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, 1998
Commission File Number 1-8538
ASCENT ASSURANCE, INC.
(FORMERLY, 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)
110 West Seventh 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) 877-3048
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $.01)
Warrants to purchase Common Stock
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. _X_
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _X_ No__
The Registrant's Common Stock is not currently listed on a formal stock
exchange. The estimated market value of voting stock as presented in the
Registrant's Amended Disclosure Statement accompanying the First Amended Plan of
Reorganization dated October 30, 1998, as modified, ranged from $47 million to
$60 million. See ITEM 1 "Business." At March 24, 1999, 6,500,000 shares of
Common Stock were outstanding.
<PAGE>
ASCENT ASSURANCE, INC.
(FORMERLY, WESTBRIDGE CAPITAL CORP.)
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1. Business................................................................................. 3
ITEM 2. Properties............................................................................... 18
ITEM 3. Legal Proceedings........................................................................ 18
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 Consolidated Financial Data..................................................... 22
ITEM 7. Management's Discussion and Analysis of Results of Operation and
Financial Condition.................................................................... 23
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 37
ITEM 8. Financial Statements and Supplementary Data.............................................. 39
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................... 77
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................... 77
ITEM 11. Executive Compensation................................................................... 77
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 77
ITEM 13. Certain Relationships and Related Transactions........................................... 77
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K.......................... 78
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Ascent Assurance, Inc. (formerly, Westbridge Capital Corp.) (the "Company") 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. As
used herein, the term "Westbridge" refers to the pre-reorganized operations
and/or financial condition of Westbridge and its consolidated subsidiaries,
unless the context requires otherwise.
The Company's revenues result primarily from premiums from the insurance
products sold by its wholly owned subsidiaries (i) National Foundation Life
Insurance Company ("NFL") and its wholly owned subsidiary, Freedom Life
Insurance Company of America ("FLICA") and (ii) National Financial Insurance
Company ("NFIC") and its wholly owned subsidiary, American Insurance Company of
Texas ("AICT," and together with NFL, NFIC and FLICA, collectively, the
"Insurance Subsidiaries"). To a lesser extent, the Company derives revenue from
fee and service income generated from (i) commissions received from sales of
unaffiliated managed care and senior products, (ii) telemarketing services, and
(iii) printing services.
The Company was incorporated as a Delaware holding company for NFL in September
1982. The Company's executive offices are located at 110 West Seventh Street,
Fort Worth, Texas 76102 and its telephone number is (817) 878-3300.
VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 OF THE U.S. BANKRUPTCY CODE AND
CORPORATE REORGANIZATION
On September 16, 1998 (the "Petition Date"), Westbridge commenced a
reorganization case (the "Chapter 11 Case") by filing a voluntary petition for
relief under Chapter 11, Title 11 of the United States Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along
with a disclosure statement (as amended, the "Disclosure Statement") and a
proposed plan of reorganization (as amended, the "Plan"). The filing of the
Disclosure Statement and Plan culminated months of negotiations between
Westbridge and an ad hoc committee (the "Creditors' Committee") of holders of
its 11% Senior Subordinated Notes due 2002 (the "Senior Notes") and its 7-1/2%
Convertible Subordinated Notes due 2004 (the "Convertible Notes"). The
Disclosure Statement and the Plan were amended on October 28, 1998, and the
Disclosure Statement was approved by entry of an order by the Bankruptcy Court
on October 30, 1998. Following the approval of the Plan by the holders of
allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on
December 17, 1998. The Plan became effective March 24, 1999 (the "Effective
Date").
In connection with its emergence from Chapter 11, Westbridge changed its
corporate name to "Ascent Assurance, Inc." Pursuant to the Plan, the Company's
Board of Directors was reconstituted as of the Effective Date into a classified
board consisting of six directors (with two directors in each class), three of
which were appointed by Credit Suisse First Boston Corporation ("CSFB"), one of
which was appointed by the Creditors' Committee and two of which were appointed
by the Company. Until June 24, 1999, the holders of the New Preferred Stock (as
defined below) have the right to designate one additional director. Also on the
Effective Date, the Company's certificates of incorporation and by-laws were
amended and restated in their entirety, copies of which are filed as an Exhibit
hereto.
The following summary of the Plan omits certain information set forth in the
Plan. Any statements contained herein concerning the Plan are not necessarily
complete, and in each such instance reference is made to the Plan, a copy of
which is incorporated by reference to Exhibit 2 of Westbridge's Current Report
on Form 8-K which was filed with the Securities and Exchange Commission on
December 29, 1998. Each such statement is qualified in its entirety by such
reference. The Plan provides for the recapitalization of certain old debt and
equity interests in Westbridge and the issuance of new equity securities and
warrants. Key terms of the Plan include the following:
CANCELLATION OF EXISTING SECURITIES
Westbridge's capital structure was realigned and deleveraged (see NOTE 1 -
"Reorganization And Emergence From Chapter 11 Case" in the Notes to the
Company's Consolidated Financial Statements). Pursuant to the Plan, the
following securities of Westbridge were canceled as of the Effective Date:
(i) $23.3 million aggregate principal amount of, plus all accrued and
unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate
principal amount of, plus all accrued and unpaid interest on, the
Convertible Notes, (iii) $13.2 million aggregate liquidation preference of,
plus all accrued and unpaid dividends on, Westbridge's Series A Convertible
Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv)
Westbridge's Common Stock, par value $.10 per share (the "Old Common
Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi)
all outstanding unexercised stock options to purchase Old Common Stock, and
(vii) all unvested grants of restricted Old Common Stock.
NEW EQUITY CAPITAL STRUCTURE
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the total number of shares of stock the Company shall have
the authority to issue is 30,040,000, consisting of 30,000,000 shares of
common stock, par value $.01 per share (the "New Common Stock") and 40,000
shares of preferred stock, par value $.01 per share, all of which are
designated Series A Convertible Preferred Stock (the "New Preferred
Stock").
DISTRIBUTIONS UNDER THE PLAN
CASH DISTRIBUTION
To the holders of Senior Notes other than CSFB, cash payments
totaling approximately $15.2 million, which are equal to the total
Allowed 11% Senior Note Claims (as defined in the Plan) held by
creditors other than CSFB, will be distributed subject to
completion of the exchange of securities as contemplated by the
Plan. In order to provide the Company with sufficient funds to
make the cash distribution to the holders of the Allowed 11%
Senior Notes under the Plan, an affiliate of CSFB (the "CSFB
Affiliate") purchased all of the shares of the New Preferred Stock
which were not otherwise distributed under the Plan.
ISSUANCE OF NEW SECURITIES
Pursuant to the Plan and the purchase of New Preferred Stock on the
Effective Date, 6,500,000 shares of New Common Stock and 23,257 shares
of New Preferred Stock were issued on the Effective Date as follows:
To holders of general unsecured claims and Convertible Notes as
of December 10, 1998 and current management, 6,110,000 shares, or
94%, of the New Common Stock issued on the Effective Date, subject
to the completion of the exchange requirements as contemplated by
the Plan. Holders of general unsecured claims and Convertible
Notes will receive their first distribution of shares in partial
satisfaction and discharge of their allowed claims beginning in
April 1999. The remaining shares of New Common Stock are held for
future distributions to such holders pending the final resolution
of disputed claims.
To holders of Old Preferred Stock as of December 10, 1998,
260,000 shares, or 4%, of the New Common Stock issued on the
Effective Date and Warrants ("New Warrants") to purchase an
additional 277,505 shares, or 2%, of the number of shares of New
Common Stock issued and outstanding on the Effective Date, on a
fully diluted basis, subject to the completion of the exchange of
securities as contemplated by the Plan.
To holders of Old Common Stock as of December 10, 1998, 130,000
shares, or 2%, of the New Common Stock issued on the Effective
Date and New Warrants to purchase an additional 693,761 shares, or
5%, of the number of shares of New Common Stock issued and
outstanding on the Effective Date, on a fully diluted basis,
subject to the completion of the exchange of securities as
contemplated by the Plan. Fractional shares of New Common Stock
will not be issued in connection with the Plan. As a result of
this provision, certain holders of Old Common Stock will receive
no distribution of New Common Stock or New Warrants under the
Plan.
To the CSFB Affiliate, in respect of the Senior Notes owned by
CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock
which, together with the 15,167 additional shares of New Preferred
Stock purchased by the CSFB Affiliate as described above, are
convertible into 4,765,165 shares of the New Common Stock at an
initial conversion price of $4.88 per share. As a result of the
New Preferred Stock received by the CSFB Affiliate, together with
the 3,093,998 shares of New Common Stock to be received by the
CSFB Affiliate in respect of the Convertible Notes owned by CSFB,
the CSFB affiliate will own approximately 56.6% of the New Common
Stock on an as converted basis.
RESERVATION OF ADDITIONAL NEW COMMON STOCK
In connection with the New Warrants described above, 971,266
shares of New Common Stock are reserved for issuance upon the
exercise of New Warrants. The New Warrants are exercisable at an
initial exercise price $9.04 per share of New Common Stock and
will expire on March 24, 2004.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the
fully diluted number of shares of New Common Stock issued and
outstanding on the Effective Date are reserved for issuance to
employees and directors, and up to 387,119 shares, or 3%, of the
fully diluted number of shares of New Common Stock issued and
outstanding on the Effective Date are reserved for issuance to the
Company's marketing agents under the Company's 1999 Stock Option
Plan.
OTHER MATTERS
In connection with the approval and effectiveness of the Plan, the Company
settled a putative class action brought on behalf of certain purchasers and
sellers of Westbridge's Convertible Notes and Old Common Stock during the
period October 31, 1996 through October 31, 1997.
MARKETING DISTRIBUTION SYSTEM
The Company markets health insurance products through its wholly owned
subsidiary, NationalCare(R) Marketing, Inc. ("NCM"). NCM recruits agents as
independent contractors to market the health insurance products underwritten by
the Insurance Subsidiaries. NCM's agents sell these insurance products on a
one-to-one basis 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. See ITEM 7 - "Strategic Initiatives."
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 indirect wholly
owned telemarketing subsidiary, Precision Dialing Services, Inc. ("PDS") is able
to generate a large number of quality sales leads. By providing its agents with
these sales leads, the Company believes it can attract experienced agents as
well as new agents entering the business.
DESCRIPTION OF PRODUCTS
The major product lines currently marketed and underwritten by the Company's
Insurance Subsidiaries are Medical Expense products and Specified Disease
products (as defined below). Historically, the Insurance Subsidiaries have 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 Insurance Subsidiaries significantly reduced the underwriting
of these products in favor of marketing the Medicare Supplement products of
other insurers due to the relatively low margins for these products. The
Insurance Subsidiaries continue to receive premiums on Medicare Supplement
policies sold prior to that date.
The Insurance Subsidiaries' products are designed with flexibility as to
benefits, deductibles, coinsurance and premium payments, which can be adapted to
meet regional sales or competitive needs, as well as those of the individual
policyholders. Set forth below is a summary of the principal products currently
underwritten by the Insurance Subsidiaries:
MEDICAL EXPENSE PRODUCTS - These products are generally designed to
reimburse insureds for eligible expenses incurred for hospital confinement,
surgical expenses, physician services, outpatient services and the cost of
medicines. The policies provide a number of options with respect to annual
deductibles, coinsurance percentages, maximum benefits and stop-loss
limits. 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 Insurance Subsidiaries up
to certain maximum aggregate policy limits.
The Medical Expense products are individually underwritten based upon
medical information provided by the applicant prior to issue. Information
provided in the application is verified with the applicant through a
tape-recorded telephone conversation or through written correspondence. In
addition, the Insurance Subsidiaries new Medical Expense products are
stringently underwritten and include a para-med examination or other
medical tests, depending on the age of the applicant. All such products are
guaranteed renewable pursuant to the Health Insurance Portability and
Accountability Act, 42 U.S.C. ss. 300 et seq. ("HIPAA").
SPECIFIED DISEASE PRODUCTS - These products include indemnity policies for
hospital confinement and convalescent care for treatment of specified
diseases and "event specific" policies, which provide fixed benefits or
lump sum payments upon diagnosis of certain types of internal cancer or
other catastrophic diseases ("Specified Disease"). Benefits are payable
directly to the insured 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 offset of non-medical
expenses or medical-related expenses not covered and paid for by the
policyholder's other health insurance. The amount of benefits provided
under the 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. Specified Disease products are generally guaranteed
renewable by contract, but are exempt from HIPAA.
The Company's operations are comprised of one segment, Accident and Health
insurance, which includes products underwritten and/or acquired by the Insurance
Subsidiaries. Premium revenue, in thousands, for each of the Insurance
Subsidiaries' major product lines is set forth below. Certain 1997 and 1996
amounts have been reclassified to conform to 1998 presentation.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
ACCIDENT AND HEALTH INSURANCE:
MEDICAL EXPENSE:
Direct business
First-year $ 15,818 $ 26,972 $ 40,391
Renewal 39,434 38,275 17,545
Acquired business (1) 9,389 10,384 13,971
-------- -------- --------
Subtotal 64,641 75,631 71,907
-------- -------- --------
SPECIFIED DISEASE:
Direct business
First-year 1,504 1,173 1,217
Renewal 14,221 12,216 12,520
Acquired business (1) (2) 16,639 19,802 20,477
-------- -------- --------
Subtotal 32,364 33,191 34,214
-------- -------- --------
MEDICARE SUPPLEMENT:
Direct business
First-year 1,477 8,763 17,863
Renewal 22,981 27,134 14,119
Acquired business (1) 13,612 15,546 17,788
-------- -------- --------
Subtotal 38,070 51,443 49,770
-------- -------- --------
Total Accident and Health Insurance 135,075 160,265 155,891
-------- -------- --------
Other 642 832 889
-------- -------- --------
Total Premium Revenue $135,717 $161,097 $156,780
======== ======== ========
</TABLE>
(1) Includes revenue from policies acquired in the acquisition of NFIC and AICT
in April 1994.
(2) Includes revenue from policies acquired in the acquisition of FLICA's
parent, Freedom Holding Company ("FHC"), in May 1996.
GEOGRAPHIC DISTRIBUTION
The Insurance Subsidiaries are licensed to conduct business in 40 states and the
District of Columbia. The distribution of premium revenue by state for the year
ended December 31, 1998, on a statutory accounting basis, was as follows:
Texas 22.3%
North Carolina 6.9%
Tennessee 6.4%
Arkansas 6.1%
Florida 5.6%
Georgia 5.1%
Mississippi 4.6%
South Carolina 4.2%
California 4.1%
Oklahoma 4.0%
All others 30.7%
----
100.0%
<PAGE>
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. 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 Board of Directors of the Company and
each of the Insurance Subsidiaries. The Company's current investment policy is
to balance its portfolio between long-term 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>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents $ 278 $ 1,030 $ 1,013
-------- -------- --------
Bonds:
U.S. Government and related agencies 19,886 22,142 26,108
State, county and municipal 1,586 1,071 518
Public utilities 13,421 11,273 11,016
Industrial and miscellaneous 87,971 94,263 53,955
-------- -------- --------
Total Bonds 122,864 128,749 91,597
-------- -------- --------
Preferred stock 2,575 2,645 147
-------- -------- --------
Common stock - 2,125 1,449
-------- -------- --------
Other Invested Assets:
Mortgage loans on real estate 318 389 658
Policy loans 280 284 282
Short-term investments and certificates of deposit 5,393 12,654 8,072
Investment real estate - 566 -
-------- -------- --------
Total Other Invested Assets 5,991 13,893 9,012
-------- -------- --------
Total Cash and Invested Assets $131,708 $148,442 $103,218
======== ======== ========
</TABLE>
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 3.2%, 1.6%, and
1.5% of the Company's total cash and invested assets at December 31, 1998, 1997
and 1996, respectively.
The following table summarizes consolidated investment results (excluding
unrealized gains or losses) for the periods shown:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C>
Total invested assets, cash and cash equivalents $131,708 $148,442 $103,218
Net investment income (1) 9,500 9,390 7,535
Net realized gains on investments 2,142 84 96
Average gross annual yield on investments 7.0% 7.7% 7.2%
</TABLE>
(1) Excludes interest on receivables from agents of $2.5 million, $1.6 million,
and $1.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following table summarizes the Company's fixed maturity securities,
excluding short-term investments and certificates of deposit, at December 31,
1998:
FIXED MATURITY SECURITIES
<TABLE>
<CAPTION>
Carrying
Value (1),(2) %
------------ --------
(in thousands)
<S> <C> <C>
U.S. Government and governmental
agencies and authorities (except
mortgage-backed) $ 11,776 9.6
States, municipalities and political
subdivisions 1,586 1.3
Finance 31,919 26.0
Public utilities 13,421 10.9
Mortgage-backed 8,110 6.6
All other corporate bonds 56,052 45.6
------------ --------
Total fixed maturity securities $ 122,864 100.0
============ ========
</TABLE>
(1) At December 31, 1998, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
Estimated market value represents the closing sales prices of marketable
securities.
(2) Investments in the debt securities of corporations are principally in
publicly-traded bonds.
Mortgage-backed securities represented approximately 6.6% of the estimated
market value of the Company's total invested assets at December 31, 1998. 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 designated by the National Association of Insurance
Commissioners ("NAIC") as Class 1 securities. Mortgage-backed securities
investors are compensated primarily for prepayment risk rather than credit
quality risk. During periods of significant interest rate volatility, the
underlying mortgages may repay 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. If the repayment of principal
occurs later than anticipated during periods of increasing interest rates, the
cost of funds to satisfy liabilities may increase due to the mismatching of
assets and liabilities.
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, 1998:
COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
<TABLE>
<CAPTION>
Carrying
Value (1) %
------------ --------
(in thousands)
<S> <C> <C>
RATINGS (2)
Investment grade:
U.S. Government and agencies $ 19,886 16.2
AAA 2,289 1.9
AA 11,058 9.0
A 38,397 31.2
BBB 47,045 38.3
Non-Investment grade:
BB 2,118 1.7
B and below 2,071 1.7
------------ --------
Total fixed maturity securities $ 122,864 100.0
============ ========
</TABLE>
(1) At December 31, 1998, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(2) Ratings are the lower of those assigned primarily by Standard & Poor's and
Moody's, when available, and are 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
(highest quality rating) to Class 6 (lowest quality rating). The following table
summarizes the Company's fixed maturity securities according to NAIC
Designations and Standard & Poor's ratings at December 31, 1998:
NAIC DESIGNATIONS
<TABLE>
<CAPTION>
Carrying
Value (1) %
------------ --------
(in thousands)
NAIC DESIGNATIONS (2)
<S> <C> <C>
NAIC 1 (AAA, AA, A) $ 71,630 58.3
NAIC 2 (BBB) 47,045 38.3
NAIC 3 (BB) and below 4,189 3.4
------------ --------
Total fixed maturity securities $ 122,864 100.0
============ ========
</TABLE>
(1) At December 31, 1998, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(2) Generally comparable to Standard & Poor's ratings. Comparisons between NAIC
Designations and Standard & Poor's ratings are as published by the NAIC.
The scheduled contractual maturities of the Company's fixed maturity securities,
excluding short-term investments and certificates of deposit, at December 31,
1998 are shown in the table below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
<TABLE>
<CAPTION>
Carrying
Value (1) %
------------ --------
(in thousands)
SCHEDULED MATURITY
<S> <C> <C>
Due in one year or less $ 1,889 1.5
Due after one year through five years 32,254 26.2
Due after five years through ten years 41,959 34.2
Due after ten years 38,652 31.5
Mortgage-backed securities 8,110 6.6
------------ --------
Total fixed maturity securities $ 122,864 100.0
============ ========
</TABLE>
(1) At December 31, 1998, all of the company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
RESERVE POLICY
The Company's reserves consist of two separate components: claim reserves and
policy benefit reserves. 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 an analysis of claim inventories, loss ratios and
historical claim payment studies. These estimates are developed in the aggregate
for claims incurred (whether or not reported).
Policy benefit reserves are established by the Company for benefit payments that
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 claim and 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 claim loss ratios experienced by the Company during the
second and third quarters of 1997 were indicative of inadequate pricing in the
Company's old Medical Expense and Medicare Supplement products. See ITEM 7 -
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
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 no 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, and absent materially adverse benefit experience, they are not generally
adjusted. 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 (such as out-patient versus in-patient care) or prolong life
expectancy. 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 Company's 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. 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."
REINSURANCE
CEDED. As is customary in the insurance industry, the Company's Insurance
Subsidiaries reinsure portions of the coverage provided to 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. See NOTE 13 - "Reinsurance" and NOTE 15 "Extraordinary Item" to
the Company's Consolidated Financial Statements.
The Company generally does not cede risks associated with its Medicare
Supplement 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 1998) for any accident or illness. In 1998, NFL entered into an
excess of loss reinsurance agreement on a closed block of annually renewable
term life insurance. NFL's retention limit is $25,000 per year, and $22,046 of
premiums were paid to the reinsurer for the year ended December 31, 1998. No
other life insurance products were reinsured during 1998, 1997 or 1996. 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 and 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.
COMPETITION
The accident and health insurance industry is highly competitive 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 agents 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 Insurance Subsidiaries are not currently
rated with A.M. Best. The Company believes that its lack of an 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 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 those 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, the Company's business, financial
condition or results of operations could be adversely affected.
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 accident and health insurance market for qualified,
effective agents. The recruitment and retention of such agents is 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 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 expanding its marketing of managed care and senior products
underwritten primarily by unaffiliated HMOs and other managed care organizations
may be adversely affected by the changes within this industry.
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 Insurance Subsidiaries' health insurance products are subject to rate
regulation by state insurance departments, which generally require the
maintenance of certain minimum loss ratios. The states in which the Company is
licensed have the authority to change the minimum mandated statutory loss ratios
to which the Company is subject, the manner in which these ratios are computed
and the manner in which compliance with these ratios is measured and enforced.
Most states in which the Company writes health insurance products have adopted
the loss ratios recommended by the NAIC. The Company is unable to predict the
impact of (i) any changes in the mandatory statutory loss ratios relating to
products offered by the Company or (ii) any change in the manner in which these
minimums are computed or enforced in the future. The Company has not been
informed by any state that it does not meet mandated minimum ratios, and the
Company believes that it is in compliance with all such minimum ratios. In the
event the Company is not in compliance with minimum statutory loss ratios
mandated by regulatory authorities, the Company may be required to reduce or
refund premiums, which could have a material adverse effect on the Company's
business, financial condition or results of operations. 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 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The NAIC has recommended an effective date of January 1,
2001. The Codification provides guidance for areas where statutory accounting
has been silent and changes current statutory accounting in certain areas. It is
not known whether the insurance departments of the state of domicile of the
Company's Insurance Subsidiaries will adopt the Codification or whether those
insurance departments will make any changes to that guidance. The Company has
not estimated the potential effect of the Codification guidance if adopted.
However, the actual effect of adoption could differ as changes are made to the
Codification guidance, prior to its recommended effective date of January 1,
2001.
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 NAIC) 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, 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 statutory 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, 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
since 1997, material transactions are subject to the approval by the department
of insurance in each domiciliary state. In December 1997, NFIC, in response to
these losses as well as the projected inability to meet RBC requirements, took
appropriate steps to voluntarily cease the sale and underwriting of new
business. In the second quarter of 1998, AICT significantly reduced the level of
sales and underwriting of new business. NFIC and AICT have also entered into a
voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code,
providing for the continued monitoring of the operations of NFIC and AICT by the
TDI. The Company has no current plans to underwrite new products in NFIC.
The Insurance Subsidiaries are subject to periodic examinations by state
regulatory authorities as part of their routine regulatory oversight process.
Mississippi is currently finalizing an examination of FLICA. In addition,
Missouri is in the process of finalizing a market conduct examination of the
Insurance Subsidiaries. Management does not expect the issuance of either
examination report to have a material effect on the financial condition of the
Company.
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 that 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 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 that 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.
Non-affiliated 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
that cannot be offset against future premium taxes are charged to expense.
Assessments that 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 $23,000 during the year ended
December 31, 1998.
Traditionally, the U.S. Government has not directly regulated the insurance
business. However, the adoption of HIPAA, as well as other proposed federal
initiatives, impacts the insurance business in a variety of ways. Current and
proposed federal measures that may significantly affect the insurance industry
include controls on the cost of medical care, medical entitlement programs
(e.g., Medicare), guaranteed renewability and portability of certain coverage,
and minimum solvency requirements for insurers.
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 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.
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, 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 Medical Expense policy is issued, the Company has adopted
more stringent underwriting practices for its new Medical Expense products by
requiring a para-med examination or other medical tests, depending on the age of
the applicant. In addition, 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
verification telephone calls are recorded for the protection of the applicant
and the Company. Applicants for the Company's 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.
EMPLOYEES
At December 31, 1998, the Company employed 388 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 moved its principal offices from 777 Main Street,
Fort Worth, Texas, to 110 West Seventh 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
facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease
agreement which expires in October, 2005. The Company also leases certain sales
offices for its affiliated marketing agencies in Arizona and California. 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
EMERGENCE FROM CHAPTER 11 CASE
As more fully described in ITEM 1 - "Business," Westbridge's Plan was confirmed
by the Bankruptcy Court on December 17, 1998 and, after the satisfaction of a
number of conditions, the Plan became effective on March 24, 1999.
Notwithstanding the confirmation and effectiveness of the Plan, the Bankruptcy
Court continues to have jurisdiction to, among other things, resolve disputed
prepetition claims against Westbridge, resolve matters related to the
assumption, assumption and assignment, or rejection of executory contracts
pursuant to the Plan, and to resolve other matters that may arise in connection
with or relate to the Plan. Except as described below, provision was made under
the Plan in respect of all prepetition liabilities of Westbridge.
Pursuant to the Plan, Westbridge's obligations in respect of certain classes of
disputed prepetition claims that may ultimately be allowed by the Bankruptcy
Court would be satisfied via the issuance of New Common Stock. The Company is
withholding 257,106 shares of the New Common Stock in a reserve account from
which the settlement of any such outstanding claims would be satisfied under the
Plan. The Company is disputing outstanding claims, which in the aggregate are
less than $5.0 million. While there can be no assurance that the actual amounts
of such disputed claims that are ultimately allowed by the Bankruptcy Court will
not exceed the estimated amounts thereof, management does not expect that any
variance between such actual and estimated amounts will have a material adverse
effect on the Company's financial position.
PUTATIVE CLASS ACTION COMPLAINT
On December 17, 1997, a purported class action complaint, naming Westbridge,
three former directors of Westbridge, and two underwriters of the Westbridge'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 alleged that Westbridge materially overstated its earnings due to the
establishment of inadequate reserves for pending insurance claims.
In October 1998, a preliminary settlement agreement was reached by and among the
parties to the complaint. The final settlement agreement was approved by the
Bankruptcy Court on December 17, 1998 and by the District Court pursuant to a
final judgment entered on January 20, 1999. The settlement did not involve an
admission of liability by any party.
