SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1998
Commission File Number 1-8538
WESTBRIDGE CAPITAL CORP.
(Exact name of Registrant as specified in its Charter)
DELAWARE 73-1165000
- ------------------------ --------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
110 West Seventh Street, Suite 300, Fort Worth, Texas 76102
- ----------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
817-878-3300
-------------------
(Registrant's Telephone Number, including Area Code)
Not Applicable
--------------------------------
(Former Name, Address and Former Fiscal Year, if changed since Last Report)
Indicate, by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO_____
Common Stock - Par Value $.10 6,878,243 Shares Outstanding at August 7, 1998
<PAGE>
Form 10-Q
Company or group of companies for which report is filed:
WESTBRIDGE CAPITAL CORP.
This quarterly report, filed pursuant to Rule 13a-13 and 15d-13 of the General
Rules and Regulations under the Securities Exchange Act of 1934, consists of the
following information as specified in Form 10-Q:
<TABLE>
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Page(s)
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1. Consolidated Balance Sheets at June 30, 1998, December 31, 1997
and June 30, 1997. 3-4
2. Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 1998 and 1997. 5
3. Consolidated Statement of Cash Flows for the Three and Six Months
Ended June 30, 1998 and 1997. 6-7
4. Notes to Consolidated Financial Statements. 8-10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 3 - Defaults Upon Senior Securities 22
Item 6 - Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---------- ----------- -----------
(unaudited) (audited) (unaudited)
---------- ----------- -----------
<S> <C> <C> <C>
Investments:
Fixed Maturities:
Available-for-sale, at market value
(amortized cost $116,258, $122,840
and $123,338) $122,853 $128,749 $126,753
Equity securities, at market 5,383 4,770 2,056
Mortgage loans on real estate 326 389 408
Investment real estate - 566 -
Policy loans 282 284 283
Short-term investments and certificates
of deposit 11,808 12,654 10,015
-------- -------- --------
Total Investments 140,652 147,412 139,515
Cash 2,201 1,030 13,761
Accrued investment income 2,323 2,453 2,436
Receivables from agents, net of allowance
for doubtful accounts 15,351 20,503 21,633
Deferred policy acquisition costs 18,480 19,165 87,477
Leasehold improvements and equipment, at
cost, net of accumulated depreciation and
amortization 1,689 1,141 1,271
Due from reinsurers 1,909 3,219 4,031
Commissions receivable 2,217 1,389 5,556
Deferred debt costs, net of accumulated
amortization 3,410 4,046 4,508
Other assets 3,015 2,498 4,765
-------- -------- --------
Total Assets $191,247 $202,856 $284,953
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---------- ---------- ----------
(unaudited) (audited) (unaudited)
---------- ---------- ----------
<S> <C> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 56,265 $ 55,811 $ 56,447
Claims 47,939 51,784 30,548
--------- --------- ---------
104,204 107,595 86,995
Accounts payable and accruals 3,106 3,846 6,112
Commission advances payable 3,377 4,702 9,217
Accrued dividends and interest payable 9,077 4,972 1,605
Other liabilities 7,153 5,612 8,330
Deferred income taxes, net - - 8,735
Notes payable 9,052 13,100 10,364
Senior subordinated notes, net of unamortized
discount, due 2002 19,500 19,447 19,397
Convertible subordinated notes, due 2004 70,000 70,000 70,000
--------- --------- ---------
Total Liabilities 225,469 229,274 220,755
--------- --------- ---------
Redeemable Preferred Stock 13,260 19,000 19,000
--------- --------- ---------
Stockholders' Equity:
Common stock ($.10 par value, 30,000,000
shares authorized; 6,878,254, 6,195,439
and 6,179,099 shares issued) 688 620 618
Capital in excess of par value 36,386 30,843 30,884
Unrealized appreciation of investments carried
at market value, net of tax 5,498 4,649 2,906
Retained (deficit) earnings (90,054) (81,530) 10,960
--------- --------- ---------
(47,482) (45,418) 45,368
Less - Aggregate of shares held in treasury and
investment by affiliate in Westbridge Capital Corp.
common stock (28,600 at June 30, 1997), at cost - - (170)
--------- --------- ---------
Total Stockholders' (Deficit) Equity (47,482) (45,418) 45,198
--------- --------- ---------
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $ 191,247 $ 202,856 $ 284,953
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------------
1998 1997 1998 1997
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premiums:
First-year $ 4,659 $ 9,700 $ 11,690 $ 21,829
Renewal 30,592 31,322 61,000 60,013
-------- -------- --------- ---------
35,251 41,022 72,690 81,842
Net investment income 3,192 2,530 6,358 4,756
Fee and service income 4,037 4,106 8,099 7,608
Net realized gain on investments 267 192 529 132
-------- -------- --------- ---------
42,747 47,850 87,676 94,338
-------- -------- --------- ---------
Benefits, claims and expenses:
Benefits and claims 25,412 31,187 53,848 56,482
Amortization of deferred policy
acquisition costs 713 8,090 1,948 13,330
Commissions 8,708 3,679 18,199 6,967
General and administrative expenses 6,892 7,946 13,900 15,268
Reorganization expense 1,084 3,100 2,100 3,100
Taxes, licenses and fees 1,443 1,625 2,731 3,082
Interest expense 2,124 1,702 4,304 2,926
-------- -------- --------- ---------
46,376 57,329 97,030 101,155
-------- -------- --------- ---------
Loss before income taxes (3,629) (9,479) (9,354) (6,817)
Benefit from income taxes (480) (3,318) (1,239) (2,386)
-------- -------- --------- ---------
Loss before extraordinary item (3,149) (6,161) (8,115) (4,431)
Extraordinary loss from early
extinguishment of debt, net of tax - (1,007) - (1,007)
-------- -------- --------- ---------
Net loss $ (3,149) $ (7,168) $ (8,115) $ (5,438)
======== ======== ========= =========
Preferred stock dividends (62) 392 409 788
-------- -------- --------- ---------
Loss applicable to common
stockholders $ (3,087) $ (7,560) $ (8,524) $ (6,226)
======== ======== ========= =========
Earnings per common share:
Basic:
Loss before extraordinary item $ (0.48) $ (1.07) $ (1.36) $ (.85)
Extraordinary item - (.16) - (.17)
-------- -------- --------- ---------
Net loss $ (0.48) $ (1.23) $ (1.36) $ (1.02)
======== ======== ========= =========
Diluted:
Loss before extraordinary item $ (0.48) $ (1.07) $ (1.36) $ (.85)
Extraordinary item - (.16) - (.17)
-------- -------- --------- ---------
Net loss $ (0.48) $ (1.23) $ (1.36) $ (1.02)
======== ======== ========= =========
Weighted average shares outstanding:
Basic 6,381 6,129 6,289 6,093
======== ======== ========= =========
Diluted 6,381 6,129 6,289 6,093
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Loss applicable to common stockholders $(3,087) $ (7,560) $ (8,524) $ (6,226)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation expense 115 119 215 237
Amortization of deferred policy acquisition costs 713 8,090 1,948 13,330
