies marketing certain managed
health care plans which are underwritten by Health Maintenance Organizations
("HMOs") and other non-affiliated managed care organizations.
During the second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced a sharp increase in claims submissions on Medical
Expense and Medicare Supplement products resulting in substantial losses for
such quarters. In addition, a backlog of pending claims was paid during that
period which also contributed to the second quarter's losses. Following
independent reviews of the Company's claim reserves and an independent benefit
analysis of claims, the Company was required to make substantial additions to
the Insurance Subsidiaries' claim reserves. During the fourth quarter of 1997,
the Company suspended interest payments on its 11% Senior Subordinated Notes and
its 7-1/2% Convertible Subordinated Notes, and suspended dividend payments on
its Series A Preferred Stock, resulting in various defaults and events of
default on such securities. The Company also recognized a substantial premium
deficiency by recording a non-cash charge to current expenses of approximately
$65 million in unamortized deferred policy acquisitions costs. The Company has
been working with Houlihan, Lokey, Howard & Zukin Capital since November 1997 to
assist it in exploring its strategic alternatives and is continuing active
discussions with its insurance regulatory authorities and certain of its
creditors. See "ITEM 7 - Management's Discussion and Analysis of Results of
Operations and Financial Condition."
MARKETING DISTRIBUTION SYSTEM
The Company markets health insurance products and managed care health plans
through a distribution system consisting of (i) general agencies in which the
Company has a controlling ownership interest and (ii) independently-owned
general agencies which have entered into exclusive contractual arrangements to
sell the Company's insurance products.
The Company has generally marketed its underwritten health insurance products to
individuals on a one-on-one basis through agents who are independent contractors
associated with general agencies. The Company's policies are sold to individuals
who are either not covered under group insurance protection normally available
to employees of business organizations or who wish to supplement existing
coverage. In many cases, these individuals are either owners or employees of
small business groups. In 1996, the Company began marketing managed care health
plans underwritten primarily by HMOs and other managed care organizations,
primarily in urban markets where managed care is the consumer's preferred
health-care choice.
Agents' sales contacts generally result from leads generated either by the
Company's telemarketing subsidiary or through outside sources. By utilizing a
predictive automated dialing system, the Company believes its wholly-owned
telemarketing subsidiary, Precision Dialing Services, Inc. ("PDS") is able to
generate a large number of quality sales leads. By providing its controlled and
independent general agencies and their agents with these sales leads, the
Company believes it can attract to experienced agents as well as new agents
entering the business. Consequently, the Company believes it can more easily
attract new agents and retain agents who are a part of its existing general
agencies.
The Company has sought to develop its network of controlled general agencies to
provide it with flexibility and long-term stability in its marketing
relationships. To the extent that these general agencies sell commissioned
products of HMOs and other managed care organizations, they provide additional
fee and service income to the Company.
The principal general agencies in which the Company has a controlling ownership
interest are LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), Senior
Benefits, LLC ("Senior Benefits"), Health Care-One Insurance Agency, Inc.
("Health Care-One"), Health Care-One Marketing Group, Inc. ("HCO Marketing") and
Freedom Marketing. These general agencies market a variety of insurance products
underwritten by the Company, as well as HMO, Preferred Provider Organization
("PPO") and Medicare SELECT products underwritten by independent managed care
organizations such as Blue Cross of California and UniCARE Life and Health
Insurance Company ("UniCARE"), each of which is a subsidiary of WellPoint Health
Networks Inc. ("WellPoint"). The principal independent general agencies that
sell the Company's products are Cornerstone National Marketing Corporation
("Cornerstone") and National Farm and Ranch Group, Inc. ("Farm & Ranch"), each
of which currently markets the Company's Medical Expense products.
Since prior to 1991, the Company's controlled and independent general agencies
have accounted for substantially all of the Company's first-year premiums.
During 1997, LifeStyles Marketing, Cornerstone, Senior Benefits and Farm & Ranch
each accounted for over 10% of the Company's first-year premiums and together
accounted for over 85% of the Company's first-year premiums. The Company
believes that its relationships with its general agencies are good. However,
there can be no assurance that such relationships will continue, or if they do
continue, that they will be profitable for the Company. The Company's ability to
increase production of its underwritten products is expected to remain limited
for the foreseeable future, and these limitations could adversely affect the
Company's relationships with these general agencies. The loss of, or
significantly reduced sales efforts by, any of these general agencies, and the
failure by the Company to replace such general agencies or otherwise offset such
losses, could have a material adverse affect on the Company's business,
financial condition or results of operations. In the event the Company desires
to expand its marketing distribution system, there can be no assurance that it
will be able to form additional general agency relationships or, if formed, that
such relationships will result in increased sales or profitability for the
Company.
DESCRIPTION OF PRODUCT LINES
The major product lines currently marketed and underwritten by the Company's
Insurance Subsidiaries are:
"Medical Expense Products," which include policies providing reimbursement
for various costs of medical and hospital care and offering reduced
deductibles and coinsurance payments to policy-holders which use the
Company's contracted PPOs; and
"Critical Care and Specified Disease Products," which include indemnity
policies for treatment of specified diseases and "event specific" and
"critical care" policies which provide fixed benefits or lump sum payments
upon diagnosis of internal cancer or other catastrophic diseases.
Historically, the Company has also underwritten a significant amount of
"Medicare Supplement Products" designed to provide reimbursement for certain
expenses not covered by the Medicare program. During 1997, the Company
significantly reduced its underwriting of these products in favor of marketing
the Medicare Supplement products of other insurers due to the relatively low
margins for these products.
<PAGE>
The major managed care products which are currently marketed by the Company and
underwritten by unaffiliated HMOs and other managed care organizations are:
HMO products underwritten by Blue Cross of California;
PPO products underwritten by UniCARE; and
Medicare SELECT products underwritten by UniCARE which utilize the
Company's network of contracted Medicare SELECT providers.
<PAGE>
Premium revenue, in thousands, for each of the Company's major underwritten
product lines is set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
ACCIDENT AND HEALTH INSURANCE:
Medical Expense Products:
Direct business
First-year $ 26,621 $ 40,308 $ 16,352
Renewal 36,680 15,906 9,990
Acquired Business (1) 10,438 14,057 19,569
Other (3) 1,500 1,520 1,926
-------- -------- --------
Total Medical Expense Products 75,239 71,791 47,837
-------- -------- --------
Critical Care and Specified Disease Products:
Direct business
First-year 1,229 1,227 1,254
Renewal 12,216 12,520 13,009
Acquired business (1) (2) 20,052 16,465 8,901
Reinsurance assumed - 4,002 9,911
-------- -------- --------
Total Critical Care and Specified Disease Products 33,497 34,214 33,075
-------- -------- --------
Medicare Supplement Products:
Direct business
First-year 8,754 17,852 12,359
Renewal 25,124 11,895 3,011
Acquired business (1) 15,546 17,788 20,645
Other (3) 2,105 2,351 2,617
-------- -------- --------
Total Medicare Supplemental Products 51,529 49,886 38,632
-------- -------- --------
Total Accident and Health Insurance 160,265 155,891 119,544
-------- -------- --------
LIFE INSURANCE:
Total Life Insurance 832 889 549
-------- -------- --------
Total Premium Revenue $161,097 $156,780 $120,093
======== ======== ========
</TABLE>
(1) Includes revenue from policies acquired in the acquisition of National
Financial Insurance Company ("NFIC") and American Insurance Company of
Texas ("AICT") in April 1994.
(2) Includes revenue from policies acquired in the acquisition of Freedom Life
Insurance Company of America's ("FLICA") parent, Freedom Holding Company
("FHC"), in May 1996.
(3) Represents pre-1987 discontinued lines of business.
<PAGE>
The Company's products are designed with flexibility as to benefits and premium
payments and can be adapted to meet regional sales or competitive needs, as well
as those of the individual policyholders. These products have fixed, capped or
limited benefits and are designed to reduce the potential financial impact of
covered illnesses and injuries.
Set forth below is a summary of the principal products the Company currently
underwrites, as well as those which are no longer sold but continue to generate
premium revenue through renewals.
Medical Expense Products. The Company's Medical Expense products are designed to
reimburse insureds for expenses incurred for hospital confinement, surgical
expenses, physician services, out-patient benefits and the cost of medicines
immediately following a hospital stay. Out-patient benefits and maternity
benefits are also available. The policies provide a number of options with
respect to deductibles, coinsurance percentages, maximum benefits and stop-loss
limits and offer reduced deductibles and coinsurance payments to policyholders
which use the Company's contracted PPOs. In addition, certain policies include
"inside limits" on benefits during hospital confinement. After the annual
deductible is met, the insured is responsible for a percentage of eligible
expenses up to a specified stop-loss limit. Thereafter, eligible expenses are
covered by the Company up to certain maximum policy limits.
The Company's Medical Expense products are individually underwritten based upon
medical information provided by the applicant prior to issue. Information in the
application is verified with the applicant through a tape-recorded telephone
conversation or through written correspondence. These policies are conditionally
renewable at the Company's option.
The Company's Medical Expense products are marketed primarily by Freedom
Marketing, LifeStyles Marketing, Cornerstone, and Farm & Ranch and are sold
primarily to members of non-affiliated associations which consist of
self-employed individuals, small business owners and members of the agricultural
community.
Critical Care and Specified Disease Products. The Company's Critical Care and
Specified Disease products include indemnity policies for hospital confinement
and convalescent care for treatment of specified diseases and "event specific"
and "critical care" policies which provide fixed benefits or lump sum payments
upon diagnosis of certain types of internal cancer or other catastrophic
diseases. Benefits are payable directly to the policyholder following diagnosis
of or treatment for a covered illness or injury. The payments are designed to
help reduce the potential financial impact of these illnesses or injuries and
may be used at the policyholder's discretion for any purpose, including helping
to offset non-medical expenses or medical-related expenses not paid by the
policyholder's other health insurance. The amount of benefits provided under the
Company's Critical Care and Specified Disease products is not necessarily
reflective of the actual cost expected to be incurred by the insured as a result
of the illness or injury. Critical Care and Specified Disease products are
generally guaranteed renewable.
Critical Care and Specified Disease products are generally issued by the Company
after an application form is filled out by the agent on behalf of the
prospective insured. Policies are not available to anyone who has been diagnosed
as having the disease prior to the date of policy issuance.
The Company's Critical Care and Specified Disease products are currently
marketed by LifeStyles Marketing and Freedom Marketing.
Medicare Supplement Products. During 1997, the Company significantly reduced the
production of its Medicare Supplement products in favor of marketing the
Medicare Supplement products of other insurers. Medicare Supplement products are
low margin products which require a large number of in-force policies to
generate significant profits.
The Medicare Supplement products previously sold by the Company provide coverage
for many of the medical expenses which the federal Medicare program does not
cover, such as copayments, deductibles and specified losses which exceed the
federal program's maximum benefits. The Company also underwrites a Medicare
SELECT policy which is designed to provide benefits which supplement Medicare at
attractive rates by taking advantage of arrangements with hospitals, other
health care providers and PPOs. These arrangements typically provide that a
hospital or health care provider will agree to waive Medicare's Part A initial
deductible, thereby reducing the total benefit expenses associated with a
hospital stay. The Company's Medicare Supplement Products are guaranteed
renewable.
The Omnibus Budget Reconciliation Act of 1990 mandated, among other things,
standardized policy features in Medicare Supplement plans and, in response, the
NAIC created ten model Medicare Supplement plans. In states that have adopted
the NAIC model, only those 10 policies can be sold. In November 1993, the
Company began underwriting four of the model plans.
Life Insurance. The Company began marketing its EZ-100 life plan in 1995. EZ-100
is an individually underwritten whole life insurance product designed to serve
as a complement to accident and health insurance products. EZ-100 is issued at
face amounts ranging from $3,000 to $20,000 and may be marketed by any of the
Company's general agencies.
While the Company substantially discontinued active sales of ordinary life
insurance products in 1979, it continues to receive renewal premiums on ordinary
life policies in force sold prior to that date.
HOME OFFICE OPERATIONS
The Company's operations are conducted primarily at its Fort Worth office (the
"Home Office"). See "ITEM 2 - Properties." The functions carried out at the Home
Office include policy issue and underwriting, policyowner service, claims
processing, agency service and other administrative functions such as data
processing, legal, accounting and actuarial.
The Company's policy issue and underwriting departments review policy
applications. Although industry practice does not require physical examinations
and tests before a policy is issued, the Company's underwriting personnel will
generally telephone an applicant for a Medical Expense product to verify the
information set forth in the policy application and the policy benefits being
sold and will often contact the applicant's physician in the verification
process. These telephone calls are recorded. Applicants for the Company's
Critical Care and Specified Disease products must certify in writing that they
meet certain health standards established by the Company before the policy will
be issued.
The Company's policyowner service department and agency service department are
responsible for responding to policyowner and agent requests for information or
services. The claims processing department reviews benefit claims submitted by
policyowners, determines the benefits payable and processes the claim payments.
RESERVE POLICY
The Company's reserves consist of two separate components: the claim reserves
and the policy benefit reserves. The claim reserves are established by the
Company for benefit payments which have already been incurred by the
policyholder but which have not been paid by the Company. The Company's
consulting actuary estimates these reserves based upon analysis of claim
inventories, loss ratios and claim lag studies. These estimates are developed in
the aggregate for claims incurred (whether or not reported). The claim reserves
include an amount which will not be paid out until subsequent reporting periods
but which is recorded in the current period for reporting purposes. See ITEM 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments".
Policy benefit reserves are established by the Company for benefit payments
which have not been incurred but which are estimated to be incurred in the
future. The policy benefit reserves are calculated according to the net level
premium reserve method and are equal to the discounted present value of the
Company's expected future policyholder benefits minus the discounted present
value of its expected future net premiums. These present value determinations
are based upon assumed fixed investment yields, the age of the insured(s) at the
time of policy issuance, expected morbidity and persistency rates, and expected
future policyholder benefits. Except for purposes of reporting to insurance
regulatory authorities and for tax filing, the Company's claim reserves and
policy benefit reserves are determined in accordance with generally accepted
accounting principles ("GAAP").
In determining the morbidity, persistency rate, claim cost and other assumptions
used in determining the Company's policy benefit reserves, the Company relies
primarily upon its own benefit payment history and upon information developed in
conjunction with actuarial consultants and industry data. The Company's
persistency rates have a direct impact upon its policy benefit reserves because
the determinations for this reserve are, in part, a function of the number of
policies in force and expected to remain in force to maturity. If persistency is
higher or lower than expected, future policyholder benefits will also be higher
or lower because of the different than expected number of policies in force, and
the policy benefit reserves will be increased or decreased accordingly.
The Company's reserve requirements are also interrelated with product pricing
and profitability. The Company must price its products at a level sufficient to
fund its policyholder benefits and still remain profitable. Because the
Company's policyholder benefits represent the single largest category of its
operating expenses, inaccuracies in the assumptions used to estimate the amount
of such benefits can result in the Company failing to price its products
appropriately and to generate sufficient premiums to fund the payment thereof.
The sharp increase in claims submissions experienced by the Company during the
second and third quarters of 1997 were indicative of inadequate pricing in the
Company's Medical Expense and Medicare Supplement products. See ITEM 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments".
Because the discount factor used in calculating the Company's policy benefit
reserves is based upon the rate of return of the Company's investments designed
to fund this reserve, the amount of the reserve is dependent upon the yield on
these investments. Provided that there is not material adverse experience with
respect to these benefits, changes in future market interest rates will not have
an impact on the profitability of policies already sold. Because fluctuations in
future market interest rates affect the Company's yield on new investments, they
also affect the discount factor used to establish, and thus the amount of, its
policy benefit reserves for new sales. In addition, because an increase in the
policy benefit reserves in any period is treated as an expense for income
statement purposes, market interest rate fluctuations can directly affect the
Company's profitability for policies sold in such period. It is not possible to
predict future market interest rate fluctuations.
In accordance with GAAP, the Company's actuarial assumptions are generally fixed
at the time they are made, and absent materially adverse benefit experience,
they are not generally adjusted. Nonetheless, the Company monitors the adequacy
of its policy benefit reserves on an ongoing basis by periodically analyzing the
accuracy of its actuarial assumptions. The adequacy of the Company's policy
benefit reserves may also be impacted by the development of new medicines and
treatment procedures which may alter the incidence rates of illness and the
treatment methods for illness and accident victims (such as out-patient versus
in-patient care) or prolong the life expectancy of such victims. Changes in
coverage provided by major medical insurers or government plans may also affect
the adequacy of the Company's reserves if, for example, such developments had
the effect of increasing or decreasing the incidence rate and per claim costs of
occurrences against which the Company insures. An increase in either the
incidence rate or the per claim costs of such occurrences could result in the
Company needing to post additional reserves, which could have a material adverse
effect upon its business, financial condition or results of operations.
The Insurance Subsidiaries consist of National Foundation Life Insurance Company
("NFL"), FLICA, NFIC and AICT. The Insurance Subsidiaries are required to report
their results of operations and financial position to state regulatory agencies
based upon statutory accounting practices ("SAP"). Under SAP, certain
assumptions used in determining the policy benefit reserves, such as claim costs
and investment result assumptions, are often more conservative than those
appropriate for use by the Company under GAAP. In particular, SAP interest rate
assumptions for investment results are fixed by statute and are generally lower
than those used by the Company under GAAP. Another significant difference is
that under SAP, unlike GAAP, the Company is required to expense all sales and
other policy acquisition costs as they are incurred rather than capitalizing and
amortizing them over the expected life of the policy. Although the effect of
this requirement is moderated by the allowance under SAP of an accounting
treatment known as the "two year preliminary term" reserve valuation method.
This reserve method allows the Company to defer any accumulation of policy
benefit reserves until after the second policy year. The immediate charge off of
sales and acquisition expenses and the sometimes conservative claim cost and
other valuation assumptions under SAP generally cause a lag between the sale of
a policy and the emergence of reported earnings. Because this lag can reduce the
Company's gain from operations on a SAP basis, it can have the effect of
reducing the amount of funds available for dividend distributions from the
Insurance Subsidiaries to Westbridge. See ITEM 7 - "Liquidity, Capital Resources
and Statutory Capital and Surplus - Insurance Subsidiaries".
REGULATION
The Company and its Insurance Subsidiaries are subject to regulation and
supervision in all jurisdictions in which they conduct business. In general,
state insurance laws establish supervisory agencies with broad administrative
powers relating to, among other things, the granting and revoking of licenses to
transact business, regulation of trade practices, premium rate levels, premium
rate increases, licensing of agents, approval of content and form of policies,
maintenance of specified minimum statutory reserves and statutory capital and
surplus, deposits of securities, form and content of required financial
statements, nature of investments and limitations on dividends to stockholders.
The purpose of such regulation and supervision is primarily to provide
safeguards for policyholders rather than to protect the interests of
stockholders.
The Company's health insurance products are subject to rate regulation by state
insurance departments, which generally require that certain minimum loss ratios
be maintained. The states in which the Company is licensed have the authority to
change the minimum mandated statutory loss ratios to which the Company is
subject, the manner in which these ratios are computed and the manner in which
compliance with these ratios is measured and enforced. Most states in which the
Company writes health insurance products have adopted the loss ratios
recommended by the National Association of Insurance Commissioners ("NAIC"). The
Company is unable to predict the impact of (i) any changes in the mandatory
statutory loss ratios relating to products offered by the Company or (ii) any
change in the manner in which these minimums are computed or enforced in the
future. The Company has not been informed by any state that it does not meet
mandated minimum ratios, and the Company believes that it is in compliance with
all such minimum ratios. In the event the Company is not in compliance with
minimum statutory loss ratios mandated by regulatory authorities, the Company
may be required to reduce or refund premiums, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Similarly, the Company's ability to increase its premium rates in
response to adverse loss ratios is subject to regulatory approval. Failure to
obtain such approval could have a material adverse effect on the Company's
business, financial condition and results of operations.
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 December 31, 1997, 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 December 31, 1997, 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, certain intercompany and
large cash transactions are subject to the approval of the domiciliary states.
The Insurance Subsidiaries are subject to periodic examinations by state
regulatory authorities as part of their routine regulatory oversight process.
Texas recently completed a periodic examination of NFIC and AICT, and management
does not expect the results of these examinations to have a material effect on
the financial condition of the Company. Mississippi is currently conducting an
examination of FLICA, and the results of that examination will be available
during 1998.
Many states have enacted insurance holding company laws that require
registration and periodic reporting by insurance companies within their
jurisdictions. Such legislation typically places restrictions on, or requires
prior notice or approval of, certain transactions within the holding company
system, including, without limitation, dividend payments from insurance
subsidiaries and the terms of loans and transfers of assets within the holding
company structure.
Generally, before the Company is permitted to market an insurance product in a
particular state, it must obtain regulatory approval from that state and adhere
to that state's insurance laws and regulations which include, among other
things, specific requirements regarding the form, language, premium rates and
policy benefits of that product. Consequently, although the Company's policies
generally provide for the same basic types and levels of coverage in each of the
states in which they are marketed, the policies are not precisely identical in
each state or other jurisdiction in which they are sold. Such regulation may
delay the introduction of new products and may impede, or impose burdensome
conditions on, rate increases or other actions that the Company may wish to take
in order to enhance its operating results. In addition, federal or state
legislation or regulatory pronouncements may be enacted that may prohibit or
impose restrictions on the ability to sell certain types of insurance products
or impose other restrictions on the Company's operations. For example, certain
states in which the Company does business have adopted NAIC model statutes and
regulations relating to market conduct practices of insurance companies. Any
limitations or other restrictions imposed on the Company's market conduct
practices by the regulators of a state which has adopted the model statutes and
regulations may also be imposed by the regulators in other states which have
adopted such statutes and regulations. No assurances can be given that future
legislative or regulatory changes will not adversely affect the Company's
business, financial condition or results of operations.
Four states, Connecticut, Massachusetts, New Jersey and New York, have adopted
statutes or insurance department regulations that either prohibit sales of
policies that offer only "specified or dread disease" coverage (such as that
provided by certain of the Company's Critical Care and Specified Disease
products) or require that such coverage be offered in conjunction with other
forms of health insurance. The Company has never written insurance in those
states and does not currently intend to enter those markets. The Company has no
knowledge of legislative initiatives which would limit or prohibit the sale of
"specified or dread disease" policies in other states in which the Company
operates.
The Company may be required, under the solvency or guaranty laws of most states
in which it does business, to pay assessments (up to prescribed limits) to fund
policyholder losses or liabilities of insurance companies that become insolvent.
Insurance company insolvencies increase the possibility that such assessments
may be required. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes. The incurrence
and amount of such assessments may increase in the future without notice. The
Company pays the amount of such assessments as they are incurred. Assessments
which cannot be offset against future premium taxes are charged to expense.
Assessments which qualify for offset against future premium taxes are
capitalized and are offset against such future premium taxes. As a result of
such assessments, the Company paid approximately $28,000 during the year ended
December 31, 1997. The likelihood and amount of any other future assessments
cannot be estimated and are beyond the control of the Company.
Although the U.S. Government generally does not directly regulate the insurance
business, federal initiatives often impact the insurance business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include controls on the cost of medical care, medical
entitlement programs (e.g., Medicare) and minimum solvency requirements for
insurers.
The NAIC has recently taken action on the subject of assumption reinsurance. The
Assumption Reinsurance Model Act was adopted in 1993 and is similar but, in
certain respects, less restrictive than the federal bill. The Model Act provides
a 25-month notice period and may allow a transfer after the expiration of such
period even if the assuming insurer does not have a higher rating than the
transferring insurer. The Model Act will have no legal effect until formally
adopted by the states, although it can be expected to be relied upon by
regulators in states without statutes, regulations or other defined rules
expressly governing assumption reinsurance.
INVESTMENTS
Investment income is an important source of revenue, and the Company's return on
invested assets has a material effect on net income. The Company's investment
policy is subject to the requirements of regulatory authorities regarding
maintenance of minimum statutory reserves in order to meet future policy
obligations for policies in force. Statutory reserves may only consist of
certain types of admitted investments and the percentage mix of those assets is
regulated by statute. In addition, certain assets are held on deposit in
specified states and invested in specified securities in order to comply with
state law. Although the Company closely monitors its investment portfolio,
available yields on newly-invested funds and gains or losses on existing
investments depend primarily on general market conditions. The Company's
investment portfolio is managed by Conseco Capital Management, Inc., a
registered investment advisor.
Investment policy is determined by the Investment Committees of Westbridge and
the Insurance Subsidiaries in accordance with guidelines set forth by their
respective Boards of Directors. The current policy of Westbridge and each of the
Insurance Subsidiaries is to balance the portfolio between long- and short-term
investments so as to achieve long-term returns consistent with the preservation
of capital and maintenance of adequate liquidity to meet the payment of the
Company's policy benefits and claims. The current schedule of the Company's
invested asset maturities corresponds with the Company's expectations regarding
anticipated cash flow payments based on the Company's policy benefit and claim
cycle, which the Company believes is medium term in nature. The Company invests
primarily in fixed-income securities of the U.S. Government and its related
agencies, investment grade fixed-income corporate securities and mortgage-backed
securities. Also, up to 5% of the Company's assets may be invested in higher
yielding, non-investment grade securities.
