LifeStyles Marketing maintains its sales headquarters at 1161 Corporate Drive, Arlington, Texas, under a five year lease agreement which expires in August, 1997. LifeStyles Marketing also leases office space for certain of its 18 branch sales office locations under lease agreements which expire on various dates throughout the next twelve months. Senior Benefits maintains its offices in Scottsdale, Arizona, under a three-year lease expiring in September, 1996.
American Senior Security Plans maintains its offices in Dallas, Texas, under an annual lease agreement.
Health-Care One maintains its offices in San Diego, California, under a lease agreement expiring January, 1999.
Selected financial data for each of the Company's last five years of operations is presented below (in thousands, except share data):
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 investment assets and gains on the sales or redemptions of investment assets. The Company's primary expenses include benefits and claims in connection with its insurance products, amortization of deferred policy acquisition costs ("DPAC"), commissions paid on policy renewals, general and administrative expenses associated with policy and claims administration, taxes, licenses and fees, and interest on the indebtedness. In addition to the foregoing expenses, the Company is obligated to pay dividends on the Series A Preferred Stock if and when declared by the Board of Directors.
DPAC consists of expenditures made for the production of new business. They consist principally of the amount by which first-year commission costs exceed commission costs paid in subsequent policy years. 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 periodically to reflect actual experience.
As demonstrated by the substantial increases in first-year premiums for company issued policies over the past three years, the Company has strived to produce revenue growth through marketing and sale of new insurance business. This successful marketing growth has resulted from expanded production at existing agency networks, such as LifeStyles Marketing and Senior Benefits, and from the development of relationships with new marketing organizations, such as Cornerstone and Farm & Ranch.
Premiums. Premiums increased $21.4 million, or 21.7%, from $98.7 million to $120.1 million. This was due to an increase in first-year premiums of $19.6 million, or 130.1 %, and an increase in renewal premiums of $1.7 million, or 2.1%.
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 $5.0 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.
The increase in renewal premium is attributable to increases of $3.0 million from Senior Benefits, $1.0 million, or 26.1%, from policies reinsured from FLICA, and $701,000, or 7.6%, for LifeStyles Marketing Products. These increases were offset by decreases of $1.2 million, or 21.3%, from discontinued Medicare Supplement and Medical Expense Products, and $1.2 million in renewal premiums from Acquired Policies. The decrease in renewal premium from Acquired Policies is primarily attributable to a $3.4 million, or 25.7%, decrease from the AII block of business along with decreases of $556,000, or 14.4%, and $416,000, or 16.6%, in renewal premium from policies acquired from Dixie National and Life and Health, respectively, offset by a $3.2 million increase in renewal premium from NFIC and AICT acquired policies. Because NFIC and AICT were acquired in April, 1994, revenues from the policies were recorded for a full year in 1995 compared to approximately nine months in 1994.
Net Investment Income. Net investment income increased $1.7 million, or 29.8%, from $5.7 million to $7.4 million due to a combination of slightly higher rates of return on the Company's invested assets and the results of having the invested assets acquired with NFIC and AICT earning income for the Company for a full year in 1995. Additionally, approximately $400,000 of interest on agents' debit balances was recorded in 1995, which was not present in 1994.
Fee and Service Income. Fee and service income increased $599,000, or 35.2%, from $1.7 million to $2.3 million due primarily to an increase of $442,000 of telemarketing services sold to non-affiliated agency operations.
Benefits and Claims. Benefit and claim expense increased $16.9 million, or 31.5%, from $53.6 million to $70.5 million. This was due to increases of $11.5 million in benefit and claim expense on Medicare Supplement Products produced by Senior Benefits, $3.2 million, or 39.8%, on Medical Expense Products sold by LifeStyles Marketing, $4.0 million, or 211.0%, on policies reinsured from FLICA, $3.4 million in Medical Expense Products marketed by Cornerstone and Farm & Ranch, and $791,000, or 64.1%, on pre-1987 Medical Expense Products. Offsetting these increases were decreases in benefits and claims expense of $4.6 million, or 81.3%, for Cancer and Specified Disease Products issued directly by the Company and $491,000, or 1.5%, related to Acquired Products.
