to expand its marketing of managed care health plans underwritten primarily by HMOs and other managed care organizations, primarily in urban markets where managed care health plans are readily available, and (iii) to focus on cross-selling its Critical Care and Specified Disease Products in connection with the managed care health plans it markets. The Company believes that its Critical Care and Specified Disease Products are attractive to managed care consumers who are concerned with the choice limitations of managed care health plans, particularly in the event of serious illness. In addition, the Company intends to evaluate opportunities for further growth through acquisitions.
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, DPAC, commissions paid on policy renewals, general and administrative expenses associated with policy and claims administration, taxes, licenses and fees and interest on its indebtedness. In addition to the foregoing expenses, Westbridge is obligated to pay dividends on the Series A Preferred Stock if and when declared by the Board of Directors.
Fee and service income is generated from (i) commissions received by the Company for sales of managed care products underwritten primarily by HMOs and other managed care organizations, (ii) telemarketing services provided by PDS, and (iii) printing services provided by WPS.
of statutory capital and surplus will be available and a failure to obtain such additional statutory capital and surplus could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, to the extent that the resumption of growth in sales involves the expansion of the Company's marketing distribution system, such growth could involve significant cash expenditures by the Company.
Due to the size and the timing of the acquisitions described above, the Company's results of operations for the years ended December 31, 1996, 1995 and 1994 compared to the corresponding periods in the prior year show significant increases in certain revenues and expenses. Generally, as a result of the acquisitions of policies in force, and the transfer of assets and liabilities relating thereto, the Company receives higher revenues in the form of premiums, net investment income and net realized gains on investments, and experiences higher expenses in the form of benefits and claims, amortization of DPAC, commissions and general and administrative expenses. The Company expects that the levels of premiums, net investment income, net realized gains on investments, benefits and claims, amortization of DPAC, commissions and general and administrative expenses attributable to these acquired policies will continue to decline over time as the acquired policies lapse.
FORWARD-LOOKING INFORMATION. Certain statements contained in this Annual Report on Form 10-K, including in the sections titled "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainties, including the Company's plans to (i) expand its underwriting and marketing of medical expense health insurance products in rural areas where managed care health plans are often unavailable, (ii) to increase fee and service income by continuing to expand its marketing of managed care health plans underwritten primarily by HMOs and other managed care organizations, primarily in urban markets where managed care is the consumer's preferred health-care choice and (iii) to focus on cross-selling its underwritten supplemental health insurance products in connection with its marketing of managed care health plans underwritten by HMOs and other managed care organizations. Actual future results and trends may differ materially depending on a variety of factors discussed elsewhere in this Annual Report on Form 10-K, including (a) the Company's ability to raise additional statutory capital and surplus to permit its Insurance Subsidiaries to increase its marketing and sale of the Company's underwritten products, (b) the availability and market acceptance of the managed care products
The increase in renewal premiums of Company-issued policies was attributable to an increase of $8.5 million, or 283.3%, in Medicare Supplement premiums produced by Senior Benefits, an increase of $3.5 million in Medical Expense premiums produced by non-affiliated general agencies, and an increase of $2.8 million, or 28%, in Medical Expense premiums produced by LifeStyles Marketing. These increases were offset, in part, by a decrease of $3.3 million in Critical Care and Specified Disease premium.
The decrease in premiums of acquired policies was attributable to a decrease of $6.9 million, or 20.9%, from the policies acquired in the NFIC and AICT acquisition, and a decrease of $1.4 million, or 14.8%, from the policies acquired from AII. These decreases were offset, in part, by an increase of $7.7 million from the policies acquired in the FLICA acquisition.
AMORTIZATION OF DPAC. Amortization of DPAC increased $11.3 million, or 97.4%, from $11.6 million to $22.9
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $5.2 million, or 23.7%, from $21.9 million to $27.1 million as a result of costs associated with expanding marketing operations and servicing a growing base of policyholders. General and administrative expenses of approximately $627,000 were incurred during 1996 as a result of acquiring the remaining interests in Senior Benefits and American Senior Security Plans.
INTEREST EXPENSE. Interest expense increased $2.1 million, or 87.5%, from $2.4 million to $4.5 million. The increase was primarily due to an increase of $1.4 million associated with a revolving line of credit which was became available to the Company on December 28, 1995 and an increase of $651,000 related to a reinsurance treaty which was effective July 1, 1996.
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%.