The following table provides information on the Company's cash and invested
assets, in thousands, as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents $ 1,030 $ 1,013 $ 2,013
-------- -------- --------
Bonds:
U.S. Government and related agencies 22,142 26,108 35,658
State, county and municipal 1,071 518 1,632
Public utilities 11,273 11,016 8,700
Industrial and miscellaneous 94,263 53,955 40,490
-------- -------- --------
Total Bonds 128,749 91,597 86,480
-------- -------- --------
Preferred stock 2,645 147 356
-------- -------- --------
Common stock 2,125 1,449 183
-------- -------- --------
Investment in Freedom Holding Company (1) - - 6,173
-------- -------- --------
Other Invested Assets:
Mortgage loans on real estate 389 658 639
Policy loans 284 282 285
Short-term investments and certificates of deposit 12,654 8,072 15,246
Investment real estate 566 - 141
-------- -------- --------
Total Other Invested Assets 13,893 9,012 16,311
-------- -------- --------
Total Cash and Invested Assets $148,442 $103,218 $111,516
======== ======== ========
</TABLE>
(1) Represents the Company's 40% ownership interest prior to May 31, 1996. On
May 31, 1996, the Company purchased the remaining 60% ownership interest of
FLICA's parent, FHC. Subsequent to that date, the Company has consolidated
the accounts of FHC in accordance with GAAP.
Included in the invested assets of the Company outlined in the preceding table
are certain high-yield debt securities which are below a "BBB" or equivalent
rating. These high-yield debt securities amounted to less than 1.6%, 1.5% and
0.7% of the Company's total cash and invested assets at December 31, 1997, 1996
and 1995, respectively.
The following table summarizes consolidated investment results (excluding
unrealized gains or losses) for the periods shown:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C>
Total invested assets, cash and cash equivalents $148,442 $103,218 $111,516
Net investment income (1) 9,390 7,535 7,021
Realized gains on investments 84 96 182
Average gross annual yield on total investments 7.7% 7.2% 7.0%
</TABLE>
(1) Excludes interest on receivables from agents of $1.6 million, $1.2 million
and $0.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following table summarizes the Company's fixed maturity securities,
excluding short-term investments and certificates of deposit, at December 31,
1997:
FIXED MATURITY SECURITIES
<TABLE>
<CAPTION>
Carrying
Value(1),(2) %
-------- ------
(in thousands)
<S> <C> <C>
Fixed maturity securities:
U.S. Government and governmental
agencies and authorities (except
mortgage-backed) $ 11,668 9.1
States, municipalities and political
subdivisions 1,071 0.8
Finance 33,581 26.1
Public utilities 11,273 8.8
Mortgage-backed 10,474 8.1
All other corporate bonds 60,682 47.1
-------- -------
Total fixed maturity securities $128,749 100.0
======== =======
</TABLE>
(1) At December 31, 1997, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
The Company's fixed maturity investment portfolio at December 31, 1997 was
composed primarily of debt securities of the U.S. Government, corporations and
mortgage-backed securities. Investments in the debt securities of corporations
are principally in publicly-traded bonds.
Mortgage-backed securities represented approximately 8.1% of the estimated
market value of the Company's total invested assets at December 31, 1997. The
Company's mortgage-backed securities portfolio consists entirely of U.S.
government agency pass-through certificates. Currently, the Company does not own
any collateralized mortgage obligations or non-agency pass-through securities.
All of these U.S. government agency pass-through securities have an investment
rating of AAA and are classified NAIC Class 1. Mortgage-backed securities
investors are compensated primarily for reinvestment risk rather than credit
quality risk. During periods of significant interest rate volatility, the
underlying mortgages may prepay more quickly or more slowly than anticipated. If
the repayment of principal occurs earlier than anticipated during periods of
declining interest rates, investment income may decline due to the reinvestment
of these funds at the lower current market rates.
The following table indicates by rating the composition of the Company's fixed
maturity securities portfolio, excluding short-term investments and certificates
of deposit, at December 31, 1997:
COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
Carrying
Value(1),(2) %
------------ -------
(in thousands)
Ratings (3)
Investment grade:
U.S. Government and agencies $ 22,142 17.2
AAA 2,280 1.8
AA 9,474 7.3
A 40,266 31.3
BBB 52,178 40.5
Non-Investment grade:
BB 2,409 1.9
B - -
---------- -------
Total fixed maturity securities $ 128,749 100.0
========== =======
(1) At December 31, 1997, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(3) Ratings are the lower of those assigned primarily by Standard & Poor's and
Moody's when available, and shown in the table using the Standard & Poor's
rating scale. Unrated securities are assigned ratings based on the
applicable NAIC designation or the rating assigned to comparable debt
outstanding of the same issuer. NAIC 1 fixed maturity securities have been
classified as "A" and NAIC 2 fixed maturity securities have been classified
as "BBB".
The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations," which are used by insurers when preparing their annual statutory
reports. The NAIC assigns designations to publicly-traded as well as
privately-placed securities. The ratings assigned by the NAIC range from Class 1
to Class 6 with Class 1 as the highest quality rating. The following table
summarizes the Company's fixed maturity securities according to NAIC
Designations and Standard & Poor's ratings at December 31, 1997:
NAIC DESIGNATIONS
<TABLE>
<CAPTION>
Carrying
Value (1), (2) %
--------------- -------
<S> <C> <C>
NAIC Designations (3)
NAIC 1 (AAA, AA, A) $ 74,162 57.6
NAIC 2 (BBB) 52,178 40.5
NAIC 3 (BB) and below 2,409 1.9
--------------- -------
Total fixed maturity securities $ 128,749 100.0
=============== =======
</TABLE>
(1) At December 31, 1997, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(3) Generally comparable to Standard & Poor's ratings. Comparisons between NAIC
Designations and Standard & Poor's ratings are as published by the NAIC.
The scheduled maturities of the Company's fixed maturity securities, excluding
short-term investments and certificates of deposit, at December 31, 1997 were:
COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
Carrying
Value(1),(2) %
-------- -------
Scheduled Maturity
Due in one year or less $ 3,500 2.7
Due after one year through five years 22,907 17.8
Due after five years through ten years 42,737 33.2
Due after ten years 49,131 38.2
Mortgage-backed securities 10,474 8.1
-------- -------
Total fixed maturity securities $128,749 100.0
======== =======
(1) At December 31, 1997, all of the company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
REINSURANCE
Ceded. As is customary in the insurance industry, the Company's Insurance
Subsidiaries reinsure portions of the coverages it provides to its policyholders
to other insurance companies on both an excess of loss and coinsurance basis.
Cession of reinsurance is utilized by an insurer to limit its maximum loss
thereby providing a greater diversification of risk and minimizing exposures on
larger risks. Reinsurance does not discharge the primary liability of the
original insurer with respect to such insurance, but the Company, in accordance
with prevailing insurance industry practice, reports reserves and claims after
adjustment for reserves and claims ceded to other companies through reinsurance.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Coinsurance Agreement") with a reinsurer
effective July 1, 1996 on the in-force Cancer, Heart and Intensive Care
business. The Coinsurance Agreement provided an initial ceding commission of
$10.5 million, of which $8.4 million was received in cash. On May 1, 1997, the
Coinsurance Agreement was terminated and recaptured. Consistent with the terms
of the agreement, the unpaid portion of the initial ceding commission allowance
was repaid inclusive of interest at 15.0%. For the years ended December 31, 1997
and 1996, the amount repaid was approximately $8.6 million and $1.9 million,
respectively. The ceding allowance payable at December 31, 1997 and 1996,
totaled $0 and $8.6 million, respectively. During the term of the Coinsurance
Agreement, the Company maintained in trust, investments with an estimated market
value equal to 90% of the active life reserves on the reinsured business
approximating $14.7 million at December 31, 1996. See NOTE 14 - REINSURANCE and
NOTE 16 - EXTRAORDINARY ITEM to the Company's Consolidated Financial Statements.
The Company generally does not cede risks associated with its Medicare
Supplement products or Life Insurance products. However, 100% of the Company's
risks under its Accidental Death policies currently in force are reinsured. The
Company also reinsures its risks under the Medical Expense products on an excess
of loss basis so that its maximum payment to any one beneficiary during any
one-year period is limited ($100,000 in 1997) for any accident or illness. In
accordance with industry practice, the reinsurance agreements in force with
respect to these policies are terminable by either party with respect to claims
incurred after the termination date and the expiration dates.
Assumed. In the past, the Company has utilized coinsurance agreements to assume
premiums and increase revenues. NFL and FLICA were party to such arrangements
prior to NFL's acquisition of FHC. In 1996, prior to this acquisition, $4
million in premiums were assumed by NFL. Subsequent to the acquisition, those
coinsurance arrangements were canceled.
HEALTH CARE REFORM
Numerous proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Proposals have included,
among other things, modifications to the existing employer-based insurance
system, a quasi-related system of "managed competition" among health plans and a
single-payer, public program. Most of these proposals are specifically directed
at the individual and small group health care market, which is a significant
portion of the Company's health business. At present, most health care reform,
other than that related to the Medicare program, is taking place at the state
level. A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge between new business
and renewal business with respect to similar demographic groups. State
legislation also has been adopted or is being considered that would make health
insurance available to all small groups by requiring coverage of all employees
and their dependents, by limiting the applicability of pre-existing conditions
exclusions, by requiring insurers to offer a basic plan exempt from certain
mandated benefits as well as a standard plan, and by establishing a mechanism to
spread the risk of high risk employees to all small group insurers.
In 1996, Congress enacted HR 3103 ("Health Insurance Portability and
Accountability Act", or "HIPAA"), also commonly referred to as the
Kennedy-Kassenbaum Bill. HIPAA provisions are applicable to both insured and
self-funded employer group coverages and include minimum standards for
pre-existing condition exclusions, waiver of pre-existing condition exclusions
for individuals meeting minimum prior coverage requirements and prohibition of
health related exclusions of individuals from employer group coverage. HIPAA
also provides guaranteed acceptance of small employers with 2 to 50 employees
for insured coverage. In other respects, HIPAA's group and small group
provisions are largely in line with state small group reform laws already
enacted by the large majority of states. In the individual market, HIPAA
requires guaranteed acceptance for eligible individuals moving out of group
plans who have at least 18 months of prior coverage. However, most states have
or are expected to amend their laws to alleviate any inconsistencies with the
federal minimum standards. States which have not already enacted all of the
HIPAA group and small group standards may enact state reforms consistent with
HIPAA. The final outcome of state amendments or new legislation, as well as
federal regulations addressing these provisions, cannot be predicted.
The Company cannot predict what effect, if any, yet to be enacted health care
legislation or proposals will have on the Company if and when enacted. The
Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. No assurance can be given that enactment
of any federal and/or state health care reforms will not have a material effect
on the Company's business, financial condition or results of operations.
COMPETITION
The accident and health insurance industry is a highly competitive environment
and includes a large number of insurance companies, many of which have
substantially greater financial resources, broader and more diversified product
lines, favorable ratings from A.M. Best Company, Inc. ("A.M. Best") and larger
staffs than the Company. The Company competes with other insurers to attract and
retain the allegiance of its independent agents and marketing organizations
that, at this time, are responsible for a significant portion of the Company's
revenues. Competitive factors applicable to the Company's business include
product mix, policy benefits, service to policyholders and premium rates. The
Company believes that its A.M. Best rating is not a significant factor affecting
its ability to sell its products in the markets that it serves.
Private insurers and voluntary and cooperative plans, such as Blue Cross and
Blue Shield and HMOs, provide various alternatives for defraying hospitalization
and medical expenses. Much of this insurance is sold on a group basis to
employer sponsored groups. The federal and state governments also provide
programs for the payment of the costs associated with medical care through
Medicare and Medicaid. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or
illnesses. The Company's Medical Expense products are designed to provide
coverage which is similar to these major medical insurance programs but are sold
primarily to persons not covered by an employer sponsored group.
The Company's Critical Care and Specified Disease products are designed to
provide coverage which is supplemental to major medical insurance and may be
used to defray nonmedical as well as medical expenses. Since these policies are
sold to complement major medical insurance, the Company competes only indirectly
with these insurers providing major medical insurance. However, expansion of
coverage by other insurers could adversely affect the Company's business,
financial condition or results of operations. Medicare Supplement products are
designed to supplement the Medicare program by reimbursing for expenses not
covered by such program. To the extent that future government programs reduce
participation by private entities in such government programs, they could
adversely affect the Company's business, financial condition or results of
operations.
The Company competes directly with other insurers offering similar products and
believes that its current benefits and premium rates are generally competitive
with those offered by other companies. Management believes that service to
policyholders and prompt and fair payment of claims continue to be important
factors in the Company's ability to remain competitive.
In addition to product and service competition, there is also very strong
competition within the supplemental accident and health insurance market for
qualified, effective agents. The recruitment and retention of such agents is
extremely important to the success and growth of the Company's business.
Management believes that the Company is competitive with respect to the
recruitment and training of agents. However, there can be no assurance that the
Company's controlled general agencies will be able to continue to recruit or
retain qualified, effective agents. The inability of the Company to adequately
recruit and retain agents could have a material adverse effect upon the
Company's business, financial condition or results of operations.
Managed health care organizations also operate in a highly competitive
environment and in an industry that is currently subject to significant changes
from business consolidations, legislative reform, aggressive marketing practices
and market pressures. The Company's ability to increase its fee and service
income by continuing to expand its marketing of managed care products
underwritten primarily by HMOs and other managed care organizations may be
adversely affected by the changes affecting this industry.
EMPLOYEES
At December 31, 1997, the Company employed 345 persons. The Company has not
experienced any work stoppages, strikes or business interruptions as a result of
labor disputes involving its employees, and the Company considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
On May 1, 1998, the Company intends to move its principal offices from 777 Main
Street, Fort Worth, Texas, to 110 West 7th Street, Fort Worth, Texas. The lease
for the new facility expires in April 2003. Westbridge Printing Services, Inc.
("WPS"), the Company's wholly-owned printing subsidiary which prints all
policies, forms and brochures of the Insurance Subsidiaries, maintains its
manufacturing facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas,
under a lease agreement which expires in October, 2005. The Company also has
lease agreements for certain sales offices of its affiliated marketing agencies
in Arizona, California and Texas. The Company believes that the newly leased
facilities will meet its existing needs and that the leases can be renewed or
replaced on reasonable terms if necessary.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business operations, the Company is involved in
various claims and other business related disputes. In the opinion of
management, the Company is not a party to any pending litigation the disposition
of which would have a material adverse effect on the Company's business,
financial position or its results of operations.
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 7-1/2% Convertible Subordinated 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. Management
believes that the lawsuit is without merit and it intends to defend this action
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK-HOLDER MATTERS
Westbridge's Common Stock is listed on the New York Stock Exchange and traded
under the symbol "WBC." The following table sets forth for the periods indicated
the high and low sales price for the Common Stock, by quarter, as reported by
the New York Stock Exchange.
High Low
1998
First Quarter (through March 9, 1998) 0.938 0.438
1997
Fourth Quarter 4.938 0.375
Third Quarter 10.625 4.563
Second Quarter 10.125 8.875
First Quarter 12.250 9.500
1996
Fourth Quarter 9.875 7.750
Third Quarter 8.750 7.500
Second Quarter 7.875 5.875
First Quarter 7.125 5.250
On March 9, 1998, the closing price of the Common Stock on the New York Stock
Exchange was $0.625 per share. As of March 9, 1998, there were approximately
2,213 record holders of the Common Stock.
Westbridge has not paid any cash dividends on the Common Stock and does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. Both the Preferred Stock Purchase Agreement relating to the
Series A Preferred Stock and the Senior Subordinated Indenture relating to the
Senior Subordinated Notes, impose certain restrictions upon Westbridge with
respect to the payment of dividends on the Common Stock.
For information concerning statutory limitations on the payment of dividends to
Westbridge by the Insurance Subsidiaries and further discussion of the Company's
results of operations and liquidity, see ITEM 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations", ITEM 1 "Business
- -Regulation", and NOTE 12 - STATUTORY CAPITAL AND SURPLUS to the Consolidated
Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below was selected or derived from the Consolidated
Financial Statements of the Company. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 (1) 1995 1994 (2) 1993
----------- ----------- ----------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statement of Operation Data:
Premiums $ 161,097 $ 156,780 $ 120,093 $ 98,703 $ 68,731
Net investment income 11,023 8,736 7,421 5,764 4,120
Fee and service income 16,700 9,534 2,336 1,759 1,411
Net realized gains on investments 84 96 182 320 1,030
----------- ----------- ----------- ----------- -----------
Total revenues 188,904 175,146 130,032 106,546 75,292
----------- ----------- ----------- ----------- -----------
Benefits and claims 136,866 94,187 70,465 53,623 33,153
Amortization of deferred policy
acquisition costs 30,873 22,907 11,553 9,711 8,159
Commissions 16,690 7,919 11,359 11,224 9,595
General and administrative expenses 31,407 27,123 21,926 16,847 14,349
Reorganization expense 4,424 - - - -
Recognition of premium deficiency 64,952 - - - -
Taxes, licenses and fees 5,995 5,951 4,101 3,230 2,724
Interest expense 7,102 4,462 2,432 3,067 2,552
----------- ----------- ----------- ----------- -----------
Total expenses 298,309 162,549 121,836 97,702 70,532
----------- ----------- ----------- ----------- -----------
(Benefit) provision for income taxes (13,268) 4,410 2,813 2,764 1,562
Equity in FHC - 74 348 345 333
(Loss) income before
extraordinary loss (96,137) 8,261 5,731 6,425 3,531
Extraordinary loss, net of
income tax 1,007 - 407 - -
----------- ----------- ----------- ----------- -----------
Net (loss) income (97,144) 8,261 5,324 6,425 3,531
Preferred stock dividends 1,572 1,650 1,650 1,190 -
----------- ----------- ----------- ----------- -----------
(Loss) income applicable to
common stockholders $ (98,716) $ 6,611 $ 3,674 $ 5,235 $ 3,531
=========== =========== =========== =========== ===========
Earnings Per Share:
Basic $ (16.07) $ 1.11 $ 0.64 $ 1.21 $ 0.84
Diluted $ (16.07) $ 0.97 $ 0.63 $ 1.04 $ 0.78
Book Value Per Share:
Basic $ (7.33) $ 7.93 $ 7.14 $ 5.95 $ 5.06
Diluted (3) $ (7.33) $ 8.07 $ 7.50 $ 6.90 $ 5.06
Weighted Average
Shares Outstanding:
Basic 6,143,000 5,978,000 5,698,000 4,335,000 4,214,000
=========== =========== =========== =========== ===========
Diluted 6,143,000 8,477,000 5,829,000 6,185,000 4,538,000
=========== =========== =========== =========== ===========
Balance Sheet Data:
Total cash and invested assets $ 148,442 $ 103,218 $ 111,516 $ 108,838 $ 57,434
Deferred policy acquisition costs 19,165 83,871 56,977 58,654 28,354
Total assets 202,856 220,716 200,999 187,581 97,067
Notes payable (4) 13,100 21,210 15,807 - -
Senior subordinated debentures
due 1996 (5) - - - 24,665 19,422
Senior subordinated notes
due 2002 (5) 19,447 19,350 19,264 - -
Convertible subordinated notes
due 2004 (6) 70,000 - - - -
Redeemable preferred stock (7) 19,000 20,000 20,000 20,000 -
Stockholders' (deficit) equity (45,418) 47,903 42,805 26,355 21,611
</TABLE>
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996.
(2) Includes operations of NFIC and AICT from April 12, 1994.
(3) Calculated by adding the redeemable preferred stock balance to
stockholders' equity and dividing the resultant sum by the period-end
shares outstanding plus the number of common shares issuable upon
conversion of the redeemable preferred stock as if converted at the end of
the period.
(4) At December 31, 1997, represents balances of $13.1 million outstanding
against a $20.0 million revolving line of credit.
(5) On February 28, 1995, the Company issued $20.0 million principal amount of
its 11% Senior Subordinated Notes due 2002 and issued 1,500,000 additional
shares of Common Stock. The proceeds of these offerings were used, in part,
to redeem the Senior Subordinated Debentures due 1996, on March 30, 1995.
(6) On April 29, 1997, the Company issued $65.0 million principal amount of its
7-1/2% Convertible Subordinated Notes ("Convertible Notes") due 2004. 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.
(7) At December 31, 1997 consists of 19,000 shares of Series A Preferred Stock,
which were convertible, at the option of the holders thereof, into an
aggregate of 2,259,214 shares of Common Stock at a conversion price of
$8.41 per share of Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT DEVELOPMENTS
During the second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced an increase in claims submissions on Medical Expense
and Medicare Supplement products resulting in substantially increased loss
ratios. In addition, a backlog of pending claims was paid during that period
which also contributed to the second quarter's losses. Independent reviews of
the Company's claim reserves were performed as of September 30, 1997.
Additionally, an independent benefit analysis of claims was completed which
indicated that significant rate increases, which are not expected to be fully
implemented until at least September 1998, and further benefit modifications
will be required to offset the current adverse claims experience. However, until
such time as the necessary rate increases, and benefit modifications can be
fully 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.
In addition, policy persistency has declined in connection with the
implementation of certain rate increases together with intensified competitor
solicitation of the Company's policyholders. These events affected the future
profit margins available to absorb amortization of Deferred Policy Acquisition
Costs ("DPAC"). As a result of these adverse changes, the Company undertook a
revaluation of the recoverability of DPAC in the fourth quarter. Based on the
results of this review and the impact of future projected premium revenues and
the discontinuance of certain lines of business, the Company determined that a
premium deficiency for certain lines of business existed as of December 31,
1997. A premium deficiency occurs when the projected present value of future
premiums associated with these policies will not be adequate to cover the
projected present value of future payments for benefits and related amortization
of DPAC. Generally accepted accounting principles require the immediate
recognition of a premium deficiency by charging the unamortized DPAC to expense.
In this connection, for the quarter and year ended December 31, 1997, the
Company recorded a non-cash charge to expense of approximately $65.0 million and
incurred a significant loss for the year ended December 31, 1997. This
adjustment has no impact on the Company's cash position at December 31, 1997 and
does not impact the statutory capital and surplus of the Insurance Subsidiaries.
As a result of these losses, in November 1997, the Company engaged Houlihan,
Lokey, Howard & Zukin to act as its financial advisor to explore the Company's
strategic 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. Since
November 1997, the Company has held 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
7-1/2% Convertible Subordinated Notes ("Convertible Notes") due 2004.
In order to preserve capital and maintain flexibility while it considers its
strategic alternatives, the Company has suspended its scheduled debt service
payments on its Senior Subordinated Notes and Convertible Notes since November
1997 and suspended its dividend payments on its outstanding Series A Preferred
Stock since October 1997. The failure to make the scheduled interest payments
constituted payment defaults under the Indentures relating to such Notes and
became events of default thereunder as of November 17, 1997. In addition, the
failure to make such interest payments also resulted in an event of default
under its Credit Agreement with a bank. Other covenant defaults are also
existing under the Credit Agreement and the Indenture relating to the Senior
Subordinated Notes (See NOTE 7 - FINANCING ACTIVITIES). 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. There can be no assurance that the Company will resume such
interest and dividend payments in the future.
The Report of Independent Accountants included herein refers to certain of the
foregoing events which are discussed in NOTE 2 to the Company's financial
statements and which raise substantial doubt about the Company's ability to
continue as a going concern. See ITEM 8 - "Financial Statements and
Supplementary Data."
IMPACT OF YEAR 2000 ISSUE
The Company is analyzing the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Management has initiated an enterprise-wide program to prepare the Company's
computer systems, infrastructure, and facilities for the Year 2000. This program
includes working with vendors and business partners to insure they are also
prepared for the Year 2000. The Company expects to incur internal staff costs as
well as consulting and other expenses approximating $3.0 million related to
computer systems, infrastructure, and facilities enhancements necessary to
prepare for the Year 2000.
The Company expects its Year 2000 program to be completed in a timely basis;
however, the Year 2000 computer problem creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial transactions. Such potential, unforeseen problems
in the Company's and/or third parties' computer systems could have a material
impact on the Company's ability to conduct its business.
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 DPAC, commissions paid
on policy renewals, general and administrative expenses associated with policy
and claims administration, taxes, licenses and fees and interest on its
indebtedness. In addition to the foregoing expenses, Westbridge is obligated to
pay dividends on the Series A Preferred Stock if and when declared by the Board
of Directors.
Fee and service income is generated from (i) commissions received by the Company
for sales of managed care products underwritten primarily by HMOs and other
managed care organizations, (ii) telemarketing services provided by PDS, and
(iii) printing services provided by 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.
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. The 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)
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.
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.
Premiums (1)
--------------------------------
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Company-issued policies:
First-year premiums $ 36,800 $ 61,049 $ 34,561
Renewal premiums 78,261 47,421 36,417
-------- -------- --------
Total company-issued policy premiums 115,061 108,470 70,978
-------- -------- --------
Acquired policies:
AII 7,179 8,364 9,811
LHI 1,533 1,820 2,089
DNL 2,827 2,974 3,299
NFIC and AICT 21,061 26,207 33,110
FLICA 12,605 7,744 -
Other 831 1,201 806
Total acquired policy premiums (2) 46,036 48,310 49,115
-------- -------- --------
Total Premiums $161,097 $156,780 $120,093
======== ======== ========
(1) For a breakdown of premiums by product line, see "Business-Product Lines."