Decrease (increase) in receivables from agents 2,560 (2,532) 5,152 (3,322)
Addition to deferred policy acquisition costs (549) (7,904) (1,263) (16,936)
Decrease (increase) in due from reinsurers 557 19,100 1,310 (2,575)
Increase in commissions receivable (408) (961) (828) (2,150)
Decrease (increase) in deferred debt costs 438 (1,192) 636 (1,692)
Decrease (increase) in other assets 1,307 189 (517) (327)
Decrease in policy liabilities and accruals (2,405) (312) (3,391) (6,395)
Decrease in accounts payable and accruals (567) (2,975) (740) (2,286)
(Decrease) increase in commission advances payable (1,368) 2,062 (1,325) 4,849
Increase in accrued dividends and interest payable 1,778 227 4,105 319
Increase (decrease) in other liabilities 2,295 (1,728) 1,541 13,818
Decrease in deferred income taxes, net - (2,233) - (1,564)
Other, net (493) (1,956) (313) (794)
------- -------- -------- --------
Net Cash Provided By (Used For) Operating Activities 886 434 (1,994) (11,714)
------- -------- -------- --------
Cash Flows From Investing Activities:
Proceeds from investments sold:
Fixed maturities, called or matured 1,872 88 5,126 2,761
Fixed maturities, sold 7,116 2,257 11,343 13,008
Short-term investments, sold or matured 1,305 4,509 1,305 9,740
Other investments, sold or matured 566 14 631 353
Cost of investments acquired (6,474) (53,906) (10,429) (60,300)
Additions to leasehold improvements and equipment,
net of retirements (604) (105) (763) (197)
------- -------- -------- --------
Net Cash Provided By (Used For) Investing Activities 3,781 (47,143) 7,213 (34,635)
------- -------- -------- --------
Cash Flows From Financing Activities:
Issuance of notes payable 1,599 3,210 2,974 9,083
Repayment of notes payable (4,526) (12,963) (7,022) (19,929)
Issuance of convertible notes - 70,000 - 70,000
Issuance of common stock - 21 - 89
Repurchase and cancellation of common stock - - - (146)
------- -------- -------- --------
Net Cash (Used For) Provided By Financing Activities (2,927) 60,268 (4,048) 59,097
------- -------- -------- --------
Increase In Cash During Period 1,740 13,559 1,171 12,748
Cash at Beginning Of Period 461 202 1,030 1,013
------- -------- -------- --------
Cash at End Of Period $ 2,201 $ 13,761 $ 2,201 $ 13,761
======= ======== ======== ========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the periods for:
Interest $ 235 $ 1,028 $ 527 $ 2,121
Income taxes $ 493 $ 13 $ 493 $ 48
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Five thousand seven hundred and forty (5,740) 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 three months ended June 30, 1998. The
converted shares of Series A Preferred Stock had an aggregate liquidation
preference of $5,740,000 and were converted into 682,520 shares of Common Stock.
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements for Westbridge
Capital Corp. ("Westbridge" and, together with its consolidated subsidiaries,
the "Company") have been prepared in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X and do not include all of the information
and footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of business operations, National Foundation Life Insurance
Company ("NFL"), National Financial Insurance Company ("NFIC"), American
Insurance Company of Texas ("AICT"), and Freedom Life Insurance Company of
America ("FLICA"), Westbridge's primary insurance subsidiaries ("Insurance
Subsidiaries"), are involved in various claims disputes and other business
related disputes. In the opinion of management, the disposition of these matters
will have no material adverse effect on the Company's consolidated financial
position.
NOTE 3 - RECENT DEVELOPMENTS
During the six months ended June 30, 1998, the Insurance Subsidiaries continued
to experience adverse loss ratios and declining persistency on certain old
Medical Expense and Medicare Supplement products. The Insurance Subsidiaries
have developed new insurance products with stricter underwriting procedures and
lower agent commissions. In addition, the Insurance Subsidiaries are
implementing rate increases to the extent approved by state regulatory
authorities or offering higher deductible benefit options on certain old lines
of business in order to mitigate the effect of adverse claims experience on such
old lines. The Insurance Subsidiaries have also implemented a policyholder
retention program designed to mitigate the impact of declining persistency on
such old lines receiving rate increases. However, the Company expects that the
Insurance Subsidiaries will continue to incur operating losses on these old
lines of business until such time as the necessary rate increases can be fully
implemented. There can be no assurance that the full extent of such rate
increase requests will be approved or that the impact of these rate increases
will result in profitability on such old lines.
The Company and its financial advisor are pursuing discussions with its
creditors, including an ad hoc committee of its principal noteholders,
concerning a possible restructuring of the Company that would result in an
improved capital structure. The Company is also continuing its discussions with
the regulatory authorities in the Insurance Subsidiaries' domiciliary states of
Delaware, Texas and Mississippi.
The Company is continuing to suspend the scheduled interest payments on its
Senior Subordinated Notes and its Convertible Notes and the scheduled dividend
payments on its Series A Preferred Stock. The failure to make the scheduled
interest payments resulted in events of default under the Indentures relating to
such Notes and also resulted in an event of default under the Company's Credit
Agreement with LaSalle National Bank (the "Credit Agreement"). Other covenant
defaults are also continuing under the Credit Agreement and the Indenture
relating to the Senior Subordinated Notes. The Company is current with respect
to its principal and interest payments under the Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At June 30, 1998, approximately $1.7 million and $6.2 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends on the Series A Preferred
Stock constituted an event of non-compliance under the terms of the Series A
Preferred Stock Agreement and resulted in an immediate increase to 9.25% from
8.25% in the rate at which dividends accrue on the Series A Preferred Stock.
This increase will remain in effect until such time as no event of
non-compliance exists. At June 30, 1998, approximately $1.2 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," (the
"Statement") that revises the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share." The Statement
established two measures of earnings per share: "basic earnings per share" and
"diluted earnings per share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were converted or exercised. The Statement requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with potential dilutive securities outstanding.