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 $2.2 million, or 39.7%, in commissions paid to LifeStyles Marketing by NFL was eliminated in consolidation. An increase of $529,000 in commissions paid to Senior Benefits by NFL was also eliminated in consolidation.
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.
Provision for Income Taxes. The provision for income taxes increased $49,000, or 1.8%, from $2,764,000 to $2,813,000. A decrease in pre-tax income of $648,000, or 7.3%, was offset by an increase of 300 basis points, or 10%, in the effective tax rate resulting in the relatively small increase in the provision for income taxes. The Company received little or no small company tax benefit in 1995 and consequently experienced an increase to the effective tax rate.
Premiums. Premiums increased $30.0 million, or 43.7%, from $68.7 million to $98.7 million. This increase was due primarily to an increase in total acquired policy premiums of $26.0 million, or 111.1%, and an increase in first-year premiums for Company-issued policies of $6.3 million, or 72.4%, offset, in part, by a decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) of $2.3 million, or 6.3%.
The decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) was primarily due to a decrease of $885,000, or 24.8%, for pre-1987 Medical Expense Products, a decrease of $479,000, or 4.9%, for LifeStyles Products and a decrease of $378,000, or 19.1%, in premiums for Cancer and Specified Disease Products reinsured from Paramount. Decreases in renewal premiums result from lapses or cancellations of existing policies which are not offset by the Company's acquisition or generation of new business. If the Company's efforts to increase the sales and marketing of its existing products do not offset future policy lapses or cancellations, premiums will decline over time.
Net Investment Income. Net investment income increased $1.6 million, or 39.0%, from $4.1 million to $5.8 million due primarily to investment income of $2.6 million earned on the investment assets acquired in the Acquisition, offset, in part, by lower returns on the Company's other investment assets resulting from reinvestment, at lower interest rates, of the proceeds on bonds which were redeemed or matured during the year ended December 31, 1993.
Amortization of DPAC. Amortization of DPAC increased $1.5 million, or 18.3%, from $8.2 million to $9.7 million. This increase was due primarily to $3.0 million of amortization expense attributable to the policies acquired in the Acquisition, and $520,000 of amortization expense relating to Medicare Supplement Products marketed by Senior Benefits, each of which were not present or were insignificant in the corresponding period in 1993. These increases were offset, in part, by decreases in amortization expense of $829,000, or 27.0%, for LifeStyles Products, $413,000, or 51.2%, for pre-1987 Medical Expense Products, and $458,000, or 41.3%, for previously acquired Medicare Supplement Products.
Commissions. Commissions increased $1.6 million, or 16.7%, from $9.6 million to $11.2 million due primarily to $2.4 million of commissions on the policies acquired in the Acquisition, offset, in part, by a decrease of $800,000, or 8.3% in other commissions.
Before elimination of intercompany revenues and expenses in consolidation, commissions decreased $145,000, or 1.3%, in NFL and increased $816,000, or 28.9%, in LifeStyles Marketing. An increase of $1.2 million, or 27.3%, in commissions paid to LifeStyles Marketing by NFL was eliminated in consolidation.
General and Administrative Expenses. General and administrative expenses increased $2.5 million, or 17.5%, from $14.3 million to $16.8 million due primarily to the costs associated with the administration of the policies acquired in the Acquisition.
Provision for Income Taxes. The provision for income taxes increased $1.2 million, or 75.0%, from $1.6 million to $2.8 million due primarily to the profitable operations acquired in the Acquisition as well as an increase in the pre-tax income of NFL.