(2) Premiums for the acquired policies include first-year premiums of
$1,090,000, $794,000 and $213,000 for the years ended December 31, 1997,
1996 and 1995, 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 Business section, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to the
Consolidated Financial Statements 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 Quarterly Reports on Form
10-Q for the quarter ended March 31, 1997, June 30, 1997 and September 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
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Premiums. Premiums increased $4.3 million, or 2.7%, from $156.8 million to
$161.1 million. This increase resulted from an increase in renewal premiums from
Company-issued policies of $33.7 million, or 75.6%, and was offset by a decrease
in renewal premiums from acquired policies of $5.4 million, or 10.7%, and
decreases in first-year premiums from Company-issued and acquired policies of
$22.8 million and $1.2 million, or 38.1% and 60.0%, respectively.
The increase in renewal premiums from Company-issued policies was attributable
to an increase of $20.7 million, or 118.3% in Medical Expense premiums, an
increase of $13.0 million, or 92.2% in Medicare Supplement premiums, an increase
in Life Insurance and other premiums of $0.3 million, or 50.0%, and was offset
by a decrease of $0.3 million, or 2.4%, in Critical Care and Specified Disease
premiums.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $5.4 million, or 20.6%, from the policies acquired in the NFIC and
AICT acquisition and to a decrease of $1.8 million, or 12.6%, from the policies
acquired from AII, LHI and DNL, and was offset by an increase of $1.8 million,
or 18.4%, from the policies acquired in the FLICA acquisition.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease of $13.5 million, or 33.5% in Medical Expense
premiums, a decrease of $9.1 million, or 50.8% in Medicare Supplement premiums,
and a decrease of $0.2 million, or 40.0%, in Life Insurance and other premiums.
The decrease in first-year premiums from acquired policies was attributable to a
decrease of $1.2 million, or 60.0%, from the policies acquired in the FLICA
acquisition.
Net Investment Income. Net investment income increased $2.3 million, or 26.4%,
from $8.7 million to $11.0 million. 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.
Fee and Service Income. Fee and service income increased $7.2 million, or 75.8%,
from $9.5 million to $16.7 million. The increase was primarily due to an
increase of $6.4 million, or 81%, relating to commissions on managed care
product sales earned by the Company's controlled general agencies and an
increase of $0.8 million, or 47.1%, in other fees.
Benefits and Claims. Benefits and claims expense increased $42.7 million, or
45.3%, from $94.2 million to $136.9 million. This increase was attributable to
an increase in benefits and claims expense from Company-issued and acquired
policies of $39.2 million and $3.5 million, or 65.7% and 10.1%, respectively.
The increase in benefits and claims expense from Company-issued policies was
primarily attributable to an increase of $31.1 million, or 115.2%, from Medical
Expense products, an increase of $6.4 million, or 25.3%, from Medicare
Supplement products, an increase of $2.2 million, or 36.7%, from Critical Care
and Specified Disease products, and was offset by a decrease of $0.5 million, or
35.7% from Life Insurance and other products.
The increase in benefits and claims expense from acquired policies was primarily
attributable to an increase of $2.9 million, or 72.5%, from the policies
acquired in the FLICA acquisition, an increase of $0.3 million, or 1.4%, from
the policies acquired in the NFIC and AICT acquisition, and an increase of $0.3
million, or 3.1% from the policies acquired from AII, LHI and DNL.
During the second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced an increase in claims submissions on Medical Expense
and Medicare Supplement products resulting in substantially increased loss
ratios. In addition, a backlog of pending claims was paid during that period
which also contributed to the second quarter's losses. Independent reviews of
the Company's claim reserves were performed as of September 30, 1997.
Additionally, an independent benefit analysis of claims was completed which
indicated that significant rate increases, which are not expected to be fully
implemented until at least September 1998, and further benefit modifications
will be required to offset the current adverse claims experience. However, until
such time as the necessary rate increases and benefit modifications can be fully
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.
Amortization of DPAC. A portion of the Company's 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 1998.
Amortization of DPAC increased $8.0 million, or 34.9%, from $22.9 million to
$30.9 million. This increase was attributable to an increase in amortization of
DPAC from Company-issued policies of $10.9 million, or 63.7%, and was offset by
a decrease of $2.9 million, or 50.0%, from acquired policies.
The increase in amortization of DPAC from Company-issued policies was primarily
attributable to an increase of $7.6 million and $3.9 million, or 71.0% and
97.5%, from Medical Expense and Medicare Supplement products, respectively, and
was offset by a decrease of $0.5 million, or 23.8% from Critical Care and
Specified Disease products and a decrease of $0.1 million from Life Insurance
and other products.
The decrease in amortization of DPAC from acquired policies was primarily
attributable to a decrease of $2.4 million, or 104.3%, from the policies
acquired in the NFIC and AICT acquisition, a decrease of $0.7 million, or 43.8%,
from the policies acquired from AII, LHI and DNL, and was offset by an increase
of $0.2 million, or 10.5%, from the policies acquired in the FLICA acquisition.
Commissions. Commissions increased $8.8 million, or 111.4%, from $7.9 million to
$16.7 million. This increase was attributable to an increase of $4.1 million in
commissions on sales of Company-issued policies and an increase of $5.6 million,
or 114.3%, on sales of non-affiliated, managed care insurance products, and was
offset by a decrease of $0.9 million, or 14.8%, from acquired policies.
General and Administrative Expenses. General and administrative expenses
increased $4.3 million, or 15.9%, from $27.1 million to $31.4 million. This
increase was primarily attributable to 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.
Reorganization Expense. As more fully described in "Recent Developments", in
response to the losses sustained by the Company in the second and third quarters
of 1997, 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 1997,
the Company incurred approximately $1.4 million in expenses during the fourth
quarter of 1997 related to these efforts. In addition, the Company incurred
approximately $3.0 million during the second quarter of 1997 in connection with
a non-recurring internal reorganization.
Recognition of Premium Deficiency. As more fully described in "Recent
Developments," in response to the significant increases in loss ratios on the
Company's Medical Expense and Medicare Supplement products and the decline in
policy persistency, the Company undertook a revaluation of the recoverability of
DPAC in the fourth quarter. Based on the results of this review and the impact
of future projected premium revenues and the discontinuance of certain lines of
business, the Company determined that a premium deficiency for certain lines of
business existed as of December 31, 1997. A premium deficiency occurs when the
projected present value of future premiums associated with these policies will
not be adequate to cover the projected present value of future payments for
benefits and related amortization of DPAC. Generally accepted accounting
principles require the immediate recognition of a premium deficiency by charging
the unamortized DPAC to expense. In this connection, for the quarter and year
ended December 31, 1997, the Company recorded a non-cash charge to expense of
approximately $65.0 million. This adjustment has no impact on the Company's cash
position at December 31, 1997 and does not impact the statutory capital and
surplus of the Insurance Subsidiaries.
Taxes, Licenses and Fees. Taxes, licenses and fees remained relatively unchanged
from the prior year at $6.0 million as increases in premium taxes due to higher
premiums levels in 1997 were offset by decreases in state levied fees and
special assessments during the same period.
Interest Expense. Interest expense increased $2.6 million, or 57.8%, from $4.5
million to $7.1 million. This increase is attributable to the accrued interest
expense related to the issuance of $70.0 million of the Company's 7-1/2%
Convertible Notes.
(Benefit from) Provision for Income Taxes. During 1996, the provision for income
taxes was calculated by applying the 35% statutory federal tax rate to the
Company's pre-tax income for the year ended December 31, 1996. The change in the
(benefit from) provision for income taxes during 1997 is directly attributable
to the net loss recorded by the Company for the year ended December 31, 1997.
This net loss generated a significant amount of net operating loss carryforwards
("NOLs") 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 the year ended
December 31, 1997. See NOTE 11 - INCOME TAXES to the Company's Consolidated
Financial Statements.
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 year
ended December 31, 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.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Premiums. Premiums increased $36.7 million, or 30.6%, from $120.1 million to
$156.8 million. The increase was attributable to first-year and renewal premiums
of Company-issued policies increasing $26.5 million and $11.0 million, or 76.6%
and 30.2%, respectively, and was offset by a decrease in premiums from acquired
policies of $0.8 million, or 1.6%.
The increase in first-year premiums of Company-issued policies was attributable
to an increase of $26.1 million, or 154.4%, in Medical Expense premiums and an
increase of $3.3 million, or 28%, in Medicare Supplement premiums. These
increases were offset, in part, by a decrease of $3.2 million in Critical Care
and Specified Disease premiums.
The increase in renewal premiums of Company-issued policies was attributable to
an increase of $8.5 million, or 283.3%, in Medicare Supplement premiums and an
increase of $6.3, or 63%, in Medical Expense premiums. These increases were
offset, in part, by a decrease of $3.3 million in Critical Care and Specified
Disease premium.
The decrease in premiums of acquired policies was attributable to a decrease of
$6.9 million, or 20.9%, from the policies acquired in the NFIC and AICT
acquisition, and a decrease of $1.4 million, or 14.8%, from the policies
acquired from AII. These decreases were offset, in part, by an increase of $7.7
million from the policies acquired in the FLICA acquisition.
Net Investment Income. Net investment income increased $1.3 million, or 17.6%,
from $7.4 million to $8.7 million. This increase was primarily the result of a
$0.8 million increase in interest earned on receivables due from agents. The
remaining increase is due primarily to a higher average investment base which
was offset, in part, by negative cash flows from operations. The higher average
investment base resulted from the acquisition of FLICA during the year and to
amounts borrowed to finance advances to general agencies.
Fee and Service Income. Fee and service income increased $7.2 million, or 313%,
from $2.3 million to $9.5 million. The increase was primarily due to an increase
of $6.4 million of commission income on managed care product sales by the
Company's controlled general agencies and an increase of $0.9 million of
telemarketing services earned by PDS.
Benefits and Claims. Benefits and claims expense increased $23.7 million, or
33.6%, from $70.5 million to $94.2 million. Benefits and claims from
Company-issued policies increased $24.4 million, or 62.7%, and were offset, in
part, by a decrease in benefits and claims from acquired policies of $0.7
million, or 2.2%. In connection with the increase in premiums, benefits and
claims increased $8.0 million, or 61.5%, from Medicare Supplement products, an
increase of $13.8 million, or 95.2%, from Medical Expense products and an
increase of $2.6 million from Critical Care and Specified Disease products. As a
result of continued lapses from a closed block of business, benefits and claims
decreased $3.4 million, or 38.6%, from policies purchased from AII. The block of
business acquired from NFIC and AICT reflected an increase in benefits and
claims expense of $2.2 million, or 11.8%, and was primarily related to
disability income products. Additionally, benefits and claims expense increased
$0.6 million due to the recent acquisition of FLICA.
Amortization of DPAC. Amortization of DPAC increased $11.3 million, or 97.4%,
from $11.6 million to $22.9 million. The increase resulted from the growth in
sales which began in the second quarter of 1995. Amortization of DPAC increased
$3.2 million for Medical Expense products, $3.5 million for Medicare Supplement
products, and $2.8 million for Critical Care and Specified Disease products, a
portion of which was attributable to a large group policy which lapsed in 1996.
Amortization of DPAC also increased $4.1 million due to sales of new policies
underwritten by NFIC and AICT. This increase for NFIC and AICT was offset, in
part, by a $2.1 million decrease in amortization of the cost of insurance
purchased which was capitalized in connection with the Company's acquisition of
NFIC and AICT. Further offsetting this increase in amortization of DPAC was a
decrease of $2.9 million from discontinued Medicare Supplement products and
Medical Expense products. Amortization of DPAC pertaining to FLICA increased
$2.3 million related to the Critical Care and Specified Disease products.
Commissions. Commissions decreased $3.5 million, or 30.7%, from $11.4 million to
$7.9 million. This decrease was a reflection of lower overall net level
commission rates on new business production as compared to level commission
rates for products written in prior reporting periods.
General and Administrative Expenses. General and administrative expenses
increased $5.2 million, or 23.7%, from $21.9 million to $27.1 million as a
result of costs associated with expanding marketing operations and servicing a
growing base of policyholders. General and administrative expenses of
approximately $0.6 million were incurred during 1996 as a result of acquiring
the remaining interests in Senior Benefits and American Senior Security Plans.
Taxes, Licenses and Fees. Taxes, licenses and fees increased $1.9 million, or
46.3%, from $4.1 million to $6.0 million. The increase was primarily due to
growth in premium revenues along with state fees charged for examinations and
various assessments, including guaranty fund assessments.
Interest Expense. Interest expense increased $2.1 million, or 87.5%, from $2.4
million to $4.5 million. The increase was primarily due to an increase of $1.4
million associated with a revolving line of credit which became available to the
Company on December 28, 1995 and an increase of $0.7 million related to a
reinsurance treaty which was effective July 1, 1996.
Provision for Income Taxes. The provision for income taxes increased $1.6
million, or 57.1%, from $2.8 million to $4.4 million. The increase was the
result of pre-tax income increasing $4.2 million, or 49.4%.
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 to Westbridge 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 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. During 1998, NFIC's and
AICT's earned surplus is negative, and as such, each company is precluded from
paying dividends 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. During 1998, FLICA is precluded from
paying dividends to NFL 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 statutory 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 by the Insurance Subsidiaries during the year ended
December 31, 1997, Westbridge does not expect to receive any dividend payments
from these entities for the foreseeable future.
Since November 1997, Westbridge suspended its scheduled interest payments on the
Senior Subordinated Notes, the Convertible Notes, and the dividend payments 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
became 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. As of December
31, 1997, the Company had accrued interest totaling $0.6 million and $3.5
million in connection with its outstanding Senior Subordinated Notes and
Convertible Notes, respectively.
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 December 31, 1997, the Company had approximately $0.8 million
in cumulative, unpaid dividends on its Series A Preferred Stock.
As of March 9, 1998, Westbridge had approximately $12.8 million in cash and
invested assets remaining from the net proceeds of the sale of the Convertible
Notes. The Company is continuing its discussions with certain of its creditors
concerning various transactional and strategic alternatives which may include,
without limitation, a refinancing, recapitalization or other corporate
reorganization involving a signficant reduction in, or exchange of equity for,
outstanding indebtedness. 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 second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced an increase in claims submissions on Medical Expense
and Medicare Supplement products resulting in substantially increased loss
ratios. In addition, a backlog of pending claims was paid during that period
which also contributed to the second quarter's losses. Independent reviews of
the Company's claim reserves were performed as of September 30, 1997.
Additionally, an independent benefit analysis of claims was completed which
indicated that significant rate increases, which are not expected to be fully
implemented until at least September 1998, and further benefit modifications
will be required to offset the current adverse claims experience. However, until
such time as the necessary rate increases and benefit modifications can be fully
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.
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. 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.
During 1997, Westbridge made capital contributions totaling approximately $45.3
million to its Insurance Subsidiaries. To the extent that the Company's
Insurance Subsidiaries experience further statutory operating losses during
1998, additional capital contributions by Westbridge 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 years ended December 31, 1997, 1996 and 1995, the
Company has recorded a provision for uncollectible commission advances totaling
$2.8 million, $1.5 million and $0, respectively. This increase in 1997 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. For the years ended 1997, 1996 and 1995, the Company charged-off $0
million, $0.9 million and $0 million, respectively, of reimbursable commission
advances which had accumulated. Future rate increases may result in additional
lapses that would lead to additional uncollectible receivables.
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"). See
NOTE 16 - EXTRAORDINARY ITEM to the Company's Consolidated Financial Statements.
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 December 31, 1997, the Company's receivables
from subagents totaled approximately $14.1 million, and approximately $13.1
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 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.
The Company also receives commission advances from the unaffiliated HMOs and
other managed care organizations and in turn advances commissions to its general
agencies and their agents. At December 31, 1997, the Company's receivables from
its subagents related to these advances totaled approximately $6.4 million, and
the Company owed approximately $4.7 million to unaffiliated HMOs and other
managed care organizations.
Consolidated
The Company's consolidated net cash used for operations totaled $20.0 million,
$10.8 million and $20.8 million in 1997, 1996 and 1995, 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 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. The reduction in cash used by operations in 1996 as compared to 1995 is
due primarily to higher net income from operations and an increase in
policyholder liabilities.
Net cash (used for) provided by investing activities for 1997, 1996 and 1995
totaled ($40.4) million, $6.3 million and $0.4 million, respectively. The
increase in the cash outflow for 1997 represents the investment of the net
proceeds from the issuance of the Convertible Notes. Cash inflows for 1996 were
utilized to fund operating cash requirements and were also attributable to the
liquidation of investments to support the increased new business production
which occurred during the first two quarters of 1996.
Net cash provided by financing activities totaled $60.4 million, $3.5 million
and $19.5 million for 1997, 1996 and 1995, respectively. For 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 $1.5 million in net borrowings and repayments
associated with the Receivables Financing program. For 1996, cash was provided
by borrowings under the Receivables Financing program with Fleet National Bank.
During 1995, the Company received $29.3 million from the sale of Common Stock
and Senior Subordinated Notes in a public offering and $15.8 million from
borrowings primarily under the Receivables Financing. Offsetting these cash
inflows in 1995 was $25.0 million paid to retire Westbridge's 11.7% Senior
Subordinated Debentures due 1996.
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 December 31, 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.
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 attempts to mitigate its exposure to inflation by incorporating certain
limitations on the maximum benefits which may be paid under certain policies and
by filing for premium rate increases as necessary.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules Covered by the
Following Report of Independent Accountants.
<TABLE>
<CAPTION>
Page
Number(s)
<S> <C>
Report of Independent Accountants 35
Financial Statements:
Consolidated Statements of Operations for the Three Years ended December 31, 1997 36
Consolidated Balance Sheets at December 31, 1997 and 1996 37
Consolidated Statements of Cash Flows for the Three Years ended December 31, 1997 39
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years ended December 31, 1997 41
Notes to Consolidated Financial Statements 42
Financial Statement Schedules:
II. Condensed Financial Information of Registrant as
of and for the Three Years ended December 31, 1997 68
III. Supplementary Insurance Information for the Three
Years ended December 31, 1997 71
IV. Reinsurance for the Three Years ended December 31, 1997 72
V. Valuation and Qualifying Accounts and Reserves for the
Three Years ended December 31, 1997 73
</TABLE>
All other Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Financial Statements or
notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Westbridge Capital Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Westbridge
Capital Corp. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in NOTE 2 to the
financial statements, the Company has suffered recurring losses from operations
during the year ended December 31, 1997 and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in NOTE 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 30, 1998
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands. except share data)
<TABLE>
<CAPTION>
December 31
------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums:
First-year $ 37,890 $ 61,843 $ 34,774
Renewal 123,207 94,937 85,319
----------- ----------- -----------
161,097 156,780 120,093
Net investment income 11,023 8,736 7,421
Fee and service income 16,700 9,534 2,336
Net realized gain on investments 84 96 182
----------- ----------- -----------
188,904 175,146 130,032
----------- ----------- -----------
Benefits, claims and expenses:
Benefits and claims 136,866 94,187 70,465
Amortization of deferred policy
acquisition costs 30,873 22,907 11,553
Commissions 16,690 7,919 11,359
General and administrative expenses 31,407 27,123 21,926
Reorganization expense 4,424 - -
Recognition of premium deficiency 64,952 - -
Taxes, licenses and fees 5,995 5,951 4,101
Interest expense 7,102 4,462 2,432
----------- ----------- -----------
298,309 162,549 121,836
----------- ----------- -----------
(Loss) income before income taxes, equity
in earnings of Freedom Holding
Company and extraordinary loss (109,405) 12,597 8,196
(Benefit) provision for income taxes (13,268) 4,410 2,813
Equity in earnings of Freedom Holding Company - 74 348
----------- ----------- -----------
(Loss) income before extraordinary loss (96,137) 8,261 5,731
Extraordinary loss, net of tax 1,007 - 407
=========== =========== ===========
Net (loss) income $ (97,144) $ 8,261 $ 5,324
=========== =========== ===========
Preferred stock dividends 1,572 1,650 1,650
----------- ----------- -----------
(Loss) income applicable to
common stockholders $ (98,716) $ 6,611 $ 3,674
=========== =========== ===========
Earnings per common share:
Basic:
(Loss) income before extraordinary loss $ (15.91) $ 1.11 $ .71
Extraordinary loss (.16) - (.07)
=========== =========== ===========
Net (loss) income $ (16.07) $ 1.11 $ .64
=========== =========== ===========
Diluted:
(Loss) income before extraordinary loss $ (15.91) $ .97 $ .70
Extraordinary loss (.16) - (.07)
=========== =========== ===========
Net (loss) income $ (16.07) $ .97 $ .63
=========== =========== ===========
Weighted average shares outstanding:
Basic 6,143,000 5,978,000 5,698,000
=========== =========== ===========
Diluted 6,143,000 8,477,000 5,829,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
--------------------
1997 1996
-------- --------
Investments:
Fixed maturities:
Available-for-sale, at market value
(amortized cost $122,840 and $90,020) $128,749 $ 91,597
Equity securities, at market 4,770 1,596
Mortgage loans on real estate 389 658
Investment real estate 566 -
Policy loans 284 282
Short-term investments and certificates of deposit 12,654 8,072
-------- --------
Total Investments 147,412 102,205
Cash and cash equivalents 1,030 1,013
Accrued investment income 2,453 1,889
Receivables from agents, net of $4,531 and
$1,729 allowance for doubtful accounts 20,503 18,311
Deferred policy acquisition costs 19,165 83,871
Leasehold improvements and equipment, at cost (net of
accumulated depreciation and amortization of
$4,106 and $4,211) 1,141 1,311
Due from reinsurers 3,219 1,456
Commissions receivable 1,389 3,406
Deferred debt costs, net of accumulated amortization 4,046 2,816
Other assets 2,498 4,438
-------- --------
Total Assets $202,856 $220,716
======== ========
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' (DEFICIT) EQUITY
December 31,
-----------------------
1997 1996
--------- ---------
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 55,811 $ 54,204
Claims 51,784 39,186
--------- ---------
107,595 93,390
Accounts payable and accruals 8,034 2,496
Commission advances payable 4,702 4,368
Other liabilities 6,396 1,700
Deferred income taxes, net - 10,299
Notes payable 13,100 21,210
Convertible subordinated notes due 2004 70,000 -
Senior subordinated notes, net of
unamortized discount, due 2002 19,447 19,350
--------- ---------
Total Liabilities 229,274 152,813
--------- ---------
Redeemable Preferred Stock 19,000 20,000
--------- ---------
Stockholders' (Deficit) Equity:
Common stock, ($.10 par value,
30,000,000 shares authorized;
6,195,439 and 6,039,994 shares issued) 620 604
Capital in excess of par value 30,843 29,226
Unrealized appreciation of investments
carried at market value, net of tax 4,649 1,057
Retained (deficit) earnings (81,530) 17,186
--------- ---------
(45,418) 48,073
Less - Aggregate of shares held in treasury and
investment by affiliate in Westbridge Capital
Corp. common stock, at cost (28,600 at December
31, 1996) - (170)
--------- ---------
Total Stockholders' (Deficit) Equity (45,418) 47,903
--------- ---------
Commitments and contingencies:
Total Liabilities, Redeemable Preferred
Stock and Stockholders' (Deficit) Equity $ 202,856 $ 220,716
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income applicable to common stockholders $ (98,716) $ 6,611 $ 3,674
Adjustments to reconcile net (loss) income applicable to common
stockholders to cash used for operating activities:
Recognition of premium deficiency 64,952 - -
Amortization of deferred policy acquisition costs 30,873 22,907 11,553
Additions to deferred policy acquisition costs (31,119) (45,138) (23,279)
Depreciation expense 470 497 486
Equity in earnings of Freedom Holding Company - (74) (348)
Increase in receivables from agents (2,192) (1,371) (9,353)
(Increase) decrease in due from reinsurers (1,763) 2,073 (856)
Decrease (increase) in commissions receivable 2,017 (3,406) -
Decrease (increase) in other assets 1,940 4,302 (1,512)
Increase (decrease) in policy liabilities and accruals 14,205 2,995 (5,194)
Increase (decrease) in accounts payable and accruals 5,538 (1,027) 2,160
Increase (decrease) in commission advances payable 334 4,368 (56)
Increase (decrease) in other liabilities 4,696 (6,694) 445
(Decrease) increase in deferred income taxes, net (10,299) 3,708 2,610
Other, net (910) (518) (1,083)
--------- --------- ---------
Net Cash Used For Operating Activities (19,974) (10,767) (20,753)
--------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company - (3,970) -
Proceeds from investments sold:
Fixed maturities, classified as held-to-maturity, called or
matured - - 2,629
Fixed maturities, classified as available-for-sale, called or
matured 9,469 8,529 468
Fixed maturities, classified as available-for-sale, sold 25,345 49,340 6,585
Short-term investments and certificates of deposit, sold or
matured 50 155,877 15,058
Other investments sold or matured 817 556 136
Cost of investments acquired (75,745) (203,849) (23,629)
Additions to leasehold improvements and equipment, net of
retirements (300) (218) (861)
--------- --------- ---------
Net Cash (Used For) Provided By Investing Activities (40,364) 6,265 386
--------- --------- ---------
Cash Flows From Financing Activities:
Increase in deferred debt costs (1,230) (567) (534)
Redemption of senior subordinated debentures - - (25,000)
Issuance of convertible subordinated notes 70,000 - -
Issuance of senior subordinated notes - - 19,200
Issuance of notes payable 21,044 16,144 15,807
Repayment of notes payable (29,154) (12,090) -
Issuance of common stock 140 140 10,108
Issuance of common stock warrants - - 74
Purchase and cancellation of common stock (445) (125) (146)
--------- --------- ---------
Net Cash Provided By Financing Activities 60,355 3,502 19,509
--------- --------- ---------
Increase (decrease) In Cash and Cash Equivalents, During Period 17 (1,000) (858)
Cash and Cash Equivalents, At Beginning Of Period 1,013 2,013 2,871
========= ========= =========
Cash and Cash Equivalents, At End Of Period $ 1,030 $ 1,013 $ 2,013
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,002 $ 3,861 $ 2,336
Income taxes $ 118 $ 982 $ 960
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING 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 year ended December 31, 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.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized Total
Appreciation Stock-
Capital (Depreciation) Retained holders'
Common Stock in Excess of Earnings Treasury Stock Equity
Shares Amount of Par Value Investments (Deficit) Shares Amount (Deficit)
------ ----- ------------ ----------- --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 4,430,458 $ 443 $ 19,328 $ (147) $ 6,901 28,600 $ (170) $ 26,355
Net income 5,324 5,324
Preferred stock dividend (1,650) (1,650)
Unrealized appreciation of investments 2,740 2,740
Issuance of shares under stock
option plans 85,300 8 230 238
Issuance of shares from an
underwritten public offering 1,500,000 150 9,720 9,870
Shares purchased and cancelled
under stock option plans (23,300) (2) (144) (146)
Issuance of stock warrants 74 74
---------- ----- ----------- --------- --------- ------ ------ --------
Balance at December 31, 1995 5,992,458 $ 599 $ 29,208 $ 2,593 $ 10,575 28,600 $ (170) $ 42,805
Net income 8,261 8,261
Preferred stock dividend (1,650) (1,650)
Unrealized depreciation of investments (1,536) (1,536)
Issuance of shares under stock
option plans 62,965 6 134 140
Award of restricted shares 8 8
Shares purchased and cancelled
under stock option plans (15,429) (1) (124) (125)
---------- ----- ----------- --------- --------- ------ ------ --------
Balance at December 31, 1996 6,039,994 $ 604 $ 29,226 $ 1,057 $ 17,186 28,600 $ (170) $ 47,903
Net loss (97,144) (97,144)
Preferred stock dividend (1,572) (1,572)
Unrealized appreciation of investments 3,592 3,592
Preferred stock converted to common 118,905 12 937 949
Issuance of shares under stock
option plans 42,500 4 115 119
Award and issuance of restricted shares 67,000 7 1,179 1,186
Cancellation of treasury stock (28,600) (3) (167) (28,600) 170 0
Shares purchased and cancelled
under stock option plans (44,360) (4) (447) (451)
========== ===== =========== ========= ========= ====== ====== ========
Balance at December 31, 1997 6,195,439 $ 620 $ 30,843 $ 4,649 $ (81,530) 0 $ 0 $(45,418)
========== ===== =========== ========= ========= ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Principles of Consolidation. The consolidated financial statements include the
accounts of Westbridge Capital Corp. ("the Company"), and its wholly-owned
subsidiaries, National Foundation Life Insurance Company ("NFL"), Freedom Life
Insurance Company of America ("FLICA"), National Financial Insurance Company
("NFIC"), American Insurance Company of Texas ("AICT"), Freedom Holding Company
("FHC"), Foundation Financial Services, Inc. ("FFS"), Westbridge Marketing
Corporation ("WMC"), Westbridge Financial Corp. ("Westbridge Financial"),
Westbridge Printing Services, Inc. ("WPS"), Precision Dialing Services, Inc.
