-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAq2jNnz2r/zHuUkk1JV+J81DM8NNaX9kNrcXgQHJY3llQEeDcoh8WgKYUbBelVO Q88AltONTvNkBIiUkQFw8g== 0000703701-96-000006.txt : 19960812 0000703701-96-000006.hdr.sgml : 19960812 ACCESSION NUMBER: 0000703701-96-000006 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960809 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTBRIDGE CAPITAL CORP CENTRAL INDEX KEY: 0000703701 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 731165000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-81380 FILM NUMBER: 96607204 BUSINESS ADDRESS: STREET 1: 777 MAIN ST STREET 2: STE 900 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178783300 MAIL ADDRESS: STREET 1: 777 MAIN ST STE 900 CITY: FORT WORTH STATE: TX ZIP: 76102 POS AM 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996 REGISTRATION NO. 33-81380 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- WESTBRIDGE CAPITAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6300 73-1165000 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) -------------------- 777 MAIN STREET FORT WORTH, TEXAS 76102 (817) 878-3300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------- PATRICK J. MITCHELL EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER WESTBRIDGE CAPITAL CORP. 777 MAIN STREET FORT WORTH, TEXAS 76102 (817) 878-3300 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------------- WITH COPIES TO: ROBERT S. REDER, ESQ. MILBANK, TWEED, HADLEY & MCCLOY 1 CHASE MANHATTAN PLAZA NEW YORK, NEW YORK 10005 (212) 530-5680 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT, AS DETERMINED BY THE SELLING SECURITYHOLDERS. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. |X| ------------------------- CROSS REFERENCE SHEET (Pursuant to Item 501(b) of Regulation S-K) REGISTRATION STATEMENT ITEMS AND HEADING LOCATION IN PROSPECTUS 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus......................... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus; Cross Reference Sheet 2. Inside Front and Outside Back Cover Pages of Prospectus.................................................. Inside Front Cover Page of Prospectus; Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges................................... Prospectus Summary; Risk Factors; The Company; Capitalization; Selected Historical Consolidated Financial Information 4. Use of Proceeds................................................ Not Applicable 5. Determination of Offering Price................................ Not Applicable 6. Dilution....................................................... Not Applicable 7. Selling Security Holders....................................... Selling Securityholders 8. Plan of Distribution........................................... Plan of Distribution 9. Description of Securities to be Registered..................... Outside Front Cover Page of Prospectus; Prospectus Summary; Description of Capital Stock; Description of Convertible Subordinated Debentures 10. Interests of Named Experts and Counsel......................... Experts; Legal Matters 11. Information with Respect to the Registrant..................... Prospectus Summary; Risk Factors; The Company; Price Range of Common Stock and Dividend Policy; Capitalization; Selected Historical Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Stockholders; Description of Capital Stock 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..................................... Not Applicable
WESTBRIDGE CAPITAL CORP. SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE EXCHANGEABLE PREFERRED STOCK $.10 PAR VALUE, $1,000 LIQUIDATION PREFERENCE COMMON STOCK CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 12, 2004 ------------------- Up to 20,000 shares of Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock, par value $.10 per share, liquidation preference $1,000 per share (the "Series A Preferred Stock"), of Westbridge Capital Corp. ("Westbridge"), may be offered from time to time by certain holders of the Series A Preferred Stock. See "Selling Securityholders." The dividend on the Series A Preferred Stock, which is equal to $82.50 per share, per annum, is payable on the last business day of each January, April, July and October out of funds legally available therefor, when, as and if declared by Westbridge's Board of Directors (the "Board of Directors") and is subject to certain adjustments described herein. Each quarterly dividend is fully cumulative and accrues (whether or not declared) without accruing interest or additional dividends. On or after April 12, 1997, Westbridge may redeem, in whole or in part, upon not less than 30 nor more than 60 days' prior written notice, the outstanding shares of Series A Preferred Stock initially at a price of $1,050 per share and thereafter at prices declining to $1,000 per share on or after April 1, 2002, in each case, plus accrued and unpaid dividends to the redemption date. On April 12, 2004, Westbridge is required to redeem all outstanding shares, if any, in whole at a price of $1,000 per share, plus accrued and unpaid dividends to the redemption date. In addition, in certain circumstances more fully described herein, holders of Series A Preferred Stock may require Westbridge to redeem, in whole or in part, as the case may be, the Series A Preferred Stock held by such holders at the applicable redemption price plus accrued and unpaid dividends to the redemption date. The Series A Preferred Stock is not subject to any mandatory sinking fund. Westbridge's ability to pay dividends on, or to redeem, the Series A Preferred Stock is limited by the amount of funds legally available therefor and is subject to the satisfaction of certain covenants and restrictions under the Senior Subordinated Indenture (as defined herein), Westbridge's Restated Certificate of Incorporation and certain legal and regulatory requirements. See "Risk Factors-Holding Company Structure; Reliance on Subsidiaries,-Repurchase at Option of Holders and-Restrictions on Dividends," "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Capital Resources and Statutory Capital and Surplus," and "Description of Capital Stock-Preferred Stock-Series A Preferred Stock." Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, into shares of Common Stock at a price of $8.41 per share, subject to certain adjustments described herein. The shares of Series A Preferred Stock may, at the option of Westbridge, be exchanged for that principal amount of Convertible Subordinated Debentures due April 12, 2004 (the "Convertible Subordinated Debentures") of Westbridge equal to the aggregate liquidation preference of the Series A Preferred Stock to be exchanged. Westbridge may effect such exchange only if accrued and unpaid dividends on the Series A Preferred Stock have been paid. Holders of Series A Preferred Stock are not entitled to any voting rights, except as set forth in Westbridge's Restated Certificate of Incorporation and as required by law. See "Description of Capital StockPreferred Stock-Series A Preferred Stock" for a discussion of these and other terms of the Series A Preferred Stock. (CONTINUES ON FOLLOWING PAGE) ------------------ THERE HAS BEEN NO ACTIVE TRADING MARKET FOR EITHER THE SERIES A PREFERRED STOCK OR THE CONVERTIBLE SUBORDINATED DEBENTURES NOR IS IT EXPECTED THAT SUCH AN ACTIVE TRADING MARKET WILL DEVELOP. ------------------ SEE"RISK FACTORS" FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, AS AN INVESTMENT IN THE SERIES A PREFERRED STOCK, THE COMMON STOCK OR THE CONVERTIBLE SUBORDINATED DEBENTURES INVOLVES A HIGH DEGREE OF RISK. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ The date of this Prospectus is August 9, 1996 - 1 - (CONTINUATION OF COVER PAGE) Up to 2,378,120 shares of Common Stock, par value $.10 per share (the "Common Stock"), of Westbridge issuable upon the conversion of the Series A Preferred Stock or the Convertible Subordinated Debentures, plus such additional number of shares of Common Stock as may be issued upon the conversion of the Series A Preferred Stock or the Convertible Subordinated Debentures by reason of adjustment of the conversion rate in certain events outlined herein, may, following conversion, be offered from time to time by certain holders of Common Stock. See "Selling Securityholders." The outstanding Common Stock is, and the Common Stock offered hereby will be, listed on the New York Stock Exchange (the "NYSE"). On July 31, 1996, the last reported sale price of the Common Stock on the NYSE was $8-1/4 per share. See "Price Range of Common Stock and Dividend Policy." Up to $20,000,000 aggregate principal amount of Convertible Subordinated Debentures issuable upon the exchange by Westbridge of the Series A Preferred Stock may, following exchange, be offered from time to time by certain holders of the Convertible Subordinated Debentures. See "Selling Securityholders." The Convertible Subordinated Debentures will bear interest at a rate equal to the applicable dividend rate on the Series A Preferred Stock at the time of exchange. Interest shall accrue from the date of exchange, or from the most recent interest payment date to which interest has been paid or provided for, determined as provided in the indenture under which the Convertible Subordinated Debentures will be issued (the "Convertible Subordinated Indenture"). Interest will be payable on the last business day of each January, April, July and October following the date of issuance and will be subject to certain adjustments described herein. The Convertible Subordinated Debentures will mature on April 12, 2004. On or after April 12, 1997, Westbridge may redeem, in whole or in part, upon not less than 30 nor more than 60 days' prior written notice, the outstanding Convertible Subordinated Debentures initially at a price per $1,000 principal amount of $1,050 and thereafter at prices declining to $1,000 on or after April 1, 2002, in each case, plus accrued and unpaid interest to the redemption date. The Convertible Subordinated Debentures are not subject to any mandatory sinking fund. In addition, in certain circumstances more fully described herein, holders of Convertible Subordinated Debentures may require Westbridge to repurchase, in whole or in part, as the case may be, the Convertible Subordinated Debentures held by such holders at the repurchase prices set forth herein, plus accrued and unpaid interest to the repurchase date. The Convertible Subordinated Debentures will rank junior to Westbridge's Senior Subordinated Notes (as defined herein) and any other Senior Indebtedness (as defined herein) subsequently issued by Westbridge. The Convertible Subordinated Debentures may, at the option of the holders thereof, be converted into shares of Common Stock at a price and in a manner substantially similar to the price and manner in which the Series A Preferred Stock may be converted as set forth herein. On July 31, 1996, there was approximately $37,600,000 of Senior Indebtedness outstanding, consisting primarily of the $20,000,000 principal component of the Senior Subordinated Notes and $17,600,000 principal amount of loans to Westbridge Funding Corporation which has been guaranteed by Westbridge under the agent balance receivables financing, described herein. See "Description of Convertible Subordinated Debentures" for a discussion of these and other terms of the Convertible Subordinated Debentures. The Company will not receive any of the proceeds from any sale of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures offered from time to time by the holders thereof (collectively, the "Selling Securityholders"). Any or all of such Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures covered by this Prospectus may be sold, from time to time by the Selling Securityholders (i) to or through underwriters or dealers, (ii) directly to one or more other purchasers, (iii) through agents on a best-efforts basis, or (iv) through a combination of any such methods of sale. The names of any underwriters or agents and the applicable commissions or discounts, along with pricing information, will be set forth in an accompanying Prospectus Supplement. See "Plan of Distribution." The Series A Preferred Stock was issued by Westbridge on April 12, 1994 pursuant to the terms of the Preferred Stock Purchase Agreement, dated as of April 1, 1994 (the "Preferred Stock Purchase Agreement"), between Westbridge and the purchasers named therein, in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The proceeds from the issuance of the Series A Preferred Stock were used to provide financing for the Acquisition (as defined herein). The Preferred Stock Purchase Agreement contained certain registration requirements on the part of Westbridge and the registration statement filed by Westbridge under the Securities Act, and of which this Prospectus is a part, satisfied those registration requirements. See "The Acquisition" and "Description of Capital StockPreferred Stock-Series A Preferred Stock." - 2 - AVAILABLE INFORMATION Westbridge is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by Westbridge can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices: 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports and other information concerning Westbridge also may be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Westbridge has filed with the Commission a Registration Statement under the Securities Act with respect to the Offering (as defined herein). This Prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to Westbridge and the Offering, reference is hereby made to such Registration Statement, exhibits and schedules. - 3 - PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO THE "SERIES A PREFERRED STOCK" MEAN THE SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE EXCHANGEABLE PREFERRED STOCK OF WESTBRIDGE, PAR VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $1,000 PER SHARE, REFERENCES TO THE "COMMON STOCK" MEAN THE COMMON STOCK OF WESTBRIDGE, PAR VALUE $.10 PER SHARE, REFERENCES TO THE "CONVERTIBLE SUBORDINATED DEBENTURES" MEAN THE CONVERTIBLE SUBORDINATED DEBENTURES OF WESTBRIDGE DUE APRIL 12, 2004 WHICH ARE ISSUABLE UPON EXCHANGE OF THE SERIES A PREFERRED STOCK AND REFERENCES TO THE "OFFERING" MEAN THE OFFERING OF THE SERIES A PREFERRED STOCK, THE COMMON STOCK OR THE CONVERTIBLE SUBORDINATED DEBENTURES MADE HEREBY. ALL FINANCIAL INFORMATION SET FORTH HEREIN IS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), UNLESS OTHERWISE NOTED. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO "WESTBRIDGE" MEAN ONLY WESTBRIDGE CAPITAL CORP., AND ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" MEAN WESTBRIDGE CAPITAL CORP. AND ITS CONSOLIDATED SUBSIDIARIES. SEE "GLOSSARY OF INSURANCE TERMS" FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. THE COMPANY Westbridge, through its subsidiaries and affiliated companies, principally underwrites and sells specialized health insurance products to supplement or substitute for medical expense coverage usually provided by employers and government programs. The Company's major product lines are: * "Cancer and Specified Disease Products", which include policies designed to provide daily indemnity for hospital confinement and convalescent care for treatment of specified diseases, as well as "event specific" policies designed to provide daily indemnity for confinement in an intensive care unit, fixed benefits in the case of accidental death, or lump sum payments upon initial diagnosis of certain types of internal cancer; * "Medical Expense Products", which include policies providing reimbursement for various costs of medical and hospital care; and * "Medicare Supplement Products", which are designed to provide reimbursement for certain expenses not covered by the Medicare program. The majority of Westbridge's operations have historically been conducted through its wholly-owned subsidiary, National Foundation Life Insurance Company ("NFL"), although the Company currently derives substantial revenue from its other Insurance Subsidiaries, primarily National Financial Insurance Company ("NFI"), and American Insurance Company of Texas ("AICT"). The Company markets its products primarily through general agency networks. The principal general agency networks include LifeStyles Marketing Group, Inc., a 51%-owned indirect subsidiary of Westbridge ("LifeStyles Marketing"). Senior Benefits, LLC, a wholly-owned indirect subsidiary of Westbridge ("Senior Benefits"); and three general agency networks controlled by individuals, the Locke Agency, Cornerstone National Marketing Corporation ("Cornerstone"), and National - 4 - Farm and Ranch Group, Inc. ("Farm and Ranch"). Each agency network specializes in one of the Company's product lines and focuses on selling those products in small towns and rural areas to individuals who have medical expense coverage that they may consider inadequate. The Company through its Insurance Subsidiaries, forms general agent's contracts with the agency networks controlled by individuals. These contracts govern the commission rates and the terms and conditions under which the Company's policies may be sold by the agency networks. Under the contracts, the agency networks are not restricted from selling products for other insurance carriers. Also, the Company is not restricted from allowing additional agency networks to sell its products. These contracts can generally be terminated by either party with 180 days notice. The Company's strategy is to continue to expand its sales and marketing of existing products; introduce new specialized supplemental products to respond to the changing health care environment; and, if and when opportunities arise, acquire blocks of business. In furtherance of this strategy, since November 1993 the Company has acquired equity interests in two insurance agencies to expand sales of its products. In addition, during 1995 the Company has entered into new relationships with established general agency networks specializing in the sale of products comparable to the Company's existing product lines and has begun offering several new products. In response to recent developments in managed healthcare, the Company has entered into contractual arrangements with a "preferred provider organization" which offers policyholders of certain Medical Expense Products the option of using network physicians, hospitals and ancillary healthcare providers to reduce their calendar year deductible and coinsurance portion by up to 50%. The Company has also contracted with individual hospitals to reduce the cost to policyholders of certain Medicare Supplement Products. SEE "BusinessDescription of Policies." Health Care-One Insurance Agency, Inc., a 50%-owned indirect subsidiary of Westbridge ("Health Care-One"), began marketing HMO and PPO products of non-affiliated companies, in late 1995. Health Care-One currently markets the products of WellPoint, Foundation Health and UniCare. SEE "Business-Marketing." Since September 1992, the Company has acquired three blocks of supplemental health insurance policies, two of which consisted exclusively of Medicare Supplement Products. Aggregate premiums from these acquisitions totaled $15.2 million for the year ended December 31, 1995 and $3.5 million for the three months ended March 31, 1996. Also, on April 12, 1994, the Company completed its acquisition (the "Acquisition") of NFI and AICT, two affiliated, privately-owned Texas health insurers with business lines substantially similar to those of the Company and with combined annualized premiums on the date of such purchase of approximately $45 million. The purchase price for the Acquisition was funded primarily through the issuance by Westbridge of 20,000 shares of its Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred Stock"). SEE "The Acquisition." The foregoing acquisitions have significantly increased the Company's revenue stream and asset base. The increase in the Company's net income from $800,000 in 1991 to $5.3 million in 1995 was due in large part to the acquisition of the two blocks of Medicare Supplement Products referred to above, as well as the Acquisition. On May 31, 1996, the Company completed the acquisition of the 60% of Freedom Holding Company, ("FHC") which the Company did not previously own. Freedom Life Insurance Company of America ("FLICA"), a wholly-owned subsidiary of FHC, coinsured a majority of its existing business with the Company prior to the acquisition. Thus, the acquisition of FHC will not have a material impact on the Company's revenues or net earnings. Westbridge's insurance subsidiaries and affiliates are licensed to sell their products in a combined total of 41 states, primarily in the western, middle western, southern and southeastern regions of the United States. These licenses are subject to renewal by the insurance regulatory authorities of each such state. The Company must file periodic financial statements with each state's insurance regulatory authority and conduct its business in accordance with such state's laws and regulations. A failure by the Company to comply with any state's financial or business conduct requirements could result in the future revocation of the Company's license to sell insurance products in such state. SEE "Business-Regulation." - 5 - SERIES A PREFERRED STOCK Title and Amount of Securities.............. Up to 20,000 shares of Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock, par value $.10 per share, liquidation preference $1,000 per share. Liquidation Preference...................... Upon any liquidation, dissolution or winding up of Westbridge, whether voluntary or involuntary, the holders of Series A Preferred Stock shall have a preference over the Common Stock or any other class or series of stock of Westbridge ranking upon liquidation, dissolution or winding up junior to the Series A Preferred Stock, for payment out of the assets of Westbridge or proceeds thereof of $1,000 per share plus all dividends accrued and unpaid thereon and after such payments the holders of Series A Preferred Stock will be entitled to no other payments. If, in the case of any such liquidation, dissolution or winding up of Westbridge, the assets of Westbridge or proceeds thereof are insufficient to pay in full the liquidation payments described above, and similar payments on or other class or series of stock of Westbridge ranking upon liquidation, dissolution or winding up on a parity with the Series A Preferred Stock, then such assets and proceeds will be distributed among the holders of the Series A Preferred Stock and any such other classes or series of stock ratably in accordance with the respective amounts which would be payable on such Series A Preferred Stock and any such other classes or series of stock if all amounts payable thereon were paid in full. Dividends................................... Holders of Series A Preferred Stock will be entitled to receive, when and as declared by the Board of Directors out of funds legally available for payment, cumulative cash dividends at an annual rate of $82.50 per share. The dividend rate is subject to a one percentage point increase if certain Events of Noncompliance (as defined herein) occur. SEE "Description of Capital Stock-Preferred Stock-Series A Preferred Stock." Once an Event of Noncompliance has been cured, the annual dividend rate will revert to $82.50 per share. Dividends on the Series A Preferred Stock will be payable quarterly in arrears from the date of original issuance on the last business day of January, April, July and October of each year, commencing on July 31, 1994, in respect of the quarterly period ending on the last day of the immediately preceding calendar quarter. In addition, if Westbridge makes any dividend payment or other distribution on the Common Stock, other than (i) dividends payable in cash in an aggregate amount in any fiscal year not exceeding $500,000, or (ii) any dividend or distribution of shares of Common Stock, then the holders of shares of Series A Preferred Stock shall be entitled to receive, with respect to each share of Series A Preferred Stock held, the same dividend or distribution received by a holder of the number of shares of Common Stock into which such share of Series A Preferred Stock is convertible on the record date for such dividend or distribution. Voting Rights............................... Except to the extent provided in the Restated Certificate of Incorporation of Westbridge (the "Certificate of Incorporation") and as provided by law, the holders of the Series A Preferred Stock will not have voting rights, except that whenever any dividends payable on shares of Series A Preferred Stock in an amount equivalent to or exceeding the amount of dividends payable thereon for six (6) Quarterly Dividend Periods (as defined herein) (whether or not consecutive) shall be past due, thereafter and until all accrued and unpaid dividends shall have been paid in full or declared and set apart for payment, the holders of shares of Series A Preferred Stock, together with the holders of any other series of preferred stock of Westbridge ("Preferred Stock") as to which dividends are in arrears and as a result are entitled to the rights described in this paragraph, shall have the right, notwithstanding anything to the contrary in the Certificate of Incorporation or the By-Laws of Westbridge (the "By-Laws"), voting together as a single class with such other series, to elect two directors of Westbridge, such directors to be in addition to the number of directors constituting the Board of Directors immediately prior to the accrual of such right, with the remaining directors to be elected by the other class or classes of stock entitled to vote therefor at any meeting of the stockholders held for the purpose of electing directors. Such right to vote for the election of directors may be exercised as provided in the Certificate of Incorporation until all accrued and unpaid dividends shall have been paid in full or declared and set apart for payment, at which time the term of office of the two directors so elected shall terminate automatically. The directors so elected shall serve until the next annual meeting of stockholders of Westbridge or until their successors shall be elected and shall qualify, unless the term of office of the persons so elected as directors shall have earlier terminated. The rights of the holders of Series A Preferred Stock to elect two directors shall not be adversely affected by the voting or other rights applicable to any other security of Westbridge. Conversion.................................. Each share of Series A Preferred Stock may, at any time, at the option of the holder thereof, be converted into shares of Common Stock, on the terms and conditions set forth in the Certificate of Incorporation. Each share of Series A Preferred Stock shall be convertible into a number of fully-paid and nonassessable shares of Common Stock equal to the result obtained (calculated to the nearest 1/1,000th of a share) by dividing the Liquidation Preference by the Conversion Price (each, as defined herein). The Conversion Price shall be subject to certain anti-dilution adjustments. SEE "Description of Capital Stock-Preferred Stock-Series A Preferred Stock-Conversion." Redemptions................................. Westbridge shall have no right to redeem any shares of Series A Preferred Stock prior to April 12, 1997. The Series A Preferred Stock is not subject to any mandatory sinking fund and the Company currently does not intend to provide for a sinking fund to satisfy its redemption obligations. All redemption payments will be made solely out of funds legally available therefor at the time of each such redemption. Optional.................................... On or after April 12, 1997, Westbridge may redeem, in whole or in part, at any time or from time to time upon not less than thirty (30) nor more than sixty (60) days prior written notice, the outstanding shares of Series A Preferred Stock by paying therefor in cash an amount per share equal to the sum of (i) $1,000 multiplied by the applicable Redemption Price set forth below, and (ii) all accrued and unpaid dividends thereon to the date of redemption; PROVIDED -------- that the redemption date in connection with any such redemption shall not be a date which is within the period commencing thirty (30) days prior to a Quarterly Dividend Payment Date (as defined herein) and ending on the fifth business day following such Quarterly Dividend Payment Date. For any redemption of the Series A Preferred Stock, the applicable "Redemption Price", if the redemption date occurs during the twelve-month period beginning April 1 of the years indicated, shall be as follows: Redemption YEAR PRICE ---- ----- 1997 105% 1998 104% 1999 103% 2000 102% 2001 101% 2002 and thereafter 100% Mandatory................................... The Series A Preferred Stock is subject to mandatory redemption by Westbridge on April 12, 2004, by paying therefor in cash an amount equal to $1,000 per share plus all accrued and unpaid dividends thereon to the date of redemption. If a Repurchase Event (as defined herein) shall have occurred, each holder of shares of Series A Preferred Stock shall be entitled to require Westbridge to redeem all or any portion of the shares of Series A Preferred Stock then held by such holder by paying therefor in cash an amount per share equal to the sum of (x) $1,000 multiplied by the applicable Redemption Price, and (y) all accrued and unpaid dividends thereon to the date of redemption. If an Event of Noncompliance of the type described in clause (v) of the definition of such term provided that such Event of Noncompliance is the result of a voluntary assignment for the benefit of creditors or a voluntary bankruptcy, reorganization, insolvency or other similar proceeding commenced by Westbridge) shall have occurred, the holder or holders of a majority of the shares of Series A Preferred Stock then outstanding shall be entitled to require Westbridge to redeem all or any portion of the Series A Preferred Stock owned by such holder or holders by paying therefor in cash an amount per share equal to the sum of (x) $1,000 and (y) all accrued and unpaid dividends thereon to the date of redemption. SEE "Risk Factors-Repurchase at Option of Holders." Exchange.................................... The shares of Series A Preferred Stock are exchangeable, in whole or in part, at the option of Westbridge, at any time upon not less than thirty (30) nor more than sixty (60) days prior written notice to the holders thereof, for that principal amount of Convertible Subordinated Debentures equal to the Liquidation Preference of the shares to be exchanged; PROVIDED that on or prior to the date of exchange Westbridge shall have paid to the holders of outstanding shares of Series A Preferred Stock all accrued and unpaid dividends thereon to the date fixed for exchange. Other Rights and Restrictions............... Whenever (i) any dividend payable on the Series A Preferred Stock is past due, thereafter and until all accrued and unpaid dividends payable have been paid in full or declared and set apart for payment, or (ii) Westbridge shall not have redeemed shares of Series A Preferred Stock on the date such redemption is required, thereafter and until such redemption payment shall have been made or all necessary funds therefor set apart for payment, Westbridge shall not: (A) declare or pay dividends, or make any other distributions, on any Junior Stock (as defined herein) other than dividends or distributions payable in Junior Stock; (B) declare or pay dividends, or make any other distributions, on any Parity Stock (as defined herein), other than dividends or distributions payable in Junior Stock, except dividends paid ratably on the Series A Preferred Stock and all Parity Stock on which dividends are payable or in arrears, in proportion to the total amounts to which the holders of all such shares are then entitled; (C) redeem or purchase or otherwise acquire for consideration (other than Junior Stock) any shares of Junior Stock or Parity Stock (other than, with respect to Parity Stock, ratably with the Series A Preferred Stock); or (D) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, except that Westbridge may redeem shares of Series A Preferred Stock. The Preferred Stock Purchase Agreement, pursuant to which the Series A Preferred Stock was issued, provides that, except as otherwise provided for therein, and for so long as one or more of the original purchasers of such shares (the "Investors") own at least $10,000,000 in aggregate Liquidation Preference of the Series A Preferred Stock, then without first obtaining the consent or approval of Investors holding at least a majority of the Series A Preferred Stock(measured by Liquidation Preference), Westbridge shall not: (i) declare or pay dividends or make any other payment or distribution, on any shares of capital stock of Westbridge other than the Series A Preferred Stock, except as provided therein; (ii) purchase, redeem or retire any shares of capital stock of Westbridge (other than Series A Preferred Stock) or any rights, options or warrants to purchase or acquire, or other securities convertible into or exchangeable for, shares of capital stock of Westbridge; (iii) sell, lease, transfer or otherwise dispose of any asset (including, without limitation, shares of capital stock or any other ownership interest in any Subsidiary (as defined herein)) other than in the ordinary course of business; (iv) issue any shares of Common Stock or any rights, options or warrants to purchase, or other securities convertible into or exchangeable for, shares of Common Stock; EXCEPT in certain circumstances as described herein; (vi) enter into any transaction with any affiliate of Westbridge (other than (x) transactions with certain Subsidiaries, (y) declarations and payments of dividends on the Common Stock permitted by clause (i) above and (z) payments of reasonable and customary fees and compensation to directors, officers and employees of Westbridge and certain of its Subsidiaries), except in the ordinary course of business and upon fair and reasonable terms no less favorable to Westbridge than would be obtained in a comparable arm's-length transaction between unrelated third parties; or (vii) amend the Certificate of Incorporation in such a manner as would adversely affect the preferences or rights of the Series A Preferred Stock. So long as any shares of Series A Preferred Stock shall be outstanding and unless the consent or approval of a greater number of shares shall then be required by law, without first obtaining the consent or approval of the holders of a majority of the shares of Series A Preferred Stock then outstanding, Westbridge shall not: (i) authorize or create any class or series, or any shares of any class or series, of any Senior Stock (as defined herein); (ii) authorize or create any class or series, or any shares of any class or series, of Parity Stock; (iii) reclassify any shares of capital stock of Westbridge into shares of Senior Stock or Parity Stock; (iv) authorize any security exchangeable for, convertible into, or evidencing the right to purchase any shares of Senior Stock or Parity Stock; or (v) amend, alter or repeal the Certificate of Incorporation to alter or change the preferences, rights or powers of the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely or to increase the authorized number of shares of Series A Preferred Stock. Ranking..................................... The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of Westbridge, (i) prior to all shares of Junior Stock (including without limitation, the Common Stock) and (ii) prior to all shares of any other series of Preferred Stock of Westbridge, unless and to the extent such other series, the authorization and creation of which was approved or consented to by the requisite holders of Series A Preferred Stock, by its terms ranks on a parity with or senior to the Series A Preferred Stock in any respect.
CONVERTIBLE SUBORDINATED DEBENTURES Title and Amount of Securities............................. Up to $20,000,000 of Convertible Subordinated Debentures Due April 12, 2004; limited to a principal amount equal to the aggregate Liquidation Preference of the shares of Series A Preferred Stock to be exchanged. Interest.................................... The Convertible Subordinated Debentures will bear interest at a rate equal to the applicable dividend rate on the Series A Preferred Stock at the time of exchange. Interest shall accrue from the date of exchange, or from the most recent interest payment date to which interest has been paid or provided for, and shall be payable quarterly in arrears on the last business day of January, April, July and October of each year. The interest rate is subject to adjustment as set forth in the Convertible Subordinated Indenture and in a manner substantially similar to the adjustment of the dividend rate relating to the Series A Preferred Stock. SEE "Description of Convertible Subordinated Debentures-Interest" and "Description of Capital Stock - Preferred Stock - Series A Preferred Stock- Dividends." Conversion.................................. The Convertible Subordinated Debentures may, at any time, at the option of the holder thereof, be converted into shares of Common Stock, on the terms and conditions set forth in the Convertible Subordinated Indenture. The conversion price with respect to the Convertible Subordinated Debentures is subject to adjustment in a manner substantially similar to the adjustment of the Conversion Price relating to the Series A Preferred Stock. SEE "Description of Convertible Subordinated Debentures-Conversion Rights" and "Description of Capital Stock-Preferred Stock-Series A Preferred Stock-Conversion." Subordination............................... The payment of the principal of, premium, if any, and interest on the Convertible Subordinated Debentures will, to the extent set forth in the Convertible Subordinated Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness. As a result of the subordination provisions, holders of the Convertible Subordinated Debentures may, in the event of insolvency of Westbridge, recover less ratably than holders of Senior Indebtedness. The Convertible Subordinated Indenture does not restrict the incurrence of additional Senior Indebtedness by Westbridge or its subsidiaries. SEE "Risk Factors-Subordination" and "Description of Convertible Subordinated Debentures- Subordination." Redemption.................................. The Convertible Subordinated Debentures are not redeemable prior to April 12, 1997. On or after April 12, 1997, Westbridge may redeem, in whole or in part, at any time, upon not less than thirty (30) nor more than sixty (60) days prior written notice, any outstanding Convertible Subordinated Debentures, initially at 105% of the principal amount thereof, declining to 100% of the principal amount thereof on or after April 1, 2002, in each case plus accrued interest to the date fixed for redemption. SEE "Risk Factors- Repurchase at Option of Holders" and "Description of Convertible Subordinated Debentures-Westbridge's Right of Redemption." Repurchase at Option of Holder.............. Upon the occurrence of a Repurchase Event or a certain Event of Noncompliance, each holder of Convertible Subordinated Debentures shall be entitled, at such holder's option, to require Westbridge to repurchase all of such holder's outstanding Convertible Subordinated Debentures, or any portion thereof that is an integral multiple of $1,000, by paying therefor in cash an amount as set forth in the Convertible Subordinated Indenture. SEE "Description of Convertible Subordinated Debentures-Repurchase at Option of Holders Under Certain Circumstances."
RISK FACTORS For a discussion of certain factors that should be considered by prospective purchasers of the Series A Preferred Stock, the Common Stock or the Convertible Subordinated Debentures, SEE "Risk Factors." - 12 - SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION THE COMPANY The information set forth below was selected or derived from the consolidated financial statements of the Company and 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 the related notes thereto appearing elsewhere in this Prospectus.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ------------------------------------------------------- 1996 1995 1995 1994(1) 1993 1992 1991 ---------------- ------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) STATEMENT OF OPERATIONS DATA: Premiums $35,410 $27,934 $120,093 $98,703 $68,731 $56,731 $55,548 Net investment income 2,116 1,820 7,421 5,764 4,120 3,932 4,520 Net realized gains (losses) on investments 85 (61) 182 320 1,030 422 7 Total revenues 39,388 30,131 130,032 106,546 75,292 62,634 61,950 Income before cumulative effect of change in accounting principle and extraordinary loss 1,573 724 5,731 6,425 3,531 1,762 814 Cumulative effect on prior years of change in accounting principle -- -- -- -- -- 1,134 -- Extraordinary loss from early extinguishment of debt, net of income tax benefit -- 407 407 -- -- -- -- Net income 1,573 317 5,324 6,425 3,531 2,896 814 Preferred stock dividends 413 413 1,650 1,190 -- -- -- Income (loss) applicable to common stockholders $1,160 $(96) $3,674 $5,235 $3,531 $2,896 $814 ======== ======== ======== ======== ======== ======== ======== PER SHARE DATA: Income (loss) before cumulative effect of change in accounting principle and extraordinary loss $0.19 $0.06 $0.70 $1.13 $0.78 $0.40 $0.20 Net income (loss) (2) - Primary $0.19 $(0.02) $0.63 $1.13 $0.78 $0.66 $0.20 - Fully-diluted $0.19 $0.04 $0.65 $1.03 $0.78 $0.66 $0.20 RATIOS: Return on average stockholders' equity (3)(4) 10.9% (1.2)% 10.1% 21.8% 20.0% 10.3% 5.6% Ratio of earnings to fixed charges (5) 2.6x 1.3x 3.0x 3.0x 2.6x 2.2x 1.3x Ratio of earnings to combined fixed charges and preferred stock dividends(6) 2.0 0.9 2.0 2.3 -- -- --
(SEE FOOTNOTES ON FOLLOWING PAGE) - 13 -
AT MARCH 31, AT DECEMBER 31, ----------------- ----------------------------------------------------------- 1996 1995 1995 1994(1) 1993 1992 1991 ---- ---- ---- ------ ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Total cash and invested assets $106,000 $106,345 $111,516 $108,838 $57,434 $59,399 $44,224 Deferred policy acquisition costs 63,373 61,610 56,977 58,564 28,354 30,768 29,672 Total assets 207,078 190,361 200,999 187,581 97,067 101,915 85,856 Notes payable 18,044 -- -- -- -- -- -- Senior subordinated notes 19,285 19,206 19,264 24,665 19,422 19,210 19,024 Redeemable preferred stock (7) 20,000 20,000 20,000 20,000 -- -- -- Stockholders' equity 42,539 36,400 42,805 26,355 21,611 18,013 14,920 SUPPLEMENTARY DATA: Policies in force (8) 342 315 333 322 230 230 227 Statutory capital and surplus (8)(9) . $20,114 $21,422 $24,038 $23,564 $16,066 $14,265 $13,501 Statutory net gain (loss) from operations (8)(9) $(3,135) $(1,733) $(6,296) $3,525 $4,066 $2,366 $2,012 - -------------- (1) Includes operations of NFI and AICT from April 12, 1994. (2) Net income in 1992 reflects the effect of the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," on a prospective basis as of January 1, 1992. (3) Before cumulative effect of change in accounting principle. (4) Return on average equity for the interim periods represents an annualized yield. (5) In computing the ratio of earnings to fixed charges, fixed charges consist of interest on indebtedness, amortization of debt expense and such portion of rental expense which is estimated to be representative of the interest factor, all on a pre-tax basis. Earnings are pre-tax income from continuing operations plus fixed charges. (6) In computing the ratio of earnings to combined fixed charges and preferred stock dividends, fixed charges consist of interest on indebtedness, amortization of debt expense, such portion of rental expense which is estimated to be representative of the interest factor, and preferred stock dividend requirements (preferred stock dividend requirements are applicable only to the years ended December 31, 1995 and 1994 and the three months ended March 31, 1996 and 1995), all on a pre-tax basis. Earnings are pre-tax income from continuing operations plus fixed charges. (7) Consists of 20,000 shares of Series A Preferred Stock which, from April 12, 1994 through February 28, 1995, were convertible, at the option of the holders thereof, into 2,285,720 shares of Common Stock at a conversion price of $8.75 per share of Common Stock. As a result of Westbridge's sale to the public on February 28, 1995 of 1,500,000 shares of Common Stock, the shares of Series A Preferred Stock are convertible, at the option of the holders thereof, into 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 Debentures due April 12, 2004 of Westbridge (the "Convertible Subordinated Debentures") equal to the aggregate liquidation preference of the shares of Series A Preferred Stock to be exchanged. (8) Applies solely to the wholly-owned insurance subsidiaries of Westbridge. (9) Calculated in accordance with statutory accounting practices.
- 14 - NFI AND AICT - BEFORE THE ACQUISITION The information set forth below is based on the consolidated financial statements of NFI and AICT before the Acquisition and should be read in conjunction with the consolidated financial statements of NFI and AICT and the related notes thereto appearing elsewhere in this Prospectus. NFI's results of operations prior to the Acquisition include the operations of AICT which, during such time, was a 65% owned subsidiary of NFI. Concurrent with the Acquisition, the remaining 35% interest in AICT, which was owned by two affiliates of NFI, was transferred to NFI. Also included in the results of operations for 1992 and 1991 is the operations of Imperial Insurance Company, a wholly-owned subsidiary of AICT, which was disposed of in 1992. The operations of Imperial Insurance Company were not material to the consolidated results of operations of NFI and AICT in 1992 or 1991.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- --------------------------------- 1994 1993 1993 1992 1991 (IN THOUSANDS, EXCEPT RATIOS) INCOME STATEMENT DATA: Premiums $12,082 $13,605 $52,153 $66,923 $78,420 Net investment income 685 966 $3,454 5,324 6,936 Net realized gain (loss) on investments 262 635 2,539 1,914 1,650 Total revenues (1) 13,183 15,267 61,569 76,242 89,246 Income (loss) before cumulative effect of change in accounting principle . 1,077 1,068 2,592 435 4,488 Cumulative effect of adoption of SFAS 109 -- (3,600) (3,600) -- -- Net income (loss) (2) $1,077 $(2,532) $(1,007) $435 $4,448 ========= ========= ========= ========= ========= RATIOS: Return on average equity (3)(4) 28.7% 25.8% 15.4% 2.3% 24.2% Ratio of benefits and claims to premiums 0.67x 0.67x 0.71x 0.69x 0.63x Ratio of general and administrative expense to premiums 0.19 0.17 0.15 0.22 0.23 Ratio of total expenses to premiums . 1.05 1.03 1.13 1.13 1.06 BALANCE SHEET DATA: Total cash and invested asset $58,077 $60,362 $59,250 $65,430 $87,397 Deferred policy acquisition costs 23,595 30,902 24,615 32,006 35,825 Total assets 90,410 101,416 95,043 111,372 138,153 Stockholder's equity 15,209 14,277 14,816 18,848 18,913 - -------------- (1) NFI and AICT discontinued marketing and new business production during the first six months of 1992. Beginning in January 1995 NFI and AICT resumed issuing new policies consisting primarily of Medical Expense Products and Medicare Supplement Products. (2) Net income in 1993 reflects the effect of the Company's adoption of SFAS 109, "Accounting for Income Taxes," on a prospective basis as of January 1, 1993. (3) Before cumulative effect of change in accounting principle. (4) Return on average equity for the interim periods represents an annualized yield.
- 15 - SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The unaudited pro forma financial data give effect to the Acquisition and the issuance of the Series A Preferred Stock as if these transactions had occurred on January 1, 1994 for purposes of the Statements of Operations. SEE "Unaudited Pro Forma Consolidated Financial Statements." The following summary financial information should be read in conjunction with the consolidated financial statements of the Company and of NFI and AICT and the related unaudited pro forma consolidated financial statements and, in each case, the related notes thereto included elsewhere in this Prospectus. The summary pro forma financial information presented is not necessarily indicative of actual results that would have been achieved had the Acquisition and related transactions closed on the dates assumed. In addition, the pro forma financial information does not purport to be indicative of the results of operations which may be achieved in the future. Both NFI and AICT ceased writing new business in 1992. The Company has recently begun to write certain Medical Expense Products and Medicare Supplement Products through NFI and AICT, and is reviewing its options to market other policies through NFI and AICT and may or may not elect to do so in the future. The pro forma financial information presented has been prepared on the basis of the assumptions described in the notes to the unaudited pro forma consolidated financial statements included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, 1994 ---------------------------------------------- NFI AND PRO FORMA PRO COMPANY AICT ADJUSTMENTS FORMA ------- ------- ------------ --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Premiums $98,703 $13,433 $ -- $112,136 Net investment income 5,764 782 -- 6,546 Net realized gain (loss) on investments 320 262 (262) 320 Total revenues 106,546 14,634 (262) 120,918 ------- ------ ---- ------- Net income (loss) 6,425 1,145 (544) 7,026 ===== ===== ==== ===== Preferred stock dividends 1,190 -- 460 (2) 1,650 Net income available to common stockholders $5,235 $1,145 $(1,004) $5,376 ====== ====== ======= ====== PER SHARE DATA: Fully diluted earnings per share $1.03 $ -- $ -- $1.02 ===== ===== ====== ===== Weighted average fully diluted shares outstanding 6,267 -- 633(3) 6,900 - --------------- (1) To eliminate historical realized gains and losses on disposal of investments. Upon acquisition, purchase accounting adjustments would result in stating marketable securities at fair market value. (2) To reflect 8.25% dividend on the Series A Preferred Stock. (3) To reflect potential dilutive effect of the Series A Preferred Stock which was convertible into Common Stock at $8.75 per share of Common Stock through February 28, 1995.
- 16 - RISK FACTORS BEFORE PURCHASING THE SERIES A PREFERRED STOCK, THE COMMON STOCK OR THE CONVERTIBLE SUBORDINATED DEBENTURES OFFERED HEREBY, A PROSPECTIVE INVESTOR SHOULD CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. RELIANCE ON GENERAL AGENCY NETWORKS/CREDIT RISK The Company's five primary general agency networks accounted for over 90% of the Company's first-year premiums for the three months ended March 31, 1996, and the year ended December 31, 1995. LifeStyles Marketing, Cornerstone, and Farm and Ranch each market the Company's Medical Expense Products for NFL, NFI and AICT, respectively. LifeStyles Marketing is 51% owned by the Company while Cornerstone and Farm and Ranch are independently owned. The Locke Agency markets the Company's Cancer and Specified Disease Products and is independently owned. Senior Benefits, a wholly-owned subsidiary, markets the Company's Medicare Supplement Products. During the three months ended March 31, 1996, LifeStyles Marketing, Senior Benefits, Cornerstone and Farm and Ranch accounted for 35.7%, 29.7%, 14.8% and 8.7% of first-year premiums through direct sales. The Locke Agency accounted, from direct sales or indirectly through coinsurance and reinsurance arrangements, for 5.4% of first-year premiums. The Company believes that its relationships with its general agency networks 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 effort by, any of these general agency networks or their controlling individuals could have a material adverse effect on the Company's future premium revenues. SEE "Business-Marketing." The Company's decision to form a relationship with any general agency network has been and will continue to be based primarily on that general agency network's historical levels of sales and profitability, as well as its access to the Company's target markets. There can be no assurance that any additional agency relationships will be formed or, if formed, that such relationships will result in increased sales or be profitable for the Company. In the ordinary course of business, the Company advances first-year commissions on policies written by its general agency networks 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 agency network or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. Except for approximately $200,000 of losses recorded by the Company during the year ended December 31, 1992, the Company has not experienced material losses on such commission advances. However, there can be no assurance as to the occurrence or degree of any future losses. As of March 31, 1996, outstanding advances totaled $1.4 million to agents of the Locke Agency (which advances are made through FLICA), $7.6 million to the agents of LifeStyles Marketing, $1.8 million to the agents of Senior Benefits, $4.3 million to Cornerstone, $2.4 million to Farm and Ranch, and $3.3 million of aggregate outstanding advances to the Company's other general agency networks and their agents. HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES Westbridge is an insurance holding company, the principal assets of which consist of the capital stock of NFL, Westbridge National Life Insurance Company ("WNL", which is a wholly-owned subsidiary of NFL), NFI, AICT (which is a wholly-owned subsidiary of NFI), and FLICA (which is wholly-owned by FHC), (collectively, the "Insurance Subsidiaries"). In addition, the Company has equity interests in marketing subsidiaries through which the Company's and other carriers' insurance products are sold. Accordingly, Westbridge is dependent upon dividends (from subsidiaries other than the Insurance Subsidiaries), advances due from subsidiaries, principal and interest payments on surplus certificates, lease payments on fixed assets and tax allocation payments from the Insurance Subsidiaries and its other subsidiaries and affiliates for funds to meet its obligations, including - 17 - interest on the Senior Subordinated Notes. Westbridge is similarly dependent on such sources to pay, if and when declared by the Board of Directors, dividends on its Common Stock and Preferred Stock, including the Series A Preferred Stock. Dividend payments from Westbridge's Insurance Subsidiaries are regulated by the insurance laws of their domiciliary states. NFL is domiciled in Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware may not declare or pay a dividend or other distribution from any source other than "earned surplus" without the state insurance commissioner's prior approval. "Earned surplus" is defined as an amount equal to the unassigned funds of an insurer as set forth on its most recent statutory annual statement, including all or part of the surplus arising from unrealized capital gains or revaluation of assets. WNL, which is domiciled in Arizona, has not contributed in the past, and is not expected to contribute in the foreseeable future, significant dividends to Westbridge. NFI and AICT are domiciled in Texas. An insurer domiciled in Texas may pay dividends only out of "surplus profits arising from its business." Moreover, insurers domiciled in either Delaware or Texas may not pay "extraordinary dividends" without first providing the state insurance commissioner with 30-days' prior notice, during which time such commissioner may disapprove the payment. An "extraordinary dividend" is defined as a dividend whose fair market value together with that of other dividends made within the preceding 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. The Company is not in a position to assess the likelihood of obtaining future approval for the payment of "extraordinary dividends" or dividends from a source other than "earned surplus." FLICA is domiciled in Mississippi. An insurer domiciled in Mississippi is limited to paying dividends to the lesser of 10% of statutory capital and surplus or 100% of statutory net gain from operations for the preceding year without prior approval of the Commissioner of the Department of Insurance. 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 (5) business days following the declaration thereof and at least ten (10) days prior to the payment thereof. As of December 31, 1995, NFL had negative statutory "earned surplus" as a result of historical statutory losses. For the foreseeable future, NFL has agreed to seek the approval of the Delaware insurance commissioner prior to making any dividend payments. In both Delaware and Texas, the state insurance commissioner reviews the dividends paid by each insurer domiciled in such commissioner's state at least once each year to determine whether they are reasonable in relation to the insurer's surplus as regards policyholders and quality of earnings. The state insurance commissioner may issue an order to limit or disallow the payment of ordinary dividends if such commissioner finds the insurer to be presently or potentially financially distressed or troubled. SEE "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Capital Resources and Statutory Capital and Surplus." The terms of loans and transfers of assets within the holding company structure are also subject to state insurance holding company laws. Westbridge holds a surplus certificate issued by NFL which, as of the date of this Prospectus, totaled $777,000. The unpaid aggregate principal amount 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 million, exclusive of any surplus provided by reinsurance treaties, and (ii) NFL receiving prior approval from the Delaware Insurance Commissioner. SEE Note 12 of "Notes to Consolidated Financial Statements" herein. NEW BUSINESS PRODUCTION; ACQUISITIONS For the year ended December 31, 1995 and the three months ended March 31, 1996, approximately 40.2% and 30.7%, respectively, of the Company's premiums related to policies obtained through purchases of closed blocks of insurance policies and through blocks acquired in the Acquisition. Renewal premiums from these closed blocks of business will decline over time due to policy run-off resulting from lapses and cancellations and the absence of newly issued policies. SEE "Management's Discussion and Analysis of Financial Condition and Results of Operations." In order to offset such run-off, the Company must issue new policies through its existing - 18 - general agency networks or through new agency networks, or acquire additional policies. There can be no assurance that efforts to offset run-off from acquired blocks of business will be successful. In addition, the ability of the Company to issue new policies will be limited by risk based capital guidelines as followed by various insurance regulators. See "Business-Regulators". As in the past, the Company may from time to time seek to acquire blocks of insurance policies in force either through indemnity and assumption reinsurance or through the acquisition of companies. Such acquisitions are subject to prior regulatory approval. In the case where indemnity and assumption reinsurance is used, prior approval from the insurance regulator of each state in which the policies to be acquired have been written must be obtained before the Company can assume those policies under assumption reinsurance. SEE "BusinessReinsurance." In the case where the Company seeks to acquire another company, prior approval from the insurance regulator of the domiciliary state of the company to be acquired, and the domiciliary state of each insurance subsidiary, must be obtained before the acquisition can be consummated. There can be no assurance that such regulatory approval would be obtained. Moreover, due to certain legislative and regulatory initiatives, it may become more difficult to utilize assumption reinsurance as a method of acquiring blocks of business in the future. SEE "Business-Regulation." In addition, future acquisitions will depend on the availability and suitability of blocks of policies in force and companies to be acquired, and may also be subject to the Company obtaining adequate financing. There can be no assurance that suitable blocks of policies in force, companies, or adequate financing would be available to the Company. 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 legislation, 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. ADEQUACY OF RESERVES; RECOVERABILITY OF DEFERRED POLICY ACQUISITION COSTS The Company's Cancer and Specified Disease Products generally provide readily determinable benefits pursuant to fixed or capped schedules of indemnities. The substantial majority of these benefits are therefore generally not subject to increase as a result of inflation. Accordingly, and based on the Company's morbidity, persistency and benefit payment experience, as well as information developed, in part, in reliance on actuarial consultants and industry data, management believes that the amounts and timing of the Company's future policyholder benefits are generally relatively predictable. Inflation may affect, to a limited extent, claim costs on the Company's Medicare Supplement Products and Medical Expense Products. SEE "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Capital Resources, and Statutory Capital and Surplus-Consolidated." As a result, future policy benefits are less predictable than with respect to the Cancer and Specified Disease Products. Although management believes that the Company's policy benefit reserves are adequate, there can be no assurance with respect to such adequacy. A material inadequacy in the policy benefit reserves could have a material adverse effect on the business, results of operations and financial condition of the Company. For example, if the Company underestimates expected policyholder benefits, then the policy benefit reserves would be inadequate to fund such benefits. As a result, the Company would incur additional operating - 19 - expenses when the Company incurs such benefits or when the Company becomes aware of the inadequacy and increases its reserve. Additionally, the Company would likely write off a portion of deferred policy acquisition costs associated with those policies. SEE "Business-Reserve Policy and Adequacy." The Company's financial results are partially based on management's estimates of the Company's liability for outstanding claims incurred and reserves for future policyholder benefits. Under generally accepted accounting principles, a deferred acquisition cost asset ("DPAC") is established to properly spread the acquisition costs for the production of new business against the expected future revenues from the policies. The deferred acquisition costs are amortized over future revenues of the business to which the costs are related. The amortization schedule is based on the expected pattern of future revenues and on the expected persistency of the policies. The actual amortization of DPAC is adjusted to reflect the actual persistency of the business. If actual policy terminations are higher than expected, DPAC will be amortized more rapidly than originally scheduled. COMPETITION The Company is engaged in a highly competitive industry. Several hundred insurance companies sell accident and health insurance, including numerous insurers which offer competitive protection plans substantially similar to those offered by the Company. Many of these competitors have considerably greater financial resources and considerably higher ratings from insurance rating agencies than the Company. Private insurers and voluntary and cooperative plans provide various alternatives for meeting hospitalization and medical expenses. Additionally, the federal and state governments provide through the Medicare and Medicaid programs for the payment of certain costs associated with medical care. These major medical programs generally cover a substantial amount of the medical expenses incurred as a result of accidents or illnesses. The Company's Cancer 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. However, expansion of coverage by other insurers could adversely affect the Company's business. The Company's Medical Expense Products are designed to provide coverage which is similar to the major medical insurance programs described above, but are sold primarily to persons not covered in an employer sponsored group. The Company's 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 the private insurance industry's participation, they could adversely affect the Company's business. SEE "Business-Competition." REGULATION Westbridge and its Insurance Subsidiaries and affiliates are subject to regulation and supervision in all of the jurisdictions in which they conduct business. Regulatory agencies supervising the insurance industry are typically granted 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 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. 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 regulations 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. No assurance can be given that future legislative or regulatory changes will not adversely effect the Company's business. SEE "Business-Regulation." - 20 - Some states 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 Cancer 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 such 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. Nearly all states in which the Company is licensed regulate loss ratios. The minimum loss ratios applicable to the Company's products range from 40% to 65%, with most falling in the range of 50% to 55%. The Company believes that it is within its minimum loss ratio requirements. Because these requirements mandate that the Company incur loss experience of not less than a specified percentage of its earned premiums over the life of a policy, they directly impact the profitability of the Company. Any increase in the Company's premium rates must be justified to the relevant regulatory authority on the basis of the Company's conformance to the minimum loss ratio. This can have the effect of inhibiting the Company's ability to raise premium rates on new sales, and thus its ability to generate additional cash from operations. Although the Company is not aware of any proposals by regulators to increase minimum loss ratios, states may increase minimum loss ratios from time to time. The National Association of Insurance Commissioners (the "NAIC") has in the past proposed model rules which would increase minimum loss ratios applicable to the Company's products. There can be no assurance that such a proposal will not be reintroduced in the future. Increases in minimum loss ratio requirements could have a material adverse effect upon the results of operations of the Company. SEE "Business-Regulation." Periodically, the insurance regulatory framework is subject to review, and certain state legislatures consider or enact laws that alter, and in many cases increase, state authority to regulate insurance companies. In recent years, the NAIC and state regulators have been re-examining existing laws and regulations, specifically focusing on insurance company investments and solvency issues. In addition, legislation has been introduced in Congress which could result in the U.S. Government assuming some role in the regulation of the insurance industry. The Company cannot predict the effect that any NAIC recommendations or proposed or future legislation or regulations may have on the financial condition or operations of the Company. SEE "Holding Company Structure; Reliance on Subsidiaries" and "Business-Regulation." CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions in Westbridge's Certificate of Incorporation (the "Certificate of Incorporation") and By-Laws (the "By-Laws") could discourage potential acquisition proposals and could delay or prevent a change in control of Westbridge. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock, or proxy contests. Such provisions may also inhibit fluctuations in the market price of the Common Stock that could result from takeover attempts. These provisions, among other things, (i) classify Westbridge's board of directors (the "Board of Directors") into three classes, each of which serves for different three-year periods, (ii) provide that a director of Westbridge may be removed only for cause and only by a vote of 80% of the Common Stock then outstanding, (iii) eliminate the ability of stockholders to take any action without a meeting, and (iv) provide that the stockholders may amend or repeal the By-Laws or any of the foregoing provisions of the Certificate of Incorporation only by a vote of 80% of the Common Stock then outstanding. In addition, the By-Laws establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings. SEE "Description of Capital Stock-Delaware Anti-takeover Law and Certain Charter Provisions." In addition, the Board of Directors, without further stockholder approval, may issue Preferred Stock with such terms as the Board of Directors may determine, and which could have the effect of delaying or preventing a change in control of Westbridge. The issuance of such Preferred Stock could also adversely affect the voting power of the holders of Common Stock. SEE "Description of Capital StockPreferred Stock." Westbridge is also afforded the protections of Section 203 of the Delaware General - 21 - Corporation Law, which could delay or prevent a change in control of Westbridge or could impede a merger, consolidation, takeover or other business combination involving Westbridge or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of Westbridge. SEE "Description of Capital Stock-Delaware Anti-takeover Law and Certain Charter Provisions." Additionally, state insurance regulatory laws require advance approval by state agencies of any change in control of certain insurance holding companies. Any purchaser of 10% or more of the outstanding shares of Common Stock of Westbridge will be presumed to have acquired control of the Insurance Subsidiaries unless the relevant insurance commissioner, following application by such purchaser in each Insurance Subsidiary's state of domicile, determines otherwise. Such approvals may deter, delay or prevent certain transactions affecting the control or the ownership of Common Stock, including transactions that could be advantageous to the stockholders of Westbridge. SEE "Description of Capital Stock-Insurance Regulation Concerning Change of Control." RESTRICTIONS ON WESTBRIDGE DIVIDENDS The Preferred Stock Purchase Agreement relating to the issuance and sale of the Series A Preferred Stock (the "Preferred Stock Purchase Agreement") provides that for so long as one or more of the original purchasers own in the aggregate Series A Preferred Stock and Convertible Subordinated Debentures having an aggregate liquidation preference and principal amount equal to at least $10 million, then without first obtaining the consent or approval of original purchasers holding in the aggregate Series A Preferred Stock and Convertible Subordinated Debentures representing a majority of the Series A Preferred Stock (measured by liquidation preference) and Convertible Subordinated Debentures (measured by principal amount) then held by the original purchasers, Westbridge shall not declare or pay dividends or make any other payment or distribution, on any shares of capital stock of Westbridge other than the Series A Preferred Stock; EXCEPT, that no approval or consent of the original purchasers shall be required for dividends or other distributions payable (x) in cash in an amount in any year not exceeding $500,000 or (y) in capital stock of Westbridge. Westbridge has not paid any cash dividends on the Common Stock and does not anticipate declaring or paying cash dividends in the foreseeable future. The Senior Subordinated Indenture prohibits the payment of dividends and other distributions on Westbridge's capital stock (except for dividends payable on the Series A Preferred Stock and dividends payable in capital stock of Westbridge) and the purchase of capital stock (except for the redemption or exchange of the Series A Preferred Stock), unless after giving effect thereto, the aggregate amount expended for those purposes subsequent to March 15, 1995, does not exceed the sum of (i) $3 million, plus (ii) 50% of Westbridge's aggregate Consolidated Net Income (excluding unrealized gains and losses on securities marked to market to the extent they were included in such Consolidated Net Income) (as defined in the Senior Subordinated Indenture) for each fiscal year commencing subsequent to December 31, 1994, plus (iii) 100% of the aggregate net proceeds received by Westbridge on account of any capital stock issued by Westbridge (other than to a subsidiary) subsequent to January 1, 1995, (including the aggregate net cash proceeds received by Westbridge on disposition of any property received by Westbridge from such sales), plus (iv) 100% of the aggregate net proceeds received by Westbridge on account of any Indebtedness (as defined in the Senior Subordinated Indenture) convertible into capital stock of Westbridge issued by Westbridge (other than to a subsidiary) subsequent to January 1, 1995, (including the aggregate net cash proceeds received by Westbridge on disposition of any property received by Westbridge from such sales), to the extent such Indebtedness has been converted into such capital stock. REDEMPTION AND REPURCHASE OF SERIES A PREFERRED STOCK AND CONVERTIBLE SUBORDINATED DEBENTURES AT OPTION OF HOLDERS The Certificate of Incorporation and the Preferred Stock Purchase Agreement describe certain events which provide each holder of Series A Preferred Stock, or the Convertible Subordinated Debentures, with the option to require Westbridge to redeem or repurchase all or any part of the holder's Series A Preferred Stock or - 22 - Convertible Subordinated Debentures, as the case may be. Such events include generally (i) a change in control of Westbridge, (ii) certain consolidations or mergers involving Westbridge, or certain sales, leases or conveyances of the assets of Westbridge or its subsidiaries, (iii) a voluntary assignment by Westbridge for the benefit of its creditors or a voluntary bankruptcy, reorganization, insolvency or similar proceeding commenced by Westbridge or its subsidiaries, and (iv) the occurrence of a period of ninety (90) consecutive days during which the Common Stock is not listed for trading. Following the occurrence of any such event, there can be no assurance that Westbridge would have sufficient funds to redeem or repurchase such Series A Preferred Stock or Convertible Subordinated Debentures. Westbridge's failure to redeem or repurchase could constitute an event of default under then existing indebtedness thereby permitting an acceleration of such indebtedness. ABSENCE OF A MARKET FOR SERIES A PREFERRED STOCK AND CONVERTIBLE SUBORDINATED DEBENTURES There is no public market for the Series A Preferred Stock at the present time. No assurance can be given that an active public market will develop for the Series A Preferred Stock or, if issued, the Convertible Subordinated Debentures, or as to the liquidity of the trading for the Series A Preferred Stock or the Convertible Subordinated Debentures. Westbridge does not intend to list the Series A Preferred Stock or the Convertible Subordinated Debentures on any national securities exchange or to include the Series A Preferred Stock or the Convertible Subordinated Debentures for quotation on any quotation system. There can be no assurance that any broker-dealer will make a market in the Series A Preferred Stock or, if issued, the Convertible Subordinated Debentures. SUBORDINATION The Convertible Subordinated Debentures will be subordinated in the right of payment to all existing and future Senior Indebtedness, including the principal of (and any premium, if any) and interest on and all other amounts due on or payable in connection with Senior Indebtedness. At July 31, 1996, there was approximately $37,600,000 of Senior Indebtedness outstanding, consisting primarily of Westbridge's 11% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes") and Notes Payable. The Convertible Subordinated Indenture does not restrict the ability of Westbridge or its subsidiaries to incur additional indebtedness and the Company may from time to time issue additional indebtedness constituting Senior Indebtedness. By reason of such subordination, in the event of liquidation, reorganization, dissolution or winding up of Westbridge, or upon an assignment for the benefit of creditors or any other marshaling of Westbridge's assets and liabilities, or upon other proceedings, the holders of the Senior Subordinated Notes and other creditors who are holders of Senior Indebtedness must be paid in full before the holders of the Convertible Subordinated Debentures may be paid. This may have the effect of reducing the amount of such proceeds paid to the holders of the Convertible Subordinated Debentures. In addition, under certain circumstances, no payments may be made with respect to the principal of or interest on the Convertible Subordinated Debentures if there exists (and has not been waived) a nonpayment default, or certain other defaults with respect to Senior Indebtedness. SEE "Description of Convertible Subordinated Debentures-Subordination." TAX CONSEQUENCES OF REDEMPTION OF SERIES A PREFERRED STOCK FOR CASH OR CONVERTIBLE SUBORDINATED DEBENTURES The Company's redemption of Series A Preferred Stock for cash or for Convertible Subordinated Debentures will be treated as a dividend distribution to the redeemed holder unless, certain tests prescribed by the Internal Revenue Code of 1986, as amended (the "Code") are met. The relevant tests are described in "Certain Federal Income Tax Consequences-Redemption of Series A Preferred Stock for Cash or Convertible Subordinated Debentures." If the redemption satisfies any of those tests, the holder will recognize capital gain or loss equal to the difference between (i) the cash redemption proceeds (except any amounts attributable to accrued but unpaid dividends) or the issue price of the Convertible Subordinated Debentures received; and (ii) the holder's tax basis - 23 - in the redeemed shares. Especially in the case of a redemption in exchange for Convertible Subordinated Debentures, no assurance can be given that any of the relevant tests will be met. If the redemption satisfies none of the relevant tests, the redeemed holder will be treated as having received a dividend equal to either the amount of cash proceeds or the issue price of the Convertible Subordinated Debentures received. The holder will recognize ordinary dividend income to the extent of the Company's earnings and profits; any excess will be applied against and reduce the holder's adjusted tax basis in the redeemed shares to the extent of the basis; any excess will be treated as capital gain, which will be long term if the holder's holding period exceeds one year. A holder receiving Convertible Subordinated Debentures but retaining no stock holdings in the Company may lose its tax basis in the redeemed shares. In addition, a redemption treated as a dividend may be an "extraordinary dividend" to a corporate holder. SEE "Certain Federal Income Tax ConsequencesExtraordinary Dividends." Investors should consult their own tax advisers regarding the possible tax consequences of a redemption of the Series A Preferred Stock. SEE "Certain Federal Income Tax ConsequencesRedemption of Series A Preferred Stock for Cash or Convertible Subordinated Debentures." TAX CONSIDERATIONS RESPECTING CONVERTIBLE SUBORDINATED DEBENTURES WITH ORIGINAL ISSUE DISCOUNT Convertible Subordinated Debentures issued in exchange for Series A Preferred Stock may have original issue discount ("OID"). A holder of Convertible Subordinated Debentures that have OID must include portions of the OID in income as it accrues (regardless of the holder's method of accounting), using a constant yield to maturity method. The OID included in income will be ordinary interest income, and generally must be included in income before the holder receives the cash representing that income. SEE "Certain Federal Income Tax ConsequencesTreatment of Convertible Subordinated Debentures." THE COMPANY Westbridge was incorporated as a Delaware holding company in September 1982 for its wholly-owned subsidiary, NFL, which has been in the insurance business since 1960. The majority of Westbridge's operations have historically been conducted through NFL although the Company currently derives substantial revenue from its other Insurance Subsidiaries, primarily NFI, AICT, and FLICA. The Common Stock is traded on the NYSE under the symbol "WBC." Westbridge, a Delaware corporation, has its executive offices located at 777 Main Street, Suite 900, Fort Worth, Texas 76102, and its telephone number is (817) 878-3300. THE ACQUISITION On April 12, 1994, the Company completed the acquisition of NFI and AICT. At that time, the acquired companies' combined health insurance 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 during the first six months of 1992. During the fourth quarter of 1994, the Company began writing certain Medical Expense Products and certain Medicare Supplement Products through NFI and AICT, and is reviewing its options to market other policies through NFI and AICT and may or may not elect to do so in the future. The Acquisition nearly doubled the Company's invested assets, total assets increased by approximately 90% and total annualized premiums in force increased by approximately 60%. SEE "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock-Preferred Stock-Series A Preferred Stock," and "Pro Forma Financial Information." - 24 - The Company consolidated the operations of NFI and AICT into NFL by transferring all policyholder information relating to the acquired policies onto NFL's administrative and database systems. In addition, the executive and administrative operations of the acquired companies have been moved to the Company's home office. As a result of this consolidation, the Company added approximately 70 employees. However, the Company expects to be able to administer the acquired business at overhead costs which are lower than those incurred by NFI and AICT prior to the Acquisition. Westbridge effected the acquisition of NFI and AICT by purchasing 100% of the outstanding capital stock of NFI for a cash purchase price of $20.1 million. The purchase price was funded primarily through the issuance by Westbridge of 20,000 shares of its Series A Preferred Stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Westbridge received approximately $19 million in net proceeds from the issuance of the Series A Preferred Stock. The remainder of the purchase price was provided from general corporate funds. RECENT DEVELOPMENTS Net income for the second quarter ended June 30, 1996 amounted to $1,997,000 equal to $.23 per fully diluted share, compared to $1,418,000, or $.17 per fully diluted share, reported in the quarter ended June 30, 1995. Total revenues were $43,364,000 versus $31,086,000. THREE MONTHS ENDED JUNE 30 , ------------------ 1996 1995 ------------------ Revenues $43,364 $31,086 Income before extra ordinary item 1,997 1,418 Net income 1,997 1,418 Preferred stock dividend 412 412 --- --- Income applicable to common shareholders 1,585 1,006 Earnings Per Common Share: Primary: Net Earnings $.26 $.17 ==== ==== Fully Diluted: Net Earnings $.23 $.17 ==== ==== Weighted Average Shares Outstanding: Primary 6,113 6,079 Fully diluted 8,532 8,457 - 25 - PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The following table sets forth the high and low sales price for the Common Stock, by quarter, for the periods indicated.