Year Ended December 31, 1993 Compared with Year Ended December 31, 1992
The decrease in first-year premiums was primarily due to a decrease of $361,000, or 6.1%, in first-year premiums generated for NFL by LifeStyles Marketing and a decrease of $471,000, or 13.3%, in first-year premiums for Cancer and Specified Disease Products. The decreases in first-year premiums followed decreases in production which occurred in response to rate increases implemented in the latter half of 1991. However, the decrease in first-year premiums for LifeStyles Products has since leveled off and, on a quarter-to-quarter basis during 1993, first-year premiums have increased. LifeStyles Products' first-year premiums were $1.1 million, $1.3 million, $1.5 million and $1.6 million in the first, second, third and fourth quarter of 1993, respectively.
The decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) was primarily due to a decrease of $1.0 million, or 5.1%, for Cancer and Specified Disease Products and a decrease of $1.3 million, or 11.9%, for LifeStyles Products. Also contributing to the decrease in renewal premiums was a decrease for certain pre-1987 Medical Expense Products of $602,000, or 14.4%, and a decrease for pre-1987 Medicare Supplement Products of $676,000, or 15.7%. Decreases in renewal premiums result from lapses or cancellations of existing policies which are not offset by the Company's acquisition or generation of new business. To the extent that the Company's efforts to increase the sales and marketing of its existing products do not offset future policy lapses or cancellations, renewal premiums will continue to decline over time.
Net Investment Income. Net investment income increased $200,000, or 5.1%, from $3.9 million to $4.1 million due primarily to additional investment assets received in connection with the acquisition of Medicare Supplement Products from AII in September 1992 and from LHI in March 1993. This increase was offset, in part, by a decrease in the Company's average annual yield on investments from 8.5% to 7.4%.
Amortization of DPAC. Amortization of DPAC decreased $300,000, or 3.5%, from $8.5 million to $8.2 million due primarily to a decrease for Cancer and Specified Disease Products of $486,000, or 16.4%, and a combined decrease for most of the Company's other product lines totaling $390,000. These decreases were offset, in part, by an increase for the Medicare Supplement Products acquired from AII in September 1992 of $583,000, or 111.0%, from $525,000 to $1.1 million.
Commissions. Commissions increased $1.2 million, or 14.3%, from $8.4 million to $9.6 million. This increase was due primarily to an increase of $2.4 million, or 224.7%, in commissions paid on acquired policies, and a decrease of $505,000 in the consolidation elimination of commissions paid to LifeStyles Marketing by NFL. These changes were offset, in part, by a decrease of $1.7 million, or 13.8%, in other commissions (excluding commissions on policies acquired in acquisitions).
The decrease in other commissions (excluding commissions on policies acquired in acquisitions) resulted from a decrease of $549,000, or 16.3%, in commissions paid by LifeStyles Marketing and a decrease of $1.1 million, or 12.9%, in other commissions paid by NFL (excluding commissions paid to LifeStyles Marketing).
Taxes, Licenses and Fees. Taxes, licenses and fees increased $600,000, or 28.6%, from $2.1 million to $2.7 million due primarily to additional premium taxes paid on increased premiums.
Provision for Income Taxes. The provision for income taxes increased $1.1 million, or 206.8%, from $532,000 to $1.6 million due to the increase in the pre-tax results of operations. Contributing to this increase was an increase in operating income and the adoption of SFAS 109 as of the beginning of 1992.
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. WNL, which is domiciled in Arizona, has not contributed in the past, and is not expected to contribute in the foreseeable future, significant dividends to Westbridge. NFIC and AICT are domiciled in Texas. An insurer domiciled in Texas may pay dividends only out of "surplus profits arising from its business." 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 twelve 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 twelve-month period ending on the preceding December 31. In September 1994, NFL paid to Westbridge an "extraordinary dividend" in the amount of $2.0 million. The Company does not believe that receipt of this dividend is an indication of, and the Company is not in a position to assess, the likelihood of obtaining approval for the payment of "extraordinary dividends" or dividends from a source other than "earned surplus." 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, 1995, NFL had 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, 1995, AICT had the ability to pay to NFIC, without prior regulatory approval, $835,000 in dividends during 1996, none of which has been paid. As of December 31, 1995, NFIC had the ability to pay to Westbridge, without prior regulatory approval, $994,000 in dividends during 1996, none of which has been paid. In both Delaware 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.
