The Company maintains its principal offices at 777 Main Street, Fort Worth, Texas, in facilities which are leased by the Company under a lease agreement which expires in June 2001. WPS, the Company's wholly-owned printing subsidiary which prints all policies, forms and brochures of the Insurance Subsidiaries, maintains its manufacturing facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. The Company also leases sales offices for certain of its affiliated marketing agencies in Arizona, California and Texas. The Company believes that its existing facilities will meet its existing needs and that the leases can be renewed or replaced on reasonable terms if necessary.
The information set forth below was selected or derived from the Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes.
The Company markets medical expense and supplemental health insurance products and managed care health plans to individuals in 41 states. Since 1992, the Company has grown through a combination of acquisitions and, more recently, increased sales of its underwritten products. Primarily as a result of acquisitions, the Company's total premiums grew from approximately $56.7 million in 1992 to approximately $98.7 million in 1994. During the first quarter of 1995, the Company embarked on a strategy of expanding the number of agents in its marketing distribution system to increase sales of its underwritten products. As a result of this initiative, the Company's net annualized written premiums increased from $19.9 million in 1994 to $79.1 million in 1996 with total premiums increasing 59% from $98.7 million in 1994 to $156.8 million in 1996. During the middle of 1996, the Company reduced the marketing of its underwritten products due to statutory capital and surplus constraints caused by its rapid growth.
The Company has taken advantage of its marketing distribution system to market certain managed care health plans which are underwritten by HMOs and other non-affiliated managed care organizations. Through this marketing effort, which generates sales commissions, the Company's fee and service income has increased from approximately $2.3 million in 1995 to approximately $9.5 million in 1996. Fee and service income can be generated without regard to the statutory capital and surplus requirements that apply to the Company's underwritten products.
The Company's strategy is (i) to expand its underwriting and marketing of its Medical Expense Products in rural areas where managed care health plans are often unavailable, (ii) to increase its fee and service income by continuing
DPAC consists of expenditures made for the production of new business. Such expenditures consist principally of the amount by which first-year commission costs exceed commission costs paid in subsequent policy years and policy issue costs. Also included in DPAC is the cost of insurance purchased relating to acquired blocks of business. The amortization of these costs is based on actuarially estimated future premium revenues. The amortization rate is adjusted monthly to reflect actual experience.
ACQUISITIONS. Over the past four years, the Company has acquired seasoned blocks of business to supplement its revenue. These acquisitions included (i) a block of Medicare Supplement Products purchased from AII in September 1992, (ii) a block of Medicare Supplement Products purchased from LHI in March 1993, (iii) a block of Critical Care and Specified Disease Products purchased from DNL in February 1994, (iv) a block of policies in all of the Company's product lines purchased in the acquisition of NFIC and AICT in April 1994, and (v) a block of Critical Care and Specified Disease Products purchased in the acquisition of FLICA in May 1996.
NEW BUSINESS PRODUCTION. The Company's ability to underwrite insurance products is limited by state regulation of statutory capital and surplus requirements. As a result of rapid growth in underwritten health insurance product sales during 1995 and the first six months of 1996, the Company has experienced a decline in its available statutory capital and surplus. Accordingly, the Company has reduced the marketing of its underwritten products since the second quarter of 1996, consistent with its available statutory capital and surplus. This reduction resulted in a decrease in first-year premiums from $16.5 million for the three months ended June 30, 1996 to $14.9 million for the three months ended December 31, 1996, respectively. Further decreases in the Company's first-year premiums are expected to continue until such time as the Company is able to obtain additional statutory capital and surplus. In the absence of a resumption of growth in sales of the Company's underwritten products, future renewal premiums are expected to level off and begin to decline during 1997. Absent other sources of revenue, a decline in total premiums would result in a reduction in the Company's earnings. The Company is seeking additional statutory capital and surplus for the Insurance Subsidiaries to permit the Company to increase the marketing of its underwritten insurance products. See "-Liquidity, Capital Resources and Statutory Capital and Surplus." However, any resulting growth in sales of the Company's underwritten products would not be expected to significantly increase total premiums until the latter part of 1997 or early 1998. No assurance can be given that additional sources
PREMIUMS. The following table shows the premiums received by the Company through internal sales and through acquisitions during the periods indicated:
underwritten by HMOs and other managed care organizations, and (c) the effect of economic and market conditions. 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 Annual Report on Form 10-K and those in the Company's reports previously filed with the Securities and Exchange Commission.