HIGH LOW ---- ---- 1994 1st Quarter ............................. 8-1/2 6-3/4 2nd Quarter.............................. 8-3/4 6-5/8 3rd Quarter.............................. 9-5/8 7-7/8 4th Quarter.............................. 9-3/8 7-3/8 1995 1st Quarter ............................. 8-1/8 5-7/8 2nd Quarter.............................. 7-1/2 5-1/2 3rd Quarter.............................. 6-5/8 5-3/4 4th Quarter.............................. 6-5/8 5-3/4 1996 1st Quarter ............................. 7-1/8 5-1/4 2nd Quarter.............................. 7-7/8 5-7/8 3rd Quarter (Through July 31, 1996)...... 8-3/4 7-5/8
On July 31, 1996, the closing price of the Common Stock on the NYSE was $8-1/4 per share. As of July 31, 1996, there were 2,390 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. SEE "Description of Capital Stock-Restrictions on Dividends." For information concerning statutory limitations on the payment of dividends by the Insurance Subsidiaries to Westbridge, SEE "Business-Regulation" and Note 12 of "Notes to the Consolidated Financial Statements" herein. - 26 - CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at March 31, 1996. The table should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere in this Prospectus.
AT MARCH 31, 1996 ----------------- (IN THOUSANDS) Debt: 11% Senior Subordinated Notes due 2002 ......................... $20,000 Notes payable .................................................. 18,044 --------- Total debt ..................................................... 38,044 --------- Redeemable Preferred Stock ($.10 par value): 1,000,000 shares authorized; 20,000 shares of preferred stock ($1,000 liquidation preference) issued (1) ............ 20,000 --------- Total redeemable preferred stock ............................... 20,000 --------- Stockholders' Equity: Common stock ($.10 par value) 30,000,000 shares authorized; 5,993,458 shares issued ..................................... 599 Capital in excess of par value ................................. 29,210 Unrealized appreciation of investments carried at market value . 1,165 Retained Earnings .............................................. 11,735 Less: Aggregate of treasury shares and investment by affiliates in Common Stock (28,600), at cost ..................... (170) --------- Total stockholders' equity ..................................... 42,539 --------- Total capitalization ........................................... $100,583 ---------
- --------------- (1) The Series A Preferred Stock is convertible, at the option of the holders thereof, into 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 Debentures equal to the aggregate liquidation preference of the shares of Series A Preferred Stock to be exchanged. - 27 - SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION THE COMPANY 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 thereto appearing elsewhere in this Prospectus.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------- ------------------------------------------------- 1996 1995 1995 1994(1) 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) STATEMENT OF OPERATIONS DATA: Premiums........................ $35,410 $27,934 $120,093 $ 98,703 $68,731 $56,731 $55,548 Net investment income........... 2,116 1,820 7,421 5,764 4,120 3,932 4,520 Fee and service income.......... 1,775 432 2,327 1,728 1,397 1,392 1,205 Net realized gains (losses) on investments................ 85 (61) 182 320 1,030 422 7 Other income.................... 2 6 9 31 14 157 670 -------------------- ----------------------- --------- -------- -------- Total revenues............. 39,388 30,131 130,032 106,546 75,292 62,634 61,950 ------ ------ ------- ------- ------ ------ ------ Benefits and claims............. 21,914 16,328 70,465 53,623 33,153 26,522 29,397 Amortization of deferred policy acquisition costs...... 4,329 2,890 11,553 9,711 8,159 8,452 9,194 Commissions..................... 1,937 3,099 11,359 11,224 9,595 8,382 5,658 General and administrative expenses 6,566 5,052 21,926 16,847 14,349 12,663 12,645 Taxes, licenses and fees........ 1,343 1,080 4,101 3,230 2,724 2,095 1,940 Interest expense................ 951 720 2,432 3,067 2,552 2,536 2,450 ------ -------- --------- ------- ------- ------- ------- Total expenses............. 37,040 29,169 121,836 97,702 70,532 60,650 61,284 ------ ------ ------- ------ ------ ------ ------ Provision for income taxes...... 822 327 2,813 2,764 1,562 532 149 Equity in Freedom Holding Company 47 89 348 345 333 310 297 Income before cumulative effect of change in accounting principle and extraordinary loss............. 1,573 724 5,731 724 6,425 3,531 1,762 Cumulative effect on prior years of change in accounting principle - - - - - 1,134 - Extraordinary loss from early extinguishment of debt, net of income tax benefit - 407 407 - - - - Net income (loss) (2)........... 1,573 317 5,324 6,425 3,531 2,896 814 ------ ------ ------ ------ ------ ------ ------ Preferred stock dividends....... 413 413 1,650 1,190 - - - Income (loss) applicable to common stockholders........... $ 1,160 $ (96) $ 3,674 $ 5,235 $ 3,531 $ 2,896 $ 814 ======= ====== ====== ====== ====== ====== ====== PER SHARE DATA: Income (loss) before cumulative effect of change in accounting principle and extraordinary loss $ 0.19 $ 0.06 $ 0.70 $ 1.13 $ 0.78 $ 0.40 $ 0.20 Net income (loss) (2) - Primary..................... 0.19 (0.02) 0.63 1.13 0.78 0.66 0.20 - Fully-diluted............... $ 0.19 $ 0.04 $ 0.65 $ 1.03 $ 0.78 $ 0.66 $ 0.20 RATIOS: Return on average stockholders' equity (3)(4)................. 10.9 % (1.2%) 10.1% 21.8% 20.0% 10.3% 5.6% Ratio of earnings to fixed charges (5) 2.6x 1.3x 3.0x 3.0x 2.6x 2.2x 1.3x Ratio of earnings to combined fixed charge and preferred stock dividends (6) 2.0 0.9 2.0 2.3 - - - (SEE FOOTNOTES ON FOLLOWING PAGE)
- 28 -
AT MARCH 31, AT DECEMBER 31, ---------------- ------------------------------------------------- 1996 1995 1995 1994(1) 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Total cash and invested assets.. $106,000 $106,345 $111,516 $108,838 $ 57,434 $ 59,399 $ 44,274 Deferred policy acquisition costs 63,373 61,610 56,977 58,654 28,354 30,768 29,672 Total assets.................... 207,078 190,361 200,999 187,581 97,067 101,915 85,856 Notes payable................... 18,044 - - - - - - Senior subordinated notes....... 19,285 19,206 19,264 24,665 19,422 19,210 19,024 Redeemable preferred stock (7).. 20,000 20,000 20,000 - - - - Stockholders' equity............ 42,539 36,400 42,805 42,805 21,611 18,013 14,920 SUPPLEMENTARY DATA: Policies in force (8)........... 342 315 333 322 230 230 227 Statutory capital and surplus (8)(9) $ 20,114 $ 21,422 $ 24,038 $ 23,564 $ 16,066 $ 14,265 $ 13,501 Statutory net gain (loss) from operations (8)(9).............. (3,135) (1,733) (6,296) 3,525 4,066 2,366 2,012
- -------------- (1) Includes operations of NFI and AICT from April 12, 1994. (2) Net income in 1992 reflects the effect of the Company's adoption of SFAS 109, "Accounting for Income Taxes," on a prospective basis as of January 1, 1992. (3) Before cumulative effect of change in accounting principle. (4) Return on average equity for the interim periods represents an annualized yield. (5) In computing the ratio of earnings to fixed charges, fixed charges consist of interest on indebtedness, amortization of debt expense and such portion of rental expense which is estimated to be representative of the interest factor, all on a pre-tax basis. Earnings are pre-tax income from continuing operations plus fixed charges. (6) In computing the ratio of earnings to combined fixed charges and preferred stock dividends, fixed charges consist of interest on indebtedness, amortization of debt expense, such portion of rental expense, which is estimated to be representative of the interest factor, and preferred stock dividend requirements (preferred stock dividend requirements are applicable only to the year ended December 31, 1995 and 1994 and the three months ended March 31, 1996 and 1995), all on a pre-tax basis. Earnings are pre-tax income from continuing operations plus fixed charges. (7) Consists of 20,000 shares of Series A Preferred Stock which, from April 12, 1994 through February 28, 1995, were convertible, at the option of the holders thereof, into 2,285,720 shares of Common Stock at a conversion price of $8.75 per share of Common Stock. As a result of Westbridge's sale to the public on February 28, 1995 of 1,500,000 shares of Common Stock, the shares of Series A Preferred Stock are convertible, at the option of the holders thereof, into 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 Debentures due April 12, 2004 of Westbridge (the "Convertible Subordinated Debentures") equal to the aggregate liquidation preference of the shares of Series A Preferred Stock to be exchanged. (8) Applies solely to the wholly-owned insurance subsidiaries of Westbridge. (9) Calculated in accordance with statutory accounting practices. - 29 - NFI AND AICT-BEFORE THE ACQUISITION The information set forth below was selected or derived from the consolidated financial statements of NFI and AICT. The information set forth below should be read in conjunction with the consolidated financial statements of NFI and AICT and related notes thereto appearing elsewhere in this Prospectus. NFI's results of operations prior to the Acquisition include the operations of AICT which, during such time, was a 65% owned subsidiary of NFI. Concurrent with the Acquisition, the remaining 35% interest in AICT, which was owned by two affiliates of NFI, was transferred to NFI. Also included in the results of operations for 1992 and 1991 is the operations of Imperial Insurance Company, a wholly-owned subsidiary of AICT, which was disposed of in 1992. The operations of Imperial Insurance Company were not material to the consolidated results of operations of NFI and AICT in 1992 or 1991.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------- ----------------------------- 1994 1993 1993 1992 1991 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT RATIOS) INCOME STATEMENT DATA: Premiums........................ $12,082 $13,605 $52,153 $66,923 $ 78,420 Net investment income........... 685 966 3,454 5,324 6,936 Net realized gain (loss) on investments 262 635 2,539 1,914 1,650 Other income.................... 154 61 3,423 2,081 2,240 ------- -------- -------- -------- ------- Total revenues (1)......... 13,183 15,267 61,569 76,242 89,246 ------- ------- -------- -------- -------- Benefits and Claims............. 8,030 9,067 37,142 46,268 49,402 Amortization of deferred policy acquisition costs............. 1,020 1,103 7,391 3,819 2,260 Commissions..................... 997 1,491 5,131 8,185 11,157 General and administrative expenses 2,290 2,272 7,874 14,759 17,888 Taxes, licenses and fees........ 315 77 1,072 2,387 2,676 Interest expense................ 19 21 78 90 122 -- -- -- -- --- Total expenses.............. 12,671 14,031 58,688 75,508 83,505 ------ ------ ------ ------ ------ Provision (benefit) for federal income taxes.................. (439) 222 502 (201) 388 Minority interest............... (126) (54) (213) 500 905 Income (loss) before cumulative effect of change in accounting principle 1,077 1,068 2,592 435 4,488 Cumulative effect of adoption of SFAS 109...................... - (3,600) (3,600) - - Net income (loss) (2)........... $ 1,077 $(2,532) $(1,007) $ 435 $ 4,448 ====== ======= ====== ====== ======= RATIOS: Return on average equity (3)(4). 28.7% 25.8% 15.4% 2.3% 24.2% Ratio of benefits and claims to premiums ............... 0.67x 0.67x 0.71x 0.69x 0.63x Ratio of general and administrative expense to premiums....... 0.19 0.17 0.15 0.22 0.23 Ratio of total expenses to premiums 1.05 1.03 1.13 1.13 1.06 BALANCE SHEET DATA: Total cash and invested asset $58,077 $ 60,362 $ 59,250 $ 65,430 $ 87,397 Deferred policy acquisition costs 23,595 30,902 24,615 32,006 35,825 Total assets................. 90,410 101,416 95,043 111,372 138,153 Stockholder's equity...... 15,209 14,277 14,816 18,848 18,913
- -------------- (1) NFI and AICT discontinued marketing and new business production during the first six months of 1992. Beginning in January 1995, NFI and AICT resumed issuing new policies consisting primarily of Medical Expense Products and Medicare Supplement Products. (2) Net income in 1993 reflects the effect of the Company's adoption of SFAS 109, "Accounting for Income Taxes," on a prospective basis as of January 1, 1993. (3) Before cumulative effect of change in accounting principle. (4) Return on average equity for the interim periods represents an annualized yield. - 30 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 investment assets and gains on the sales or redemptions of investment assets. The Company's primary expenses include benefits and claims in connection with its insurance products, DPAC, commissions paid on policy renewals, general and administrative expenses associated with policy and claims administration, taxes, licenses and fees, interest on the indebtedness and dividends. 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 LifeStyles Marketing and Health Care-One from unaffiliated insurance companies, (ii) fees received by Westbridge Printing Services, Inc. ("WPS"), a wholly-owned printing subsidiary, for services provided to unaffiliated companies and (iii) fees received by Foundation Financial Services, Inc. ("FFS"), a wholly-owned third party administrator, for services provided to unaffiliated companies, and (iv) fees received by Precision Dialing Services, Inc. ("PDS"), a wholly-owned subsidiary, for telemarketing services provided to unaffiliated companies. 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. They consist principally of the amount by which first-year commission costs exceed commission costs paid in subsequent policy years. Also included in DPAC is the cost of insurance purchased relating to acquired blocks of business. The amortization of these costs is based on actuarially estimated future premium revenues. The amortization rate is adjusted periodically to reflect actual experience. The Company has acquired seasoned blocks of business to supplement its revenue. These acquisitions included (i) a block of Medicare Supplement Products purchased from American Integrity Insurance Company ("American Integrity") in September 1992, (ii) a block of Medicare Supplement Products purchased from Life and Health Insurance Company of America ("Life and Health") in March 1993, (iii) a block of Cancer and Specified Disease Products purchased from Dixie National Life Insurance Company ("Dixie National Life") in February 1994 and (iv) a block of policies in all of the Company's product lines purchased in the Acquisition. - 31 - The following table shows the premiums received by the Company through internal sales and through acquisitions during the periods indicated.
PREMIUMS (1) THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) COMPANY-ISSUED POLICIES First-year premiums $14,382 $5,922 $34,561 $15,019 $8,675 $9,483 $16,826 Renewal premiums 10,165 8,700 37,223 34,328 36,655 40,345 38,722 -------- -------- -------- -------- -------- -------- -------- Total Company-issued policy premiums. 24,547 14,622 71,784 49,347 45,330 49,828 55,548 -------- -------- -------- -------- -------- -------- -------- ACQUIRED POLICIES American Integrity 2,226 2,881 9,811 13,200 21,137 6,903 -- Life and Health 478 552 2,089 2,506 2,264 -- -- Dixie National Life 774 927 3,299 3,907 -- -- -- NFI and AICT 7,385 8,952 33,110 29,743 -- -- -- ----- ----- ------ ------ ------ ----- ------ Total acquired policy premiums (2) 10,863 13,312 48,309 49,356 23,401 6,903 -- ------ ------ ------ ------ ------ ----- ------ Total Premiums $35,410 $27,934 $120,093 $98,703 $68,731 $56,731 $55,548 ======= ======= ======== ======= ======= ======= =======
- ------------------ (1) For a breakdown of premiums by product line, see "Business - Product Lines." (2) Premiums for the acquired policies include first-year premiums of $18 and $37 for the three months ended March 31, 1996 and 1995, respectively, and $213, $76 and $63 for the years ended December 31, 1995, 1994 and 1993, 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, 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 businesses run off. In an effort to expand the marketing of its products, the Company is actively seeking new relationships with established general agency networks and has recently entered into several such relationships and begun working with such agencies to develop and offer new products. Such expansion may involve the creation of new subsidiaries, joint ventures or similar business arrangements, and is expected to involve moderate cash expenditures by the Company. To the extent the Company is successful in generating new business, premiums, as well as benefits and claims, amortization of DPAC, commissions, general and administrative expenses and taxes, licenses and fees would be expected to increase. RESULTS OF OPERATIONS-THE COMPANY THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1995 PREMIUMS. Premiums increased from $27.9 million to $35.4 million for the first quarter of 1996, an increase of $7.5 million or 26.9%. The increase was attributable to first-year and renewal premiums on Company-issued policies increasing $8.4 million and $1.5 million, respectively, offset by decreases in premiums from acquired policies of $2.4 million. - 32 - The increase in first-year premiums was primarily due to increases of $2 million in Medicare Supplement premiums produced by Senior Benefits for NFL, $3.2 million in Medical Expense premiums produced by LifeStyles Marketing for NFL and $3.4 million, in Medicare Supplement and Medical Expense premiums produced by non-affiliated agencies for NFI and AICT. Renewal premiums decreased $1 million, or 4.5%, as a result of lower premiums from acquired policies offsetting higher renewal premiums from Company-issued policies. Decreases in renewal premium consisted of $655,000 on policies acquired from American Integrity Insurance Company and $1.6 million on policies acquired from NFI and AICT due to policy lapses or cancellations. Offsetting these decreases, in part, were increases in renewal premiums of $1 million in Medicare Supplement premiums produced by Senior Benefits for NFL and $583,000 in Cancer and Specified Disease premiums reinsured by NFL from FLICA. NET INVESTMENT INCOME. Net investment income increased $300,000, or 16.7%, from $1.8 to $2.1 million. The increase was attributable to $400,000 of interest charged in the first quarter of 1996 on receivables from agents, which was not present in the prior year period. FEE AND SERVICE INCOME. Fee and service income increased from $432,000 to $1.8 million, an increase of $1.4 million. The increase was primarily due to increases of $503,000 for telemarketing service fees to non-affiliated companies and $839,000 for commission fees earned by Health Care-One from non-affiliated companies. Sales of telemarketing services to non-affiliated companies began during the second quarter of 1995. Health Care-One began operations during the fourth quarter of 1995. BENEFITS AND CLAIMS. Benefits and claims increased $5.6 million, or 34.4%, from $16.3 million to $21.9 million. The increase can be attributed to increases of $1.0 million for Cancer and Specified Disease Products directly issued by NFL, $1.8 million for Medicare Supplement Products marketed by Senior Benefits for NFL, $1.5 million for Medical Expense Products marketed by LifeStyles Marketing for NFL, and $687,000 for policies acquired in the purchase of NFI and AICT and $690,000 from NFI and AICT Company-issued policies also consisting principally of Medicare Supplement and Medical Expense Products. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ("DPAC"). Amortization of DPAC increased from $2.9 million to $4.3 million, an increase of $1.4 million or 48.3%. The increase was attributable to those product lines producing the largest new sales growth, specifically an increase of $889,000 from Medicare Supplement Products marketed by Senior Benefits, and an increase of $502,000 from Medical Expense Products marketed by LifeStyles Marketing. COMMISSIONS. Commissions decreased $1.2 million, or 38.7%, from $3.1 million to $1.9 million. Before elimination of intercompany revenues and expenses in consolidation, commissions decreased $539,000, or 18%, in NFL and $202,000, or 27%, in NFI and AICT while commissions increased $485,000 in Health Care-One, which began operations in the fourth quarter of 1995, and $1 million in LifeStyles Marketing. An increase of $1.5 million in commissions from NFL to LifeStyles Marketing was eliminated in consolidation. Additionally, other increases in commissions between the Company's insurance subsidiaries and agency subsidiaries, totaling $509,000, were eliminated in consolidation. Commission expense decreased in the insurance subsidiaries despite higher premium revenues. This resulted from a shift in the mix of business to products having low ultimate commission rates. These low ultimate commission rates primarily result from the Company's policy of not paying commissions on future premium rate increases on most lines of business currently produced. - 33 - GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $1.5 million, or 29.4%, from $5.1 million to $6.6 million principally due to costs associated with expanding marketing operations and servicing a growing base of policyholders. TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $300,000, or 27.3%, from $1.1 million to $1.4 million. The increase was primarily due to the increase in collected premiums and the associated premium taxes. INTEREST EXPENSE. Interest expense increased $231,000, or 32.1%, from $720,000 to $951,000, primarily due to $354,000 of interest expense associated with a revolving line of credit which was not present in the comparable 1995 period. Offsetting this increase was a $123,000 decrease in interest expense stemming from the redemption of $25,000,000 par, 11.7% senior subordinated debentures in the first quarter of 1995, in conjunction with the issuance of $20,000,000 principal 11.0% senior notes, also in the first quarter of 1995. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $327,000 to $822,000, an increase of $495,000. The increase resulted from an increase to pre-tax income of $1.3 million. 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 and 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 Acquired Policies is primarily attributable to a $3.4 million, or 25.7%, decrease from the AII block of business along with decreases of $556,000, or 14.4%, and $416,000, or 16.6%, in renewal premium from policies acquired from Dixie National and Life and Health, respectively, offset by a $3.2 million increase in renewal premium from NFI and AICT acquired policies. Because NFI 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 NFI 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 - 34 - 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 and Ranch, and $791,000, or 64.1%, on pre-1987 Medical Expense Products. Offsetting these increases were decreases in benefits and claims expense of $4.6 million, or 81.3%, for Cancer and Specified Disease Products issued directly by the Company and $491,000, or 1.5%, related to Acquired Products. 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 Cancer 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 Cancer and Specified Disease Product of $2.0 million and Cancer 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 NFI and AICT, and $1.3 million, or 35.1%, in LifeStyles Marketing. An increase of $2.2 million, or 39.7%, in commissions paid to LifeStyles Marketing by NFL was eliminated in consolidation. An increase of $529,000 in commissions paid to Senior Benefits by NFL was also eliminated in consolidation. 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 Cancer and Specified Disease Products. The increase in commissions before consolidation eliminations for NFI and AICT is principally the result of two items. $449,000 of the increase resulted from recording NFI and AICT commissions for a full year in 1995, as opposed to about nine months in 1994. $398,000 of the increase resulted from new product sales generated by Cornerstone and Farm and 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 $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 NFI 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 11% senior notes on February 28, 1995. - 35 - 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. YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993 PREMIUMS. Premiums increased $30 million, or 43.7%, from $68.7 million to $98.7 million. This increase was due primarily to an increase in total acquired policy premiums of $26 million, or 111.1%, and an increase in first-year premiums for Company-issued policies of $6.3 million, or 72.4%, offset, in part, by a decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) of $2.3 million, or 6.3%. The increase in total acquired policy premiums resulted from premiums of $29.7 million from the policies obtained in the Acquisition and $3.9 million from the Cancer and Specified Disease Products acquired from Dixie National Life, which, in each case, were not present in the year ended December 31, 1993. In addition, premiums on the block of policies acquired from Life and Health in March 1993 increased $242,000, or 10.7%, from the corresponding prior year period. These increases were offset, in part, by a decrease in premiums on the block of policies acquired from American Integrity in September 1992 of $7.9 million, or 37.4%, due to policy lapses or cancellations. The increase in first-year premiums resulted primarily from $3.9 million in first-year premiums generated by Senior Benefits, which began writing the Company's Medicare Supplement Products in November 1993, and increases of $1.7 million, or 30.9%, in first-year premiums for Medical Expense Products sold by LifeStyles Marketing and $1.3 million, or 118.2%, in first-year premiums on policies reinsured from FLICA. These increases were offset, in part, by a decrease of $548,000, or 27.1% in first-year premiums on Cancer and Specified Disease Products written directly by the Company. The decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) was primarily due to a decrease of $885,000, or 24.8%, for pre-1987 Medical Expense Products, a decrease of $479,000, or 4.9%, for LifeStyles Products and a decrease of $378,000, or 19.1%, in premiums for Cancer and Specified Disease Products reinsured from Paramount Life Insurance Company ("Paramount Life"). Decreases in renewal premiums result from lapses or cancellations of existing policies which are not offset by the Company's acquisition or generation of new business. If the Company's efforts to increase the sales and marketing of its existing products do not offset future policy lapses or cancellations, premiums will decline over time. NET INVESTMENT INCOME. Net investment income increased $1.6 million, or 39%, from $4.1 million to $5.8 million due primarily to investment income of $2.6 million earned on the investment assets acquired in the Acquisition, offset, in part, by lower returns on the Company's other investment assets resulting from reinvestment, at lower interest rates, of the proceeds on bonds which were redeemed or matured during the year ended December 31, 1993. FEE AND SERVICE INCOME. Fee and service income increased $300,000, or 21.4%, from $1.4 million to $1.7 million due primarily to increased commissions earned through LifeStyles Marketing from non-affiliated insurers. BENEFITS AND CLAIMS. Benefits and claims increased $20.4 million, or 61.4%, from $33.2 million to $53.6 million. This increase was due primarily to benefits and claims of $19.4 million on the policies acquired in the Acquisition, $2.7 million on the Cancer and Specified Disease Products acquired from Dixie National Life in February 1994, and $1.5 million on the Medicare Supplement Products marketed by Senior Benefits following - 36 - its formation in November 1993, each of which were not present or were insignificant in the corresponding period in 1993. Also contributing were increases in benefits and claims of $1.1 million, or 15.9%, for LifeStyles Products, $1.4 million, or 32.6%, for Cancer and Specified Disease Products issued directly by the Company, and $352,000 or 23%, for Cancer and Specified Disease Products reinsured from FLICA. These increases were offset, in part, by decreases in benefits and claims of $4.3 million, or 29.9%, for the previously acquired Medicare Supplement Products, and $1.3 million, or 46.4%, for pre-1987 Medical Expense Products. AMORTIZATION OF DPAC. Amortization of DPAC increased $1.5 million, or 18.3%, from $8.2 million to $9.7 million. This increase was due primarily to $3 million of amortization expense attributable to the policies acquired in the Acquisition, and $520,000 of amortization expense relating to Medicare Supplement Products marketed by Senior Benefits, each of which were not present or were insignificant in the corresponding period in 1993. These increases were offset, in part, by decreases in amortization expense of $829,000, or 27%, for LifeStyles Products, $413,000, or 51.2%, for pre-1987 Medical Expense Products, and $458,000, or 41.3%, for previously acquired Medicare Supplement Products. COMMISSIONS. Commissions increased $1.6 million, or 16.7%, from $9.6 million to $11.2 million due primarily to $2.4 million of commissions on the policies acquired in the Acquisition, offset, in part, by a decrease of $800,000, or 8.3% in other commissions. Before elimination of intercompany revenues and expenses in consolidation, commissions decreased $145,000, or 1.3%, in NFL and increased $816,000, or 28.9%, in LifeStyles Marketing. An increase of $1.2 million, or 27.3%, in commissions paid to LifeStyles Marketing by NFL was eliminated in consolidation. The decrease in commissions paid by NFL resulted primarily from decreases of $1.3 million, or 37.1%, in commissions paid on the previously acquired Medicare Supplement Products and $157,000, or 4.1%, in commissions paid on Cancer and Specified Disease Products issued directly by the Company. These decreases were offset, in part, by $767,000 in commissions paid on the Cancer and Specified Disease Products acquired from Dixie National Life, and $205,000 of commission expense relating to Medicare Supplement Products marketed by Senior Benefits, each of which were not present in 1993, and increases of $234,000, or 12.6%, in commissions paid on LifeStyles Products and $269,000, or 22.4%, in commissions paid on Cancer and Specified Disease Products reinsured from FLICA. The increase in commissions paid by LifeStyles Marketing resulted from increased production of new business. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $2.5 million, or 17.5%, from $14.3 million to $16.8 million due primarily to the costs associated with the administration of the policies acquired in the Acquisition. TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $500,000, or 18.5%, from $2.7 million to $3.2 million due primarily to the additional taxes on the premiums associated with the policies acquired in the Acquisition. INTEREST EXPENSE. Interest expense increased $600,000, or 24%, from $2.5 million to $3.1 million due primarily to the 25% increase in the Company's consolidated debt following NFL's sale in February 1994 of $5 million principal amount of Senior Subordinated Debentures previously held in its investment portfolio. PROVISION FOR INCOME TAXES. The provision for income taxes increased $1.2 million, or 75%, from $1.6 million to $2.8 million due primarily to the profitable operations acquired in the Acquisition as well as an increase in the pre-tax income of NFL. - 37 - RESULTS OF OPERATIONS-NFI AND AICT-BEFORE THE ACQUISITION NFI's results of operations prior to the Acquisition include the operations of AICT which, during such time, was a 65% owned subsidiary of NFI. Concurrent with the Acquisition, the remaining 35% interest in AICT, which was owned by two affiliates of NFI, was transferred to NFI. Both NFI and AICT were principally involved in the sale of individual accident and health insurance policies consisting primarily of major medical, hospital and surgical coverage which was substantially similar to the Company's Medical Expense Products. NFI and AICT had also written various forms of individual life insurance policies. During the first half of 1992, both NFI and AICT ceased writing new business. Income from the sale of the entire block of life insurance policies was recognized by NFI and AICT in the first quarter of 1993. Due to the decision by NFI and AICT to cease writing new business and, to a lesser extent, the sales of their respective life insurance blocks of business, NFI and AICT have been managing closed blocks of accident and health insurance policies since the latter half of 1992. As a result, the policies have and will continue to run-off over time resulting in decreased premiums, investment assets and net investment income, as well as lower benefits and claims and commissions. THREE MONTHS ENDED MARCH 31, 1994 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1993 PREMIUMS. Premiums decreased $1.5 million, or 11%, from $13.6 million to $12.1 million due to the run-off of existing policies. Reductions of $642,000 and $881,000 were recorded for first-year premiums and renewal premiums, respectively. NET INVESTMENT INCOME. Net investment income decreased $281,000, or 29.1%, from $966,000 to $685,000 due primarily to lower yields on invested assets. NFI restructured its investment portfolio during the latter half of 1993 and the first quarter of 1994 in anticipation of the Acquisition. A substantial portion of the fixed income investments and mortgage loans, all of the marketable securities and nearly all of the collateral loans were re-invested in short-term investments, resulting in lower investment yields. Also contributing to lower net investment income was a decrease in the average amount of investment assets from $59.6 million to $53 million. NET REALIZED GAIN ON INVESTMENTS. Net realized gain on investments decreased $373,000, or 58.7%, from $635,000 to $262,000 due primarily to lower returns realized on the sale of investment assets. OTHER INCOME. Other income increased $93,000, or 152.5%, from $61,000 to $154,000 due to insignificant fluctuations in various other income categories. BENEFITS AND CLAIMS. Benefits and claims decreased $1.1 million, or 12.1%, from $9.1 million to $8 million due to the run-off of existing policies. This decrease is consistent with the decrease in premiums for the same period as discussed above. AMORTIZATION OF DPAC. Amortization of DPAC, net of amounts deferred, decreased $100,000, or 9.1%, from $1.1 million to $1 million due primarily to decreased amortization expense associated with lower premiums. COMMISSIONS. Commissions decreased $503,000, or 33.5%, from $1.5 million to $997,000 due primarily to the decrease in first-year premiums of $642,000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $18,000, or 0.8%, to remain at $2.3 million due to insignificant fluctuations in various expense categories. - 38 - TAXES, LICENSES AND FEES. Taxes, licenses and fees increased $238,000, or 309.1%, from $77,000 to $315,000. Generally, changes in taxes, licenses and fees follow the changes in premiums; however, at year-end 1992, NFI over-estimated its liability for premium taxes due for fiscal year 1992 by $450,000 and, as a result, taxes, licenses and fees for the first quarter of 1993 appeared unusually low. YEAR ENDED DECEMBER 31, 1993 COMPARED WITH YEAR ENDED DECEMBER 31, 1992 PREMIUMS. Premiums decreased $14.7 million, or 22.0%, from $66.9 million to $52.2 million due primarily to the run-off of existing policies which were not replaced by new business. First-year and renewal premiums decreased $2.9 million and $11.9 million, respectively. Also contributing to this decrease was the sale of the block of life insurance policies which caused a decrease in renewal premiums of $597,000. NET INVESTMENT INCOME. Net investment income decreased $1.8 million, or 34%, from $5.3 million to $3.5 million due to a decrease in the amount of investment assets and a lower average yield on investments. The decrease in the amount of investment assets resulted from the run-off of existing policies. The lower average yield on investments resulted from the sale of certain higher yielding investment assets in anticipation of the Acquisition and reinvestment of these assets at lower rates. As a result, the average yield on investment assets decreased from 7.9% to 6.4%. NET REALIZED GAIN ON INVESTMENTS. Net realized gain on investments increased $600,000, or 31.6%, from $1.9 million to $2.5 million due primarily to the sale of investment assets at the end of 1993 in anticipation of the Acquisition. OTHER INCOME. Other income increased $1.3 million, or 61.9%, from $2.1 million to $3.4 million due primarily to the recognition of income from the sale by NFI and AICT of the entire block of their life insurance policies. BENEFITS AND CLAIMS. Benefits and claims decreased $9.2 million, or 19.9%, from $46.3 million to $37.1 due to the run-off of existing policies which were not replaced by new business. This decrease was consistent with the decrease in premiums for the same period as discussed above. AMORTIZATION OF DPAC. Amortization of DPAC, net of amounts deferred, increased $3.6 million, or 94.7%, from $3.8 million to $7.4 million due primarily to a decrease in the amount of acquisition costs deferred during 1993 of $2.9 million, or 88.3%, from $3.3 million to $385,000 as a result of management's decision to cease writing new business. Additionally, the sale of life insurance policies resulted in amortization of $2.5 million of DPAC in 1993. COMMISSIONS. Commissions decreased $3.1 million, or 37.8%, from $8.2 million to $5.1 million due primarily to the decrease in first-year premiums of $2.9 million. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased $6.9 million, or 46.6%, from $14.8 million to $7.9 million due primarily to elimination of the marketing, underwriting and new business related functions and the consolidation of NFI's operations in its Dallas office. Most of these measures were implemented during the third and fourth quarters of 1992. TAXES, LICENSES AND FEES. Taxes, licenses and fees decreased $1.3 million, or 54.2%, from $2.4 million to $1.1 million due primarily to decreases in premium taxes associated with lower premium levels. Also contributing to this decrease was a $450,000 over-estimation by NFI for its liability for premium taxes at the end of 1992. - 39 - YEAR ENDED DECEMBER 31, 1992 COMPARED WITH YEAR ENDED DECEMBER 31, 1991 PREMIUMS. Premiums decreased $11.5 million, or 14.7%, from $78.4 million to $66.9 million due primarily to run-off of existing policies and NFI's decision to cease writing new business during 1992, which resulted in decreases of $8.5 million and $3 million in renewal premiums and first-year premiums, respectively. Also contributing to this decrease was the sale of the life insurance business, which caused a decrease in renewal premiums of $1 million. NET INVESTMENT INCOME. Net investment income decreased $1.6 million, or 23.2%, from $6.9 million to $5.3 million due to a decrease in the amount of investment assets and a decrease in the average return on investment assets from 8.9% to 7.9%. The decrease in investment assets resulted from the run-off of existing policies. NET REALIZED GAIN ON INVESTMENTS. Net realized gain on investments remained relatively level for the year ended December 31, 1992 as compared to the year ended December 31, 1991. BENEFITS AND CLAIMS. Benefits and claims decreased $3.1 million, or 6.3%, from $49.4 million to $46.3 million due primarily to a decrease in the amount of insurance in force resulting from management's decision to cease writing new business. AMORTIZATION OF DPAC. Amortization of DPAC, net of amounts deferred, increased $1.5 million, or 65.2%, from $2.3 million to $3.8 million due primarily to a decrease in the amount of acquisition costs deferred during 1992 of $2.1 million, or 39.2%, from $5.4 million to $3.3 million as a result of the cessation of new business production. COMMISSIONS. Commissions decreased $3 million, or 26.8%, from $11.2 million to $8.2 million due primarily to the decrease in first-year premiums of $3 million. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased $3.1 million, or 17.3%, from $17.9 million to $14.8 million due primarily to elimination of the marketing, underwriting and new business related functions and the consolidation of NFI's operations in its Dallas office. Most of these measures were implemented during the third and fourth quarter of 1992. TAXES, LICENSES AND FEES. Taxes, licenses and fees decreased $300,000, or 11.1%, from $2.7 million to $2.4 million due primarily to decreases in premium taxes associated with lower premium levels. LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS WESTBRIDGE Westbridge is a holding company which conducts its principal operations through its Insurance Subsidiaries. Westbridge's primary assets consist of the outstanding capital stock of NFL, NFI and FHC, of which it is the sole stockholder. NFL owns 100% of WNL. AICT is a wholly-owned subsidiary of NFI and FHC owns 100% of FLICA. Westbridge's primary sources of funds are advances due from 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. During the year ended December 31, 1995, Westbridge received approximately $3.3 million, or 93.3%, of its funds (excluding the proceeds from the public offering in February 1995 of Common Stock and the Senior Subordinated Notes) from its subsidiaries. Of the funds received from its subsidiaries, approximately $1 million, or 30.8%, was received from NFL in the form of lease payments on fixed assets, payments of principal and interest on the surplus - 40 - certificate issued by NFL and other sources, and the remaining $2.3 million, or 69.2%, was received from LifeStyles Marketing in the form of repayments of advances from Westbridge. For the three months ended March 31, 1996, Westbridge received approximately $2.4 million, or 97%, of its funds from its subsidiaries. Of the funds received from its subsidiaries, 46% was received from LifeStyles in the form of repayments on previous advances from Westbridge and new advances to Westbridge, 17.5% was received from NFL in the form of lease payments on fixed assets and reimbursement of office facilities leased along with payments of interest on the surplus certificate issued by NFL, 15.9% was provided by AICT in the form of an advance, 11.1% was received by Senior Benefits for repayment of advances from Westbridge and 9.5% was received from WMC in the form of a dividend along with repayment of advances from Westbridge. Westbridge's expenses and other obligations consist 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, 1995 and the three months ended March 31, 1996, Westbridge's cash requirements (exclusive of amounts paid in connection with the sale of the Common Stock and Senior Subordinated Notes) aggregated approximately $6.1 million and $2.8 million, respectively. Westbridge used a substantial portion of the proceeds from the sale of the Common Stock and Senior Subordinated Notes to redeem the Senior Subordinated Debentures in March 1995. The Senior Subordinated Notes mature in March 2002 and the Series A Preferred Stock is subject to mandatory redemption in April 2004. Dividend payments from Westbridge's principal Insurance Subsidiaries are regulated by the insurance laws of their domiciliary states. NFL is domiciled in Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware may not declare or pay a dividend or other distribution from any source other than "earned surplus" without the state insurance commissioner's prior approval. "Earned surplus" is defined as an amount equal to the unassigned funds of an insurer as set forth on its most recent statutory annual statement, including all or part of the surplus arising from unrealized capital gains or revaluation of assets. WNL, which is domiciled in Arizona, has not contributed in the past, and is not expected to contribute in the foreseeable future, significant dividends to Westbridge. NFI and AICT are domiciled in Texas. An insurer domiciled in Texas may pay dividends only out of "surplus profits arising from its business." Moreover, insurers domiciled in either Delaware or Texas may not pay "extraordinary dividends" without first providing the state insurance commissioner with thirty (30) days prior notice, during which time such commissioner may disapprove the payment. An "extraordinary dividend" is defined as a dividend whose fair market value together with that of other dividends made within the preceding twelve (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 twelve (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 lesser of the 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. In September 1994, NFL paid to Westbridge an "extraordinary dividend" in the amount of $2 million. Of this amount, $1.5 million was used for the September semi-annual interest payment on the Senior Subordinated Debentures and the remainder was used for general corporate purposes. The Company does not believe that receipt of this dividend is an indication of, and the Company is not in a position to assess, the likelihood of obtaining approval for the payment of "extraordinary dividends" or dividends from a source other than "earned surplus." With respect to ordinary dividends payable by an insurer domiciled in Delaware, notice of any dividend must be provided to the state Insurance Commissioner within five (5) business days following the declaration thereof and at least ten (10) days prior to the payment thereof. As of December 31, 1995, NFL had negative statutory "earned surplus" as a result of historical statutory losses. For the foreseeable future, NFL has agreed to seek the approval of the Delaware Insurance Commissioner prior to making any dividend payments. As of December 31, 1995, AICT had the ability to pay to NFI, without prior regulatory approval, $835,000 in dividends during 1996, none of which has been paid. As of December 31, 1995, NFI had the ability to pay to Westbridge, without prior regulatory approval, $1 million in dividends during 1996, none of which has been paid. FLICA is precluded from making dividend payments in 1996 without prior written approval from the Insurance Commissioner due to net losses - 41 - on a statutory basis in 1995. In Delaware, Texas and Mississippi, 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 March 31, 1996, such advances due from subsidiaries totaled $4.8 million. Westbridge also holds a receivable from the surplus certificate issued by NFL which, as of the date of this Prospectus, totaled $777,000. Payments of principal due under the surplus certificate require the prior approval of the Delaware regulatory authorities. In addition, Westbridge holds a secured promissory note (the "Elkins Note") from NFC Marketing, Inc., an Arkansas corporation which is wholly-owned by Phillip D. Elkins ("Elkins"). The balance of this note recorded on the books of Westbridge at March 31, 1996 was approximately $850,000. This note represents principal and accrued interest on a loan made by Westbridge to NFC Marketing, Inc. for the purpose of expanding its marketing efforts. The original loan was scheduled to be repaid in April 1993. However, due to certain financial difficulties, NFC Marketing, Inc. was in arrears on the full amount of this note and, as of October 10, 1994, owed Westbridge approximately $1.2 million. On such date, the Elkins Note was renewed and extended with terms which provide, among other things, for the payment to Westbridge of $20,000 per month until such time as the full amount of principal and interest thereunder has been paid. Under the terms of the Elkins Note, such amounts will be paid to Westbridge by NFL out of monthly commissions which would otherwise be payable to NFC Marketing, Inc. by NFL. Payment of principal and interest under the Elkins Note has been guaranteed by Elkins. In addition, under the terms of a Security Agreement delivered to Westbridge by NFC Marketing, Inc., following a default, Westbridge has the right to apply monies, balances, credits or collections which it may hold for NFC Marketing, Inc. on deposit, or which might otherwise be payable to NFC Marketing by NFL (including, among other things, agents' commissions payable by NFL to NFC Marketing, Inc.), to offset the unpaid balance of the Elkins Note. Amounts available for such offset have averaged approximately $155,000 per month over the past six months and consist exclusively of commissions. Such commissions relate to and are paid by NFL out of premiums it receives from policyholders on previously written policies. Subject to policy lapses or cancellations, these premiums will continue to be received by NFL and commissions thereon will be available for offset by Westbridge whether or not Elkins' relationship with the Company continues. Following any exercise by Westbridge of its right of offset, management believes that the level of lapses and cancellations would gradually increase as a result of agents' efforts to transfer the policies to other insurers. However, management also believes that the rate at which such policies could be rewritten would not significantly affect the level of premiums received by NFL in the near term. As a result, management believes that following any future payment default Westbridge should be able to recover the full amount owed on this note. Westbridge does not know of, nor does it have any reason to believe that there is, any other of its general agency networks which is experiencing financial difficulty. Westbridge believes that its near-term cash requirements, including interest on the Senior Subordinated Notes and dividend payments on the Series A Preferred Stock, will be met through operating cash flows, repayments of advances due from subsidiaries and payments relating to the surplus certificate. INSURANCE SUBSIDIARIES The primary sources of cash for the Insurance Subsidiaries are premiums, income on investment assets and fee and service income. Additional cash is periodically provided from the sale of short-term investment assets and could, if necessary, be provided through the sale of long-term investment assets. The Insurance Subsidiaries' primary uses for cash are benefits and claims, commissions, general and administrative expenses and taxes. - 42 - In the ordinary course of business, the Company advances first-year commissions on policies written by its general agency networks and their agents. The Company is reimbursed for these advances from 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 agency network or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. Except for approximately $200,000 of losses recorded by the Company during the year ended December 31, 1992, the Company has not experienced material losses on such advances. There can be no assurance as to the occurrence or degree of any future losses. As of March 31, 1996, outstanding advances totaled $1.4 million to the Locke Agency, $7.6 million to the agents of LifeStyles Marketing, $1.8 million to the agents of Senior Benefits, $4.3 million to the agents of Cornerstone, $2.4 million to the agents of Farm and Ranch and $3.3 million of aggregate outstanding advances to the Company's other general agency networks and their agents. The Insurance Subsidiaries and other subsidiaries of Westbridge advance a percentage of first year commissions payable to agents for policies sold by such agents. In order to finance these advances, Westbridge's wholly-owned subsidiary Westbridge Funding Corporation ("WFC") entered into a credit agreement dated as of December 28, 1995 with Fleet National Bank (the "Credit Agreement") which provides WFC with a two-year $20,000,000 revolving loan facility, the proceeds of which are used by WFC to purchase receivables evidencing agent advances. 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 agreed, subject to regulatory approval, to pledge all of the issued and outstanding shares of the capital stock of NFL, NFIC and WFC as collateral for its guaranty. As of July 31, 1996 $17.6 million was outstanding under the Credit Agreement. The termination date of the current agent receivable financing program is January 7, 1998. CONSOLIDATED The Company's consolidated net cash used for operations totaled $21.3 million, $10.6 million and $7.2 million in 1995, 1994 and 1993, respectively. The primary reason for the increase in cash used for operations from 1994 to 1995 is the increase in new business production in 1995 over 1994 attributed to agent advances and higher first-year policy issue costs. The primary reason for the increase in cash used for operations from 1993 to 1994 is an increase in paid claims associated with the Acquisition partially offset by increases in collected premiums. Net cash used for operations for the three months ended March 31, 1996, totaled $5.7 million compared to $6.6 million for the corresponding period in 1995. Net cash used for operations has increased substantially since 1991 and relates directly to the Company's three significant acquisitions of closed blocks of policies since September 1992. Each of these transactions were effected through indemnity and assumption reinsurance arrangements which involved the transfer to the Company of cash or other investment assets and the assumption by the Company of policy liabilities. While the benefits and claims paid on the policies assumed are reflected directly in the statement of cash flows, the initial receipt of cash and/or investment assets is reflected supplementally on the statement of cash flows through a schedule of non-cash investing activities. As a result, as the investment assets mature or are liquidated, and cash is paid out in the form of benefits and claims, the effect on the Company's statement of cash flows is an increase in net cash used. Such negative operating cash flows are planned, and are an inherent part of acquisitions of closed blocks of business through indemnity and assumption reinsurance. A review of operating cash flows should be considered in conjunction with the supplemental schedule of non-cash investing activities. Investment activity provided $5.7 million for the three months ended March 31, 1996, compared to $578,000 for the first three months of 1995. Investing activities were utilized to provide partial funding for operating activities for the three months ended March 31, 1996, while financing activities provided substantially all funding to support operating activities for the comparable 1995 period. Net cash provided by investing activity was $386,000 and $5.4 million in 1995 and 1994, respectively. Proceeds from investment activities were utilized to - 43 - fund operations in 1994 while funds provided by finance activities were used to fund operations in 1995. Net cash used for investment activities in 1994 was $11.5 million and was primarily due to the acquisition of all outstanding common stock of NFI. Cash flows from financing activities were $20 million, $24.9 million and $34,000 for the years ended December 31, 1995, 1994 and 1993, respectively. During 1995, $29.3 million was provided by the sale of Common Stock and Senior Subordinated Notes in a public offering along with $15.8 million from notes payable, primarily derived from a revolving line of credit. Offsetting these cash inflows in 1995 was $25 million disbursed to retire, prior to maturity, the 11.7% Senior Subordinated Debentures due 1996. During 1994, $20 million was provided by the sale of the Series A Preferred Stock to fund the purchase of NFI and $5 million was provided by the sale from NFL to a non-affiliated party of $5 million par value of Senior Subordinated Debentures due 1996, which had been held by NFL in its investment portfolio. No significant financing activities occurred during the year ended December 31, 1993. Cash flows provided by financing activities were $2.2 million for the three months ended March 31, 1996, compared to $4.1 million for the prior year period. The Company made a draw of $2.2 million on a $20 million revolving line of credit, which is secured by receivable balances from insurance agents, during the first three months of 1996. For the comparable three month period in 1995, $29.1 million was provided by the sale of Common Stock and Senior Subordinated Notes which was offset in part by the early retirement at par of $25 million, par value, of Senior Subordinated Debentures due 1996. The Company believes that its near-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 also be met through a combination of operating and investing cash flows. Additional capital may be necessary to consummate future growth through acquisitions. There can be no assurance that additional financing facilities will be obtained, that opportunities for future acquisitions will arise or that additional capital to consummate such acquisitions will be available. The Company had no significant high-yield, unrated or less than investment grade corporate debt securities in its investment portfolio as of March 31, 1996, and it is the Company's policy not to exceed more than 5% of total investments in such assets. Changes in interest rates may affect the market value of the Company's investment portfolio. The Company's policy is to hold its investments to maturity and, therefore, absent redemptions of such investments prior to maturity, or loss experience materially in excess of, or at times materially sooner than expected, such changes should not impact the Company's ability to meet its future policyholder benefit obligations. Included in the assets of the Company at March 31, 1996 were $625,000 of real estate mortgage loans and $141,000 of real estate acquired through foreclosure. Approximately 98% of these assets are located in Oklahoma and Texas. Such regional concentration may have a higher investment risk than a more diversified portfolio. It is the Company's policy not to invest in such assets and, accordingly, the Company has made no mortgage loans or real estate purchases since 1989. Inflation may affect, to a limited extent, 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." - 44 - The NAIC has proposed certain risk-based capital ("RBC") statutory requirements for insurance companies. Under the proposed requirements, insurers whose capital and surplus fall below the specified level would be subject to remedial action. As of December 31, 1995, the RBC for each of the Insurance Subsidiaries exceeded the proposed threshold for required regulatory intervention. SEE "Business-Regulation." Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). BUSINESS GENERAL Westbridge, through its subsidiaries and affiliated companies, principally underwrites and sells specialized health insurance products to supplement medical expense coverage usually provided by employers and government programs. The Company's major product lines are Cancer and Specified Disease Products, Medical Expense Products and Medicare Supplement Products. Cancer and Specified Disease Products include policies designed to provide daily indemnity for hospital confinement and convalescent care for treatment of specified diseases, as well as "event specific" policies designed to provide daily indemnity for confinement in an intensive care unit or to provide a fixed benefit in the case of accidental death. Medical Expense Products include policies providing reimbursement for various medical and hospital care, catastrophic nursing care and home health care. Medicare Supplement Products are designed to reimburse for the expenses not covered by the Medicare program. The Company markets its products primarily through general agency networks. The principal general agency networks used by the Company include: LifeStyles Marketing; Senior Benefits; and three general agency networks controlled by individuals, the Locke Agency, Cornerstone and Farm and Ranch. Each agency network specializes in one of the Company's product lines and focuses on selling those products in small towns and rural areas to individuals who have medical expense coverage that they may consider inadequate. SEE "BusinessMarketing." The Company's strategy is to continue to expand its sales and marketing of existing products; introduce new specialized supplemental products to respond to the changing health care environment; and, if and when opportunities arise, acquire blocks of business. Since 1988 the Company's general agency networks have accounted for substantially all of the Company's first-year premiums. LifeStyles Marketing, which is 51% owned by Westbridge's wholly-owned subsidiary, Westbridge Marketing Corporation ("WMC"), markets the Company's Medical Expense Products. In addition to generating premiums for the Company from the policies it sells, LifeStyles Marketing also generates commissions on those products it sells that are underwritten by other insurance companies. The marketing of the Company's Cancer and Specified Disease Products is performed by the Locke Agency. In November 1993, the Company and an Arizona-based agency specializing in the sale of Medicare supplement insurance formed Senior Benefits through a joint venture agreement. The Company exercised an option in the joint venture agreement to acquire the remaining 50% of Senior Benefits in June 1996. Senior Benefits, now 100% owned by WMC, markets the Company's Medicare Supplement Products. Health Care-One began marketing HMO and PPO products of non-affiliate companies in late 1995. Health Care-One currently markets the products of WellPoint, Foundation Health and UniCare. The Company has sought and continues to seek opportunities to acquire business with which it is very familiar, having underwritten or sold such policies in the past. In September 1992, NFL purchased a block of Medicare supplement policies from American Integrity having annualized premium revenues of approximately $42 million. - 45 - The purchase was accomplished through a combination of indemnity and assumption reinsurance agreements. Under the terms of the agreements, American Integrity transferred assets to NFL and NFL assumed the risks associated with the policies acquired. The policies acquired by NFL are not subject to voluntary recapture by American Integrity. Additionally, in March 1993, NFL purchased a similar block of Medicare Supplement policies from Life and Health having annualized premium revenues of approximately $4 million. The purchase was accomplished through a combination of indemnity and assumption reinsurance agreements. Under the terms of the agreements, Life and Health transferred assets to NFL and NFL assumed the risks associated with the policies acquired in a manner similar to the American Integrity transaction. The Medicare supplement policies acquired from American Integrity and from Life and Health were existing blocks of business from which the Company has derived additional revenue through renewal premiums. In February 1994, the Company purchased a closed block of cancer indemnity insurance from Dixie National Life with annualized premiums of approximately $4.5 million. The acquisition was completed by way of assumption reinsurance agreements and did not require additional financing. The transaction involved the transfer of cash by NFL and the assumption of certain Dixie National Life liabilities and reserve assets. On April 12, 1994, the Company completed the acquisition of NFI and AICT. At that time, the acquired companies' combined health insurance 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. The Company has recently begun to write certain Medical Expense Products and certain Medicare Supplement Products through NFI and AICT, and is reviewing its options to market other policies through NFI and AICT and may or may not elect to do so in the future. On May 31, 1996, the Company acquired the 60% of FHC which it did not then own for $6.3 million in cash. The Company previously had contractual arrangements with FLICA, a wholly-owned subsidiary of FHC, to coinsurance a majority of FLICA's existing business. As a result of the acquisition of FHC will not have a material impact on the Company's revenues or net earnings. Over the past five years, the Company has developed sophisticated administrative and database systems in order to provide high quality service to its agents and policyholders and to reduce overhead expenses as a percentage of premiums. As a result, the Company has been able to absorb quickly and efficiently the business it has acquired and believes that it can support future growth while maintaining an efficient and cost effective operation. Westbridge's Insurance Subsidiaries and affiliates are licensed to sell their products in a combined total of 41 states, primarily in the western, middle western, southern and southeastern regions of the United States. These licenses are subject to renewal by the insurance regulatory authorities of each such state. The Company must file periodic financial statements with each state's insurance regulatory authority and conduct its business in accordance with such state's laws and regulations. A failure by the Company to comply with any state's financial or business conduct requirements could result in the future revocation of the Company's license to sell insurance products in such state. SEE "Business-Regulation." - 46 - PRODUCT LINES Premiums by major product line for each of the periods indicated is set forth below:
PREMIUMS BY MAJOR PRODUCT LINE THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1996 1995 1995 1994 1993 -------------------- ------------------------------- (IN THOUSANDS) ACCIDENT AND HEALTH INSURANCE CANCER AND SPECIFIED DISEASE PRODUCTS Direct business First-year......................... $ 291 $ 308 $ 1,254 $ 1,476 $ 2,024 Renewal............................. 3,468 3,312 13,815 13,321 13,414 Acquired business First-year...................... - 37 1 53 - Renewal (1)......................... 2,001 2,177 8,094 7,954 - Reinsurance assumed First-year......................... 812 1,098 4,437 2,363 1,051 Renewal............................. 1,596 1,366 5,474 5,484 5,782 ------- ------ -------- -------- -------- Total Cancer and Specified Disease Products 8,168 8,298 33,075 30,651 22,271 MEDICAL EXPENSE PRODUCTS LifeStyles Products (2) First-year.......................... 5,043 1,811 11,774 7,219 5,539 Renewal............................. 2,580 2,467 9,968 9,267 9,746 Other direct First-year.......................... 3,226 208 4,516 - - Renewal............................ 146 - 20 - Acquired business First-year....................... 18 - 133 - - Renewal (1)......................... 4,151 5,378 19,436 18,350 - Other (3) First-year........................ 82 - 64 1 6 Renewal........................... 408 533 1,926 2,686 3,571 --------- --------- -------- -------- -------- Total Medical Expense Products ........... 15,654 10,397 47,837 37,523 18,862 MEDICARE SUPPLEMENT PRODUCTS Direct business First-year.......................... 4,826 2,486 12,359 3,952 46 Renewal............................ 1,254 207 3,011 43 - Acquired business First-year..................... - - 79 3 63 Renewal (1)......................... 4,693 5,720 20,566 22,996 23,338 Other (3) First-year....................... 3 (3) - - - Renewal........................... 612 708 2,617 3,090 3,642 --- --- ----- ----- ----- Total Medicare Supplement Products........ 11,388 9,118 38,632 30,084 27,089 ------- -------- -------- ------- ------- Total Accident and Health Insurance...... 35,210 27,813 119,544 98,258 68,222 ------- ------- ------- ------- ------- LIFE INSURANCE First-year....................... 100 15 159 8 9 Renewal.......................... 100 106 390 437 500 --- --- --- --- --- Total Life Insurance................... 200 121 549 445 509 --- --- --- --- --- Total Premium Revenue..................... $35,410 $27,934 $120,093 $98,703 $68,731 ======= ======= ======== ======= =======
- --------------------------- (1) Includes revenue from policies acquired in the Acquisition. (2) Consists of MedPlan IV, Hospital Surgical Expense Policies, Super Saver I and previously marketed LifeStyles Products. SEE "-Description of Policies." (3) Consists of certain policies included in pre-1987 Medical Expense Products that were subsequently discontinued, and "NationalCare Products" that were introduced in 1986 and discontinued in 1988. SEE "- Description of Policies." - 47 - DESCRIPTION OF POLICIES 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, capped or limited benefits and are designed to reduce the potential financial impact of covered illnesses and injuries. Set forth below is a brief description of the principal insurance products which the Company offers currently and those which have been discontinued with respect to new sales but are still being renewed. CANCER AND SPECIFIED DISEASE PRODUCTS The Company's Cancer and Specified Disease Products make both immediate and subsequent payments 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. Payments 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 Cancer 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. Cancer and Specified Disease Products are guaranteed renewable. Cancer 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. The application form asks the prospective insured whether he has had the disease for which insurance is sought. Policies are not available to anyone who has been diagnosed as having the disease prior to the date of policy issuance. The Company is currently marketing the following products: ORDINARY CANCER AND SPECIFIED DISEASE. The Company's Ordinary Cancer and Specified Disease policies generally pay according to a fixed, predetermined schedule of indemnities after the insured has been diagnosed as having cancer or one of 27 other covered diseases. Optional benefits include a first occurrence benefit, which pays a specified sum to the policyholder upon the initial diagnosis of internal cancer and an intensive care unit ("ICU") benefit which pays an additional benefit for each day an insured is confined in an ICU. While an insured is confined to a hospital for subsequent covered treatment, the benefits provided under the Company's policy generally include the following: (i) a specified payment for each day of hospital confinement, (ii) reimbursement for actual charges for in-patient drugs and diagnostic testing, subject to fixed, predetermined per diem limits, (iii) a specified payment for each day an insured is visited by an attending physician or receives special private nurse care, (iv) reimbursement for actual charges incurred for ambulance service in connection with hospital confinement, (v) reimbursement for actual charges for family member transportation to and from a hospital in which an insured is confined, subject to fixed, predetermined per trip limits and certain geographic and distance requirements, and (vi) reimbursement for actual charges for family member lodging while accompanying an insured confined to a hospital, subject to fixed, predetermined per diem limits and certain geographic and distance requirements. The Company's cancer policies also provide a range of medical, medical-related and non-medical benefits, regardless of whether an insured is hospitalized. These benefits generally include the following: (i) reimbursement for actual charges for breast prosthetic devices, subject to fixed, predetermined per device limits, (ii) a specified payment for each day of confinement in a skilled nursing facility, subject to a fixed, predetermined number of days, (iii) a specified payment for each day of hospice confinement or treatment, (iv) reimbursement for actual charges for transportation of an insured to and from a facility where covered cancer treatments are - 48 - received, subject to fixed, predetermined per trip limits and certain geographic and distance requirements, (v) reimbursement for actual charges for radiation and chemotherapy treatment, subject to fixed, predetermined annual or lifetime limits, and (vi) specified payments for each surgical procedure which an insured undergoes, and for each administration of anesthesia to the insured, according to a fixed, predetermined schedule based upon the nature of the surgical procedure. FIRST OCCURRENCE. The Company's First Occurrence policies pay a specified lump sum to the policyholder or beneficiary under the policy immediately upon the initial diagnosis of malignant internal cancer. The First Occurrence policies are a new product underwritten by FLICA and 90% coinsured with NFL. Benefits under these policies range from $10,000 to $50,000. CASH. The Company's CASH policies pay according to fixed, per diem amounts while the insured is confined to a hospital for the treatment of a covered illness or injury. Covered illness or injury consists of cancer, accident, stroke or heart attack. A majority of the policies are sold with an optional return of premium benefit which provides for the return after 20 years to the policyholder of all premiums paid under the policy less any claims paid to the policyholder. The CASH policies are underwritten by FLICA and 50% coinsured with NFL. The Company has a number of older Cancer and Specified Disease Products which are not currently sold in material amounts, but which produce significant renewal premiums and consist of the following: CANCER AND HEART ATTACK. The Company offers two versions of its basic Cancer and Heart Attack policies, introduced in 1973 and 1977, respectively. One version provides insureds with predetermined daily benefits for each period of hospital confinement or convalescence for treatment of cancer or a heart attack. The other version contains maximum limits for scheduled benefits, but overall policy benefits are not limited. These products impose no limit on the number of days of hospitalization for which benefits may be payable. INTENSIVE CARE UNIT. The Company also offers an ICU policy, introduced in 1978, which provides a fixed daily payment in the event of hospital confinement in an intensive care unit for any accident or sickness. Benefits are provided for a maximum of 15 days per confinement and are subject to a lifetime maximum per insured. ACCIDENTAL DEATH. In 1981, the Company introduced an Accidental Death insurance policy which provides a fixed benefit when accidental injury causes the death of the insured. The policy also offers an optional rider which provides a daily benefit in the event of total disability caused by an accident. MEDICAL EXPENSE PRODUCTS The Company's Medical Expense Products are designed to reimburse the insureds for expenses incurred for hospital confinement, surgical expenses, physician services and the cost of medicines immediately following a hospital stay. Out-patient benefits and maternity benefits are also available. These policies 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. Based upon the state in which these policies are offered, these policies are issued either as guaranteed renewable for life or conditionally renewable at the Company's option. The Company's Medical Expense Products are marketed primarily by LifeStyles Marketing, Cornerstone, and Farm and Ranch and are written by NFL, NFI, and AICT. Medical Expense Products currently offered by the Company include the following: MM-95. MM-95 provides major medical coverage for hospital, medical and surgical expenses, including certain out-patient coverages. The insured has a number of options with respect to deductibles, coinsurance percentages, and stop-loss limits. After the annual deductible is met, ranging from $500 to $20,000, the insured is reimbursed - 49 - 60% to 80% of eligible expenses up to a stop-loss limit ranging from $5,000 to $10,000, after which 100% of eligible expenses are covered, up to certain maximum policy limits. MM-95 also offers reduced deductibles and coinsurance amounts if the insured uses the services of a provider which is a member of a participating Preferred Provider Organization ("PPO") network. SUPER SAVER I. Super Saver I provides limited benefits for hospital, medical and surgical expenses. The policies reimburse 60% of the first $10,000 of eligible expenses which exceed the calendar year deductible and 100% of eligible expenses thereafter. The policy has a maximum benefit of $100,000 for each injury or sickness. Eligible expenses are similar to MedPlan IV eligible expenses except that out-patient benefits are limited to surgical, extended care, hospice care and home care. Super Saver I also offers reduced deductibles and coinsurance amounts if the insured uses the services of a provider participating in a PPO network. MEDPLAN IV. MedPlan IV policies reimburse 80% of the first $5,000 of eligible expenses which exceed a calendar year deductible and 100% of eligible expenses thereafter. Reimbursement is subject to specified aggregate per cause and lifetime maximums. Eligible expenses include usual and customary charges for hospital room expense; in-hospital expenses for drugs, x-rays, laboratory charges; surgical expenses (subject to limitation); in-hospital physicians, private duty nurses, pathologist, radiologist or physiotherapist expense (subject to limitation); and outpatient benefits, including surgical benefits, extended care, hospice care and home care. Benefits are also provided (subject to a calendar year maximum) for out-patient medical services including prescription drugs. HOSPITAL SURGICAL EXPENSE POLICIES. These policies cover many of the expenses described as MedPlan IV eligible expenses, subject, however, to inside limits. These limits take the form of maximum daily hospital benefits, maximum out-patient treatment benefits, and calendar year limits for miscellaneous hospital benefits, out-patient day surgery, out-patient x-rays and laboratory tests, and doctor visits. Surgical benefits are subject to a schedule of limits. Maximum benefits under the policies are limited to a maximum of $25,000 per confinement. The Company has a number of older Medical Expense Products which are not currently sold in material amounts, but which produce significant renewal premiums and consist of the following: LIFESTYLES PRODUCTS. These products consist of Limited Benefit Basic Hospital Medical Surgical Expense Insurance (the "LBBH Policy") and Medical Surgical Expense Insurance (the "MSE Policy") and were sold by LifeStyles Marketing. The LBBH Policy is designed to reimburse insureds for expenses incurred for hospital confinement, surgical expenses, physician services and the cost of medicines immediately following a hospital stay. Optional limited benefit out-patient and maternity benefit riders are also offered. The policy features a range of deductibles and copayment options. The MSE Policy is more limited and therefore less expensive than the LBBH Policy, and is designed to reimburse insureds for expenses incurred for hospital confinement, surgical expenses, physicians services and minor out-patient expenses. The policy contains "inside limits" on the separate benefits provided such as a limit on the daily room and board benefit, a fixed surgical schedule and a limit on the maximum miscellaneous hospital benefit payable. These limits make the benefits provided by the policy less subject to inflationary increases in the cost of medical care. PRE-1987 MEDICAL EXPENSE PRODUCTS. These products consist of major medical expense policies and general health care policies. NATIONALCARE PRODUCTS. These products consist of nursing care policies, catastrophic nursing care policies, home care policies, physician and out-patient care policies and hospital indemnity policies. - 50 - MEDICARE SUPPLEMENT PRODUCTS The Company's Medicare Supplement Products provide coverage for many of the medical expenses which the Medicare program does not cover, such as copayments, deductibles and specified losses which exceed the federal program's maximum benefits. The Omnibus Budget Reconciliation Act of 1990 mandated, among other things, standardized policy features in Medicare supplement plans. In July 1991, the NAIC implemented regulations creating ten model Medicare supplement plans (Plans A through J). Plan A provides the least coverage, while Plan J offers the most extensive coverage. The Company's Medicare Supplement Products are generally underwritten by NFL and are guaranteed renewable. For the three months ended March 31, 1996, approximately 41% of the Company's Medicare Supplement Products' premium revenue consisted of Medicare Supplement Products acquired by the Company from American Integrity during 1992, from Life and Health during 1993, and from NFI and AICT during 1994. These policies were existing blocks of business from which the Company expects to derive additional revenue through renewal premiums. In addition, the Company is currently marketing the following Medicare Supplement Products: MEDICARE SUPPLEMENT PLANS. In November 1993, the Company began offering four of the model plans (Plans A, B, C and F) through Senior Benefits. During 1995, the Company also marketed Medicare Supplement Plans through ASSP. The Company has declined to offer the other plans due in large part to their high benefit levels and consequently higher cost to the consumer. MEDICARE SELECT. Medicare Select is designed to provide benefits which supplement the Medicare Program at attractive rates by taking advantage of arrangements with hospitals and other health care providers. These arrangements typically provide that 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 has entered into Hospital Preferred Provider Network Agreements ("PPO Agreements") in 8 states. The Company also has a number of older Medicare Supplement Products which are not currently sold in material amounts, but produce renewal premiums. These products consist of certain pre-1987 Medical Expense Products and certain NationalCare Products. LIFE INSURANCE In 1988, the Company reentered the life insurance market through the development of its Annually Renewable Term ("ART") policy. The ART policy was approved for sale in January 1988. It is an individually underwritten level term policy which is renewable to age 70. Premiums increase with advancing age. The policy is issued in face amounts ranging from $5,000 to $100,000, and an optional accidental death benefit rider is also available. This policy is currently sold exclusively, subject to territorial production requirements, through LifeStyles Marketing, but only nominal production of new business has occurred since 1991. The Company began marketing its EZ-100 plan in 1995. EZ-100 is an individually underwritten whole life insurance product designed to serve as a compliment to other accident and health product offerings. EZ-100 is issued in face amounts ranging from $3,000 to $20,000, and may be offered by any of the Company's marketing organizations. 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. The Company sold a substantial portion of this block of business during 1991 and 1992. - 51 - MARKETING The Company generally markets its products to individuals on a one-on-one basis primarily through agents who are independent contractors associated with general agency networks. The initial sales contact is a result of leads generated either by the agency network or through outside sources. The agent's decision to sell one policy in preference to another and, more specifically, to associate with an agency network that markets one or a group of policies over those of competing carriers depends on several factors, assuming the basic marketability of the product. These factors include: (i) the commission to which the agent will be entitled upon the sale of the policy, (ii) the carrier's reputation for rapid processing of policyholder applications and inquiries, (iii) the rapid and equitable administration of claims, (iv) the willingness of the general agency to provide prospect leads, and (v) availability of sales brochures and other marketing materials (including information about the Company) to assist the agent's sales efforts. The Company's five primary agency networks accounted for over 90% of its first-year premium revenues in the three months ended March 31, 1996, and each specializes in marketing one of the Company's product lines. The Company's Medical Expense Products are marketed by LifeStyles Marketing, Cornerstone and Farm and Ranch for NFL, NFI and AICT, respectively. The Company's Cancer and Specified Disease Products are marketed by the Locke Agency. The Company's Medicare Supplement Products are marketed by Senior Benefits. Each of these general agencies has a field force of "career" agents who depend on the general agency for leads and produce insurance sales exclusively for that general agency. In addition, the Locke Agency, Senior Benefits and LifeStyles Marketing have licensed a number of "independent" agents on a brokerage basis to sell the Company's products. These independent agents typically sell the products of other insurance companies and also sell the Company's products on an irregular basis. The Company's agency networks focus on niche marketing of specialized policies in localized geographical markets, primarily in the western, middle western, southern and southeastern regions of the United States. 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. Generally, Medicare Supplement Products are targeted to individuals over 65, Medical Expense and Cancer and Specified Disease Products are targeted to individuals under 65. The general agency networks receive commissions equal to a percentage of premiums paid, varying with the type of policy and differing for first-year sales and policy renewals. Commissions for first-year sales range from 30% to 95.0% of premiums paid; commissions for policy renewals range from 0% to 30% of premiums paid. The Company has entered into new relationships with established general agency networks specializing in the sale of products comparable to the Company's existing product lines and has begun offering several new products. The Company continues to seek additional similar relationships. The Company's decision to form a relationship with any general agency network has been and will continue to be based primarily on that general agency network's historical levels of sales and profitability, as well as its access to the Company's target markets. There can be no assurance that any additional agency relationships will be formed or, if formed, that such relationships will result in increased sales or be profitable for the Company. - 52 - The chart below summarizes the primary marketing arrangements for the Company's products as of March 31, 1996.
PRODUCT LINE AGENCY NETWORK APPROX. PRIMARY PERCENT OF NATURE OF RELATIONSHIP WITH THE NUMBER OF STATES NEW COMPANY AGENTS WHERE PREMIUM (CAREER/ MARKETED VOLUME FOR INDEPEN- THE THREE DENT) MONTHS ENDED MARCH 31, 1996 Cancer and Specified John P. Locke 25/3,000 KY, NC, SC, 5.4% - Independent Agency Disease Products AL, LA, TN - Coinsurance and computer services agreement with FLICA, jointly owned by Locke (60%) and the Company (40%); effective May 31, 1996, the Company owns 100% of FLICA Phillip D. Elkins 100/0 AR 1.6% - Independent Agency Medical Expense LifeStyles 957/1,547 TX, OK, CO, 35.7% - Agency contract provides exclusive Products Marketing Group, LA, TN, KY, right to sell NFL's Medical Expense Inc. AL, NC, Products KS, IN - 51% owned by the Company Cornerstone 711/0 AR, CA 14.8% - Independent Agency National FL, GA Marketing Corp. MO, TX National Farm & 403/0 TX, MO 8.7% - Independent Agency Ranch Group, Inc. Medicare Supplement Senior Benefits, 200/2,400 AZ, TX 29.7% - Agency contract provides exclusive Products LLC right to sell NFL's Medicare Supplement Products - 100% owned by the Company in June 1996 American Senior 165/375 OK, MS, 3.0% - 50% owned by the Company Security Plans, KY, TX LLC HMO Products Health Care-One 407/0 CA, TX N/A - Sells products for Blue Cross of Insurance Agency, California and Foundation Health Inc. - 50% owned by the Company
- 53 - CANCER AND SPECIFIED DISEASE AGENCY NETWORKS The Company's Cancer and Specified Disease Products are distributed primarily through the Locke Agency, which has marketed the Company's products for over 17 years. Prior to May 31, 1996, Locke owned 60% of FHC and the Company owned the remaining 40%. The Company purchased Locke's 60% ownership of FHC in May 1996. FHC owns 100% of FLICA, a Mississippi insurer licensed in 34 states, which specializes in the sale of cancer and specified disease insurance. In November 1988, FLICA and NFL entered into a ten-year coinsurance agreement under which the Company receives 50% of all insurance written by FLICA. Most of the new insurance policies written by the Locke Agency are written in FLICA and reinsured in NFL, however, some new business is written directly in NFL. In late 1993, the Locke Agency began writing a new cancer product, "First Occurrence," which is written in FLICA and 90% reinsured in NFL under a coinsurance agreement which expires in 1998. SEE "Description of Policies-Cancer and Specified Disease Products." The Locke Agency maintains its sales headquarters in Louisville, Kentucky and currently consists of approximately 25 career agents and 3,000 independent agents operating in 15 states. Locke's Agency network, directly through sales in NFL and indirectly through reinsurance assumed from FLICA, accounted for approximately 5.4% of NFL's first-year accident and health insurance premiums for the three months ended March 31, 1996. The loss of, or significantly reduced sales efforts by, the Locke Agency, and the failure by the Company to replace such agents or otherwise offset such losses, could materially affect the business of the Company. Management believes that its relations with the Locke Agency are good. In general, Cancer and Specified Disease Products entail lower premiums than the Company's other products. The majority of premiums are collected from policyholders on a monthly basis. In order to attract agency networks to sell these products, the Company (as is the practice in the industry) advances a portion of a full year's commission at the time of each policy issuance. MEDICAL EXPENSE AGENCY NETWORK The Company's Medical Expense Products are sold primarily through LifeStyles Marketing, Cornerstone and Farm and Ranch. LIFESTYLES MARKETING GROUP, INC. In September 1987, the Company entered into an agency contract with an insurance agency granting it the exclusive right, subject to territorial production requirements, to sell the Medical Expense Products introduced by NFL in 1987 and 1988. Effective April 1, 1988, the Company and the owners of the agency agreed to restructure the insurance agency as a joint venture, creating LifeStyles Marketing. Under the terms of the joint venture agreement WMC, the Company's wholly-owned subsidiary, owns a 51% voting interest in LifeStyles Marketing, is entitled to 50% of the profits and losses of LifeStyles Marketing and is responsible for financing LifeStyles Marketing's operations. This venture allows the Company to share in the commission fees of products of other insurance carriers that are sold by LifeStyles Marketing, but which NFL has elected not to underwrite. LifeStyles Marketing is responsible for recruiting, supervising and compensating agents. All commissions paid by NFL and other insurance carriers are remitted to LifeStyles Marketing, which in turn pays the writing agent an agreed-upon amount. As is common in insurance marketing agencies, amounts paid to a writing agent at the time of a policy sale are generally a multiple of the commissions received by LifeStyles Marketing from the insurance carriers on such policy sale. These advanced or unearned amounts are generally deducted before any earned renewal amounts are paid to the writing agent on such policy. During a period of increasing sales, cash is required in order to finance agent advances. The LifeStyles Marketing agency - 54 - network maintains its sales headquarters in Arlington, Texas and currently consists of approximately 957 career agents and 1,547 independent agents operating out of 18 branch sales offices in 14 states. LifeStyles Marketing accounted for 35.7% of the Company's first-year premium revenues for the three months ended March 31, 1996. CORNERSTONE NATIONAL MARKETING CORP. In October 1994, the Company entered into a Master General Agent's Contract with Cornerstone. Under this agreement, Cornerstone markets the Company's Medical Expense Products underwritten in NFI. Cornerstone maintains its sales headquarters in Arlington, Texas, and consists of 711 agents. Cornerstone specializes in the marketing of association group insurance programs, and accounted for approximately 14.8% of the Company's first-year premium revenues for the three months ended March 31, 1996. NATIONAL FARM AND RANCH GROUP, INC. In December 1994, the Company entered into a General Agent's Contract with Farm and Ranch. Under this agreement, Farm and Ranch markets the Company's Medical Expense Products underwritten in AICT. Farm and Ranch maintains its sales headquarters in Fort Worth, Texas, and consists of 403 agents. Farm and Ranch specializes in the marketing of insurance products to farmers, ranchers and others in the rural agricultural community. Farm and Ranch accounted for approximately 8.7% of the Company's first-year premium revenues for the three months ended March 31, 1996. The loss of, or significantly reduced sales efforts by either Cornerstone or Farm and Ranch, and the failure by the Company to replace such agents or otherwise offset such losses, could materially affect the business of the Company. Management believes that its relations with Cornerstone and Farm and Ranch are good. MEDICARE SUPPLEMENT AGENCY NETWORK In November 1993, the Company and an Arizona-based agency specializing in the sale of Medicare supplement insurance, formed Senior Benefits. The Company acquired a 50% interest in Senior Benefits to establish a strong distribution network for its Medicare Supplement Products. The Company subsequently acquired in June 1996, the remaining 50% interest in Senior Benefits making Senior Benefits a wholly-owned subsidiary. Senior Benefits maintains its sales headquarters in Scottsdale, Arizona and currently consists of approximately 200 career and 2,400 independent agents. The Company entered into this relationship in order to better position itself in the Medicare supplemental segment of the insurance market and Senior Benefits accounted for approximately 29.7% of the Company's first-year accident and health insurance premiums for the three months ended March 31, 1996. To complement its new "Medicare Select" products and the agency contract with Senior Benefits, the Company has entered into PPO Agreements with Columbia/HCA and other hospitals and health care providers, and is currently negotiating additional PPO Agreements. Accordingly, Senior Benefits intends to expand its marketing operations to additional states in which Medicare Select has been approved and NFL is currently licensed. - 55 - HMO AGENCY NETWORK In late 1995, the Company purchased a 50% ownership in Health Care-One, an insurance agency specializing in marketing HMO Products for Blue Cross of California and Foundation Health Plans in both California and Texas. Health Care-One maintains its sales headquarters in San Diego, California, and has a sales force consisting of 202 career agents. The Company entered into this arrangement to expand the marketing efforts to include HMO Products. This venture allows the Company to earn commission income through sales of products of other insurance carriers, without assuming underwriting risk. HOME OFFICE OPERATIONS Except for LifeStyles Marketing, Senior Benefits, WPS and American Senior Security Plans, 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 policy issue and underwriting department reviews policy applications. Although, as is common in the industry, physical examinations and tests are not required before a policy is issued, 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 (which telephone calls are recorded as a matter of course) and will often contact the applicant's physician in the verification process. Applicants for the Company's Cancer 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 its determination as to 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 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 actuaries estimate 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 56.1% of the Company's total reserves as of March 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 insured(s) under a policy at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder - 56 - 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 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 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, results of operations and financial condition. The Insurance Subsidiaries are required to report their results of operations and financial position to state regulatory agencies based upon 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 under 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 - 57 - 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 shareholders. REGULATION The Company and its affiliates are subject to regulation and supervision in all jurisdictions in which they conduct business. In general, 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 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. Such regulation delays 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. No assurances can be given that future legislative or regulatory changes will not adversely affect the Company's business. 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. In addition, obtaining such approval can cause delays in the Company's ability to market new products. Nearly all states in which the Company does business regulate loss ratios. The minimum loss ratios applicable to the Company's products range from 40% to 65%, with most falling in the range of 50% to 55%. The Company believes that it is within its minimum loss ratio requirements. Because these requirements mandate that the Company incur loss experience of not less than a specified percentage of its earned premiums over the life of a policy, they directly impact the profitability of the Company. Any increase in the Company's premiums must be justified to the relevant regulatory authority on the basis of the Company's conformance to the minimum loss ratio. This can have the effect of inhibiting the Company's ability to raise premiums on new sales, and thus its ability to generate additional cash from operations. Although the Company is not aware of any proposals by regulators to increase minimum loss ratios, states may increase minimum loss ratios from time to time. The NAIC has in the past proposed model rules which would increase minimum loss ratios applicable to the Company's products. No assurance can be given that such a proposal will not be reintroduced in the future. Increases in minimum loss ratio requirements could have a material adverse effect upon the results of operations of the Company. The NAIC has adopted a model law for adoption in the states requiring every life and health insurer licensed in a state to utilize an adopted RBC formula. The RBC formula establishes capital requirements for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. The NAIC has proposed that the RBC formula may be used by regulators as an analytical tool to monitor the adequacy of capital 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 - 58 - 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 he 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. As of December 31, 1995 each Insurance Subsidiary's RBC substantially exceeded the "Company Action Level." This model law has been adopted in Delaware. Although it has not been formally adopted in Texas, it is used by the Regulators in Texas. The Company does not believe that the model law will have any material adverse effect on liquidity, capital resources or results of operations of the Company or cause the Company to change its business strategy. Under applicable Delaware law, NFL must maintain minimum aggregate statutory capital and surplus of $550,000. Under applicable Texas law, each of NFI and AICT must 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 Kentucky requires minimum 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, NFI and AICT must maintain is $3.5 million. FLICA must maintain a minimum of $4 million. At March 31, 1996, aggregate statutory capital and surplus for NFL, NFI, AICT and FLICA was $11.7 million, $8.4 million, $8.2 million, and $6 million, respectively. According to SAP (as opposed to GAAP), costs in excess of first-year premiums associated with the issuance of new policies are charged to surplus through operations. These costs are primarily sales commissions and issuance costs and the establishment of statutory reserves. Increased first-year sales of insurance tend to reduce statutory surplus. Statutory net loss for NFL, NFI, AICT and FLICA for the three months ended March 31, 1996 was $2.6 million, $540,000, $156,000, and $150,000, respectively. On the basis of statutory financial statements filed with state insurance regulators, the NAIC also calculates annually 13 financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. Departure from the "usual range" on four or more of the ratios could lead to inquiries from individual state insurance departments and increased regulatory oversight. Based on statutory financial statements for 1995, NFL and AICT fell within the "usual range" on 12 of the ratios. NFI fell within the "usual range" on 11 of the ratios. NFL and NFI fell outside the "usual range" for "Net Income to Total Income" (Ratio 2) as a result of recording statutory losses during 1995. Because continued production of new business may continue to reduce statutory capital and surplus during 1996, this event could recur in 1996. NFIC and AICT fell outside the "usual range" for "Change in Reserving Ratio" (Ratio 12) as a result of having life insurance reserves in 1995, when there were none in 1994. This resulted from production of life insurance business in 1995. Both NFI and AICT are expected to return to the "usual range" for this ratio in 1996. In 1995, an examination for NFL was concluded for the years 1990 through 1992 by the insurance departments of Delaware and Mississippi. Also in 1995, and examination for NFI 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. Currently, the State of Delaware is conducting a statutory examination of NFL which covers the years 1993 through 1995. 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 - 59 - notice or approval of, certain transactions within the holding company system. For example, dividend payments from Westbridge's principal Insurance Subsidiaries, NFL, NFI, AICT and FLICA, are regulated by the insurance laws of their domiciliary states. SEE "Risk Factors-Holding Company Structure; Reliance on Subsidiaries" and "Risk Factors-Certain Anti-takeover Provisions." Additionally, the terms of loans and transfers of assets within the holding company structure are also subject to state insurance holding company laws. Westbridge holds a surplus certificate issued by NFL in the amount of $777,000. 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 part, upon (i) NFL's surplus exceeding $7 million, exclusive of any surplus provided by reinsurance treaties, and (ii) NFL receiving prior approval from the Delaware State Insurance Commissioner. SEE Note 13 of "Notes to Consolidated Financial Statements" herein. A majority of the states in the U.S., including those in which the Company is currently licensed and markets its policies, have adopted requirements that coverage provided by all accident and health policies contain prescribed minimum and maximum benefits and meet other minimum standards, and that specified disclosure forms be provided to policyholders at the time of sale. Compliance with such requirements has not adversely affected NFL's marketing efforts in those states. 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 Cancer 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. Recent insolvencies of insurance companies 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 $65,000 in the year ended December 31, 1995, and approximately $10,000 in the three months ended March 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), minimum solvency requirements for insurers and the development of a national health care system. SEE "Risk Factors-Health Care Reform." 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 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. - 60 - 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 under policies in force. Statutory reserves may consist only of certain types of admitted investments, the percentage mix of which 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 and reduce premium tax assessments in such states. 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. Investment policy is determined by the Investment Committees of the Company and the Insurance Subsidiaries in accordance with guidelines set forth by their respective Boards of Directors. The current investment policy of the Company and the Insurance Subsidiaries is to invest 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. Current policy is also 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 the indebtedness and dividends on the Series A Preferred Stock. Although the balance sheet 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 and since prior to 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, valued in accordance with generally accepted accounting principles:
DECEMBER 31, MARCH 31, 1996 1995 1994 1993 ---------------- ---- ---- ---- (IN THOUSANDS) Cash.................................................. $ 1,534 $ 2,013 $ 2,871 $ 148 -------- -------- ------- ------- Bonds: U.S. Government and related agencies................ 32,492 35,658 39,753 18,875 State, county and municipal......................... 550 1,632 1,450 1,480 Public utilities.................................... 8,213 8,700 8,778 4,476 Industrial and miscellaneous........................ 40,420 40,490 40,783 24,006 ------- ------- ------ ------ Total Bonds........................................ 81,675 86,480 90,764 48,837 ------- ------- ------ ------ Preferred stock....................................... 309 356 343 356 --------- --------- -------- -------- Common stock.......................................... 197 183 126 119 --------- --------- -------- -------- Investment in Freedom Holding Company (1)............. 6,220 6,173 5,945 5,600 -------- -------- ------- ------- Other Invested Assets: Mortgage loans on real estate....................... 625 639 768 865 Policy loans........................................ 278 285 291 289 Certificates of deposit and short-term investments.. 15,021 15,246 7,589 1,079 Investment real estate.............................. 141 141 141 141 ---------- ---------- ---------- -------- Total Other Invested Assets........................ 16,065 16,311 8,789 2,374 -------- -------- --------- ------- Total Cash and Invested Assets.................. $106,000 $111,516 $108,838 $57,434 ======= ======= ======= ======
- ----------- (1) Represents the Company's 40% ownership interest. - 61 - 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. The Company owned no such assets at December 31, 1993, and these high-yield debt securities amounted to less than 0.8%, 0.7% and 0.1% of the Company's total cash and invested assets at March 31, 1996, December 31, 1995 and December 31, 1994, respectively. The significant increase in the investment portfolio during 1994 was primarily the result of the assets acquired in the Acquisition. SEE "Business-General." The following table summarizes consolidated investment results for the periods shown:
December 31, MARCH 31, 1996 1995 1994 1993 --------------- ---- ---- ---- (IN THOUSANDS) Total invested assets, cash and cash equivalents...... $106,000 $111,516 $108,838 $57,434 Net investment income (1)............................. 2,116 7,421 5,764 4,120 Average annual yield on total investments............. 7.0% 7.0% 6.4% 7.4% Realized gains on investments......................... 85 182 320 1,030
- ----------- (1) Excludes interest on agent's receivables of $394,000 for the three months ended March 31, 1996 and $400,000, $0 and $0 for the twelve months ended December 31, 1995, 1994 and 1993, respectively. At March 31, 1996, the market or estimated fair value of the Company's total fixed maturity assets was $82 million. The following table summarizes the Company's fixed maturity securities, excluding short-term investments, as of March 31, 1996.
FIXED MATURITY SECURITIES MARKET OR ESTIMATED BOOK VALUE(1) FAIR VALUE(2) TOTAL l % TOTAL % -------- ----- ------- ----- (IN THOUSANDS) Fixed maturity securities at March 31, 1996: U.S. Government and governmental agencies and authorities (except mortgage-backed) .............. $21,778 26.6 $21,778 26.6 States, municipalities and political subdivisions ................ 550 0.7 550 0.7 Finance ................................. 18,198 22.2 18,198 22.2 Public utilities ........................ 8,213 10.0 8,213 10.0 Mortgage-backed ......................... 10,714 13.1 10,714 13.1 All other corporate bonds ............... 22,222 27.0 22,222 27.0 Certificates of deposit ................. 300 0.4 300 0.4 --- --- --- --- Total fixed maturity securities $81,975 100.0 $81,975 100.0 ======= ===== ======= =====
- ----- (1) At March 31, 1996, all of the Company's fixed maturity securities were classified as available-for-sale and are carried at market value. (2) Market value represents the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the Company, which may be of another issuer. The Company's fixed maturity investment portfolio at March 31, 1996 was composed primarily of debt securities of the U.S. Government and corporations and of mortgage-backed securities. Investments in the debt securities of corporations are principally in publicly-traded bonds. Mortgage-backed securities represented approximately 13.1% of the Company's total invested assets as of March 31, 1996. Investors are compensated primarily for reinvestment risk rather than credit quality risk. During - 62 - 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 period 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, as of March 31, 1996. COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
MARKET OR ESTIMATED BOOK VALUE (1) FAIR VALUE (2) --------------------------------------------- RATINGS (3) TOTAL % TOTAL % - ----------- --------- --- ------- --- (IN THOUSANDS) Investment grade: U.S. Government and agencies ............... $32,263 39.4 $32,263 39.4 AAA ........................................ 1,769 2.2 1,769 2.2 AA ......................................... 9,010 11.0 9,010 11.0 A .......................................... 23,695 28.9 23,695 28.9 BBB ........................................ 14,438 17.5 14,438 17.5 B .......................................... 800 1.0 800 1.0 ------- ----- ------- ----- Total fixed maturity of securities $81,975 100.0 $81,975 100.0 ======= ===== ======= =====
- -------------------- (1) At March 31, 1996, all of the Company's fixed maturities were classified as available-for-sale and are carried at market value. (2) Market value represents the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the Company, which may be of another issuer. (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 rating 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 market or estimated fair value of the Company's fixed maturity securities according to NAIC Designations and Standard & Poor's ratings as of March 31, 1996. - 63 - NAIC DESIGNATIONS
MARKET OR ESTIMATED BOOK VALUE (1) FAIR VALUE (2) ----------------- -------------------- NAIC DESIGNATION (3) TOTAL % TOTAL % - -------------------- --------- --- --------- --- (IN THOUSANDS) NAIC 1 (AAA, AA, A) ........................ $66,737 81.4 $66,737 81.4 NAIC 2 (BBB) ............................... 14,438 17.6 14,438 17.6 NAIC 3 (BB) and below ...................... 800 1.0 800 1.0 ------- ----- ------- ----- Total fixed maturity securities ..... $81,975 100.0 $81,975 100.0 ======= ===== ======= =====
- ----------- (1) At March 31, 1996, all of the Company's fixed maturity securities were classified as available-for-sale and are carried at market value. (2) Market value represents the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the Company, which may be of another issuer. (3) Generally comparable to Standard & Poor's ratings. Comparisons between NAIC ratings 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, as of March 31, 1996 were as follows: COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
MARKET OR ESTIMATED BOOK VALUE(1) FAIR VALUE(2) --------------- ---------------- SCHEDULED MATURITY TOTAL % TOTAL % ----- --- ----- --- (IN THOUSANDS) Due in one year or less .................... $ 847 1.0 $ 847 1.0 Due after one year through five years ...... 23,297 28.4 23,297 28.4 Due after five years through ten years ..... 23,639 28.8 23,639 28.8 Due after ten years ........................ 23,478 28.7 23,478 28.7 Mortgage and asset backed securities ....... 10,714 13.1 10,714 13.1 ------- ----- ------- ----- Total fixed maturity securities ..... $81,975 100.0 $81,975 100.0 ======= ===== ======= =====
- ----------- (1) At March 31, 1996, all of the Company's fixed maturity securities were classified as available-for-sale and are carried at market value. (2) Market value represents the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the Company, which may be of another issuer. 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 generally does not cede risks associated with its Cancer and Specified Disease Products, Medicare Supplement Products or Life Insurance Products. However, 100% of the Company's risks under its Accidental Death policies currently in force are reinsured, and the Company had an excess loss reinsurance agreement during 1995 which limited the Company's losses on the First Occurrence policies in the event that such losses exceed - 64 - a certain percentage of earned premiums. The Company currently reinsures its risks under its Medical Expense Products so that its maximum payment to any one beneficiary during any one-year period is limited ($100,000 in 1995) 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. The Company also assumes reinsurance (primarily in the form of coinsurance) as part of its ongoing operations. Assumption of reinsurance is utilized by insurers as an additional source of insurance business. In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms of the treaty, NFL assumed a 50% share of all cancer and specified disease policies written by FLICA, the ceding company, from January 1, 1987 through December 31, 1988. During 1988, the coinsurance treaty was amended to continue until December 31, 1998. SEE "Business-Marketing." For the three months ended March 31, 1996, $1 million of assumed premiums under this coinsurance treaty were recorded as premiums. In March 1990, NFL entered into a coinsurance treaty with Paramount Life. Under the terms of the treaty, which was in effect from April 1, 1990 through May 31, 1995, NFL assumed 90% of the cancer and specified disease policies written by Paramount Life. The treaty effectively ended upon the purchase of this block of business by NFL from Paramount Life. For the year ended December 31, 1995, $582,000 of assumed premiums under this coinsurance treaty were recorded as premiums. In December 1993, NFL entered into a coinsurance agreement with FLICA. Under the terms of this agreement, which expires in November 1998, the Company assumes 90% of the First Occurrence policies issued by FLICA. For the three months ended March 31, 1996, $1.4 million of assumed premiums under this agreement were recorded as premiums. USE IN ACQUISITIONS. Over the past four years, the Company has acquired blocks of policies in force from American Integrity, Life and Health and Dixie National Life 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 discussed 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 will be granted by each relevant state, or as to the time required to obtain such approval. EMPLOYEES At July 31, 1996, the Company employed 324 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. - 65 - 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 legislation, 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. FACILITIES The Company maintains its principal offices at 777 Main Street, Fort Worth, Texas. Such offices were leased by NFL in July 1983 under a lease agreement which was amended in July 1992 and 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. LifeStyles Marketing maintains its sales headquarters at 1161 Corporate Drive, Arlington, Texas, under a five year lease agreement which expires in August 1997. LifeStyles Marketing also leases office space for certain of its 18 branch sales office locations under lease agreements which expire on various dates throughout the next twelve months. Senior Benefits maintains its offices in Scottsdale, Arizona, under a three-year lease expiring in May 1998. American Senior Security Plans maintains its offices in Dallas, Texas, under an annual lease agreement. Health Care-One maintains its offices in San Diego, California, under a lease agreement expiring January, 1999. LITIGATION 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 consolidated financial position or its results of operations. COMPETITION The supplemental health and accident 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 - 66 - 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 Health Maintenance Organizations, provide various alternatives for meeting 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 insurance through the Medicare and Medicaid programs for the payment of the costs associated with medical care. These major medical programs generally cover a substantial amount of the medical expenses incurred as a result of accidents or illnesses. The Company's Cancer 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. However, expansion of coverage by other insurers could adversely affect the Company's business. SEE "Risk Factors-Health Care Reform." The Company's Medical Expense Products are designed to provide coverage which is similar to the major medical insurance programs described above, but sold primarily to persons not covered in an employer sponsored group. The Company's 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 expand or contract the private insurance industry's participation, they could benefit or adversely affect the Company's business. 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 health and accident 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's controlled agency network is competitive with respect to the recruitment and training of agents. However, there can be no assurance that the Company's controlled agency network will be able to continue to recruit or retain qualified, effective agents. The inability of the Company to adequately recruit and retain such agents could have a material adverse effect upon the Company's business, results of operations and financial condition. - 67 - MANAGEMENT EXECUTIVE OFFICERS. Westbridge's executive officers, who serve at the pleasure of the Board of Directors, 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 19 James W. Thigpen 59 President and Chief Operating Officer 15 Stephen D. Davidson 40 Executive Vice President and Chief Marketing Officer 2 Margaret A. Megless 45 Vice President 19 Patrick J. Mitchell 38 Executive Vice President, Chief Financial Officer and Treasurer 1 Michael D. Norris 49 Vice President and Secretary 13 Dennis A. Weverka 51 Executive Vice President 15
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 1990. Mr. Kantor has served as Chairman of the Board of NFL since prior to 1990, and also became Chief Executive Officer of NFL in 1985. Following the acquisition of each of NFI, AICT and FLICA, Mr. Kantor was appointed Chairman of the Board and Chief Executive Officer. Mr. Kantor may be deemed to be a control person of Westbridge by virtue of his ownership of 724,001 shares, or 12.08% of the outstanding shares of Westbridge's Common Stock at July 31, 1996. This amount does not include shares held in various trusts established by Mr. Kantor for the benefit of his children and grandchildren over which he has no voting or investment power and as to which Mr. Kantor disclaims beneficial ownership. SEE "Principal Stockholders." 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 1990. Mr. Thigpen has also served as President and Chief Operating Officer of NFL since prior to 1990. Following the acquisition of each of NFI, AICT and FLICA, Mr. Thigpen was appointed President and Chief Operating Officer. 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, NFI and AICT since joining the Company in August 1994. Following the acquisition of FLICA, Mr. Davidson was appointed Sr. Vice President. 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. - 68 - 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 NFI and AICT, Ms. Megless was appointed Senior Vice President, and in June 1994 was appointed a director of NFL, NFI and AICT. Following the acquisition of FLICA, Mr. Megless was appointed a director and Senior Vice President. Ms. Megless joined the Company in January 1977, serving as Vice President, Information Systems of NFL from 1984 to 1992. 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, NFI and AICT. Following the acquisition of FLICA, Mr. Mitchell was appointed Senior Vice President, Treasurer and director. 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. NORRIS has served as Secretary of Westbridge since prior to 1990 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 1990. Following the acquisition of each of NFI and AICT, Mr. Norris was appointed Senior Vice President, Secretary and General Counsel, and in June 1994 was appointed a director of NFL, NFI and AICT. Following the acquisition of FLICA, Mr. Norris was appointed a director, Senior Vice President, Secretary and General Counsel. Mr. Norris was Counsel for the Oklahoma Insurance Department, Oklahoma City, Oklahoma for two years prior to joining NFL in March 1983. Mr. Norris was an adjuster and attorney for Allstate Insurance Company, Oklahoma City, Oklahoma, from 1979 to 1981. 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 1990. Following the acquisition of each of NFI and AICT, Mr. Weverka was appointed Senior Vice President, and in June 1994 was appointed a director of NFL, NFI and AICT. Following the acquisition of FLICA, Mr. Weverka was appointed director and Senior Vice President. DIRECTORS. Westbridge's directors are as follows: SERVED AS DIRECTOR NAME AGE SINCE Marvin H. Berkeley.............. 73 1982 Arthur W. Feinberg.............. 73 1984 George M. Garfunkel............. 57 1994 Martin E. Kantor................ 74 1982 Peter J. Millock................ 49 1996 Glenn O. Phillips............... 66 1987 Joseph C. Sibigtroth............ 80 1984 James W. Thigpen................ 59 1985 Barth P. Walker................. 81 1982 - 69 - The Board of Directors is classified into three classes, each of which serves for three years with one class being elected each year. Messrs. Feinberg and Garfunkel serve as directors for a term expiring at the 1997 Annual Meeting of Stockholders, Messrs. Kantor, Sibigtroth and Walker serve as directors for a term expiring at the 1998 Annual Meeting of Stockholders and Messrs. Berkeley, Millock, Phillips and Thigpen serve as directors for a term expiring at the 1999 Annual Meeting of Stockholders. For other information with respect to Messrs. Kantor and Thigpen, SEE "Management-Executive Officers." DR. BERKELEY has served as Professor of Management of the University of North Texas, Denton, Texas, since prior to 1991, and is former Dean of the College of Business Administration of the University of North Texas. Dr. Berkeley is also a director of Irving National BankShares, Inc., Irving, Texas. Dr. Berkeley is a former advisory director of Enersyst Development Center, Inc., a former director of John Watson Landscape Illumination, Inc., and a former Governor of International Insurance Society, Inc. DR. FEINBERG has served as the Chief of Geriatric Medicine of the Department of Medicine of North Shore University Hospital, Manhasset, New York since prior to 1991. Dr. Feinberg also has been, since prior to 1991, a Professor, Clinical Medicine, Cornell University Medical College. Dr. Feinberg was formerly a Regent and Chairman of the Board of Governors of the American College of Physicians. MR. GARFUNKEL is a founding partner of the Great Neck, New York law firm of Garfunkel, Wild & Travis P.C., which specializes in the representation of clients in the health care industry. He is also a director of Berkshire Taconic Community Foundation, Inc. For information relating to Mr. Garfunkel's ownership of Common Stock, SEE Note (2) under "Principal Stockholders". MR. MILLOCK was elected as a director in July 1996. He has served as Counsel in private practice with the law firm of Nixon, Hargrave, Devans & Doyle, Albany, New York, since 1995. Prior to 1995, Mr. Millock served as General Counsel and Chief Legal Officer of the New York State Department of Health for 15 years. He is also an Associate Professor for the State University of New York, School of Public Health. MR. PHILLIPS is an Insurance Consultant and has served as Partner with Professional Insurance Group since December 1994, and is a former Consultant for the National Document Registry Corp. since June 1994. Mr. Phillips also served as President and Director of Financial Services of America from 1991 through 1994. Prior to 1992, Mr. Phillips was an insurance consultant, with Glenn Phillips and Associates, and from 1966 through 1987 was employed by Businessmen's Assurance Company of Kansas City, Missouri where he held the position of Vice President of Corporate Brokerage and Special Sales. Prior to that period, Mr. Phillips served as director and Executive Vice President of Certified Life Company of Shreveport, Louisiana and Vice President and Field Manager for Central Assurance Company of Columbus, Ohio. MR. SIBIGTROTH is a retired Consulting Actuary and had been a private consulting actuary since prior to 1991. From 1972 to 1981 he served as Senior Vice President and Chief Actuary of New York Life Insurance Company. In the past, he has served as Chairman of both the Mortality and Morbidity Committees of the American Society of Actuaries, and as Treasurer of the New York State Guaranty Corporation. MR. WALKER has been a senior member of Walker & Walker, a law firm in Oklahoma City, Oklahoma since prior to 1991. - 70 - The Board of Directors met four times during 1995. All of the members of the Board of Directors attended at least 75% of the aggregate of all Board meetings and meetings of any Committee of the Board on which they served during 1995. BOARD COMMITTEES EXECUTIVE COMMITTEE. The Board formed an Executive Committee on June 22, 1995. The Executive Committee is composed of Mr. Garfunkel (Chairman), Dr. Feinberg and Mr. Kantor. The Executive Committee possesses all the powers and authority of the Board in the management and direction of the business and affairs of the Company, except as limited by law. The Executive Committee is to meet at least once between regular board meetings and met one time in 1995. AUDIT COMMITTEE. The Audit Committee of the Board of Directors is composed of Mr. Walker (Chairman), Dr. Berkeley, and Mr. Sibigtroth. The Audit Committee, which met twice during 1995 recommends to the Board of Directors the firm to be employed as the Company's independent accountants, reviews details of each audit engagement and audit reports, including all reports by the independent accountants regarding internal control and management reports, and reviews resolution of any material matters with respect to appropriate accounting principles and practices to be used in preparation of the Company's financial statements. COMPENSATION AND NOMINATING COMMITTEE. The Board of Directors does not have a compensation or nominating committee. - 71 - EXECUTIVE COMPENSATION The following table sets forth information on cash and other compensation paid or accrued for each of the fiscal years ended December 31, 1995, 1994 and 1993 to each of the named Executive Officers including the Chief Executive Officer, for services in all capacities to the Company and its subsidiaries.
