-----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, SS0RviaWKyqjXm22fPvZ+XZ4mrL8CemBNBZsnk2k5OUcz8kVtVooKCs69JAaPZVS cyiEKbz18Oguh46T4HgM8w== 0000703701-99-000008.txt : 19990902 0000703701-99-000008.hdr.sgml : 19990902 ACCESSION NUMBER: 0000703701-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASCENT ASSURANCE INC CENTRAL INDEX KEY: 0000703701 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 731165000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10873 FILM NUMBER: 99580401 BUSINESS ADDRESS: STREET 1: 110 WEST SEVENTH STREET STREET 2: STE 300 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178783306 MAIL ADDRESS: STREET 1: 110 WEST SEVENTH STREET STREET 2: SUITE 300 CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: WESTBRIDGE CAPITAL CORP DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 Commission File Number 1-8538 ASCENT ASSURANCE, INC. (FORMERLY, WESTBRIDGE CAPITAL CORP.) (Exact Name of Registrant as Specified in its Charter) DELAWARE 73-1165000 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 110 West Seventh Street, Fort Worth, Texas 76102 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (817) 878-3300 Registrant's Shareholder and Investor Relations Telephone Number: (817) 877-3048 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock (par value $.01) Warrants to purchase Common Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive Proxy Statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _X_ No__ The Registrant's Common Stock is not currently listed on a formal stock exchange. The estimated market value of voting stock as presented in the Registrant's Amended Disclosure Statement accompanying the First Amended Plan of Reorganization dated October 30, 1998, as modified, ranged from $47 million to $60 million. See ITEM 1 "Business." At March 24, 1999, 6,500,000 shares of Common Stock were outstanding. ASCENT ASSURANCE, INC. (FORMERLY, WESTBRIDGE CAPITAL CORP.) 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I ITEM 1. Business................................................................................. 3 ITEM 2. Properties............................................................................... 18 ITEM 3. Legal Proceedings........................................................................ 18 ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 19 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters................. 20 ITEM 6. Selected Consolidated Financial Data..................................................... 22 ITEM 7. Management's Discussion and Analysis of Results of Operation and Financial Condition.................................................................... 23 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 37 ITEM 8. Financial Statements and Supplementary Data.............................................. 39 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 77 PART III ITEM 10. Directors and Executive Officers of the Registrant....................................... 77 ITEM 11. Executive Compensation................................................................... 77 ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 77 ITEM 13. Certain Relationships and Related Transactions........................................... 77 PART IV ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K.......................... 78
PART I ITEM 1. BUSINESS GENERAL Ascent Assurance, Inc. (formerly, Westbridge Capital Corp.) (the "Company") is an insurance holding company engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners. As used herein, the term "Westbridge" refers to the pre-reorganized operations and/or financial condition of Westbridge and its consolidated subsidiaries, unless the context requires otherwise. The Company's revenues result primarily from premiums from the insurance products sold by its wholly owned subsidiaries (i) National Foundation Life Insurance Company ("NFL") and its wholly owned subsidiary, Freedom Life Insurance Company of America ("FLICA") and (ii) National Financial Insurance Company ("NFIC") and its wholly owned subsidiary, American Insurance Company of Texas ("AICT," and together with NFL, NFIC and FLICA, collectively, the "Insurance Subsidiaries"). To a lesser extent, the Company derives revenue from fee and service income generated from (i) commissions received from sales of unaffiliated managed care and senior products, (ii) telemarketing services, and (iii) printing services. The Company was incorporated as a Delaware holding company for NFL in September 1982. The Company's executive offices are located at 110 West Seventh Street, Fort Worth, Texas 76102 and its telephone number is (817) 878-3300. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 OF THE U.S. BANKRUPTCY CODE AND CORPORATE REORGANIZATION On September 16, 1998 (the "Petition Date"), Westbridge commenced a reorganization case (the "Chapter 11 Case") by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along with a disclosure statement (as amended, the "Disclosure Statement") and a proposed plan of reorganization (as amended, the "Plan"). The filing of the Disclosure Statement and Plan culminated months of negotiations between Westbridge and an ad hoc committee (the "Creditors' Committee") of holders of its 11% Senior Subordinated Notes due 2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004 (the "Convertible Notes"). The Disclosure Statement and the Plan were amended on October 28, 1998, and the Disclosure Statement was approved by entry of an order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became effective March 24, 1999 (the "Effective Date"). In connection with its emergence from Chapter 11, Westbridge changed its corporate name to "Ascent Assurance, Inc." Pursuant to the Plan, the Company's Board of Directors was reconstituted as of the Effective Date into a classified board consisting of six directors (with two directors in each class), three of which were appointed by Credit Suisse First Boston Corporation ("CSFB"), one of which was appointed by the Creditors' Committee and two of which were appointed by the Company. Until June 24, 1999, the holders of the New Preferred Stock (as defined below) have the right to designate one additional director. Also on the Effective Date, the Company's certificates of incorporation and by-laws were amended and restated in their entirety, copies of which are filed as an Exhibit hereto. The following summary of the Plan omits certain information set forth in the Plan. Any statements contained herein concerning the Plan are not necessarily complete, and in each such instance reference is made to the Plan, a copy of which is incorporated by reference to Exhibit 2 of Westbridge's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on December 29, 1998. Each such statement is qualified in its entirety by such reference. The Plan provides for the recapitalization of certain old debt and equity interests in Westbridge and the issuance of new equity securities and warrants. Key terms of the Plan include the following: CANCELLATION OF EXISTING SECURITIES Westbridge's capital structure was realigned and deleveraged (see NOTE 1 - "Reorganization And Emergence From Chapter 11 Case" in the Notes to the Company's Consolidated Financial Statements). Pursuant to the Plan, the following securities of Westbridge were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount of, plus all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate principal amount of, plus all accrued and unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate liquidation preference of, plus all accrued and unpaid dividends on, Westbridge's Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock, and (vii) all unvested grants of restricted Old Common Stock. NEW EQUITY CAPITAL STRUCTURE Pursuant to the Company's Amended and Restated Certificate of Incorporation, the total number of shares of stock the Company shall have the authority to issue is 30,040,000, consisting of 30,000,000 shares of common stock, par value $.01 per share (the "New Common Stock") and 40,000 shares of preferred stock, par value $.01 per share, all of which are designated Series A Convertible Preferred Stock (the "New Preferred Stock"). DISTRIBUTIONS UNDER THE PLAN CASH DISTRIBUTION To the holders of Senior Notes other than CSFB, cash payments totaling approximately $15.2 million, which are equal to the total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors other than CSFB, will be distributed subject to completion of the exchange of securities as contemplated by the Plan. In order to provide the Company with sufficient funds to make the cash distribution to the holders of the Allowed 11% Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. ISSUANCE OF NEW SECURITIES Pursuant to the Plan and the purchase of New Preferred Stock on the Effective Date, 6,500,000 shares of New Common Stock and 23,257 shares of New Preferred Stock were issued on the Effective Date as follows: To holders of general unsecured claims and Convertible Notes as of December 10, 1998 and current management, 6,110,000 shares, or 94%, of the New Common Stock issued on the Effective Date, subject to the completion of the exchange requirements as contemplated by the Plan. Holders of general unsecured claims and Convertible Notes will receive their first distribution of shares in partial satisfaction and discharge of their allowed claims beginning in April 1999. The remaining shares of New Common Stock are held for future distributions to such holders pending the final resolution of disputed claims. To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, subject to the completion of the exchange of securities as contemplated by the Plan. To holders of Old Common Stock as of December 10, 1998, 130,000 shares, or 2%, of the New Common Stock issued on the Effective Date and New Warrants to purchase an additional 693,761 shares, or 5%, of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, subject to the completion of the exchange of securities as contemplated by the Plan. Fractional shares of New Common Stock will not be issued in connection with the Plan. As a result of this provision, certain holders of Old Common Stock will receive no distribution of New Common Stock or New Warrants under the Plan. To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, are convertible into 4,765,165 shares of the New Common Stock at an initial conversion price of $4.88 per share. As a result of the New Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New Common Stock to be received by the CSFB Affiliate in respect of the Convertible Notes owned by CSFB, the CSFB affiliate will own approximately 56.6% of the New Common Stock on an as converted basis. RESERVATION OF ADDITIONAL NEW COMMON STOCK In connection with the New Warrants described above, 971,266 shares of New Common Stock are reserved for issuance upon the exercise of New Warrants. The New Warrants are exercisable at an initial exercise price $9.04 per share of New Common Stock and will expire on March 24, 2004. Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to employees and directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to the Company's marketing agents under the Company's 1999 Stock Option Plan. OTHER MATTERS In connection with the approval and effectiveness of the Plan, the Company settled a putative class action brought on behalf of certain purchasers and sellers of Westbridge's Convertible Notes and Old Common Stock during the period October 31, 1996 through October 31, 1997. MARKETING DISTRIBUTION SYSTEM The Company markets health insurance products through its wholly owned subsidiary, NationalCare(R) Marketing, Inc. ("NCM"). NCM recruits agents as independent contractors to market the health insurance products underwritten by the Insurance Subsidiaries. NCM's agents sell these insurance products on a one-to-one basis 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. See ITEM 7 - "Strategic Initiatives." Agents' sales contacts generally result from leads generated either by the Company's telemarketing subsidiary or through outside sources. By utilizing a predictive automated dialing system, the Company believes its indirect wholly owned telemarketing subsidiary, Precision Dialing Services, Inc. ("PDS") is able to generate a large number of quality sales leads. By providing its agents with these sales leads, the Company believes it can attract experienced agents as well as new agents entering the business. DESCRIPTION OF PRODUCTS The major product lines currently marketed and underwritten by the Company's Insurance Subsidiaries are Medical Expense products and Specified Disease products (as defined below). Historically, the Insurance Subsidiaries have also underwritten a significant amount of Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. During 1997, the Insurance Subsidiaries significantly reduced the underwriting of these products in favor of marketing the Medicare Supplement products of other insurers due to the relatively low margins for these products. The Insurance Subsidiaries continue to receive premiums on Medicare Supplement policies sold prior to that date. The Insurance Subsidiaries' products are designed with flexibility as to benefits, deductibles, coinsurance and premium payments, which can be adapted to meet regional sales or competitive needs, as well as those of the individual policyholders. Set forth below is a summary of the principal products currently underwritten by the Insurance Subsidiaries: MEDICAL EXPENSE PRODUCTS - These products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of medicines. The policies provide a number of options with respect to annual deductibles, coinsurance percentages, maximum benefits and stop-loss limits. After the annual deductible is met, the insured is responsible for a percentage of eligible expenses up to a specified stop-loss limit. Thereafter, eligible expenses are covered by the Insurance Subsidiaries up to certain maximum aggregate policy limits. The Medical Expense products are individually underwritten based upon medical information provided by the applicant prior to issue. Information provided in the application is verified with the applicant through a tape-recorded telephone conversation or through written correspondence. In addition, the Insurance Subsidiaries new Medical Expense products are stringently underwritten and include a para-med examination or other medical tests, depending on the age of the applicant. All such products are guaranteed renewable pursuant to the Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et seq. ("HIPAA"). SPECIFIED DISEASE PRODUCTS - These products include indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and "event specific" policies, which provide fixed benefits or lump sum payments upon diagnosis of certain types of internal cancer or other catastrophic diseases ("Specified Disease"). Benefits are payable directly to the insured following diagnosis of or treatment for a covered illness or injury. The payments are designed to help reduce the potential financial impact of these illnesses or injuries and may be used at the policyholder's discretion for any purpose, including offset of non-medical expenses or medical-related expenses not covered and paid for by the policyholder's other health insurance. The amount of benefits provided under the 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. Specified Disease products are generally guaranteed renewable by contract, but are exempt from HIPAA. The Company's operations are comprised of one segment, Accident and Health insurance, which includes products underwritten and/or acquired by the Insurance Subsidiaries. Premium revenue, in thousands, for each of the Insurance Subsidiaries' major product lines is set forth below. Certain 1997 and 1996 amounts have been reclassified to conform to 1998 presentation.
Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- ACCIDENT AND HEALTH INSURANCE: MEDICAL EXPENSE: Direct business First-year $ 15,818 $ 26,972 $ 40,391 Renewal 39,434 38,275 17,545 Acquired business (1) 9,389 10,384 13,971 -------- -------- -------- Subtotal 64,641 75,631 71,907 -------- -------- -------- SPECIFIED DISEASE: Direct business First-year 1,504 1,173 1,217 Renewal 14,221 12,216 12,520 Acquired business (1) (2) 16,639 19,802 20,477 -------- -------- -------- Subtotal 32,364 33,191 34,214 -------- -------- -------- MEDICARE SUPPLEMENT: Direct business First-year 1,477 8,763 17,863 Renewal 22,981 27,134 14,119 Acquired business (1) 13,612 15,546 17,788 -------- -------- -------- Subtotal 38,070 51,443 49,770 -------- -------- -------- Total Accident and Health Insurance 135,075 160,265 155,891 -------- -------- -------- Other 642 832 889 -------- -------- -------- Total Premium Revenue $135,717 $161,097 $156,780 ======== ======== ========
(1) Includes revenue from policies acquired in the acquisition of NFIC and AICT in April 1994. (2) Includes revenue from policies acquired in the acquisition of FLICA's parent, Freedom Holding Company ("FHC"), in May 1996. GEOGRAPHIC DISTRIBUTION The Insurance Subsidiaries are licensed to conduct business in 40 states and the District of Columbia. The distribution of premium revenue by state for the year ended December 31, 1998, on a statutory accounting basis, was as follows: Texas 22.3% North Carolina 6.9% Tennessee 6.4% Arkansas 6.1% Florida 5.6% Georgia 5.1% Mississippi 4.6% South Carolina 4.2% California 4.1% Oklahoma 4.0% All others 30.7% ---- 100.0% INVESTMENTS 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. In addition, certain assets are held on deposit in specified states and invested in specified securities in order to comply with state law. Although the Company closely monitors its investment portfolio, available yields on newly-invested funds and gains or losses on existing investments depend primarily on general market conditions. The Company's investment portfolio is managed by Conseco Capital Management, Inc., a registered investment advisor. Investment policy is determined by the Board of Directors of the Company and each of the Insurance Subsidiaries. The Company's current investment policy is to balance its portfolio between long-term 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. The current schedule of the Company's invested asset maturities corresponds with the Company's expectations regarding anticipated cash flow payments based on the Company's policy benefit and claim cycle, which the Company believes is medium term in nature. The Company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. Also, up to 5% of the Company's assets may be invested in higher yielding, non-investment grade securities. The following table provides information on the Company's cash and invested assets, in thousands, as of the dates indicated:
December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Cash and cash equivalents $ 278 $ 1,030 $ 1,013 -------- -------- -------- Bonds: U.S. Government and related agencies 19,886 22,142 26,108 State, county and municipal 1,586 1,071 518 Public utilities 13,421 11,273 11,016 Industrial and miscellaneous 87,971 94,263 53,955 -------- -------- -------- Total Bonds 122,864 128,749 91,597 -------- -------- -------- Preferred stock 2,575 2,645 147 -------- -------- -------- Common stock - 2,125 1,449 -------- -------- -------- Other Invested Assets: Mortgage loans on real estate 318 389 658 Policy loans 280 284 282 Short-term investments and certificates of deposit 5,393 12,654 8,072 Investment real estate - 566 - -------- -------- -------- Total Other Invested Assets 5,991 13,893 9,012 -------- -------- -------- Total Cash and Invested Assets $131,708 $148,442 $103,218 ======== ======== ========
Included in the invested assets of the Company outlined in the preceding table are certain high-yield debt securities which are below a "BBB" or equivalent rating. These high-yield debt securities amounted to less than 3.2%, 1.6%, and 1.5% of the Company's total cash and invested assets at December 31, 1998, 1997 and 1996, respectively. The following table summarizes consolidated investment results (excluding unrealized gains or losses) for the periods shown:
December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands, except percentages) Total invested assets, cash and cash equivalents $131,708 $148,442 $103,218 Net investment income (1) 9,500 9,390 7,535 Net realized gains on investments 2,142 84 96 Average gross annual yield on investments 7.0% 7.7% 7.2%
(1) Excludes interest on receivables from agents of $2.5 million, $1.6 million, and $1.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. The following table summarizes the Company's fixed maturity securities, excluding short-term investments and certificates of deposit, at December 31, 1998: FIXED MATURITY SECURITIES
Carrying Value (1),(2) % ------------ -------- (in thousands) U.S. Government and governmental agencies and authorities (except mortgage-backed) $ 11,776 9.6 States, municipalities and political subdivisions 1,586 1.3 Finance 31,919 26.0 Public utilities 13,421 10.9 Mortgage-backed 8,110 6.6 All other corporate bonds 56,052 45.6 ------------ -------- Total fixed maturity securities $ 122,864 100.0 ============ ========
(1) At December 31, 1998, all of the Company's fixed maturity securities are classified as available-for-sale and are carried at estimated market value. Estimated market value represents the closing sales prices of marketable securities. (2) Investments in the debt securities of corporations are principally in publicly-traded bonds. Mortgage-backed securities represented approximately 6.6% of the estimated market value of the Company's total invested assets at December 31, 1998. The Company's mortgage-backed securities portfolio consists entirely of U.S. government agency pass-through certificates. Currently, the Company does not own any collateralized mortgage obligations or non-agency pass-through securities. All of these U.S. government agency pass-through securities have an investment rating of AAA and are designated by the National Association of Insurance Commissioners ("NAIC") as Class 1 securities. Mortgage-backed securities investors are compensated primarily for prepayment risk rather than credit quality risk. During periods of significant interest rate volatility, the underlying mortgages may repay more quickly or more slowly than anticipated. If the repayment of principal occurs earlier than anticipated during periods of declining interest rates, investment income may decline due to the reinvestment of these funds at the lower current market rates. If the repayment of principal occurs later than anticipated during periods of increasing interest rates, the cost of funds to satisfy liabilities may increase due to the mismatching of assets and liabilities. The following table indicates by rating the composition of the Company's fixed maturity securities portfolio, excluding short-term investments and certificates of deposit, at December 31, 1998: COMPOSITION OF FIXED MATURITY SECURITIES BY RATING
Carrying Value (1) % ------------ -------- (in thousands) RATINGS (2) Investment grade: U.S. Government and agencies $ 19,886 16.2 AAA 2,289 1.9 AA 11,058 9.0 A 38,397 31.2 BBB 47,045 38.3 Non-Investment grade: BB 2,118 1.7 B and below 2,071 1.7 ------------ -------- Total fixed maturity securities $ 122,864 100.0 ============ ========