PREMIUMS. Premiums increased $36.7 million, or 30.6%, from $120.1 million to $156.8 million. The increase was attributable to first-year and renewal premiums of Company-issued policies increasing $26.5 million and $11 million, or 76.6% and 30.2%, respectively, offset by a decrease in premiums from acquired policies of $0.8 million, or 1.6%.
The increase in first-year premiums of Company-issued policies was attributable to an increase of $17.2 million, or 337.3%, in Medical Expense premiums produced by non-affiliated general agencies, an increase of $8.9 million, or 75.4%, in Medical Expense premiums produced by LifeStyles Marketing, and an increase of $3.3 million, or 28%, in Medicare Supplement premiums produced by Senior Benefits. These increases were offset, in part, by a decrease of $3.2 million in Critical Care and Specified Disease premiums.
NET INVESTMENT INCOME. Net investment income increased $1.3 million, or 17.6%, from $7.4 million to $8.7 million. This increase was primarily the result of an $800,000 increase in interest earned on receivables due from agents. The remaining increase is due primarily to a higher average investment base which was offset, in part, by negative cash flows from operations. The higher average investment base resulted from the acquisition of FLICA during the year and to amounts borrowed to finance advances to general agencies.
FEE AND SERVICE INCOME. Fee and service income increased $7.2 million, or 313%, from $2.3 million to $9.5 million. The increase was primarily due to an increase of $6.4 million of commission income on managed care product sales by the Company's controlled general agencies and an increase of $865,000 of telemarketing services earned by PDS.
COMMISSIONS. Commissions decreased $3.5 million, or 30.7%, from $11.4 million to $7.9 million. This decrease was a reflection of lower overall net level commission rates on new business production as compared to level commission rates for products written in prior reporting periods. Before elimination of intercompany revenues and expenses in consolidation, commissions decreased $4.3 million in NFL, or 43.9%, and $1.2 million, or 36.4%, in NFIC and AICT. Offsetting these decreases were increases in commissions of $3.3 million, or 67.3%, in LifeStyles Marketing, $3.3 million in Health Care-One, which began operations in the fourth quarter of 1995, $577,000 in Senior Benefits and $350,000 in American Senior Security Plans. An increase of $3.3 million in commissions paid to the Company's controlled general agencies was eliminated in consolidation.
TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $1.9 million, or 46.3%, from $4.1 million to $6 million. The increase was primarily due to growth in premium revenues along with state fees charged for examinations and various assessments, including guaranty fund assessments.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $1.6 million, or 57.1%, from $2.8 million to $4.4 million. The increase was the result of pre-tax income increasing $4.2 million, or 49.4%.
The increase in first-year premiums resulted from a $7.9 million, or 199.1%, increase in first-year Medicare Supplement premium generated by Senior Benefits, a $4.6 million, or 63.1%, increase in first-year Medical Expense premiums generated by LifeStyles Marketing, an increase of $5 million in first-year Medical Expense premiums generated by Cornerstone and Farm & Ranch, which began marketing products for the Company in December 1994, and a $2.1 million, or 87.5%, increase in first-year premiums on policies reinsured from FLICA.
AMORTIZATION OF DPAC. Amortization of DPAC increased $1.8 million, or 18.6%, from $9.7 million to $11.5 million. The increase in amortization of DPAC resulted from amortization increases of $2.9 million related to LifeStyles Marketing Products, $1.4 million from discontinued Medicare Supplement Products and $927,000 from pre-1987 Medical Expense Products. These increases are offset, in part, by decreases in amortization of DPAC related to Company-issued Critical Care and Specified Disease Product of $2 million and Critical Care and Specified Disease Product reinsured from FLICA of $1.1 million.
COMMISSIONS. Commissions increased $135,000, or 1.2%, from $11.2 million to $11.3 million. Commissions increased $587,000 from policies reinsured with FLICA with an offsetting decrease of $510,000 from Acquired policies. Before elimination of intercompany revenues and expenses in consolidation, commissions increased $913,000, or 8.3%, in NFL, $847,000, or 35.1%, in NFIC and AICT, and $1.3 million, or 35.1%, in LifeStyles Marketing. An increase of $2.7 million, or 44.5%, in commissions paid to the Company's controlled general agencies was eliminated in consolidation.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $5.1 million, or 30.1%, from
TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $871,000, or 27.2%, from $3.2 million to $4.1 million due principally to the increase in collected premiums and the related tax thereon levied by state governments.