("PDS"), Westbridge National Life Insurance Company ("WNL"), Flex-Plan Systems,
Inc. ("FPS"), Westbridge Funding Corporation ("WFC") (formerly known as National
Legal Services Company, Inc.), LifeStyles Marketing Group, Inc. ("LifeStyles
Marketing"), Senior Benefits, LLC ("Senior Benefits") and American Senior
Security Plans, LLC ("ASSP"). The consolidated financial statements also include
the accounts of the Company's 80%-owned subsidiary Health Care-One Marketing
Group, Inc. ("HCO Marketing") as well as the Company's 50%-owned subsidiary,
Health Care-One Insurance Agency, Inc. ("Health Care-One"). The Company's
decision to consolidate the accounts of Health Care-One is based on the extent
to which the Company exercises control over Health Care-One. The Company has
agreed to provide 100% of the financing required to support the marketing
efforts of Health Care-One and also has significant input in its management. All
significant intercompany accounts and transactions have been eliminated.
Nature of Operations. The Company, through its subsidiaries and affiliates, is
licensed to market medical expense and supplemental health insurance products
and managed care health plans in 38 states and the District of Columbia. The
major underwritten product lines currently being marketed by the Company are
Medical Expense products and Critical Care and Specified Disease products. In
the past, the Company also underwrote a significant amount of Medicare
Supplement products. The Company also markets certain managed care health plans,
which are underwritten by health maintenance organizations ("HMO's") and other
non-affiliated managed care organizations.
Accounting Principles and Regulatory Matters. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP"). These principles differ from statutory accounting
principles, which must be used by NFL, FLICA, NFIC and AICT (together, the
"Insurance Subsidiaries") when reporting to state insurance departments. The
Insurance Subsidiaries are subject to oversight by the state insurance
departments of Delaware, Mississippi, Texas and other states in which they are
authorized to conduct business. These regulators perform periodic examinations
of the Insurance Subsidiaries' statutory financial statements and, as a result,
may propose adjustment to such statements.
Cash Equivalents. Cash equivalents consist of highly liquid instruments with
maturities at the time of acquisition of three months or less. Cash equivalents
are stated at cost, which approximates market.
Investments. The Company's fixed maturity portfolio is classified as
available-for-sale and is carried at estimated market value. Equity securities
(common and nonredeemable preferred stocks) are also carried at estimated market
value. Changes in aggregate unrealized appreciation or depreciation on fixed
maturities and equity securities are reported directly in stockholders' equity,
net of applicable deferred income taxes and, accordingly, have no effect on
current operations. The Company's 40% equity investment in FHC was accounted for
on the equity basis (i.e., cost adjusted for equity in post-acquisition earnings
and amortization of excess cost) until May 31, 1996 and on a consolidated basis
for the periods subsequent to the acquisition of the remaining 60% of FLICA's
parent FHC. Mortgage loans on real estate and policy loans are carried at the
unpaid principal balance. Realized gains and losses on sales of investments are
recognized in current operations on the specific identification basis.
Concentrations of Credit Risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash
equivalents, investments and receivables from agents. The Company maintains cash
and investments with various major financial institutions. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions. Concentrations of credit risk with respect to receivables from
agents are limited due to the large number of agents and their dispersion across
many geographic areas. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific agents,
historical trends and other information. The Company's historical experience in
collection of these receivables falls within the recorded allowances. Due to
these factors, no additional credit risk beyond the amounts provided for
collection losses is believed inherent in the Company's receivables from agents.
Deferred Policy Acquisition Costs ("DPAC"). Policy acquisition costs consisting
of commissions and other policy issue costs, which vary with and are primarily
related to the production of new business, are deferred and amortized over
periods not to exceed the estimated premium-paying periods of the related
policies. Also included in DPAC is the cost of insurance purchased on acquired
business. The amortization of these costs is based on actuarially estimated
future premium revenues, and the amortization rate is adjusted monthly to
reflect actual experience. Projected future levels of premium revenue are
estimated using assumptions as to interest, mortality, morbidity and withdrawals
consistent with those used in calculating liabilities for future policy
benefits.
Leasehold Improvements and Equipment. Leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation of
equipment is computed using the straight-line method over the estimated useful
lives (three to seven years) of the assets. Leasehold improvements are amortized
over the estimated useful lives of the related assets or the period of the
lease, whichever is shorter. Maintenance and repairs are expensed as incurred,
and renewals and betterments which materially extend the useful life of the
underlying assets are capitalized.
Future Policy Benefits and Claims. Liabilities for future policy benefits not
yet incurred are computed primarily using the net level premium method including
actuarial assumptions as to investment yield, mortality, morbidity and
withdrawals. Claim reserves represent the estimated liabilities on claims
reported plus claims incurred but not yet reported. These liabilities are
subject to the impact of future changes in claim experience and, as adjustments
become necessary, they are reflected in current operations.
Recognition of Revenue. Life insurance and accident and health premiums are
recognized as revenue when received. Benefits and expenses are associated with
related premiums so as to result in a proper matching of revenues with expenses.
Fee and service income and investment income are recognized when earned.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes. The Company records income taxes based on the asset and liability
approach, which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequence of temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
Earnings Per Share. In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("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 1996 and 1995 to conform to this pronouncement.
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
(Amounts in 000's, except per share amounts)
<S> <C> <C> <C>
Basic:
(Loss) income available to common shareholders $(98,716) $ 6,611 $ 3,674
======== ======== ========
Average weighted shares outstanding 6,143 5,978 5,698
======== ======== ========
Basic earnings per share $ (16.07) $ 1.11 $ 0.64
======== ======== ========
Diluted:
(Loss) income available to common shareholders $(98,716) $ 6,611 $ 3,674
Adjustment for conversion of Series A Preferred Stock - 1,650 -
-------- -------- --------
Adjusted (loss) income available to common shareholders $(98,716) $ 8,261 $ 3,674
======== ======== ========
Average weighted shares outstanding 6,143 5,978 5,698
Adjustment for conversion of Series A Preferred Stock - 2,378 -
Adjustment for restricted stock - 4 -
Adjustment for options and warrants - 117 131
-------- -------- --------
Adjusted average weighted shares outstanding 6,143 8,477 5,829
======== ======== ========
Diluted earnings per share $ (16.07) $ 0.97 $ 0.63
======== ======== ========
</TABLE>
For the year ended December 31, 1995, the Series A Preferred Stock was
antidilutive and has been excluded from the calculation of diluted earnings per
share.
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. Accordingly, the
adoption of SFAS 130 in 1998 will require the Company to modify its presentation
of the information already disclosed in the Consolidated Financial Statements.
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 Company does not expect that its adoption
of SFAS 131 in 1998 will significantly change the number or designation of the
reportable segments currently disclosed in its 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.
Reclassifications. Certain reclassifications have been made to 1996 and 1995
amounts in order to conform to 1997 financial statement presentation.
NOTE 2 - RECENT DEVELOPMENTS
During the second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced an increase in claims submissions on Medical Expense
and Medicare Supplement products resulting in substantially increased loss
ratios. In addition, a backlog of pending claims was paid during that period
which also contributed to the second quarter's losses. Independent reviews of
the Company's claim reserves were performed as of September 30, 1997.
Additionally, an independent benefit analysis of claims was completed which
indicated that additional rate increases, which are not expected to be fully
implemented until at least September 1998, and further benefit modifications
will be required to offset the current adverse claims experience. However, until
such time as the necessary rate increases and benefit modifications can be fully
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.
In addition, policy persistency has declined in connection with the
implementation of certain rate increases together with intensified competitor
solicitation of the Company's policyholders. These events affected the future
profit margins available to absorb amortization of Deferred Policy Acquisition
Costs ("DPAC"). As a result of these adverse changes, the Company undertook a
revaluation of the recoverability of DPAC in the fourth quarter. Based on the
results of this review and the impact of future projected premium revenues and
the discontinuance of certain lines of business, the Company determined that a
premium deficiency for certain lines of business existed as of December 31,
1997. A premium deficiency occurs when the projected present value of future
premiums associated with these policies will not be adequate to cover the
projected present value of future payments for benefits and related amortization
of DPAC. Generally accepted accounting principles require the immediate
recognition of a premium deficiency by charging the unamortized DPAC to expense.
In this connection, for the quarter and year ended December 31, 1997, the
Company recorded a non-cash charge to expense of approximately $65.0 million and
incurred a significant loss for the year ended December 31, 1997. This
adjustment has no impact on the Company's cash position at December 31, 1997 and
does not impact the statutory capital and surplus of the Insurance Subsidiaries.
As a result of these losses, in November 1997, the Company engaged Houlihan,
Lokey, Howard & Zukin to act as its financial advisor to explore the Company's
strategic 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. Since
November 1997, the Company has held 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
7-1/2% Convertible Subordinated Notes ("Convertible Notes") due 2004.
In order to preserve capital and maintain flexibility while it considers its
strategic alternatives, the Company has suspended its scheduled debt service
payments on its Senior Subordinated Notes and Convertible Notes since November
1997 and suspended its dividend payments on its outstanding Series A Preferred
Stock effective October 1997. The failure to make the scheduled interest
payments constituted payment defaults under the Indentures relating to such
Notes and became events of default thereunder as of November 17, 1997. In
addition, the failure to make such interest payments also resulted in an event
of default under its Credit Agreement with a bank. 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. There
can be no assurance that the Company will resume such interest and dividend
payments in the future.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As such, the consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE 3 - INVESTMENTS
Major categories of investment income are summarized as follows:
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Fixed maturities $ 8,268 $ 6,607 $ 6,542
Mortgage loans on real estate 42 62 71
Short-term investments and certificates of deposit 891 513 250
Interest on receivables from agents 1,633 1,201 400
Other 426 584 424
------- ------- -------
11,260 8,967 7,687
Less: Investment expenses 237 231 266
======= ======= =======
Net investment income $11,023 $ 8,736 $ 7,421
======= ======= =======
Realized gains (losses) on investments are summarized as follows:
Year Ended December 31,
-----------------------
1997 1996 1995
----- ----- -----
(in thousands)
Fixed maturities $ 535 $(146) $ 185
Equity securities (385) 238 -
Short-term investments and certificates of deposit - - (3)
Other (66) 4 -
===== ===== =====
Realized gains on investments $ 84 $ 96 $ 182
===== ===== =====
Unrealized appreciation on investments reflected directly in stockholders'
equity is summarized as follows:
Year Ended December 31,
-----------------
1997 1996
------- -------
(in thousands)
Balance at beginning of year $ 1,057 $ 2,593
Unrealized appreciation (depreciation), net
of tax, on fixed maturities available-for-sale 2,816 (1,328)
Unrealized appreciation (depreciation), net of
tax, on equity securities and other investments 776 (208)
======= =======
Balance at end of year $ 4,649 $ 1,057
======= =======
Estimated market values represent the closing sales prices of marketable
securities. The amortized cost and estimated market values of investments in
fixed maturities at December 31, 1997 and 1996, are summarized by category as
follows: <TABLE> <CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Available-for-Sale Cost Gains Losses Value
- ---------------------------------------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government and governmental
agencies and authorities $ 11,331 $ 347 $ 10 $ 11,668
States, municipalities, and political
subdivisions 997 74 - 1,071
Finance companies 32,073 1,512 4 33,581
Public utilities 10,854 430 11 11,273
Mortgage-backed securities 10,237 265 28 10,474
All other corporate bonds 57,348 3,552 218 60,682
======== ======== ======== ========
Balance at December 31, 1997 $122,840 $ 6,180 $ 271 $128,749
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Available-for-Sale Cost Gains Losses Value
- ---------------------------------------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government and governmental
agencies and authorities $12,813 $ 227 $ 53 $12,987
States, municipalities, and political
subdivisions 518 - - 518
Finance companies 24,545 487 159 24,873
Public utilities 10,818 215 17 11,016
Mortgage-backed securities 12,950 234 63 13,121
All other corporate bonds 28,376 879 173 29,082
======= ======= ======= =======
Balance at December 31, 1996 $90,020 $ 2,042 $ 465 $91,597
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market value of investments in
available-for-sale fixed maturities as of December 31, 1997, are shown below, in
thousands, summarized by year to maturity. Mortgage-backed securities are listed
separately. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Estimated
Amortized Market
Cost Value
-------- --------
(in thousands)
Due in one year or less $ 3,492 $ 3,500
Due after one year through five years 22,309 22,907
Due after five years through ten years 40,902 42,737
Due after ten years 45,900 49,131
Mortgage-backed securities 10,237 10,474
-------- --------
$122,840 $128,749
======== ========
A summary of unrealized appreciation reflected directly in stockholders' equity
at December 31, 1997 and 1996, on investments in fixed maturities
available-for-sale, is as follows:
Year Ended December 31,
--------------------
1997 1996
-------- --------
(in thousands)
Amortized cost $122,840 $ 90,370
Estimated market value 128,749 91,947
-------- --------
Excess of market value to amortized cost 5,909 1,577
Estimated tax 2,068 552
-------- --------
Unrealized appreciation, net of tax $ 3,841 $ 1,025
======== ========
Proceeds from sales of investments in fixed maturity securities were
approximately $34.0 million in 1997 and $57.9 million in 1996. Gross gains of
$654,000 and gross losses of $119,000 were realized on fixed maturity investment
sales during 1997. Gross gains of $535,000 and gross losses of $681,000 were
realized on fixed maturity investment sales during 1996.
Included in fixed maturities at December 31, 1997 and 1996, are high-yield,
unrated or less than investment grade corporate debt securities comprising less
than 1.6% and 1.5% of total cash and invested assets at December 31, 1997 and
1996, respectively.
Investment securities on deposit with insurance regulators in accordance with
statutory requirements at December 31, 1997 and 1996 had a par value totaling
$26.5 million and $21.9 million, respectively.
As of December 31, 1997, the Company had restricted access to $1.8 million of
invested cash in connection with the processing of premium collections through
the Automated Clearing House (ACH) banking system.
NOTE 4 - ACQUISITIONS
Acquisition of Remaining Interest of FHC
On May 31, 1996, the Company completed its acquisition of the remaining 60%
equity interest in Freedom Holding Company ("FHC"). FHC is a holding company
which owns 100% of FLICA, a Mississippi domiciled insurer licensed in 33 states.
The purchase price was $6.3 million in cash, and the transaction was accounted
for under the purchase method. Prior to the acquisition, the Company accounted
for its 40% investment in FHC using the equity method. The Company's portion of
FHC's earnings prior to the acquisition in 1996 accounted for using the equity
method was $74,000 in 1996 and $348,000 in 1995. The Company received a $120,000
dividend in 1995 from FHC.
Beginning June 1, 1996, the results of operations of FHC have been reflected in
the Company's Consolidated Statements of Operations and of Cash Flows. The
present value of future profits associated with the purchase are being amortized
in relation to premium revenues over the remaining life of the business. At the
time of the acquisition, the Company, through NFL, reinsured the majority of
business underwritten by FLICA. Subsequent to the acquisition of the remaining
interest of FHC, the coinsurance agreements between FLICA and NFL were
cancelled. The acquisition did not have a material pro-forma impact on
operations.
NOTE 5 - MARKETING OPERATIONS
LifeStyles Marketing Group, Inc.
In September 1987, NFL consummated an agency contract with LifeStyles Agency of
Arlington, Texas ("LifeStyles Marketing") granting its agency force the
exclusive right, subject to territorial production requirements, to sell NFL's
Medical Expense products developed in 1987 and 1988. During the second quarter
of 1988, the Company agreed with the owners of LifeStyles Marketing to
restructure the insurance agency as a joint venture. Under the terms of the
definitive agreement consummated in November 1988, WMC, a wholly-owned
subsidiary of the Company, held a 51%-voting interest in the entity, LifeStyles
Marketing. Effective January 1, 1997, WMC acquired the remaining 49% of LMG.
The Company provides financing to LifeStyles Marketing. LifeStyles Marketing's
revenues and expenses during 1997 approximated $11.9 million and $10.7 million,
respectively. Revenues and expenses were $13.3 million and $12.4 million in 1996
and $9.1 million and $8.4 million in 1995, respectively. Of the revenues
received, $7.8 million were derived from NFL in the form of commission income on
insurance products sold for NFL during 1997, $11.1 million in 1996 and $7.7
million in 1995.
Profits and losses of LifeStyles Marketing are allocated 50% to WMC and 50% to
the President of LifeStyles Marketing. However, because of the Company's voting
and financial control, the operations of the joint venture are consolidated with
the Company's operations and, accordingly, all significant intercompany accounts
and transactions are eliminated.
The Company had, prior to 1996 recognized 100% of the cumulative losses of
LifeStyles Marketing. During 1996, those cumulative losses were fully recovered
through earnings.
Senior Benefits, LLC
In November 1993, the Company acquired a 50% ownership interest in Senior
Benefits. In June 1996, the Company acquired the remaining 50% ownership
interest in Senior Benefits. Senior Benefits' revenue and expenses were $5.3
million and $4.9 million during 1997, $1.6 million and $1.4 million during 1996
and $1.0 million and $1.1 million during 1995, respectively. Senior Benefits
primarily markets Medicare Supplement products for non-affiliated insurance
carriers although it previously sold Medicare Supplement products for NFL. Of
the revenues received, $674,000 were derived from NFL in the form of commission
income on insurance products sold during 1997 ($770,000 in 1996 and $982,000 in
1995.) Through December 31, 1997, the Company had loaned Senior Benefits
approximately $0.5 million in the form of working capital advances. These
advances will be repaid in the future through positive cash flows generated from
renewal commissions, from advanced commissions from non-affiliated insurance
carriers, and if and when profits are recognized from continuing operations.
Health Care-One Insurance Agency, Inc.
In 1995, the Company formed Health Care-One, which markets insurance products
for non-affiliated insurance carriers. The Company owns 50% of Health Care-One.
The Company is providing financing to Health Care-One during the start-up phase
of operations. Health Care-One's revenue and expenses were $5.1 million and $4.8
million and $4.4 million and $4.1 million in 1997 and 1996, respectively. Health
Care-One's operations were not significant in 1995. Through December 31, 1997
and 1996, the Company had loaned Health Care-One approximately $0.8 million and
$1.2 million in the form of first-year commission advances. These advances will
be repaid in the future through positive cash flows generated from renewal
commissions, from advanced commissions from non-affiliated insurance carriers,
and if and when profits are recognized from continuing operations. The minority
interest in pre-tax income subject to profit-sharing and recognized by the
Company is $107,000 and $44,000 at December 31, 1997 and 1996, respectively.
Health Care-One Marketing Group, Inc.
In February 1996, the Company formed HCO Marketing. The Company owns 80% of HCO
Marketing which commenced operations in March 1996. In 1997, HCO Marketing broke
even and its operations were not significant in 1996. Through December 31, 1997,
the Company had advanced $0.8 million at December 31, 1997 to HCO Marketing to
fund operations. These advances will be repaid in the future through positive
cash flows generated from renewal commissions, from advanced commissions from
non-affiliated insurance carriers, and if and when profits are recognized from
continuing operations.
NOTE 6 - FUTURE POLICY BENEFITS
Future policy benefits have been calculated using assumptions (which generally
contemplate the risk of adverse deviation) for withdrawals, interest, mortality
and morbidity appropriate at the time the policies were issued. The more
material assumptions are as follows:
LIFE PRODUCTS
Withdrawals Standard industry tables are used for issues through 1975. Company
experience is used for issues subsequent to 1975.
Interest Level 4% for issues through 1965; level 4.5% for 1966 through
1969 issues, and 6% graded to 4.5% in 25 years for 1970
through 1981 issues. Issues for 1982 through 1987 are 10%
graded to 7% at year 10. ART issues in 1988 and later are 8.5%
for 5 years graded to 7.5% in year 20. Participating policies
are 4.5% for issues through 1965; 5% for 1966 through 1969
issues, and graded from 6% to 5% in 25 years for issues
subsequent to 1969; 1995 and later issues are 6% level.
Mortality Based on modifications of the 1955-1960 Select and Ultimate
Basic Tables and, for certain issues from 1975 through 1981,
modifications of the 1958 CSO. Issues for 1981 through 1994
use modifications of the 1965-1970 Select and Ultimate Basic
Tables. Issues subsequent to 1994 use modifications of the
1975-1980 Ultimate Basic Tables.
ACCIDENT AND HEALTH PRODUCTS
Withdrawals Issues through 1980 are based on industry experience; 1981
through 1996 issues are based on industry experience and
Company experience, where available. Policies acquired in
acquisitions are based on recent experience of the blocks
acquired.
Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most
1981 through 1992 issues are 10% graded to 7% in 10 years
except for certain NationalCare and Supplemental Hospital
Income issues which are 8% graded to 6% in 8 years and
LifeStyles Products which are 9% graded to 7% in 10 years.
1993 and later issues are 7% level. Policies acquired from AII
in 1992 are 6.4% level. Policies acquired from LHI in 1993 and
DNL in 1994 are 6% level. Policies acquired in the Acquisition
of NFIC and AICT are 7% level.
Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues
subsequent to 1980 through 1992 use the 1965-1970 Ultimate
Table. 1993 and later issues use the 1975-1980 Ultimate Table.
Policies acquired in acquisitions use the 1965-1970 Ultimate
Table.
Morbidity Based on industry tables published in 1974 by Tillinghast,
Nelson and Warren, Inc., as well as other population
statistics and morbidity studies.
NOTE 7 - FINANCING ACTIVITIES
Common Stock Offering
On February 28, 1995, the Company issued 1.5 million shares of its Common Stock
in an underwritten public offering. The Shares of Common Stock were issued at a
price of $7.00 per share, less an underwriting discount of $.42 per share. As a
result of the issuance of the Common Stock, the conversion rate of the Series A
Preferred Stock has been adjusted. See NOTE 9 - REDEEMABLE PREFERRED STOCK.
Subordinated Notes
On February 28, 1995, the Company issued $20.0 million aggregate principal
amount of its 11% Senior Subordinated Notes due 2002 (the "Senior Subordinated
Notes") in an underwritten public offering. The Senior Subordinated Notes were
issued at par, less an underwriting discount of 4%.
The Company may redeem the Senior Subordinated Notes at any time on or after
March 1, 1998, upon 30-days written notice, at par plus accrued interest.
