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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 1-8538
WESTBRIDGE CAPITAL CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 73-1165000
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
777 Main Street, Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(817) 878-3300
Registrant's Shareholder and Investor Relations Toll Free Telephone Number:
(800) 437-8690
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock (par value $.10) New York Stock Exchange
$20,000,000 11.0% Senior Subordinated Notes Due 2002,
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive Proxy Statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of voting stock held by non-affiliates of the
Registrant amounted to $52,955,258 as of March 7, 1997.
At March 7, 1997, 6,075,156 shares of Common Stock were outstanding.
Certain items in Part III are incorporated by reference from the definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders.
WESTBRIDGE CAPITAL CORP.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business 3
ITEM 2. Properties 21
ITEM 3. Legal Proceedings 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 24
ITEM 6. Selected Financial Data 25
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
ITEM 8. Financial Statements and Supplementary Data 37
ITEM 9. Disagreements on Accounting and Financial Disclosure 37
PART III
ITEM 10.Directors and Executive Officers of the Registrant 73
ITEM 11.Executive Compensation 73
ITEM 12.Security Ownership of Certain Beneficial Owners and Management 73
ITEM 13.Certain Relationships and Related Transactions 73
PART IV
ITEM 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K 73
2
PART I
ITEM 1. BUSINESS
GENERAL
Westbridge Capital Corp. ("Westbridge" and, together with its consolidated
subsidiaries, the "Company") (See Note 1-"Principles of Consolidation" to the
Consolidated Financial Statements for a description of Westbridge's
subsidiaries), 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% 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 Health Maintenance
Organizations ("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 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 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.
MARKETING DISTRIBUTION SYSTEM
The Company markets health insurance products and managed care health plans
through a distribution system of (i) general agencies in which the Company has a
controlling ownership interest, and (ii) independently-owned general agencies
which have entered into exclusive contractual arrangements to sell the Company's
Medical Expense Products.
The Company has generally marketed its underwritten health insurance products to
individuals on a one-on-one basis through agents who are independent contractors
associated with general agencies. The Company's policies are sold to individuals
who are either not covered under group insurance protection normally available
to employees of business organizations or who wish to supplement existing
coverage. In many cases, these individuals are employed by small business
groups. In 1996, the Company began marketing 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. This marketing effort has substantially increased the Company's fee and
service income and enables it to cross-sell its underwritten supplemental health
insurance to managed care health plan members.
The Company believes that its success in attracting and retaining agents is
based on its unique distribution model which (i) begins with focused
telemarketing to generate high quality sales leads at a relatively low cost,
(ii) includes
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intensive training programs that yield highly productive agents, (iii) focuses
upon the Company having an ownership interest in its major distributors to
provide incentives for long-term stability, and (iv) offers innovative agent
compensation which includes participation in the Company's restricted stock
plan.
Agents' sales contacts generally result from leads generated either by a general
agency or through outside sources. By providing its controlled and independent
general agencies and their agents with sales leads which result in a high
percentage of sales, the Company believes it is especially attractive to
experienced agents as well as new agents entering the business. Consequently,
the Company believes it can more easily attract new agents and retain agents who
are a part of its existing general agencies. By utilizing a predictive automated
dialing system, the Company believes its wholly-owned subsidiary, Precision
Dialing Services, Inc. ("PDS") is able to generate a large number of quality
sales leads for approximately two-thirds the cost of the national industry
average.
To provide agents with a detailed understanding of its products and to assist
its agents' sales efforts, the Company provides sales brochures and other
marketing materials (including information about the Company) to its agents. In
addition, the Company requires that every new agent complete a comprehensive
review of the Company's compliance and procedures manual.
The Company has sought to develop its network of controlled general agencies to
provide it with flexibility and long-term stability in its marketing
relationships. To the extent that these general agencies sell commissioned
products of HMOs and other managed care organizations, they provide additional
fee and service income to the Company.
Agent compensation is an important factor in providing incentives for an agent's
decision to market health insurance products offered by or through the Company
over those health insurance products of competing insurers and to associate with
a particular general agency. Agents typically receive commissions equal to a
percentage of premiums paid which varies by policy type. First-year commissions
on the Company's products typically range from 30% to 95% of collected premiums.
Renewal commissions on the Company's products typically range from 3% to 30% of
collected premiums. The Company also awards shares of its restricted stock to
general agency managers and agents who meet specified production, persistency
and quality of service criteria. These shares vest over a five-year period
thereby providing agents with a long-term proprietary interest in maximizing the
growth, profitability and overall success of the Company.
The principal general agencies in which the Company has a controlling ownership
interest are LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), Senior
Benefits, LLC ("Senior Benefits"), Health Care-One Insurance Agency, Inc.
("Health Care-One"), and Health Care-One Marketing Group, Inc. ("HCO
Marketing"). These general agencies market a variety of insurance products
underwritten by the Company, as well as HMO, Preferred Provider Organization
("PPO") and Medicare SELECT products underwritten by independent managed care
organizations such as Blue Cross of California and UniCARE Life and Health
Insurance Company ("UniCARE"), each of which are subsidiaries of WellPoint
Health Networks Inc. ("WellPoint"), Foundation Health National Life Insurance
Company ("Foundation Health") and MEDFIRST Health Plans of Louisiana, Inc.
("MEDFIRST"). The principal independent general agencies which sell the
Company's products are Cornerstone National Marketing Corporation
("Cornerstone") and National Farm and Ranch Group, Inc. ("Farm & Ranch"), each
of which currently markets the Company's Medical Expense Products.
Since prior to 1991, the Company's controlled and independent general agencies
have accounted for substantially all of the Company's first-year premiums.
During 1996, LifeStyles Marketing, Cornerstone, Senior Benefits and Farm & Ranch
each accounted for over 10% of the Company's first-year premiums and together
accounted for over 93% of the Company's first-year premiums. The Company
believes that its relationships with its general agencies are good. However,
there can be no assurance that such relationships will continue, or if they do
continue, that they will remain profitable for the Company. The loss of, or
significantly reduced sales efforts by, any of these general agencies, and the
failure by the Company to replace such general agencies or otherwise offset such
losses, could have a material adverse affect on the Company's business,
financial condition or results of operations. In the event the Company desires
to expand its marketing distribution system, there can be no assurance that it
will be able to form additional general agency relationships or, if formed, that
such relationships will result in increased sales or
4
profitability for the Company.
CONTROLLED GENERAL AGENCIES
LIFESTYLES MARKETING GROUP, INC. LifeStyles Marketing was formed in 1988 as a
joint venture by the Company and a non-affiliated insurance agency which was
contracted to sell the Company's Medical Expense Products. The Company owns 51%
of LifeStyles Marketing and entered into this investment to provide the Company
with commissions received by LifeStyles Marketing for selling non-affiliated
insurance carriers' products which were not then underwritten by the Company.
The Company receives 50% of the profits (and losses) of LifeStyles Marketing and
has agreed to finance LifeStyles Marketing's operations.
LifeStyles Marketing maintains its sales headquarters in Arlington, Texas and
currently sells the Company's Medical Expense Products and the HMO and PPO
products of UniCARE and Foundation Health. LifeStyles Marketing currently
markets in ten states and intends to begin marketing in Virginia and Michigan in
1997.
SENIOR BENEFITS, LLC. The Company and an Arizona-based agency specializing in
the sale of Medicare Supplement Products formed Senior Benefits in November
1993. The Company initially acquired 50% of Senior Benefits to establish a
strong distribution network for its Medicare Supplement Products. The Company
also entered into PPO Agreements with Columbia/HCA and other hospitals and
health care providers to complement its "Medicare SELECT" products. In June
1996, the Company acquired the remaining 50% interest of Senior Benefits.
However, due to the relatively low margins for Medicare Supplement Products, the
Company intends to significantly reduce its underwriting of these products in
favor of marketing the Medicare Supplement Products of other insurers. In late
1996, Senior Benefits began marketing the Medicare Supplement Products of
UniCARE.
Senior Benefits maintains its sales headquarters in Scottsdale, Arizona and,
according to WellPoint data, is currently the leading marketer of UniCARE's
Medicare SELECT product. Senior Benefits currently markets in two states and
intends to expand its marketing of UniCARE's Medicare SELECT product by selling
this product in Alabama, Georgia, Illinois, North Carolina and Tennessee during
1997.
HEALTH CARE-ONE INSURANCE AGENCY, INC. In late 1995, the Company formed Health
Care-One, with an existing insurance agency specializing in marketing HMO and
PPO products in California for WellPoint's Blue Cross of California subsidiary.
The Company entered into this arrangement to increase its fee and service income
by expanding its marketing of managed care health plans which are underwritten
by HMOs and other managed care organizations. The Company owns 50% of Health
Care-One.
Health Care-One maintains its sales headquarters in San Diego, California and,
according to WellPoint data, is currently the leading marketer of individual
health insurance products and managed care health plans for Blue Cross of
California. During 1997, Health Care-One intends to begin cross marketing the
Company's new "critical care" product to Blue Cross of California plan members.
HEALTH CARE-ONE MARKETING GROUP, INC. In 1996, the Company formed HCO Marketing
to further increase its fee and service income by expanding its marketing of
UniCARE's managed care products in states other than California.
The Company owns 80% of HCO Marketing.
HCO Marketing maintains its sales headquarters in San Diego, California and,
according to WellPoint data, is currently the leading marketer of individual
health insurance products and managed care health plans for UniCARE. During
1997, HCO Marketing intends to expand its marketing of UniCARE's products by
selling its products in Arizona, Illinois, Indiana and Virginia. Also during
1997, HCO Marketing intends to begin marketing MEDFIRST's products in Louisiana.
FREEDOM MARKETING, INC. The Company formed Freedom Marketing as a wholly-owned
subsidiary in 1996.
Freedom Marketing maintains its sales headquarters in Fort Worth, Texas and
currently sells Medical Expense
5
Products and Critical Care and Specified Disease Products. The Company expects
Freedom Marketing to generate significant submitted annualized premiums in 1997.
INDEPENDENT GENERAL AGENCIES
CORNERSTONE NATIONAL MARKETING CORP. Cornerstone is an independent general
agency which specializes in the marketing of association group insurance
programs to self employed individuals and small business owners. In October
1994, the Company entered into a Master General Agent's Contract with
Cornerstone pursuant to which Cornerstone agreed to market Medical Expense
Products underwritten exclusively by the Company. The Master General Agent's
Contract is terminable by either party upon 180 days' notice.
Cornerstone maintains its sales headquarters in Arlington, Texas. Cornerstone
currently markets the Company's Medical Expense Products in 11 states and,
subject to the Company's ability to resume the growth in sales of its
underwritten products, intends to begin selling such products in four additional
states in 1997.
NATIONAL FARM AND RANCH GROUP, INC. Farm & Ranch is an independent general
agency which specializes in the marketing of association group insurance
programs to farmers, ranchers and other persons in the agricultural community.
In December 1994, the Company entered into a General Agent's Contract with Farm
& Ranch pursuant to which Farm & Ranch agreed to market Medical Expense Products
underwritten exclusively by the Company. These products have been endorsed by
two nationally recognized agricultural associations. The Master General Agent's
Contract is terminable by either party upon 180 days' notice.
Farm & Ranch maintains its sales headquarters in Fort Worth, Texas. Farm & Ranch
currently markets the Company's Medical Expense Products in 12 states and,
subject to the Company's ability to resume the growth in sales of its
underwritten products, intends to begin selling such products in Illinois,
Indiana and Ohio in 1997.
6
DESCRIPTION OF PRODUCT LINES
The major underwritten product lines currently being marketed by the Company
are:
* "Medical Expense Products," which include policies providing
reimbursement for various costs of medical and hospital care and
offering reduced deductibles and coinsurance payments to policyholders
which use the Company's contracted PPOs; and
* "Critical Care and Specified Disease Products," which include indemnity
policies for treatment of specified diseases and "event specific" and
"critical care" policies which provide fixed benefits or lump sum
payments upon diagnosis of internal cancer or other catastrophic
diseases.
Within each of these product lines, the Company continues to develop new
policies and products to respond to changes in the health care environment. The
Company has recently developed its "MSA Major Medical Plan" which allows
individuals to take advantage of certain federal tax benefits by purchasing high
deductible major medical insurance together with a medical savings account that
includes a unique package of additional benefits. Additionally, the Company has
developed a new "critical care" product to cross-sell in connection with its
marketing of HMO and PPO products.
Historically, the Company has also underwritten a significant amount of
"Medicare Supplement Products" designed to provide reimbursement for certain
expenses not covered by the Medicare program. However, due to the relatively low
margins for this product, the Company intends to significantly reduce its
underwriting of these products in favor of marketing the Medicare Supplement
Products of other insurers.
The major managed care products underwritten by HMOs and other managed care
organizations which are currently being marketed by the Company are:
* HMO products underwritten by Blue Cross of California, MEDFIRST
and Foundation Health;
* PPO products underwritten by UniCARE; and
* Medicare SELECT products underwritten by UniCARE which utilize the
Company's network of contracted Medicare SELECT providers.
7
Premium revenue for each of the Company's major underwritten product lines for
each of the periods indicated is set forth below:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
ACCIDENT AND HEALTH INSURANCE:
MEDICAL EXPENSE PRODUCTS:
Direct business
First-year $40,308 $16,352 $7,219
Renewal 15,906 9,990 9,267
Acquired business
First-year -- 133 --
Renewal (1) 14,057 19,436 18,350
Other
First-year -- -- 1
Renewal 1,520 1,926 2,686
-------- -------- --------
Total Medical Expense Products 71,791 47,837 37,523
-------- -------- --------
CRITICAL CARE AND SPECIFIED DISEASE PRODUCTS:
Direct business
First-year 1,227 1,254 1,476
Renewal 12,520 13,009 13,321
Acquired business
First-year (2) 788 1 53
Renewal (1) (2) 15,677 8,900 7,954
Reinsurance assumed
First-year 1,188 4,437 2,363
Renewal 2,814 5,474 5,484
-------- -------- --------
Total Critical Care and Specified Disease Products 34,214 33,075 30,651
-------- -------- --------
MEDICARE SUPPLEMENT PRODUCTS:
Direct business
First-year 17,852 12,359 3,952
Renewal 11,895 3,011 43
Acquired business
First-year -- 79 3
Renewal (1) 17,788 20,566 22,996
Other
First-year 8 -- --
Renewal 2,343 2,617 3,090
-------- -------- --------
Total Medicare Supplement Products 49,886 38,632 30,084
-------- -------- --------
Total Accident and Health Insurance 155,891 119,544 98,258
-------- -------- --------
LIFE INSURANCE:
Total Life Insurance 889 549 445
-------- -------- --------
Total Premium Revenue $156,780 $120,093 $98,703
======== ======== ========
(1) Includes revenue from policies acquired in the acquisition of National
Financial Insurance Company ("NFIC") and American Insurance Company of
Texas ("AICT") in April 1994.
(2) Includes revenue from policies acquired in the acquisition of Freedom Life
Insurance Company of America's ("FLICA") parent, Freedom Holding Company
("FHC"), in May 1996.
The Company's products are designed with flexibility as to benefits and premium
payments and can be adapted to meet regional sales or competitive needs, as well
as those of the individual policyholders. These products have fixed,
8
capped or limited benefits and are designed to reduce the potential financial
impact of covered illnesses and injuries.
Set forth below is a summary of the principal products the Company currently
underwrites, as well as those which are no longer sold but continue to generate
premium revenue through renewals.
MEDICAL EXPENSE PRODUCTS. The Company's Medical Expense Products are designed to
reimburse insureds for expenses incurred for hospital confinement, surgical
expenses, physician services, out-patient benefits and the cost of medicines
immediately following a hospital stay. Out-patient benefits and maternity
benefits are also available. The policies provide a number of options with
respect to deductibles, coinsurance percentages, maximum benefits and stop-loss
limits and offer reduced deductibles and coinsurance payments to policyholders
which use the Company's contracted PPOs. In addition, certain policies include
"inside limits" on benefits during hospital confinement. After the annual
deductible is met, the insured is responsible for a percentage of eligible
expenses up to a specified stop-loss limit. Thereafter, eligible expenses are
covered by the Company up to certain maximum policy limits.
The Company's Medical Expense Products are individually underwritten based upon
medical information provided by the applicant prior to issue. Information in the
application is verified with the applicant through a tape-recorded telephone
conversation or through written correspondence. These policies are conditionally
renewable at the Company's option.
The Company's Medical Expense Products are marketed primarily by LifeStyles
Marketing, Cornerstone, and Farm & Ranch and are sold primarily to members of
non-affiliated associations which consist of self-employed individuals, small
business owners and members of the agricultural community. In addition, the
Company has recently developed its "MSA Major Medical Plan" which allows
individuals to take advantage of certain federal tax benefits by purchasing high
deductible major medical insurance together with a medical savings account and
other unique benefits, including a Westbridge affinity Visa debit card and a
prescription drug consumer card. The Company began marketing the MSA Major
Medical Plan in March 1997.
CRITICAL CARE AND SPECIFIED DISEASE PRODUCTS. The Company's Critical Care and
Specified Disease Products include indemnity policies for hospital confinement
and convalescent care for treatment of specified diseases and "event specific"
and "critical care" policies which provide fixed benefits or lump sum payments
upon diagnosis of certain types of internal cancer or other catastrophic
diseases. Benefits are payable directly to the policyholder following diagnosis
of or treatment for a covered illness or injury. The payments are designed to
help reduce the potential financial impact of these illnesses or injuries and
may be used at the policyholder's discretion for any purpose, including helping
to offset non-medical expenses or medical-related expenses not paid by the
policyholder's other health insurance. The amount of benefits provided under the
Company's Critical Care and Specified Disease Products is not necessarily
reflective of the actual cost expected to be incurred by the insured as a result
of the illness or injury. Critical Care and Specified Disease Products are
generally guaranteed renewable.
Critical Care and Specified Disease Products are generally issued by the Company
after an application form is filled out by the agent on behalf of the
prospective insured. Policies are not available to anyone who has been diagnosed
as having the disease prior to the date of policy issuance.
The Company's Critical Care and Specified Disease Products are currently
marketed by LifeStyles Marketing and Freedom Marketing. The Company has recently
introduced a "critical care" product which provides supplemental coverage to HMO
and PPO plan members and allows them to obtain a lump sum payment upon diagnosis
of internal cancer, heart attack, kidney failure or organ transplant. The lump
sum benefit can be used to obtain specialized or experimental treatment not
ordinarily available to HMO and PPO members.
MEDICARE SUPPLEMENT PRODUCTS. The Company's Medicare Supplement Products provide
coverage for many of the medical expenses which the federal Medicare program
does not cover, such as copayments, deductibles and specified losses which
exceed the federal program's maximum benefits. The Company also underwrites a
Medicare SELECT policy which is designed to provide benefits which supplement
Medicare at attractive rates by taking advantage of arrangements with hospitals,
other health care providers and PPOs. These arrangements typically provide that
9
a hospital or health care provider will agree to waive Medicare's Part A initial
deductible, thereby reducing the total benefit expenses associated with a
hospital stay. The Company's Medicare Supplement Products are guaranteed
renewable.
The Omnibus Budget Reconciliation Act of 1990 mandated, among other things,
standardized policy features in Medicare Supplement plans and, in response, the
NAIC created ten model Medicare Supplement plans. In states that have adopted
the NAIC model, only those 10 policies can be sold. In November 1993, the
Company began underwriting four of the model plans.
The Company's Medicare Supplement Products are currently marketed primarily by
Senior Benefits. However, due to the need for a large number of policies in
force necessary to generate significant profits on this relatively low margin
product, the Company intends to significantly reduce its underwriting of these
products in favor of marketing the Medicare Supplement Products of other
insurers.
LIFE INSURANCE. The Company began marketing its EZ-100 life plan in 1995. EZ-100
is an individually underwritten whole life insurance product designed to serve
as a complement to accident and health insurance products. EZ-100 is issued in
face amounts ranging from $3,000 to $20,000, and may be marketed by any of the
Company's general agencies.
While the Company substantially discontinued active sales of ordinary life
insurance products in 1979, it continues to receive renewal premiums on ordinary
life policies in force sold prior to that date.
ACQUISITIONS
The Company believes that conditions in the accident and health insurance
industry have created, and will continue to create in the short term,
opportunities to acquire health insurance companies and blocks of insurance
policies at a lower cost that would be required to produce such business. Larger
companies are reducing administrative costs by divesting blocks of business
which are outside such companies' core product lines. In addition, smaller
companies are finding it difficult to remain competitive. The Company has
completed several acquisitions since 1992 and intends to evaluate opportunities
for further growth through acquisitions as such opportunities become available.
The Company is not currently actively pursuing any opportunities to acquire
additional insurance companies or blocks of business.
In September 1992, the Company purchased a block of Medicare Supplement policies
from American Integrity Insurance Company ("AII") having annualized premium
revenues of approximately $42 million. The purchase was accomplished through a
combination of indemnity and assumption reinsurance agreements.
In March 1993, the Company purchased an additional block of Medicare Supplement
policies from Life and Health Insurance Company of America ("LHI") having
annualized premium revenues of approximately $4 million. The purchase was
accomplished through a combination of indemnity and assumption reinsurance
agreements.
In February 1994, the Company purchased a closed block of cancer indemnity
insurance from Dixie National Life Insurance Company ("DNL") with annualized
premiums of approximately $4.5 million. The acquisition was completed by way of
assumption reinsurance agreements and did not require additional financing.
In April 1994, the Company completed the acquisition of NFIC and AICT. At that
time, the acquired companies' combined health insurance policies in force
consisted of approximately 102,000 policies with approximately $45 million in
annualized premiums in business lines substantially similar to those of the
Company. Both acquired companies ceased writing new business in the first six
months in 1992. However, in 1995 the Company began underwriting certain Medical
Expense Products and certain Medicare Supplement Products through NFIC and AICT.
In May 1996, the Company acquired the 60% ownership interest in FHC which it did
not then own. The Company previously coinsured a majority of the existing
business of FLICA, FHC's wholly-owned subsidiary.
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HOME OFFICE OPERATIONS
Except for Health Care-One, HCO Marketing, LifeStyles Marketing, PDS, Senior
Benefits, and Westbridge Printing Services, Inc. ("WPS"), none of the Company's
subsidiaries has any branch offices and, other than incidental travel by
employees, the subsidiaries conduct their entire operations at the Fort Worth
office (the "Home Office"). The functions carried out at the Home Office include
policy issue and underwriting, policyowner service, claims processing, agency
service and other administrative functions such as data processing, legal,
accounting and actuarial.
The Company's policy issue and underwriting departments review policy
applications. The industry practice does not require physical examinations and
tests before a policy is issued. However, the Company's underwriting personnel
will generally telephone an applicant for a Medical Expense Product to verify
the information set forth in the policy application and the policy benefits
being sold, and will often contact the applicant's physician in the verification
process. These telephone calls are recorded. Applicants for the Company's
Critical Care and Specified Disease Products must certify in writing that they
meet certain health standards established by the Company before the policy will
be issued. Most applicants for the Company's Medicare Supplement Products fill
out an application and, based on the historical health information certified
therein, the Company makes a determination whether to issue the policy. Certain
applicants, during a six-month "window" after reaching age 65, are not required
to provide historical health information.
The Company's policyowner service department and agency service department are
responsible for responding to policyowner and agent requests for information or
services. The claims processing department reviews benefit claims submitted by
policyowners, determines the benefits payable and processes the claim payments.
RESERVE POLICY AND ADEQUACY
The Company's reserves consist of two separate components: the claim reserves
and the policy benefit reserves. The claim reserves are established by the
Company for benefit payments which have already been incurred by the
policyholder but which have not been paid by the Company. The Company's
consulting actuary estimates these reserves based upon analysis of claim
inventories, loss ratios and claim lag studies. These estimates are developed in
the aggregate for claims incurred (whether or not reported). The claim reserves
include an amount which will not be paid out until subsequent reporting periods,
but which is recorded in the current period for reporting purposes. Policy
benefit reserves are established by the Company for benefit payments which have
not been incurred but which are estimated to be incurred in the future. The
policy benefit reserves accounted for approximately 58% of the Company's total
reserves as of December 31, 1996. The policy benefit reserves are calculated
according to the net level premium reserve method, and are equal to the
discounted present value of the Company's expected future policyholder benefits,
minus the discounted present value of its expected future net premiums. These
present value determinations are based upon assumed fixed investment yields, the
age of policy insured(s) at the time of policy issuance, expected morbidity and
persistency rates, and expected future policyholder benefits. Except for
purposes of reporting to insurance regulatory authorities and for tax filing,
the Company's claim reserves and policy benefit reserves are determined in
accordance with generally accepted accounting principles ("GAAP").
In determining the morbidity, persistency rate, claim cost and other assumptions
used in determining the Company's policy benefit reserves, the Company relies
primarily upon its own benefit payment history and upon information developed in
conjunction with actuarial consultants and industry data. The Company's
persistency rates have a direct impact upon its policy benefit reserves, because
the determinations for this reserve are, in part, a function of the number of
policies in force and expected to remain in force to maturity. If persistency is
higher or lower than expected, future policyholder benefits will also be higher
or lower because of the different than expected number of policies in force, and
accordingly, the policy benefit reserves will be increased or decreased.
The Company's reserve requirements are also interrelated with product pricing
and profitability. The Company must price its products at a level sufficient to
fund its policyholder benefits and still remain profitable. Because the
Company's policyholder benefits represent the single largest category of its
operating expenses, inaccuracies in the assumptions used to estimate the amount
of such benefits can result in the Company failing to price its products
appropriately and to generate sufficient premiums to fund the payment thereof.
Because the discount factor used
11
in calculating the Company's policy benefit reserves is based upon the rate of
return of the Company's investments designed to fund this reserve, the amount of
the reserve is dependent upon the yield on these investments. Provided that
there is not material adverse experience with respect to these benefits, changes
in future market interest rates will not have an impact on the profitability of
policies already sold. Because fluctuations in future market interest rates
affect the Company's yield on new investments, they also affect the discount
factor used to establish, and thus the amount of, its policy benefit reserves
for new sales. In addition, because an increase in the policy benefit reserves
in any period is treated as an expense for income statement purposes, market
interest rate fluctuations can directly affect the Company's profitability for
policies sold in such period. It is not possible to predict future market
interest rate fluctuations.
In accordance with GAAP, the Company's actuarial assumptions are generally fixed
at the time they are made, and absent materially adverse benefit experience,
they are not generally adjusted. Nonetheless, the Company monitors the adequacy
of its policy benefit reserves on an ongoing basis by periodically analyzing the
accuracy of its actuarial assumptions.
The adequacy of the Company's policy benefit reserves may also be impacted by
the development of new medicines and treatment procedures which may alter the
incidence rates of illness and the treatment methods for illness and accident
victims (such as out-patient versus in-patient care) or prolong the life
expectancy of such victims. Changes in coverage provided by major medical
insurers or government plans may also affect the adequacy of the Company's
reserves if, for example, such developments had the effect of increasing or
decreasing the incidence rate and per claim costs of occurrences against which
the Company insures. An increase in either the incidence rate or the per claim
costs of such occurrences could result in the Company needing to post additional
reserves, which could have a material adverse effect upon its business,
financial condition or results of operations.
National Foundation Life Insurance Company ("NFL"), FLICA, NFIC and AICT
(together, the "Insurance Subsidiaries") are required to report their results of
operations and financial position to state regulatory agencies based upon
statutory accounting practices ("SAP"). Under SAP, certain assumptions used in
determining the policy benefit reserves, such as claim costs and investment
result assumptions, are often more conservative than those appropriate for use
by the Company under GAAP. In particular, SAP interest rate assumptions for
investment results are fixed by statute and are generally lower than those used
by the Company under GAAP. Another significant difference is that under SAP,
unlike GAAP, the Company is required to expense all sales and other policy
acquisition expenses as they are incurred, rather than capitalizing and
amortizing them over the expected life of the policy. Although the effect of
this requirement is moderated by the allowance under SAP of an accounting
procedure known as the "two year preliminary term" reserve valuation method,
which allows the Company to defer any accumulation of policy benefit reserves
until after the second policy year, the immediate charge off of sales and
acquisition expenses and the sometimes conservative claim cost and other
valuation assumptions under SAP generally cause a lag between the sale of a
policy and the emergence of reported earnings. Because this lag can reduce the
Company's gain from operations on a SAP basis, it can have the effect of
reducing the amount of funds available for dividend distributions to
stockholders.
REGULATION
The Company and the Insurance Subsidiaries are subject to regulation and
supervision in all jurisdictions in which they conduct business. In general,
state insurance laws establish supervisory agencies with broad administrative
powers relating to, among other things, the granting and revoking of licenses to
transact business, regulation of trade practices and premiums, licensing of
agents, approval of content and form of policies, maintenance of specified
reserves and statutory capital and surplus, deposits of securities, form and
content of required financial statements, nature of investments and limitations
on dividends to stockholders. The purpose of such regulation and supervision is
primarily to provide safeguards for policyholders rather than to protect the
interests of stockholders.
The Company's health insurance products are subject to rate regulation by state
insurance departments which generally require that certain minimum loss ratios
be maintained. The states in which the Company is licensed have the authority to
change the minimum mandated statutory loss ratios to which the Company is
subject, the manner in which these ratios are computed and the manner in which
compliance with these ratios is measured and enforced.
12
Most states in which the Company writes health insurance products have adopted
the loss ratios recommended by the National Association of Insurance
Commissioners ("NAIC"). The Company is unable to predict the impact of (i) any
changes in the mandatory statutory loss ratios relating to products offered by
the Company or (ii) any change in the manner in which these minimums are
computed or enforced in the future. The Company has not been informed by any
state that it does not meet mandated minimum ratios and the Company believes
that it is in compliance with all such minimum ratios. In the event the Company
is not in compliance with minimum statutory loss ratios mandated by regulatory
authorities, the Company may be required to reduce or refund premiums, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The NAIC has developed Risk-Based Capital ("RBC") statutory requirements for
insurance companies which require remedial action in the event an insurance
company's statutory capital and surplus falls below the specified level. The RBC
formula establishes capital requirements for four categories of risk: asset
risk; insurance risk; interest rate risk; and business risk. The NAIC's RBC
formula may be used by regulators as an analytical tool to monitor the adequacy
of statutory capital and surplus of insurers. Under the model law, if an
insurer's RBC, as determined under the RBC formula, falls below specified RBC
levels, the insurer would be subject to different degrees of regulatory action
depending upon the RBC level. At the initial problem level, the "Company Action
Level," the insurer would be required to identify and propose actions to correct
the risk-based capital deficiency and to provide the regulator with financial
projections assuming both the absence and the presence of corrective action
(collectively, an "RBC Plan"). At the second problem level, the "Regulatory
Action Level," the insurer would be required to submit an RBC Plan and would be
subject to such examination or analysis and to such orders specifying required
corrective action as the insurance regulator deems necessary. At the third
problem level, the "Authorized Control Level," the regulator may place the
insurer under regulatory control if the regulator decides that would be in the
best interests of policyholders, creditors and the public. At the fourth problem
level, the "Mandatory Control Level," the model law requires the regulator to
place the insurer under regulatory control. The NAIC's requirements are
effective on a state by state basis if and when they are adopted by the
regulators in the respective states. The States of Delaware and Mississippi have
each adopted the NAIC's RBC guidelines. The State of Texas has developed a
guideline for calculating RBC which varies from the NAIC's requirements. At
December 31, 1996, each Insurance Subsidiary's RBC exceeded the "Company Action
Level."