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 DNL and LHI, 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 million, or 211%, 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 Critical Care and Specified Disease Products issued directly by the Company and $491,000, or 1.5%, related to Acquired Policies.
Benefits and claims expense as a percentage of total premiums rose 4.3% in 1995 compared to 1994. This increase is primarily attributable to two factors. First, a shift in product mix from defined benefit policies such Critical Care and Specified Disease Products, to Medical Expense Products and Medicare Supplement Products which have inherently higher benefit ratios. Second, increased medical provider claims industry-wide contributed to the increase.
The increase in commissions before consolidation eliminations for NFL resulted from increases of $1.3 million for products sold by Senior Benefits, $383,000, or 18.4%, for products sold by LifeStyles Marketing, and $587,000, or 39.9%, for policies reinsured from FLICA. These increases were offset, in part, by decreases of $959,000, or 32.8%, for Acquired Policies and $261,000, or 7.2%, for Company-issued Critical Care and Specified Disease Products. The increase in commissions before consolidation eliminations for NFIC and AICT is principally the result of two items. Approximately $0.5 million of this increase resulted from recording NFIC and AICT commissions for a full year in 1995, as opposed to approximately nine months in 1994. Approximately $0.5 million of this increase resulted from new product sales generated by Cornerstone and Farm & Ranch. These items were not present or were insignificant in the corresponding period in 1994.
$16.8 million to $21.9 million. This increase stems from expenses associated with developing marketing operations to maintain growth momentum and the effect of the first full fiscal year administering the NFIC and AICT acquisition.
INTEREST EXPENSE. Interest expense decreased $635,000, or 21.2%, from $3 million to $2.4 million. This decrease is the result of the Company retiring $25 million of 11.7% Senior Subordinated Debentures effective March 30, 1995 along with the issuance of $20 million of Senior Subordinated Notes on February 28, 1995.
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.
Westbridge is an insurance holding company, the principal assets of which consist of the capital stock of its operating subsidiaries. Accordingly, Westbridge is dependent upon dividends from its operating subsidiaries, advances from non-insurance company subsidiaries, principal and interest payments on a surplus certificate issued by NFL to Westbridge, lease payments on fixed assets and tax contributions under a tax sharing agreement among Westbridge and its subsidiaries for funds to meet its obligations, including principal and interest on its indebtedness and, if and when declared by the Board of Directors, dividends on the Series A Preferred Stock.
Dividend payments from the Insurance Subsidiaries are regulated by the insurance laws of their domiciliary states. NFL is domiciled in the State of 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" to the extent 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) 10% 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. FLICA is domiciled in Mississippi. Under Mississippi Insurance Regulations, an insurer domiciled in Mississippi may pay dividends limited to the lesser of 10% of statutory capital and surplus or 100% of statutory net income for the preceding year unless prior written approval of the Commissioner is obtained.
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. In addition, 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, FLICA had the ability to pay
NFL, without prior regulatory approval, approximately $1.5 million in dividends during 1997, none of which has been paid. NFIC and AICT are precluded from making dividend payments during 1997 without prior written approval from the insurance commissioner due to net losses on a statutory basis for the year ended December 31, 1996. In the States of 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.
Westbridge periodically advances cash to its subsidiaries as their continuing operations require and, as of December 31, 1996, such working capital advances outstanding totaled $2.6 million. Westbridge also holds a receivable from the surplus certificate issued by NFL which, as of December 31, 1996, totaled $777,000. Payments of principal due under the surplus certificate require the prior approval of the Delaware regulatory authorities.
During the year ended December 31, 1996, Westbridge received approximately $8.5 million, or 91%, of its funds from its subsidiaries. Of the funds received from its subsidiaries, approximately $2.7 million, or 32%, was received in the form of lease payments on fixed assets, $2.9 million, or 34%, was received from agency operations, $1.1 million, or 13%, was received from advanced commissions on sales of certain managed care products which were underwritten by HMOs and other managed care organizations, and an aggregate of $1.8 million, or 21% was received from WFC in the form of dividends, from payments of principal and interest on the surplus certificate issued by NFL, from repayments of advances to the Company's marketing subsidiaries, and from payments under the Company's tax sharing agreement. Westbridge's expenses and other obligations consisted primarily of $2.2 million in annual interest payments on the Senior Subordinated Notes, $1.7 million in annual dividends on the Series A Preferred Stock, working capital requirements for its marketing subsidiaries and taxes. For the year ended December 31, 1996, Westbridge's cash requirements aggregated approximately $9.4 million. The Senior Subordinated Notes may be redeemed, at the Company's option, without premium, on or after March 1, 1998 and mature in March 2002. The Series A Preferred Stock may be redeemed, at the option of the Company, on and after April 12, 1997 and is subject to mandatory redemption on April 12, 2004.
