-----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, WZdgCmLB/EonQYugPhwdkYb3D/jeQOQ1OGky69jCYCUawu354bbRIabycc6bUs3I Fiz4HXDjPY1MRMGAFyxPzA== 0000703701-98-000002.txt : 19980515 0000703701-98-000002.hdr.sgml : 19980515 ACCESSION NUMBER: 0000703701-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-08538 FILM NUMBER: 98620572 BUSINESS ADDRESS: STREET 1: 777 MAIN ST STREET 2: STE 900 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178783306 MAIL ADDRESS: STREET 1: 777 MAIN ST STE 900 CITY: FORT WORTH STATE: TX ZIP: 76102 10-Q 1 3/98 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended March 31, 1998 Commission File Number 1-8538 WESTBRIDGE CAPITAL CORP. (Exact name of Registrant as specified in its Charter) DELAWARE 73-1165000 (State of Incorporation) (I.R.S. Employer Identification No.) 110 West Seventh Street, Suite 300, Fort Worth, Texas 76102 - -------------------------------------------------------- --------- (Address of Principal Executive Offices) (Zip Code) 817-878-3300 (Registrant's Telephone Number, including Area Code) Not Applicable (Former Name, Address and Former Fiscal Year, if changed since Last Report) Indicate, by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_____ Common Stock - Par Value $.10 6,260,015 Shares Outstanding at May 7, 1998 Form 10-Q Company or group of companies for which report is filed: WESTBRIDGE CAPITAL CORP. This quarterly report, filed pursuant to Rule 13a-13 and 15d-13 of the General Rules and Regulations under the Securities Exchange Act of 1934, consists of the following information as specified in Form 10-Q: Page(s) PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 1. Consolidated Balance Sheets at March 31, 1998, December 31, 1997 and March 31, 1997. 3-4 2. Consolidated Statement of Operations for the Three Months Ended March 31, 1998 and 1997. 5 3. Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1998 and 1997. 6 4. Notes to Consolidated Financial Statements. 7-10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 20 Item 3 - Defaults Upon Senior Securities 20 Item 6 - Exhibits and Reports on Form 8-K 20 WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS
March 31, December 31, March 31, 1998 1997 1997 -------- --------- -------- (unaudited) (audited) (unaudited) -------- --------- -------- Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $119,167, $122,840 and $79,533) $124,695 $128,749 $ 79,584 Equity securities, at market 5,070 4,770 1,696 Mortgage loans on real estate 329 389 423 Investment real estate 566 566 - Policy loans 279 284 281 Short-term investments and certificates of deposit 12,808 12,654 6,294 -------- -------- -------- Total Investments 143,747 147,412 88,278 Cash 461 1,030 202 Accrued investment income 2,383 2,453 1,440 Receivables from agents, net of allowance for doubtful accounts 17,911 20,503 19,101 Deferred policy acquisition costs 18,644 19,165 87,663 Leasehold improvements and equipment, at cost, net of accumulated depreciation and amortization 1,200 1,141 1,285 Due from reinsurers 2,466 3,219 23,131 Commissions receivable 1,809 1,389 4,595 Deferred debt costs, net of accumulated amortization 3,848 4,046 3,316 Other assets 4,322 2,498 4,954 -------- -------- -------- Total Assets $196,791 $202,856 $233,965 ======== ======== ========
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
March 31, December 31, March 31, 1998 1997 1997 --------- ---------- --------- (unaudited) (audited) (unaudited) --------- ---------- --------- Liabilities: Policy liabilities and accruals: Future policy benefits $ 56,073 $ 55,811 $ 55,171 Claims 50,536 51,784 32,136 --------- --------- --------- 106,609 107,595 87,307 Accounts payable and accruals 3,673 3,846 3,072 Commission advances payable 4,745 4,702 7,155 Accrued dividends and interest payable 7,299 4,972 618 Other liabilities 4,858 5,612 16,828 Deferred income taxes, net - - 10,968 Notes payable 11,979 13,100 20,494 Senior subordinated notes, net of unamortized discount, due 2002 19,473 19,447 19,374 Convertible subordinated notes, due 2004 70,000 70,000 - --------- --------- --------- Total Liabilities 228,636 229,274 165,816 --------- --------- --------- Redeemable Preferred Stock 19,000 19,000 19,400 --------- --------- --------- Stockholders' Equity: Common stock ($.10 par value, 30,000,000 shares authorized; 6,195,439, 6,195,439 and 6,127,537 shares issued) 620 620 613 Capital in excess of par value 30,904 30,843 29,815 Unrealized appreciation (depreciation) of investments carried at market value, net of tax 4,598 4,649 (29) Retained (deficit) earnings (86,967) (81,530) 18,520 --------- --------- --------- (50,845) (45,418) 48,919 Less - Aggregate of shares held in treasury and investment by affiliate in Westbridge Capital Corp. common stock (28,600 at March 31, 1997), at cost - - (170) --------- --------- --------- Total Stockholders' (Deficit) Equity (50,845) (45,418) 48,749 --------- --------- --------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $ 196,791 $ 202,856 $ 233,965 ========= ========= =========
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended March 31, ---------------------- 1998 1997 -------- --------- Revenues: Premiums: First-year $ 7,031 $ 12,129 Renewal 30,408 28,691 -------- -------- 37,439 40,820 Net investment income 3,166 2,226 Fee and service income 4,062 3,502 Net realized gain (loss) on investments 262 (60) -------- -------- 44,929 46,488 -------- -------- Benefits, claims and expenses: Benefits and claims 28,436 25,295 Amortization of deferred policy acquisition costs 1,235 5,240 Commissions 9,491 3,288 General and administrative expenses 7,008 7,322 Reorganization expense 1,016 - Taxes, licenses and fees 1,288 1,457 Interest expense 2,180 1,224 -------- -------- 50,654 43,826 -------- -------- (Loss) income before income taxes (5,725) 2,662 (Benefit) provision for income taxes (759) 932 ======== ======== Net (loss) income $ (4,966) $ 1,730 ======== ======== Preferred stock dividends 471 396 -------- -------- (Loss) income applicable to common stockholders $ (5,437) $ 1,334 ======== ======== Earnings per common share: Basic: Net (loss) income $ (0.88) $ 0.22 ======== ======== Diluted: Net (loss) income $ (0.88) $ 0.20 ======== ======== Weighted average shares outstanding: Basic 6,195 6,056 ======== ======== Diluted 6,195 8,674 ======== ======== The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, --------------------- 1998 1997 -------- --------- Cash Flows From Operating Activities: (Loss) income applicable to common stockholders $(5,437) $ 1,334 Adjustments to reconcile net (loss) income to net cash used for operating activities: Depreciation expense 100 118 Amortization of deferred policy acquisition costs 1,235 5,240 Decrease (increase) in receivables from agents 2,592 (790) Addition to deferred policy acquisition costs (714) (9,032) Decrease (increase) in due from reinsurers 753 (21,675) Increase in commissions receivable (420) (1,189) Decrease (increase) in deferred debt costs 198 (500) Increase in other assets (1,824) (516) Decrease in policy liabilities and accruals (986) (6,083) (Decrease) increase in accounts payable and accruals (4,361) 689 Increase in accrued dividends and interest payable 1,639 92 Increase in commission advances payable 43 2,787 Increase in other liabilities 4,122 15,546 Increase in deferred income taxes, net - 669 Other, net 180 1,162 ------- -------- Net Cash Used For Operating Activities (2,880) (12,148) ------- -------- Cash Flows From Investing Activities: Proceeds from investments sold: Fixed maturities, called or matured 3,254 2,673 Fixed maturities, sold 4,227 10,751 Short-term investments, sold or matured - 5,231 Other investments, sold or matured 65 339 Cost of investments acquired (3,955) (6,394) Additions to leasehold improvements and equipment, net of retirements (159) (92) ------- -------- Net Cash Provided By Investing Activities 3,432 12,508 ------- -------- Cash Flows From Financing Activities: Issuance of notes payable 1,375 5,873 Repayment of notes payable (2,496) (6,966) Issuance of common stock - 68 Repurchase and cancellation of common stock - (146) ------- -------- Net Cash Used For Financing Activities (1,121) (1,171) ------- -------- Decrease In Cash During Period (569) (811) Cash at Beginning Of Period 1,030 1,013 ------- -------- Cash at End Of Period $ 461 $ 202 ======= ======== Supplemental Disclosures Of Cash Flow Information: Cash paid during the periods for: Interest $ 292 $ 1,093 Income taxes $ - $ 35
The accompanying notes are an integral part of these financial statements. 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 Rule 10-01 of Regulation S-X 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 months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. NOTE 2 - COMMITMENTS AND CONTINGENCIES In the normal course of business operations, National Foundation Life Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"), American Insurance Company of Texas ("AICT"), and Freedom Life Insurance Company of America ("FLICA"), Westbridge's primary insurance subsidiaries ("Insurance Subsidiaries"), are involved in various claims disputes 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 - ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES, DUE 2004 On April 29, 1997, the Company completed the sale of $65.0 million aggregate principal amount of its 7-1/2% Convertible Subordinated Notes due 2004 (the "Convertible Notes") in an underwritten public offering. On May 16, 1997, the Company completed the sale of an additional $5.0 million of its Convertible Notes in connection with the underwriters' over-allotment option. The net proceeds of the transaction approximated $67.7 million after deducting underwriting commissions and other expenses incurred in connection with the sales. Each $1,000 principal amount of the Convertible Notes is convertible into 91.575 shares of Westbridge Common Stock (6,410,250 shares in the aggregate) at an initial conversion price of $10.92 per share, subject to certain anti-dilution adjustments. Also, at the initial closing for the sale of the Convertible Notes, Westbridge sold to the underwriters, for nominal consideration, warrants to purchase 297,619 shares of Common Stock in the aggregate at an exercise price of $10.92 per share, subject to certain anti-dilution provisions. The warrants are exercisable for a period of four years commencing on April 29, 1998. Interest on the Convertible Notes is payable semi-annually on May 1 and November 1 of each year, commencing November 1, 1997. Since November 1997, the Company has suspended the scheduled interest payments on these Convertible Notes. At March 31, 1998, approximately $4.8 million of unpaid interest has been accrued on such Convertible Notes. See NOTE 4 - RECENT DEVELOPMENTS regarding covenant defaults. As of May 7, 1998, Westbridge had contributed approximately $39.3 million of the net proceeds to its Insurance Subsidiaries to enhance statutory capital and surplus. The Company used approximately $16.4 million in net proceeds for other general corporate purposes and to settle certain intercompany balances with its Insurance Subsidiaries. In January 1998, Westbridge used an additional $1.8 million of the net proceeds to collateralize a $1.5 million standby letter of credit ("LOC") for the purpose of potential future capital contributions to NFIC. This collateralized LOC expires after a one-year term and future draws upon this LOC are subject to certain provisions regarding NFIC's statutory capital and surplus levels. NOTE 4 - RECENT DEVELOPMENTS During the three months ended March 31, 1998, the Company continued to experience adverse loss ratios on its Medical Expense and Medicare Supplement products, as well as declining persistency of inforce policies. The Company has modified certain product benefits and requested rate increases on these lines of business in order to mitigate the effect of such adverse claims experience and has implemented a policyholder conservation program designed to mitigate the impact of declining persistency. However, the Company expects that it will continue to incur operating losses until such time as the necessary rate increases and benefit modifications can be implemented. There can be no assurance that the full extent of such rate increase requests will be approved. The Company continues to work with its financial advisor, Houlihan, Lokey, Howard & Zukin, to develop a strategic plan in anticipation of transactional alternatives which may include, without limitation, a refinancing, recapitalization or other corporate reorganization involving a significant reduction in, or exchange of equity for, outstanding indebtedness. The Company is also continuing its discussions with the regulatory authorities in its domiciliary states of Delaware, Texas and Mississippi and with an ad hoc creditors' committee representing both the holders of the 11% Senior Subordinated Notes ("Senior Subordinated Notes") due 2002 and the holders of its Convertible Notes. Also, as previously reported, the Company has not made the scheduled interest payments on its Senior Subordinated Notes and its Convertible Notes and the scheduled dividend payments on its Series A Preferred Stock. The failure to make the scheduled interest payments resulted in events of default under the Indentures relating to such Notes and also resulted in an event of default under the Company's Credit Agreement (as defined herein). Other covenant defaults are also continuing under the Credit Agreement and the Indenture relating to the Senior Subordinated Notes. The Company is current with respect to its principal and interest payments under the Credit Agreement. As a result of the existing events of default, the holders of the Convertible Notes and the Senior Subordinated Notes and the lender under the Credit Agreement may declare the outstanding principal amount thereof, together with accrued and unpaid interest thereon, to be due and payable