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 statutory capital
and surplus of $1 million. The State of Georgia requires licensed out-of-state
insurers to maintain minimum statutory capital of $1.5 million and the
Commonwealth of Kentucky requires minimum statutory surplus of $2 million, which
levels are higher than those of any other states in which the Insurance
Subsidiaries are currently licensed. Accordingly, the minimum aggregate
statutory capital and surplus which each of NFL, NFIC and AICT must 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 $14.8 million, respectively. According
to SAP (as opposed to GAAP), costs associated with the issuance of new policies
are charged to statutory surplus. These costs consist primarily of sales
commissions and issuance costs. An increase in first-year sales of insurance
products tend to reduce statutory surplus. 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 is an
indirect wholly-owned subsidiary of NFL, and AICT is a wholly-owned subsidiary
of NFIC. Accordingly, the statutory capital and surplus of NFL and NFIC includes
the statutory capital and surplus of their respective subsidiary.
As part of their routine regulatory oversight process, state insurance
regulators periodically conduct detailed examinations of the books, records, and
operations of insurers. In 1996, an examination of NFL was concluded for the
years 1993 through 1995 by the insurance department of the State of Delaware. In
1995, an examination for NFIC and AICT was concluded by the insurance department
of Texas for the years 1991 through 1993. These examinations did not result in
any significant adjustments to the statutory financial statements for the years
under examination. In addition to conducting these examinations, state insurance
regulatory authorities also conduct separate market conduct examinations. These
examinations focus on an insurer's claims practices, policyholder complaints,
policy forms, advertising practices and other marketing aspects. None of these
examinations has resulted
13
in any significant adjustments to the Company's operations.
Many states have enacted insurance holding company laws that require
registration and periodic reporting by insurance companies within their
jurisdictions. Such legislation typically places restrictions on, or requires
prior notice or approval of, certain transactions within the holding company
system, including, without limitation, dividend payments from insurance
subsidiaries and the terms of loans and transfers of assets within the holding
company structure.
Generally, before the Company is permitted to market an insurance product in a
particular state, it must obtain regulatory approval from that state and adhere
to that state's insurance laws and regulations which include, among other
things, specific requirements regarding the form, language, premium rates and
policy benefits of that product. Consequently, although the Company's policies
generally provide for the same basic types and levels of coverage in each of the
states in which they are marketed, the policies are not precisely identical in
each state or other jurisdiction in which they are sold. Such regulation may
delay the introduction of new products and may impede, or impose burdensome
conditions on, rate increases or other actions that the Company may wish to take
in order to enhance its operating results. In addition, federal or state
legislation or regulatory pronouncements may be enacted that may prohibit or
impose restrictions on the ability to sell certain types of insurance products
or impose other restrictions on the Company's operations. For example, certain
states in which the Company does business have adopted NAIC model statutes and
regulations relating to market conduct practices of insurance companies. Any
limitations or other restrictions imposed on the Company's market conduct
practices by the regulators of a state which has adopted the model statutes and
regulations may also be imposed by the regulators in other states which have
adopted such statutes and regulations. No assurances can be given that future
legislative or regulatory changes will not adversely affect the Company's
business, financial condition or results of operations.
Four states, Connecticut, Massachusetts, New Jersey and New York, have adopted
statutes or insurance department regulations that either prohibit sales of
policies that offer only "specified or dread disease" coverage (such as that
provided by certain of the Company's Critical Care and Specified Disease
Products) or require that such coverage be offered in conjunction with other
forms of health insurance. The Company has never written insurance in those
states and does not currently intend to enter those markets. The Company has no
knowledge of legislative initiatives which would limit or prohibit the sale of
"specified or dread disease" policies in other states in which the Company
operates.
The Company may be required, under the solvency or guaranty laws of most states
in which it does business, to pay assessments (up to prescribed limits) to fund
policyholder losses or liabilities of insurance companies that become insolvent.
Insurance company insolvencies increase the possibility that such assessments
may be required. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes. The incurrence
and amount of such assessments may increase in the future without notice. The
Company pays the amount of such assessments as they are incurred. Assessments
which cannot be offset against future premium taxes are charged to expense.
Assessments which qualify for offset against future premium taxes are
capitalized and are offset against such future premium taxes. The Company paid
approximately $21,000 during the year ended December 31, 1996, as a result of
such assessments. The likelihood and amount of any other future assessments
cannot be estimated and are beyond the control of the Company.
Although the U.S. Government generally does not directly regulate the insurance
business, federal initiatives often impact the insurance business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include controls on the cost of medical care, medical
entitlement programs (e.g., Medicare) and minimum solvency requirements for
insurers.
The NAIC has recently taken action on the subject of assumption reinsurance. The
Assumption Reinsurance Model Act was adopted in 1993 and is similar but, in
certain respects, less restrictive than the federal bill. The Model Act provides
a 25-month notice period and may allow a transfer after the expiration of such
period even if the assuming insurer does not have a higher rating than the
transferring insurer. The Model Act will have no legal effect until
14
formally adopted by the states, although it can be expected to be relied upon by
regulators in states without statutes, regulations or other defined rules
expressly governing assumption reinsurance.
15
INVESTMENT POLICY AND RESULTS
Investment income is an important source of revenue and the Company's return on
invested assets has a material effect on net income. The Company's investment
policy is subject to the requirements of regulatory authorities regarding
maintenance of minimum statutory reserves in order to meet future policy
obligations for policies in force. Statutory reserves may only consist of
certain types of admitted investments and the percentage mix of those assets is
regulated by statute. In addition, certain assets are held on deposit in
specified states and invested in specified securities in order to comply with
state law. Although the Company closely monitors its investment portfolio,
available yields on newly-invested funds and gains or losses on existing
investments depend primarily on general market conditions. The Company's
investment portfolio is managed by Conseco Capital Management, Inc.
Investment policy is determined by the Investment Committees of Westbridge and
the Insurance Subsidiaries in accordance with guidelines set forth by their
respective Boards of Directors. The current policy of Westbridge and each of the
Insurance Subsidiaries is to balance the portfolio between long- and short-term
investments so as to achieve long-term returns consistent with the preservation
of capital and maintenance of adequate liquidity to meet the payment of the
Company's policy benefits and claims, interest on its indebtedness and dividends
on the Westbridge's Series A Cumulative Convertible Redeemable Exchangeable
Preferred Stock ("the Series A Preferred Stock"). The current schedule of the
Company's invested asset maturities corresponds with the Company's expectations
regarding anticipated cash flow payments based on the Company's policy benefit
and claim cycle, which the Company believes is medium term in nature. The
Company invests primarily in fixed-income securities of the U.S. Government and
its related agencies, investment grade fixed-income corporate securities and
mortgage-backed securities. Also, up to 5% of the Company's assets may be
invested in higher yielding non-investment grade securities. Although the
Company's consolidated balance sheet at December 31, 1996 shows invested assets
in real estate and mortgage loans, the Company's investment policy excludes the
investment of new funds in real estate or mortgage loans . Since 1989 the
Company has acquired no such assets in its portfolio.
The following table sets forth a summary of consolidated cash and invested
assets of the Company for the dates indicated:
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------------
(in thousands)
Cash $1,013 $2,013 $2,871
-------- -------- --------
Bonds:
U.S. Government and related agencies 26,108 35,658 39,753
State, county and municipal 518 1,632 1,450
Public utilities 11,016 8,700 8,778
Industrial and miscellaneous 53,955 40,490 40,783
-------- -------- --------
Total Bonds 91,597 86,480 90,764
-------- -------- --------
Preferred stock 147 356 343
-------- -------- --------
Common stock 1,449 183 126
-------- -------- --------
Investment in Freedom Holding Company (1) -- 6,173 5,945
-------- -------- --------
Other Invested Assets:
Mortgage loans on real estate 658 639 768
Policy loans 282 285 291
Certificates of deposit and short-term investments 8,072 15,246 7,589
Investment real estate -- 141 141
-------- -------- --------
Total Other Invested Assets 9,012 16,311 8,789
-------- -------- --------
Total Cash and Invested Assets $103,218 $111,516 $108,838
======== ======== ========
- - --------
(1) Represents the Company's 40% ownership interest prior to May 31, 1996. On
May 31, 1996, the Company purchased the remaining 60% ownership interest
of FLICA's parent, FHC. Subsequent to that date, the Company has
consolidated the accounts of FHC in accordance with GAAP.
Included in the invested assets of the Company outlined in the preceding table
are certain high-yield debt securities which are below a "BBB" or equivalent
rating. These high-yield debt securities amounted to less than 1.5%, 0.7%
16
and 0.1% of the Company's total cash and invested assets at December 31, 1996,
1995 and 1994, respectively.
The following table summarizes consolidated investment results for the periods
shown:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------------------------------
(in thousands, except percentages)
Total invested assets, cash and cash equivalents $103,218 $111,516 $108,838
Net investment income (1) 7,535 7,021 5,764
Realized gains on investments 96 182 320
Average annual yield on total investments 7.2% 7.0% 6.4%
- - --------
(1) Excludes interest on receivables from agents of $1.2 million, $0.4 million
and $0 for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table summarizes the Company's fixed maturity securities,
excluding short-term investments, at December 31, 1996:
FIXED MATURITY SECURITIES
Estimated
BOOK VALUE (1) MARKET VALUE (2)
----------------- -----------------
TOTAL % TOTAL %
------- ------- ---------- -----
(in thousands, except percentages)
Fixed maturity securities:
U.S. Government and governmental
agencies and authorities (except
mortgage-backed) $12,987 14.1 $12,987 14.1
States, municipalities and political
subdivisions 518 0.5 518 0.5
Finance 24,873 27.1 24,873 27.1
Public utilities11,016 12.0 11,016 12.0
Mortgaged-backed 13,121 14.3 13,121 14.3
All other corporate bonds 29,082 31.6 29,082 31.6
Certificates of deposit 350 0.4 350 0.4
------- ------- ---------- -----
Total fixed maturity securities $91,947 100.0 $91,947 100.0
======= ======= ========== =====
- - ---------------------
(1) At December 31, 1996, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
securities.
The Company's fixed maturity investment portfolio at December 31, 1996 was
composed primarily of debt securities of the U.S. Government, corporations and
mortgage-backed securities. Investments in the debt securities of corporations
are principally in publicly-traded bonds.
Mortgage-backed securities represented approximately 14.3% of the estimated
market value of the Company's total invested assets at December 31, 1996.
Mortgage-backed securities investors are compensated primarily for reinvestment
risk rather than credit quality risk. During periods of significant interest
rate volatility, the underlying mortgages may prepay more quickly or more slowly
than anticipated. If the repayment of principal occurs earlier than anticipated
during periods of declining interest rates, investment income may decline due to
the reinvestment of these funds at the lower current market rates.
The following table indicates by rating the composition of the Company's fixed
maturity securities portfolio, excluding short-term investments, at December 31,
1996:
17
COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
Estimated
BOOK VALUE (1) MARKET VALUE (2)
---------------- ----------------
RATINGS (3) TOTAL % TOTAL %
- - ------------------------------------- ------- ----- ------- -----
(in thousands, except percentages)
Investment grade:
U.S. Government and agencies $26,108 28.4 $26,108 28.4
AAA 3,975 4.3 3,975 4.3
AA 6,427 7.0 6,427 7.0
A 29,074 31.6 29,074 31.6
BBB 24,902 27.1 24,902 27.1
Non-Investment grade:
BB 711 0.8 711 0.8
B 750 0.8 750 0.8
------- ----- ------- -----
Total fixed maturity securities $91,947 100.0 $91,947 100.0
======= ===== ======= =====
- - -----
(1) At December 31, 1996, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(3) Ratings are the lower of those assigned primarily by Standard & Poor's and
Moody's when available, and shown in the table using the Standard & Poor's
rating scale. Unrated securities are assigned ratings based on the
applicable NAIC designation or the rating assigned to comparable debt
outstanding of the same issuer. NAIC 1 fixed maturity securities have been
classified as "A" and NAIC 2 fixed maturity securities have been classified
as "BBB".
The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations," which are used by insurers when preparing their annual statutory
reports. The NAIC assigns designations to publicly- traded as well as
privately-placed securities. The ratings assigned by the NAIC range from Class 1
to Class 6 with Class 1 as the highest quality rating. The following table sets
forth the book and estimated market value of the Company's fixed maturity
securities according to NAIC Designations and Standard & Poor's ratings at
December 31, 1996:
NAIC DESIGNATIONS
Estimated
BOOK VALUE (1) MARKET VALUE (2)
-------------------------------------
NAIC DESIGNATIONS (3) TOTAL % TOTAL %
- - ----------------------------------- ------- ----- ------- -----
(in thousands, except percentages)
NAIC 1 (AAA, AA, A) $65,584 71.3 $65,584 71.3
NAIC 2 (BBB) 24,902 27.1 24,902 27.1
NAIC 3 (BB) and below 1,461 1.6 1,461 1.6
------- ----- ------- -----
Total fixed maturity securities $91,947 100.0 $91,947 100.0
======= ===== ======= =====
- - -----
(1) At December 31, 1996, all of the Company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
(3) Generally comparable to Standard & Poor's ratings. Comparisons between
NAIC Designations and Standard & Poor's ratings are as published by the
NAIC.
The scheduled maturities of the Company's fixed maturity securities, excluding
short-term investments, at December 31, 1996 were:
COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
Estimated
BOOK VALUE (1) MARKET VALUE (2)
------------------------------------
SCHEDULED MATURITY TOTAL % TOTAL %
(in thousands, except percentages)
Due in one year or less $2,602 2.8 $2,602 2.8
Due after one year through five years 25,395 27.6 25,395 27.6
Due after five years through ten years 29,621 32.2 29,621 32.2
Due after ten years 21,208 23.1 21,208 23.1
Mortgage-backed securities 13,121 14.3 13,121 14.3
------- ----- ------- -----
Total fixed maturity securities $91,947 100.0 $91,947 100.0
======= ===== ======= =====
-----
(1) At December 31, 1996, all of the company's fixed maturity securities are
classified as available-for-sale and are carried at estimated market value.
(2) Estimated market value represents the closing sales prices of marketable
fixed maturity securities.
REINSURANCE
CEDED. As is customary in the insurance industry, the Company cedes reinsurance
to other insurance companies. Cession of reinsurance is utilized by an insurer
to limit its maximum loss thereby providing a greater diversification of risk
and minimizing exposures on larger risks. Reinsurance does not discharge the
primary liability of the original insurer with respect to such insurance (except
for assumption reinsurance described below) but the Company, in accordance with
prevailing insurance industry practice, reports reserves and claims after
adjustment for reserves and claims ceded to other companies through reinsurance.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Coinsurance Agreement") effective July 1,
1996 on the in-force Cancer, Heart and Intensive Care business. The Coinsurance
Agreement provided an initial ceding commission of $10.5 million, of which $8.4
million was received in cash. This ceding commission allowance will be repaid,
inclusive of interest at 12.5%, as statutory profits are generated from the
reinsured block of business. For the year ended December 31, 1996, the amount
repaid was approximately $1.9 million. The ceding allowance payable at December
31, 1996, totaled $8.6 million. The Company must maintain in trust, investments
with an estimated market value equal to 90% of the active life reserves on the
reinsured business was approximately $14.7 million at December 31, 1996. 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 Coinsurance Agreement
is subject to recapture at anytime at the option of the Company.
The Company generally does not cede risks associated with its Medicare
Supplement Products or Life Insurance Products. However, 100% of the Company's
risks under its Accidental Death policies currently in force are reinsured. The
Company also reinsures its risks under the Medical Expense Products on an excess
of loss basis so that its maximum payment to any one beneficiary during any
one-year period is limited ($100,000 in 1996) for any accident or illness. In
accordance with industry practice, the reinsurance agreements in force with
respect to these policies are terminable by either party with respect to claims
incurred after the termination date and the expiration dates.
ASSUMED. In the past, the Company has utilized coinsurance agreements to assume
premiums and increase revenues. NFL and FLICA were party to such arrangements
prior to NFL's acquisition of FHC. In 1996, prior to this acquisition, $4
million in premiums were assumed by NFL. Subsequent to the acquisition, those
coinsurance arrangements were canceled.
USE IN ACQUISITIONS. Over the past four years, the Company has acquired blocks
of policies in force from AII, LHI and DNL through the use of indemnity and
assumption reinsurance. Using this process, the Company first acquires policies
by insuring the risks of policies ceded by other insurers in the manner
described above. Following such acquisition, the Company applies to each
relevant state regulatory authority for approval to convert the indemnity
reinsurance to assumption reinsurance. As regulatory approval from each state is
obtained, the Company issues assumption certificates to policyholders in the
approving state to provide notice of the Company's assumption of the primary
obligation under the insurance policies assumed. There can be no assurance that
regulatory approval
19
will be granted by each relevant state, or as to the time required to obtain
such approval.
HEALTH CARE REFORM
Health care reform has been and continues to be a legislative focus at both the
federal and state levels. Such federal or state legislative reform, if enacted,
could, among other things, further restrict the Company's ability to implement
rate increases and could impose limitations on the profitability of certain of
the Company's insurance products. Also, to the extent that such legislation
guarantees major medical coverage to all United States residents and/or expands
the scope of basic coverage, the demand for specified disease and supplemental
insurance may be reduced, and certain health insurance business currently in
force could experience high lapse rates. The Company cannot predict what effect,
if any, yet to be enacted health care legislation or proposals will have on the
Company if and when enacted. The Company believes that the current political
environment in which it operates will result in continued legislative scrutiny
of health care reform and may lead to additional legislative initiatives. No
assurance can be given that enactment of any federal and/or state health care
reforms will not have a material effect on the Company's business, financial
condition or results of operations.
COMPETITION
The supplemental accident and health insurance industry in the United States is
highly competitive. Although this market is fragmented, the Company competes
with a large number of other insurers, some of which have been in business for a
longer period of time and some of which have higher ratings by A.M. Best
Company, Inc. ("A.M. Best") and substantially greater financial and other
resources than the Company. A.M. Best, a nationally recognized insurance rating
agency, assigns a rating which measures each company's relative financial
strength and ability to meet its contractual obligations. In the markets in
which the Company sells its products, the Company believes that its A.M. Best
rating is not a significant factor affecting its ability to sell its insurance
products.
Private insurers and voluntary and cooperative plans, such as Blue Cross and
Blue Shield and HMOs, provide various alternatives for defraying hospitalization
and medical expenses. Much of this insurance is sold on a group basis to
employer sponsored groups. The federal and state governments also provide
programs for the payment of the costs associated with medical care through
Medicare and Medicaid. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or
illnesses. The Company's Medical Expense Products are designed to provide
coverage which is similar to these major medical insurance programs but are sold
primarily to persons not covered by an employer sponsored group.
The Company's Critical Care and Specified Disease Products are designed to
provide coverage which is supplemental to major medical insurance and may be
used to defray nonmedical as well as medical expenses. Since these policies are
sold to complement major medical insurance, the Company competes only indirectly
with these insurers providing major medical insurance. However, expansion of
coverage by other insurers could adversely affect the Company's business,
financial condition or results of operations. Medicare Supplement Products are
designed to supplement the Medicare program by reimbursing for expenses not
covered by such program. To the extent that future government programs reduce
participation by private entities in such government programs, they could
adversely affect the Company's business, financial condition or results of
operations.
The Company competes directly with other insurers offering similar products and
believes that its current benefits and premium rates are generally competitive
with those offered by other companies. Management believes that service to
policyholders and prompt and fair payment of claims continue to be important
factors in the Company's ability to remain competitive.
In addition to product and service competition, there is also very strong
competition within the supplemental accident and health insurance market for
qualified, effective agents. The recruitment and retention of such agents is
extremely important to the success and growth of the Company's business.
Management believes that the Company is competitive with respect to the
recruitment and training of agents. However, there can be no assurance that the
Company's controlled general agencies will be able to continue to recruit or
retain qualified, effective agents. The inability of the Company to adequately
recruit and retain agents could have a material adverse effect upon the
20
Company's business, financial condition or results of operations.
Managed health care organizations operate in a highly competitive environment
and in an industry that it currently subject to significant changes from
business consolidations, legislative reform, aggressive marketing practices and
market pressures. The Company's ability to increase its fee and service income
by continuing to expand its marketing of managed care products underwritten
primarily by HMOs and other managed care organizations may be adversely affected
by the changes affecting this industry.
EMPLOYEES
At December 31, 1996, the Company employed 386 persons. The Company has not
experienced any work stoppages, strikes or business interruptions as a result of
labor disputes involving its employees, and the Company considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business operations, the Company is involved in
various claims and other business related disputes. In the opinion of
management, the Company is not party to any pending litigation the disposition
of which would have a material adverse effect on the Company's business,
financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
EXECUTIVE OFFICERS OF REGISTRANT
Westbridge's executive officers are as follows:
Years with
NAME AGE POSITION WITH THE COMPANY THE COMPANY
Martin E. Kantor 74 Chairman of the Board and
Chief Executive Officer 20
James W. Thigpen 59 President and Chief
Operating Officer 15
Patrick J. Mitchell 38 Executive Vice President, Chief
Financial Officer and Treasurer 1
Stephen D. Davidson 41 Executive Vice President and
Chief Marketing Officer 3
Dennis A. Weverka 52 Executive Vice President 16
Margaret A. Megless 45 Vice President 21
Michael D. Norris 50 Vice President and Secretary 13
Mr. Kantor has served as Chairman of the Board and Chief Executive Officer of
Westbridge since January 1993. Mr. Kantor had served as Chairman of the Board,
President and Chief Operating Officer of Westbridge since prior to 1992. Mr.
Kantor has served as Chairman of the Board of NFL since prior to 1992 and also
became Chief Executive Officer of NFL in 1985. Following the acquisition of each
of NFIC, AICT and FLICA, Mr. Kantor was appointed Chairman of the Board and
Chief Executive Officer of each entity.
Mr. Thigpen has served as President and Chief Operating Officer of Westbridge
since January 1993. Mr. Thigpen had served as Executive Vice President of
Westbridge since prior to 1992. Mr. Thigpen has also served as President and
Chief Operating Officer of NFL since prior to 1992. Following the acquisition of
each of NFIC, AICT and FLICA, Mr. Thigpen was appointed President and Chief
Operating Officer of each entity.
Mr. Mitchell joined Westbridge as Vice President, Chief Financial Officer and
Treasurer in August 1995 and has served as Executive Vice President, Chief
Financial Officer and Treasurer since May 1996. Mr. Mitchell is also Senior Vice
President, Treasurer and director of NFL, NFIC and AICT. Following the
acquisition of FLICA, Mr. Mitchell was appointed Senior Vice President,
Treasurer and director of FLICA. Prior to joining Westbridge, he served as Vice
President, Finance for Bankers Life and Casualty Company. From 1989 to 1993, Mr.
Mitchell was Assistant Vice President, Finance for Reliance Standard Life
Insurance Company.
Mr. Davidson has served as Executive Vice President and Chief Marketing Officer
of Westbridge since May 1996. Mr. Davidson had served as Vice President and
Chief Marketing Officer of Westbridge prior to May 1996. Mr. Davidson also
serves as Senior Vice President of NFL, NFIC and AICT since joining the Company
in August 1994. Following the acquisition of FLICA, Mr. Davidson was appointed
Senior Vice President of FLICA. Mr. Davidson served as President of Senior
Benefits, from 1992 to 1994 and as Vice President of Marketing for Pioneer Life
Insurance Company, Rockford, Illinois, from 1989 to 1992.
Mr. Weverka has served as Executive Vice President, Administration of Westbridge
since May 1996. Since August 1994, Mr. Weverka served as Vice President,
Corporate Planning and Development. Mr. Weverka joined the Company in August
1981 and has served as a Senior Vice President of NFL since prior to 1992.
Following the acquisition of each of NFIC and AICT, Mr. Weverka was appointed
Senior Vice President of each entity, and in June 1994 was appointed a director
of NFL, NFIC and AICT. Following the acquisition of FLICA, Mr. Weverka was
appointed director and Senior Vice President of FLICA.
Ms. Megless has served as Vice President, Information Systems of Westbridge
since August 1994 and as Senior Vice President, Information Systems of NFL since
1992. Following the acquisition of each of NFIC and AICT, Ms. Megless was
appointed Senior Vice President of each entity, and in June 1994 was appointed a
director of NFL, NFIC and AICT. Following the acquisition of FLICA, Ms. Megless
was appointed a director and Senior Vice President of FLICA. Ms. Megless joined
the Company in January 1977 and served as Vice President, Information Systems of
NFL from 1984 to 1992.
Mr. Norris has served as Secretary of Westbridge since prior to 1992 and was
appointed Vice President of Westbridge in August 1994. Mr. Norris has also
served as Senior Vice President, General Counsel and Secretary of NFL since
prior to 1992. Following the acquisition of each of NFIC and AICT, Mr. Norris
was appointed Senior Vice President, Secretary and General Counsel of each
entity, and in June 1994 was appointed a director of NFL, NFIC and AICT.
Following the acquisition of FLICA, Mr. Norris was appointed a director, Senior
Vice President, Secretary and General Counsel of FLICA. Mr. Norris was Counsel
for the Oklahoma Insurance Department, Oklahoma City, Oklahoma for two years
prior to joining NFL in March 1983.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Westbridge's Common Stock is listed on the New York Stock Exchange and traded
under the symbol "WBC." The following table sets forth for the periods indicated
the high and low sales price for the Common Stock, by quarter, as reported for
New York Stock Exchange consolidated transactions.
HIGH LOW
1997
First Quarter (through March 7, 1997) 12 1/4 9 1/2
1996
Fourth Quarter 9 7/8 7 3/4
Third Quarter 8 3/4 7 1/2
Second Quarter 7 7/8 5 7/8
First Quarter 7 1/8 5 1/4
1995
Fourth Quarter 6 5/8 5 5/8
Third Quarter 6 5/8 5 3/4
Second Quarter 7 1/2 5 1/2
First Quarter 8 1/8 5 7/8
On March 7, 1997, the closing price of the Common Stock on the New York Stock
Exchange was $11.25 per share. As of March 7, 1997, there were approximately
2,342 record holders of the Common Stock.
Westbridge has not paid any cash dividends on the Common Stock and does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. Both the Preferred Stock Purchase Agreement relating to the
Series A Preferred Stock and the Senior Subordinated Indenture relating to the
Senior Subordinated Notes, impose certain restrictions upon Westbridge with
respect to the payment of dividends on the Common Stock. For information
concerning statutory limitations on the payment of dividends by the Insurance
Subsidiaries to Westbridge, See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Liquidity, Capital Resources and
Statutory Capital and Surplus," "Business -- Regulation" and Note 11 of Notes to
the Consolidated Financial Statements.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below was selected or derived from the Consolidated
Financial Statements of the Company. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes.
YEAR ENDED DECEMBER 31,
1996(1) 1995 1994(2) 1993 1992
--------------------------------------------------------------
(in thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Premiums $156,780 $120,093 $98,703 $68,731 $56,731
Net investment income 8,736 7,421 5,764 4,120 3,932
Fee and service income 9,534 2,327 1,728 1,397 1,392
Net realized gains on investments 96 182 320 1,030 422
Other income -- 9 31 14 157
---------- ---------- ---------- ---------- ----------
Total revenues 175,146 130,032 106,546 75,292 62,634
---------- ---------- ---------- ---------- ----------
Benefits and claims 94,187 70,465 53,623 33,153 26,522
Amortization of deferred policy
acquisition costs 22,907 11,553 9,711 8,159 8,452
Commissions 7,919 11,359 11,224 9,595 8,382
General and administrative expenses 27,123 21,926 16,847 14,349 12,663
Taxes, licenses and fees 5,951 4,101 3,230 2,724 2,095
Interest expense 4,462 2,432 3,067 2,552 2,536
---------- ---------- ---------- ---------- ----------
Total expenses 162,549 121,836 97,702 70,532 60,650
---------- ---------- ---------- ---------- ----------
Provision for income taxes 4,410 2,813 2,764 1,562 532
Equity in FHC 74 348 345 333 310
Income before cumulative effect of
change in accounting principle and
extraordinary loss 8,261 5,731 6,425 3,531 1,762
Cumulative effect of change in
accounting principle(3) -- -- -- -- 1,134
Extraordinary loss from early
extinguishment of debt, net
of income tax benefit -- 407 -- -- --
---------- ---------- ---------- ---------- ----------
Net income 8,261 5,324 6,425 3,531 2,896
Preferred stock dividends 1,650 1,650 1,190 -- --
---------- ---------- ---------- ---------- ----------
Income applicable to common
stockholders $6,611 $3,674 $5,235 $3,531 $2,896
========== ========== ========== ========== ==========
Net Income Per Share:
Primary $1.08 $0.63 $1.13 $0.78 $0.66
Fully Diluted $0.97 $0.65 $1.03 $0.78 $0.66
Book Value Per Share:
Primary $7.97 $7.18 $5.99 $5.09 $4.30
Fully diluted(4) $8.09 $7.53 $6.93 $5.09 $4.30
Weighted Average Number of
Shares Outstanding:
Primary 6,131,000 5,836,000 4,617,000 4,555,000 4,381,000
========== ========== ========== ========== ==========
Fully diluted 8,540,000 8,204,000 6,267,000 4,555,000 4,381,000
========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 31,
1996(1) 1995 1994(2) 1993 1992
-------------------------------------------------------------
(in thousands, except share data)
BALANCE SHEET DATA:
Total cash and invested assets $103,218 $111,516 $108,838 $57,434 $59,399
Deferred policy acquisition costs 83,871 56,977 58,654 28,354 30,768
Total assets 220,716 200,999 187,581 97,067 101,915
Notes payable(5) 21,210 15,807 -- -- --
Senior subordinated debentures
due 1996(6) -- -- 24,665 19,422 19,210
Senior subordinated notes
due 2002(6) 19,350 19,264 -- -- --
Redeemable preferred stock (7) 20,000 20,000 20,000 -- --
Stockholders' equity 47,903 42,805 26,355 21,611 18,013
- - ----------
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996.
(2) Includes operations of NFIC and AICT from April 12, 1994.
(3) Represents the effect of the Company's adoption of SFAS 109, "Accounting
for Income Taxes", on a prospective basis as of January 1, 1992.