Following the death of any holder of the Senior Subordinated Notes and the
request for repayment, the Company will repay such holder's Senior Subordinated
Notes at par plus accrued interest. The Company is not obligated to redeem more
than $50,000 in principal amount per holder per calendar year or in aggregate
for all holders more than $250,000 in principal amount per calendar year. The
Senior Subordinated Notes contain certain covenants which limit the Company's
ability to (i) incur certain types of indebtedness, (ii) pay dividends or make
distributions to holders of the Company's equity securities, or (iii)
consolidate, merge, or transfer all or substantially all of the Company's
assets. The Senior Subordinated Notes also contain covenants which require the
Company to maintain (i) a minimum amount of liquid assets, (ii) a minimum
consolidated net worth, and (iii) a minimum fixed charge ratio.
Since November 1997, the Company suspended the scheduled monthly interest
payments on these Senior Subordinated Notes. At December 31, 1997, approximately
$0.5 million has been accrued on such Senior Subordinated Notes. See further
discussion herein regarding covenant defaults.
Subordinated Debentures
In March 1986, the Company completed a public offering of 25,000 Units
consisting of $25.0 million principal amount of 11.70% Senior Subordinated
Debentures due 1996 (the "Debentures") and warrants to purchase 800,000 shares
of the Company's Common Stock (the "Warrants") at $12.25 per share. The Warrants
expired unexercised on March 15, 1991.
In August 1987, NFL purchased, in an open market transaction, $5 million par
value of the Debentures. For GAAP reporting purposes, the purchased Debentures
were no longer treated as part of the Company's consolidated debt.
In February 1994, NFL sold at par value, to an unrelated party, the $5 million
par value of the Debentures held in its portfolio. This transaction has been
accounted for, on a consolidated basis as an issuance of debt.
Concurrent with the Common Stock and Note offerings, on February 29, 1995, the
Company placed funds in escrow sufficient to cover all remaining principal and
interest payments on its outstanding 11.7% Senior Subordinated Debentures due
1996, which were called for redemption on March 30, 1995. The redemption price
was par plus accrued interest. This redemption prior to scheduled maturity
resulted in a loss from early extinguishment of debt. The loss related to
amortization of the remaining original issue discount and write-off of deferred
financing costs, offset in part by interest earned on the funds in escrow. This
loss is reported as an extraordinary item in the accompanying consolidated
statements of operations.
Senior Note
On December 22, 1995, the Company issued a $1.0 million principal amount 10%
Senior Note due 2002 (the "Senior Note") to the Chairman of the Board of
Directors, a related party. The Senior Note was issued at par. In connection
with the Senior Note issuance, the Company also issued a Common Stock purchase
Warrant for 135,501 shares of Common Stock at an exercise price of $7.38 per
share.
In May 1997, the Company used a portion of the proceeds from the public offering
of its Convertible Subordinated Notes to repay the amounts outstanding,
including accrued interest, under this Senior Note. The loss on this early
extinguishment of debt was immaterial for the year ending December 31, 1997.
Convertible Subordinated Notes
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 $68.0 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
December 31, 1997, approximately $3.5 million has been accrued on such
Convertible Notes. See further discussion herein regarding covenant defaults.
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 $9.0 million in total recapture costs less approximately $2.0
million in unearned premium reserves due to NFL and FLICA. See NOTE 16
EXTRAORDINARY ITEM. As of December 31, 1997, Westbridge had contributed
approximately $38.3 million of additional proceeds to the Insurance Subsidiaries
to enhance statutory capital and surplus. The Company has used approximately
$6.7 million in net proceeds to settle certain intercompany balances with its
Insurance Subsidiaries and for other general corporate purposes. Subsequent to
December 31, 1997, Westbridge contributed an additional $1.0 million and used
$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.
Credit Arrangement
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"). See
NOTE 16 - EXTRAORDINARY ITEM. 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. As of December 31, 1997, $13.1 million was outstanding
under the Credit Agreement (interest rate of 9%). The Company incurs a
commitment fee on the unused portion of the Credit Agreement at a rate of 0.50%
per annum. 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 herein, 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. As of December 31, 1997, the Company had placed $2.5 million of
cash in a cash collateral account in connection with this Credit Agreement. The
maintenance of this cash collateral account allows WFC to borrow against the
Credit Agreement and purchase agent advance receivables at face value.
Ceding Allowance Payable
During 1996, the Company borrowed approximately $10.5 million from a reinsurer
in connection with a Coinsurance Funds Withheld Reinsurance Agreement (See NOTE
14 - REINSURANCE). The borrowing was to be repaid, inclusive of interest at
12.5%, as statutory profits emerged on the reinsured block of business. As of
December 31, 1996, $8.6 million in ceding allowance was due to this reinsurer.
On May 1, 1997, Westbridge contributed approximately $7.0 million of the net
proceeds from the sale of the Convertible Notes to recapture this block of
business. This contribution was comprised of approximately $9.0 million in total
recapture costs calculated at an interest rate of 15% less approximately $2.0
million in unearned premium reserves due to NFL and FLICA. See NOTE 16
EXTRAORDINARY ITEM.
Covenant Defaults
As described herein, since November 1997, the Company has suspended its
scheduled interest payments on the Senior Subordinated Notes and the Convertible
Notes. The failure to make the scheduled interest payments constituted payment
defaults under the Indentures relating to such Notes and became 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 herein). 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 is currently in ongoing
discussions with its creditors regarding its transactional alternatives to
resolve these matters which may include, without limitation, a refinancing,
recapitalization or other corporate reorganization involving a significant
reduction in, or exchange of equity for, outstanding indebtedness.
Deferred Debt Costs. In connection with the Company's financing activities, the
Company defers the costs incurred in connection with the issuance of debt and
amortizes such costs on a straight-line basis over the related term of each
underlying debt issue.
NOTE 8 - CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending claim
reserve balances, on a gross-of-reinsurance basis, for 1997, 1996 and 1995, to
the amounts reported in the Company's balance sheet:
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
Balance at January 1 (Gross) $ 39,186 $ 39,063 $ 41,387
Less: reinsurance recoverables on
claim reserves 1,456 3,419 1,457
-------- -------- --------
Net balance at January 1 37,730 35,644 39,930
Incurred related to:
Current year 111,459 80,821 67,239
Prior years 22,512 14,242 2,698
-------- -------- --------
Total incurred 133,971 95,063 69,937
-------- -------- --------
Current year reserves acquired - 788 -
Paid related to:
Current year 77,168 68,199 46,755
Prior years 45,704 25,297 27,468
Current year acquired business - 269 -
-------- -------- --------
Total paid 122,872 93,765 74,223
-------- -------- --------
Balance at December 31 48,829 37,730 35,644
Plus: reinsurance recoverables
on claim reserves 2,955 1,456 3,419
-------- -------- --------
Balance at December 31 (Gross) $ 51,784 $ 39,186 $ 39,063
======== ======== ========
Included in reinsurance recoverables on claims reserves is approximately $1.9
million and $1.5 million relating to paid claims as of December 31, 1997 and
1996, respectively.
NOTE 9 - REDEEMABLE PREFERRED STOCK
On April 12, 1994, the Company issued 20,000 shares of Series A Cumulative
Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred
Stock"), at a price of $1,000 per share. The Series A Preferred Stock was issued
in a private placement and was subsequently registered with the Securities and
Exchange Commission under a registration statement which was declared effective
in October 1994. The following summarizes the significant terms of the Series A
Preferred Stock:
Liquidation preference of $1,000 per share.
Cumulative annual dividend rate of 8.25%, subject to increase to 9.25%
upon non-compliance by the Company with certain restrictions.
At December 31, 1994, the Series A Preferred Stock was convertible by the
holders thereof into the 2,285,720 shares of the Company's Common Stock at
a conversion price of $8.75 per share. As a result of the Common Stock
offering in 1995, the conversion price was adjusted to $8.41 per share. One
thousand shares of the Company's Series A Preferred Stock were converted
into shares of Westbridge's common stock, par value $.10 per share ("Common
Stock") during the year ended December 31, 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 Series A Preferred Stock were convertible into 2,259,214 shares of
Common Stock as of December 31, 1997.
On or after April 12, 1995, the Series A Preferred Stock may, at the
option of the Company, be exchanged for an amount of Convertible
Subordinated Notes due April 12, 2004, equal to the aggregate liquidation
preference of the Series A Preferred Stock being exchanged. The Convertible
Subordinated Notes would bear interest at 8.25% and be convertible into
Common Stock at a price of $8.41 per share, in each case, subject to
certain adjustments.
The Company is required to redeem all shares of Series A Preferred Stock,
or any Convertible Subordinated Notes outstanding on April 12, 2004.
The Company may redeem any and all shares of Series A Preferred Stock
outstanding on or after April 12, 1997.
In connection with the issuance of the Series A Preferred Stock, the placement
agent was granted a warrant to purchase 120,000 shares at $8.75 per share,
subject to certain adjustments. As a result of the February 28, 1995 Common
Stock issuance, the conversion price of the Warrant was adjusted to $8.41 per
share.
Since November 1997, the Company has suspended the scheduled dividend payments
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. At December 31, 1997, $0.8 million of
cumulative, unpaid dividends have been accrued.
NOTE 10 - DEFERRED POLICY ACQUISITION COSTS ("DPAC")
A summary of DPAC by major product line of insurance follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------------------
Accident Accident Accident
and and and
Life Health Life Health Life Health
------- ------------ -------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 569 $ 83,302 $ 205 $ 56,772 $ 31 $ 58,623
Deferrals:
Commissions 189 27,744 430 39,423 122 16,517
Issue costs 42 3,144 63 5,222 30 6,484
------- ------------ -------- ------------ ------ ------------
800 114,190 698 101,417 183 81,624
Cost of insurance purchased - - - 4,663 - 126
Purchase accounting
adjustment - - - - - (13,403)
Recognition of premium
deficiency (32) (64,920) - -
Amortization expense (206) (30,667) (129) (22,778) 22 (11,575)
======= ============ ======== ============ ====== ============
Balance at end of year $ 562 $ 18,603 $ 569 $ 83,302 $ 205 $ 56,772
======= ============ ======== ============ ====== ============
</TABLE>
The cost of insurance purchased in 1996 is related to the acquisition of the
remaining 60% ownership interest in FHC and its wholly-owned insurance
subsidiary, FLICA. This amount is being amortized in relation to premium revenue
over the remaining life of the business. Interest accrues on the unamortized
balance at 7% per year. Amortization of this cost of insurance purchased was
approximately $0.6 million and $0.3 million in 1997 and 1996, respectively, net
of interest accretion of $0.2 million and $0.2 million.
In connection with the Company's acquisition of NFIC and AICT in 1994, the
related cost of insurance purchased is being amortized in relation to premium
revenues over the remaining life of the business. Interest accrues on the
unamortized balance at 7% per year. Amortization of this cost of insurance
purchased was approximately $1.5 million, $1.8 million and $2.3 million in 1997,
1996 and 1995, respectively, net of the respective interest accretion of $0.3
million, $0.5 million and $1.3 million.
During 1995, the Company recorded purchase accounting adjustments to the
allocation of the purchase price of NFIC and AICT as these adjustments fell
within the allocation period following the acquisition, in accordance with
Statement of Financial Accounting Standard No. 38 "Accounting for Preacquisition
Contingencies of Purchased Enterprises."
Recognition of Premium Deficiency. During the second and third quarters of 1997,
the Company's Insurance Subsidiaries experienced an increase in claims
submissions on Medical Expense and Medicare Supplement products resulting in
substantially increased loss ratios. In addition, policy persistency declined in
connection with the implementation of certain rate increases together with
intensified competitor solicitation of the Company's policyholders. These events
affected the future profit margins available to absorb DPAC.
As a result of these adverse changes, the Company undertook a revaluation of the
recoverability of DPAC in the fourth quarter of 1997. Based on the results of
this review and the impact of future projected premium revenues and the
discontinuance of certain lines of business, the Company determined that a
premium deficiency for certain lines of business existed at December 31, 1997. A
premium deficiency occurs when the projected present value of future premiums
associated with these policies will not be adequate to cover the projected
present value of future payments for benefits and related amortization of DPAC.
GAAP requires the immediate recognition of a premium deficiency by charging the
unamortized DPAC to expense. In this connection, the Company recorded a non-cash
charge to expense of approximately $65.0 million for the quarter and year ended
December 31, 1997. This adjustment has no impact on the Company's cash position
at December 31, 1997 and does not impact the statutory capital and surplus of
the Insurance Subsidiaries.
NOTE 11 - INCOME TAXES
The (benefit from) provision for income taxes is calculated as the amount of
income taxes expected to be payable for the current year plus (or minus) the
deferred income tax expense (or benefit) represented by the change in the
deferred income tax accounts at the beginning and end of the year. The effect of
changes in tax rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation allowance, reducing any recognized
deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized.
The Company and its wholly-owned subsidiaries, other than NFIC, AICT and FLICA,
file a consolidated federal income tax return. NFIC, AICT and FLICA file
separate federal income tax returns.
The (benefit from) provision for U.S. federal income taxes charged to continuing
operations was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current $ (926) $ (804) $ 1,032
Deferred (12,342) 5,214 1,781
-------- -------- --------
Total (benefit from) provision for income taxes $(13,268) $ 4,410 $ 2,813
======== ======== ========
</TABLE>
Provision has not been made for state and foreign income tax expense since such
expense is minimal. In addition, as described in NOTE 16 - EXTRAORDINARY ITEM,
the Company recognized an extraordinary loss of approximately $1.0 million for
the year ended December 31, 1997. This amount has been reflected in the
accompanying financial statements, net of approximately $519,000 in deferred
taxes.
The differences between the effective tax rate and the amount derived by
multiplying the (loss) income before income taxes by the federal income tax rate
for the Company's last three years was as follows:
Year Ended December 31,
---------------------
1997 1996 1995
--- --- ---
(in thousands)
Statutory tax rate (34%) 34% 34%
Unutilized loss carryforwards 22% - -
Equity earnings of unconsolidated subsidiary - - (1%)
Other items, net - 1% -
--- --- ---
Effective tax rate (12%) 35% 33%
=== === ===
Deferred taxes are recorded for temporary differences between the financial
reporting basis and the federal income tax basis of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
Year Ended December 31,
---------------------
1997 1996
-------- --------
(in thousands)
Deferred Tax Liabilities
Deferred policy acquisition costs $ - $ 18,581
Invested assets - 231
Unrealized gain on investments 2,410 553
Other deferred tax liabilities 1,118 1,822
-------- --------
Total deferred tax liability $ 3,528 21,187
-------- --------
Deferred Tax Assets:
Deferred policy acquisition costs $ 3,662 $ -
Policy reserves 3,514 7,196
Net operating loss carryforwards 24,640 8,296
Tax credit carryforwards 11 11
Other deferred tax assets 429 263
Valuation allowance (28,728) (4,878)
-------- --------
Total deferred tax asset $ 3,528 $ 10,888
======== ========
Net deferred tax liability $ - $ 10,299
======== ========
A valuation allowance of approximately $23.8 million has been provided for the
year ended December, 31, 1997 for the tax effect of the Company's net operating
loss carryovers and other deductible temporary differences since it appears more
likely than not that such benefits will not be realized. For 1996, a valuation
allowance was provided for a portion of the Company's net operating loss
carryovers. The change in the valuation allowance for 1997 relates primarily to
the increase in net operating losses and decrease in DPAC.
Under the provisions of pre-1984 life insurance tax regulations, NFL was taxed
on the lesser of taxable investment income or income from operations, plus
one-half of any excess of income from operations over taxable investment income.
One-half of the excess (if any) of the income from operations over taxable
investment income, an amount which was not currently subject to taxation, plus
special deductions allowed in computing the income from operations, were placed
in a special memorandum tax account known as the policyholders' surplus account.
The aggregate accumulation in the account at December 31, 1997, approximated
$2.5 million. Federal income taxes will become payable on this account at the
then current tax rate when and to the extent that the account exceeds a specific
maximum, or when and if distributions to stockholders, other than stock
dividends and other limited exceptions, are made in excess of the accumulated
previously taxed income. The Company does not anticipate any transactions that
would cause any part of the amount to become taxable and, accordingly, deferred
taxes which would approximate $0.9 million have not been provided on such
amount.
At December 31, 1997, NFL has approximately $7.9 million in its shareholders
surplus account from which it could make distributions to the Company without
incurring any federal tax liability. The amount of dividends which may be paid
by NFL to the Company is limited by statutory regulations.
At December 31, 1997, the Company and its wholly-owned subsidiaries have
aggregate net operating loss carryforwards of approximately $70.4 million and
$61.9 million for regular tax and alternative minimum tax purposes,
respectively, which expire in 2003 through 2013.
NOTE 12 - STATUTORY CAPITAL AND SURPLUS
Under applicable Delaware law, NFL must maintain minimum aggregate statutory
capital and surplus of $550,000. Under applicable Texas law, NFIC and AICT must
each maintain minimum aggregate statutory capital and surplus of $1.4 million.
Under Mississippi law, FLICA is required to maintain minimum capital and surplus
of $1.0 million. The State of Georgia requires licensed out-of-state insurers to
maintain minimum capital of $1.5 million, and the Commonwealth of Kentucky
requires minimum surplus of $2.0 million. These levels are higher than the
requirements of any other states in which the Insurance Subsidiaries are
currently licensed. Accordingly, the minimum aggregate statutory capital and
surplus which NFL, NFIC and FLICA must each maintain is $3.5 million. AICT must
maintain a minimum of $1.5 million. At December 31, 1997, aggregate statutory
capital and surplus for NFL, NFIC, AICT and FLICA was $18.3 million, $3.3
million, $4.0 million and $12.0 million, respectively. Although NFIC's capital
and surplus is below $3.5 million at December 31, 1997, NFIC voluntarily ceased
writing new business effective December 15, 1997. Moreover, NFIC's capital and
surplus exceeds the minimum requirements for its state of domicile, Texas.
Statutory net losses for NFL, NFIC, AICT and FLICA for the year ended December
31, 1997, were $(28.9) million, $(20.4) million, $(4.2) million and $(3.1)
million, respectively. FLICA through its parent FHC, is wholly-owned by NFL, and
AICT is wholly-owned by NFIC. Accordingly, statutory capital and surplus of the
parent includes the statutory capital and surplus of the respective subsidiary.
Westbridge used proceeds from its public offering of Convertible Notes (See NOTE
7 - FINANCING ACTIVITIES) to contribute $30.2 million and $15.1 million to NFL
and NFIC, respectively, during 1997.
Dividends paid by the Insurance Subsidiaries to Westbridge 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 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. During 1998, NFIC's and
AICT's earned surplus is negative, and as such, each company is precluded from
paying dividends 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. During 1998, FLICA is precluded from
paying dividends to NFL without prior regulatory approval as it recorded a net
loss from operations for the year ending December 31, 1997.
Generally, all states require insurance companies to maintain statutory 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 year ended December 31, 1997, Westbridge
does not expect to receive any dividends from its Insurance Subsidiaries for the
foreseeable future.
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 December 31, 1997, 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 December 31, 1997, 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, certain intercompany and
large cash transactions are subject to the approval of the domiciliary states.
In December 1990, the Company and NFL entered into an agreement under which NFL
issued a surplus certificate to the Company in the principal amount of
$2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid
aggregate principal under the surplus certificate bears interest at an agreed
upon rate not to exceed 10% and is repayable, in whole or in part, upon (i)
NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any
reinsurance agreements and (ii) NFL receiving prior approval for repayment from
the Delaware State Insurance Commissioner. During 1993 and 1994, NFL received
such approval and repaid $2,086,000 to the Company. No principal payments have
been made subsequent to 1994. The unpaid aggregate principal under this surplus
certificate totaled $777,000 as of December 31, 1997 and 1996.
The statutory financial statements of the Insurance Subsidiaries are prepared
using accounting methods which are prescribed or permitted by the insurance
department of the respective companies' state of domicile. Prescribed statutory
accounting practices include a variety of publications of the NAIC as well as
state laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company applies ABP Opinion No. 25 and related interpretations in accounting
for its employee benefit plans, which are described below. Accordingly,
compensation expense is not recognized for qualified stock option plans until
such options are exercised. If compensation cost for the Company's stock option
plans had been determined based on the estimated market value at the grant dates
for awards under those plans consistent with the method provided by SFAS No.
123, the Company's net income and earnings per share would have been reflected
by the following pro forma amounts for the years ended December 31, 1996 and
1995. There were no material grants of stock options during 1997.
Year Ended December 31,
------------------------------
1996 1995
------------- -------------
Net income, as reported $ 8,261,000 $ 5,324,000
Net income, pro forma $ 8,037,000 $ 5,270,000
Basic earnings per share, as reported $ 1.11 $ 0.64
Basic earnings per share, pro forma $ 1.07 $ 0.64
Diluted earnings per share, as reported $ 0.97 $ 0.63
Diluted earnings per share, pro forma $ 0.95 $ 0.62
The estimated market value of each option grant is estimated on the date of
grant using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants during the years ended December 31, 1996 and
1995:
Dividend yield 0%
Expected volatility 70.00%
Risk-free rate of return 5.80%
Expected life 5.0 years
<PAGE>
The Company adopted, as of July 1, 1982, an employee incentive stock option plan
(the "ISO Plan"). The ISO Plan authorizes the Company's Board of Directors to
issue to key full-time employees of the Company, or any of its subsidiaries,
non-transferrable options to purchase up to 580,000 (as adjusted to give effect
for stock dividends paid in 1983) shares, in the aggregate, of the Company's
Common Stock. Options granted under the ISO Plan are intended to qualify as
either "incentive stock options" under Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), or as non-qualified stock options as defined
under the Code. The ISO Plan provides that the option price per share will be no
less than the estimated market value for a share of the Company's Common Stock
on the date of grant. To date, all option prices have been equal to the
estimated market value of the stock on the date of grant. The ISO plan also
provides that shares available upon the exercise of options granted under the
ISO Plan may be paid for with cash or by tendering shares of Common Stock owned
by optionee(s), or a combination of the foregoing. All vested options
outstanding are exercisable for a period not to exceed ten years from the date
the option was granted, except that no option is exercisable until at least one
year after its grant. In addition, the ISO Plan provides that no one owning 10%
of the total combined voting power of all classes of the Company's stock, or of
the stock of any subsidiary, is eligible to be awarded options under the ISO
Plan.
The Company also adopted, as of September 5, 1985, a second employee stock
option plan (as amended, the "1985 Plan"). The 1985 Plan provides for the
granting, to eligible employees of the Company or its subsidiaries, of stock
options to purchase up to a total of 200,000 shares of the Company's Common
Stock. Options granted under the 1985 Plan are treated as "non-qualified stock
options" for purposes of the Code and the option price per share shall not be
less than 90% of the estimated market value of the Company's Common Stock on the
date of grant. All options outstanding are exercisable within seven years from
the date the option was granted, except that no option is exercisable until at
least one year after its grant.
A third employee stock option plan, was adopted as of March 26, 1992 (as
amended, the "1992 Plan"). The 1992 Plan provides for the granting, to eligible
employees of the Company or its subsidiaries, of stock options to purchase up to
a total of 300,000 shares of the Company's Common Stock. Options granted under
the 1992 Plan are treated as "non-qualified stock options" for purposes of the
Code and the option price per share shall not be less than 90% of the estimated
market value of the Company's Common Stock on the date of grant. All options
outstanding are exercisable within seven years from the date the option was
granted, except that no option is exercisable until at least one year after its
grant.
On April 19, 1996, the Company adopted a Restricted Stock Plan (the "1996
Plan"). This 1996 Plan provides for the granting of up to 1,000,000 shares of
Common Stock subject to certain restrictions and adjustments. The restricted
shares are subject to vesting requirements ("the restriction period") ranging
from twelve months for non-employee directors to sixty months for employees or
other authorized grantees. During the restriction period, the grantee may not
sell, assign, transfer, pledge, encumber or otherwise dispose of or hypothecate
such an award. Upon satisfaction of the vesting schedule and any other
applicable restrictions, terms or conditions, the grantee will be entitled to
receive the shares. The total compensation expense recognized in the Company's
statement of operations for the year ending December 31, 1997 was $611,000.
<PAGE>
Information regarding the Company's restricted stock plan is summarized as
follows:
Year Ended December 31,
---------------------
1997 1996
-------- --------
Restricted stock outstanding at beginning of year 7,000 -
Restricted stock awards during the year:
Non-employee directors 12,000 7,000
Employees 455,000 -
Agents 11,800 -
Restricted stock vested during the year:
Non-employee directors (7,000) -
Employees (60,000) -
Agents - -
Restricted stock forfeitures during the year:
Non-employee directors - -
Employees (194,000) -
Agents (300) -
-------- --------
Restricted stock outstanding at end of year 224,500 7,000
======== ========
Weighted average grant price:
Non-employee directors $ 9.125 $ 6.75
Employees $ 9.060 -
Agents $ 9.750 -
Information regarding the Company's stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Options outstanding at beginning of year 336,529 411,994 375,294
Options granted during the year:
Price granted at $5.40 - - 116,000
Price granted at $5.60 - - 6,000
Price granted at $8.25 1,000 4,000 -
Options exercised during the year:
Price ranging from $1.88 to $5.40 (42,500) (62,965) (85,300)
-------- -------- --------
Options cancelled during the year:
Price ranging from $1.88 to $7.65 (176,029) (16,500) -
======== ======== ========
Options outstanding at end of year 119,000 336,529 411,994
======== ======== ========
</TABLE>
At December 31, 1997, options for 20,000 shares were exercisable under the stock
options plans at a price of $1.88 and options for 99,000 shares were exercisable
at a price ranging from $5.18 to $8.25. Also, at December 31, 1997, 1996 and
1995, options for 154,000, 10,000 and 6,000 shares, respectively, remained
available for future grant under the plans.