immediately. If such Notes were to be accelerated, the Company does not have the ability to repay the outstanding Convertible Notes, the Senior Subordinated Notes and the Credit Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of unpaid interest has been accrued on such Senior Subordinated Notes and Convertible Notes, respectively. There can be no assurance that the Company will resume such interest payments in the future. The failure to declare and pay the scheduled dividends on the Series A Preferred Stock constituted an event of non-compliance under the terms of the Series A Preferred Stock Agreement and resulted in an immediate increase to 9.25% from 8.25% in the rate at which dividends accrue on the Series A Preferred Stock. This increase will remain in effect until such time as no event of non-compliance exists. At March 31, 1998, approximately $1.3 million of cumulative, unpaid dividends were accrued. There can be no assurance that the Company will resume such dividend payments in the future. NOTE 5 - EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," (the "Statement") that revises the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share." The Statement established two measures of earnings per share: "basic earnings per share" and "diluted earnings per share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with potential dilutive securities outstanding. Diluted weighted average shares exclude all convertible securities for loss periods. The Statement also requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The Statement is effective for interim and annual periods ending after December 15, 1997. The Company adopted SFAS No. 128 for the year ended December 31, 1997 and has restated the earnings per share computations for the quarter ended March 31, 1997 to conform to this pronouncement. The following table reflects the calculation of basic and diluted earnings per share:
March 31, -------------------- 1998 1997 -------- ------- (Amounts in 000's, except per share amounts) Basic: (Loss) income available to common shareholders $(5,437) $1,334 ======= ====== Average weighted shares outstanding 6,195 6,056 ======= ====== Basic earnings per share $ (0.88) $ 0.22 ======= ====== Diluted: (Loss) income available to common shareholders $(5,437) $1,334 Adjustment for conversion of Series A Preferred Stock - 396 ------- ------ Adjusted (loss) income available to common shareholders $(5,437) $1,730 ======= ====== Average weighted shares outstanding 6,195 6,056 Adjustment for conversion of Series A Preferred Stock - 2,344 Adjustment for restricted stock - 47 Adjustment for options and warrants - 227 ------- ------ Adjusted average weighted shares outstanding 6,195 8,674 ======= ====== Diluted earnings per share $ (0.88) $ 0.20 ======= ======
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS 130"). This pronouncement, effective for calendar year 1998 financial statements, requires comprehensive income and its components to be reported either in a separate financial statement, combined and included with the statement of income or included in a statement of changes in stockholders' equity. Comprehensive income equals the total of net income and all other non-owner changes in equity. For the Company, comprehensive income will equal its reported consolidated net income plus the change in the unrealized appreciation of marketable securities from the previously reported period. Currently, this unrealized appreciation of marketable securities, net of tax, is reported in the Company's Consolidated Balance Sheets as a separate component of stockholders' equity. Comprehensive (loss) income is as follows, in thousands: For the three months ended March 31, -------------------------- 1998 1997 -------- ------- Net (loss) income $(4,966) $ 1,730 Change in unrealized depreciation (51) (1,086) ------- ------- Comprehensive (loss) income $(5,017) $ 644 ======= ======= Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"). This pronouncement, also effective for calendar year 1998 financial statements, requires reporting segment information consistent with the way executive management of an entity disaggregates its operations internally to assess performance and make decisions regarding resource allocations. Among the information to be disclosed, SFAS 131 requires an entity to report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. SFAS 131 also requires reconciliations of total segment revenues, total segment profit or loss and total segment assets to the corresponding amounts shown in the entity's consolidated financial statements. The adoption of SFAS 131 in 1998 will not change the number or designation of the reportable segments currently disclosed in the Company's Consolidated Financial Statements. In December 1997, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting for insurance-related assessments. The Company is required to adopt SOP 97-3 effective January 1, 1999. Previously issued financial statements should not be restated unless the SOP is adopted prior to the effective date and during an interim period. The adoption of SOP 97-3 is not expected to have a material impact on the Company's results of operations, liquidity or financial position. NOTE 7 - RECLASSIFICATIONS Certain reclassifications have been made to 1997 amounts in order to conform to 1998 financial statement presentation. WESTBRIDGE CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS During the three months ended March 31, 1998, the Company continued to experience adverse loss ratios on its Medical Expense and Medicare Supplement products, as well as declining persistency of inforce policies. The Company has modified certain product benefits and requested rate increases on these lines of business in order to mitigate the effect of such adverse claims experience and has implemented a policyholder conservation program designed to mitigate the impact of declining persistency. However, the Company expects that it will continue to incur operating losses until such time as the necessary rate increases and benefit modifications can be implemented. There can be no assurance that the full extent of such rate increase requests will be approved. The Company continues to work with its financial advisor, Houlihan, Lokey, Howard & Zukin, to develop a strategic plan in anticipation of transactional alternatives which may include, without limitation, a refinancing, recapitalization or other corporate reorganization involving a significant reduction in, or exchange of equity for, outstanding indebtedness. The Company is also continuing its discussions with the regulatory authorities in its domiciliary states of Delaware, Texas and Mississippi and with an ad hoc creditors' committee representing both the holders of the Senior Subordinated Notes and the holders of the Convertible Notes. Also, as previously reported, the Company has not made the scheduled interest payments on its Senior Subordinated Notes and its Convertible