Diluted weighted average shares exclude all convertible securities for loss
periods.
The Company adopted SFAS No. 128 for the year ended December 31, 1997 and has
restated the earnings per share computations for the quarter ended June 30, 1997
to conform to this pronouncement.
NOTE 5 - 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 (loss) 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 (loss) equals the total of net income (loss) and
all other non-owner changes in equity. For the Company, comprehensive income
(loss) will equal its reported consolidated net income (loss) plus the change in
the unrealized appreciation (depreciation) of marketable securities from the
previously reported period. Currently, this unrealized appreciation
(depreciation) of marketable securities, net of tax, is reported in the
Company's Consolidated Balance Sheets as a separate component of stockholders'
equity.
Comprehensive income (loss) is as follows, in thousands:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Loss applicable to common shareholders $(3,087) $(7,560) $(8,524) $(6,226)
Other comprehensive income (loss):
Unrealized holding gains arising during
period, net of tax 955 3,060 5,722 2,993
Less: reclassification adjustment for
gains included in net income, net
of tax (53) (125) (224) (86)
------- ------- ------- -------
Comprehensive loss, net of tax $(2,185) $(4,625) $(3,026) $(3,319)
======= ======= ======= =======
</TABLE>
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("SFAS 131"). This pronouncement, also
effective for calendar year 1998 financial statements, requires reporting
segment information consistent with the way executive management of an entity
disaggregates its operations internally to assess performance and make decisions
regarding resource allocations. Among the information to be disclosed, SFAS 131
requires an entity to report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. SFAS 131 also requires
reconciliations of total segment revenues, total segment profit or loss and
total segment assets to the corresponding amounts shown in the entity's
consolidated financial statements. The adoption of SFAS 131 in 1998 will not
change the number or designation of the reportable segments currently disclosed
in the Company's Consolidated Financial Statements.
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company is required to adopt SOP 97-3
effective January 1, 1999. Previously issued financial statements should not be
restated unless the SOP is adopted prior to the effective date and during an
interim period. The adoption of SOP 97-3 is not expected to have a material
impact on the Company's results of operations, liquidity or financial position.
NOTE 6 - RECLASSIFICATIONS
Certain reclassifications have been made to 1997 amounts in order to conform to
1998 financial statement presentation.
<PAGE>
WESTBRIDGE CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the six months ended June 30, 1998, the Insurance Subsidiaries continued
to experience adverse loss ratios and declining persistency on certain old
Medical Expense and Medicare Supplement products. The Insurance Subsidiaries
have developed new insurance products with stricter underwriting procedures and
lower agent commissions. In addition, the Insurance Subsidiaries are
implementing rate increases to the extent approved by state regulatory
authorities or offering higher deductible benefit options on certain old lines
of business in order to mitigate the effect of adverse claims experience on such
old lines. The Insurance Subsidiaries have also implemented a policyholder
retention program designed to mitigate the impact of declining persistency on
such old lines receiving rate increases. However, the Company expects that the
Insurance Subsidiaries will continue to incur operating losses on these old
lines of business until such time as the necessary rate increases can be fully
implemented. There can be no assurance that the full extent of such rate
increase requests will be approved or that the impact of these rate increases
will result in profitability on such old lines.
The Company and its financial advisor are pursuing discussions with its
creditors, including an ad hoc committee of its principal noteholders,
concerning a possible restructuring of the Company that would result in an
improved capital structure. The Company is also continuing its discussions with
the regulatory authorities in the Insurance Subsidiaries' domiciliary states of
Delaware, Texas and Mississippi.
The Company is continuing to suspend the scheduled interest payments on its
Senior Subordinated Notes and its Convertible Notes and the scheduled dividend
payments on its Series A Preferred Stock. The failure to make the scheduled
interest payments resulted in events of default under the Indentures relating to
such Notes and also resulted in an event of default under the Company's Credit
Agreement (as defined herein). Other covenant defaults are also continuing under
the Credit Agreement and the Indenture relating to the Senior Subordinated
Notes. The Company is current with respect to its principal and interest
payments under the Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At June 30, 1998, approximately $1.7 million and $6.2 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends on the Series A Preferred
Stock constituted an event of non-compliance under the terms of the Series A
Preferred Stock Agreement and resulted in an immediate increase to 9.25% from
8.25% in the rate at which dividends accrue on the Series A Preferred Stock.
This increase will remain in effect until such time as no event of
non-compliance exists. At June 30, 1998, approximately $1.2 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
BUSINESS OVERVIEW
The Company derives its revenue primarily from premiums from its insurance
products and, to a significantly lesser extent, from fee and service income,
income earned on invested assets and gains on the sales or redemptions of
invested assets. The Company's primary expenses include benefits and claims in
connection with its insurance products, amortization of deferred policy
acquisition costs ("DPAC"), commissions paid on policy renewals, general and
administrative expenses associated with policy and claims administration, taxes,
licenses and fees and interest on its indebtedness. In addition to the foregoing
expenses, Westbridge is obligated to pay dividends on the Series A Preferred
Stock if, and when, declared by the Board of Directors.
Fee and service income is generated from (i) commissions received by the Company
for sales of non-affiliated managed care products underwritten primarily by HMOs
and other managed care organizations, (ii) telemarketing services, and (iii)
printing services.
Benefits and claims are comprised of (i) claims paid, (ii) changes in claim
reserves for claims incurred (whether or not reported), and (iii) changes in
policy benefit reserves based on actuarial assumptions of future benefit
obligations not yet incurred on policies in force.
Under generally accepted accounting principles, a DPAC asset is established to
properly match the costs of writing new business against the expected future
revenues or gross profits from the policies. These costs, which are capitalized
and amortized, consist of first-year commissions in excess of renewal
commissions and certain home office expenses related to selling, policy issue,
and underwriting. The DPAC for accident and health policies and traditional life
policies are amortized over future premium revenues of the business to which the
costs are related. The rate of amortization depends on the expected pattern of
future premium revenues for the block of policies. The scheduled amortization
for a block of policies is established when the policies are issued. However,
the actual amortization of DPAC will reflect the actual persistency and
profitability of the business. For example, if actual policy terminations are
higher than expected or if future losses are anticipated, DPAC could be
amortized more rapidly than originally scheduled or written-off, which would
reduce earnings in the applicable period. See "Results of Operations -
Amortization of DPAC". 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 insurance policies from American Integrity Insurance Company ("AII"), Life
and Health Insurance Company of America ("LHI"), Dixie National Life Insurance
Company ("DNL"), NFIC, AICT and FLICA.