(4) Calculated by adding the redeemable preferred stock balance to
stockholders' equity and dividing the resultant sum by the periodend shares
outstanding plus the number of common shares issuable upon conversion of
the redeemable preferred stock as if converted at the end of the period.
(5) At December 31, 1996, represents balance of $11.6 million outstanding
against a revolving line of credit with a cap of $20 million, a balance due
of approximately $8.6 million for ceding commission related to a
reinsurance agreement, and a balance of approximately $1.1 million due to a
related party.
(6) On February 28, 1995, the Company issued $20 million principal amount of
its 11% Senior Subordinated Notes due 2002 (the "Notes") and issued
1,500,000 additional shares of Common Stock. The proceeds of these
offerings have been used, in part, to redeem the Senior Subordinated
Debentures due 1996, on March 30, 1995.
(7) At December 31, 1996, consists of 20,000 shares of Series A Preferred
Stock, which were convertible, at the option of the holders thereof, into
an aggregate of 2,378,120 shares of Common Stock at a conversion price of
$8.41 per share of Common Stock. The Series A Preferred Stock is
exchangeable, at the option of Westbridge, into that principal amount of
Convertible Subordinated Notes equal to the aggregate liquidation
preference of the shares of Series A Preferred Stock to be exchanged.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
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
25
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.
OVERVIEW
The Company derives its revenue primarily from premiums from its insurance
products and, to a significantly lesser extent, from fee and service income,
income earned on invested assets and gains on the sales or redemptions of
invested assets. The Company's primary expenses include benefits and claims in
connection with its insurance products, 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.
Benefits and claims are comprised of (i) claims paid, (ii) changes in claim
reserves for claims incurred (whether or not reported) and (iii) changes in
policy benefit reserves based on actuarial assumptions of future benefit
obligations not yet incurred on policies in force.
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
26
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.
PREMIUMS. The following table shows the premiums received by the Company through
internal sales and through acquisitions during the periods indicated:
PREMIUMS (1)
YEAR ENDED DECEMBER 31,
1996 1995 1994
-----------------------------
(in thousands)
Company-issued policies:
First-year premiums $61,049 $34,561 $15,019
Renewal premiums 47,421 36,417 34,328
-------- -------- -------
Total company-issued policy premiums 108,470 70,978 49,347
-------- -------- -------
Acquired policies:
AII 8,364 9,811 13,200
LHI 1,820 2,089 2,506
DNL 2,974 3,299 3,907
NFIC and AICT 26,207 33,110 29,743
FLICA 7,744 -- --
Other 1,201 806 --
-------- -------- -------
Total acquired policy premiums (2) 48,310 49,115 49,356
-------- -------- -------
Total Premiums $156,780 $120,093 $98,703
======== ======== =======
- - -------------------
(1) For a breakdown of premiums by product line, see "Business-Product Lines."
(2) Premiums for the acquired policies include first-year premiums of $788,000,
$213,000 and $56,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
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
27
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
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.
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.
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.
BENEFITS AND CLAIMS. Benefits and claims expense increased $23.7 million, or
33.6%, from $70.5 million to $94.2 million. Benefits and claims from
Company-issued policies increased $24.4 million, or 62.7%, and were offset, in
part, by a decrease in benefits and claims from acquired policies of $700,000,
or 2.2%. In connection with the increase in premiums, benefits and claims
increased $8 million, or 61.5%, from Medicare Supplement Products marketed by
Senior Benefits, an increase of $5.9 million, or 53.2%, from Medical Expense
Products marketed by LifeStyles Marketing, an increase of $7.9 million, or
232.4%, from Medicare Supplement and Medical Expense Products marketed by
non-affiliated general agencies, and an increase of $2.6 million from Critical
Care and Specified Disease Products marketed by non-affiliated general agencies.
As a result of continued lapses from a closed block of business, benefits and
claims decreased $3.4 million, or 38.6%, from policies purchased from AII. The
block of business acquired from NFIC and AICT reflected an increase in benefits
and claims expense of $2.2 million, or 11.8%, and was primarily related to
disability income products. Additionally, benefits and claims expense increased
$600,000 due to the recent acquisition of FLICA.
AMORTIZATION OF DPAC. Amortization of DPAC increased $11.3 million, or 97.4%,
from $11.6 million to $22.9
28
million. The increase resulted from the growth in sales which began in the
second quarter of 1995. Amortization of DPAC increased $3.2 million for Medical
Expense Products produced by LifeStyles Marketing, $3.5 million for Medicare
Supplement Products produced by Senior Benefits, and $2.8 million for Critical
Care and Specified Disease Products produced by non-affiliated general agencies,
a portion of which was attributable to a large group policy which lapsed in
1996. Amortization of DPAC also increased $4.1 million due to sales of new
policies underwritten by NFIC and AICT. This increase for NFIC and AICT was
offset, in part, by a $2.1 million decrease in amortization of the cost of
insurance purchased which was capitalized in connection with the Company's
acquisition of NFIC and AICT. Further offsetting this increase in amortization
of DPAC was a decrease of $2.9 million from discontinued Medicare Supplement
Products and Medical Expense Products. Amortization of DPAC pertaining to FLICA
increased $2.3 million related to the Critical Care and Specified Disease
Products produced by non-affiliated general agencies.
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.
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.
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.
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.
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%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
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 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 million from
Senior Benefits, $1 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
29
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.
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.
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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $5.1 million, or 30.1%, from
30
$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.
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.
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.
LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS
WESTBRIDGE
Westbridge is an insurance holding company, the principal assets of which
consist of the capital stock of its operating subsidiaries. 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
31
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.
INSURANCE SUBSIDIARIES
The primary sources of cash for the Insurance Subsidiaries are premiums and
income on invested assets. Additional cash is periodically provided from the
sale of short-term investments and could, if necessary, be provided through the
sale of long-term investments and blocks of business. The Insurance
Subsidiaries' primary uses for cash are benefits and claims, commissions,
general and administrative expenses, taxes, licenses and fees.
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.
32
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.
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.
CONSOLIDATED
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 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.
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.
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
33
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.
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.
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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules Covered by the
Following Report of Independent Accountants.
NUMBER(S)
Report of Independent Accountants 38
FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the Three Years ended December 31, 1996 39
Consolidated Balance Sheets at December 31, 1996 and 1995 40
Consolidated Statements of Cash Flows for the Three Years ended December 31, 1996 42
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years ended December 31, 1996 44
Notes to Consolidated Financial Statements 45
FINANCIAL STATEMENT SCHEDULES:
II. Condensed Financial Information of Registrant as
of and for the Three Years ended December 31, 1996 67
III. Supplementary Insurance Information for the Three
Years ended December 31, 1996 70
IV. Reinsurance for the Three Years ended December 31, 1996 71
V. Valuation and Qualifying Accounts and Reserves for the
Three Years ended December 31, 1996 72
All other Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Financial Statements or
notes thereto.
35
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
and Stockholders of
Westbridge Capital Corp.
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.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 14, 1997
36
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
1996 1995
Investments:
Fixed maturities:
Available-for-sale, at market value
(amortized cost $90,370 and $83,160) $91,947 $86,780
Equity securities, at market 1,596 539
Investment in Freedom Holding Company,
on the equity basis -- 6,173
Mortgage loans on real estate 658 639
Investment real estate -- 141
Policy loans 282 285
Short-term investments 7,722 14,946
-------- --------
Total Investments 102,205 109,503
Cash 1,013 2,013
Accrued investment income 1,889 1,711
Receivables from agents, net of $1,729 and
$1,187 allowance for doubtful accounts 18,311 16,706
Deferred policy acquisition costs 83,871 56,977
Leasehold improvements and equipment, at cost, net of
accumulated depreciation and amortization of
$4,211 and $3,905 1,311 1,590
Other assets 12,116 12,499
-------- --------
Total Assets $220,716 $200,999
======== ========
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
DECEMBER 31,
1996 1995
Liabilities:
Policy liabilities and accruals:
Future policy benefits $54,204 $46,620
Claims 39,186 39,063
--------- ---------
93,390 85,683
Accumulated policyholders' funds 393 373
Other liabilities 8,171 11,226
Deferred income taxes 10,299 5,841
Notes payable 21,210 15,807
Senior subordinated notes, net of
unamortized discount, due 2002 19,350 19,264
--------- ---------
Total Liabilities 152,813 138,194
--------- ---------
Redeemable Preferred Stock 20,000 20,000
--------- ---------
Stockholders' Equity:
Common stock, ($.l0 par value,
30,000,000 shares authorized;
6,039,994, and 5,992,458 shares issued) 604 599
Capital in excess of par value 29,226 29,208
Unrealized appreciation of investments
carried at market value, net of tax 1,057 2,593
Retained earnings 17,186 10,575
--------- ---------
48,073 42,975
Less - Aggregate of shares held in treasury and
investment by affiliate in Westbridge Capital
Corp. common stock (28,600 at December 31,
1996 and 1995, at cost) (170) (170)
--------- ---------
Total Stockholders' Equity 47,903 42,805
--------- ---------
Commitments and contingencies:
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $220,716 $200,999
========= =========
The accompanying notes are an integral part of these financial statements.
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
1996 1995 1994
Revenues:
Premiums:
First-year $61,843 $34,774 $15,111
Renewal 94,937 85,319 83,592
---------- ----------- ----------
156,780 120,093 98,703
Net investment income 8,736 7,421 5,764
Fee and service income 9,534 2,327 1,728
Net realized gain on investments 96 182 320
Other income -- 9 31
---------- ----------- ----------
175,146 130,032 106,546
---------- ----------- ----------
Benefits, claims and expenses:
Benefits and claims 94,187 70,465 53,623
Amortization of deferred policy acquisition costs 22,907 11,553 9,711
Commissions 7,919 11,359 11,224
General and administrative expenses 27,123 21,926 16,847
Taxes, licenses and fees 5,951 4,101 3,230
Interest expense 4,462 2,432 3,067
---------- ----------- ----------
162,549 121,836 97,702
---------- ----------- ----------
Income before income taxes, equity in earnings of
Freedom Holding Company and extraordinary item 12,597 8,196 8,844
Provision for income taxes 4,410 2,813 2,764
Equity in earnings of Freedom Holding Company 74 348 345
---------- ----------- ----------
Income before extraordinary item 8,261 5,731 6,425
Extraordinary loss from early extinguishment of debt -- 407 --
---------- ----------- ----------
Net income 8,261 5,324 6,425
Preferred stock dividends 1,650 1,650 1,190
---------- ----------- ----------
Income applicable to common stockholders $6,611 $3,674 $5,235
========== =========== ==========
Earnings Per Common Share:
Primary:
Income before extraordinary item $1.08 $0.70 $1.13
Extraordinary item -- (0.07) --
---------- ----------- ----------
Net earnings $1.08 $0.63 $1.13
========== =========== ==========
Fully Diluted:
Income before extraordinary item $0.97 $0.70 $1.03
Extraordinary item -- (0.05) --
---------- ----------- ----------
Net earnings $0.97 $0.65 $1.03
========== =========== ==========
Weighted Average Shares Outstanding:
Primary 6,131,000 5,836,000 4,617,000
========== =========== ==========
Fully Diluted 8,540,000 8,204,000 6,267,000
========== =========== ==========
The accompanying notes are an integral part of these financial statements.
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------------------------------
Cash Flows From Operating Activities:
Net income applicable to common stockholders $6,611 $3,674 $5,235
Adjustments to reconcile net income applicable to common
stockholders to cash provided by (used for) operating activities:
Increase (decrease) in policy liabilities and accruals 2,995 (5,194) (6,700)
Amortization of deferred policy acquisition costs 22,907 11,553 9,711
Increase in deferred income taxes 3,708 2,610 905
Additions to deferred policy acquisition costs (45,138) (23,279) (12,582)
Depreciation expense 497 486 325
Increase in receivables from agents (1,371) (9,353) (2,403)
Decrease (increase) in other assets 2,402 (2,902) (6,257)
Equity in earnings of Freedom Holding Company (74) (348) (345)
Net realized gain on investments (96) (182) (320)
(Decrease) increase in other liabilities (3,353) 2,548 1,013
Other, net (422) (900) 798
--------- -------- --------
Net Cash Used For Operating Activities (11,334) (21,287) (10,620)
--------- -------- --------
Cash Flows From Investing Activities:
Acquisition of Freedom Holding Company (3,970) -- --
Acquisition of NFIC and AICT -- -- (20,178)
Proceeds from investments sold:
Fixed maturities, classified as held-to-maturity, called or matured -- 2,629 4,357
Fixed maturities, classified as available-for-sale, called or matured 8,529 468 1,544
Fixed maturities, classified as available-for-sale, sold 49,340 6,585 7,275
Short-term investments sold or matured 155,877 15,058 45,020
Other investments sold or matured 556 136 98
Cost of investments acquired (203,849) (23,629) (50,039)
Notes receivable from related parties -- -- 1,381
Additions to leasehold improvements and equipment, net of retirements (218) (861) (976)
--------- -------- --------
Net Cash Provided By (Used For) Investing Activities 6,265 386 (11,518)
--------- -------- --------
Cash Flows From Financing Activities:
Effective issuance of senior subordinated debentures, at par -- -- 5,000
Redemption of senior subordinated debentures -- (25,000) --
Issuance of redeemable preferred stock -- -- 20,000
Issuance of subordinated notes -- 19,200 --
Issuance of notes payable 16,144 15,807 --
Issuance of common stock 140 10,108 395
Issuance of common stock warrants -- 74 --
Purchase and cancellation of common stock (125) (146) (534)
Repayment of notes payable (12,090) -- --
--------- -------- --------
Net Cash Provided By Financing Activities 4,069 20,043 24,861
--------- -------- --------
(Decrease) Increase In Cash During Period (1,000) (858) 2,723
Cash At Beginning Of Period 2,013 2,871 148
--------- -------- --------
Cash At End Of Period $1,013 $2,013 $2,871
========= ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $3,861 $2,336 $2,678
Income taxes $982 $960 $2,090
The accompanying notes are an integral part of these financial statements.
42
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
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:
Assets $13,542,000
Liabilities $ 5,780,000
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 purchased the outstanding capital stock of a health insurer and its
subsidiary in the second quarter of 1994 for a cash purchase price of $20.1
million. This purchase resulted in the Company receiving assets and assuming
liabilities as follows:
Assets $61,293,000
Liabilities $72,199,000
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:
Investments $ 545,000
Policy Liabilities $ 2,625,000
The accompanying notes are an integral part of these financial statements.
43
WESTBRIDGE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
UNREALIZED
APPRECIATION TOTAL
CAPITAL (DEPRECIATION) STOCK-
COMMON STOCK IN EXCESS OF RETAINED TREASURY STOCK HOLDERS'
SHARES AMOUNT OF PAR VALUE INVESTMENTS EARNINGS SHARES AMOUNT EQUITY
------ ------ ------------ ----------- -------- ------ ------ ------
Balance at January 1, 1994 4,273,467 $427 $19,483 $205 $1,666 28,600 $(170) $21,611
Net income 6,425 6,425
Preferred stock dividend (1,190) (1,190)
Unrealized depreciation of investments (352) (352)
Issuance of shares under stock
option plans 219,648 22 373 395
Shares purchased and cancelled
under stock option plans (62,657) (6) (528) (534)
----------- ----- ------- ------ ------ ------ ------ -------
Balance at December 31, 1994 4,430,458 443 19,328 (147) 6,901 28,600 (170) 26,355
Net income 5,324 5,324
Preferred stock dividend (1,650) (1,650)
Unrealized appreciation of investments 2,740 2,740
Issuance of shares under stock
option plans 85,300 8 230 238
Issuance of shares from an underwritten
public offering 1,500,000 150 9,720 9,870
Shares purchased and cancelled
under stock option plans (23,300) (2) (144) (146)
Issuance of stock warrants 74 74
----------- ----- ------ ------ ------ ------ ----- -------
Balance at December 31, 1995 5,992,458 599 29,208 2,593 10,575 28,600 (170) 42,805
Net income 8,261 8,261
Preferred stock dividend (1,650) (1,650)
Unrealized depreciation of investments (1,536) (1,536)
Issuance of shares under stock
option plans 62,965 6 134 140
Issuance of restricted shares 8 8
Shares purchased and cancelled
under stock option plans (15,429) (1) (124) (125)
---------- ----- ------- ------ ------- ------ ----- -------
Balance at December 31, 1996 6,039,994 $604 $29,226 $1,057 $17,186 28,600 $(170) $47,903
========= ==== ======= ====== ======= ====== ===== =======
The accompanying notes are an integral part of these financial statements.
44
WESTBRIDGE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Westbridge Capital Corp. ("the Company"), and its 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.
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.
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.
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
45
identification basis.
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.
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.
Actual results could differ from those estimates.
INCOME TAXES. The Company records income taxes based on the asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequence of temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
EARNINGS PER SHARE. 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
46
to 1996 financial statement presentation.
NOTE 2 - INVESTMENTS
Major categories of investment income are summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
Fixed maturities $6,607 $6,542 $5,064
Mortgage loans on real estate 62 71 83
Short-term investments 513 250 489
Interest on receivables from agents 1,201 400 --
Other 584 424 308
------ ------ ------
8,967 7,687 5,944
Less: Investment expenses 231 266 180
------ ------ ------
Net investment income $8,736 $7,421 $5,764
====== ====== ======
Realized gains (losses) on investments are summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
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:
Year Ended
DECEMBER 31,
1996 1995
(in thousands)
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
======= =======
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
47
for as follows:
* 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.
* 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.
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.
In accordance with the Statement, the cumulative effect of recording the
difference between estimated market value and amortized cost at January 1, 1994
of securities classified as available-for-sale to a separate component of
stockholders' equity 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.
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 values of investments in fixed
maturities at December 31, 1996 and 1995, are summarized by category as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
(in thousands)
U.S. Government and governmental
agencies and authorities $12,813 $227 $53 $12,987
States, municipalities, and political
subdivisions 518 -- -- 518
Finance companies 24,545 487 159 24,873
Public utilities 10,818 215 17 11,016
Mortgage-backed securities 12,950 234 63 13,121
All other corporate bonds 28,376 879 173 29,082
Certificates of deposit 350 -- -- 350
---------- ---------- ---------- ----------
Balance at December 31, 1996 $90,370 $2,042 $465 $91,947
========== ========== ========== ==========
48
Gross Gross Estimated
Amortized Unrealized Unrealized Market
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
(in thousands)
U.S. Government and governmental
agencies and authorities $23,365 $1,226 $8 $24,583
States, municipalities, and political
subdivisions 1,510 122 -- 1,632
Mortgage-backed securities 10,756 390 71 11,075
Public utilities 8,241 519 60 8,700
Finance companies 18,224 719 198 18,745
All other corporate bonds 20,764 1,236 255 21,745
Certificates of deposit 300 -- -- 300
--------- --------- --------- ---------
Balance at December 31, 1995 $83,160 $4,212 $592 $86,780
========= ========= ========= =========
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.
Estimated
Amortized Market
COST VALUE
(in thousands)
Due in one year or less $2,585 $2,602
Due after one year through five years 25,131 25,395
Due after five years through ten years 29,131 29,621
Due after ten years 20,573 21,208
Mortgage-backed securities 12,950 13,121
------- -------
$90,370 $91,947
======= =======
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:
YEAR ENDED DECEMBER 31,
1996 1995
(in thousands)
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
======= =======
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.
49
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.
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.
In connection with the Credit Agreement (see NOTE 6 - FINANCING ACTIVITIES,
Credit Agreement), the Company has funds that are restricted as to withdrawal
and as to to use for current operations consisting of cash of $0.3 million and
short-term investments of $4.9 million as of December 31, 1996. These balances
are held as collateral for the amounts borrowed under the Credit Agreement.
NOTE 3 - ACQUISITIONS
ACQUISITION OF REMAINING INTEREST OF FHC
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.
ACQUISITION OF NFIC AND AICT
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 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.
PRO-FORMA FINANCIAL DATA
(in thousands, except share data; unaudited)
Year Ended
December 31,
1994
Total Revenues $115,466
Income applicable to common stockholders 5,483
Net income per common share:
Primary $1.19
Fully diluted $1.03
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.
NOTE 4 - MARKETING OPERATIONS
LIFESTYLES MARKETING GROUP, INC.
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.
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,
51
1996. The Company had, prior to 1996 recognized 100% of the cumulative losses of
LifeStyles Marketing. During 1996, those cumulative losses were fully recovered
through earnings.
SENIOR BENEFITS, LLC
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.
HEALTH CARE-ONE INSURANCE AGENCY, INC.
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.
HEALTH CARE-ONE MARKETING GROUP, INC.
In February 1996, the Company formed HCO Marketing. The Company owns 80% of HCO
Marketing which commenced operations in March 1996. HCO Marketing's operations
were not significant in 1996. The Company will advance money to HCO Marketing to
fund operations. 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.
NOTE 5 - FUTURE POLICY BENEFITS
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:
LIFE PRODUCTS
Withdrawals Standard industry tables are used for issues through 1975.
Company experience is used for issues subsequent to 1975.
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
52
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.
Mortality Based on modifications of the 1955-1960 Select and Ultimate
Basic Tables and, for certain issues from 1975 through 1981,
modifications of the 1958 CSO. Issues for 1981 through 1994
use modifications of the 1965-1970 Select and Ultimate Basic
Tables. Issues subsequent to 1994 use modifications of the
1975-1980 Ultimate Basic Tables.
ACCIDENT AND HEALTH PRODUCTS
Withdrawals Issues through 1980 are based on industry experience; 1981
through 1996 issues are based on industry experience and
Company experience, where available. Policies acquired in
acquisitions are based on recent experience of the blocks
acquired.
Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most
1981 through 1992 issues are 10% graded to 7% in 10 years
except for certain NationalCare and Supplemental Hospital
Income issues which are 8% graded to 6% in 8 years and
LifeStyles Products which are 9% graded to 7% in 10 years.
1993 and later issues are 7% level. Policies acquired from AII
in 1992 are 6.4% level. Policies acquired from LHI in 1993 and
DNL in 1994 are 6% level. Policies acquired in the Acquisition
of NFIC and AICT are 7% level.
Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues
subsequent to 1980 through 1992 use the 1965-1970 Ultimate
Table. 1993 and later issues use the 1975-1980 Ultimate Table.
Policies acquired in acquisitions use the 1965-1970 Ultimate
Table.
Morbidity Based on industry tables published in 1974 by Tillinghast,
Nelson and Warren, Inc., as well as other population
statistics and morbidity studies.
NOTE 6 - FINANCING ACTIVITIES
COMMON STOCK OFFERING
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.
SUBORDINATED NOTES
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,
53
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.
SUBORDINATED DEBENTURES
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.
In August 1987, NFL purchased, in an open market transaction, $5 million 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 million
par value of the Debentures held in its portfolio. This transaction has been
accounted for, on a consolidated basis as an issuance of debt.
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.
SENIOR NOTE
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.
Interest payments on the Senior Note prior to the third anniversary of the
commencement date are added to the principal amount of the Senior Note.
Subsequent to the third anniversary date, interest payments on the accumulated
interest and principal are due on a semi-annual basis. The Senior Note may be
prepaid in whole or in part without premium or penalty. Following the death of
the holder of the Senior Note and request for payment, the Company will repay
the Senior Note within one year of notification provided that the Company is,
or, after giving effect to such prepayment would not be in default under any
Senior Indebtedness.
54
CREDIT ARRANGEMENT
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).
CEDING ALLOWANCE PAYABLE
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.
NOTE 7 - CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending claim
reserve balances, on a gross-of-reinsurance basis, for 1996, 1995 and 1994, to
the amounts reported in the Company's balance sheet:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
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:
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
======= ======= ========
NOTE 8 - REDEEMABLE PREFERRED STOCK
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
55
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:
* Liquidation preference of $1,000 per share.
* 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.
* 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 Company is required to redeem all shares of Series A Preferred
Stock, or any Convertible Subordinated Notes outstanding on April 12,
2004.
* The Company may redeem any and all shares of Series A Preferred Stock
outstanding on or after April 12, 1997.
In connection with the issuance of the Series A Preferred Stock, the placement
agent was granted a warrant to purchase 120,000 shares at $8.75 per share,
subject to certain adjustments. As a result of the February 28, 1995 Common
Stock issuance, the conversion price of the Warrant was adjusted to $8.41 per
share.
56
NOTE 9 - DEFERRED POLICY ACQUISITION COSTS
A summary of DPAC by major product line of insurance follows (in thousands):
1996 1995 1994
---- ---- ----
Accident Accident Accident
and and and
LIFE HEALTH LIFE HEALTH LIFE HEALTH
Balance at beginning
of year $205 $56,772 $31 $58,623 $36 $28,318
Deferrals:
Commissions 430 39,423 122 16,517 2 7,465
Issue costs 63 5,222 30 6,484 3 1,535
--------- --------- ------- -------- -------- --------
698 101,417 183 81,624 41 37,318
Cost of insurance purchased -- 4,663 -- 126 -- 31,006
Purchase accounting
adjustment -- -- -- (13,403) -- --
Amortization expense (129) (22,778) 22 (11,575) (10) (9,701)
--------- --------- ------- -------- -------- --------
Balance at end of year $569 $83,302 $205 $56,772 $31 $58,623
========= ========= ======= ======== ======== ========
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.
During 1995, the Company recorded purchase accounting adjustments to the
allocation of the purchase price of NFIC and AICT as these adjustments fell
within the allocation period following the acquisition, in accordance with
Statement of Financial Accounting Standard No. 38 "Accounting for Preacquisition
Contingencies of Purchased Enterprises."
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.
NOTE 10 - INCOME TAXES
The provision for income taxes is calculated as the amount of income taxes
expected to be payable for the current year plus (or minus) the deferred income
tax expense (or benefit) represented by the change in the deferred income tax
accounts at the beginning and end of the year. The effect of changes in tax
rates and federal income tax laws are reflected in income from continuing
operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation
57
allowance, reducing any recognized deferred tax asset, must be recorded if it is
determined that it is more likely than not that such deferred tax asset will not
be realized.
The Company and its wholly-owned subsidiaries, other than NFIC, AICT and FLICA,
file a consolidated federal income tax return. NFIC, AICT and FLICA file
separate federal income tax returns.
The provision for (benefit from) U.S. federal income taxes charged to continuing
operations was as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
Current $ ( 804) $1,032 $1,581
Deferred 5,214 1,781 1,183
------ ------ ------
Total provision for income taxes $4,410 $2,813 $2,764
====== ====== ======
Provision has not been made for state and foreign income tax expense since such
expense is minimal.
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:
YEAR ENDED DECEMBER 31,
1996 1995 1994
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%
=== === ===
58
Deferred taxes are recorded for temporary differences between the financial
reporting basis and the federal income tax basis of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
YEAR ENDED DECEMBER 31,
1996 1995
(in thousands)
Deferred Tax Liabilities:
Deferred policy acquisition costs $18,581 $8,683
Invested assets 231 604
Unrealized gain on investments 553 1,300
Other deferred tax liabilities 1,822 1,950
-------- --------
Total deferred tax liability 21,187 12,537
-------- --------
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
======== ========
A valuation allowance has been provided for 1996 and 1995, respectively, for the
tax effect of a portion of the non-life loss carryovers since it is more likely
than not that such benefits will not be realized.
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.
59
NOTE 11 - STATUTORY CAPITAL AND SURPLUS
Under applicable Delaware law, NFL must maintain minimum aggregate statutory
capital and surplus of $550,000. Under applicable Texas law, NFIC and AICT must
each maintain minimum aggregate statutory capital and surplus of $1.4 million.
Under Mississippi law, FLICA is required to maintain minimum capital and surplus
of $1 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
60
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.
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 statutory financial statements of the Insurance Subsidiaries are prepared
using accounting methods which are prescribed or permitted by the insurance
department of the respective companies' state of domicile. Prescribed statutory
accounting practices include a variety of publications of the NAIC as well as
state laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed. The
Company employed no permitted statutory accounting practices that individually
or in the aggregate materially affected statutory surplus or risk-based capital
at December 31, 1996 or 1995.
NOTE 12 - EMPLOYEE BENEFIT PLANS
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:
YEAR ENDED DECEMBER 31,
1996 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
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:
Dividend yield 0%
Expected volatility 70.00%
Risk-free rate of return 5.80%
Expected life 5.0 years
The Company adopted, as of July 1, 1982, an employee incentive stock option plan
(the "ISO Plan"). The ISO Plan authorizes the Company's Board of Directors to
issue to key full-time employees of the Company, or any of its subsidiaries,
non-transferrable options to purchase up to 580,000 (as adjusted to
61
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.
A third employee stock option plan, was adopted as of March 26, 1992 (as
amended, the "1992 Plan"). The 1992 Plan provides for the granting, to eligible
employees of the Company or its subsidiaries, of stock options to purchase up to
a total of 300,000 shares of the Company's Common Stock. Options granted under
the 1992 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.
62
Information regarding the Company's stock option plans is summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
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:
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.
NOTE 13 - REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on
both life and accident and health business. Reinsurance agreements are used to
limit maximum losses and provide greater diversity of risk. The Company remains
liable to policyholders to the extent the reinsuring companies are unable to
meet their treaty obligations. Total accident and health premiums of $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.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds
Withheld Reinsurance Agreement (the "Agreement") effective July 1, 1996 on the
inforce Critical Care and Specified Disease business. The Agreement provided an
initial ceding commission of $10.5 million, of which $8.4 million was received
in cash. This ceding commission allowance will be repaid, inclusive of interest
at 12.5%, as statutory profits emerge from the reinsured block of business. For
the year ended December 31, 1996, the
63
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.
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 March 1990, NFL entered into a coinsurance treaty with Paramount Life
Insurance Company ("Paramount"). Under the terms of the treaty, which was in
effect from April 1, 1990 through May 31, 1995, NFL assumed 90% of the Critical
Care and Specified Disease policies written by Paramount. The treaty effectively
ended upon the purchase of this block of business by NFL from Paramount. For the
year ended December 31, 1996, 1995 and 1994, $0, $582,000 and $1,601,000,
respectively, of assumed premiums under this coinsurance treaty were recorded as
revenue.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating leases,
relating primarily to office facilities and data processing equipment having a
remaining term in excess of one year, at December 31, 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.
In the normal course of their business operations, the Insurance Subsidiaries,
continue to be involved in various claims, lawsuits (alleging actual as well as
substantial exemplary damages) and regulatory matters. In the opinion of
management, the disposition of these or any other legal matters will not have a
material adverse effect on the Company's business, consolidated financial
position or results of operations.
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.
64
The Company collects $20,000 per month until this note and the related accrued
interest is satisified. 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.