Notes and the scheduled dividend payments on its Series A Preferred Stock. The failure to make the scheduled interest payments resulted in events of default under the Indentures relating to such Notes and also resulted in an event of default under the Company's Credit Agreement (as defined herein). Other covenant defaults are also continuing under the Credit Agreement and the Indenture relating to the Senior Subordinated Notes. The Company is current with respect to its principal and interest payments under the Credit Agreement. As a result of the existing events of default, the holders of the Convertible Notes and the Senior Subordinated Notes and the lender under the Credit Agreement may declare the outstanding principal amount thereof, together with accrued and unpaid interest thereon, to be due and payable immediately. If such Notes were to be accelerated, the Company does not have the ability to repay the outstanding Convertible Notes, the Senior Subordinated Notes and the Credit Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of unpaid interest has been accrued on such Senior Subordinated Notes and Convertible Notes, respectively. There can be no assurance that the Company will resume such interest payments in the future. The failure to declare and pay the scheduled dividends on the Series A Preferred Stock constituted an event of non-compliance under the terms of the Series A Preferred Stock Agreement and resulted in an immediate increase to 9.25% from 8.25% in the rate at which dividends accrue on the Series A Preferred Stock. This increase will remain in effect until such time as no event of non-compliance exists. At March 31, 1998, approximately $1.3 million of cumulative, unpaid dividends were accrued. There can be no assurance that the Company will resume such dividend payments in the future. BUSINESS OVERVIEW The Company derives its revenue primarily from premiums from its insurance products and, to a significantly lesser extent, from fee and service income, income earned on invested assets and gains on the sales or redemptions of invested assets. The Company's primary expenses include benefits and claims in connection with its insurance products, amortization of deferred policy acquisition costs ("DPAC"), commissions paid on policy renewals, general and administrative expenses associated with policy and claims administration, taxes, licenses and fees and interest on its indebtedness. In addition to the foregoing expenses, Westbridge is obligated to pay dividends on the Series A Preferred Stock if, and when, declared by the Board of Directors. Fee and service income is generated from (i) commissions received by the Company for sales of managed care products underwritten primarily by HMOs and other managed care organizations, (ii) telemarketing services, and (iii) printing services. 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. Under generally accepted accounting principles, a DPAC asset is established to properly match the costs of writing new business against the expected future revenues or gross profits from the policies. These costs, which are capitalized and amortized, consist of first-year commissions in excess of renewal commissions and certain home office expenses related to selling, policy issue, and underwriting. The DPAC for accident and health policies and traditional life policies are amortized over future premium revenues of the business to which the costs are related. The rate of amortization depends on the expected pattern of future premium revenues for the block of policies. The scheduled amortization for a block of policies is established when the policies are issued. However, the actual amortization of DPAC will reflect the actual persistency and profitability of the business. For example, if actual policy terminations are higher than expected or if future losses are anticipated, DPAC could be amortized more rapidly than originally scheduled or written-off, which would reduce earnings in the applicable period. Also included in DPAC is the cost of insurance purchased relating to acquired blocks of business. Acquisitions. Since 1992, the Company has from time to time acquired seasoned blocks of business to supplement its revenue. These acquisitions included blocks of: (i) Medicare Supplement products purchased from American Integrity Insurance Company ("AII") in September 1992, (ii) Medicare Supplement products purchased from Life and Health Insurance Company of America ("LHI") in March 1993, (iii) Specified Disease products purchased from Dixie National Life Insurance Company ("DNL") in February 1994, (iv) policies in all of the Company's product lines purchased in the acquisition of NFIC and AICT in April 1994, and (v) Specified Disease products purchased in the acquisition of the remaining 60% ownership interest in Freedom Holding Company, FLICA's parent, in May 1996. Premiums. The following table shows the premiums, in thousands, received by the Company as a result of internal sales and acquisitions. Certain reclassifications have been made to 1997 amounts in order to conform to 1998 presentation. Three Months Ended March 31, ------- -------- 1998 1997 ------- -------- First-year premiums $ 6,752 $11,822 Renewal premiums 20,006 17,136 ------- ------- Total Company-issued policy premiums 26,758 28,958 ------- ------- Acquired Policies: AII 1,599 1,893 LHI 353 407 DNL 687 717 NFIC and AICT 5,037 5,611 FLICA 3,005 3,234 ------- ------- Total acquired policy premiums (1) 10,681 11,862 ------- ------- Total Premiums $37,439 $40,820 ======= ======= (1) Premiums for acquired policies include first-year premiums of $0.3 million and $0.3 million, respectively. Generally, as a result of acquisitions of policies in force and the transfer of assets and liabilities relating thereto, the Company receives higher revenues in the form of premiums and net investment income and experiences higher expenses in the form of benefits and claims, amortization of DPAC, commissions and general and administrative expenses. The Company expects that premiums, net investment income, net realized gains on investments, benefits and claims, amortization of DPAC, commissions and general and administrative expenses attributable to these acquired policies will continue to decline over time as the acquired policies lapse. Forward-Looking Information. The preceding statement and certain other statements contained in the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. These forward-looking statements are based on current expectations that could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, the extent of any increase in future claim submissions, the availability of sufficient statutory capital and surplus, the ability to increase premium rates on inforce policies to offset higher than anticipated loss ratios, actions that may be taken by insurance regulatory authorities and the Company's creditors following recent operating losses, and the risks described from time to