OTHER 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Plan and the related Disclosure Statement were transmitted to all impaired
creditors and equity security holders of the Company along with ballots for the
purpose of soliciting acceptances of the Plan. At a hearing to consider
confirmation of the Plan, the Bankruptcy Court found that the Plan was accepted
by holders of approximately 99.9%, in dollar amount, and 97.1%, in number of
holders, of general unsecured claims and Convertible Notes held by creditors
that timely voted to accept or reject the Plan, and that the Plan was accepted
by the holders of approximately 76.9% and 97.5%, respectively, in amount of
shares held by Old Preferred Stock and Old Common Stock holders that timely
voted to accept or reject the Plan. The ballots contained no provision for
abstentions. As a result, ballots that were not returned and invalid ballots had
no effect on the outcome of the vote on the Plan. A summary of the valid ballots
cast is as follows:
<TABLE>
<CAPTION>
Ballots Ballots
Accepting Plan Rejecting Plan
------------ ------------
<S> <C> <C>
Holders of general unsecured claims and Convertible Notes 103 3
Holders of Old Preferred Stock interests 5 2
Holders of Old Common Stock interests 490 26
</TABLE>
EXECUTIVE OFFICERS OF REGISTRANT
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
Years with
Officer Name Age Position with the Company the Company
- - -------------------- ------- ----------------------------------------- --------------
<S> <C> <C>
Patrick J. Mitchell 40 Chairman of the Board and Chief Executive 3
Officer
Patrick H. O'Neill 48 Executive Vice President, General Counsel 1
and Secretary
</TABLE>
Mr. Mitchell has served as Chairman of the Board and Chief Executive Officer
since September 1998. He has also been serving 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 the
Chairman of the Board, Chief Executive Officer, 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 the Company 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK-HOLDER MATTERS
COMMON STOCK
Pursuant to the Plan, on the Effective Date (i) 6,500,000 shares of New Common
Stock and 971,266 New Warrants were delivered to LaSalle National Bank, as
exchange agent, for distribution as described above (see ITEM 1 "Business"), and
(ii) 23,257 shares of New Preferred Stock were delivered to the CSFB Affiliate.
The New Common Stock, the New Warrants and 8,090 shares of the New Preferred
Stock were issued without registration under the Securities Act of 1933, as
amended (the "Securities Act") pursuant an exemption granted under Section 1145
of the Bankruptcy Code, and the remaining 15,167 shares of New Preferred Stock
were issued and sold to the CSFB Affiliate in a private placement, exempt from
the registration requirement under the Securities Act in reliance upon the
provisions of Regulation D promulgated thereunder. The proceeds from the sale of
the New Preferred Shares pursuant to Regulation D, totaling $15.2 million, were
distributed to holders of Senior Notes (other than CSFB) pursuant to the Plan.
Each share of New Preferred Stock is convertible at any time into 204.8897
shares of New Common Stock at an initial conversion price of $4.88 per share,
subject to customary anti-dilution adjustments. The New Warrants are exercisable
at any time prior to March 24, 2004 for an aggregate of 971,266 shares of New
Common Stock at an initial exercise price of $9.04 per share, subject to
customary anti-dilution adjustments.
The New Common Stock and New Warrants are expected to be quoted on the
over-the-counter bulletin board ("OTC Bulletin Board") and application has been
made to list the New Common Stock and New Warrants on the NASDAQ SmallCap
Market. Based on the distributions made pursuant to the Plan, there were
6,500,000 shares of New Common Stock outstanding as of March 24, 1999.
Until September 16, 1998, Westbridge's Old Common Stock was traded on the New
York Stock Exchange ("NYSE"). As a result of the Chapter 11 filing, Westbridge's
Old Common Stock was delisted from the NYSE and trading commenced on the OTC
Bulletin Board. The high and low stock price listed for Westbridge's Old Common
Stock reflects the OTC Bulletin Board closing bid prices from September 25,
1998, to March 23, 1999. The bid prices, as stated, represent inter-dealer
prices without adjustments for retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1999
First Quarter (through March 23, 1999) 0.344 0.172
1998
Fourth Quarter 0.438 0.016
Third Quarter 0.563 0.016
Second Quarter 0.875 0.313
First Quarter 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
</TABLE>
DIVIDEND POLICY
The Company did not pay any cash dividends on its Old Common Stock and does not
anticipate declaring or paying cash dividends on its New Common Stock in the
foreseeable future.
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 Results of Operations and Financial Condition", ITEM 1 - "Business
- - -Regulation", and NOTE 11 - "Statutory Capital And Surplus" to the Company's
Consolidated Financial Statements.
<PAGE>
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 ITEM 7 - "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Consolidated Financial
Statements of the Company and related notes.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1998 1997 1996 (1) 1995 1994 (2)
------------- -------------- ------------ ------------ -------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA:
Premiums $ 135,717 $ 161,097 $ 156,780 $ 120,093 $ 98,703
Total revenues 166,061 188,904 175,146 130,032 106,546
Benefits and claims 99,419 136,866 94,187 70,465 53,623
Total expenses 188,115 298,309 162,549 121,836 97,702
Provision (benefit) for income taxes 231 (13,268) 4,410 2,813 2,764
Extraordinary loss, net of
income tax - 1,007 - 407 -
Net (loss) income (22,285) (97,144) 8,261 5,324 6,425
Preferred stock dividends 520 1,572 1,650 1,650 1,190
(Loss) income applicable to
common stockholders $ (22,805) $ (98,716) $ 6,611 $ 3,674 $ 5,235
EARNINGS PER SHARE:
Basic $ (3.43) $ (16.07) $ 1.11 $ 0.64 $ 1.21
Diluted $ (3.43) $ (16.07) $ 0.97 $ 0.63 $ 1.04
BOOK VALUE PER SHARE:
Basic $ (8.82) $ (7.33) $ 7.93 $ 7.14 $ 5.95
Diluted (3) $ (8.82) $ (7.33) $ 8.07 $ 7.50 $ 6.90
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 6,640,000 6,143,000 5,978,000 5,698,000 4,335,000
Diluted 6,640,000 6,143,000 8,477,000 5,829,000 6,185,000
BALANCE SHEET DATA:
Total cash and invested assets $ 131,708 $ 148,442 $ 103,218 $ 111,516 $ 108,838
Total assets 169,741 202,856 220,716 200,999 187,581
Policy liabilities 97,987 107,595 93,390 85,683 104,280
Notes payable 95,715 102,547 40,560 35,071 24,665
Total liabilities 219,886 229,274 152,813 138,194 141,226
Redeemable preferred stock (4) 11,935 19,000 20,000 20,000 20,000
Stockholders' (deficit) equity (62,080) (45,418) 47,903 42,805 26,355
</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, 1998 consists of 11,935 shares of Westbridge's Old Preferred
Stock, which were convertible, at the option of the holders thereof, into an
aggregate of 1,419,144 shares of Old Common Stock at a conversion price of $8.41
per share of Old Common Stock.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
KEY EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASE IN SEPTEMBER 1998
INCREASED CLAIM LOSS RATIOS
During the second and third quarters of 1997, the Company's Insurance
Subsidiaries experienced an increase in claim loss ratios on various Medical
Expense and Medicare Supplement products. Two independent reviews of the
Company's claim reserves were performed as of September 30, 1997 on the
Company's old lines of insurance business. Additionally, an independent benefit
analysis of claims was completed, which indicated that significant rate
increases would be required to offset the adverse claims experience. During the
months prior to the commencement of the Chapter 11 Case in September 1998, the
Insurance Subsidiaries continued to experience adverse loss ratios and declining
persistency on certain old Medical Expense and Medicare Supplement products.
DETERMINATION OF PREMIUM DEFICIENCY
Also during 1997, policy persistency declined in connection with the
implementation of certain rate increases together with intensified competitor
solicitation of the Company's policyholders. These events, including increased
claim loss ratios, 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 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 existed for
certain old lines of business 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.
GAAP requires the immediate recognition of a premium deficiency by charging the
unamortized DPAC to expense. Accordingly, 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 had no impact on the Company's cash position
at December 31, 1997 nor did it affect the statutory capital and surplus of the
Insurance Subsidiaries.
The Insurance Subsidiaries continued to experience adverse loss ratios and
declining persistency on such old Medical Expense and Medicare Supplement
products in the months prior to the commencement of the Chapter 11 Case in
September 1998, although the loss ratios for the third quarter of 1998 reflected
an improvement over the first and second quarters of 1998. As a result of these
factors, the Company undertook a further revaluation of the recoverability of
DPAC in the third quarter of 1998. Based on the results of this review, the
Company determined that an additional premium deficiency existed and recorded a
non-cash charge to expense of approximately $5.0 million for the quarter and
nine months ended September 30, 1998. This adjustment had no impact on the
Company's cash position or on the statutory capital and surplus of the Insurance
Subsidiaries as of September 30, 1998.
FILING OF CHAPTER 11 CASE
The increase in claim loss ratios resulted in significant cash contributions by
Westbridge to its Insurance Subsidiaries beginning in the third quarter of 1997,
which threatened the Company's ability to meet its interest and dividend
payments. In November 1997, the Company suspended its payment of interest and
dividends. On September 16, 1998, Westbridge filed the Chapter 11 Case in the
Bankruptcy Court for the District of Delaware, along with the Disclosure
Statement and the Plan which culminated months of negotiations between
Westbridge and an ad hoc committee of holders of its Senior Notes and its
Convertible Notes. The Disclosure Statement and the Plan were amended on October
28, 1998 and the Disclosure Statement was approved by entry of an order by the
Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the
holders of allowed claims and equity interests, the Bankruptcy Court confirmed
the Plan on December 17, 1998. The Plan became effective on March 24, 1999.
Under the Plan, among other things, the Senior Notes, the Convertible Notes, the
Old Preferred Stock, the Old Common Stock and all outstanding options and
warrants were canceled, certain prepetition claims were discharged and new
equity interests were issued. (See ITEM 1 - "Business")
STRATEGIC INITIATIVES
As a result of the Company's poor financial performance in 1997, current
management has completed or is working toward completing the following strategic
initiatives designed to restore profitability:
CHANGE IN MANAGEMENT STRUCTURE AND CORPORATE OVERHEAD EXPENSE REDUCTIONS:
In the fourth quarter of 1997, the Company announced the termination of
approximately 25 senior officers, managers and other employees in order to
create a new management framework focused on correcting the problems of the
past and restoring the Company to profitability. In addition, the Company
initiated other efforts to reduce corporate overhead expenses by completing
the relocation of its corporate headquarters in May 1998. The changes
effected in the fourth quarter of 1997 and the relocation of corporate
headquarters will result in considerable annual savings to the Company.
In addition, Westbridge Management Corp., an indirect wholly owned
subsidiary, and the Insurance Subsidiaries entered into an Administrative
Service and Management Agreement dated as of March 1, 1998, in an effort to
avoid duplication of costs, to increase efficiency, and to otherwise reduce
common expenses in equipment, office space, personnel, data processing and
information system services, as well as to provide other centralized
management and administrative services for the Insurance Subsidiaries.
PRODUCT REVISION AND NEW PRODUCT DEVELOPMENT: The Company introduced a new
Medical Expense product during the first quarter of 1998. Accordingly,
management has focused on providing a reasonable level of policy benefits
in relation to premiums and on reducing first-year commission rates on all
of its Medical Expense products in order to enhance overall profitability
of the business.
REVISED MARKETING STRUCTURE: In addition to commission reductions, the
marketing structure was completely revised to consolidate fragmented agency
operations into a single, career agency force. The Company believes that
this restructuring has resulted in better deployment of marketing resources
and stronger controls over the Company's distribution channel.
IMPLEMENTATION OF RATE INCREASES AND PRODUCT CANCELLATIONS: As indicated
above, due to the adverse loss ratio development in the Company's old
Medical Expense and Medicare Supplement lines of business, the Company has
requested rate increases on those lines of business in order to mitigate
the effect of such claims experience. In addition, consistent with federal
and state law, the Company is pursuing the cancellation of certain blocks
of policy forms that have irreversible excessive loss ratios.
POLICYHOLDER CONSERVATION: The Company has also implemented a detailed
policyholder conservation program designed to mitigate the possible impact
of adverse selection. As indicated above, the Company suffered declining
persistency resulting from increased competitor solicitation of its
policyholders, as well as from the implementation of rate increases. The
Company is working on several fronts to retain a loyal and profitable base
of satisfied policyholders.
REPLACEMENT OF CLAIMS AND POLICYHOLDER ADMINISTRATION DATA PROCESSING
SYSTEMS: The Company is working toward a replacement of its claims and
policyholder administration data processing systems during 1999. Not only
will this data processing system replacement ensure that the Company is
Year 2000 compliant, but resulting system efficiencies will allow the
Company to further reduce and control its overhead expense levels.
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 under the Credit Agreement. Prior to the filing of the Chapter 11
Case, Westbridge was obligated to pay interest on its Senior Notes and
Convertible Notes, and dividends on its Old Preferred Stock if, and when,
declared by the Board of Directors.
As of the Effective Date, the Company is obligated to pay dividends on its New
Preferred Stock, when, as and if declared by the Board of Directors. Dividends
on the New Preferred Stock accrue at an annual rate of $102.50 per share and are
payable annually. The Company may pay dividends on the New Preferred in cash or
in additional shares of New Preferred Stock having an aggregate liquidation
preference equal to the amount of dividends being declared and paid. The Company
expects to pay such dividends by issuing additional shares of New Preferred
Stock for the foreseeable future.
Fee and service income is generated from (i) commissions received by the Company
for sales of managed care and senior products underwritten primarily by
unaffiliated 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 GAAP, 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 is 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 "Key Events - Determination
of Premium Deficiency". 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 direct sales and acquisitions. Certain reclassifications
have been made to 1997 and 1996 amounts in order to conform to 1998
presentation.
Premiums (1)
------------------------------
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Company-issued policies:
First-year premiums $ 18,847 $ 37,104 $ 59,937
Renewal premiums 77,230 78,261 44,607
-------- -------- --------
Total company-issued policy premiums 96,077 115,365 104,544
-------- -------- --------
Acquired policies:
AII 6,127 7,179 8,364
LHI 1,345 1,533 1,820
DNL 2,619 2,827 2,974
NFIC and AICT 18,607 20,757 24,508
FLICA 10,011 12,605 14,560
Other 931 831 10
-------- -------- --------
Total acquired policy premiums 39,640 45,732 52,236
-------- -------- --------
Total Premiums $135,717 $161,097 $156,780
======== ======== ========
(1) For a breakdown of premiums by product line, see ITEM 1 - "Business-Product
Lines."
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
PREMIUMS. Premiums decreased $25.4 million, or 15.8%, from $161.1 million to
$135.7 million as a result of declining persistency of in force 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 $18.2 million,
or 49.1%, a decrease in renewal premiums from Company-issued policies of $1.1
million, or 1.4%, a decrease in first-year premiums from acquired policies of
$0.5 million, or 61.0%, and a decrease in renewal premiums from acquired
policies of $5.6 million, or 12.4%.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease in Medical Expense premiums of $11.1 million, or
41.2%, a decrease in Medicare Supplement premiums of $7.3 million, or 83.4%, and
a decrease in other premiums of $0.1 million, or 75.5%, and was offset by an
increase in Specified Disease premiums of $0.3 million, or 30.4%.
The decrease in renewal premiums from Company-issued policies was attributable
to a decrease in Medicare Supplement premiums of $4.1 million, or 15.1%, and was
offset by an increase in Medical Expense premiums of $1.2 million, or 3.1%, and
an increase in Specified Disease premiums of $1.8 million, or 14.8%.
The decrease in first-year premiums from acquired policies was primarily
attributable to a decrease of $0.5 million, or 61.0%, from the policies acquired
from FLICA.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $2.2 million, or 10.5%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $1.9 million, or 16.2%, from the policies
acquired from FLICA, and a decrease of $1.5 million, or 12.0%, from the policies
acquired from AII and other acquisitions.
NET INVESTMENT INCOME. Net investment income increased $1.0 million, or 9.1%,
from $11.0 million to $12.0 million for the year ended December 31, 1998,
related to agents' debit balances.
FEE AND SERVICE INCOME. Fee and service income decreased $0.5 million, or 3.2%,
from $16.7 million to $16.2 million for the year ended December 31, 1998. The
Company's sales of unaffiliated managed care and senior products were lower in
1998 than 1997.
BENEFITS AND CLAIMS. During the year ended December 31, 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 more stringent
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
(i) until such time as the necessary rate increases can be fully implemented and
realized, and (ii) until sales of new products reach targeted production levels.
There can be no assurance that the full extent of such rate increase requests
will be approved, that the impact of these rate increases will result in
profitability on such old lines, or that targeted production levels will be
reached and sustained.
Benefits and claims expense decreased $37.5 million, or 27.4%, from $136.9
million to $99.4 million. This decrease was attributable to the decline in
premium revenue during 1998 and to the significant strengthening of claim
reserves during the second and third quarters of 1997 as a result of substantial
increases in claim loss ratios on certain Medical Expense and Medicare
Supplement products.
AMORTIZATION OF DPAC. The Company recognized a $5.0 million non-cash charge to
write off unrecoverable DPAC during the third quarter of 1998 and recognized a
$65.0 million non-cash charge to write off unrecoverable DPAC during the fourth
quarter of 1997. See "Key Events - Determination of Premium Deficiency."
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. For comparative purposes, current period DPAC amortization is lower
than prior periods and commission expense is higher than prior periods.
Amortization of DPAC decreased $26.5 million, or 85.9%, from $30.9 million to
$4.4 million. This variance was attributable to decreases of $18.0 million, $7.9
million, $0.2 million, and $0.4 million, from Company-issued Medical Expense
products, Medicare Supplement products, Specified Disease products and acquired
policies, respectively.
COMMISSIONS. Commissions increased $13.3 million, or 80.1%, from $16.7 million
to $30.0 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
$13.2 million on Company-issued policies and $0.9 million, or 8.6%, on sales of
unaffiliated insurance products, and was offset by a decrease in commissions on
sales of acquired policies of $0.8 million, or 16.0%. GENERAL AND ADMINISTRATIVE
EXPENSES. For the year ending December 31, 1998, general and administrative
expenses decreased $3.3 million, or 10.5%, from $31.4 million to $28.1 million.
These decreases were primarily attributable to corporate overhead reduction
initiatives that were implemented beginning in the fourth quarter of 1997.
RECOGNITION OF PREMIUM DEFICIENCY. During the third quarter of 1998, the Company
recorded a non-cash charge to expense of approximately $5.0 million compared to
a $65.0 million premium deficiency charge recognized in the fourth quarter of
1997. This adjustment has no impact on the Company's cash position and does not
impact the statutory capital and surplus of the Insurance Subsidiaries. See "KEY
EVENTS - Determination of Premium Deficiency".
REORGANIZATION EXPENSE. The Company was responsible for paying the fees of
certain professional advisors in connection with the Chapter 11 Case. During the
year ended December 31, 1998, the Company incurred approximately $9.2 million in
expense related to these efforts. During the year ended December 31, 1997, the
Company incurred approximately $4.4 million in reorganization expense related to
the fees of certain professional advisors and to an internal reorganization of
management.
TAXES, LICENSES AND FEES. Taxes, licenses and fees decreased $0.8 million, or
13.3%, from $6.0 million to $5.2 million for the year ended December 31, 1998.
These decreases are attributable to the declining premium base for which premium
taxes are levied.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 4.2%, from $7.1
million to $6.8 million for the year ended December 31, 1998. Commensurate with
the filing of the Chapter 11 Case, interest on the Company's Convertible Notes
ceased to accumulate. Accordingly, pre-petition non-cash accrued interest
totaled approximately $7.3 million on such Convertible Notes as of December 31,
1998.
Under the terms of the Plan, interest on the Company's Senior Notes continued to
accrue post-petition at the rate of 11% per annum through the Effective Date.
Accordingly, pre-petition non-cash accrued interest totaled approximately $2.1
million and post-petition non-cash accrued interest totaled approximately $0.6
million on such Senior Notes for the year ended December 31, 1998.
During 1997, interest expense was computed from the date of the issuance of the
Company's Convertible Notes in the second quarter of 1997.
PROVISION FOR INCOME TAXES. The change in the provision for income taxes during
1998 is directly attributable to the net loss recorded by the Company for the
year ended December 31, 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. Accordingly, 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, 1998. See NOTE 10 - "Income Taxes" to the Company's Consolidated
Financial Statements.
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 policies and the
recognition of unamortized financing fees associated with the prepayment and
refinancing of the Company's revolving credit facility.
PREFERRED STOCK DIVIDENDS. Commensurate with the filing of the Chapter 11 Case,
dividends on the Company's Old Preferred Stock ceased to accumulate.
Accordingly, the Company recorded approximately $1.3 million of pre-petition
non-cash accrued dividends on such Old Preferred Stock for the year ended
December 31, 1998.
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 75.5%, and was offset by a decrease
in renewal premiums from acquired policies of $5.4 million, or 10.7%, a decrease
in first-year premiums from Company-issued policies of $22.8 million, or 38.0%
and a decrease in first-year premiums from acquired policies of $1.2 million, or
61.4%.
The increase in renewal premiums from Company-issued policies was attributable
to an increase of $20.8 million, or 118.9% in Medical Expense premiums, an
increase of $13.0 million, or 91.9% in Medicare Supplement premiums, an increase
in other premiums of $0.2 million, or 50.0%, and was offset by a decrease of
$0.3 million, or 2.1%, in Specified Disease premiums.
The decrease in renewal premiums from acquired policies was attributable to a
decrease of $3.7 million, or 15.2%, from the policies acquired in the NFIC and
AICT acquisition, a decrease of $0.7 million, or 5.3%, from the policies
acquired from AII, LHI and DNL, and a decrease of $1.0 million, or 7.9%, from
the policies acquired in the FLICA acquisition.
The decrease in first-year premiums from Company-issued policies was
attributable to a decrease of $13.4 million, or 33.1% in Medical Expense
premiums, a decrease of $9.2 million, or 51.1% in Medicare Supplement premiums,
and a decrease of $0.2 million, or 50.0%, in 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 agency operations 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 Specified
Disease products, and was offset by a decrease of $0.5 million, or 35.7% from
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 a substantial increase in claim loss ratios on certain
Medical Expense and Medicare Supplement products. 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 would 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. 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 Specified Disease
products and a decrease of $0.1 million from 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 "Key Events", in response to
the losses sustained by the Company in the second and third quarters of 1997,
the Company hired a financial advisor to explore its strategic alternatives. The
Company was responsible for paying the fees of its financial advisor and legal
counsel and agreed to pay the fees of the financial advisors and legal counsel
for 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 "Key Events," 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. 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 had no impact on the Company's cash
position at December 31, 1997 and did 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
premium 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 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 recorded a valuation allowance
that significantly reduced its benefit from income taxes 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 10 -
"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 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.
LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS
THE COMPANY
The Company's principal assets consist of the capital stock of its operating
subsidiaries and invested assets. Accordingly, the Company's sources of funds
are comprised of dividends from its operating subsidiaries, advances and
management fees from non-insurance company subsidiaries, and tax payments under
a tax sharing agreement among the Company and its subsidiaries. In addition, for
the year ended December 31, 1998, Westbridge made capital contributions totaling
approximately $5.7 million to its Insurance Subsidiaries. As of December 31,
1998, Westbridge had approximately $10.3 million in unrestricted cash and
invested assets.
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 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 1999, 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 excluding 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 1999 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 1999 without the prior approval of the Mississippi Insurance
Commissioner as it recorded a net loss from operations for the year ended
December 31, 1998.
Generally, all states require insurance companies to maintain statutory 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 1998, the Company does
not expect to receive any dividends from its Insurance Subsidiaries for the
foreseeable future.
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 the Company 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 year ended December 31, 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 more stringent 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 (i) until such time as the necessary rate increases can be
fully implemented and realized, and (ii) until sales of new products reach
targeted production levels. There can be no assurance that the full extent of
such rate increase requests will be approved, that the impact of these rate
increases will result in profitability on such old lines, or that targeted
production levels will be reached and sustained.
For the year ended December 31, 1998, the Insurance Subsidiaries received
capital contributions totaling approximately $5.7 million from Westbridge. To
the extent that the Insurance Subsidiaries experience further statutory
operating losses, additional capital may be required.
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 NAIC) 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, 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 statutory 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, 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, material transactions are subject to approval by the department of
insurance in each domiciliary state.
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.
CONSOLIDATED
The Company's consolidated net cash used for operations totaled $8.0 million,
$20.0 million and $10.8 million for the years ended December 31, 1998, 1997 and
1996, respectively. The variance in the amount of net cash used for operations
between 1998 and 1997 was primarily the result of (a) amounts remitted to
reinsurers during 1997 terminating certain reinsurance arrangements, and (b) the
reduction in the Company's marketing results for its underwritten products,
which resulted in a decrease in net cash used for operations related to the
funding of agents' debit balances. The variance in the amount of net cash used
for operations between 1997 and 1996 was primarily the result of (a) increases
in the claim loss ratios of the Company's Medical Expense and Medicare
Supplement products, and (b) increases in amounts remitted to reinsurers under
certain reinsurance arrangements.
Net cash provided by (used for) investing activities for the years ended
December 31, 1998, 1997 and 1996 totaled $13.3 million, $(40.4) million and $6.3
million, respectively. Net cash provided by investing activities between 1998
and 1997 was primarily used to fund the Company's operating and financing
activities for the same period. Further, the significant cash outflow to acquire
investments in 1997 was related to the investment of the net proceeds from the
issuance of Westbridge's 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 increase in new business production,
which occurred during the first two quarters of 1996.
Net cash (used for) provided by financing activities totaled $(6.0) million,
$60.4 million and $3.5 million for the years ended December 31, 1998, 1997 and
1996, respectively. Cash flows for financing activities for the year ended
December 31, 1998 were related to the net borrowings and repayments associated
with the Company's Receivables Financing program (defined below). The Company's
net financing cash outflows declined as a result of the reduction in the
Company's marketing results for its underwritten products, which in turn
resulted in a decrease in cash flows used to finance agents' debit balances.
Cash flows provided by financing activities for the year ended December 31,
1997, included approximately $70.0 million in cash inflows resulting from the
issuance of Westbridge's Convertible Notes that was offset, in part, by cash
payments of $7.0 million to retire a note payable associated with a recaptured
reinsurance agreement, $1.0 million to retire a note with a related party, and
$0.1 million in net borrowings and repayments associated with the Company's
Receivables Financing program. For 1996, cash was provided by borrowings under
the Receivables Financing program with Fleet National Bank.
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, 1998, 1997 and 1996, the
Company has recorded a net provision for uncollectible commission advances
totaling $0.6 million, $2.8 million and $0.5 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
(the "Credit Agreement") with LaSalle National Bank ("LaSalle"). 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, 1998, the Company's receivables from
subagents totaled approximately $9.0 million and approximately $6.2 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.
The Company has guaranteed WFC's obligations under the Credit Agreement, and 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's obligations under
the Guaranty Agreement continue following confirmation of the Plan. As of the
Effective Date, there were no events of default under the Credit or Guaranty
Agreements. See NOTE 6 to the Company's Consolidated Financial Statements.