The Company has filed a registration statement relating to a proposed public offering of $65 million principal amount of its Convertible Subordinated Notes due 2007. The Company intends to use a portion of the net proceeds of the offering to provide additional statutory capital and surplus to the Insurance Subsidiaries and to recapture a block of reinsured insurance policies, with the remainder to be used for general corporate purposes. No assurance can be given that the public offering will be completed or that additional statutory capital and surplus will be obtained.
Westbridge believes that its short-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 from subsidiaries, and payments relating to the surplus certificate.
In order to finance commission advances, the Company's wholly-owned subsidiary WFC entered into the Credit Agreement which provides WFC with a two-year $20 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used by WFC to purchase receivables evidencing commission advances to agents. WFC's obligations under the Credit Agreement are secured by liens upon substantially all of WFC's assets. In addition, Westbridge has guaranteed WFC's obligations under the Credit Agreement and has pledged all of the issued and outstanding shares of the capital stock of FLICA, NFL, NFIC and WFC as collateral for its guaranty. As of December 31, 1996, $11.6 million was outstanding under the Credit Agreement. The Credit Agreement terminates on January 7, 1998, at which time the outstanding principal and interest thereunder will be due and payable. The Company expects that the Credit Agreement will be extended or refinanced at or prior to its maturity.
The ability of the Insurance Subsidiaries to underwrite insurance products is limited by state regulation of statutory capital and surplus requirements. As a result of rapid growth in product sales during 1995 and the first six months of 1996, the Company has had to restrain the growth of its underwritten products since the second quarter of 1996, consistent with its available statutory capital and surplus. This restraint has limited the Company's premiums and earnings and will continue to do so until such time as additional statutory capital and surplus can be obtained by the Company. The Company continues to seek additional sources of statutory capital and surplus, however, there can be no assurance that such efforts will be successful. During 1996, the Company entered into reinsurance arrangements which provided approximately $8.5 million in additional cash flow. No assurance can be given that the Company will be able to obtain additional financing or enter into additional reinsurance arrangements.
The Company's consolidated net cash used for operations totaled $11.3 million, $21.3 million, and $10.6 million in 1996, 1995 and 1994, respectively. The reduction in cash used by operations in 1996 as compared to 1995 is due primarily to higher net income from operations and an increase in policyholder liabilities. The primary reason for the increase in cash used for operations from 1994 to 1995 was the increase in new business production in 1995.
Net cash provided by financing activities were $4.1 million, $20 million and $24.9 million for the years ended December 1996, 1995, and 1994, respectively. The net cash provided by financing activities in 1996 resulted primarily from borrowings under the Receivables Financing. During 1995, the Company received $29.3 million from the sale of Common Stock and Senior Subordinated Notes in a public offering and $15.8 million from borrowings primarily under the Receivables Financing. Offsetting these cash inflows in 1995 was $25 million paid to retire Westbridge's 11.7% Senior Subordinated Debentures due 1996. During 1994, the Company received $20 million from the sale of the Series A Preferred Stock, which was used to fund the acquisition of NFIC and AICT, and $5 million from the sale by NFL to a non-affiliated party of $5 million par value of Westbridge's Senior Subordinated Debentures due 1996, which had been held by NFL in its investment portfolio.
The Company believes that its short-term cash requirements will be met through a combination of operating and investing cash flows and use of the revolving line of credit. The Company anticipates that its longer-term cash requirements for the operation of the business will be met through a combination of operating and investing cash flows. In order to expand its underwriting and marketing of medical expense and specialized supplemental health insurance products, the Company will require additional statutory capital and surplus. In addition, opportunities for future acquisitions, if any, may also require additional financing. There can be no assurance that such additional statutory capital and surplus or financing will be obtained.
assets in such securities. Changes in interest rates may affect the market value of the Company's investment portfolio. The Company's principal objective with respect to the management of its investment portfolio is to meet its future policyholder benefit obligations. In the event of material adverse loss experience, the Company may be required to compromise its investment yield to satisfy such obligations.