NOTE 15 - RECONCILIATION TO STATUTORY REPORTING
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:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
Net income (loss) as reported by the insurance
subsidiaries on a regulatory basis $870 $(6,296) $3,043
Additions to (deductions from) regulatory basis:
Future policy benefits and claims (2,016) 166 1,264
FHC pre-acquisition statutory earnings (1,388) -- --
Deferred policy acquisition and
development costs, net of amortization 22,434 15,329 6,967
Deferred and uncollected premiums (1,719) 138 (601)
Coinsurance Funds Withheld reinsurance treaty (7,336) -- --
Income taxes (4,214) (2,837) (2,505)
Operations of affiliates 2,001 (1,355) (2,669)
Other, net (371) 179 926
-------- -------- -------
Consolidated net income as reported herein on a GAAP basis $8,261 $5,324 $6,425
======== ======== =======
A reconciliation of capital and surplus reported by the Insurance Subsidiaries
under regulatory practices to stockholders' equity as reported herein by
Westbridge on a consolidated GAAP basis follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
(in thousands)
Capital and surplus as reported by the Insurance
Subsidiaries on a regulatory basis $18,648 $24,038 $23,564
Additions to (deductions from) a regulatory basis:
Future policy benefits and claims 10 (9,723) (23,298)
Deferred policy acquisition and development costs 83,952 34,333 55,305
Nonadmitted assets 4,818 1,124 8,127
Coinsurance Funds Withheld reinsurance treaty (8,831) -- --
Income taxes (12,706) (9,447) (10,038)
Deferred, uncollected and advance premiums (12,651) 241 704
Asset valuation reserve 1,157 823 1,644
Stockholders' equity of affiliates (31,494) (8,506) (41,071)
Other, net 5,000 9,922 11,418
-------- -------- --------
Consolidated stockholders' equity as reported
herein on a GAAP basis $47,903 $42,805 $26,355
======== ======== ========
65
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for each of the Company's last two years of
operations is as follows (in thousands, except per share data):
QUARTER ENDED
1996 MARCH JUNE SEPTEMBER DECEMBER
-------------------------------------------
Premium income $35,410 $39,040 $40,688 $41,642
Net investment income 2,116 2,191 2,283 2,146
Net realized gains (losses) on investments 85 116 (28) (77)
Fee, service and other income 1,777 2,017 2,440 3,300
Benefits, claims and other expenses 37,040 40,334 41,890 43,285
Preferred stock dividend 413 412 412 413
Income applicable to common stockholders 1,160 1,585 1,858 2,008
Earnings per share:
Primary $0.19 $0.26 $0.30 $0.33
Fully diluted $0.19 $0.23 $0.27 $0.28
QUARTER ENDED
1995 MARCH JUNE SEPTEMBER DECEMBER
-------------------------------------------
Premium income $27,934 $28,876 $30,554 $32,729
Net investment income 1,820 1,764 1,722 2,115
Net realized gains (losses) on investments (61) (11) 37 217
Fee, service and other income 438 457 665 776
Benefits, claims and other expenses 29,169 29,069 30,386 33,212
Net income before extraordinary item 724 1,418 1,796 1,793
Extraordinary loss from early extinguishment
of debt, net of income tax benefit 407 -- -- --
Preferred stock dividend 413 412 413 412
Income (loss) applicable to common stockholders (96) 1,006 1,383 1,381
Earnings per share:
Primary:
Income before extraordinary item $0.06 $0.17 $0.23 $0.23
Extraordinary item (0.08) -- -- --
Net earnings $(0.02) $0.17 $0.23 $0.23
Fully diluted:
Income before extraordinary item $0.10 $0.17 $0.21 $0.21
Extraordinary item (0.06) -- -- --
Net earnings $0.04 $0.17 $0.21 $0.21
66
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
Net investment income $62 $23 $12
Intercompany income derived from:
Interest on Surplus Certificates 78 78 106
Rental of leasehold improvements and equipment 1,703 1,597 658
Interest on advances to subsidiaries 192 182 170
Other income 106 120 96
-------- -------- -------
2,141 2,000 1,042
-------- -------- -------
General and administrative expenses 2,128 2,085 894
Taxes, licenses and fees 90 97 35
Interest expense 2,496 2,432 3,228
-------- -------- -------
4,714 4,614 4,157
-------- -------- -------
Loss before benefit for income taxes and equity in
undistributed net earnings of subsidiaries (2,573) (2,614) (3,115)
Benefit for income taxes 432 1,427 1,228
-------- -------- -------
(2,141) (1,187) (1,887)
Equity in undistributed net earnings of subsidiaries 10,402 6,918 8,312
-------- -------- -------
Net income before extraordinary item 8,261 5,731 6,425
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $210 -- 407 --
-------- -------- -------
Net income 8,261 5,324 6,425
Preferred stock dividends 1,650 1,650 1,190
-------- -------- -------
Income applicable to common stockholders 6,611 3,674 5,235
Retained earnings at beginning of year 10,575 6,901 1,666
-------- -------- -------
Retained earnings at end of year $17,186 $10,575 $6,901
======== ======== =======
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1996 consolidated financial statements and
notes thereto.
67
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
BALANCE SHEETS
(in thousands)
DECEMBER 31,
1996 1995
Assets:
Cash and other short-term investments $1,241 $1,446
Investment in consolidated subsidiaries 77,946 70,118
Accrued investment income 50 34
Leasehold improvements and equipment, net 1,100 1,387
Other assets 6,540 7,257
Advances due from subsidiaries 2,557 4,797
Receivable from subsidiary on Surplus Certificate 777 777
-------- --------
Total Assets $90,211 $85,816
======== ========
Liabilities:
Senior subordinated notes, net $19,350 $19,264
Note payable 1,038 927
Other liabilities 991 1,130
Payable to subsidiaries 929 1,690
-------- --------
Total Liabilities 22,308 23,011
-------- --------
Redeemable Preferred Stock 20,000 20,000
-------- --------
Stockholders' Equity:
Common stock 604 599
Capital in excess of par value 29,226 29,208
Unrealized appreciation
of investments carried at market value 1,057 2,593
Retained earnings 17,186 10,575
-------- --------
48,073 42,975
-------- --------
Less: Aggregate shares held in treasury and investment by
affiliate in Parent Company's common stock
(28,600 shares at December 31, 1996 and 1995), at cost (170) (170)
-------- --------
Total Stockholders' Equity 47,903 42,805
-------- --------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Equity $90,211 $85,816
======== ========
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1996 consolidated financial statements and
notes thereto.
68
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
Cash Flows From Operating Activities:
Net income applicable to common stockholders $6,611 $3,674 $5,235
Adjustments to reconcile net income applicable to
common stockholders to cash provided by
(used for) operating activities:
Equity in undistributed net income of subsidiaries (10,402) (6,918) (8,312)
Accrued investment income (16) (12) 87
Advances due from subsidiaries 1,471 1,383 1,461
Other liabilities (138) 10 356
Decrease (increase) in deferred income tax benefit 356 (1,376) (1,268)
(Increase) decrease in deferred expenses 218 (137) (1,726)
Other 546 335 669
-------- -------- --------
Net Cash Used For Operating Activities (1,354) (3,041) (3,498)
-------- -------- --------
Cash Flows From Investing Activities:
Acquisition of NFIC and AICT -- -- (20,178)
Proceeds from investments sold and matured -- -- 100
Proceeds from surplus certificate -- -- 1,000
Notes receivable from related parties -- -- 1,381
Additions to leasehold improvements and equipment,
net of retirements (165) (703) (911)
Decrease in notes receivable 158 -- --
Investment in subsidiaries 1,038 -- 2,000
-------- -------- --------
Net Cash Provided By (Used For) Investing Activities 1,031 (703) (16,608)
-------- -------- --------
Cash Flows From Financing Activities:
Issuance of redeemable preferred stock -- -- 20,000
Retirement of subordinated debentures, due 1996 -- (25,000) --
Issuance of subordinated notes, due 2002 -- 19,200 --
Issuance of note payable 103 927 --
Issuance of common stock 140 10,108 395
Issuance of common stock warrants -- 74 --
Purchase and cancellation of common stock (125) (146) (534)
-------- -------- --------
Net Cash Provided By Financing Activities 118 5,163 19,861
-------- -------- --------
(Decrease) Increase in Cash and Short-Term
Investments During the Year (205) 1,419 (245)
Cash and Short-Term Investments at
Beginning of Year 1,446 27 272
-------- -------- --------
Cash and Short-Term Investments at End of Year $1,241 $1,446 $27
======== ======== ========
The condensed financial information should be read in conjunction with the
Westbridge Capital Corp. December 31, 1996 consolidated financial statements and
notes thereto.
69
SCHEDULE III
WESTBRIDGE CAPITAL CORP.
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
OTHER
POLICY AMORTIZATION
DEFERRED CLAIMS BENEFITS OF POLICY
POLICY FUTURE AND NET AND ACQUISI- OTHER
ACQUISITION POLICY BENEFITS PREMIUM INVESTMENT CLAIMS TION OPERATING PREMIUMS
SEGMENT COSTS BENEFITS PAYABLE REVENUE INCOME EXPENSE COSTS EXPENSES WRITTEN*
- - --------------------------------- ------- ------- ------- -------- ------ ------- ------- ------- --------
YEAR ENDED DECEMBER 31, 1996:
Insurance operations $83,871 $54,204 $39,186 $156,780 $6,514 $94,187 $22,907 $16,385 $107,149
========
Fee and service income activities -- -- -- -- 1,784 -- -- 24,433
Corporate (parent company) -- -- -- -- 438 -- -- 4,637
------- -------- ------ ------- ------- ------- --------
Total $83,871 $54,204 $39,186 $156,780 $8,736 $94,187 $22,907 $45,455
======= ======= ======== ====== ======= ======= ======= ========
YEAR ENDED DECEMBER 31, 1995:
Insurance operations $56,977 $46,620 $39,063 $120,093 $7,095 $70,465 $11,553 $23,533 $98,996
========
Fee and service income activities -- -- -- -- -- -- -- 11,670
Corporate (parent company) -- -- -- -- 326 -- -- 4,615
------- -------- ------ ------- ------- ------- --------
Total $56,977 $46,620 $39,063 $120,093 $7,421 $70,465 $11,553 $39,818
======= ======= ======== ====== ======= ======= ======= ========
YEAR ENDED DECEMBER 31, 1994:
Insurance operations $58,654 $62,862 $41,349 $98,703 $5,487 $53,623 $9,711 $22,688 $34,732
========
Fee and service income activities -- -- -- -- -- -- -- 7,704
Corporate (parent company) -- -- -- -- 277 -- -- 3,976
------- ------- -------- ------ ------- ------- ------- --------
Total $58,654 $62,862 $41,349 $98,703 $5,764 $53,623 $9,711 $34,368
======= ======= ======== ====== ======= ======= ======= ========
* Premiums Written--Amounts do not apply to life insurance.
70
WESTBRIDGE CAPITAL CORP.
SCHEDULE IV
REINSURANCE
(in thousands, except percentages)
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
YEAR ENDED DECEMBER 31, 1996:
Life insurance in force $86,978 $ -- $ -- $86,978 --
======== ========== ========== ==========
Premiums:
Life $889 $ -- $ -- $889 --
Accident and health 155,952 4,063 4,002 155,891 2.57%
-------- ---------- ---------- ----------
Total premiums $156,841 $4,063 $4,002 $156,780 2.55%
======== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1995:
Life insurance in force $43,441 $ -- $ -- $43,441 --
======== ========== ========== ==========
Premiums:
Life $549 $ -- $ -- $549 --
Accident and health 112,444 2,811 9,911 119,544 8.29%
-------- ---------- ---------- ----------
Total premiums $112,993 $2,811 $9,911 $120,093 8.25%
======== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1994:
Life insurance in force $21,814 $ -- $ -- $21,814 --
======= ========== ========== ==========
Premiums:
Life $444 $(1) $ -- $445 --
Accident and health 92,192 1,781 7,847 98,258 7.99%
------- ---------- ---------- ----------
Total premiums $92,636 $1,780 $7,847 $98,703 7.95%
======= ========== ========== ==========
71
SCHEDULE V
WESTBRIDGE CAPITAL CORP.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Additions
Charged Balance
Balance at to at
Beginning Costs and Deductions End of
OF PERIOD EXPENSES (CHARGE OFFS) PERIOD
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful agents' balances $1,187 $1,462 $(920) $1,729
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful agents' balances $1,137 $50 $ -- $1,187
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful agents' balances $1,133 $4 $ -- $1,137
========= ========= ========= =========
72
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated herein by reference to
Election of Directors" from the Company's definitive proxy statement for the
1997 Annual Meeting of Stockholders. Information relating to executive officers
is contained under the heading "Executive Officers" in PART I hereof.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation is incorporated herein by reference to "Election of
Directors -- Executive Compensation" from the Company's definitive proxy
statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of certain beneficial owners and
management is incorporated herein by reference to "Principal Stockholders" and
"Election of Directors -- Security Ownership of Management" from the Company's
definitive proxy statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
incorporated herein by reference to "Principal Stockholders" and "Election of
Directors" from the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) The documents set forth below are filed as part of this report.
(1) FINANCIAL STATEMENTS:
Reference is made to ITEM 8, "Index to Financial Statements and
Financial Statement Schedules."
(2) FINANCIAL STATEMENT SCHEDULES:
Reference is made to ITEM 8, "Index to Financial Statements and
Financial Statement Schedules."
73
(3) EXHIBITS:
The following exhibits are filed herewith. Exhibits incorporated by reference
are indicated in the parentheses following the description.
3.1 Restated Certificate of Incorporation of Westbridge filed with the
Secretary of State of Delaware on July 28, 1994 (incorporated by reference
to Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
No. 33-81380 on Form S-1).
3.2 By-Laws of Westbridge, effective as of June 24, 1994 (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the Company's Registration
Statement No. 33-81380 on Form S-1).
4.1 Specimen Certificate for Westbridge Common Stock (incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to the Company's Registration Statement
No. 2-78200 on Form S-1).
4.2 Indenture between Westbridge and Liberty Bank & Trust Company of Oklahoma
City, National Association, as Trustee, including form of Senior
Subordinated Note (incorporated by reference to Exhibit 2 to the Company's
Form 8-A dated July 19, 1995).
10.1 Westbridge Employee Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Company's Registration Statement
No. 2-78200 on Form S-1).
10.2 Description of Cash Bonus Plan (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.3 Westbridge 1985 Stock Option Plan (incorporated by reference to Exhibit
10.7 to the Company's Registration Statement No. 33-3577 on Form S-1).
10.4 Amendment No. 1 to the 1985 Employee Incentive Stock Option Plan of
Westbridge (incorporated by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1986).
10.5 Amendment No. 2 to the 1985 Employee Incentive Stock Option Plan of
Westbridge (incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1987).
10.6 Amendment No. 3 to the 1985 Employee Incentive Stock Option Plan of
Westbridge (incorporated by reference to Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1988).
10.7 Stockholders' Agreement dated April 2, 1988, by and among the Company and
the other stockholders of LifeStyles Marketing Group, Inc., named therein,
as amended (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988).
10.8 Supplement to General Agent's Agreement with Phillip D. Elkins as amended
on February 8, 1990 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.9 Assumption Reinsurance Agreement, dated June 20, 1991, by and among
National Foundation
74
Life Insurance Company and Bankers Protective Life Insurance
Company (incorporated by reference to Exhibit 2 to the Company's
Report on Form 8-K dated August 27, 1991).
10.10Assumption Reinsurance Agreement dated September 16, 1992, by and among
National Foundation Life Insurance Company and American Integrity Insurance
Company (incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K dated September 25, 1992).
10.11Westbridge 1992 Stock Option Plan (incorporated by reference to Exhibit
28.4 to the Company's Registration Statement No. 33-55192 on Form S-8).
10.12First Amendment to the 1992 Stock Option Plan (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.13Second Amendment to the 1992 Stock Option Plan (incorporated by reference
to Exhibit 10.21 to Amendment No.1 to the Company's Registration Statement
No. 33-31830 on Form S-1).
10.14Preferred Stock Purchase Agreement dated as of April 1, 1994 by and
between Westbridge Capital Corp. and each of the purchasers named on the
signature pages thereto (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 26, 1994).
10.15* Amended and Restated Receivables Purchase and Sale Agreement dated as of
November 14, 1996 between National Foundation Life Insurance Company,
National Financial Insurance Company, American Insurance Company of Texas,
Health Care-One Insurance Agency, Inc., and Westbridge Funding Corporation.
10.16* Non-Insurance Company Sellers Receivables Purchase and Sale Agreement
dated as of November 14, 1996 between Health Care-One Insurance Agency,
Inc., Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of
Texas, Inc., Westbridge Marketing and Westbridge Funding Corporation.
10.17Credit Agreement dated as of December 28, 1995 between Westbridge Funding
Corporation and Fleet National Bank of Connecticut, (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.18* First Amendment and Waiver to the Credit Agreement, dated as of May 17,
1996, between Westbridge Funding Corporation and Fleet National Bank.
10.19* Second Amendment and Waiver to the Credit Agreement, dated as of November
14, 1996, between Westbridge Funding Corporation and Fleet National Bank.
10.20Guaranty Agreement dated as of December 28, 1995 by Westbridge Capital
Corp. in favor of Fleet National Bank of Connecticut, (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.21* First Amendment to the Guaranty Agreement dated as of November 14, 1996
by Westbridge Capital Corp. in favor of Fleet National Bank.
10.22Security Agreement dated as of December 28, 1995 by Westbridge Funding
Corporation for the benefit of Fleet National Bank of Connecticut,
(incorporated by reference to the Company's
75
Annual Report on Form 10-K for the year ended December 31, 1995).
10.23Westbridge Capital Corp. 10% Senior Note Due 2002 dated December 22, 1995,
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.24Warrant to Purchase Common Stock of Westbridge Capital Corp. (transfer
restricted) dated December 22, 1995, (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
10.25Master General Agent's Contract by and between American Insurance Company
of Texas and National Farm & Ranch Group, Inc., effective as of the 1st day
of September, 1994, (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.26Master General Agent's Contract by and between National Financial
Insurance Company and National Farm & Ranch Group, Inc., effective as of
the 1st day of June, 1995, (incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to the Company's Registration Statement No.
33-81380 on Form S-1, as filed on August 9, 1996).
10.27Master General Agent's Contract by and between National Foundation Life
Insurance Company and National Farm & Ranch Group, Inc., effective as of
the 1st day of September, 1994, (incorporated by reference to Exhibit 10.27
to Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.28Master General Agent's Contract by and between American Insurance Company
of Texas and Cornerstone National Marketing Corporation effective, as of
the 19th day of October, 1994, (incorporated by reference to Exhibit 10.28
to Amendment No. 2 to the Company's Registration Statement No. 33-81380 on
Form S-1, as filed on August 9, 1996).
10.29Master General Agent's Contract by and between National Financial
Insurance Company and Cornerstone National Marketing Corporation, effective
as of the 19th day of October, 1994, (incorporated by reference to Exhibit
10.29 to Amendment No. 2 to the Company's Registration Statement No.
33-81380 on Form S-1, as filed on August 9, 1996).
10.30Master General Agent's Contract by and between National Foundation Life
Insurance Company and Cornerstone National Marketing Corporation, effective
as of the 19th day of October, 1994, incorporated by reference to Exhibit
10.30 to Amendment No. 2 to the Company's Registration Statement No.
33-81380 on Form S-1, as filed on August 9, 1996).
10.31Master General Agent's Contract by and between Freedom Life Insurance
Company of America and John P. Locke, d.b.a. 1ST MILLION, dated the 31st
day of May, 1996, (incorporated by reference to Exhibit 10.31 to Amendment
No. 2 to the Company's Registration Statement No.33-81380 on Form S-1, as
filed on August 9, 1996).
10.32Westbridge Capital Corp. 1996 Restricted Stock Plan (incorporated by
reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders of the Company held on May 30, 1996).
10.33Form of Pledge Agreement between Westbridge Capital Corp. and Fleet
National Bank of
76
Connecticut, (incorporated by reference to Exhibit 10.33 to Amendment No.
2 to the Company's Registration Statement No. 33-81380 on Form S-1, as
filed on August 9, 1996).
10.34Reinsurance Agreement between National Foundation Life Insurance Company &
Freedom Life Insurance Company of America and Reassurance Company of
Hannover, effective July 1, 1996 (incorporated by reference to Exhibit
10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
21.1* List of Subsidiaries of Westbridge Capital Corp.
24.1* Consent of Price Waterhouse LLP
27.1* Financial Data Schedule.
(b) REPORT ON FORM 8-K.
Westbridge filed no reports on Form 8-K during the last quarter of
the year covered by this report.
- - ------------------------
* Filed Herewith.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 28th day of March,
1997.
WESTBRIDGE CAPITAL CORP.
/S/ MARTIN E. KANTOR
(Martin E. Kantor,
Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/S/ MARTIN E. KANTOR Director, Chairman of the Board March 28, 1997
- - --------------
(Martin E. Kantor) and Chief Executive Officer
(Principal Executive Officer)
/S/ MARVIN H. BERKELEY Director March 28, 1997
- - --------------
(Marvin H. Berkeley)
/S/ ARTHUR S. FEINBERG Director March 28, 1997
- - --------------
(Arthur W. Feinberg)
/S/ GEORGE M. GARFUNKEL Director March 28, 1997
- - --------------
(George M. Garfunkel)
/S/ PETER J. MILLOCK Director March 28, 1997
- - --------------
(Peter J. Millock)
/S/ GLENN O. PHILLIPS Director March 28, 1997
- - --------------
(Glenn O. Phillips)
/S/ JOSEPH C. SIBIGTROTH Director March 28, 1997
- - --------------
(Joseph C. Sibigtroth)
/S/ JAMES W. THIGPEN Director, President and March 28, 1997
- - --------------
(James W. Thigpen) Chief Operating Officer
/S/ BARTH P. WALKER Director March 28, 1997
- - --------------
(Barth P. Walker)
/S/ PATRICK J. MITCHELL Executive Vice President, Chief March 28, 1997
- - --------------
(Patrick J. Mitchell) Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
78
INDEX OF EXHIBITS
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
10.15* Amended and Restated Receivables Purchase and Sale Agreement dated as of
November 14, 1996 between National Foundation Life Insurance Company,
National Financial Insurance Company, American Insurance Company of Texas,
Health Care-One Insurance Agency, Inc., and Westbridge Funding Corporation.
10.16* Non-Insurance Company Sellers Receivables Purchase and Sale Agreement dated
as of November 14, 1996 between Health Care-One Insurance Agency, Inc., Health
Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of Texas, Inc.,
Westbridge Marketing and Westbridge Funding Corporation.
10.18* First Amendment and Waiver to the Credit Agreement, dated as of May 17, 1996,
between Westbridge Funding Corporation and Fleet National Bank.
10.19* Second Amendment and Waiver to the Credit Agreement, dated as of November
14, 1996, between Westbridge Funding Corporation and Fleet National Bank.
10.21* First Amendment to the Guaranty Agreement dated as of November 14, 1996 by
Westbridge Capital Corp. in favor of Fleet National Bank.
21.1* List of Subsidiaries of Westbridge Capital Corp.
24.1* Consent of Price Waterhouse LLP
27.1* Financial Data Schedule.
* Filed Herewith
79
EXHIBIT 10.15
80
EXHIBIT 10.5
AMENDED AND RESTATED
RECEIVABLES PURCHASE AND SALE AGREEMENT
This Amended and Restated Receivables Purchase and Sale
Agreement, dated as of November 14, 1996 (this "AGREEMENT"), is entered into by
and between National Foundation Life Insurance Company, a Delaware corporation,
National Financial Insurance Company, a Texas corporation, American Insurance
Company of Texas, a Texas corporation, Freedom Life Insurance Company of
America, a Mississippi corporation, and Health Care-One Insurance Agency, Inc.,
a California corporation (each of which is referred to herein as a "SELLER" and
are collectively referred to herein as the "SELLERS"), and Westbridge Funding
Corporation, a Delaware corporation (the "PURCHASER"). Capitalized terms not
otherwise defined herein shall have the meanings set forth in SECTION 1.1.
WHEREAS, NFL, NFIC, AICT, HCO and Purchaser entered into the
Receivables Purchase and Sale Agreement, dated as of November 15, 1995, and
desire (i) to amend the Receivables Purchase and Sale Agreement to, among other
things, to include Freedom Life Insurance Company of America as an additional
Seller, to terminate the rights of Health Care-One Insurance Agency, Inc. to
sell Receivables hereunder on and after November 1, 1996, and to clarify certain
procedures described therein, and (ii) to restate that agreement in its
entirety;
WHEREAS, the Sellers are in the business of underwriting
and/or selling insurance products, and in the ordinary course of such business
(i) generate and receive premiums from insureds, a portion of which premiums
represent commissions (the "COMMISSIONS") due or to become due to their agents,
including without limitation their general agents and other agents with whom
said general agents have contracted (collectively, the "AGENTS") and (ii)
generate accounts receivable resulting from advances of first-year Commissions
paid to the Sellers' Agents (each, an "AGENT OBLIGOR") in respect of insurance
policies sold by such Agent Obligors (the obligations of such Agent Obligors to
repay the principal amount of, and interest and other finance charges on, such
advances being referred to herein as "AGENT RECEIVABLES");
WHEREAS, the Sellers desire to sell to the Purchaser, and,
subject to the terms and conditions set forth herein, the Purchaser agrees to
purchase from the Sellers, from time to time on a non-recourse basis, all of
each Seller's right, title and interest in, to and under their respective Agent
Receivables; and
WHEREAS, in connection with such sale of Agent Receivables and
as collateral for the repayment thereof, the Sellers desire to assign to the
Purchaser, and the Purchaser desires to assume, all of each Seller's rights in,
to and under all guarantees thereof and all collateral security therefor,
including, without limitation, the Assigned Commissions and Agent Contract
Rights (each as defined below);
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreements, and for other good and valuable
consideration, the receipt and sufficiency of which is are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Definitions. The following terms shall have the definitions set
forth below:
"AGENT CONTRACT RIGHTS" means all of each Seller's rights under each
contract, financing
81
agreement, note, instrument, or other agreement by which any Agent Obligor is
bound to make payments to such Seller to repay advances of first-year
Commissions made by such Seller to such Agent Obligor or any other Agent Obligor
and to pay interest and/or other finance charges to the Seller.
"ASSIGNED COMMISSIONS" means the Commissions due or to become due to the
Agent Obligors with respect to Insurance Policies sold by such Agent Obligors,
including without limitation all renewal Commissions, but only to the extent
that such Commissions have been assigned by such Agent Obligors to a Seller as
collateral to secure the payment of the Agent Receivables owing by such Agent
Obligors.
"BUSINESS DAY" means any day on which commercial banks are open for
business in the States of Connecticut and Texas.
"COLLECTIONS" means all the payments and collections received by a Seller,
from time to time, under any Insurance Policies arising out of a sale of
insurance products or services, which includes (i) premiums, (ii) Commissions,
(iii) any interest or finance charges on such Commissions, and (iv) any other
obligations of the insureds thereunder.
"CUT-OFF DATE" means, with respect to each Closing, the last day of a
calendar month designated by the Purchaser, which designated calendar month must
be either of the two calendar months immediately preceding the month in which
such Closing occurs.
"INSURANCE POLICIES" means the insurance policies issued by any Seller and
sold by any Agent ------------------ Obligor.
"PERSON" means any individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"PURCHASE TERMINATION DATE" means January 7, 1998 or such later date as the
parties to this Agreement mutually agree.
ARTICLE II
PURCHASE AND SALE; CLOSINGS
Section 2.1. PURCHASE AND SALE. On the terms and subject to the conditions
of this Agreement, each Seller hereby agrees to sell to the Purchaser, and the
Purchaser hereby agrees to purchase from each Seller, from time to time on a
non-recourse basis, all of such Seller's right, title and interest in, to and
under certain outstanding Agent Receivables to be designated by the Purchaser
from time to time, and in connection therewith and as collateral therefor, the
Seller agrees to assign to the Purchaser at the time of each sale, and the
Purchaser agrees to assume from the Seller, all of the Sellers right, title and
interest in, to and under including, without limitation, all interest accrued or
accruing on such Agent Receivables, all monies due and to become due thereunder,
all guarantees thereof, all collateral security therefor (including, without
limitation, all Assigned Commissions and Agent Contract Rights), and all
proceeds thereof. Each sale and purchase of Agent Receivables hereunder shall
take place in the manner set forth in SECTION 2.2 below.
Section 2.2. CLOSINGS. (a) A closing of the sale and purchase of Agent
Receivables (each, a "CLOSING") shall take place from time to time on the
Business Days to be specified by the Purchaser and agreed to by Sellers (each, a
"CLOSING DATE"). At the time a Closing Date is established, the Purchaser shall
82
specify (i) the Agent Receivables to be purchased from Sellers on such Closing
Date and (ii) the applicable Cut-Off Date for such Agent Receivables.
(b) On each Closing Date:
(i) each Seller shall deliver to the Purchaser an Assignment
substantially in the form of EXHIBIT A hereto, dated the Closing Date,
which specifies in reasonable detail (A) each Agent Receivable
outstanding as of the Cut-Off Date immediately prior to such Closing
Date and being purchased from such Seller on the applicable Closing
Date, (B) the outstanding amount of each such Agent Receivable as of
such Cut-Off Date, and (C) the Assigned Commissions and Agent Contract
Rights relating to each such Agent Receivable which have not been
previously assigned by each Seller; and
(ii) the Purchaser shall deliver to each Seller, in
immediately available funds, the aggregate purchase price for the Agent
Receivables being purchased from such Seller on such date equal to 85%
of the aggregate amount of such Agent Receivables as of the Cut-Off
Date.
(c) (i) the obligations of the Sellers and the Purchaser to
consummate the sale and purchase of any Agent Receivables on each
Closing Date shall be subject to the satisfaction of the following
conditions: (A) the transactions contemplated by this Agreement not
being prohibited by or in conflict with any applicable law, order,
decree or governmental regulation; and (B) the receipt and continued
effectiveness of all consents, approvals and actions of, filings with
and notices to any third party, including, without limitation, any
governmental or regulatory authority, necessary to permit the Sellers
and the Purchaser to perform their respective obligations under this
Agreement and to consummate the transactions contemplated hereby, all in
form and substance reasonably satisfactory to the Purchaser and the
Sellers, as applicable; and
(ii) the obligations of the Purchaser to consummate the
purchase of Agent Receivables on each Closing Date shall be subject to
the Purchaser having available sufficient funds to pay the purchase
price on such Closing Date.
(d) Prior to the initial Closing Date, each Seller shall
deliver to the Purchaser a UCC-1 financing statement of the Purchaser as secured
party/assignee and such Seller as the debtor/assignor with respect to the Agent
Receivables, and the Assigned Commissions and Agent Contract Rights relating
thereto, to be assigned by such Seller hereunder.
(e) Notwithstanding anything herein to the contrary, on and
after November 1, 1996, Health Care-One Insurance Agency, Inc. agrees that it
shall not sell Agent Receivables hereunder.