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. The Company has not experienced material annual losses on such commission advances. However, for the year ended December 31, 1996, the Company charged-off approximately $0.9 million of reimbursable commission advances which had accumulated in LifeStyles Marketing over a period of five years.
There can be no assurance as to the occurrence or degree of any future losses. As of December 31, 1996, outstanding advances totaled $18.3 million to the Company's general agencies and their agents.
Net cash provided by investing activities totaled $6.2 million, $0.4 million, and $11.5 million in 1996, 1995 and 1994, respectively. The increase in 1996 was attributable to the liquidation of investments to support the increased new business production which occurred during the first two quarters of 1996.
The Company had no significant high-yield, unrated or less than investment grade fixed maturity securities in its investment portfolio as of December 31, 1996, and it is the Company's policy not to exceed more than 5% of total
Inflation will affect claim costs on the Company's Medicare Supplement Products and Medical Expense Products. Costs associated with a hospital stay and the amounts reimbursed by the Medicare program are each determined, in part, based on the rate of inflation. If hospital and other medical costs which 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.
In our opinion, the consolidated financial statements listed in the index appearing on page 37 of this Form 10-K present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
In the second quarter of 1996, the Company purchased the remaining outstanding capital stock of an insurance holding company that it did not already own, for a cash purchase price of $6.3 million. This purchase resulted in the Company receiving assets and assuming liabilities as follows:
WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Westbridge Capital Corp. ("the Company"), and its wholly-owned subsidiaries, National Foundation Life Insurance Company ("NFL"), Freedom Life Insurance Company of America ("FLICA"), National Financial Insurance Company ("NFIC"), American Insurance Company of Texas ("AICT"), Freedom Holding Company ("FHC"), Foundation Financial Services, Inc. ("FFS"), Westbridge Marketing Corporation ("WMC"), Westbridge Financial Corp. ("Westbridge Financial"), Westbridge Printing Services, Inc. ("WPS"), Precision Dialing Services, Inc. ("PDS"), Westbridge National Life Insurance Company ("WNL"), Flex-Plan Systems, Inc. ("FPS"), Westbridge Funding Corporation ("WFC"), (formerly known as National Legal Services Company, Inc.), Senior Benefits, LLC ("Senior Benefits") and American Senior Security Plans, LLC ("ASSP"). The consolidated financial statements also include the accounts of the Company's 80%-owned subsidiary Health Care-One Marketing Group, Inc. ("HCO Marketing") as well as its 51%-owned subsidiary, LifeStyles Marketing Group, Inc. ("LifeStyles Marketing") and its 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.
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 insurance regulators of Delaware, Mississippi, Texas and other states in which they are authorized to conduct business. These regulators perform triennial examinations of the statutory financial statements and, as a result, may propose adjustment to such statements.
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.
Claims represent the estimated liabilities on claims reported plus claims incurred but not yet reported. These liabilities are subject to the impact of future changes in claim experience and, as adjustments become necessary, they are reflected in current operations.
RECOGNITION OF REVENUE. Life insurance and accident and health premiums are recognized as revenue when received. Benefits and expenses are associated with related premiums so as to result in a proper matching of revenues with expenses. Fee and service income and investment income are recognized when earned.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Balance at beginning of year $2,593 $(147) Unrealized (depreciation) appreciation, net of tax, on fixed maturities available-for-sale (1,328) 2,735 Unrealized (depreciation) appreciation, net of tax, on equity securities and other investments (208) 5 ------- ------- Balance at end of year $1,057 $2,593 ======= =======
* Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as AVAILABLE-FOR-SALE SECURITIES and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
Amortized cost $90,370 $83,160 Estimated market value 91,947 86,780 ------- ------- Excess of market value to amortized cost 1,577 3,620 Estimated tax 552 1,267 ------- ------- Unrealized appreciation, net of tax $1,025 $2,353 ======= =======
Securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1996 and 1995 had a par value totaling $21,870,000 and $19,920,000, respectively.