Westbridge periodically advances cash to its subsidiaries as their continuing operations require and, as of December 31, 1995, such advances due from subsidiaries totaled $4.8 million. Westbridge also holds a receivable from the surplus certificate issued by NFL which, as of December 31, 1995, totaled $777,000. Payments of principal due under the surplus certificate require the prior approval of the Delaware regulatory authorities. In addition, Westbridge holds a secured promissory note (the "Elkins Note") from NFC Marketing, Inc., an Arkansas corporation which is wholly-owned by Elkins. The balance of this note recorded on the books of Westbridge at December 31, 1995 was approximately $860,000. This note, which was renegotiated in October 1994, represents principal and accrued interest on a loan made by Westbridge to NFC Marketing, Inc. for the purpose of expanding its marketing efforts. The original loan was scheduled to be repaid in April 1993. However, due to certain financial difficulties, NFC Marketing, Inc., was in arrears on the full amount of this note and, as of October 10, 1994, owed Westbridge approximately $1.2 million. On such date, the Elkins Note was renewed and extended with terms which provide, among other things, for the payment to Westbridge of $20,000 per month until such time as the full amount of principal and interest thereunder has been paid. Under the terms of the Elkins Note, such amounts will be paid to Westbridge by NFL out of monthly commissions which would otherwise be payable to NFC Marketing, Inc., by NFL. Payment of principal and interest under the Elkins Note has been guaranteed by Elkins. In addition, under the terms of a Security Agreement delivered to Westbridge by NFC Marketing, Inc., following a default, Westbridge has the right to apply monies, balances, credits or collections which it may hold for NFC Marketing, Inc. on deposit, or which might otherwise be payable to NFC Marketing, Inc., by NFL (including, among other things, agents' commissions payable by NFL to NFC Marketing, Inc.), to offset the unpaid balance of the Elkins Note. Amounts available for such offset have averaged approximately $150,000 per month over the past twelve months and consist exclusively of commissions. Such commissions relate to and are paid by NFL out of premiums it receives from policyholders on previously written policies. Subject to policy lapses or cancellations, these premiums will continue to be received by NFL and commissions thereon will be available for offset by Westbridge whether or not Elkins' relationship with the Company continues. Following any exercise by Westbridge of its right of offset, management believes that the level of lapses and cancellations would gradually increase as a result of agents' efforts to transfer the policies to other insurers. However, management also believes that the rate at which such policies could be rewritten would not significantly affect the level of premiums received by NFL in the near term. As a result, management believes that following any future payment default Westbridge should be able to recover the full amount owed on this note. Westbridge does not know of, nor does it have any reason to believe that there is, any other of its general agency networks which is experiencing financial difficulty.
Westbridge believes that its near-term cash requirements, including interest on the Senior Subordinated Notes and dividend payments on the Series A Preferred Stock, will be met through operating cash flows, repayments of advances due from subsidiaries, payments relating to the surplus certificate and dividends received from the Insurance Subsidiaries.
The primary sources of cash for the Insurance Subsidiaries are premiums, income on investment assets and fee and service income. Additional cash is periodically provided from the sale of short-term investment assets and could, if necessary, be provided through the sale of long-term investment assets. However, the Company's investment policy is to hold its long-term securities to maturity. The Insurance Subsidiaries' primary uses for cash are benefits and claims, commissions, general and administrative expenses and taxes.