YEAR 2000 ISSUES
The Company has initiated an enterprise-wide program designed to determine
whether all of its Information Technology ("I/T"), such as computer systems and
related software applications, and non-I/T systems, such as facsimile machines
and copy machines, will function properly as the millennium (the "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.
The Company is highly reliant upon computer systems and software, as are many of
the Company's principal businesses with which it interacts. The Company's
ability to service its policyholders and agents is dependent upon accurate and
timely transaction reporting. Transaction reporting in turn is dependent upon
the Company's highly complex interdependent computer hardware, software,
telecommunications and desktop applications, and the information obtained from
its critical business partners.
The Company's overall Year 2000 remediation effort has focused on preparing the
computer systems, infrastructure and facilities for the Year 2000. The following
phases encompass the Year 2000 plan: (i) assessment of all internal and external
business critical systems, including I/T and non-I/T systems, (ii) remediation
or upgrading of business critical systems, (iii) testing of remediated and
updated systems, (iv) implementation of remediated and updated systems, and (v)
contingency planning.
The Company has engaged certain outside vendors and dedicated certain employees
on a full time basis to help in the full array of its Year 2000 efforts. This
includes system assessment and monitoring advice, actual code remediation,
communication and consultation with critical business partners and testing
resources.
Under the Company's enterprise-wide remediation program, the most effective I/T
systems solution was to purchase a new, more modern, Year 2000 compliant
policyholder and claim administration system. This replacement effort is well
underway and targeted for implementation in the third quarter of 1999.
The Company has also completed the assessment of its non-I/T systems and is
currently remediating and upgrading those systems. The non-I/T systems have been
prioritized to remediate critical systems early in 1999 and non-critical systems
later in the year.
Another significant component of the Company's enterprise-wide remediation
effort is to determine whether critical business partners and vendors are Year
2000 compliant. The assessment and testing of the Year 2000 readiness of these
critical business partners and vendors have been integrated with the Company's
I/T and non-I/T Year 2000 system strategies. As a part of this process, the
Company has written letters and corresponded with its outside vendors and
critical business partners to determine whether they are also prepared for the
Year 2000.
The Company's contingency plan is to make the existing I/T systems, which are to
be replaced, Year 2000 compliant. This effort is currently in the remediation
and testing phases of the project and is scheduled to be completed during the
second quarter of 1999. The Company's contingency plan has identified and
prioritized the Year 2000 exposures within the existing I/T systems. By
remediating these I/T exposures on a priority basis, the Company is working to
limit its Year 2000 contingency risk to lower priority I/T exposures in the
event that the Company's most reasonably likely worst case Year 2000 scenario
were to occur.
The most reasonably likely worst case Year 2000 scenario would be that certain
functions within the Company's existing I/T systems would incorrectly process
policy information such as policy paid-to-dates, premium billings, commissions
and claims. This scenario could have a material, adverse impact on the Company's
ability to conduct its business.
The Company expects to incur approximately $4.0 to $5.0 million in charges
related to computer hardware and software, infrastructure, and facilities
enhancements necessary to prepare for the Year 2000, of which a portion may be
capitalized. For the year ending December 31, 1998, the Company incurred
approximately $0.6 million in expenses related to systems planning and
consulting efforts associated with the development of the Company's Year 2000
remediation plans. The majority of the Company's Year 2000 costs relate to
computer hardware and software purchases and consulting fees, which will occur
primarily in the first and second quarters of 1999.
The Company expects its Year 2000 program to be completed in a timely manner;
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,
adverse impact on the Company's ability to conduct its business.
FORWARD-LOOKING STATEMENTS:
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The preceding statements and certain other
statements contained in ITEM 1 - "Business," ITEM 7 - "Management's Discussion
and Analysis of Results of Operation and Financial Condition," and Notes to the
Consolidated Financial Statements are forward-looking statements. These
forward-looking statements are based on the intent, belief or current
expectations of the Company and members of its senior management team. While the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance, and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors known to management that could
cause actual results to differ materially from those contemplated by the
forward-looking statements in this Report include, but are not limited to, the
effect of economic and market conditions, further adverse developments with
respect to the Company's liquidity position or operations of the Company's
various businesses, actions that may be taken by insurance regulatory
authorities, adverse developments in the timing or results of the Company's
current strategic business plan, the difficulty in controlling health care costs
and integrating new operations, the ability of the Company to realize
anticipated general and administrative expense savings and overhead reductions
presently contemplated, the ability of the Company to return the Company's
operations to profitability, the level and nature of any restructuring charges,
and the possible negative effects of prospective health care reform. Additional
factors that would cause actual results to differ materially from those
contemplated within this report can also be found in the Company's reports to
the Securities and Exchange Commission ("SEC") on Form 8-K during 1999 and 1998
and Form 10-Q for the quarters ended September 30, 1998, June 30, 1998 and 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary objectives in managing its cash flows and investments are
to maximize investment income and yield while preserving capital and minimizing
credit risks. To attain these objectives, investment policies and strategies are
developed using expected underwriting results, forecasted federal tax positions,
regulatory requirements, forecasted economic conditions including expected
fluctuations in interest rates and general market risks.
Market risk represents the potential for loss due to adverse changes in the fair
market value of financial instruments. The market risks associated with the
financial instruments of the Company primarily relate to the Company's
investment portfolio that consists largely (93.5%) of fixed income securities.
The Company's investment portfolio is exposed to market risk through
fluctuations in interest rates, changes in credit quality and principal
prepayments.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. The Company evaluates the potential changes in
interest rates and market prices within the context of asset and liability
management. Asset and liability management involves forecasting the payout
pattern of the Company's liabilities, consisting primarily of accident and
health claim reserves, to determine duration and then matching the duration of
the liabilities to fixed income investments with a similar duration. Through
asset and liability management, the Company believes that interest rate risk is
mitigated.
The table below provides cash flow information about the Company's fixed
maturity investments at December 31, 1998. The table presents cash flows of
principal amounts and related weighted average interest rates by expected
maturity dates. The cash flows are based on the earlier of the call date or the
maturity date or, for mortgage-backed securities, expected principal payment
patterns. Actual cash flows could differ from the expected amounts.
As of December 31, 1998, all of the Company's securities were classified as
available-for-sale securities.
<TABLE>
<CAPTION>
PROJECTED PRINCIPAL CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------------------
Fair
Market
Value
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
--------- -------- ---------- ---------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 375 $ 725 $ 1,645 $ 3,025 $ 715 $ 3,290 $ 9,775 $ 10,776
Average Interest Rate 6.38% 6.96% 7.65% 6.80% 6.64% 7.82%
Mortgage-Backed Securities 1,774 1,345 1,024 762 563 2,336 7,804 8,109
Average Interest Rate 7.82% 7.77% 7.71% 7.68% 7.64% 8.20%
Callable Securities 2,140 653 1,049 1,393 1,033 3,360 9,628 9,913
Average Interest Rate 7.99% 7.93% 7.67% 8.85% 7.11% 7.85%
Other Fixed Maturities 1,548 5,196 5,425 6,380 9,020 60,274 87,843 94,066
Average Interest Rate 5.16% 7.16% 7.32% 7.79% 6.54% 7.62%
--------- -------- ---------- ---------- ---------- ------------- ----------- -----------
Total $ 5,837 $ 7,919 $ 9,143 $ 11,560 $ 11,331 $ 69,260 $ 115,050 $ 122,864
========= ======== ========== ========== ========== ============= =========== ===========
</TABLE>
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. (See PART 1 - ITEM 1 and NOTE 3 - "Investments" to
the Company's Consolidated Financial Statements.) Approximately 3.4% of the
Company's fixed-income portfolio is comprised of less than investment grade
securities. The Company's investment policy allows up to 5% of the Company's
assets to be invested in higher yielding, non-investment grade securities. Due
to the overall high quality of the Company's investment portfolio (A as rated by
Standard & Poor's), management believes the Company has marginal risk with
regard to credit quality.
Mortgage-backed securities investors are compensated primarily for prepayment
risk rather than credit quality risk. During periods of significant interest
rate volatility, the underlying mortgages may repay 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. To manage
prepayment risk, the Company limits the type of mortgage-backed structures
invested in and restricts the portfolio's total exposure in mortgage-backed
securities. If the repayment occurs later than expected during periods of
increasing interest rates, the cost of funds to pay liabilities may increase due
to the mismatching of assets and liabilities.
<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............................................................................... 40
FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the Three Years ended December 31, 1998.......................... 41
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. 42
Consolidated Statements of Cash Flows for the Three Years ended December 31, 1998.......................... 44
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
Three Years ended December 31, 1998.................................................................... 46
Consolidated Statements of Comprehensive (Loss) Income for the Three Years
ended December 31, 1998................................................................................ 47
Notes to Consolidated Financial Statements................................................................. 48
FINANCIAL STATEMENT SCHEDULES:
II. Condensed Financial Information of Registrant............................................................. 71
III. Supplementary Insurance Information....................................................................... 74
IV. Reinsurance................................................................................................ 75
V. Valuation and Qualifying Accounts and Reserves............................................................ 76
</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. (now, Ascent Assurance, Inc.)
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Westbridge Capital Corp. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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.
As discussed in NOTE 1 to the Consolidated Financial Statements, Westbridge
Capital Corp. filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan on
December 17, 1998, and, after the satisfaction of a number of conditions, the
Plan became effective on March 24, 1999. In connection with its emergence from
Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent
Assurance, Inc.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 1999
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS. EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums:
First-year $ 19,161 $ 37,890 $ 61,923
Renewal 116,556 123,207 94,857
-------------- --------------- -------------
135,717 161,097 156,780
Net investment income 12,011 11,023 8,736
Fee and service income 16,191 16,700 9,534
Net realized gain on investments 2,142 84 96
-------------- --------------- -------------
166,061 188,904 175,146
-------------- --------------- -------------
Benefits, claims and expenses:
Benefits and claims 99,419 136,866 94,187
Amortization of deferred policy
acquisition costs 4,411 30,873 22,907
Commissions 29,979 16,690 7,919
General and administrative expenses 28,149 31,407 27,123
Reorganization expense 9,179 4,424 -
Recognition of premium deficiency 4,948 64,952 -
Taxes, licenses and fees 5,216 5,995 5,951
Interest expense 6,814 7,102 4,462
-------------- --------------- -------------
188,115 298,309 162,549
-------------- --------------- -------------
(Loss) income before income taxes, equity
in earnings of Freedom Holding
Company and extraordinary item (22,054) (109,405) 12,597
Provision (benefit) for income taxes 231 (13,268) 4,410
Equity in earnings of Freedom Holding Company - - 74
-------------- --------------- -------------
(Loss) income before extraordinary item (22,285) (96,137) 8,261
Extraordinary loss, net of tax - 1,007 -
============== =============== =============
Net (loss) income (22,285) $ (97,144) $ 8,261
============== =============== =============
Preferred stock dividends 520 1,572 1,650
-------------- --------------- -------------
(Loss) income applicable to
common stockholders (22,805) $ (98,716) $ 6,611
============== =============== =============
Earnings per common share:
Basic:
(Loss) income before extraordinary item $ (3.43) $ (15.91) $ 1.11
Extraordinary loss - (.16) -
============== =============== =============
Net (loss) income $ (3.43) $ (16.07) $ 1.11
============== =============== =============
Diluted:
(Loss) income before extraordinary item $ (3.43) $ (15.91) $ .97
Extraordinary loss - (.16) -
============== =============== =============
Net (loss) income $ (3.43) $ (16.07) $ .97
============== =============== =============
Weighted average shares outstanding:
Basic 6,640,000 6,143,000 5,978,000
============== =============== =============
Diluted 6,640,000 6,143,000 8,477,000
============== =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
---------------------- -----------------------
<S> <C> <C>
Investments:
Fixed maturities:
Available-for-sale, at market value
(amortized cost $116,871 and $122,840) $ 122,864 $ 128,749
Equity securities, at market 2,575 4,770
Mortgage loans on real estate 318 389
Investment real estate - 566
Policy loans 280 284
Short-term investments and certificates of deposit 5,393 12,654
---------------------- -----------------------
Total Investments 131,430 147,412
Cash and cash equivalents 278 1,030
Accrued investment income 2,372 2,453
Receivables from agents (net of $5,176 and
$4,531 allowance for doubtful accounts) 9,860 20,503
Deferred policy acquisition costs 14,177 19,165
Leasehold improvements and equipment, at cost (net of
accumulated depreciation and amortization of
$3,443 and $4,106) 1,849 1,141
Due from reinsurers 2,155 3,219
Commissions receivable 3,273 1,389
Deferred debt costs, net of accumulated amortization 3,182 4,046
Other assets 1,165 2,498
---------------------- -----------------------
Total Assets $ 169,741 $ 202,856
====================== =======================
</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' DEFICIT
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 53,871 $ 55,811
Claims 44,116 51,784
----------------------- -----------------------
97,987 107,595
Accounts payable and accruals 8,642 3,847
Commission advances payable 991 4,702
Other liabilities 5,174 5,612
Accrued dividends and interest payable 11,377 4,971
Deferred income taxes, net - -
Notes payable 6,192 13,100
Convertible subordinated notes, due 2004 70,000 70,000
Senior subordinated notes, net of
unamortized discount, due 2002 19,523 19,447
----------------------- -----------------------
Total Liabilities 219,886 229,274
----------------------- -----------------------
Redeemable Preferred Stock 11,935 19,000
----------------------- -----------------------
Stockholders' (Deficit) Equity:
Common stock, ($.10 par value,
30,000,000 shares authorized;
7,035,809 and 6,195,439 shares issued) 703 620
Capital in excess of par value 37,641 30,843
Accumulated other comprehensive
income, net of tax 3,911 4,649
Deficit (104,335) (81,530)
----------------------- -----------------------
Total Stockholders' Deficit (62,080) (45,418)
----------------------- -----------------------
Commitments and contingencies:
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Deficit $ 169,741 $ 202,856
======================= =======================
</TABLE>
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,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income applicable to common stockholders $ (22,805) $ (98,716) $ 6,611
Adjustments to reconcile net (loss) income applicable to common
stockholders to cash used for operating activities:
Recognition of premium deficiency 4,948 64,952 -
Amortization of deferred policy acquisition costs 4,411 30,873 22,907
Additions to deferred policy acquisition costs (4,371) (31,119) (45,138)
Depreciation expense 476 470 497
Equity in earnings of Freedom Holding Company - - (74)
Decrease (increase) in receivables from agents 10,643 (2,192) (1,371)
Decrease (increase) in due from reinsurers 1,064 (1,763) 2,073
(Increase) decrease in commissions receivable (1,884) 2,017 (3,406)
Decrease in other assets 1,333 1,940 4,302
(Decrease) increase in policy liabilities and accruals (9,608) 14,205 2,995
Increase (decrease) in accounts payable and accruals 4,795 1,351 (1,027)
Increase in accrued dividends and interest payable 6,406 4,445 99
(Decrease) increase in commission advances payable (3,711) 334 4,368
(Decrease) increase in other liabilities (438) 4,438 (6,793)
(Decrease) increase in deferred income taxes, net - (10,299) 3,708
Other, net 735 (910) (518)
------------ ------------- ------------
Net Cash Used For Operating Activities (8,006) (19,974) (10,767)
------------ ------------- ------------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company - - (3,970)
Proceeds from investments sold:
Fixed maturities, called or matured 7,531 9,469 8,529
Fixed maturities, sold 13,810 25,345 49,340
Short-term investments and certificates of deposit, sold or
matured 7,261 50 155,877
Other investments, sold or matured 1,652 817 556
Cost of investments acquired (15,772) (75,745) (203,849)
Additions to leasehold improvements and equipment, net of
retirements (1,184) (300) (218)
------------ ------------- ------------
Net Cash Provided By (Used For) Investing Activities 13,298 (40,364) 6,265
------------ ------------- ------------
Cash Flows From Financing Activities:
Decrease (increase) in deferred debt costs 864 (1,230) (567)
Issuance of convertible subordinated notes - 70,000 -
Issuance of notes payable 5,461 21,044 16,144
Repayment of notes payable (12,369) (29,154) (12,090)
Issuance of common stock - 140 140
Purchase and cancellation of common stock - (445) (125)
------------ ------------- ------------
Net Cash (Used For) Provided By Financing Activities (6,044) 60,355 3,502
------------ ------------- ------------
(Decrease) increase in Cash and Cash Equivalents, During Period (752) 17 (1,000)
Cash and Cash Equivalents, At Beginning Of Period 1,030 1,013 2,013
============ ============= ============
Cash and Cash Equivalents, At End Of Period $ 278 $ 1,030 $ 1,013
============ ============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 833 $ 3,002 $ 3,861
Income taxes $ 1,143 $ 118 $ 982
</TABLE>
The accompanying notes are an integral part of these financial statements.
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
During the year ended December 31, 1998, seven thousand and sixty-five (7,065)
shares of the Company's Old Preferred Stock were converted into shares of Old
Common Stock. The converted shares of Old Preferred Stock had an aggregate
liquidation preference of $7,065,000 and were converted into 840,071 shares of
Old 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>
ACCUMULATED TOTAL
OTHER STOCK-
CAPITAL COMPREHENSIVE RETAINED HOLDERS'
COMMON STOCK IN EXCESS INCOME EARNINGS TREASURY STOCK EQUITY
SHARES AMOUNT OF PAR VALUE (LOSS) (DEFICIT) SHARES AMOUNT (DEFICIT)
------ ------ --------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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)
Accumulated comprehensive loss, net of tax (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 canceled
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)
Accumulated comprehensive income, 3,592 3,592
net of tax
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 canceled
under stock option plans (44,360) (4) (447) (451)
---------- -------- -------- -------- --------- ------ ----- --------
Balance at December 31, 1997 6,195,439 $ 620 $ 30,843 $ 4,649 $ (81,530) -- $-- $(45,418)
Net loss (22,285) (22,285)
Preferred stock dividend (520) (520)
Accumulated comprehensive loss, net of tax (738) (738)
Preferred stock converted to common 840,071 83 6,982 7,065
Other, net 299 -- (184) (184)
========== ======== ======== ======== ========= ====== ===== ========
Balance at December 31, 1998 7,035,809 $ 703 $ 37,641 $ 3,911 $(104,335) -- $-- $(62,080)
========== ======== ======== ======== ========= ====== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
(Loss) income before income taxes $ (22,054) $ (109,405) $ 12,597
Other comprehensive (loss) income:
Unrealized holding gains (losses) arising during period 822 5,677 (2,271)
Less: reclassification adjustment for gains on
sales of fixed and equity securities included in
net (loss) income (1,957) (150) (92)
-------------- ------------- --------------
Comprehensive (loss) income before income taxes (23,189) (103,878) 10,234
Provision for (benefit from) income taxes; extraordinary
loss, net of tax; and preferred stock dividends 751 (10,689) 5,986
(Benefit from) provision for income taxes on
comprehensive (loss) income (397) 1,934 (827)
-------------- ------------- --------------
Comprehensive (loss) income, net of income taxes $ (23,543) $ (95,123) $ 5,075
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REORGANIZATION AND EMERGENCE FROM CHAPTER 11 CASE
On September 16, 1998 (the "Petition Date"), Westbridge commenced a
reorganization case (the "Chapter 11 Case") by filing a voluntary petition for
relief under Chapter 11, Title 11 of the United States Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along
with a disclosure statement (as amended, the "Disclosure Statement") and a
proposed plan of reorganization (as amended, the "Plan"). The filing of the
Disclosure Statement and Plan culminated months of negotiations between
Westbridge and an ad hoc committee of holders of its 11% Senior Subordinated
Notes due 2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated
Notes due 2004 (the "Convertible Notes"). The Disclosure Statement and the Plan
were amended on October 28, 1998, and the Disclosure Statement was approved by
entry of an order by the Bankruptcy Court on October 30, 1998. Following the
approval of the Plan by the holders of allowed claims and equity interests, the
Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became
effective March 24, 1999 (the "Effective Date").
In connection with its emergence from Chapter 11, Westbridge changed its
corporate name to "Ascent Assurance, Inc." Pursuant to the Plan, the Company's
Board of Directors was reconstituted as of the Effective Date, and the Company's
certificates of incorporation and by-laws were amended and restated in their
entirety.
The Plan provides for the recapitalization of certain old debt and equity
interests in Westbridge and the issuance of new equity securities and warrants.
Key terms of the Plan include the following:
CANCELLATION OF EXISTING SECURITIES
Westbridge's capital structure was realigned and deleveraged. Pursuant to
the Plan, the following securities of Westbridge were canceled as of the
Effective Date: (i) $23.3 million aggregate principal amount of, plus all
accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million
aggregate principal amount of, plus all accrued and unpaid interest on, the
Convertible Notes, (iii) $13.2 million aggregate liquidation preference of,
plus all accrued and unpaid dividends on, Westbridge's Series A Convertible
Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv)
Westbridge's Common Stock, par value $.10 per share (the "Old Common
Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi)
all outstanding unexercised stock options to purchase Old Common Stock, and
(vii) all unvested grants of restricted Old Common Stock.
NEW EQUITY CAPITAL STRUCTURE
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the total number of shares of stock the Company shall have
the authority to issue is 30,040,000, consisting of 30,000,000 shares of
common stock, par value $.01 per share (the "New Common Stock") and 40,000
shares of preferred stock, par value $.01 per share, all of which are
designated Series A Convertible Preferred Stock (the "New Preferred Stock")
DISTRIBUTIONS UNDER THE PLAN
CASH DISTRIBUTION
To the holders of Senior Notes other than CSFB (defined below),
cash payments totaling approximately $15.2 million, which are
equal to the total Allowed 11% Senior Note Claims (as defined in
the Plan) held by creditors other than Credit Suisse First Boston
Corporation ("CSFB"), will be distributed subject to completion of
the exchange of securities as contemplated by the Plan. In order
to provide the Company with sufficient funds to make the cash
distribution to the holders of the Allowed 11% Senior Notes under
the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased
all of the shares of the New Preferred Stock which were not
otherwise distributed under the Plan.
ISSUANCE OF NEW SECURITIES
Pursuant to the Plan and the purchase of New Preferred Stock on the
Effective Date, 6,500,000 shares of New Common Stock and 23,257
shares of New Preferred Stock were issued on the Effective Date
as follows:
To holders of general unsecured claims and Convertible Notes as
of December 10, 1998 and current management, 6,110,000 shares, or
94%, of the New Common Stock issued on the Effective Date, subject
to the completion of the exchange requirements as contemplated by
the Plan. Holders of general unsecured claims and Convertible
Notes will receive their first distribution of shares in partial
satisfaction and discharge of their allowed claims beginning in
April 1999. The remaining shares of New Common Stock are held for
future distributions to such holders pending the final resolution
of disputed claims.
To holders of Old Preferred Stock, 260,000 shares as of December
10, 1998, or 4%, of the New Common Stock issued on the Effective
Date and Warrants ("New Warrants") to purchase an additional
277,505 shares, or 2%, of the number of shares of New Common Stock
issued and outstanding on the Effective Date, on a fully diluted
basis, subject to the completion of the exchange of securities as
contemplated by the Plan.
To holders of Old Common Stock, 130,000 shares as of December 10,
1998, or 2%, of the New Common Stock issued on the Effective Date
and New Warrants to purchase an additional 693,761 shares, or 5%,
of the number of shares of New Common Stock issued and outstanding
on the Effective Date, on a fully diluted basis, subject to the
completion of the exchange of securities as contemplated by the
Plan. Fractional shares of New Common Stock will not be issued in
connection with the Plan. As a result of this provision, many
holders of Old Common Stock will receive no distribution of New
Common Stock or New Warrants under the Plan.
To the CSFB Affiliate, in respect of the Senior Notes owned by
CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock
which, together with the 15,167 additional shares of New Preferred
Stock purchased by the CSFB Affiliate as described above, are
convertible into 4,765,165 shares of the New Common Stock at an
initial conversion price of $4.88 per share. As a result of the
New Preferred Stock received by the CSFB Affiliate, together with
the 3,093,998 shares of New Common Stock to be received by the
CSFB Affiliate in respect of the Convertible Notes owned by CSFB,
the CSFB affiliate will own approximately 56.6% of the New Common
Stock on an as converted basis.
RESERVATION OF ADDITIONAL NEW COMMON STOCK
In connection with the New Warrants described above, 971,266
shares of New Common Stock are reserved for issuance upon the
exercise of New Warrants. The New Warrant are exercisable at an
initial exercise price $9.04 per share of New Common Stock and
will expire on March 24, 2004.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the
fully diluted number of shares of New Common Stock issued and
outstanding on the Effective Date are reserved for issuance to
employees and directors, and up to 387,119 shares, or 3%, of the
fully diluted number of shares of New Common Stock issued and
outstanding on the Effective Date are reserved for issuance to the
Company's marketing agents under the Company's 1999 Stock Option
Plan.
OTHER MATTERS
In connection with the approval and effectiveness of the Plan, the Company
settled a putative class action brought on behalf of certain purchasers and
sellers of Westbridge's Convertible Notes and Old Common Stock during the
period October 31, 1996 through October 31, 1997.
See NOTES 6 and 11 regarding the status of the Company's financing
arrangements and Insurance Subsidiaries.
In connection with the reorganization, the Company will realize a non-taxable
gain from the extinguishment of certain indebtedness for tax purposes, since the
gain results from a reorganization under the Bankruptcy Code. However, the
Company will be required during 1999 to reduce certain tax attributes related to
Westbridge, exclusive of its operating subsidiaries, including (i) net operating
loss carryforwards ("NOLs"), (ii) certain tax credits and (iii) tax bases in
assets in an amount equal to such a gain on extinguishment.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," the Company will adopt fresh start
reporting. For accounting purposes, the Effective Date is deemed to be March 31,
1999. In fresh start reporting, a reorganization value will be assigned to the
Company's New Preferred Stock and New Common Stock. The reorganization value
will be allocated to the fair value of assets and liabilities similar to the
purchase method of accounting under APB 16. As a result of the application of
fresh start reporting, the Company's financial statements issued subsequent to
the adoption of fresh start reporting will not be comparable with those prepared
before emergence, including the historical financial statements in this annual
report.
NOTE 2 - 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 six wholly owned
subsidiaries: National Foundation Life Insurance Company ("NFL"), National
Financial Insurance Company ("NFIC"), Westbridge Management Corp. ("WBMC"),
NationalCare Marketing(R), Inc. ("NCM"), Westbridge Printing Services, Inc.
("WPS"), and Foundation Financial Services, Inc. ("FFS"). In addition, the
consolidated financial statements include the accounts of the Company's
indirect, wholly owned subsidiaries: (a) Freedom Life Insurance Company of
America ("FLICA") is a wholly owned subsidiary of Freedom Holding Company
("FHC"), and FHC is a wholly owned subsidiary of NFL, (b) American Insurance
Company of Texas ("AICT") is a wholly owned subsidiary of NFIC, and (c) NCM owns
100% of Westbridge Funding Corporation ("WFC"), Precision Dialing Services, Inc.