Premiums. The following table shows the premiums, in thousands, received by the
Company as a result of internal sales and acquisitions. Certain
reclassifications have been made to 1997 amounts in order to conform to 1998
presentation.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Company-Issued Policies:
First-year premiums $ 4,523 $ 9,473 $11,440 $21,291
Renewal premiums 20,597 19,929 40,453 36,795
------- ------- ------- -------
Total Company-issued policy premiums 25,120 29,402 51,893 58,086
------- ------- ------- -------
Acquired Policies:
AII 1,535 1,799 3,134 3,692
LHI 339 387 692 794
DNL 691 717 1,378 1,434
NFIC and AICT 4,661 5,298 9,698 10,909
FLICA 2,905 3,419 5,895 6,927
------- ------- ------- -------
Total acquired policy premiums (1) 10,131 11,620 20,797 23,756
------- ------- ------- -------
Total Premiums $35,251 $41,022 $72,690 $81,842
======= ======= ======= =======
</TABLE>
(1) For the three months ended June 30, 1998 and 1997, premiums for acquired
policies include first-year premiums of $0.1 million and $0.2 million,
respectively. For the six months ended June 30, 1998 and 1997, premiums for
acquired policies include first-year premiums of $0.2 million and $0.5
million, respectively.
Generally, as a result of acquisitions of policies in force and the transfer of
assets and liabilities relating thereto, the Company receives higher revenues in
the form of premiums and net investment income and experiences higher expenses
in the form of benefits and claims, amortization of DPAC, commissions and
general and administrative expenses. The Company expects that premiums, net
investment income, net realized gains on investments, benefits and claims,
amortization of DPAC, commissions and general and administrative expenses
attributable to these acquired policies will continue to decline over time as
the acquired policies lapse.
Forward-Looking Information. The preceding statement and certain other
statements contained in the Notes to the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements. These forward-looking statements are
based on current expectations that could be affected by the risks and
uncertainties involved in the Company's business. These risks and uncertainties
include, but are not limited to, the effect of economic and market conditions,
the extent of any increase in future claim submissions, the availability of
sufficient statutory capital and surplus, the ability to increase premium rates
on inforce policies to offset higher than anticipated loss ratios, actions that
may be taken by insurance regulatory authorities and the Company's creditors
following recent operating losses, and the risks described from time to time in
the Company's reports to the Securities and Exchange Commission ("SEC"), which
include the Company's Annual Report on Form 10-K for the year ended December 31,
1997 and the Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 1998. Subsequent written or oral statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this Quarterly Report and those in the
Company's reports previously filed with the SEC.
Copies of these filings may be obtained by contacting the Company or the SEC.
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1998 Compared With Same Periods Ended
June 30, 1997
Premiums
Three months ended June 30, 1998. Premiums decreased $5.7 million, or 13.9%,
from $41.0 million to $35.3 million as a result of declining persistency of
inforce policies and a reduction in the Company's marketing results. This
decrease resulted from a decrease in first-year premiums from Company-issued
policies of $4.9 million, or 51.6%, a decrease in renewal premiums from acquired
policies of $1.4 million, or 12.3%, and a decrease in first-year premiums from
acquired policies of $0.1 million, or 50.0%, and was offset by an increase in
renewal premiums from Company-issued policies of $0.7 million, or 3.5%.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease in Medical Expense premiums of $2.9 million, or
43.9%, and a decrease in Medicare Supplement premiums of $2.1 million, or 84.0%,
and was offset by an increase in Specified Disease premiums of $0.1 million, or
33.3%.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $0.7 million, or 13.2%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $0.3 million, or 16.7%, from the policies
acquired from AII, and a decrease of $0.4 million, or 12.5%, from the policies
acquired from FLICA and other acquisitions.
The decrease in first-year premiums from acquired policies was attributable to a
decrease of $0.1 million, or 50.0%, from the policies acquired from FLICA.
The increase in renewal premiums from Company-issued policies was attributable
to an increase in Medical Expense premiums of $0.8 million, or 8.3%, and an
increase in Specified Disease premiums of $0.2 million, or 6.5%, and was offset
by a decrease in Medicare Supplement premiums of $0.3 million, or 4.3%.
Six months ended June 30, 1998. Premiums decreased $9.1 million, or 11.1%, from
$81.8 million to $72.7 million as a result of declining persistency of inforce
policies and a reduction in the Company's marketing results. This decrease
resulted from a decrease in first-year premiums from Company-issued policies of
$9.8 million, or 46.2%, a decrease in renewal premiums from acquired policies of
$2.6 million, or 11.2%, and a decrease in first-year premiums from acquired
policies of $0.3 million, or 50.0%, and was offset by an increase in renewal
premiums from Company-issued policies of $3.6 million, or 9.8%.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease in Medical Expense premiums of $5.2 million, or
35.9%, a decrease in Medicare Supplement premiums of $4.7 million, or 79.7%, and
a decrease in other premiums of $0.2 million and was offset by an increase in
Specified Disease premiums of $0.3 million, or 50.0%.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $1.3 million, or 11.9%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $0.6 million, or 16.2%, from the policies
acquired from AII, and a decrease of $0.7 million, or 10.4%, from the policies
acquired from FLICA and other acquisitions.
The decrease in first-year premiums from acquired policies was attributable to a
decrease of $0.3 million, or 50.0%, from the policies acquired from FLICA.
The increase in renewal premiums from Company-issued policies was attributable
to an increase in Medical Expense premiums of $2.9 million, or 16.8%, an
increase in Medicare Supplement premiums of $0.4 million, or 3.1%, and an
increase in Specified Disease premiums of $0.4 million, or 6.6%, and was offset
by a decrease in other premiums of $0.1 million.
Net Investment Income. Net investment income increased $0.7 million, or 28.0%,
from $2.5 million to $3.2 million for the three months ended June 30, 1998. Net
investment income increased $1.6 million, or 33.3%, from $4.8 million to $6.4
million for the six months ended June 30, 1998. These increases were
attributable to a higher average investment base resulting from the net proceeds
received from the Company's sale of its Convertible Notes during the second
quarter of 1997 and from higher average portfolio yields.