(1) At December 31, 1998, all of the Company's fixed maturity securities are classified as available-for-sale and are carried at estimated market value. Estimated market value represents the closing sales prices of marketable fixed maturity securities. (2) Ratings are the lower of those assigned primarily by Standard & Poor's and Moody's, when available, and are shown in the table using the Standard & Poor's rating scale. Unrated securities are assigned ratings based on the applicable NAIC designation or the rating assigned to comparable debt outstanding of the same issuer. NAIC 1 fixed maturity securities have been classified as "A" and NAIC 2 fixed maturity securities have been classified as "BBB". The NAIC assigns securities quality ratings and uniform prices called "NAIC Designations," which are used by insurers when preparing their annual statutory reports. The NAIC assigns designations to publicly-traded as well as privately-placed securities. The ratings assigned by the NAIC range from Class 1 (highest quality rating) to Class 6 (lowest quality rating). The following table summarizes the Company's fixed maturity securities according to NAIC Designations and Standard & Poor's ratings at December 31, 1998: NAIC DESIGNATIONS
Carrying Value (1) % ------------ -------- (in thousands) NAIC DESIGNATIONS (2) NAIC 1 (AAA, AA, A) $ 71,630 58.3 NAIC 2 (BBB) 47,045 38.3 NAIC 3 (BB) and below 4,189 3.4 ------------ -------- Total fixed maturity securities $ 122,864 100.0 ============ ========
(1) At December 31, 1998, all of the Company's fixed maturity securities are classified as available-for-sale and are carried at estimated market value. Estimated market value represents the closing sales prices of marketable fixed maturity securities. (2) Generally comparable to Standard & Poor's ratings. Comparisons between NAIC Designations and Standard & Poor's ratings are as published by the NAIC. The scheduled contractual maturities of the Company's fixed maturity securities, excluding short-term investments and certificates of deposit, at December 31, 1998 are shown in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. COMPOSITION OF FIXED MATURITY SECURITIES BY MATURITY
Carrying Value (1) % ------------ -------- (in thousands) SCHEDULED MATURITY Due in one year or less $ 1,889 1.5 Due after one year through five years 32,254 26.2 Due after five years through ten years 41,959 34.2 Due after ten years 38,652 31.5 Mortgage-backed securities 8,110 6.6 ------------ -------- Total fixed maturity securities $ 122,864 100.0 ============ ========
(1) At December 31, 1998, all of the company's fixed maturity securities are classified as available-for-sale and are carried at estimated market value. Estimated market value represents the closing sales prices of marketable fixed maturity securities. RESERVE POLICY The Company's reserves consist of two separate components: claim reserves and policy benefit reserves. Claim reserves are established by the Company for benefit payments which have already been incurred by the policyholder but which have not been paid by the Company. The Company's consulting actuary estimates these reserves based upon an analysis of claim inventories, loss ratios and historical claim payment studies. These estimates are developed in the aggregate for claims incurred (whether or not reported). Policy benefit reserves are established by the Company for benefit payments that have not been incurred but which are estimated to be incurred in the future. 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 the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. Except for purposes of reporting to insurance regulatory authorities and for tax filing, the Company's claim reserves and policy benefit reserves are determined in accordance with generally accepted accounting principles ("GAAP"). In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Company's policy benefit reserves, the Company relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. The Company's persistency rates have a direct impact upon its policy benefit reserves because the determinations for this reserve are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly. 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 claim and 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. The sharp increase in claim loss ratios experienced by the Company during the second and third quarters of 1997 were indicative of inadequate pricing in the Company's old Medical Expense and Medicare Supplement products. See ITEM 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition." 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 no 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, and absent materially adverse benefit experience, they are not generally adjusted. 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 (such as out-patient versus in-patient care) or prolong life expectancy. Changes in coverage provided by major medical insurers or government plans may also affect the adequacy of the Company's reserves if, for example, such developments had the effect of increasing or decreasing the incidence rate and per claim costs of occurrences against which the Company insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the Company needing to post additional reserves, which could have a material adverse effect upon its business, financial condition or results of operations. The Company's Insurance Subsidiaries are required to report their results of operations and financial position to state regulatory agencies based upon statutory accounting practices ("SAP"). Under SAP, certain assumptions used in determining the policy benefit reserves, such as claim costs and investment result assumptions, are often more conservative than those appropriate for use by the Company under GAAP. In particular, SAP interest rate assumptions for investment results are fixed by statute and are generally lower than those used by the Company under GAAP. Another significant difference is that under SAP, unlike GAAP, the Company is required to expense all sales and other policy acquisition costs as they are incurred rather than capitalizing and amortizing them over the expected life of the policy. The effect of this requirement is moderated by the allowance under SAP of an accounting treatment known as the "two year preliminary term" reserve valuation method. This reserve method allows the Company to defer any accumulation of policy benefit reserves until after the second policy year. The immediate charge off of sales and acquisition expenses and the sometimes conservative claim cost and other valuation assumptions under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce the Company's gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividend distributions from the Insurance Subsidiaries to Westbridge. See ITEM 7 - "Liquidity, Capital Resources and Statutory Capital and Surplus - Insurance Subsidiaries." REINSURANCE CEDED. As is customary in the insurance industry, the Company's Insurance Subsidiaries reinsure portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and coinsurance basis. 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, but the Company, in accordance with prevailing insurance industry practice, reports reserves and claims after adjustment for reserves and claims ceded to other companies through reinsurance. The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Coinsurance Agreement") with a reinsurer effective July 1, 1996 on the in force Cancer, Heart and Intensive Care business. The Coinsurance Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. On May 1, 1997, the Coinsurance Agreement was terminated and recaptured. Consistent with the terms of the agreement, the unpaid portion of the initial ceding commission allowance was repaid inclusive of interest at 15.0%. For the years ended December 31, 1997 and 1996, the amount repaid was approximately $8.6 million and $1.9 million, respectively. See NOTE 13 - "Reinsurance" and NOTE 15 "Extraordinary Item" to the Company's Consolidated Financial Statements. The Company generally does not cede risks associated with its Medicare Supplement products. However, 100% of the Company's risks under its Accidental Death policies currently in force are reinsured. The Company also reinsures its risks under the Medical Expense products on an excess of loss basis so that its maximum payment to any one beneficiary during any one-year period is limited ($100,000 in 1998) for any accident or illness. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance. NFL's retention limit is $25,000 per year, and $22,046 of premiums were paid to the reinsurer for the year ended December 31, 1998. No other life insurance products were reinsured during 1998, 1997 or 1996. 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 and expiration dates. ASSUMED. In the past, the Company has utilized coinsurance agreements to assume premiums and increase revenues. NFL and FLICA were party to such arrangements prior to NFL's acquisition of FHC. In 1996, prior to this acquisition, $4 million in premiums were assumed by NFL. Subsequent to the acquisition, those coinsurance arrangements were canceled. COMPETITION The accident and health insurance industry is highly competitive and includes a large number of insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines, favorable ratings from A.M. Best Company, Inc. ("A.M. Best") and larger staffs than the Company. The Company competes with other insurers to attract and retain the allegiance of its agents that, at this time, are responsible for a significant portion of the Company's revenues. Competitive factors applicable to the Company's business include product mix, policy benefits, service to policyholders and premium rates. The Insurance Subsidiaries are not currently rated with A.M. Best. The Company believes that its lack of an A.M. Best rating is not a significant factor affecting its ability to sell its products in the markets that it serves. Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield and HMOs, provide various alternatives for defraying hospitalization and medical expenses. Much of this insurance is sold on a group basis to employer sponsored groups. The federal and state governments also provide programs for the payment of the costs associated with medical care through Medicare and Medicaid. These major medical programs generally cover a substantial amount of the medical expenses incurred as a result of accidents or illnesses. The Company's Medical Expense products are designed to provide coverage which is similar to these major medical insurance programs but are sold primarily to persons not covered by an employer sponsored group. The Company's 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 those insurers providing major medical insurance. However, expansion of coverage by other insurers could adversely affect the Company's business, financial condition or results of operations. Medicare Supplement products are designed to supplement the Medicare program by reimbursing for expenses not covered by such program. To the extent that future government programs reduce participation by private entities in such government programs, the Company's business, financial condition or results of operations could be adversely affected. 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 accident and health insurance market for qualified, effective agents. The recruitment and retention of such agents is important to the success and growth of the Company's business. Management believes that the Company is competitive with respect to the recruitment and training of agents. However, there can be no assurance that the Company will be able to continue to recruit or retain qualified, effective agents. The inability of the Company to adequately recruit and retain agents could have a material adverse effect upon the Company's business, financial condition or results of operations. Managed health care organizations also operate in a highly competitive environment and in an industry that is currently subject to significant changes from business consolidations, legislative reform, aggressive marketing practices and market pressures. The Company's ability to increase its fee and service income by expanding its marketing of managed care and senior products underwritten primarily by unaffiliated HMOs and other managed care organizations may be adversely affected by the changes within this industry. REGULATION The Company and its Insurance Subsidiaries are subject to regulation and supervision in all jurisdictions in which they conduct business. In general, state insurance laws establish supervisory agencies with broad administrative powers relating to, among other things, the granting and revoking of licenses to transact business, regulation of trade practices, premium rate levels, premium rate increases, licensing of agents, approval of content and form of policies, maintenance of specified minimum statutory reserves and statutory capital and surplus, deposits of securities, form and content of required financial statements, nature of investments and limitations on dividends to stockholders. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders rather than to protect the interests of stockholders. The Insurance Subsidiaries' health insurance products are subject to rate regulation by state insurance departments, which generally require the maintenance of certain minimum loss ratios. The states in which the Company is licensed have the authority to change the minimum mandated statutory loss ratios to which the Company is subject, the manner in which these ratios are computed and the manner in which compliance with these ratios is measured and enforced. Most states in which the Company writes health insurance products have adopted the loss ratios recommended by the NAIC. The Company is unable to predict the impact of (i) any changes in the mandatory statutory loss ratios relating to products offered by the Company or (ii) any change in the manner in which these minimums are computed or enforced in the future. The Company has not been informed by any state that it does not meet mandated minimum ratios, and the Company believes that it is in compliance with all such minimum ratios. In the event the Company is not in compliance with minimum statutory loss ratios mandated by regulatory authorities, the Company may be required to reduce or refund premiums, which could have a material adverse effect on the Company's business, financial condition or results of operations. Similarly, the Company's ability to increase its premium rates in response to adverse loss ratios is subject to regulatory approval. Failure to obtain such approval could have a material adverse effect on the Company's business, financial condition and results of operations. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. It is not known whether the insurance departments of the state of domicile of the Company's Insurance Subsidiaries will adopt the Codification or whether those insurance departments will make any changes to that guidance. The Company has not estimated the potential effect of the Codification guidance if adopted. However, the actual effect of adoption could differ as changes are made to the Codification guidance, prior to its recommended effective date of January 1, 2001. 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 NAIC) 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 December 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 statutory 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 December 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 since 1997, material transactions are subject to the approval by the department of insurance in each domiciliary state. In December 1997, NFIC, in response to these losses as well as the projected inability to meet RBC requirements, took appropriate steps to voluntarily cease the sale and underwriting of new business. In the second quarter of 1998, AICT significantly reduced the level of sales and underwriting of new business. NFIC and AICT have also entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the TDI. The Company has no current plans to underwrite new products in NFIC. The Insurance Subsidiaries are subject to periodic examinations by state regulatory authorities as part of their routine regulatory oversight process. Mississippi is currently finalizing an examination of FLICA. In addition, Missouri is in the process of finalizing a market conduct examination of the Insurance Subsidiaries. Management does not expect the issuance of either examination report to have a material effect on the financial condition of the Company. Many states have enacted insurance holding company laws that require registration and periodic reporting by insurance companies within their jurisdictions. Such legislation typically places restrictions on, or requires prior notice or approval of, certain transactions within the holding company system, including, without limitation, dividend payments from insurance subsidiaries and the terms of loans and transfers of assets within the holding company structure. Generally, before the Company is permitted to market an insurance product in a particular state, it must obtain regulatory approval from that state and adhere to that state's insurance laws and regulations which include, among other things, specific requirements regarding the form, language, premium rates and policy benefits of that product. Consequently, although the Company's policies generally provide for the same basic types and levels of coverage in each of the states in which they are marketed, the policies are not precisely identical in each state or other jurisdiction in which they are sold. Such regulation may delay the introduction of new products and may impede, or impose burdensome conditions on, rate increases or other actions that the Company may wish to take in order to enhance its operating results. In addition, federal or state legislation or regulatory pronouncements may be enacted that may prohibit or impose restrictions on the ability to sell certain types of insurance products or impose other restrictions on the Company's operations. For example, certain states in which the Company does business have adopted NAIC model statutes and regulations relating to market conduct practices of insurance companies. Any limitations or other restrictions imposed on the Company's market conduct practices by the regulators of a state that has adopted the model statutes and regulations may also be imposed by the regulators in other states which have adopted such statutes and regulations. No assurances can be given that future legislative or regulatory changes will not adversely affect the Company's business, financial condition or results of operations. Four states, Connecticut, Massachusetts, New Jersey and New York, have adopted statutes or insurance department regulations that either prohibit sales of policies that offer only "specified or dread disease" coverage (such as that provided by certain of the Company's 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 that 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. Non-affiliated insurance company insolvencies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The incurrence and amount of such assessments may increase in the future without notice. The Company pays the amount of such assessments as they are incurred. Assessments that cannot be offset against future premium taxes are charged to expense. Assessments that qualify for offset against future premium taxes are capitalized and are offset against such future premium taxes. As a result of such assessments, the Company paid approximately $23,000 during the year ended December 31, 1998. Traditionally, the U.S. Government has not directly regulated the insurance business. However, the adoption of HIPAA, as well as other proposed federal initiatives, impacts the insurance business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance industry include controls on the cost of medical care, medical entitlement programs (e.g., Medicare), guaranteed renewability and portability of certain coverage, and minimum solvency requirements for insurers. HEALTH CARE REFORM Numerous proposals have been introduced in Congress and various state legislatures to reform the present health care system. Proposals have included, among other things, modifications to the existing employer-based insurance system, a quasi-related system of "managed competition" among health plans and a single-payer, public program. Most of these proposals are specifically directed at the individual and small group health care market, which is a significant portion of the Company's health business. At present, most health care reform, other than that related to the Medicare program, is taking place at the state level. A number of states have passed or are considering legislation that would limit the differentials in rates that insurers could charge between new business and renewal business with respect to similar demographic groups. State legislation also has been adopted or is being considered that would make health insurance available to all small groups by requiring coverage of all employees and their dependents, by limiting the applicability of pre-existing conditions exclusions, by requiring insurers to offer a basic plan exempt from certain mandated benefits as well as a standard plan, and by establishing a mechanism to spread the risk of high risk employees to all small group insurers. In 1996, Congress enacted HIPAA, also commonly referred to as the Kennedy-Kassenbaum Bill. HIPAA provisions are applicable to both insured and self-funded employer group coverages and include minimum standards for pre-existing condition exclusions, waiver of pre-existing condition exclusions for individuals meeting minimum prior coverage requirements and prohibition of health related exclusions of individuals from employer group coverage. HIPAA also provides guaranteed acceptance of small employers with 2 to 50 employees for insured coverage. In other respects, HIPAA's group and small group provisions are largely in line with state small group reform laws already enacted by the large majority of states. In the individual market, HIPAA requires guaranteed acceptance for eligible individuals moving out of group plans who have at least 18 months of prior coverage. However, most states have or are expected to amend their laws to alleviate any inconsistencies with the federal minimum standards. States which have not already enacted all of the HIPAA group and small group standards may enact state reforms consistent with HIPAA. The final outcome of state amendments or new legislation, as well as federal regulations addressing these provisions, cannot be predicted. The Company cannot predict what effect, if any, yet-to-be enacted health care legislation or proposals will have on the Company if and when enacted. The Company believes that the current political environment in which it operates will result in continued legislative scrutiny of health care reform and may lead to additional legislative initiatives. No assurance can be given that enactment of any federal and/or state health care reforms will not have a material effect on the Company's business, financial condition or results of operations. HOME OFFICE OPERATIONS The Company's operations are conducted primarily at its Fort Worth office (the "Home Office"). See ITEM 2 "Properties." The functions carried out at the Home Office include policy issue, underwriting, policyowner service, claims processing, agency service, and other administrative functions such as data processing, legal, accounting and actuarial. The Company's policy issue and underwriting departments review policy applications. Although industry practice does not require physical examinations and tests before a Medical Expense policy is issued, the Company has adopted more stringent underwriting practices for its new Medical Expense products by requiring a para-med examination or other medical tests, depending on the age of the applicant. In addition, the Company's underwriting personnel will generally telephone an applicant for a Medical Expense product to verify the information set forth in the policy application and the policy benefits being sold and will often contact the applicant's physician in the verification process. These