Net cash provided by investing activities totaled $386,000 in 1995 and $5.4 million in 1993, compared to net cash used for investing activities of $11.5 million in 1994. The significant amount of net cash used in 1994 resulted primarily from the purchase of the common stock of NFIC in the Acquisition. For 1993, net cash provided by investing activities was principally the result of the excess of proceeds from investments sold and matured over the cost of investments acquired.
Included in the assets of the Company at December 31, 1995 were $639,000 of real estate mortgage loans and $141,000 of real estate acquired through foreclosure. Approximately 98.0% of these assets are located in Oklahoma and Texas. Such regional concentration may have a higher investment risk than a more diversified portfolio. It is the Company's policy not to invest in such assets and, accordingly, the Company has made no mortgage loans or real estate purchases since 1989.
During 1995, the Company experienced rapid growth in product sales and first-year premium revenues. Such growth tends to produce cash flow strain, and statutory surplus strain for the Company's Insurance Subsidiaries. The Company could ease these strains by limiting marketing activities, by seeking additional equity or debt financing, or through reinsurance. No assurance can be given that the Company will be able to obtain additional financing or reinsurance, and if necessary, the Company will limit marketing operations as a means of reducing strain to cash flow and statutory surplus.
Index to Financial Statements and Financial Statement Schedules Covered by the Following Report of Independent Accountants.
WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data)
The Company purchased a block of Supplemental Health insurance in the first quarter of 1994. This purchase resulted in the Company disbursing investments and assuming liabilities as follows:
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 the Company's Insurance Subsidiaries when reporting to state insurance departments. The Company's Insurance Subsidiaries are subject to oversight by insurance regulators of Delaware, 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.
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 necessarily 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 revenue with expenses.
Income Taxes. The Company records income taxes based on the asset and liability approach. The asset and liaility approach 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.
New Accounting Pronouncements. During 1995, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the statement requires that long-lived assets and certain identifiable intangibles to be disposed of, be reported at the lower of carrying amount of fair value less cost to sell.
During 1995, the FASB also issued FAS No. 123 "Accounting for Stock-Based Compensation", which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", with footnote disclosure of the pro-forma effects of the fair value based method. The Company plans to adopt SFAS No. 123 during 1996 by continuing to account for stock-based compensation under the intrinsic value method and disclosing the pro-forma effects of the fair value method in the footnotes to the financial statements.
Unrealized appreciation (depreciation) on investments reflected directly in stockholders' equity is summarized as follows:
* Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
* 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.
In accordance with the Statement, the cumulative effect of recording to a separate component of stockholders' equity the difference between market value and amortized cost at January 1, 1994 of securities classified as available-for-sale has been treated as a change in accounting principle, and no restatement of prior year financial statements has been made. Additionally, in accordance with the statement, all investments categorized as held-to-maturity, were transferred to the available-for-sale category at December 31, 1995.
The amortized cost and estimated market values of investments in fixed maturities as of December 31, 1995 and 1994, are summarized by category as follows (in thousands):
A summary of unrealized appreciation (depreciation) reflected directly in stockholders' equity at December 31, 1995 and 1994, on investments in fixed maturities available-for-sale, is as follows (in thousands):
Year Ended December 31, ------------------------------------- 1995 1994 ------------ ------------- Amortized cost $83,160 $11,310 Estimated market value 86,780 10,787 ------- ------ Excess (deficit) of market value to amortized cost 3,620 (523) Estimated tax 1,231 (178) ------- ------ Unrealized appreciation (depreciation), net of tax $ 2,389 $ (345) ======= ======
Year Ended December 31, --------------------------------------- 1994 1993 -------- -------- Amortized cost $80,377 $49,737 Estimated Market Value 75,238 51,806 ------ ------ Unrealized appreciation (depreciation) $ (5,139) $ 2,069 ====== ======
The funds used to acquire NFIC and AICT were provided by the issuance of Series A Preferred Stock (see NOTE 9).
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, which will have a continuing impact. The following results assume the acquisition occurred as of the beginning of the respective periods.