Fee and Service Income
Three months ended June 30, 1998. Fee and service income decreased $0.1 million,
or 2.4%, from $4.1 million to $4.0 million. This decrease was primarily
attributable to commissions on managed care product sales that were earned by
the Company's controlled general agencies as a result of a reduction in the
Company's marketing results from these unaffiliated products.
Six months ended June 30, 1998. Fee and service income increased $0.5 million,
or 6.6%, from $7.6 million to $8.1 million. This increase was primarily
attributable to commissions on managed care product sales that were earned by
the Company's controlled general agencies during the first quarter of 1998.
Benefits and Claims. During the six months ended June 30, 1998, the Insurance
Subsidiaries continued to experience adverse loss ratios and declining
persistency on certain old Medical Expense and Medicare Supplement products. The
Insurance Subsidiaries have developed new insurance products with stricter
underwriting procedures and lower agent commissions. In addition, the Insurance
Subsidiaries are implementing rate increases to the extent approved by state
regulatory authorities or offering higher deductible benefit options on certain
old lines of business in order to mitigate the effect of adverse claims
experience on such old lines. The Insurance Subsidiaries have also implemented a
policyholder retention program designed to mitigate the impact of declining
persistency on such old lines receiving rate increases. However, the Company
expects that the Insurance Subsidiaries will continue to incur operating losses
on these old lines of business until such time as the necessary rate increases
can be fully implemented. There can be no assurance that the full extent of such
rate increase requests will be approved or that the impact of these rate
increases will result in profitability on such old lines.
Three months ended June 30, 1998. Benefits and claims expense decreased $5.8
million, or 18.6%, from $31.2 million to $25.4 million. This decrease was
attributable to a decrease in benefits and claims expense from Company-issued
and acquired policies of $1.8 million and $4.0 million, or 8.4% and 40.8%,
respectively.
The decrease in benefits and claims expense from Company-issued policies was
primarily attributable to a decrease in Medicare Supplement claims of $2.3
million, or 29.1%, and a decrease in Medical Expense claims of $0.4 million, or
3.3%, and was offset by an increase in Specified Disease and other claims of
$0.9 million, or 60.0%.
The decrease in benefits and claims expense from acquired policies was primarily
attributable to a decrease of $3.6 million, or 58.1%, from the policies acquired
in the NFIC and AICT acquisition, a decrease of $0.2 million, or 16.7%, from the
policies acquired from LHI and DNL, and a decrease of $0.2 million, or 15.4%,
from the policies acquired from FLICA.
Six months ended June 30, 1998. Benefits and claims expense decreased $2.6
million, or 4.6%, from $56.4 million to $53.8 million. This decrease was
attributable to a decrease in benefits and claims expense from acquired policies
of $3.8 million, or 20.9% offset by an increase from Company-issued policies of
$1.2 million, or 3.1%.
The decrease in benefits and claims expense from acquired policies was primarily
attributable to a decrease of $3.0 million, or 28.6%, from the policies acquired
in the NFIC and AICT acquisition, a decrease of $0.8 million, or 25.0%, from the
policies acquired from FLICA, a decrease of $0.4 million, or 15.4%, from the
policies acquired from AII, and was offset by an increase of $0.4 million, or
21.1%, from the policies acquired from LHI and DNL.
The increase in benefits and claims expense from Company-issued policies was
primarily attributable to an increase in Medical Expense claims of $3.2 million,
or 15.5%, an increase in Specified Disease claims of $0.8 million, or 25.8%, and
was offset by a decrease in Medicare Supplement and other claims of $2.8
million, or 19.3%.
Amortization of DPAC. As previously described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, the Company recognized a $65.0
million non-cash charge of DPAC during the fourth quarter of 1997. As a result,
the Company is currently recording commission expense on such old lines of
business that would ordinarily be deferred and amortized as a component of DPAC
until profitability can be restored on these old lines of business. For
comparative purposes, current period DPAC amortization is lower than prior
periods and commission expense is higher than prior periods.
Three months ended June 30, 1998. Amortization of DPAC decreased $7.4 million,
or 91.4%, from $8.1 million to $0.7 million. This variance was attributable to
decreases of $4.7 million, $1.8 million, $0.4 million and $0.5 million, from
Company-issued Medical Expense products, Medicare Supplement products, Specified
Disease products and acquired policies, respectively.
Six months ended June 30, 1998. Amortization of DPAC decreased $11.4 million, or
85.7%, from $13.3 million to $1.9 million. This variance was attributable to
decreases of $7.7 million, $2.8 million, $0.1 million and $0.8 million, from
Company-issued Medical Expense products, Medicare Supplement products, Specified
Disease products and acquired policies, respectively.
Commissions
Three months ended June 30, 1998. Commissions increased $5.0 million, or 135.1%,
from $3.7 million to $8.7 million. This variance was attributable to a decrease
in the commissions that would ordinarily be deferred and amortized as a
component of DPAC and an increase in the amounts that are being expensed as
commissions on a current basis. The increase was attributable to an increase in
commissions of $4.9 million on Company-issued policies and $0.1 million, or
3.4%, on sales of non-affiliated insurance products.
Six months ended June 30, 1998. Commissions increased $11.2 million, or 160.0%,
from $7.0 million to $18.2 million. This variance was attributable to a decrease
in the commissions that would ordinarily be deferred and amortized as a
component of DPAC and an increase in the amounts that are being expensed as
commissions on a current basis. The increase was attributable to an increase in
commissions of $10.7 million on Company-issued policies and $0.6 million, or
11.3%, on sales of non-affiliated insurance products, and was offset by a
decrease in commissions on sales of acquired policies of $0.1 million, or 3.8%.
General and Administrative Expenses
Three months ended June 30, 1998. General and administrative expenses decreased
$1.0 million, or 12.7%, from $7.9 million to $6.9 million. This decrease was
primarily attributable to corporate overhead reduction initiatives that were
implemented in the fourth quarter of 1997.
Six months ended June 30, 1998. General and administrative expenses decreased
$1.4 million, or 9.2%, from $15.3 million to $13.9 million. This decrease was
primarily attributable to corporate overhead reduction initiatives that were
implemented in the fourth quarter of 1997.
Reorganization Expense. As more fully described in "Recent Developments", the
Company has hired a financial advisor to explore its strategic alternatives. The
Company is responsible for paying the fees of its financial advisor and legal
counsel and has agreed to pay the fees of the financial advisors and legal
counsel to an ad hoc committee of principal noteholders concerning a possible
restructuring of the Company's capital structure. During the second quarter of
1998, the Company incurred approximately $1.1 million in expenses related to
these efforts. During the second quarter of 1997, the Company incurred
approximately $3.1 million in reorganization expenses related to an internal
reorganization of management.