("PDS"), Senior Benefits, LLC ("Senior Benefits"), LifeStyles Marketing Group,
Inc. ("LifeStyles Marketing"), American Senior Security Plans, LLC ("ASSP"), and
Westbridge Financial Corp. 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 accident and health insurance products in 40 states and the
District of Columbia. The major underwritten product lines currently marketed by
the Company are Medical Expense products 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 and senior products,
which are underwritten by 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 periodically 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. Accident and health premiums are recognized as revenue
when earned. 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
GAAP 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," ("SFAS 128") that revises the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings Per Share."
The SFAS 128 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 SFAS 128
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 Company adopted SFAS No. 128 for the
year ended December 31, 1997 and has restated the earnings per share
computations for 1996 to conform to this pronouncement.
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
(Amounts in 000's, except per share amounts)
<S> <C> <C> <C>
BASIC:
(Loss) income available to common shareholders $ (22,805) $ (98,716) $ 6,611
============== ============= ==============
Average weighted shares outstanding 6,640 6,143 5,978
============== ============= ==============
Basic earnings per share $ (3.43) $ (16.07) $ 1.11
============== ============= ==============
DILUTED:
(Loss) income available to common shareholders $ (22,805) $ (98,716) $ 6,611
Adjustment for conversion of Old Preferred Stock - - 1,650
-------------- ------------- --------------
Adjusted (loss) income available to common shareholders $ (22,805) $ (98,716) $ 8,261
============== ============= ==============
Average weighted shares outstanding 6,640 6,143 5,978
Adjustment for conversion of Old Preferred Stock - - 2,378
Adjustment for restricted stock - - 4
Adjustment for options and warrants - - 117
-------------- ------------- --------------
Adjusted average weighted shares outstanding 6,640 6,143 8,477
============== ============= ==============
Diluted earnings per share $ (3.43) $ (16.07) $ 0.97
============== ============= ==============
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. On January 1, 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Comprehensive income (loss) equals the total of net income (loss) and all other
non-owner changes in equity. This pronouncement 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. The Company has elected to present
its comprehensive income (loss) as a separate financial statement.
For the Company, comprehensive income (loss) equals its reported consolidated
net income (loss) plus the change in the unrealized appreciation (depreciation)
of marketable securities from the previously reported period. Currently, this
accumulated other comprehensive income, net of tax, is reported in the Company's
Consolidated Balance Sheets as a separate component of stockholders' equity.
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 companies to
report 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. Under SFAS 131, the Company will continue to
have only one reportable segment, Accident and Health insurance.
In December 1997, the Accounting Standards Executive Committee ("AcSEC") 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 will adopt SOP 97-3 on
a prospective basis. 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.
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use," which requires capitalization of
certain costs after the date of adoption in connection with developing or
obtaining software for internal use. The Company will adopt SOP 98-1 on a
prospective basis. The Company has not yet determined the impact of adopting
this SOP.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would also be effective upon implementation. The NAIC
has recommended an effective date of January 1, 2001. The Codification provides
guidance for areas where statutory accounting has been silent and changes
current statutory accounting in certain areas. It is not known whether the
insurance departments of the state of domicile of the Company's Insurance
Subsidiaries will adopt the Codification or whether those insurance departments
will make any changes to that guidance. The Company has not estimated the
potential effect of the Codification guidance if adopted. However, the actual
effect of adoption could differ as changes are made to the Codification
guidance, prior to its recommended effective date of January 1, 2001.
RECLASSIFICATIONS. Certain reclassifications have been made to 1997 and 1996
amounts in order to conform to 1998 financial statement presentation.
NOTE 3 - INVESTMENTS
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
(in thousands)
<S> <C> <C> <C>
Fixed maturities $ 8,754 $ 8,268 $ 6,607
Short-term investments and certificates of deposit 708 891 513
Interest on receivables from agents 2,511 1,633 1,201
Other 351 468 646
-------------- --------------
-------------
12,324 11,260 8,967
Less: Investment expenses 313 237 231
============== ============== =============
Net investment income $ 12,011 $ 11,023 $ 8,736
============== ============== =============
</TABLE>
Realized gains (losses) on investments are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
(in thousands)
<S> <C> <C> <C>
Fixed maturities $ 403 $ 535 $ (146)
Equity securities 1,555 (385) 238
Other 184 (66) 4
============== ============== =============
Realized gains on investments $ 2,142 $ 84 $ 96
============== ============== =============
</TABLE>
Unrealized appreciation on investments is reflected directly in stockholders'
equity as a component of accumulated other comprehensive income and is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
-------------- ---------------
(in thousands)
<S> <C> <C>
Balance at beginning of year $ 4,649 $ 1,057
Unrealized appreciation, net
of tax, on fixed maturities available-for-sale 54 2,816
Unrealized (depreciation) appreciation, net of
tax, on equity securities and other investments (792) 776
============== ===============
Balance at end of year $ 3,911 $ 4,649
============== ===============
</TABLE>
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, 1998 and 1997, are summarized by category as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1998 Available-for-Sale Cost Gains Losses Value
- - ------------------------------------------- ---------------- --------------- --------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government and governmental
agencies and authorities $ 11,145 $ 644 $ 13 $ 11,776
States, municipalities, and political
subdivisions 1,490 96 - 1,586
Finance companies 30,441 1,549 71 31,919
Public utilities 12,745 801 125 13,421
Mortgage-backed securities 7,834 284 8 8,110
All other corporate bonds 53,216 3,346 510 56,052
================ =============== =============== ==============
Balance at December 31, 1998 $ 116,871 $ 6,720 $ 727 $ 122,864
================ =============== =============== ==============
</TABLE>
<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>
The amortized cost and estimated market value of investments in
available-for-sale fixed maturities as of December 31, 1998, are shown below, in
thousands, summarized by year to contractual 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 penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------------ ------------------
(in thousands)
<S> <C> <C>
Due in one year or less $ 1,882 $ 1,889
Due after one year through five years 31,417 32,254
Due after five years through ten years 39,748 41,959
Due after ten years 35,990 38,652
Mortgage-backed securities 7,834 8,110
------------------ ------------------
$ 116,871 $ 122,864
================== ==================
</TABLE>
A summary of unrealized appreciation on investments in fixed maturities
available-for-sale, which is reflected directly in stockholders' equity as a
component of accumulated other comprehensive income, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
-------------- ---------------
(in thousands)
<S> <C> <C>
Amortized cost $ 116,871 $ 122,840
Estimated market value 122,864 128,749
-------------- ---------------
Excess of market value to amortized cost 5,993 5,909
Estimated tax 2,098 2,068
-------------- ---------------
Unrealized appreciation, net of tax 3,895 $ 3,841
============== ===============
</TABLE>
Proceeds from sales and maturities of investments in fixed maturity securities
were approximately $25.1 million in 1998 and $34.0 million in 1997. Gross gains
of $0.8 million and gross losses of $0.4 million were realized on fixed maturity
investment sales during 1998. Gross gains of $0.7 million and gross losses of
$0.1 million were realized on fixed maturity investment sales during 1997.
Included in fixed maturities at December 31, 1998 and 1997, are high-yield,
unrated or less than investment grade corporate debt securities comprising less
than 3.2% and 1.6% of total cash and invested assets at December 31, 1998 and
1997, respectively.
Investment securities on deposit with insurance regulators in accordance with
statutory requirements at December 31, 1998 and 1997 had a par value totaling
$28.2 million and $28.3 million, respectively.
At December 31, 1998, the Company had restricted cash and investments totaling
$2.5 million and $1.9 million, respectively, related to its receivables
financing program (see NOTE 6 - "Financing Activities") and to a collateralized
letter of credit ("LOC") for the purpose of potential future capital
contributions to NFIC and AICT. The collateralized LOC expires in June 1999 and
future draws upon this LOC are subject to certain provisions regarding NFIC's
and AICT's statutory capital and surplus levels.
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. 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.
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 canceled.
The acquisition did not have a material pro-forma impact on operations.
NOTE 5 - FUTURE POLICY BENEFITS
Future policy benefits for Accident and Health insurance products 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:
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 6 - FINANCING ACTIVITIES
CREDIT ARRANGEMENT
The Company finances the majority of its obligations to make commission advances
through Westbridge Funding Corporation ("WFC"), an indirect wholly owned
subsidiary. On June 6, 1997, WFC entered into a Credit Agreement dated as of
such date with LaSalle National Bank (the "Credit Agreement"). See NOTE 15 -
"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, 1998, $6.2 million was outstanding under
the Credit Agreement (interest rate of 8.375%). 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.
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, 1998, 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.
As of the Effective Date, there were no events of default under the Guaranty or
Credit Agreements, which were amended to reflect the recapitalization of the
Company.
Prior to the Effective Date of the Plan (see NOTE 1), the Company had the
following debt securities outstanding:
SENIOR NOTES
During the first quarter of 1995, the Company issued $20.0 million aggregate
principal amount of its Senior Notes, due 2002, in an underwritten public
offering. The Senior Notes were issued at par, less an underwriting discount of
4%. Contractual interest on the Senior Notes was payable in monthly
installments. In November 1997, the Company suspended the scheduled monthly
interest payments on these Senior Notes.
Accrued but unpaid interest on the Senior Notes through the Petition Date was
approximately $2.1 million. The Plan required the continued accrual of interest
on the Senior Notes from the Petition Date to the Effective Date. Accrued but
unpaid interest on the Senior Notes from the Petition Date to December 31, 1998
totaled approximately $0.6 million.
Contractual interest continued to accrue at a rate of $6,111 per day from
January 1, 1999 through the Effective Date.
As of the Effective Date, these Senior Notes were canceled, extinguished and
retired. As more fully described in NOTE 1, holders of Allowed 11% Senior Note
Claims held by creditors other than CSFB received cash payments totaling $15.2
million, subject to completion of the exchange of securities as contemplated by
the Plan.
As more fully described in NOTE 8, in order to provide Westbridge with
sufficient funds to make the cash distributions to the holders of the Allowed
11% Senior Notes under the Plan, the Company entered into a Stock Purchase
Agreement with CSFB, a significant noteholder, pursuant to which CSFB, subject
to the conditions contained therein, purchased all of the shares of the New
Preferred Stock which were not otherwise distributed under the Plan.
CONVERTIBLE NOTES
During the second quarter of 1997, the Company completed the sale of $70.0
million aggregate principal amount of its Convertible Notes, due 2004, in an
underwritten public offering. Contractual interest on the Convertible Notes was
payable in semi-annual installments on May 1 and November 1 of each year,
commencing November 1, 1997. In November 1997, the Company suspended the
scheduled interest payments on these Convertible Notes. At the Petition Date,
approximately $7.3 million of unpaid interest was accrued. The Company did not
accrue interest on its Convertible Notes after the Petition Date as it was
unlikely such interest would be paid under the Plan. The amount of contractual
interest that would have otherwise been accrued from the Petition Date to
December 31, 1998 totaled $2.7 million, and such contractual interest would have
continued to accrue at $14,583 per day from January 1, 1999 until the Effective
Date.
As of the Effective Date, these Convertible Notes were canceled, extinguished
and retired. Holders of the Convertible Notes and allowed general unsecured
creditors will receive their pro rata share of 94% of the New Common Stock
issued on the Effective Date, subject to the completion of the exchange
requirements as contemplated by the Plan.
NOTE 7 - CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending claim
reserve balances, on a gross-of-reinsurance basis, for 1998, 1997 and 1996, to
the amounts reported in the Company's balance sheet:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance at January 1 (Gross) $ 51,784 $ 39,186 $ 39,063
Less: reinsurance recoverables on
claim reserves 2,955 1,456 3,419
-------------- -------------- -------------
Net balance at January 1 48,829 37,730 35,644
Incurred related to:
Current year 98,203 111,459 80,821
Prior years (95) 22,512 14,242
-------------- -------------- -------------
Total incurred 98,108 133,971 95,063
-------------- -------------- -------------
Current year reserves acquired - - 788
Paid related to:
Current year 67,911 77,168 68,199
Prior years 36,675 45,704 25,297
Current year acquired business - - 269
-------------- -------------- -------------
Total paid 104,586 122,872 93,765
-------------- -------------- -------------
Balance at December 31 42,351 48,829 37,730
Plus: reinsurance recoverables
on claim reserves 1,765 2,955 1,456
-------------- -------------- -------------
Balance at December 31 (Gross) $ 44,116 $ 51,784 $ 39,186
============== ============== =============
</TABLE>
Included in reinsurance recoverables on claim reserves is approximately $0.7
million and $1.9 million relating to paid claims as of December 31, 1998 and
1997, respectively.
NOTE 8 - PREFERRED STOCK
NEW PREFERRED STOCK
Pursuant to the Plan, the Company authorized 40,000 shares of non-voting New
Preferred Stock, of which 23,257 shares are owned by CSFB (See NOTE 1).
The following summarizes the significant terms of the New Preferred Stock:
Stated value of $1,000 share.
Cumulative annual dividend rate of $102.50 per share payable annually in
arrears on the last day of January in each year by issuance of cash or
additional shares of New Preferred Stock.
Each share of New Preferred Stock is convertible at any time into 204.8897
shares of New Common Stock at an initial conversion price of $4.88 per
share, subject to customary anti-dilution adjustments.
The right to designate one additional director prior to June 24, 1999, and
the right to elect one director if dividends are in arrears.
The New Preferred Stock is mandatorily redeemable in cash on the fifth
anniversary of the Effective Date in an amount equal to the stated value per
share plus all accrued and unpaid dividends thereon to the date of redemption.
Prior to the Effective Date of the Plan (see NOTE 1), the Company had the
following preferred stock securities outstanding:
OLD PREFERRED STOCK
On April 12, 1994, the Company issued 20,000 shares of Old Preferred Stock, at a
price of $1,000 per share. The Old 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 Old
Preferred Stock:
Cumulative annual dividend rate of 8.25%, subject to increase to 9.25%,
upon non-compliance by the Company with certain restrictions.
Seven thousand sixty-five (7,065) shares of the Old Preferred Stock were
converted into shares of Old Common Stock during the year ended December
31, 1998. The converted shares of Old Preferred Stock had an aggregate
liquidation preference of $7,065,000 and were converted into 840,071 shares
of Old Common Stock. Old Preferred Stock was convertible into 1,419,144
shares of Common Stock as of December 31, 1998 at a conversion price of
$8.41 per share.
In November 1997, the Company suspended the scheduled dividend payments on its
Old Preferred Stock. The failure to declare and pay the scheduled dividend on
the Old Preferred Stock constituted an event of non-compliance under the terms
of the Old Preferred Stock Agreement and resulted in an immediate increase from
8.25% to 9.25% in the rate at which dividends accrued on the Old Preferred
Stock. At the Petition Date, approximately $1.3 million of cumulative, unpaid
dividends were accrued. The Company did not accrue dividends on its Old
Preferred Stock after the Petition Date as it was unlikely such dividends would
be paid under the Plan. The amount of contractual dividends that would have
otherwise been accrued from the Petition Date to December 31, 1998 totaled $0.6
million, and such contractual dividends would have continued to accrue at $3,067
per day from January 1, 1999 until the Effective Date.
As of the Effective Date, shares of Old Preferred Stock were canceled,
extinguished and retired. Holders of Old Preferred Stock will receive their pro
rata share of 4% of the New Common Stock issued on the Effective Date and New
Warrants to purchase their pro rata share of up to 2% of the number of shares of
New Common Stock issued and outstanding on the Effective Date, on a fully
diluted basis, subject to the completion of the exchange of securities
contemplated by the Plan.
NOTE 9 - DEFERRED POLICY ACQUISITION COSTS ("DPAC")
A summary of DPAC follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- ----------------
<S> <C> <C> <C>
Balance at beginning
of year $ 19,165 $ 83,871 $ 56,977
Deferrals:
Commissions 3,339 27,933 39,853
Issue costs 1,032 3,186 5,285
--------------- ----------------- ----------------
23,536 114,990 102,115
Cost of insurance purchased - - 4,663
Recognition of premium
deficiency (4,948) (64,952) -
Amortization expense (4,411) (30,873) (22,907)
=============== ================= ================
Balance at end of year $ 14,177 $ 19,165 $ 83,871
=============== ================= ================
</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 $0.8 million and $0.6 million in 1998 and 1997, respectively, net
of interest accretion of $0.3 million and $0.2 million.
In connection with the Company's acquisition of NFIC and AICT in 1994 and prior
to the recognition of a premium deficiency as described below, the related cost
of insurance purchased was amortized in relation to premium revenues over the
remaining life of the business. Interest accrued on the unamortized balance at
7% per year. Amortization of this cost of insurance purchased was approximately
$0, $1.5 million and $1.8 million in 1998, 1997 and 1996, respectively, net of
the respective interest accretion of $0, $0.3 million and $0.5 million.
RECOGNITION OF PREMIUM DEFICIENCY. During 1997, 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 amortization of 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 old 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.
GAAP requires the immediate recognition of a premium deficiency by charging the
unamortized DPAC to expense. Accordingly, 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 had no impact on the Company's cash position
at December 31, 1997 nor did it affect the statutory capital and surplus of the
Insurance Subsidiaries.
During 1998, the Company continued to experience adverse loss ratios and
declining persistency on its old Medical Expense and Medicare Supplement
products, although the loss ratios for 1998 reflected an improvement over 1997.
As a result of these factors, the Company undertook a further revaluation of the
recoverability of DPAC in the third quarter of 1998. Based on the results of
this review, the Company determined that an additional premium deficiency
existed and recorded a non-cash charge to expense of approximately $5.0 million
in the third quarter of 1998. This adjustment had no impact on the Company's
cash position or on the statutory capital and surplus of the Insurance
Subsidiaries.
NOTE 10 - INCOME TAXES
The provision for (benefit from) income taxes is calculated as the amount of
income taxes expected to be payable for the current year plus (or minus) the
deferred income tax expense (or benefit) represented by the change in the
deferred income tax accounts at the beginning and end of the year. The effect of
changes in tax rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation allowance, reducing any recognized
deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized.
The Company and its wholly owned subsidiaries, other than NFIC, AICT and FLICA,
file a consolidated federal income tax return. NFIC, AICT and FLICA file
separate federal income tax returns.
The provision for (benefit from) U.S. federal income taxes charged to continuing
operations was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C>
Current 231 $ (926) $ (804)
Deferred - (12,342) 5,214
------------- ------------- ---------------
Total provision for (benefit from) income taxes $ 231 $ (13,268) $ 4,410
============= ============= ===============
</TABLE>
Provision has not been made for state and foreign income tax expense since such
expense is minimal. In addition, as described in NOTE 15 - "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 $0.5 million 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Statutory tax rate (34%) (34%) 34%
Unutilized loss carryforwards 31% 22% -
Other items, net 4% - 1%
- - -
Effective tax rate 1% (12%) 35%
======= ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
-------------- ---------------
(in thousands)
<S> <C> <C>
Deferred Tax Liabilities
Unrealized gain on investments $ 2,761 $ 2,410
Other deferred tax liabilities 1,620 1,118
-------------- ---------------
Total deferred tax liability $ 4,381 $ 3,528
-------------- ---------------
Deferred Tax Assets:
Deferred policy acquisition costs $ 5,035 $ 3,662
Policy reserves 2,921 3,514
Net operating loss carryforwards 28,149 24,640
Tax credit carryforwards - 11
Other deferred tax assets 4,725 429
Valuation allowance (36,449) (28,728)
-------------- ---------------
Total deferred tax asset 4,381 $ 3,528
============== ===============
Net deferred tax liability $ - $ -
============== ===============
</TABLE>
A valuation allowance of approximately $36.4 million and $28.7 million has been
provided for the year ended December, 31, 1998 and 1997, respectively, 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. The change in the valuation allowance for 1998 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, 1998, 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, 1998, NFL has approximately $7.8 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, 1998, the Company and its wholly owned subsidiaries have
aggregate net operating loss carryforwards of approximately $80.4 million and
$71.9 million for regular tax and alternative minimum tax purposes,
respectively, which expire in 2003 through 2014. However, the Company's
emergence from its Chapter 11 Case on March 24, 1999 is expected to
significantly limit the availability of such net loss operating carryforwards to
offset future taxable income.
NOTE 11 - STATUTORY CAPITAL AND SURPLUS
Under applicable Delaware law, NFL must maintain minimum aggregate statutory
capital and surplus of $550,000. Under applicable Texas law, NFIC and AICT must
each maintain minimum aggregate statutory 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, 1998, aggregate statutory
capital and surplus for NFL, NFIC, AICT and FLICA was $15.9 million, $2.1
million, $2.8 million and $11.5 million, respectively. Although NFIC's capital
and surplus is below $3.5 million at December 31, 1998, 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) income for NFL, NFIC, AICT and FLICA for the year ended
December 31, 1998, were $(5.9) million, $(3.3) million, $(2.0) million and $0.6
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.
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 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 1999, 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 excluding 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 1999 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 1999 without the prior approval of the Mississippi Insurance
Commissioner as it recorded a net loss from operations for the year ending
December 31, 1998.
Generally, all states require insurance companies to maintain statutory 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 1998, the Company 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 NAIC) 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, 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 statutory 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, 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.
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 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, 1998 and 1997.
As a result of the statutory losses sustained by the Insurance Subsidiaries
since 1997, material transactions are subject to the approval by the department
of insurance in each domiciliary state. In December 1997, NFIC, in response to
these losses as well as the projected inability to meet RBC requirements, took
appropriate steps to voluntarily cease the sale and underwriting of new
business. In the second quarter of 1998, AICT significantly reduced the level of
sales and underwriting of new business. NFIC and AICT have also entered into a
voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code,
providing for the continued monitoring of the operations of NFIC and AICT by the
TDI. The Company has no current plans to underwrite new products in NFIC.
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 12 - EMPLOYEE BENEFIT 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 ten investment funds at the discretion of the employee. Until
July 1998, Company contributions were in the form of Old Common Stock.
Subsequent to July 1998, the Company began making cash contributions. The
Company's contributions to the plan in 1998, 1997 and 1996 approximated $80,000,
$106,000 and $102,000, respectively.
The Company's incentive stock option plans adopted as of July 1, 1982, September
5, 1985, and March 26, 1992, and the Company's restricted stock plan adopted as
of April 19, 1996, have been canceled as of the Effective Date. All outstanding
grants of stock options or restricted stock have been extinguished as
contemplated by the terms of the Plan.
1999 STOCK OPTION PLAN
Pursuant to the Plan, on March 24, 1999, the Company's Board of Directors
adopted the 1999 Stock Option Plan (the "1999 Plan") in order to further and
promote the interest of the Company, its subsidiaries and its shareholders by
enabling the Company and its subsidiaries to attract, retain and motivate
employees, non-employee directors and consultants (including marketing agents)
or those who will become employees, non-employee directors and consultants
(including marketing agents), and to align the interests of those individuals
and the Company's shareholders. To do this, the 1999 Plan offers equity-based
opportunities providing such employees and consultants with a proprietary
interest in maximizing the growth, profitability and overall success of the
Company and its subsidiaries.
The 1999 Plan became effective on the date of its adoption by the Company and
will remain in effect until December 31, 2008, except with respect to awards (as
that term is defined in the 1999 Plan) then outstanding, unless terminated or
suspended by the Board of Directors at that time. After such date no further
awards shall be granted under the 1999 Plan.
NOTE 13 - REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on
both life and accident and health business. Reinsurance agreements are used to
limit maximum losses and provide greater diversity of risk. The Company remains
liable to policyholders to the extent the reinsuring companies are unable to
meet their treaty obligations. Total accident and health premiums of $2.8
million, $3.6 million and $4.1 million, were paid to reinsurers in 1998, 1997,
and 1996, respectively. Face amounts of life insurance in force approximated
$37.5 million, $53.1 million and $87.0 million at December 31, 1998, 1997 and
1996, respectively. In 1998, NFL entered into an excess of loss reinsurance
agreement on a closed block of annually renewable term life insurance. NFL's
retention limit is $25,000 per year, and $22,046 of premiums were paid to the
reinsurer for the year ended December 31, 1998. No other life insurance products
were reinsured during 1998, 1997 or 1996.
<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 in force 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 15 -
"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 Specified Disease business. For the years ended
December 31, 1998, 1997 and 1996, $0, $0 and $2.3 million, respectively, of
assumed premiums under this coinsurance treaty are included as premium revenue
in the consolidated financial statements. This coinsurance treaty was canceled
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, 1998, 1997 and 1996, $0, $0 and $1.7 million, respectively,
of assumed premiums under the coinsurance treaty are included as revenue in the
consolidated financial statements. This coinsurance treaty was canceled
subsequent to the acquisition of the remaining interest of FLICA's parent FHC,
on May 31, 1996.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating leases,
relating primarily to office facilities and data processing equipment having a
remaining term in excess of one year, at December 31, 1998, aggregated $6.7
million. The amounts due by year are as follows: 1999-$2.3 million; 2000-$1.4
million; 2001-$1.1 million; 2002-$1.0 million; 2003-$0.4 million; and
thereafter-$0.5 million. Aggregate rental expense included in the consolidated
financial statements for all operating leases approximated $3.2 million, $4.4
million and $4.2 million in 1998, 1997 and 1996, 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>
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 results of operations.
NOTE 15 - EXTRAORDINARY ITEM
For the year ended December 31, 1997, the Company recognized an aggregate of
$1.0 million in extraordinary losses, net of taxes. Of this amount, (i) $0.6
million 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 6 "Financing Activities"); and (ii) $0.4
million resulted from the termination and recapture of the block of reinsured
policies referred to in NOTE 13 - "Reinsurance."