verification telephone calls are recorded for the protection of the applicant and the Company. Applicants for the Company's Specified Disease products must certify in writing that they meet certain health standards established by the Company before the policy will be issued. The Company's policyowner service department and agency service department are responsible for responding to policyowner and agent requests for information or services. The claims processing department reviews benefit claims submitted by policyowners, determines the benefits payable and processes the claim payments. EMPLOYEES At December 31, 1998, the Company employed 388 persons. The Company has not experienced any work stoppages, strikes or business interruptions as a result of labor disputes involving its employees, and the Company considers its relations with its employees to be good. ITEM 2. PROPERTIES On May 1, 1998, the Company moved its principal offices from 777 Main Street, Fort Worth, Texas, to 110 West Seventh Street, Fort Worth, Texas. The lease for the new facility expires in April, 2003. Westbridge Printing Services, Inc. ("WPS"), the Company's wholly owned printing subsidiary which prints all policies, forms and brochures of the Insurance Subsidiaries, maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. The Company also leases certain sales offices for its affiliated marketing agencies in Arizona and California. The Company believes that the newly leased facilities will meet its existing needs and that the leases can be renewed or replaced on reasonable terms if necessary. ITEM 3. LEGAL PROCEEDINGS EMERGENCE FROM CHAPTER 11 CASE As more fully described in ITEM 1 - "Business," Westbridge's Plan was confirmed by the Bankruptcy Court on December 17, 1998 and, after the satisfaction of a number of conditions, the Plan became effective on March 24, 1999. Notwithstanding the confirmation and effectiveness of the Plan, the Bankruptcy Court continues to have jurisdiction to, among other things, resolve disputed prepetition claims against Westbridge, resolve matters related to the assumption, assumption and assignment, or rejection of executory contracts pursuant to the Plan, and to resolve other matters that may arise in connection with or relate to the Plan. Except as described below, provision was made under the Plan in respect of all prepetition liabilities of Westbridge. Pursuant to the Plan, Westbridge's obligations in respect of certain classes of disputed prepetition claims that may ultimately be allowed by the Bankruptcy Court would be satisfied via the issuance of New Common Stock. The Company is withholding 257,106 shares of the New Common Stock in a reserve account from which the settlement of any such outstanding claims would be satisfied under the Plan. The Company is disputing outstanding claims, which in the aggregate are less than $5.0 million. While there can be no assurance that the actual amounts of such disputed claims that are ultimately allowed by the Bankruptcy Court will not exceed the estimated amounts thereof, management does not expect that any variance between such actual and estimated amounts will have a material adverse effect on the Company's financial position. PUTATIVE CLASS ACTION COMPLAINT On December 17, 1997, a purported class action complaint, naming Westbridge, three former directors of Westbridge, and two underwriters of the Westbridge'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 alleged that Westbridge materially overstated its earnings due to the establishment of inadequate reserves for pending insurance claims. In October 1998, a preliminary settlement agreement was reached by and among the parties to the complaint. The final settlement agreement was approved by the Bankruptcy Court on December 17, 1998 and by the District Court pursuant to a final judgment entered on January 20, 1999. The settlement did not involve an admission of liability by any party. OTHER LEGAL PROCEEDINGS In the normal course of its business operations, the Company is involved in various claims and other business related disputes. In the opinion of management, the Company is not a party to any pending litigation the disposition of which would have a material adverse effect on the Company's business, financial position or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Plan and the related Disclosure Statement were transmitted to all impaired creditors and equity security holders of the Company along with ballots for the purpose of soliciting acceptances of the Plan. At a hearing to consider confirmation of the Plan, the Bankruptcy Court found that the Plan was accepted by holders of approximately 99.9%, in dollar amount, and 97.1%, in number of holders, of general unsecured claims and Convertible Notes held by creditors that timely voted to accept or reject the Plan, and that the Plan was accepted by the holders of approximately 76.9% and 97.5%, respectively, in amount of shares held by Old Preferred Stock and Old Common Stock holders that timely voted to accept or reject the Plan. The ballots contained no provision for abstentions. As a result, ballots that were not returned and invalid ballots had no effect on the outcome of the vote on the Plan. A summary of the valid ballots cast is as follows:
Ballots Ballots Accepting Plan Rejecting Plan ------------ ------------ Holders of general unsecured claims and Convertible Notes 103 3 Holders of Old Preferred Stock interests 5 2 Holders of Old Common Stock interests 490 26
EXECUTIVE OFFICERS OF REGISTRANT The Company's executive officers are as follows:
Years with Officer Name Age Position with the Company the Company - - -------------------- ------- ----------------------------------------- -------------- Patrick J. Mitchell 40 Chairman of the Board and Chief Executive 3 Officer Patrick H. O'Neill 48 Executive Vice President, General Counsel 1 and Secretary
Mr. Mitchell has served as Chairman of the Board and Chief Executive Officer since September 1998. He has also been serving as President, Chief Operating Officer, Chief Financial Officer, Treasurer and Director since October 1997. Mr. Mitchell had served as Executive Vice President, Chief Financial Officer and Treasurer since May 1996 and joined the Company in August 1995 as Vice President, Chief Financial Officer and Treasurer. Mr. Mitchell is also the Chairman of the Board, Chief Executive Officer, President and Director of NFL, NFIC, AICT and FLICA. Prior to joining Westbridge, he served as Vice President, Finance for Bankers Life and Casualty Company. From 1989 to 1993, Mr. Mitchell was Assistant Vice President, Finance for Reliance Standard Life Insurance Company. Mr. O'Neill joined the Company in September 1997 as Senior Vice President, General Counsel and Secretary. In November 1997, Mr. O'Neill was promoted to Executive Vice President. In addition, Mr. O'Neill serves as Senior Vice President, General Counsel, Secretary and Director of NFL, NFIC, AICT and FLICA. Prior to joining Westbridge and since 1990, Mr. O'Neill served as founder and President of the Law Offices of Patrick H. O'Neill, P.C. Prior to 1990, Mr. O'Neill was a partner in the Law Firm of Camp, Jones, O'Neill, Hall & Bates. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK-HOLDER MATTERS COMMON STOCK Pursuant to the Plan, on the Effective Date (i) 6,500,000 shares of New Common Stock and 971,266 New Warrants were delivered to LaSalle National Bank, as exchange agent, for distribution as described above (see ITEM 1 "Business"), and (ii) 23,257 shares of New Preferred Stock were delivered to the CSFB Affiliate. The New Common Stock, the New Warrants and 8,090 shares of the New Preferred Stock were issued without registration under the Securities Act of 1933, as amended (the "Securities Act") pursuant an exemption granted under Section 1145 of the Bankruptcy Code, and the remaining 15,167 shares of New Preferred Stock were issued and sold to the CSFB Affiliate in a private placement, exempt from the registration requirement under the Securities Act in reliance upon the provisions of Regulation D promulgated thereunder. The proceeds from the sale of the New Preferred Shares pursuant to Regulation D, totaling $15.2 million, were distributed to holders of Senior Notes (other than CSFB) pursuant to the Plan. Each share of New Preferred Stock is convertible at any time into 204.8897 shares of New Common Stock at an initial conversion price of $4.88 per share, subject to customary anti-dilution adjustments. The New Warrants are exercisable at any time prior to March 24, 2004 for an aggregate of 971,266 shares of New Common Stock at an initial exercise price of $9.04 per share, subject to customary anti-dilution adjustments. The New Common Stock and New Warrants are expected to be quoted on the over-the-counter bulletin board ("OTC Bulletin Board") and application has been made to list the New Common Stock and New Warrants on the NASDAQ SmallCap Market. Based on the distributions made pursuant to the Plan, there were 6,500,000 shares of New Common Stock outstanding as of March 24, 1999. Until September 16, 1998, Westbridge's Old Common Stock was traded on the New York Stock Exchange ("NYSE"). As a result of the Chapter 11 filing, Westbridge's Old Common Stock was delisted from the NYSE and trading commenced on the OTC Bulletin Board. The high and low stock price listed for Westbridge's Old Common Stock reflects the OTC Bulletin Board closing bid prices from September 25, 1998, to March 23, 1999. The bid prices, as stated, represent inter-dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
HIGH LOW 1999 First Quarter (through March 23, 1999) 0.344 0.172 1998 Fourth Quarter 0.438 0.016 Third Quarter 0.563 0.016 Second Quarter 0.875 0.313 First Quarter 0.938 0.438 1997 Fourth Quarter 4.938 0.375 Third Quarter 10.625 4.563 Second Quarter 10.125 8.875 First Quarter 12.250 9.500
DIVIDEND POLICY The Company did not pay any cash dividends on its Old Common Stock and does not anticipate declaring or paying cash dividends on its New Common Stock in the foreseeable future. For information concerning statutory limitations on the payment of dividends to Westbridge by the Insurance Subsidiaries and further discussion of the Company's results of operations and liquidity, see ITEM 7 "Management's Discussion and Analysis of Results of Operations and Financial Condition", ITEM 1 - "Business - - -Regulation", and NOTE 11 - "Statutory Capital And Surplus" to the Company's Consolidated Financial Statements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information set forth below was selected or derived from the Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with ITEM 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Consolidated Financial Statements of the Company and related notes.
December 31, --------------------------------------------------------------------------------- 1998 1997 1996 (1) 1995 1994 (2) ------------- -------------- ------------ ------------ ------------- (in thousands, except share data) STATEMENT OF OPERATION DATA: Premiums $ 135,717 $ 161,097 $ 156,780 $ 120,093 $ 98,703 Total revenues 166,061 188,904 175,146 130,032 106,546 Benefits and claims 99,419 136,866 94,187 70,465 53,623 Total expenses 188,115 298,309 162,549 121,836 97,702 Provision (benefit) for income taxes 231 (13,268) 4,410 2,813 2,764 Extraordinary loss, net of income tax - 1,007 - 407 - Net (loss) income (22,285) (97,144) 8,261 5,324 6,425 Preferred stock dividends 520 1,572 1,650 1,650 1,190 (Loss) income applicable to common stockholders $ (22,805) $ (98,716) $ 6,611 $ 3,674 $ 5,235 EARNINGS PER SHARE: Basic $ (3.43) $ (16.07) $ 1.11 $ 0.64 $ 1.21 Diluted $ (3.43) $ (16.07) $ 0.97 $ 0.63 $ 1.04 BOOK VALUE PER SHARE: Basic $ (8.82) $ (7.33) $ 7.93 $ 7.14 $ 5.95 Diluted (3) $ (8.82) $ (7.33) $ 8.07 $ 7.50 $ 6.90 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 6,640,000 6,143,000 5,978,000 5,698,000 4,335,000 Diluted 6,640,000 6,143,000 8,477,000 5,829,000 6,185,000 BALANCE SHEET DATA: Total cash and invested assets $ 131,708 $ 148,442 $ 103,218 $ 111,516 $ 108,838 Total assets 169,741 202,856 220,716 200,999 187,581 Policy liabilities 97,987 107,595 93,390 85,683 104,280 Notes payable 95,715 102,547 40,560 35,071 24,665 Total liabilities 219,886 229,274 152,813 138,194 141,226 Redeemable preferred stock (4) 11,935 19,000 20,000 20,000 20,000 Stockholders' (deficit) equity (62,080) (45,418) 47,903 42,805 26,355
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996. (2) Includes operations of NFIC and AICT from April 12, 1994. (3) Calculated by adding the redeemable preferred stock balance to stockholders' equity and dividing the resultant sum by the period-end shares outstanding plus the number of common shares issuable upon conversion of the redeemable preferred stock as if converted at the end of the period. (4) At December 31, 1998 consists of 11,935 shares of Westbridge's Old Preferred Stock, which were convertible, at the option of the holders thereof, into an aggregate of 1,419,144 shares of Old Common Stock at a conversion price of $8.41 per share of Old Common Stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION KEY EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASE IN SEPTEMBER 1998 INCREASED CLAIM LOSS RATIOS During the second and third quarters of 1997, the Company's Insurance Subsidiaries experienced an increase in claim loss ratios on various Medical Expense and Medicare Supplement products. Two independent reviews of the Company's claim reserves were performed as of September 30, 1997 on the Company's old lines of insurance business. Additionally, an independent benefit analysis of claims was completed, which indicated that significant rate increases would be required to offset the adverse claims experience. During the months prior to the commencement of the Chapter 11 Case in September 1998, the Insurance Subsidiaries continued to experience adverse loss ratios and declining persistency on certain old Medical Expense and Medicare Supplement products. DETERMINATION OF PREMIUM DEFICIENCY Also during 1997, policy persistency declined in connection with the implementation of certain rate increases together with intensified competitor solicitation of the Company's policyholders. These events, including increased claim loss ratios, affected the future profit margins available to absorb amortization of Deferred Policy Acquisition Costs ("DPAC"). As a result of these adverse changes, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter of 1997. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency existed for certain old lines of business as of December 31, 1997. A premium deficiency occurs when the projected present value of future premiums associated with these policies will not be adequate to cover the projected present value of future payments for benefits and related amortization of DPAC. GAAP requires the immediate recognition of a premium deficiency by charging the unamortized DPAC to expense. Accordingly, for the quarter and year ended December 31, 1997, the Company recorded a non-cash charge to expense of approximately $65.0 million and incurred a significant loss for the year ended December 31, 1997. This adjustment had no impact on the Company's cash position at December 31, 1997 nor did it affect the statutory capital and surplus of the Insurance Subsidiaries. The Insurance Subsidiaries continued to experience adverse loss ratios and declining persistency on such old Medical Expense and Medicare Supplement products in the months prior to the commencement of the Chapter 11 Case in September 1998, although the loss ratios for the third quarter of 1998 reflected an improvement over the first and second quarters of 1998. As a result of these factors, the Company undertook a further revaluation of the recoverability of DPAC in the third quarter of 1998. Based on the results of this review, the Company determined that an additional premium deficiency existed and recorded a non-cash charge to expense of approximately $5.0 million for the quarter and nine months ended September 30, 1998. This adjustment had no impact on the Company's cash position or on the statutory capital and surplus of the Insurance Subsidiaries as of September 30, 1998. FILING OF CHAPTER 11 CASE The increase in claim loss ratios resulted in significant cash contributions by Westbridge to its Insurance Subsidiaries beginning in the third quarter of 1997, which threatened the Company's ability to meet its interest and dividend payments. In November 1997, the Company suspended its payment of interest and dividends. On September 16, 1998, Westbridge filed the Chapter 11 Case in the Bankruptcy Court for the District of Delaware, along with the Disclosure Statement and the Plan which culminated months of negotiations between Westbridge and an ad hoc committee of holders of its Senior Notes and its Convertible Notes. The Disclosure Statement and the Plan were amended on October 28, 1998 and the Disclosure Statement was approved by entry of an order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became effective on March 24, 1999. Under the Plan, among other things, the Senior Notes, the Convertible Notes, the Old Preferred Stock, the Old Common Stock and all outstanding options and warrants were canceled, certain prepetition claims were discharged and new equity interests were issued. (See ITEM 1 - "Business") STRATEGIC INITIATIVES As a result of the Company's poor financial performance in 1997, current management has completed or is working toward completing the following strategic initiatives designed to restore profitability: CHANGE IN MANAGEMENT STRUCTURE AND CORPORATE OVERHEAD EXPENSE REDUCTIONS: In the fourth quarter of 1997, the Company announced the termination of approximately 25 senior officers, managers and other employees in order to create a new management framework focused on correcting the problems of the past and restoring the Company to profitability. In addition, the Company initiated other efforts to reduce corporate overhead expenses by completing the relocation of its corporate headquarters in May 1998. The changes effected in the fourth quarter of 1997 and the relocation of corporate headquarters will result in considerable annual savings to the Company. In addition, Westbridge Management Corp., an indirect wholly owned subsidiary, and the Insurance Subsidiaries entered into an Administrative Service and Management Agreement dated as of March 1, 1998, in an effort to avoid duplication of costs, to increase efficiency, and to otherwise reduce common expenses in equipment, office space, personnel, data processing and information system services, as well as to provide other centralized management and administrative services for the Insurance Subsidiaries. PRODUCT REVISION AND NEW PRODUCT DEVELOPMENT: The Company introduced a new Medical Expense product during the first quarter of 1998. Accordingly, management has focused on providing a reasonable level of policy benefits in relation to premiums and on reducing first-year commission rates on all of its Medical Expense products in order to enhance overall profitability of the business. REVISED MARKETING STRUCTURE: In addition to commission reductions, the marketing structure was completely revised to consolidate fragmented agency operations into a single, career agency force. The Company believes that this restructuring has resulted in better deployment of marketing resources and stronger controls over the Company's distribution channel. IMPLEMENTATION OF RATE INCREASES AND PRODUCT CANCELLATIONS: As indicated above, due to the adverse loss ratio development in the Company's old Medical Expense and Medicare Supplement lines of business, the Company has requested rate increases on those lines of business in order to mitigate the effect of such claims experience. In addition, consistent with federal and state law, the Company is pursuing the cancellation of certain blocks of policy forms that have irreversible excessive loss ratios. POLICYHOLDER CONSERVATION: The Company has also implemented a detailed policyholder conservation program designed to mitigate the possible impact of adverse selection. As indicated above, the Company suffered declining persistency resulting from increased competitor solicitation of its policyholders, as well as from the implementation of rate increases. The Company is working on several fronts to retain a loyal and profitable base of satisfied policyholders. REPLACEMENT OF CLAIMS AND POLICYHOLDER ADMINISTRATION DATA PROCESSING SYSTEMS: The Company is working toward a replacement of its claims and policyholder administration data processing systems during 1999. Not only will this data processing system replacement ensure that the Company is Year 2000 compliant, but resulting system efficiencies will allow the Company to further reduce and control its overhead expense levels. 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 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 under the Credit Agreement. Prior to the filing of the Chapter 11 Case, Westbridge was obligated to pay interest on its Senior Notes and Convertible Notes, and dividends on its Old Preferred Stock if, and when, declared by the Board of Directors. As of the Effective Date, the Company is obligated to pay dividends on its New Preferred Stock, when, as and if declared by the Board of Directors. Dividends on the New Preferred Stock accrue at an annual rate of $102.50 per share and are payable annually. The Company may pay dividends on the New Preferred in cash or in additional shares of New Preferred Stock having an aggregate liquidation preference equal to the amount of dividends being declared and paid. The Company expects to pay such dividends by issuing additional shares of New Preferred Stock for the foreseeable future. Fee and service income is generated from (i) commissions received by the Company for sales of managed care and senior products underwritten primarily by unaffiliated 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 GAAP, 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. The 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 is 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. See "Key Events - Determination of Premium Deficiency". 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 insurance policies from American Integrity Insurance Company ("AII"), Life and Health Insurance Company of America ("LHI"), Dixie National Life Insurance Company ("DNL"), NFIC, AICT and FLICA. PREMIUMS. The following table shows the premiums, in thousands, received by the Company as a result of direct sales and acquisitions. Certain reclassifications have been made to 1997 and 1996 amounts in order to conform to 1998 presentation. Premiums (1) ------------------------------ Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Company-issued policies: First-year premiums $ 18,847 $ 37,104 $ 59,937 Renewal premiums 77,230 78,261 44,607 -------- -------- -------- Total company-issued policy premiums 96,077 115,365 104,544 -------- -------- -------- Acquired policies: AII 6,127 7,179 8,364 LHI 1,345 1,533 1,820 DNL 2,619 2,827 2,974 NFIC and AICT 18,607 20,757 24,508 FLICA 10,011 12,605 14,560 Other 931 831 10 -------- -------- -------- Total acquired policy premiums 39,640 45,732 52,236 -------- -------- -------- Total Premiums $135,717 $161,097 $156,780 ======== ======== ======== (1) For a breakdown of premiums by product line, see ITEM 1 - "Business-Product Lines." 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. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 PREMIUMS. Premiums decreased $25.4 million, or 15.8%, from $161.1 million to $135.7 million as a result of declining persistency of in force policies and a reduction in the Company's marketing results. This decrease resulted from a decrease in first-year premiums from Company-issued policies of $18.2 million, or 49.1%, a decrease in renewal premiums from Company-issued policies of $1.1 million, or 1.4%, a decrease in first-year premiums from acquired policies of $0.5 million, or 61.0%, and a decrease in renewal premiums from acquired policies of $5.6 million, or 12.4%. The decrease in first-year premiums from Company-issued policies was attributable to a decrease in Medical Expense premiums of $11.1 million, or 41.2%, a decrease in Medicare Supplement premiums of $7.3 million, or 83.4%, and a decrease in other premiums of $0.1 million, or 75.5%, and was offset by an increase in Specified Disease premiums of $0.3 million, or 30.4%. The decrease in renewal premiums from Company-issued policies was attributable to a decrease in Medicare Supplement premiums of $4.1 million, or 15.1%, and was offset by an increase in Medical Expense premiums of $1.2 million, or 3.1%, and an increase in Specified Disease premiums of $1.8 million, or 14.8%. The decrease in first-year premiums from acquired policies was primarily attributable to a decrease of $0.5 million, or 61.0%, from the policies acquired from FLICA. The decrease in renewal premiums from acquired policies was attributable to a decrease of $2.2 million, or 10.5%, from the policies acquired in the NFIC and AICT acquisition, a decrease of $1.9 million, or 16.2%, from the policies acquired from FLICA, and a decrease of $1.5 million, or 12.0%, from the policies acquired from AII and other acquisitions. NET INVESTMENT INCOME. Net investment income increased $1.0 million, or 9.1%, from $11.0 million to $12.0 million for the year ended December 31, 1998, related to agents' debit balances. FEE AND SERVICE INCOME. Fee and service income decreased $0.5 million, or 3.2%, from $16.7 million to $16.2 million for the year ended December 31, 1998. The Company's sales of unaffiliated managed care and senior products were lower in 1998 than 1997. BENEFITS AND CLAIMS. During the year ended December 31, 1998, the Insurance Subsidiaries continued to experience adverse loss ratios and declining persistency on certain old Medical Expense and Medicare Supplement products. The Insurance Subsidiaries have developed new insurance products with more stringent underwriting procedures and lower agent commissions. In addition, the Insurance Subsidiaries are implementing rate increases to the extent approved by state regulatory authorities or offering higher deductible benefit options on certain old lines of business in order to mitigate the effect of adverse claims experience on such old lines. The Insurance Subsidiaries have also implemented a policyholder retention program designed to mitigate the impact of declining persistency on such old lines receiving rate increases. However, the Company expects that the Insurance Subsidiaries will continue to incur operating losses (i) until such time as the necessary rate increases can be fully implemented and realized, and (ii) until sales of new products reach targeted production levels. There can be no assurance that the full extent of such rate increase requests will be approved, that the impact of these rate increases will result in profitability on such old lines, or that targeted production levels will be reached and sustained. Benefits and claims expense decreased $37.5 million, or 27.4%, from $136.9 million to $99.4 million. This decrease was attributable to the decline in premium revenue during 1998 and to the significant strengthening of claim reserves during the second and third quarters of 1997 as a result of substantial increases in claim loss ratios on certain Medical Expense and Medicare Supplement products. AMORTIZATION OF DPAC. The Company recognized a $5.0 million non-cash charge to write off unrecoverable DPAC during the third quarter of 1998 and recognized a $65.0 million non-cash charge to write off unrecoverable DPAC during the fourth quarter of 1997. See "Key Events - Determination of Premium Deficiency." As a result, the Company is currently recording commission expense on such old lines of business that would ordinarily be deferred and amortized as a component of DPAC. For comparative purposes, current period DPAC amortization is lower than prior periods and commission expense is higher than prior periods. Amortization of DPAC decreased $26.5 million, or 85.9%, from $30.9 million to $4.4 million. This variance was attributable to decreases of $18.0 million, $7.9 million, $0.2 million, and $0.4 million, from Company-issued Medical Expense products, Medicare Supplement products, Specified Disease products and acquired policies, respectively. COMMISSIONS. Commissions increased $13.3 million, or 80.1%, from $16.7 million to $30.0 million. This variance was attributable to a decrease in the commissions that would ordinarily be deferred and amortized as a component of DPAC and an increase in the amounts that are being expensed as commissions on a current basis. The increase was attributable to an increase in commissions of $13.2 million on Company-issued policies and $0.9 million, or 8.6%, on sales of unaffiliated insurance products, and was offset by a decrease in commissions on sales of acquired policies of $0.8 million, or 16.0%. GENERAL AND ADMINISTRATIVE EXPENSES. For the year ending December 31, 1998, general and administrative expenses decreased $3.3 million, or 10.5%, from $31.4 million to $28.1 million. These decreases were primarily attributable to corporate overhead reduction initiatives that were implemented beginning in the fourth quarter of 1997. RECOGNITION OF PREMIUM DEFICIENCY. During the third quarter of 1998, the Company recorded a non-cash charge to expense of approximately $5.0 million compared to a $65.0 million premium deficiency charge recognized in the fourth quarter of 1997. This adjustment has no impact on the Company's cash position and does not impact the statutory capital and surplus of the Insurance Subsidiaries. See "KEY EVENTS - Determination of Premium Deficiency". REORGANIZATION EXPENSE. The Company was responsible for paying the fees of certain professional advisors in connection with the Chapter 11 Case. During the year ended December 31, 1998, the Company incurred approximately $9.2 million in expense related to these efforts. During the year ended December 31, 1997, the Company incurred approximately $4.4 million in reorganization expense related to the fees of certain professional advisors and to an internal reorganization of management. TAXES, LICENSES AND FEES. Taxes, licenses and fees decreased $0.8 million, or 13.3%, from $6.0 million to $5.2 million for the year ended December 31, 1998. These decreases are attributable to the declining premium base for which premium taxes are levied. INTEREST EXPENSE. Interest expense decreased $0.3 million, or 4.2%, from $7.1 million to $6.8 million for the year ended December 31, 1998. Commensurate with the filing of the Chapter 11 Case, interest on the Company's Convertible Notes ceased to accumulate. Accordingly, pre-petition non-cash accrued interest totaled approximately $7.3 million on such Convertible Notes as of December 31, 1998. Under the terms of the Plan, interest on the Company's Senior Notes continued to accrue post-petition at the rate of 11% per annum through the Effective Date. Accordingly, pre-petition non-cash accrued interest totaled approximately $2.1 million and post-petition non-cash accrued interest totaled approximately $0.6 million on such Senior Notes for the year ended December 31, 1998. During 1997, interest expense was computed from the date of the issuance of the Company's Convertible Notes in the second quarter of 1997. PROVISION FOR INCOME TAXES. The change in the provision for income taxes during 1998 is directly attributable to the net loss recorded by the Company for the year ended December 31, 1998. As a result, net operating loss carryforwards ("NOLs") were 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. Accordingly, 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 the year ended December 31, 1998. See NOTE 10 - "Income Taxes" to the Company's Consolidated Financial Statements. EXTRAORDINARY ITEM. During the second quarter ended June 30, 1997, the Company recognized an extraordinary loss on the early extinguishment of debt in the amount of $1.0 million, net of taxes. This extraordinary charge was related to the termination and recapture of a block of reinsured policies and the recognition of unamortized financing fees associated with the prepayment and refinancing of the Company's revolving credit facility. PREFERRED STOCK DIVIDENDS. Commensurate with the filing of the Chapter 11 Case, dividends on the Company's Old Preferred Stock ceased to accumulate. Accordingly, the Company recorded approximately $1.3 million of pre-petition non-cash accrued dividends on such Old Preferred Stock for the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 PREMIUMS. Premiums increased $4.3 million, or 2.7%, from $156.8 million to $161.1 million. This increase resulted from an increase in renewal premiums from Company-issued policies of $33.7 million, or 75.5%, and was offset by a decrease in renewal premiums from acquired policies of $5.4 million, or 10.7%, a decrease in first-year premiums from Company-issued policies of $22.8 million, or 38.0% and a decrease in first-year premiums from acquired policies of $1.2 million, or 61.4%. The increase in renewal premiums from Company-issued policies was attributable to an increase of $20.8 million, or 118.9% in Medical Expense premiums, an increase of $13.0 million, or 91.9% in Medicare Supplement premiums, an increase in other premiums of $0.2 million, or 50.0%, and was offset by a decrease of $0.3 million, or 2.1%, in Specified Disease premiums. The decrease in renewal premiums from acquired policies was attributable to a decrease of $3.7 million, or 15.2%, from the policies acquired in the NFIC and AICT acquisition, a decrease of $0.7 million, or 5.3%, from the policies acquired from AII, LHI and DNL, and a decrease of $1.0 million, or 7.9%, from the policies acquired in the FLICA acquisition. The decrease in first-year premiums from Company-issued policies was attributable to a decrease of $13.4 million, or 33.1% in Medical Expense premiums, a decrease of $9.2 million, or 51.1% in Medicare Supplement premiums, and a decrease of $0.2 million, or 50.0%, in other premiums. The decrease in first-year premiums from acquired policies was attributable to a decrease of $1.2 million, or 60.0%, from the policies acquired in the FLICA acquisition. NET INVESTMENT INCOME. Net investment income increased $2.3 million, or 26.4%, from $8.7 million to $11.0 million. 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. FEE AND SERVICE INCOME. Fee and service income increased $7.2 million, or 75.8%, from $9.5 million to $16.7 million. The increase was primarily due to an increase of $6.4 million, or 81%, relating to commissions on managed care product sales earned by the Company's agency operations and an increase of $0.8 million, or 47.1%, in other fees. BENEFITS AND CLAIMS. Benefits and claims expense increased $42.7 million, or 45.3%, from $94.2 million to $136.9 million. This increase was attributable to an increase in benefits and claims expense from Company-issued and acquired policies of $39.2 million and $3.5 million, or 65.7% and 10.1%, respectively. The increase in benefits and claims expense from Company-issued policies was primarily attributable to an increase of $31.1 million, or 115.2%, from Medical Expense products, an increase of $6.4 million, or 25.3%, from Medicare Supplement products, an increase of $2.2 million, or 36.7%, from Specified Disease products, and was offset by a decrease of $0.5 million, or 35.7% from other products. The increase in benefits and claims expense from acquired policies was primarily attributable to an increase of $2.9 million, or 72.5%, from the policies acquired in the FLICA acquisition, an increase of $0.3 million, or 1.4%, from the policies acquired in the NFIC and AICT acquisition, and an increase of $0.3 million, or 3.1% from the policies acquired from AII, LHI and DNL. During the second and third quarters of 1997, the Company's Insurance Subsidiaries experienced a substantial increase in claim loss ratios on certain Medical Expense and Medicare Supplement products. Independent reviews of the Company's claim reserves were performed as of September 30, 1997. Additionally, an independent benefit analysis of claims was completed which indicated that significant rate increases would be required to offset the current adverse claims experience. However, until such time as the necessary rate increases and benefit modifications can be fully implemented, the Company expects that it will continue to incur operating losses. There can be no assurance that the full extent of such rate increase requests will be approved. AMORTIZATION OF DPAC. Amortization of DPAC increased $8.0 million, or 34.9%, from $22.9 million to $30.9 million. This increase was attributable to an increase in amortization of DPAC from Company-issued policies of $10.9 million, or 63.7%, and was offset by a decrease of $2.9 million, or 50.0%, from acquired policies. The increase in amortization of DPAC from Company-issued policies was primarily attributable to an increase of $7.6 million and $3.9 million, or 71.0% and 97.5%, from Medical Expense and Medicare Supplement products, respectively, and was offset by a decrease of $0.5 million, or 23.8% from Specified Disease products and a decrease of $0.1 million from other products. The decrease in amortization of DPAC from acquired policies was primarily attributable to a decrease of $2.4 million, or 104.3%, from the policies acquired in the NFIC and AICT acquisition, a decrease of $0.7 million, or 43.8%, from the policies acquired from AII, LHI and DNL, and was offset by an increase of $0.2 million, or 10.5%, from the policies acquired in the FLICA acquisition. COMMISSIONS. Commissions increased $8.8 million, or 111.4%, from $7.9 million to $16.7 million. This increase was attributable to an increase of $4.1 million in commissions on sales of Company-issued policies and an increase of $5.6 million, or 114.3%, on sales of non-affiliated, managed care insurance products, and was offset by a decrease of $0.9 million, or 14.8%, from acquired policies. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $4.3 million, or 15.9%, from $27.1 million to $31.4 million. This increase was primarily attributable to increases in the allowance for doubtful agent receivables and a change in estimate for the recognition of deferred compensation expense. In addition, fewer policies were eligible for deferral of acquisition costs as a result of the reduction in the Company's marketing efforts for its underwritten insurance products beginning in the second quarter of 1996. REORGANIZATION EXPENSE. As more fully described in "Key Events", in response to the losses sustained by the Company in the second and third quarters of 1997, the Company hired a financial advisor to explore its strategic alternatives. The Company was responsible for paying the fees of its financial advisor and legal counsel and agreed to pay the fees of the financial advisors and legal counsel for an ad hoc creditors' committee in connection with the efforts to formulate and evaluate transactional alternatives. During 1997, the Company incurred approximately $1.4 million in expenses during the fourth quarter of 1997 related to these efforts. In addition, the Company incurred approximately $3.0 million during the second quarter of 1997 in connection with a non-recurring internal reorganization. RECOGNITION OF PREMIUM DEFICIENCY. As more fully described in "Key Events," in response to the significant increases in loss ratios on the Company's Medical Expense and Medicare Supplement products and the decline in policy persistency, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency for certain lines of business existed as of December 31, 1997. In this connection, for the quarter and year ended December 31, 1997, the Company recorded a non-cash charge to expense of approximately $65.0 million. This adjustment had no impact on the Company's cash position at December 31, 1997 and did not impact the statutory capital and surplus of the Insurance Subsidiaries. TAXES, LICENSES AND FEES. Taxes, licenses and fees remained relatively unchanged from the prior year at $6.0 million as increases in premium taxes due to higher premium levels in 1997 were offset by decreases in state levied fees and special assessments during the same period. INTEREST EXPENSE. Interest expense increased $2.6 million, or 57.8%, from $4.5 million to $7.1 million. This increase is attributable to the accrued interest expense related to the issuance of $70.0 million of the Company's Convertible Notes. (BENEFIT FROM) PROVISION FOR INCOME TAXES. During 1996, the provision for income taxes was calculated by applying the 35% statutory federal tax rate to the Company's pre-tax income for the year ended December 31, 1996. The change in the (benefit from) provision for income taxes during 1997 is directly attributable to the net loss recorded by the Company for the year ended December 31, 1997. This net loss generated a significant amount of net operating loss carryforwards ("NOLs") 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 recorded a valuation allowance that significantly reduced its benefit from income taxes from the amount that would have been derived by applying the 35% statutory federal tax rate to the Company's pre-tax loss for the year ended December 31, 1997. See NOTE 10 - "Income Taxes" to the Company's Consolidated Financial Statements. EXTRAORDINARY ITEM. The Company recognized an extraordinary loss on the early extinguishment of debt in the amount of $1.0 million, net of taxes, for the year ended December 31, 1997. This extraordinary charge is comprised of (i) $0.4 million, net of taxes, related to the termination and recapture of a block of reinsured policies and (ii) $0.6 million, net of taxes, related to the recognition of unamortized financing fees associated with the repayment and refinancing of the Company's revolving credit facility with Fleet National Bank. LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS THE COMPANY The Company's principal assets consist of the capital stock of its operating subsidiaries and invested assets. Accordingly, the Company's sources of funds are comprised of dividends from its operating subsidiaries, advances and management fees from non-insurance company subsidiaries, and tax payments under a tax sharing agreement among the Company and its subsidiaries. In addition, for the year ended December 31, 1998, Westbridge made capital contributions totaling approximately $5.7 million to its Insurance Subsidiaries. As of December 31, 1998, Westbridge had approximately $10.3 million in unrestricted cash and invested assets. 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 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 1999, 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 excluding 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 1999 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 1999 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ended December 31, 1998. Generally, all states require insurance companies to maintain statutory 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 1998, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future. INSURANCE SUBSIDIARIES The primary sources of cash for the Insurance Subsidiaries are premiums and income on invested assets. Additional cash is periodically provided by capital contributions from the Company 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 year ended December 31, 1998, the Insurance Subsidiaries continued to experience adverse loss ratios and declining persistency on certain old Medical Expense and Medicare Supplement products. The Insurance Subsidiaries have developed new insurance products with more stringent underwriting procedures and lower agent commissions. In addition, the Insurance Subsidiaries are implementing rate increases to the extent approved by state regulatory authorities or offering higher deductible benefit options on certain old lines of business in order to mitigate the effect of adverse claims experience on such old lines. The Insurance Subsidiaries have also implemented a policyholder retention program designed to mitigate the impact of declining persistency on such old lines receiving rate increases. However, the Company expects that the Insurance Subsidiaries will continue to incur operating losses on these old lines of business (i) until such time as the necessary rate increases can be fully implemented and realized, and (ii) until sales of new products reach targeted production levels. There can be no assurance that the full extent of such rate increase requests will be approved, that the impact of these rate increases will result in profitability on such old lines, or that targeted production levels will be reached and sustained. For the year ended December 31, 1998, the Insurance Subsidiaries received capital contributions totaling approximately $5.7 million from Westbridge. To the extent that the Insurance Subsidiaries experience further statutory operating losses, additional capital may be required. 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 NAIC) 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 December 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 statutory 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 December 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, material transactions are subject to approval by the department of insurance in each domiciliary state. 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. CONSOLIDATED The Company's consolidated net cash used for operations totaled $8.0 million, $20.0 million and $10.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The variance in the amount of net cash used for operations between 1998 and 1997 was primarily the result of (a) amounts remitted to reinsurers during 1997 terminating certain reinsurance arrangements, and (b) the reduction in the Company's marketing results for its underwritten products, which resulted in a decrease in net cash used for operations related to the funding of agents' debit balances. The variance in the amount of net cash used for operations between 1997 and 1996 was primarily the result of (a) increases in the claim loss ratios of the Company's Medical Expense and Medicare Supplement products, and (b) increases in amounts remitted to reinsurers under certain reinsurance arrangements. Net cash provided by (used for) investing activities for the years ended December 31, 1998, 1997 and 1996 totaled $13.3 million, $(40.4) million and $6.3 million, respectively. Net cash provided by investing activities between 1998 and 1997 was primarily used to fund the Company's operating and financing activities for the same period. Further, the significant cash outflow to acquire investments in 1997 was related to the investment of the net proceeds from the issuance of Westbridge's Convertible Notes. Cash inflows for 1996 were utilized to fund operating cash requirements and were also attributable to the liquidation of investments to support the increase in new business production, which occurred during the first two quarters of 1996. Net cash (used for) provided by financing activities totaled $(6.0) million, $60.4 million and $3.