Taxes, Licenses and Fees. Taxes, licenses and fees decreased $0.2 million, or
12.5% from $1.6 million to $1.4 million for the three months ended June 30,
1998. Taxes, licenses and fees decreased $0.4 million, or 12.9% from $3.1
million to $2.7 million for the six months ended June 30, 1998. These decreases
are attributable to the declining premium base for which premium taxes are
levied.
Interest Expense. Interest expense increased $0.4 million, or 23.5%, from $1.7
million to $2.1 million for the three months ended June 30, 1998. Interest
expense increased $1.4 million, or 48.3%, from $2.9 million to $4.3 million for
the six months ended June 30, 1998. These increases are attributable to the
accrued but unpaid interest expense related to the issuance of $70.0 million
aggregate principal of the Company's Convertible Notes.
Benefit from Income Taxes. During 1997, the benefit from income taxes was
calculated by applying the 35% statutory federal tax rate to the Company's
pre-tax income for the three and six months ended June 30, 1997. The change in
the benefit from income taxes during 1998 is directly attributable to the net
loss recorded by the Company for the three and six months ended June 30, 1998.
As a result, net operating loss carryforwards ("NOLs") were generated that will
be available for offset against taxable income generated in future reporting
periods. The Company has determined that it is more likely than not that it will
be unable to utilize all of these NOLs prior to the related expiration dates. In
this connection, the Company has recorded a valuation allowance that
significantly reduces its benefit from income taxes for the current year from
the amount that would have been derived by applying the 35% statutory federal
tax rate to the Company's pre-tax loss for the three and six months ended June
30, 1998.
Extraordinary Item. During the second quarter ended June 30, 1997, the Company
recognized an extraordinary loss on the early extinguishment of debt in the
amount of $1.0 million, net of taxes. This extraordinary charge was related to
the termination and recapture of a block of reinsured insurance policies and the
recognition of unamortized financing fees associated with the prepayment and
refinancing of the Company's revolving credit facility.
Preferred Stock Dividends. During the second quarter ended June 30, 1998, 5,740
shares of the Company's Series A Preferred Stock were converted into 682,520
shares of the Company's Common Stock. As a result, the Company was no longer
required to hold an accrual for the unpaid, cumulative preferred stock dividends
related to these converted shares. The release of this accrual has resulted in
negative preferred stock dividends for the three months ended June 30, 1998.
FINANCIAL CONDITION
Liquidity, Capital Resources and Statutory Capital and Surplus
Westbridge
Westbridge is an insurance holding company, the principal assets of which
consist of the capital stock of its operating subsidiaries and invested assets.
Accordingly, Westbridge's sources of funds are comprised of dividends from its
operating subsidiaries, advances and management fees from non-insurance company
subsidiaries, and tax contributions under a tax sharing agreement among
Westbridge and its subsidiaries. Westbridge's primary obligations include
principal and interest on its indebtedness and, if and when declared by the
Board of Directors, dividends on its Series A Preferred Stock. In addition, for
the six months ended June 30, 1998, Westbridge made capital contributions
totaling approximately $4.4 million to its Insurance Subsidiaries.
Dividends paid by the Insurance Subsidiaries are determined by and subject to
the regulations of the insurance laws and practices of the insurance departments
of their respective state of domicile. NFL, a Delaware domestic company, may not
declare or pay dividends from any source other than earned surplus without the
Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines
earned surplus as the amount equal to the unassigned funds as set forth in NFL's
most recent statutory annual statement including surplus arising from unrealized
gains or revaluation of assets. Delaware life insurance companies may generally
pay ordinary dividends or make distributions of cash or other property within
any twelve month period with a fair market value equal to or less than the
greater of 10% of surplus as regards policyholders as of the preceding December
31 or the net gain from operations for the twelve month period ending on the
preceding December 31. During 1998, NFL is precluded from paying dividends
without the prior approval of the Delaware Insurance Commissioner as its earned
surplus is negative. Further, NFL has agreed to obtain prior approval for any
future dividends.
NFIC and AICT, Texas domestic companies, may make dividend payments from surplus
profits or earned surplus arising from its business. The Texas Insurance Code
defines earned surplus as unassigned surplus not including any unrealized gains.
Texas life insurance companies may generally pay ordinary dividends or make
distributions of cash or other property within any twelve month period with a
fair market value equal to or less than the greater of 10% of surplus as regards
policyholders as of the preceding December 31 or the net gain from operations
for the twelve month period ending on the preceding December 31. Any dividend
exceeding the applicable threshold is considered extraordinary and requires
prior approval of the Texas Insurance Commissioner. NFIC's and AICT's earned
surplus is negative, and as such, each company is precluded from paying
dividends during 1998 without the prior approval of the Texas Insurance
Commissioner.
FLICA, a Mississippi domestic company, may make dividend payments only from its
actual net surplus computed as required by law in its statutory annual
statement. Mississippi life insurance companies may generally pay ordinary
dividends or make distributions of cash or other property within any twelve
month period with a fair market value not exceeding the lesser of 10% of surplus
as regards policyholders as of the preceding December 31 or the net gain from
operations for the twelve month period ending on the preceding December 31. Any
dividend exceeding the applicable threshold amount requires prior approval of
the Mississippi Insurance Commissioner. FLICA is precluded from paying dividends
to NFL during 1998 without the prior approval of the Mississippi Insurance
Commissioner as it recorded a net loss from operations for the year ended
December 31, 1997.
Generally, all states require insurance companies to maintain capital and
surplus that is reasonable in relation to their existing liabilities and
adequate to their financial needs. Delaware, Texas and Mississippi also maintain
discretionary powers relative to the declaration and payment of dividends based
upon an insurance company's financial position. In light of the statutory losses
incurred by the Insurance Subsidiaries during 1997 and for the six months ended
June 30, 1998, Westbridge does not expect to receive any dividends from its
Insurance Subsidiaries for the foreseeable future.
The Company is continuing to suspend the scheduled interest payments on its
Senior Subordinated Notes and its Convertible Notes and the scheduled dividend
payments on its Series A Preferred Stock. The failure to make the scheduled
interest payments resulted in events of default under the Indentures relating to
such Notes and also resulted in an event of default under the Company's Credit
Agreement. Other covenant defaults are also continuing under the Credit
Agreement and the Indenture relating to the Senior Subordinated Notes. The
Company is current with respect to its principal and interest payments under the
Credit Agreement.