LONG-TERM COMPENSATION/ AWARDS/SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION* OPTIONS(#) COMPENSATION** (A) (B) (C) (D) (E) (F) (G) - ----------------------------------------------------------------------------------------------------------------- Martin E. Kantor 1995 $403,615 $50,000 0 0 $2,772 Chairman of the Board and 1994 $366,923 $60,000 0 0 $2,310 Chief Executive Officer 1993 $321,058 $40,000 0 0 $2,249 James W. Thigpen 1995 $346,638 $50,000 0 0 $2,310 President and Chief 1994 $305,869 $60,000 0 0 $2,310 Operating Officer 1993 $254,916 $40,000 0 10,000 $2,249 Stephen D. Davidson 1995 $183,462 $40,000 0 30,000 $2,310 Vice President and 1994 $107,821 $30,000 0 25,000 $ 846 Chief Marketing Officer 1993 $ 9,995 $ 0 0 10,000 $ 0 Dennis A. Weverka 1995 $158,231 $15,000 0 10,000 $2,643 Vice President 1994 $142,942 $30,000 0 0 $2,310 1993 $112,365 $20,000 0 12,000 $2,044 Margaret A. Megless 1995 $142,917 $15,000 0 10,000 $1,941 Vice President 1994 $127,629 $30,000 0 0 $1,984 1993 $ 98,071 $20,000 0 15,000 $1,859
- -------------------------- * The amount of other annual compensation paid to each of the named Executive Officers during the years shown does not include perquisites and other personal benefits, if any. Such benefits totaled less than the lesser of either $50,000 or 10% of total annual salary and bonus reported for each of the named Executive Officers. ** Amounts shown in column (g) represent matching contributions of the Company credited to the Executive Officers under the Company's 401(k) plan. Each director of Westbridge who is not a salaried employee or consultant of NFL receives $2,500 per Board meeting attended. Additionally, all audit committee members who attend special audit committee meetings which do not coincide with full board meetings receive $1,000 per special audit committee meeting attended. All directors are reimbursed for their expenses incurred in attending Board meetings. Dr. Berkeley received $6,000 in consultation fees from NFL in 1995. Each non-employee director is also entitled to receive automatic, non-discretionary and fixed annual grants of stock options under the Company's 1992 Stock Option Plan, as amended (the "Plan"). Pursuant to the Plan, a stock option to acquire 5,000 shares of Common Stock was granted to each non-employee director serving as a member of the Board of Directors on January 14, 1993. Thereafter, a stock option to acquire 1,000 shares of Common Stock will automatically be granted each succeeding year (immediately following Westbridge's annual - 72 - meeting of stockholders) to each non-employee director serving as a Board member at such time. Additionally, each non-employee Board member, upon becoming a director of Westbridge for the first time, will be entitled to receive a stock option to acquire 5,000 shares of Common Stock. The option price per share is the average of the mean high and low trading prices for the Common Stock for the fifth through the ninth trading day following the relevant grant date. Each option becomes exercisable on the first anniversary of the date of grant and may thereafter be exercised in whole or in part during the term of the option by payment of the full option price for the number of underlying shares to be acquired upon any such exercise. Each option will expire seven years after the date on which the option is granted, subject to earlier termination upon an optionee's termination of service as a director, other than as a result of retirement, death or disability. During 1995, each non-employee director of Westbridge received an option to acquire 1,000 shares of Common Stock pursuant to the Plan. STOCK OPTIONS THE WESTBRIDGE CAPITAL CORP. 1996 RESTRICTED STOCK PLAN (THE "RESTRICTED STOCK PLAN") Each member of the Company's Board of Directors who is not an employee of the Company or any Subsidiary, and who has not been such during the one year period immediately preceding (a) the initial grant date (as defined below and with respect to any initial grant to such member) and (b) any annual grant date (as defined below and with respect to any annual grant to such member) (an "Eligible Director") shall automatically participate in the fixed formula grant portion of the Restricted Stock Plan. Each Eligible Director shall automatically be granted 5,000 shares immediately following the Company's annual shareholders meeting at which the Eligible Director is first elected to the Board of Directors (the "Initial Grant Date"), commencing with the 1996 Annual Meeting (each, an "Initial Grant"). In addition, each Eligible Director who does not receive the grant described in the preceding sentence shall automatically be granted 1,000 shares of Restricted Stock each year, immediately following the Company's annual shareholders meeting in such year (the "Annual Grant Date") commencing with the 1996 Annual Meeting (each, an "Annual Grant"). All shares of Restricted Stock granted to Eligible Directors shall become 100% vested on the first anniversary of the Initial Grant Date or the Annual Grant Date that relates to any such award. The following table sets forth information as to the named Executive Officers, the exercise of stock options during the last fiscal year and the values of unexercised options as of the end of the last fiscal year all of which were exercisable as of such date. - 73 - AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF NUMBER OF SECURITIES UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT YEAR-END OPTIONS AT YEAR-END NAME AND ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/ PRINCIPAL POSITION ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE) (a) (b) (c) (d) (e) - ------------------------------------------------------------------------------------------------------------------- Martin E. Kantor - $ - - $ - Chairman of the Board and Chief Executive Officer James W. Thigpen - $ - 47,000/ $190,200/ President and Chief 0 $0 Operating Officer Stephen D. Davidson - $ - 35,000/ $0/ Vice President and Chief 30,000 $36,750 Marketing Officer Dennis A. Weverka 4,000 $17,000 16,265/ $37,599/ Vice President 10,000 $12,250 Margaret A. Megless - $ - 40,700/ $143,750/ Vice President 10,000 $12,250
The values listed in columns (c) and (e) represent the difference between the fair market value of the Common Stock and the exercise price of the options at exercise and December 31, 1995, respectively. - 74 - EMPLOYMENT AGREEMENTS The Company has entered into a separate employment agreement with each of Martin E. Kantor and James W. Thigpen (each, and "Employee" and collectively, the "Employees"), pursuant to which Mr. Kantor is employed as the Chairman of the Board and Chief Executive Officer of the Company and National Foundation Life Insurance Company (a subsidiary of the Company, "NFL") and Mr. Thigpen is employed as the President and Chief Operating Officer of the Company and NFL (the "Employment Agreements"). The Company has agreed to employ each of the Employees for a period of commencing on April 1, 1996, and ending on the fifth anniversary of such date. Each Employee's employment period will be automatically extended each year thereafter unless an Employee, with respect to his own employment, or the Company gives notice to the contrary. Mr. Kantor's base salary is $468,000 per annum and Mr. Thigpen's base salary is $380,000 per annum. Each Employee's base salary will be reviewed annually for increase in the sole discretion of the Board of Directors of the Company. The Employees are also entitled to participate in and receive all benefits under any and all bonus, short- or long-term incentive, savings and retirement plans, and welfare benefit plans, practices, policies and programs maintained or provided by the Company and/or its subsidiaries for the benefit of senior executives. If an Employee's employment is terminated by reason of death, or by the Company due to "disability" (as defined in the Employment Agreements), such Employee or his legal representative will be entitled to, among other things, (a)(i) in the case of death, (x) his base salary for a period of three months after the date of death, plus (y) a death benefit in an amount equal to three times the base salary at the rate in effect on the date of termination less any amounts paid to the Employee's beneficiary(ies) pursuant to the group and/or other corporate life insurance policies maintained by the Company or NFL, and (ii) in the case of disability, his base salary for 36 months after the date of termination; (b) certain accrued benefits and a pro rata bonus payment for the year in which such death or disability occurs, and (c) immediate and accelerated vesting of all restricted stock grants previously awarded to the Employee. If an Employee's employment is terminated by the Company without cause, or by the Employee for "good reason" (as defined in the Employment Agreements and which, in the case of Mr. Kantor's Employment Agreement, includes the occurrence of a "change in control" as defined therein), such Employee will be entitled to (a) a lump sum payment equal to three times the sum of (i) his base salary, and (ii) the highest annual bonus awarded to him, (b) certain accrued benefits, (c) continuation of the health and welfare benefits, and (d) immediate and accelerated vesting of all restricted stock grants previously awarded to the Employee. If an Employee's employment is terminated for "cause" (as defined in the Employment Agreements), such Employee will be entitled to, among other things, (a) his base salary through the date of termination and (b) certain accrued benefits. If the Company terminates his employment (other than due to death, disability, or for cause), such Employee will be entitled to, among other things, (a) his base salary through the date of termination, (b) certain accrued benefits, and (c) continuation of the health and welfare benefits. In addition to the foregoing, if Mr. Kantor's employment is terminated other than for cause, Mr. Kantor will be entitled to repayment, within thirty business days after the date of termination, of the outstanding principal amount (and any accrued, but unpaid, interest through the date of repayment) of any loans (including the Senior Note) (as defined under the caption "Certain Transactions" below), or other advances made by the him to the Company, NFL or any affiliate of either such entity. If any payment or distribution by the Company or any subsidiary or affiliate to an Employee would be subject to any "golden parachute payment" excise tax or similar tax, and if, and only if, such payments less the excise tax or similar tax is less than the maximum amount of payments which could be payable to the Employee without the imposition of the excise tax or similar tax, then and only then, and only to the extent necessary to eliminate the imposition of the excise tax or similar tax (and after taking into account any reduction in the payments provided by reason of Section 280G of the Code in any other plan, arrangement or agreement), (A) any cash - 75 - payments under the Employment Agreement shall first be reduced (if necessary, to zero), and (B) all other non-cash payments under the Employment Agreement shall next be reduced. If an Employee's employment is terminated by the Company for cause or if an Employee voluntarily terminates his employment without good reason, for a period of eighteen months, such Employee shall not (i) solicit or take away the patronage of (a) any customers or agents of the Company, NFL or any affiliate of either as of the date of such termination, or (b) any prospective customers or agents of the Company or any affiliate whose business the Company and/or NFL was actively soliciting on the date of such termination, and with which the Employee had business contact while employed by the Company and NFL, or (ii) directly or indirectly, induce or solicit any employees or agents of the Company, NFL or any affiliate of either to leave or terminate their employment or agency relationship with the Company or NFL. If a claim for payment or benefits under the Employment Agreements is disputed, the Executives will be reimbursed for all attorney fees and expenses incurred in pursuing such claim, provided that the Executives are successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. In addition, the Employment Agreements provide that if the Executives are made a party or are threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that either is or was a director or officer of the Company or any subsidiary or is or was serving at the request of the Company or any subsidiary as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, each will be indemnified and held harmless by the Company or a subsidiary of the Company to the fullest extent authorized by applicable law against all expenses incurred or suffered by the Executives. This indemnification will continue as to the Executives even if the Executives have ceased to be an officer, director or agent, or are no longer employed by the Company or any subsidiary. The Company has also entered into a separate agreement with each of Stephen D. Davidson, Margaret A. Megless and Dennis A. Weverka, pursuant to which each such person is entitled to participate in and receive all benefits provided to senior officers of the Company and to receive a severance payment upon the termination of his or her employment with the Company or one of its subsidiaries, as applicable. The amount of severance payable to Mr. Davidson would equal the aggregate salary and bonus paid to Mr. Davidson during the calendar year preceding any such termination of employment; PROVIDED, that if such aggregate amount is less than $400,000, then an additional amount not to exceed $400,000 minus the aggregate paid in respect of such preceding year's salary and bonus, shall be paid to Mr. Davidson based on the difference between the then current market price of the Common Stock and the exercise price of certain options to acquire Common Stock then held by Mr. Davidson. The amount of severance payable to each of Ms. Megless and Mr. Weverka would equal the aggregate salary (excluding bonus) paid to such person during the calendar year preceding any such termination of employment, equal to the aggregate salary (excluding any bonus) paid to such person during the prior calendar year. Pursuant to the agreement with Mr. Davidson, Mr. Davidson is employed as the President of the Company's wholly-owned subsidiary, Westbridge Marketing Corporation, for a period commencing on January 1, 1996 and ending on the fifth anniversary on such date. Mr. Davidson's base salary is $250,000 per annum. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Westbridge's Board of Directors does not have a compensation committee or other board committee performing equivalent functions. Mr. Kantor, who served as Chairman of the Board, President and Chief Executive Officer of Westbridge during 1995, and Mr. Thigpen who served as President and Chief Operating Officer of Westbridge during 1995, participated in deliberations of the Board during 1995 concerning executive officer compensation. - 76 - CERTAIN TRANSACTIONS As of March 31, 1996, James W. Thigpen, President and Chief Operating Officer of Westbridge, was indebted to the Company in the aggregate amount of $104,500. Such indebtedness is in the form of interest-free salary advances, the most recent of which occurred on April 1, 1991 in the amount of $70,000. Since January 1, 1995, the largest aggregate amount of indebtedness was $124,500. Mr. Thigpen has agreed to repay the full amount of this indebtedness on or prior to December 31, 1999. On December 13, 1995, Mr. Kantor, the Chairman of the Board and Chief Executive Officer of the Company, made a $1 million loan to the Company which is evidenced by a 10% Senior Note due December 22, 2002 (the "Senior Note"). In connection with the loan, Mr. Kantor received a warrant to purchase 135,501 shares of the Company's Common Stock at an exercise price of $7.38 per share, subject to certain adjustments (the "Warrant"). The Senior Note is subject to mandatory prepayment upon the termination of Mr. Kantor's employment with the Company other than for cause. Mr. Kantor's exercise of the Warrant is subject to significant restrictions, including the approval of holders of the Company's Common Stock and Series A Preferred Stock. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth as of July 31, 1996, (except for 401(k) shares owned by Messrs. Davidson, Kantor, Megless, Thigpen and Weverka and other Executive Officers which are as of April 30, 1996), the number and percentage of shares of Common Stock owned by the directors of Westbridge and all nominees as directors, each of the Executive Officers named in the table under "Summary of Compensation" and all Executive Officers and directors as a group. To Westbridge's knowledge, the persons listed below each have sole voting and investment power as to all shares indicated as owned by them. NUMBER OF NAME SHARES OWNED PERCENT Marvin H. Berkeley (i) 17,200 * Stephen D. Davidson (i) (ii) 37,051 * Arthur W. Feinberg (i) 18,098 * George M. Garfunkel (i) (iii) 450,568 7.52 Martin E. Kantor (ii)(iv) 724,001 12.08 Margaret A. Megless (i) (ii) 53,384 * Glenn O. Phillips (i) 6,500 * Joseph C. Sibigtroth (i) 7,000 * James W. Thigpen (i) (ii) 159,841 2.64 Barth P. Walker (i) (v) 47,526 * Dennis A. Weverka (i) (ii) 46,861 * All Executive Officers and Directors as a group (13) (vi) 1,615,189 26.05 - --------------- * Less than 1% (i) The number of shares owned by Messrs. Berkeley, Davidson, Feinberg, Garfunkel, Megless, Phillips, Sibigtroth, Thigpen, Walker and Weverka, includes 6,000; 35,000; 6,000; 5,000; 40,700; 6,000; 6,000; 47,000; 6,000 and 16,265 shares, respectively, subject to stock options granted and exercisable within sixty (60) days under Westbridge's employee stock option plans. - 77 - (ii) The number of shares owned by Messrs. Davidson, Kantor, Megless, Thigpen and Weverka, includes 516; 6,273; 2,717; 6,241; and 4,896, shares, respectively, which are owned through participation in Westbridge's 401(k) plan. (iii) SEE Note (2) under "Principal Stockholders." (iv) SEE Note (1) under "Principal Stockholders." (v) Does not include 72,868 shares (1.22%) held in trusts established by Mr. Walker for the benefit of his grandchildren or 76,344 shares (1.27%) owned by Mr. Walker's wife over which he has no voting or investment power and as to which Mr. Walker disclaims beneficial ownership. (vi) The number of shares owned by all Executive Officers and directors as a group includes 206,529 shares (3.33%) subject to employee stock options granted and exercisable within sixty (60) days to all Executive Officers and Directors under Westbridge's employee stock option plans and 26,590 shares owned through participation in Westbridge's 401(k) plan. PRINCIPLE STOCKHOLDERS The following table sets forth, as of July 31, 1996, the name and address of each person known by Westbridge to own beneficially, directly or indirectly, more than five percent of the outstanding shares of Common Stock (its only class of voting securities): NUMBER NAME AND ADDRESS OF SHARES PERCENT - ------------------- ------- ------ Martin E. Kantor (1) 724,001 12.08% 175 Great Neck Road Great Neck, NY 11021 George M. Garfunkel (2) 450,568 7.52% 175 Great Neck Road Great Neck, NY 11021 President & Fellows of Harvard College (3) 594,530 9.02% c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, MA 02210-2203 - -------------------- (1) Based upon information supplied by Mr. Kantor, Mr. Kantor has sole voting and dispositive power as to the shares indicated above. Does not include 437,408 shares (7.30%) held in trusts established by Mr. Kantor for the benefit of his children and grandchildren over which he has no voting or investment power and as to which Mr. Kantor disclaims beneficial ownership. (2) Based upon information supplied by Mr. Garfunkel. Includes 437,408 shares beneficially owned by Mr. Garfunkel as trustee under various trusts established by Mr. Kantor and referred to in Note (1) above, over which Mr. Garfunkel has sole voting and investment power. (3) In each case represents the number of shares of Common Stock into which the shares of the Company's Series A Preferred Stock held by such holder is convertible. Each share of Series A Preferred Stock, which generally does not vote with the Common Stock in the election of directors or on other matters, is convertible into 118.906 shares of Common Stock. (4) In each case represents the number of shares of Common Stock issuable upon conversion of the shares of Series A Preferred Stock which are beneficially owned by such person as investment manager for one or more holders of Series A Preferred Stock. Each share of Series A Preferred Stock, which generally does not vote with the Common Stock in the election of directors or on other matters, is convertible into 118.906 shares of Common Stock. - 78 - DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The authorized capital stock of Westbridge consists of 30,000,000 shares of Common Stock, par value $.10 per share, and 1,000,000 shares of Preferred Stock, par value $.10 per share. As of July 31, 1996, 5,993,458, shares of Common Stock and 20,000 shares of Series A Preferred Stock (with an aggregate liquidation preference of $20 million) were outstanding. All of the shares of Common Stock and Preferred Stock outstanding are validly issued, fully paid and nonassessable. COMMON STOCK Each holder of Common Stock is entitled to one vote per share in all matters to be voted on by the stockholders, including elections of directors, and, except as otherwise required by law or provided with respect to the Series A Preferred Stock, the holders of such shares exclusively possess all voting power. SEE "- Preferred Stock Series A Preferred Stock." Holders of Common Stock are not entitled to cumulate their votes. Subject to certain preferential rights of the Series A Preferred Stock, and any other outstanding series of Preferred Stock created by the Board of Directors from time to time, holders of Common Stock are entitled to dividends and other distributions as and when declared by the Board of Directors out of assets legally available therefor, and upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock would be entitled to share equally in the distribution of all of the Company's assets. The holders of Common Stock have no preemptive rights to purchase shares of Common Stock of the Company. The transfer agent and registrar for the Company's Common Stock is The Liberty National Bank and Trust Company of Oklahoma City, 100 Broadway, Oklahoma City, Oklahoma 73102. PREFERRED STOCK The Board of Directors has the authority, without action by the stockholders, to issue shares of Preferred Stock in one or more series and, within certain limitations, to determine the dividend rights, dividend rate, rights and terms of redemption, liquidation preferences, sinking fund terms, conversion and voting rights of any series of Preferred Stock, the number of shares constituting any such series, the designation thereof and the price therefor. The Company believes that the ability of its Board of Directors to issue one or more series of Preferred Stock will provide the Company with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs which might arise. The authorized shares of Preferred Stock, as well as Common Stock, will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. The NYSE currently requires stockholder approval to issue additional shares in several instances, including issuances of shares which would possess at least 20% of the voting power outstanding or represents at least 20% of the number of shares of Common Stock outstanding before such issuance. SERIES A PREFERRED STOCK Set forth below is a summary of the principal terms of the Series A Preferred Stock. Such summary is qualified in its entirety by reference to the text of the Certificate of Incorporation and to the Preferred Stock Purchase - 79 - Agreement, each of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and is incorporated herein by reference. The Series A Preferred Stock constitutes a series of the Preferred Stock, consisting of 20,000 shares. Upon any liquidation, dissolution or winding up of Westbridge, whether voluntary or involuntary, the holders of Series A Preferred Stock shall have priority over the Common Stock or any other class or series of stock of Westbridge ranking upon liquidation, dissolution or winding up junior to the Series A Preferred Stock, for payment out of the assets of Westbridge or proceeds thereof of $1,000 per share plus all dividends accrued and unpaid thereon and after such payments the holders of Series A Preferred Stock will be entitled to no other payments. If, in the case of any such liquidation, dissolution or winding up of Westbridge, the assets of Westbridge or proceeds thereof are insufficient to pay in full the liquidation payments described above, and similar payments on or other class or series of stock of Westbridge ranking upon liquidation, dissolution or winding up on a parity with the Series A Preferred Stock, then such assets and proceeds will be distributed among the holders of the Series A Preferred Stock and any such other classes or series of stock ratably in accordance with the respective amounts which would be payable on such Series A Preferred Stock and any such other classes or series of stock if all amounts payable thereon were paid in full. A sale of all or substantially all the assets of Westbridge, or a consolidation, merger or other business combination of Westbridge with or into one or more corporations, will not be deemed to be a liquidation, dissolution or winding up of Westbridge. DIVIDENDS. Holders of Series A Preferred Stock will be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for payment, cumulative cash dividends at an annual rate of $82.50 per share. The dividend rate is subject to a one percentage point increase if an Event of Noncompliance (as defined below) of the type described in clause (i) or (ii) of the definition of such term occurs. Once such an Event of Noncompliance has been cured, the annual dividend rate will revert to $82.50 per share. Dividends on the Series A Preferred Stock will be payable quarterly in arrears from the date of original issuance on the last day of January, April, July and October of each year in respect of the quarterly period ending on the last day of the immediately preceding calendar quarter. In addition, if Westbridge makes any dividend payment or other distribution on the Common Stock, other than (i) dividends payable in cash in an aggregate amount in any fiscal year not exceeding $500,000, or (ii) any dividend or distribution of shares of Common Stock, then the holders of shares of Series A Preferred Stock shall be entitled to receive, with respect to each share of Series A Preferred Stock held, the same dividend or distribution received by a holder of the number of shares of Common Stock into which such share of Series A Preferred Stock is convertible on the record date for such dividend or distribution. Any such dividend or distribution shall be declared, ordered, paid or made on the Series A Preferred Stock at the same time such dividend or distribution is declared, ordered, paid or made on the Common Stock. Whenever (i) any dividend payable on the Series A Preferred Stock is past due, thereafter and until all accrued and unpaid dividends payable have been paid in full or declared and set apart for payment, or (ii) Westbridge shall not have redeemed shares of Series A Preferred Stock on the date such redemption is required, thereafter and until such redemption payment shall have been made or all necessary funds therefor set apart for payment, Westbridge shall not: (A) declare or pay dividends, or make any other distributions, on any shares of Common Stock or any other stock of Westbridge ranking junior to the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets, whether upon liquidation or otherwise ("Junior Stock") other than dividends or distributions payable in Junior Stock; (B) declare or pay dividends, or make any other distributions, on any shares of stock of Westbridge ranking on a parity with the Series A Preferred Stock either with respect to the payment of dividends or the distribution of assets, whether upon liquidation or otherwise ("Parity Stock"), other than dividends or distributions payable in Junior Stock, except dividends paid ratably on the Series A Preferred Stock and all Parity Stock on which dividends are payable or in arrears, in proportion to the total amounts to which the holders of all such shares are then entitled; (C) redeem or purchase or otherwise acquire for consideration (other - 80 - than Junior Stock) any shares of Junior Stock or Parity Stock (other than, with respect to Parity Stock, ratably with the Series A Preferred Stock); or (D) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, except that Westbridge may redeem shares of Series A Preferred Stock. Generally, an "Event of Noncompliance" shall have occurred if: (i) Westbridge fails to pay the full amount of dividends when due; (ii) Westbridge fails to make any required redemption payment; (iii) Westbridge fails to observe or perform certain specified covenants or restrictions contained in the Preferred Stock Purchase Agreement for a period of sixty (60) days after written notice thereof has been given to Westbridge; (iv) any representation or warranty made by Westbridge in or pursuant to the Preferred Stock Purchase Agreement proves to have been incorrect in any material respect when made; (v) Westbridge makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating Westbridge bankrupt or insolvent; or any order for relief with respect to Westbridge is entered under the Federal Bankruptcy Code; or Westbridge or any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by Westbridge (a "Subsidiary") petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of Westbridge or any of its Subsidiaries or of any substantial part of the assets of Westbridge or any of its Subsidiaries, or commences any proceeding relating to Westbridge or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against Westbridge or any of its Subsidiaries and either (a) Westbridge or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within ninety (90) days; or (vi) Westbridge or certain of its Subsidiaries fails to pay when due principal plus interest of at least $1,000,000 in respect of any indebtedness of Westbridge or certain of its Subsidiaries and such failure results in the acceleration of such indebtedness, or a judgment or order for the payment of money of at least $1,000,000 shall be rendered against Westbridge or certain of its Subsidiaries and such judgment or order shall not have been vacated, discharged, stayed or bonded pending appeal within sixty (60) days. PREFERRED STOCK PURCHASE AGREEMENT. The Preferred Stock Purchase Agreement provides that for so long as one or more of the Investors own at least $10,000,000 in aggregate Liquidation Preference of the Series A Preferred Stock, then without first obtaining the consent or approval of Investors holding at least a majority of the Series A Preferred Stock (measured by Liquidation Preference), Westbridge shall not: (i) declare or pay dividends or make any other payment or distribution, on any shares of capital stock of Westbridge other than the Series A Preferred Stock; EXCEPT, that no approval or consent of the Investors shall be required for dividends or other distributions payable (x) in cash in an amount in any year not exceeding $500,000 or (y) in capital stock of Westbridge; (ii) purchase, redeem or retire any shares of capital stock of Westbridge (other than Series A Preferred Stock) or any rights, options or warrants to purchase or acquire, or other securities convertible into or exchangeable for, shares of capital stock of Westbridge; EXCEPT, that no approval or consent of the Investors shall be required in the case of purchases, redemptions or retirements payable out of the net cash proceeds to Westbridge from the issuance or sale of any shares of capital stock of Westbridge, or any rights, options or warrants to purchase or acquire, or other securities convertible into or exchangeable for, shares of capital stock of Westbridge; (iii) sell, lease, transfer or otherwise dispose of any asset (including, without limitation, shares of capital stock or any other ownership interest in any Subsidiary) other than in the ordinary course of business; EXCEPT, that no approval or consent of the Investors shall be required in the case of any sale, lease, transfer or other disposition if (x) there shall not have occurred an Event of Noncompliance directly as a result thereof, (y) Westbridge receives, in exchange for such asset, the Fair Market Value (as defined in the Certificate of Incorporation) thereof, and (z) all of the proceeds of such sale, lease, transfer or other disposition are used by Westbridge within ninety (90) days either to acquire assets for use in the business of Westbridge or any of its Subsidiaries, or to repay or redeem Series A Preferred Stock or indebtedness of Westbridge; (iv) issue any shares - 81 - of Common Stock or any rights, options or warrants to purchase, or other securities convertible into or exchangeable for, shares of Common Stock; EXCEPT, that no approval or consent of the Investors shall be required in the case of shares of Common Stock (or rights, options or warrants to purchase, or securities convertible into or exchangeable for, shares of Common Stock) issued (w) upon the exercise of certain options to purchase Common Stock granted to Oppenheimer & Co., Inc. in connection with its acting as placement agent for the Series A Preferred Stock, (x) through an underwritten offering registered pursuant to the Securities Act, (y) pursuant to any Employee Benefit Plan (as defined in the Certificate of Incorporation), or (z) as consideration for the acquisition of any business or block of insurance business by Westbridge or any of its Subsidiaries; (v) enter into, or permit any subsidiary to enter into, any business which is substantially different from and/or not connected with the business in which Westbridge or certain of its Subsidiaries were engaged on April 12, 1994; (vi) enter into any transaction with any affiliate of Westbridge (other than (x) transactions with certain Subsidiaries, (y) declarations and payments of dividends on the Common Stock permitted by clause (i) above and (z) payments of reasonable and customary fees and compensation to directors, officers and employees of Westbridge and certain of its Subsidiaries), except in the ordinary course of business and upon fair and reasonable terms no less favorable to Westbridge than would be obtained in a comparable arm's-length transaction between unrelated third parties; or (vii) amend the Certificate of Incorporation in such a manner as would adversely affect the preferences or rights of the Series A Preferred Stock. ELECTION OF DIRECTORS. Whenever any dividends payable on shares of Series A Preferred Stock in an amount equivalent to or exceeding the amount of dividends payable thereon for six (6) Quarterly Dividend Periods (whether or not consecutive) shall be past due, thereafter and until all accrued and unpaid dividends shall have been paid in full or declared and set apart for payment, the holders of shares of Series A Preferred Stock, together with the holders of any other series of Preferred Stock as to which dividends are in arrears and as a result are entitled to the rights described in this paragraph, shall have the right, notwithstanding anything to the contrary in the Certificate of Incorporation or the By-Laws, voting together as a single class with such other series, to elect two directors of Westbridge, such directors to be in addition to the number of directors constituting the Board of Directors immediately prior to the accrual of such right, with the remaining directors to be elected by the other class or classes of stock entitled to vote therefor at any meeting of the stockholders held for the purpose of electing directors. Such right to vote for the election of directors may be exercised as provided in the Certificate of Incorporation until all accrued and unpaid dividends shall have been paid in full or declared and set apart for payment, at which time the term of office of the two directors so elected shall terminate automatically. The directors so elected shall serve until the next annual meeting of stockholders of Westbridge or until their successors shall be elected and shall qualify, unless the term of office of the persons so elected as directors shall have earlier terminated. The rights of the holders of Series A Preferred Stock to elect two directors shall not be adversely affected by the voting or other rights applicable to any other security of Westbridge. CERTAIN RESTRICTIONS. So long as any shares of Series A Preferred Stock shall be outstanding and unless the consent or approval of a greater number of shares shall then be required by law, without first obtaining the consent or approval of the holders of a majority of the shares of Series A Preferred Stock then outstanding, Westbridge shall not: (i) authorize or create any class or series, or any shares of any class or series, of any stock of the Company ranking prior to the Series A Preferred Stock either with respect to the payment of dividends or the distribution of assets, whether upon liquidation or otherwise ("Senior Stock"); (ii) authorize or create any class or series, or any shares of any class or series, of Parity Stock; (iii) reclassify any shares of capital stock of Westbridge into shares of Senior Stock or Parity Stock; (iv) authorize any security exchangeable for, convertible into, or evidencing the right to purchase any shares of Senior Stock or Parity Stock; or (v) amend, alter or repeal the Certificate of Incorporation to alter or change the preferences, rights or powers of the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely or to increase the authorized number of shares of Series A Preferred Stock. - 82 - REDEMPTION. Westbridge shall have no right to redeem any shares of Series A Preferred Stock prior to April 12, 1997. On or after April 12, 1997, Westbridge may redeem, in whole or in part, at any time or from time to time upon not less than thirty (30) nor more than sixty (60) days' prior written notice, the outstanding shares of Series A Preferred Stock by paying therefor in cash an amount per share equal to the sum of (i) $1,000 multiplied by the applicable Redemption Price set forth below, and (ii) all accrued and unpaid dividends thereon to the date of redemption; PROVIDED that the redemption date in connection with any such redemption shall not be a date which is within the period commencing thirty (30) days prior to a Quarterly Dividend Payment Date and ending on the fifth business day following such Quarterly Dividend Payment Date. For any redemption of the Series A Preferred Stock, the applicable Redemption Price, if the redemption date occurs during the twelve-month period beginning April 1 of the years indicated, shall be as follows: REDEMPTION YEAR PRICE ---- --------- 1997 105% 1998 104% 1999 103% 2000 102% 2001 101% 2002 and thereafter 100% If a Repurchase Event (as defined below) shall have occurred, each holder of shares of Series A Preferred Stock shall be entitled to require Westbridge to redeem all or any portion of the shares of Series A Preferred Stock then held by such holder by paying therefor in cash an amount per share equal to the sum of (x) $1,000 multiplied by the applicable Redemption Price, and (y) all accrued and unpaid dividends thereon to the date of redemption. If an Event of Noncompliance of the type described in CLAUSE (V) of the definition of such term (provided that such Event of Noncompliance is the result of a voluntary assignment for the benefit of creditors or a voluntary bankruptcy, reorganization, insolvency or other similar proceeding commenced by Westbridge) shall have occurred, the holder or holders of a majority of the shares of Series A Preferred Stock then outstanding shall be entitled to require Westbridge (by written notice delivered to the Secretary at the principal executive offices of Westbridge) to redeem all or any portion of the Series A Preferred Stock owned by such holder or holders by paying therefor in cash an amount per share equal to the sum of (x) $1,000 and (y) all accrued and unpaid dividends thereon to the date of redemption. The Series A Preferred Stock is subject to mandatory redemption by Westbridge on April 12, 2004, by paying therefor in cash an amount equal to the stated liquidation preference of $1,000 per share (the "Liquidation Preference") plus all accrued and unpaid dividends thereon to the date of redemption. A "Repurchase Event" shall occur or has occurred if: (a) any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended {the "Exchange Act"}), other than Westbridge or any of its Subsidiaries, any employee benefit plan or related trust of Westbridge or any of its Subsidiaries, or any of the original purchasers of Series A Preferred Stock pursuant to the Preferred Stock Purchase Agreement and their transferees and their respective affiliates (within the meaning of Rule 12b-2 under the Exchange Act), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act) more than 50% of the total voting power of all classes of capital stock of Westbridge entitled to vote generally in the election of directors of Westbridge; or (b) Westbridge consolidates with, merges into or sells, leases or conveys all or - 83 - substantially all of its assets to, any Person other than a wholly-owned Subsidiary of Westbridge, unless in connection with such consolidation, merger, sale, lease or conveyance, the holders of all outstanding shares of Series A Preferred Stock are entitled to receive, upon conversion, aggregate consideration (in the form of cash, securities listed for trading on the NYSE or the American Stock Exchange or traded through the NASDAQ System - National Market System (the value of which for this purpose shall be the current trading price on the trading day immediately preceding the closing date of such consolidation, merger, sale, lease or conveyance), or any combination thereof) in an amount for each share of Common Stock into which the Series A Preferred Stock is at the time convertible at least equal to the product of (i) an amount equal to the Redemption Price, expressed as a percentage of the Liquidation Preference on the date of such Repurchase Event (or if such Repurchase Event occurs prior to April 1, 1997, 105%), plus accrued and unpaid dividends to the date of such payment, and (ii) the Conversion Price in effect immediately prior to consummation of such consolidation, merger, sale, lease or conveyance. CONVERSION. Each share of Series A Preferred Stock may, at any time, at the option of the holder thereof, be converted into shares of Common Stock, on the terms and conditions set forth in the Certificate of Incorporation. Each share of Series A Preferred Stock shall be convertible into a number of fully-paid and nonassessable shares of Common Stock equal to the result obtained (calculated to the nearest 1/1,000th of a share) by dividing the Liquidation Preference by an amount equal to $8.41 as adjusted from time to time as provided in the Certificate of Incorporation (the "Conversion Price"). The Conversion Price shall be subject to adjustment from time to time: (i) in case Westbridge shall at any time declare a dividend, or make a distribution, on the outstanding shares of Common Stock in shares of Common Stock or subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine or reclassify the outstanding shares of Common Stock into a smaller number of shares of Common Stock, (ii) in case Westbridge shall, subject to certain exceptions, issue shares of Common Stock (or rights, options or warrants to purchase or other securities convertible into or exchangeable for shares of Common Stock) at any time at a price per share less than the Current Market Price per share of Common Stock on the date of issuance of such shares (or the date of issuance of such rights, options, warrants or other convertible or exchangeable securities) and (iii) in case Westbridge shall be a party to certain transaction (including, without limitation, a merger, consolidation, sale of all or substantially all of Westbridge's assets or recapitalization of the Common Stock) in which the previously outstanding Common Stock shall be changed into or, pursuant to the operation of law or the terms of the transaction to which Westbridge is a party, exchanged for different securities of Westbridge or common stock or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing. EXCHANGE. The shares of Series A Preferred Stock are exchangeable, in whole or in part, at the option of Westbridge, at any time on or after April 12, 1995 upon not less than thirty (30) nor more than sixty (60) days prior written notice to the holders thereof, for that principal amount of Convertible Subordinated Debentures equal to the Liquidation Preference of the shares to be exchanged; PROVIDED that on or prior to the date of exchange Westbridge shall have paid to the holders of outstanding shares of Series A Preferred Stock all accrued and unpaid dividends thereon to the date fixed for exchange. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of Westbridge, (i) prior to all shares of Junior Stock (including, without limitation, the Common Stock) and (ii) prior to all shares of any other series of Preferred Stock of Westbridge, unless and to the extent such other series, the authorization and creation of which was approved or consented to by the requisite holders of Series A Preferred Stock, by its terms ranks on a parity with or senior to the Series A Preferred Stock in any respect. - 84 - RESTRICTIONS ON DIVIDENDS The Preferred Stock Purchase Agreement provides that for so long as one or more of the Investors own at least $10,000,000 in aggregate Liquidation Preference of the Series A Preferred Stock, then without first obtaining the consent or approval of Investors holding at least a majority of the Series A Preferred Stock (measured by Liquidation Preference), Westbridge shall not: (i) declare or pay dividends or make any other payment or distribution, on any shares of capital stock of Westbridge other than the Series A Preferred Stock; EXCEPT, that no approval or consent of the Investors shall be required for dividends or other distributions payable (x) in cash in an amount in any year not exceeding $500,000 or (y) in capital stock of Westbridge. Westbridge has not paid any cash dividends on the Common Stock and does not anticipate declaring or paying any such cash dividends in the foreseeable future. The Senior Subordinated Indenture prohibits the payment of dividends and other distributions on Westbridge's capital stock (except for dividends payable on the Series A Preferred Stock and dividends payable in capital stock of Westbridge) and the purchase of capital stock (except for the redemption or exchange of the Series A Preferred Stock), unless after giving effect thereto, the aggregate amount expended for those purposes subsequent to March 15, 1995, does not exceed the sum of (i) $3.0 million, plus (ii) 50.0% of Westbridge's aggregate Consolidated Net Income (excluding unrealized gains and losses on securities marked to market to the extent they were included in such Consolidated Net Income) (as defined in the Senior Subordinated Indenture) for each fiscal year commencing subsequent to December 31, 1994, plus (iii) 100% of the aggregate net proceeds received by Westbridge on account of any capital stock issued by Westbridge (other than to a subsidiary) subsequent to January 1, 1995 (including the aggregate net cash proceeds received by Westbridge on disposition of any property received by Westbridge from such sales), plus (iv) 100% of the aggregate net proceeds received by Westbridge on account of any Indebtedness (as defined in the Senior Subordinated Indenture) convertible into capital stock of Westbridge issued by Westbridge (other than to a subsidiary) subsequent to January 1, 1995 (including the aggregate net cash proceeds received by Westbridge on disposition of any property received by Westbridge from such sales), to the extent such Indebtedness has been converted into such capital stock. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Section 203 of the Delaware General Corporation Law, as amended ("Section 203"), provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an "interested stockholder" unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder", (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder", the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the "interested stockholder." Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (x) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. - 85 - Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Certificate of Incorporation does not exclude the Company from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors, since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the shareholder becoming an interested shareholder. Such provisions also may have the effect of preventing changes in the management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests. The Certificate of Incorporation and By-Laws contain certain provisions relating to corporate governance and to the rights of stockholders which may be deemed to have potential anti-takeover effects in that such provisions may delay or prevent a change of control of the Company. These provisions: (i) classify the Board of Directors into three classes, each of which serve for three years, with one class being elected each year; (ii) provide that the number of directors of the Company shall be fixed by the By-Laws and may be increased or decreased from time to time in such manner as may be prescribed in the By-Laws; (iii) require that advance notice of stockholder nominations be given in the manner provided for in the By-Laws; (iv) provide that directors may be removed only for cause and only with the approval of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class; (v) require that stockholder action be taken at an annual meeting of stockholders or a special meeting of stockholders, which may be called only by the Chairman of the Board, the President or by resolution of the Board of Directors, and prohibit stockholder action by written consent; and (vi) provide that the stockholder vote required to alter, amend, or repeal the foregoing provisions of the Certificate of Incorporation or the By-Law Amendments (as defined below), or to adopt any provision inconsistent therewith, shall be 80% of the Voting Stock, voting together as a single class. Further, the By-Laws contain related provisions that, among other things, (i) provide that advance notice of stockholder nominations of directors and of stockholder proposals of business to be conducted at annual meetings of stockholders be given and that certain information be provided with respect to such nominations or proposals in the manner provided in the By-Laws; (ii) provide that the number of directors of the Company be fixed exclusively by the Board of Directors within the range established in the By-Laws; and (iii) provide that any vacancy on the Board of Directors shall be filled only by the remaining directors then in office, though less than a quorum, and that directors so appointed will serve for the remainder of the full term of the class in which the vacancy occurred rather than until the next annual meeting of stockholders. Although the Board of Directors has no intention at the present time of doing so, it could issue additional series of Preferred Stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The Board of Directors will make any determination to issue such shares based on its judgment as to the best interests of the Company and its stockholders. The Board of Directors, in so acting, could issue Preferred Stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of the Board of Directors, including a tender offer or other transaction that some, or a majority, of the Company's stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. - 86 - INSURANCE REGULATION CONCERNING CHANGE OF CONTROL State insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by state agencies of any change in control of an insurance company that is domiciled (or, in some cases, having such substantial business that it is deemed commercially domiciled) in that state. "Control" is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company which controls a domestic insurance company. In addition, many state insurance regulatory laws contain provisions that may require pre-notification to state agencies of a change in control of a nondomestic admitted insurance company in that state. While such pre-notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize the issuance of a cease and desist order with respect to the nondomestic admitted insurer if certain conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of the Company would generally require prior approval by the state insurance departments of Arizona, Delaware, Mississippi and Texas and may require the pre-acquisition notification in those states which have adopted pre-acquisition notification provisions and wherein the insurers are admitted to transact business. Such requirements may deter, delay or prevent certain transactions affecting the control of or the ownership of Common Stock, including transactions that could be advantageous to the shareholders of the Company. LIMITATION OF LIABILITY OF DIRECTORS The Certificate of Incorporation provides that a director of the Company will not be personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law, which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. While the Certificate of Incorporation provides directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. Accordingly, the Certificate of Incorporation will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. The provisions of the Certificate of Incorporation described above apply to an officer of the Company only if he or she is a director of the Company and is acting in his or her capacity as director, and do not apply to officers of the Company who are not directors. DESCRIPTION OF CONVERTIBLE SUBORDINATED DEBENTURES The shares of Series A Preferred Stock are exchangeable, in whole or in part, at the option of Westbridge, at any time on or after April 12, 1995, upon not less than thirty (30) nor more than sixty (60) days prior written notice to the holders thereof, for that principal amount of Convertible Subordinated Debentures equal to the Liquidation Preference for the shares to be exchanged. If Westbridge elects to exchange the Series A Preferred Stock for the Convertible Subordinated Debentures, Westbridge will issue the Convertible Subordinated Debentures under the Convertible Subordinated Indenture to be entered into between Westbridge and a trustee to be designated by Westbridge prior to such exchange which would qualify at the time of such designation as a trustee under the Trust Indenture Act of 1939, as amended (together with any successor trustee, the "Trustee"). Westbridge may only effect such exchange if on or prior to the date of exchange Westbridge shall have paid to holders of outstanding shares of Series A Preferred Stock all accrued and unpaid dividends thereon to the date fixed for exchange. - 87 - Set forth below is a summary of certain provisions of the Convertible Subordinated Indenture and the Convertible Subordinated Debentures and is qualified in its entirety by reference to the Convertible Subordinated Indenture, including the definitions of certain terms contained therein. The form of the Convertible Subordinated Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and is incorporated herein by reference. GENERAL. The Convertible Subordinated Debentures will be general, unsecured, subordinated obligations of Westbridge, limited to a principal amount equal to the Liquidation Preference of the shares of Series A Preferred Stock to be exchanged, and will mature on April 12, 2004. The Convertible Subordinated Debentures will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiples thereof. INTEREST. The Convertible Subordinated Debentures will bear interest at a rate equal to the applicable dividend rate on the Series A Preferred Stock at the time of exchange. Interest shall accrue from the date fixed for exchange, or from the most recent interest payment date to which interest has been paid or duly provided for, and shall be payable quarterly in arrears on the last day of January, April, July and October of each year to the person in whose name the Convertible Subordinated Debentures are registered at the close of business on the January 15, April 15, July 15 and October 15, as the case may be, next preceding such interest payment date. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. The interest rate is subject to adjustment as set forth in the Convertible Subordinated Indenture and in a manner substantially similar to the adjustment of the dividend rate relating to the Series A Preferred Stock as set forth above. SEE "Description of Capital Stock - Preferred Stock - Series A Preferred Stock - Dividends." Principal of, premium, if any, and interest on the Convertible Subordinated Debentures will be payable, and the transfer of Convertible Subordinated Debentures will be registrable, at the office or agency of Westbridge maintained for that purpose in the City of New York, New York. In addition, payment of interest may, at the option of Westbridge, be made by check mailed to the address of the person entitled thereto as it appears in the register of holders of Convertible Subordinated Debentures. CONVERSION RIGHTS. The Convertible Subordinated Debentures will be convertible into shares of Common Stock at the option of the holder at any time and at the conversion price then in effect on the terms and conditions set forth in the Convertible Subordinated Indenture. The conversion price with respect to the Convertible Subordinated Debentures is subject to adjustment as set forth in the Convertible Subordinated Indenture and in a manner substantially similar to the adjustment of the Conversion Price relating to the Series A Preferred Stock as set forth above. SEE "Description of Capital Stock - Preferred Stock - Series A Preferred Stock - Conversion." The right to convert Convertible Subordinated Debentures called for redemption will terminate on the business day next preceding the date fixed for redemption. Holders of Convertible Subordinated Debentures at the close of business on an interest payment record date will be entitled to receive the interest payable on such Convertible Subordinated Debentures on the corresponding interest payment date notwithstanding the conversion thereof or Westbridge's default on payment of the interest due on such interest payment date. However, Convertible Subordinated Debentures surrendered for conversion during the period from the close of business on any interest payment record date to the opening of business on the corresponding interest payment date (except Convertible Subordinated Debentures or portions thereof called for redemption on a redemption date during such period) must be accompanied by payment of an amount equal to the interest payable on such Convertible Subordinated Debentures on such interest payment date. A holder of Convertible Subordinated Debentures on an interest payment record date who converts Convertible Subordinated Debentures on an interest payment date will receive the interest payment on such Convertible Subordinated Debentures by Westbridge on such date, and the converting holder need not include payment in the - 88 - amount of such interest upon surrender of Convertible Subordinated Debentures for conversion. Except as provided above, no payment or adjustment will be made on account of accrued interest upon conversion of Convertible Subordinated Debentures. Upon surrender of the Convertible Subordinated Debentures to be converted, as required in the Convertible Subordinated Indenture, Westbridge will issue the number of full shares of Common Stock issuable upon conversion thereof. No fractions of shares of Common Stock will be issued upon conversion, but in lieu thereof, an amount will be paid in cash by Westbridge to holders of Convertible Subordinated Debentures for such fractional interest equal to such fractional interest multiplied by the Current Market Price per share of Common Stock (as defined in the Convertible Subordinated Indenture) on the conversion date. SUBORDINATION. The payment of the principal of, premium, if any, and interest on Convertible Subordinated Debentures will, to the extent set forth in the Convertible Subordinated Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined below). In the event and during the continuation of any default in the payment of principal, interest or premium, if any, on any Senior Indebtedness or an event of default with respect to any Senior Indebtedness as defined therein (after giving effect to any grace period provided for therein) or in any agreement pursuant to which any Senior Indebtedness is issued and the default is the subject of a judicial proceeding or the Company receives notice of the default from the Trustee or any holder of Senior Indebtedness or any trustee therefor, no payment with respect to the principal, interest or premium, if any, on the Convertible Subordinated Debentures may be made by Westbridge unless and until such default has been waived or shall have ceased to exist. Upon any payment or distribution of assets or securities of Westbridge to creditors upon any dissolution, winding up, liquidation, reorganization or upon an assignment for the benefit of creditors or any other marshaling of the assets and liabilities of Westbridge or upon other proceedings, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the holders of the Convertible Subordinated Debentures will be entitled to (i) receive any payment in respect of the principal of or premium, if any, or interest on the Convertible Subordinated Debentures or (ii) retain any assets so paid or distributed in respect thereof. In the event that notwithstanding the foregoing, the Trustee or the holder of any Convertible Subordinated Debentures is entitled to receive any payment or distribution of assets or securities of Westbridge of any kind or character (excluding securities of Westbridge as reorganized or readjusted or securities of Westbridge or any other corporation provided for by a plan of reorganization or readjustment, which are subordinate in right of payment to all Senior Indebtedness to the same extent as the Convertible Subordinated Debentures), then such payment or distribution will be required to be paid over or delivered forthwith directly to the holders of Senior Indebtedness or their representative(s) or the trustee(s) under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay the Senior Indebtedness in full. Because of these subordination provisions, in the event of an insolvency of Westbridge, holders of Convertible Subordinated Debentures may recover less, ratably, than holders of Senior Indebtedness. "Senior Indebtedness" as defined in the Convertible Subordinated Indenture means the principal of, premium, if any, and interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to Westbridge, whether or not such claim for post-petition interest is allowed in such proceeding) on the following, whether outstanding at the date of the Convertible Subordinated Indenture or thereafter incurred or created: (a) indebtedness of Westbridge for money borrowed (including purchase-money obligations) evidenced by notes or other written obligations, (b) indebtedness of Westbridge evidenced by notes, debentures (other than the Convertible Subordinated Debentures), bonds or other securities issued under the - 89 - provisions of an indenture or similar instrument, including, without limitation, Westbridge's Senior Subordinated Notes, (c) obligations of Westbridge as lessee under capitalized leases and leases of property made as part of any sale and leaseback transactions, (d) indebtedness of others of any of the kinds described in the preceding clauses (a) through (c) assumed or guaranteed by Westbridge and (e) renewals, extensions and refundings of, and indebtedness and obligations of a successor corporation issued in exchange for or in replacement of, indebtedness or obligations of the kinds described in the preceding clauses (a) through (d), unless in the case of any particular indebtedness, obligation, renewal, extension or refunding the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such indebtedness, obligation, renewal, extension or refunding is not superior in right of payment to the Convertible Subordinated Debentures; PROVIDED, HOWEVER, that the Convertible Subordinated Debentures shall not be superior in right of payment to such enumerated indebtedness issued, assumed or guaranteed by Westbridge. At July 31, 1996, Westbridge's Senior Indebtedness aggregated approximately $37,600,000, consisting primarily of $20,000,000 of Senior Subordinated Notes and $17,600,000 principal amount of loans to WFC which has been guaranteed by Westbridge under the agent balance receivables financing agreement. Westbridge may from time to time to incur additional indebtedness constituting Senior Indebtedness. The Convertible Subordinated Indenture does not restrict the incurrence of additional Senior Indebtedness by Westbridge or its subsidiaries. OPTIONAL REDEMPTION. The Convertible Subordinated Debentures will be redeemable, at the option of Westbridge, at any time on or after April 12, 1997, in whole or in part, upon not less than thirty (30) nor more than sixty (60) days prior notice at the redemption prices (expressed as percentages of the principal amount being redeemed) set forth below, plus accrued interest, if the date fixed for redemption occurs during the twelve-month period beginning April 1 of the years indicated: REDEMPTION YEAR PRICE 1997...................................... 105% 1998...................................... 104% 1999...................................... 103% 2000...................................... 102% 2001...................................... 101% 2002 and thereafter....................... 