On May 31, 1996, the Company completed the acquisition of the 60% of Freedom Holding Company ("FHC") it did not already own. FHC is a holding company which owns 100% of FLICA, a Mississippi domiciled insurer licensed in 34 states. The purchase price was $6.3 million in cash, and the transaction was accounted for under the purchase method. Prior to the acquisition, the Company accounted for its 40% investment in FHC using the equity method. The Company's portion of FHC's earnings prior to the acquisition in 1996 accounted for using the equity method was $74,000 in 1996, $348,000 in 1995 and $345,000 in 1994. The Company received a $120,000 dividend in 1995 from FHC.
Beginning June 1, 1996, the results of operations of FHC have been reflected in the Company's Consolidated Statements of Operations and of Cash Flows. The present value of future profits associated with the purchase are being amortized in relation to premium revenues over the remaining life of the business. At the time of the acquisition, the Company, through an insurance subsidiary, reinsured the majority of business underwritten by FLICA. Subsequent to the acquisition of the remaining interest of FHC, the coinsurance agreements between FLICA and NFL were cancelled. The acquisition did not have a material pro-forma impact on operations.
The following summary, prepared on a pro-forma basis, combines the consolidated results of operations of NFIC and AICT with the operations of the Company, after including the impact of certain adjustments, such as amortization of deferred acquisition costs, dividends on the Series A Preferred Stock, and factually supportable expense reductions resulting from the consolidation of administrative operations. The following results assume the Acquisition occurred as of the beginning of the respective period.
Under the terms of the joint venture agreement, profits and losses of LifeStyles Marketing are to be allocated 50% to WMC and 50% to the minority shareholders. However, because of the Company's voting and financial control, the operations of the joint venture are consolidated with the Company's operations and, accordingly, all significant intercompany accounts and transactions are eliminated.
The minority interest share of pre-tax income recognized by the Company is $247,000 at December 31,
In November 1993, the Company acquired a 50% ownership interest in Senior Benefits. In June 1996, the Company acquired the remaining 50% ownership interest in Senior Benefits. Senior Benefits' revenue and expenses were $1,593,000 and $1,358,000 during 1996, and $1,005,000 and $1,105,000 during 1995 and $278,000 and $547,000 during 1994, respectively. Senior Benefits primarily markets Medicare Supplement products for NFL and began marketing products in late 1996 for non-affiliated insurance carriers. Of the revenues received, $770,000 were derived from NFL in the form of commission income on insurance products sold during 1996 ($982,000 in 1995 and $271,000 in 1994.) Through December 31, 1996, the Company had loaned Senior Benefits approximately $579,000 in the form of working capital advances. These advances will be repaid in the future through positive cash flows generated from renewal commissions, from advanced commissions from non-affiliated insurance carriers, and if and when profits are recognized from continuing operations.
In 1995, the Company formed Health Care-One, which markets insurance products for non-affiliated insurance carriers. The Company owns 50% of Health Care-One. The Company is providing financing to Health Care-One during the start-up phase of operations. Health Care-One's revenue and expenses were $4,365,000 and $4,121,000 respectively, in 1996. Health Care-One's operations were not significant in 1995. Through December 31, 1996, the Company had loaned Health Care-One approximately $1,230,000 in the form of first-year commission advances. These advances will be repaid in the future through positive cash flows generated from renewal commissions, from advanced commissions from non-affiliated insurance carriers, and if and when profits are recognized from continuing operations. The minority interest in pre-tax income subject to profit-sharing and recognized by the Company is $44,000 at December 31, 1996.
are 10% graded to 7% at year 10. ART issues in 1988 and later are 8.5% for 5 years graded to 7.5% in year 20. Participating policies are 4.5% for issues through 1965; 5% for 1966 through 1969 issues, and graded from 6% to 5% in 25 years for issues subsequent to 1969; 1995 and later issues are 6% level.
On February 28, 1995, the Company issued $20 million aggregate principal amount of its 11% Senior Subordinated Notes due 2002 (the "Notes") in an underwritten public offering. The Notes were issued at par, less an underwriting discount of 4%.
The Company may redeem the Notes at any time on or after March 1, 1998, upon 30-days written notice,
In March 1986, the Company completed a public offering of 25,000 Units consisting of $25 million principal amount of 11.70% Senior Subordinated Debentures due 1996 (the "Debentures") and warrants to purchase 800,000 shares of the Company's Common Stock (the "Warrants") at $12.25 per share. The Warrants expired unexercised on March 15, 1991.