In September 1986, the Company established a retirement savings plan for its
employees. The plan permits all employees who have been with the Company for at
least one year to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. The plan allows employees to defer up to 3%
of their salary with partially matching discretionary Company contributions
determined by the Company's Board of Directors. Employee contributions are
invested in any of five investment funds at the discretion of the employee.
Company contributions are in the form of the Company's Common Stock. The
Company's contributions to the plan in 1997, 1996 and 1995 approximated
$106,000, $102,000, and $79,000, respectively.
NOTE 14 - REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on
both life and accident and health business. Reinsurance agreements are used to
limit maximum losses and provide greater diversity of risk. The Company remains
liable to policyholders to the extent the reinsuring companies are unable to
meet their treaty obligations. Total accident and health premiums of $3.6
million, $4.1 million, and $2.8 million, were paid to reinsurers in 1997, 1996,
and 1995, respectively. Face amounts of life insurance in force approximated
$53.1 million, $87.0 million and $43.4 million at December 31, 1997, 1996 and
1995, respectively. No life insurance was reinsured as of December 31, 1997,
1996 and 1995, respectively.
<PAGE>
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Agreement") with a reinsurer effective July
1, 1996 on the inforce Critical Care and Specified Disease business. The
Agreement provided an initial ceding commission of $10.5 million, of which $8.4
million was received in cash. This ceding commission allowance was to be repaid,
inclusive of interest at 12.5%, as statutory profits emerged from the reinsured
block of business. For the year ended December 31, 1996, the repayment was $1.9
million. The ceding allowance payable for the year ended December 31, 1996 was
$8.6 million. The Company exercised its option to terminate and recapture this
Agreement on April 1, 1997 consisting of approximately $9.0 million in total
recapture costs calculated at an interest rate of 15% less approximately $2.0
million in unearned premium reserves due to NFL and FLICA. See NOTE 16
EXTRAORDINARY ITEM.
In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a
wholly-owned subsidiary of FHC. Under the terms of the treaty, NFL assumed a 90%
pro-rata share of certain Critical Care and Specified Disease business. For the
years ended December 31, 1997, 1996 and 1995, $0, $2.3 million, and $5.1
million, respectively, of assumed premiums under this coinsurance treaty are
included as premium revenue in the consolidated financial statements. This
coinsurance treaty was cancelled subsequent to the acquisition of the remaining
interest of FLICA's parent FHC, on May 31, 1996.
In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms
of the treaty, NFL assumed a 50% pro-rata share of all insurance business
written by FLICA from January 1, 1987 through December 31, 1988. In November
1988, the coinsurance treaty was amended to extend through 1997. For the years
ended December 31, 1997, 1996 and 1995, $0, $1.7 million, and $4.3 million,
respectively, of assumed premiums under the coinsurance treaty are included as
revenue in the consolidated financial statements. This coinsurance treaty was
cancelled subsequent to the acquisition of the remaining interest of FLICA's
parent FHC, on May 31, 1996.
In March 1990, NFL entered into a coinsurance treaty with Paramount Life
Insurance Company ("Paramount"). Under the terms of the treaty, which was in
effect from April 1, 1990 through May 31, 1995, NFL assumed 90% of the Critical
Care and Specified Disease policies written by Paramount. The treaty effectively
ended upon the purchase of this block of business by NFL from Paramount. For the
year ended December 31, 1997, 1996 and 1995, $0, $0 and $0.6 million,
respectively, of assumed premiums under this coinsurance treaty were recorded as
revenue.
<PAGE>
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating leases,
relating primarily to office facilities and data processing equipment having a
remaining term in excess of one year, at December 31, 1997, aggregated $9.8
million. The amounts due by year are as follows: 1998-$2.6 million; 1999-$1.9
million; 2000-$1.5 million; 2001-$1.1 million, 2002-$1.1 million, and
thereafter-$1.6 million. Aggregate rental expense included in the consolidated
financial statements for all operating leases approximated $4.4 million, $4.2
million and $3.4 million in 1997, 1996 and 1995, respectively.
In the normal course of their business operations, the Insurance Subsidiaries,
continue to be involved in various claims, lawsuits (alleging actual as well as
substantial exemplary damages) and regulatory matters. In the opinion of
management, the disposition of these or any other legal matters will not have a
material adverse effect on the Company's business, consolidated financial
position or results of operations.
<PAGE>
In the ordinary course of business, the Company has advanced commissions and
made loans to agents collateralized by future commissions. First-year commission
advances to agents are recorded as receivables from agents and totaled $20.5
million as of December 31, 1997. Westbridge holds a secured promissory note (the
"Elkins Note"), from NFC Marketing, Inc. ("NFC"), an Arkansas corporation which
is wholly-owned by Elkins. The balance of this note recorded on the books of the
Company at December 31, 1997 is approximately $752,000. The note, which was
renegotiated in October 1994, represents principal and accrued interest on a
loan made by Westbridge to NFC for the purpose of expanding its marketing
efforts. The Company collects $25,000 per month until this note and the related
accrued interest is satisified. Payment of the principal and interest under the
Elkins Note has been guaranteed by Elkins. In addition, under the terms of a
Security Agreement delivered to Westbridge by NFC, following a default,
Westbridge has the right to apply monies, balances, credit or collections which
it may hold for NFC on deposit, or which might otherwise be payable to NFC by
NFL (including, among other things, agents' commissions payable by NFL to NFC),
to offset the unpaid balance of the Elkins Note.
The Company's Insurance Subsidiaries are subject to extensive governmental
regulation and supervision at both federal and state levels. Such regulation
includes premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy, transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have
significant impact on the Company's revenues and results of operations.
NOTE 16 - EXTRAORDINARY ITEM
For the year ended December 31, 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 (See NOTE 7 FINANCING ACTIVITIES); and (ii) $433,000 resulted from
the termination and recapture of the block of reinsured insurance policies
referred to in NOTE 14 - REINSURANCE.
<PAGE>
NOTE 17 - RECONCILIATION TO STATUTORY REPORTING
A reconciliation of net (loss) income as reported by the Insurance Subsidiaries
under practices prescribed or permitted by regulatory authorities and that
reported herein by the Company on a consolidated GAAP basis is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net (loss) income as reported by the Insurance
Subsidiaries on a statutory basis $(49,618) $ 870 $ (6,296)
Additions to (deductions from) statutory basis:
Future policy benefits and claims 2,493 (2,016) 166
FHC pre-acquisition statutory earnings - (1,388) -
Deferred policy acquisition costs,
net of amortization 735 22,434 15,329
Deferred uncollected and advance premiums 44 (1,719) 138
Coinsurance Funds Withheld reinsurance treaty 8,575 (7,336) -
Recognition of premium deficiency (64,952) - -
Extraordinary item (1,007) - -
Income taxes 13,970 (4,214) (2,837)
Subsidiary companies, eliminations,
and other adjustments (6,664) 2,001 (1,355)
Other, net (720) (371) 179
-------- -------- --------
Consolidated net (loss) income as reported
herein on a GAAP basis $(97,144) $ 8,261 $ 5,324
======== ======== ========
</TABLE>
A reconciliation of the statutory capital and surplus reported by the Insurance
Subsidiaries under regulatory practices to stockholders' (deficit) equity as
reported herein by the Company on a consolidated GAAP basis is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Capital and surplus as reported by the Insurance
Subsidiaries on a statutory basis $ 21,592 $ 18,648 $ 24,038
Deductions from (additions to) a statutory basis:
Future policy benefits and claims (10,147) 10 (9,723)
Deferred policy acquisition costs 19,165 83,871 56,977
Nonadmitted assets 832 4,818 1,124
Coinsurance Funds Withheld reinsurance treaty - (8,831) -
Income taxes (1,037) (13,242) (9,447)
Deferred, uncollected and advance premiums 249 (12,651) 241
Asset valuation reserve 1,049 1,157 823
Unrealized appreciation on investments,
gross of deferred taxes 4,039 1,620 3,667
Other, net 1,248 3,997 6,255
-------- -------- --------
Combined insurance subsidiaries stockholders'
equity on a GAAP basis 36,990 79,397 73,955
Subsidiary companies (deficit) equity,
eliminations and other adjustments (82,408) (31,494) (31,150)
-------- -------- --------
Consolidated stockholders' (deficit) equity in
accordance with GAAP $(45,418) $ 47,903 $ 42,805
======== ======== ========
</TABLE>
<PAGE>
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for each of the Company's last two years of
operations is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
1997 March June September December
- ----------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Premium income $ 40,820 $ 41,022 $ 40,450 $ 38,805
Net investment income 2,226 2,530 3,207 3,060
Net realized (losses) gains on investments (60) 192 223 (271)
Fee, service and other income 3,502 4,106 4,525 4,567
Benefits, claims and other expenses 43,826 57,329 79,125 118,029
Net income (loss) before extraordinary loss 1,730 (6,161) (19,968) (71,738)
Extraordinary loss, net of tax - (1,007) - -
Preferred stock dividend 396 392 392 392
Income (loss) applicable to common stockholders 1,334 (7,560) (20,360) (72,130)
Earnings per share:
Basic:
Income (loss) before extraordinary item $ 0.22 $ (1.07) $ (3.29) $ (11.64)
Extraordinary item $ - $ (0.16) $ - $ -
Net earnings (loss) $ 0.22 $ (1.23) $ (3.29) $ (11.64)
Diluted:
Income (loss) before extraordinary item $ 0.20 $ (1.07) $ (3.29) $ (11.64)
Extraordinary item $ - $ (0.16) $ - $ -
Net earnings (loss) $ 0.20 $ (1.23) $ (3.29) $ (11.64)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
1996 March June September December
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Premium income $ 35,410 $ 39,040 $ 40,688 $ 41,642
Net investment income 2,116 2,191 2,283 2,146
Net realized gains (losses) on investments 85 116 (28) (77)
Fee, service and other income 1,777 2,017 2,440 3,300
Benefits, claims and other expenses 37,040 40,334 41,890 43,285
Preferred stock dividend 413 412 412 413
Income applicable to common stockholders 1,160 1,585 1,858 2,008
Earnings per share:
Basic $ 0.19 $ 0.27 $ 0.31 $ 0.33
Diluted $ 0.19 $ 0.24 $ 0.27 $ 0.28
</TABLE>
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net investment income $ 1,579 $ 62 $ 23
Realized gains on investments 984 - -
Intercompany income derived from:
Interest on Surplus Certificates 78 78 78
Rental of leasehold improvements and equipment 1,926 1,703 1,597
Interest on advances to subsidiaries 266 192 182
Other income 228 106 120
-------- -------- --------
5,061 2,141 2,000
-------- -------- --------
General and administrative expenses 4,349 2,128 2,085
Reorganization expense 1,324 - -
Taxes, licenses and fees 164 90 97
Interest expense 5,846 2,496 2,432
-------- -------- --------
11,683 4,714 4,614
-------- -------- --------
Loss before income taxes and equity in undistributed
net earnings of subsidiaries and FHC (6,622) (2,573) (2,614)
(Benefit from) provision for income taxes (3,939) 432 1,427
-------- -------- --------
(10,561) (2,141) (1,187)
Equity in undistributed net (losses) earnings of
subsidiaries and FHC (86,419) 10,402 6,918
-------- -------- --------
(Loss) income before extraordinary item (96,980) 8,261 5,731
Extraordinary loss (1) (2) 164(1) - 407(2)
-------- -------- --------
Net income (97,144) 8,261 5,324
Preferred stock dividends 1,572 1,650 1,650
-------- -------- --------
(Loss) income applicable to common stockholders (98,716) 6,611 3,674
Retained earnings at beginning of year 17,186 10,575 6,901
-------- -------- --------
Retained (deficit) earnings at end of year $(81,530) $ 17,186 $ 10,575
======== ======== ========
</TABLE>
(1) From early extinguishment of debt, net of income tax benefit of $85.
(2) From early extinguishment of debt, net of income tax benefit of $210.
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1997 consolidated financial statements and
notes thereto.
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Assets:
Cash and other short-term investments $ 3,317 $ 1,241
Fixed maturities, at market value 15,198 -
Equity securities, at market value 1,038 -
Investment real estate 566 -
Investment in consolidated subsidiaries 38,224 77,946
Accrued investment income 288 50
Leasehold improvements and equipment, net 960 1,100
Advances due from subsidiaries 4,181 2,557
Receivable from subsidiary on Surplus Certificate 777 777
Other assets 4,618 6,540
-------- --------
Total Assets $ 69,167 $ 90,211
======== ========
Liabilities:
Senior subordinated notes, net $ 19,447 $ 19,350
Convertible subordinated notes 70,000 -
Senior note payable - 1,038
Payable to subsidiaries 36 929
Interest payable 4,077 -
Other liabilities 2,025 991
-------- --------
Total Liabilities 95,585 22,308
-------- --------
Redeemable Preferred Stock 19,000 20,000
-------- --------
Stockholders' Equity:
Common stock 620 604
Capital in excess of par value 30,843 29,226
Unrealized appreciation of investments
carried at market value 4,649 1,057
Retained (deficit) earnings (81,530) 17,186
-------- --------
(45,418) 48,073
-------- --------
Less: Aggregate shares held in treasury and investment
by affiliate in Parent Company's common stock, at cost
(28,600 shares at December 31, 1996) - (170)
-------- --------
Total Stockholders' (Deficit) Equity (45,418) 47,903
-------- --------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Equity $ 69,167 $ 90,211
======== ========
</TABLE>
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1997 consolidated financial statements and
notes thereto.
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
(Loss) income applicable to common stockholders $(98,716) $ 6,611 $ 3,674
Adjustments to reconcile net (loss) income to cash
provided by (used for) operating activities:
Equity in undistributed net loss (income) of subsidiaries 86,419 (10,402) (6,918)
Accrued investment income (238) (16) (12)
Advances due from subsidiaries, net (2,536) 1,471 1,383
Other liabilities 5,111 (138) 10
Other, net 1,539 1,120 (1,178)
-------- -------- --------
Net Cash Used For Operating Activities (8,421) (1,354) (3,041)
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sale of investments 42,268 - -
Cost of investments acquired (57,366) - -
Additions to leasehold improvements and equipment,
net of retirements (349) (165) (703)
Decrease in notes receivable 288 158 -
Investment in subsidiaries (43,105) 1,038 -
-------- -------- --------
Net Cash (Used For) Provided by Operating Activities (58,264) 1,031 (703)
-------- -------- --------
Cash Flows From Financing Activities:
Retirement of subordinated debentures - - (25,000)
Issuance of senior subordinated notes - - 19,200
Issuance of convertible subordinated notes 70,000 - -
(Retirement) issuance of senior note payable (1,103) 103 927
Issuance of common stock 140 140 10,108
Issuance of common stock warrants - - 74
Purchase and cancellation of common stock (276) (125) (146)
-------- -------- --------
Net Cash Provided By Financing Activities 68,761 118 5,163
-------- -------- --------
Increase (Decrease) in Cash and Short-Term
Investments During the Year 2,076 (205) 1,419
Cash and Other Short-Term Investments at
Beginning of Year 1,241 1,446 27
======== ======== ========
Cash and Other Short-Term Investments at End of Year $ 3,317 $ 1,241 $ 1,446
======== ======== ========
</TABLE>
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1997 consolidated financial statements and
notes thereto.
<PAGE>
SCHEDULE III
WESTBRIDGE CAPITAL CORP.
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Other
Policy
Deferred Claims Benefits Amortization
Policy Future and Net and of Policy Other
Acquisition Policy Benefits Premium Investment Claims Acquisition Operating Premiums
Segment Costs Benefits Payable Revenue Income Expense Costs Expenses Written*
- ----------------------------- --------- -------- -------- -------- ------- --------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Insurance operations $ 19,165 $ 55,811 $ 51,784 $161,097 $ 7,325 $ 136,866 $ 30,873 $ 91,633 $ 73,611
Fee and service income ========
activities - - - - 1,547 - - 27,564
Corporate (parent company) - - - - 2,151 - - 11,373
========= ======== ======== ======== ======= ========= ============ ========
Total $ 19,165 $ 55,811 $ 51,784 $161,097 $11,023 $ 136,866 $ 30,873 $130,570
========= ======== ======== ======== ======= ========= ============ ========
Year ended December 31, 1996:
Insurance operations $ 83,871 $ 54,204 $ 39,186 $156,780 $ 6,514 $ 94,187 $ 22,907 $ 16,385 $107,149
Fee and service income ========
activities - - - - 1,784 - - 24,433
Corporate (parent company) - - - - 438 - - 4,637
========= ======== ======== ======== ======= ========= ============ ========
Total $ 83,871 $ 54,204 $ 39,186 $156,780 $ 8,736 $ 94,187 $ 22,907 $ 45,455
========= ======== ======== ======== ======= ========= ============ ========
Year ended December 31, 1995:
Insurance operations $ 56,977 $ 46,620 $ 39,063 $120,093 $ 7,095 $ 70,465 $ 11,553 $ 23,533 $ 98,996
Fee and service income ========
activities - - - - - - - 11,670
Corporate (parent company) - - - - 326 - - 4,615
========= ======== ======== ======== ======= ========= ============ ========
Total $ 56,977 $ 46,620 $ 39,063 $120,093 $ 7,421 $ 70,465 $ 11,553 $ 39,818
========= ======== ======== ======== ======= ========= ============ ========
</TABLE>
*Premiums Written--Amounts do not apply to life insurance.
<PAGE>
WESTBRIDGE CAPITAL CORP.
SCHEDULE IV
REINSURANCE
(in thousands, except percentages)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
-------- ----------- ------------ -------- ----
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force $ 53,065 $ - $ - $ 53,065 -
=========== ============ ============ ========
Premiums:
Life $ 830 $ - $ - $ 830 -
Accident and health 161,867 3,635 2,035 160,267 1.27%
----------- ------------ ------------ --------
Total premiums $162,697 $ 3,635 $ 2,035 $161,097 1.26%
=========== ============ ============ ========
Year ended December 31, 1996:
Life insurance in force $ 86,978 $ - $ - $ 86,978 -
=========== ============ ============ ========
Premiums:
Life $ 889 $ - $ - $ 889 -
Accident and health 155,952 4,063 4,002 155,891 2.57%
----------- ------------ ------------ --------
Total premiums $156,841 $ 4,063 $ 4,002 $156,780 2.55%
=========== ============ ============ ========
Year ended December 31, 1995:
Life insurance in force $ 43,441 $ - $ - $ 43,441 -
=========== ============ ============ ========
Premiums:
Life $ 549 $ - $ - $ 549 -
Accident and health 112,444 2,811 9,911 119,544 8.29%
----------- ------------ ------------ --------
Total premiums $112,993 $ 2,811 $ 9,911 $120,093 8.25%
=========== ============ ============ ========
</TABLE>
<PAGE>
SCHEDULE V
WESTBRIDGE CAPITAL CORP.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Additions
Charged Balance
Balance at to at
Beginning Costs and Deductions End of
of Period Expenses (Charge Offs) Period
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful agents' balances $ 1,729 $ 2,802 $ - $ 4,531
============ ============ ============ ============
Year ended December 31, 1996:
Allowance for doubtful agents' balances $ 1,187 $ 1,462 $ (920) $ 1,729
============ ============ ============ ============
Year ended December 31, 1995:
Allowance for doubtful agents' balances $ 1,137 $ 50 $ - $ 1,187
============ ============ ============ ============
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Westbridge's executive officers are as follows:
<TABLE>
<CAPTION>
Years with
Officer Name Age Position with the Company the Company
- ------------------------- -- ----------------------------------------- ------------
<S> <C> <C> <C>
Martin E. Kantor 75 Chairman of the Board and 21
Chief Executive Officer
Patrick J. Mitchell 39 President, Chief Operating Officer, 2
Chief Financial Officer and Treasurer
Patrick H. O'Neill 47 Executive Vice President, General Counsel 0
and Secretary
</TABLE>
Mr. Kantor has served as Chairman of the Board and Chief Executive Officer of
Westbridge since January 1993. Mr. Kantor had served as Chairman of the Board,
President and Chief Operating Officer of Westbridge since prior to 1992. Mr.
Kantor has served as Chairman of the Board of NFL since prior to 1992 and also
became Chief Executive Officer of NFL in 1985. Following the acquisition of each
of NFIC, AICT and FLICA, Mr. Kantor was appointed Chairman of the Board and
Chief Executive Officer of each entity.
Mr. Mitchell has served as President, Chief Operating Officer, Chief Financial
Officer, Treasurer and Director since October 1997. Mr. Mitchell had served as
Executive Vice President, Chief Financial Officer and Treasurer since May 1996
and joined the Company in August 1995 as Vice President, Chief Financial Officer
and Treasurer. Mr. Mitchell is also President and Director of NFL, NFIC, AICT
and FLICA. Prior to joining Westbridge, he served as Vice President, Finance for
Bankers Life and Casualty Company. From 1989 to 1993, Mr. Mitchell was Assistant
Vice President, Finance for Reliance Standard Life Insurance Company.
Mr. O'Neill joined Westbridge in September 1997 as Senior Vice President,
General Counsel and Secretary. In November 1997, Mr. O'Neill was promoted to
Executive Vice President. In addition, Mr. O'Neill serves as Senior Vice
President, General Counsel, Secretary and Director of NFL, NFIC, AICT and FLICA.
Prior to joining Westbridge and since 1990, Mr. O'Neill served as founder and
President of the Law Offices of Patrick H. O'Neill, P.C. Prior to 1990, Mr.
O'Neill was a partner in the Law Firm of Camp, Jones, O'Neill, Hall & Bates.
Westbridge's directors are as follows:
<TABLE>
<CAPTION>
Expiration
Years with of Term of
Director Name Age Position with the Company the Company Office
- ------------------------- --- -------------------------------------- ------------ ---------
<S> <C> <C> <C>
Martin E. Kantor 75 Chairman of the Board, Chief Executive 21 1998
Officer
Patrick J. Mitchell 39 Director, President, Chief Operating 2 1999
Officer, Chief Financial Officer and
Treasurer
Joseph C. Sibigtroth 82 Director 14 1998
Barry L. Stevens 51 Director 1 1998
Barth P. Walker 83 Director 16 1998
Marvin H. Berkeley 75 Director 16 1999
Glenn O. Phillips 68 Director 11 1999
Arthur W. Feinberg 74 Director 13 2000
George M. Garfunkel 59 Director 4 2000
Peter J. Millock 51 Director 2 2000
</TABLE>
Martin E. Kantor has served as Chairman of the Board and Chief Executive Officer
of Westbridge since January 1993. Mr. Kantor had served as Chairman of the
Board, President and Chief Operating Officer of Westbridge since prior to 1992.
Mr. Kantor has served as Chairman of the Board of NFL since prior to 1992 and
also became Chief Executive Officer of NFL in 1985. Following the acquisition of
each of NFIC, AICT and FLICA, Mr. Kantor was appointed Chairman of the Board and
Chief Executive Officer of each entity. Mr. Kantor may be deemed a control
person of the Company by virtue of his ownership of 708,767 shares, or 11.39%,
of the outstanding shares of the Company's Common Stock at March 9, 1998. This
amount does not include shares held in various trusts established by Mr. Kantor
for the benefit of his children and grandchildren over which he has no voting or
investment power and as to which Mr. Kantor disclaims beneficial ownership, see
Note (1) under "Principal Stockholders".
Patrick J. Mitchell has served as President, Chief Operating Officer, Chief
Financial Officer, Treasurer and Director since October 1997. Mr. Mitchell had
served as Executive Vice President, Chief Financial Officer and Treasurer since
May 1996 and joined the Company in August 1995 as Vice President, Chief
Financial Officer and Treasurer. Mr. Mitchell is also President and Director of
NFL, NFIC, AICT and FLICA. Prior to joining Westbridge, he served as Vice
President, Finance for Bankers Life and Casualty Company. From 1989 to 1993, Mr.
Mitchell was Assistant Vice President, Finance for Reliance Standard Life
Insurance Company.
Joseph C. Sibigtroth has been a director since 1984. Mr. Sibigtroth is a retired
consulting actuary and had been a private consulting actuary since prior to
1992. Mr. Sibigtroth has served as Chairman of both the Mortality and Morbidity
Committees of the American Society of Actuaries, and as Treasurer of the New
York State Guaranty Corporation.
Barry L. Stevens has been a director of Westbridge since 1997. Mr. Stevens has
been the director of the Bureau of Investments for the Treasury Department,
State of Michigan, since February 1989. From January 1985 to February 1989, Mr.
Stevens served as the Assistant Director, Bureau of Investments for the Treasury
Department, State of Michigan. Prior to that period, Mr. Stevens served as
Senior Equity Analyst and Administrator of the Equity Division, Treasury
Department, State of Michigan.
Barth P. Walker has been a director of Westbridge since 1982. Mr. Walker has
been a senior member of Walker & Walker, a law firm in Oklahoma City, Oklahoma
since prior to 1992.
Marvin H. Berkeley has been a director of Westbridge since 1982. Dr. Berkeley
has served as Professor of Management of the University of North Texas, Denton,
Texas, since prior to 1992, and is former Dean of the College of Business
Administration of the University of North Texas. Dr. Berkeley is also a director
of Irving National BankShares, Inc., Irving, Texas. Dr. Berkeley is a former
advisory director of Enersyst Development Center, Inc., a former director of
John Watson Landscape Illumination, Inc., and a former Governor of International
Insurance Society, Inc.