PRO-FORMA FINANCIAL DATA (Unaudited) (In thousands, except share data) Year Ended December 31, -------------------------------- 1994 1993 --------- ----------- Total Revenues $115,466 $116,446 Income applicable to common stockholders 5,483 5,149 Net income per common share Primary $1.19 $1.13 Fully diluted $1.03 $0.99
On March 29, 1993, NFL completed its purchase of a block of Medicare Supplement policies from Life and Health Insurance Company of America ("LHI"). Under the terms of the purchase, LHI transferred to NFL $2,526,000 in cash and NFL assumed the risks associated with those policies. The Company accounted for this transaction using the purchase method of accounting.
The Company is providing financing to LifeStyles Marketing in its expansion efforts. LifeStyles Marketing's revenues and expenses during 1995 approximated $9,115,000 and $8,397,000, respectively. Revenues and expenses were $7,246,000 and $7,130,000 in 1994 and $5,395,000 and $6,014,000 in 1993, respectively. Of the revenues received, $7,664,000 were derived from NFL in the form of commission income on insurance products sold for NFL during 1995, $5,561,000 in 1994 and $4,386,000 in 1993. Through December 31, 1995, the Company loaned LifeStyles Marketing approximately $7,127,000 in the form of advances which accrue interest at prime plus 1% established at the beginning of each year, which equaled 8.5% during the year ended December 31, 1995, on the unpaid balance. There is not a scheduled repay-ment plan in place for amounts the Company has loaned to LifeStyles Marketing. No dividends are to be distributed to any shareholders until all advances and accrued interest due the Company have been repaid.
Through December 31, 1995, the Company has recognized 100% of the cumulative losses of LifeStyles Marketing in its consolidated financial statements. The minority interest share in such losses recognized by the Company is $840,000 at December 31, 1995. The Company has, and will continue to, recognize 100% of LifeStyles Marketing's profits in the consolidated financial statements until all cumulative losses are recovered through future earnings.
Future policy benefits have been calculated using assumptions (which generally contemplate the risk of adverse deviation) for withdrawals, interest, mortality and morbidity appropriate at the time the policies were issued. The more material assumptions pertinent thereto are as follows:
Morbidity Based on industry tables published in 1974 by Tillinghast, Nelson and Warren, Inc., as well as other population statistics and morbidity studies.
The Company may redeem the Notes at any time on or after March 1, 1998, upon 30-days written notice, at par plus accrued interest. Following the death of any holder of the Notes and the request for repayment, the Company will repay such holder's Notes at par plus accrued interest. The Company is not obligated to redeem more than $50,000 in principal amount per holder per calendar year or in aggregate for all holders more than $250,000 in principal amount per calendar year. The Notes contain certain covenants which limit the Company's ability to, (i) incur certain types of indebtedness, (ii) pay dividends or make distributions to holders of the Company's equity securities, or (iii) consolidate, merge, or transfer all or substantially all of the Company's assets. The Notes also contain covenants which require the Company to maintain, (i) a minimum amount of liquid assets, (ii) a minimum consolidated net worth, and (iii) a minimum fixed charge ratio.
In August 1987, NFL purchased, in an open market transaction, $5,000,000 par value of the Debentures. For GAAP reporting purposes, the purchased Debentures were no longer treated as part of the Company's consolidated debt.
In February 1994, NFL sold at par value, to an unrelated party, the $5,000,000 par value of the Debentures held in its portfolio. This transaction has been accounted for, on a consolidated basis as an issuance of debt.
The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 1995, 1994 and 1993, to the gross amounts reported in the Company's balance sheet.
* At December 31, 1994, the Series A Preferred Stock was convertible by the holders thereof into the Company's common stock at a conversion price of $8.75 per share. At December 31, 1994, the 20,000 shares of Series A Preferred Stock were convertible into 2,285,720 shares of common stock. At December 31, 1995, as a result of the common stock offering, the conversion price was adjusted to $8.41 per share which equates to the Series A Preferred Stock being convertible into 2,378,120 shares of common stock.