NOTE 16 - 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,
--------------------------------------------------
1998 1997 1996
------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C>
Net (loss) income as reported by the Insurance
Subsidiaries on a statutory basis $ (8,108) $ (49,618) $ 870
Additions to (deductions from) statutory basis:
Future policy benefits and claims 806 2,493 (2,016)
FHC pre-acquisition statutory earnings - - (1,388)
Deferred policy acquisition costs,
net of amortization (41) 735 22,434
Deferred, uncollected and advance premiums (104) 44 (1,719)
Coinsurance Funds Withheld reinsurance treaty - 8,575 (7,336)
Recognition of premium deficiency (4,948) (64,952) -
Extraordinary item, net of tax - (1,007) -
Income taxes 1,250 13,970 (4,214)
Subsidiary companies, eliminations,
and other adjustments (10,776) (6,664) 2,001
Other, net (364) (720) (371)
------------- ------------- ---------------
Consolidated net (loss) income as reported
herein on a GAAP basis $ (22,285) $ (97,144) $ 8,261
============= ============= ===============
</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,
--------------------------------------------------
1998 1997 1996
------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C>
Capital and surplus as reported by the Insurance
Subsidiaries on a statutory basis $ 17,937 $ 21,592 $ 18,648
Deductions from (additions to) a statutory basis:
Future policy benefits and claims (9,521) (10,147) 10
Deferred policy acquisition costs 14,177 19,165 83,871
Nonadmitted assets 2,123 832 4,818
Coinsurance Funds Withheld reinsurance treaty - - (8,831)
Income taxes - (1,037) (13,242)
Deferred, uncollected and advance premiums 136 249 (12,651)
Asset valuation reserve 796 1,049 1,157
Interest maintenance reserve 1,380 1,499 1,475
Unrealized appreciation on investments,
net of tax 3,037 3,446 1,054
Other, net 727 342 3,088
------------- ------------- ---------------
Combined insurance subsidiaries stockholders'
equity on a GAAP basis 30,792 36,990 79,397
Combined non-insurance subsidiaries
stockholders' equity (deficit) on a GAAP basis 7,887 477 (1,409)
Eliminations and other adjustments (100,759) (82,885) (30,085)
------------- ------------- ---------------
Consolidated stockholders' (deficit) equity as
reported herein on a GAAP basis $ (62,080) $ (45,418) $ 47,903
============= ============= ===============
</TABLE>
<PAGE>
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for each of the Company's last two
years of operations is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
1998 March June September December
- - ----------------------------------------------------- ------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Premium income $ 37,439 $ 35,251 $ 33,278 $ 29,749
Net investment income 3,166 3,192 2,929 2,724
Net realized gains on investments 262 267 1,576 37
Fee, service and other income 4,062 4,037 4,085 4,007
Benefits, claims and other expenses 50,654 46,376 48,531 42,554
Loss before income taxes (5,725) (3,629) (6,663) (6,037)
Preferred stock dividend 471 (62) 111 -
Loss applicable to common stockholders $ (5,437) $ (3,087) $ (7,018) $ (7,263)
Earnings per share:
Basic $ (0.88) $ (0.48) $ (1.01) $ (1.05)
Diluted $ (0.88) $ (0.48) $ (1.01) $ (1.05)
</TABLE>
<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
Income (loss) before income taxes and
extraordinary items 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 loss $ - $ (0.16) $ - $ -
Net income (loss) $ 0.22 $ (1.23) $ (3.29) $ (11.64)
Diluted:
Income (loss) before extraordinary item $ 0.20 $ (1.07) $ (3.29) $ (11.64)
Extraordinary loss $ - $ (0.16) $ - $ -
Net income (loss) $ 0.20 $ (1.23) $ (3.29) $ (11.64)
</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,
-----------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net investment income $ 1,090 $ 1,579 $ 62
Realized gains on investments 475 984 -
Intercompany income derived from:
Interest on Surplus Certificates 78 78 78
Rental of leasehold improvements and equipment 397 1,926 1,703
Interest on advances to subsidiaries 254 266 192
Other income 121 228 106
--------------- -------------- ---------------
2,415 5,061 2,141
--------------- -------------- ---------------
General and administrative expenses 2,319 4,349 2,128
Reorganization expense 7,856 1,324 -
Taxes, licenses and fees 45 164 90
Interest expense 5,933 5,846 2,496
--------------- -------------- ---------------
16,153 11,683 4,714
--------------- -------------- ---------------
Loss before income taxes and equity in undistributed
net earnings of subsidiaries and FHC (13,738) (6,622) (2,573)
(Benefit from) provision for income taxes (235) 3,939 (432)
--------------- -------------- ---------------
(13,503) (10,561) (2,141)
Equity in undistributed net (losses) earnings of
subsidiaries and FHC (8,782) (86,419) 10,402
--------------- -------------- ---------------
(Loss) income before extraordinary item (22,285) (96,980) 8,261
Extraordinary loss (1) - 164(1) -
--------------- -------------- ---------------
Net (loss) income (22,285) (97,144) 8,261
Preferred stock dividends 520 1,572 1,650
--------------- -------------- ---------------
(Loss) income applicable to common stockholders (22,805) (98,716) 6,611
Retained (deficit) earnings at beginning of year (81,530) 17,186 10,575
--------------- -------------- ---------------
Retained (deficit) earnings at end of year $ (104,335) $ (81,530) $ 17,186
=============== ============== ===============
</TABLE>
(1) From early extinguishment of debt, net of income tax benefit of $85.
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. consolidated financial statements as of December 31,
1998 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,
---------------------------------------------------
1998 1997
---------------------- ------------------------
<S> <C> <C>
Assets:
Cash and other short-term investments $ 985 $ 3,317
Fixed maturities, at market value 10,433 15,198
Equity securities, at market value 1,010 1,038
Investment real estate - 566
Investment in consolidated subsidiaries 39,584 38,224
Accrued investment income 213 288
Leasehold improvements and equipment, net - 960
Advances due from subsidiaries 2,107 4,219
Receivable from subsidiary on Surplus Certificate 777 777
Other assets 3,088 4,580
---------------------- ------------------------
Total Assets $ 58,197 $ 69,167
====================== ========================
Liabilities:
Senior subordinated notes, net $ 19,523 $ 19,447
Convertible subordinated notes 70,000 70,000
Payable to subsidiaries - 36
Interest and dividends payable 11,315 4,861
Other liabilities 7,504 1,241
---------------------- ------------------------
Total Liabilities 108,342 95,585
---------------------- ------------------------
Redeemable Preferred Stock 11,935 19,000
---------------------- ------------------------
Stockholders' Equity:
Common stock 703 620
Capital in excess of par value 37,641 30,843
Accumulated other comprehensive income,
net of tax 3,911 4,649
Deficit (104,335) (81,530)
---------------------- ------------------------
Total Stockholders' Deficit (62,080) (45,418)
---------------------- ------------------------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Deficit $ 58,197 $ 69,167
====================== ========================
</TABLE>
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. consolidated financial statements as of December 31,
1998 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,
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
(Loss) income applicable to common stockholders $ (22,805) $ (98,716) $ 6,611
Adjustments to reconcile net (loss) income to cash
provided by (used for) operating activities:
Equity in undistributed net loss (income) of subsidiaries 8,782 86,419 (10,402)
Depreciation expense 89 422 452
Accrued investment income 75 (238) (16)
Decrease (increase) in other assets 1,043 51 (7)
Advances (due from) due to subsidiaries, net (2,105) (2,536) 1,471
Increase (decrease) in other liabilities 6,263 665 (137)
Increase (decrease) in interest and dividend payable 6,454 4,446 (1)
Other, net 595 2,980 457
--------------- --------------- ---------------
Net Cash Used For Operating Activities (1,609) (6,507) (1,572)
--------------- --------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of investments 5,176 42,268 -
Cost of investments acquired - (57,366) -
Additions to leasehold improvements and equipment,
net of retirements (27) (349) (165)
(Increase) decrease in other assets (283) 288 158
Investment in subsidiaries (6,321) (43,105) 1,038
--------------- --------------- ---------------
Net Cash (Used For) Provided by Investing Activities (1,455) (58,264) 1,031
--------------- --------------- ---------------
Cash Flows From Financing Activities:
Decrease (increase) in other assets 732 (1,914) 218
Issuance of convertible notes - 70,000 -
(Retirement) issuance of note payable - (1,103) 103
Issuance of common stock - 140 140
Purchase and cancellation of common stock - (276) (125)
--------------- --------------- ---------------
Net Cash Provided By Financing Activities 732 66,847 336
--------------- --------------- ---------------
(Decrease) increase in Cash and Short-Term
Investments During the Year (2,332) 2,076 (205)
Cash and Other Short-Term Investments at
Beginning of Year 3,317 1,241 1,446
=============== =============== ===============
Cash and Other Short-Term Investments at End of Year $ 985 $ 3,317 $ 1,241
=============== =============== ===============
</TABLE>
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. consolidated financial statements as of December 31,
1998 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, 1998:
Insurance operations $14,177 $53,871 $44,116 $135,717 $ 8,314 $ 99,419 $ 4,411 $ 44,447 $ 31,216
Other activities -- -- -- -- 2,607 -- -- 23,828 =======
Corporate (parent company) -- -- -- -- 1,090 -- -- 16,009
======= ======= ======= ======= ======= ======= ======= ========
Total $14,177 $53,871 $44,116 $135,717 $12,011 $ 99,419 $ 4,411 $ 84,284
======= ======= ======= ======= ======= ======= ======= ========
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
Other 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
Other 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
======= ======= ======= ======= ======= ======= ======= ========
</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, 1998:
Life insurance in force $ 44,815 $ 7,275 $ - $ 37,540 -
=============== ============== ============== ===============
Premiums:
Life $ 664 $ 22 $ - $ 642 -
Accident and health 136,291 2,812 1,596 135,075 1.18%
--------------- -------------- -------------- ---------------
Total premiums $ 136,955 $ 2,834 $ 1,596 $ 135,717 1.18%
=============== ============== ============== ===============
YEAR ENDED DECEMBER 31, 1997:
Life insurance in force $ 53,065 $ - $ - $ 53,065 -
=============== ============== ============== ===============
Premiums:
Life $ 832 $ - $ - $ 832 -
Accident and health 161,865 3,635 2,035 160,265 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%
=============== ============== ============== ===============
</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, 1998:
Allowance for doubtful agents' balances $ 4,531 $ 645 $ - $ 5,176
================ ================ ================ ===============
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
================ ================ ================ ===============
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated herein by reference to
"Election of Directors" from the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders, which will be filed on or before April 30,
1999. Information relating to executive officers is contained under the heading
"Executive Officers" in PART I hereof.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation is incorporated herein by reference to "Election of
Directors -- Executive Compensation" from the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders, which will be filed on or
before April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of certain beneficial owners and
management is incorporated herein by reference to "Principal Stockholders" and
"Election of Directors -- Security Ownership of Management" from the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders, which
will be filed on or before April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transaction is
incorporated herein by reference to "Principal Stockholders" and "Election of
Directors" from the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders, which will be filed on or before April 30, 1999.
<PAGE>
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.
(3) EXHIBITS:
The following exhibits are filed herewith. Exhibits incorporated by reference
are indicated in the parentheses following the description.
2.1 First Amended Plan of Reorganization of Westbridge Capital Corp. Under
Chapter 11 of the Bankruptcy Code, dated as of October 30, 1998
(incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on
September 21, 1998).
2.2 Amended Disclosure Schedule Accompanying the First Amended Plan of
Reorganization of Westbridge Capital Corp. under Chapter 11 of the
Bankruptcy Code (incorporated by reference to Exhibit 2 to the Company's
Form 8-K filed on September 21, 1998).
2.3 Findings of Fact, Conclusions of Law, and Order confirming the First
Amended Plan of Reorganization of Westbridge Capital Corp. dated October
30, 1998, as modified (incorporated by reference to Exhibit 2 to the
Company's Form 8-K filed on December 29, 1998).
3.1 Second Amended and Restated Certificate of Incorporation of the Company
filed with the Secretary of State of Delaware on March 24, 1999
(incorporated by reference to Exhibit 3.1 to the Company's Form 8-A filed
on March 25, 1999).
3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999
(incorporated by reference to Exhibit 3.2 to the Company's Form 8-A filed
on March 25, 1999).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Company's Form 8-A filed on March 25, 1999).
4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement
(incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed
on March 25, 1999).
4.3 Form of Warrant Agreement dated as of March 24, 1999, between the Company
and LaSalle National Bank, as warrant agent (incorporated by reference to
Exhibit 4.3 to the Company's Form 8-A filed on March 25, 1999).
4.4* Form of Preferred Stock Certificate.
<PAGE>
10.1 Credit 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).
10.2 Guaranty 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).
10.3 Pledge 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).
10.4 Security 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).
10.5 Second 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).
10.6 Amended 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).
10.7 Lock-Up Agreement, dated as of September 16, 1998, by and among the Company
and Credit Suisse First Boston Corporation (incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on September 21, 1998).
10.8 Stock Purchase Agreement, dated as of September 16, 1998, between the
Company and Credit Suisse First Boston Corporation (incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K filed on September 21,
1998).
10.9 Employment Agreement, dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell
(incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed
on September 21, 1998).
10.10Employment Agreement dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick H. O'Neill
(incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
on September 21, 1998).
10.11* First Amendment and Waiver to Credit Agreement among Westbridge Funding
Corporation, Westbridge Capital Corp. and LaSalle National Bank dated as of
September 8, 1998.
10.12* First Amendment to Guaranty Agreement dated as of March 24, 1999 between
Westbridge Capital Corp. in favor of LaSalle National Bank.
10.13* Registration Rights Agreement dated as of March 24, 1999 between the
Company and Special Situations Holdings, Inc. - Westbridge.
10.14* 1999 Stock Option Plan dated as of March 24, 1999.
21.1* List of Subsidiaries of Ascent Assurance, Inc.
24.1* Consent of PricewaterhouseCoopers LLP
27.1* Financial Data Schedule.
(b) REPORT ON FORM 8-K.
The Registrant filed a Report on Form 8-K dated March 25, 1999 in
response to Item 5, Other Events, to report its emergence on March 24,
1999 from the Chapter 11 Case commenced on September 16, 1998.
The Registrant filed a Report on Form 8-K dated December 29, 1998 in
response to Item 3, Bankruptcy or Receivership, to report the
confirmation of its First Amended Plan of Reorganization (the "Plan")
under Chapter 11 of Title 11 of the United States Bankruptcy Court in
the District of Delaware. In conjunction with this filing, the Company
submitted a copy of the Confirmation Order with accompanying exhibits,
including a copy of the Plan as confirmed.
- - ------------------------
* 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 29th day of March,
1999.
ASCENT ASSURANCE, INC.
(FORMERLY, WESTBRIDGE CAPITAL CORP.)
/S/ PATRICK J. MITCHELL
(Patrick J. Mitchell,
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/ PATRICK J. MITCHELL Director, Chairman of the Board March 29, 1999
(Patrick J. Mitchell) and Chief Executive Officer
(Principal Executive Officer)
(Principal Financial and Accounting
Officer)
/S/ JOHN H. GUTFREUND Director March 29, 1999
(John H. Gutfreund)
/S/ RICHARD H. HERSHMAN Director March 29, 1999
(Richard H. Hershman)
/S/ MICHAEL A. KRAMER Director March 29, 1999
(Michael A. Kramer)
/S/ ROBERT A. PEISER Director March 29, 1999
(Robert A. Peiser)
/S/ JAMES K. STEEN Director March 29, 1999
(James K. Steen)
</TABLE>
<PAGE>
INDEX OF EXHIBITS
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
4.4* Form of Preferred Stock Certificate.
10.11* First Amendment and Waiver to Credit Agreement among Westbridge
Funding Corporation, Westbridge Capital Corp. and LaSalle
National Bank dated as of September 8, 1998.
10.12* First Amendment to Guaranty Agreement dated as of March 24, 1999
between Westbridge Capital Corp. in favor of LaSalle National
Bank.
10.13* Registration Rights Agreement dated as of March 24, 1999 between
the Company and Special Situations Holdings, Inc. - Westbridge.
10.14* 1999 Stock Option Plan dated as of March 24, 1999.
21.1* List of Subsidiaries of Ascent Assurance, Inc.
24.1* Consent of PricewaterhouseCoopers LLP
27.1* Financial Data Schedule.
* Filed Herewith
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ASCENT ASSURANCE, INC.
(FORMERLY, WESTBRIDGE CAPITAL CORP.)
<TABLE>
<CAPTION>
PERCENTAGE SUBSIDIARY OWNERSHIP
<S> <C>
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. Ascent Funding, Inc. (Delaware) 100%
(formerly, Westbridge Funding Corporation)
7. Foundation Financial Services, Inc. (Nevada) 100%
8. NationalCare(R) Marketing, Inc. (Delaware) 100%
(formerly, Westbridge Marketing Corporation)
9. Westbridge Printing Services, Inc. (Delaware) 100%
10. Ascent Management, Inc. (Delaware) 100%
(formerly, Westbridge Management Corp.)
11. Ascent Financial, Inc. (Delaware) 100%
(formerly, Westbridge Financial Corp.)
12. Precision Dialing Services, Inc. (Delaware) 100%
13. Senior Benefits, LLC (Arizona) 100%
14. American Senior Security Plans, LLC (Delaware) 100%
15. Health Care-One Marketing Group, Inc. (Texas) 80%
16. LifeStyles Marketing Group, Inc. (Delaware) 100%
17. Health Care-One Insurance Agency, Inc. (California) 50%
</TABLE>
<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 29, 1999, appearing on page 40 of this
Form 10-K.
/S/ PRICWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 1999
<PAGE>
EXHIBIT 4.4
NY1:#3209613v1
Incorporated under the Laws
of the State of Delaware
ASCENT ASSURANCE, INC.
SERIES A CONVERTIBLE PREFERRED STOCK CERTIFICATE
This certifies that ______________ is the owner of __________
fully paid and non-assessable shares of the Series A Convertible Preferred Stock
of the par value of $0.01 per share of Ascent Assurance, Inc. (hereinafter
called the "Corporation") transferable on the books of the Corporation in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Certificate of Incorporation
and By-Laws of the Corporation and the amendments from time to time made
thereto, copies of which are or will be on file at the principal office of the
Corporation, to all of which the holder by acceptance hereof assents.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
ASCENT ASSURANCE, INC.
By /S/ PATRICK J. MITCHELL
Chairman of the Board
Attest:
/S/ PATRICK H. O'NEILL
Secretary
<PAGE>
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AUTHORIZED TO BE ISSUED AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AN/OR RIGHTS. ANY SUCH REQUEST MAY BE ADDRESSED
TO THE SECRETARY OF THE CORPORATION.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT - ....Custodian...
TEN ENT -as by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
Survivorship and not as tenants Act.........................
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - ------------------------------------------------------------------------------
(Please print or typewrite name and address of Assignee)
- - ------------------------------------------------------------------------------
_________________________________________________Shares of the stock represented
by the within Certificate, and do hereby irrevocably constitute and appoint
___________________ ____________________________Attorney to transfer the said
stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated _________________________
Signature(s) Guaranteed ___________________________________________
Notice: The Signature to this
Assignment must correspond
with the name as written
upon the Fact of the
Certificate, in every
particular, without
alteration or enlargement,
or any change whatever.
By______________________________
The Signature should be guaranteed by an eligible guarantor
institution (Banks, Stockbrokers, savings and loan
associations and credit unions with membership in an
approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17 Ad-15.
<PAGE>
EXHIBIT 10.11
FIRST AMENDMENT AND
WAIVER TO CREDIT AGREEMENT
AMONG WESTBRIDGE FUNDING CORPORATION,
WESTBRIDGE CAPITAL CORPORATION, AND
LASALLE NATIONAL BANK
Dated September 8, 1998
The First Amendment and Waiver ("Amendment") to that certain Credit
Agreement, dated as of June 6, 1997, as amended from time to time (collectively,
"Credit Agreement"), by and between LaSalle National Bank ("Bank") and
Westbridge Funding Corporation ("Borrower") is entered into as of the date
stated above by the Borrower, the Bank and Westbridge Capital Corporation (the
"Guarantor"). Capitalized terms used herein without definition shall have the
respective meanings assigned thereto in the Credit Agreement.
WITNESSETH:
WHEREAS, the Bank and the Borrower are parties to the Credit Agreement; and
WHEREAS, as condition to the Credit Agreement, the Guarantor issued its
Guaranty to the Bank of all of the Obligations of the Borrower to the Bank
pursuant to the Credit Agreement and the related Loan Documents;
WHEREAS, the Borrower and the Guarantor have advised the Bank that the
Guarantor intends to file a voluntary petition for relief in the United States
Bankruptcy Court, District of Delaware, pursuant to Chapter 11 of the Bankruptcy
Code (the "Proceeding") on or about September 10, 1998; and
WHEREAS, pursuant to the Credit Agreement, the commencement of the
Proceeding constitutes one or more Events of Default; and
WHEREAS, upon the occurrence of any Event of Default, the Bank may exercise
various rights and remedies provided to it in the Loan Documents, or by
applicable law or in equity, including, without limitation, terminating the
Commitment, declaring all amounts owing under the Credit Agreement to be
forthwith due and payable, and exercising any and all rights that it may have
with respect to the Collateral (as such term is defined in the Security
Agreement); and
WHEREAS, the Borrower and Guarantor have requested, and the Bank has
agreed, subject to the terms and conditions herein, to waive the occurrence and
continuance of the Events of Default occasioned by the commencement of the
Proceeding; and
WHEREAS, the Borrower has also requested, and the Bank has agreed, to
modify and amend certain provisions of the Credit Agreement to more accurately
reflect certain obligations actually incurred from time to time by the Borrower;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy and sufficiency of which are hereby acknowledged, the Bank, the
Borrower and the Guarantor hereby agree as follows:
1. WAIVER OF EVENTS OF DEFAULT. Subject to the terms hereof, the Bank
hereby waives the Events of Default occasioned as a result of the
commencement of the Proceeding by the Guarantor. Such Waiver is
limited to the Events of Default occasioned by the commencement of the
Proceeding and it is not a waiver with respect to any other Default or
Event of Default which has or may occur pursuant to the terms of the
Credit Agreement generally. In particular, during the term of this
Waiver, the Bank hereby waives any Event of Default arising under the
following provisions of the Credit Agreement, insofar as they apply to
the Guarantor and are occasioned by the commencement of the
Proceeding: (i) Section 8.1(c); (ii) Section 8.1(e), to the extent
relating to compliance with Sections 6.3, 6.4 and 6.9 of the Guaranty,
or Section 9(ii) of the Pledge Agreement, or to the extent performance
of other provisions thereof by the Guarantor is prohibited by the
pendency of the Proceeding; (iii) Section 8.1(j); and (iv) Section
8.1.(k).
2. WAIVER FEE; TERM OF WAIVER. In addition to the conditions set forth in
Section 4 hereof, this Amendment and the effectiveness of the waiver
herein contained is conditioned upon the payment by Borrower to the
Bank of a waiver fee on the date hereof in the amount of $50,000. In
consideration of such fee, and subject to the conditions precedent set
forth in Section 4 hereof, the waiver herein granted shall continue
from the date of the commencement of the Proceeding through and
including March 9, 1999. Thereafter, in the event that a final,
non-applicable order of confirmation has not yet been entered in the
Proceeding, in the sole discretion of the Bank, and so long as no
Default or Event of Default other than those waived hereby has
occurred and is continuing, the Bank may elect to extend the waiver
for one or more 30-day periods, upon the payment by the Borrower to
the Bank of an extension fee for each such 30-day period in the amount
of $15,000. Nothing herein contained shall obligate the Bank to extend
the waiver beyond March 9, 1999, or to grant any additional extensions
after such date. Notwithstanding anything contained in this Section 2
to the contrary, in the event that Guarantor in any way seeks to
modify the treatment of the LaSalle Claim form that provided for in
the Plan (as herein defined) without the Bank's consent, or should an
order of confirmation be entered with respect to any plan of
reorganization which would have the effect of impairing the LaSalle
Claim without the Bank's consent, the waiver contained herein shall
immediately and automatically terminate.
3. AMENDMENT TO CREDIT AGREEMENT. Section 1.1 of the Credit Agreement is
hereby amended, effective as of June 30, 1998, by deleting the defined
term "INTEREST COVERAGE RATIO" and inserting the following in its
stead:
"INTEREST COVERAGE RATIO" at the end of any fiscal quarter means the
ratios of (i) an amount equal to the sum of (a) consolidated GAAP EBIT
of the Borrower and all Subsidiaries for the immediately preceding
four fiscal quarters (ending on such date) PLUS (b) Deferred Revenues
for the immediately preceding four fiscal quarters (ending on such
date), to (2) total Interest Expense of the Borrower and its
Subsidiaries on a consolidated basis for the immediately preceding
four fiscal quarters (ending on such date).
4. CONDITIONS PRECEDENT. This Amendment and the waiver herein contained
is subject to the satisfaction of the following condition precedent:
i. The Guarantor shall file a plan of reorganization and related
disclosure statement substantially in the form delivered by the
Guarantor's counsel to the Bank on August 25, 1998 (the "Plan").
5. COVENANTS OF GUARANTOR. So long as the Proceeding shall continue,
Guarantor hereby covenants and agrees to deliver to the Bank, promptly
following their delivery to the Court, copies of all filings,
pleadings, financial reports, budgets, studies and the like filed in
the Proceeding. All such deliveries shall be in addition to any and
all reporting requirements set forth in the Credit Agreement.
6. REAFFIRMATION. The Borrower hereby reaffirms to the Bank that, except
as modified hereby, the Credit Agreement and all of the Loan Documents
remain in full force and effect and have not been otherwise waived,
modified or amended.
7. GOVERNING LAW AND INTERPRETATION. This Amendment has been delivered in
Chicago, Illinois, and shall be governed by and construed in
accordance with the provisions of the Credit Agreement and the laws
and decisions of the State of Illinois without giving effect to the
conflict of law principles thereunder.
8. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. One or
more counterparts of this waiver may be delivered by telecopier, with
the intention that they shall have the same effect as an original
counterpart thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Waiver
to be duly executed and delivered as of the day and year first above written.
BANK:
LASALLE NATIONAL BANK
By: /S/ JANET R. GATES
Its: FIRST VICE PRESIDENT
BORROWER:
WESTBRIDGE FUNDING CORPORATION
By: /S/ PATRICK J. MITCHELL
Its: PRESIDENT
GUARANTOR:
WESTBRIDGE CAPITAL CORP.
By: /S/ PATRICK J. MITCHELL
Its: PRESIDENT
<PAGE>
EXHIBIT 10.12
FIRST AMENDMENT TO GUARANTY AGREEMENT
This FIRST AMENDMENT TO GUARANTY AGREEMENT (this "Amendment") dated as
of March 24, 1999, is made by Westbridge Capital Corp., a Delaware corporation
(the "Guarantor") for the benefit of LaSalle National Bank (the "Bank"), its
successors and assigns and any and all other Beneficiaries. Capitalized terms
used herein without definition shall have the respective meanings assigned to
them in that certain Guaranty Agreement made by Guarantor in favor of Bank and
dated as of June 26, 1997 (the "Guaranty Agreement").
R E C I TA L S
A. Pursuant to that certain Credit Agreement dated as of June 6, 1997 (the
"Credit Agreement") between Westbridge Funding Corporation (the "Debtor") and
the Bank, the Bank agreed, on certain terms and conditions, to make revolving
loans to the Debtor from time to time in an aggregate principal amount at any
one time outstanding not to exceed $20,000,000 (the "Revolving Loans").
B. The Debtor is an indirect wholly-owned subsidiary of the Guarantor.
C. As a condition to making the Revolving Loans, the Bank required that the
Guarantor execute and deliver the Guaranty Agreement.
D. On September 16, 1998, Guarantor filed its voluntary petition for relief
pursuant to Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court, District of Delaware, Case No. 98-2105 (the "Proceeding").
E. Pursuant to the Credit Agreement, the commencement of the Proceeding
constitutes one or more Events of Default.
F. Pursuant to that certain First Amendment and Waiver to Credit Agreement
dated as of September 8, 1998 among Debtor, Guarantor and the Bank, the Bank
agreed to waive the Events of Default occasioned as a result of the commencement
of the Proceeding, on the condition, among other things, that the Guarantor
agree to restate and reaffirm the Guaranty Agreement and certain other
agreements between Guarantor and the Bank, including, without limitation, that
certain Pledge Agreement dated as of June 26, 1997, made by Guarantor in favor
of the Bank, all pursuant to a Plan of Reorganization acceptable to the Bank
(the "Plan").