Glenn O. Phillips has been a director of Westbridge since 1987. Mr. Phillips is
an Insurance Consultant and has served as Partner with Professional Insurance
Group since December 1994. Mr. Phillips served as a Consultant for the National
Registry Corp. from June 1994 through 1995 and as President and Director of
Financial Services of America from 1991 through 1994.
Arthur W. Feinberg has been a director of Westbridge since 1985. Mr. Feinberg
has served as the Chief of Geriatric Medicine of the Department of Medicine of
North Shore University Hospital, Manhasset, New York since prior to 1992. Dr.
Feinberg also has been, since prior to 1992, a Professor, Clinical Medicine,
Cornell University Medical College. Dr. Feinberg was formerly a Regent and
Chairman of the Board of Governors of the American College of Physicians.
George M. Garfunkel has been a director of Westbridge since 1994. Mr. Garfunkel
is a founding partner of the Great Neck, New York law firm of Garfunkel, Wild &
Travis P.C., which specializes in the representation of clients in the health
care industry. He is also a director of Berkshire Taconic Community Foundation,
Inc.
Peter J. Millock has been a director of Westbridge since July 1996. Mr. Millock
is Counsel in private practice with the law firm of Nixon, Hargrave, Devans &
Doyle LLP, Albany, New York. Mr. Millock previously served for 15 years as
general counsel and chief legal officer for the New York State Department of
Health.
Board Committees
The Board formed an Executive Committee on June 22, 1995. The Executive
Committee is composed of Mr. Garfunkel (Chairman), Dr. Feinberg and Mr. Kantor.
The Executive Committee possesses all the powers and authority of the Board in
the management and direction of the business and affairs of the Company, except
as limited by law. The Executive Committee met twice during 1997.
The Board formed a Compensation Committee on May 30, 1996. The Compensation
Committee is composed of Mr. Phillips (Chairman), Mr. Garfunkel and Dr.
Feinberg.
The Compensation Committee has responsibility for reviewing and approving
salaries, bonuses and other compensation and benefits of executive officers, and
advising management regarding benefits and other terms and conditions of
compensation for executive officers. The Compensation Committee did not meet
during 1997.
The Audit Committee of the Board is composed of Mr. Walker (Chairman), Dr.
Berkeley, and Mr. Sibigtroth. The Audit Committee, which met twice during 1997,
recommends to the Board the firm to be employed as the Company's independent
accountants, reviews details of each audit engagement and audit reports,
including all management reports by the independent accountants regarding
internal controls, and reviews resolution of any material matters with respect
to appropriate accounting principles and practices to be used in preparation of
the Company's financial statements.
The Board does not have a Nominating Committee.
The Board met six times during 1997. Each member of the Board attended at least
75% of the Board meetings and all meetings of any committee of the Board on
which such Director served during 1997.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Compensation
The following table sets forth information on cash and other compensation paid
or accrued for each of the fiscal years ended December 31, 1997, 1996 and 1995
to those persons who were at the end of the 1997 fiscal year the Chief Executive
Officer and the four most highly compensated executive officers of the Company,
for services in all capacities to the Company and its subsidiaries.
<TABLE>
<CAPTION>
Long-Term Compensation/
Restricted Stock All Other
Name and Awards (6)/Securities Compensation
Principal Position Year Salary Bonus Underlying Options (1) (5)
------------------------- -- -------- ------------ ----------- --- ----------------------- -- -----------------
<S> <C> <C> <C> <C> <C>
Martin E. Kantor 1997 $ 492,500 $ 0 60,000 $ 0
Chairman of the 1996 $ 477,462 $ 0 0 $ 2,850
Board and Chief 1995 $ 403,615 $ 50,000 0 $ 2,772
Executive Officer
Patrick J. Mitchell (2) 1997 $ 279,958 $ 0 45,000 $ 3,225
President, Chief 1996 $ 204,519 $ 0 0 $ 1,425
Operating Officer, Chief 1995 $ 55,819 $ 25,000 25,000 $ 0
Financial Officer and
Treasurer
James W. Thigpen (3) 1997 $ 233,333 $ 0 60,000 $ 2,535,054
President and Chief 1996 $ 387,692 $ 0 0 $ 2,375
Operating Officer 1995 $ 346,638 $ 50,000 0 $ 2,310
Stephen D. Davidson (4) 1997 $ 243,645 $ 0 45,000 $ 2,215
Executive Vice 1996 $ 255,048 $ 0 0 $ 2,375
President and Chief 1995 $ 183,462 $ 40,000 30,000 $ 2,310
Marketing Officer
</TABLE>
(1) Amounts shown represent matching contributions of the Company credited to
the named executive officers under the Company's 401(k) plan.
(2) Effective October 31, 1997, Patrick Mitchell was named President and Chief
Operating Officer.
(3) Effective August 18, 1997, James Thigpen ceased serving as President and
Chief Operating Officer.
(4) Effective December 1, 1997, Steven Davidson ceased serving as Executive
Vice President and Chief Marketing Officer.
(5) The amounts reported for James Thigpen include (a) the payment of
approximately $1.5 million in satisfaction of obligations under his
employment agreement plus accrued vacation, (b) approximately $850,000
representing the fair market value of the immediate vesting of 60,000
shares of restricted stock awarded on January 1, 1997 and the fair market
value, net of consideration paid by Mr. Thigpen, in connection with his
exercise of options to purchase 34,500 shares of stock during 1997, and (c)
forgiveness of $95,500 of interest-free salary advances. See ITEM 13 -
"Certain Relationships and Related Transactions".
(6) On January 1, 1997, Messrs. Kantor, Mitchell, Thigpen and Davidson received
restricted stock grants of 60,000, 45,000, 60,000 and 45,000 shares,
respectively. In September 1997, Mr. O'Neill received a restricted stock
grant of 30,000 shares. These shares vest and are issuable over a period of
four years. Related compensation expense will be reported in subsequent
reporting periods as vesting criteria are satisfied and shares are issued.
Each director of the Company who is not a salaried employee or consultant of NFL
receives $2,500 per meeting of the Board attended. Additionally, all Audit
Committee members who attend special Audit Committee meetings which do not
coincide with meetings of the Board receive $1,000 per special Audit Committee
meeting attended. All directors are reimbursed for their expenses incurred in
attending meetings of the Board. Additionally, Dr. Feinberg received $6,000 in
consultation fees from the Company during 1997.
Options Granted in Last Fiscal Year
Each non-employee director is entitled to receive automatic, non-discretionary
and fixed annual grants of stock options under the 1992 Stock Option Plan,
subject to the availability of shares of Common Stock issuable under the 1992
Plan (the "Plan"). Pursuant to the Plan, a stock option to acquire 5,000 shares
of Common Stock was granted to each non-employee director serving as a member of
the Board on January 14, 1993. Thereafter, a stock option to acquire 1,000
shares of Common Stock was and will automatically be granted each succeeding
year (immediately following the Company's annual meeting of stockholders) to
each non-employee director serving as a member of the Board at such time.
Additionally, each non-employee director, upon becoming a member of the Board
for the first time, is entitled to receive a stock option to purchase 5,000
shares of Common Stock. The option price per share is the average of the mean
high and low trading prices for the Common Stock for the fifth through the ninth
trading day following the relevant grant date. Each option becomes exercisable
on the first anniversary of the date of grant and may thereafter be exercised in
whole or in part during the term of the option by payment of the full option
price for the number of underlying shares to be acquired upon any such exercise.
Each option will expire seven years after the date on which the option is
granted, subject to earlier termination upon an optionee's termination of
service as a director, other than as a result of retirement, death or
disability. During 1997, a stock option to acquire 1,000 shares of Common Stock
was granted to Mr. Millock. There were no other stock options granted to any of
the named executive officers or non-employee directors under the Plan.
Each non-employee director who has not been an employee during the one year
period immediately preceding (a) the initial grant date (as defined below and
with respect to any initial grant to such member) and (b) any annual grant date
(as defined below and with respect to any annual grant to such member) (an
"Eligible Director") shall automatically participate in the fixed formula grant
portion of the restricted Stock Plan. Each eligible director shall automatically
be granted 5,000 shares of restricted Common Stock immediately following the
Company's annual stockholders meeting at which the eligible director is first
elected to the Board (the "Initial Grant Date"), commencing with the 1996 Annual
Meeting (each, an "Initial Grant"). In addition, each eligible director who does
not receive the grant described in the preceding sentence shall automatically be
granted 1,000 shares of restricted Common Stock each year, immediately following
the Company's annual stockholders meeting in such year (the "Annual Grant Date")
commencing with the 1996 Annual Meeting (each, an "Annual Grant"). All shares of
restricted Common Stock granted to eligible directors shall become 100% vested
on the first anniversary of the Initial Grant Date or the Annual Grant Date that
relates to any such award. During 1997, each eligible non-employee director,
other than Mr. Millock, received a grant of 1,000 shares of restricted Common
Stock pursuant to the restricted Stock Plan. Mr. Millock received a grant of
5,000 shares of restricted common stock pursuant to the restricted Stock Plan.
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised In-The
Unexercised Options Money Options
Shares at Fiscal Year End at Fiscal Year End
Name and Principal Acquired Value (Exercisable/ (Exercisable/
Position On Exercise Realized Unexercisable) Unexercisable)
- ------------------------------------- --------------- ------------ -------------------------- -----------------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Martin E. Kantor - - - -
Chairman of the Board
and Chief Executive Officer
Patrick J. Mitchell - - 25,000/ $ 10,156/
President and Chief 0 0
Operating Officer
James W. Thigpen 34,500 $ 284,500 0/ $ 0/
President and Chief 0 0
Operating Officer
Stephen D. Davidson - - 0/ $ 0/
Executive Vice President 0 0
and Chief Marketing Officer
</TABLE>
The values listed in columns (c) and (e) represent the difference between the
estimated market value of the Company's Common Stock and the exercise price of
the options at exercise and at December 31, 1997, respectively.
Long-term Incentive Plans/Defined Benefit or Actuarial Plans
During 1997, the Company did not have any Long-term Incentive Plans ("LTIP"),
defined benefit plans or actuarial plans in effect.
Employment Agreements
The Company is party to an employment agreement with Martin E. Kantor, pursuant
to which Mr. Kantor is employed as the Chairman of the Board and Chief Executive
Officer of the Company and NFL. The Company has agreed to employ Mr. Kantor for
a period of commencing on April 1, 1996, and ending on the fifth anniversary of
such date. The employment period will be automatically extended each year
thereafter unless an employee, with respect to his own employment, or the
Company gives notice to the contrary.
Effective January 1, 1998, Mr. Kantor's base salary is $492,000 per annum. Mr.
Kantor's base salary will be reviewed annually for increase at the sole
discretion of the Company's Board. Mr. Kantor is also entitled to participate in
and receive all benefits under any and all bonus, short- or long-term incentive,
savings and retirement plans, and welfare benefit plans, practices, policies and
programs maintained or provided by the Company and/or its subsidiaries for the
benefit of senior executives.
If Mr. Kantor's employment is terminated by reason of death, or by the Company
due to "disability" (as defined in the Employment Agreements), such employee or
his legal representative will be entitled to, among other things, (a)(i) in the
case of death, (x) his base salary for a period of three months after the date
of death, plus (y) a death benefit in an amount equal to three times the base
salary at the rate in effect on the date of termination less any amounts paid to
the employee's beneficiary(ies) pursuant to the group and/or other corporate
life insurance policies maintained by the Company or NFL, and (ii) in the case
of disability, his base salary for 36 months after the date of termination; (b)
certain accrued benefits and a pro rata bonus payment for the year in which such
death or disability occurs, and (c) immediate and accelerated vesting of all
restricted stock grants previously awarded to the employee. If an employee's
employment is terminated by the Company without cause, or by the employee for
"good reason" (as defined in the Employment Agreements and which, in the case of
Mr. Kantor's Employment Agreement, includes the occurrence of a "change in
control" as defined therein), such employee will be entitled to (a) a lump sum
payment equal to three times the sum of (i) his base salary, and (ii) the
highest annual bonus awarded to him, (b) certain accrued benefits, (c)
continuation of the health and welfare benefits, and (d) immediate and
accelerated vesting of all restricted stock grants previously awarded to the
employee. If an employee's employment is terminated for "cause" (as defined in
the Employment Agreements), such employee will be entitled to, among other
things, (a) his base salary through the date of termination and (b) certain
accrued benefits. If the Company terminates his employment (other than due to
death, disability, or for cause), such employee will be entitled to, among other
things, (a) his base salary through the date of termination, (b) certain accrued
benefits, and (c) continuation of the health and welfare benefits. In addition
to the foregoing, if Mr. Kantor's employment is terminated other than for cause,
Mr. Kantor will be entitled to repayment, within thirty business days after the
date of termination, of the outstanding principal amount (and any accrued, but
unpaid, interest through the date of repayment) of any loans (including the
Senior Note) (as defined in ITEM 13 "Certain Transactions"), or other advances
made by him to the Company, NFL or any affiliate of either such entity.
If any payment or distribution by the Company or any subsidiary or affiliate to
an employee would be subject to any "golden parachute payment" excise tax or
similar tax, and if, and only if, such payments less the excise tax or similar
tax is less than the maximum amount of payments which could be payable to the
employee without the imposition of the excise tax or similar tax, then and only
then, and only to the extent necessary to eliminate the imposition of the excise
tax or similar tax (and after taking into account any reduction in the payments
provided by reason of Section 280G of the Code in any other plan, arrangement or
agreement), (A) any cash payments under the Employment Agreement shall first be
reduced (if necessary, to zero), and (B) all other non-cash payments under the
Employment Agreement shall next be reduced.
If Mr. Kantor's employment is terminated by the Company for cause or if an
employee voluntarily terminates his employment without good reason, for a period
of eighteen months, such employee shall not (i) solicit or take away the
patronage of (a) any customers or agents of the Company, NFL or any affiliate of
either as of the date of such termination, or (b) any prospective customers or
agents of the Company or any affiliate whose business the Company and/or NFL was
actively soliciting on the date of such termination, and with which the employee
had business contact while employed by the Company and NFL, or (ii) directly or
indirectly, induce or solicit any employees or agents of the Company, NFL or any
affiliate of either to leave or terminate their employment or agency
relationship with the Company or NFL.
If a claim for payment or benefits under the Employment Agreement is disputed,
Mr. Kantor will be reimbursed for all attorney fees and expenses incurred in
pursuing such claim, provided that Mr. Kantor is successful as to at least part
of the disputed claim by reason of litigation, arbitration or settlement. In
addition, the Employment Agreement provides that if Mr. Kantor is made a party
or are threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
either is or was a director or officer of the Company or any subsidiary or is or
was serving at the request of the Company or any subsidiary as a director,
officer, member, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including, without limitation, service
with respect to employee benefit plans, each will be indemnified and held
harmless by the Company or a subsidiary of the Company to the fullest extent
authorized by applicable law against all expenses incurred or suffered by the
Executives. This indemnification will continue as to the executives even if the
Executives have ceased to be an officer, director or agent, or are no longer
employed by the Company or any subsidiary.
The Company has also entered into a separate agreement with each of Patrick J.
Mitchell and Patrick H. O'Neill, pursuant to which each such person is entitled
to participate in and receive all benefits provided to senior officers of the
Company and to receive a severance payment upon the termination of his or her
employment by the Company for reasons other than cause, as applicable. The
amount of severance payable to Mr. Mitchell would be equal the aggregate salary
(excluding bonus) paid to him during the calendar year preceding any such
termination of employment. The amount of severance payable to Mr. O'Neill would
equal his current annual salary (excluding bonus).
On August 18, 1997, James Thigpen ceased serving as President and Chief
Operating Officer. Pursuant to the terms of his Employment Agreement with the
Company, Mr. Thigpen received the following: (a) a lump sum payment of $1.38
million equal to three times the sum of his base salary and the highest annual
bonus awarded to him, (b) certain accrued benefits totaling approximately
$168,000, (c) continuation of health and welfare benefits and (d) immediate and
accelerated vesting of the 60,000 shares of restricted stock grants previously
awarded to Mr. Thigpen on January 1, 1997 with a fair market value of $562,500
on the date of vesting. In addition, as described in ITEM 13 - "Certain
Relationships and Related Transactions", the Company forgave $95,500 of Mr.
Thigpen's outstanding indebtedness to the Company for non-interest bearing
salary advances. Further, the Company transferred to Mr. Thigpen the title to
his company-owned vehicle with a fair value of approximately $31,000. Also in
connection with his retirement, Mr. Thigpen exercised options to acquire 10,000
shares of the Company's Common Stock with an aggregate market value of $39,500
net of the related consideration paid by Mr. Thigpen.
Compensation Committee Interlocks and Insider Participation
Since its formation on May 30, 1996, the Compensation Committee has consisted of
Messrs. Phillips (Chairman), Garfunkel and Dr. Feinberg, all of whom are outside
directors.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
<TABLE>
<CAPTION>
Number
Name and Address of Shares Percent
- ------------------------------------------ --------- --------
<S> <C> <C>
Martin E. Kantor (1) 708,767 11.39%
777 Main Street
Fort Worth, Texas 76102
George M. Garfunkel (2) 455,568 7.31%
111 Great Neck Road, Suite 503
Great Neck, New York 11021
President & Fellows of Harvard College (3) 594,530 8.72%
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Edwin S. Marks (4) 346,100 5.56%
135 East 57th Street
New York, New York 10022
Credit Suisse First Boston (5) 1,426,739 18.65%
Uetlibergstrasse 231
P.O. Box 900
CH-8045 Zurich, Switzerland
Forest Investment Management LLC (6) 413,862 6.23%
53 Forest Avenue
Old Greenwich, Connecticut 06870
Founders Financial Group, L.P. (6) 413,862 6.23%
53 Forest Avenue
Old Greenwich, Connecticut 06870
Michael A. Boyd, Inc. (6) 413,862 6.23%
53 Forest Avenue
Old Greenwich, Connecticut 06870
Michael A. Boyd (6) 413,862 6.23%
53 Forest Avenue
Old Greenwich, Connecticut 06870
Pecks Management Partners Ltd (7) 1,510,280 19.53%
One Rockefeller Plaza
New York, New York 10020
</TABLE>
(1) Based upon information supplied by Mr. Kantor. Mr. Kantor has sole voting
and dispositive power as to the shares indicated above. Excludes 440,408
shares (7.08%) held in trusts established by Mr. Kantor for the benefit of
his children and grandchildren over which he has no voting or investment
power and as to which Mr. Kantor disclaims beneficial ownership.
(2) Based upon information supplied by Mr. Garfunkel. Includes 440,408 shares
beneficially owned by Mr. Garfunkel as trustee under various trusts
established by Mr. Kantor and referred to in Note (1) above, over which Mr.
Garfunkel has sole voting and investment power.
(3) Based upon information provided by the stockholder and represents the
number of shares of Common Stock into which the shares of Series A
Cumulative Convertible Exchangeable Redeemable Preferred Stock ("Series A
Preferred Stock") held by such holder are convertible. Each share of Series
A Preferred Stock, which generally does not vote with the Common Stock in
the election of directors or on other matters, is convertible into 118.906
shares of Common Stock.
(4) Based upon the stockholder's Schedule 13D dated January 21, 1997. Mr. Marks
has sole voting and dispositive power with respect to 175,700 of the
346,100 total shares indicated above. Mr. Marks has shared voting and
dispositive power with respect to the remaining 170,400 shares beneficially
owned by Nancy A. Marks and the Marks Family Foundations.
(5) Based upon the stockholder's Schedule 13G dated January 7, 1998. Credit
Suisse First Boston has sole voting and dispositive power with respect to
the shares indicated above. Based upon information provided by the
stockholder, the shares indicated above represent the number of shares of
Common Stock into which the 7-1/2% Convertible Subordinated Notes due 2004
(the "Convertible Notes") held by such holder are convertible. Each $1,000
unit of Convertible Notes, which generally does not vote with the Common
Stock in the election of directors or on other matters, is convertible into
91.575 shares of Common Stock.
(6) Based upon the stockholders' Schedule 13G dated February 17, 1998, the
shares are held for the benefit of Forest Investment Management LLC
("Forest"), an Investment Advisor, Founders Financial Group L.P.
("Founders"), in its capacity as the owner of a controlling interest in
Forest, (c) Michael A. Boyd, Inc. ("MAB, Inc."), in its capacity as the
general partner of Founders and (d) Michael A. Boyd ("Mr. Boyd"), in his
capacity as the sole director and shareholder of MAB, Inc. (collectively,
the "Filing Parties"). The Filing Parties have sole voting and dispositive
powers as to the shares indicated above. In addition, the shares indicated
above represent the number of shares of Common Stock into which 400 shares
of Series A Preferred Stock and 4,000 units of Convertible Notes are
convertible.
(7) Based upon the stockholder's Schedule 13G dated February 23, 1998, the
shares are held in the investment advisory accounts of Pecks Management
Partners Ltd. Therefore, various persons have the right to receive or the
power to direct the receipt of dividends from or the proceeds from the sale
of the shares. The shares indicated above represent the number of shares of
Common Stock into which 5,000 shares of Series A Preferred Stock and 10,000
units of Convertible Notes are convertible.
Security Ownership of Management
The following table sets forth as of March 9, 1998 (except for shares owned by
Messrs. Davidson, Kantor, and Mitchell, through participation in the Company's
401(k) Plan, which are as of November 30, 1997) the number and percentage of
shares of Common Stock owned by the directors of the Company and all nominees as
directors, each of the executive officers named in the table under "Summary of
Compensation" and all executive officers and directors as a group. To the
Company's knowledge, the persons listed below each have sole voting and
investment power as to all shares indicated as owned by them.
<TABLE>
<CAPTION>
Number of
Name Shares Owned Percent
- ---------------------------------------------------------------- ------------- -------
<S> <C> <C>
Marvin H. Berkeley (i) ......................................... 19,200 *
Stephen D. Davidson (ii) (vii).................................. 1,071 *
Arthur W. Feinberg (i).......................................... 20,098 *
George M. Garfunkel (i) (iii)................................... 455,568 7.31%
Martin E. Kantor (ii) (iv)...................................... 708,767 11.39%
Peter J. Millock (i)............................................ 6,000 *
Patrick J. Mitchell (i) (ii) ................................... 25,634 *
Patrick H. O'Neill.............................................. 0 *
Glenn O. Phillips (i)........................................... 8,500 *
Joseph C. Sibigtroth (i)........................................ 9,000 *
Barry L. Stevens................................................ 11,500 *
James W. Thigpen (viii)......................................... 0 *
Barth P. Walker (i) (v)......................................... 18,379 *
All executive officers and directors as a group (13) (vi)....... 1,283,717 20.39%
</TABLE>
.........
*Less than 1%
(i) The number of shares owned by Messrs. Berkeley, Feinberg, Garfunkel,
Millock, Mitchell, Phillips, Sibigtroth and Walker includes 7,000, 7,000,
6,000, 5,000, 25,000, 7,000, 7,000 and 7,000 shares, respectively, subject
to stock options granted and exercisable within sixty (60) days under the
Company's stock option plans.
(ii) The number of shares owned by Messrs. Davidson, Kantor and Mitchell
includes 1,071, 6,070 and 534, respectively, which are owned through
participation in the Company's 401(k) plan.
(iii) See Note (2) under "Principal Stockholders."
(iv) See Note (1) under "Principal Stockholders."
(v) Excludes 270,751 shares (4.35%) held in trusts established by Mr. Walker
for the benefit of his children and grandchildren over which he has no
voting or investment power and as to which Mr. Walker disclaims beneficial
ownership.
(vi) The number of shares owned by all executive officers and directors includes
an aggregate of 71,000 shares (1.13%) subject to stock options granted and
exercisable within sixty (60) days to all executive officers and directors
as a group under the Company's stock option plans and 7,675 shares owned
through participation in the Company's 401(k) Plan.
(vii)Mr. Davidson ceased serving as an executive officer on December 1, 1997. As
such, the Company is unaware of any outstanding common stock held by Mr.
Davidson as of March 9, 1998, except for the shares owned by Mr. Davidson
through participation in the Company's 401(k) plan. See (ii) above.
(viii) Mr. Thigpen ceased serving as an executive officer on August 18, 1997. As
such, the Company is unaware of any outstanding common stock held by Mr.
Thigpen as of March 9, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
the Common Stock, to file with the Securities and Exchange Commission (the
"SEC") and the New York Stock Exchange, reports of ownership and changes in
ownership of the Common Stock. Directors, executive officers and
greater-than-10% stock-holders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on
review of the copies of such reports furnished to the Company or written
representations that no other reports were required, the Company believes that,
during 1997, all other filing requirements applicable to its directors,
executive officers and greater-than-10% stockholders were complied with, except
that Patrick H. O'Neill did not timely file a Form 3 upon his being named an
executive officer. This Form 3 has subsequently been filed by Mr. O'Neill.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
On December 13, 1995, Mr. Kantor, the Chairman of the Board and Chief Executive
Officer of the Company made a $1 million loan to the Company which was evidenced
by a 10% Senior Note due December 22, 2002 (the "Senior Note"). In connection
with the loan, Mr. Kantor received a warrant to purchase 135,501 shares of the
Company's Common Stock at an exercise price of $7.38 per share, subject to
certain adjustments (the "Warrant"). On May 6, 1997, subsequent to the Company's
public offering of its $70 million aggregate principal 7-1/2% Convertible
Subordinated Notes due 2004, the Company paid Mr. Kantor approximately $1.14
million, representing principal and accrued interest, in order to retire the
Senior Note.