Section 2.3. SECURITY INTEREST. The parties hereto agree that this
Agreement is intended to constitute the sale of and shall transfer ownership to
the Purchaser of all right, title and interest of each Seller in, to and under
the Agent Receivables sold hereunder. In addition, the parties hereto agree that
(a) this Agreement constitutes a grant by each Seller to the Purchaser of a
perfected first priority security interest in all of such Seller's right, title
and interest in, to and under each Agent Receivable sold hereunder, including,
without limitation, all interest accrued or accruing thereon, all monies due and
to become due thereunder, all guarantees thereof, all collateral security
therefor (including, without limitation, all Assigned Commissions and Agent
Contract Rights), and all "proceeds" (as defined in Section 9-306 of the Uniform
Commercial Code as in effect in the applicable jurisdiction) thereof, in each
case, whether now existing or hereafter arising, (b) such security interest is
intended to secure, without limitation, all now and hereafter outstanding
obligations of each Seller to the Purchaser and (c) this Agreement shall
constitute a security
83
agreement under applicable law.
ARTICLE III
ADDITIONAL COVENANTS
Section 3.1. APPOINTMENT OF SELLERS AS SERVICING AGENTS. The
Purchaser hereby appoints each Seller, and each Seller hereby accepts such
appointment, as the Purchaser's agent to service, administer and collect the
Agent Receivables sold by it hereunder and the Assigned Commissions assigned by
it hereunder (in such capacity, each Seller is referred to herein as a
"SERVICING AGENT") pursuant to the terms of this SECTION 3.1.
Section 3.2. RIGHTS AND DUTIES OF SERVICING AGENT. (a) Each
Servicing Agent shall take or cause to be taken all such actions as may be
necessary or advisable to service, administer, account, collect and remit to the
Purchaser from time to time the Assigned Commissions relating to the Agent
Receivables sold by it hereunder, all with reasonable care and diligence and in
accordance with its sound credit and collection policies, which policies shall
not be amended, modified or waived in any material respect without the prior
written consent of the Purchaser. Unless and until otherwise specified by the
Purchaser, each Servicing Agent shall enforce the Purchaser's rights and
interests in and under the Agent Receivables sold by it hereunder and the
related collateral security and guarantees (including the Assigned Commissions
and Agent Contract Rights).
(b) Each Servicing Agent shall collect, and hold in trust for
the account of the Purchaser in an interest bearing account of the Servicing
Agent, the portion of all Collections received after the respective Cut-Off for
the Agent Receivables purchased by the Purchaser hereunder which represent
Assigned Commissions (together with all interest and/or other finance charges
paid by the Agent Obligors thereon, the "COLLECTED COMMISSIONS"). Not later than
the fifteenth day of each calendar month, each Servicing Agent will (i) furnish
or cause to be furnished to the Purchaser a statement setting forth a detailed
itemization of the amounts which it has received in respect of the repayment of
Agent Receivables and such other information as the Purchaser may reasonably
request; and (ii) pay to the Purchaser such amounts, together with any and all
interest received thereon during the period for which such amounts were held by
such Servicing Agent.
(c) Promptly following each calendar quarter, each Servicing
Agent shall reconcile the aggregate Collected Commissions received by it to the
amount of Assigned Commissions which should have been received by it in
repayment of Agent Receivables. To the extent necessary and in accordance with
the Agent Contract Rights relating to such Agent Receivables, each Servicing
Agent shall take such steps as shall be necessary to recover from each Agent
Obligor any shortfall in the repayment of Agent Receivables. Not later than the
fifteenth day of each calendar month, each Servicing Agent will (i) furnish or
cause to be furnished to the Purchaser a statement setting forth a detailed
itemization of the amounts which it has recovered in respect of shortfalls in
the repayment of Agent Receivables and such other information as the Purchaser
may reasonably request; and (ii) pay to the Purchaser such recovered amounts,
together with any and all interest received thereon during the period for which
such recovered amounts were held by such Servicing Agent. The Purchaser hereby
authorizes each Servicing Agent to enforce each Agent Obligor's obligations
under the respective Agent Receivables and related Agent Contract Rights and to
collect all amounts due under the Agent Receivables sold by it hereunder,
including, without limitation, endorsing any instruments representing
Collections.
Section 3.3. RIGHTS OF THE PURCHASER. (a) At any time or from time to time,
the Purchaser
84
may notify (or cause each Servicing Agent to notify) the Agent Obligors of its
ownership of the Agent Receivables purchased by it hereunder, and may direct
such Agent Obligors to pay all amounts due or to become due thereunder directly
to the Purchaser or its designee.
(b) Each Servicing Agent shall, at the Purchaser's request,
(i) assemble all of the documents, instruments and other records (including,
without limitation, computer tapes and disks) which evidence the Agent
Receivables purchased by the Purchaser hereunder and the related Agent Contract
Rights and collateral security (and such other information which the Purchaser
may reasonably request), and make the same available to the Purchaser or its
designee, and (ii) segregate all cash, checks and other instruments received by
it from time to time constituting Collections of Agent Receivables purchased by
the Purchaser hereunder in a manner acceptable to the Purchaser and shall, remit
all such cash, checks and instruments, duly endorsed or with duly executed
instruments of transfer, to the Purchaser or its designee.
(c) Anything herein to the contrary notwithstanding, the
exercise by the Purchaser of any of its rights hereunder shall not relieve the
Servicing Agent from any of its duties or obligations with respect to the Agent
Contract Rights relating to the Agent Receivables sold by it hereunder.
Section 3.4. FURTHER ASSURANCES. At any time or from time to time after the
date hereof, at the Purchaser's request and without further consideration, each
of the Sellers shall execute and deliver to the Purchaser such other instruments
of sale, transfer, conveyance, assignment and confirmation, provide such
materials and information and take such other actions as the Purchaser may
reasonably deem necessary or desirable in order more effectively to transfer,
convey and assign to the Purchaser, and to confirm the Purchaser's title to, all
of the Agent Receivables and Assigned Commissions and Agent Contract Rights
relating thereto, and, to the full extent permitted by law, to cause each of the
Sellers to fulfill its obligations under this Agreement, including, without
limitation, the execution of any financing statements or continuation statements
relating to Agent Receivables or Assigned Commissions or Agent Contract Rights
for filing under the provisions of the Uniform Commercial Code of any applicable
jurisdiction.
Section 3.5. STANDARD OF CARE. Each Seller will exercise and give the same
care and attention to its obligations pursuant to Article III as it gives to all
other corporate obligations of a comparable nature, PROVIDED, that it shall not
be held responsible for any losses arising from any action taken by it hereunder
in good faith absent willful misconduct or gross negligence.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 4.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the Sellers
severally, and not jointly, hereby represents, warrants and covenants to the
Purchaser as follows:
(a) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy giving rise to such Agent
Receivables and the related Assigned Commissions will be in full force and
effect in accordance with its terms and, to its knowledge free from any lien,
security interest, encumbrance or other right, title or interest of any Person,
and neither it nor, to its knowledge, any insured had or will have done or
failed to do anything that would or might permit any such insured or it to
terminate any such Insurance Policy or suspend or reduce any payments or
obligations due or to become due thereunder.
(b) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy sold by such Seller giving rise to
such Agent Receivables is a valid, binding and legally enforceable
85
obligation of it and it had all requisite authority and capacity to issue or
sell such Insurance Policy and no such Insurance Policy violates any applicable
law or contravenes any other agreement to which it is subject.
(c) the execution and delivery of this Agreement by it, and
the performance by it of its obligations hereunder, have been duly authorized by
all necessary corporate and other action and do not and, subject to the approval
of the relevant state insurance commissioners and receipt of the consents set
forth in SCHEDULE 4.1(C), will not require any consent or approval not
heretofore obtained of any governmental authority or other Person.
(d) this Agreement is the valid, binding and enforceable
obligation of it, and does not violate any applicable law or contravene any
other agreement to which it is a party.
(e) other than financing statements on file at any public
office covering its security interests in Assigned Commissions and Agent
Contract Rights which will be assigned to the Purchaser hereunder, there are no
financing statements now on file, or intended so to be, and neither it nor any
of its subsidiaries or affiliates will execute or consent to the filing in any
public office of any financing statement under the laws of any jurisdiction,
relating to the Agent Receivables and the Assigned Commissions, Agent Contract
Rights and other collateral relating thereto.
(f) on each Closing Date, SCHEDULE I to the Assignment
delivered on such Closing Date will contain a complete and correct statement of
the Agent Receivables being sold on such Closing Date and the Assigned
Commissions and Agent Contracts Rights relating thereto.
(g) upon payment on each Closing Date of the dollar amount to
be paid on such date as described in SECTION 2.2(B)(II) hereof for the purchase
of the Agent Receivables sold to the Purchaser on such date, the Purchaser will
have at such time good title to the Agent Receivables set forth in SCHEDULE I to
the Assignment delivered on such Closing Date.
ARTICLE V
MISCELLANEOUS
Section 5.1. TERMINATION. This Agreement will terminate on the Purchase
Termination Date, or on such other date as the parties shall agree to in
writing.
Section 5.2 NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile transmission or mailed (first class postage
prepaid) to the other parties at the respective addresses set forth on the
signature pages hereof. All such notices, requests and other communications will
be deemed given upon receipt.
Section 5.3. WAIVER. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
86
Section 5.4. AMENDMENT. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party hereto.
Section 5.5. NO THIRD PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and except as set forth in SECTION
5.11 it is not the intention of the parties to confer third-party beneficiary
rights upon any other Person.
Section 5.6. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors, heirs, personal representatives and permitted assigns.
Section 5.7. ENTIRE AGREEMENT. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof between the parties, and contains the sole and entire agreement
between the parties hereto with respect to the subject matter hereof.
Section 5.8. HEADINGS. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
Section 5.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 5.10. INVALID PROVISIONS. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future Law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable, (b) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof
and (c) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom.
Section 5.11. SELLERS' OBLIGATIONS. Notwithstanding that all sales of Agent
Receivables pursuant to SECTION 2.1 of this Agreement will be on a non-recourse
basis, nothing contained herein shall be construed to relieve any Seller from
liability for any misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on its part contained in ARTICLE
IV. Each Seller understands that the Purchaser intends to assign to and grant to
a lending institution or institutions a security interest in all of its rights,
title and interest to this Agreement. Each Seller hereby consents to such
assignment and grant, and further agrees that all representations, warranties,
covenants and agreements of such Seller made herein shall also be for the
benefit of and inure to such lending institution or institutions and all holders
from time to time of notes issued by Purchaser to such institution or
institutions.
Section 5.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
87
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party as of the date first above written.
SELLERS:
NATIONAL FOUNDATION LIFE INSURANCE
COMPANY
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
NATIONAL FINANCIAL INSURANCE COMPANY
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
AMERICAN INSURANCE COMPANY OF TEXAS
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
88
FREEDOM LIFE INSURANCE COMPANY OF
AMERICA
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
HEALTH CARE-ONE INSURANCE AGENCY, INC.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
PURCHASER:
WESTBRIDGE FUNDING CORPORATION
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
89
EXHIBIT A
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned (the "SELLER") does hereby sell,
transfer, convey, assign and deliver to the Purchaser free and clear of all
mortgages, pledges, assessments, security interests, leases, liens, adverse
claims, levies, charges or other encumbrances of any kind ("LIENS"), other than
permitted Liens, on a non-recourse basis, all of the Seller's right, title and
interest in, to and under the Agent Receivables listed in SCHEDULE I hereto,
together with all interest accrued or accruing thereon, all monies due and to
become due thereunder, all guarantees thereof, all collateral security therefor
(including, without limitation, all Assigned Commissions and Agent Contract
Rights), and all proceeds thereof in each case, listed in SCHEDULE I hereto (the
"ASSIGNED ASSETS"), TO HAVE AND TO HOLD the same unto the Purchaser, its
successors and assigns, forever.
The terms Seller, Agent Receivables, Assigned Commissions and Agent
Contract Rights shall have the respective meanings assigned thereto in the
Amended and Restated Receivables Purchase and Sale Agreement, dated as of
November 14, 1996 between National Foundation Life Insurance Company, a Delaware
corporation, National Financial Insurance Company, a Texas corporation, American
Insurance Company of Texas, a Texas corporation, Freedom Life Insurance Company
of America, a Mississippi corporation and Health Care-One Insurance Agency,
Inc., a California corporation, and Westbridge Funding Corporation, a Delaware
corporation (the "PURCHASER").
The Purchaser hereby accepts the sale, transfer, conveyance, assignment and
delivery of the Assigned Assets.
At any time or from time to time after the date hereof, at the Purchaser's
request and without further consideration, the Seller shall execute and deliver
to the Purchaser such other instruments of sale, transfer, conveyance,
assignment and confirmation, provide such materials and information and take
such other actions as the Purchaser may reasonably deem necessary or desirable
in order more effectively to transfer, convey and assign to the Purchaser, and
to confirm the Purchaser's title to, all of the Assigned Assets, and, to the
full extent permitted by law, to put the Purchaser in actual possession and
operating control of the Assigned Assets and to assist the Purchaser in
exercising all rights with respect thereto.
This Assignment shall be governed by and construed in accordance with the
laws of the State of Texas applicable to a contract executed and performed in
such State without giving effect to the conflicts of laws principles thereof,
except that if it is necessary in any other jurisdiction to have the law of such
other jurisdiction govern this Assignment in order for this Assignment to be
effective in any respect, then the laws of such other jurisdiction shall govern
this Assignment to such extent.
1
IN WITNESS WHEREOF, the undersigned has caused its duly authorized officer
to execute this Assignment on this ______ day of _________, 199_.
[SELLER]
By:____________________________
Name:
Title:
2
SCHEDULE 4.1(C)
1. General Agent's Agreement, dated April 5, 1976 by and between NFL and
Phillip David Elkins of Little Rock Arkansas. (Pursuant to section 10,
NFL must obtain prior written consent to assign this Agreement.)
3
EXHIBIT 10.16
4
EXHIBIT 10.16
NON-INSURANCE COMPANY SELLERS
RECEIVABLES PURCHASE AND SALE AGREEMENT
This Receivables Purchase and Sale Agreement, dated as of November 14, 1996
(this "AGREEMENT"), is entered into by and between Health Care-One Insurance
Agency, Inc. a California corporation, HealthCare One Marketing Group, Inc., a
Texas corporation, LSMG, Inc., a Texas corporation, Senior Benefits of Texas,
Inc., a Texas corporation, and Westbridge Marketing Corporation, a Delaware
corporation (each of which is referred to herein as a "NON-INSURANCE COMPANY
SELLER" and are collectively referred to herein as the "NON-INSURANCE COMPANY
SELLERS"), and Westbridge Funding Corporation, a Delaware corporation (the
"PURCHASER"). Capitalized terms not otherwise defined herein shall have the
meanings set forth in SECTION 1.1.
WHEREAS, the Non-Insurance Company Sellers are in the business of selling
insurance products, and in the ordinary course of such business (i) are granted
certain rights, pursuant to the terms of the Agency Contracts (defined below) to
receive from the insurance companies for which they sell insurance products, the
portion of the premiums paid by the insureds which represent commissions (the
"COMMISSIONS") due or to become due to the Non-Insurance Company Sellers'
agents, including without limitation their general agents and other agents with
whom said general agents have contracted (collectively, the "AGENTS") (the
obligations of such insurance companies to pay the portion of premiums
representing Commissions being referred to herein as "INSURANCE COMPANY
RECEIVABLES"), and (ii) generate accounts receivable resulting from advances of
first-year Commissions paid to the Non-Insurance Company Sellers' Agents (each,
an "AGENT OBLIGOR") in respect of insurance policies sold by such Agent Obligors
(the obligations of such Agent Obligors to repay the principal amount of, and
interest and other finance charges on, such advances being referred to herein as
"AGENT RECEIVABLES");
WHEREAS, the Non-Insurance Company Sellers desire to sell to the Purchaser,
and, subject to the terms and conditions set forth herein, the Purchaser agrees
to purchase from the Non-Insurance Company Sellers, from time to time on a full
recourse basis, all of each Non-Insurance Company Seller's right, title and
interest in, to and under their respective Agent Receivables; and
WHEREAS, in connection with such sale of Agent Receivables and as
collateral for the repayment thereof, the Non-Insurance Company Sellers desire
to assign to the Purchaser, and the Purchaser desires to assume, all of each
Non-Insurance Company Seller's rights in, to and under all guarantees thereof
and all collateral security therefor, including, without limitation, the
Assigned Commissions and Agent Contract Rights (each as defined below) and the
Insurance Company Receivables;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreements, and for other good and valuable consideration, the
receipt and sufficiency of which is are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Definitions. The following terms shall have the definitions
set forth below:
"AGENCY CONTRACTS" means the agreements identified on Schedule 1 hereto
between the NonInsurance Company Sellers and the insurance companies identified
therein.
"AGENT CONTRACT RIGHTS" means all of each Non-Insurance Company Seller's
rights under each contract, financing agreement, note, instrument, or other
agreement by which any Agent Obligor is bound to make payments to such
Non-Insurance Company Seller to repay advances of first-year Commissions made by
such Non-Insurance Company Seller to such Agent Obligor or any other Agent
Obligor and to pay interest and/or other finance charges to the Non-Insurance
Company Seller.
"ASSIGNED COMMISSIONS" means the Commissions due or to become due to the
Agent Obligors with respect to Insurance Policies sold by such Agent Obligors,
including without limitation all renewal Commissions, but only to the extent
that such Commissions have been assigned by such Agent Obligors to a
Non-Insurance Company Seller as collateral to secure the payment of the Agent
Receivables owing by such Agent Obligors.
"BUSINESS DAY" means any day on which commercial banks are open for
business in the States of Connecticut and Texas.
"COLLECTIONS" means all the payments and collections received by a
Non-Insurance Company Seller, from time to time, in respect of Insurance Company
Receivables.
"CUT-OFF DATE" means, with respect to each Closing, the last day of a
calendar month designated by the Purchaser, which designated calendar month must
be either of the two calendar months immediately preceding the month in which
such Closing occurs.
"INSURANCE POLICIES" means the insurance policies issued by any insurance
company and sold by any Agent Obligor.
"PERSON" means any individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"PURCHASE TERMINATION DATE" means January 7, 1998 or such later date as the
parties to this Agreement mutually agree.
ARTICLE II
PURCHASE AND SALE; CLOSINGS
Section 2.1. PURCHASE AND SALE. On the terms and subject to the conditions
of this Agreement, each Non-Insurance Company Seller hereby agrees to sell to
the Purchaser, and the Purchaser hereby agrees to purchase from each
Non-Insurance Company Seller, from time to time on a full recourse basis, all of
such Non-Insurance Company Seller's right, title and interest in, to and under
certain outstanding Agent Receivables to be designated by the Purchaser from
time to time, and in connection therewith and as collateral therefor, the
Non-Insurance Company Seller agrees to assign to the Purchaser at the time of
each sale, and the Purchaser agrees to assume from the Non-Insurance Company
Seller, all of the Non-Insurance Company Seller's right, title and interest in,
to and under including, without limitation, all interest accrued or accruing on
such Agent Receivables, all monies due and to become due thereunder, all
guarantees thereof, all collateral security therefor (including, without
limitation, all Assigned
5
Commissions and Agent Contract Rights), and all proceeds thereof. Each sale and
purchase of Agent Receivables hereunder shall take place in the manner set forth
in SECTION 2.2 below.
Section 2.2. CLOSINGS. (a) A closing of the sale and purchase of Agent
Receivables (each, a "CLOSING") shall take place from time to time on the
Business Days to be specified by the Purchaser and agreed to by the
Non-Insurance Company Sellers (each, a "CLOSING DATE"). At the time a Closing
Date is established, the Purchaser shall specify (i) the Agent Receivables to be
purchased from the Non-Insurance Company Sellers on such Closing Date and (ii)
the applicable Cut-Off Date for such Agent Receivables.
(b) On each Closing Date:
(i) each Non-Insurance Company Seller shall deliver to the
Purchaser an Assignment substantially in the form of EXHIBIT A hereto,
dated the Closing Date, which specifies in reasonable detail (A) each
Agent Receivable outstanding as of the Cut-Off Date relating to such
Closing Date and being purchased from such Non-Insurance Company Seller
on the applicable Closing Date, (B) the outstanding amount of each such
Agent Receivable as of such Cut-Off Date, and (C) the Assigned
Commissions, Agent Contract Rights and Insurance Company Receivables
relating to each such Agent Receivable which have not been previously
assigned by each Non-Insurance Company Seller; and
(ii) the Purchaser shall deliver to each Non-Insurance Company
Seller, in immediately available funds, the aggregate purchase price for
the Agent Receivables being purchased from such Non-Insurance Company
Seller on such date equal to 85% of the aggregate amount of such Agent
Receivables as of the Cut-Off Date.
(c) (i) the obligations of the Non-Insurance Company Sellers
and the Purchaser to consummate the sale and purchase of any Agent
Receivables on each Closing Date shall be subject to the satisfaction of
the following conditions: (A) the transactions contemplated by this
Agreement not being prohibited by or in conflict with any applicable
law, order, decree or governmental regulation; and (B) the receipt and
continued effectiveness of all consents, approvals and actions of,
filings with and notices to any third party, including, without
limitation, any governmental or regulatory authority, necessary to
permit the Non-Insurance Company Sellers and the Purchaser to perform
their respective obligations under this Agreement and to consummate the
transactions contemplated hereby, all in form and substance reasonably
satisfactory to the Purchaser and the NonInsurance Company Sellers, as
applicable; and
(ii) the obligations of the Purchaser to consummate the
purchase of Agent Receivables on each Closing Date shall be subject to
the Purchaser having available sufficient funds to pay the purchase
price on such Closing Date.
(d) Prior to the initial Closing Date, each Non-Insurance
Company Seller shall deliver to the Purchaser a UCC-1 financing statement of the
Purchaser as secured party/assignee and such NonInsurance Company Seller as the
debtor/assignor with respect to the Agent Receivables, and the Assigned
Commissions and Agent Contract Rights relating thereto, and the Insurance
Company Receivables to be assigned by such Non-Insurance Company Seller
hereunder.
Section 2.3. SECURITY INTEREST. The parties hereto agree that this
Agreement is intended to constitute the sale of and shall transfer ownership to
the Purchaser of all right, title and interest of each NonInsurance Company
Seller in, to and under the Agent Receivables sold hereunder. In addition, the
parties
6
hereto agree that (a) this Agreement constitutes a grant by each Non-Insurance
Company Seller to the Purchaser of a perfected first priority security interest
in all of such Non-Insurance Company Seller's right, title and interest in, to
and under each Agent Receivable sold hereunder and the Insurance Company
Receivables, including, without limitation, all interest accrued or accruing
thereon, all monies due and to become due thereunder, all guarantees thereof,
all collateral security therefor (including, without limitation, all Assigned
Commissions and Agent Contract Rights), and all "proceeds" (as defined in
Section 9-306 of the Uniform Commercial Code as in effect in the applicable
jurisdiction) thereof, in each case, whether now existing or hereafter arising,
(b) such security interest is intended to secure, without limitation, all now
and hereafter outstanding obligations of each Non-Insurance Company Seller to
the Purchaser and (c) this Agreement shall constitute a security agreement under
applicable law.
Section 2.4. GUARANTY. Each Non-Insurance Company Seller hereby
unconditionally guarantees to the Purchaser the full and punctual payment of the
Agent Receivables sold by it hereunder. This guaranty is an absolute,
unconditional and continuing guaranty of the full and punctual payment not later
than the Revolving Loan Termination Date (as such term is defined in the Credit
Agreement dated as of December 28, 1995 between the Purchaser and Fleet National
Bank, as amended) of each of the Agent Receivables sold by it hereunder, and is
in no way conditioned upon any requirement that the Purchaser first attempt to
collect payment from the Agent Obligor or any other guaranty or surety or resort
to any security or other means of obtaining payment of all or any part of the
Agent Receivables sold by it hereunder or upon any other contingency. Each
Non-Insurance Company Seller hereby waives all demands or notices of any nature
which may otherwise be required to cause payment of such Agent Receivables to be
due and payable.
(b) If after receipt of any payment of all or any part of the
Agent Receivables, Purchaser is compelled to surrender or voluntarily surrenders
such payment to any person because such payment is or may be avoided or set
aside as a preference, fraudulent conveyance, impermissible set-off or for any
other reason, then the Agent Receivables or part thereof affected shall be
reinstated and continue and the obligations of each Non-Insurance Company Seller
under this SECTION 2.4 shall continue in full force as to such Agent Receivables
or part thereof as if such payment had not been received. The provisions of this
SECTION 2.4(B) shall survive the termination of provisions of this Agreement and
any satisfaction and discharge of Purchaser by virtue of any payment, court
order or any federal or state law.
(c) The obligations and liabilities of each Non-Insurance
Company Seller under this SECTION 2.4 shall be absolute and unconditional, shall
not be subject to any counterclaim, set-off, deduction or defense based upon any
claim such Non-Insurance Company Seller may have against the Purchaser or any
other person or entity, and shall remain in full force and effect until such
obligations and liabilities and all Agent Receivables of the Non-Insurance
Company Seller have been fully satisfied, without regard to, or release or
discharge by, any event, circumstance or condition (whether or not the
Non-Insurance Company Seller shall have knowledge of notice thereof) which but
for the provisions of this Section might constitute a legal or equitable defense
or discharge of a guarantor or surety or which might in any way limit recourse
against the Non-Insurance Company Seller, including without limitation (a) any
amendment, modification or extension of or supplement to the terms of this
Agreement or any other agreement, instrument or other writing relating to the
Agent Receivables or (b) any waiver, consent or indulgence by Purchaser, or any
exercise or non-exercise by Purchaser of any right, power or remedy, under or in
respect o this Agreement, or any other agreements, instruments or writings
relating to the Agent Receivables (whether or not such Non-Insurance Company
Seller has notice or knowledge of any such action or inaction).
(d) As collateral to further secure full performance and
payment by each Non-Insurance Company Seller of all now and hereafter
outstanding obligations of such Non-Insurance Company Seller
7
under this SECTION 2.4, each Non-Insurance Company Seller grants to the
Purchaser a first priority security interest in all of such Non-Insurance
Company Seller's right, title and interest in and to all commissions, policy
fees, service fees, and reversions or claims therefor and all other amounts due
such Non-Insurance Company Seller, whether accrued or accruing, under the
agreement(s) identified on Schedule 1 hereto (the "AGENCY CONTRACTS"), and all
rights and benefits of such Non-Insurance Company Seller under such Agency
Contracts with respect to the collection and payment of such commissions, policy
fees service fees and reversion, and the "proceeds" (as defined in Section 9-306
of the Uniform Commercial Code as in effect in the applicable jurisdiction) of
the conversion, voluntary or involuntary, of the foregoing into cash or other
liquidated property. This SECTION 2.4(D) shall constitute a security agreement
under applicable law. Prior to the initial Closing Date, each Non-Insurance
Company Seller shall deliver to the Purchaser a UCC-1 financing statement in
form and substance legally sufficient to perfect the Purchaser's security
interest in the applicable Agency Contracts as described in this SECTION 2.4(D),
and naming the Purchaser as secured party and such Non-Insurance Company Seller
as the debtor.
ARTICLE III
ADDITIONAL COVENANTS
Section 3.1. APPOINTMENT OF NON-INSURANCE COMPANY SELLERS AS SERVICING
AGENTS. The Purchaser hereby appoints each Non-Insurance Company Seller, and
each Non-Insurance Company Seller hereby accepts such appointment, as the
Purchaser's agent to service, administer and collect the Agent Receivables sold
by it hereunder and the Assigned Commissions and Insurance Company Receivables
assigned by it hereunder (in such capacity, each Non-Insurance Company Seller is
referred to herein as a "SERVICING AGENT") pursuant to the terms of this SECTION
3.1.
Section 3.2. RIGHTS AND DUTIES OF SERVICING AGENT. (a) Each Servicing Agent
shall take or cause to be taken all such actions as may be necessary or
advisable to service, administer, account, collect and remit to the Purchaser
from time to time the Assigned Commissions relating to the Agent Receivables
sold by it hereunder, all with reasonable care and diligence and in accordance
with its sound credit and collection policies, which policies shall not be
amended, modified or waived in any material respect without the prior written
consent of the Purchaser. Unless and until otherwise specified by the Purchaser,
each Servicing Agent shall enforce the Purchaser's rights and interests in and
under the Agent Receivables sold by it hereunder and the related collateral
security and guarantees (including the Assigned Commissions and Agent Contract
Rights) and the Insurance Company Receivables.
(b) Each Servicing Agent shall collect, and hold in trust for
the account of the Purchaser in an interest bearing account of the Servicing
Agent, the portion of all Collections received after the respective Cut-Off Date
for the Agent Receivables purchased by Purchaser hereunder which represent
Assigned Commissions (together with all interest and/or other finance charges
paid by the Agent Obligors thereon, the "COLLECTED COMMISSIONS"). Not later than
the fifteenth day of each calendar month, each Servicing Agent will (i) furnish
or cause to be furnished to the Purchaser a statement setting forth a detailed
itemization of the amounts which it has received in respect of the repayment of
Agent Receivables and such other information as the Purchaser may reasonably
request; and (ii) pay to the Purchaser such amounts, together with any and all
interest received thereon during the period for which such amounts were held by
such Servicing Agent.
(c) Promptly following each calendar quarter, each
Servicing Agent shall reconcile the
8
aggregate Collected Commissions received by it to the amount of Assigned
Commissions which should have been received by it in repayment of Agent
Receivables. To the extent necessary and in accordance with the Agent Contract
Rights relating to such Agent Receivables, each Servicing Agent shall take such
steps as shall be necessary to recover from each Agent Obligor any shortfall in
the repayment of Agent Receivables. Not later than the fifteenth day of each
calendar month, each Servicing Agent will (i) furnish or cause to be furnished
to the Purchaser a statement setting forth a detailed itemization of the amounts
which it has recovered in respect of shortfalls in the repayment of Agent
Receivables and such other information as the Purchaser may reasonably request;
and (ii) pay to the Purchaser such recovered amounts, together with any and all
interest received thereon during the period for which such recovered amounts
were held by such Servicing Agent. The Purchaser hereby authorizes each
Servicing Agent to enforce each Agent Obligor's obligations under the respective
Agent Receivables and related Agent Contract Rights and to collect all amounts
due under the Agent Receivables sold by it hereunder, including, without
limitation, endorsing any instruments representing Collections.
Section 3.3. RIGHTS OF THE PURCHASER. (a) At any time or from time to time,
the Purchaser may notify (or cause each Servicing Agent to notify) the Agent
Obligors of its ownership of the Agent Receivables purchased by it hereunder,
and may direct such Agent Obligors to pay all amounts due or to become due
thereunder directly to the Purchaser or its designee.