G. On December 17, 1998, a confirmation hearing was held with respect to
Guarantor's Plan, and such Plan was approved in all respects.
<PAGE>
NOW, THEREFORE, the Guarantor hereby agrees as follows:
1. AMENDMENTS TO GUARANTY AGREEMENT.
1.1 GENERAL. Each ARTICLE of the Guaranty Agreement is hereby renumbered
so as to be in proper numerical sequence, commencing with ARTICLE 1
and ending with ARTICLE 7.
1.2 DEFINITIONS. The defined term "Consolidated GAAP Net Worth" contained
in Section 1.2 of the Guaranty Agreement is hereby amended by deleting
the parenthetical phrase contained in subsection (d) and inserting the
following in its stead:
"(without giving effect to any increase or decrease to
Consolidated GAAP Net Worth attributable to the application of
SFAS Nos. 115 and 130)".
1.3 FINANCIAL COVENANTS.
(a) Section 6.3 of the Guaranty Agreement is hereby amended by
deleting the reference to "$62,500,000" contained therein and
inserting "$45,000,000" in its stead.
(b) Section 6.4 of the Guaranty Agreement is hereby deleted in its
entirety and INTENTIONALLY DELETED is inserted in its stead.
(c) Section 6.6 of the Guaranty Agreement is hereby amended by
deleting the first sentence thereof and inserting the following
in its stead:
"At any time that the Obligations remain outstanding, permit the
RBC Ratio of any Insurance Subsidiary (excluding NFIC) to be less
than 105%."
(d) Section 6.7 of the Guaranty Agreement is hereby deleted in its
entirety and INTENTIONALLY DELETED is inserted in its stead, and
the Bank hereby consents to any Insurance Subsidiary having an
A.M. Best Rating of NR.
(e) SCHEDULE 6.8 to the Guaranty Agreement is hereby deleted in its
entirety and SCHEDULE 6.8 attached hereto is substituted in its
stead.
1.4 AMENDMENT TO OFFICER'S CERTIFICATE. Attachment 4 to the Officer's
Certificate attached as Exhibit A to the Guaranty Agreement is hereby
deleted in its entirety and Attachment 4 attached hereto is
substituted in its stead.
<PAGE>
2. CONSENT TO CHANGE OF NAME. The Bank hereby consents to the Guarantor's
change of its name to Ascent Assurance, Inc. effective on or about
March 24, 1999.
3. CONDITIONS PRECEDENT. This Amendment is subject to the satisfaction of
the following condition precedent, and thereupon shall be effective as
of March 24, 1999:
(i) The confirmation of the Guarantor' s Plan shall be come final and
non-appealable, and shall in all respects be satisfactory to the
Bank.
4. REAFFIRMATION OF PLEDGE AGREEMENT. The Guarantor hereby reaffirms to
the Bank that the Pledge Agreement is hereby restated in its entirety
and remains in full force and effect as it relates to the Guaranty
Agreement as hereby amended.
5. REAFFIRMATION OF GUARANTY AGREEMENT. The Guarantor hereby reaffirms to
the Bank that, except as modified hereby, the Guaranty Agreement is
hereby restated in its entirety and remains in full force and effect.
6. GOVERNING LAW. This Amendment has been delivered in Chicago, Illinois
and shall be governed by and construed in accordance with the
provisions of the laws and decisions of the State of Illinois, without
giving effect to the conflict of law principles thereunder.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. One or
more counterparts of this Amendment may be delivered by telecopier,
with the intention that they shall have the same effect as an original
counterpart thereof.
<PAGE>
EXHIBIT 10.12
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be duly executed and delivered as of the day and year first above written.
BANK:
LASALLE NATIONAL BANK
By: /S/ JANET R. GATES
Its: SENIOR VICE PRESIDENT
GUARANTOR:
ASCENT ASSURANCE, INC.
(FORMERLY, WESTBRIDGE CAPITAL CORP.)
By: /S/ PATRICK J. MITCHELL
Its: CHAIRMAN AND CEO
<PAGE>
EXHIBIT 10.12
SCHEDULE 6.8
MINIMUM STATUTORY SURPLUS REQUIREMENTS
(in million $)
INSURANCE SUBSIDIARY 1999
- - -------------------------------------------------------------
NFL $13.5
- - -------------------------------------------------------------
NFIC $ 1.4
- - -------------------------------------------------------------
AIC $ 1.4
- - -------------------------------------------------------------
FLICA $ 9.5
- - -------------------------------------------------------------
<PAGE>
EXHIBIT 10.12
Attachment 4
to
Officer's Certificate
Computations and Information
Showing Compliance with
Sections 6.3 to 6.9
of the
Guaranty Agreement
<TABLE>
<CAPTION>
Except as otherwise defined herein, terms used herein shall have the meanings
set forth in the Guaranty Agreement.
<S> <C>
SECTION 6.3. MINIMUM CONSOLIDATED GAAP NET WORTH
1. Consolidated GAAP Net Worth as of the Guarantor
the fiscal quarter ending ______________, 199__. = ________________
2. Consolidated positive Net Income of the Guarantor for each fiscal quarter
following the fiscal quarter ending _________________ was:
[INCLUDE DATA FOR EACH QUARTER, AS APPLICABLE]
2a. The sum of the positive Net Income for each of the quarters
set forth in Line 2 above = ________________
2b. 50% of line 2a = ________________
3. 100% of proceeds resulting from any issuance by Guarantor of its
capital stock = ________________
4. The sum of $45,000,000 and line 2b and line 3 = ________________
5. Line 1 is not less than line 4.
</TABLE>
<PAGE>
EXHIBIT 10.12
SECTION 6.4. INTENTIONALLY DELETED
SECTION 6.5. INVESTMENT GRADE ASSETS.
1. Total consolidated Investment of the Insurance
Subsidiaries and Eligible Non-Insurance Company Sellers
in Investment Grade Securities: = ________________
2. Total Invested Assets: = ________________
3. The ratio of line 1 to line 2: = ___ : ___
4. The ratio in line 3 is at least .95 to 1.00.
SECTION 6.6. RBC RATIO.
NFL AIC FLICA
- - ------------------------------------------------------------------------------
1. Adjusted Capital and Surplus as of the fiscal
[quarter/year] ending [_____,], 199_:
- - ------------------------------------------------------------------------------
2. Authorized Control Level RBC as of the fiscal
year ending [_____,], 199_:
- - ------------------------------------------------------------------------------
3. The ratio of line 1 to line 2.
- - ------------------------------------------------------------------------------
4. The ratio in line 3 is at least 1.05 to 1.0.
- - ------------------------------------------------------------------------------
SECTION 6.7. INTENTIONALLY DELETED
<PAGE>
SECTION 6.8. MINIMUM STATUTORY SURPLUS OF INSURANCE SUBSIDIARIES
NFL NFIC AIC FLI
- - -------------------------------------------------------------------------------
1 Positive Statutory Capital
and Surplus of Insurance
Subsidiary as of the fiscal
quarter ending ___________
- - ------------------------------------------------- --------------- -------------
2 Positive Statutory Net Income
for each fiscal quarter
following the fiscal
quarter ending ______________
was
[INCLUDE DATA FOR EACH
QUARTER, AS APPLICABLE]
- - ------------------------------------------------- --------------- -------------
2.a The sum of positive Statutory
Net Income for each of
the quarters set forth in line
2 above
- - ------------------------------------------------- --------------- -------------
2.b 50% of line 2.a.
- - ------------------------------------------------- --------------- -------------
3 Contributions to surplus
made by Debtor to any
Insurance Subsidiary with
Positive Statutory Net Income
during each fiscal quarter were:
[INCLUDE DATA FOR EACH
QUARTER, AS APPLICABLE]
- - ------------------------------------------------- --------------- -------------
3.a The sum of the contributions
to surplus for each of the
quarters
- - ------------------------------------------------- --------------- -------------
4 Applicable Annual Base Statutory
Surplus from Schedule 6.8
- - ------------------------------------------------- --------------- -------------
5 The sum of line 2.b.,
line 3.a. and line 4
- - ------------------------------------------------- --------------- -------------
6 Line 1 is not less
than line 5
- - -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.12
SECTION 6.9 FUNDED DEBT RATIO
1. Funded Debt _____________
2. Consolidated GAAP Net Worth _____________
3. Total Capitalization (the sum of line
1 and line 2) _____________
4. The ratio of line 1 to line 3 _____________
5. The ratio in line 4 is not greater than .65 to 1.0. _____________
<PAGE>
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of March 24, 1999, among
Ascent Assurance, Inc. (formerly Westbridge Capital Corp.), a Delaware
corporation (the "COMPANY") and the holders of Common Stock and the holders of
New Convertible Preferred Stock of the Company listed on Schedule I hereto (the
"INITIAL HOLDERS").
W I T N E S S E T H:
WHEREAS, pursuant to Section VII.A. of the First Amended Plan of
Reorganization of the Company under Chapter 11 of the Bankruptcy Code dated
October 30, 1998, as the same may have been amended or supplemented from time to
time prior to the date hereof (the "PLAN"), as of the Effective Date (as defined
in the Plan) the Company is obligated to enter into a registration rights
agreement substantially in the form of Exhibit "B" thereto; and
WHEREAS, the parties hereto have agreed that the execution and delivery
by the Company and the Initial Holders of this Agreement will satisfy such
obligation under the Plan;
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and agreements set forth herein, the parties hereby agree as follows:
1. DEFINITIONS.
(a) Capitalized terms used in this Agreement but not otherwise defined
herein shall have the meanings given to them in the Plan. Each reference herein
to an agreement, document or instrument shall mean that agreement, document or
instrument as from time to time amended, modified or supplemented in accordance
with its terms, including in each case all exhibits, annexes and schedules to
such agreement, document or instrument, all of which are incorporated by
reference to such agreement, document or instrument. The use herein of the word
"or" shall not be deemed exclusive.
(b) As used in this Exhibit, the following capitalized terms shall have
the meanings ascribed to them below:
"COMMON STOCK" means the Common Stock, par value $.01 per share, of
the Company being issued and sold pursuant to the Plan.
"EFFECTIVE DATE" means the effective date as defined in the Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute then in effect, and a reference to a
particular section thereof shall be deemed to include a reference to the
comparable section, if any, of any such similar federal statute.
"HOLDER" means a registered holder of Registrable Securities who is an
Initial Holder .
"PERSON" means an individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization or
government or any department or agency thereof.
"PREFERRED STOCK" means the Series A Cumulative Convertible Redeemable
Preferred Stock, par value $.01 per share, of the Company being issued
pursuant to the Plan.
"PROSPECTUS" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement or any other amendments
and supplements to such prospectus, including without limitation any
preliminary prospectus, any pre-effective or post-effective amendment and
all material incorporated by reference in any prospectus.
"REGISTRABLE SECURITIES" means (i) the shares of Common Stock issued
to any Initial Holder pursuant to the Plan, (ii) the shares of Preferred
Stock issued to any Initial Holder pursuant to the Plan or the Stock
Purchase Agreement dated as of September 16, 1998 between the Company and
Credit Suisse First Boston Corporation (the "Stock Purchase Agreement"),
(iii) any shares of Common Stock issued upon conversion of shares of
Preferred Stock issued to any Initial Holder pursuant to the Plan or the
Stock Purchase Agreement and (iv) any securities issued or issuable in
respect of or in exchange for any of the shares of Common Stock or
Preferred Stock referred to in clause (i), (ii) or (iii) by way of a stock
dividend or other distribution, stock split, reverse stock split or other
combination of shares, recapitalization, reclassification, merger,
consolidation or exchange offer. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable
Securities when (i) a Registration Statement with respect to the sale of
such securities shall have become effective under the Securities Act and
such securities shall be eligible to be disposed of in accordance with such
Registration Statement, (ii) such securities shall (x) have been sold, or
(y) with respect to any Registrable Securities held by any Holder, all
Registrable Securities then owned by such Holder can be sold in any
three-month period, in either case pursuant to Rule 144 (or any successor
provision) under the Securities Act ("RULE 144"), (iii) such securities
shall have been otherwise transferred and new certificates for such
securities not bearing a legend restricting further transfer shall have
been delivered by the Company or (iv) such securities shall have ceased to
be outstanding. Shares of Common Stock available upon the conversion of the
Preferred Stock shall not constitute "REGISTRABLE SECURITIES" for purposes
of this Agreement and shall not be available for inclusion in a
Registration Statement to be filed pursuant to Section 2 or 5 hereof until
such shares are actually obtained upon conversion of the Preferred Stock.
"REGISTRATION EXPENSES" has the meaning set forth in Section 4 hereof.
"REGISTRATION STATEMENT" means any registration statement of the
Company which covers Registrable Securities pursuant to the provisions of
this Registration Rights Agreement, all amendments and supplements to such
Registration Statement, including post-effective amendments, and all
exhibits and all material incorporated by reference in such Registration
Statement.
"SEC" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange
Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable
section, if any, of any such similar federal statute.
2. DEMAND REGISTRATION.
(a) REQUESTS FOR REGISTRATION. Subject to the provisions of paragraphs
(b), (c) and (d) of this Section 2, at any time during the period beginning on
the Effective Date and ending on the first date on which there are no
Registrable Securities (the "DEMAND REGISTRATION PERIOD"), any Holder or group
of Holders holding at least 10% of any class of the aggregate Registrable
Securities still outstanding on a fully-diluted basis may make a written request
for registration under the Securities Act of all or any part of such Holder's or
Holders' Registrable Securities (a "DEMAND REGISTRATION"). Such request shall
specify the amount of Registrable Securities to be registered and the intended
method or methods of disposition. Within 10 days after receipt of such request,
the Company shall send written notice of such request to all Holders and shall,
subject to the provisions of paragraphs (b), (c) and (d) of this Section 2,
include in such Demand Registration all Registrable Securities with respect to
which the Company receives written requests (specifying the amount of
Registrable Securities to be registered and the intended method or methods of
disposition) for inclusion therein within 30 days after such notice is sent. The
Company shall file with the SEC a Registration Statement, registering all
Registrable Securities that any Holders have requested the Company to register,
for disposition in accordance with the intended method or methods set forth in
their notices to the Company, and the Company shall use good faith efforts to
make such filing within 30 days of such request. The Company shall use its best
efforts to cause such Registration Statement to be declared effective as soon as
practicable after filing and to remain effective until the earlier of (i) 90
days following the date on which it was declared effective and (ii) the date on
which all of the Registrable Securities covered thereby are disposed of in
accordance with the method or methods of disposition stated therein.
(b) NUMBER OF REGISTRATIONS. The Holders shall be entitled to request
an aggregate of five (5) Demand Registrations during the Demand Registration
Period; PROVIDED, HOWEVER, that the Company will not be obligated to comply with
any such request unless (i) such request is made by Persons holding at least 10%
of the aggregate amount of any class of Registrable Securities at the time
outstanding and (ii) the Company has not effected another Demand Registration in
accordance with the provisions of this Agreement within the previous six months.
(c) SUSPENSION OF REGISTRATION. The Company shall have the right to
delay the filing or effectiveness of a Registration Statement for any Demand
Registration and to require the Holders not to sell under any such Registration
Statement, during one or more periods aggregating not more than 60 days in each
twelve-month period during the Demand Registration Period in the event that (i)
the Company would, in accordance with the advice of its counsel, be required to
disclose in the Prospectus information not otherwise then required by law to be
publicly disclosed and (ii) in the judgment of the Company, there is a
reasonable likelihood that such disclosure, or any other action to be taken in
connection with the Prospectus, would materially and adversely affect any
existing or prospective material business situation, transaction or negotiation
or otherwise materially and adversely affect the Company.
(d) OFFERING BY THE COMPANY. The Company may include in any Demand
Registration additional shares of capital stock to be sold for the Company's
account pursuant to such registration; PROVIDED, HOWEVER, that if the managing
underwriter for a Demand Registration that involves an underwritten offering
shall advise the Company that, in its opinion, the inclusion of the amount and
kind of shares of capital stock to be sold for the Company's account would
adversely affect the success of the offering for the selling Holders, then the
number and kind of shares of capital stock to be sold for the Company's account
shall be reduced (and may be reduced to zero) in accordance with the managing
underwriter's recommendation.
(e) SUSPENSION OF EFFECTIVENESS. In the event that a Demand
Registration which has been declared or ordered effective in accordance with the
rules of the SEC is not kept effective for the period of time contemplated by
Section 2(a) (after taking into account any suspensions and extensions thereof),
then such Demand Registration shall not be counted as a Demand Registration for
purposes of Section 2(b).
3. REGISTRATION PROCEDURES.
(a) THE COMPANY TO USE BEST EFFORTS. In connection with the Company's
Demand Registration obligations pursuant to Section 2 hereof, the Company shall
use its best efforts to effect such registrations to permit the sale of such
Registrable Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Company shall use its best
efforts:
(i) to prepare and file with the SEC a Registration Statement
relating to each Demand Registration on any appropriate form under the
Securities Act, and to cause such Registration Statement to become
effective as soon as practicable and to remain continuously effective
for the time period required by the provisions of this Agreement to the
extent permitted under the Securities Act, PROVIDED that as far in
advance as practical before filing such Registration Statement or any
amendment thereto, the Company will furnish to the Holders copies of
reasonably complete drafts of all such documents proposed to be filed
(including exhibits), and the Holders shall have the opportunity to (i)
object to any information pertaining solely to the Holders that is
contained therein and the Company will make the corrections reasonably
requested by the Holders with respect to such information and (ii)
comment on any other information contained therein and the Company will
in good faith consider whether any changes or corrections are required,
in each case, prior to filing any such Registration Statement or
amendment;
(ii) to prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
applicable period set forth in paragraph (a) of Section 2; and to cause
the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed in accordance with the
Securities Act and any rules and regulations promulgated thereunder;
and otherwise to comply with the provisions of the Securities Act as
may be necessary to facilitate the disposition of all Registrable
Securities covered by such Registration Statement during the applicable
period in accordance with the intended method or methods of disposition
by the selling Holders thereof set forth in such Registration Statement
or such Prospectus or Prospectus supplement;
(iii) to notify the selling Holders and the managing
underwriters, if any, promptly if at any time (A) any Prospectus,
Registration Statement or amendment or supplement thereto is filed, (B)
any Registration Statement, or any post-effective amendment thereto,
becomes effective, (C) the SEC requests any amendment or supplement to,
or any additional information in respect of, any Registration Statement
or Prospectus, (D) the SEC issues any stop order suspending the
effectiveness of a Registration Statement or initiates any proceedings
for that purpose, (E) the representations and warranties of the Company
contemplated by subclause (B) of clause (xii) of this paragraph (a)
cease to be true and correct, (F) the Company receives any notice that
the qualification of any Registrable Securities for sale in any
jurisdiction has been suspended or that any proceeding has been
initiated for the purpose of suspending such qualification, or (G) any
event occurs which requires that any changes be made in such
Registration Statement or any related Prospectus so that such
Registration Statement or Prospectus will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(iv) to make every reasonable effort to obtain the withdrawal
of any order suspending the effectiveness of a Registration Statement,
or the qualification of any Registrable Securities for sale in any
jurisdiction, at the earliest possible moment;
(v) to furnish to each selling Holder and each managing
underwriter, if any, one signed copy of the applicable Registration
Statement and any post-effective amendment thereto, including all
financial statements and schedules thereto, all documents incorporated
therein by reference and all exhibits thereto (including exhibits
incorporated by reference) as promptly as practicable after filing such
documents with the SEC;
(vi) to deliver to each selling Holder and each underwriter,
if any, as many copies of the Prospectus or Prospectuses (including
each preliminary Prospectus) and any amendment or supplement thereto as
such Persons may reasonably request; and to consent to the use of such
Prospectus or any amendment or supplement thereto by each such selling
Holder and underwriter, if any, in connection with the offering and
sale of the Registrable Securities covered by such Prospectus,
amendment or supplement;
(vii) prior to any public offering of Registrable Securities,
to register or qualify, or to cooperate with the selling Holders, the
underwriters, if any, and their respective counsel in connection with
the registration or qualification of such Registrable Securities, for
offer and sale under the securities or blue sky laws of such
jurisdictions as may be requested by the Holders of a majority of the
Registrable Securities included in such Registration Statement; to keep
each such registration or qualification effective during the period set
forth in paragraph (a) of Section 2 that the applicable Registration
Statement is required to be kept effective; and to do any and all other
acts or things necessary to enable the disposition in such
jurisdictions of the Registrable Securities covered by such
Registration Statement; PROVIDED, HOWEVER, that the Company will not be
required to qualify generally to do business in any jurisdiction where
it is not then so qualified or to take any action which would subject
it to taxation or general service of process in any jurisdiction where
it is not then so subject;
(viii) to cooperate with the selling Holders and the
underwriters, if any, in the preparation and delivery of certificates
representing the Registrable Securities to be sold, such certificates
to be in such denominations and registered in such names as such
selling Holders or managing underwriters may request at least three
Business Days prior to any sale of Registrable Securities represented
by such certificates;
(ix) to cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to
enable the seller or sellers thereof or the underwriters, if any, to
consummate the sale of such Registrable Securities in conformity with
federal law and the laws of the jurisdictions in which such Registrable
Securities shall be registered or qualified pursuant to clause (viii)
of this paragraph (a);
(x) upon the occurrence of any event described in subclause
(C) or (G) of clause (iii) of this paragraph (a), promptly to prepare
and file a supplement or post-effective amendment to the applicable
Registration Statement or Prospectus or any document incorporated
therein by reference, and any other required document, either in
accordance with the request of the SEC, or so that such Registration
Statement and Prospectus will not thereafter contain an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, as the case
may be, and to cause such supplement or post-effective amendment to
become effective as soon as practicable;
(xi) to cause all Registrable Securities covered by such
Registration Statement to be listed or included on any securities
exchange (or on any quotation system operated by a national securities
association) on which such Registrable Securities are then listed or
included, if any; to enter into customary agreements with any such
securities exchange or system, including, if necessary, a listing
application and indemnification agreement in customary form; and to
provide a transfer agent for such Registrable Securities no later than
the effective date of such Registration Statement;
(xii) to take all other actions in connection therewith as are
reasonably necessary or desirable in order to expedite or facilitate
the disposition of the Registrable Securities included in such
Registration Statement and, in the case of an underwritten offering:
(A) to enter into an underwriting agreement in customary form for the
managing underwriters with respect to issuers of similar market
capitalization and reporting and financial histories; (B) to make
representations and warranties to each Holder participating in such
offering and to each of the underwriters, in such form, substance and
scope as are customarily made to the managing underwriters by issuers
of similar market capitalization and reporting and financial histories
and to confirm the same to the extent customary if and when requested;
(C) to obtain opinions of counsel to the Company (which may be the
Company's inside counsel) and updates thereof addressed to each Holder
participating in such offering and to each of the underwriters, such
opinions and updates to be in customary form to cover the matters
customarily covered in opinions obtained in underwritten offerings by
the managing underwriters for issuers of similar market capitalization
and reporting and financial histories; (D) to obtain "comfort" letters
and updates thereof from the Company's independent certified public
accountants addressed to each of the underwriters, such letters to be
in customary form and to cover matters of the type customarily covered
in "comfort" letters to the managing underwriters in connection with
underwritten offerings by them for issuers of similar market
capitalization and reporting and financial histories; (E) to provide,
in the underwriting agreement to be entered into in connection with
such offering, indemnification provisions and procedures no less
favorable than those set forth in Section 6 hereof with respect to all
parties to be indemnified pursuant to such Section 6; and (F) to
deliver such customary documents and certificates as may be reasonably
requested by Holders of a majority of the Registrable Securities
included in such Registration Statement and the managing underwriters
to evidence compliance with clause (B) of this paragraph (xii) and with
any customary conditions contained in the underwriting agreement
entered into by the Company in connection with such offering;
(xiii) in the case of any offering other than an underwritten
offering: (A) to make representations and warranties to each Holder
participating in such offering, in such form, substance and scope as
are customarily made in such offerings by issuers of similar market
capitalization and reporting and financial histories and to confirm the
same if and when requested, (B) to obtain "comfort" letters and updates
thereof from the Company's independent certified public accountants,
such letters to be in customary form and to cover the matters of the
type customarily covered in "comfort" letters in such offerings for
issuers of similar market capitalization and reporting and financial
histories, (C) to obtain an opinion of counsel to the Company (which
may be the Company's inside counsel) at the time of effectiveness of
such Registration Statement covering such offering and an update
thereof at the time of effectiveness of any post-effective amendment to
such Registration Statement (other than by reason of incorporation by
reference of documents filed with the SEC) addressed to each Holder of
any Registrable Securities covered by such Registration Statement,
covering matters customarily covered in opinions obtained in
underwritten offerings by issuers with similar market capitalization
and reporting and financial histories; and (D) to deliver a certificate
of a senior executive officer of the Company at the time of
effectiveness of such Registration Statement and, upon the request of
Holders of a majority of the Registrable Securities included in such
Registration Statement, updates thereof, such certificates to cover
matters customarily covered in officers' certificates delivered in
connection with underwritten offerings by issuers with similar market
capitalization and reporting and financial histories;
(xiv) to make available for inspection by representatives of
the Holders of Registrable Securities being sold pursuant to any Demand
Registration and of the underwriters, if any, participating in such
sale all financial and other records, pertinent corporate documents and
properties of the Company, and to cause the Company's officers,
directors and employees to supply all information reasonably requested
by any such representatives, in connection with such Demand
Registration; PROVIDED, HOWEVER, that all information regarding such
records, documents and properties shall be subject to customary
confidentiality agreements to be entered into by such Persons with the
Company;
(xv) to comply with all applicable rules and regulations of
the SEC relating to such Registration Statement and the distribution of
the securities being offered or otherwise necessary in order to perform
the Company's obligations under this paragraph (a);
(xvi) to cooperate and assist in any filings required to be
made with the National Association of Securities Dealers, Inc. and in
the performance of any customary or required due diligence
investigation by any underwriter; and
(xvii) to take all other reasonable steps necessary and
appropriate to effect such registration in the manner contemplated by
the provisions of this Agreement.
(b) HOLDERS' OBLIGATION TO FURNISH INFORMATION. The Company may
require, as a condition precedent to the Company's obligations under this
Section 3, each Holder of Registrable Securities as to which any registration is
being effected to furnish to the Company such information regarding the
distribution of such securities as the Company may from time to time reasonably
request.
(c) SUSPENSION OF SALES PENDING AMENDMENT OF PROSPECTUS. Each Holder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in subclause (C), (D), (E), (F) or (G) of clause
(iii) of paragraph (a) of this Section 3, such Holder will forthwith forego or
delay the disposition of any Registrable Securities covered by such Registration
Statement or Prospectus until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by clause (x) of such paragraph
(a), or until it is advised in writing by the Company that the use of the
applicable Prospectus may be resumed, and has received copies of any additional
or supplemental filings which are incorporated by reference in such Prospectus,
and, if so directed by the Company, such Holder will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such Holder's possession of any Prospectus covering such Registrable Securities.