The Company and its wholly-owned subsidiaries, other than NFIC and AICT, file a consolidated federal income tax return. NFIC and AICT file separate federal income tax returns.
The differences between the effective tax rate and the amount derived by multiplying the income (loss) before income tax expense by the Federal income tax rate for the Company's last three years follow:
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, 1995 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 $875,000, have not been provided on such amount.
At December 31, 1995, NFL has approximately $12,209,000 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.
Year Ended December 31, ------------------------------------- 1995 1994 1993 ------- ------- ------- Options outstanding at beginning of year 375,294 554,917 499,285 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 $5.18 -- -- 92,000 Price granted at $5.75 -- -- 30,000 Price granted at $6.08 -- -- 10,000 Price granted at $2.50 -- -- -- Options exercised during the year: Price ranging from $1.63 to $5.75 (85,300) (219,623) (66,180) Options canceled during the year: Price ranging from $1.69 to $2.00 -- -- (10,188) ------- ------- ------- Options outstanding at end of year 411,994 375,294 554,917 ======= ======= =======
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 four investment funds at the discretion of the employee. Company contributions are in the form of the Company's Common Stock. The Company's contributions to the plan in 1995, 1994 and 1993 approximated $79,000, $98,000 and $45,000, respectively.
In March 1990, NFL entered into a coinsurance treaty with Paramount Life Insurance Company ("Paramount"). Paramount is controlled by one of NFL's managing general agents. Under the terms of the treaty, NFL assumes a quota-share of all insurance written by PLIC for a period of five years beginning in 1990. For 1990 and 1991 new business, NFL assumed a 90% quota-share. No new business was reinsured from Paramount during 1993 or 1992. For the years ended December 31, 1995, 1994 and 1993, $582,000, $1,601,000, and $1,977,000, respectively, of assumed premiums under the coinsurance treaty with Paramount is included as premium revenue in the consolidated financial statements.
In the ordinary course of business, the Company has advanced commissions and made loans to agents collateralized by future commissions. Advances to agents are recorded as receivables from agents and consisted as of December 31, 1995 in amounts of $7,690,000 for LifeStyles Marketing's agents, $1,718,000 for agent balances reinsured from FLICA, $1,768,000 for Farm & Ranch's agents, $2,423,000 for Cornerstone's agents, $1,585,000 for Senior Benefit's agents, and $1,522,000 for other agent balances. 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, 1995 is approximately $860,000. The note, which was renegotiated in October 1994, represents principal and accrued interest on a loan made by Westbridge to NFC for the purpose of expanding its marketing efforts. The original loan was scheduled to be repaid in April 1993. However, due to certain financial difficulties, NFC was in arrears on the full amount of this note and in October 1994 the Elkins Note was renewed and extended with terms which provide, among other things, for the payment to Westbridge of $20,000 per month until such time as the full amount of principal and interest thereunder has been paid. Under the terms of the Elkins Note, such amounts have been paid to Westbridge by NFL from monthly commissions which would otherwise be payable to NFC by NFL. Payment of the principal and interest under the Elkins Note has been guaranteed by Elkins. In addition, under the terms of a Security Agreement delivered to Westbridge by NFC, following a default, Westbridge has the right to apply monies, balances, credit or collections which it may hold for NFC on deposit, or which might otherwise be payable to NFC by NFL (including, among other things, agents' commissions payable by NFL to NFC), to offset the unpaid balance of the Elkins Note. Following any exercise by the Company of its right of offset, management believes that the level of lapses and cancellations would gradually increase as a result of agents' efforts to transfer the policies to other insurers. However, management also believes that the rate at which such policies could be rewritten would not significantly affect the level of premiums received in the near term and, as a result, the Company should recover the full amount owed on this note.
A reconciliation of net 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 follows:
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) STATEMENT OF CASH FLOWS (In thousands)