(b) Each Servicing Agent shall, at the Purchaser's request,
(i) assemble all of the documents, instruments and other records (including,
without limitation, computer tapes and disks) which evidence the Agent
Receivables purchased by the Purchaser hereunder and the related Agent Contract
Rights and collateral security (and such other information which the Purchaser
may reasonably request), and make the same available to the Purchaser or its
designee, and (ii) segregate all cash, checks and other instruments received by
it from time to time constituting Collections of Agent Receivables purchased by
the Purchaser hereunder in a manner acceptable to the Purchaser and shall, remit
all such cash, checks and instruments, duly endorsed or with duly executed
instruments of transfer, to the Purchaser or its designee.
(c) Anything herein to the contrary notwithstanding, the
exercise by the Purchaser of any of its rights hereunder shall not relieve the
Servicing Agent from any of its duties or obligations with respect to the Agent
Contract Rights relating to the Agent Receivables sold by it hereunder.
Section 3.4. FURTHER ASSURANCES. At any time or from time to time after the
date hereof, at the Purchaser's request and without further consideration, each
of the Non-Insurance Company Sellers shall execute and deliver to the Purchaser
such other instruments of sale, transfer, conveyance, assignment and
confirmation, provide such materials and information and take such other actions
as the Purchaser may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to the Purchaser, and to confirm the
Purchaser's title to, all of the Agent Receivables and Assigned Commissions and
Agent Contract Rights relating thereto and the Insurance Company Receivables,
and, to the full extent permitted by law, to cause each of the Non-Insurance
Company Sellers to fulfill its obligations under this Agreement, including,
without limitation, the execution of any financing statements or continuation
statements relating to Agent Receivables or Assigned Commissions, Agent Contract
Rights or Insurance Company Receivables for filing under the provisions of the
Uniform Commercial Code of any applicable jurisdiction.
Section 3.5. STANDARD OF CARE. Each Non-Insurance Company Seller will
exercise and give the same care and attention to its obligations pursuant to
Article III as it gives to all other corporate obligations of a comparable
nature, PROVIDED, that it shall not be held responsible for any losses arising
from
9
any action taken by it hereunder in good faith absent willful misconduct or
gross negligence.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 4.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
Non-Insurance Company Sellers severally, and not jointly, hereby represents,
warrants and covenants to the Purchaser as follows:
(a) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy giving rise to such Agent
Receivables and the related Assigned Commissions will be in full force and
effect in accordance with its terms and, to its knowledge free from any lien,
security interest, encumbrance or other right, title or interest of any Person,
and neither it nor, to its knowledge, any insured had or will have done or
failed to do anything that would or might permit any such insured or it to
terminate any such Insurance Policy or suspend or reduce any payments or
obligations due or to become due thereunder.
(b) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy sold by such Non-Insurance Company
Seller giving rise to such Agent Receivables is a valid, binding and legally
enforceable obligation of an insurance company and such Non-Insurance Company
Seller had all requisite authority and capacity to issue or sell such Insurance
Policy and no such Insurance Policy violates any applicable law or contravenes
any other agreement to which it is subject.
(c) the execution and delivery of this Agreement by it, and
the performance by it of its obligations hereunder, have been duly authorized by
all necessary corporate and other action and do not and, subject to receipt of
the consents set forth in SCHEDULE 4.1(C), will not require any consent or
approval not heretofore obtained of any governmental authority or other Person.
(d) this Agreement is the valid, binding and enforceable
obligation of it, and does not violate any applicable law or contravene any
other agreement to which it is a party.
(e) other than financing statements on file at any public
office covering its security interests in Assigned Commissions and Agent
Contract Rights which will be assigned to the Purchaser hereunder, there are no
financing statements now on file, or intended so to be, and neither it nor any
of its subsidiaries or affiliates will execute or consent to the filing in any
public office of any financing statement under the laws of any jurisdiction,
relating to the Agent Receivables and the Assigned Commissions, Contract Rights,
Insurance Company Receivables and other collateral relating thereto.
(f) on each Closing Date, SCHEDULE I to the Assignment
delivered on such Closing Date will contain a complete and correct statement of
the Agent Receivables being sold on such Closing Date and the Assigned
Commissions and Agent Contracts relating thereto.
(g) upon payment on each Closing Date of the dollar amount to
be paid on such date as described in SECTION 2.2(B)(II) hereof for the purchase
of the Agent Receivables sold to the Purchaser on such date, the Purchaser will
have at such time good title to the Agent Receivables set forth in SCHEDULE I to
the Assignment delivered on such Closing Date.
10
ARTICLE V
MISCELLANEOUS
Section 5.1. TERMINATION. This Agreement will terminate on the Purchase
Termination Date, or on such other date as the parties shall agree to in
writing.
Section 5.2 NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile transmission or mailed (first class postage
prepaid) to the other parties at the respective addresses set forth on the
signature pages hereof. All such notices, requests and other communications will
be deemed given upon receipt.
Section 5.3. WAIVER. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
Section 5.4. AMENDMENT. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party hereto.
Section 5.5. NO THIRD PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and except as set forth in SECTION
5.11 it is not the intention of the parties to confer third-party beneficiary
rights upon any other Person.
Section 5.6. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors, heirs, personal representatives and permitted assigns.
Section 5.7. ENTIRE AGREEMENT. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof between the parties, and contains the sole and entire agreement
between the parties hereto with respect to the subject matter hereof.
Section 5.8. HEADINGS. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
Section 5.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 5.10. INVALID PROVISIONS. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future Law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable, (b) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof
and (c) the remaining provisions of this Agreement will remain
11
in full force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.
Section 5.11. NON-INSURANCE COMPANY SELLERS' OBLIGATIONS. Each
Non-Insurance Company Seller understands that the Purchaser intends to assign to
and grant to a lending institution or institutions a security interest in all of
its rights, title and interest to this Agreement. Each Non-Insurance Company
Seller hereby consents to such assignment and grant, and further agrees that all
representations, warranties, covenants and agreements of such Non-Insurance
Company Seller made herein shall also be for the benefit of and inure to such
lending institution or institutions and all holders from time to time of notes
issued by Purchaser to such institution or institutions.
Section 5.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
12
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party as of the date first
above written.
NON-INSURANCE COMPANY SELLERS:
HEALTH CARE-ONE INSURANCE AGENCY, INC.
By: /S/ STEPHEN D. DAVIDSON
Name: Stephen D. Davidson
Title: Secretary
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
HEALTHCARE ONE MARKETING GROUP, INC.
By: /S/ STEPHEN D. DAVIDSON
Name: Stephen D. Davidson
Title: President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
LSMG, INC.
By: /S/ M. CURTISS DUWE
Name: M. Curtiss Duwe
Title: President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
13
SENIOR BENEFITS OF TEXAS, INC.
By: /S/ STEPHEN D. DAVIDSON
Name: Stephen D. Davidson
Title: President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
WESTBRIDGE MARKETING CORPORATION
By: /S/ STEPHEN D. DAVIDSON
Name: Stephen D. Davidson
Title: President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
14
EXHIBIT A
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned (the "NON-INSURANCE
COMPANY SELLER") does hereby sell, transfer, convey, assign and deliver to the
Purchaser free and clear of all mortgages, pledges, assessments, security
interests, leases, liens, adverse claims, levies, charges or other encumbrances
of any kind ("LIENS"), other than permitted Liens, on a full recourse basis, all
of the Non-Insurance Company Seller's right, title and interest in, to and under
the Agent Receivables listed in SCHEDULE I hereto, together with all interest
accrued or accruing thereon, all monies due and to become due thereunder, all
guarantees thereof, all collateral security therefor (including, without
limitation, all Assigned Commissions) and Agent Contract Rights, and all
proceeds thereof in each case, listed in SCHEDULE I hereto (the "ASSIGNED
ASSETS"), TO HAVE AND TO HOLD the same unto the Purchaser, its successors and
assigns, forever.
The terms Non-Insurance Company Seller, Agent Receivables,
Assigned Commissions and Agent Contract Rights shall have the respective
meanings assigned thereto in the Receivables Purchase and Sale Agreement, dated
as of November 14, 1996, between Health Care-One Insurance Agency, Inc., a
California corporation, HealthCare One Marketing Group, Inc. a Texas
corporation, LSMG, Inc., a Texas corporation, Senior Benefits of Texas, Inc., a
Texas corporation, and Westbridge Marketing Corporation, a Delaware corporation
and Westbridge Funding Corporation, a Delaware corporation (the "PURCHASER").
The Purchaser hereby accepts the sale, transfer, conveyance,
assignment and delivery of the Assigned Assets.
At any time or from time to time after the date hereof, at the
Purchaser's request and without further consideration, the Non-Insurance Company
Seller shall execute and deliver to the Purchaser such other instruments of
sale, transfer, conveyance, assignment and confirmation, provide such materials
and information and take such other actions as the Purchaser may reasonably deem
necessary or desirable in order more effectively to transfer, convey and assign
to the Purchaser, and to confirm the Purchaser's title to, all of the Assigned
Assets, and, to the full extent permitted by law, to put the Purchaser in actual
possession and operating control of the Assigned Assets and to assist the
Purchaser in exercising all rights with respect thereto.
This Assignment shall be governed by and construed in
accordance with the laws of the State of Texas applicable to a contract executed
and performed in such State without giving effect to the conflicts of laws
principles thereof, except that if it is necessary in any other jurisdiction to
have the law of such other jurisdiction govern this Assignment in order for this
Assignment to be effective in any respect, then the laws of such other
jurisdiction shall govern this Assignment to such extent.
1
IN WITNESS WHEREOF, the undersigned has caused its duly
authorized officer to execute this Assignment on this ______ day of _________,
199_.
[Non-Insurance Company Seller]
By:____________________________
Name:
Title:
2
SCHEDULE 1
LIST OF AGENCY CONTRACTS
1. Agent Agreement dated September 1, 1995 between Blue Cross of California
and HealthCare One Insurance Agency Inc.
2. Agent Agreement between UniCARE Insurance Company and HealthCare One
Marketing Group, Inc., as dated February 1, 1996 in the Loan Amendment
thereto.
3. Agent Agreement between UniCARE Insurance Company and L.M.S.G., Inc., as
dated November 1, 1995 in the Loan Amendment thereto.
4. Agent Agreement dated August 6, 1996 between UniCARE Life & Health
Insurance Company and Senior Benefits of Texas, Inc.
5. General Agent Agreement dated September 1, 1996 between Westbridge
Marketing Corporation and FOUNDATION Health National Life Insurance Company
and FOUNDATION Health, a California Health Plan, Inc.
1
SCHEDULE 4.1(c)
CONSENTS REQUIRED
None
EXHIBIT 10.18
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EXHIBIT 10.18
EXECUTION COPY
FIRST AMENDMENT AND WAIVER
TO THE
CREDIT AGREEMENT
Dated as of May 17, 1996
This FIRST AMENDMENT AND WAIVER dated as of May 17, 1996 (the "First
Amendment") is between WESTBRIDGE FUNDING CORPORATION, a Delaware corporation
(the "Borrower"), and FLEET NATIONAL BANK (the "Bank"), formerly known as Fleet
National Bank of Connecticut.
PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit
Agreement dated as of December 28, 1995 (the "Credit Agreement"). The Borrower
has requested the Bank to amend the Credit Agreement to create additional
defined terms, to modify the mandatory prepayment provision and to waive certain
defaults arising out of the Borrower's failure to make certain prepayments as
required in Section 2.6 of the Credit Agreement.
NOW THEREFORE, the Borrower and the Bank agree as follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the
effective date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended
as follows:
(a) SECTION 1.1 (DEFINITIONS) of the Credit Agreement is amended
by adding the following defined terms:
"COLLATERAL AGREEMENT" means the Collateral Agreement, dated
as of the date hereof, duly executed and delivered by the Borrower to the Bank.
"PLEDGED ACCOUNT" means all accounts maintained by the
Borrower with the Bank or its affiliates, which accounts have
been pledged to the Bank pursuant to the Collateral Agreement.
(b) SECTION 1.1 (DEFINITIONS) of the Credit Agreement is amended by
substituting for the defined term "Receivables Purchase Agreement" the
following:
" RECEIVABLES PURCHASE AGREEMENT" means the Receivables Purchase and Sale
Agreement dated as of November 15, 1995 by and between the Borrower and each of
the Eligible Sellers, as amended.
(b) SECTION 2.6 (MANDATORY PREPAYMENTS) of the Credit Agreement is amended
by substituting therefor the following:
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"If as of the end of any month the aggregate principal amount of the
Revolving Loans exceeds the Borrowing Base, the Borrower shall pay to the Bank
or deposit in
the Pledged Account, without premium or penalty (except as set forth in Section
2.16), the amount equal to said excess, accompanied by the payment of accrued
interest on the amount of such payment to the date thereof. Such payment shall
be made on or before the date the Borrower is required to deliver the monthly
Borrowing Base Certificate pursuant to Section 6.8(i)."
(c) SECTION 6.8 (REPORTING REQUIREMENTS) of the Credit Agreement is amended
by adding the following new subsection:
"(i) BORROWING BASE CERTIFICATE. Within fifteen (15) days following the end of
each month, a Borrowing Base Certificate dated as of the end of such month in
the form of Exhibit L to the Credit Agreement, setting forth the Eligible Agent
Collateral Value attributable to each Eligible Agent Obligor."
Section 2. WAIVERS. The Bank waives any Default or Event of Default which
has resulted prior to the date hereof from the Borrower's failure to make the
mandatory prepayments required under Section 2.6 of the Credit Agreement. The
foregoing waiver shall be effective only for said Default or Events of Default
and shall not entitle the Borrower to any future waiver in similar or other
circumstances.
Section 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall become
effective as of the date hereof when, and only when, the Bank shall have
received a counterpart of this First Amendment duly executed by the Borrower and
payment of a $15,000 amendment fee.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents as follows:
(a) The execution, delivery and performance by the Borrower of this
First Amendment is within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action and does not and will not (i)
require any consent or approval of the shareholders of the Borrower; (ii)
contravene the Borrower's charter or by-laws; (iii) violate any provision of, or
require any filing, registration, consent or approval under, any law, rule,
regulation (including without limitation, Regulations U and X), order, writ,
judgment, injunction, decree, determination or award presently in effect having
applicability to and binding upon the Borrower; (iv) result in a breach of or
constitute a default or require any consent under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) except to the extent provided for or contemplated herein,
result in, or require, the creation or imposition of any mortgage, deed of trust
, pledge, lien, security interest or other charge or encumbrance of any nature
upon or with respect to any of the properties now owned or hereafter acquired by
the Borrower.
(b) No authorization, consent, approval, order, license or permit from,
or filing, registration or qualification with, or exemption by, any governmental
or public body or authority, or any subdivision thereof, or any other Person,
including without limitation, any Insurance Commissioner, is required to
authorize, or is required in connection with the execution, delivery and
performance by the Borrower of, or the legality, validity, binding effect or
enforceability of, this First Amendment.
(c) This First Amendment has been duly executed and when delivered by
the Borrower will constitute the legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with its terms, except
to the extent that such enforcement may be limited by applicable
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bankruptcy, insolvency and other similar laws affecting creditors' rights
generally and by general principles of equity.
(d) The representations and warranties contained in Article 5 of the
Credit Agreement are correct on and as of the date hereof as though made on and
as of the date hereof.
(e) No Default or Event of Default has occurred and is continuing
(except those that been waived pursuant to Section 2 of this First Amendment and
the letter dated May 10, 1996 from Westbridge Capital Corp. to Fleet National
Bank) or would result from the signing of this First Amendment or the
transactions contemplated hereby.
(f) There has been no material adverse change in the financial
condition, operations, properties, business or business prospects of the
Borrower since the date of the last financial statements furnished to the Bank.
(g) No actions, suits or proceedings or investigations are pending or,
to the knowledge of the Borrower, threatened against or affecting the Borrower,
or any property before any court, governmental agency or arbitrator, which if
determined adversely to the Borrower would in any one case or in the aggregate,
materially adversely affect the financial condition, operations, properties,
business or, to the knowledge of the Borrower, prospects of the Borrower or the
ability of the Borrower to perform its obligations under the Credit Agreement,
as amended by this First Amendment.
(h) No information, exhibit or report furnished in writing by or on
behalf of the Borrower or any officer or director of the Borrower to the Bank in
connection with the negotiation of, or pursuant to the terms of, this First
Amendment contained when made any material misstatement of fact or omitted to
state a material fact necessary to make the statements contained therein not
misleading.
Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT, REVOLVING NOTE,
GUARANTY, SECURITY AGREEMENT AND COLLATERAL AGREEMENT.
(a) Upon the effectiveness of this First Amendment, on and after the
date hereof, each reference in the Credit Agreement to this "Agreement",
"hereunder", "hereof", "herein" or words of like import and each reference in
the Revolving Note, each reference in the Guaranty, each reference in the
Security Agreement and each reference in the Collateral Agreement to the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended
hereby.
(b) Except as specifically amended above, the Credit Agreement shall
remain in full force and effect and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this First Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Bank under the Credit Agreement, nor constitute a
waiver of any provision of the Credit Agreement.
Section 5. COSTS AND EXPENSES. Unless otherwise agreed in writing, the
Borrower shall reimburse the Bank on demand for all reasonable costs, expenses
and charges (including without limitation reasonable fees and charges of its
attorneys) incurred by the Bank in connection with the preparation and
negotiation of this First Amendment. The Borrower further agrees to pay on
demand all reasonable costs and expenses (including reasonable counsel fees and
expenses),
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4
if any, in connection with the enforcement, including without limitation the
enforcement of judgments (whether through negotiations, legal proceedings or
otherwise) of this First Amendment or any other document to be delivered
hereunder or thereunder. Until paid, the amount of any cost, expense or charge
shall constitute, together with all accrued interest thereon, part of the
Obligations.
Section 6. EXECUTION IN COUNTERPARTS. This First Amendment may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument.
Section 7. GOVERNING LAW. This First Amendment shall be governed by, and
construed in accordance with, the laws of the State of Connecticut.
Section 8. DEFINED TERMS. Capitalized terms used herein which are not
expressly defined herein shall have the meanings ascribed to them in the Credit
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed as of the day and year first above written.
WESTBRIDGE FUNDING CORPORATION
By: /s/ Patrick J.Mitchell
Name: Patrick J. Mitchell
Title: Chief Financial Officer
FLEET NATIONAL BANK
By: /s/ Anson T. Harris
Name: Anson T. Harris
Title: Vice President
WESTBRIDGE CAPITAL CORP. hereby acknowledges that the Borrower has entered into
the First Amendment to the Credit Agreement dated as of May 17, 1996 and
confirms that its guaranty as set forth in the Guaranty Agreement dated as of
December 28, 1995 in favor of the Bank is in full force and effect and applies
to the Credit Agreement as amended by the First Amendment.
WESTBRIDGE CAPITAL CORP.
By:_/s/ Patrick J. Mitchell__________
Name: Patrick J. Mitchell
Title: Chief Financial Officer
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EHIBIT 10.19
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EXHIBIT 10.19
SECOND AMENDMENT AND WAIVER
TO THE
CREDIT AGREEMENT
Dated as of November 14, 1996
This SECOND AMENDMENT AND WAIVER TO THE CREDIT AGREEMENT,
dated as of November 14, 1996 (this "SECOND AMENDMENT") is between WESTBRIDGE
FUNDING CORPORATION, a Delaware corporation (the "BORROWER"), and FLEET NATIONAL
BANK (formerly known as Fleet National Bank of Connecticut) (the "BANK").
PRELIMINARY STATEMENTS. The Borrower and the Bank entered into
a Credit Agreement dated as of December 28, 1995, as amended by the First
Amendment and Waiver to the Credit Agreement, dated as of May 17, 1996 (as so
amended, the "CREDIT AGREEMENT"; capitalized terms used but not defined herein
shall have the respective meanings ascribed to such terms in the Credit
Agreement). The Borrower and the Bank desire to further amend the Credit
Agreement to (i) include additional Eligible Sellers and Master General Agents,
(ii) to resolve certain inconsistencies between the Credit Agreement and the
Borrower's normal course of business, and (iii) to waive certain defaults under
the Credit Agreement arising as a result of those inconsistencies.
NOW THEREFORE, the Borrower and the Bank hereby agree as
follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit
Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by adding,
in alphabetical order, the following defined terms:
""Eligible Insurance Company Seller" means any of AIC, FLICA,
NFIC and NFL.
"Eligible Non-Insurance Company Seller" means any of HCO, HCO
Marketing, LSMG, Senior Benefits of Texas and Westbridge Marketing.
"FLICA" means Freedom Life Insurance Company of America, a
Mississippi corporation.
"HCO Marketing" means HealthCare One Marketing Group, Inc., a
Texas corporation.
"Insurance Company Receivables Purchase Agreement" means the
Amended and Restated Receivables Purchase and Sale Agreement dated as
of November 15, 1995 by and between the Borrower and each of the
Eligible Insurance Company Sellers, as amended from time to time, a
copy of which is set forth as Exhibit M-1.
"LSMG" means LSMG, Inc., a Texas corporation.
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"Non-Affiliated Insurance Company" means any of Blue Cross/Blue
Shield of California, FOUNDATION Health National Life Insurance
Company, FOUNDATION Health, a California Health Plan, Inc., Unicare
Life and Health Insurance Company and Unicare Insurance Company.
"Non-Insurance Company Receivables Purchase Agreement" means the
Receivables Purchase and Sale Agreement dated as of November 14, 1996
by and between the Borrower and each of the Eligible Non-Insurance
Company Sellers, as amended from time to time, a copy of which is set
forth as Exhibit M-2.
"Senior Benefits of Texas" means Senior Benefits of Texas, Inc.,
a Texas corporation.
"Westbridge Marketing" means Westbridge Marketing Corporation, a
Delaware corporation."
(b) Section 1.1 of the Credit Agreement is amended by
substituting in their entirety the definition of "Eligible Seller", "Guaranty",
"Insurance Affiliate", "Insurance Policy", "Master General Agent", "Master
General Agent Contract", "Pledge Agreement", "Receivables Purchase Agreement",
"Security Agreement" and "Stock Pledge Financing Statements" with the following
definitions, respectively:
""Eligible Seller" means any of the Eligible Insurance Company
Sellers and any of the Eligible Non-Insurance Company Sellers.
"Guaranty" means the Guaranty Agreement, in the form of EXHIBIT E
hereto, duly executed and delivered by the Guarantor, as amended or
supplemented from time to time with the consent of the Bank.
"Insurance Affiliate" means any of AIC, FLICA, NFIC and NFL.
"Insurance Policy" means an insurance policy of the types set
forth in EXHIBIT C hereto and which is written or sold by an Eligible
Agent Obligor.
"Master General Agent" means any (i) agent of an Affiliated
Insurance Company Seller, which is party to a Master General Agent
Contract with such Affiliated Insurance Company, or (ii) Eligible
NonInsurance Company Seller in its capacity as agent of a
Non-Affiliated Insurance Company pursuant to the terms of a Master
General Agent Contract, in each case, as identified in EXHIBIT I
hereto or which is subsequently approved by the Bank in writing.
"Master General Agent Contract" means an agreement between either
(i) a Master General Agent and an Eligible Seller substantially in one
of the forms set forth in EXHIBIT B-2, or (ii) an Eligible
Non-Insurance Company Seller and a Non-Affiliated Insurance Company
substantially in one of the forms set forth in EXHIBIT B-3.
"Pledge Agreement" means the Pledge Agreement, in the form of
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EXHIBIT G hereto, duly executed and delivered by the Guarantor and the
Bank, as amended or supplemented from time to time.
"Receivables Purchase Agreement" means the Insurance Company
Receivables Purchase Agreement or the Non-Insurance Company
Receivables
Purchase Agreement, as applicable.
"Security Agreement" means the Security Agreement in the form of
EXHIBIT E hereto, duly executed and delivered by the Borrower and the
Bank, as amended or supplemented from time to time.
"Stock Pledge Financing Statements" means UCC-1 financing
statements signed by the Guarantor in connection with the stock of the
Borrower, FLICA, NFIC and NFL pledged to the Bank pursuant to the
Pledge Agreement (if delivered)."
(c) Section 2.6 of the Credit Agreement is amended by
substituting in its entirety the following new Section 2.6:
"2.6. MANDATORY PREPAYMENTS. If as of the end of any month (i)
(x) the aggregate principal amount of the Revolving Loan, less (y) an
amount equal to the aggregate Shortfall Deposits (as defined below) made
during the immediately preceding Abatement Period (as defined below),
exceeds (ii) the Borrowing Base, the Borrower shall deposit into the
Pledged Account an amount equal to such excess (such deposit referred to
herein as a "Shortfall Deposit"), accompanied by the deposit into the
Pledge Account of accrued interest on such amount to the date thereof,
or pay to the Bank, without premium or penalty (except as set forth in
Section 2.16) an amount equal to such excess, accompanied by the payment
of accrued interest on such amount to the date thereof. Such payment
shall be made on or before the date the Borrower is required to deliver
the monthly Borrowing Base Certificate pursuant to Section 6.8(i). For
purposes of this Section 2.6, "ABATEMENT PERIOD" means, with respect to
any date of determination, a period ending on the date of determination
and commencing on the last to occur of (x) the date of the most recent
Borrowing, or (y) the date of the most recent repayment of any
Eurodollar Rate Loan."
(d) Section 3.2 of the Credit Agreement is amended by substituting in
its entirety the following new Section 3.2:
"Section 3.2. PLEDGE AGREEMENT. In order to further secure
payment when due of the principal and interest under the Revolving Note
and the other Obligations, the Borrower agrees to cause to be delivered
to the Bank, within five (5) Business Days after each Pledge Approval
has been obtained, the following:
(a) the Pledge Agreement which is the subject of such Pledge
Approval, duly executed and delivered by the Guarantor;
(b) stock certificates representing all of the outstanding
capital stock of FLICA, NFIC, NFL and the Borrower (with stock powers
signed in
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blank), as the case may be, which are the subject of such Pledge
Approval;
(c) the related Stock Pledge Financing Statements, duly
executed and delivered by the Guarantor; and
(d) favorable opinions of counsel to the Guarantor, dated as
of the date of such Pledge Agreement, in substantially in the form set
forth in EXHIBIT J-3."
(e) Section 4.2 of the Credit Agreement is amended by adding
the following new subsection (j):
"(j) if, at any time since the last Borrowing under this
Agreement, NFL has consummated any sale or reinsurance of insurance
policies issued or owned by it which, together with all such sales and
reinsurance arrangements during the preceding twelve month period
involves insurance policies with annual in-force premiums which exceed
$1 million, then at the request of the Bank and prior to any additional
Borrowings in respect of Eligible Receivables to be purchased from NFL,
the Guarantor shall have executed and delivered an amendment to the
Guaranty for the sole purpose of increasing the Annual Base Statutory
Surplus or Minimum Statutory Surplus for NFL as specified in Schedule
6.8 of the Guaranty, as applicable, to an amount to be determined in
good faith negotiations between the Guarantor and the Bank, which
amendment shall be in form and substance reasonably satisfactory to the
Bank."
(f) Section 7.12 of the Credit is amended by substituting in its
entirety the following new Section 7.12:
"7.12. MINIMUM COLLATERAL RATIO. At any time that the principal
amount of the Revolving Loans outstanding under this Agreement exceeds
the Borrowing Base, fail to comply with the provisions of Section 2.6
hereof."
(g) Article VII of the Credit Agreement is amended by adding the
following new Section 7.15:
"Section 7.15. PURCHASES OF ELIGIBLE RECEIVABLES FROM ELIGIBLE
NON-INSURANCE COMPANY SELLERS. Purchase Eligible Receivables from
Eligible Non-Insurance Company Sellers in an amount which would result
in more than $2,000,000 outstanding principal amount of such Eligible
Receivables being owned by the Borrower immediately following such
purchase."
(h) A new Exhibit B-3, in the form attached as EXHIBIT A hereto,
is added to the Credit Agreement.
(i) Exhibit C to the Credit Agreement is hereby replaced in its
entirety with the Exhibit C attached as EXHIBIT B hereto.
(j) Paragraph (1) of Exhibit D to the Credit Agreement is amended
by substituting in its entirety the following new paragraph (1):
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"1. (x) has been purchased by the Borrower pursuant to the terms
of (i) with respect to any Receivable purchased from an Eligible
Insurance Company Seller, the Insurance Company Receivables Purchase
Agreement, and (ii) with respect to any Receivable purchased from an
Eligible Non-Insurance Company Seller, the Non-Insurance Company
Receivables Purchase Agreement, and (y) is identified on a duly
executed Assignment substantially in the form of Exhibit A to the
applicable Receivables Purchase Agreement, a copy of which Assignment
shall have been delivered to the Bank;"
(k) The introductory clause of Section 6 of Exhibit D to the
Credit Agreement is hereby replaced in its entirety with the following
new clause:
"arises in connection only with the origination of an Insurance Policy
which has been issued by an Insurance Affiliate or a Non-Affiliated
Insurance Company which:"
(l) Exhibit I to the Credit Agreement is hereby replaced in its
entirety with the Exhibit I attached as EXHIBIT C hereto.
Section 2. WAIVERS AND CONSENTS. (a) To the extent that the
Borrower would have been in compliance with Section 7.12 of the Credit
Agreement as hereby amended, the Bank waives any Default or Event of
Default which resulted prior to the date hereof as a result of
permitting the principal amount of the Revolving Loans outstanding
under this Agreement to exceed the Borrowing Base in violation of
Section 7.12 of the Credit Agreement prior to its amendment hereby.
(b) The Bank waives any Default or Event of Default which
resulted prior to the date hereof as a result of purchasing
Receivables from HCO, to the extent such Receivables would constitute
Eligible Receivables under the Credit Agreement as amended hereby.
(c) The Bank waives any Default or Event of Default which
resulted prior to the date hereof as a result of the purchase by the
Borrower, on July 31, 1996, of Receivables from HCO, to the extent
such Receivables would constitute Eligible Receivables under the
Credit Agreement as amended hereby.
(d) The Bank waives any Default or Event of Default which
resulted prior to the date hereof and arose out of the failure of a
Receivable to constitute an "Eligible Receivable" due to the
termination of an Insurance Policy sold by an Eligible Agent Obligor
whose Eligible Agent Contract has been terminated, so long as the
repayment of such Receivable was being received in a manner which, in
accordance with then customary payment terms, would have resulted in
the payment to the Eligible Seller on or prior to the Revolving Loan
Termination Date (but not later than the date which would be fifteen
(15) months after the date of issuance of such terminated Insurance
Policy) of 100% of First-Year Commissions associated with such
Insurance Policy. The Borrower hereby covenants that, except as
permitted in this paragraph (c), on and after the date hereof, each
Receivable which is included in the calculation of the Borrowing Base
will satisfy all of the eligible criteria set forth on Exhibit D
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to the Credit Agreement as hereby amended. The Bank hereby agrees
that, on and after the date hereof, the Borrower may include in its
calculation of the Borrowing Base up to $100,000 principal amount of
Terminated Agent Lapsed Policy Receivables (as defined herein), and
that each Terminated Agent Lapsed Policy Receivable included therein
shall be deemed to be an Eligible Receivable to the extent that
repayment of such Receivable is being collected out of the terminated
Eligible Agent Obligor's "earned commissions" in a manner reasonably
expected to result in the full repayment of such Receivable on or
prior to the Revolving Loan Termination Date (but not later than the
date which would be fifteen (15) months after the date of issuance of
the terminated Insurance Policy). "LAPSED POLICY RECEIVABLE" means a
Receivable that arises in connection with an Insurance Policy that was
issued between July 1, 1996 and October 31, 1996 and is subsequently
terminated. "TERMINATED AGENT LAPSED POLICY RECEIVABLE" means a Lapsed
Policy Receivable that was originated by an Eligible Agent Obligor
whose Eligible Agent Contract was terminated after the purchase of
such Receivable by the Borrower. The limited waiver described in this
clause (c) supersedes any and all prior waivers by the Bank relating
to the matters described herein, and such prior waivers shall be of no
further force or effect.