time in the Company's reports to the Securities and Exchange Commission ("SEC"), which include the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Quarterly Report and those in the Company's reports previously filed with the SEC. Copies of these filings may be obtained by contacting the Company or the SEC. RESULTS OF OPERATIONS Three Months Ended March 31, 1998 Compared With Three Months Ended March 31, 1997 Premiums. Premiums decreased $3.4 million, or 8.3%, from $40.8 million to $37.4 million as a result of declining persistency of inforce policies and a reduction in the Company's marketing efforts. This decrease resulted from a decrease in first-year premiums from Company-issued policies of $5.1 million, or 42.9%, and from a decrease in renewal premiums from acquired policies of $1.2 million, or 10.1%, and was offset by an increase in renewal premiums from Company-issued policies of $2.9 million, or 17.2%. The decrease in first-year premiums from Company-issued policies was attributable to a decrease of $2.4 million, or 29.6%, in Medical Expense premiums, a decrease of $2.6 million, or 76.5%, in Medicare Supplement premiums, and a decrease of $0.1 million in other premiums. The decrease in renewal premiums from acquired policies was attributable to a decrease of $0.6 million, or 10.7%, from the policies acquired in the NFIC and AICT acquisition, a decrease of $0.3 million, or 15.8%, from the policies acquired from AII, and a decrease of $0.3 million, or 9.1%, from the policies acquired from FLICA and other acquisitions. The increase in renewal premiums from Company-issued policies was attributable to an increase of $2.2 million, or 28.9%, in Medical Expense premiums, an increase of $0.6 million, or 10.0%, in Medicare Supplement premiums and an increase of $0.1 million, or 3.2%, in Specified Disease premiums. Net Investment Income. Net investment income increased $1.0 million, or 45.5%, from $2.2 million to $3.2 million for the three months ended March 31, 1998. This increase was attributable to a higher average investment base resulting from the net proceeds received from the Company's sale of its Convertible Notes during the second quarter of 1997 and from higher average portfolio yields. Fee and Service Income. Fee and service income increased $0.6 million, or 17.1%, from $3.5 million to $4.1 million. This increase was primarily attributable to commissions on managed care product sales that were earned by the Company's controlled general agencies. Benefits and Claims. During the three months ended March 31, 1998, the Company continued to experience adverse loss ratios on its Medical Expense and Medicare Supplement products, as well as declining persistency of inforce policies. The Company has the ability, within the constraints of the loss ratios mandated by the regulatory authorities and subject to regulatory approval, to raise premium rates on its products in the event of adverse claims experience. As a result of the losses sustained on this unprofitable business, the Company has modified certain product benefits and requested rate increases on these lines of business in order to mitigate the effect of such adverse claims experience and has implemented a policyholder conservation program designed to mitigate the impact of declining persistency. However, the Company expects that it will continue to incur operating losses until such time as the necessary rate increases and benefit modifications can be implemented. There can be no assurance that the full extent of such rate increase requests will be approved. Benefits and claims expense increased $3.1 million, or 12.3%, from $25.3 million to $28.4 million. This increase was attributable to an increase in benefits and claims expense from Company-issued and acquired policies of $2.9 million and $0.2 million, or 17.3% and 2.4%, respectively. The increase in benefits and claims expense from Company-issued policies was primarily attributable to an increase of $3.5 million, or 40.2%, from Medical Expense products, an increase of $0.1 million, or 6.7%, from Specified Disease products, and was offset by a decrease of $0.7 million, or 10.6%, from Medicare Supplement and other products. Although the Medicare Supplement loss ratios increased for the three months ended March 31, 1998, the total dollar amount of the related claims expense decreased in connection with a declining base of Medicare Supplement premiums. The increase in benefits and claims expense from acquired policies was primarily attributable to an increase of $0.5 million, or 11.6%, from the policies acquired in the NFIC and AICT acquisition, an increase of $0.6 million, or 60.0%, from the policies acquired from LHI and DNL, and was offset by a decrease of $0.9 million, or 28.1%, from the policies acquired from AII and FLICA. Amortization of DPAC. As previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, the Company recognized a $65.0 million non-cash charge of DPAC during the fourth quarter of 1997. In light of this charge and until profitability can be restored on these lines of business, the Company is recording commission expense on a current basis that would ordinarily be deferred and amortized as a component of DPAC. As a result, current period DPAC amortization is lower than prior periods and commission expense is higher than prior periods. Amortization of DPAC decreased $4.0 million, or 76.9%, from $5.2 million to $1.2 million. This variance was attributable to decreases of $3.0, $1.0 million and $0.2 million, from Company-issued Medical Expense, Medicare Supplement products, and acquired policies, respectively. This decrease was offset by an increase of $0.2 million, or 66.7%, from Company-issued Specified Disease products. Commissions. Commissions increased $6.2 million, or 187.9%, from $3.3 million to $9.5 million. This variance was attributable to a decrease in the commissions that would ordinarily be deferred and amortized as a component of DPAC, which are being expensed as commissions on a current basis. The increase was attributable to an increase in commissions of $5.8 million on Company-issued policies and $0.6 million, or 25.0%, on sales of non-affiliated insurance products, and was offset by a decrease in commissions on sales of acquired policies of $0.2 million, or 13.3%. General and Administrative Expenses. General and administrative expenses decreased $0.3 million, or 4.1%, from $7.3 million to $7.0 million. This decrease was primarily attributable to corporate overhead reductions beginning in the fourth quarter of 1997. Reorganization Expense. As more fully described in "Recent Developments", the Company has hired a financial advisor to explore its strategic alternatives. The Company is responsible for paying the fees of its financial advisor and legal counsel and has agreed to pay the fees of the financial advisors and legal counsel to an ad hoc creditors' committee in connection with the efforts to formulate and evaluate transactional alternatives. During