Included in the invested assets of the Company at December 31, 1996 were real estate mortgage loans with an estimated market value of $0.7 million. Approximately 98% of these assets relate to property located in Oklahoma and Texas. Such regional concentration may have a higher investment risk than a more diversified portfolio. The Company has adopted a policy not to invest in such assets and, accordingly, the Company has made no mortgage loans or real estate purchases since 1989.
However, with the approval of the relevant state regulatory authority, the Company has the ability, within the constraints of the loss ratios mandated by the regulatory authorities, to raise premium rates on its guaranteed renewable products in the event of adverse claims experience. In addition, the Company has limited its exposure to inflation by incorporating certain maximum benefits under its policies. See "Business -- Products."
The NAIC has developed certain RBC statutory requirements for insurance companies. Under these requirements, insurers whose statutory capital and surplus fall below the specified level are subject to remedial action. These guidelines are not effective unless they are adopted by the states. The States of Delaware and Mississippi have each adopted the NAIC's RBC calculation guidelines. The State of Texas has developed an RBC calculation which varies from the NAIC. As of December 31, 1996, the RBC for each of the Insurance Subsidiaries exceeded the proposed thresholds for required regulatory intervention.
To The Board of Directors and Stockholders of Westbridge Capital Corp.
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Adjustments to reconcile net income to cash used for operating activities in the Company's Consolidated Statements of Cash Flows exclude increases relating to the acquired assets and liabilities of this insurance holding company. Accordingly, these adjustments do not correspond to the changes in the related line items on the Company's Consolidated Balance Sheets.
The Company also 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:
NATURE OF OPERATIONS. The Company, through its subsidiaries and affiliates, markets medical expense and supplemental health insurance products and managed care health plans in 41 states. The major underwritten product lines currently being marketed by the Company are Medical Expense Products and Critical Care and Specified Disease Products. In the past, the Company also underwrote a significant amount of Medicare Supplement Products. The Company also markets certain managed care health plans which are underwritten by health maintenance organizations ("HMO's") and other non-affiliated managed care organizations.
INVESTMENTS. In 1994, the Company's fixed maturity portfolio was segregated into two components: fixed maturities held-to-maturity and fixed maturities available-for-sale. During 1995, the Company's held-tomaturity portfolio was reclassified as available-for-sale; therefore, fixed maturities available-for-sale are carried at market value. Changes in aggregate unrealized appreciation or depreciation on fixed maturities available for sale are reported directly in stockholders' equity, net of applicable deferred income taxes. Equity securities (common and nonredeemable preferred stocks) are carried at market value. 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) in 1995 and on a consolidated basis for the period subsequent to the acquisition of the remaining 60% of FLICA's parent FHC on May 31, 1996. Changes in market values of equity securities, after deferred income tax effects, are reflected as unrealized appreciation or depreciation directly in stockholders' equity and, accordingly, have no effect on current operations. Mortgage loans on real estate and policy loans are carried at the unpaid principal balance. Accrual of interest income ceases when loans are ninety days or more past due. Foreclosed assets are carried at the lower of fair value or unpaid principal balance, less necessary costs to effect foreclosure. Realized gains and losses on sales of investments are recognized in current operations on the specific
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 deferred policy acquisition costs is the cost of insurance purchased on acquired business. The amortization of these costs is based on actuarially estimated future premium revenues, and the amortization rate is adjusted monthly to reflect actual experience. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits.
EARNINGS PER SHARE. Primary net income per share of Common Stock is determined by dividing net income, less dividends on the issued and outstanding shares of Series A Preferred Stock, by primary weighted-average shares outstanding. Fully diluted net income per share is computed by dividing net income before dividends by fully diluted weighted average shares outstanding, which assumes conversion of the Series A Preferred Stock. At the December 31, 1994, the Series A Preferred Stock was convertible at $8.75 per share, resulting in 2,285,720 additional shares. The additional average shares outstanding were measured from the April 12, 1994 issue date, through December 31, 1994. At December 31, 1995, as a result of the February 28, 1995 Common Stock issuance, the conversion price was adjusted to $8.41 per share resulting in 2,378,120 additional shares.