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash flows for financing activities for the year ended December 31, 1998 were related to the net borrowings and repayments associated with the Company's Receivables Financing program (defined below). The Company's net financing cash outflows declined as a result of the reduction in the Company's marketing results for its underwritten products, which in turn resulted in a decrease in cash flows used to finance agents' debit balances. Cash flows provided by financing activities for the year ended December 31, 1997, included approximately $70.0 million in cash inflows resulting from the issuance of Westbridge's Convertible Notes that was offset, in part, by cash payments of $7.0 million to retire a note payable associated with a recaptured reinsurance agreement, $1.0 million to retire a note with a related party, and $0.1 million in net borrowings and repayments associated with the Company's Receivables Financing program. For 1996, cash was provided by borrowings under the Receivables Financing program with Fleet National Bank. 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 years ended December 31, 1998, 1997 and 1996, the Company has recorded a net provision for uncollectible commission advances totaling $0.6 million, $2.8 million and $0.5 million, 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 (the "Credit Agreement") with LaSalle National Bank ("LaSalle"). 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 December 31, 1998, the Company's receivables from subagents totaled approximately $9.0 million and approximately $6.2 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. The Company has guaranteed WFC's obligations under the Credit Agreement, and 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's obligations under the Guaranty Agreement continue following confirmation of the Plan. As of the Effective Date, there were no events of default under the Credit or Guaranty Agreements. See NOTE 6 to the Company's Consolidated Financial Statements. YEAR 2000 ISSUES The Company has initiated an enterprise-wide program designed to determine whether all of its Information Technology ("I/T"), such as computer systems and related software applications, and non-I/T systems, such as facsimile machines and copy machines, will function properly as the millennium (the "Year 2000") approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is highly reliant upon computer systems and software, as are many of the Company's principal businesses with which it interacts. The Company's ability to service its policyholders and agents is dependent upon accurate and timely transaction reporting. Transaction reporting in turn is dependent upon the Company's highly complex interdependent computer hardware, software, telecommunications and desktop applications, and the information obtained from its critical business partners. The Company's overall Year 2000 remediation effort has focused on preparing the computer systems, infrastructure and facilities for the Year 2000. The following phases encompass the Year 2000 plan: (i) assessment of all internal and external business critical systems, including I/T and non-I/T systems, (ii) remediation or upgrading of business critical systems, (iii) testing of remediated and updated systems, (iv) implementation of remediated and updated systems, and (v) contingency planning. The Company has engaged certain outside vendors and dedicated certain employees on a full time basis to help in the full array of its Year 2000 efforts. This includes system assessment and monitoring advice, actual code remediation, communication and consultation with critical business partners and testing resources. Under the Company's enterprise-wide remediation program, the most effective I/T systems solution was to purchase a new, more modern, Year 2000 compliant policyholder and claim administration system. This replacement effort is well underway and targeted for implementation in the third quarter of 1999. The Company has also completed the assessment of its non-I/T systems and is currently remediating and upgrading those systems. The non-I/T systems have been prioritized to remediate critical systems early in 1999 and non-critical systems later in the year. Another significant component of the Company's enterprise-wide remediation effort is to determine whether critical business partners and vendors are Year 2000 compliant. The assessment and testing of the Year 2000 readiness of these critical business partners and vendors have been integrated with the Company's I/T and non-I/T Year 2000 system strategies. As a part of this process, the Company has written letters and corresponded with its outside vendors and critical business partners to determine whether they are also prepared for the Year 2000. The Company's contingency plan is to make the existing I/T systems, which are to be replaced, Year 2000 compliant. This effort is currently in the remediation and testing phases of the project and is scheduled to be completed during the second quarter of 1999. The Company's contingency plan has identified and prioritized the Year 2000 exposures within the existing I/T systems. By remediating these I/T exposures on a priority basis, the Company is working to limit its Year 2000 contingency risk to lower priority I/T exposures in the event that the Company's most reasonably likely worst case Year 2000 scenario were to occur. The most reasonably likely worst case Year 2000 scenario would be that certain functions within the Company's existing I/T systems would incorrectly process policy information such as policy paid-to-dates, premium billings, commissions and claims. This scenario could have a material, adverse impact on the Company's ability to conduct its business. The Company expects to incur approximately $4.0 to $5.0 million in charges related to computer hardware and software, infrastructure, and facilities enhancements necessary to prepare for the Year 2000, of which a portion may be capitalized. For the year ending December 31, 1998, the Company incurred approximately $0.6 million in expenses related to systems planning and consulting efforts associated with the development of the Company's Year 2000 remediation plans. The majority of the Company's Year 2000 costs relate to computer hardware and software purchases and consulting fees, which will occur primarily in the first and second quarters of 1999. The Company expects its Year 2000 program to be completed in a timely manner; however, the Year 2000 computer problem creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions. Such potential, unforeseen problems in the Company's and/or third parties' computer systems could have a material, adverse impact on the Company's ability to conduct its business. FORWARD-LOOKING STATEMENTS: The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The preceding statements and certain other statements contained in ITEM 1 - "Business," ITEM 7 - "Management's Discussion and Analysis of Results of Operation and Financial Condition," and Notes to the Consolidated Financial Statements are forward-looking statements. These forward-looking statements are based on the intent, belief or current expectations of the Company and members of its senior management team. While the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report include, but are not limited to, the effect of economic and market conditions, further adverse developments with respect to the Company's liquidity position or operations of the Company's various businesses, actions that may be taken by insurance regulatory authorities, adverse developments in the timing or results of the Company's current strategic business plan, the difficulty in controlling health care costs and integrating new operations, the ability of the Company to realize anticipated general and administrative expense savings and overhead reductions presently contemplated, the ability of the Company to return the Company's operations to profitability, the level and nature of any restructuring charges, and the possible negative effects of prospective health care reform. Additional factors that would cause actual results to differ materially from those contemplated within this report can also be found in the Company's reports to the Securities and Exchange Commission ("SEC") on Form 8-K during 1999 and 1998 and Form 10-Q for the quarters ended September 30, 1998, June 30, 1998 and March 31, 1998. 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 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary objectives in managing its cash flows and investments are to maximize investment income and yield while preserving capital and minimizing credit risks. To attain these objectives, investment policies and strategies are developed using expected underwriting results, forecasted federal tax positions, regulatory requirements, forecasted economic conditions including expected fluctuations in interest rates and general market risks. Market risk represents the potential for loss due to adverse changes in the fair market value of financial instruments. The market risks associated with the financial instruments of the Company primarily relate to the Company's investment portfolio that consists largely (93.5%) of fixed income securities. The Company's investment portfolio is exposed to market risk through fluctuations in interest rates, changes in credit quality and principal prepayments. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The Company evaluates the potential changes in interest rates and market prices within the context of asset and liability management. Asset and liability management involves forecasting the payout pattern of the Company's liabilities, consisting primarily of accident and health claim reserves, to determine duration and then matching the duration of the liabilities to fixed income investments with a similar duration. Through asset and liability management, the Company believes that interest rate risk is mitigated. The table below provides cash flow information about the Company's fixed maturity investments at December 31, 1998. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected principal payment patterns. Actual cash flows could differ from the expected amounts. As of December 31, 1998, all of the Company's securities were classified as available-for-sale securities.
PROJECTED PRINCIPAL CASH FLOWS (IN THOUSANDS) -------------------------------------------------------------------------------------------- Fair Market Value 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 --------- -------- ---------- ---------- ---------- ------------- ----------- ----------- U.S. Treasury Securities $ 375 $ 725 $ 1,645 $ 3,025 $ 715 $ 3,290 $ 9,775 $ 10,776 Average Interest Rate 6.38% 6.96% 7.65% 6.80% 6.64% 7.82% Mortgage-Backed Securities 1,774 1,345 1,024 762 563 2,336 7,804 8,109 Average Interest Rate 7.82% 7.77% 7.71% 7.68% 7.64% 8.20% Callable Securities 2,140 653 1,049 1,393 1,033 3,360 9,628 9,913 Average Interest Rate 7.99% 7.93% 7.67% 8.85% 7.11% 7.85% Other Fixed Maturities 1,548 5,196 5,425 6,380 9,020 60,274 87,843 94,066 Average Interest Rate 5.16% 7.16% 7.32% 7.79% 6.54% 7.62% --------- -------- ---------- ---------- ---------- ------------- ----------- ----------- Total $ 5,837 $ 7,919 $ 9,143 $ 11,560 $ 11,331 $ 69,260 $ 115,050 $ 122,864 ========= ======== ========== ========== ========== ============= =========== ===========
The Company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. (See PART 1 - ITEM 1 and NOTE 3 - "Investments" to the Company's Consolidated Financial Statements.) Approximately 3.4% of the Company's fixed-income portfolio is comprised of less than investment grade securities. The Company's investment policy allows up to 5% of the Company's assets to be invested in higher yielding, non-investment grade securities. Due to the overall high quality of the Company's investment portfolio (A as rated by Standard & Poor's), management believes the Company has marginal risk with regard to credit quality. Mortgage-backed securities investors are compensated primarily for prepayment risk rather than credit quality risk. During periods of significant interest rate volatility, the underlying mortgages may repay more quickly or more slowly than anticipated. If the repayment of principal occurs earlier than anticipated during periods of declining interest rates, investment income may decline due to the reinvestment of these funds at the lower current market rates. To manage prepayment risk, the Company limits the type of mortgage-backed structures invested in and restricts the portfolio's total exposure in mortgage-backed securities. If the repayment occurs later than expected during periods of increasing interest rates, the cost of funds to pay liabilities may increase due to the mismatching of assets and liabilities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Financial Statement Schedules Covered by the Following Report of Independent Accountants.
Page NUMBER(S) Report of Independent Accountants............................................................................... 40 FINANCIAL STATEMENTS: Consolidated Statements of Operations for the Three Years ended December 31, 1998.......................... 41 Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. 42 Consolidated Statements of Cash Flows for the Three Years ended December 31, 1998.......................... 44 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Three Years ended December 31, 1998.................................................................... 46 Consolidated Statements of Comprehensive (Loss) Income for the Three Years ended December 31, 1998................................................................................ 47 Notes to Consolidated Financial Statements................................................................. 48 FINANCIAL STATEMENT SCHEDULES: II. Condensed Financial Information of Registrant............................................................. 71 III. Supplementary Insurance Information....................................................................... 74 IV. Reinsurance................................................................................................ 75 V. Valuation and Qualifying Accounts and Reserves............................................................ 76
All other Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Westbridge Capital Corp. (now, Ascent Assurance, Inc.) In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. As discussed in NOTE 1 to the Consolidated Financial Statements, Westbridge Capital Corp. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan on December 17, 1998, and, after the satisfaction of a number of conditions, the Plan became effective on March 24, 1999. In connection with its emergence from Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent Assurance, Inc. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Dallas, Texas March 29, 1999 WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS. EXCEPT SHARE DATA)
December 31, ---------------------------------------------------- 1998 1997 1996 -------------- --------------- ------------- Revenues: Premiums: First-year $ 19,161 $ 37,890 $ 61,923 Renewal 116,556 123,207 94,857 -------------- --------------- ------------- 135,717 161,097 156,780 Net investment income 12,011 11,023 8,736 Fee and service income 16,191 16,700 9,534 Net realized gain on investments 2,142 84 96 -------------- --------------- ------------- 166,061 188,904 175,146 -------------- --------------- ------------- Benefits, claims and expenses: Benefits and claims 99,419 136,866 94,187 Amortization of deferred policy acquisition costs 4,411 30,873 22,907 Commissions 29,979 16,690 7,919 General and administrative expenses 28,149 31,407 27,123 Reorganization expense 9,179 4,424 - Recognition of premium deficiency 4,948 64,952 - Taxes, licenses and fees 5,216 5,995 5,951 Interest expense 6,814 7,102 4,462 -------------- --------------- ------------- 188,115 298,309 162,549 -------------- --------------- ------------- (Loss) income before income taxes, equity in earnings of Freedom Holding Company and extraordinary item (22,054) (109,405) 12,597 Provision (benefit) for income taxes 231 (13,268) 4,410 Equity in earnings of Freedom Holding Company - - 74 -------------- --------------- ------------- (Loss) income before extraordinary item (22,285) (96,137) 8,261 Extraordinary loss, net of tax - 1,007 - ============== =============== ============= Net (loss) income (22,285) $ (97,144) $ 8,261 ============== =============== ============= Preferred stock dividends 520 1,572 1,650 -------------- --------------- ------------- (Loss) income applicable to common stockholders (22,805) $ (98,716) $ 6,611 ============== =============== ============= Earnings per common share: Basic: (Loss) income before extraordinary item $ (3.43) $ (15.91) $ 1.11 Extraordinary loss - (.16) - ============== =============== ============= Net (loss) income $ (3.43) $ (16.07) $ 1.11 ============== =============== ============= Diluted: (Loss) income before extraordinary item $ (3.43) $ (15.91) $ .97 Extraordinary loss - (.16) - ============== =============== ============= Net (loss) income $ (3.43) $ (16.07) $ .97 ============== =============== ============= Weighted average shares outstanding: Basic 6,640,000 6,143,000 5,978,000 ============== =============== ============= Diluted 6,640,000 6,143,000 8,477,000 ============== =============== =============
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
December 31, -------------------------------------------------- 1998 1997 ---------------------- ----------------------- Investments: Fixed maturities: Available-for-sale, at market value (amortized cost $116,871 and $122,840) $ 122,864 $ 128,749 Equity securities, at market 2,575 4,770 Mortgage loans on real estate 318 389 Investment real estate - 566 Policy loans 280 284 Short-term investments and certificates of deposit 5,393 12,654 ---------------------- ----------------------- Total Investments 131,430 147,412 Cash and cash equivalents 278 1,030 Accrued investment income 2,372 2,453 Receivables from agents (net of $5,176 and $4,531 allowance for doubtful accounts) 9,860 20,503 Deferred policy acquisition costs 14,177 19,165 Leasehold improvements and equipment, at cost (net of accumulated depreciation and amortization of $3,443 and $4,106) 1,849 1,141 Due from reinsurers 2,155 3,219 Commissions receivable 3,273 1,389 Deferred debt costs, net of accumulated amortization 3,182 4,046 Other assets 1,165 2,498 ---------------------- ----------------------- Total Assets $ 169,741 $ 202,856 ====================== =======================
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' DEFICIT
December 31, --------------------------------------------------- 1998 1997 ----------------------- ----------------------- Liabilities: Policy liabilities and accruals: Future policy benefits $ 53,871 $ 55,811 Claims 44,116 51,784 ----------------------- ----------------------- 97,987 107,595 Accounts payable and accruals 8,642 3,847 Commission advances payable 991 4,702 Other liabilities 5,174 5,612 Accrued dividends and interest payable 11,377 4,971 Deferred income taxes, net - - Notes payable 6,192 13,100 Convertible subordinated notes, due 2004 70,000 70,000 Senior subordinated notes, net of unamortized discount, due 2002 19,523 19,447 ----------------------- ----------------------- Total Liabilities 219,886 229,274 ----------------------- ----------------------- Redeemable Preferred Stock 11,935 19,000 ----------------------- ----------------------- Stockholders' (Deficit) Equity: Common stock, ($.10 par value, 30,000,000 shares authorized; 7,035,809 and 6,195,439 shares issued) 703 620 Capital in excess of par value 37,641 30,843 Accumulated other comprehensive income, net of tax 3,911 4,649 Deficit (104,335) (81,530) ----------------------- ----------------------- Total Stockholders' Deficit (62,080) (45,418) ----------------------- ----------------------- Commitments and contingencies: Total Liabilities, Redeemable Preferred Stock and Stockholders' Deficit $ 169,741 $ 202,856 ======================= =======================
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ Cash Flows From Operating Activities: Net (loss) income applicable to common stockholders $ (22,805) $ (98,716) $ 6,611 Adjustments to reconcile net (loss) income applicable to common stockholders to cash used for operating activities: Recognition of premium deficiency 4,948 64,952 - Amortization of deferred policy acquisition costs 4,411 30,873 22,907 Additions to deferred policy acquisition costs (4,371) (31,119) (45,138) Depreciation expense 476 470 497 Equity in earnings of Freedom Holding Company - - (74) Decrease (increase) in receivables from agents 10,643 (2,192) (1,371) Decrease (increase) in due from reinsurers 1,064 (1,763) 2,073 (Increase) decrease in commissions receivable (1,884) 2,017 (3,406) Decrease in other assets 1,333 1,940 4,302 (Decrease) increase in policy liabilities and accruals (9,608) 14,205 2,995 Increase (decrease) in accounts payable and accruals 4,795 1,351 (1,027) Increase in accrued dividends and interest payable 6,406 4,445 99 (Decrease) increase in commission advances payable (3,711) 334 4,368 (Decrease) increase in other liabilities (438) 4,438 (6,793) (Decrease) increase in deferred income taxes, net - (10,299) 3,708 Other, net 735 (910) (518) ------------ ------------- ------------ Net Cash Used For Operating Activities (8,006) (19,974) (10,767) ------------ ------------- ------------ Cash Flows From Investing Activities: Acquisition of Freedom Holding Company - - (3,970) Proceeds from investments sold: Fixed maturities, called or matured 7,531 9,469 8,529 Fixed maturities, sold 13,810 25,345 49,340 Short-term investments and certificates of deposit, sold or matured 7,261 50 155,877 Other investments, sold or matured 1,652 817 556 Cost of investments acquired (15,772) (75,745) (203,849) Additions to leasehold improvements and equipment, net of retirements (1,184) (300) (218) ------------ ------------- ------------ Net Cash Provided By (Used For) Investing Activities 13,298 (40,364) 6,265 ------------ ------------- ------------ Cash Flows From Financing Activities: Decrease (increase) in deferred debt costs 864 (1,230) (567) Issuance of convertible subordinated notes - 70,000 - Issuance of notes payable 5,461 21,044 16,144 Repayment of notes payable (12,369) (29,154) (12,090) Issuance of common stock - 140 140 Purchase and cancellation of common stock - (445) (125) ------------ ------------- ------------ Net Cash (Used For) Provided By Financing Activities (6,044) 60,355 3,502 ------------ ------------- ------------ (Decrease) increase in Cash and Cash Equivalents, During Period (752) 17 (1,000) Cash and Cash Equivalents, At Beginning Of Period 1,030 1,013 2,013 ============ ============= ============ Cash and Cash Equivalents, At End Of Period $ 278 $ 1,030 $ 1,013 ============ ============= ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 833 $ 3,002 $ 3,861 Income taxes $ 1,143 $ 118 $ 982