100% REPURCHASE AT OPTION OF HOLDERS UNDER CERTAIN CIRCUMSTANCES. Upon the occurrence of a Repurchase Event or an Event of Noncompliance of the type described in CLAUSE (V) of the definition of such term (provided that such Event of Noncompliance is the result of a voluntary assignment for the benefit of creditors or a voluntary bankruptcy, reorganization, insolvency or other similar proceeding commenced by Westbridge), each holder of Convertible Subordinated Debentures shall be entitled, at such holder's option, to require Westbridge to repurchase all of such holder's outstanding Convertible Subordinated Debentures, or any portion thereof that is an integral multiple of $1,000, by paying therefor in cash an amount equal to (a) in the case of a Repurchase Event, the applicable redemption price set forth in the form of Convertible Subordinated Debentures, or (b) in the case of an Event of Noncompliance as described above, the principal amount of Convertible Subordinated Debentures being repurchased, together in each case with all accrued and unpaid interest to the date fixed for repurchase. - 90 - Westbridge is obligated to provide notice to the Trustee and all holders of record of the Convertible Subordinated Debentures of certain information with respect to a repurchase as set forth in the Convertible Subordinated Indenture. To exercise the right to require Westbridge to repurchase outstanding Convertible Subordinated Debentures, holders must deliver to the Trustee a written notice exercising such right. EVENTS OF DEFAULT. The following will be Events of Default under the Convertible Subordinated Indenture: (a) failure to pay principal of or premium, if any, on the Convertible Subordinated Debentures when due at maturity, upon redemption or otherwise; (b) failure to pay any interest on any Convertible Subordinated Debentures when it becomes due and payable, continued for five (5) business days; (c) failure to perform any other covenant or restriction of Westbridge in the Convertible Subordinated Indenture or in certain sections of the Preferred Stock Purchase Agreement, continued for 60 days after written notice to the Company as provided in the Convertible Subordinated Indenture; (d) certain events in bankruptcy, insolvency or reorganization of Westbridge or any Subsidiary of Westbridge; or (e) failure to pay when due principal plus interest in an amount equal to at least $1,000,000 in respect of any indebtedness of Westbridge or any Subsidiary of Westbridge and such failure results in acceleration of such indebtedness, or a judgment or order for the payment of an amount equal to at least $1,000,000 is rendered against Westbridge or any Subsidiary of Westbridge and is not vacated, discharged, stayed or bonded pending appeal within sixty (60) days thereof. Subject to the provisions of the Convertible Subordinated Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Convertible Subordinated Indenture at the request or direction of any of the holders, unless such holders shall have offered to the Trustee reasonable security or indemnity. The holders of a majority in aggregate principal amount of the outstanding Convertible Subordinated Debentures will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred to the Trustee (subject to certain exceptions). If an Event of Default occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Convertible Subordinated Debentures may accelerate the maturity of all Convertible Subordinated Debentures. Notwithstanding the foregoing, the maturity of the Convertible Subordinated Debentures automatically accelerates upon the occurrence of an Event of Default arising out of certain events in bankruptcy, insolvency or reorganization, as set forth above. After acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate principal amount of outstanding Convertible Subordinated Debentures may, under certain circumstances, rescind and annul the acceleration if all Events of Default, other than the nonpayment of principal amounts which became due by acceleration, have been cured or waived, and certain other payments have been made by Westbridge, as provided in the Convertible Subordinated Indenture. No holder of any Convertible Subordinated Debentures will have any right to institute any proceeding with respect to the Convertible Subordinated Indenture or for the appointment of a receiver or trustee, or for any remedy under the Convertible Subordinated Indenture unless such holder previously has given to the Trustee written notice of a continuing Event of Default and unless the holders of at least 25% in aggregate principal amount of the outstanding Convertible Subordinated Debentures have made written request, and offered reasonable indemnity to the Trustee, to institute proceedings as trustee, and the Trustee has not received from the holders of a majority in aggregate principal amount of the outstanding Convertible Subordinated Debentures a direction inconsistent with the request, and the Trustee has failed to institute such proceedings, within 60 days. However, these limitations do not apply to a suit instituted by a holder of Convertible Subordinated Debentures for the enforcement of payment of the principal or premium, if any, or interest on such Convertible Subordinated Debentures on or after the respective due dates expressed in such Convertible Subordinated Debentures or the - 91 - right to require Westbridge to repurchase the Convertible Subordinated Debentures under certain circumstances or convert the Convertible Subordinated Debentures in accordance with the Convertible Subordinated Indenture. Westbridge will be required to furnish to the Trustee annually a statement of the performance by Westbridge of certain of its obligations under the Convertible Subordinated Indenture and as to any default in the performance of the obligations. The Trustee will, within ninety (90) days after the occurrence of a default, mail to all holders of Convertible Subordinated Debentures notice of all defaults known to it, but except in the case of a default in the payment of the principal of or premium, if any, or interest on any of the Convertible Subordinated Debentures, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of such holders. The holders of a majority in aggregate principal amount of outstanding Convertible Subordinated Debentures may on behalf of the holders of all the Convertible Subordinated Debentures waive any past defaults, other than a default (a) in payment of the principal of or premium, if any, or interest on any Convertible Subordinated Debentures or (b) in respect of a covenant or provision in the Convertible Subordinated Indenture which pursuant to the Convertible Subordinated Indenture cannot be modified or amended without the consent of the holder of each outstanding Convertible Subordinated Debenture affected. MERGER AND CONSOLIDATION. Westbridge may not consolidate with or merge into any other corporation or lease, convey or transfer all or substantially all of its properties and assets to, another corporation, person or entity unless (a) the successor or transferee is a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia, (b) the successor assumes the due and punctual payment of the principal of and premium, if any, and interest on all the Subordinated Convertible Debentures and the performance of every covenant by Westbridge in the Convertible Subordinated Indenture, and provides for conversion rights to the extent set forth in the Convertible Subordinated Indenture, (c) after such transaction no Event of Default exists, and no event has occurred and is continuing which after notice or lapse of time or both, would become an Event of Default, and (d) Westbridge has delivered to the Trustee an officers' certificate and an opinion of counsel as set forth in the Convertible Subordinated Indenture. MODIFICATION. Supplemental indentures modifying or amending the Convertible Subordinated Indenture may be entered into by Westbridge and the Trustee with the consent of the holders of a majority in aggregate principal amount of the outstanding Convertible Subordinated Debentures; provided, however, that no such modification or amendment may, without the consent of the holder of each Convertible Subordinated Debenture affected thereby, (a) change the stated maturity of the principal, or any installment of interest on, any Convertible Subordinate Debentures, reduce the interest rate, the principal amount, or premium, if any, on any Convertible Subordinated Debentures, or impair the right of a holder to institute suit for payment thereof, change the place of payment where or the currency in which the Convertible Subordinated Debentures are payable, impair the right to convert the Convertible Subordinated Debentures into Common Stock, modify the subordination provisions of the Convertible Subordinated Indenture in a manner adverse to the holders of Convertible Subordinated Debentures or, following the making of an offer to purchase Convertible Subordinated Debentures by Westbridge in connection with a repurchase at the option of holders, modify the provisions of the Convertible Subordinated Indenture with respect to Westbridge's obligation to purchase such Convertible Subordinated Debentures in a manner adverse to such holder, or (b) reduce the percentage in principal amount of the outstanding Convertible Subordinated Debentures, the consent of holders of which is required for any such modifications or any waiver of certain provisions provided for in the Convertible Subordinated Indenture. - 92 - CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of the material federal income tax consequences of acquiring, owning and disposing of the Series A Preferred Stock. Milbank, Tweed, Hadley & McCloy has acted as the Company's tax counsel and has delivered an opinion that the summary, insofar as it expresses conclusions of law, is accurate in all material respects. Tax consequences that result from the tax status or particular circumstances of the holder are not addressed. Thus, for example, the summary does not discuss the treatment of holders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, corporations subject to the alternative minimum tax, S corporations, foreign entities, nonresident alien individuals, broker-dealers and tax-exempt entities. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations, court decisions and current administrative rulings and pronouncements of the Internal Revenue Service ("IRS"), all of which are subject to change, possibly with retroactive effect. The summary assumes that the Series A Preferred Stock will be held as "capital assets" as defined in the Code. Prospective purchasers are advised to consult their own tax advisors regarding the tax consequences of acquiring, holding or disposing of the Series A Preferred Stock in light of their personal investment circumstances, and the consequences under federal, state, local and foreign tax laws. DIVIDENDS ON SERIES A PREFERRED STOCK Distributions with respect to the Series A Preferred Stock will constitute "dividends" for federal income tax purposes to the extent that the Company has current or accumulated earnings and profits for federal income tax purposes. Distributions paid to corporations that qualify as "dividends" for federal income tax purposes will generally be eligible for the dividends received deduction under section 243 of the Code, subject to the limitations contained in sections 246 and 246A of the Code. The dividends received deduction will not be available with respect to stock that is held for 45 days or less (90 days in the case of a dividend on preferred stock attributable to a period or periods aggregating more than 366 days), including the day of disposition, but excluding the day of acquisition or any day that is more than 45 days (or 90 days) after the date on which the stock becomes ex-dividend. A taxpayer's holding period for these purposes is reduced by periods during which the taxpayer has an option to sell, is under a contractual obligation to sell, has made (but not closed) a short sale of substantially identical stock or securities or is the grantor of an option to purchase substantially identical stock or securities. A taxpayer's holding period also is reduced where the taxpayer's risk of loss with respect to the stock is considered diminished by reason of the taxpayer holding one or more positions in substantially similar or related property. Proposed regulations issued on May 26, 1993 offer guidance on the application of this rule. These proposed regulations are prospective, except for certain specified transactions, including a short sale of common stock or a convertible debenture when the taxpayer holds convertible preferred stock of the same issuer and the price changes of the common stock or convertible debenture, as the case may be, are related to price changes on the convertible preferred stock. Further, the dividends received deduction will also not be available if the taxpayer is under an obligation to make related payments with respect to positions in substantially similar or related property. The dividends received deduction will be limited to specified percentages of the holder's taxable income and may be reduced or eliminated if the holder has indebtedness "directly attributable" to its investment in the stock. Prospective corporate purchasers of Series A Preferred Stock should consult their own tax advisors to determine whether these limitations might apply to them. A corporate holder may, in general, be required to include in its alternative minimum taxable income an amount equal to a portion of any dividends received deduction allowed in computing regular taxable income. - 93 - If a distribution with respect to Series A Preferred Stock exceeds the holder's allocable share of the Company's current and accumulated earnings and profits, the excess will be applied against and reduce the holder's tax basis in the Series A Preferred Stock. The amount in excess of the amount of the dividend and the amount applied against basis, if any, will be treated as capital gain. EXTRAORDINARY DIVIDENDS If a corporate holder receives an "extraordinary dividend" from the Company with respect to Series A Preferred Stock that it has not held for more than two years on the dividend announcement date, the basis of the Series A Preferred Stock will be reduced (but not below zero) by the portion of the dividend that is not taxed because of the dividends received deduction. If, because of the prohibition against reducing basis below zero, any amount of the non-taxed portion of an extraordinary dividend has not been applied to reduce basis, that amount will be treated as gain from the sale or exchange of stock when the stock is disposed of. An "extraordinary dividend" on the Series A Preferred Stock would include a dividend that (i) equals or exceeds 5% of the holder's adjusted tax basis in the stock, treating all dividends having ex-dividend dates within an 85-day period as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis (determined without regard to any reduction for the nontaxed portion of prior extraordinary dividends) in the stock, treating all dividends having ex-dividend dates within a 365-day period as one dividend. A holder may elect to use the fair market value of the stock, rather than its adjusted basis, for purposes of applying the 5% or 20% limitation, if the holder is able to establish fair market value to the satisfaction of the IRS. An "extraordinary dividend" would also include any amount treated as a dividend in the case of a redemption of the Series A Preferred Stock that is non-pro rata as to all stockholders, without regard to the period the holder held the stock. Special rules apply to "qualified preferred dividends." A qualified preferred dividend is any fixed dividend payable with respect to preferred stock which (i) provides for fixed preferred dividends payable no less often than annually and (ii) is not in arrears as to dividends when acquired, provided the actual rate of return, as determined under section 1059(e)(3) of the Code, on the stock does not exceed 15%. Where a qualified preferred dividend exceeds the 5% or 20% extraordinary dividend limitation described above, (1) the extraordinary dividend rules will not apply if the taxpayer has held the stock for more than five years, and (2) if the taxpayer disposes of the stock before it has been held for more than five years, the aggregate reduction in basis will not exceed the excess of the qualified preferred dividends paid on the stock during the period held by the taxpayer over the qualified preferred dividends that would have been paid during the period on the basis of the stated rate of return as determined under section 1059(e)(3) of the Code. The length of time a taxpayer is deemed to have held stock for purposes of the extraordinary dividend rules is determined under principles similar to those applicable to the dividends received deduction discussed above. REDEMPTION PREMIUM If the redemption price of redeemable preferred stock exceeds its issue price, all or a portion of the excess may constitute an unreasonable redemption premium, taxable as a dividend to the extent of the issuing corporation's current or accumulated earnings and profits over the period during which the preferred stock cannot be redeemed. In the case of redeemable preferred stock that the issuer is not required to redeem at a specified time, a premium is considered to be reasonable if it is in the nature of a penalty for a premature redemption and if the premium does not exceed the amount the issuer would be required to pay for the redemption right under market conditions existing at the time of issuance of the preferred stock. If the redemption premium payable on the Series A Preferred Stock is considered unreasonable under the foregoing rules, a holder of the Series A Preferred Stock would take the amount of such premium (the excess of the redemption price over the issue price) into income over the period during which the stock cannot be called for redemption under an economic accrual method. The - 94 - Revenue Reconciliation Act of 1990 authorized the Treasury Department to promulgate new regulations to govern the federal income tax treatment of redemption premiums on preferred stock. Under proposed regulations (the "Proposed 305 Regulations") that would not apply to stock issued before publications of final regulations, and thus would not by their terms apply to the Series A Preferred Stock, in the case of redeemable preferred stock that the issuer is not required to redeem at a specified time, the premium may be taxable as a dividend only if redemption pursuant to the issuer's call right is more likely than not to occur. The Proposed 305 Regulations provide that a redemption is not treated as more likely than not to occur if (i) the issuer and the holder are not related within the meaning of Section 267(b) or Section 707(b) of the Code, (ii) there are no arrangements that effectively require the issuer to redeem the stock, and (iii) the exercise of the right to redeem would not reduce the yield of the stock. Even if the redemption is more likely than not to occur, the premium will not be taxable as a dividend if the premium is solely in the nature of a penalty for premature redemption. A penalty for premature redemption is a premium paid as a result of changes in economic or market conditions over which neither the issuer nor the holder has control. There can be no assurance final regulations will not differ from the Proposed 305 Regulations and have retroactive effect. In addition, the legislative history of the Revenue Reconciliation Act of 1990 indicates that the Treasury Department may treat accrued and unpaid dividends on cumulative preferred stock, like the Series A Preferred Stock, as a disguised redemption premium if, at the time of issuance of the stock, there is no intention for dividends to be paid currently. If accrued and unpaid dividends were treated as a disguised redemption premium, the holder would be required to accrue the dividends into income without regard to whether they were paid in cash. REDEMPTION OF SERIES A PREFERRED STOCK FOR CASH OR CONVERTIBLE SUBORDINATED DEBENTURES Under the rules of section 302 of the Code, a redemption of shares of Series A Preferred Stock by the Company for cash will be treated as a distribution taxable as a dividend to redeeming stockholders to the extent of the Company's current or accumulated earnings and profits, unless the redemption (i) results in a "complete termination" of the stockholder's interest in the Company (within the meaning of section 302(b)(3) of the Code), (ii) is "substantially disproportionate" (within the meaning of section 302(b)(2) of the Code) with respect to the holder or (iii) is "not essentially equivalent to a dividend" (within the meaning of section 302(b)(1) of the Code). In determining whether any of the Code section 302(b) tests have been met, shares of Common Stock and of any other class of stock of the Company will be taken into account along with shares of Series A Preferred Stock. Moreover, shares considered to be owned by the holder by reason of the constructive ownership rules set forth in section 318 of the Code, as well as shares actually owned, will be taken into account. If any of the foregoing tests is met, then, except with respect to declared and unpaid dividends, if any, the redemption of shares of Series A Preferred Stock for cash will result in taxable capital gain or loss equal to the difference between the amount of cash received and the holder's tax basis in the redeemed shares. Any capital gain or loss and will be long-term capital gain or loss if the shareholder's holding period exceeds one year. Based on a published IRS ruling, the redemption of a shareholder's Series A Preferred Stock for cash will be treated as "not essentially equivalent to a dividend" if, taking into account the constructive ownership rules, (a) the shareholder's relative stock interest in the Company is minimal, (b) the shareholder exercises no control over the Company's affairs and (c) there is a reduction in the holder's proportionate interest in the Company. In general, an exchange of Series A Preferred Stock for Convertible Subordinated Debentures will be subject to the same rules as a redemption for cash. However, because the Convertible Subordinated Debentures will be convertible into Common Stock, which a holder of the Convertible Subordinated Debentures will be deemed to own under the constructive ownership rules of section 318 of the Code, it is unlikely the receipt of Convertible Subordinated Debentures in exchange for the Series A Preferred Stock would qualify under the "complete - 95 - termination" or "substantially disproportionate" tests described above. Accordingly, the redemption would be treated as a distribution to the extent of the issue price of the Convertible Subordinated Debentures and be taxable as a dividend (to the extent of the Company's current or accumulated earnings and profits) unless the "not essentially equivalent to a dividend" test is satisfied. No assurance can be given that it would be possible to satisfy that test in these circumstances. If any exception is satisfied, the exchange would not, except with respect to declared and unpaid dividends, be treated as a dividend and the holder would recognize capital gain or loss equal to the difference between the issue price of the Convertible Subordinated Debentures and the holder's adjusted tax basis in the Series A Preferred Stock. Gain or loss would be long-term capital gain or loss if the holding period for the Series A Preferred Stock exceeded one year. If a redemption of Series A Preferred Stock is treated as a distribution that may be taxable as a dividend, as opposed to consideration received in a sale or exchange, the amount of the distribution will be measured by the amount of cash or the issue price of the Convertible Subordinated Debentures, as the case may be, received by the holder. The holder's adjusted tax basis in the Series A Preferred Stock will be transferred to any remaining stock holdings in the Company. If the holder does not retain any stock ownership in the Company, it is unclear whether the holder will be permitted to transfer the basis to any Convertible Subordinated Debentures received in the exchange or will lose the basis entirely. Under section 1059 of the Code, the term "extraordinary dividend" includes any redemption of stock that is treated as a dividend and that is non-pro rata as to all stock, including holders of common stock, irrespective of holding period. Consequently, to the extent an exchange of Series A Preferred Stock for Convertible Subordinated Debentures or cash constitutes a distribution taxable as a dividend, it may constitute an "extraordinary dividend" to a corporate shareholder. SEE "-Extraordinary Dividends" above. All prospective purchasers are urged to consult their own tax advisers with respect to the question of whether an exchange of Series A Preferred Stock for Convertible Subordinated Debentures will satisfy any of the nondividend exceptions to section 302(b) of the Code and other issues relating to an exchange for Convertible Subordinated Debentures. TREATMENT OF CONVERTIBLE SUBORDINATED DEBENTURES INTEREST AND ORIGINAL ISSUE DISCOUNT. Stated interest on the Convertible Subordinated Debentures should generally be included in the holder's taxable income in accordance with the holder's method of accounting. In addition, if the Series A Preferred Stock is exchanged for Convertible Subordinated Debentures and the issue price of the Convertible Subordinated Debentures, as determined under section 1273 or 1274 of the Code, is less than the stated redemption price at maturity of the Convertible Subordinated Debentures (as determined under Code section 1273), then, provided the excess is greater than a statutory DE MINIMIS amount, the Convertible Subordinated Debentures will have OID. Assuming the Convertible Subordinated Debentures are traded on an established securities market, the issue price of the Convertible Subordinated Debentures will be their fair market value (including the value of the conversion feature) on their issue date. Similarly, if the Series A Preferred Stock, but not the Convertible Subordinated Debentures issued and exchanged therefor, is traded on an established securities market at the time of the exchange, the issue price of each Convertible Subordinated Debenture should be the fair market value of the Preferred Stock exchanged therefor at the time of the exchange. In the event neither the Series A Preferred Stock nor the Convertible Subordinated Debentures are traded on an established securities market, the issue price of the Convertible Subordinated Debentures will be their stated principal amount or, in the event the Convertible Subordinated Debentures do not bear "adequate stated interest" within the meaning of Code section 1274, their "imputed principal amount," which is generally the sum of the present values of all payments due under the Convertible Subordinated Debentures, discounted from the date of payment to their issue date at the appropriate "applicable federal rate." A holder of a Convertible Subordinated Debenture with OID would be required to include OID in income as it accrues using a constant yield to maturity method (regardless of its method of accounting). OID is considered DE MINIMIS if it is less than 0.25% of the principal - 96 - amount of the Convertible Subordinated Debenture multiplied by its weighted average maturity. In general, OID must be included in income in advance of the receipt of the cash representing that income. BOND PREMIUM ON CONVERTIBLE SUBORDINATED DEBENTURES. If the Series A Preferred Stock is exchanged for Convertible Subordinated Debentures, and the holder's basis in the Convertible Subordinated Debentures exceeds the amount payable at the maturity date (or earlier redemption date, if appropriate) of the Convertible Subordinated Debentures, the excess (excluding the amount attributable to the conversion feature as determined under Treasury regulation section 1.171-2(c)(2)) may be deductible, subject to certain limitations with respect to individuals, by the holder of the Convertible Subordinated Debentures as amortizable bond premium over the term of the Convertible Subordinated Debentures (taking into account earlier call dates, as appropriate), under a yield to maturity formula but only if an election by the taxpayer under section 171 of the Code is in effect or is made. An election is binding once made and applies to all debt obligations owned or subsequently acquired by the taxpayer. The amortizable bond premium will be treated as an offset to interest income on the Convertible Subordinated Debentures, rather than as a separate deduction item. - 97 - MARKET DISCOUNT ON RESALE OF CONVERTIBLE SUBORDINATED DEBENTURES If a holder acquires (other than at original issue) a Convertible Subordinated Debenture at a price that is less than the principal amount of the Convertible Subordinated Debenture, or if the Convertible Subordinated Debenture is issued with OID, its adjusted issue price, by an amount greater than a statutory DE MINIMIS amount, the Convertible Subordinated Debenture will be treated as having market discount. If a holder thereafter recognizes gain upon disposition of such a Convertible Subordinated Debenture, the lesser of (i) such gain, or (ii) the portion of the market discount that accrued while the Convertible Subordinated Debenture was held by the holder will be treated as ordinary income at the time of the disposition. A holder of a Convertible Subordinated Debenture may elect to include any market discount in income currently as it accrues rather than upon disposition on the Convertible Subordinated Debenture. This election is revocable only with the consent of the IRS and applies to all market discount bonds acquired by the holder on or after the first day of the taxable year in which the holder makes the election In addition, although market discount generally accrues on a straight line basis over the term of the Convertible Subordinated Debenture, at the election of the holder, it will accrue on a constant interest basis. A holder of a Convertible Subordinated Debenture that acquired it at a market discount may be required to defer the deduction of all or a portion of any interest paid or accrued on any indebtedness incurred or continued to purchase or carry the Convertible Subordinated Debenture until the market discount is recognizable upon a subsequent disposition of the Convertible Subordinated Debenture. Deferral is not required, however, if the holder elects to include accrued market discount in income currently. REDEMPTION OR SALE OF CONVERTIBLE SUBORDINATED DEBENTURES Generally, any redemption or sale of Convertible Subordinated Debentures by a holder would result in taxable gain or loss equal to the difference between the amount of cash received (except to the extent that cash received is attributable to accrued interest) and the holder's basis in the Convertible Subordinated Debentures. The tax basis of a holder of a Convertible Subordinated Debenture generally will be equal to the holder's cost, increased by any market discount included in the holder's income, and reduced by any amortizable bond premium applied against the holder's income, prior to sale or redemption of the Debenture. The tax basis of a holder that received a Convertible Subordinated Debenture in exchange for Series A Preferred Stock will generally be equal to the issue price of the Convertible Subordinated Debenture on the date the Debenture was issued plus any OID or market discount on the Convertible Subordinated Debenture included in the holder's income prior to sale or redemption of the Convertible Subordinated Debenture. Subject to the market discount rules described above, such gain or loss would be capital gain or loss and would be long-term capital gain or loss if the holding period exceeded one year. CONVERSION OF SERIES A PREFERRED STOCK OR CONVERTIBLE SUBORDINATED DEBENTURES INTO COMMON STOCK No gain or loss generally will be recognized upon conversion of shares of Series A Preferred Stock or Convertible Subordinated Debentures into shares of Common Stock, except with respect to any cash paid in lieu of fractional shares of Common Stock, which generally will be capital gain. Additionally, if the conversion takes place when there is a dividend arrearage on the Series A Preferred Stock and the fair market value of the Common Stock exceeds the issue price of the Series A Preferred Stock, a portion of the Common Stock received might be treated as a dividend distribution, taxable as ordinary income. In addition, ordinary income may be recognized to the extent that a portion of the Common Stock received is determined to constitute an interest payment with respect to the Convertible Subordinated Debentures. The tax basis of the Common Stock received upon conversion will be equal to the tax basis of the shares of Series A Preferred Stock (assuming the conversion is not treated as resulting in the payment of a dividend) or the Convertible Subordinated Debentures converted, and the holding - 98 - period of the Common Stock will include the holding period of the shares of Series A Preferred Stock or Convertible Subordinated Debentures converted. The tax basis of any Common Stock treated as a dividend will be equal to its fair market value on the date of the distribution. ADJUSTMENT OF CONVERSION PRICE Holders of convertible preferred stock or convertible debt may be deemed to have received a constructive distribution of stock that is taxable as a dividend where the conversion ratio is adjusted to reflect a cash or property distribution with respect to stock into which such preferred stock is convertible. An adjustment to the conversion price made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing the dilution of the interest of the holders generally will not be considered to result in a constructive distribution of stock. Certain of the possible adjustments provided in the Series A Preferred Stock and Convertible Subordinated Debentures may not qualify as being pursuant to a bona fide reasonable adjustment formula. If a nonqualifying adjustment were made, the holders of Series A Preferred Stock or Convertible Subordinated Debentures might be deemed to have received a taxable stock dividend. BACKUP WITHHOLDING Under the backup withholding provisions of the Code and applicable Treasury regulations, a holder of Series A Preferred Stock or Convertible Subordinated Debentures may be subject to backup withholding at the rate of 31% with respect to dividends on, or the proceeds of a sale, exchange or redemption of, the Series A Preferred Stock or Convertible Subordinated Debentures, unless such holder (i) is a corporation or comes within certain other exempt categories and when required demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to a holder will be credited against the holder's federal income tax liability and may entitle the holder to a refund, provided that the required information is furnished to the IRS. PLAN OF DISTRIBUTION Westbridge will not receive any of the proceeds from the sale by the Selling Securityholders of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures offered hereby. Any or all of the shares of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may be sold from time to time (i) to or through underwriters or dealers, (ii) directly to one or more other purchasers, (iii) through agents on a best-efforts basis, or (iv) through a combination of any such methods of sale. The Selling Securityholders and any such underwriters, dealers or agents that participate in the distribution of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may be deemed to be underwriters within the meaning of the Securities Act, and any profit on the sale of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures by them and any discounts, commissions or concessions received by them may be deemed to be underwriting discounts and commissions under the Securities Act. The Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may be sold from time to time in one or more transactions at a fixed offering price, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the Selling Securityholders or by an agreement between the Selling Securityholders and underwriters or dealers. Brokers or dealers acting in connection with the sale of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures contemplated by this Prospectus may receive fees or commissions in connection therewith. - 99 - At the time a particular offer of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures is made, to the extent required, a supplement to this Prospectus will be distributed which will identify and set forth the aggregate number of shares of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, the purchase price paid by any underwriter for Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures purchased from the Selling Securityholders, any discounts, commissions and other items constituting compensation from the Selling Securityholders and/or Westbridge and any discounts, commissions or concessions allowed or reallowed or paid to dealers, including the proposed selling price to the public. Such supplement to this Prospectus and, if necessary, a post-effective amendment to the Registration Statement of which this Prospectus is a part, will be filed with the Commission to reflect the disclosure of additional information with respect to the distribution of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures. The Series A Preferred Stock is not currently listed on any national securities exchange or included on the NASDAQ System. Westbridge does not intend to provide for such a listing or inclusion for the Series A Preferred Stock or, if issued, the Convertible Subordinated Debentures. The outstanding Common Stock is, and the Common Stock offered hereby will be, listed on the NYSE. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may not simultaneously engage in market making activities with respect to the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures for a period of nine business days prior to the commencement of such distribution. In addition and without limiting the foregoing, the Selling Securityholders and any person participating in the distribution of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation rules 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures by the Selling Securityholders or any such other person. In order to comply with certain states' securities laws, if applicable, the Series A Preferred Stock, Common Stock and Convertible Subordinated Debentures will be sold in such jurisdictions only through registered or licensed brokers or dealers. In certain states the Series A Preferred Stock, Common Stock and Convertible Subordinated Debentures may not be sold unless they have been registered or qualified for sale in such state, or unless an exemption from registration or qualification is available. Pursuant to the Preferred Stock Purchase Agreement, Westbridge agreed to file the Registration Statement of which this Prospectus is a part with the Commission and use its best efforts to have it declared effective, and to indemnify the Selling Securityholders and certain other persons against certain liabilities, including liabilities arising under the Securities Act. Under the terms of such Preferred Stock Purchase Agreement, Westbridge has agreed to keep such Registration Statement continuously effective for a period of three years from the date the Registration Statement is first declared effective by the Commission. Pursuant to the Preferred Stock Purchase Agreement, Westbridge has paid or will pay any and all expenses incident to the performance of or compliance with such agreement including, among other things, registration and filing fees, fees and expenses incurred in connection with compliance with securities or blue sky laws of the applicable states, fees and disbursements of counsel and independent public accountants for Westbridge, but excluding underwriting discounts and commissions, the fees and expenses of counsel to the Selling Securityholders and transfer taxes, if any. - 100 - In the Preferred Stock Purchase Agreement, Westbridge agreed to indemnify and hold harmless, to the extent permitted by law, the Selling Securityholders and their general and limited partners, officers, directors, agents and employees and each person who controls a Selling Securityholder against all losses, claims, damages, liabilities, costs (including the costs of investigation and reasonable attorneys' fees) and expenses (collectively "Losses"), arising out of or based upon any untrue or alleged untrue statement of material fact contained in this Prospectus or the Registration Statement of which it is a part, any amendment of supplement hereto or thereto, or any omission or alleged omission of a material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading, except to the extent that the same arise out of or are based upon information furnished in writing to Westbridge by such Selling Securityholders expressly for use herein or therein. The Selling Securityholders also have agreed to indemnify, to the extent permitted by law, Westbridge and its officers, directors, agents and employees, and each person who controls Westbridge against Losses arising out of or based upon any untrue statement of material fact contained in this Prospectus or the Registration Statement of which it is a part, any omission to state herein or therein a material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading to the extent such statement or omission is contained in information provided by such Selling Securityholder for inclusion herein or therein. SELLING SECURITYHOLDERS Certain holders of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may offer such securities hereby on a continuous or delayed basis pursuant to Rule 415 promulgated under the Securities Act. Holders who so offer such securities (the "Selling Securityholders") shall consist solely of Investors and permitted transferees thereof, if any, which acquired such securities other than under an effective registration statement with respect to such securities or in a public distribution pursuant to Rule 144 promulgated under the Securities Act. The following table provides certain information as of the date of this Prospectus with respect to each Selling Securityholder for whose account Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures may be sold pursuant to this Prospectus, which information has been furnished to the Company by the Selling Securityholders and other sources that the Company has not certified. Because the Selling Securityholders may sell all or some part of the Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures that they hold pursuant to this Prospectus, no estimate can be given as to the amount of Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures that will be held by the Selling Securityholders at any time subsequent to the date of this Prospectus. SEE "Plan of Distribution." As of the date of this Prospectus, none of the Selling Securityholders has had a material relationship within the past three years with the Company or any of its Subsidiaries, other than as a result of the ownership of the securities of the Company. - 101 -
Shares of Shares of Series A Series A Preferred Stock Preferred Stock Beneficially Beneficially Owned Prior to Shares Offered Owned After the Name Of Selling Securityholder The Offering (1) Hereby (2) The Offering (1)(2)(3) - ------------------------------ -------------------- ------------- ---------------------- Number Percent Number Percent (4) ------ ------- ------ ----------- Delaware State Employees Retirement Fund 1,675 8.38 1,675 0 Declaration of Trust for Defined Benefit Plans of Zeneca Holdings, Inc. 325 1.63 325 0 Declaration of Trust for Defined Benefit Plans of ICI American Holdings, Inc. 500 2.50 500 0 Davos Partners, L.P. (5) 780 3.90 780 0 Adrienne Partners, L.P. (5) 90 (7) 90 0 Antosa Ltd. 250 1.25 250 0 Bonnington Corporation 150 (7) 150 0 Lulworth Corporation 150 (7) 150 0 Chesterwood Ltd. 150 (7) 150 0 Sebo Ltd. 150 (7) 150 0 Palmareal Ltd. 150 (7) 150 0 President and Fellows of Harvard College 5,000 25.00 5,000 0 National Lloyds Insurance Company 1,000 5.00 1,000 0 Convertible Holdings, Inc. 2,000 10.00 2,000 0 Offshore Strategies Ltd. 500 2.50 500 0 Bridge Rope & Co. (6) 1,500 7.50 1,500 0
- -------------------- (1) Information with respect to beneficial ownership was obtained from the Selling Securityholders. (2) This Prospectus also covers the maximum number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock or Convertible Subordinated Debentures, and the aggregate principal amount of Convertible Subordinated Debentures issuable upon exchange of the Series A Preferred Stock, in each case, as described herein. (3) Assumes sale of all, and no other purchases or sales of, Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures. SEE "Plan of Distribution." (4) No holders will after the Offering own as much as 1% of the Series A Preferred Stock. (5) Such shares are beneficially owned by David Nolan. (6) Such shares are beneficially owned by Merrill Lynch World Income Fund, Inc. (7) Less than 1%. The Selling Securityholders' right to offer Series A Preferred Stock, Common Stock or Convertible Subordinated Debentures hereby derives from certain registration rights granted to the Investors in the Preferred Stock Purchase Agreement. In the Preferred Stock Purchase Agreement, Westbridge agreed to use its best efforts to keep the Registration Statement, of which this Prospectus is a part, effective for a period of up to three years following the date of its original effectiveness. LEGAL MATTERS The legality of the Series A Preferred Stock, the Convertible Subordinated Debentures issuable upon the exchange of the Series A Preferred Stock, and the Common Stock issuable upon the conversion of the Series A Preferred Stock or the Convertible Subordinated Debentures and certain Federal tax matters has been passed upon for the Company by Milbank, Tweed, Hadley & McCloy, New York, New York. - 102 - EXPERTS The consolidated financial statements of Westbridge included in this Prospectus as of December 31, 1995, 1994, and 1993, and for each of the years in the three-year period ended December 31, 1995, and the financial statement schedules included herein and elsewhere in the Registration Statement, have been so included in reliance upon the report of Price Waterhouse, independent accountants, given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of NFI as of December 31, 1993, and for the year then ended, have been so included in reliance upon the report of Price Waterhouse, independent accountants, given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of NFI as of December 31, 1992, and for each of the years in the two-year period ended December 31, 1992, have been so included in reliance upon the report of Jaynes, Reitmeier, Boyd & Therrell, P.C., independent accountants, given upon the authority of such firm as experts in accounting and auditing. - 103 - GLOSSARY OF INSURANCE TERMS The following Glossary includes definitions of certain general insurance terms, as well as certain terms which relate specifically to the Company. agent: An independent contractor representative of an insurer licensed to sell and service the insurer's products. amortization of DPAC: Amortization of DPAC for a particular period expressed as a percentage of premiums earned for that period, all amounts determined in accordance with GAAP. assumption reinsurance: A transfer of policies from one insurance company to another where there is a novation of the existing policies and the assuming insurer is substituted for the transferring insurer. The transferring insurer is released from any obligations to the policyholder under the policy. benefits: All amounts payable pursuant to the Company's policies, including base policy benefits and the benefits payable by the Company by virtue of a return of premium rider. claim: A demand by the policyholder for payment by the Company of a base policy benefit. coinsurance: Where two or more insurers share all losses covered by a policy in a proportion agreed upon in advance. commission: Compensation paid by an insurer to its agents or to brokers for placing insurance coverage with the insurer, usually determined as a percentage of premiums earned by the insurer with respect to policies written by those agents or brokers. controlled agency network system: A group of agency networks in which the Company has either a substantial ownership interest or a long-term marketing relationship or reinsurance agreement. copayment: The amount paid by a covered person toward a claim after the deductible has been met. deductible: The portion of an insured loss to be borne by the insured before he is entitled to any recovery from the insurer. - 104 - deferred policy acquisition costs (DPAC): An asset of an insurer, determined in accordance with GAAP, that consists of expenses incurred by the insurer that are related to, and vary with, the production of new sales. This asset consists of the portion of first-year commissions in excess of renewal commissions and certain underwriting, policy issue and selling expenses, all of which are capitalized and amortized over the expected term of the policy. This asset does not exist under SAP, which require that these items be expensed in the period in which they are incurred. first-year premiums: During any fiscal period, the premiums recorded in the first 12 months following the issuance of a policy. GAAP: Generally accepted accounting principles in the United States. guaranteed renewable policy: An insurance policy that the policyholder has the absolute right to continue in force for the duration of his life or for a specified period of time by the timely payment of premiums. The insurer is contractually prohibited during such period, absent policyholder agreement, from changing any provision of a guaranteed renewable policy, other than the amount of premiums payable by the insured. level term: A type of life insurance policy where the face value remains the same from the effective date until the expiration date. loss ratio: The sum of the Company's policyholder benefits and claims for a particular period plus the increase in its policy benefit reserves during that period expressed as a percentage of its premiums earned for that period. morbidity: The relative incidence of disease. mortality: The relative incidence of death. NAIC: The National Association of Insurance Commissioners, an association of all state insurance commissioners formed to promote uniformity in regulation. Statutory accounting practices are largely based on NAIC policies. policy: An individual contract of insurance or a certificate of coverage issued by an insurer to a policyholder evidencing the agreement of the insurer to provide the benefit described therein. policyholder: The individual who applies to the Company for coverage and in whose name a policy or a certificate of coverage is issued. The policyholder will receive the benefits payable under the policy unless he assigns them to someone else or he designates a beneficiary. - 105 - policyholder benefits: The total amount of benefits paid under the Company's policies during a particular period plus the increase (or minus the decrease) in its unpaid claim reserves (including the IBNR claim reserves and the ICOS claim reserves). premiums: The amount payable to an insurer by its policyholders in consideration of the coverage period under its insurance policies. recapture: The action of a ceding insurance company taking back from a reinsurer insurance previously ceded. reinsurance: The acceptance by one or more insurers, of a portion or all of the risk underwritten by another insurer. renewal premiums: During any fiscal period, the premiums recorded from and after the 13th month following the issuance of a policy. rider: An agreement attached to or incorporated into an insurance policy which adds to, or changes the terms of coverage provided under the policy. statutory accounting practices (SAP): Accounting practices prescribed or permitted by the relevant state insurance regulatory authorities. statutory capital and surplus: The amount remaining after all of an insurer's liabilities as of a particular date are subtracted from all of its assets as of that date, all amounts determined in accordance with SAP. surplus: The amount by which admitted assets exceed liabilities and paid-in capital, all amounts as determined in accordance with SAP. underwriting: An insurer's process of reviewing an application for insurance coverage, deciding whether and on what basis to award all or part of the coverage requested, and determining the applicable premium; also refers to the granting of such coverage. - 106 - INDEX TO FINANCIAL STATEMENTS The Company Report of Independent Accountants.................................................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and 1994....................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993.................................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.................................................................................... F-6 Consolidated Statements of Changes in Stockholders' Equity......................................... F-8 Notes to Consolidated Financial Statements......................................................... F-9 Unaudited Consolidated Balance Sheets as of March 31, 1996, December 31, 1995 and March 31, 1995............................................................. F-30 Unaudited Consolidated Statements of Operations for the three months ended March 31, 1996 and 1995.......................................................................... F-32 Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995........................................................................... F-33 Notes to Unaudited Consolidated Financial Statements............................................... F-34 NFI and AICT Reports of Independent Accountants................................................................. F-35 Consolidated Balance Sheets of December 31, 1993 and 1992.......................................... F-37 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991............. F-39 Consolidated Statement of Changes in Stockholder's Equity.......................................... F-40 Consolidated Statement of Cash Flows............................................................... F-41 Notes to Consolidated Financial Statements......................................................... F-43 Unaudited Consolidated Balance Sheet as of March 31, 1994.......................................... F-58 Unaudited Consolidated Statement of Income for the three months ended March 31, 1994 .............. F-60 Unaudited Consolidated Statement of Cash Flows for the three months ended March 31, 1994........... F-61 Notes to Unaudited Consolidated Financial Statements............................................... F-62 Pro Forma Pro Forma Financial Information.................................................................... P-1 Pro Forma Consolidated Statement of Operations for the year ended December 31, 1994................ P-2 Notes to Pro Forma Financial Information........................................................... P-3
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Stockholders of Westbridge Capital Corp. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 Fort Worth, Texas March 29, 1996 F-2 WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
December 31, 1995 1994 ----------------- Investments: Fixed maturities: Available-for-sale, at market value (amortized cost $83,160 and $11,310) ............. $ 86,780 $ 10,787 Held-to-maturity, at amortized cost (market value $0 and $75,238) .................... -- 80,377 Equity securities, at market .......................... 539 469 Investment in Freedom Holding Company, on the equity basis ................................ 6,173 5,945 Mortgage loans on real estate ......................... 639 768 Investment real estate ................................ 141 141 Policy loans .......................................... 285 291 Short-term investments ................................ 14,946 7,189 ------- ------- Total Investments ............................. 109,503 105,967 Cash ..................................................... 2,013 2,871 Accrued investment income ................................ 1,711 1,924 Receivables from agents, net of $1,187 and $1,137 allowance for doubtful accounts ................ 16,706 7,353 Deferred policy acquisition costs ........................ 56,977 58,654 Leasehold improvements and equipment, at cost, net of accumulated depreciation and amortization of $3,905 and $3,446 ..................................... 1,590 1,215 Other assets ............................................. 12,499 9,597 ------- ------- Total Assets .................................. $200,999 $187,581 ======= =======
The accompanying notes are an integral part of these financial statements. F-3 WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
December 31, 1995 1994 -------------------- Liabilities: Policy liabilities and accruals: Future policy benefits .............................. $ 46,620 $ 62,893 Claims .............................................. 39,063 41,387 ------- ------- 85,683 104,280 Accumulated policyholders' funds ....................... 373 372 Other liabilities ...................................... 11,226 8,678 Deferred income taxes .................................. 5,841 3,231 Notes payable .......................................... 15,807 -- Senior subordinated debentures, net of unamortized discount ......................... -- 24,665 Senior subordinated notes, net of unamortized discount, due 2002 ...................... 19,264 -- ------- ------- Total Liabilities ........................... 138,194 141,226 ------- ------- Redeemable Preferred Stock ............................. 20,000 20,000 ------- ------- Stockholders' Equity: Common stock, ($.l0 par value, 30,000,000 shares authorized; 5,992,458, and 4,430,458 shares issued) .......... 599 443 Capital in excess of par value ...................... 29,208 19,328 Unrealized appreciation (depreciation) of investments carried at market value, net of tax 2,593 (147) Retained earnings ................................... 10,575 6,901 ------- ------- 42,975 26,525 Less - Aggregate of shares held in treasury and investment by affiliate in Westbridge Capital Corp. common stock (28,600 at December 31, 1995 and 1994, at cost) .......................... (170) (170) ------- ------- Total Stockholders' Equity .................. 42,805 26,355 ------- ------- Commitments and contingencies Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity ............ $ 200,999 $ 187,581 ======= =======
The accompanying notes are an integral part of these financial statements. F-4 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data)
Year Ended December 31, 1995 1994 1993 ------------------------------------ Revenues: Premiums: First-year ................................... $ 34,774 $ 15,111 $ 8,738 Renewal ...................................... 85,319 83,592 59,993 ------- ------- ------- 120,093 98,703 68,731 Net investment income ........................... 7,421 5,764 4,120 Fee and service income .......................... 2,327 1,728 1,397 Net realized gain on investments ................ 182 320 1,030 Other income .................................... 9 31 14 ------- ------- ------- 130,032 106,546 75,292 ------- ------- ------- Benefits, claims and expenses: Benefits and claims ............................. 70,465 53,623 33,153 Amortization of deferred policy acquisition costs 11,553 9,711 8,159 Commissions ..................................... 11,359 11,224 9,595 General and administrative expenses ............. 21,926 16,847 14,349 Taxes, licenses and fees ........................ 4,101 3,230 2,724 Interest expense ................................ 2,432 3,067 2,552 ------- ------- ------- 121,836 97,702 70,532 ------- ------- ------- Income before income taxes, equity in earnings of Freedom Holding Company and extraordinary item .. 8,196 8,844 4,760 Provision for income taxes ......................... 2,813 2,764 1,562 Equity in earnings of Freedom Holding Company ...... 348 345 333 ------- ------- ------- Income before extraordinary item ................... 5,731 6,425 3,531 Extraordinary loss from early extinguishment of debt 407 -- -- ------- ------- ------- Net income ................................ $ 5,324 $ 6,425 $ 3,531 ======= ======= ======= Preferred stock dividends .......................... 1,650 1,190 -- ------- ------- ------- Income applicable to common stockholders ........... $ 3,674 $ 5,235 $ 3,531 ======= ======= ======= Earnings Per Common Share: Primary: Income before extraordinary item ............. $ 0.70 $ 1.13 $ 0.78 Extraordinary item ........................... (0.07) -- ------- ------- ------- Net earnings .............................. $ 0.63 $ 1.13 $ 0.78 ======= ======= ======= Fully Diluted: Income before extraordinary item ............. $ 0.70 $ 1.03 $ 0.78 Extraordinary item ........................... (0.05) -- -- ------- ------- ------- Net earnings .............................. $ 0.65 $ 1.03 $ 0.78 ======= ======= ======= Weighted Average Shares Outstanding: Primary ......................................... 5,836,000 4,617,000 4,555,000 Fully Diluted ................................... 8,204,000 6,267,000 4,555,000
The accompanying notes are an integral part of these financial statements. F-5 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 1995 1994 1993 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income applicable to common stockholders $ 3,674 $ 5,235 $ 3,531 Adjustments to reconcile net income applicable cash provided by (used for) operating activities: Decrease in policy liabilities and accruals (5,194) (6,700) (15,108) Amortization of deferred policy acquisition costs 11,553 9,711 8,159 Increase in deferred income taxes 2,610 905 1,138 Additions to deferred policy acquisition costs (23,279) (12,582) (5,745) Depreciation expense 486 325 413 Increase in receivables from agents (9,353) (2,403) (994) Increase in other assets (2,902) (6,257) (128) Change in investment in Freedom Holding Company (228) (345) (333) Net realized gains on investments (182) (320) (1,030) Increase in other liabilities 2,548 1,013 2,867 Other, net (1,020) 798 49 ------- ------- ------- NET CASH USED FOR OPERATING ACTIVITIES (21,287) (10,620) (7,181) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: 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 10,240 Fixed maturities, classified as available-for-sale, called or matured 468 1,544 -- Fixed maturities, classified as held-to-maturity, sold -- -- 18,187 Fixed maturities, classified as available-for-sale, sold 6,585 7,275 -- Short-term investments sold or matured 15,058 45,020 1,581 Other investments sold or matured 136 98 329 Cost of investments acquired (23,629) (50,039) (25,542) Notes receivable from related parties -- 1,381 783 Additions to leasehold improvements and equipment, net of retirements (861) (976) (228) ------- ------- ------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 386 (11,518) 5,350 ------- ------- ------- 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 15,807 -- -- Issuance of common stock 10,108 395 123 Issuance of common stock warrants 74 -- -- Purchase and cancellation of common stock (146) (534) (89) ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 20,043 24,861 34 INCREASE (DECREASE) IN CASH DURING PERIOD (858) 2,723 (1,797) CASH AT BEGINNING OF PERIOD 2,871 148 1,945 ------- ------- ------- CASH AT END OF PERIOD $ 2,013 $ 2,871 $ 148 ======= ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 2,336 $ 2,678 $ 2,353 Income taxes $ 960 $ 2,090 $ 424
The accompanying notes are an integral part of these financial statements. F-6 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Supplemental Schedule Of Non-Cash Investing Activities: 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 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 $ 2,626,000 The Company purchased a Medicare Supplement block of business in the first quarter of 1993. This purchase resulted in the Company receiving investments and assuming liabilities as follows: Investments $ 2,526,000 Policy liabilities $ 2,445,000 The accompanying notes are an integral part of these financial statements. F-7 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data)
Unrealized Appreciation Retained Total Capital (Depreciation) Earnings Stock- Common Stock in Excess of Accumulated Treasury Stock holders' Shares Amount of Par Value Investments Deficit) Shares Amount Equity ------------------------------------------------------------------------------------- Balance at January 1, 1993 4,220,837 $ 422 $ 19,454 $ 172 $ (1,865) 28,600 $ (170) $ 18,013 Net income 3,531 3,531 Unrealized appreciation of investments 33 33 Issuance of shares under stock option plans 66,180 7 116 123 Shares purchased and canceled (13,550) (2) (87) (89) -------------------------------------------------------------------------------------- Balance at December 31, 1993 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 canceled (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 canceled (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 ========= ===== ======= ====== ====== ====== ==== ======
The accompanying notes are an integral part of these financial statements. F-8 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 accounts of Westbridge Capital Corp. ("the Company"), and its wholly-owned subsidiaries, National Foundation Life Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"), American Insurance Company of Texas ("AICT"), 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"), and Westbridge Funding Corporation ("WFC"), (formerly known as National Legal Services Company, Inc.), as well as its 51%-owned subsidiary, LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), and its 50%-owned subsidiaries, Senior Benefits, LLC ("Senior Benefits"), American Senior Security Plans, LLC ("ASSP"), and Health Care-One Insurance Agency, Inc. ("Health Care-One"). The Company's decision to consolidate the accounts of Senior Benefits, ASSP, and Health Care-One, is based on the extent to which the Company exercises control over Senior Benefits, ASSP and Health Care-One. The Company has agreed to provide 100% of the financing required to support the marketing efforts of Senior Benefits, ASSP, and Health Care-One, and also has significant input in their management. All significant intercompany accounts and transactions have been eliminated. Nature of Operations. The Company, through its subsidiaries and affiliates, principally underwrites and sells specialized health insurance products and health plans. The company's major product lines are Cancer and Specified Disease Products, Medical Expense Products and Medicare Supplement Products. Accounting Principles and Regulatory Matters. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). These principles differ from statutory accounting principles, which must be used by the Company's Insurance Subsidiaries when reporting to state insurance departments. The Company's Insurance Subsidiaries are subject to oversight by insurance regulators of Delaware, Texas and other states in which they are authorized to conduct business. These regulators perform triennial examinations of the statutory financial statements and, as a result, may propose adjustment to such statements. 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 Freedom Holding Company is accounted for on the equity basis (i.e., cost adjusted for equity in post-acquisition earnings and amortization of excess cost). 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 identification basis. 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. F-9 Deferred Policy Acquisition Costs. Policy acquisition costs consisting of commissions and other 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. Amortization is dynamically adjusted based on current and projected future levels of premium revenue. Such 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 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 necessarily subject to the impact of future changes in claim experience and, as adjustments become necessary, they are reflected in current operations. Recognition of Revenue. Life insurance and accident and health premiums are recognized as revenue when received. Benefits and expenses are associated with related premiums so as to result in a proper matching of revenue with expenses. 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. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Earnings Per Share. Primary net income per share of Common Stock is determined by dividing net income, less dividends on the Series A Preferred Stock, by primary weighted-average shares outstanding. Fully diluted net income per share is computed through dividing net income 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. New Accounting Pronouncements. During 1995, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and F-10 for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the statement requires that long-lived assets and certain identifiable intangibles to be disposed of, be reported at the lower of carrying amount of fair value less cost to sell. FAS No. 121 is effective for fiscal years beginning after 1995. The Company plans to adopt FAS No. 121 effective January 1, 1996. Management does not anticipate that adoption of this standard will have a material impact on the Company's financial statements. During 1995, the FASB also issued FAS No. 123 "Accounting for Stock-Based Compensation", which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This statement also allows companies to continue to account for stockbased compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", with footnote disclosure of the pro-forma effects of the fair value based method. The Company plans to adopt SFAS No. 123 during 1996 by continuing to account for stock-based compensation under the intrinsic value method and disclosing the pro-forma effects of the fair value method in the footnotes to the financial statements. NOTE 2 - INVESTMENTS Major categories of investment income are summarized as follows: Year Ended December 31, 1995 1994 1993 ----------------------- (In thousands) Fixed maturities $6,542 $5,064 $3,823 Mortgage loans on real estate 71 83 94 Short-term investments 250 489 31 Other 824 308 323 ----- ----- ----- 7,687 5,944 4,271 Less: Investment expenses 266 180 151 ----- ----- ----- Net investment income $7,421 $5,764 $4,120 ===== ===== ===== Realized gains (losses) on investments are summarized as follows: Year Ended December 31, 1995 1994 1993 ---------------------- (In thousands) Fixed maturities $ 185 $320 $ 1,113 Short-term investments (3) -- 55 Other long-term investments -- -- (138) ---- ---- ------ Realized gains on investments $ 182 $320 $ 1,030 ==== ==== ====== F-11 Unrealized appreciation (depreciation) on investments reflected directly in stockholders' equity is summarized as follows: Year Ended December 31, 1995 1994 1993 --------------------- (In thousands) Balance at beginning of year $ (147) $ 205 $172 Unrealized appreciation (depreciation), net of tax on fixed maturities available-for-sale 2,735 (346) -- Unrealized appreciation (depreciation) on equity securities and other investments 5 (6) 33 ----- ---- ---- Balance at end of year $ 2,593 $(147) $205 ===== ==== ==== 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 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, 1995. In accordance with the Statement, the cumulative effect of recording to a separate component of stockholders' equity the difference between market value and amortized cost at January 1, 1994 of securities classified as available-for-sale has been treated as a change in accounting principle, and no restatement of prior year financial statements has been made. Additionally, in accordance with the statement, all investments categorized as held-to-maturity, were transferred to the available-for-sale category at December 31, 1995. Market values represent the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the company, which may be of another issuer. F-12 The amortized cost and estimated market values of investments in fixed maturities as of December 31, 1995 and 1994, are summarized by category as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Market Available-for-Sale Cost Gains Losses Value - ------------------ ------------------------------------------------------- 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 ======================================================