Concurrent with the Common Stock and Note offerings, on February 29, 1995, the Company placed funds in escrow sufficient to cover all remaining principal and interest payments on its outstanding 11.7% Senior Subordinated Debentures due 1996, which were called for redemption on March 30, 1995. The redemption price was par plus accrued interest. This redemption prior to scheduled maturity resulted in a loss from early extinguishment of debt. The loss related to amortization of the remaining original issue discount and write-off of deferred financing costs, offset in part by interest earned on the funds in escrow. This loss is reported as an extraordinary item on the accompanying statement of operations.
On December 22, 1995, the Company issued a $1 million principal amount 10% Senior Note due 2002 (the "Senior Note") to the Chairman of the Board of Directors, a related party. The Senior Note was issued at par. In connection with the Senior Note issuance, the Company also issued a Common Stock purchase Warrant for 135,501 shares of Common Stock at an exercise price of $7.38 per share.
The Company has a $20 million Credit Agreement (the "Agreement") which is secured by receivable balances from insurance agents which expires on January 7, 1998. A commitment fee of 1/2 of 1% is applied against the unused portion. At the Company's option, interest under the Agreement may be based on prime rate or LIBOR plus an applicable margin. The rate in effect at December 31, 1996, was approximately 8.5%. The Company had approximately $11.6 million outstanding under the Agreement at December 31, 1996. The Agreement required the Company, among other things, to maintain minimum levels of statutory surplus, tangible net worth and certain minimum financial ratios. (See discussion of restricted funds in NOTE 2 - INVESTMENTS).
Current year 68,199 46,755 42,919 Prior years 25,297 27,468 10,655 Current year acquired business 269 -- 10,706 ------- ------- -------- Total paid 93,765 74,223 64,280 ------- ------- -------- Balance at December 31 37,730 35,644 39,930 Plus: reinsurance recoverables 1,456 3,419 1,457 ------- ------- -------- Balance at December 31 (Gross) $39,186 $39,063 $41,387 ======= ======= ========
On April 12, 1994, the Company issued 20,000 shares of Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred Stock"), at a price of $1,000 per share. The Series
A Preferred Stock was issued in a private placement and was subsequently registered with the Securities and Exchange Commission under a registration statement which was declared effective in October 1994. The following summarizes the significant terms of the Series A Preferred Stock:
* Cumulative annual dividend rate of 8.25%, subject to increase upon non-compliance by the Company with certain restrictions.
* At December 31, 1994, the Series A Preferred Stock was convertible by the holders thereof into the 2,285,720 shares of the Company's Common Stock at a conversion price of $8.75 per share. As a result of the Common Stock offering in 1995, the conversion price was adjusted to $8.41 per share. The Series A Preferred Stock were convertible into 2,378,120 shares of Common Stock as of December 31, 1995 and 1996.
* The Company may redeem any and all shares of Series A Preferred Stock outstanding on or after April 12, 1997.
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, which was not previously owned by the Company. 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 $346,000 in 1996, net of interest accretion of $180,000.
The cost of insurance purchased in 1994 is related to the purchase of NFIC and AICT and is being amortized in relation to premium revenues over the remaining life of the business. Interest accrues on the unamortized balance at 7% per year. Amortization of this cost of insurance purchased was approximately $1.8 million, $2.3 million and $3 million in 1996, 1995 and 1994, respectively, net of interest accretion of $0.5 million, $1.3 million and $1.5 million.
The estimated amortization of the cost of insurance purchased is 15% to 20% of each years' beginning balance for a period of five years subsequent to the date of acquisition.
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.
Current $ ( 804) $1,032 $1,581 Deferred 5,214 1,781 1,183 ------ ------ ------ Total provision for income taxes $4,410 $2,813 $2,764 ====== ====== ======
Statutory tax rate 34% 34% 34% Small life insurance company deduction calculated as a percentage of life insurance company income -- -- (5%) Unutilized loss carryforwards of non-life companies -- -- 2% Equity earnings of unconsolidated subsidiary -- (1%) (1%) Other items, net 1% -- -- --- --- --- Effective tax rate 35% 33% 30% === === ===
Deferred Tax Assets: Policy reserves 7,196 3,296 Net operating loss carryforwards 8,296 6,960 Tax credit carryforwards 11 11 Other deferred tax assets 263 1,307 Valuation allowance (4,878) (4,878) -------- -------- Total deferred tax asset 10,888 6,696 -------- -------- Net deferred tax liability $10,299 $5,841 ======== ========
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 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 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 AICT must each maintain is $3.5 million. FLICA must maintain a minimum of $4 million. At December 31, 1996, aggregate statutory capital and surplus for NFL, NFIC, AICT and FLICA was $14.4 million, $7.8 million, $8.2 million and $14.9 million, respectively. Statutory net income (loss) for NFL, NFIC, AICT and FLICA for the year ended December 31, 1996, was $1.7 million, $(2.2) million, $(0.1) million and $7 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.