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: During the year ended December 31, 1998, seven thousand and sixty-five (7,065) shares of the Company's Old Preferred Stock were converted into shares of Old Common Stock. The converted shares of Old Preferred Stock had an aggregate liquidation preference of $7,065,000 and were converted into 840,071 shares of Old Common Stock. The Company purchased the outstanding capital stock of Freedom Holding Company ("FHC") in the second quarter of 1996 for a cash purchase price of $6.3 million. This purchase resulted in the Company receiving assets and assuming liabilities as follows: Assets $13,542,000 Liabilities $ 5,780,000 Adjustments to reconcile net income to cash used for operating activities in the Company's Consolidated Statement of Cash Flows exclude increases relating to the acquired assets and liabilities of FHC. Accordingly, these adjustments do not correspond to the changes in the related line items on the Company's Consolidated Balance Sheets. The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL OTHER STOCK- CAPITAL COMPREHENSIVE RETAINED HOLDERS' COMMON STOCK IN EXCESS INCOME EARNINGS TREASURY STOCK EQUITY SHARES AMOUNT OF PAR VALUE (LOSS) (DEFICIT) SHARES AMOUNT (DEFICIT) ------ ------ --------- ------ --------- ------ ------ --------- Balance at January 1, 1996 5,992,458 $ 599 $ 29,208 $ 2,593 $ 10,575 28,600 $(170) $ 42,805 Net income 8,261 8,261 Preferred stock dividend (1,650) (1,650) Accumulated comprehensive loss, net of tax (1,536) (1,536) Issuance of shares under stock option plans 62,965 6 134 140 Award of restricted shares 8 8 Shares purchased and canceled under stock option plans (15,429) (1) (124) (125) ---------- -------- -------- -------- --------- ------ ----- -------- Balance at December 31, 1996 6,039,994 $ 604 $ 29,226 $ 1,057 $ 17,186 28,600 $(170) $ 47,903 Net loss (97,144) (97,144) Preferred stock dividend (1,572) (1,572) Accumulated comprehensive income, 3,592 3,592 net of tax Preferred stock converted to common 118,905 12 937 949 Issuance of shares under stock option plans 42,500 4 115 119 Award and issuance of restricted shares 67,000 7 1,179 1,186 Cancellation of treasury stock (28,600) (3) (167) (28,600) 170 0 Shares purchased and canceled under stock option plans (44,360) (4) (447) (451) ---------- -------- -------- -------- --------- ------ ----- -------- Balance at December 31, 1997 6,195,439 $ 620 $ 30,843 $ 4,649 $ (81,530) -- $-- $(45,418) Net loss (22,285) (22,285) Preferred stock dividend (520) (520) Accumulated comprehensive loss, net of tax (738) (738) Preferred stock converted to common 840,071 83 6,982 7,065 Other, net 299 -- (184) (184) ========== ======== ======== ======== ========= ====== ===== ======== Balance at December 31, 1998 7,035,809 $ 703 $ 37,641 $ 3,911 $(104,335) -- $-- $(62,080) ========== ======== ======== ======== ========= ====== ===== ========
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (IN THOUSANDS)
Year Ended December 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- (Loss) income before income taxes $ (22,054) $ (109,405) $ 12,597 Other comprehensive (loss) income: Unrealized holding gains (losses) arising during period 822 5,677 (2,271) Less: reclassification adjustment for gains on sales of fixed and equity securities included in net (loss) income (1,957) (150) (92) -------------- ------------- -------------- Comprehensive (loss) income before income taxes (23,189) (103,878) 10,234 Provision for (benefit from) income taxes; extraordinary loss, net of tax; and preferred stock dividends 751 (10,689) 5,986 (Benefit from) provision for income taxes on comprehensive (loss) income (397) 1,934 (827) -------------- ------------- -------------- Comprehensive (loss) income, net of income taxes $ (23,543) $ (95,123) $ 5,075 ============== ============= ==============
The accompanying notes are an integral part of these financial statements. WESTBRIDGE CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - REORGANIZATION AND EMERGENCE FROM CHAPTER 11 CASE On September 16, 1998 (the "Petition Date"), Westbridge commenced a reorganization case (the "Chapter 11 Case") by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), along with a disclosure statement (as amended, the "Disclosure Statement") and a proposed plan of reorganization (as amended, the "Plan"). The filing of the Disclosure Statement and Plan culminated months of negotiations between Westbridge and an ad hoc committee of holders of its 11% Senior Subordinated Notes due 2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004 (the "Convertible Notes"). The Disclosure Statement and the Plan were amended on October 28, 1998, and the Disclosure Statement was approved by entry of an order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the Plan on December 17, 1998. The Plan became effective March 24, 1999 (the "Effective Date"). In connection with its emergence from Chapter 11, Westbridge changed its corporate name to "Ascent Assurance, Inc." Pursuant to the Plan, the Company's Board of Directors was reconstituted as of the Effective Date, and the Company's certificates of incorporation and by-laws were amended and restated in their entirety. The Plan provides for the recapitalization of certain old debt and equity interests in Westbridge and the issuance of new equity securities and warrants. Key terms of the Plan include the following: CANCELLATION OF EXISTING SECURITIES Westbridge's capital structure was realigned and deleveraged. Pursuant to the Plan, the following securities of Westbridge were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount of, plus all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate principal amount of, plus all accrued and unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate liquidation preference of, plus all accrued and unpaid dividends on, Westbridge's Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock, and (vii) all unvested grants of restricted Old Common Stock. NEW EQUITY CAPITAL STRUCTURE Pursuant to the Company's Amended and Restated Certificate of Incorporation, the total number of shares of stock the Company shall have the authority to issue is 30,040,000, consisting of 30,000,000 shares of common stock, par value $.01 per share (the "New Common Stock") and 40,000 shares of preferred stock, par value $.01 per share, all of which are designated Series A Convertible Preferred Stock (the "New Preferred Stock") DISTRIBUTIONS UNDER THE PLAN CASH DISTRIBUTION To the holders of Senior Notes other than CSFB (defined below), cash payments totaling approximately $15.2 million, which are equal to the total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors other than Credit Suisse First Boston Corporation ("CSFB"), will be distributed subject to completion of the exchange of securities as contemplated by the Plan. In order to provide the Company with sufficient funds to make the cash distribution to the holders of the Allowed 11% Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. ISSUANCE OF NEW SECURITIES Pursuant to the Plan and the purchase of New Preferred Stock on the Effective Date, 6,500,000 shares of New Common Stock and 23,257 shares of New Preferred Stock were issued on the Effective Date as follows: To holders of general unsecured claims and Convertible Notes as of December 10, 1998 and current management, 6,110,000 shares, or 94%, of the New Common Stock issued on the Effective Date, subject to the completion of the exchange requirements as contemplated by the Plan. Holders of general unsecured claims and Convertible Notes will receive their first distribution of shares in partial satisfaction and discharge of their allowed claims beginning in April 1999. The remaining shares of New Common Stock are held for future distributions to such holders pending the final resolution of disputed claims. To holders of Old Preferred Stock, 260,000 shares as of December 10, 1998, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, subject to the completion of the exchange of securities as contemplated by the Plan. To holders of Old Common Stock, 130,000 shares as of December 10, 1998, or 2%, of the New Common Stock issued on the Effective Date and New Warrants to purchase an additional 693,761 shares, or 5%, of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, subject to the completion of the exchange of securities as contemplated by the Plan. Fractional shares of New Common Stock will not be issued in connection with the Plan. As a result of this provision, many holders of Old Common Stock will receive no distribution of New Common Stock or New Warrants under the Plan. To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, are convertible into 4,765,165 shares of the New Common Stock at an initial conversion price of $4.88 per share. As a result of the New Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New Common Stock to be received by the CSFB Affiliate in respect of the Convertible Notes owned by CSFB, the CSFB affiliate will own approximately 56.6% of the New Common Stock on an as converted basis. RESERVATION OF ADDITIONAL NEW COMMON STOCK In connection with the New Warrants described above, 971,266 shares of New Common Stock are reserved for issuance upon the exercise of New Warrants. The New Warrant are exercisable at an initial exercise price $9.04 per share of New Common Stock and will expire on March 24, 2004. Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to employees and directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to the Company's marketing agents under the Company's 1999 Stock Option Plan. OTHER MATTERS In connection with the approval and effectiveness of the Plan, the Company settled a putative class action brought on behalf of certain purchasers and sellers of Westbridge's Convertible Notes and Old Common Stock during the period October 31, 1996 through October 31, 1997. See NOTES 6 and 11 regarding the status of the Company's financing arrangements and Insurance Subsidiaries. In connection with the reorganization, the Company will realize a non-taxable gain from the extinguishment of certain indebtedness for tax purposes, since the gain results from a reorganization under the Bankruptcy Code. However, the Company will be required during 1999 to reduce certain tax attributes related to Westbridge, exclusive of its operating subsidiaries, including (i) net operating loss carryforwards ("NOLs"), (ii) certain tax credits and (iii) tax bases in assets in an amount equal to such a gain on extinguishment. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company will adopt fresh start reporting. For accounting purposes, the Effective Date is deemed to be March 31, 1999. In fresh start reporting, a reorganization value will be assigned to the Company's New Preferred Stock and New Common Stock. The reorganization value will be allocated to the fair value of assets and liabilities similar to the purchase method of accounting under APB 16. As a result of the application of fresh start reporting, the Company's financial statements issued subsequent to the adoption of fresh start reporting will not be comparable with those prepared before emergence, including the historical financial statements in this annual report. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Westbridge Capital Corp. ("the Company"), and its six wholly owned subsidiaries: National Foundation Life Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"), Westbridge Management Corp. ("WBMC"), NationalCare Marketing(R), Inc. ("NCM"), Westbridge Printing Services, Inc. ("WPS"), and Foundation Financial Services, Inc. ("FFS"). In addition, the consolidated financial statements include the accounts of the Company's indirect, wholly owned subsidiaries: (a) Freedom Life Insurance Company of America ("FLICA") is a wholly owned subsidiary of Freedom Holding Company ("FHC"), and FHC is a wholly owned subsidiary of NFL, (b) American Insurance Company of Texas ("AICT") is a wholly owned subsidiary of NFIC, and (c) NCM owns 100% of Westbridge Funding Corporation ("WFC"), Precision Dialing Services, Inc. ("PDS"), Senior Benefits, LLC ("Senior Benefits"), LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), American Senior Security Plans, LLC ("ASSP"), and Westbridge Financial Corp. The consolidated financial statements also include the accounts of the Company's 80%-owned subsidiary Health Care-One Marketing Group, Inc. ("HCO Marketing") as well as the Company's 50%-owned subsidiary, Health Care-One Insurance Agency, Inc. ("Health Care-One"). The Company's decision to consolidate the accounts of Health Care-One is based on the extent to which the Company exercises control over Health Care-One. The Company has agreed to provide 100% of the financing required to support the marketing efforts of Health Care-One and also has significant input in its management. All significant intercompany accounts and transactions have been eliminated. NATURE OF OPERATIONS. The Company, through its subsidiaries and affiliates, is licensed to market accident and health insurance products in 40 states and the District of Columbia. The major underwritten product lines currently marketed by the Company are Medical Expense products and Specified Disease products. In the past, the Company also underwrote a significant amount of Medicare Supplement products. The Company also markets certain managed care and senior products, which are underwritten by other non-affiliated managed care organizations. ACCOUNTING PRINCIPLES AND REGULATORY MATTERS. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). These principles differ from statutory accounting principles, which must be used by NFL, FLICA, NFIC and AICT (together, the "Insurance Subsidiaries") when reporting to state insurance departments. The Insurance Subsidiaries are subject to oversight by the state insurance departments of Delaware, Mississippi, Texas and other states in which they are authorized to conduct business. These regulators perform periodic examinations of the Insurance Subsidiaries' statutory financial statements and, as a result, may propose adjustment to such statements. CASH EQUIVALENTS. Cash equivalents consist of highly liquid instruments with maturities at the time of acquisition of three months or less. Cash equivalents are stated at cost, which approximates market. INVESTMENTS. The Company's fixed maturity portfolio is classified as available-for-sale and is carried at estimated market value. Equity securities (common and nonredeemable preferred stocks) are also carried at estimated market value. Changes in aggregate unrealized appreciation or depreciation on fixed maturities and equity securities are reported directly in stockholders' equity, net of applicable deferred income taxes and, accordingly, have no effect on current operations. The Company's 40% equity investment in FHC was accounted for on the equity basis (i.e., cost adjusted for equity in post-acquisition earnings and amortization of excess cost) until May 31, 1996 and on a consolidated basis for the periods subsequent to the acquisition of the remaining 60% of FLICA's parent FHC. Mortgage loans on real estate and policy loans are carried at the unpaid principal balance. Realized gains and losses on sales of investments are recognized in current operations on the specific identification basis. CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and receivables from agents. The Company maintains cash and investments with various major financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions. Concentrations of credit risk with respect to receivables from agents are limited due to the large number of agents and their dispersion across many geographic areas. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific agents, historical trends and other information. The Company's historical experience in collection of these receivables falls within the recorded allowances. Due to these factors, no additional credit risk beyond the amounts provided for collection losses is believed inherent in the Company's receivables from agents. DEFERRED POLICY ACQUISITION COSTS ("DPAC"). Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Also included in DPAC is the cost of insurance purchased on acquired business. The amortization of these costs is based on actuarially estimated future premium revenues, and the amortization rate is adjusted periodically to reflect actual experience. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits. LEASEHOLD IMPROVEMENTS AND EQUIPMENT. Leasehold improvements and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of equipment is computed using the straight-line method over the estimated useful lives (three to seven years) of the assets. Leasehold improvements are amortized over the estimated useful lives of the related assets or the period of the lease, whichever is shorter. Maintenance and repairs are expensed as incurred, and renewals and betterments which materially extend the useful life of the underlying assets are capitalized. FUTURE POLICY BENEFITS AND CLAIMS. Liabilities for future policy benefits not yet incurred are computed primarily using the net level premium method including actuarial assumptions as to investment yield, mortality, morbidity and withdrawals. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. These liabilities are subject to the impact of future changes in claim experience and, as adjustments become necessary, they are reflected in current operations. RECOGNITION OF REVENUE. Accident and health premiums are recognized as revenue when earned. Benefits and expenses are associated with related premiums so as to result in a proper matching of revenues with expenses. Fee and service income and investment income are recognized when earned. USE OF ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES. The Company records income taxes based on the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," ("SFAS 128") that revises the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share." The SFAS 128 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 SFAS 128 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 Company adopted SFAS No. 128 for the year ended December 31, 1997 and has restated the earnings per share computations for 1996 to conform to this pronouncement. The following table reflects the calculation of basic and diluted earnings per share:
December 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- (Amounts in 000's, except per share amounts) BASIC: (Loss) income available to common shareholders $ (22,805) $ (98,716) $ 6,611 ============== ============= ============== Average weighted shares outstanding 6,640 6,143 5,978 ============== ============= ============== Basic earnings per share $ (3.43) $ (16.07) $ 1.11 ============== ============= ============== DILUTED: (Loss) income available to common shareholders $ (22,805) $ (98,716) $ 6,611 Adjustment for conversion of Old Preferred Stock - - 1,650 -------------- ------------- -------------- Adjusted (loss) income available to common shareholders $ (22,805) $ (98,716) $ 8,261 ============== ============= ============== Average weighted shares outstanding 6,640 6,143 5,978 Adjustment for conversion of Old Preferred Stock - - 2,378 Adjustment for restricted stock - - 4 Adjustment for options and warrants - - 117 -------------- ------------- -------------- Adjusted average weighted shares outstanding 6,640 6,143 8,477 ============== ============= ============== Diluted earnings per share $ (3.43) $ (16.07) $ 0.97 ============== ============= ==============
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income (loss) equals the total of net income (loss) and all other non-owner changes in equity. This pronouncement requires comprehensive income (loss) 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. The Company has elected to present its comprehensive income (loss) as a separate financial statement. For the Company, comprehensive income (loss) equals its reported consolidated net income (loss) plus the change in the unrealized appreciation (depreciation) of marketable securities from the previously reported period. Currently, this accumulated other comprehensive income, net of tax, is reported in the Company's Consolidated Balance Sheets as a separate component of stockholders' equity. 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 companies to report 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. Under SFAS 131, the Company will continue to have only one reportable segment, Accident and Health insurance. In December 1997, the Accounting Standards Executive Committee ("AcSEC") 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 will adopt SOP 97-3 on a prospective basis. 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. In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use," which requires capitalization of certain costs after the date of adoption in connection with developing or obtaining software for internal use. The Company will adopt SOP 98-1 on a prospective basis. The Company has not yet determined the impact of adopting this SOP. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. It is not known whether the insurance departments of the state of domicile of the Company's Insurance Subsidiaries will adopt the Codification or whether those insurance departments will make any changes to that guidance. The Company has not estimated the potential effect of the Codification guidance if adopted. However, the actual effect of adoption could differ as changes are made to the Codification guidance, prior to its recommended effective date of January 1, 2001. RECLASSIFICATIONS. Certain reclassifications have been made to 1997 and 1996 amounts in order to conform to 1998 financial statement presentation. NOTE 3 - INVESTMENTS Major categories of investment income are summarized as follows:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- (in thousands) Fixed maturities $ 8,754 $ 8,268 $ 6,607 Short-term investments and certificates of deposit 708 891 513 Interest on receivables from agents 2,511 1,633 1,201 Other 351 468 646 -------------- -------------- ------------- 12,324 11,260 8,967 Less: Investment expenses 313 237 231 ============== ============== ============= Net investment income $ 12,011 $ 11,023 $ 8,736 ============== ============== =============
Realized gains (losses) on investments are summarized as follows:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- (in thousands) Fixed maturities $ 403 $ 535 $ (146) Equity securities 1,555 (385) 238 Other 184 (66) 4 ============== ============== ============= Realized gains on investments $ 2,142 $ 84 $ 96 ============== ============== =============
Unrealized appreciation on investments is reflected directly in stockholders' equity as a component of accumulated other comprehensive income and is summarized as follows:
Year Ended December 31, ---------------------------------- 1998 1997 -------------- --------------- (in thousands) Balance at beginning of year $ 4,649 $ 1,057 Unrealized appreciation, net of tax, on fixed maturities available-for-sale 54 2,816 Unrealized (depreciation) appreciation, net of tax, on equity securities and other investments (792) 776 ============== =============== Balance at end of year $ 3,911 $ 4,649 ============== ===============
Estimated market values represent the closing sales prices of marketable securities. The amortized cost and estimated market values of investments in fixed maturities at December 31, 1998 and 1997, are summarized by category as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market 1998 Available-for-Sale Cost Gains Losses Value - - ------------------------------------------- ---------------- --------------- --------------- -------------- (in thousands) U.S. Government and governmental agencies and authorities $ 11,145 $ 644 $ 13 $ 11,776 States, municipalities, and political subdivisions 1,490 96 - 1,586 Finance companies 30,441 1,549 71 31,919 Public utilities 12,745 801 125 13,421 Mortgage-backed securities 7,834 284 8 8,110 All other corporate bonds 53,216 3,346 510 56,052 ================ =============== =============== ============== Balance at December 31, 1998 $ 116,871 $ 6,720 $ 727 $ 122,864 ================ =============== =============== ==============
Gross Gross Estimated Amortized Unrealized Unrealized Market 1997 Available-for-Sale Cost Gains Losses Value - - ------------------------------------------- ---------------- --------------- --------------- -------------- (in thousands) U.S. Government and governmental agencies and authorities $ 11,331 $ 347 $ 10 $ 11,668 States, municipalities, and political subdivisions 997 74 - 1,071 Finance companies 32,073 1,512 4 33,581 Public utilities 10,854 430 11 11,273 Mortgage-backed securities 10,237 265 28 10,474 All other corporate bonds 57,348 3,552 218 60,682 ================ =============== =============== ============== Balance at December 31, 1997 $ 122,840 $ 6,180 $ 271 $ 128,749 ================ =============== =============== ==============
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1998, are shown below, in thousands, summarized by year to contractual 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 penalties.