RECLASSIFICATIONS. Certain reclassifications have been made to 1995 and 1994 amounts in order to conform
Fixed maturities $(146) $185 $320 Equities 238 -- -- Short-term investments -- (3) -- Other long-term investments 4 -- -- ----- ----- ---- Realized gains on investments $96 $182 $320 ===== ===== ====
Unrealized appreciation on investments reflected directly in stockholders' equity is summarized as follows:
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (the "Statement"). This Statement requires all debt securities and certain equity securities to be classified in three categories and accounted
* Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as HELD-TO-MATURITY SECURITIES and reported at amortized cost.
* 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.
The Company does not engage in "trading" of securities, and accordingly, all of the applicable investments have been categorized as held-to-maturity securities or as available-for-sale securities at December 31, 1994 and as available-for-sale securities at December 31, 1996 and 1995.
Estimated market values represent the closing sales prices of marketable securities. Estimated market values are based on the credit quality and duration of marketable securities deemed comparable by the Company, which may be of another issuer.
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1996, are shown below, in thousands, summarized by year to maturity. Mortgage-backed securities are listed separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
A summary of unrealized appreciation reflected directly in stockholders' equity at December 31, 1996 and 1995, on investments in fixed maturities available-for-sale, is as follows:
Proceeds from sales of investments in fixed maturity securities were $57,869,000 in 1996 and $9,682,000 in 1995. Gross gains of $793,000 and gross losses of $697,000 were realized on 1996 investment sales. Gross gains of $255,000 and gross losses of $73,000 were realized on 1995 investment sales. The specific identification method is utilized to determine realized gains and losses on sales of investments.
Included in fixed maturities at December 31, 1996 and 1995, are high-yield, unrated or less than investment grade corporate debt securities comprising less than 1.5% and 0.7% of total cash and invested assets at December 31, 1996 and 1995, respectively.
On April 12, 1994, Westbridge consummated the acquisition (the "Acquisition") of all of the outstanding capital stock of NFIC and its wholly-owned subsidiary AICT. The purchase price for the Acquisition approximated $20.1 million and was paid in cash. The funds used to acquire NFIC and AICT were provided by the issuance of Series A Preferred Stock (see NOTE 8). The Acquisition was accounted for under the purchase method and, accordingly, the operating results of NFIC and AICT have been included in the consolidated operating results since the date of Acquisition.
During 1995, the Company revised the assumptions used in calculating the future policy benefits and claims liabilities for NFIC and AICT. These changes resulted in a net purchase accounting adjustment of approximately $13.4 million.
The pro-forma financial information is presented for informational purposes only and is not necessarily indicative of what actually would have occurred if the Acquisition had been in effect for the entire period presented. In addition, the pro-forma financial information is not intended to be a projection of future results.
ACQUISITION OF A BLOCK OF CRITICAL CARE AND SPECIFIED DISEASE INSURANCE BUSINESS
On February 8, 1994, NFL completed its purchase of a block of Critical Care and Specified Disease Insurance from Dixie National Life Insurance Company. The purchase price for the block was $2,125,000. This acquisition has been accounted for using the purchase method of accounting.
In September 1987, NFL consummated an agency contract with LifeStyles Agency of Arlington, Texas ("LifeStyles Marketing") granting its agency force the exclusive right, subject to territorial production requirements, to sell NFL's Medical Expense Products developed in 1987 and 1988. During the second quarter of 1988, the Company agreed with the owners of LifeStyles Marketing to restructure the insurance agency as a joint venture. Under the terms of the definitive agreement consummated in November 1988, WMC, a wholly-owned subsidiary of the Company, holds a 51%-voting interest in the entity, LifeStyles Marketing.
The Company provides financing to LifeStyles Marketing in its expansion efforts. LifeStyles Marketing's revenues and expenses during 1996 approximated $13,295,000 and $12,373,000, respectively. Revenues and expenses were $9,115,000 and $8,397,000 in 1995 and $7,246,000 and $7,130,000 in 1994, respectively. Of the revenues received, $11,098,000 were derived from NFL in the form of commission income on insurance products sold for NFL during 1996, $7,664,000 in 1995 and $5,561,000 in 1994. Through December 31, 1996, the Company had loaned LifeStyles Marketing approximately $5,193,000 in the form of advances which accrue interest at prime plus 1%. Prime equaled 8.25% at December 31, 1996. 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.
Interest Level 4% for issues through 1965; level 4.5% for 1966 through 1969 issues, and 6% graded to 4.5% in 25 years for 1970 through 1981 issues. Issues for 1982 through 1987
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.