Gross Gross Estimated Amortized Unrealized Unrealized Market Available-for-Sale Cost Gains Losses Value - ------------------ ------------------------------------------------------- U.S. Government and governmental agencies and authorities $ - $ - $ - $ - States, municipalities, and political subdivisions 1,485 - 35 1,450 Mortgage-backed securities 2,622 11 133 2,500 Public utilities 2,516 - 95 2,421 All other corporate bonds 4,687 9 280 4,416 ------------------------------------------------------ Balance at December 31, 1994 $11,310 $ 20 $ 543 $10,787 ======================================================
Gross Gross Estimated Amortized Unrealized Unrealized Market Held-to-Maturity Cost Gains Losses Value - ---------------- ------------------------------------------------------- U.S. Government and governmental agencies and authorities $27,849 $ 89 $1,289 $26,649 States, municipalities, and political subdivisions - - - - Mortgage-backed securities 9,403 - 336 9,067 Public utilities 6,357 37 415 5,979 Financial institutions 18,244 11 1,748 16,507 All other corporate bonds 18,124 54 1,542 16,636 Certificates of deposit 400 - - 400 ------------------------------------------------------ Balance at December 31, 1994 $80,377 $191 $5,330 $75,238 ======================================================
F-13 The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1995, 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 ------------------ Due in one year or less $ 3,441 $ 3,441 Due after one year through five years 23,078 23,380 Due after five years through ten years 18,730 19,987 Due after ten years 27,155 28,897 Mortgage-backed securities 10,756 11,075 ------------------ $83,160 $86,780 ================== A summary of unrealized appreciation (depreciation) reflected directly in stockholders' equity at December 31, 1995 and 1994, on investments in fixed maturities available-for-sale, is as follows (in thousands): Year Ended December 31, 1995 1994 -------------------- Amortized cost $83,160 $ 11,310 Estimated market value 86,780 10,787 ------ ------ Excess (deficit) of market value to amortized cost 3,620 (523) Estimated tax 1,231 (178) ------ ------ Unrealized appreciation (depreciation), net of tax $ 2,389 $ (345) ------ ------ A summary of unrealized appreciation (depreciation) on investments in fixed maturities held-to-maturity, is as follows (in thousands): Year Ended December 31, 1994 1993 ------------------- Amortized cost $ 80,377 $49,737 Estimated Market Value 75,238 51,806 ------ ------ Unrealized appreciation (depreciation) $ (5,139) $ 2,069 ====== ====== Proceeds from sales of investments in fixed maturity securities were $9,682,000 in 1995 and $13,176,000 in 1994. Gross gains of $255,000 and gross losses of $73,000 were realized on 1995 sales. Gross gains of $372,000 and gross losses of $52,000 were realized on 1994 sales. Included in fixed maturities at December 31, 1995, are two high-yield, unrated or less than investment grade corporate debt securities. The Company's investment in the two securities comprises 0.7% of total cash and invested assets at December 31, 1995. The Company owned one high-yield, unrated or less than F-14 investment grade corporate debt security at December 31, 1994. The Company's investment in this security comprised 0.1% of total cash and invested assets at December 31, 1994. Securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1995 and 1994 aggregated $19,920,000 and $19,820,000, respectively. NOTE 3 - ACQUISITIONS 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. NFIC and AICT are health insurers which ceased marketing operations in the past, and currently administer closed blocks of health insurance policies. During the latter part of 1994, NFIC and AICT renewed marketing operations. The purchase price for the Acquisition approximated $20,100,000, which was paid in cash. The Acquisition has been 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 benefit and claims liabilities for NFIC and AICT. These changes resulted in a net purchase accounting adjustment of approximately $13.4 million. The funds used to acquire NFIC and AICT were provided by the issuance of Series A Preferred Stock (see NOTE 9). The following summary, prepared on a pro-forma basis, combines the consolidated results of operations of NFIC and AICT with the operations of the Company, after including the impact of certain adjustments, such as amortization of deferred acquisition costs, dividends on the Series A Preferred Stock, and factually supportable expense reductions resulting from the consolidation of administrative operations, which will have a continuing impact. The following results assume the acquisition occurred as of the beginning of the respective periods. PRO-FORMA FINANCIAL DATA (Unaudited) (In thousands, except share data) Year Ended December 31, ----------------------- 1994 1993 ----------------------- Total Revenues $ 115,466 $ 116,446 Income applicable to common stockholders 5,483 5,149 Net income per common share: Primary $ 1.19 $ 1.13 Fully diluted $ 1.03 $ 0.99 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 periods presented. In addition, the pro forma financial information is not intended to be a projection of future results. F-15 Acquisition of a Block of Cancer and Specified Disease Insurance Business On February 8, 1994, NFL completed its purchase of a block of Cancer 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. Acquisition of Medicare Supplement Business On March 29, 1993, NFL completed its purchase of a block of Medicare Supplement policies from Life and Health Insurance Company of America ("LHI"). Under the terms of the purchase, LHI transferred to NFL $2,526,000 in cash and NFL assumed the risks associated with those policies. The Company accounted for this transaction using the purchase method of accounting. NOTE 4 - INVESTMENT IN FREEDOM HOLDING COMPANY In November 1988, the Company purchased a 40% equity interest in Freedom Holding Company of Louisville, Kentucky ("Freedom"). Freedom owns 100% of Freedom Life Insurance Company of America ("FLICA"), a Mississippi insurer licensed in 34 states and specializing in the sale of Cancer and Specified Disease Insurance products. Freedom's 60% principal owner is John P. Locke. Concurrent with the equity purchase in Freedom, Locke and his insurance marketing agencies also entered into a 10-year marketing agreement with FLICA and NFL for the sale of their products on an exclusive basis. Additionally, FLICA and NFL consummated a 10-year coinsurance agreement under which NFL or its affiliates will receive 50% of all insurance business written by FLICA. The purchase price for the equity ownership in Freedom aggregated $4,200,000. The Company also made loans to Locke and Freedom in the amount of $2,400,000 and $1,086,000 respectively. The loans were each in the form of 10-year, 11.70% notes. Concurrent with the purchase, Locke made a $2,400,000 capital contribution to Freedom. This capital contribution together with the Company's loan to Freedom and $1,600,000 of the purchase price proceeds were utilized by Freedom to retire all of its then existing debt obligations. During 1994, both notes were repaid in full. The Company utilizes the equity method of accounting for its 40% equity interest in Freedom. The Company's portion of Freedom's earnings was $348,000 in 1995, $345,000 in 1994 and $333,000 in 1993. The Company received a $120,000 dividend in 1995 from Freedom. NOTE 5 - MARKETING OPERATIONS LifeStyles Marketing Group, Inc. Joint Venture 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 is providing financing to LifeStyles Marketing in its expansion efforts. LifeStyles Marketing's revenues and expenses during 1995 approximated $9,115,000 and $8,397,000, respectively. Revenues and expenses were $7,246,000 and $7,130,000 in 1994 and $5,395,000 and $6,014,000 in 1993, respectively. F-16 Of the revenues received, $7,664,000 were derived from NFL in the form of commission income on insurance products sold for NFL during 1995, $5,561,000 in 1994 and $4,386,000 in 1993. Through December 31, 1995, the Company loaned LifeStyles Marketing approximately $7,127,000 in the form of advances which accrue interest at prime plus 1% established at the beginning of each year, which equaled 8.5% during the year ended December 31, 1995, on the unpaid balance. There is not a scheduled repayment plan in place for amounts the Company has loaned to LifeStyles Marketing. No dividends are to be distributed to any shareholders until all advances and accrued interest due the Company have been repaid. 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. Through December 31, 1995, the Company has recognized 100% of the cumulative losses of LifeStyles Marketing in its consolidated financial statements. The minority interest share in such losses recognized by the Company is $840,000 at December 31, 1995. The Company has, and will continue to, recognize 100% of LifeStyles Marketing's profits in the consolidated financial statements until all cumulative losses are recovered through future earnings. Senior Benefits, LLC In November 1993, the Company acquired a 50% interest in Senior Benefits, which markets Medicare Supplement policies for NFL. The Company is providing financing to Senior Benefits during the start-up phase of the operations. Senior Benefits' revenue and expenses were $1,005,000 and $1,105,000 during 1995, and $278,000 and $547,000 during 1994, respectively. Of the revenues received, $982,000 were derived from NFL in the form of commission income on insurance products sold during 1995, and $271,000 in 1994. Through December 31, 1995, the Company loaned Senior Benefits approximately $980,000 in the form of advances. There is not a scheduled repayment plan in place for amounts the Company has loan Senior Benefits. No dividends are to be distributed to any shareholders until all advances due to the Company have been repaid. Through December 31, 1995, the Company has recognized 100% of the cumulative losses of Senior Benefits of which the minority interest share of such losses is approximately $175,000. NOTE 6 - 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 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. F-17 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 subsequent to 1981 use modifications of the 1965-1970 Select and Ultimate Basic Tables. ACCIDENT AND HEALTH PRODUCTS Withdrawals Issues through 1980 are based on industry experience; 1981 through 1993 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 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 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 7 - 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 convervitble 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 $20,000,000 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, 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. F-18 Subordinated Debentures In March 1986, the Company completed a public offering of 25,000 Units consisting of $25,000,000 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, $5,000,000 par value of the Debentures. For GAAP reporting purposes, the purchased Debentures were no longer treated as part of the Company's consolidated debt. In February 1994, NFL sold at par value, to an unrelated party, the $5,000,000 par value of the Debentures held in its portfolio. This transaction has been accounted for, on a consolidated basis as an issuance of debt. 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 $1,000,000 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. Credit Arrangement The Company has a $20,000,000 Credit Agreement (the "Agreement") which is secured by receivable balances from insurance agents which expires on December 28, 1997. There is a commitment fee of 1/2 of 1% on 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, 1995, was approximately 8.7%. The Company borrowed approximately $14,880,000 under the Agreement at December 31, 1995. The Agreement required the Company, among other things, to maintain minimum levels of statutory surplus, tangible net worth and certain minimum financial ratios. Subsequent to December 31, 1995 the Company made an additional borrowing under the Agreement of approximately $2,200,000. F-19 NOTE 8 - CLAIM RESERVES The following table provides a reconciliation of the beginning and ending claim reserve balances, on a grossof-reinsurance basis, for 1995, 1994 and 1993, to the gross amounts reported in the Company's balance sheet. Year Ended December 31, 1995 1994 1993 ---- ---- ---- (in thousands) Balance at January 1 (Gross) $41,387 $ 12,794 $ * Less: reinsurance recoverables 1,457 65 * ----- ------ ------- Net balance at January 1 39,930 12,729 21,635 Incurred related to: Current year 67,239 59,830 42,018 Prior years 2,698 (1,381) (5,376) ----- ------ ------ Total incurred 69,937 58,449 36,642 ------ ------ ------ Current year reserves acquired -- 33,032 291 Paid related to: Current year 46,755 42,919 30,205 Prior years 27,468 10,655 13,695 Current year acquired business -- 10,706 1,939 ------ ------ ----- Total paid 74,223 64,280 45,839 ------ ------ ------ Balance at December 31 35,644 39,930 12,729 Plus: reinsurance recoverables 3,419 1,457 65 ----- ----- ------ Balance at December 31 (Gross) $39,063 $ 41,387 $ 12,794 ======= ======== ======== - ------------------- * Amounts are presented net prior to the adoption by the Company in 1993 of SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long Duration Contracts." NOTE 9 - 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 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. F-20 * At December 31, 1994, the Series A Preferred Stock was convertible by the holders thereof into the Company's Common Stock at a conversion price of $8.75 per share. At December 31, 1994, the 20,000 shares of Series A Preferred Stock were convertible into 2,285,720 shares of Common Stock. At December 31, 1995, as a result of the Common Stock offering, the conversion price was adjusted to $8.41 per share which equates to the Series A Preferred Stock being convertible into 2,378,120 shares of Common Stock. * 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. NOTE 10 - DEFERRED POLICY ACQUISITION COSTS A summary of deferred policy acquisition costs by major product line of insurance follows:
1995 1994 1993 --------------------------------------------------- Accident Accident Accident and and and Life Health Life Health Life Health ------------------------------------------------------------------ (In thousands) Balance at beginning of year $ 31 $ 58,623 $ 36 $ 28,318 $ 46 $ 30,722 Deferrals: Commissions 122 16,517 2 7,465 2 4,733 Issue costs 30 6,484 3 1,535 2 1,008 --- ----- -- ----- -- ----- 183 81,624 41 37,318 50 36,463 Cost of insurance purchased - 126 - 31,006 - - Purchase accounting adjustment - (13,403) - - - - Amortization 22 (11,575) (10) (9,701) (14) (8,145) -- ------- --- ------ --- ------ Balance at end of year $ 205 $ 56,772 $ 31 $ 58,623 $ 36 $ 28,318 ======= ======== ======== ======== ======== ========
The cost of insurance purchased in 1994 is related to the purchase of NFIC 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 $2.3 million and $3.0 million in 1995 and 1994, respectively, net of interest accretion of $1.3 million and $1.5 million. F-21 During 1995, the Company recorded Purchase Accounting adjustments to the purchase price of NFIC as these adjustments fell within the one-year "look-back" period following the acquisition, in accordance with Statement of Financial Accounting Standard No. 38 "Accounting for Preacquisition Contingencies of Purchased Enterprises." For each of the next five years, the estimated amortization of the cost of insurance purchased is 15% to 20% of each years' beginning balance. NOTE 11 - 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 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 and AICT, file a consolidated federal income tax return. NFIC and AICT file separate federal income tax returns. The provision for U.S. federal income taxes charged to continuing operations was as follows: Year Ended December 31, 1995 1994 1993 ----------------------- (In thousands) Current ........................... $1,032 $1,581 $ 321 Deferred .......................... 1,781 1,183 1,241 ----- ----- ----- Total provision for income taxes .. $2,813 $2,764 $1,562 ====== ====== ====== 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 (loss) before income tax expense by the Federal income tax rate for the Company's last three years follow: Year Ended December 31, 1995 1994 1993 --------------------- Statutory tax rate 34% 34% 34% Small life insurance company deduction calculated as a percentage of life insurance company income -- (5%) (3%) Unutilized loss carryforwards of non-life companies -- 2% 4% Equity earnings of unconsolidated subsidiary (1%) (1%) (2%) Other items, net -- -- (2%) --- --- --- Effective tax rate 33% 30% 31% == == == F-22 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: December 31, 1995 1994 ------------------ (In thousands) Deferred Tax Liabilities: Deferred policy acquisition costs $8,683 $11,817 Invested assets 604 63 Unrealized gain on investments 851 -- Other deferred tax liabilities 2,399 1,890 ----- ----- Total deferred tax liability 12,537 13,770 ------ ------ Deferred Tax Assets: Policy reserves 3,296 8,668 Net operating loss carryforwards 6,960 6,292 Tax credit carryforwards 11 11 Unrealized depreciation of investments -- 75 Other deferred tax assets 1,307 444 Valuation allowance (4,878) (4,951) ------ ------ Total deferred tax asset 6,696 10,539 ----- ------ Net deferred tax liability $5,841 $3,231 ====== ====== A valuation allowance has been provided for 1995 and 1994, 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. The change in the valuation allowance of $73,000 is due primarily to decreases in non-life net operating losses which are not expected to be utilized against life company income. Under the provisions of pre-1984 life insurance tax regulations, NFL was taxed on the lesser of taxable investment income or income from operations, plus one-half of any excess of income from operations over taxable investment income. One-half of the excess (if any) of the income from operations over taxable investment income, an amount which was not currently subject to taxation, plus special deductions allowed in computing the income from operations, were placed in a special memorandum tax account known as the policyholders' surplus account. The aggregate accumulation in the account at December 31, 1995, approximated $2.5 million. Federal income taxes will become payable on this account at the then current tax rate when and to the extent that the account exceeds a specific maximum, or when and if distributions to stockholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income. The Company does not anticipate any transactions that would cause any part of the amount to become taxable and, accordingly, deferred taxes which would approximate $875,000, have not been provided on such amount. At December 31, 1995, NFL has approximately $12,209,000 in its shareholders surplus account from which it could make distributions to the Company without incurring any federal tax liability. The amount of dividends which may be paid by NFL to the Company is limited by statutory regulations. At December 31, 1995, the Company and its wholly-owned subsidiaries have aggregate non-life net operating loss carryforwards of approximately $19,241,000 and $8,021,000 for regular tax and alternative minimum tax purposes, respectively, which expire in 2001 through 2010. F-23 NOTE 12 - STATUTORY CAPITAL AND SURPLUS Under applicable Delaware law, NFL must maintain minimum aggregate statutory capital and surplus of $550,000. Under applicable Texas law, each of NFIC and AICT must maintain minimum aggregate statutory capital and surplus of $1.4 million. The state of Georgia requires licensed out-of-state insurers to maintain minimum capital of $1.5 million and Kentucky requires minimum surplus of $2.0 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. At December 31, 1995, aggregate statutory capital and surplus for NFL, NFIC and AICT was $14.1 million, $9.9 million and $8.3 million, respectively. Statutory net income (loss) for NFL, NFIC and AICT for the year ended December 31, 1995, was $(5.5) million, $(0.8) million and $1.7 million, respectively. AICT is wholly-owned by NFIC. Accordingly, statutory capital and surplus of NFIC includes capital and surplus of AICT. 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". 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. In September 1994, NFL paid to Westbridge an "extraordinary dividend" in the amount of $2.0 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, 1994, NFL had negative statutory "earned surplus" as a result of historical statutory losses. For the foreseeable future, NFL has agreed to seek the approval of the Delaware insurance commissioner prior to making any dividend payments. As of December 31, 1995, AICT has the ability to pay to NFIC, without prior regulatory approval, $835,000 in dividends during 1996. As of December 31, 1995, NFIC has the ability to pay to Westbridge, without prior regulatory approval, $1.0 million during 1996. In both Delaware and Texas, the state insurance commissioner reviews the dividends paid by each insurer domiciled in such commissioner's state at least once each year to determine whether they are reasonable in relation to the insurer's surplus as regards policyholders and quality of earnings. The state insurance commissioner may issue an order to limit or disallow the payment of ordinary dividends if such commissioner finds the insurer to be presently or potentially financially distressed or troubled. 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 treaties, 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. F-24 The statutory financial statements of the Company's 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, 1995 or 1994. NOTE 13 - EMPLOYEE BENEFIT PLANS The Company adopted, as of July 1, 1982, an employee incentive stock option plan (the "ISO Plan"). The ISO Plan, as amended, 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 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 fair 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 fair 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 options outstanding are exercisable within 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 (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 fair 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 (the "1992 Plan"), was adopted as of March 26, 1992. The 1992 Plan provided 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 fair 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. F-25 Information regarding the Company's stock option plans is summarized as follows: Year Ended December 31, 1995 1994 1993 ------------------------------- Options outstanding at beginning of year 375,294 554,917 499,285 Options granted during the year: Price granted at $5.40 116,000 -- -- Price granted at $5.60 6,000 -- -- Price granted at $6.84 -- 5,000 -- Price granted at $7.20 -- 5,000 -- Price granted at $7.65 -- 25,000 -- Price granted at $7.71 -- 5,000 -- Price granted at $5.18 -- -- 92,000 Price granted at $5.75 -- -- 30,000 Price granted at $6.08 -- -- 10,000 Price granted at $2.50 -- -- -- Options exercised during the year: Price ranging from $1.63 to $5.75 (85,300) (219,623) (66,180) Options canceled during the year: Price ranging from $1.69 to $2.00 -- -- (10,188) ------- ------- ------- Options outstanding at end of year 411,994 375,294 554,917 ======= ======= ======= At December 31, 1995, options for 141,294 shares were exercisable under the stock options plans at a price ranging from $1.88 to $2.50; and options for 148,700 shares were exercisable at a price ranging from $5.18 to $7.71. Also, at December 31, 1995, 1994 and 1993, options for 6,000, 128,000 and 168,000 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 four investment funds at the discretion of the employee. Company contributions are in the form of the Company's Common Stock. The Company's contributions to the plan in 1995, 1994 and 1993 approximated $79,000, $98,000 and $45,000, respectively. NOTE 14 - REINSURANCE The Insurance Subsidiaries cede insurance to other insurers and reinsurers on both its life and accident and health business. Reinsurance agreements are used to limit maximum losses and provide greater diversity of risk. The Company remains liable to policyholders to the extent the reinsuring companies are unable to meet their treaty obligations. Total accident and health premiums of $2,807,000, $1,703,000, and $495,000, were paid to reinsurers in 1995, 1994, and 1993, respectively. Face amounts of life insurance in force approximated $43,441,000, and $21,814,000 at December 31, 1995 and 1994, respectively. No life insurance was reinsured as of December 31, 1995 and 1994. In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a wholly-owned subsidiary of Freedom. Under the terms of the treaty, NFL assumed a 90% pro-rata share of first occurrence cancer F-26 business. For the years ended December 31, 1995, 1994 and 1993, $5,058,000, $1,640,000, and zero, respectively, of assumed premiums under this coinsurance treaty are included as premium revenue in the Consolidated Financial Statements. 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 4), the coinsurance treaty was amended to extend through 1997. For the years ended December 31, 1995, 1994 and 1993, $4,272,000, $4,607,000, and $4,856,000, respectively, of assumed premiums under the coinsurance treaty are included as premium revenues in the consolidated financial statements. In March 1990, NFL entered into a coinsurance treaty with Paramount Life Insurance Company ("Paramount"). Paramount is controlled by one of NFL's managing general agents. Under the terms of the treaty, NFL assumes a quota-share of all insurance written by PLIC for a period of five years beginning in 1990. For 1990 and 1991 new business, NFL assumed a 90% quota-share. No new business was reinsured from Paramount during 1993 or 1992. For the years ended December 31, 1995, 1994 and 1993, $582,000, $1,601,000, and $1,977,000, respectively, of assumed premiums under the coinsurance treaty with Paramount is included as premium revenue in the consolidated financial statements. NOTE 15 - 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, 1995, aggregated $13,580,000. The amounts due by year are as follows: 1996-$2,750,000; 1997-$2,550,000; 1998- $2,260,000; 1999-$1,990,000; 2000-$1,760,000; and thereafter-$2,270,000. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $3,413,000, $2,953,000, and $1,908,000 in 1995, 1994 and 1993, 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 consolidated financial position. In the ordinary course of business, the Company has advanced commissions and made loans to agents collateralized by future commissions. Advances to agents are recorded as receivables from agents and consisted as of December 31, 1995 in amounts of $7,690,000 for LifeStyles Marketing's agents, $1,718,000 for agent balances reinsured from FLICA, $1,768,000 for Farm & Ranch's agents, $2,423,000 for Cornerstone's agents, $1,585,000 for Senior Benefit's agents, and $1,522,000 for other agent balances. Westbridge holds a secured promissory note (the "Elkins Note"), from NFC Marketing, Inc. ("NFC"), an Arkansas corporation which is wholly-owned by Elkins. The balance of this note recorded on the books of the Company at December 31, 1995 is approximately $860,000. The note, which was renegotiated in October 1994, represents principal and accrued interest on a loan made by Westbridge to NFC for the purpose of expanding its marketing efforts. The original loan was scheduled to be repaid in April 1993. However, due to certain financial difficulties, NFC was in arrears on the full amount of this note and in October 1994 the Elkins Note was renewed and extended with terms which provide, among other things, for the payment to Westbridge of $20,000 per month until such time as the full amount of principal and interest thereunder has been paid. Under the terms of the Elkins Note, such amounts have been paid to Westbridge by NFL from monthly commissions which would otherwise be payable to NFC by NFL. Payment of the principal and interest under the Elkins Note has been guaranteed by Elkins. In addition, under the terms of a Security Agreement delivered to Westbridge by NFC, following a default, Westbridge F-27 has the right to apply monies, balances, credit or collections which it may hold for NFC on deposit, or which might otherwise be payable to NFC by NFL (including, among other things, agents' commissions payable by NFL to NFC), to offset the unpaid balance of the Elkins Note. Following any exercise by the Company of its right of offset, management believes that the level of lapses and cancellations would gradually increase as a result of agents' efforts to transfer the policies to other insurers. However, management also believes that the rate at which such policies could be rewritten would not significantly affect the level of premiums received in the near term and, as a result, the Company should recover the full amount owed on this note. NOTE 16 - 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, 1995 1994 1993 ------------------------------ (In thousands) Net (loss) income as reported by the insurance subsidiaries on a regulatory basis $(6,296) $3,043 $4,066 Additions to (deductions from) regulatory basis: Future policy benefits and claims 166 1,264 4,076 Deferred policy acquisition and development costs, net of amortization 15,329 6,967 (2,414) Deferred and uncollected premiums 138 (601) 1,672 Income taxes (2,837) (2,505) (1,991) Operations of affiliates (1,355) (2,669) (2,347) Other, net 179 926 469 --- --- --- Consolidated net income as reported herein on a GAAP basis $5,324 $6,425 $3,531 ====== ====== ======
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, 1995 1994 1993 ------------------------------ (In thousands) Capital and surplus as reported by the Insurance Subsidiaries on a regulatory basis $24,038 $23,564 $16,066 Additions to (deductions from) a regulatory basis: Future policy benefits and claims (9,723) (23,298) (12,090) Deferred policy acquisition and development costs 34,333 55,305 28,354 Nonadmitted assets 1,124 8,127 4,567 Income taxes (9,447) (10,038) (2,326) Deferred, uncollected and advance premiums 241 704 2,246 Asset valuation reserve 823 1,644 1,518 Stockholders' equity (deficit) of affiliates (8,506) (41,071) (20,621) Other, net 9,922 11,418 3,897 ----- ------ ----- Consolidated stockholders' equity as reported herein on a GAAP basis $42,805 $26,355 $21,611 ======= ======= =======
F-28 NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data for each of the Company's last two years of operations is as follows:
Quarter Ended ----------------------------------------- 1995 March June September December - ---- ----------------------------------------- (In thousands, except per share data) 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 $.06 $.17 $.23 $.23 Extraordinary item (.08) -- -- -- Net earnings $(.02) $.17 $.23 $.23 Fully diluted: Income before extraordinary item $.10 $.17 $.21 $.21 Extraordinary item (.06) -- -- -- Net earnings $.04 $.17 $.21 $.21
Quarter Ended ----------------------------------------- 1994 March June September December - ---- ----------------------------------------- (In thousands, except per share data) Premium income $17,201 $26,763 $27,696 $27,043 Net investment income 872 1,460 1,610 1,822 Realized gains on investments 62 131 127 -- Fee, service and other income 448 409 449 453 Benefits, claims and other expenses 16,989 26,331 27,302 27,080 Net income before cumulative effect of a change in accounting principle 1,146 1,691 1,781 1,807 Preferred stock dividends -- 365 412 413 Income applicable to common stockholders 1,146 1,326 1,369 1,394 Earnings per share: Primary $.25 $.29 $.30 $.30 Fully diluted $.25 $.26 $.26 $.26
F-29 WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS ------
March 31, December 31, March 31, 1996 1995 1995 (Unaudited) (Audited) (Unaudited) --------- --------- --------- Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $80,544, $83,160 and $11,187) $81,975 $86,780 $11,051 Held-to-maturity, at amortized cost (market value $0, $0, and $77,806) -- -- 80,113 Equity securities, at market 506 539 470 Investment in Freedom Holding Company, on the equity basis 6,220 6,173 5,915 Mortgage loans on real estate 625 639 749 Investment real estate 141 141 141 Policy loans 278 285 287 Short-term investments 14,721 14,946 6,609 ------ ------ ----- Total Investments 104,466 109,503 105,335 Cash 1,534 2,013 1,010 Accrued investment income 1,486 1,711 1,703 Receivables from agents, net of allowance for doubtful accounts 20,805 16,706 9,239 Deferred policy acquisition costs 63,373 56,977 61,610 Leasehold improvements and equipment, at cost, net of accumulated depreciation and amortization 1,534 1,590 1,490 Other assets 13,880 12,499 9,974 ------ ------ ----- Total Assets $207,078 $200,999 $190,361 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-30 WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
March 31, December 31, March 31, (Unaudited) (Audited) (Unaudited) --------- --------- --------- 1996 1995 1995 Liabilities: Policy Liabilities and Accruals: Future policy benefits $49,154 $46,620 $63,200 Claims 38,415 39,063 40,355 ------ ------ ------ 87,569 85,683 103,555 Accumulated policyholders' funds 380 373 362 Other liabilities 12,849 11,226 7,870 Deferred income taxes 6,412 5,841 2,968 Notes payable 18,044 15,807 -- Senior subordinated notes, net of unamortized discount, due 2002 19,285 19,264 19,206 ---- ------ ------ ------ Total Liabilities 144,539 138,194 133,961 ------- ------- ------- Redeemable Preferred Stock 20,000 20,000 20,000 ------ ------ ------ Stockholders' Equity: Common stock, ($.10 par value, 30,000,000 shares authorized; 5,993,458, 5,992,458 and 5,949,758 shares issued) 599 599 595 Capital in excess of par value 29,210 29,208 29,125 Unrealized appreciation of investments carried at market value, net of tax 1,165 2,593 45 Retained earnings 11,735 10,575 6,805 42,709 42,975 36,570 ------ ------ ------ Less - Aggregate of shares held in treasury and investment by affiliate in Westbridge Capital Corp. common stock (28,600 at March 31, 1996, December 31, 1995 and March 31, 1995), at cost (170) (170) (170) ---- ---- ---- Total Stockholders' Equity 42,539 42,805 36,400 ------ ------ ------ Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $207,078 $200,999 $190,361 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-31 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)
Three Months Ended March 31, --------------------- 1996 1995 --------------------- Revenues: Premiums: First-year $14,400 $5,959 Renewal 21,010 21,975 ------ ------ 35,410 27,934 Net investment income 2,116 1,820 Fee and service income 1,775 432 Net realized gains (losses) on investments 85 (61) Other income 2 6 ------ ------ 39,388 30,131 ------ ------ Benefits, Claims and Expenses: Benefits and claims 21,914 16,328 Amortization of deferred policy acquisition costs 4,329 2,890 Commissions 1,937 3,099 General and administrative expenses 6,566 5,052 Taxes, licenses and fees 1,343 1,080 Interest expense 951 720 ------ ------ 37,040 29,169 ------ ------ Income before income taxes, equity in earnings of Freedom Holding Company and extraordinary item 2,348 962 Provision for income taxes 822 327 Equity in earnings of Freedom Holding Company 47 89 ------ ------ Income before extraordinary item 1,573 724 Extraordinary loss from early extinguishment of debt -- 407 ------ ------ Net Income $1,573 $317 ====== ==== Preferred Stock Dividends 413 413 --- --- Income (loss) applicable to common stockholders $1,160 $(96) ====== ==== Earnings Per Common Share: Primary: Income before extraordinary item $.19 $.06 Extraordinary item -- (.08) ---- ---- Net Earnings (loss) $.19 $(.02) ==== ===== Fully Diluted: Income before extraordinary item $.19 $.10 Extraordinary item -- (.06) ---- ---- Net Earnings $.19 $.04 ==== ==== Weighted Average Shares Outstanding: Primary 6,105,000 5,125,000 Fully diluted 8,483,000 7,444,000
The accompanying notes are an integral part of these financial statements. F-32 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ----------------- 1996 1995 ----------------- Cash Flows From Operating Activities: Net income (loss) applicable to common stockholders $1,160 $(96) Adjustments to reconcile net income to cash provided by (used for) operating activities: Increase (decrease) in policy liabilities and accruals 1,886 (725) Amortization of deferred policy acquisition costs 4,329 2,890 Additions to deferred policy acquisition costs (10,725) (5,846) Increase (decrease) in deferred income taxes 571 (263) Depreciation expense 131 111 Increase in receivables from agents (4,099) (1,886) Increase in other assets (1,381) (377) Equity in earnings of Freedom Holding Company (47) 30 Increase (decrease) in other liabilities 1,630 (808) Other, net 863 382 --- --- Net Cash Used For Operating Activities (5,682) (6,588) ------ ------ Cash Flows From Investing Activities: Proceeds From Investments Sold: Fixed maturities, classified as held-to-maturity, called or matured -- 248 Fixed maturities, classified as available-for-sale, called or matured 4,588 13 Fixed maturities, classified as available-for-sale, sold 1,033 952 Short-term investments, sold or matured 43,979 2,934 Other investments, sold or matured 72 24 Cost of investments acquired (46,633) (3,207) Additions to leasehold improvements and equipment, net of retirements (75) (386) --- ---- Net Cash Provided By Investing Activities 2,964 578 ----- --- Cash Flows From Financing Activities: Retirement of senior subordinated debentures, at par -- (25,000) Issuance of notes payable 2,237 -- Issuance of subordinated notes -- 19,200 Issuance of common stock 2 9,949 ----- ----- Net Cash Provided By Financing Activities 2,239 4,149 ----- ----- Decrease In Cash During Period (479) (1,861) Cash At Beginning Of Period 2,013 2,871 ----- ----- Cash At End Of Period $1,534 $1,010 ====== ====== Supplemental Disclosures Of Cash Flow Information: Cash Paid During The Periods For: Interest $896 $1,778 Income taxes $2 $3
The accompanying notes are an integral part of these financial statements. F-33 WESTBRIDGE CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements for Westbridge Capital Corp. ("Westbridge" and, together with its consolidated subsidiaries, the "Company") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE 2 - COMMITMENTS AND CONTINGENCIES In the normal course of their business operations, National Foundation Life Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"), and American Insurance Company of Texas ("AICT"), Westbridge's primary insurance subsidiaries, are involved in various claims and other business related disputes. In the opinion of management, the disposition of these matters will have no material adverse effect on the Company's consolidated financial position. NOTE 3 - EARNINGS PER SHARE Primary Income Before Extraordinary Item. Calculated by dividing income before extraordinary item, less preferred stock dividends, by primary weighted average shares outstanding. Primary weighted average shares outstanding do not assume the conversion to Common Stock of the Series A Preferred Stock. Fully Diluted Income Before Extraordinary Item. Calculated by dividing income before extraordinary item by fully diluted weighted average shares outstanding. The preferred stock dividend is not deducted from income for the fully diluted calculation, but the fully diluted average shares outstanding number is larger. The fully diluted calculation assumes the conversion of the Series A Preferred Stock to Common Stock at the beginning of the period. Were such a conversion to occur, (a) preferred dividends would not be paid, and are therefore not deducted from earnings for the calculation and, (b) there would be a greater number of shares of Common Stock outstanding as a result of the conversion. At March 31, 1996, the Series A Preferred Stock was convertible to Common Stock at a conversion price of $8.41, which would result in 2,378,120 additional shares of Common Stock upon conversion. NOTE 4 - SUBSEQUENT EVENT On May 2, 1996, the Company agreed to purchase the remaining 60% of Freedom Holding Company ("FHC") for $6.3 million, bringing total ownership of FHC to 100%. FHC is the parent company of Freedom Life Insurance Company of America ("FLICA"), a Mississippi domiciled insurer. FLICA principally offers Cancer and Specified Disease Products and is licensed in thirty-four states. F-34 Report of Independent Accountants To the Board of Directors and Shareholder of National Financial Insurance Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position of National Financial Insurance Company and its subsidiary at December 31, 1993, and the results of their operations and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. The consolidated financial statements of National Financial Insurance Company for the years ended December 31, 1992 and 1991 were audited by other independent accountants whose report dated November 24, 1993 expressed an unqualified opinion on those statements. As discussed in Note 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as of January 1, 1993. /s/ Price Waterhouse PRICE WATERHOUSE Dallas, Texas June 23, 1994 F-35 Independent Auditor's Report To The Board of Directors Westbridge Capital Corp.: We have audited the consolidated balance sheets of National Financial Insurance Company and Subsidiaries (a subsidiary of National Group Corporation) as of December 31, 1992 and 1991 and the related consolidated statements of income, stockholder's equity and cash flows for the years then ended. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements of National Financial Insurance Company for any period subsequent to December 31, 1992. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Financial Insurance Company and Subsidiaries (a subsidiary of National Group Corporation) at December 31, 1992 and 1991 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Jaynes, Reitmeier, Boyd, Therrell, P.C. November 24, 1993 F-36 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 - -----------------------------------------------------------------------------
1993 1992 -------- -------- ASSETS Fixed maturities, at amortized cost (market - $25,940,393 and $30,101,280) $24,970,781 $29,454,692 Marketable equity securities, at market: Preferred stocks (cost $595,407 and $569,826) 469,343 450,318 Common stocks (cost - $2,445,201 and $2,575,977) 2,383,806 3,417,915 Mortgage loans on real estate 3,637,988 7,227,474 Collateral loans 5,751,920 6,281,736 Investment real estate 8,134,978 7,565,131 Short-term investments 2,772,896 5,214,792 Other invested assets 270,752 -- ------------ ------------ Total invested assets 48,392,464 59,612,058 Cash and cash equivalents 10,857,748 5,817,950 Deposit under reinsurance financing agreement -- 2,569,278 Ceded reinsurance recoverable 2,275,823 -- Premiums due and other receivables 1,946,497 2,438,291 Accrued investment income 613,105 879,131 Deferred policy acquisition costs 24,614,611 32,005,618 Property and equipment 436,966 636,752 Receivable from affiliates 344,307 97,111 Goodwill 4,650,063 4,818,823 Other assets 911,578 2,497,147 ------------ ------------ Total assets $95,043,162 $111,372,159 ------------ ------------
See accompanying notes to consolidated financial statements. F-37 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, 1993 AND 1992 - ------------------------------------------------------------------------------
1993 1992 ---------- ---------- LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accident and health future policy benefits $31,868,304 $36,021,831 Policy and contract claims 34,722,021 39,404,470 ------------ ------------ 66,590,325 75,426,301 Federal income taxes: Current 238,045 905,328 Deferred 4,525,264 1,560,727 Notes payable 1,000,000 1,000,000 Accrued commissions and expenses -- 2,072,883 Deferred revenue under reinsurance agreements 2,171,884 5,694,704 Payable to affiliates 190,831 389,319 Other liabilities 2,277,083 1,912,590 ------------ ------------ Total liabilities 76,993,432 88,961,852 ------------ ------------ Minority interest 3,233,922 3,562,236 ------------ ------------ Stockholder's equity: Common stock (par value $12 per share; 200,000 shares authorized; 125,000 and 100,000 shares issued and outstanding) 1,500,000 1,200,000 Net unrealized (loss) gain on marketable equity securities (70,151) 374,966 Retained earnings 13,385,959 17,273,105 ------------ ------------ Total stockholder's equity 14,815,808 18,848,071 ------------ ------------ Commitments and contingencies (Note 10) -- -- Total liabilities and stockholder's equity $95,043,162 $111,372,159 ------------ ------------
F-38 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 - -----------------------------------------------------------------------------
1993 1992 1991 ---- ---- ---- Premiums and other revenue: Life and accident and health premiums $52,152,550 $66,925,334 $78,387,000 Property and casualty premiums -- (2,730) 32,531 Net investment income 3,453,989 5,323,909 6,936,143 Gains from sale of investments 2,539,061 1,913,900 1,649,610 Other revenue 3,423,605 2,081,344 2,240,228 --------- --------- --------- 61,569,205 76,241,757 89,245,512 ---------- ---------- ---------- Benefits and expenses: Death and other policy benefits: Life and accident and health 42,675,465 54,805,918 57,971,812 Property and casualty -- 58,981 80,167 Decrease in liability for future policy benefits (5,533,464) (8,596,937) (8,650,334) Amortization of deferred policy acquisition costs, net of amounts deferred 7,391,007 3,819,046 2,259,823 Commissions for acquiring and servicing policies 5,131,262 8,185,106 11,156,783 Taxes, licenses and fees 1,071,894 2,386,988 2,676,347 Other operating costs and expenses 7,874,404 14,759,205 17,887,540 Interest expense 77,499 89,339 122,438 ------ ------ ------- 58,688,067 75,507,646 83,504,576 ---------- ---------- ---------- Gain from operations before federal income taxes, minority interest and cumulative effect of change in accounting principle 2,881,138 734,111 5,740,936 --------- ------- --------- Provision (benefit) for federal income taxes: Current 917,907 751,555 327,943 Deferred (416,020) (952,962) 60,355 -------- -------- ------ 501,887 (201,407) 388,298 ------- -------- ------- Gain from operations before minority interest and cumulative effect of change in accounting principle 2,379,251 935,518 5,352,638 Minority interest in (loss) earnings (213,241) 500,400 904,612 -------- ------- ------- Gain from operations before cumulative effect of change in accounting principle 2,592,492 435,118 4,448,026 Cumulative effect on prior years of change in accounting principle 3,599,638 -- -- --------- Net income (loss) $(1,007,146) $435,118 $4,448,026 =========== ======== ==========
See accompanying notes to consolidated financial statements. F-39 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 - -----------------------------------------------------------------------------
Marketable Total Capital Equity Retained Stockholder's Stock Securities Earnings Equity --------- ---------- ---------- ---------- Balances, December 31, 1990 $1,200,000 $(113,746) $16,736,961 $17,823,215 Net income -- -- 4,448,026 4,448,026 Dividends to stockholder -- -- (3,447,000) (3,447,000) Unrealized gains on marketable securities -- 88,632 -- 88,632 --------- --------- --------- --------- Balances, December 31, 1991 1,200,000 (25,114) 17,737,987 18,912,873 Net income -- -- 435,118 435,118 Dividends to stockholder -- -- (900,000) (900,000) Unrealized gains on marketable equity securities -- 400,080 -- 400,080 --------- --------- --------- --------- Balances, December 31, 1992 1,200,000 374,966 17,273,105 18,848,071 Net income -- -- (1,007,146) (1,007,146) Dividends to stockholder (2,580,000) (2,580,000) Unrealized gains on marketable equity securities -- (445,117) -- (445,117) Stock dividend 300,000 (300,000) -- --------- --------- --------- --------- Balances, December 31, 1993 $1,500,000 $(70,151) $13,385,959 $14,815,808 ========== ======== =========== ===========
See accompanying notes to consolidated financial statements. F-40 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 - ------------------------------------------------------------------------------
1993 1992 1991 ---- ---- ---- Cash flows from operating activities: Net income (loss) $(1,007,146) $435,118 $4,448,026 Adjustments to reconcile net income to net cash provided from (used for) operating activities: Decrease in liabilities for policyholder funds (8,835,976) (25,797,217) (7,497,019) Deferral of policy acquisition costs (384,954) (3,285,637) (6,476,793) Amortization of deferred policy acquisition costs 7,775,961 7,104,683 7,660,823 Increase in federal income tax liability 2,297,254 (952,962) 60,355 Depreciation and amortization 444,060 308,335 165,678 Realized (gains) losses on investments (2,539,061) (1,913,900) (1,649,610) Minority interest in earnings of subsidiaries (213,241) 500,400 904,612 Decrease in allowance for losses on investments -- (643,052) (129,478) Decrease (increase) in premiums due and other receivables 491,794 1,028,347 (1,036,331) Decrease in accrued investment income 266,026 432,033 56,990 Decrease in deposit under financing agreement 293,455 132,373 1,727,573 Increase (decrease) in deferred revenue under reinsurance agreements (3,522,820) 805,253 (625,425) Increase (decrease) in accrued commissions and expenses (2,072,883) (534,471) (90,120) Decrease (increase) in other assets 1,585,569 (1,076,602) 417,148 Increase (decrease) in other liabilities 670,876 65,064 (3,245,293) ------- ------ ---------- Net cash used for operating activities (4,751,086) (23,392,235) (5,308,864) ---------- ----------- ---------- Cash flows from investing activities: Investments matured or repaid: Bonds 6,701,626 3,488,267 2,275,384 Mortgage and collateral loans 9,552,444 12,445,123 10,448,937 Investments sold: Bonds 1,837,650 3,526,744 1,116,946 Stocks 9,444,043 6,895,247 6,979,093 Real estate -- 744,228 69,511 Other investments -- 2,537,301 165,892
F-41 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 - ----------------------------------------------------------------------------
1993 1992 1991 ---- ---- ---- Cash flows from investing activities (continued): Additions to investments: Bonds $(3,854,185) $(13,551,499) $(6,395,345) Stocks (7,039,743) (5,807,691) (5,034,316) Mortgage and collateral loans (5,250,000) (6,664,133) (6,814,292) Real estate (1,305,491) (2,041,067) (3,543,279) Other investments (269,663) -- 288 Decrease in short-term investments 2,441,896 17,718,255 8,198,117 Decrease (increase) in property and equipment 112,307 -- (64,899) ------- --------- ------- Net cash provided from investing activities 12,370,884 19,290,775 7,402,037 ---------- ---------- --------- Cash flows from financing activities: Repayment of notes payable -- (500,000) -- Dividends paid (2,580,000) (1,559,622) (4,077,000) ---------- ---------- ---------- Net cash used for financing activities (2,580,000) (2,059,622) (4,077,000) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 5,039,798 (6,161,082) (1,983,827) Cash and cash equivalents, beginning of year 5,817,950 11,979,032 13,962,859 --------- ---------- ---------- Cash and cash equivalents, end of year $10,857,748 $5,817,950 $11,979,032 =========== ========== =========== Supplemental disclosures cash flow information: Cash paid during the year for: Interest $77,499 $89,339 $271,279 Income taxes 1,612,139 -- 4,186,818
See accompanying notes to consolidated financial statements. F-42 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES National Financial Insurance Company (NFIC or the Company) is a life and health insurance company which was incorporated in 1979 and is domiciled in the state of Texas. The Company is licensed to write insurance policies in twenty-five states and primarily issues individual and group accident and health insurance policies. Until April 12, 1994, the Company and its majority-owned (65%) subsidiary, American Insurance Company of Texas (AICT), were wholly-owned subsidiaries of National Group Corporation. On April 12, 1994, NFIC and AICT were sold to Westbridge Capital Corp. Summary of Significant Accounting Policies Basis of presentation The accompanying consolidated financial statements include the accounts of NFIC and AICT, adjusted for minority interest in AICT. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers cash and all highly liquid investments purchased with an original maturity date of three months or less to be cash and cash equivalents. Investments Investments in fixed maturities are recorded at amortized cost. Investments in common stock and nonredeemable preferred stock are recorded at market value with unrealized gains and losses reported as a separate component of stockholder's equity. Mortgage loans are recorded at amortized cost less an allowance for uncollectible balances. Real estate is recorded at cost less accumulated depreciation calculated over the estimated useful life using the straight-line method. Short-term investments are recorded at cost which approximates market value. Realized gains and losses on investments sold is determined on the specific identification method. Deferred policy acquisition costs Certain costs of acquiring new insurance policies, such as commissions and underwriting expenses, are deferred and amortized over the expected premium-paying period of the related policy based on the ratio of annual premium revenue to expected total premium revenue to be received for the life of the policy. F-43 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- Fixed Assets Electronic data processing equipment and furniture and equipment are stated at cost less accumulated depreciation of $1,126,123 and $897,415 at December 31, 1993 and 1992, respectively. Depreciation of electronic data processing equipment and furniture and equipment is computed using the straight-line method over the estimated useful lives (two to seven years) of the assets. Liability for future policy benefits Liabilities for future policy benefits have been calculated on a net level premium method using estimated investment yields, withdrawals, mortality and other assumptions based on Company experience. Premium recognition Premiums on accident and health insurance policies are recognized over the premium paying period. Federal income taxes The Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. This statement requires the use of the asset and liability method for calculating deferred income taxes. Under this method, deferred income tax balances are computed based on the tax effect of the temporary differences in the financial reporting and income tax bases of assets and liabilities using tax rates which are expected to be in effect when these temporary differences are expected to reverse. As a result of adopting FAS 109, a charge of $3,599,638 has been recorded related to the cumulative effect of a change in accounting principle. Recent accounting pronouncements During 1993, the Financial Accounting Standards Board adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires that investments in such securities be segregated into three categories based on management's intentions in investing in those securities. First, securities which management has the positive intent and ability to hold to maturity are classified as such and are reported at amortized cost. Second, securities which are purchased for resale in the near term are classified as "trading securities" and are reported at market value with unrealized gains and losses included in earnings. All other securities are classified as "available-for-sale" and are reported at market value with unrealized gains and losses reported as a separate component of stockholder's equity. This statement is effective for fiscal years beginning after December 15, 1993. Management believes that the adoption of this statement will have an insignificant impact on the Company's operations and financial position. F-44 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- 2. INVESTMENTS At December 31, 1993 and 1992, gross unrealized gains and losses on the Company's fixed maturity portfolio were as follows:
1993 Gross Gross Amortized Unrealized Unrealized Market Cost Gain Losses Value --------- --------- ---------- --------- U.S. Treasury securities and obligations of U.S. government agencies $9,764,555 $471,295 $1,743 $10,234,107 Obligations of state and political sub- divisions 5,263,624 4,507 7 5,268,124 Public utility securities 3,901,220 219,564 40,053 4,080,731 Corporate securities 6,041,382 317,790 1,741 6,357,431 --------- ------- ----- --------- $24,970,781 $1,013,156 $43,544 $25,940,393 =========== ========== ======= ===========
1992 Gross Gross Amortized Unrealized Unrealized Market Cost Gain Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. government agencies $9,002,001 $343,406 $2,900 $9,342,507 Obligations of state and political sub- divisions 6,115,662 4,002 -- 6,119,664 Public utility securities 7,625,942 163,191 19,112 7,770,021 Corporate securities 6,711,087 161,702 3,701 6,869,088 --------- ------- ----- --------- $29,454,692 $672,301 $25,713 $30,101,280 =========== ======== ======= ===========
F-45 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- Unrealized appreciation (depreciation) on investments in equity securities and other investments reflected directly in stockholder's equity is summarized as follows: Year Ended December 31, 1993 1992 --------------------- Balance at beginning of year $374,966 $(25,114) Unrealized (depreciation) appreciation (445,117) 400,080 --------- --------- Balance at end of year $(70,151) $374,966 ======== ======== The amortized cost and estimated market value of investments in fixed maturities as of December 31, 1993 are shown below, summarized by duration to maturity. 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 --------- --------- Due in one year or less $324,965 $334,000 Due after one year through five years 4,489,279 4,702,098 Due after five years through ten years 9,537,771 10,063,820 Due after ten years 10,618,766 10,840,475 ----------- ----------- $24,970,781 $25,940,393 =========== =========== Investment income for the years ended December 31, 1993, 1992 and 1991 is summarized as follows: 1993 1992 1991 ---- ---- ---- Interest on bonds $2,177,170 $2,314,364 $1,734,903 Dividends on preferred and common stocks 71,337 290,924 188,730 Interest on mortgage and collateral loans 1,258,053 1,928,733 2,757,233 Real estate income 1,539,208 791,583 214,536 Interest on short-term investments 370,937 1,041,687 2,705,997 Other 19,551 165,723 191,082 ------ ------- ------- 5,436,256 6,533,014 7,792,481 Investment expenses 1,982,267 1,209,105 856,338 --------- --------- ------- $3,453,989 $5,323,909 $6,936,143 ========== ========== ========== F-46 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- The realized gains (losses) on investments before federal income taxes for the years ended December 31, are summarized as follows: 1993 1992 1991 ---- ---- ---- Bonds $166,411 $159,704 $22,419 Preferred stocks 940 (7,975) 26 Common stocks 2,233,192 1,182,442 1,796,389 Mortgage loans (63,529) 620,500 109,908 Real estate 198,561 17,200 (76,571) Other 3,486 (57,971) (202,561) ----- ------- -------- $2,539,061 $1,913,900 $1,649,610 ========== ========== ========== Collateral loans in the amount of $5,751,920 and $5,969,675 at December 31, 1993 and 1992, respectively, are due from one of the Company's outside legal counsel or from entities owned or controlled by the legal counsel. Cash, cash equivalents and short-term investments at December 31, 1993 and 1992 include deposits at one financial institution of $3,760,056 and $4,181,055, respectively. The Companies have certain investments on deposit in custody for various state insurance regulatory authorities. These consisted of bonds, preferred stocks, common stocks and certificates of deposit with an aggregate carrying value of $6,666,993 and $8,523,532 at December 31, 1993 and 1992, respectively. In addition, the Company is required to maintain on deposit with a trustee assets in an amount equal to the total reserves on policies assumed from an unaffiliated insurance company of $3,807,843 and $4,115,890 at December 31, 1993 and 1992, respectively. Total reserves are defined as the total statutory reserves required to be maintained on these policies. The assets would be used by the ceding company for the benefit of the policyholders only in the event of the Company's failure to fulfill its obligations as reinsurer under the terms of the reinsurance agreements. Proceeds from sales of investments in debt securities were $8,539,276 in 1993 and $7,015,011 in 1992. Gross gains of $170,197 and gross losses of $3,786 were realized on 1993 sales. Gross gains of $160,662 and gross losses of $1,333 were realized on 1992 sales. The Company owned no high-yield, unrated or less than investment grade corporate debt securities at December 31, 1993 and 1992. F-47 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- 3. INVESTMENT IN REAL ESTATE Investment real estate at December 31, is summarized as follows: 1993 1992 ---- ---- Investment real estate, at cost $7,477,679 $7,062,087 Less accumulated depreciation (574,100) (239,641) Properties acquired in satisfaction of debt 1,231,399 742,685 --------- ------- $8,134,978 $7,565,131 ========== ========== The Company excluded due and accrued income from investment income on loans in foreclosure or delinquent 90 days or more. Assets acquired in satisfaction of debt are recorded at fair value and depreciated using the straight-line method. 4. FUTURE POLICY BENEFITS The major assumptions used in the calculation of future policy benefits for accident and health policies are as follows: Line of Years of Interest Mortality or Business Issue Rates Morbidity - --------- --------- -------- ---------------------------- Accident All 7% 59 ADB Table, TSA Vol. XXXI, pages 173-175. 100% - 1965-70 Ultimate Mortality Table Cancer All 7% TSA Vol. XXX, pages 49-55 and Other Sources. 100% - 1965-70 Ultimate Mortality Table Disability All 7% 1985 Commissioners' Individual Disability Table. 100% - 1965-70 Ultimate Mortality Table Home health All 7% TSA Vol. XXXIV, pages 485-570 and Other Sources. 100% - 1965- 70 Ultimate Mortality Table Nursing home All 7% 1985 National Nursing Home Survey and review of 1977 National Nursing Home Survey- modified F-48 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- Line of Years of Interest Mortality or Business Issue Rates Morbidity - -------- -------- -------- ------------ Hospital and major medical All 7% TSA Vol. XXX, pages 9-123 and Other Sources. 100% 1965- 70 Ultimate Mortality Table Medicare Supplement All 7% TSA Vol. XXXIV, pages 485- 570 and Other Sources. 100% - 1965-70 Ultimate Mortality Table 5. DEFERRED POLICY ACQUISITION COSTS A summary of deferred policy acquisition costs follows: Year Ended December 31, 1993 1992 1991 ---- ---- ---- Balance at beginning of year $32,005,618 $35,824,664 $37,008,694 Additions 384,954 3,285,637 5,401,000 Amortization (7,775,961) (7,104,683) (7,660,823) Acquisition -- -- 1,075,793 ---------- ---------- ---------- Balance at end of year $24,614,611 $32,005,618 $35,824,664 =========== =========== =========== Commissions comprise the majority of the additions to deferred policy acquisition costs in each year. 6. INCOME TAXES In 1993, the Company will join in the filing of a consolidated federal income tax return with its parent and other affiliates. Pursuant to a tax sharing agreement, the Company records a portion of the allocated federal income tax of the consolidated group generally based on the amount of tax computed as if the Company filed separately. As discussed in Note 1, the Company changed its method of accounting for income taxes on a prospective basis effective January 1, 1993. Consequently, the 1993 tax provision has been calculated in accordance with FAS 109, whereas the 1992 and 1991 tax provisions were calculated in accordance with the previous method of accounting. F-49 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- In accordance with SFAS 109, total tax expense is the amount of income taxes expected to be payable for the current year plus (or minus) the deferred income tax expense (or benefit) represented by the change in the deferred income tax accounts at the beginning and end of the year. The effect of changes in tax rates and federal income tax laws are reflected in income from continuing operations in the period such changes are enacted. The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded when such differences arise. A valuation allowance, reducing any recognized deferred tax asset, must be recorded if it is determined that it is more likely than not that such deferred tax asset will not be realized. The provision for U.S. federal income taxes charged to continuing operations was as follows: 1993 1992 1991 ---- ---- ---- Current $917,907 $751,555 $327,943 Deferred (416,020) (952,962) 60,355 -------- -------- ------ Total provision for income taxes $501,887 $(201,407) $388,298 ======== ========= ======== The provision for income taxes for the year ended December 31, 1993 is less than the amount of income tax determined by applying the U.S. statutory income tax rate of 34% to the pretax income as a result of the following differences: Income tax at the statutory rate $979,587 Increase (decrease) in taxes resulting from: Small life insurance company deduction (572,000) Dividends received deduction (148,652) Other items, net 242,952 ------- Total provision for income taxes $501,887 ======== F-50 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- The provision for income taxes for the years ended December 31, 1992 and 1991 is less than the amount of income tax determined by applying the U.S. statutory income tax rate of 34% to the pretax income as a result of the following differences: 1992 1991 ---- ---- Income tax at the statutory rate $249,598 $1,951,918 Increase (decrease) in taxes resulting from: Small life insurance company deduction (402,245) (583,714) Dividends received deduction (54,987) (39,582) Change in realizable reversal of timing/ temporary differences -0- (938,215) Other items, net 6,227 (2,109) ----- ------ Total provisions for income taxes $(201,407) $388,298 ========= ======== The effective federal income tax rates of (27)% and 7% in 1992 and 1991, respectively, are less than the regular corporate federal income tax rate of 34% primarily because of: (a) the small life insurance company deduction used for income tax purposes, and, (b) changes in the timing of projected reversals of future deductible temporary differences. Deferred taxes are recorded for temporary differences between the financial reporting bases and the federal income tax bases of the Company's assets and liabilities. The sources of these differences and the estimated tax effect of each are as follows: December 31, January 1, 1993 1993 ---- ---- Deferred Tax Liability Deferred policy acquisition costs $6,965,634 $9,615,678 Policyholders surplus account 757,000 757,000 Invested assets 301,162 774,036 Other 445,510 650,850 ------- ------- 8,469,306 11,797,564 Deferred Tax Asset Policy reserves 2,893,724 4,659,201 Other 1,050,318 1,977,999 --------- --------- 3,944,042 6,637,200 --------- --------- Net deferred tax liability $4,525,264 $5,160,364 ========== ========== Under the provisions of pre-1984 life insurance tax regulations, the Company 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 F-51 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- subject to taxation, plus special deductions allowed in computing the income from operations, were placed in a special memorandum tax account known as the policy holders surplus account. The aggregate accumulation in the account at December 31, 1993 and December 31, 1992 approximated $2,226,000. 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 the distributions to stockholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income. At December 31, 1993 and December 31, 1992, the Company has approximated $17,789,000 and $17,307,000, respectively, in its shareholder's surplus account from which it could make distributions without incurring any federal tax liability. The Company has recorded $757,000 of deferred federal income taxes relating to expected transactions which will cause taxable income relating to the PSA. At December 31, 1993, the Company has an alternative minimum tax credit carryforward of approximately $200,000. 7. REINSURANCE As is customary in the insurance industry, the Company reinsures portions of certain insurance policies they write, thereby providing a greater diversification of risk and minimizing exposure on larger risks. The Company remains liable to the policyholder if the assuming companies were unable to meet their obligations under any reinsurance treaties. The Company adopted the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," effective January 1, 1993. The statement requires future policy reserves and claim reserves to be reported on a gross basis in the balance sheet and amounts ceded to reinsurers are recorded as receivables. At December 31, 1993, future policy benefits and policy and contract claim amounts ceded under terms of reinsurance agreements totaling $2,275,823 have been recorded as ceded reinsurance recoverables. During 1993, 1992 and 1991, the Company had a "deposit" type agreement with one unrelated insurance company which did not qualify as an reinsurance agreement. The agreement was terminated during 1993. Future policy benefits and policy and contract claims which have been excluded from the accompanying financial statements under terms of reinsurance agreements at December 31, are as follows: 1993 1992 Future policy benefits $ -0- $17,846,158 ======= =========== Policy and contract claims $ -0- $1,454,127 ======= ========== F-52 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- Premiums and related reinsurance amounts for the years ended December 31, are summarized as follows: 1993 1992 1991 Direct premiums $54,032,288 $69,377,036 $81,414,206 Reinsurance premiums assumed from other companies 1,609,179 1,944,878 2,564,405 Reinsurance premiums ceded to other companies (3,488,917) (4,399,310) (5,559,080) ---------- ---------- ---------- Net premiums $52,152,550 $66,922,604 $78,419,531 =========== =========== =========== Life insurance in force amounts at December 31, are summarized as follows (in thousands): 1993 1992 ---- ---- Direct life insurance in force $ -0- $86,905 Reinsurance risks ceded to other companies -0- (86,905) ----- ------- Net life insurance in force $ -0- $ -0- ====== ======= Included in the reinsurance amounts discussed in the preceding paragraphs for 1992 is the Company's life insurance in force ceded through a 100% indemnity reinsurance to an unrelated insurance company. During 1993, the Company received regulatory approval of the transaction, which was then modified to an assumption reinsurance transaction. The transaction consisted of the following assets transferred and liabilities ceded:
American National Insurance Financial Company Insurance of Texas Company Total --------- ---------- ---------- Future policy benefits $(664,431) $(16,313,848) $(16,978,279) Policy and contract claims (21,321) (36,837) (58,158) Dividends and coupons -- (300,444) (300,444) Net premiums due less advance 62,699 176,824 239,523 Other, net (4,100) 6,007 1,907 ------ ----- ----- (627,153) (16,468,298) (17,095,451) Net consideration paid on reinsurance ceded 484,020 13,657,690 14,141,710 ------- ---------- ---------- Deferred gain on reinsurance ceded $(143,133) $(2,810,608) $(2,953,741) ========= =========== ===========
F-53 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- The deferred gain of $2,953,741 is included in deferred revenue under reinsurance agreements in the accompanying financial statements at December 31, 1992. Also included in the 1992 financial statements are deferred acquisition costs related to the life business of $143,000 in American Insurance Company of Texas and $2,357,536 in National Financial Insurance Company which will be charged against the above deferred gain once the assumption reinsurance agreement is finalized. In connection with the 100% indemnity reinsurance agreement on life business described above, the Company sold policy loans of approximately $2.4 million for their book value, which approximated market. 8. STATUTORY CAPITAL AND SURPLUS The Company and its insurance subsidiaries are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from financial statements prepared on the basis of generally accepted accounting principles. Reconciliations of statutory net income and capital and surplus, as determined using statutory accounting principles, to the amounts included in the accompanying financial statements are as follows:
December 31, 1993 1992 1991 ---- ---- ---- Combined statutory net income of insurance subsidiaries $1,963,956 $1,318,178 $2,534,754 Increases (decreases): Deferred policy acquisition costs (7,391,007) (3,819,046) (1,184,030) Future policy benefits (543,561) (833,380) 2,011,473 Deferred federal income taxes (3,183,618) 952,962 (60,355) Reinsurance financing agreement 4,690,872 3,688,361 905,491 Allowance for losses on investment -- 620,500 (542,575) Deferred gain on life business reinsured 2,953,741 (2,953,741) -- Earnings in excess of dividends received from subsidiaries -- 2,377,606 317,762 Other adjustments, net (106,789) 967,666 2,857,881 Consolidating eliminations and adjustments 609,260 (1,883,988) (2,392,375) ------- ---------- ---------- Net (loss) income as reported herein $(1,007,146) $435,118 $4,448,026 =========== ======== ==========
F-54 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- 1993 1992 ---- ---- Combined statutory capital and surplus of insurance subsidiaries $12,958,018 $13,717,952 Increases (decreases): Deferred policy acquisition costs 24,614,611 32,005,618 Future policy benefits (14,356,009) (13,812,448) Deferred federal income taxes (4,525,264) (1,560,727) Goodwill 4,650,063 4,818,823 Reinsurance financing agreement -- (4,690,872) Surplus debenture (1,000,000) (1,000,000) Deferred revenue on assumed business (2,171,884) (2,740,963) Deferred revenue on life business reinsured -- (2,953,741) Allowance for losses on investments -- (158,382) Statutory asset valuation reserves 2,127,698 1,913,551 Investment in subsidiaries 2,913,029 3,392,817 Other adjustments, net (1,154,678) 94,259 Consolidating eliminations and adjustments (9,239,776) (10,177,816) ---------- ----------- Stockholder's equity as reported herein $14,815,808 $18,848,071 =========== =========== Under Texas Insurance Law, all dividends on capital stock must be distributed out of earned surplus only. Further, dividends paid not requiring state insurance department approval are generally limited to the greater of 10% of statutory capital and surplus or statutory gain from operations for life and accident and health companies. 9. PROFIT SHARING AND RETIREMENT PLAN The Company participates with other affiliates in a noncontributory employee profit sharing plan covering substantially all employees. Company contributions were based on various factors, including profitability, and are made at the sole discretion of the Company. No contribution was made to this plan in 1993 or 1992. Beginning January 1, 1992, the Company initiated a contributory defined contribution 401(k) employee profit sharing plan in which the Company matches employee contributions at a stated percentage of employee contributions to a defined maximum. An employee is eligible to participate in the plan after one year of employment and is fully vested after seven years of employment. The profit sharing plan, as well as the 401(k) plan, invests in various stocks and other permissible investments. Investment earnings are distributed based on account balances while contributions and forfeitures are distributed based on employee compensation. The Company contributions to the 401(k) plan in 1993 and 1992 were $64,184 and $90,744, respectively. F-55 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- 10. CONTINGENCIES The Company and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of their business. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with counsel and a review of available facts, it is management's opinion these proceedings ultimately will be resolved without materially affecting the consolidated financial statements of the Company. 11. RELATED PARTY TRANSACTIONS Financial Reinsurance Corporation, related through common ownership, reinsured accident and health business of the Company for 1991 and a portion of 1992. Policy premiums ceded to Financial Reinsurance Corporation totaled $1,051,194 and $1,326,117 for 1992 and 1991, respectively. On July 1, 1992, the Company canceled the reinsurance agreement and received funds equal to the reserves of the ceded policies. The policy and contract claims liability at December 31, 1991 was reduced by $694,464 for the business ceded. The Company received commissions on reinsurance ceded of $157,560 and $254,331 in 1992 and 1991, respectively, from Financial Reinsurance Corporation. The Company is controlled by a common parent, National Group Corporation, along with other affiliated companies. Other affiliated companies under the common control of National Group Corporation include National Lloyds Insurance Company, National Group Management Corporation, NALICO General Agency, Inc., NALICO Insurance Service Corporation and Adjustment Associates, Inc. During 1990, the Company purchased an office building used by its parent and affiliated corporations. Rental income from these affiliates totaled $61,603, $27,510 and $34,665 for 1993, 1992 and 1991, respectively. The Company has surplus debentures totaling $1,000,000 at December 31, 1993 and 1992 payable to National Group Corporation which bear interest at a base rate plus one percent (7.75% at December 31, 1993). Interest incurred totaled $77,499, $98,944 and $149,753 for 1993, 1992 and 1991, respectively. Mortgage loans at December 31, 1993, 1992 and 1991 include a first lien mortgage note receivable from an affiliated corporation of approximately $240,000. Interest received during 1993, 1992 and 1991, totaled $16,083, $15,251 and $24,867, respectively. F-56 The Company shares certain general and administrative expenses under cost sharing agreements with an affiliate, National Group Management Corporation. Such expenses, which include data processing and equipment charges, totaled $112,110, $469,438 and $552,520 for 1993, 1992 and 1991, respectively and were allocated based on usage time and approximate costs that would have been incurred on a stand-alone basis. 12. SUBSEQUENT EVENTS On April 12, 1994, all of the outstanding stock of NFIC was acquired by Westbridge Capital Corp., a Delaware holding company for a purchase price of approximately $20 million. Westbridge, through its wholly-owned subsidiary National Foundation Life Insurance Company, a Delaware domiciled insurance company, operates in the life and accident and health insurance business. In connection with the acquisition, the following events occurred. First, the remaining 35% of AICT, which was not previously held by NFIC, was transferred to NFIC. Second, all invested assets held by NFIC and AICT prior to the acquisition, excluding bonds on deposit with state insurance departments, were converted to cash at the previous book value. The funds have subsequently been reinvested in U.S. Treasury securities, GNMA mortgage backed securities, investment grade corporate bonds, and short-term investments. F-57 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Unaudited, in thousands) ASSETS March 31, March 31, 1994 1993 ---- ---- Fixed maturities: Available-for-sale, at market value (amortized cost $14,311) $15,115 $ -- Held-for-maturity, at amortized cost (market value $29,492) -- 28,480 Marketable equity securities, at market -- 4,198 Mortgage loans on real estate 2,625 7,073 Collateral loans 181 6,266 Investment real estate 7,928 7,040 Short-term investments 31,673 6,435 ------ ----- Total Invested Assets 57,522 59,492 Cash and cash equivalents 555 870 Accrued investment income 487 935 Deferred policy acquisition costs 23,595 30,902 Receivable from affiliates 215 105 Goodwill 4,608 4,777 Other assets 3,428 4,335 ----- ----- Total Assets $90,410 $101,416 ======= ======== The accompanying notes are an integral part of these financial statements. F-58 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Continued) (Unaudited, in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, March 31, 1994 1993 Liabilities: Accident and health future policy benefits $30,231 $31,666 Policy and contract claims 31,516 36,010 ------ ------ 61,747 67,676 Federal income taxes: Current 485 627 Deferred 4,545 5,851 Notes payable 1,000 1,000 Deferred revenue under reinsurance agreements 2,049 4,814 Payable to affiliates 199 222 Other liabilities 2,068 3,469 ----- ----- Total Liabilities 72,093 83,659 ------ ------ Minority Interest 3,108 3,480 ----- ----- Stockholders' Equity: Common stock 1,500 1,200 Net unrealized gain on securities 531 645 Retained earnings 13,178 12,432 ------ ------ Commitments and contingencies (Note 3) -- -- Total Stockholders' Equity 15,209 14,277 ------ ------ Total Liabilities and Stockholders' Equity $90,410 $101,416 ======= ======== The accompanying notes are an integral part of these financial statements. F-59 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME (Unaudited, in thousands) Three Months Ended March 31, ----------------- 1994 1993 ----------------- Revenues: Premiums $12,082 $13,605 Net investment income 685 966 Gains from sale of investments 262 635 Other revenue 154 61 --- -- 13,183 15,267 Benefits and Expenses: Life and accident and health policy benefits 8,030 9,067 Decrease in deferred policy acquisition costs 1,020 1,103 Commissions 997 1,491 Taxes, licenses and fees 315 77 Other operating costs and expenses 2,290 2,272 Interest expense 19 21 -- -- 12,671 14,031 Income before federal income taxes and minority interest 512 1,236 Provision (benefit) for federal income taxes (439) 222 Minority interest in loss of subsidiary 126 54 Gain from operations before cumulative effect of change in accounting principle 1,077 1,068 ----- ----- Cumulative effect on prior years of change in accounting principle -- (3,600) ----- ------ Net income (loss) $1,077 $(2,532) ====== ======= The accompanying notes are an integral part of these financial statements. F-60 NATIONAL FINANCIAL INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in thousands) Three Months Ended March 31, ------------------ 1994 1993 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $1,077 $(2,532) Adjustments to reconcile net income to cash used for operating activities: Decrease in policy liabilities (4,843) (7,750) Amortization of deferred policy acquisition costs 1,020 1,103 Depreciation and amortization 42 48 Realized gains on investments (262) (635) Minority interest 126 54 Decrease in accrued investment income 127 56 Decrease (increase) in other assets 3,300 (1,838) Decrease in other liabilities (229) (517) Other, net (1,133) 385 ------ --- NET CASH USED FOR OPERATING ACTIVITIES (775) (11,626) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments: Fixed maturities, classified as held-to-maturity, called or matured -- 7,481 Fixed maturities, classified as held-to-maturity, sold -- 3,913 Fixed maturities, classified as available-for-sale, sold or matured 20,657 -- Cost of investments acquired (28,900) (2,136) ------- ------ NET CASH USED BY INVESTING ACTIVITIES (8,243) 9,258 ------ ----- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends declared and paid (1,285) (2,580) ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES (1,285) (2,580) ------ ------ DECREASE IN CASH DURING PERIOD (10,303) (4,948) CASH AT BEGINNING OF PERIOD 10,858 5,818 ------ ----- CASH AT END OF PERIOD $555 $870 ==== ==== The accompanying notes are an integral part of these financial statements. F-61 NATIONAL FINANCIAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION National Financial Insurance Company ("the Company") and its subsidiary, American Insurance Company of Texas ("AICT"), are life and accident and health insurers domiciled in the state of Texas. The Company and its subsidiary ceased marketing operations in the past, and currently administer closed blocks of insurance policies. NOTE 2 - FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements for the Company should be read in conjunction with the consolidated statements for the year ended December 31, 1993. These unaudited consolidated financial statements exclude certain information and other informative disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1994 are not necessarily indicative of the results that may be expected for the full year. NOTE 3 - CHANGE IN ACCOUNTING FOR INVESTMENTS 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 for as follows: * Debt securities that the Company 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. F-62 The Company does not engage in "trading" of securities, and accordingly, all of the applicable investments have been categorized as available-for-sale securities. In accordance with the Statement, the cumulative effect of recording to a separate component of stockholders' equity the difference between market value and amortized cost at January 1, 1994 of securities classified as available-for-sale has been treated as a change in accounting principal, and no restatement of prior year financial statements has been made. All applicable investments have been classified as available-for-sale. As described in Note 5, concurrent with the sale of the Company, on April 12, 1994, substantially all investments were converted to cash. Accordingly, presentation of maturities and major security types is not meaningful. A summary of unrealized appreciation reflected directly in stockholders' equity at March 31, 1994, on investments in fixed maturities available-for-sale is as follows (in thousands): Amortized cost $14,311 Estimated market value 15,115 Excess of market value over amortized cost 804 Estimated tax at 34% (273) -- ---- Unrealized appreciation, net of tax $531 ==== NOTE 4 - COMMITMENTS AND CONTINGENCIES In the normal course of its business operations, the Company and its subsidiary are involved in various claims and other business related disputes. In the opinion of management, the disposition of these matters will have no material adverse effect on the Company's consolidated financial position. NOTE 5 - SUBSEQUENT EVENTS On April 12, 1994, the Company and its subsidiary were sold to Westbridge Capital Corp. ("Westbridge"), a holding company domiciled in Delaware, with its main offices located in Fort Worth, Texas. Concurrent with the sale of the Company, the following significant events occurred: * The 35% minority share in AICT not previously held by the Company was transferred to the Company in the form of a capital contribution. * Most of the invested assets of the Company and AICT were converted to cash, and subsequently reinvested in government bonds and investment grade corporate debt securities. Westbridge is currently in the process of consolidating the operations of the Company and AICT with its other insurance operations in its Fort Worth headquarters. F-63 F-64 Pro Forma Financial Information The Unaudited Pro Forma Consolidated Financial Statements of Westbridge Capital Corp. ("the Company") set forth on the following pages (the "Pro Forma Statements") include the Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1994. Because the consolidated balance sheet of the Company at December 31, 1994 includes National Financial Insurance Company ("NFIC") and American Insurance Company of Texas ("AICT"), which were acquired by the Company on April 12, 1994, a pro forma balance sheet has not been presented. The Pro Forma Consolidated Statement of Operations for the year ended December 31, 1994 has been prepared by combining the consolidated statement of operations of the Company for the year ended December 31, 1994 (which includes the operations of NFIC from April 12, 1994, through December 31, 1994) with the consolidated statement of operations of NFIC for the period January 1, 1994, through April 11, 1994, adjusted to give effect to the acquisition, the sale of the convertible preferred stock, and the application of the net proceeds as if they had occurred on January 1, 1994. The Pro Forma Statement includes all material adjustments necessary to present the historical results in a manner reflecting the assumptions set forth above. The Pro Forma Statement does not purport to be indicative of the results of operations that would have actually been obtained if the acquisition had been consummated as of the beginning of the period presented. In addition, the Pro Forma Statement does not purport to be indicative of the results of operations which may be achieved in the future. NFIC and AICT ceased writing new business in 1992 and resumed new business writing in January, 1995. The Pro Forma Statement of Operations has been prepared using calculations based on assumptions and adjustments deemed reasonable by the Company. These assumptions and adjustments are set forth in the Notes to Pro Forma Financial Information. The pro forma adjustments and combined amounts are provided for informational purposes only. The Company's financial statements reflect the effects of the acquisition only from the date of the acquisition, April 12, 1994. The pro forma adjustments are applied to the historical consolidated financial statements of the Company and NFIC to account for the acquisition as a purchase. Under purchase accounting, the total purchase cost is allocated to the assets and liabilities of NFIC based on their relative fair values. Allocations are subject to valuations as of the date of the acquisition based on appraisals and other studies and estimates. P-1 WESTBRIDGE CAPITAL CORP. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 (Unaudited, in thousands)
Pro Forma Westbridge NFIC Adjustments Pro Forma ---------- -------- ---------- -------- Revenues Premiums $98,703 $13,433 $ - $112,136 Net investment income 5,764 782 - 6,546 Fee and service income 1,728 1,728 Net realized gains (losses) on investments 320 262 (262)(1) 320 Other income 31 157 - 188 ------ ------ ------ ------ Total Revenue 106,546 14,634 (262) 120,918 ------- ------ ---- ------- Benefits, Claims and Expenses Benefits and claims 53,623 8,910 - 62,533 Amortization of deferred policy acquisition costs and intangibles 9,711 1,170 8 (2) 10,889 Commissions 11,224 1,107 - 12,331 General and administrative expenses 16,847 2,517 (600)(3) 18,764 Taxes, licenses and fees 3,230 350 - 3,580 Interest expense 3,067 - - 3,067 ------ ------ ---- ------- Total Expenses 97,702 14,054 (592) 111,164 ------ ------ ---- ------- Provision for income taxes 2,764 (439) 748 (4) 3,073 Equity in earnings of Freedom Holding Company 345 - - 345 Minority Interest - 126 (126)(7) - ----- ----- ---- ----- Net Income $ 6,425 $ 1,145 $ (544) $ 7,026 ======= ======= ======= ======== Preferred stock dividends 1,190 - 460 (5) 1,650 Net income available to common stockholders $ 5,235 $ 1,145 $(1,004) $ 5,376 ======= ======= ======= ======== Fully diluted earnings per share $ 1.03 - - $ 1.02 ====== ====== ====== ====== Weighted average fully diluted shares outstanding 6,267 - 633 (6) 6,900 ===== ====== ===== =====
See accompanying notes to unaudited pro forma financial information. P-2 WESTBRIDGE CAPITAL CORP. NOTES TO PRO FORMA FINANCIAL INFORMATION 1. Adjustment serves to eliminate historical realized gains and losses on disposal of investments. Upon acquisition, purchase accounting adjustments would result in stating marketable securities at fair market value. Accordingly, during the year, resultant gains and losses would be minimal. 2. Adjusts amortization expense upon elimination of historical deferred acquisition costs of NFIC resulting from purchase accounting, and provides for amortization of present value of future profits and goodwill resulting from the acquisition. The pro-forma adjustment for amortization of deferred policy acquisition costs and intangibles for the year ended December 31, 1994, is composed of the following amounts, (in thousands): Elimination of historical amortization expense of NFIC $(1,170) Pro-forma amortization of cost of insurance purchased relating to the acquisition of NFIC 1,178 ----- Pro-forma adjustment for the year ended December 31, 1994 $ 8 ===== The consolidated statement of operations of Westbridge for the year ended December 31, 1994, included $3,023,000 of amortization of cost of insurance purchased relating to the acquisition of NFIC for the period from April 12, 1994 through December 31, 1994. 3. Reductions in costs have been realized upon consolidation of the operations of NFIC with the other insurance operations of Westbridge. Because Westbridge's results of operations include the actual results of operations of NFIC beginning April 12, 1994, the pro-forma adjustments relate to NFIC's results of operations prior to April 12, 1994. For the pro forma results of operations for the year ended December 31, 1994, the pro forma expense reductions are composed of the following items (in thousands): Salaries and wages $124 Real estate and rental expenses 423 Actuarial fees 50 Other 3 ---- $600 ==== P-3 Salaries and Wages Prior to the acquisition, NFIC incurred salaries and wages for approximately 100 employees. Upon acquisition, Westbridge immediately began the process of absorbing the operations of NFIC into Westbridge's existing operations in its Fort Worth facilities. Two months following the acquisition, approximately 60 NFIC employees were released. Additional NFIC employees continued to be released. Seven months following the acquisition, all NFIC employees were released upon completion of the conversion process. Following the acquisition, Westbridge began adding staff to its existing operation in its Fort Worth facilities to support the operations of NFIC. As of seven months following the acquisition, Westbridge had completed its acquisition related staff increases, and was performing all of the administration for the NFIC operations in its Fort Worth facilities. The net increase in staff by Westbridge related to the acquisition of NFIC, was approximately 70. The NFIC employees terminated were across all job functions. The additional employees added by Westbridge were primarily line-level employees. Real Estate and Rental Expenses Adjustment represents cost savings realized by the elimination of real estate expenses, and the expense of duplicate facilities and equipment rental. Under the terms of the purchase, the seller has agreed to allow NFIC to occupy office space rent free for up to one year following the acquisition. The Company had the conversion completed and the duplicate facilities vacated well in advance of the one year period. The Company has no significant lease obligations with respect to the duplicate facilities. Amounts are quantified as follows (in thousands): Real estate expenses $300 Rental expense 123 --- $423 ==== P-4 Actuarial Fees Represents a reduction in consulting actuary fees which are realized by consolidation of operations. 4. Adjusts consolidated pro forma tax provision to the appropriate combined rate. 5. Provides for 8.25% dividend on the Convertible Redeemable Exchangeable Preferred Stock. 6. To reflect the potential dilutive effect of Preferred Stock which is convertible into Westbridge Capital Common Stock at $8.75 per share. 7. To reflect the elimination of minority interest in the earnings of AICT. Prior to the acquisition, there was a 35% minority interest in AICT. Concurrent with the Acquisition, the remaining 35% interest in AICT was obtained by NFIC. Accordingly, a pro forma adjustment has been made to remove the effects of the minority interest. P-5 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH SUCH PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------- TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION .................................................... 3 PROSPECTUS SUMMARY ....................................................... 4 RISK FACTORS ............................................................. 17 THE COMPANY .............................................................. 24 THE ACQUISITION .......................................................... 24 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY ........................................................ 26 CAPITALIZATION ........................................................... 27 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION ................... 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................................................. 31 BUSINESS ................................................................. 45 MANAGEMENT ............................................................... 68 PRINCIPAL STOCKHOLDERS ................................................... 78 DESCRIPTION OF CAPITAL STOCK ............................................. 79 DESCRIPTION OF CONVERTIBLE SUBORDINATED DEBENTURES ....................... 87 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ................................ 93 PLAN OF DISTRIBUTION ..................................................... 99 SELLING SECURITYHOLDERS .................................................. 101 LEGAL MATTERS ............................................................ 102 EXPERTS .................................................................. 103 GLOSSARY OF INSURANCE TERMS .............................................. 104 INDEX TO FINANCIAL STATEMENTS ............................................ F-1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the fees and expenses payable in connection with the sale of the Series A Preferred Stock, Common Stock and Convertible Subordinated Debentures being registered. The Company will pay all such fees and expenses. All amounts are estimates except for the filing and listing fees. SEC Registration Fee ............................. $6,896.55 NYSE listing fees ................................ 17,500.00 Blue Sky fees and expenses ....................... 5,000.00 Accounting fees and expenses ..................... 72,000.00 Legal fees and expenses .......................... 285,000.00 Printing and engraving fees and expenses ......... 3,000.00 Transfer Agent's and registrar's fees and expenses 5,000.00 Trustee's fees and expenses ...................... 10,000.00 Miscellaneous fees and expenses .................. 16,603.45 ----------- Total ..................................... $421,000.00 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits ("DGCL") a Delaware corporation to indemnify any of its directors, officers, employees and agents of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against actual and reasonable expenses (including attorneys' fees) incurred by such person in connection with any action, suit or proceeding if (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and (ii) in the case of a criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. Except as ordered by a court, no indemnification shall be made in connection with any proceeding brought by or in the right of the Company where the person involved is adjudged to be liable to the Company. Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would otherwise have the power to indemnify him under Section 145. The Company maintains policies insuring the Company's officers and directors against certain liabilities for actions taken in such capacities, including liabilities under the Securities Act. Article V of the By-Laws of the Company provides for indemnification of the directors and officers of the Company to the full extent permitted by law, as now in effect or later amended. Article V of the Certificate of Incorporation limits under certain circumstances the liability of the Company's directors for a breach of their fiduciary duty as directors. These provisions do not eliminate the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL), or (iv) for any transaction from which the director derived an improper personal benefit. II-1 At present, there is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought nor is the Company aware of any threatened litigation that may result in claims for indemnification by any officer, director, or employee of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On April 12, 1994, Westbridge issued 20,000 shares of its Series A Cumulative Convertible Exchangeable Redeemable Preferred Stock (the "Series A Preferred Stock") with a liquidation preference of $1,000 per share. Such shares were privately placed by Oppenheimer & Co., Inc., ("Oppenheimer"), as placement agent with "accredited investors" (as defined in Regulation D promulgated under the Securities Act of 1933, as amended) and such sale was, pursuant to the provision of Rule 506, exempt from the registration requirements under the Securities Act of 1933, as amended. Westbridge received approximately $20.0 million in cash from the sale of the Series A Preferred Stock and, from this amount, paid to Oppenheimer a fee of $800,000 and certain other expenses estimated at $197,500. In addition, Westbridge issued to Oppenheimer warrants to purchase 120,000 shares of Common Stock at $8.75 per share. On December 22, 1995 the Company issued a $1,000,000 principal amount 10% Senior Note due 2002 (the "Senior Note"), to the Chairman of the Board of Directors. 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. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, Westbridge received approximately $1 million in cash from the sale of the Senior Note. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS. The following exhibits are filed herewith. Exhibits incorporated by reference are indicated in the parentheses following the description. 2.1 - Stock Purchase Agreement dated as of December 6, 1993 among Westbridge, National Group Corporation and C. Clifton Robinson (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 2.2 - Amendment No. 1 to Stock Purchase Agreement, dated as of April 12, 1994, by and among Westbridge, National Group Corporation and C. Clifton Robinson (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated April 26, 1994). 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* - Article Fourth of the Restated Certificate of Incorporation of Westbridge (included in Exhibit 3.1). 4.2 - 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). 4.3* - Form of Convertible Subordinated Indenture relating to the Convertible Subordinated Debentures, including form of Convertible Subordinated Debenture. 4.4 - 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). 5.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding legality of the Series A Preferred Stock, the Common Stock and the Convertible Subordinated Debentures. 7.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding liquidation preference of the Series A Preferred Stock. 8.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding certain tax matters. 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 - Regional General Agent's Contract with C. Flowers (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985). II-3 10.3 - General Agent's Agreement with Phillip D. Elkins as amended on April 5, 1976 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.4 - 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). 10.5 - 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). 10.6 - Amendment No. 1 to 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). 10.7 - Amendment No. 2 to 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). 10.8 - Amendment No. 3 to 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). 10.9 - 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). 10.10- 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). 10.11- Coinsurance Agreement between National Foundation Life Insurance Company and Paramount Life Insurance Company, as of March 1, 1990 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.12- Coinsurance Agreement between National Foundation Life Insurance Company and Freedom Life Insurance Company of America, as of May 5, 1987 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.13- Assumption Reinsurance Agreement, dated June 20, 1991, by and among National Foundation 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). 10.14- Assumption 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 report on Form 8-K dated September 25, 1992). 10.15- Westbridge 1992 Stock Option Plan (incorporated by reference to Exhibit 28.4 to the Company's Registration Statement No. 33-55192 on Form S-8). 10.16- First 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). 10.17 - Second Amendment to the 1992 Stock Option Plan. II-4 10.18- Preferred Stock Purchase Agreement dated as of April 1, 1994 by and between Westbridge 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). 10.19- Receivables Purchase and Sale Agreement dated as of November 15, 1995 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, (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.20- Credit 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). 10.21- Guaranty 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). 10.22- Security 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 Annual Report on Form 10-K for the year ended December 31, 1995). 10.23- Westbridge 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). 10.24- Warrant 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). . 10.25** - Master General Agent's Contract by and between American Insurance Company of Texas and National Farm & Ranch Group, Inc., effective the 1st day of September, 1994. 10.26** - Master 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. 10.27** - Master 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. 10.28** - Master 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. 10.29** - Master 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. 10.30**- Master 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. II-5 10.31** - Master 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. 10.32- Westbridge 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). 10.33** - Form of Pledge Agreement between Westbridge Capital Corp. and Fleet National Bank of Connecticut. 12.1** - Statement of computation of earnings to fixed charges. 21.1** - List of Subsidiaries of Westbridge. 23.1** - Consents of Price Waterhouse LLP. 23.2** - Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C. 23.3*- Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibits 5.1, 7.1 and 8.1). 24.1* - Powers of Attorney. 27.1** - Financial Data Schedule. - ------------------------- * Previously Filed ** Filed Herewith II-6 (B) FINANCIAL STATEMENT SCHEDULES. II. Condensed Financial Information of Registrant (included on page S-1). III. Supplementary Insurance Information (included on page S-4). IV. Reinsurance (included on page S-5). V. Valuation and Qualifying Accounts and Reserves (included on page S-6). ITEM 17. UNDERTAKINGS. 1. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to its Certificate of Incorporation, ByLaws or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 2. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a) (3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 3. The undersigned Company hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act of 1939. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth, State of Texas, on August 9, 1996. WESTBRIDGE CAPITAL CORP. By: /S/ MARTIN E. KANTOR (Martin E. Kantor, Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------------------------------------------------- /S/ MARTIN E. KANTOR Director, Chairman of the Board, August 9, 1996 - -------------- (Martin E. Kantor) and Chief Executive Officer (Principal Executive Officer) /S/ JAMES W. THIGPEN Director, President and August 9, 1996 - -------------- (James W. Thigpen) Chief Operating Officer /S/ PATRICK J. MITCHELL Executive Vice President, Chief August 9, 1996 - -------------- (Patrick J. Mitchell) Financial Officer and Treasurer (Principal Financial and Accounting Officer) * Director (Marvin H. Berkeley) * Director (Arthur W. Feinberg) * Director (George M. Garfunkel) * Director (Peter J. Millock) * Director (Glenn O. Phillips) * Director (Joseph C. Sibigtroth) * Director (Barth P. Walker) *By:/S/JAMES W. THIGPEN August 9, 1996 (James W. Thigpen) (Attorney-in-Fact)
II-8 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---- ---- ---- Net investment income $ 23 $ 12 $ 36 Realized gains and losses on investments - - 55 Intercompany income derived from: Interest on Surplus Certificates 78 106 229 Rental of leasehold improvements and equipment 1,597 658 618 Interest on advances to subsidiaries 182 170 226 Other income 120 96 205 ------- -------- 2,000 1,042 1,369 ------ ------ ------ General and administrative expenses 2,085 894 652 Taxes, licenses and fees 97 35 25 Interest expense 2,432 3,228 3,190 ------ ------- ------- 4,614 4,157 3,867 ------ ------- ------- Loss before benefit for income taxes and equity in undistributed net earnings of subsidiaries (2,614) (3,115) (2,498) Benefit for income taxes 1,427 1,228 842 ------- ------- ------- (1,187) (1,887) (1,656) Equity in undistributed net earnings of subsidiaries 6,918 8,312 5,187 ------- ------- ------- Net income before extraordinary item 5,731 6,425 3,531 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $210 407 - - ------- ------- ------- Net income 5,324 6,425 3,531 Preferred stock dividends 1,650 1,190 - ------- ------ ------- Income applicable to common stockholders 3,674 5,235 3,531 Retained earnings (accumulated deficit) at beginning of year 6,901 1,666 (1,865) ------- -------- ------- Retained earnings (accumulated deficit) at end of year $10,575 $ 6,901 $ 1,666 ======= ======= =======
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. December 31, 1995 consolidated financial statements and notes thereto. II-1 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) BALANCE SHEETS (In thousands)
DECEMBER 31, 1995 1994 ---- ---- Assets: Cash and other short-term investments $1,446 $27 Investment in consolidated subsidiaries 70,118 60,613 Notes receivable from related parties -- -- Accrued investment income 34 22 Leasehold improvements and equipment, net 1,387 1,131 Other assets 7,257 5,862 Advances due from subsidiaries 4,797 5,519 Receivable from subsidiary on Surplus Certificate 777 777 -------- -------- Total Assets $85,816 $73,951 ======== ======== Liabilities: Senior subordinated debentures, net $19,264 $24,580 Interest payable 2 871 Other liabilities 2,055 1,116 Payable to subsidiaries 1,690 1,029 -------- -------- Total Liabilities 23,011 27,596 -------- -------- Redeemable Preferred Stock 20,000 20,000 Stockholders' Equity: Common stock 599 443 Capital in excess of par value 29,208 19,328 Unrealized appreciation (depreciation) of investments carried at market value 2,593 (147) Retained earnings 10,575 6,901 -------- -------- 42,975 26,525 -------- -------- Less: Aggregate shares held in treasury and investment by affiliate in Parent Company's common stock (28,600 shares at December 31, 1995 and 1994), at cost (170) (170) -------- -------- Total Stockholders' Equity 42,805 26,355 -------- -------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $85,816 $73,951 ======== ========
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. December 31, 1995 consolidated financial statements and notes thereto. II-2 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) STATEMENT OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income applicable to common stockholders $3,674 $5,235 $3,531 Adjustments to reconcile net income to cash provided by (used for) operating activities: Equity in undistributed net income of subsidiaries (6,918) (8,312) (5,187) Accrued investment income (12) 87 39 Advances due from subsidiaries 1,383 1,461 6 Other liabilities 10 356 (18) Increase in deferred income tax benefit (1,376) (1,268) (842) (Increase) decrease in deferred expense (137) (1,726) 117 Other, net 335 669 427 -------- -------- -------- NET CASH USED FOR OPERATING ACTIVITIES (3,041) (3,498) (1,927) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of NFIC and AICT -- (20,178) -- Proceeds from investments sold and matured -- 100 100 Proceeds from surplus certificate -- 1,000 864 Notes receivable from related parties -- 1,381 278 Additions to leasehold improvements and equipment, net of retirements (703) (911) (219) Investment in subsidiaries -- 2,000 -- -------- -------- -------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (703) (16,608) 1,023 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of redeemable preferred stock -- 20,000 -- Retirement of 1996 debentures (25,000) -- -- Issuance of subordinated notes 19,200 -- -- Issuance of note payable 927 -- -- Issuance of common stock 10,108 395 123 Issuance of common stock warrants 74 -- -- Purchase and cancellation of common stock (146) (534) (89) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,163 19,861 34 -------- -------- -------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS DURING THE YEAR 1,419 (245) (870) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 27 272 1,142 -------- -------- -------- CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $1,446 $27 $272 ======== ======== ========
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. December 31, 1995 consolidated financial statements and notes thereto. II-3 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, 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 ======== ======== ======== ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1993: Insurance operations $28,354 $32,877 $12,794 $68,731 $3,653 $33,153 $8,159 $19,898 $23,809 ======== Fee and service income activities -- -- -- -- -- -- -- 6,180 Corporate (parent company) -- -- -- -- 467 -- -- 3,142 -------- -------- -------- -------- -------- -------- -------- -------- Total $28,354 $32,877 $12,794 $68,731 $4,120 $33,153 $8,159 $29,220 ======== ======== ======== ======== ======== ======== ======== ========
* Premiums Written--Amounts do not apply to life insurance. II-4 WESTBRIDGE CAPITAL CORP. SCHEDULE IV REINSURANCE (IN THOUSANDS)
ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET --------------------------------------------------------- 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% ======== ========= =========== ======== YEAR ENDED DECEMBER 31, 1993: Life insurance in force $22,340 $ -- $ -- $22,340 -- ======== ========= =========== ======== Premiums: Life $509 $ -- $ -- $509 -- Accident and health 61,884 495 6,833 68,222 10.02% -------- --------- ----------- -------- Total premiums $62,393 $495 $6,833 $68,731 9.94% ======== ========= =========== ========
II-5 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, 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 ============ ============ ============ ============ YEAR ENDED DECEMBER 31, 1993: Allowance for doubtful agents' balances $1,152 $(19) $ -- $1,133 ============ ============ ============ ============
II-6 EXHIBIT INDEX EXHIBIT NO. PAGE NO. 2.1 - Stock Purchase Agreement dated as of December 6, 1993 among Westbridge, National Group Corporation and C. Clifton Robinson (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 2.2 - Amendment No. 1 to Stock Purchase Agreement, dated as of April 12, 1994, by and among Westbridge, National Group Corporation and C. Clifton Robinson (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated April 26, 1994). 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* - Article Fourth of the Restated Certificate of Incorporation of Westbridge (included in Exhibit 3.1). 4.2 - 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). 4.3* - Form of Convertible Subordinated Indenture relating to the Convertible Subordinated Debentures, including form of Convertible Subordinated Debenture. 4.4 - 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). 5.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding legality of the Series A Preferred Stock, the Common Stock and the Convertible Subordinated Debentures. 7.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding liquidation preference of the Series A Preferred Stock. 8.1* - Opinion of Milbank, Tweed, Hadley & McCloy regarding certain tax matters. 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 - Regional General Agent's Contract with C. Flowers (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985). 10.3 - General Agent's Agreement with Phillip D. Elkins as amended on April 5, 1976 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). (Confidential Treatment for portions of this Exhibit has been requested). 10.4 - 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). 10.5 - 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). -i- EXHIBIT NO. PAGE NO. 10.6 - Amendment No. 1 to 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). 10.7 - Amendment No. 2 to 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). 10.8 - Amendment No. 3 to 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). 10.9 - 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). 10.10- 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). (Confidential Treatment for portions of this Exhibit has been requested). 10.11- Coinsurance Agreement between National Foundation Life Insurance Company and Paramount Life Insurance Company, as of March 1, 1990 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.12- Coinsurance Agreement between National Foundation Life Insurance Company and Freedom Life Insurance Company of America, as of May 5, 1987 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.13- Assumption Reinsurance Agreement, dated June 20, 1991, by and among National Foundation 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). 10.14- Assumption 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 report on Form 8-K dated September 25, 1992). 10.15- Westbridge 1992 Stock Option Plan (incorporated by reference to Exhibit 28.4 to the Company's Registration Statement No. 33-55192 on Form S-8). 10.16- First 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). 10.17 - Second Amendment to the 1992 Stock Option Plan. 10.18- Preferred Stock Purchase Agreement dated as of April 1, 1994 by and between Westbridge 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). 10.19- Receivables Purchase and Sale Agreement dated as of November 15, 1995 between National Foundation Life Insurance Company, National Financial Insurance Company, American Insurance Company of Texas, Health Care-One Insurance Agency, Inc., and -ii- EXHIBIT NO. PAGE NO. Westbridge Funding Corporation, (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.20- Credit 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). 10.21- Guaranty 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). 10.22- Security 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 Annual Report on Form 10-K for the year ended December 31, 1995). 10.23- Westbridge 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). 10.24- Warrant 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). . 10.25** - Master 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. 10.26** - Master 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. 10.27** - Master 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. 10.28** - Master 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. 10.29** - Master 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. 10.30**- Master 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. 10.31** - Master 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. -iii- EXHIBIT NO. PAGE NO. 10.32- Westbridge 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). 10.33** Form of Pledge Agreement between Westbridge Capital Corp. and Fleet National Bank of Connecticut. 12.1**- Statement of computation of earnings to fixed charges. 21.1** - List of Subsidiaries of Westbridge. 23.1** - Consents of Price Waterhouse LLP. 23.2** - Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C. 23.3*- Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibits 5.1, 7.1 and 8.1). 24.1* - Powers of Attorney. 27.1** - Financial Data Schedule. - ------------------------- * Previously Filed ** Filed Herewith -iv- EXHIBIT 10.25 MASTER GENERAL AGENT'S CONTRACT BETWEEN AMERICAN INSURANCE COMPANY OF TEXAS AND NATIONAL FARM & RANCH GROUP, INC. EXHIBIT 10.25 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between AMERICAN INSURANCE COMPANY OF TEXAS, an insurance corporation of Texas, hereinafter called the "Company", and NATIONAL FARM & RANCH GROUP, INC., hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints NATIONAL FARM & RANCH GROUP, INC., named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. NATIONAL FARM & RANCH GROUP, AMERICAN INSURANCE COMPANY OF INC. TEXAS By: /S/ MIKE STEVENS By:/S/ J.W. THIGPEN Mike Stevens James W. Thigpen President President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: August 30, 1994 Effective the 1st day of September, 1994. (affixed by the Company) EXHIBIT 10.26 MASTER GENERAL AGENT'S CONTRACT BETWEEN NATIONAL FINANCIAL INSURANCE COMPANY AND NATIONAL FARM & RANCH GROUP, INC. EXHIBIT 10.26 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between NATIONAL FINANCIAL INSURANCE COMPANY, an insurance corporation of Texas, hereinafter called the "Company", and NATIONAL FARM & RANCH GROUP, INC., hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints NATIONAL FARM & RANCH GROUP, INC., named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. NATIONAL FARM & RANCH GROUP, NATIONAL FINANCIAL INSURNACE INC. COMPANY By: /S/ MIKE STEVENS By: /S/ STEPHEN D. DAVIDSON President Vice-President Attest: /S/ SHERRY MCMURTREY Asst. Secretary Date Signed: - ----------------------- Effective the 1st day of June, 1995. (affixed by the Company) EXHIBIT 10.27 MASTER GENERAL AGENT'S CONTRACT BETWEEN NATIONAL FOUNDATION LIFE INSURANCE COMPANY AND NATIONAL FARM & RANCH GROUP, INC. EXHIBIT 10.27 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between NATIONAL FOUNDATION LIFE INSURANCE COMPANY, an insurance corporation of Delaware, hereinafter called the "Company", and NATIONAL FARM & RANCH GROUP, INC., hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints NATIONAL FARM & RANCH GROUP, INC., named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. NATIONAL FARM & RANCH GROUP, NATIONAL FOUNDATION LIFE INC. INSURANCE COMPANY By: /S/ MIKE STEVENS By: /S/ J.W. THIGPEN President President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: August 30, 1994 Effective the 1st day of September, 1994. (affixed by the Company) EXHIBIT 10.28 MASTER GENERAL AGENT'S CONTRACT BETWEEN AMERICAN INSURANCE COMPANY OF TEXAS AND CORNERSTONE NATIONAL MARKETING CORPORATION EXHIBIT 10.28 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between AMERICAN INSURANCE COMPANY OF TEXAS, an insurance corporation of Texas, hereinafter called the "Company", and CORNERSTONE NATIONAL MARKETING CORPORATION, hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints CORNERSTONE NATIONAL MARKETING CORPORATION, named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. CORNERSTONE NATIONAL AMERICAN INSURANCE COMPANY OF MARKETING CORPORATION TEXAS By: /S/ WILLIAM C. MCREE By: /S/ STEPHEN D. DAVIDSON President Vice-President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: 10-19-94 Effective the 19th day of October, 1994. (affixed by the Company) EXHIBIT 10.29 MASTER GENERAL AGENT'S CONTRACT BETWEEN NATIONAL FINANCIAL INSURANCE COMPANY AND CORNERSTONE NATIONAL MARKETING CORPORATION EXHIBIT 10.29 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between NATIONAL FINANCIAL INSURANCE COMPANY, an insurance corporation of Texas, hereinafter called the "Company", and CORNERSTONE NATIONAL MARKETING CORPORATION, hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints CORNERSTONE NATIONAL MARKETING CORPORATION, named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. CORNERSTONE NATIONAL NATIONAL FINANCIAL INSURANCE MARKETING CORPORATION COMPANY By: /S/ WANDA GILLIAM By:/S/ STEPHEN D. DAVIDSON Secretary Vice-President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: 12/22/95 Effective the 19th day of October, 1994. (affixed by the Company) EXHIBIT 10.30 MASTER GENERAL AGENT'S CONTRACT BETWEEN NATIONAL FOUNDATION LIFE INSURANCE COMPANY AND CORNERSTONE NATIONAL MARKETING CORPORATION EXHIBIT 10.30 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between NATIONAL FOUNDATION LIFE INSURANCE COMPANY, an insurance corporation of Delaware, hereinafter called the "Company", and CORNERSTONE NATIONAL MARKETING CORPORATION, hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints CORNERSTONE NATIONAL MARKETING CORPORATION, named above as Master General Agent, and authorizes it to procure and submit applications for the insurance policies shown in Schedule A herein in the territory as licensed and assigned by the Company. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize it and Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or its SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, it shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall keep correct accounts and records of all business transacted and monies collected, which shall be open to inspection and examination by the Company's authorized representatives; and the Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw, substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon thirty (30) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of its place of business, its equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use its best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Mast General Agent shall hold harmless the Company from any and all claims or causes of action of each Sub-Agent and those claims or causes of action of third parties against the Company resulting from the activities of each Sub-Agent, shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a Sub-Agent is terminated, or if transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein its is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to its license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with its personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. While this Contract continues in force, the Company will pay to the Master General Agent the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by it or by or through the SubAgents, when paid for in cash to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or its successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for 180 (180) days, then all policy fees and commissions shall revert to the Company. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, or violation of any of the provisions of Paragraph 21 hereof), the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever. The policy fees and commissions provided herein shall also cease and revert to the Company should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company, all as solely determined by the Company. Since the amount of damages would be difficult or impossible to prove, in the event of any such act by the Master General Agent or any Sub-Agent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent liquidated damages in the sum of $1,000.00 for each such act. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. 18. Subject to all the provisions of this Contract any written modifications thereof, the Company will allow the Master General Agent for its services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year, First Year Override Earned Commissions, Override Earned Commissions Second Year Through Tenth Year, and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) First Year Earned Commissions shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) Earned Commissions Second Year Through Tenth Year shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (3) First Year Override Earned Commissions shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (4) Override Earned Commissions Second Year Through Tenth Year shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (5) Service Fee shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent in policy years eleven and thereafter. (6) If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that it has in its possession or over which it has a right of control. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days written notice to the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days written notice, the Company may terminate after thirty days written notice to the Master General Agent's last known address, or delivered personally, if the Master General Agent shall fail to comply with the rules and regulations of any State Insurance Department, or shall fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company. 21. Additionally, should the Master General Agent or any Sub-Agent so conduct its activities as to injure the Company's standing or good name in the community or elsewhere, or make any disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent fail to abide by the terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this or any prior contract with the Company as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Additionally, the Master General Agent hereby agrees to pay interest at the rate of one (1) percent per month, effective beginning sixty (60) days after incurring any indebtedness on the books of the Company resulting from any activity by the Master General Agent under this Contract during the period from the effective date of this Contract until termination, and that a separate ledger account on the books of the Company shall be maintained to account for the activity of the Master General Agent for this period. Advances or loans by the Company to the Master General Agent or to any Sub-Agent, and any monies or claims due or to become due to the Company from any SubAgent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be immediately payable on demand. This indebtedness may be paid in twelve (12) equal installments. The Master General Agent agrees to pay interest on any such indebtedness at the maximum non-usurious rate until paid. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17 and was not as a result of the Master General Agent knowingly inducing or attempting to induce any Policyholder of the Company to lapse or cancel their policy of insurance. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on it for the privilege of it doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than a reasonable number of brochures and applications ordered from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (i) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. (c) Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. Since the Master General Agent is a corporate entity, the Master General Agent agrees to provide all business information, corporate agreements, and other documents requested by the Company, and to provide to the Company immediate notice of any change in the officers or change in the officers of the corporation. 31. THIS CONTRACT shall supersede and cancel all previous written or oral contracts or understandings between the parties hereto, and any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. CORNERSTONE NATIONAL NATIONAL FOUNDATION LIFE MARKETING CORPORATION INSURANCE COMPANY By: /S/ WILLIAM C. MCREE By:/S/ STEPHEN D. DAVIDSON President Vice-President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: 12/30/94 Effective the 19th day of October, 1994. (affixed by the Company) EXHIBIT 10.31 MASTER GENERAL AGENT'S CONTRACT BETWEEN FREEDOM LIFE INSURANCE COMPANY OF AMERICA AND JOHN P. LOCKE, D.B.A. 1ST MILLION EXHIBIT 10.31 MASTER GENERAL AGENT'S CONTRACT THIS CONTRACT is by and between FREEDOM LIFE INSURANCE COMPANY OF AMERICA, an insurance corporation of Mississippi, hereinafter called the "Company", and JOHN LOCKE, D.B.A. 1ST MILLION, hereinafter called the "Master General Agent". APPOINTMENT 1. The Company hereby appoints JOHN LOCKE, D.B.A. 1ST MILLION, named above as Master General Agent, and authorizes him to procure and submit applications for the insurance policies shown in Schedule A herein in the territories in which the Company is licensed to conduct business, and in which the various policies are approved or will be approved. 2. The Master General Agent agrees that during the term of this Contract applications solicited on policy application forms of the Company pursuant to this appointment will first be offered to the Company prior to submission to any other insurance company. 3. The Master General Agent agrees that the purpose of this Contract is to authorize him and his Sub-Agents (defined below) to solicit applications for insurance satisfactory to the Company and therefore, the Company shall have the right for any reason to reject, modify, or decline any application which in its sole opinion is not acceptable under its underwriting procedures and guidelines, as well as settlements tendered or made hereunder, and for any reason to take up and cancel any policy and return the policy fee and premium on the same or any part thereof. Any policy fee and commission paid or credited to the Master General Agent or his SubAgents on the collected and accepted fees and premiums of such a policy or part thereof which is so returned shall become payable to the Company by the Master General Agent upon demand and may be set-off against any monies otherwise due the Master General Agent. 4. In connection with business written by or through the Master General Agent, he shall repay or return to the Company, on demand, all policy fees and commissions received by the Master General Agent or any Sub-Agent on the fees and premiums collected with applications rejected or declined by the Company or if a modified policy is not accepted by the applicants, or upon policies rescinded or in any way voided by the Company or the insured because of alleged misrepresentations made or misunderstandings had at or preceding the time applications were taken or upon delivery of the policies, or for any other reason. 5. The Company may from time to time prescribe requirements for the eligibility of applicants for insurance, not unreasonably interfering with the freedom of action of the Master General Agent, and applications procured and submitted pursuant to this Contract shall be in accordance with the Company's underwriting guidelines, now or hereafter in force. The Master General Agent shall make and transmit to the Company reports and any requested responses of any nature and related to any matter, in writing and on forms provided or designated, all as may be required by the Company. 6. The Company may, at its option and at any time, require the Master General Agent to furnish a bond with surety satisfactory to the Company to guarantee faithful performance of its obligation hereunder. 7. If any legal action by any person, or administrative action by, including but not limited to, any State Insurance Department or any other regulatory agency, is brought or proposed to be brought against either party hereto, or both parties jointly, solely by reason of any alleged act, fault or failure of the Master General Agent or any Sub-Agent of the Master General Agent in connection with any activities under this Contract or under any appointment agreement with any Sub-Agent of the Master General Agent, the Company may require the Master General Agent to defend such action, or at the Company's sole option, it may defend itself therein and expend such sums therefor, including but not limited to attorneys fees and costs, and the Master General Agent shall be chargeable therewith as well as with any amount which may be recovered against the Company or any amount paid in settlement or disposition by the Company in any such action, which amount the Master General Agent shall pay to the Company on demand, except in those cases when the Master General Agent has not been at fault and should not be held responsible. The Master General Agent and Sub-Agents shall cooperate with the Company in such action and provide all requested information to the Company in any such action. In no event shall Master General Agent be responsible for any claims or causes of action arising in part or in whole by reason of Company's delay in paying a valid claim or Company's failure to pay a valid claim. If any legal or administrative action is brought against the Company by the Master General Agent, and the Company prevails, the Master General Agent shall pay the attorneys fees, expenses, and costs incurred by the Company as well as any damages awarded the Company. If any legal or administrative action is brought against the Master General Agent by the Company, and the Master General Agent prevails, the Company shall pay the attorneys fees, expenses and costs incurred by the Master General Agent as well as any damages awarded to the Master General Agent. 