Estimated Amortized Market Cost Value ------------------ ------------------ (in thousands) Due in one year or less $ 1,882 $ 1,889 Due after one year through five years 31,417 32,254 Due after five years through ten years 39,748 41,959 Due after ten years 35,990 38,652 Mortgage-backed securities 7,834 8,110 ------------------ ------------------ $ 116,871 $ 122,864 ================== ==================
A summary of unrealized appreciation on investments in fixed maturities available-for-sale, which is reflected directly in stockholders' equity as a component of accumulated other comprehensive income, is as follows:
Year Ended December 31, ---------------------------------- 1998 1997 -------------- --------------- (in thousands) Amortized cost $ 116,871 $ 122,840 Estimated market value 122,864 128,749 -------------- --------------- Excess of market value to amortized cost 5,993 5,909 Estimated tax 2,098 2,068 -------------- --------------- Unrealized appreciation, net of tax 3,895 $ 3,841 ============== ===============
Proceeds from sales and maturities of investments in fixed maturity securities were approximately $25.1 million in 1998 and $34.0 million in 1997. Gross gains of $0.8 million and gross losses of $0.4 million were realized on fixed maturity investment sales during 1998. Gross gains of $0.7 million and gross losses of $0.1 million were realized on fixed maturity investment sales during 1997. Included in fixed maturities at December 31, 1998 and 1997, are high-yield, unrated or less than investment grade corporate debt securities comprising less than 3.2% and 1.6% of total cash and invested assets at December 31, 1998 and 1997, respectively. Investment securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1998 and 1997 had a par value totaling $28.2 million and $28.3 million, respectively. At December 31, 1998, the Company had restricted cash and investments totaling $2.5 million and $1.9 million, respectively, related to its receivables financing program (see NOTE 6 - "Financing Activities") and to a collateralized letter of credit ("LOC") for the purpose of potential future capital contributions to NFIC and AICT. The collateralized LOC expires in June 1999 and future draws upon this LOC are subject to certain provisions regarding NFIC's and AICT's statutory capital and surplus levels. NOTE 4 - ACQUISITIONS ACQUISITION OF REMAINING INTEREST OF FHC On May 31, 1996, the Company completed its acquisition of the remaining 60% equity interest in Freedom Holding Company ("FHC"). FHC is a holding company which owns 100% of FLICA, a Mississippi domiciled insurer. The purchase price was $6.3 million in cash, and the transaction was accounted for under the purchase method. Prior to the acquisition, the Company accounted for its 40% investment in FHC using the equity method. The Company's portion of FHC's earnings prior to the acquisition in 1996 accounted for using the equity method was $74,000. Beginning June 1, 1996, the results of operations of FHC have been reflected in the Company's Consolidated Statements of Operations and of Cash Flows. The present value of future profits associated with the purchase are being amortized in relation to premium revenues over the remaining life of the business. At the time of the acquisition, the Company, through NFL, reinsured the majority of business underwritten by FLICA. Subsequent to the acquisition of the remaining interest of FHC, the coinsurance agreements between FLICA and NFL were canceled. The acquisition did not have a material pro-forma impact on operations. NOTE 5 - FUTURE POLICY BENEFITS Future policy benefits for Accident and Health insurance products 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 are as follows: Withdrawals Issues through 1980 are based on industry experience; 1981 through 1996 issues are based on industry experience and Company experience, where available. Policies acquired in acquisitions are based on recent experience of the blocks acquired. Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most 1981 through 1992 issues are 10% graded to 7% in 10 years except for certain NationalCare and Supplemental Hospital Income issues which are 8% graded to 6% in 8 years and LifeStyles Products which are 9% graded to 7% in 10 years. 1993 and later issues are 7% level. Policies acquired from AII in 1992 are 6.4% level. Policies acquired from LHI in 1993 and DNL in 1994 are 6% level. Policies acquired in the Acquisition of NFIC and AICT are 7% level. Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through 1992 use the 1965-1970 Ultimate Table. 1993 and later issues use the 1975-1980 Ultimate Table. Policies acquired in acquisitions use the 1965-1970 Ultimate Table. Morbidity Based on industry tables published in 1974 by Tillinghast, Nelson and Warren, Inc., as well as other population statistics and morbidity studies. NOTE 6 - FINANCING ACTIVITIES CREDIT ARRANGEMENT The Company finances the majority of its obligations to make commission advances through Westbridge Funding Corporation ("WFC"), an indirect wholly owned subsidiary. On June 6, 1997, WFC entered into a Credit Agreement dated as of such date with LaSalle National Bank (the "Credit Agreement"). See NOTE 15 - "Extraordinary Item." 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. As of December 31, 1998, $6.2 million was outstanding under the Credit Agreement (interest rate of 8.375%). The Company incurs a commitment fee on the unused portion of the Credit Agreement at a rate of 0.50% per annum. The Credit Agreement terminates on June 5, 2000, at which time the outstanding principal and interest thereunder will be due and payable. 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. As of December 31, 1998, the Company had placed $2.5 million of cash in a cash collateral account in connection with this Credit Agreement. The maintenance of this cash collateral account allows WFC to borrow against the Credit Agreement and purchase agent advance receivables at face value. As of the Effective Date, there were no events of default under the Guaranty or Credit Agreements, which were amended to reflect the recapitalization of the Company. Prior to the Effective Date of the Plan (see NOTE 1), the Company had the following debt securities outstanding: SENIOR NOTES During the first quarter of 1995, the Company issued $20.0 million aggregate principal amount of its Senior Notes, due 2002, in an underwritten public offering. The Senior Notes were issued at par, less an underwriting discount of 4%. Contractual interest on the Senior Notes was payable in monthly installments. In November 1997, the Company suspended the scheduled monthly interest payments on these Senior Notes. Accrued but unpaid interest on the Senior Notes through the Petition Date was approximately $2.1 million. The Plan required the continued accrual of interest on the Senior Notes from the Petition Date to the Effective Date. Accrued but unpaid interest on the Senior Notes from the Petition Date to December 31, 1998 totaled approximately $0.6 million. Contractual interest continued to accrue at a rate of $6,111 per day from January 1, 1999 through the Effective Date. As of the Effective Date, these Senior Notes were canceled, extinguished and retired. As more fully described in NOTE 1, holders of Allowed 11% Senior Note Claims held by creditors other than CSFB received cash payments totaling $15.2 million, subject to completion of the exchange of securities as contemplated by the Plan. As more fully described in NOTE 8, in order to provide Westbridge with sufficient funds to make the cash distributions to the holders of the Allowed 11% Senior Notes under the Plan, the Company entered into a Stock Purchase Agreement with CSFB, a significant noteholder, pursuant to which CSFB, subject to the conditions contained therein, purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan. CONVERTIBLE NOTES During the second quarter of 1997, the Company completed the sale of $70.0 million aggregate principal amount of its Convertible Notes, due 2004, in an underwritten public offering. Contractual interest on the Convertible Notes was payable in semi-annual installments on May 1 and November 1 of each year, commencing November 1, 1997. In November 1997, the Company suspended the scheduled interest payments on these Convertible Notes. At the Petition Date, approximately $7.3 million of unpaid interest was accrued. The Company did not accrue interest on its Convertible Notes after the Petition Date as it was unlikely such interest would be paid under the Plan. The amount of contractual interest that would have otherwise been accrued from the Petition Date to December 31, 1998 totaled $2.7 million, and such contractual interest would have continued to accrue at $14,583 per day from January 1, 1999 until the Effective Date. As of the Effective Date, these Convertible Notes were canceled, extinguished and retired. Holders of the Convertible Notes and allowed general unsecured creditors will receive their pro rata share of 94% of the New Common Stock issued on the Effective Date, subject to the completion of the exchange requirements as contemplated by the Plan. NOTE 7 - CLAIM RESERVES The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 1998, 1997 and 1996, to the amounts reported in the Company's balance sheet:
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- (in thousands) Balance at January 1 (Gross) $ 51,784 $ 39,186 $ 39,063 Less: reinsurance recoverables on claim reserves 2,955 1,456 3,419 -------------- -------------- ------------- Net balance at January 1 48,829 37,730 35,644 Incurred related to: Current year 98,203 111,459 80,821 Prior years (95) 22,512 14,242 -------------- -------------- ------------- Total incurred 98,108 133,971 95,063 -------------- -------------- ------------- Current year reserves acquired - - 788 Paid related to: Current year 67,911 77,168 68,199 Prior years 36,675 45,704 25,297 Current year acquired business - - 269 -------------- -------------- ------------- Total paid 104,586 122,872 93,765 -------------- -------------- ------------- Balance at December 31 42,351 48,829 37,730 Plus: reinsurance recoverables on claim reserves 1,765 2,955 1,456 -------------- -------------- ------------- Balance at December 31 (Gross) $ 44,116 $ 51,784 $ 39,186 ============== ============== =============
Included in reinsurance recoverables on claim reserves is approximately $0.7 million and $1.9 million relating to paid claims as of December 31, 1998 and 1997, respectively. NOTE 8 - PREFERRED STOCK NEW PREFERRED STOCK Pursuant to the Plan, the Company authorized 40,000 shares of non-voting New Preferred Stock, of which 23,257 shares are owned by CSFB (See NOTE 1). The following summarizes the significant terms of the New Preferred Stock: Stated value of $1,000 share. Cumulative annual dividend rate of $102.50 per share payable annually in arrears on the last day of January in each year by issuance of cash or additional shares of New Preferred Stock. Each share of New Preferred Stock is convertible at any time into 204.8897 shares of New Common Stock at an initial conversion price of $4.88 per share, subject to customary anti-dilution adjustments. The right to designate one additional director prior to June 24, 1999, and the right to elect one director if dividends are in arrears. The New Preferred Stock is mandatorily redeemable in cash on the fifth anniversary of the Effective Date in an amount equal to the stated value per share plus all accrued and unpaid dividends thereon to the date of redemption. Prior to the Effective Date of the Plan (see NOTE 1), the Company had the following preferred stock securities outstanding: OLD PREFERRED STOCK On April 12, 1994, the Company issued 20,000 shares of Old Preferred Stock, at a price of $1,000 per share. The Old 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 Old Preferred Stock: Cumulative annual dividend rate of 8.25%, subject to increase to 9.25%, upon non-compliance by the Company with certain restrictions. Seven thousand sixty-five (7,065) shares of the Old Preferred Stock were converted into shares of Old Common Stock during the year ended December 31, 1998. The converted shares of Old Preferred Stock had an aggregate liquidation preference of $7,065,000 and were converted into 840,071 shares of Old Common Stock. Old Preferred Stock was convertible into 1,419,144 shares of Common Stock as of December 31, 1998 at a conversion price of $8.41 per share. In November 1997, the Company suspended the scheduled dividend payments on its Old Preferred Stock. The failure to declare and pay the scheduled dividend on the Old Preferred Stock constituted an event of non-compliance under the terms of the Old Preferred Stock Agreement and resulted in an immediate increase from 8.25% to 9.25% in the rate at which dividends accrued on the Old Preferred Stock. At the Petition Date, approximately $1.3 million of cumulative, unpaid dividends were accrued. The Company did not accrue dividends on its Old Preferred Stock after the Petition Date as it was unlikely such dividends would be paid under the Plan. The amount of contractual dividends that would have otherwise been accrued from the Petition Date to December 31, 1998 totaled $0.6 million, and such contractual dividends would have continued to accrue at $3,067 per day from January 1, 1999 until the Effective Date. As of the Effective Date, shares of Old Preferred Stock were canceled, extinguished and retired. Holders of Old Preferred Stock will receive their pro rata share of 4% of the New Common Stock issued on the Effective Date and New Warrants to purchase their pro rata share of up to 2% of the number of shares of New Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, subject to the completion of the exchange of securities contemplated by the Plan. NOTE 9 - DEFERRED POLICY ACQUISITION COSTS ("DPAC") A summary of DPAC follows (in thousands):
1998 1997 1996 --------------- ----------------- ---------------- Balance at beginning of year $ 19,165 $ 83,871 $ 56,977 Deferrals: Commissions 3,339 27,933 39,853 Issue costs 1,032 3,186 5,285 --------------- ----------------- ---------------- 23,536 114,990 102,115 Cost of insurance purchased - - 4,663 Recognition of premium deficiency (4,948) (64,952) - Amortization expense (4,411) (30,873) (22,907) =============== ================= ================ Balance at end of year $ 14,177 $ 19,165 $ 83,871 =============== ================= ================
The cost of insurance purchased in 1996 is related to the acquisition of the remaining 60% ownership interest in FHC and its wholly owned insurance subsidiary, FLICA. This amount is being amortized in relation to premium revenue over the remaining life of the business. Interest accrues on the unamortized balance at 7% per year. Amortization of this cost of insurance purchased was approximately $0.8 million and $0.6 million in 1998 and 1997, respectively, net of interest accretion of $0.3 million and $0.2 million. In connection with the Company's acquisition of NFIC and AICT in 1994 and prior to the recognition of a premium deficiency as described below, the related cost of insurance purchased was amortized in relation to premium revenues over the remaining life of the business. Interest accrued on the unamortized balance at 7% per year. Amortization of this cost of insurance purchased was approximately $0, $1.5 million and $1.8 million in 1998, 1997 and 1996, respectively, net of the respective interest accretion of $0, $0.3 million and $0.5 million. RECOGNITION OF PREMIUM DEFICIENCY. During 1997, policy persistency declined in connection with the implementation of certain rate increases together with intensified competitor solicitation of the Company's policyholders. These events affected the future profit margins available to absorb amortization of DPAC. As a result of these adverse changes, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter of 1997. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency for certain old lines of business existed as of December 31, 1997. A premium deficiency occurs when the projected present value of future premiums associated with these policies will not be adequate to cover the projected present value of future payments for benefits and related amortization of DPAC. GAAP requires the immediate recognition of a premium deficiency by charging the unamortized DPAC to expense. Accordingly, for the quarter and year ended December 31, 1997, the Company recorded a non-cash charge to expense of approximately $65.0 million and incurred a significant loss for the year ended December 31, 1997. This adjustment had no impact on the Company's cash position at December 31, 1997 nor did it affect the statutory capital and surplus of the Insurance Subsidiaries. During 1998, the Company continued to experience adverse loss ratios and declining persistency on its old Medical Expense and Medicare Supplement products, although the loss ratios for 1998 reflected an improvement over 1997. As a result of these factors, the Company undertook a further revaluation of the recoverability of DPAC in the third quarter of 1998. Based on the results of this review, the Company determined that an additional premium deficiency existed and recorded a non-cash charge to expense of approximately $5.0 million in the third quarter of 1998. This adjustment had no impact on the Company's cash position or on the statutory capital and surplus of the Insurance Subsidiaries. NOTE 10 - INCOME TAXES The provision for (benefit from) 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, AICT and FLICA, file a consolidated federal income tax return. NFIC, AICT and FLICA file separate federal income tax returns. The provision for (benefit from) U.S. federal income taxes charged to continuing operations was as follows:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 ------------- ------------- --------------- (in thousands) Current 231 $ (926) $ (804) Deferred - (12,342) 5,214 ------------- ------------- --------------- Total provision for (benefit from) income taxes $ 231 $ (13,268) $ 4,410 ============= ============= ===============
Provision has not been made for state and foreign income tax expense since such expense is minimal. In addition, as described in NOTE 15 - "Extraordinary Item," the Company recognized an extraordinary loss of approximately $1.0 million for the year ended December 31, 1997. This amount has been reflected in the accompanying financial statements, net of approximately $0.5 million in deferred taxes. The differences between the effective tax rate and the amount derived by multiplying the (loss) income before income taxes by the federal income tax rate for the Company's last three years was as follows:
Year Ended December 31, ----------------------------- 1998 1997 1996 ------ ------ ------ (in thousands) Statutory tax rate (34%) (34%) 34% Unutilized loss carryforwards 31% 22% - Other items, net 4% - 1% - - - Effective tax rate 1% (12%) 35% ======= ====== ======
Deferred taxes are recorded for temporary differences between the financial reporting basis and the federal income tax basis of the Company's assets and liabilities. The sources of these differences and the estimated tax effect of each are as follows:
Year Ended December 31, ---------------------------------- 1998 1997 -------------- --------------- (in thousands) Deferred Tax Liabilities Unrealized gain on investments $ 2,761 $ 2,410 Other deferred tax liabilities 1,620 1,118 -------------- --------------- Total deferred tax liability $ 4,381 $ 3,528 -------------- --------------- Deferred Tax Assets: Deferred policy acquisition costs $ 5,035 $ 3,662 Policy reserves 2,921 3,514 Net operating loss carryforwards 28,149 24,640 Tax credit carryforwards - 11 Other deferred tax assets 4,725 429 Valuation allowance (36,449) (28,728) -------------- --------------- Total deferred tax asset 4,381 $ 3,528 ============== =============== Net deferred tax liability $ - $ - ============== ===============