Dividend payments from Westbridge's principal Insurance Subsidiaries are regulated by the insurance laws of their domiciliary states. NFL is domiciled in Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware may not declare or pay a dividend or other distribution from any source other than "earned surplus" without the state insurance commissioner's prior approval. "Earned surplus" is defined as an amount equal to the unassigned funds of an insurer as set forth on its most recent statutory annual statement, including all or part of the surplus arising from unrealized capital gains or revaluation of assets. NFIC and AICT are domiciled in Texas. An insurer domiciled in Texas may pay dividends only out of "surplus profits arising from its business" to the exent of net gains from operations, not including realized capital gains, for the twelve month period ending as of the preceding December 31. Moreover, insurers domiciled in either Delaware or Texas may not pay "extraordinary dividends" without first providing the state insurance commissioner with 30-days prior notice, during which time such commissioner may disapprove the payment. An "extraordinary dividend" is defined as a dividend whose fair market value together with that of other dividends made within the preceding 12-months exceeds the greater of (a) ten percent of the insurer's surplus as regards policyholders as of the preceding December 31 or (b) the net gain from operations of such insurer, not including realized capital gains, for the 12-month period ending on the preceding December 31. FLICA is domiciled in Mississippi. Under Mississippi Insurance Regulations, an insurer domiciled in Mississippi may pay dividends limited to the lessor of 10% of statutory capital and surplus or 100% of the statutory net income for the preceding year unless prior written approval of the Commissioner is obtained. In September 1994, NFL paid to Westbridge an "extraordinary dividend" in the amount of $2 million. With respect to ordinary dividends payable by an insurer domiciled in Delaware, notice of any dividend must be provided to the state insurance commissioner within five business days following the declaration thereof and at least ten days prior to the payment thereof.
As of December 31, 1996, NFL is precluded from paying dividends during 1997 without prior regulatory approval due to negative statutory "earned surplus" as a result of historical statutory losses. For the foreseeable future, NFL has agreed to seek the approval of the Delaware insurance commissioner prior to making any dividend payments. As of December 31, 1996, NFIC and AICT are precluded from paying dividends during 1997 without prior regulatory approval due to statutory losses for the year ended December 31, 1996. FLICA has the ability to pay NFL, without prior regulatory approval, approximately $1.5 million in dividends during 1997, none of which has been paid.
In Delaware, Mississippi and Texas, the state insurance commissioner reviews the dividends paid by each insurer domiciled in such commissioner's state at least once each year to determine whether they are
reasonable in relation to the insurer's surplus as regards policyholders and quality of earnings. The state insurance commissioner may issue an order to limit or disallow the payment of ordinary dividends if such commissioner finds the insurer to be presently or potentially financially distressed or troubled.
The Company applies ABP Opinion No. 25 and related interpretations in accounting for its stock options plans, which are described below. Accordingly, no compensation cost has been recognized for its qualified stock option plans. If compensation cost for the Company's stock option plans had been determined based on the estimated market value at the grant dates for awards under those plans consistent with the method provided by SFAS No. 123, the Company's net income and earnings per share would have been reflected by the following pro forma amounts for the year ended December 31, 1996 and 1995:
Net income, as reported $8,261,000 $5,324,000 Net income, pro forma $8,037,000 $5,270,000 Primary earnings per share, as reported $1.08 $0.63 Primary earnings per share, pro forma $1.04 $0.62 Fully diluted earnings per share, as reported $0.97 $0.65 Fully diluted earnings per share, pro forma $0.94 $0.64
give effect for stock dividends paid in 1983) shares, in the aggregate, of the Company's Common Stock. Options granted under the ISO Plan are intended to qualify as either "incentive stock options" under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or as non-qualified stock options as defined under the Code. The ISO Plan provides that the option price per share will be no less than the estimated market value for a share of the Company's Common Stock on the date of grant. To date, all option prices have been equal to the estimated market value of the stock on the date of grant. The ISO plan also provides that shares available upon the exercise of options granted under the ISO Plan may be paid for with cash or by tendering shares of Common Stock owned by optionee(s), or a combination of the foregoing. All vested options outstanding are exercisable for a period not to exceed ten years from the date the option was granted, except that no option is exercisable until at least one year after its grant. In addition, the ISO Plan provides that no one owning 10% of the total combined voting power of all classes of the Company's stock, or of the stock of any subsidiary, is eligible to be awarded options under the ISO Plan.