As described in ITEM 11 - EXECUTIVE COMPENSATION - "Employment Agreements", on
August 18, 1997, the Company forgave a loan to Mr. Thigpen, former President and
Chief Operating Officer, in the aggregate amount of $95,500. This indebtedness
resulted from certain interest-free salary advances to Mr. Thigpen over the
course of his tenure as an executive officer of the Company.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) The documents set forth below are filed as part of this report.
(1) Financial Statements:
Reference is made to ITEM 8, "Index to Financial Statements and Financial
Statement Schedules."
(2) Financial Statement Schedules:
Reference is made to ITEM 8, "Index to Financial Statements and Financial
Statement Schedules."
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
<PAGE>
(3) Exhibits:
The following exhibits are filed herewith. Exhibits incorporated by reference
are indicated in the parentheses following the description.
3.1 Restated Certificate of Incorporation of Westbridge filed with the
Secretary of State of Delaware on July 28, 1994 (incorporated by reference
to Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
No. 33-81380 on Form S-1).
3.2 By-Laws of Westbridge, effective as of June 24, 1994 (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the Company's Registration
Statement No. 33-81380 on Form S-1).
4.1 Specimen Certificate for Westbridge Common Stock (incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to the Company's Registration Statement
No. 2-78200 on Form S-1).
4.2 Indenture between Westbridge and Liberty Bank & Trust Company of Oklahoma
City, National Association, as Trustee, including form of Senior
Subordinated Note (incorporated by reference to Exhibit 2 to the Company's
Form 8-A dated July 19, 1995).
Indenture, dated as of April 24, 1997, between Westbridge and First Union
National Bank, as Trustee, relating to the 7-1/2% Convertible Subordinated Notes
due 2004, including form of Convertible Subordinated Note (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
Underwriters' Warrant Agreement, dated as of April 29, 1997, by an among
Westbridge Capital Corp., Forum Capital Markets L.P. and Raymond James &
Associates, Inc., including form of Warrant (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
10.1 Westbridge Employee Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Company's Registration Statement
No. 2-78200 on Form S-1).
10.2 Description of Cash Bonus Plan (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.3 Stockholders' Agreement dated April 2, 1988, by and among the Company and
the other stockholders of LifeStyles Marketing Group, Inc., named therein,
as amended (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988).
10.4 Supplement to General Agent's Agreement with Phillip D. Elkins as amended
on February 8, 1990 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
<PAGE>
10.5 Assumption Reinsurance Agreement, dated June 20, 1991, by and among
National Foundation Life Insurance Company and Bankers Protective Life
Insurance Company (incorporated by reference to Exhibit 2 to the Company's
Report on Form 8-K dated August 27, 1991).
10.6 Assumption Reinsurance Agreement dated September 16, 1992, by and among
National Foundation Life Insurance Company and American Integrity Insurance
Company (incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K dated September 25, 1992).
10.7 Westbridge 1992 Stock Option Plan (incorporated by reference to Exhibit
28.4 to the Company's Registration Statement No. 33-55192 on Form S-8).
10.8 First Amendment to the 1992 Stock Option Plan (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.9 Second Amendment to the 1992 Stock Option Plan (incorporated by reference
to Exhibit 10.21 to Amendment No.1 to the Company's Registration Statement
No. 33-31830 on Form S-1).
10.10Preferred Stock Purchase Agreement dated as of April 1, 1994 by and between
Westbridge Capital Corp. and each of the purchasers named on the signature
pages thereto (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 26, 1994).
10.11Westbridge Capital Corp. 10% Senior Note Due 2002 dated December 22, 1995,
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.12Warrant to Purchase Common Stock of Westbridge Capital Corp. (transfer
restricted) dated December 22, 1995, (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
Employment Contract of Martin E. Kantor (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
10.14Employment Contract of Patrick J. Mitchell (incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
10.15Master General Agent's Contract by and between American Insurance Company
of Texas and National Farm & Ranch Group, Inc., effective as of the 1st day
of September, 1994, (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.16Master General Agent's Contract by and between National Financial
Insurance Company and National Farm & Ranch Group, Inc., effective as of
the 1st day of June, 1995, (incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.17Master General Agent's Contract by and between National Foundation Life
Insurance Company and National Farm & Ranch Group, Inc., effective as of
the 1st day of September, 1994, (incorporated by reference to Exhibit 10.27
to Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.18Master General Agent's Contract by and between American Insurance Company
of Texas and Cornerstone National Marketing Corporation effective, as of
the 19th day of October, 1994, (incorporated by reference to Exhibit 10.28
to Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.19Master General Agent's Contract by and between National Financial Insurance
Company and Cornerstone National Marketing Corporation, effective as of the
19th day of October, 1994, (incorporated by reference to Exhibit 10.29 to
Amendment No. 2 to the Company's Registration Statement No.
33-81380 on Form S-1, as filed on August 9, 1996).
10.20Master General Agent's Contract by and between National Foundation Life
Insurance Company and Cornerstone National Marketing Corporation, effective
as of the 19th day of October, 1994, incorporated by reference to Exhibit
10.30 to Amendment No. 2 to the Company's Registration Statement No.
33-81380 on Form S-1, as filed on August 9, 1996).
10.21Master General Agent's Contract by and between Freedom Life Insurance
Company of America and John P. Locke, d.b.a. 1ST MILLION, dated the 31st
day of May, 1996, (incorporated by reference to Exhibit 10.31 to Amendment
No. 2 to the Company's Registration Statement No. 33-81380 on Form S-1, as
filed on August 9, 1996).
10.22Westbridge Capital Corp. 1996 Restricted Stock Plan (incorporated by
reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders of the Company held on May 30, 1996).
<PAGE>
10.23Reinsurance Agreement between National Foundation Life Insurance Company &
Freedom Life Insurance Company of America and Reassurance Company of
Hannover, effective July 1, 1996 (incorporated by reference to Exhibit
10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.24Credit Agreement dated as of June 6, 1997 between Westbridge Funding
Corporation and LaSalle National Bank (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.25Guaranty Agreement dated as of June 6, 1997 by Westbridge Capital Corp. in
favor of LaSalle National Bank (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
10.26Pledge Agreement dated as of June 6, 1997 between Westbridge Marketing
Corporation and LaSalle National Bank (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.27Security Agreement dated as of June 6, 1997 between Westbridge Funding
Corporation for the benefit of LaSalle National Bank (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.28Second Amended and Restated Receivables Purchase and Sale Agreement, dated
as of June 6, 1997 between National Foundation Life Insurance Company,
National Financial Insurance Company, American Insurance Company of Texas,
Freedom Life Insurance Company of America, and Westbridge Funding
Corporation (incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10.29Amended and Restated Non-Insurance Company Sellers Receivables Purchase and
Sale Agreement, dated as of June 6, 1997 between American Senior Security
Plans, L.L.C., Freedom Marketing, Inc., Health Care-One Insurance Agency,
Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of
Texas, Inc., and Westbridge Marketing Corporation (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.30* Stock Sale and Purchase Agreement by and between the other stockholders
of LifeStyles Marketing Group, Inc., named therein and Westbridge Marketing
Corporation dated December 31, 1997.
10.31* Employment Contract of Patrick H. O'Neill.
21.1* List of Subsidiaries of Westbridge Capital Corp.
24.1* Consent of Price Waterhouse LLP
27.1* Financial Data Schedule.
(b) Report on Form 8-K.
Westbridge filed no reports on Form 8-K during the last quarter of the
year covered by this report.
- ------------------------
* Filed Herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of March,
1998.
WESTBRIDGE CAPITAL CORP.
/s/ Martin E. Kantor
(Martin E. Kantor,
Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ Martin E. Kantor Director, Chairman of the Board March 30, 1998
- --------------
(Martin E. Kantor) and Chief Executive Officer
(Principal Executive Officer)
/s/ Marvin H. Berkeley Director March 30, 1998
- --------------
(Marvin H. Berkeley)
/s/ Arthur S. Feinberg Director March 30, 1998
- --------------
(Arthur S. Feinberg)
/s/ George M. Garfunkel Director March 30, 1998
- --------------
(George M. Garfunkel)
/s/ Peter J. Millock Director March 30, 1998
- --------------
(Peter J. Millock)
/s/ Patrick J. Mitchell Director, President, Chief Operating March 30, 1998
- --------------
(Patrick J. Mitchell) Officer, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
/s/ Glenn O. Phillips Director March 30, 1998
- --------------
(Glenn O. Phillips)
/s/ Joseph C. Sibigtroth Director March 30, 1998
- --------------
(Joseph C. Sibigtroth)
/s/ Barry L. Stevens Director March 30, 1998
- --------------
(Barry L. Stevens)
/s/ Barth P. Walker Director March 30, 1998
- --------------
(Barth P. Walker)
</TABLE>
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
10.28* Stock Sale and Purchase Agreement by and between the other stockholders
of LifeStyles Marketing Group, Inc., named therein and Westbridge Marketing
Corporation dated December 31, 1997.
10.31* Employment Contract of Patrick H. O'Neill.
21.1* List of Subsidiaries of Westbridge Capital Corp.
24.1* Consent of Price Waterhouse LLP
27.1* Financial Data Schedule.
* Filed Herewith
<PAGE>
Exhibit 10.28
- -------------------------------------------------------------------------------
STOCK ACQUISITION AGREEMENT BY AND BETWEEN CURT DUWE AND WESTBRIDGE MARKETING
CORPORATION PAGE 6 STOCK SALE AND PURCHASE AGREEMENT
BY AND BETWEEN
CURT DUWE, AS SELLER
AND WESTBRIDGE MARKETING CORPORATION, AS PURCHASER
STATE OF TEXAS ss.
ss.
COUNTY OF TARRANT ss.
WHEREAS, Curt Duwe owns 49 shares of the capital stock of Lifestyles
Marketing Group, Inc., a Delaware corporation, (hereinafter "Lifestyles")
represented by Stock Certificate Nos. 11 14, which constitutes forty-nine (49%)
percent of all of the issued outstanding shares of capital stock in such
corporation;
and WHEREAS, Westbridge Marketing Corporation, a Delaware corporation,
(hereinafter "Westbridge Marketing") owns 51 shares of the remaining issued and
outstanding capital stock of Lifestyles represented by Stock Certificate No. 6,
which constitutes fifty-one (51%) percent of all of the issued and outstanding
shares of capital stock in such corporation;
and WHEREAS, Westbridge Marketing desires to purchase from Curt Duwe all of
his 49 shares of capital stock in Lifestyles;
and WHEREAS, Curt Duwe has agreed to sell all of his 49 shares of stock in
Lifestyles to Westbridge Marketing for and in consideration of the payment of
the sum of $10,000.00, together with the performance by Westbridge Marketing of
all of the other conditions, covenants, promises, representations, and
warranties contained herein.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS that in consideration of the
mutual promises of the parties; in reliance upon the representations,
warranties, covenants, and conditions contained in this Agreement; and for other
good and valuable consideration, the parties agree as follows:
ARTICLE 1
Sale
1.01 Curt Duwe agrees to, and does hereby, sell, convey, transfer,
assign, and deliver to Westbridge Marketing all of the right, title, and
interest in his 49 shares of capital stock in Lifestyles which shares are
represented by Stock Certificate Nos. 11 and 14 and which constitutes forty-nine
(49%) percent of the issued and outstanding capital stock in such corporation.
Westbridge Marketing agrees to, and does hereby, purchase from Curt Duwe all of
his right, title, and interest in such capital stock.
Consideration for Sale
1.02 In consideration of the sale and transfer of Curt Duwe's 49 shares
of capital stock in Lifestyles, represented by Stock Certificate Nos. 11 and 14,
together with the representations, warranties, and covenants of Curt Duwe set
forth in this Agreement, Westbridge Marketing agrees to, and does hereby, pay to
Curt Duwe the sum of $10,000.00, the receipt and sufficiency of which is hereby
acknowledged and confessed by Curt Duwe.
ARTICLE 2
Curt Duwe's Representations and Warranties
Curt Duwe hereby represents and warrants to Westbridge Marketing that the
following facts and circumstances are true and correct: 2.01 Curt Duwe is the
sole owner of 49 shares of issued and outstanding capital stock of Lifestyles
represented by Stock Certificate Nos. 11 and 14 which constitutes forty-nine
(49%) percent of the issued and outstanding stock of such corporation. No other
person or persons have any claim, right, title, interest, or lien in, to, or on
all or any part of such shares of stock.
ARTICLE 3
Westbridge Marketing's Representations and
Warranties Westbridge Marketing represents and
warrants to Curt Duwe as follows:
Authority
3.01 Westbridge Marketing has full power and authority to execute, deliver,
and consummate this Agreement. All corporate acts, reports, and returns required
to be filed by Westbridge Marketing any government or regulatory agency with
respect to this transaction have been, or will be properly filed. No provisions
exist in an contract, document, or other instrument to which Westbridge
Marketing is a party, or by which Westbridge Marketing is bound that would be
violated by the consummation of the transactions contemplated by this Agreement.
Organization and Standing of Westbridge Marketing 3.02 Westbridge Marketing is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware, with its principal place of business in Fort
Worth, Texas, and it possesses appropriate corporate power to own property and
carry on its business as it is now being conducted.
ARTICLE 4
General Provisions Survival of Representations,
Warranties, and Covenants
4.01 The representations, promises, warranties, covenants, and conditions
set forth above as contained in this Agreement, or contained in any writing
delivered pursuant to this Agreement, shall survive beyond the date of this
Agreement. 4.02 All notices that are required or that may be given pursuant to
the terms of this Agreement shall be in writing and shall be sufficient in all
respects if given in writing and delivered personally or by registered or
certified mail, return receipt requested, postage pre-paid, as follows: If to
Curt Duwe: Curt Duwe 3756 Country Club Circle Fort Worth, Texas 76109
If to Westbridge Marketing:
Westbridge Marketing Corporation 777 Main Street,
Suite 1000 Fort Worth, Texas 76102.
Assignment of Agreement
4.03 This Agreement shall be binding on and inure to the benefit of the
parties to this Agreement and their respective successors and permitted assigns.
This Agreement may not, however, be assigned by any other party without the
written consent of all parties and any attempt to make an assignment without
such consent is void.
Governing Law
4.04 This Agreement shall be construed and governed by the laws of the
State of Texas. Amendment; Waiver
4.05 This Agreement may be amended only in writing by the mutual consent of
all parties, evidenced by all necessary and proper corporate authority. No
waiver of any provision of this Agreement shall arise from any action or
inaction of any party, except an instrument in writing expressly waiving the
provision executed by the party entitled to the benefit of the provision. Entire
Agreement
4.06 This Agreement, together with any documents and exhibits given or
delivered pursuant to this Agreement, constitutes the entire agreement between
the parties to this Agreement regarding the stock purchase and sale which is the
subject matter of this Agreement. No party shall be bound by any communication
between them on the subject matter of this Agreement unless the communication is
(a) in writing, (b) bears a date contemporaneous with or subsequent to the date
of this Agreement, and (c) is agreed to by all parties to this Agreement. On the
execution of this Agreement, all prior agreements or understandings between the
parties shall be null and void.
As evidence of our acceptance and execution of this Agreement, the
undersigned have affixed their respective signatures hereto on this ______ day
of _________________________, 1997.
------------------------------
Curt Duwe
------------------------------
Westbridge Marketing Corporation
by its President, Patrick J. Mitchell
<PAGE>
Exhibit 10.31
- -----------------------------------------------------------------
EMPLOYMENT CONTRACT/PATRICK H. O'NEILL - PAGE 6
WESTBRIDGE CAPITAL CORP.
EMPLOYMENT CONTRACT OF PATRICK H. O'NEILL
By this Agreement, Westbridge Capital Corp., referred to in this
Agreement as Employer, located at 777 Main Street, Fort Worth, Texas 76102,
employs Patrick H. O'Neill, referred to in this Agreement as Employee, of 4001
Briarhaven Court, Fort Worth, Texas 76109, who accepts employment of the
following terms and conditions:
ARTICLE 1
TERM OF EMPLOYMENT
1.01 By this Agreement, Employer employs Employee, and Employee accepts
employment with Employer, commencing on the 22nd of September, 1997, for an
indefinite term.
ARTICLE 2
COMPENSATION
Basic Compensation
2.01 As compensation for all services rendered under this Agreement,
Employee shall be paid by Employer a minimum salary of $225,000 per year which
shall be payable in equal semi-monthly installments on the first and fifteenth
days of each month during the period of employment. The amount paid shall be
prorated for any period of partial employment.
Restricted Stock
2.02 As additional incentive compensation for all services rendered
under this Agreement, Employee shall immediately receive on the above
commencement date a restrictive stock award from Employer in the amount of
30,000 shares pursuant to the 1996 Restricted Stock Plan of Employer and which
awarded shares shall have the following vesting schedule during the term of this
Agreement: 10% on its first anniversary of this Agreement, 25% on its second
anniversary of this Agreement, 30% on its third anniversary of this Agreement,
and 35% on its fourth anniversary of this Agreement; provided, however, that any
current shares of restricted stock hereby awarded shall immediately and fully
vest upon the total disability or death of Employee.
ARTICLE 3
DUTIES OF EMPLOYEE
3.01 Employee is employed as Senior Vice President and General Counsel
and shall work at the office of Employer located at 777 Main Street, Fort Worth,
Texas 76102. Employee shall perform all duties commonly discharged by general
counsel and the heads of company law departments. Additionally, Employee may be
required to perform supervisory duties over other departments of Employer and
its subsidiaries.
3.02 Employee shall devote his entire productive time, ability,
attention, and energies to the business of Employer during the term of this
Agreement with the exception of time reasonably required in the winding up of
the current caseload, current client matters, and other current business of the
Law Offices of Patrick H. O'Neill, P.C. Other than winding up the current
caseload, current client matters, and other current business of the Law Offices
of Patrick H. O'Neill, P.C., Employee shall not directly or indirectly render
any services of a business, commercial, or professional nature to any other
person or organization, whether or not for compensation, without the prior
written consent of Employer.
ARTICLE 4
EMPLOYEE'S OBLIGATIONS OTHER THAN TO
PERFORM SERVICES
Non-competition by Employee
4.01 During the term of this Agreement, Employee shall not, directly or
indirectly, either as an employee, employer, consultant, general counsel,
attorney, insurance agent, marketer, general agent, principal, partner,
stockholder, corporate officer, director, manager of a limited liability
company, or in any other individual or representative capacity, engage or
participate in any business that is in competition, in any manner whatsoever,
with the business of Employer, or any of its subsidiaries.
ARTICLE 5
EMPLOYEE BENEFITS AND BONUSES
Benefits
5.01 Employer agrees to include Employee as a participant and/or
recipient in the current insurance benefits program and 401K plan of Employer.
Bonuses
5.02 In addition to Employee's salary provided in paragraph 2.01 of
this Agreement, Employer may, in its sole discretion choose to pay Employee a
cash bonus at the end of each calendar year during the term of this Agreement.
Upon termination of employment, Employee shall not be entitled to any portion of
the bonus for the employment year of termination.
Restricted Stock and Stock Option Programs
5.03 In addition to Employee's salary provided in Paragraph 2.01 of
this Agreement and discretionary bonuses provided for in Paragraph 5.02 of this
Agreement, Employer may, in its sole discretion, choose to award and allow
Employee to participate in the company's restricted stock and stock option plans
and programs currently in place or hereinafter adopted.
ARTICLE 6
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
Business Expenses
6.01 Employee is authorized to incur reasonable business expenses for
promoting the business of Employer and handling its legal affairs, including
expenditures for entertainment, gifts, and travel. Employer will reimburse
Employee for all such reasonable expenses upon Employee's presentation and
itemized account of such expenditures.
ARTICLE 7
PROPERTY RIGHTS OF PARTIES
Trade Secrets
7.01 During the term of employment, Employee will have access to and
become familiar with various trade secrets, consisting of formulas, devices,
secret inventions, processes, and compilations of information, records,
specifications, actuarial data, marketing strategies, marketing organization
formations, and marketing organization compensation formulas, owned by Employer,
and/or any of its subsidiaries, and regularly used in the operation of the
business of Employer, and/or any of its subsidiaries. Employee shall not
disclose any such trade secrets, directly or indirectly, nor use them in any
way, either during the term of this Agreement or at any time thereafter, except
as required in the course of his employment. All files, records, documents,
drawings, specifications, equipment, and similar items relating to the business
of Employer, and/or any of its subsidiaries, whether or not prepared by
Employee, shall remain the exclusive property of Employer and shall not be
removed from the premises of Employer, and/or any of its subsidiaries, under any
circumstances without the prior written consent of Employer.
Return of Employer's Property
7.02 On the termination of employment or whenever requested by
Employer, Employee shall immediately deliver to Employer all property in
Employee's possession or under Employee's control belonging to Employer,
including, but not limited to all marketing records, agents records, accounting
records, computer terminals and tapes, accounting machines, and all office
furniture and fixtures, supplies, and other personal property placed in the
office of Employer at 777 Main Street, Fort Worth, Texas 76102, in good
condition, ordinary wear and tear excepted.
ARTICLE 8
OBLIGATIONS OF EMPLOYER
Indemnification of Losses of Employee
8.01 Employer shall indemnify Employee for all losses sustained by
Employee as a direct result of the discharge of his duties required by this
Agreement.
Working Conditions
8.02 Employer will provide Employee with a private office, furnishings,
library, equipment, services of associate general counsels, paralegals,
administrative assistants, secretarial and stenographic services, and any other
facilities and services as are suitable to Employee's position or required for
the establishment and maintenance of a corporate law department or otherwise in
performance of Employee's duties.
ARTICLE 9
TERMINATION
Termination by Either Party
9.01 This Agreement may be terminated, with or without cause, by either
party by giving seven (7) days' written notice of termination to the other
party. Such termination shall not prejudice any remedy that the terminating
party may have at law or in equity under this Agreement.
Effect of Termination by Employer on Compensation
9.02 In the event of termination of this Agreement by Employer for any
reason except gross negligence, fraud, theft, or actual and intentional
dishonesty perpetrated by Employee upon Employer, Employee shall be entitled to
compensation earned but not paid to Employee prior to the date of termination as
provided in this Agreement, computed pro rata up to and including that date. In
addition, provided such termination is for any reason except gross negligence,
fraud, theft, or actual and intentional dishonesty perpetrated by Employee upon
Employer, Employee shall be entitled to the following severance payment:
The sum of Employee's then current annual salary (excluding
any annual bonus paid) payable in equal semi-monthly
installments on the first and fifteenth days of each month
during the year following the month of such termination.
Effect of Termination by Employer on Restricted Stock
9.03 Additionally, upon termination of this Agreement by Employer,
Employee shall be entitled to the immediate vesting of such additional
percentage of non-vested shares of restricted stock as represented on the
anniversary date of the otherwise applicable vesting schedule through the year
next following the year of such termination.
Effect of Termination by Employee on Compensation
9.04 In the event of termination of this Agreement by Employee,
Employee shall be entitled to the salary earned but not paid to Employee prior
to the date of termination as provided in this Agreement, computed pro rata up
to and including that date. Employee shall be entitled to no further
compensation or vesting of restricted stock or stock options after the date of
such termination.
ARTICLE 10
GENERAL PROVISIONS
Notices
10.01 All notices or other communications required under this Agreement
may be effected either by personal delivery in writing or by certified mail,
return receipt requested. Notice shall be deemed to have been given when
delivered or mailed to the parties at their respective addresses as set forth
above or when mailed to the last address provided in writing to the other party
by the addressee.
Entirety of Agreement
10.02 This Agreement supersedes all other agreements, either oral or in
writing, between the parties to this Agreement, with respect to the employment
of Employee by Employer. This Agreement contains the entire understanding of the
parties and all of the covenants and agreements between the parties with respect
to such employment.
EXECUTED at Fort Worth, Texas on _____________________, 1997.
EMPLOYER
Westbridge Capital Corp.
By: ______________________________
Fred E. Crosley, President
EMPLOYEE
-----------------------------------
Patrick H. O'Neill
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF WESTBRIDGE CAPITAL CORP.
Percentage Subsidiary Ownership
1 National Foundation Life Insurance Company (Delaware) 100%
2 American Insurance Company of Texas (Texas) 100%
3 National Financial Insurance Company (Texas) 100%
4 Freedom Life Insurance Company of America (Mississippi) 100%
5 Freedom Holding Company (Kentucky) 100%
6 Westbridge Funding Corporation (Delaware) 100%
(Formerly National Legal Services Company, Inc.)
7 Foundation Financial Services, Inc. (Nevada) 100%
8 Westbridge Marketing Corporation (Delaware) 100%
9 Westbridge Printing Services, Inc. (Delaware) 100%
10 Flex-Plan Systems, Inc. (Delaware) 100%
11 Westbridge Financial Corp. (Delaware) 100%
12 Precision Dialing Services, Inc. (Delaware) 100%
13 Westbridge National Life Insurance Company (Arizona) 100%
14 Senior Benefits, LLC (Arizona) 100%
15 American Senior Security Plans, LLC (Delaware) 100%
16 Health Care-One Marketing Group, Inc. (Texas) 80%
17 LifeStyles Marketing Group, Inc. (Delaware) 100%
18 Health Care-One Insurance Agency, Inc. (California) 50%
<PAGE>
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 33-55192) of Westbridge Capital Corp. and its
subsidiaries of our report dated March 30, 1998, appearing on page 35 of this
Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 30, 1998
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