As a result of the existing events of default, the holders of the Convertible
Notes and the Senior Subordinated Notes and the lender under the Credit
Agreement may declare the outstanding principal amount thereof, together with
accrued and unpaid interest thereon, to be due and payable immediately. If such
Notes were to be accelerated, the Company does not have the ability to repay the
outstanding Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At June 30, 1998, approximately $1.7 million and $6.2 million of
unpaid interest has been accrued on such Senior Subordinated Notes and
Convertible Notes, respectively. There can be no assurance that the Company will
resume such interest payments in the future.
The failure to declare and pay the scheduled dividends on the Series A Preferred
Stock constituted an event of non-compliance under the terms of the Series A
Preferred Stock Agreement and resulted in an immediate increase to 9.25% from
8.25% in the rate at which dividends accrue on the Series A Preferred Stock.
This increase will remain in effect until such time as no event of
non-compliance exists. At June 30, 1998, approximately $1.2 million of
cumulative, unpaid dividends were accrued. There can be no assurance that the
Company will resume such dividend payments in the future.
As of July 31, 1998, Westbridge had approximately $15.2 million in cash and
invested assets. The Company and its financial advisor are pursuing discussions
with its creditors, including an ad hoc committee of its principal noteholders,
concerning a possible restructuring of the Company that would result in an
improved capital structure. The Company is also continuing its discussions with
the regulatory authorities in the Insurance Subsidiaries' domiciliary states of
Delaware, Texas and Mississippi.
Insurance Subsidiaries
The primary sources of cash for the Insurance Subsidiaries are premiums and
income on invested assets. Additional cash is periodically provided by capital
contributions from Westbridge and from the sale of short-term investments and
could, if necessary, be provided through the sale of long-term investments and
blocks of business. The Insurance Subsidiaries' primary uses for cash are
benefits and claims, commissions, general and administrative expenses, and
taxes, licenses and fees.
During the six months ended June 30, 1998, the Insurance Subsidiaries continued
to experience adverse loss ratios and declining persistency on certain old
Medical Expense and Medicare Supplement products. The Insurance Subsidiaries
have developed new insurance products with stricter underwriting procedures and
lower agent commissions. In addition, the Insurance Subsidiaries are
implementing rate increases to the extent approved by state regulatory
authorities or offering higher deductible benefit options on certain old lines
of business in order to mitigate the effect of adverse claims experience on such
old lines. The Insurance Subsidiaries have also implemented a policyholder
retention program designed to mitigate the impact of declining persistency on
such old lines receiving rate increases. However, the Company expects that the
Insurance Subsidiaries will continue to incur operating losses on these old
lines of business until such time as the necessary rate increases can be fully
implemented. There can be no assurance that the full extent of such rate
increase requests will be approved or that the impact of these rate increases
will result in profitability on such old lines.
For the six months ended June 30, 1998, the Insurance Subsidiaries received
capital contributions totaling approximately $4.4 million from Westbridge. To
the extent that the Insurance Subsidiaries experience further statutory
operating losses during 1998, additional capital will be required.
In the ordinary course of business, the Company advances commissions on policies
written by its general agencies and their agents. The Company is reimbursed for
these advances from the commissions earned over the respective policy's life. In
the event that policies lapse prior to the time the Company has been fully
reimbursed, the general agency or the individual agents, as the case may be, are
responsible for reimbursing the Company for the outstanding balance of the
commission advance. For the six months ended June 30, 1998 and 1997, the Company
has recorded a provision for uncollectible commission advances totaling $0.7
million and $0.9 million, respectively.
The Company finances the majority of its obligations to make commission advances
through Westbridge Funding Corporation ("WFC"), an indirect wholly-owned
subsidiary of Westbridge. On June 6, 1997, WFC entered into a Credit Agreement
dated as of such date with LaSalle National Bank (the "Credit Agreement"). This
Credit Agreement provides WFC with a three-year, $20.0 million revolving loan
facility (the "Receivables Financing"), the proceeds of which are used to
purchase agent advance receivables from the Insurance Subsidiaries and certain
affiliated marketing companies. WFC's obligations under the Credit Agreement are
secured by liens upon substantially all of WFC's assets. In connection with this
commission advancing program, at June 30, 1998, the Company's receivables from
subagents totaled approximately $10.9 million and approximately $9.1 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 are currently certain events of
default existing under the Credit Agreement. The Company is in discussions with
LaSalle National Bank concerning these defaults; however, the Company is current
with respect to its principal and interest payments under this Credit Agreement.
WFC's obligations under the Credit Agreement have been guaranteed by Westbridge
under the Guaranty Agreement, and the Company has pledged all of the issued and
outstanding shares of the capital stock of WFC, NFL and NFIC as collateral for
that guaranty.
The Company also receives commission advances from an unaffiliated managed care
organization and in turn advances commissions to its general agencies and their
agents. At June 30, 1998, the Company's receivables from its subagents related
to these advances totaled approximately $4.4 million, and the Company owed
approximately $3.4 million to an unaffiliated managed care organization.
Consolidated
The Company's consolidated net cash used for operations totaled $2.0 million and
$11.7 million for the six months ended June 30, 1998 and 1997, respectively. The
variance in the amount of net cash used for operations between 1998 and 1997 was
primarily the result of amounts remitted to reinsurers during 1997 terminating
certain reinsurance arrangements. In addition, the reduction in the Company's
marketing results for its underwritten products resulted in a decrease in net
cash used for operations related to the funding of agents' debit balances.
Net cash provided by (used for) investing activities for the six months ended
June 30, 1998 and 1997 totaled $7.2 million and $(34.6) million, respectively.
The increase in net cash provided by investing activities between 1998 and 1997
was primarily the result of the decrease in net cash used for operating
activities for the same period. As a result, there was a reduction in the amount
of invested assets that were liquidated to fund operating cash requirements.
Further, the significant cash outflow during the second quarter of 1997 includes
the investment of the net proceeds from the issuance of the Company's
Convertible Notes.
Net cash (used for) provided by financing activities totaled $(4.0) million and
$59.1 million for the six months ended June 30, 1998 and 1997, respectively.