If the Company shall have given any such notice during a period when a Demand
Registration is in effect, the 90-day period described in clause (i) of
paragraph (a) of Section 3 shall be extended by the number of days from and
including the date of the giving of such notice to and including the date when
each Holder of Registrable Securities covered by such Registration Statement
shall have received the copies of the supplemented or amended Prospectus
contemplated by clause (x) of such paragraph (a) or shall have been advised in
writing by the Company that the use of the applicable Prospectus may be resumed.
4. REGISTRATION EXPENSES.
All expenses incident to the Company's performance of or compliance
with its obligations under the provisions of this Agreement shall be borne by
the Company, including without limitation all (i) registration and filing fees,
(ii) fees and expenses of compliance with securities or blue sky laws, (iii)
printing expenses (including expenses of printing Prospectuses), (iv) messenger
and delivery expenses, (v) internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), (vi) fees and disbursements of its counsel and its
independent certified public accountants (including the expenses of any special
audit or "comfort" letters required by or incident to such performance or
compliance), (vii) securities acts liability insurance (if the Company elects to
obtain such insurance), (viii) reasonable fees and expenses of any special
experts retained by the Company in connection with any registration hereunder,
(ix) reasonable fees and expenses of other Persons retained by the Company, and
(x) reasonable fees and expenses of one counsel for the Holders of Registrable
Securities covered by each Registration Statement, with such counsel to be
selected by Holders of a majority of such Registrable Securities (all such
expenses being herein referred to as "REGISTRATION EXPENSES"); PROVIDED,
HOWEVER, that Registration Expenses shall not include any underwriting
discounts, commissions, fees or expenses or transfer taxes attributable to the
sale of the Registrable Securities.
5. PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If at any time during the
Demand Registration Period the Company proposes to register any Registrable
Securities under the Securities Act, whether or not for sale for its own account
(other than a registration on Form S-4 or Form S-8, or any successor or similar
forms), in a manner that would permit registration of Registrable Securities of
the same class for sale to the public under the Securities Act, it will each
such time promptly give written notice to all Persons who hold of record any
Registrable Securities of the same class of its intention to do so and of the
intended method of disposition of the shares being registered, of the
registration form of the SEC that has been selected by the Company and of rights
of Holders under this Section 5 (the "SECTION 5 NOTICE"). The Company will use
its best efforts to include in the proposed registration (and, if such
registration involves an underwritten offering, in the underwriting) all
Registrable Securities of the same class that the Company is requested in
writing, within 15 days after the Section 5 Notice is given, to register by the
Holders thereof; PROVIDED, HOWEVER, that (i) if, at any time after giving
written notice of its intention to register any Registrable Securities and prior
to the effective date of the registration statement filed in connection with
such registration, the Company shall determine for any reason not to register
such Registrable Securities, the Company may, at its election, give written
notice of such determination to all Persons who hold of record any Registrable
Securities of the same class and, thereupon, shall be relieved of its obligation
to register any Registrable Securities of the same class in connection with such
abandoned registration, without prejudice, however, to the rights of Holders
under Section 2 hereof and (ii) in case of a determination by the Company to
delay registration of its Registrable Securities, the Company shall be permitted
to delay the registration of such Registrable Securities of the same class for
the same period as the delay in registering such Registrable Securities. No
registration effected under this Section 5 shall relieve the Company of its
obligations to effect registrations upon request under Section 2 and,
notwithstanding anything to the contrary in Section 2, no Holder shall have the
right to require the Company to register any Registrable Securities pursuant to
Section 2 until the later of (A) the completion of the distribution of the
securities offered and registered pursuant to the Section 5 Notice and (B) 90
days after the date each registration statement described in the first sentence
of this paragraph (a) is declared effective.
(b) EXPENSES. The Company shall pay all Registration Expenses in
connection with each registration of Registrable Securities of the same class
requested pursuant to this Section 5; PROVIDED, HOWEVER, that each Holder shall
pay all underwriting discounts, commissions, fees or expenses or transfer taxes,
if any, relating to the sale or disposition of such Holder's Registrable
Securities of the same class pursuant to a Registration Statement effected
pursuant to this Section 5.
(c) PRIORITY IN INCIDENTAL REGISTRATION. If the managing underwriter
for a registration pursuant to this Section 5 that involves an underwritten
offering shall advise the Company that, in its opinion, the inclusion of the
amount of Registrable Securities of the same class to be sold for the account of
Holders would adversely affect the success of the offering for the Company, then
the number of Registrable Securities of the same class to be sold for the
account of such Holders shall be reduced (and may be reduced to zero) in
accordance with the managing underwriter's recommendation. In the event that the
number of Registrable Securities of the same class to be included in any
registration is reduced (but not to zero), the number of such Registrable
Securities of the same class included in such registration shall be allocated
pro rata among all requesting Holders, on the basis of the relative number of
shares of such Registrable Securities of the same class each such Holder has
requested to be included in such registration. If, as a result of the proration
provisions of this paragraph (c), any Holder shall not be entitled to include
all Registrable Securities of the same class in a registration pursuant to this
Section 5 that such Holder has requested be included, such Holder may elect to
withdraw its Registrable Securities of the same class from the registration;
PROVIDED, HOWEVER, that such withdrawal election shall be irrevocable and, after
making a withdrawal election, a Holder shall no longer have any right to include
Registrable Securities of the same class in the registration as to which such
withdrawal election was made.
(d) MERGER, CONSOLIDATION, ETC. Notwithstanding anything in this
Section 5 to the contrary, Holders shall not have any right to include their
Registrable Securities in any distribution or registration of equity securities
by the Company, which is a result of a merger, consolidation, acquisition,
exchange offer, recapitalization, other reorganization, dividend reinvestment
plan, stock option plan or other employee benefit plan, or any similar
transaction having the same effect.
6. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of
any securities of the Company under the Securities Act pursuant to Section 2 or
5 hereof, the Company will, and hereby does, indemnify and hold harmless, to the
extent permitted by law, the seller of any Registrable Securities covered by any
Registration Statement filed to effect such registration, its directors and
officers or general and limited partners (and the directors and officers
thereof), each other Person who participates as an underwriter, if any, in the
offering or sale of such securities and each other Person, if any, who controls
such seller or any such underwriter within the meaning of the Securities Act,
against any and all losses, claims, damages or liabilities, joint or several,
and expenses (including any amounts paid in any settlement effected with the
Company's consent, which consent shall not be unreasonably withheld) to which
such seller or any such director, officer, general or limited partner,
underwriter or controlling Person may become subject under the Securities Act,
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement under which such securities were
registered under the Securities Act or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary Prospectus, together
with the documents incorporated by reference therein (as amended or supplemented
if the Company shall have filed with the SEC any amendment thereof or supplement
thereto), if used prior to the effective date of such Registration Statement, or
contained in the Prospectus, together with the documents incorporated by
reference therein (as amended or supplemented if the Company shall have filed
with the SEC any amendment thereof or supplement thereto), or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (iii) any violation
by the Company of any federal, state or common law rule or regulation applicable
to the Company and relating to action required of or inaction by the Company in
connection with any such registration, and the Company will reimburse such
seller and each such director, officer, general or limited partner, underwriter
and controlling Person for any legal or any other expenses reasonably incurred
by any of them in connection with investigating or defending any such loss,
claim, liability, action or proceeding; PROVIDED, HOWEVER, that the Company
shall not be liable to any such seller or any such director, officer, general or
limited partner, underwriter or controlling Person in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in such
Registration Statement or amendment thereof or supplement thereto or in any such
preliminary, final or summary Prospectus in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any such seller
or any such director, officer, general or limited partner, underwriter or
controlling Person, for use in the preparation thereof; and PROVIDED FURTHER,
that the Company will not be liable to any Person who participates as an
underwriter in any underwritten offering or sale of Registrable Securities, or
to any Person who is a seller in any non-underwritten offering or sale of
Registrable Securities, or any other Person, if any, who controls such
underwriter or seller within the meaning of the Securities Act, under the
indemnity agreement in this paragraph (a) with respect to any preliminary
Prospectus or the final Prospectus (including any amended or supplemented
preliminary or final Prospectus), as the case may be, to the extent that any
such loss, claim, damage or liability of such underwriter, seller or controlling
Person results from the fact that such underwriter or seller sold Registrable
Securities to a person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final Prospectus or of the
final Prospectus as then amended or supplemented, whichever is most recent, if
the Company has previously furnished copies thereof to such underwriter or
seller and such final Prospectus, as then amended or supplemented, has corrected
any such misstatement or omission. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such seller or
any such director, officer, general or limited partner, underwriter or
controlling Person and shall survive the transfer of such securities by such
underwriter or seller.
(b) INDEMNIFICATION BY THE SELLERS. In consideration of the Company's
including any Registrable Securities in any Registration Statement filed in
accordance with Section 2 or 5 hereof, the prospective seller of such
Registrable Securities hereby agrees to indemnify and hold harmless (in the same
manner and to the same extent as set forth in paragraph (a) of this Section 6)
the Company and its directors and officers and each person controlling the
Company within the meaning of the Securities Act and all other prospective
sellers and their directors, officers, general and limited partners and
respective controlling Persons with respect to any statement or alleged
statement in or omission or alleged omission from such Registration Statement,
any preliminary, final or summary Prospectus contained therein, or any amendment
or supplement, but only to the extent such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company or its representatives by or on
behalf of such seller for use in the preparation of such Registration Statement,
preliminary, final or summary Prospectus or amendment or supplement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any of the prospective sellers or any of
their respective directors, officers, general or limited partners or controlling
Persons and shall survive the transfer of such securities by such seller. Any
Holder's liability hereunder shall be limited to the amount of proceeds received
by such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Section 6, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
latter of the commencement of such action; PROVIDED, HOWEVER, that the failure
of any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding paragraphs of this
Section 6, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. If any such claim or action shall be
brought against an indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate therein, and,
to the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; PROVIDED, HOWEVER, that if, in any
indemnified party's reasonable judgment, a conflict of interest between such
indemnified party and the indemnifying party exists in respect of such claim,
then such indemnified party shall have the right to participate in the defense
of such claim and to employ one firm of attorneys at the indemnifying party's
expense to represent such indemnified party. Once the indemnifying party has
assumed the defense of any claim, no indemnified party will consent to entry of
any judgment or enter into any settlement without the indemnifying party's
consent to such judgment or settlement, which shall not be unreasonably
withheld.
(d) OTHER INDEMNIFICATION. Indemnification similar to that specified in
the preceding paragraphs of this Section 6 (with appropriate modifications)
shall be given by the Company and each seller of Registrable Securities with
respect to any required registration or other qualification of securities under
any state securities and "blue sky" laws.
(e) CONTRIBUTION. If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an indemnified party under
paragraph (a), (b) or (d) of this Section 6, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in such paragraph (a),
(b) or (d) in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and the indemnified party on the other
hand in connection with statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statements or omission. The Company agrees, and
the Holders (in consideration of the Company's including any Registrable
Securities in any Registration Statement filed in accordance with Section 2 or 5
hereof) shall be deemed to have agreed, that it would not be just and equitable
if contributions pursuant to this paragraph (e) were to be determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the first sentence of this
paragraph (e). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of this
paragraph (e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim (which shall be limited as provided in paragraph (c) of this
Section 6 if the indemnifying party has assumed the defense of any such action
in accordance with the provisions thereof) which is the subject of this
paragraph (e). No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Promptly after receipt by an indemnified party under this
paragraph (e) of notice of the commencement of any action against such party in
respect of which a claim for contribution may be made against an indemnifying
party under this paragraph (e), such indemnified party shall notify the
indemnifying party in writing of the commencement thereof if the notice
specified in paragraph (c) of this Section 6 has not been given with respect to
such action; PROVIDED, HOWEVER, that the omission so to notify the indemnifying
party shall not relieve the indemnifying party from any liability which it may
have to any indemnified party otherwise under this paragraph (e), except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. Notwithstanding anything in this paragraph (e) to the contrary, no
indemnifying party (other than the Company) shall be required pursuant to this
paragraph (e) to contribute any amount in excess of the proceeds received by
such indemnifying party from the sale of Registrable Securities in the offering
to which the losses, claims, damages or liabilities of the indemnified parties
relate.
(f) SURVIVAL. The provisions of this Section 6 will survive
indefinitely, notwithstanding any transfer of the Registrable Securities by
any Holder.
7. RULES 144 AND 144A.
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations promulgated
thereunder, and shall take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act within
the limitations of the exemptions provided by Rule 144. Upon the request of any
Holder, the Company shall deliver to such Holder a written statement stating
whether it has complied with such information and requirements. Upon request,
the Company shall furnish to each Holder such information as shall be reasonably
required pursuant to Rule 144A(d)(4)(i) to permit such Holder to dispose of its
Registrable Securities in a transaction pursuant to Rule 144A.
8. UNDERWRITTEN REGISTRATIONS.
(a) SELECTION OF UNDERWRITERS. If any of the Registrable Securities
covered by any Demand Registration are to be sold in an underwritten offering,
the underwriter or underwriters and managing underwriter or managing
underwriters that will administer the offering shall be selected by, and the
terms of any underwriting agreement and other underwriting arrangements shall be
approved by, the Company; PROVIDED, HOWEVER, that such underwriters and managing
underwriters shall be subject to the approval of the Holders of a majority in
aggregate amount of Registrable Securities included in such offering, which
approval shall not be unreasonably withheld.
(b) AGREEMENTS OF SELLING HOLDERS. No Holder shall sell any of its
Registrable Securities in any underwritten offering pursuant to a registration
hereunder unless such Holder (i) agrees to sell such Registrable Securities on
the basis provided in any underwriting agreement or other underwriting
arrangements approved by the Persons entitled hereunder to approve such
agreements or arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting agreements or other underwriting
arrangements.
9. CERTAIN COMPANY REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) NO EXISTING AGREEMENTS. The Company represents and warrants to the
Initial Holders that there is not in effect on the date hereof any agreement by
the Company (other than this Agreement) pursuant to which any holders of the
securities of the Company to be issued pursuant to the Plan have a right to
cause the Company to register or qualify such securities under the Securities
Act or any securities or blue sky laws of any jurisdiction.
(b) FUTURE AGREEMENTS. Without the prior consent of each Holder that
holds Registrable Securities, the Company shall not hereafter agree with the
holders of any securities issued or to be issued by the Company to register or
qualify such securities under the Securities Act or any securities or blue sky
laws of any jurisdiction unless the rights so granted, if exercised, would not
materially conflict with, be materially inconsistent with or violate the
provisions of this Agreement.
(c) TRANSFERS; REMOVAL OF LEGEND. Following the Closing Date, upon
delivery to the Company by a Holder of a certificate, in form and substance
reasonably satisfactory to the Company and duly executed by an authorized
officer of the Holder, to the effect that the Registrable Securities have been
transferred (i) pursuant to a registration statement that has been declared
effective by the SEC and was, at the time of such sale or other transfer,
effective under the Securities Act or (ii) without registration pursuant to a
transaction which complies with the requirements of Rule 144, the Company will,
or will instruct its transfer agent to, issue upon surrender of the certificates
representing such Registrable Securities, one or more new certificates
evidencing the Registrable Securities so transferred, which new certificates
will not bear a restrictive legend to the effect that the securities represented
by such certificates have not been registered under the Securities Act and
applicable state securities laws and may not be sold or otherwise transferred in
the absence of such registration or an exemption therefrom. Other than with
respect to any sale or other transfer for which any such certificate has been
received by the Company or for which the Company has received a reasonably
satisfactory opinion of counsel to the effect that such sale or other transfer
is not required to be registered under the Securities Act or applicable state
securities laws, the Company or the Company's transfer agent at the Company's
instruction may refuse to transfer Registrable Securities on the transfer books
of the Company and any such transfer shall be null and void. The holder of
certificates representing Registrable Securities bearing a restrictive legend
shall also be entitled to receive certificates not bearing such legend, upon
furnishing the Company with a reasonably satisfactory opinion of counsel to the
effect that such legend may be removed under the Securities Act and applicable
state securities laws.
10. HOLDBACK AGREEMENTS.
(a) RESTRICTIONS ON PUBLIC SALES BY HOLDERS. To the extent not
inconsistent with applicable law, each Holder that is timely notified in writing
by the managing underwriter or underwriters shall not effect any public sale or
distribution (including a sale pursuant to Rule 144) of any of their shares of
Common Stock if any other shares of Common Stock (or any securities of the
Company convertible into or exchangeable for or exercisable for shares of Common
Stock) are being registered by the Company for sale in an underwritten offering
(other than pursuant to an employee stock option, stock purchase, stock bonus or
similar plan, pursuant to a merger, an exchange offer or a transaction of the
type specified in Rule 145(a) under the Securities Act or pursuant to a "shelf"
registration), except as part of such registration, during the 10-day period
prior to the effective date of the applicable registration statement, or during
the period beginning on such effective date and ending on the later of (i) the
completion of the distribution of such securities pursuant to such offering and
(ii) 90 days after such effective date (or such shorter time period as the
managing underwriter or underwriters shall deem appropriate).
(b) RESTRICTIONS ON PUBLIC SALES BY THE COMPANY. The Company shall not
effect any public sale or distribution of any shares of Common Stock (other than
pursuant to an employee stock option, stock purchase, stock bonus or similar
plan, pursuant to a merger, exchange offer or a transaction of the type
specified in Rule 145(a) under the Securities Act or pursuant to a "shelf"
registration), or any securities of the Company convertible into or exchangeable
or exercisable for shares of Common Stock, except as part of such registration,
during the 10-day period prior to the effective date of a Demand Registration to
be effected as an underwritten offering, or during the period beginning on such
effective date and ending on the later of (i) the completion of the distribution
of such securities pursuant to such offering and (ii) 90 days after such
effective date (or such shorter time period as the managing underwriter or
underwriters shall deem appropriate).
11. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall
have obtained the written consent to such amendment, action or omission to act,
of the Holders of a majority of the Registrable Securities then outstanding.
Holders shall be bound from and after the date of the receipt of a written
notice from the Company setting forth such amendment or waiver by any consent
authorized by this paragraph (a), whether or not the certificates representing
such Registrable Securities shall have been marked to indicate such consent.
(b) SUCCESSORS, ASSIGNS AND TRANSFEREES. The provisions of this
Agreement shall be binding upon and shall inure to the benefit of the Company,
the Holders and their respective successors, assigns and transferees.
(c) INTEGRATION. The provisions of this Agreement and the documents
referred to herein or delivered pursuant hereto that form a part hereof contain
the entire understanding of the Company and the Initial Holders with respect to
its subject matter. There are no restrictions, agreements, promises,
representations, warranties, covenants or undertakings with respect to the
subject matter hereof other than those expressly set forth herein. The
provisions of this Agreement supersede all prior agreements and understandings
between the Company and the Initial Holders with respect to its subject matter.
(d) NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be sent by first class mail, telex,
telecopier or hand delivery:
if to the Company, to:
Ascent Assurance, Inc.
110 West Seventh Street
Suite #300
Fort Worth, Texas 76102
Attention: General Counsel
Telecopier: (817) 878-3672
with a copy to:
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Attention: Robert S. Reder, Esq.
Telecopier: (212) 530-5219
If to any Holder, to the address of such Holder as shown in the stock
record books of the Company.
All such notices and communications shall be deemed to have been given
or made (i) when delivered by hand, (ii) five Business Days after being
deposited in the mail, postage prepaid, (iii) when telexed answer-back received
or (iv) when telecopied, receipt acknowledged.
(e) DESCRIPTIVE HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit, expand or otherwise affect
the meaning of the provisions hereof.
(f) SEVERABILITY. In the event that any one or more of the provisions,
paragraphs, subparagraphs, sentences, clauses, subclauses, phrases or words
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability thereof in every other respect and of the remaining
provisions, paragraphs, subparagraphs, sentences, clauses, subclauses, phrases
and words hereof shall not be in any way impaired, it being intended that all
rights, powers and privileges of the Company and the Holders hereunder shall be
enforceable to the fullest extent permitted by law.
(g) GOVERNING LAW. The provisions of this Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
Delaware, without regard to the principles of conflicts of laws thereof, as if
it were a contract between the Company and the Initial Holders made and to be
performed entirely within that State.
(h) TERMINATION. The provisions of this Agreement shall terminate, and
thereby become null and void, at the end of the Demand Registration Period;
PROVIDED, HOWEVER, that the provisions of Section 6 shall survive the
termination of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
ASCENT ASSURANCE, INC.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chairman & CEO
SPECIAL SITUATIONS HOLDINGS, INC. -- WESTBRIDGE
By: /S/ DAVID J. MATLIN
Name: David J. Matlin
Title: Managing Director
<PAGE>
Schedule I
INITIAL HOLDERS
Initial Number of Shares Initial Number of Shares
OF NEW COMMON STOCK OF NEW PREFERRED STOCK
Special Situations Holdings, 3,093,999* 23,257
Inc.-- Westbridge
* This represents the number of shares of New Common Stock which Special
Situations Holdings, Inc. - Westbridge will receive on the Initial Distribution
Date (as defined in the Plan). This number will be automatically adjusted upward
to include any New Common Stock received as surplus on the Distribution Date (as
defined in the Plan).
<PAGE>
EXHIBIT 10.14
NY2:#4259609v5
ASCENT ASSURANCE, INC.
1999 STOCK OPTION PLAN
* * * * *
1. PURPOSE. The purpose of the 1999 Stock Option Plan (the "Plan") is to
further and promote the interests of Ascent Assurance, Inc., its Subsidiaries
and its shareholders by enabling the Company and its Subsidiaries to attract,
retain and motivate employees, non-employee directors and consultants (including
marketing agents) or those who will become employees, non-employee directors or
consultants (including marketing agents), and to align the interests of those
individuals and the Company's shareholders. To do this, the Plan offers
equity-based opportunities providing such employees and consultants with a
proprietary interest in maximizing the growth, profitability and overall success
of the Company and its Subsidiaries.
2. DEFINITIONS. For purposes of the Plan, the following terms shall have
the meanings set forth below:
2.1 "AWARD" means an award or grant made to a Participant under
Section 6 of the Plan.
2.2 "AWARD AGREEMENT" means the agreement executed by the Company and
a Participant pursuant to Sections 3.2 and 12.7 of the Plan in connection
with the granting of an Award.
2.2 "BOARD" means the Board of Directors of the Company, as
constituted from time to time.
2.3 "CODE" means the Internal Revenue Code of 1986, as in effect and
as amended from time to time, or any successor statute thereto, together
with any rules, regulations and interpretations promulgated thereunder or
with respect thereto.
2.4 "COMMITTEE" means the committee of the Board established to
administer the Plan, as described in Section 3 of the Plan.
2.5 "COMMON STOCK" means the Common Stock, par value $.01 per share,
of the Company or any security of the Company issued by the Company in
substitution or exchange therefor.
2.6 "COMPANY" means Ascent Assurance, Inc., a Delaware corporation, or
any successor corporation to Ascent Assurance, Inc..
2.7 "DISABILITY" means disability as defined in the Participant's then
effective employment agreement, or if the participant is not then a party
to an effective employment agreement with the Company which defines
disability, "Disability" means disability as determined by the Committee in
accordance with standards and procedures similar to those under the
Company's long-term disability plan, if any. Subject to the first sentence
of this Section 2.7, at any time that the Company does not maintain a
long-term disability plan, "Disability" shall mean any physical or mental
disability which is determined to be total and permanent by a physician
selected in good faith by the Company.
2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in
effect and as amended from time to time, or any successor statute thereto,
together with any rules, regulations and interpretations promulgated
thereunder or with respect thereto.
2.9 "FAIR MARKET VALUE" means on, or with respect to, any given
date(s), the last reported sale price or, in case no such sale takes place
on such day, the average of the closing bid and asked prices of the Common
Stock, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the last quoted
sale price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System or such
other system then in use, or, if on any such date the Common Stock is not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Common Stock selected by the Board of Directors of the Company. If at any
time the Common Stock is not so traded, the Fair Market Value of a share of
the Common Stock shall be determined in good faith by the Board.
2.10 "INCENTIVE STOCK OPTION" means any stock option granted pursuant
to the provisions of Section 6 of the Plan (and the relevant Award
Agreement) that is intended to be (and is specifically designated as) an
"incentive stock option" within the meaning of Section 422 of the Code.
2.11 "NON-QUALIFIED STOCK OPTION" means any stock option granted
pursuant to the provisions of Section 6 of the Plan (and the relevant Award
Agreement) that is not (and is specifically designated as not being) an
Incentive Stock Option.
2.12 "PARTICIPANT" means any individual who is selected from time to
time under Section 5 to receive an Award under the Plan.
2.13 "PLAN" means Ascent Assurance, Inc. 1999 Stock Option Plan, as
set forth herein and as in effect and as amended from time to time
(together with any rules and regulations promulgated by the Committee with
respect thereto).
2.14 "RETIREMENT" means the voluntary retirement by the Participant
from active employment with the Company and its Subsidiaries on or after
the attainment of (i) age 65, or (ii) 60, with the consent of the Board.
2.15 "SUBSIDIARY(IES)" means any corporation (other than the Company)
or other entity of which a majority of the outstanding capital stock or
other equity interests having ordinary voting power in the election of
directors or similar officials is owned, directly or indirectly through one
or more corporations or other entities, by the Company.
3. ADMINISTRATION.
3.1 THE COMMITTEE. The Plan shall be administered by the Committee.
The Committee shall be appointed from time to time by the Board and shall
be comprised of not less than three (3) of the then members of the Board
who are Non-Employee Directors (within the meaning of SEC Rule 16b-3(b)(3))
of the Company and "outside directors" (within the meaning of Section
162(m) of the Code). Consistent with the Bylaws of the Company, members of
the Committee shall serve at the pleasure of the Board and the Board,
subject to the immediately preceding sentence, may at any time and from
time to time remove members from, or add members to, the Committee.
3.2 PLAN ADMINISTRATION AND PLAN RULES. The Committee is authorized to
construe and interpret the Plan and to promulgate, amend and rescind rules
and regulations relating to the implementation, administration and
maintenance of the Plan. Subject to the terms and conditions of the Plan,
the Committee shall make all determinations necessary or advisable for the
implementation, administration and maintenance of the Plan including,
without limitation, (a) selecting the Plan's Participants, (b) making
Awards in such amounts and form as the Committee shall determine, (c)
imposing such restrictions, terms and conditions upon such Awards as the
Committee shall deem appropriate, and (d) correcting any technical
defect(s) or technical omission(s), or reconciling any technical
inconsistency(ies), in the Plan and/or any Award Agreement. The Committee
may designate persons other than members of the Committee to carry out the
day-to-day ministerial administration of the Plan under such conditions and
limitations as it may prescribe, except that the Committee shall not
delegate its authority with regard to the selection for participation in
the Plan and/or the granting of any Awards to Participants. The Committee's
determinations under the Plan need not be uniform and may be made
selectively among Participants, whether or not such Participants are
similarly situated. Any determination, decision or action of the Committee
in connection with the construction, interpretation, administration,
implementation or maintenance of the Plan shall be final, conclusive and
binding upon all Participants and any person(s) claiming under or through
any Participants. The Company shall effect the granting of Awards under the
Plan, in accordance with the determinations made by the Committee, by
execution of written agreements and/or other instruments in such form as is
approved by the Committee.