On February 28, 1995, the Company issued 1,500,000 shares of its Common Stock in an underwritten public offering. The Shares of Common Stock were issued at a price of $7.00 per share, less an underwriting discount of $.42 per share. As a result of the issuance of the Common Stock, the conversion rate of the Series A Preferred Stock has been adjusted. The Series A Preferred Stock is now convertible into 2,378,120 shares of Common Stock at a conversion price of $8.41 per share.
In connection with a Coinsurance Funds Withheld Reinsurance Agreement (see NOTE 11), $8.6 million in ceding allowance is due to a reinsurer at December 31, 1996. This amount is repaid, inclusive of interest at 12.5%, as statutory profits emerge on the reinsured block of business.
The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 1996, 1995 and 1994, to the amounts reported in the Company's balance sheet:
Balance at January 1 (Gross) $39,063 $41,387 $12,794 Less: reinsurance recoverables 3,419 1,457 65 ------- ------- -------- Net balance at January 1 35,644 39,930 12,729 Incurred related to: Current year 80,821 67,239 59,830 Prior years 14,242 2,698 (1,381) ------- ------- -------- Total incurred 95,063 69,937 58,449 ------- ------- -------- Current year reserves acquired 788 -- 33,032 Paid related to:
* On or after April 12, 1995, the Series A Preferred Stock may, at the option of the Company, be exchanged for an amount of Convertible Subordinated Notes due April 12, 2004, equal to the aggregate liquidation preference of the Series A Preferred Stock being exchanged. The Convertible Subordinated Notes would bear interest at 8.25% and be convertible into Common Stock at a price of $8.41 per share, in each case, subject to certain adjustments.
The 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
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 differences between the effective tax rate and the amount derived by multiplying the income 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, 1996, 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, 1996, NFL has approximately $12,782,000 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.
At December 31, 1996, the Company and its wholly-owned subsidiaries have aggregate net operating loss carryforwards of approximately $24,411,000 and $13,619,000 for regular tax and alternative minimum tax purposes, respectively, which expire in 2001 through 2011.
In December 1990, the Company and NFL entered into an agreement under which NFL issued a surplus certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the surplus certificate bears interest at an agreed upon rate not to exceed 10% and is repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance agreements, and (ii) NFL receiving prior approval for repayment from the Delaware State Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. No principal payments were made in 1995 or 1996. The unpaid aggregate principal under this surplus certificate was $777,000 as of December 31, 1996 and 1995.
The estimated market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the years ended December 31, 1996 and 1995:
Price ranging from $1.88 to $5.18 (62,965) (85,300) (219,623) Options canceled during the year: Price ranging from $1.88 to $5.40 (16,500) -- -- -------- -------- -------- Options outstanding at end of year 336,529 411,994 375,294 ======== ======== ========
At December 31, 1996, options for 76,529 shares were exercisable under the stock options plans at a price ranging from $1.88 to $2.50 and options for 256,000 shares were exercisable at a price ranging from $5.18 to $7.71. Also, at December 31, 1996, 1995 and 1994, options for 10,000, 6,000 and 128,000 shares, respectively, remained available for future grant under the plans.
In September 1986, the Company established a retirement savings plan for its employees. The plan permits all employees who have been with the Company for at least one year to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The plan allows employees to defer up to 3% of their salary with partially matching discretionary Company contributions determined by the Company's Board of Directors. Employee contributions are invested in any of five investment funds at the discretion of the employee. Company contributions are in the form of the Company's Common Stock. The Company's contributions to the plan in 1996, 1995 and 1994 approximated $102,000, $79,000, and $98,000, respectively.
repayment approximated $1.9 million. The ceding allowance payable at December 31, 1996, totaled $8.6 million, (see NOTE 6). The Company must maintain in trust, investments with an estimated market value equal to 90% of the active life reserves on the reinsured business, which at December 31, 1996, approximated $14.7 million. Upon repayment of the initial ceding commission, statutory profits on the block of business will be shared on a 50/50 quota share basis. The Agreement is subject to recapture at anytime at the option of the Company.
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, 1996, aggregated $13,607,000. The amounts due by year are as follows: 1997-$3,024,000; 1998-$2,808,000; 1999- $2,402,000; 2000-$1,987,000; 2001-$1,155,000; and thereafter-$2,231,000. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $4,166,000, $3,413,000, and $2,953,000 in 1996, 1995 and 1994, respectively.
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. December 31, 1996 consolidated financial statements and notes thereto.