(e) The foregoing waivers described in paragraphs (a), (b), (c)
and (d) above shall be effective only for said Defaults or Events of
Default and shall not entitle the Borrower to any future waiver in
similar or other circumstances.
(f) In accordance with the provisions of Section 7.14 of the
Credit Agreement, the Bank hereby consents and agrees to the amendment
and restatement of the Receivables Purchase Agreement in the form
attached hereto as EXHIBIT D hereto.
Section 3. CONDITIONS OF EFFECTIVENESS. This Second Amendment
shall become effective as of the date hereof immediately upon the
satisfaction of each of the following conditions:
(a) the Bank shall have received a certificate of the Secretary
or Assistant Secretary of the Borrower, dated the date hereof,
attesting on behalf of the Borrower to all corporate action taken by
the Borrower, including resolutions of its Board of Directors
authorizing the execution, delivery and performance of this Second
Amendment, the Insurance Company Receivables Purchase Agreement being
amended and restated as of the date hereof, and the Non-Insurance
Company Receivables Purchase Agreement dated the date hereof and each
other document to be delivered by the Borrower thereunder, and
attesting to the names and true signatures of the officers of the
Borrower authorized to sign such documents and the other documents to
be delivered by the Borrower thereunder;
(b) the Bank shall have received a certificate of the Secretary
or Assistant Secretary of the Guarantor, dated the date hereof,
attesting on behalf of the Guarantor to all corporate action taken by
the Guarantor, including resolutions of its Board of Directors
authorizing the execution, delivery and performance of the First
Amendment to the Guaranty dated the date hereof and each other
document to be delivered by the Guarantor thereunder, and
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13
attesting to the names and true signatures of the officers of the
Guarantor authorized to sign such documents and the other documents to
be delivered by the Guarantor thereunder;
(c) the Bank shall have received a certificate of the Secretary
or Assistant Secretary of each of FLICA, HCO, HCO Marketing, LSMG,
Senior Benefits of Texas and Westbridge Marketing (each, a "NEW
ELIGIBLE SELLER"), dated the date hereof, attesting on behalf of such
New Eligible Seller to all corporate action taken by such New Eligible
Seller, including resolutions of its Board of Directors authorizing
the execution, delivery and performance of the Receivables Purchase
Agreement to which it is a party and each other document to be
delivered by the New Eligible Seller thereunder, and attesting to the
names and true signatures of the officers of the New Eligible Seller
authorized to sign the Receivables Purchase Agreement and the other
documents to be delivered by the New Eligible Seller thereunder;
(d) a certificate of a Senior Officer of each New Eligible
Seller, dated the date hereof, certifying on behalf of such New
Eligible Seller that (i) the representations and warranties of such
New Eligible Seller in Article IV of the Receivables Purchase
Agreement to which it is a party are true, complete and correct in all
material respects on such date as though made on and as of such date
(or, if such representation or warranty is expressly stated to have
been made as of a specific date, as of such specific date), (ii) no
event has occurred and is continuing which constitutes a default under
such Receivables Purchase Agreement, and (iii) there has been no
material adverse change in the financial condition, operations,
Properties, business, or as far as the New Eligible Seller can
reasonably foresee, prospects of the New Eligible Seller since June
30, 1996;
(e) a certificate of good standing for each New Eligible Seller
as of a recent date by the Secretary of State of its jurisdiction of
incorporation and each state where it, by the nature of its business,
is required to qualify to do business, except where the failure to be
so qualified would not have a Materially Adverse Effect;
(f) with respect to each New Eligible Seller, a certificate or
similar instrument from the appropriate tax authority in its
jurisdiction of incorporation as to the payment by such New Eligible
Seller of all taxes owed;
(g) a certificate of authority from the Insurance Commissioner of
the State of Mississippi certifying that FLICA is duly licensed and in
good standing with the such Insurance Commissioner;
(h) a favorable opinion of special counsel to the Guarantor, the
Borrower and each New Eligible Seller, dated the date hereof, in
substantially the form set forth in EXHIBIT E hereto;
(i) a favorable opinion of general counsel to the Guarantor, the
Borrower and each New Eligible Seller, dated the date hereof, in
substantially the form set forth in EXHIBIT F hereto;
(j) a certificate of a Senior Officer of the Borrower certifying
HART01-62849-2
18916-18940
14
that each consent, license, approval and notice required by the
Borrower in connection with the execution, delivery, performance,
validity and enforceability of this Second Amendment, the Insurance
Company Receivables Purchase Agreement being amended and restated as
of the date hereof, and the Non-Insurance Company Receivables Purchase
Agreement dated the date hereof and each other document and instrument
required to be delivered in connection herewith is in full force and
effect, except for those consents, licenses, approvals and notices
referred to in clauses, (i), (ii) and (iii) of Section 5.15 of the
Credit Agreement;
(k) a certificate of a Senior Officer of the Guarantor certifying
that each consent, license, approval and notice required by the
Guarantor in connection with the execution, delivery, performance,
validity and enforceability of the First Amendment to the Guaranty
dated the date hereof and each other document and instrument required
to be delivered in connection herewith is in full force and effect,
except for those consents, licenses, approvals and notices referred to
in clauses, (i), (ii) and (iii) of Section 4.13 of the Guaranty;
(l) a certificate of a Senior Officer of each Eligible Seller
certifying that each consent, license, approval and notice required by
such Eligible Seller in connection with the execution, delivery,
performance, validity and enforceability of the Receivables Purchase
Agreement to which it is a party and each other document and
instrument required to be delivered in connection herewith is in full
force and effect, except for those consents, licenses, approvals and
notices referred to in clauses, (i), (ii) and (iii) of Section 5.15 of
the Credit Agreement;
(m) unless previously delivered to the Bank in connection with
the execution and delivery of the Credit Agreement, a Master General
Agent Contract for each Master General Agent, attached to a
certificate of a Senior Officer of the Eligible Seller party thereto
certifying that such Master General Agent Contract is a true, correct
and complete copy, including all amendments and supplements thereto,
and is in full force and effect on the date hereof;
(n) payment to Day, Berry & Howard, special counsel to the Bank,
of its legal fees and disbursements relating to the preparation,
negotiation, execution and delivery of this Second Amendment;
(o) UCC-1 financing statements signed by each of the New Eligible
Sellers in connection with the security interest granted to the
Borrower shall have been delivered to the Borrower; and
(p) the Bank shall have received from HCO a duly authorized,
executed and delivered agreement similar in substance to the guaranty
set forth in Section 2.4 of the form of Non-Insurance Company Seller
Receivables Purchase and Sale Agreement guarantying repayment of
Eligible Receivables purchased from HCO pursuant to the Receivables
Purchase and Sale Agreement dated as of November 15, 1995 between the
Borrower, HCO and certain other parties named therein, and an opinion
of counsel to HCO confirming the enforceability of such guaranty
agreement, both in form and substance reasonably acceptable to the
HART01-62849-2
18916-18940
15
Bank.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower hereby represents and warrants to the Bank as follows:
(a) The execution, delivery and performance by the Borrower of
this Second Amendment are within the Borrower's corporate powers, have
been duly authorized by all necessary corporate action and do not and
will not (i) require any consent or approval of the shareholders of
the Borrower, (ii) contravene the Borrower's charter or by-laws, (iii)
violate any provision of, or require any filing, registration, consent
or approval under, any law, rule, regulation (including without
limitation, Regulations U and X), order, writ, judgment, injunction,
decree, determination or award presently in effect having
applicability to and binding upon the Borrower, (iv) result in a
breach of or constitute a default or require any consent under any
indenture or loan or credit agreement or any other material agreement,
lease or instrument to which the Borrower is a party or by which it or
its properties may be bound or affected, or (v) except to the extent
provided for or contemplated herein, result in, or require, the
creation or imposition of any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance of any nature upon or
with respect to any of the properties now owned or hereafter acquired
by the Borrower.
(b) No authorization, consent, approval, order, license or permit
from, or filing, registration or qualification with, or exemption by,
any governmental or public body or authority, or any subdivision
thereof, or any other Person, including without limitation, any
Insurance Commissioner, is required to authorize, or is required in
connection with the execution, delivery and performance by the
Borrower of, or the legality, validity, binding effect or
enforceability of, this Second Amendment.
(c) This Second Amendment has been duly executed and delivered by
the Borrower and constitutes the legal, valid and binding obligations
of the Borrower enforceable against the Borrower in accordance with
its terms, except to the extent that such enforcement may be limited
by applicable bankruptcy, insolvency and other similar laws affecting
creditors' rights generally and by general principles of equity.
(d) The representations and warranties contained in Article 5 of
the Credit Agreement are correct on and as of the date hereof as
though made on and as of the date hereof.
(e) No Default or Event of Default has occurred and is continuing
or would result from the signing of this Second Amendment or the
transactions contemplated hereby.
(f) There has been no material adverse change in the financial
condition, operations, properties, business or business prospects of
the Borrower since the date of the last financial statements furnished
to the Bank.
(g) No actions, suits or proceedings or investigations are
pending or, to the knowledge of the Borrower, threatened against or
affecting
HART01-62849-2
18916-18940
16
the Borrower, or any property before any court, governmental
agency or arbitrator, which if determined adversely to the Borrower
would in any one case or in the aggregate, materially adversely affect
the financial condition, operations, properties, business or, to the
knowledge of the Borrower, prospects of the Borrower or the ability of
the Borrower to perform its obligations under the Credit Agreement, as
amended by this First Amendment.
(h) No information, exhibit or report furnished in writing by or
on behalf of the Borrower or any officer or director of the Borrower
to the Bank in connection with the negotiation of, or pursuant to the
terms of, this First Amendment contained when made any material
misstatement of fact or omitted to state a material fact necessary to
make the statements contained therein not misleading.
Section 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT,
REVOLVING NOTE, GUARANTY, SECURITY AGREEMENT AND COLLATERAL AGREEMENT.
(a) On and after the date hereof, each reference in the Credit
Agreement to this "Agreement", "hereunder", "hereof", "herein" or words of like
import and each reference in the Revolving Note, each reference in the Guaranty,
each reference in the Security Agreement and each reference in the Collateral
Agreement to the Credit Agreement shall mean and be a reference to the Credit
Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Second
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Bank under the Credit Agreement, nor
constitute a waiver of any provision of the Credit Agreement.
Section 6. EXECUTION IN COUNTERPARTS. This Second Amendment
may be executed in any number of counterparts, each of which when so executed
and delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
Section 7. GOVERNING LAW. This Second Amendment shall be
governed by, and construed in accordance with, the laws of the State of
Connecticut.
Section 8. DEFINED TERMS. Capitalized terms used herein
which are not expressly defined herein shall have the meanings ascribed to them
in the Credit Agreement.
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18916-18940
17
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
WESTBRIDGE FUNDING CORPORATION
By/S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
FLEET NATIONAL BANK
By: /S/ ANSON T. HARRIS
Name: Anson T. Harris
Title: Assistant Vice President
WESTBRIDGE CAPITAL CORP. hereby acknowledges that the Borrower
has entered into the Second Amendment and Waiver to the Credit Agreement dated
as of November 14, 1996 and confirms that its guaranty as set forth in the
Guaranty Agreement dated as of December 28, 1995 in favor of the Bank, as
amended by the First Amendment to the Guaranty Agreement, dated as of the date
hereof, is in full force and effect and applies to the Credit Agreement as
amended by the Second Amendment.
WESTBRIDGE CAPITAL CORP.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
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18
Exhibit A to
Second Amendment
to
Credit Agreement
EXHIBIT B-3
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18916-18940
1
Exhibit B to
Second Amendment
to
Credit Agreement
EXHIBIT C
SCHEDULE OF MAXIMUM ADVANCE PERCENTAGE
BY POLICY TYPE
TYPE OF POLICY MAXIMUM ADVANCE PERCENTAGE
MEDICAL EXPENSE 75%
HSC, HSG, SSC, SSG, MM95, LMGMM1, AGMMI, MSE,
NFLS92, GPPO
MEDICARE SUPPLEMENT 150%*
NCMSA, NCMSB, NCMSD, NCMSF, NCDMA, NCMDB,
AMSSA, AMSSB, AMSSC
HOME HEALTH CARE/LONG TERM CARE 75%
HHCP, LTC
CANCER 100%
LSMCS, CSD-92, FD-95, GCC-C
LIFE 100%
EZ-100, TERM70
CHAMPUS SUPPLEMENT 75%
CHMPS
ACCIDENT 75%
ACCT-C
HMO/PPO 84%
- - --------
* Level Commission states only, in all other states the Maximum
Advance Percentage is 100%.
1
Exhibit C to
Second Amendment
to
Credit Agreement
EXHIBIT I
MASTER GENERAL AGENT AFFILIATED NON-AFFILIATED
INSURANCE INSURANCE
COMPANY COMPANY
American Senior Security Plans, LLC AIC
NFIC
Cornerstone National Marketing Corp. NFIC
AIC
National Farm & Ranch Group, Inc. NFIC
NFL
AIC
Lifestyles Marketing Group, Inc. NFL
AIC
Senior Benefits, L.L.C. NFL
AIC
NFIC
FLICA
HealthCare One Insurance Agency Inc. Blue Cross/
Blue Shield
of California
Tim McCoy & Associates, Inc. NFL
AIC
John P. Locke, d/b/a First Million FLICA
HealthCare One Marketing Group, Inc. FLICA UniCARE
Westbridge Marketing Corporation NFL FOUNDATION
AIC Health National
NFIC Life Insurance
FLICA Company
and
FOUNDATION
Health, a
California Health
Plan,
Inc.
LSMG, Inc. UniCARE
Senior Benefits of Texas, Inc. FLICA UniCARE
2
Exhibit D to
Second Amendment
to
Credit Agreement
1
AMENDED AND RESTATED
RECEIVABLES PURCHASE AND SALE AGREEMENT
This Amended and Restated Receivables Purchase and Sale
Agreement, dated as of November 14, 1996 (this "AGREEMENT"), is entered into by
and between National Foundation Life Insurance Company, a Delaware corporation,
National Financial Insurance Company, a Texas corporation, American Insurance
Company of Texas, a Texas corporation, Freedom Life Insurance Company of
America, a Mississippi corporation, and Health Care-One Insurance Agency, Inc.,
a California corporation (each of which is referred to herein as a "SELLER" and
are collectively referred to herein as the "SELLERS"), and Westbridge Funding
Corporation, a Delaware corporation (the "PURCHASER"). Capitalized terms not
otherwise defined herein shall have the meanings set forth in SECTION 1.1.
WHEREAS, NFL, NFIC, AICT, HCO and Purchaser entered into the
Receivables Purchase and Sale Agreement, dated as of November 15, 1995, and
desire (i) to amend the Receivables Purchase and Sale Agreement to, among other
things, to include Freedom Life Insurance Company of America as an additional
Seller, to terminate the rights of Health Care-One Insurance Agency, Inc. to
sell Receivables hereunder on and after November 1, 1996, and to clarify certain
procedures described therein, and (ii) to restate that agreement in its
entirety;
WHEREAS, the Sellers are in the business of underwriting
and/or selling insurance products, and in the ordinary course of such business
(i) generate and receive premiums from insureds, a portion of which premiums
represent commissions (the "COMMISSIONS") due or to become due to their agents,
including without limitation their general agents and other agents with whom
said general agents have contracted (collectively, the "AGENTS") and (ii)
generate accounts receivable resulting from advances of first-year Commissions
paid to the Sellers' Agents (each, an "AGENT OBLIGOR") in respect of insurance
policies sold by such Agent Obligors (the obligations of such Agent Obligors to
repay the principal amount of, and interest and other finance charges on, such
advances being referred to herein as "AGENT RECEIVABLES");
WHEREAS, the Sellers desire to sell to the Purchaser, and,
subject to the terms and conditions set forth herein, the Purchaser agrees to
purchase from the Sellers, from time to time on a non-recourse basis, all of
each Seller's right, title and interest in, to and under their respective Agent
Receivables; and
WHEREAS, in connection with such sale of Agent Receivables and
as collateral for the repayment thereof, the Sellers desire to assign to the
Purchaser, and the Purchaser desires to assume, all of each Seller's rights in,
to and under all guarantees thereof and all collateral security therefor,
including, without limitation, the Assigned Commissions and Agent Contract
Rights (each as defined below);
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set
2
forth in this Agreements, and for other good and valuable consideration, the
receipt and sufficiency of which is are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Definitions. The following terms shall have the
definitions set forth below:
"AGENT CONTRACT RIGHTS" means all of each Seller's rights
under each contract, financing agreement, note, instrument, or other agreement
by which any Agent Obligor is bound to make payments to such Seller to repay
advances of first-year Commissions made by such Seller to such Agent Obligor or
any other Agent Obligor and to pay interest and/or other finance charges to the
Seller.
"ASSIGNED COMMISSIONS" means the Commissions due or to become
due to the Agent Obligors with respect to Insurance Policies sold by such Agent
Obligors, including without limitation all renewal Commissions, but only to the
extent that such Commissions have been assigned by such Agent Obligors to a
Seller as collateral to secure the payment of the Agent Receivables owing by
such Agent Obligors.
"BUSINESS DAY" means any day on which commercial banks are
open for business in the States of Connecticut and Texas.
"COLLECTIONS" means all the payments and collections received
by a Seller, from time to time, under any Insurance Policies arising out of a
sale of insurance products or services, which includes (i) premiums, (ii)
Commissions, (iii) any interest or finance charges on such Commissions, and (iv)
any other obligations of the insureds thereunder.
"CUT-OFF DATE" means, with respect to each Closing, the last
day of a calendar month designated by the Purchaser, which designated calendar
month must be either of the two calendar months immediately preceding the month
in which such Closing occurs.
"INSURANCE POLICIES" means the insurance policies issued by
any Seller and sold by any Agent Obligor.
"PERSON" means any individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or other
entity of whatever nature.
"PURCHASE TERMINATION DATE" means January 7, 1998 or such
later date as the parties to this Agreement mutually agree.
3
ARTICLE II
PURCHASE AND SALE; CLOSINGS
Section 2.1. PURCHASE AND SALE. On the terms and subject to
the conditions of this Agreement, each Seller hereby agrees to sell to the
Purchaser, and the Purchaser hereby agrees to purchase from each Seller, from
time to time on a non-recourse basis, all of such Seller's right, title and
interest in, to and under certain outstanding Agent Receivables to be designated
by the Purchaser from time to time, and in connection therewith and as
collateral therefor, the Seller agrees to assign to the Purchaser at the time of
each sale, and the Purchaser agrees to assume from the Seller, all of the
Sellers right, title and interest in, to and under including, without
limitation, all interest accrued or accruing on such Agent Receivables, all
monies due and to become due thereunder, all guarantees thereof, all collateral
security therefor (including, without limitation, all Assigned Commissions and
Agent Contract Rights), and all proceeds thereof. Each sale and purchase of
Agent Receivables hereunder shall take place in the manner set forth in SECTION
2.2 below.
Section 2.2. CLOSINGS. (a) A closing of the sale and purchase
of Agent Receivables (each, a "CLOSING") shall take place from time to time on
the Business Days to be specified by the Purchaser and agreed to by Sellers
(each, a "CLOSING DATE"). At the time a Closing Date is established, the
Purchaser shall specify (i) the Agent Receivables to be purchased from Sellers
on such Closing Date and (ii) the applicable Cut-Off Date for such Agent
Receivables.
(b) On each Closing Date:
(i) each Seller shall deliver to the Purchaser an Assignment
substantially in the form of EXHIBIT A hereto, dated the Closing Date,
which specifies in reasonable detail (A) each Agent Receivable
outstanding as of the Cut-Off Date immediately prior to such Closing
Date and being purchased from such Seller on the applicable Closing
Date, (B) the outstanding amount of each such Agent Receivable as of
such Cut-Off Date, and (C) the Assigned Commissions and Agent Contract
Rights relating to each such Agent Receivable which have not been
previously assigned by each Seller; and
(ii) the Purchaser shall deliver to each Seller, in
immediately available funds, the aggregate purchase price for the Agent
Receivables being purchased from such Seller on such date equal to 85%
of the aggregate amount of such Agent Receivables as of the Cut-Off
Date.
(c) (i) the obligations of the Sellers and the Purchaser to
consummate the sale and purchase of any Agent Receivables on each
Closing Date shall be subject to the satisfaction of the following
conditions: (A) the transactions contemplated by this Agreement not
being prohibited by or in conflict with any applicable law, order,
decree or governmental regulation; and (B) the receipt and continued
effectiveness of all consents, approvals and actions of, filings with
and notices to any third party, including, without limitation, any
governmental or regulatory authority, necessary to permit the Sellers
and the Purchaser to
4
perform their respective obligations under this Agreement and to
consummate the transac tions contemplated hereby, all in form and
substance reasonably satisfactory to the Purchaser and the Sellers, as
applicable; and
(ii) the obligations of the Purchaser to consummate the
purchase of Agent Receivables on each Closing Date shall be subject to
the Purchaser having available sufficient funds to pay the purchase
price on such Closing Date.
(d) Prior to the initial Closing Date, each Seller shall
deliver to the Purchaser a UCC-1 financing statement of the Purchaser as secured
party/assignee and such Seller as the debtor/assignor with respect to the Agent
Receivables, and the Assigned Commissions and Agent Contract Rights relating
thereto, to be assigned by such Seller hereunder.
(e) Notwithstanding anything herein to the contrary, on and
after November 1, 1996, Health Care-One Insurance Agency, Inc. agrees that it
shall not sell Agent Receivables hereunder.
Section 2.3. SECURITY INTEREST. The parties hereto agree that
this Agreement is intended to constitute the sale of and shall transfer
ownership to the Purchaser of all right, title and interest of each Seller in,
to and under the Agent Receivables sold hereunder. In addition, the parties
hereto agree that (a) this Agreement constitutes a grant by each Seller to the
Purchaser of a perfected first priority security interest in all of such
Seller's right, title and interest in, to and under each Agent Receivable sold
hereunder, including, without limitation, all interest accrued or accruing
thereon, all monies due and to become due thereunder, all guarantees thereof,
all collateral security therefor (including, without limitation, all Assigned
Commissions and Agent Contract Rights), and all "proceeds" (as defined in
Section 9-306 of the Uniform Commercial Code as in effect in the applicable
jurisdiction) thereof, in each case, whether now existing or hereafter arising,
(b) such security interest is intended to secure, without limitation, all now
and hereafter outstanding obligations of each Seller to the Purchaser and (c)
this Agreement shall constitute a security agreement under applicable law.
ARTICLE III
ADDITIONAL COVENANTS
Section 3.1. APPOINTMENT OF SELLERS AS SERVICING AGENTS. The
Purchaser hereby appoints each Seller, and each Seller hereby accepts such
appointment, as the Purchaser's agent to service, administer and collect the
Agent Receivables sold by it hereunder and the Assigned Commissions assigned by
it hereunder (in such capacity, each Seller is referred to herein as a
"SERVICING AGENT") pursuant to the terms of this SECTION 3.1.
Section 3.2. RIGHTS AND DUTIES OF SERVICING AGENT. (a) Each
Servicing Agent shall take or cause to be taken all such actions as may be
necessary or advisable to service, administer, account, collect and remit to the
Purchaser from time to time the Assigned Commissions relating to
5
the Agent Receivables sold by it hereunder, all with reasonable care and
diligence and in accordance with its sound credit and collection policies, which
policies shall not be amended, modified or waived in any material respect
without the prior written consent of the Purchaser. Unless and until otherwise
specified by the Purchaser, each Servicing Agent shall enforce the Purchaser's
rights and interests in and under the Agent Receivables sold by it hereunder and
the related collateral security and guarantees (including the Assigned
Commissions and Agent Contract Rights).
(b) Each Servicing Agent shall collect, and hold in trust for
the account of the Purchaser in an interest bearing account of the Servicing
Agent, the portion of all Collections received after the respective Cut-Off for
the Agent Receivables purchased by the Purchaser hereunder which represent
Assigned Commissions (together with all interest and/or other finance charges
paid by the Agent Obligors thereon, the "COLLECTED COMMISSIONS"). Not later than
the fifteenth day of each calendar month, each Servicing Agent will (i) furnish
or cause to be furnished to the Purchaser a statement setting forth a detailed
itemization of the amounts which it has received in respect of the repayment of
Agent Receivables and such other information as the Purchaser may reasonably
request; and (ii) pay to the Purchaser such amounts, together with any and all
interest received thereon during the period for which such amounts were held by
such Servicing Agent.
(c) Promptly following each calendar quarter, each Servicing
Agent shall reconcile the aggregate Collected Commissions received by it to the
amount of Assigned Commissions which should have been received by it in
repayment of Agent Receivables. To the extent necessary and in accordance with
the Agent Contract Rights relating to such Agent Receivables, each Servicing
Agent shall take such steps as shall be necessary to recover from each Agent
Obligor any shortfall in the repayment of Agent Receivables. Not later than the
fifteenth day of each calendar month, each Servicing Agent will (i) furnish or
cause to be furnished to the Purchaser a statement setting forth a detailed
itemization of the amounts which it has recovered in respect of shortfalls in
the repayment of Agent Receivables and such other information as the Purchaser
may reasonably request; and (ii) pay to the Purchaser such recovered amounts,
together with any and all interest received thereon during the period for which
such recovered amounts were held by such Servicing Agent. The Purchaser hereby
authorizes each Servicing Agent to enforce each Agent Obligor's obligations
under the respective Agent Receivables and related Agent Contract Rights and to
collect all amounts due under the Agent Receivables sold by it hereunder,
including, without limitation, endorsing any instruments representing
Collections.
Section 3.3. RIGHTS OF THE PURCHASER. (a) At any time or from
time to time, the Purchaser may notify (or cause each Servicing Agent to notify)
the Agent Obligors of its ownership of the Agent Receivables purchased by it
hereunder, and may direct such Agent Obligors to pay all amounts due or to
become due thereunder directly to the Purchaser or its designee.
(b) Each Servicing Agent shall, at the Purchaser's request,
(i) assemble all of the documents, instruments and other records (including,
without limitation, computer tapes and disks) which evidence the Agent
Receivables purchased by the Purchaser hereunder and the related Agent
6
Contract Rights and collateral security (and such other information which the
Purchaser may reasonably request), and make the same available to the Purchaser
or its designee, and (ii) segregate all cash, checks and other instruments
received by it from time to time constituting Collections of Agent Receivables
purchased by the Purchaser hereunder in a manner acceptable to the Purchaser and
shall, remit all such cash, checks and instruments, duly endorsed or with duly
executed instruments of transfer, to the Purchaser or its designee.
(c) Anything herein to the contrary notwithstanding, the
exercise by the Purchaser of any of its rights hereunder shall not relieve the
Servicing Agent from any of its duties or obligations with respect to the Agent
Contract Rights relating to the Agent Receivables sold by it hereunder.
Section 3.4. FURTHER ASSURANCES. At any time or from time to
time after the date hereof, at the Purchaser's request and without further
consideration, each of the Sellers shall execute and deliver to the Purchaser
such other instruments of sale, transfer, conveyance, assignment and
confirmation, provide such materials and information and take such other actions
as the Purchaser may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to the Purchaser, and to confirm the
Purchaser's title to, all of the Agent Receivables and Assigned Commissions and
Agent Contract Rights relating thereto, and, to the full extent permitted by
law, to cause each of the Sellers to fulfill its obligations under this
Agreement, including, without limitation, the execution of any financing
statements or continuation statements relating to Agent Receivables or Assigned
Commissions or Agent Contract Rights for filing under the provisions of the
Uniform Commercial Code of any applicable jurisdiction.
Section 3.5. STANDARD OF CARE. Each Seller will exercise and
give the same care and attention to its obligations pursuant to Article III as
it gives to all other corporate obligations of a comparable nature, PROVIDED,
that it shall not be held responsible for any losses arising from any action
taken by it hereunder in good faith absent willful misconduct or gross
negligence.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 4.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the Sellers
severally, and not jointly, hereby represents, warrants and covenants to the
Purchaser as follows:
(a) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy giving rise to such Agent
Receivables and the related Assigned Commissions will be in full force and
effect in accordance with its terms and, to its knowledge free from any lien,
security interest, encumbrance or other right, title or interest of any Person,
and neither it nor, to its knowledge, any insured had or will have done or
failed to do anything that would or might permit any such insured or it to
terminate any such Insurance Policy or suspend or reduce any payments or
obligations due or to become due thereunder.
7
(b) on the Cut-Off Date relating to the sale of Agent
Receivables hereunder, each Insurance Policy sold by such Seller giving rise to
such Agent Receivables is a valid, binding and legally enforceable obligation of
it and it had all requisite authority and capacity to issue or sell such
Insurance Policy and no such Insurance Policy violates any applicable law or
contravenes any other agreement to which it is subject.
(c) the execution and delivery of this Agreement by it, and
the performance by it of its obligations hereunder, have been duly authorized by
all necessary corporate and other action and do not and, subject to the approval
of the relevant state insurance commissioners and receipt of the consents set
forth in SCHEDULE 4.1(C), will not require any consent or approval not
heretofore obtained of any governmental authority or other Person.
(d) this Agreement is the valid, binding and enforceable
obligation of it, and does not violate any applicable law or contravene any
other agreement to which it is a party.
(e) other than financing statements on file at any public
office covering its security interests in Assigned Commissions and Agent
Contract Rights which will be assigned to the Purchaser hereunder, there are no
financing statements now on file, or intended so to be, and neither it nor any
of its subsidiaries or affiliates will execute or consent to the filing in any
public office of any financing statement under the laws of any jurisdiction,
relating to the Agent Receivables and the Assigned Commissions, Agent Contract
Rights and other collateral relating thereto.
(f) on each Closing Date, SCHEDULE I to the Assignment
delivered on such Closing Date will contain a complete and correct statement of
the Agent Receivables being sold on such Closing Date and the Assigned
Commissions and Agent Contracts Rights relating thereto.