the first quarter of 1998, the Company incurred approximately $1.0 million in expenses related to these efforts. The Company did not incur any reorganization expenses during the first quarter ended March 31, 1997. Taxes, Licenses and Fees. Taxes, licenses and fees decreased $0.2 million, or 13.3% from $1.5 million to $1.3 million due to the declining premium base for which premium taxes are levied. Interest Expense. Interest expense increased $1.0 million, or 83.3%, from $1.2 million to $2.2 million. This increase is attributable to the accrued interest expense related to the issuance of $70.0 million aggregate principal of the Company's Convertible Notes. (Benefit from) Provision for Income Taxes. During 1997, the provision for income taxes was calculated by applying the 35% statutory federal tax rate to the Company's pre-tax income for three months ended March 31, 1997. The change in the (benefit from) provision for income taxes during 1998 is directly attributable to the net loss recorded by the Company for the three months ended March 31, 1998. As a result, a net operating loss carryforward ("NOLs") was generated that will be available for offset against taxable income generated in future reporting periods. The Company has determined that it is more likely than not that it will be unable to utilize all of these NOLs prior to the related expiration dates. In this connection, the Company has recorded a valuation allowance that significantly reduces its benefit from income taxes for the current year from the amount that would have been derived by applying the 35% statutory federal tax rate to the Company's pre-tax loss for three months ended March 31, 1998. FINANCIAL CONDITION Liquidity, Capital Resources and Statutory Capital and Surplus Westbridge Westbridge is an insurance holding company, the principal assets of which consist of the capital stock of its operating subsidiaries and invested assets. Accordingly, Westbridge's sources of funds are comprised of dividends from its operating subsidiaries, advances and management fees from non-insurance company subsidiaries, lease payments on fixed assets and tax contributions under a tax sharing agreement among Westbridge and its subsidiaries. Westbridge's primary obligations include principal and interest on its indebtedness and, if and when declared by the Board of Directors, dividends on its Series A Preferred Stock. In addition, for the three months ended March 31, 1998, Westbridge made capital contributions totaling approximately $1.1 million to its Insurance Subsidiaries. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile. NFL, a Delaware domestic company, may not declare or pay dividends from any source other than earned surplus without the Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines earned surplus as the amount equal to the unassigned funds as set forth in NFL's most recent statutory annual statement including surplus arising from unrealized gains or revaluation of assets. Delaware life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. During 1998, NFL is precluded from paying dividends without the prior approval of the Delaware Insurance Commissioner as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. NFIC and AICT, Texas domestic companies, may make dividend payments from surplus profits or earned surplus arising from its business. The Texas Insurance Code defines earned surplus as unassigned surplus not including any unrealized gains. Texas life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold is considered extraordinary and requires prior approval of the Texas Insurance Commissioner. NFIC's and AICT's earned surplus is negative, and as such, each company is precluded from paying dividends during 1998 without the prior approval of the Texas Insurance Commissioner. FLICA, a Mississippi domestic company, may make dividend payments only from its actual net surplus computed as required by law in its statutory annual statement. Mississippi life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value not exceeding the lesser of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold amount requires prior approval of the Mississippi Insurance Commissioner. FLICA is precluded from paying dividends to NFL during 1998 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ended December 31, 1997. Generally, all states require insurance companies to maintain capital and surplus that is reasonable in relation to their existing liabilities and adequate to their financial needs. Delaware, Texas and Mississippi also maintain discretionary powers relative to the declaration and payment of dividends based upon an insurance company's financial position. In light of the statutory losses incurred by the Insurance Subsidiaries during 1997 and for the three months ended March 31, 1998, Westbridge does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future. Also, as previously reported, the Company has not made the scheduled interest payments on its Senior Subordinated Notes and its Convertible Notes and the scheduled dividend payments on its Series A Preferred Stock. The failure to make the scheduled interest payments resulted in events of default under the Indentures relating to such Notes and also resulted in an event of default under the Company's Credit Agreement. Other covenant defaults are also continuing under the Credit Agreement and the Indenture relating to the Senior Subordinated Notes. The Company is current with respect to its principal and interest payments under the Credit Agreement. As a result of the existing events of default, the holders of the Convertible Notes and the Senior Subordinated Notes and the lender under the Credit Agreement may declare the outstanding principal amount thereof, together with accrued and unpaid interest thereon, to be due and payable immediately. If such Notes were to be accelerated, the Company does not have the ability to repay the outstanding Convertible Notes, the Senior Subordinated Notes and the Credit Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of unpaid interest has been accrued on such Senior Subordinated Notes and Convertible Notes, respectively. There can be no assurance that the Company will resume such interest payments in the future. The failure to declare and pay the scheduled dividends on the Series A Preferred Stock constituted an event of non-compliance under the terms of the Series A Preferred Stock Agreement and resulted in an immediate increase to 9.25% from 8.25% in the rate at which dividends accrue on the Series A Preferred Stock. This increase will remain in effect until such time as no event of non-compliance exists. At March 31, 1998, approximately $1.3 million of cumulative, unpaid dividends were accrued. There can be no assurance that the Company will resume such dividend payments in the future. As of May 7, 1998, Westbridge had approximately $12.0 million in cash and invested assets remaining from the net proceeds of the sale