3.3 LIABILITY LIMITATION. Neither the Board nor the Committee, nor any
member of either, shall be liable for any act, omission, interpretation,
construction or determination made in good faith in connection with the
Plan (or any Award Agreement), and the members of the Board and the
Committee shall be entitled to indemnification and reimbursement by the
Company in respect of any claim, loss, damage or expense (including,
without limitation, attorneys' fees) arising or resulting therefrom to the
fullest extent permitted by law and/or under any directors and officers
liability insurance coverage which may be in effect from time to time.
4. TERM OF PLAN/COMMON STOCK SUBJECT TO PLAN.
4.1 TERM. The Plan shall terminate on December 31, 2008, except with
respect to Awards then outstanding. After such date no further Awards shall
be granted under the Plan.
4.2 COMMON STOCK. The maximum number of shares of Common Stock in
respect of which Awards may be granted under the Plan to employees and
non-employee directors, in the aggregate, subject to adjustment as provided
in Section 10.2 of the Plan, shall not exceed 1,251,685 shares. The maximum
number of shares of Common Stock in respect of which Awards may be granted
under the Plan to consultants (including marketing agents), subject to
adjustment as provided in Section 10.2 of the Plan, shall not exceed
387,119 shares. In the event of a change in the Common Stock of the Company
that is limited to a change in the designation thereof to "Capital Stock"
or other similar designation, or to a change in the par value thereof, or
from par value to no par value, without increase or decrease in the number
of issued shares, the shares resulting from any such change shall be deemed
to be the Common Stock for purposes of the Plan. Common Stock which may be
issued under the Plan may be either authorized and unissued shares or
issued shares which have been reacquired by the Company (in the open-market
or in private transactions) and which are being held as treasury shares. No
fractional shares of Common Stock shall be issued under the Plan.
4.3 COMPUTATION OF AVAILABLE SHARES. If any Awards expire unexercised
or are forfeited, surrendered, cancelled, terminated or settled in cash in
lieu of Common Stock, the shares of Common Stock which were theretofore
subject (or potentially subject) to such Awards shall again be available
for Awards under the Plan to the extent of such expiration, forfeiture,
surrender, cancellation, termination or settlement of such Awards.
5. ELIGIBILITY. Individuals eligible for Awards under the Plan shall
consist of all salaried employees, non-employee directors and consultants
(including marketing agents), or those who will become such employees,
non-employee directors and consultants (including marketing agents) of the
Company and/or its Subsidiaries who are responsible for the management, growth
and protection of the business of the Company and/or its Subsidiaries or whose
performance or contribution, in the sole discretion of the Committee, benefits
or will benefit the Company.
6. STOCK OPTIONS.
6.1 TERMS AND CONDITIONS. Stock options granted under the Plan shall
be in respect of Common Stock and may be in the form of either Incentive
Stock Options or Non-Qualified Stock Options (sometimes referred to
collectively herein as the "Stock Option(s))". However, in no event may a
non-employee director or a consultant (including a marketing agent) receive
a grant of Incentive Stock Options under the Plan. Stock Options shall be
subject to the terms and conditions set forth in this Section 6 and any
additional terms and conditions, not inconsistent with the express terms
and provisions of the Plan, as the Committee shall set forth in the
relevant Award Agreement.
6.2 GRANT. Stock Options may be granted under the Plan in such form as
the Committee may from time to time approve. Special provisions shall apply
to Incentive Stock Options granted to any employee who owns (within the
meaning of Section 422(b)(6) of the Code) more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or
its parent corporation or any subsidiary of the Company, within the meaning
of Sections 424(e) and (f) of the Code (a "10% Shareholder").
6.3 EXERCISE PRICE. The exercise price per share of Common Stock
subject to a Stock Option shall be determined by the Committee, including,
without limitation, a determination based on a formula determined by the
Committee; PROVIDED, HOWEVER, that, except with respect to the Stock
Options which, in accordance with the Company's First Amended Plan of
Reorganization under Chapter 11 of the Bankruptcy Code, are being granted
with an exercise price of $.01 per share of Common Stock, in no event shall
any Stock Option granted pursuant to this Plan have an exercise price of
less than $4.39 per share of Common Stock; PROVIDED, FURTHER, HOWEVER, that
the exercise price of an Incentive Stock Option shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock on the
date of the grant of such Incentive Stock Option; PROVIDED, FURTHER,
HOWEVER, that, in the case of a 10% Shareholder, the exercise price of an
Incentive Stock Option shall not be less than one hundred ten percent
(110%) of the Fair Market Value of the Common Stock on the date of grant.
6.4 TERM. The term of each Stock Option shall be such period of time
as is fixed by the Committee; PROVIDED, HOWEVER, that the term of any Stock
Option shall not exceed ten (10) years (five (5) years, in the case of an
Incentive Stock Option granted to a 10% Shareholder) after the date
immediately preceding the date on which the Stock Option is granted.
6.5 METHOD OF EXERCISE. A Stock Option may be exercised, in whole or
in part, by giving written notice of exercise to the Secretary of the
Company, or the Secretary's designee, specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the
exercise price in cash, by certified check, bank draft or money order
payable to the order of the Company or, if permitted by the Committee (in
its sole discretion) and applicable law, by delivery of, alone or in
conjunction with a partial cash or instrument payment, (a) a fully-secured
promissory note or notes, (b) shares of Common Stock already owned by the
Participant for at least six (6) months, or (c) some other form of payment
acceptable to the Committee. The Committee may also permit Participants
(either on a selective or group basis) to simultaneously exercise Stock
Options and sell the shares of Common Stock thereby acquired, pursuant to a
"cashless exercise" arrangement or program, selected by and approved of in
all respects in advance by the Committee. Payment instruments shall be
received by the Company subject to collection. The proceeds received by the
Company upon exercise of any Stock Option may be used by the Company for
general corporate purposes. Any portion of a Stock Option that is exercised
may not be exercised again.
6.6 EXERCISABILITY. In respect of any Stock Option granted under the
Plan, unless otherwise (a) determined by the Committee (in its sole
discretion) at any time and from time to time in respect of any such Stock
Option, or (b) provided in the Award Agreement or in the Participant's
employment agreement in respect of any such Stock Option, such Stock Option
shall become exercisable as to the aggregate number of shares of Common
Stock underlying such Stock Option, as determined on the date of grant, as
follows:
* 33%, on the first anniversary of the date of
grant of the Stock Option, provided the Participant
is then employed by or providing services to the
Company and/or one of its Subsidiaries;
* 66%, on the second anniversary of the date of
grant of the Stock Option, provided the Participant
is then employed by or providing services to the
Company and/or one of its Subsidiaries; and
* 100%, on the third anniversary of the date of grant
of the Stock Option, provided the Participant is then
employed by or providing services to the Company
and/or one of its Subsidiaries.
Notwithstanding anything to the contrary contained in this Section 6.6, such
Stock Option shall become one hundred percent (100%) exercisable as to the
aggregate number of shares of Common Stock underlying such Stock Option upon the
death, Disability or Retirement of the Participant or upon a Change in Control.
For the purpose of this Plan, "Change in Control" shall mean:
6.6.1 The acquisition, after the effective date of the Plan, by an
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 34% or more of either
(a) the outstanding shares of the Common Stock (excluding any acquisition
by Credit Suisse First Boston Corporation ("CSFB") or any Permitted
Subsidiary (as defined below) of 34% or more of the Common Stock upon
conversion of the shares of Series A Convertible Preferred Stock received
by CSFB or CSFB's wholly-owned subsidiary, Special Situations Holdings,
Inc.- Westbridge, pursuant to the effectiveness of the Company's First
Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code
dated October 30, 1998, as modified), or (b) the combined voting power of
the voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); PROVIDED, HOWEVER, that
the following -------- ------- acquisitions shall not constitute a Change
in Control: (x) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any person or entity
controlling, controlled by or under common control with the Company (an
"Affiliate"), or (y) any acquisition by any corporation if, immediately
following such acquisition, more than 66% of the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation (entitled to vote
generally in the election of directors), is beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who, immediately prior to such acquisition, were the beneficial owners of
the Common Stock and the Voting Securities in substantially the same
proportions, respectively, as their ownership, immediately prior to such
acquisition, of the Common Stock and Voting Securities; or
6.6.2 Individuals who, on the 30th day after the effective date of the
Plan, constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; PROVIDED, HOWEVER, that any
individual becoming a director subsequent to the effective date of the Plan
whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then serving
and comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents; or
6.6.3 Approval by the shareholders of the Company of a reorganization,
merger or consolidation, other than a reorganization, merger or
consolidation with respect to which all or substantially all of the
individuals and entities who were the beneficial owners, immediately prior
to such reorganization, merger or consolidation, of the Common Stock and
Voting Securities beneficially own, directly or indirectly, immediately
after such reorganization, merger or consolidation, more than 66% of the
then outstanding common stock and voting securities (entitled to vote
generally in the election of directors) of the corporation resulting from
such reorganization, merger or consolidation in substantially the same
proportions as their respective ownership, immediately prior to such
reorganization, merger or consolidation, of the Common Stock and the Voting
Securities; or 6.6.4 Approval by the shareholders of the Company of (a) a
complete liquidation or dissolution of the Company, or (b) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a Subsidiary, wholly-owned, directly or indirectly, by the
Company. For purposes of Section 6.6.1, a "Permitted Subsidiary" shall mean
Special Situations Holdings, Inc.- Westbridge and any other directly or
indirectly wholly-owned subsidiary of Credit Suisse Group, a corporation
organized and existing under the laws of Switzerland, to which shares of
Series A Convertible Preferred Stock are transferred for tax, regulatory or
other general corporate purposes, but excluding any subsidiary which either
(i) is or intends to be engaged in any line of business in which the
Company is engaged as of the date of such conversion, (ii) becomes a
subsidiary after the Effective Date through any acquisition, merger or
similar transaction, or (iii) intends to become, or becomes, engaged in the
day to day management of the Company's business to such an extent that it
alters the control of the Company's operations.
6.7 AUTOMATIC GRANTS. Any shares underlying Stock Options granted to
consultants who are marketing agents and which are forfeited during any
calendar year pursuant to Section 8 (the "Forfeited Shares") shall
automatically become the subject of new Stock Options automatically granted
under and pursuant to the terms of this Section 6.7 to all of the
consultants who are marketing agents in good standing with the Company on
January 2 of the calendar year immediately following the calendar year in
which the forfeiture(s) occurred. Each such marketing agent consultant
shall promptly receive a new Stock Option to acquire a number of shares of
Common Stock equal to the aggregate number of Forfeited Shares in respect
of such calendar year, multiplied by a fraction, the numerator of which
shall be the aggregate commissions earned by such marketing agent
consultant during such Calendar Year and the denominator of which shall be
the aggregate commissions earned by all such marketing agent consultants
during such calendar year, as determined by the Committee. The per share
exercise price of such new Stock Options shall be equal to 100% of the Fair
Market Value of the Common Stock on such January 2 of such calendar year
and the term of the new Stock Options shall be ten years from the date of
grant. The new Stock Options shall become exercisable in accordance with
Section 6.6 of the Plan.
7. MAXIMUM YEARLY AWARDS. All Participants in the aggregate may not
receive in any calendar year Awards of Options, exceeding 1,638,804
underlying shares of Common Stock. Each individual Participant may not
receive in any calendar year Awards of Options exceeding 819,402 underlying
shares of Common Stock. The maximum annual Common Stock amounts in this
Section 7 are subject to adjustment under Section 10.2 and are subject to
the Plan maximum under Section 4.2.
8. TERMINATION OF EMPLOYMENT.
8.1 GENERAL. Except as is otherwise provided (a) in the relevant
Award Agreement as determined by the Committee (in its sole
discretion), or (b) in the Participant's then effective employment
agreement, if any, the following terms and conditions shall apply as
appropriate and as not inconsistent with the terms and conditions, if
any, contained in such Award Agreement and/or such employment
agreement:
8.1.1 OPTIONS. Subject to any determination of the Committee
pursuant to Section 6.6 of the Plan, if a Participant's employment
with or provision of services to the Company and its Subsidiaries
terminates for any reason any then unexercisable Stock Options shall
be forfeited and cancelled by the Company. Except as otherwise
provided in this Section 8.1.1, if a Participant's employment with or
provision of services to the Company and its Subsidiaries terminates
for any reason, such Participant's rights, if any, to exercise any
then exercisable Stock Options shall terminate ninety (90) days after
the date of such termination (but not beyond the stated term of any
such Stock Option as determined under Section 6.4) and thereafter such
Stock Options shall be forfeited and cancelled by the Company. The
Committee, in its sole discretion, may determine that any such
Participant's Stock Options to the extent exercisable immediately
prior to any termination of employment with or provision of services
to the Company, (other than a termination due to death, Retirement or
Disability) may remain exercisable for an additional specified time
period after such ninety (90) day period expires (subject to any other
applicable terms and provisions of the Plan and the relevant Award
Agreement), but not beyond the stated term of any such Stock Option.
If any termination of employment with or provision of services to the
Company is due to death, Retirement or Disability, a Participant (and
such Participant's estate, designated beneficiary or other legal
representative, as the case may be and as determined by the Committee)
shall have the right to exercise such Stock Options, at any time
within the one (1) year period following such termination due to
death, Retirement or Disability (but not beyond the term of any such
Stock Option as determined under Section 6.4).
9. NON-TRANSFERABILITY OF AWARDS. Unless otherwise provided in the
Award Agreement, no Award under the Plan or any Award Agreement, and no
rights or interests herein or therein, shall or may be assigned,
transferred, sold, exchanged, encumbered, pledged, or otherwise
hypothecated or disposed of by a Participant or any beneficiary(ies) of any
Participant, except by testamentary disposition by the Participant or the
laws of intestate succession. No such interest shall be subject to
execution, attachment or similar legal process, including, without
limitation, seizure for the payment of the Participant's debts, judgements,
alimony, or separate maintenance. Unless otherwise provided in the Award
Agreement, during the lifetime of a Participant, Stock Options are
exercisable only by the Participant.
10. CHANGES IN CAPITALIZATION AND OTHER MATTERS.
10.1 NO CORPORATE ACTION RESTRICTION. The existence of the Plan,
any Award Agreement and/or the Awards granted hereunder shall not
limit, affect or restrict in any way the right or power of the Board
or the shareholders of the Company to make or authorize (a) any
adjustment, recapitalization, reorganization or other change in the
Company's or any Subsidiary's capital structure or its business, (b)
any merger, consolidation or change in the ownership of the Company or
any Subsidiary, (c) any issue of bonds, debentures, capital, preferred
or prior preference stocks ahead of or affecting the Company's or any
Subsidiary's capital stock or the rights thereof, (d) any dissolution
or liquidation of the Company or any Subsidiary, (e) any sale or
transfer of all or any part of the Company's or any Subsidiary's
assets or business, or (f) any other corporate act or proceeding by
the Company or any Subsidiary. No Participant, beneficiary or any
other person shall have any claim against any member of the Board or
the Committee, the Company or any Subsidiary, or any employees,
officers or agents of the Company or any subsidiary, as a result of
any such action.
10.2 RECAPITALIZATION ADJUSTMENTS. In the event of any change in
capitalization affecting the Common Stock of the Company, including,
without limitation, a stock dividend or other non-cash distribution,
stock split, reverse stock split, recapitalization, consolidation,
subdivision, split-up, spin-off, split-off, combination or exchange of
shares or other form of reorganization or recapitalization, or any
other change affecting the Common Stock, the Board shall authorize and
make such proportionate adjustments, if any, as the Board deems
appropriate to reflect such change, including, without limitation,
with respect to the aggregate number of shares of the Common Stock for
which Awards in respect thereof may be granted under the Plan, the
maximum number of shares of the Common Stock which may be granted or
awarded to any Participant, the number of shares of the Common Stock
covered by each outstanding Award, and the exercise price per share of
Common Stock in respect of outstanding Awards.
10.3 CERTAIN MERGERS.
10.3.1 If the Company enters into or is involved in any merger,
reorganization or other business combination with any person or entity
(such merger, reorganization or other business combination to be
referred to herein as a "Merger Event") and as a result of any such
Merger Event the Company will be or is the surviving corporation, a
Participant shall be entitled, as of the date of the execution of the
agreement evidencing the Merger Event (the "Execution Date") and with
respect to both exercisable and unexercisable Stock Options (but only
to the extent not previously exercised), to receive substitute stock
options in respect of the shares of the surviving corporation on such
terms and conditions, as to the number of shares, pricing and
otherwise, which shall substantially preserve the value, rights and
benefits of any affected Stock Options granted hereunder as of the
date of the consummation of the Merger Event. Notwithstanding anything
to the contrary in this Section 10.3, if any Merger Event occurs, the
Company shall have the right, but not the obligation, to pay to each
affected Participant an amount in cash or certified check equal to the
excess of the Fair Market Value of the Common Stock underlying any
affected unexercised Stock Options as of the Execution Date (whether
then exercisable or not) over the aggregate exercise price of such
unexercised Stock Options.
10.3.2 If, in the case of a Merger Event in which the Company
will not be, or is not, the surviving corporation and the Company
determines not to make the cash or certified check payment described
in Section 10.3.1 of the Plan, the Company shall compel and obligate,
as a condition of the consummation of the Merger Event, the surviving
or resulting corporation and/or the other party to the Merger Event,
as necessary, or any parent, subsidiary or acquiring corporation
thereof, to grant, with respect to both exercisable and unexercisable
Stock Options (but only to the extent not previously exercised),
substitute stock options in respect of the shares of common or other
capital stock of such surviving or resulting corporation on such terms
and conditions, as to the number of shares, pricing and otherwise,
which shall substantially preserve the value, rights and benefits of
any affected Stock Options previously granted hereunder as of the date
of the consummation of the Merger Event.
10.3.3 Upon receipt by any affected Participant of any such cash,
certified check, or substitute stock options as a result of any such
Merger Event, such Participant's affected Stock Options for which such
cash, certified check or substitute awards was received shall be
thereupon cancelled without the need for obtaining the consent of any
such affected Participant.
10.3.4 The foregoing adjustments and the manner of application of
the foregoing provisions, including, without limitation, the issuance
of any substitute stock options shall be determined in good faith by
the Committee in its sole discretion. Any such adjustment may provide
for the elimination of fractional shares.
11. AMENDMENT, SUSPENSION AND TERMINATION.
11.1 IN GENERAL. The Board may suspend or terminate the Plan (or
any portion thereof) at any time and may amend the Plan at any time
and from time to time in such respects as the Board may deem advisable
to insure that any and all Awards conform to or otherwise reflect any
change in applicable laws or regulations, or to permit the Company or
the Participants to benefit from any change in applicable laws or
regulations, or in any other respect the Board may deem to be in the
best interests of the Company or any Subsidiary. No such amendment,
suspension or termination shall (x) materially adversely effect the
rights of any Participant under any outstanding Stock Options, without
the consent of such Participant, or (y) make any change that would
disqualify the Plan, or any other plan of the Company or any
Subsidiary intended to be so qualified, from the benefits provided
under Section 422 of the Code, or any successor provisions thereto.
11.2 AWARD AGREEMENT MODIFICATIONS. The Committee may (in its
sole discretion) amend or modify at any time and from time to time the
terms and provisions of any outstanding Stock Options, in any manner
to the extent that the Committee under the Plan or any Award Agreement
could have initially determined the restrictions, terms and provisions
of such Stock Options, including, without limitation, changing or
accelerating the date or dates as of which such Stock Options shall
become exercisable. No such amendment or modification shall, however,
materially adversely affect the rights of any Participant under any
such Award without the consent of such Participant.
12. MISCELLANEOUS.
12.1 TAX WITHHOLDING. The Company shall have the right to deduct
from any payment or settlement under the Plan, including, without
limitation, the exercise of any Stock Option, or the delivery,
transfer or vesting of any Common Stock, any federal, state, local or
other taxes of any kind which the Committee, in its sole discretion,
deems necessary to be withheld to comply with the Code and/or any
other applicable law, rule or regulation. If the Committee, in its
sole discretion, permits shares of Common Stock to be used to satisfy
any such tax withholding, such Common Stock shall be valued based on
the Fair Market Value of such stock as of the date the tax withholding
is required to be made, such date to be determined by the Committee.
The Committee may establish rules limiting the use of Common Stock to
meet withholding requirements by Participants who are subject to
Section 16 of the Exchange Act.
12.2 NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan,
the granting of any Award, nor the execution of any Award Agreement,
shall confer upon any employee of the Company or any Subsidiary any
right to continued employment with the Company or any Subsidiary, as
the case may be, nor shall it interfere in any way with the right, if
any, of the Company or any Subsidiary to terminate the employment of
any employee at any time for any reason.
12.3 UNFUNDED PLAN. The Plan shall be unfunded and the Company
shall not be required to segregate any assets in connection with any
Awards under the Plan. Any liability of the Company to any person with
respect to any Award under the Plan or any Award Agreement shall be
based solely upon the contractual obligations that may be created as a
result of the Plan or any such award or agreement. No such obligation
of the Company shall be deemed to be secured by any pledge of,
encumbrance on, or other interest in, any property or asset of the
Company or any Subsidiary. Nothing contained in the Plan or any Award
Agreement shall be construed as creating in respect of any Participant
(or beneficiary thereof or any other person) any equity or other
interest of any kind in any assets of the Company or any Subsidiary or
creating a trust of any kind or a fiduciary relationship of any kind
between the Company, any Subsidiary and/or any such Participant, any
beneficiary thereof or any other person.
12.4 PAYMENTS TO A TRUST. The Committee is authorized to cause to
be established a trust agreement or several trust agreements or
similar arrangements from which the Committee may make payments of
amounts due or to become due to any Participants under the Plan.
12.5 OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS. Payments
and other benefits received by a Participant under an Award made
pursuant to the Plan shall not be deemed a part of a Participant's
compensation for purposes of the determination of benefits under any
other employee welfare or benefit plans or arrangements, if any,
provided by the Company or any Subsidiary unless expressly provided in
such other plans or arrangements, or except where the Board expressly
determines in writing that inclusion of an Award or portion of an
Award should be included to accurately reflect competitive
compensation practices or to recognize that an Award has been made in
lieu of a portion of competitive annual base salary or other cash
compensation. Awards under the Plan may be made in addition to, in
combination with, or as alternatives to, grants, awards or payments
under any other plans or arrangements of the Company or its
Subsidiaries. The existence of the Plan notwithstanding, the Company
or any Subsidiary may adopt such other compensation plans or programs
and additional compensation arrangements as it deems necessary to
attract, retain and motivate employees.
12.6 LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE. No Awards
or shares of the Common Stock shall be required to be granted or
issued under the Plan unless legal counsel for the Company shall be
satisfied that such grant or issuance will be in compliance with all
applicable federal and state securities laws and regulations and any
other applicable laws or regulations. The Committee may require, as a
condition of any payment or share issuance, that certain agreements,
undertakings, representations, certificates, and/or information, as
the Committee may deem necessary or advisable, be executed or provided
to the Company to assure compliance with all such applicable laws or
regulations. Certificates for shares of Common Stock delivered under
the Plan may be subject to such stock-transfer orders and such other
restrictions as the Committee may deem advisable under the rules,
regulations, or other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common Stock is then
listed, and any applicable federal or state securities law. In
addition, if, at any time specified herein (or in any Award Agreement
or otherwise) for (a) the making of any Award, or the making of any
determination, (b) the issuance or other distribution of Common Stock,
or (c) the payment of amounts to or through a Participant with respect
to any Award, any law, rule, regulation or other requirement of any
governmental authority or agency shall require either the Company, any
Subsidiary or any Participant (or any estate, designated beneficiary
or other legal representative thereof) to take any action in
connection with any such determination, any such shares to be issued
or distributed, any such payment, or the making of any such
determination, as the case may be, shall be deferred until such
required action is taken. With respect to persons subject to Section
16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of SEC Rule 16b-3. To the extent
any provision of the Plan or any action by the administrators of the
Plan fails to so comply with such rule, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the
Committee.
12.7 AWARD AGREEMENTS. Each Participant receiving an Award under
the Plan shall enter into an Award Agreement with the Company in a
form specified by the Committee. Each such Participant shall agree to
the restrictions, terms and conditions of the Award set forth therein
and in the Plan.
12.8 DESIGNATION OF BENEFICIARY. Each Participant to whom an
Award has been made under the Plan may designate a beneficiary or
beneficiaries to exercise any option or to receive any payment which
under the terms of the Plan and the relevant Award Agreement may
become exercisable or payable on or after the Participant's death. At
any time, and from time to time, any such designation may be changed
or cancelled by the Participant without the consent of any such
beneficiary. Any such designation, change or cancellation must be on a
form provided for that purpose by the Committee and shall not be
effective until received by the Committee. If no beneficiary has been
designated by a deceased Participant, or if the designated
beneficiaries have predeceased the Participant, the beneficiary shall
be the Participant's estate. If the Participant designates more than
one beneficiary, any payments under the Plan to such beneficiaries
shall be made in equal shares unless the Participant has expressly
designated otherwise, in which case the payments shall be made in the
shares designated by the Participant.
12.9 LEAVES OF ABSENCE/TRANSFERS. The Committee shall have the
power to promulgate rules and regulations and to make determinations,
as it deems appropriate, under the Plan in respect of any leave of
absence from the Company or any Subsidiary granted to a Participant.
Without limiting the generality of the foregoing, the Committee may
determine whether any such leave of absence shall be treated as if the
Participant has terminated employment with the Company or any such
Subsidiary. If a Participant transfers within the Company, or to or
from any Subsidiary, such Participant shall not be deemed to have
terminated employment as a result of such transfers.
12.10 LOANS. Subject to applicable law, the Committee may
provide, pursuant to Plan rules, for the Company or any Subsidiary to
make loans to Participants to finance the exercise price of any Stock
Options, as well as the withholding obligation under Section 12.1 of
the Plan and/or the estimated or actual taxes payable by the
Participant as a result of the exercise of such Stock Option and the
Committee may prescribe the terms and conditions of any such loan.
12.11 GOVERNING LAW. The Plan and all actions taken thereunder
shall be governed by and construed in accordance with the laws of the
State of Delaware, without reference to the principles of conflict of
laws thereof. Any titles and headings herein are for reference
purposes only, and shall in no way limit, define or otherwise affect
the meaning, construction or interpretation of any provisions of the
Plan.
12.12 EFFECTIVE DATE. The Plan shall be effective upon its
approval by the Board and adoption by the Company, subject to the
approval of the Plan by the Company's shareholders in accordance with
Sections 162(m) and 422 of the Code.
IN WITNESS WHEREOF, this Plan is adopted by the Company on
this 24th day of March, 1999.
ASCENT ASSURANCE, INC.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chairman and CEO
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