(g) upon payment on each Closing Date of the dollar amount to
be paid on such date as described in SECTION 2.2(B)(II) hereof for the purchase
of the Agent Receivables sold to the Purchaser on such date, the Purchaser will
have at such time good title to the Agent Receivables set forth in SCHEDULE I to
the Assignment delivered on such Closing Date.
ARTICLE V
MISCELLANEOUS
Section 5.1. TERMINATION. This Agreement will terminate on
the Purchase Termination Date, or on such other date as the parties shall agree
to in writing.
Section 5.2 NOTICES. All notices, requests and other
communications hereunder must be in writing and will be deemed to have been duly
given only if delivered personally or by facsimile transmission or mailed (first
class postage prepaid) to the other parties at the respective addresses set
forth on the signature pages hereof. All such notices, requests and other
communications will be deemed given upon receipt.
8
Section 5.3. WAIVER. Any term or condition of this Agreement
may be waived at any time by the party that is entitled to the benefit thereof,
but no such waiver shall be effective unless set forth in a written instrument
duly executed by or on behalf of the party waiving such term or condition. No
waiver by any party of any term or condition of this Agreement, in any one or
more instances, shall be deemed to be or construed as a waiver of the same or
any other term or condition of this Agreement on any future occasion. All
remedies, either under this Agreement or by Law or otherwise afforded, will be
cumulative and not alternative.
Section 5.4. AMENDMENT. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party hereto.
Section 5.5. NO THIRD PARTY BENEFICIARY. The terms and
provisions of this Agreement are intended solely for the benefit of each party
hereto and their respective successors or permitted assigns, and except as set
forth in SECTION 5.11 it is not the intention of the parties to confer
third-party beneficiary rights upon any other Person.
Section 5.6. SUCCESSORS AND ASSIGNS. This Agreement shall
inure to the benefit of and shall be binding upon the parties hereto and their
respective successors, heirs, personal representatives and permitted assigns.
Section 5.7. ENTIRE AGREEMENT. This Agreement supersedes all
prior discussions and agreements between the parties with respect to the subject
matter hereof between the parties, and contains the sole and entire agreement
between the parties hereto with respect to the subject matter hereof.
Section 5.8. HEADINGS. The headings used in this Agreement have been
inserted for
convenience of reference only and do not define or limit the provisions hereof.
Section 5.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 5.10. INVALID PROVISIONS. If any provision of this
Agreement is held to be illegal, invalid or unenforceable under any present or
future Law, and if the rights or obligations of any party hereto under this
Agreement will not be materially and adversely affected thereby, (a) such
provision will be fully severable, (b) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof and (c) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal, invalid
or unenforceable provision or by its severance herefrom.
Section 5.11. SELLERS' OBLIGATIONS. Notwithstanding that all
sales of Agent Receivables pursuant to SECTION 2.1 of this Agreement will be on
a non-recourse basis, nothing contained herein shall be construed to relieve any
Seller from liability for any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on its part
contained in ARTICLE IV. Each Seller understands that the Purchaser intends to
assign to and grant
9
to a lending institution or institutions a security interest in all of its
rights, title and interest to this Agreement. Each Seller hereby consents to
such assignment and grant, and further agrees that all representations,
warranties, covenants and agreements of such Seller made herein shall also be
for the benefit of and inure to such lending institution or institutions and all
holders from time to time of notes issued by Purchaser to such institution or
institutions.
Section 5.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
10
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party as of the date first
above written.
SELLERS:
NATIONAL FOUNDATION LIFE INSURANCE
COMPANY
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
NATIONAL FINANCIAL INSURANCE
COMPANY
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
AMERICAN INSURANCE COMPANY OF
TEXAS
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
11
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
FREEDOM LIFE INSURANCE COMPANY OF
AMERICA
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Senior Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
HEALTH CARE-ONE INSURANCE AGENCY,
INC.
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
12
PURCHASER:
WESTBRIDGE FUNDING CORPORATION
By: /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Vice President
Address for Notices:
777 Main Street
Suite 900
Fort Worth, Texas 76102
13
EXHIBIT A
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned (the "SELLER") does hereby
sell, transfer, convey, assign and deliver to the Purchaser free and clear of
all mortgages, pledges, assessments, security interests, leases, liens, adverse
claims, levies, charges or other encumbrances of any kind ("LIENS"), other than
permitted Liens, on a non-recourse basis, all of the Seller's right, title and
interest in, to and under the Agent Receivables listed in SCHEDULE I hereto,
together with all interest accrued or accruing thereon, all monies due and to
become due thereunder, all guarantees thereof, all collateral security therefor
(including, without limitation, all Assigned Commissions and Agent Contract
Rights), and all proceeds thereof in each case, listed in SCHEDULE I hereto (the
"ASSIGNED ASSETS"), TO HAVE AND TO HOLD the same unto the Purchaser, its
successors and assigns, forever.
The terms Seller, Agent Receivables, Assigned Commissions and
Agent Contract Rights shall have the respective meanings assigned thereto in the
Amended and Restated Receivables Purchase and Sale Agreement, dated as of
November 14, 1996 between National Foundation Life Insurance Company, a Delaware
corporation, National Financial Insurance Company, a Texas corporation, American
Insurance Company of Texas, a Texas corporation, Freedom Life Insurance Company
of America, a Mississippi corporation and Health Care-One Insurance Agency,
Inc., a California corporation, and Westbridge Funding Corporation, a Delaware
corporation (the "PURCHASER").
The Purchaser hereby accepts the sale, transfer, conveyance,
assignment and delivery of the Assigned Assets.
At any time or from time to time after the date hereof, at the
Purchaser's request and without further consideration, the Seller shall execute
and deliver to the Purchaser such other instruments of sale, transfer,
conveyance, assignment and confirmation, provide such materials and information
and take such other actions as the Purchaser may reasonably deem necessary or
desirable in order more effectively to transfer, convey and assign to the
Purchaser, and to confirm the Purchaser's title to, all of the Assigned Assets,
and, to the full extent permitted by law, to put the Purchaser in actual
possession and operating control of the Assigned Assets and to assist the
Purchaser in exercising all rights with respect thereto.
This Assignment shall be governed by and construed in
accordance with the laws of the State of Texas applicable to a contract executed
and performed in such State without giving effect to the conflicts of laws
principles thereof, except that if it is necessary in any other jurisdiction to
have the law of such other jurisdiction govern this Assignment in order for this
1
Assignment to be effective in any respect, then the laws of such other
jurisdiction shall govern this Assignment to such extent.
IN WITNESS WHEREOF, the undersigned has caused its duly
authorized officer to execute this Assignment on this ______ day of _________,
199_.
[SELLER]
By:____________________________
Name:
Title:
2
SCHEDULE 4.1(C)
1. General Agent's Agreement, dated April 5, 1976 by and between NFL and
Phillip David Elkins of Little Rock Arkansas. (Pursuant to section 10,
NFL must obtain prior written consent to assign this Agreement.)
3
Exhibit E to
Second Amendment
to
Credit Agreement
1
December 2, 1996
Fleet National Bank
777 Main Street, MSN 250
Hartford, CT 06115
Ladies and Gentlemen:
We have acted as special counsel to (i) Westbridge Capital
Corp., a Delaware corporation (the "GUARANTOR"), (ii) Westbridge Funding
Corporation, a Delaware corporation and an indirect wholly-owned subsidiary of
the Guarantor (the "BORROWER"), and (iii) National Foundation Life Insurance
Company, a Delaware corporation, National Financial Insurance Company, a Texas
corporation, American Insurance Company of Texas, a Texas corporation, Freedom
Life Insurance Company of America, a Mississippi corporation, Health Care-One
Insurance Agency, a California corporation ("HCO"), Health Care One Marketing
Group, Inc., a Texas corporation, LSMG, Inc., a Texas corporation, Senior
Benefits of Texas, a Texas corporation, and Westbridge Marketing Corporation, a
Delaware corporation (collectively referred to herein as the "ELIGIBLE
SELLERS"), in connection with (i) the Second Amendment and Waiver to the Credit
Agreement dated as of November 14, 1996 (the "SECOND AMENDMENT") between the
Borrower and Fleet National Bank (formerly Fleet National Bank of Connecticut,
the "BANK") and (ii) the other agreements, instruments and documents referred to
in the next paragraph. All capitalized terms used but not defined herein have
the respective meanings given to such terms in the Second Amendment. This
opinion letter is delivered to you pursuant to Section 3 of the Second
Amendment.
In rendering the opinions expressed below, we have examined
the following agreements, instruments and other documents:
2
(a) the Second Amendment;
(b) the First Amendment to the Guaranty Agreement dated as of November 14,
1996 by the Guarantor in favor of the Bank (the "FIRST AMENDMENT TO
THE GUARANTY AGREEMENT", together with the Second Amendment, the "LOAN
AMENDMENTS");
(c) the Security Agreement;
(d) the Insurance Company Receivables Purchase Agreement;
(e) the Non-Insurance Company Receivables Purchase Agreement;
(f) the Secured Guaranty Agreement, dated as of November 14, 1996, by
Health Care- One Insurance Agency, Inc., for the benefit of Westbridge
Funding Corporation (the "SECURED GUARANTY");
(g) certain financing statements in the forms attached as Annex A hereto
(collectively, the "FINANCING STATEMENTS"); and
(h) such records of the Guarantor, the Borrower, the Eligible Sellers and
such other documents as we have deemed necessary as a basis for the
opinions expressed below.
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with authentic original documents of all documents submitted to
us as copies. When relevant facts were not independently established, we have
relied upon certificates of governmental officials and appropriate
representatives of the Guarantor, the Borrower, the Eligible Sellers, and upon
representations made in or pursuant to the Loan Amendments, the Insurance
Company Receivables Purchase Agreement, the Non-Insurance Company Receivables
Purchase Agreement and the Secured Guaranty.
In rendering the opinions expressed below, we have assumed,
with respect to all of the documents referred to in this opinion letter, that
(except as to the Guarantor, the Borrower and, with respect to clauses (i), (ii)
and (iv) below, the Eligible Sellers):
(i) such documents have been duly authorized by, have been duly executed
and delivered by, and constitute legal, valid, binding and enforceable
obligations of, all
3
- 4 -
of the parties to such documents;
(ii) all signatories to such documents have been duly authorized;
(iii)all of the parties to such documents are duly organized and validly
existing; and
(iv) all of the parties have the power and authority (corporate,
partnership or other) to execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to
the comments and qualifications set forth below, and having considered such
questions of law as we have deemed necessary as a basis for the opinions
expressed below, we are of the opinion that:
1. Each of the Guarantor and the Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and
authority to own its assets and to transact the business in which it is
now engaged.
2. The Guarantor has all requisite corporate power to (i)
execute, deliver and perform the First Amendment to the Guaranty
Agreement, (ii) execute and deliver the documents and certificates
delivered in connection therewith, and (iii) carry out the transactions
contemplated thereby. The Borrower has all requisite corporate power to
(i) execute, deliver and perform the Second Amendment, the Insurance
Company Receivables Purchase Agreement and the Non-Insurance Company
Receivables Purchase Agreement, (ii) execute and deliver the documents
and certificates delivered in connection therewith, and (iii) carry out
the transactions contemplated thereby. Each of the Eligible Sellers has
all requisite corporate power to (i) execute, deliver and perform the
Insurance Company Receivables Purchase Agreement or the Non-Insurance
Company Receivables Purchase Agreement, as applicable, (ii) execute and
deliver the documents and certificates delivered in connection
therewith, and (iii) carry out the transactions contemplated thereby.
HCO has all requisite corporate power to (i) execute, deliver and
perform the Secured Guaranty, (ii) execute and deliver the documents
and certificates delivered in connection therewith, and (iii) carry out
the transactions contemplated thereby.
3. The execution, delivery and performance by the Guarantor
and the Borrower of each of the Loan Amendments to which it is a party,
the execution, delivery and performance by the Borrower and each of the
Eligible Sellers of the Insurance Company Receivables Purchase
Agreement or the Non-Insurance Company Receivables Purchase
4
Agreement, as applicable, and the execution, delivery and performance
by HCO of the Secured Guaranty, (a) have been duly authorized by all
necessary corporate action on its part, and (b) do not and will not (i)
violate any provision of its certificate of incorporation or by-laws,
or (ii) violate any applicable law, rule or regulation of the United
States of America (including without limitation, Regulation U and X of
the Board of Governors of the Federal Reserve System) or the State of
New York, or any order, writ, judgment, injunction, decree,
determination or award of any court located in the State of New York
presently in effect having applicability to and binding upon the
Guarantor, the Borrower or the Eligible Sellers of which we have
knowledge.
4. The Second Amendment, the First Amendment to the Guaranty
Agreement, the Insurance Company Receivables Purchase Agreement, the
Non-Insurance Company Receivables Purchase Agreement and the Secured
Guaranty have been duly executed and delivered by duly authorized
officers of the Guarantor, the Borrower and each of the Eligible
Sellers, as applicable. If the Loan Amendments, the Insurance Company
Receivables Purchase Agreement, the Non-Insurance Company Receivables
Purchase Agreement and the Secured Guaranty were stated to be governed
by and construed in accordance with the law of the State of New York,
each Loan Amendment, the Insurance Company Receivables Purchase
Agreement, the Non-Insurance Company Receivables Purchase Agreement and
the Secured Guaranty would constitute the legal, valid and binding
obligation of the Guarantor, the Borrower and each of the Eligible
Sellers, as applicable, enforceable against each such party thereto in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or
transfer or other similar laws relating to or affecting the rights of
creditors generally and except as the enforceability of the Loan
Amendments, the Insurance Company Receivables Purchase Agreement, the
Non-Insurance Company Receivables Purchase Agreement and Secured
Guaranty is subject to the application of general principles of equity
(regardless of whether considered in a proceeding in equity or at law),
including, without limitation, (a) the possible unavailability of
specific performance, injunctive relief or any other equitable remedy
and (b) concepts of materiality, reasonableness, good faith and fair
dealing.
5. If the Security Agreement was stated to be governed by and
construed in accordance with the law of the State of New York, or if a
Connecticut court was to apply the law of the State of New York to the
Security Agreement, the Security Agreement would be effective to
create, in favor of the Bank, a valid security interest under the
Uniform Commercial Code in the State of New York (the "UCC") in all of
the right, title and interest of the Borrower in, to and under the
Collateral (as defined in the Security Agreement) as
5
collateral security for the payment when due of the Obligations (as
defined in the Security Agreement), except that (a) such security
interest will continue in Collateral after its sale, exchange or other
disposition and in any "proceeds" within the meaning of Section
9-306(1) of the UCC thereof only to the extent provided in Sections
9-306 of the UCC, and (b) such security interest in any portion of the
Collateral in which the Borrower acquires rights after the commencement
of a case under the Bankruptcy Code in respect of the Borrower may be
limited by Section 552 of the Bankruptcy Code.
6. If the Insurance Company Receivables Purchase Agreement and
the NonInsurance Company Receivables Purchase Agreement were stated to
be governed by and construed in accordance with the law of the State of
New York, or if a Connecticut court were to apply the law of the State
of New York to the Insurance Company Receivables Purchase Agreement,
the Non-Insurance Company Receivables Purchase Agreement, the
Assignment referred to in the Insurance Company Receivables Purchase
Agreement and the Non-Insurance Company Receivables Purchase Agreement
would be legally adequate to vest in the Borrower all of each Eligible
Sellers right, title and interest in, to and under the Receivables to
the extent provided therein.
7. The Receivables are properly classified as "general
intangibles" within the meaning of ss.9-106 of the Uniform Commercial
Code in the State of Texas (the "UCC") and are not subject to either
ss.9-104 or ss.9-302(c) of the UCC.
8. The security interest referred to in paragraph 5 above in
that portion of the Collateral consisting of "general intangibles" and
"accounts" within the meaning of ss.9-106 of the UCC will be perfected
by filing the Financing Statements in the office of the Secretary of
State of the State of Texas; PROVIDED that, if the Borrower moves its
chief executive office to another jurisdiction, the effectiveness of
the Financing Statements naming the Borrower as debtor will cease on
the expiration of four months after such change or, if earlier, when
perfection would have otherwise ceased, unless such security interest
becomes perfected under the law of such other jurisdiction prior to
such expiration. The effectiveness of the Financing Statements will
lapse on the expiration of a five year period from their date of
filing, or (if later) five years from the last date as to which such
Financing Statements were effective following the proper filing of
continuation statements with respect thereto, unless continuation
statements are filed within six months prior to the expiration of the
applicable five year period, and, if the Borrower so changes its name,
identity or corporate structure that the Financing Statements naming
the Borrower as debtor become seriously misleading, the Financing
Statements naming the Borrower as debtor will be ineffective to perfect
a security interest in Collateral acquired by the Borrower more than
6
four months after such change.
The foregoing opinions are subject to the following comments
and qualifications:
(A) The enforceability of provisions in the Loan Amendments,
Insurance Company Receivables Purchase Agreement, Non-Insurance Company
Receivables Purchase Agreement or the Secured Guaranty to the effect
that terms may not be waived or modified except in writing may be
limited under certain circumstances.
(B) We express no opinion as to the applicability to the
obligations of the Guarantor (or the enforceability of such
obligations) of Section 548 of the Bankruptcy Code, Article 10 of the
New York Debtor and Creditor Law or any other provision of law relating
to fraudulent conveyances, transfers or obligations, and we wish to
point out that the acquisition by the Borrower after the initial
Borrowing under the Credit Agreement of an interest in Property that
becomes subject to the Lien of the Security Agreement may constitute a
voidable preference under Section 547 of the Bankruptcy Code.
(C) Our opinions in paragraphs 2, 3, and 4 above, to the
extent that they relate to any of the Eligible Sellers, are based
solely upon a review of the relevant provisions of the California
General Corporation Law, the Texas Business Corporation Act, the
Mississippi Business Corporation Act, and the certificate or articles
of incorporation, by-laws and
corporate resolutions of the Eligible Sellers.
(D) Except as expressly provided in paragraph 5 above, we
express no opinion as to the right, title or interest of the Borrower
or the Eligible Sellers in, to or under, any of the Collateral (as
defined in the Security Agreement). We express no opinion as to the
existence of any of the Collateral.
(E) Except as expressly provided in paragraphs 5 and 8 above,
we express no opinion as to the creation or perfection of any security
interest in, or other lien on, the Collateral. We express no opinion as
to the priority of any security interest in, or other lien on, the
Collateral.
(F) Our opinion in paragraph 8 above is based solely upon a
review of the relevant statutory text of Article 9 of the UCC as set
forth in the CCH Secured Transactions Guide for the State of Texas as
on file in our offices on November 14, 1996, without regard to the
decisional law of such State.
7
(G) We express no opinion as to the subject matter
jurisdiction of the Connecticut State or United States Federal courts
sitting in Connecticut to adjudicate any controversy related to the
Loan Amendments, Insurance Company Receivables Purchase Agreement, the
Non-Insurance Company Receivables Purchase Agreement or the Secured
Guaranty with respect to proceedings in the Connecticut State or United
States Federal courts sitting in Connecticut.
The foregoing opinions are limited (except as otherwise
expressly provided in paragraphs (C) and (F) above) to matters involving the
Federal laws of the United States of America, the Delaware General Corporation
Law and the law of the State of New York, and we do not express any opinion as
to the laws of any other jurisdiction. We do not express any opinion as to the
insurance laws of any jurisdiction (including, without limitation, the State of
New York).
We have reviewed the opinion letter of Patrick H. O'Neill
dated the date hereof and in our view you are justified in relying on such
opinion letter.
At the request of our clients, this opinion letter is provided
to you by us in our capacity as special counsel to the Guarantor, the Borrower,
the Eligible Sellers and this opinion letter may not be relied upon by any
Person for any purpose other than in connection with the transactions
contemplated by the Second Amendment without, in each instance, our prior
written consent.
Very truly yours,
/s/ Robert S. Reder
Milbank, Tweed, Hadley
& McCloy
RSR/JRR
M&A\47037_2
8
Annex A
Financing Statements
9
EXHIBIT 10.21
1
EXHIBIT 10.21
Exhibit F to
Second Amendment
to
Credit Agreement
FIRST AMENDMENT
TO THE
GUARANTY AGREEMENT
Dated as of November 14, 1996
This FIRST AMENDMENT TO THE GUARANTY AGREEMENT, dated as of
November 14, 1996 (this "FIRST AMENDMENT"), is by WESTBRIDGE CAPITAL CORP., a
Delaware corporation (the "GUARANTOR"), in favor of FLEET NATIONAL BANK
(formerly known as Fleet National Bank of Connecticut) (the "BANK").
PRELIMINARY STATEMENTS. Westbridge Funding Corporation, an
indirect wholly-owned subsidiary of the Guarantor, and the Bank entered into a
Credit Agreement dated as of December 28, 1995, as amended by the First
Amendment and Waiver to the Credit Agreement, dated as of May 17, 1996 and the
Second Amendment and Waiver to the Credit Agreement, dated as of the date hereof
(as so amended, the "Credit Agreement"; capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in the Credit
Agreement). As a condition to making the Revolving Loans under the Credit
Agreement, the Bank required the Guarantor to execute and deliver in favor of
the Bank the Guaranty Agreement dated as of December 28, 1996 (the "Guaranty
Agreement"). The Guarantor desires to amend, and the Bank is willing to consent
to the amendment of, the Guaranty Agreement to conform with certain amendments
to the Credit Agreement being effected on the date hereof pursuant to the Second
Amendment and Waiver to the Credit Agreement, dated as of the date hereof, and
to modify the requirements for the minimum statutory surplus which must be
maintained by the insurance subsidiaries of the Guarantor specified in the
Guaranty Agreement.
NOW THEREFORE, the Guarantor and the Bank hereby agree as
follows:
2
Section 1. AMENDMENT TO THE GUARANTY AGREEMENT. The
Guaranty Agreement is hereby amended as follows:
(a) Section 1.2 of the Guaranty Agreement is amended by
adding, in alphabetical order, the following defined term:
""FLICA" means Freedom Life Insurance Company of
American, a Mississippi corporation."
(b) Section 1.2 of the Guaranty Agreement is amended by
substituting in their entirety the definitions of "Financing Statements" and
"Insurance Subsidiary" with the following definitions, respectively:
""Financing Statements" means the UCC-1 financing statements
to be signed by the Guarantor in connection with the security interest
to be granted to the Bank in the stock of the Borrower, FLICA, NFIC and
NFL, pursuant to the Pledge Agreement (if and when delivered).
"Insurance Subsidiary" means, AIC, FLICA, NFIC and NFL."
(c) Paragraphs (b) and (c) of Section 3.1 of the Guaranty
Agreement are hereby replaced in their entirety with the following new
paragraphs, respectively:
"(b) stock certificates representing all of the outstanding
capital stock of the Debtor, FLICA, NFIC and NFL (with stock powers
signed in blank);
(c) the Financing Statements duly executed by the
Guarantor;"
(d) Section 3.3 of the Guaranty Agreement is amended by
substituting in its entirety the following new Section 3.3:
"Section 3.3. REQUIRED CONSENTS AND APPROVALS. The Guarantor
agrees to use reasonable efforts to obtain, as soon as practicable, all
necessary approvals and consents by the Insurance Commissioners
permitting the pledge of all of the capital stock of each of the
Debtor, FLICA, NFIC and NFL to the Bank and the execution and delivery
of the related Pledge Agreement (collectively, the "Pledge
Approvals")."
3
(e) Section 6.8 of the Guaranty Agreement is amended by
substituting in its entirety the following new Section 6.8:
"Section 6.8 MINIMUM STATUTORY SURPLUS OF INSURANCE
SUBSIDIARIES. As of the end of any fiscal quarter ending (i) after the
date hereof and before September 30, 1996, permit the Statutory Surplus
of any Insurance Subsidiary to be less than an amount equal to the sum
of (a) the Annual Base Statutory Surplus for such Insurance Subsidiary
as specified in Part I of SCHEDULE 6.8 for the applicable fiscal year,
PLUS (b) 50% of any cumulative positive Statutory Net Income of such
Insurance Subsidiary for each fiscal quarter following the fiscal
quarter ending September 30, 1995, MINUS (c) an amount equal to 5% of
the Eligible Agent Collateral Value as of such date (such sum being
referred to herein as the "Formula Amount"), and (ii) on and after
September 30, 1996, permit the Statutory Surplus of any Insurance
Subsidiary to be less than an amount equal to the greater of (a) the
Formula Amount for such Insurance Subsidiary and (b) the Minimum
Statutory Surplus Requirement for such Insurance Subsidiary specified
in Part II of SCHEDULE 6.8; PROVIDED, HOWEVER, that notwithstanding the
foregoing, if, at any time since the last Borrowing under this
Agreement, NFL has consummated any sale or reinsurance of insurance
policies issued or owned by it which, together with all such sales and
reinsurance arrangements during the preceding twelve month period
involves insurance policies with annual in-force premiums which exceed
$1 million, then at the request of the Bank, the Guarantor shall
execute and deliver an amendment to the Guaranty for the sole purpose
of increasing the Annual Base Statutory Surplus or Minimum Statutory
Surplus for NFL as specified in Schedule 6.8 of the Guaranty, as
applicable, to an amount to be determined in good faith negotiations
between the Guarantor and the Bank."
(f) SCHEDULE 6.8 to the Guaranty Agreement is hereby replaced
in its entirety with the SCHEDULE 6.8 attached as Exhibit A hereto.
Section 2. CONDITIONS OF EFFECTIVENESS. This First Amendment
shall become effective as of the date hereof immediately upon the effectiveness
of the Second Amendment and Waiver to the Credit Agreement, dated as of the date
hereof, in accordance with the terms thereof.
4
Section 3. REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR.
The Guarantor hereby represents and warrants to the Bank as follows:
(a) The execution, delivery and performance by the Guarantor
of this First Amendment are within the Guarantor's corporate powers, have been
duly authorized by all necessary corporate action and do not and will not (i)
require any consent or approval of the stockholders of the Guarantor, (ii)
contravene the Guarantor's charter or by-laws, (iii) violate any provision of,
or require any filing, registration, consent or approval under, any law, rule,
regulation order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to and binding upon the Guarantor, (iv)
result in a breach of or constitute a default or require any consent under any
indenture or loan or credit agreement or any other material agreement, lease or
instrument to which the Guarantor or any of its Subsidiaries is a party or by
which it or its properties may be bound or affected, or (v) result in, or
require, the creation or imposition of any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance of any nature upon or
with respect to any of the properties now owned or hereafter acquired by the
Guarantor.
(b) No authorization, consent, approval, order, license or
permit from, or filing, registration or qualification with, or exemption by, any
governmental or public body or authority, or any subdivision thereof, or any
other Person, including without limitation, any Insurance Commissioner, is
required to authorize, or is required in connection with the execution, delivery
and performance by the Guarantor of, or the legality, validity, binding effect
or enforceability of, this First Amendment.
(c) This First Amendment has been duly executed and delivered
by the Guarantor and constitutes the legal, valid and binding obligations of the
Guarantor enforceable against the Guarantor in accordance with its terms, except
to the extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights generally and by
general principles of equity.
Section 4. REFERENCE TO AND EFFECT ON THE GUARANTY
AGREEMENT, REVOLVING NOTE, CREDIT AGREEMENT, SECURITY AGREEMENT
AND COLLATERAL AGREEMENT.
5
(a) On and after the date hereof, each reference in the
Guaranty Agreement to this "Agreement", "hereunder", "hereof", "herein" or words
of like import and each reference in the Revolving Note, each reference in the
Credit Agreement, each reference in the Security Agreement and each reference in
the Collateral Agreement to the Guaranty Agreement shall mean and be a reference
to the Guaranty Agreement as amended hereby.
(b) Except as specifically amended above, the Guaranty
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this First
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Bank under the Guaranty Agreement, nor
constitute a waiver of any provision of the Guaranty Agreement.
Section 5. EXECUTION IN COUNTERPARTS. This First Amendment may
be executed in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
Section 6. GOVERNING LAW. This First Amendment shall
be governed by, and construed in accordance with, the laws of the
State of Connecticut.
Section 7. DEFINED TERMS. Capitalized terms used
herein which are not expressly defined herein shall have the
meanings ascribed to them in the Credit Agreement.
6
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed as of the day and year first above written.
WESTBRIDGE CAPITAL CORP.
By /S/ PATRICK J. MITCHELL
Name: Patrick J. Mitchell
Title: Chief Financial Officer
FLEET NATIONAL BANK
By: /S/ ANSON T. HARRIS
Name: Anson T. Harris
Title: Assistant Vice President
7
Exhibit A
to
First Amendment
to Guaranty Agreement
SCHEDULE 6.8
PART I -- ANNUAL BASE STATUTORY SURPLUS
(in million $)
INSURANCE SUBSIDIARY 1995 1996 1997 1998
- - -------------------- ---- ---- ---- ----
NFL $14.0 $14.0 $14.0 $14.0
NFIC 8.0 4.0 3.0 4.0
AIC 6.5 6.5 6.5 6.5
FLICA 8.0 8.0 8.0 8.0
PART II -- MINIMUM STATUTORY SURPLUS REQUIREMENTS
(in million $)
INSURANCE SUBSIDIARY 1996 1997 1998
- - -------------------- ------- ------- -------
NFL $14.0 $14.0 $14.0
NFIC 7.0 7.0 7.0
AIC 7.5 7.5 7.5
FLICA 8.0 8.0 8.0
1
EXHIBIT 21.1
SUBSIDIARIES OF WESTBRIDGE CAPITAL CORP.
Percentage
SUBSIDIARY OWNERSHIP
1 National Foundation Life Insurance Company (Delaware) 100%
2 American Insurance Company of Texas (Texas) 100%
3 National Financial Insurance Company (Texas) 100%
4 Freedom Life Insurance Company of America (Mississippi) 100%
5 Freedom Holding Company (Kentucky) 100%
6 Westbridge Funding Corporation (Delaware)
(Formerly National Legal Services Company, Inc.) 100%
7 Foundation Financial Services, Inc. (Nevada) 100%
8 Westbridge Marketing Corporation (Delaware) 100%
9 Westbridge Printing Services, Inc. (Delaware) 100%
10 Flex-Plan Systems, Inc. (Delaware) 100%
11 Westbridge Financial Corp. (Delaware) 100%
12 Precision Dialing Services, Inc. (Delaware) 100%
13 Westbridge National Life Insurance Company (Arizona) 100%
14 Senior Benefits, LLC (Arizona) 100%
15 American Senior Security Plans, LLC (Delaware) 100%
16 Health Care-One Marketing Group, Inc. (Texas) 80%
17 LifeStyles Marketing Group, Inc. (Delaware) 51%
18 Health Care-One Insurance Agency, Inc. (California) 50%
2
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 33-55192) of Westbridge Capital Corp. and its
subsidiaries of our report dated March 14, 1997, appearing on page 38 of this
Form 10-K.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 14, 1997
3