of the Convertible Notes. The Company continues to work with its financial advisor, Houlihan, Lokey, Howard & Zukin, and with an ad hoc creditors' committee representing both the holders of its Senior Subordinated Notes and the holders of its Convertible Notes to develop a strategic business plan in anticipation of transaction alternatives, which may include, without limitation, a refinancing, recapitalization or other corporate reorganization involving a significant reduction in, or exchange of equity for, outstanding indebtedness. In addition, the Company continues to work closely with the insurance regulatory authorities in its domiciliary states of Delaware, Texas and Mississippi. Insurance Subsidiaries The primary sources of cash for the Insurance Subsidiaries are premiums and income on invested assets. Additional cash is periodically provided by advances from Westbridge and from the sale of short-term investments and could, if necessary, be provided through the sale of long-term investments and blocks of business. The Insurance Subsidiaries' primary uses for cash are benefits and claims, commissions, general and administrative expenses, and taxes, licenses and fees. During the three months ended March 31, 1998, the Company continued to experience adverse loss ratios on its Medical Expense and Medicare Supplement products, as well as declining persistency of inforce policies. The Company has the ability, within the constraints of the loss ratios mandated by the regulatory authorities and subject to regulatory approval, to raise premium rates on its products in the event of adverse claims experience. As a result of the losses sustained on this unprofitable business, the Company has modified certain product benefits and requested rate increases on these lines of business in order to mitigate the effect of such adverse claims experience and has implemented a policyholder conservation program designed to mitigate the impact of declining persistency. However, the Company expects that it will continue to incur operating losses until such time as the necessary rate increases and benefit modifications can be implemented. There can be no assurance that the full extent of such rate increase requests will be approved. For the three months ended March 31, 1998, the Insurance Subsidiaries received capital contributions totaling approximately $1.1 million from Westbridge. To the extent that the Insurance Subsidiaries experience further statutory operating losses during 1998, additional capital will be required. In the ordinary course of business, the Company advances commissions on policies written by its general agencies and their agents. The Company is reimbursed for these advances from the commissions earned over the respective policy's life. In the event that policies lapse prior to the time the Company has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. For the three months ended March 31, 1998 and 1997, the Company has recorded a provision for uncollectible commission advances totaling $0.3 million and $-0-, respectively. The Company finances the majority of its obligations to make commission advances through Westbridge Funding Corporation ("WFC"), an indirect wholly-owned subsidiary of Westbridge. On June 6, 1997, WFC entered into a Credit Agreement dated as of such date with LaSalle National Bank (the "Credit Agreement"). This Credit Agreement provides WFC with a three-year, $20.0 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from the Insurance Subsidiaries and certain affiliated marketing companies. WFC's obligations under the Credit Agreement are secured by liens upon substantially all of WFC's assets. In connection with this commission advancing program, at March 31, 1998, the Company's receivables from subagents totaled approximately $13.2 million and approximately $12.0 million was outstanding under the Credit Agreement. The Credit Agreement terminates on June 5, 2000, at which time the outstanding principal and interest thereunder will be due and payable. As referred to above, there are currently certain events of default existing under the Credit Agreement. The Company is in discussions with LaSalle National Bank concerning these defaults; however, the Company is current with respect to its principal and interest payments under this Credit Agreement. WFC's obligations under the Credit Agreement have been guaranteed by Westbridge under the Guaranty Agreement, and the Company has pledged all of the issued and outstanding shares of the capital stock of WFC, NFL and NFIC as collateral for that guaranty. The Company also receives commission advances from an unaffiliated managed care organization and in turn advances commissions to its general agencies and their agents. At March 31, 1998, the Company's receivables from its subagents related to these advances totaled approximately $4.7 million, and the Company owed approximately $4.7 million to an unaffiliated managed care organization. Consolidated The Company's consolidated net cash used for operations totaled $2.9 million and $12.1 million for the three months ended March 31, 1998 and 1997, respectively. The variance in the amount of net cash used for operations between 1998 and 1997 was primarily the result of amounts remitted to reinsurers during 1997 under certain reinsurance arrangements. In addition, the Company's reduction of its marketing efforts for its underwritten products resulted in a decrease in net cash used for operations related to the funding of agents' debit balances. Net cash provided by investing activities for the three months ended March 31, 1998 and 1997 totaled $3.4 million and $12.5 million, respectively. The decrease in net cash provided by investing activities between 1998 and 1997 was primarily the result of the decrease in net cash used for operating activities for the same period. As a result, there was a reduction in the amount of invested assets that were liquidated to fund operating cash requirements. Net cash used for financing activities totaled $1.1 million and $1.2 million for the three months ended March 31, 1998 and 1997, respectively. Cash flows for financing activities remained relatively unchanged between 1998 and 1997 and relate primarily to the net borrowings and repayments associated with the Company's Receivables Financing program. The Company will require additional capital or a refinancing, recapitalization or other reorganization involving a significant reduction in, or exchange of equity for, outstanding indebtedness to satisfy its short-term and long-term cash requirements and there can be no assurance that sufficient additional capital can be obtained. The Company is evaluating its strategic alternatives with its financial advisor. The Company had no significant high-yield, unrated or less than investment grade fixed maturity securities in its investment portfolio as of March 31, 1998, and it is the Company's policy not to exceed more than 5% of total assets in such