The Company also adopted, as of September 5, 1985, a second employee stock option plan (as amended, the "1985 Plan"). The 1985 Plan provides for the granting, to eligible employees of the Company or its subsidiaries, of stock options to purchase up to a total of 200,000 shares of the Company's Common Stock. Options granted under the 1985 Plan are treated as "non-qualified stock options" for purposes of the Code and the option price per share shall not be less than 90% of the estimated market value of the Company's Common Stock on the date of grant. All options outstanding are exercisable within seven years from the date the option was granted, except that no option is exercisable until at least one year after its grant.
On April 19, 1996, the Company adopted a Restricted Stock Plan (the "1996 Plan"). This 1996 Plan provides for the granting of up to 1,000,000 shares of Common Stock subject to certain restrictions and adjustments. The restricted shares are subject to vesting requirements ("the restriction period") ranging from six months for non-employee directors to sixty months for employees or other authorized grantees. During the restriction period, the grantee may not sell, assign, transfer, pledge, encumber or otherwise dispose of or hypothecate such an award. Upon satisfaction of the vesting schedule and any other applicable restrictions, terms or conditions, the grantee will be entitled to receive the shares. There were no awards or grants of restricted shares during 1996 to employees. Non-employee directors were granted a total of 6,000 restricted shares during 1996.
Options outstanding at beginning of year 411,994 375,294 554,917 Options granted during the year: Price granted at $5.40 -- 116,000 -- Price granted at $5.60 -- 6,000 -- Price granted at $6.84 -- -- 5,000 Price granted at $7.20 -- -- 5,000 Price granted at $7.65 -- -- 25,000 Price granted at $7.71 -- -- 5,000 Price granted at $8.25 4,000 -- -- Options exercised during the year:
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 $4,063,000, $2,807,000, and $1,703,000, were paid to reinsurers in 1996, 1995, and 1994, respectively. Face amounts of life insurance in force approximated $86,978,000, $43,441,000 and $21,814,000 at December 31, 1996, 1995 and 1994, respectively. No life insurance was reinsured as of December 31, 1996, 1995 and 1994, respectively.
In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a wholly-owned subsidiary of FHC. Under the terms of the treaty, NFL assumed a 90% pro-rata share of certain Critical Care and Specified Disease business. For the years ended December 31, 1996, 1995 and 1994, $2,329,000, $5,058,000, and $1,640,000, respectively, of assumed premiums under this coinsurance treaty are included as premium revenue in the Consolidated Financial Statements. This coinsurance treaty was cancelled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996.
In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms of the treaty, NFL assumed a 50% pro-rata share of all insurance business written by FLICA from January 1, 1987 through December 31, 1988. In November 1988 (see NOTE 3), the coinsurance treaty was amended to extend through 1997. For the years ended December 31, 1996, 1995 and 1994, $1,673,000, $4,272,000, and $4,607,000, respectively, of assumed premiums under the coinsurance treaty are included as revenue in the consolidated financial statements. This coinsurance treaty was cancelled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996,
In the ordinary course of business, the Company has advanced commissions and made loans to agents collateralized by future commissions. First-year commission advances to agents are recorded as receivables from agents and totaled $18.3 million as of December 31, 1996. Westbridge holds a secured promissory note (the "Elkins Note"), from NFC Marketing, Inc. ("NFC"), an Arkansas corporation which is wholly-owned by Elkins. The balance of this note recorded on the books of the Company at December 31, 1996 is approximately $702,000. The note, which was renegotiated in October 1994, represents principal and accrued interest on a loan made by Westbridge to NFC for the purpose of expanding its marketing efforts.
Summarized quarterly financial data for each of the Company's last two years of operations is as follows (in thousands, except per share data):