Cash flows for financing activities for the six months ended June 30, 1998
relate primarily to the net borrowings and repayments associated with the
Company's Receivables Financing program. In addition, the reduction in the
Company's marketing results for its underwritten products resulted in a decrease
in cash inflows used to finance agents' debit balances. Cash flows provided by
financing activities for the six months ended June 30, 1997, included
approximately $67.7 million in net cash resulting from the issuance of $70.0
million aggregate principal of Convertible Notes that was offset, in part, by
cash payments of $8.6 million to retire a note payable associated with a
recaptured reinsurance agreement, $1.0 million to retire a note with a related
party and $1.1 million in net borrowings and repayments associated with the
Company's Receivables Financing program.
The Company will require additional capital or a refinancing, recapitalization
or other reorganization involving a significant reduction in, or exchange of
equity for, outstanding indebtedness to satisfy its short-term and long-term
cash requirements and there can be no assurance that sufficient additional
capital can be obtained. The Company is evaluating its strategic alternatives
with its financial advisor and an ad hoc committee of principal noteholders.
The Company had no significant high-yield, unrated or less than investment grade
fixed maturity securities in its investment portfolio as of June 30, 1998, and
it is the Company's policy not to exceed more than 5% of total assets in such
securities. Changes in interest rates may affect the market value of the
Company's investment portfolio. The Company's principal objective with respect
to the management of its investment portfolio is to meet its future policyholder
benefit obligations. In the event the Company was forced to liquidate
investments prior to maturity, investment yields could be compromised.
Inflation will affect claim costs on the Company's Medicare Supplement and
Medical Expense products. Costs associated with a hospital stay and the amounts
reimbursed by the Medicare program are each determined, in part, based on the
rate of inflation. If hospital and other medical costs that are reimbursed by
the Medicare program increase, claim costs on the Medicare Supplement products
will increase. Similarly, as the hospital and other medical costs increase,
claim costs on the Medical Expense products will increase. The Company has
somewhat mitigated its exposure to inflation by incorporating certain
limitations on the maximum benefits which may be paid under its policies and by
filing for premium rate increases as necessary.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health
Insurers Model Act ("the Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of statutory capital and surplus an
insurer must maintain in relation to its insurance and investment risks and
whether there is a need for possible regulatory attention. The Model Act (or
similar legislation or regulation) has been adopted in states where the
Insurance Subsidiaries are domiciled.
The Model Act provides four levels of regulatory attention, varying with the
ratio of the insurance company's total adjusted capital (defined as the total of
its statutory capital and surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan aimed at improving its
capital position to the regulatory authority proposing corrective actions. If a
company's total adjusted capital is less than 75 percent but greater than or
equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory
authority will perform a special examination of the company and issue an order
specifying the corrective actions that must be followed. If a company's total
adjusted capital is less than 50 percent but greater than or equal to 35 percent
of its RBC (the "Authorized Control Level"), the regulatory authority may take
any action it deems necessary, including placing the company under regulatory
control. If a company's total adjusted capital is less than 35 percent of its
RBC (the "Mandatory Control Level"), the regulatory authority must place the
company under its control. The NAIC's requirements are effective on a state by
state basis if, and when, they are adopted by the regulators in the respective
states. The Insurance Departments of the States of Delaware and Mississippi have
each adopted the NAIC's Model Act. At June 30, 1998, total adjusted capital for
NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company,
exceeded the respective Company Action Levels.
The Texas Department of Insurance ("TDI") has adopted its own RBC requirements,
the stated purpose of which is to require a minimum level of capital and surplus
to absorb the financial, underwriting and investment risks assumed by an
insurer. Texas' RBC requirements differ from those adopted by the NAIC in two
principal respects: (i) they use different elements to determine minimum RBC
levels in their calculation formulas and (ii) they do not stipulate "Action
Levels" (like those adopted by the NAIC) where corrective actions are required.
However, the Commissioner of the TDI does have the power to take similar
corrective actions if a company does not maintain the required minimum level of
statutory capital and surplus. NFIC and AICT are domiciled in Texas and must
comply with Texas RBC requirements. At June 30, 1998, AICT's RBC exceeded the
minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum
level prescribed by the TDI.
As a result of the statutory losses sustained by the Insurance Subsidiaries
during 1997 and the six months ended June 30, 1998, material transactions are
subject to approval by the department of insurance in each domiciliary state.
<PAGE>
PART II
Item 1 - Legal Proceedings (See Part I - Note 2 to the Consolidated Financial
Statements).
On December 17, 1997, a purported class action complaint, naming the
Company, two current directors of the Company, one former director of
the Company and two underwriters of the Company's Convertible Notes as
defendants, was filed in the United States District Court for the
Northern District of Texas on behalf of persons who purchased
securities of the Company during the period October 31, 1996 through
October 31, 1997. The complaint alleges that the Company materially
overstated its earnings due to the Company's establishment of
inadequate reserves for pending insurance claims. The plaintiff seeks
unspecified money damages and certain costs and expenses. On April 30,
1998, the defendants filed separate motions to dismiss the complaint.
On June 15, 1998, the plaintiff filed a motion for leave to file an
amended complaint, which plaintiff asked the court to accept as a
response to the defendants' motions to dismiss. Management believes
that the lawsuit is without merit and it intends to defend this action
vigorously.
Item 3 - Defaults Upon Senior Securities
(a) Debt Securities
Effective November 3, 1997, Westbridge suspended the scheduled
interest payments on its Senior Subordinated Notes and its
Convertible Notes. The failure to make the scheduled interest
payments resulted in an event of default under the Indentures
relating to such Notes and also resulted in an event of default
under the Credit Agreement. As a result of the existing events of
defaults, the holders of such indebtedness may declare the
outstanding principal amount thereof, together with accrued and
unpaid interest thereon, to be due and payable immediately. If
such Notes were to be accelerated, the Company does not have the
ability to repay the indebtedness under the outstanding
Convertible Notes, the Senior Subordinated Notes and the Credit
Agreement. At June 30, 1998, approximately $1.7 million and $6.2
million of unpaid interest has been accrued on such Senior
Subordinated Notes and Convertible Notes, respectively.
(b) Preferred Stock
Effective October 31, 1997, Westbridge suspended payment of the
scheduled dividends on its Series A Preferred Stock. At June 30,
1998, approximately $1.2 million of cumulative, unpaid dividends
were accrued.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule, (included in electronic
filing only).
(b) Reports on Form 8-K
No Form 8-K was required to be filed during the period.
<PAGE>
Form 10-Q
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTBRIDGE CAPITAL CORP.
/s/ Patrick J. Mitchell
----------------------
Patrick J. Mitchell
President, Chief Operating Officer,
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
Dated at Fort Worth, Texas
August 11, 1998
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