securities. Changes in interest rates may affect the market value of the Company's investment portfolio. The Company's principal objective with respect to the management of its investment portfolio is to meet its future policyholder benefit obligations. In the event the Company was forced to liquidate investments prior to maturity, investment yields could be compromised. Inflation will affect claim costs on the Company's Medicare Supplement 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 that 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. The Company has somewhat mitigated its exposure to inflation by incorporating certain limitations on the maximum benefits which may be paid under its policies and by filing for premium rate increases as necessary. In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health Insurers Model Act ("the Model Act"). The Model Act provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory attention. The Model Act (or similar legislation or regulation) has been adopted in states where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention, varying with the ratio of the insurance company's total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its risk-based capital ("RBC"). If a company's total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, or if a negative trend (as defined by the regulators) has occurred and total adjusted capital is less than 125 percent of RBC (the "Company Action Level"), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions. If a company's total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed. If a company's total adjusted capital is less than 50 percent but greater than or equal to 35 percent of its RBC (the "Authorized Control Level"), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. If a company's total adjusted capital is less than 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control. The NAIC's requirements are effective on a state by state basis if, and when, they are adopted by the regulators in the respective states. The Insurance Departments of the States of Delaware and Mississippi have each adopted the NAIC's Model Act. At March 31, 1998, total adjusted capital for NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company, exceeded the respective Company Action Levels. The Texas Department of Insurance ("TDI") has adopted its own RBC requirements, the stated purpose of which is to require a minimum level of capital and surplus to absorb the financial, underwriting and investment risks assumed by an insurer. Texas' RBC requirements differ from those adopted by the NAIC in two principal respects: (i) they use different elements to determine minimum RBC levels in their calculation formulas and (ii) they do not stipulate "Action Levels" (like those adopted by the NAIC) where corrective actions are required. However, the Commissioner of the TDI does have the power to take similar corrective actions if a company does not maintain the required minimum level of statutory capital and surplus. NFIC and AICT are domiciled in Texas and must comply with Texas RBC requirements. At March 31, 1998, AICT's RBC exceeded the minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum level prescribed by the TDI. As a result of the statutory losses sustained by the Insurance Subsidiaries during 1997 and the three months ended March 31, 1998, certain intercompany and large cash transactions are subject to the approval of the domiciliary states. PART II Item 1 - Legal Proceedings (See Part I - Note 2 to the Consolidated Financial Statements). On December 17, 1997, a purported class action complaint, naming the Company, two current directors of the Company, one former director of the Company and two underwriters of the Company's Convertible Notes as defendants, was filed in the United States District Court for the Northern District of Texas on behalf of persons who purchased securities of the Company during the period October 31, 1996 through October 31, 1997. The complaint alleges that the Company materially overstated its earnings due to the Company's establishment of inadequate reserves for pending insurance claims. The plaintiff seeks unspecified money damages and certain costs and expenses. On April 30, 1998, the defendants filed separate motions to dismiss the complaint. On May 12, 1998, the plaintiff notified Westbridge's legal counsel that he intends to file an amended complaint on or before June 15, 1998. Management believes that the lawsuit is without merit and it intends to defend this action vigorously. Item 3 - Defaults Upon Senior Securities (a) Debt Securities Effective November 3, 1997, Westbridge suspended the scheduled interest payments on its Senior Subordinated Notes and its Convertible Notes. The failure to make the scheduled interest payments resulted in an event of default under the Indentures relating to such Notes and also resulted in an event of default under the Credit Agreement. As a result of the existing events of defaults, the holders of such indebtedness may declare the outstanding principal amount thereof, together with accrued and unpaid interest thereon, to be due and payable immediately. If such Notes were to be accelerated, the Company does not have the ability to repay the indebtedness under the outstanding Convertible Notes, the Senior Subordinated Notes and the Credit Agreement. At March 31, 1998, approximately $1.1 million and $4.8 million of unpaid interest has been accrued on such Senior Subordinated Notes and Convertible Notes, respectively. (b) Preferred Stock Effective October 31, 1997, Westbridge suspended payment of the scheduled dividends on its Series A Preferred Stock. At March 31, 1998, approximately $1.3 million of cumulative, unpaid dividends were accrued. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 Financial Data Schedule, (included in electronic filing only). (b) Reports on Form 8-K No Form 8-K was required to be filed during the period. Form 10-Q Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTBRIDGE CAPITAL CORP. /s/ Patrick J. Mitchell Patrick J. Mitchell President, Chief Operating Officer, Chief Financial Officer and Treasurer (On Behalf of the Registrant and as Principal Financial and Accounting Officer) Dated at Fort Worth, Texas May 14, 1998 21 Form 10-Q Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTBRIDGE CAPITAL CORP. /s/ Patrick J. Mitchell ---------------------------------- Patrick J. Mitchell President, Chief Operating Officer, Chief Financial Officer and Treasurer (On Behalf of the Registrant and as Principal Financial and Accounting Officer) Dated at Fort Worth, Texas May 14, 1998 EX-27 2 ARTICLE 7 FDS FOR 10-Q
7 1,000 3-MOS DEC-31-1998 MAR-31-1998 124,695 0 0 5,070 329 566 143,747 461 2,466 18,644 196,791 106,609 0 0 0 101,452 19,000 0 620 51,465 196,791 37,439 3,166 262 4,062 28,436 1,235 8,024 (5,725) (759) (4,966) 0 0 0 (5,437) (0.88) (0.88) 0 0 0 0 0 0 0
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