8. Without liability to the Master General Agent, the Company may retire from any territory or state, and may at its discretion withdraw (if Company elects to terminate issuing such policy), substitute or add any policy or policies to those listed in Schedule A and determine or change policy fees, administrative fees, and/or premium rates and, upon ninety (90) days written notice to the Master General Agent, change the policy fees and/or commissions charged or allowed on such policies, provided that any change in policy fees and/or commissions shall operate prospectively only and shall not affect policy fees and/or commissions earned or to be earned on policies sold prior to such change. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of premium which results from any premium rate increase after the effective date of any such policy. If the Company withdraws from a state, the Master General Agent and his Sub-Agents shall be permitted to contract with a different insurance carrier in that state, and may solicit policies for insurance similar or identical to those policies solicited by Master General Agent and his Sub-Agents prior to such withdrawal, and such actions performed by Master General Agent and his Sub-Agents shall not be considered a breach of this Contract. 9. Nothing herein contained shall be construed to create the relationship of employer and employee between the Company and the Master General Agent. The Master General Agent shall be free to exercise his own judgment as to the location of his place of business, his equipment and office personnel, but the Company may, from time to time, prescribe rules and regulations respecting the conduct of the business covered hereby, not unreasonably interfering with such freedom of action of the Master General Agent, and the Master General Agent agrees to be governed by such rules and regulations. From time to time, the Company may make training materials, sales aids, or similar devices available for use by the Master General Agent; such materials shall not be altered and shall be solely for the purpose of assisting the business of the Master General Agent and not for the purpose of controlling the manner in which services are to be performed under this Contract. AUTHORITY 10. The Master General Agent shall have the authority to recruit and recommend to the Company, subject to its approval and appointment, soliciting General Agents and Agents, but shall not have the authority to bind the Company to any contract with any such General Agents or Agents. All agreements with recommended Area Directors and Writing Agents shall be on the Company's contract or other special agreement form showing the Master General Agent's recommendation thereon. No agreement shall be effective until the Area Director or Writing Agent is duly licensed by the State Insurance Department having jurisdiction, appointed by the Company and the agreement has been executed by a duly authorized officer of the Company. Each such Area Director or Writing Agent approved by the Company and assigned to the Master General Agent shall herein be called a "Sub-Agent", and, collectively, the "Sub-Agents". In this connection, it is understood and agreed that in the event an application is taken by a Sub-Agent when such Sub-Agent is not appointed and/or licensed by the applicable Insurance Department and thereafter such application is submitted to the Company and a policy is issued thereon, that in such event the policy will be considered a Home Office issue policy and no commissions shall be payable under Schedule A to either the Master General Agent or such Sub-Agent. The Master General Agent shall use his best efforts to prevent each Sub-Agent from soliciting policy applications or receiving sales materials from or through the Master General Agent unless and until the Sub-Agent is properly appointed and/or licensed by the applicable State Insurance Department and the Master General Agent has been so notified by the Company. The Master General Agent shall hold harmless the Company from any and all actual damages resulting from claims or causes of action arising because of improper action of his Sub-Agents and those claims or causes of action of third parties against the Company resulting solely from the activities of each of his Sub-Agent (Master General Agent shall in no event be responsible for any claims or causes of actions arising in whole or in part by reason of Company's delay in paying a valid claim or Company's failure to pay a valid claim),and said actual damages shall constitute an indebtedness of the Master General Agent to the Company and become payable upon demand by the Company. If a SubAgent is terminated, or is transferred to another Sub-Agent, all prior business written by the Sub-Agent remains under any contract of the previous supervising Sub-Agent of such terminated or transferred Sub-Agent unless agreed to in writing between the Company and the Master General Agent. If a Sub-Agent is to be considered for a transfer to another Sub-Agent or considered for a Sub-Agent contract, the request must submitted through the Master General Agent. Each Sub-Agent may receive directly from the Company periodic statements of the business written by the Sub-Agent for which policies of insurance were issued by the Company. The Master General Agent agrees that the Company shall have the right to terminate the contract or other special agreement of any Sub-Agent in accordance with its terms. The Company may from time to time upon the Master General Agent's approval assign other Sub-Agents to operate under the Master General Agent. The Master General Agent may be granted written authority by the Company to deliver to insureds policies which the Company issues, and assist only if requested by the Company in the collection of subsequent premiums. If either authority is granted, the Master General Agent agrees to adhere to the rules of the Company for such delivery and collection and to account to the Company for all policies delivered or premiums collected. The Company shall notify in writing the Master General Agent of any delivery rule violations committed by either the Master General Agent or any Sub-Agent, within fifteen (15) days of the Company's knowledge of such violation. Either authority, if granted, may be reasonably revoked in writing at any time by the Company. For each policy as to which the Master General Agent or any Sub-Agent fails to adhere to the rules for such delivery, the Master General Agent shall pay to the Company, upon demand, actual damages or losses, costs, or expenses the Company incurs as a result of the failure to adhere to the rules for such policies. The Master General Agent shall obtain and maintain at the Master General Agent's expense, licenses and/or appointments from the State Insurance Departments of the states wherein he is licensed and/or appointed. The Master General Agent shall immediately advise the Company of any actions taken or proposed to be taken by any State Insurance Department with respect to his license and/or appointment, and shall furnish the Company copies of all correspondence to and from said State Insurance Departments or any governmental authority relating to its insurance business activities. 11. The Master General Agent shall not accept renewal premiums, except in connection with a conservation program previously approved in writing by an officer of the Home Office of the Company. All monies received by the Master General Agent as full or partial payment of first year premiums, or any other item whatsoever, shall be held in trust for the Company and shall be immediately delivered and paid to the Company together with a summary of the solicitations made, and such remittance of money must be applied to the relevant item. The Master General Agent shall not make any personal or other use of such monies, or intermingle the same with his personal or other funds. 12. The Master General Agent shall not have the authority on behalf of the Company to alter or discharge any policy; to make any endorsement on any policy; to waive forfeiture; to name special policy fees, administrative fees, or rates; to allow the delivery of a policy unless the first installment of premium and the applicable policy fee have been paid; to receive any money due or to become due the Company, unless expressly authorized in writing by an officer of the Home Office of the Company; or to incur any expenditures on account of the Company except as authorized in writing by an officer of the Home Office of the Company. 13. The Master General Agent shall not insert or authorize the insertion of any advertising matter bearing the Company's name in any publication or other media form, issue or distribute or authorize the issuance or distribution of any letterhead, business cards, circular, paper, advertising matter, or other sales material in any form on behalf of the Company or with expressed or implied reference to the Company or any of the policies offered by the Company without first submitting such items to the Company and receiving the written approval of the President or a Senior Vice President of the Company. Such approval shall not be unreasonably withheld. 14. No assignment or transfer of rights or interests under this Contract shall be valid against the Company unless authorized in advance in writing by the President or a Senior Vice President of the Company. If approved, any assignment shall be subject to all rights of the Company as to any indebtedness of the Master General Agent to the Company then existing or thereafter incurred. 15. The Master General Agent shall have no power or authority other than as herein expressly granted and no other or greater powers shall be implied from the grant or denial of powers specifically mentioned herein. 16. No acts of forbearance on the part of the Company to enforce any of the provisions of this Contract nor its failure to exercise any right or privilege herein granted shall be considered as a waiver of such right or privilege. COMPENSATION 17. The Company will pay to the Master General Agent (I)the policy fees, first year commissions, renewal commissions and service fees on policies issued as a result of applications personally procured by him or by or through the Sub-Agents, and(ii) will continue to pay to Master General Agent override first year and renewal commissions on all policies issued as a result of applications by all General Agents, Sub-Agents and Agents who have contracted directly with the Company prior to the date of this Agreement, when paid for in cash or other currently available funds to the Company and accepted at its Home Office in Fort Worth in accordance with Paragraph 18, and subject to the provisions contained in this Contract. The Master General Agent shall determine and advise the Company of the allocation of commissions among the Master General Agent and SubAgents. The compensation of the Master General Agent on the business produced by the Sub-Agents shall be the difference between the commissions and policy fees payable to the Sub-Agents by the Company and the commissions and policy fees provided on Schedule A attached hereto. If a new policy is issued within six (6) months prior to or subsequent to the date of surrender of or discontinuance of premium payments on a then or formerly existing policy on the same person, with the same benefit as such policy, the Master General Agent shall not be entitled to the policy fee and commissions on such new policy, unless said policy is accepted by the Company at which time the Master General Agent shall be entitled to commissions only on the amount by which the new policy fee or premium is in excess of the policy fee or premium rate applicable to the then or formerly existing policy, except the Master General Agent shall be entitled to commissions on the entire amount of the first month's collected premium on the new policy. If this Contract is terminated (whether for death, disability, resignation, discharge without cause or otherwise, except if discharge is "with cause" as defined hereinafter), the Company will pay to the Master General Agent, or his successors or assigns, policy fees and commissions on business produced hereunder prior to termination and in accordance with Paragraph 18, now or hereafter, in the amounts and for the periods of time set forth on Schedule A so long as premiums are received by the Company thereon. If the Master General Agent fails to furnish the Company his correct mailing address and such failure continues for one hundred eighty (180) days, then payment of all policy fees and commissions shall be deferred by the Company, until such time as a current address is obtained. If termination of the Master General Agent is "with cause" (defined as conviction of fraud or a crime involving dishonesty to the Company or its policyholders, conviction of criminal offense involving moral turpitude, the Master General Agent shall not be entitled to any further policy fees or commissions of any kind whatsoever on policies written after the date of this Contract. Should the Master General Agent or Sub-Agents, (1) fail to fully comply with Paragraph 19, or (2) at any time while this Contract is in force or after its termination, knowingly induce or attempt to induce any active Policyholder, or any Policyholder whose policy has been lapsed less than seventy-five days from the last paid to date of the policy, to terminate his policy or policies with the Company, or (3) knowingly induce or attempt to induce any of the Company's agents not appointed by or through the Master General Agent to leave the Company, or (4) should the Master General Agent or any Sub-Agent defame the Company. Master General Agent shall be liable to Company for actual damages incurred by reason thereof. In the event of any such act by the Master General Agent or any SubAgent, it is agreed that the Company would be entitled to declaratory and injunctive relief against the Master General Agent and Sub-Agent and, additionally, the Company would be entitled to receive from the Master General Agent actual damages. Notwithstanding the arbitration provision hereinafter contained in this Agreement, the Company does not waive the right to pursue injunctive relief, damages, costs, attorneys fees, and any other relief, either equitable or legal, against the Master General Agent in the occurrence of any of these events. Likewise, notwithstanding the arbitration provisions hereinafter contained in this Agreement, the Master General Agent does not waive the right to pursue any claim for injunctive relief, damages, costs, attorneys fees and any other relief, either equitable for legal, he may have against Company by reason of Company's failure to pay commissions due. 18. Subject to all the provisions of this Contract and any written modifications thereof, the Company will allow the Master General Agent for his services as provided for under this Contract, First Year Earned Commissions Second and Subsequent Renewal Year Commissions, First Year Override Earned Commissions, Second and Subsequent Renewal Year Override Commissions, Override Earned Commissions Second Year Through Tenth Year, and Policy and Service Fees equal to the percentage of collected and accepted premiums set forth in Schedule A. For Purposes Herein: (1) FIRST YEAR EARNED COMMISSIONS shall mean that portion of the first year's collected and accepted premium of a policy of insurance which is written by the Master General Agent in the percentage reflected on Schedule A. (2) SECOND AND SUBSEQUENT RENEWAL YEAR COMMISSIONS shall mean that portion of renewal years collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two and thereafter, as long as such premiums continue to be collected and accepted by the Company in the percentage reflected on Schedule A referred to as "Second and Thereafter". (3) EARNED COMMISSIONS SECOND YEAR THROUGH TENTH YEAR shall mean that portion of renewal year's collected and accepted premiums of a policy of insurance which is written by the Master General Agent in policy years two through ten in the percentage reflected on Schedule A. (4) FIRST YEAR OVERRIDE EARNED COMMISSIONS shall mean the difference between the first year earned commissions payable to the Sub-Agent on that portion of the first year's collected and accepted premium of a policy of insurance which is written by a Sub-Agent assigned to the Master General Agent and the First Year Earned Commissions payable to Master General Agent on Schedule A. (5) SECOND AND SUBSEQUENT RENEWAL YEAR OVERRIDE COMMISSIONS shall mean the difference between the Second and Thereafter Earned Commissions payable to the Sub-Agent on that portion of renewal years collected and accepted premiums of a policy of insurance in policy years two and thereafter which is written by a Sub-Agent assigned to the Master General Agent and the Earned Commissions Second Year and Thereafter payable to the Master General Agent on Schedule A referred to as "Second and Thereafter". (6) OVERRIDE EARNED COMMISSIONS SECOND YEAR THROUGH TENTH YEAR shall mean the difference between the second through tenth year earned commissions payable to the Sub-Agent on that portion of renewal year's collected and accepted premiums of a policy of insurance in policy years two through ten which is written by a SubAgent assigned to the Master General Agent and the Earned Commissions Second Year Through Tenth Year payable to Master General Agent on Schedule A. (7) POLICY FEE shall mean the entire amount of any policy fee paid to the Company by any policyholder or prospective policyholder in connection with the purchase or maintenance of any insurance policy offered by the Company which has been approved or which becomes approved to charge a Policy Fee or Policy Fees. (8) SERVICE FEE shall mean the percentage of commission payable to Master General Agent on Schedule A on premiums collected and accepted by Company in policy years eleven and thereafter for services to be rendered to Policyholders by Master General Agent or his Sub-Agents in policy years eleven and thereafter. If a policy of insurance written by the Master General Agent or by a Sub-Agent assigned to the Master General Agent is initially rejected by the Company or the applicant, prior to issuance or at the time of delivery of the policy to the applicant or subsequent thereto, or if such policy is lapsed, then the premiums on such policy are not commissionable and no commissions shall be earned or paid thereon. The Master General Agent shall not earn or be paid any policy fees, service fees, and/or commissions on that portion of any premium which results from any premium rate increase after the effective date of any such policy, on new policies written after the date of this Contract. TERMINATION 19. Upon termination of this Contract, the Master General Agent shall return all books, receipts, certificates, literature, policies, applications, training materials and all other records, forms, papers, documents and memoranda pertaining to the Company, that he has in his possession. 20. This Contract may be terminated by either party hereto on one hundred eighty (180) days prior written notice sent by certified mail, return receipt requested to the other party at the other party's last known address or delivered personally. However, the cancellation of the Master General Agent's license or appointment shall automatically terminate this Contract. Moreover, without restricting the right of the Company to terminate this Contract on one hundred eighty (180) days prior written notice, the Company may terminate this Contract after thirty (30) days prior written notice sent by certified mail, return receipt requested to the Master General Agent at the Master General Agent's last known address, or delivered personally, if the Master General Agent shall intentionally fail to comply with the rules and regulations of any State Insurance Department, or shall intentionally fail to conform to the terms and conditions of this Contract or any other agency agreement with the Company, provided however, prior to giving such thirty (30) day prior written notice of termination, Company shall give the Master General Agent a reasonable opportunity to correct such claimed problem. 21. Additionally, should the Master General Agent intentionally conduct his activities in a manner injuring the Company's standing or good name in the community or elsewhere, or intentionally make any false disparaging or derogatory remarks concerning the financial condition of the Company, or should the Master General Agent intentionally fail to abide by any material terms of this Contract or the laws or regulations of any state in which it is doing business done hereunder, or violates the provisions of Paragraph 11 hereof relating to immediate remittance of monies to the Company, or violates the provisions of Paragraphs 3, 4, 7 or 10 hereof by failing to repay after demand, then and in any of such events, as determined by the Company, this Contract shall terminate immediately upon written notice being mailed to the Master General Agent's last known address or delivered personally. 22. The Company shall have, and is hereby given a valid first lien on all commissions, policy fees, service fees, and reversions (as hereinafter defined) or claims therefor and on all other amounts due the Master General Agent under this contract with the Company which accrue subsequent to the date hereof, as security for payment of any and all monies or claims due or to become due to it from the Master General Agent. Advances or loans by the Company to the Master General Agent or to any Sub-Agent who has contracted directly with Master General Agent (and specifically excluding advances or loans to General Agents or Sub-Agents contracting directly with Company who are Sub-Agents of Master General Agent), and any monies or claims due or to become due to the Company from any such Sub-Agent, as set forth in this Contract, shall constitute an indebtedness of the Master General Agent and subject to the provisions of the preceding paragraph. The Master General Agent shall be entitled to any "reversions" (credits earned) of any Sub-Agent who is terminated, and who is non-vested and/or indebted to the Company at the time of termination for whom the Master General Agent is responsible under the preceding paragraph. Said reversions shall be effective beginning with the date of termination. 23. Upon termination of this Contract, any and all monies due the Company by the Master General Agent and any and all monies which may later become due whether in the form of advances; policy fee or commissions charges for rejected applications and refunded policy fees and premiums; or any other debit balance items on the Company's books due from the Master General Agent shall be paid in twelve (12) equal installments. If any indebtedness of the Master General Agent to the Company is placed in the hands of any attorney for collection, the Master General Agent agrees to pay any costs, expenses, and attorneys fees for such collection by the Company. Upon termination of this Contract, Sub-Agents contracted directly to the Company may, at the Company's option, continue to represent the Company provided the Company continues to pay Master General Agent commissions or overrides on all business written by such Sub-Agents and accepted by the Company for a period of twenty-four (24) months, provided the termination of this Contract by the Company was not with cause as defined in Paragraph 17. MISCELLANEOUS 24. The Master General Agent shall be responsible for the payment of all taxes, fees or levies which are imposed on him for the privilege of his doing business, but this shall not include premium taxes or other taxes specifically levied against the Company as a privilege tax. The Master General Agent shall pay for all expenses incurred by him in the performance of this Contract, unless the Company has in writing agreed to do otherwise. Any materials or supplies, other than brochures and applications ordered by Master General Agent and his Sub-Agents from or through the Company shall, according to Company rules and practice, be charged to the Master General Agent's account unless other arrangements for payment have been made to which the Company has agreed in writing. 25. The Master General Agent hereby agrees that the ledger accounts of the Company shall be competent and sufficient prima facie evidence of the state of accounts between the parties hereto; and the failure of the Master General Agent to object in writing, to any statement of account or accounts furnished by the Company to the Master General Agent, within thirty (30) days from the date such statement of account is furnished, shall render such statement a correct account as between the Master General Agent and the Company, unless later discovered to be materially erroneous. 26. The payment of compensation or the cessation of compensation to the Master General Agent shall in no way limit or otherwise affect the right of the Company to service the business produced under this Contract. 27. Captions of sections or paragraphs herein are shown solely for convenience of the reader, and have nothing to do with the substance of this Contract. 28. If any provision of this Contract is declared or found to be illegal, unenforceable or void pursuant to the laws, rules or regulations of any applicable jurisdiction, or if any conduct authorized hereby is declared or found to be impermissible pursuant to any opinion, ruling, declaration or bulletin of any State Insurance Department, then with respect to such jurisdiction, both parties shall be relieved of all obligations arising under such provision or all obligations to engage in such conduct, as the case may be, but only to the extent that such provision is illegal, unenforceable or void or such conduct is impermissible, it being the intent and agreement of the parties that (I) with respect to each such jurisdiction, this Contract shall be amended by the parties to modify such provision or conduct to the extent necessary to make it legal and enforceable or permissible while preserving its intent or, if that is not possible, by substituting therefor another provision or conduct that is legal and enforceable or permissible and achieves substantially the same objective and (ii) with respect to all other jurisdictions, such provision shall remain in full force and effect and such conduct shall be continued. 29. Except as otherwise provided herein, any dispute between the parties hereto shall be settled by arbitration. The parties agree to arbitrate in good faith and the arbitration will be conducted as follows: (a) The Court of Arbitration shall consist of three arbitrators who must be officers or former officers of life insurance companies or life insurance agents other than the parties to this Agreement or their affiliates and must have no material business or personal relationship with either party or any affiliate thereof or any officer, director or holder of record of more than 5% of the outstanding shares of such party or affiliate. The Company shall appoint one arbitrator and Master General Agent the second. These two arbitrators shall then select the third before arbitration begins. Should one of the parties decline to appoint an arbitrator within 30 days after delivery of the notice referred to in (a) commencing the arbitration or should the two arbitrators be unable to agree upon the choice of a third within 45 days after delivery of such notice, such appointment shall be made by the president of the American Council of Life Insurance within 60 days after delivery of such notice. If said president fails to make any such appointment within the 60 day period, the appointment shall be made by the American Arbitration Association as soon as practicable. (b) The arbitration proceedings shall be conducted in accordance with the rules of the American Arbitration Association except that the parties shall be entitled to take discovery during a period of 90 days after the final arbitrator is appointed, the arbitrators shall have the power to issue subpoenas, compel discovery, award sanctions, and grant injunctive relief. The arbitrators shall be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall have none of the relationships to either of the parties that are prohibited above for arbitrators. The arbitrators shall decide by a majority of votes, and from their decision there can be no appeal except to the extent permitted by applicable law. The arbitration hearings shall commence no sooner than 120 days after delivery of the notice referred to in (a) above commencing the arbitration and not later than 180 days after the delivery of such notice. The arbitration hearing shall be conducted during normal working hours on business days without interruption or adjournment of more than two days at any one time or six days in the aggregate. The arbitrators shall deliver to the parties their decision in writing within 10 days after the conclusion of the arbitration hearing. Any arbitration instituted pursuant to this section shall be held in Fort Worth, Texas. 30. THIS CONTRACT shall supersede and terminate all previous written or oral contracts or understandings between the parties, provided however, it shall not in any way affect Master General Agent's rights to receive compensation (commissions, renewal commissions, overrides, policy or service fees, etc.) otherwise due pursuant to any previous contracts or understandings, nor shall any provision hereof under any circumstances entitle Company to withhold payment of any such compensation or make a claim against any such compensation, for any reason whatsoever. Any modification hereof must be in writing and signed by the parties hereto. This Contract shall be governed by the laws of the State of Texas and enforceable at Fort Worth, Tarrant County, Texas. IN WITNESS WHEREOF, the parties hereto have executed this Contract to be effective upon acceptance and execution by the Company as of the below date affixed by the Company. JOHN LOCKE, d.b.a. 1ST MILLION FREEDOM LIFE INSURANCE COMPANY OF AMERICA By: /S/ JOHN P. LOCKE By: /S/ STEPHEN D. DAVIDSON President Vice-President Attest: /S/ MICHAEL D. NORRIS Secretary Date Signed: May 31, 1996 Effective the 31st day of May, 1996. (affixed by the Company) EXHIBIT 10.33 FORM OF PLEDGE AGREEMENT BETWEEN WESTBRIDGE CAPITAL CORP. AND FLEET NATIONAL BANK OF CONNECTICUT EXHIBIT 10.33 FORM OF PLEDGE AGREEMENT This PLEDGE AGREEMENT, dated as of [____ __], 1996 is between WESTBRIDGE CAPITAL CORP., a Delaware corporation ("Pledgor"), and FLEET NATIONAL BANK OF CONNECTICUT, a national banking association ("Pledgee"). Except as otherwise defined herein, all terms used herein and defined in the Credit Agreement dated as of December 28, 1995 between Pledgor and Pledgee shall have the meaning assigned to them therein. RECITALS: 1. Pledgor owns, on and as of the date on which this Pledge Agreement is executed and delivered, 100% of the issued and outstanding shares of the capital stock of National Foundation Life Insurance Company, a Delaware corporation ("NFL"), National Financial Insurance Company, a Texas corporation ("NFIC") and Westbridge Funding Corporation, a Delaware corporation ("WFC"), all of which shares (including any certificates and/or other tangible evidences thereof) are more specifically described in ATTACHMENT A hereto. 2. Pursuant to the Credit Agreement dated as of December 28, 1995 (the "Credit Agreement") between WFC and the Pledgee, the Pledgee has agreed, on certain terms and conditions to make one or more revolving loans to WFC in an aggregate principal amount not to exceed $20,000,000 (the "Revolving Loans"), which Revolving Loans are evidenced by a single promissory note in favor of the Pledgee in the principal amount of $20,000,000 (the "Revolving Note"), due and payable in accordance with the terms of the Credit Agreement.. 3. Pursuant to the Guaranty Agreement dated as of December 28, 1995 by Pledgor in favor of the Pledgee (said Guaranty Agreement as currently in effect and as from time to time amended, modified or supplemented being herein called the "Financing Agreement"), Pledgee has (i) guaranteed the full and punctual payment and performance by WFC of its obligations under the Credit Agreement and the Revolving Note and (ii) agreed to enter into this Pledge Agreement, if and when the pledge by the Pledgor of shares referred to in paragraph 1 above is approved by the Insurance Commissioners of the State of Delaware and the State of Texas and (ii) the Insurance Commissioners of the State of Delaware and the State of Texas have granted such approval. NOW, THEREFORE, in consideration of such financing and for other good and valuable consideration, receipt of which is hereby acknowledged, Pledgor and Pledgee agree as follows: 1. PLEDGE AND DELIVERY. (a) To secure the prompt and complete payment and performance when due of the Obligations (as defined in Section 1(b) hereof), Pledgor hereby pledges, assigns and delivers to Pledgee, and grants Pledgee a continuing security interest in, all of the following property and rights and interests in property (all such property, rights and interests being hereinafter collectively called the "Pledged Collateral"): (i) all issued and outstanding shares of the capital stock of NFL, NFIC and WFC (the "Pledged Subsidiaries") described in ATTACHMENT A hereto, and any additional shares of the capital stock of any class or series of any Pledged Subsidiary which Pledgor may at any time and from time to time hereafter purchase or otherwise acquire, together with the certificates and/or other instruments or writings representing them (such shares, certificates and other writings being hereinafter collectively called the "Pledged Shares"); (ii)(A) all shares and other securities and all warrants, rights and options (such shares, securities, warrants, rights and options together with the certificates and/or other instruments or writings representing them being hereinafter collectively called the "Additional Pledged Securities") and (B) all money and other property, at any time and from time to time received or receivable by or distributed or distributable to Pledgor from the issuer of any or all of the Pledged Shares (whether in the ordinary course of such issuer's business or representing or resulting from cash or stock dividends, stock splits or reclassifications, the recapitalization, reorganization, merger, consolidation, disposition of assets, liquidation or dissolution of such issuer, the exercise by Pledgor of warrants, rights or options, or any other action or cause) in exchange or substitution for or otherwise in respect of any or all of the Pledged Shares or earlier-issued Additional Pledged Securities; and (iii) all proceeds of any or all of the foregoing. (b) As used herein, the term "Obligations" shall mean all indebtedness, liabilities and obligations of any kind of Pledgor to Pledgee (whether directly as principal or maker or indirectly as guarantor, surety, endorser or otherwise), now or hereafter existing, due or to become due, howsoever incurred, arising or evidenced, whether of principal or interest or payment or performance, and all obligations of the Pledgee now or hereafter existing under this Agreement. (c) Prior to the execution and delivery hereof by Pledgee, Pledgor shall have delivered to Pledgee, and Pledgee by such execution and delivery shall acknowledge its prior receipt of, the certificate(s) and/or other instruments and documents evidencing all of the Pledged Shares, Additional Pledged Securities and all other items of the Pledged Collateral then owned by Pledgor. Pledgor agrees that it shall immediately deliver to Pledgee any and all of the Pledged Shares, Additional Pledged Securities and other Pledged Collateral (including any and all certificates and/or other instruments or documents representing each item thereof) which it acquires in any way at any time after such execution and delivery. Upon delivery to Pledgee, each item of the Pledged Collateral shall be accompanied by, as appropriate, (i) undated, duly executed stock powers endorsed by Pledgor either in blank or to Pledgee in a manner which Pledgee deems satisfactory, and/or (ii) such other instruments or documents as Pledgee shall reasonably request. 2. PLEDGOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Pledgor represents and warrants that: (i) Pledgor has the right, power and authority to execute, deliver and perform this Pledge Agreement and to pledge, assign, deliver, transfer and grant a security interest in the Pledged Collateral; (ii) this Pledge Agreement constitutes the legal, valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally (regardless of whether such enforceability is considered in a proceeding in equity or at law) and subject to any limitation that may restrict Pledgee from selling, voting or exercising control over NFL or NFIC without obtaining approval of the Insurance Commissioner; (iii) Pledgor has good title to all of the Pledged Shares and is the legal record and beneficial owner of each of the Pledged Shares (and will have good title to and be the legal record and beneficial owner of each other item of Pledged Collateral, including any Additional Pledged Securities), free and clear of all encumbrances except Pledgee's security interest hereunder; (iv) each of the Pledged Shares and Additional Pledged Securities is, or will be when acquired by Pledgor and pledged hereunder, duly and validly issued and fully paid and non-assessable, and there are no restrictions on the transfer of any thereof other than such restrictions as appear on the certificates or other instruments or writings representing them, or as are referred to in clause (ii) above or otherwise may be imposed under applicable law; (v) no action other than the delivery of each item of the Pledged Collateral to, and its continued possession by, Pledgee or any of its agents or nominees is necessary to maintain a perfected, first-priority security interest in such item in favor of Pledgee; and (vi) no authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Pledgor of this Agreement or for the validity or enforceability hereof except those which have already been obtained and remain in full force and effect. (b) Pledgor covenants and agrees that it will at its expense (i) defend both its own rights and interests and Pledgee's rights and security interest in and to the Pledged Collateral against the claims and demands of all other persons and (ii) execute and deliver to Pledgee such further conveyances, agreements, assignments, instruments and other writings, and take such further action, as Pledgee may request in order to obtain the full benefit of this Pledge Agreement, the Pledged Collateral, and the rights, powers and remedies granted to Pledgee hereunder. Pledgor further covenants and agrees that until all Obligations have been satisfied and this Pledge Agreement has been terminated, Pledgor will not without Pledgee's prior written consent sell, assign, transfer, exchange or otherwise temporarily or permanently dispose of any item of the Pledged Collateral, or offer or contract to do so, and will not without such consent create, incur, assume or permit to exist any security interest, pledge, claim or other charge or encumbrance on or with respect to any such item other than the security interest granted to Pledgee hereunder. 3. NAMES IN WHICH PLEDGED SHARES AND ADDITIONAL PLEDGED SECURITIES MAY BE REGISTERED. Upon the occurrence of any Pledgor Default (as defined in Section 9 hereof), Pledgee shall be entitled to hold any or all of the Pledged Shares and Additional Pledged Securities in its own name, the name(s) of one or more of its nominees or the name of Pledgor endorsed or assigned in blank or in favor of Pledgee. With respect to any of the Pledged Shares and/or Additional Pledged Securities which Pledgee wishes to hold in its own name or the name of any nominee in accordance with this Section 3, Pledgee (acting in its own name and capacity or as Pledgor's attorney-in-fact pursuant to the power of attorney granted to Pledgee in Section 5 hereof) may have such Pledged Shares and Additional Pledged Securities registered accordingly on the books of the issuer(s) thereof, and Pledgor shall cooperate fully with Pledgee in causing such issuer(s) to effect such transfer and registration. 4. VOTING RIGHTS; DISTRIBUTIONS, ETC. (a) Subject to Section 4(c), Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers accruing to an owner of the Pledged Shares and Additional Pledged Securities for any purpose not inconsistent with (A) the provisions of this Pledge Agreement and the Financing Agreement and applicable insurance and other law and (B) the preservation of the value of and Pledgee's security interest in the Pledged Collateral. (b) Subject to Section 4(c), Pledgor shall be entitled to receive and retain all cash dividends, interest and other cash distributions payable in respect of the Pledged Collateral to the extent that such distributions are permitted by law. (c) Upon the occurrence and during the continuance of a Pledgor Default, Pledgor may thereafter continue to exercise any and all voting and consensual rights and powers until such time as Pledgee shall notify Pledgor in writing that Pledgee intends to assume and, subject to Section 15, exercise the same, and all powers described in Section 4(b) to receive the dividends, interest and other cash distributions described in such Section shall cease, and all such rights shall thereupon become vested in Pledgee. (d) Upon the occurrence and during the continuance of a Pledgor Default and subject to Section 15, Pledgee may, in its own name and capacity or as Pledgor's attorney-in-fact, collect, receive, endorse and deposit all Additional Pledged Securities, money, cash proceeds, instruments and any and all other property which is or may at any time become payable in respect of any or all of the Pledged Collateral and which Pledgee is or may become entitled to receive under subsection (a) or (b) of this Section 4. All such property so received by Pledgee may be retained by Pledgee as additional Pledged Collateral, and (i) all money and other cash proceeds so received may be applied by Pledgee to payment of the Obligations in such order as Pledgee may elect, whether or not a Pledgor Default shall then be continuing, and (ii) during the continuance of a Pledgor Default, all other property so received may be sold or otherwise disposed of by Pledgee as provided in Section 10 hereof and the proceeds thereof applied as also provided in such Section. Any and all money and other property received by Pledgor contrary to the provisions of this Section 4 shall be held by Pledgor in trust for Pledgee, shall be segregated by Pledgor from Pledgor's other funds and property and shall promptly be delivered to Pledgee in exactly the form received by Pledgor, except for any necessary endorsements. 5. PLEDGEE APPOINTED AS PLEDGOR'S ATTORNEY-IN-FACT. Subject to Section 15, Pledgor hereby appoints Pledgee as Pledgor's attorney-in-fact with full power in Pledgor's place and stead, in Pledgor's name or its own name and at Pledgor's expense, to execute, endorse and deliver any and all agreements, assignments, pledges, instruments and any other writings, and to take any and all other actions, which Pledgee may deem necessary or desirable to carry out the terms and effect the purposes of this Pledge Agreement and to exercise fully its rights and remedies hereunder. Pledgee may delegate any or all of such power to any of its officers, directors, employees, agents, nominees, stockholders and other representatives (hereinafter collectively called "Representatives") and to have any such Representative(s) exercise any such delegated power as substitute(s) for Pledgee. Pledgor hereby ratifies all that Pledgee and all such Representatives shall lawfully and properly do or cause to be done under this power of attorney, which power is coupled with an interest and shall be irrevocable until all Obligations have been satisfied and this Pledge Agreement has been terminated. So long as no Pledgor Default (as defined in Section 9 hereof) has occurred, Pledgee agrees to give Pledgor five business days prior notice of its intention to exercise the power of attorney granted hereby. 6. PLEDGEE'S RIGHTS TO PERFORM FOR PLEDGOR. If Pledgor shall at any time fail to perform or comply with any of its covenants and agreements hereunder, Pledgee may (but shall not be required or obligated to) take such action, in its own name and capacity or as Pledgor's attorney-in-fact, as Pledgee shall deem necessary or desirable to effect such performance or compliance. 7. REASONABLE CARE OF PLEDGED COLLATERAL. Pledgee shall be deemed to have used reasonable care in the custody and preservation of the Pledged Collateral in its possession to the extent it accords such Pledged Collateral treatment which is substantially equal to that which Pledgee accords its own property of like kind; PROVIDED, HOWEVER, that Pledgee shall have no obligation, regardless of whether it takes any such action with respect to its own property, (i) to ascertain or take action with respect to calls, tenders, conversions, exchanges, maturities or other matters involving or affecting any item(s) of such Pledged Collateral (whether or not Pledgee has actual or constructive knowledge of any such matters), unless reasonably requested by Pledgor to do so, or (ii) to take action to preserve rights against prior or other parties. 8. LIMITATION OF PLEDGEE'S LIABILITY; REIMBURSEMENT OF EXPENSES AND INDEMNIFICATION. (a) Pledgor agrees that Pledgee shall have no obligation to take, or refrain from taking, any action with respect to the Pledged Collateral or Pledgor's rights and interests therein except for (i) the preservation and return of the Pledged Collateral in its possession as and to the extent provided, respectively, in Sections 7 and 14 hereof, (ii) the execution and delivery to Pledgor of certain instruments and other writings imposed by law and (iii) compliance with insurance regulatory requirements, if any, described in Section 15. Pledgor further agrees that neither Pledgee nor any of its Representatives shall have any liability to Pledgor, or to any person claiming rights against Pledgee by, through or under Pledgor, in any way arising out of or in connection with Pledgee's or any such Representative's administration of this Pledge Agreement or its exercise of any of its rights, power and remedies hereunder except for (i) Pledgee's or any such Representative's failure to take as and when required any of the actions referenced in the first sentence of this Section 8(a) or to account to Pledgor for those amounts of money and other property -- and only for those amounts -which it actually receives in connection with such administration or exercise and which it is required to pay over to Pledgor or apply to the Obligations under any other provision hereof, (ii) its failure to exercise reasonable care as and to the extent required in Section 7 hereof or (iii) its negligence or willful misconduct. (b) Pledgor shall pay or reimburse Pledgee on demand for all costs and expenses (including without limitation reasonable attorneys' fees and legal expenses) paid or incurred by Pledgee in connection with (i) any amendment of this Pledge Agreement and (ii) the exercise and enforcement of any of Pledgee's rights, powers and remedies hereunder, including without limitation its right to perform Pledgor's covenants and agreements hereunder to the extent Pledgor fails to do so. Pledgor further agrees to indemnify, defend and hold harmless Pledgee, its Representatives, successors and assigns from and against any and all liabilities, claims, actions, losses, damages, taxes, penalties, fines, costs and expenses (including reasonable attorneys' fees and legal expenses) which in any way arise out of or in connection with any of the actions or matters with respect to which Pledgor has a payment or reimbursement obligation under this Section; PROVIDED, HOWEVER, that Pledgor shall have no obligation to indemnify Pledgee or any such Representative, successor or assign against any liabilities, claims, etc. resulting from such party's negligence or willful misconduct or its failure to exercise reasonable care as and to the extent required in Section 7 hereof. Until any reimbursement of costs or expenses or any indemnity payment required under this Section is received by Pledgee in cash or immediately available funds, the amount thereof shall bear interest at the rate specified in the Credit Agreement for delinquent payments, and such amount and such interest shall constitute part of the Obligations secured by the Pledged Collateral. 9. PLEDGOR DEFAULTS. The following shall constitute a "Pledgor Default": (i) Pledgor fails to perform or comply with any of its covenants or agreements hereunder; or (ii) a default or event of default occurs under the Financing Agreement. 10. REMEDIES. (a) If a Pledgor Default has occurred and is continuing, Pledgee may at any time and from time to time exercise any and all rights and remedies available to it (i) hereunder and under the Financing Agreement and any other agreement or instrument then in effect between Pledgor and Pledgee and relating to the Obligations, including without limitation those rights and remedies set out in subsections (b) through (f) of this Section 10, and (ii) as a secured party under the Uniform Commercial Code as then in effect in the State of Connecticut (the "Code") and under any other applicable law or rule of law or equity. Should Pledgee elect to proceed by action at law or in equity to foreclose its security interest in and sell any or all of the Pledged Collateral, Pledgor waives (to the extent permitted by law) any rights it may then have in connection therewith to require Pledgee to post bonds, sureties or collateral security or to demand possession of any such Pledged Collateral pending judgment therein. (b) Subject to Section 15 and to the extent permitted by federal and state securities laws, Pledgee may sell, assign, transfer, endorse and deliver all or, from time to time any part, of the Pledged Collateral at public or private sale, over the counter or at any broker's board or securities exchange, for cash, on credit or in exchange for other property, for immediate or future delivery, without advertisement or notice (except as provided in this subsection), and for such price and on such terms as Pledgee deems appropriate, PROVIDED only that all aspects of any such disposition are commercially reasonable within the requirements of Section 42a- 9-504 of the Code, as defined and supplemented by the standards and agreements set forth herein. Pledgor agrees that to the extent notice of the time and place of any such public sale, or of the time after which Pledgee intends to make any such private sale or other disposition, is required under the Code, such notice shall be deemed commercially reasonable if transmitted by any of the means described in the Financing Agreement not less than 15 days prior thereto. Pledgee shall not be obligated to effect any sale of any or all of the Pledged Collateral, whether or not notice thereof has been given, and may adjourn any public or private sale from time to time by announcement at the time and place fixed for such sale, and such sale may be held without further notice at the time and place to which it was so adjourned. (c) At any such private or public sale, subject to Section 15, Pledgee shall be entitled to bid for and/or purchase the Pledged Collateral then being sold and may pay the price thereof by credit against the Obligations then outstanding. Any purchaser of any item(s) of the Pledged Collateral (including Pledgee) shall take such item(s) free from any right or claim of Pledgor, and Pledgor hereby waives, to the extent permitted by the Code and other applicable law, all rights of redemption and/or to any stay, exemption or appraisal which Pledgor now has or may hereafter acquire. (d) Pledgor agrees and acknowledges that requiring the issuer(s) of the securities included in the Pledged Collateral to register such securities under applicable provisions of federal and state securities laws would not be practicable and therefore could not be deemed commercially reasonable. Pledgor further agrees and acknowledges that in order to comply with applicable federal and state securities laws without effecting such registration, Pledgee may be required: (i) to sell or otherwise dispose of any or all of the Pledged Collateral at one or more private rather than public sales and (ii) to limit the prospective purchasers at such sale(s) to persons who will represent and agree that they are purchasing the securities they intend to acquire for their own account for investment and not with a view to the distribution or sale thereof, and who will be compelled to accept stringent restrictions on their ability to dispose of such securities. Accordingly, Pledgor agrees that: (i) Pledgee shall not incur any liability to Pledgor by reason of the fact that the price obtained for any or all the Pledged Collateral at such private sale(s) to investors restricted as provided above may be less than the price which might be obtained therefor at a public sale or unrestricted private sale and (iii) any and all private sales shall be deemed commercially reasonable even if (A) the amount received is less than the then-outstanding amount of the Obligations and/or (b) even if Pledgee accepts the first offer received or does not offer all or any part of the Pledged Collateral to more than one prospective purchaser, unless the sale in question is conducted in bad faith or in a manner manifestly unreasonable for sales of that type. (e) In case of any sale by the Pledgee of any item(s) of the Pledged Collateral on credit or for future delivery, such item(s) may be retained by the Pledgee until the selling price is paid by the purchaser(s) thereof, but the Pledgee shall incur no liability in case of failure of the purchaser to take up and pay for such item(s). In case of any such failure, such item(s) may be sold again upon notice, to the extent required by law, as provided in subsection (b) of this Section 10. (f) The proceeds of the sale or other disposition of the Pledged Collateral shall be applied first, to that part of the Obligations consisting of Pledgee's expenses (including without limitation reasonable attorneys' fees and legal expenses) in preparing for disposition and disposing of the Pledged Collateral and, to the extent not previously reimbursed by Pledgor and exercising and enforcing its rights, powers and remedies hereunder, and second, to the satisfaction of the then outstanding amount of Pledgor's indebtedness under the Financing Agreement and of all other Obligations then remaining unpaid. Pledgee shall account to Pledgor for any surplus and Pledgor shall be liable to Pledgee for any deficiency. 11. AMENDMENTS, ETC. No provision of this Pledge Agreement may be amended, modified, supplemented or waived, and no consent to any departure therefrom by Pledgor may be given, except by a writing duly executed and delivered by the parties hereto, and any such amendment, modification, supplement or waiver shall be effective only as and to the extent provided therein. 12. CUMULATIVE REMEDIES; NO WAIVERS BY PLEDGEE. All rights, powers and remedies of Pledgee (i) under this Pledge Agreement and the Financing Agreement and under any other agreements, instruments and other writings now or hereafter existing between Pledgor and Pledgee and relating to the Obligations, and (ii) under the Code and other applicable law, are cumulative and except as otherwise provided by law or in such agreements may be exercised concurrently or in any order of succession. Pledgee's failure to exercise or delay in exercising any of such rights, powers and remedies shall not constitute or imply a waiver thereof, nor shall Pledgee's single or partial exercise of any such right, power or remedy preclude its other or further exercise thereof, or the exercise of any other right, power or remedy. Pledgee's cure of any Pledgor Default shall not constitute a waiver thereof, and its waiver of one Pledgor Default shall not constitute a waiver of any subsequent Pledgor Default. 13. PLEDGOR'S WAIVERS. Pledgor agrees that Pledgee's security interest in the Pledged Collateral shall be absolute and unconditional regardless of the existence or occurrence of, and expressly waives any defense or discharge which might otherwise arise from, any of the following: (i) any lack of validity or enforceability of this Pledge Agreement, the Financing Agreement, the Credit Agreement or any other agreement or instrument relating hereto or thereto or otherwise relating to the Obligations; (ii) any change in the time, manner or place of payment of, or in any other terms of, any or all of the Obligations, or any other amendment or waiver of, or any consent to departure from, this Pledge Agreement or the Financing Agreement, the Credit Agreement or any other agreement, instrument or other writing now or hereafter existing between Pledgor and Pledgee and relating to the Obligations; (iii) any exchange, release or non-perfection of any other collateral, or any release, amendment or waiver of, or consent to departure from any guaranty, for any or all of the Obligations; (iv) Pledgee's resort, during the continuation of a Pledgor Default, to any or all of the Pledged Collateral for payment of all or part of the Obligations prior to proceeding against any other collateral or any other party primarily or secondarily liable for payment thereof; or (v) to the extent permitted by law, any other circumstance which might otherwise constitute a defense available to, or a discharge of, Pledgor in respect of the Obligations or this Pledge Agreement. 14. TERMINATION; RELEASE OF PLEDGED COLLATERAL. This Agreement and the security interest granted hereunder shall terminate on the date on which all Obligations have been fully satisfied. Pledgee shall thereupon reassign and redeliver (or cause to be reassigned and redelivered) to Pledgor or such person(s) as Pledgor shall designate, against due execution and delivery by Pledgor or such person(s) of a receipt therefor satisfactory to Pledgee in form and substance, such items of the Pledged Collateral (if any) as are then held by Pledgee or its Representatives, together with appropriate instruments of reassignment and release. Any such reassignment shall be without recourse to or warranty by Pledgee or any such Representative and at the expense of Pledgor. 15. INSURANCE REGULATORY REQUIREMENTS. Anything in this Agreement to the contrary notwithstanding, Pledgee may not exercise any of the rights or powers described in Sections 4, 5 and 10 hereof or otherwise foreclose upon or sell the Pledged Shares or the Additional Pledged Securities, unless and until the Pledgee (and, in the cases of a sale of the Pledged Shares or the Additional Pledged Securities, the purchaser thereof) has complied, to the extent legally required, with all filing requirements of all applicable laws of Texas and Delaware regulating the acquisition of voting securities or control of any insurance company, and the acquisition of the Pledged Collateral and the Additional Pledged Securities and control of NFL and NFIC by the Pledgee hereunder (or by the purchaser in any such sale) has, to the extent legally required, been duly approved in accordance with all applicable Texas and Delaware statutory and regulatory requirements and any other applicable laws. 16. NOTICES. All notices, requests, directions, consents, waivers and other communications hereunder shall be in writing and shall be transmitted by the means and to the addresses from time to time specified in the Financing Agreement. 17. BINDING AGREEMENT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED, HOWEVER, that Pledgor shall not assign or otherwise transfer any of its obligations, rights or interests hereunder without the prior written consent of Pledgee. 18. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. Wherever possible each provision of this Pledge Agreement shall be construed in such manner as to be valid and enforceable under applicable law, but if any provision hereof shall be deemed invalid or unenforceable to any extent in any jurisdiction, such provision shall be ineffective only to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remainder of such provision or any of the other provisions hereof, and any such invalidity or unenforceability in one jurisdiction shall not render such provision ineffective in any other jurisdiction. 19. JURISDICTION; IMMUNITIES. (a) The Pledgor hereby irrevocably submits to the jurisdiction of any Connecticut State or United States Federal court sitting in Connecticut over any action or proceeding arising out of or relating to this Pledge Agreement, and the Pledgor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Connecticut State or Federal court. The Pledgor irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Pledgor at its address specified in Section 9.6 of the Credit Agreement. The Pledgor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Pledgor further waives any objection to venue in such State and any objection to an action or proceeding in such State on the basis of forum non conveniens. The Pledgor further agrees that any action or proceeding brought against the Pledgee shall be brought only in Connecticut State or United States Federal courts sitting in Connecticut. (b) Nothing in this Section shall affect the right of the Pledgee to serve legal process in any other manner permitted by law or affect the right of the Pledgee to bring any action or proceeding against the Pledgor or its Property in the courts of any other jurisdictions. 20. TITLES; COUNTERPARTS. Section titles are for convenience only and shall not define, limit, amplify, supplement or otherwise modify or affect the substance or intent of this Pledge Agreement or any provision hereof. This Pledge Agreement may be executed in two or more counterparts, each of which shall when executed by both parties be deemed to be an original but all of which together shall constitute one and the same agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, each of the parties hereto has caused this Pledge Agreement to be duly executed by its respective authorized officer as of the date first above written. WESTBRIDGE CAPITAL CORP. By: Name: Title: FLEET NATIONAL BANK OF CONNECTICUT By: Name: Title: ATTACHMENT A ISSUED AND OUTSTANDING SHARES OF CAPITAL STOCK NAME OF ISSUER NO. OF SHARES CERTIFICATE NO.(S) - ------------------ ------------- Westbridge Funding Corporation National Foundation Life Insurance Company National Financial Insurance Company EXHIBIT 12.1 STATEMENT OF COMPUTATION OF RATIOS EXHIBIT 12.1 WESTBRIDGE CAPITAL CORP. and CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES and PREFERRED DIVIDENDS AND RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Income from continuing operations before provisions for income taxes per statement of income $1,982 $231 $6,487 $7,999 $5,093 $3,428 $963 Add: Portion of rents representative of the interest factor 265 134 884 901 612 452 407 Interest on indebtedness 929 662 2,315 2,827 2,340 2,340 2,340 Amortization of debt expense 22 58 117 240 212 196 110 ------- ------- ------- ------- ------- ------- ------- Income as adjusted $3,198 $1,085 $9,803 $11,967 $8,257 $6,416 $3,820 ======= ======= ======= ======= ======= ======= ======= Preferred stock dividend requirements 242 413 934 779 -- -- -- Ratio of income before pro- vision for income taxes to net income 170.66 100.00 176.58 152.80 144.24 118.37 188.30 Preferred stock dividend factor on pre-tax basis 413 413 1,650 1,190 -- -- -- Fixed Charges: Interest on indebtedness 929 662 2,315 2,827 2,340 2,340 2,340 Amortization of debt expense 22 58 117 240 212 196 110 Capitalized interest -- -- -- -- -- -- -- Portion of rents representative of the interest factor 265 134 884 901 612 452 407 ------- ------- ------- ------- ------- ------- ------- Fixed charges and preferred stock dividends $1,629 $1,267 $4,966 $5,158 $3,164 $2,988 $2,857 ======= ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges and preferred stock dividends 1.96 0.86 1.97 2.32 2.61 2.15 1.34 ======= ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 2.63 1.27 2.96 3.02 2.61 2.15 1.34 ======= ======= ======= ======= ======= ======= =======
EXHIBIT 21.1 LIST OF SUBSIDIARIES OF WESTBRIDGE EXHIBIT 21.1 SUBSIDIARIES OF WESTBRIDGE CAPITAL CORP. SUBSIDIARY PERCENTAGE ---------- OWNERSHIP ---------- 1. National Foundation Life Insurance Company 100% 2. National Financial Insurance Company 100% 3. American Insurance Company of Texas 100% 4. Freedom Holding Company 100% 5. Freedom Life Insurance Company of America 100% 6. Foundation Financial Services, Inc. 100% 7. Westbridge National Life Insurance Company 100% 8. Westbridge Printing Services, Inc. 100% 9. Westbridge Marketing Corporation 100% 10. Westbridge Funding Corporation (Formerly National Legal Services Company, Inc.) 100% 11. Flex-Plan Systems, Inc. 100% 12. Precision Dialing Services, Inc. 100% 13. Westbridge Financial Corporation 100% 14. Westbridge Marketing of Texas, Inc. 100% 15. Health Care-One Marketing Group, Inc. 80% 16. Senior Benefits, L.L.C 100% 17. Senior Benefits of Texas, Inc. 100% 18. LifeStyles Marketing Group, Inc. 51% 19. American Senior Security Plans, L.L.C 50% 20. American Senior Security Plans of Texas, Inc. 50% 21. Health Care-One Insurance Agency, Inc. 50% EXHIBIT 23.1 CONSENTS OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 29, 1996 relating to the consolidated financial statements of Westbridge Capital Corp., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedules for the three years ended December 31, 1995 listed under Item 16(b) of this Registration Statement when such schedules are read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included these schedules. We also consent to the reference to us under the heading "Experts" in such Prospectus. /S/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Fort Worth, Texas August 6, 1996 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated June 23, 1994 relating to the consolidated financial statements of National Financial Insurance Company, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /S/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Fort Worth, Texas August 6, 1996 EXHIBIT 23.2 CONSENT OF JAYNES, REITMEIER, BOYD & THERRELL, P.C. EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Westbridge Capital Corp.: We hereby consent to the use in the Prospectus constituting part of this Post-Effective Amendment No. 2 to Form S-1 Registration Statement of our report dated November 24, 1993 relating to the financial statements of National Financial Insurance Company, which appears in such Prospectus. We also consent to the reference to our firm under the heading "Expert" in such Prospectus. /S/ JAYNES, REITMEIER, BOYD & THERRELL, P.C. August 2, 1996 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE INDEX OF DEFINED TERMS PAGE NO. ------- A.M. Best 75 Acquisition 5 Agent 111 AICT 5 American Integrity 34 AMEX 2 Amortization of DPAC 111 ART 58 Assumption reinsurance 111 Benefits 111 Board of Directors 1 By-Laws 7 Certificate of Designation 7 Certificate of Incorporation 6 Claim 111 Code 100 Coinsurance 111 Commission 3, 111 Common Stock 2, 4 Company 4 Controlled agency network system 111 Conversion Price 90 Convertible Subordinated Debentures 1, 4 Convertible Subordinated Indenture 2 Copayment 111 Deductible 111 Deferred policy acquisition costs (DPAC) 112 DGCL 1 Dixie National Life 34 DPAC 34 Earned surplus 20, 47 Elkins 4 Elkins Agency 4 Elkins Note 48 Event of Noncompliance 86 Exchange Act 89 Extraordinary dividend 20, 47, 101, 103 FFS 34 First-year premium revenue 112 FLICA 19 FLICA Agreement 19 Freedom Holding 19 GAAP 4, 112 Guaranteed renewable policy 112 Home Office 63 HSA 18 ICU 55 Insurance Subsidiaries 20 Investors 10 IRS 100 Junior Stock 86 LBBH Policy 57 Level term 112 Life and Health 34 -i- PAGE NO. ------- LifeStyles Marketing 4 Liquidation Preference 89 Locke 4 Locke Agency 4 Loss ratio 112 Losses 108 Morbidity 112 Mortality 112 MSE Policy 57 NAIC 21, 112 NASDAQ 23 NFI 5 NFL 20 Offering 4 OID 103 Oppenheimer 2 Paramount Agreements 19 Paramount Life 19 Parity Stock 86 Policy 112 Policyholder 112 Policyholder benefits 113 PPO Agreements 58 Preferred Stock 7 Premiums 113 Proposed 305 Regulations 102 RBC 50 RBC Plan 66 Recapture 113 Redemption Price 8 Reinsurance 113 Repurchase Event 89 Rider 113 Section 203 91 Securities Act 2 Selling Securityholders 2, 108 Senior Benefits 4 Senior Indebtedness 96 Senior Stock 88 Senior Subordinated Debentures 25 Senior Subordinated Indenture 23 Series A Preferred Stock 1, 4, 2 SFAS 14 SFAS 115 50 Statutory accounting practices (SAP) 113 Statutory capital and surplus 113 Subsidiary 86 Surplus 113 Trustee 94 Underwriting 113 Voting Stock 92 WBC 27, 28 Westbridge 1, 4 WMC 52 WNL 20 WPS 34 -ii- EX-27 2 ARTICLE 7 FDS FOR POS AM
7 1000 3-MOS YEAR DEC-31-1996 DEC-31-1995 MAR-31-1996 DEC-31-1995 81,975 86,780 0 0 0 0 506 539 625 639 141 141 104,466 109,503 1,534 2,013 0 0 63,373 56,977 207,078 200,999 87,569 85,683 0 0 0 0 380 373 37,329 35,071 20,000 20,000 0 0 599 599 41,940 42,206 207,078 200,999 35,410 120,093 2,116 7,421 85 182 1,777 2,336 21,914 70,465 4,329 11,553 6,566 21,926 2,348 8,196 822 2,813 1,573 5,731 0 0 0 (407) 0 0 1,160 3,674 .19 .63 .19 .65 0 0 0 0 0 0 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----