A valuation allowance of approximately $36.4 million and $28.7 million has been provided for the year ended December, 31, 1998 and 1997, respectively, for the tax effect of the Company's net operating loss carryovers and other deductible temporary differences since it appears more likely than not that such benefits will not be realized. The change in the valuation allowance for 1998 relates primarily to the increase in net operating losses and decrease in DPAC. 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, 1998, 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 $0.9 million have not been provided on such amount. At December 31, 1998, NFL has approximately $7.8 million 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, 1998, the Company and its wholly owned subsidiaries have aggregate net operating loss carryforwards of approximately $80.4 million and $71.9 million for regular tax and alternative minimum tax purposes, respectively, which expire in 2003 through 2014. However, the Company's emergence from its Chapter 11 Case on March 24, 1999 is expected to significantly limit the availability of such net loss operating carryforwards to offset future taxable income. NOTE 11 - STATUTORY CAPITAL AND SURPLUS Under applicable Delaware law, NFL must maintain minimum aggregate statutory capital and surplus of $550,000. Under applicable Texas law, NFIC and AICT must each maintain minimum aggregate statutory capital and surplus of $1.4 million. Under Mississippi law, FLICA is required to maintain minimum capital and surplus of $1.0 million. The State of Georgia requires licensed out-of-state insurers to maintain minimum capital of $1.5 million, and the Commonwealth of Kentucky requires minimum surplus of $2.0 million. These levels are higher than the requirements of any other states in which the Insurance Subsidiaries are currently licensed. Accordingly, the minimum aggregate statutory capital and surplus which NFL, NFIC and FLICA must each maintain is $3.5 million. AICT must maintain a minimum of $1.5 million. At December 31, 1998, aggregate statutory capital and surplus for NFL, NFIC, AICT and FLICA was $15.9 million, $2.1 million, $2.8 million and $11.5 million, respectively. Although NFIC's capital and surplus is below $3.5 million at December 31, 1998, NFIC voluntarily ceased writing new business effective December 15, 1997. Moreover, NFIC's capital and surplus exceeds the minimum requirements for its state of domicile, Texas. Statutory net (losses) income for NFL, NFIC, AICT and FLICA for the year ended December 31, 1998, were $(5.9) million, $(3.3) million, $(2.0) million and $0.6 million, respectively. FLICA through its parent FHC, is wholly owned by NFL, and AICT is wholly owned by NFIC. Accordingly, statutory capital and surplus of the parent includes the statutory capital and surplus of the respective subsidiary. 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 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 1999, 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 excluding 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 1999 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 1999 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ending December 31, 1998. Generally, all states require insurance companies to maintain statutory 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 1998, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future. 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 NAIC) 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 December 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 statutory 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 December 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. In December 1990, the Company and NFL entered into an agreement under which NFL issued a surplus certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the surplus certificate bears interest at an agreed upon rate not to exceed 10% and is repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance agreements and (ii) NFL receiving prior approval for repayment from the Delaware Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. No principal payments have been made subsequent to 1994. The unpaid aggregate principal under this surplus certificate totaled $777,000 as of December 31, 1998 and 1997. As a result of the statutory losses sustained by the Insurance Subsidiaries since 1997, material transactions are subject to the approval by the department of insurance in each domiciliary state. In December 1997, NFIC, in response to these losses as well as the projected inability to meet RBC requirements, took appropriate steps to voluntarily cease the sale and underwriting of new business. In the second quarter of 1998, AICT significantly reduced the level of sales and underwriting of new business. NFIC and AICT have also entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the TDI. The Company has no current plans to underwrite new products in NFIC. The statutory financial statements of the Insurance Subsidiaries are prepared using accounting methods which are prescribed or permitted by the insurance department of the respective companies' state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. NOTE 12 - EMPLOYEE BENEFIT 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 ten investment funds at the discretion of the employee. Until July 1998, Company contributions were in the form of Old Common Stock. Subsequent to July 1998, the Company began making cash contributions. The Company's contributions to the plan in 1998, 1997 and 1996 approximated $80,000, $106,000 and $102,000, respectively. The Company's incentive stock option plans adopted as of July 1, 1982, September 5, 1985, and March 26, 1992, and the Company's restricted stock plan adopted as of April 19, 1996, have been canceled as of the Effective Date. All outstanding grants of stock options or restricted stock have been extinguished as contemplated by the terms of the Plan. 1999 STOCK OPTION PLAN Pursuant to the Plan, on March 24, 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999 Plan") in order to further and promote the interest of the Company, its subsidiaries and its shareholders by enabling the Company and its subsidiaries to attract, retain and motivate employees, non-employee directors and consultants (including marketing agents) or those who will become employees, non-employee directors and consultants (including marketing agents), and to align the interests of those individuals and the Company's shareholders. To do this, the 1999 Plan offers equity-based opportunities providing such employees and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and its subsidiaries. The 1999 Plan became effective on the date of its adoption by the Company and will remain in effect until December 31, 2008, except with respect to awards (as that term is defined in the 1999 Plan) then outstanding, unless terminated or suspended by the Board of Directors at that time. After such date no further awards shall be granted under the 1999 Plan. NOTE 13 - REINSURANCE The Insurance Subsidiaries cede insurance to other insurers and reinsurers on both life and accident and health business. Reinsurance agreements are used to limit maximum losses and provide greater diversity of risk. The Company remains liable to policyholders to the extent the reinsuring companies are unable to meet their treaty obligations. Total accident and health premiums of $2.8 million, $3.6 million and $4.1 million, were paid to reinsurers in 1998, 1997, and 1996, respectively. Face amounts of life insurance in force approximated $37.5 million, $53.1 million and $87.0 million at December 31, 1998, 1997 and 1996, respectively. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance. NFL's retention limit is $25,000 per year, and $22,046 of premiums were paid to the reinsurer for the year ended December 31, 1998. No other life insurance products were reinsured during 1998, 1997 or 1996. The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Agreement") with a reinsurer effective July 1, 1996 on the in force Specified Disease business. The Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. This ceding commission allowance was to be repaid, inclusive of interest at 12.5%, as statutory profits emerged from the reinsured block of business. For the year ended December 31, 1996, the repayment was $1.9 million. The ceding allowance payable for the year ended December 31, 1996 was $8.6 million. The Company exercised its option to terminate and recapture this Agreement on April 1, 1997 consisting of approximately $9.0 million in total recapture costs calculated at an interest rate of 15% less approximately $2.0 million in unearned premium reserves due to NFL and FLICA. See NOTE 15 - "Extraordinary Item." In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a wholly owned subsidiary of FHC. Under the terms of the treaty, NFL assumed a 90% pro-rata share of certain Specified Disease business. For the years ended December 31, 1998, 1997 and 1996, $0, $0 and $2.3 million, respectively, of assumed premiums under this coinsurance treaty are included as premium revenue in the consolidated financial statements. This coinsurance treaty was canceled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996. In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms of the treaty, NFL assumed a 50% pro-rata share of all insurance business written by FLICA from January 1, 1987 through December 31, 1988. In November 1988, the coinsurance treaty was amended to extend through 1997. For the years ended December 31, 1998, 1997 and 1996, $0, $0 and $1.7 million, respectively, of assumed premiums under the coinsurance treaty are included as revenue in the consolidated financial statements. This coinsurance treaty was canceled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996. NOTE 14 - COMMITMENTS AND CONTINGENCIES The Company's future minimum lease payments for non-cancelable operating leases, relating primarily to office facilities and data processing equipment having a remaining term in excess of one year, at December 31, 1998, aggregated $6.7 million. The amounts due by year are as follows: 1999-$2.3 million; 2000-$1.4 million; 2001-$1.1 million; 2002-$1.0 million; 2003-$0.4 million; and thereafter-$0.5 million. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $3.2 million, $4.4 million and $4.2 million in 1998, 1997 and 1996, respectively. In the normal course of their business operations, the Insurance Subsidiaries, continue to be involved in various claims, lawsuits (alleging actual as well as substantial exemplary damages) and regulatory matters. In the opinion of management, the disposition of these or any other legal matters will not have a material adverse effect on the Company's business, consolidated financial position or results of operations. The Company's Insurance Subsidiaries are subject to extensive governmental regulation and supervision at both federal and state levels. Such regulation includes premium rate levels, premium rate increases, policy forms, minimum loss ratios, dividend payments, claims settlement, licensing of insurers and their agents, capital adequacy, transfer of control, and amount and type of investments. Additionally, there are numerous health care reform proposals and regulatory initiatives under consideration which if enacted could have significant impact on the Company's results of operations. NOTE 15 - EXTRAORDINARY ITEM For the year ended December 31, 1997, the Company recognized an aggregate of $1.0 million in extraordinary losses, net of taxes. Of this amount, (i) $0.6 million resulted from the recognition of unamortized financing fees associated with the prepayment and refinancing of the Company's revolving credit facility with Fleet National Bank (See NOTE 6 "Financing Activities"); and (ii) $0.4 million resulted from the termination and recapture of the block of reinsured policies referred to in NOTE 13 - "Reinsurance." NOTE 16 - RECONCILIATION TO STATUTORY REPORTING A reconciliation of net (loss) 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 is as follows:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 ------------- ------------- --------------- (in thousands) Net (loss) income as reported by the Insurance Subsidiaries on a statutory basis $ (8,108) $ (49,618) $ 870 Additions to (deductions from) statutory basis: Future policy benefits and claims 806 2,493 (2,016) FHC pre-acquisition statutory earnings - - (1,388) Deferred policy acquisition costs, net of amortization (41) 735 22,434 Deferred, uncollected and advance premiums (104) 44 (1,719) Coinsurance Funds Withheld reinsurance treaty - 8,575 (7,336) Recognition of premium deficiency (4,948) (64,952) - Extraordinary item, net of tax - (1,007) - Income taxes 1,250 13,970 (4,214) Subsidiary companies, eliminations, and other adjustments (10,776) (6,664) 2,001 Other, net (364) (720) (371) ------------- ------------- --------------- Consolidated net (loss) income as reported herein on a GAAP basis $ (22,285) $ (97,144) $ 8,261 ============= ============= ===============
A reconciliation of the statutory capital and surplus reported by the Insurance Subsidiaries under regulatory practices to stockholders' (deficit) equity as reported herein by the Company on a consolidated GAAP basis is as follows:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 ------------- ------------- --------------- (in thousands) Capital and surplus as reported by the Insurance Subsidiaries on a statutory basis $ 17,937 $ 21,592 $ 18,648 Deductions from (additions to) a statutory basis: Future policy benefits and claims (9,521) (10,147) 10 Deferred policy acquisition costs 14,177 19,165 83,871 Nonadmitted assets 2,123 832 4,818 Coinsurance Funds Withheld reinsurance treaty - - (8,831) Income taxes - (1,037) (13,242) Deferred, uncollected and advance premiums 136 249 (12,651) Asset valuation reserve 796 1,049 1,157 Interest maintenance reserve 1,380 1,499 1,475 Unrealized appreciation on investments, net of tax 3,037 3,446 1,054 Other, net 727 342 3,088 ------------- ------------- --------------- Combined insurance subsidiaries stockholders' equity on a GAAP basis 30,792 36,990 79,397 Combined non-insurance subsidiaries stockholders' equity (deficit) on a GAAP basis 7,887 477 (1,409) Eliminations and other adjustments (100,759) (82,885) (30,085) ------------- ------------- --------------- Consolidated stockholders' (deficit) equity as reported herein on a GAAP basis $ (62,080) $ (45,418) $ 47,903 ============= ============= ===============
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for each of the Company's last two years of operations is as follows (in thousands, except per share data):
Quarter Ended ----------------------------------------------------------------- 1998 March June September December - - ----------------------------------------------------- ------------- ------------ --------------- ------------- Premium income $ 37,439 $ 35,251 $ 33,278 $ 29,749 Net investment income 3,166 3,192 2,929 2,724 Net realized gains on investments 262 267 1,576 37 Fee, service and other income 4,062 4,037 4,085 4,007 Benefits, claims and other expenses 50,654 46,376 48,531 42,554 Loss before income taxes (5,725) (3,629) (6,663) (6,037) Preferred stock dividend 471 (62) 111 - Loss applicable to common stockholders $ (5,437) $ (3,087) $ (7,018) $ (7,263) Earnings per share: Basic $ (0.88) $ (0.48) $ (1.01) $ (1.05) Diluted $ (0.88) $ (0.48) $ (1.01) $ (1.05)
Quarter Ended ----------------------------------------------------------------- 1997 March June September December - - ----------------------------------------------------- ------------- ------------ --------------- ------------- Premium income $ 40,820 $ 41,022 $ 40,450 $ 38,805 Net investment income 2,226 2,530 3,207 3,060 Net realized (losses) gains on investments (60) 192 223 (271) Fee, service and other income 3,502 4,106 4,525 4,567 Benefits, claims and other expenses 43,826 57,329 79,125 118,029 Income (loss) before income taxes and extraordinary items 1,730 (6,161) (19,968) (71,738) Extraordinary loss, net of tax - (1,007) - - Preferred stock dividend 396 392 392 392 Income (loss) applicable to common stockholders $ 1,334 $ (7,560) (20,360) $ (72,130) Earnings per share: Basic: Income (loss) before extraordinary item $ 0.22 $ (1.07) $ (3.29) $ (11.64) Extraordinary loss $ - $ (0.16) $ - $ - Net income (loss) $ 0.22 $ (1.23) $ (3.29) $ (11.64) Diluted: Income (loss) before extraordinary item $ 0.20 $ (1.07) $ (3.29) $ (11.64) Extraordinary loss $ - $ (0.16) $ - $ - Net income (loss) $ 0.20 $ (1.23) $ (3.29) $ (11.64)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (in thousands)
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 --------------- -------------- --------------- Net investment income $ 1,090 $ 1,579 $ 62 Realized gains on investments 475 984 - Intercompany income derived from: Interest on Surplus Certificates 78 78 78 Rental of leasehold improvements and equipment 397 1,926 1,703 Interest on advances to subsidiaries 254 266 192 Other income 121 228 106 --------------- -------------- --------------- 2,415 5,061 2,141 --------------- -------------- --------------- General and administrative expenses 2,319 4,349 2,128 Reorganization expense 7,856 1,324 - Taxes, licenses and fees 45 164 90 Interest expense 5,933 5,846 2,496 --------------- -------------- --------------- 16,153 11,683 4,714 --------------- -------------- --------------- Loss before income taxes and equity in undistributed net earnings of subsidiaries and FHC (13,738) (6,622) (2,573) (Benefit from) provision for income taxes (235) 3,939 (432) --------------- -------------- --------------- (13,503) (10,561) (2,141) Equity in undistributed net (losses) earnings of subsidiaries and FHC (8,782) (86,419) 10,402 --------------- -------------- --------------- (Loss) income before extraordinary item (22,285) (96,980) 8,261 Extraordinary loss (1) - 164(1) - --------------- -------------- --------------- Net (loss) income (22,285) (97,144) 8,261 Preferred stock dividends 520 1,572 1,650 --------------- -------------- --------------- (Loss) income applicable to common stockholders (22,805) (98,716) 6,611 Retained (deficit) earnings at beginning of year (81,530) 17,186 10,575 --------------- -------------- --------------- Retained (deficit) earnings at end of year $ (104,335) $ (81,530) $ 17,186 =============== ============== ===============
(1) From early extinguishment of debt, net of income tax benefit of $85. The condensed financial information should be read in conjunction with the Westbridge Capital Corp. consolidated financial statements as of December 31, 1998 and notes thereto. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) BALANCE SHEETS (in thousands)
Year Ended December 31, --------------------------------------------------- 1998 1997 ---------------------- ------------------------ Assets: Cash and other short-term investments $ 985 $ 3,317 Fixed maturities, at market value 10,433 15,198 Equity securities, at market value 1,010 1,038 Investment real estate - 566 Investment in consolidated subsidiaries 39,584 38,224 Accrued investment income 213 288 Leasehold improvements and equipment, net - 960 Advances due from subsidiaries 2,107 4,219 Receivable from subsidiary on Surplus Certificate 777 777 Other assets 3,088 4,580 ---------------------- ------------------------ Total Assets $ 58,197 $ 69,167 ====================== ======================== Liabilities: Senior subordinated notes, net $ 19,523 $ 19,447 Convertible subordinated notes 70,000 70,000 Payable to subsidiaries - 36 Interest and dividends payable 11,315 4,861 Other liabilities 7,504 1,241 ---------------------- ------------------------ Total Liabilities 108,342 95,585 ---------------------- ------------------------ Redeemable Preferred Stock 11,935 19,000 ---------------------- ------------------------ Stockholders' Equity: Common stock 703 620 Capital in excess of par value 37,641 30,843 Accumulated other comprehensive income, net of tax 3,911 4,649 Deficit (104,335) (81,530) ---------------------- ------------------------ Total Stockholders' Deficit (62,080) (45,418) ---------------------- ------------------------ Total Liabilities, Redeemable Preferred Stock and Stockholders' Deficit $ 58,197 $ 69,167 ====================== ========================
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. consolidated financial statements as of December 31, 1998 and notes thereto. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, --------------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Cash Flows From Operating Activities: (Loss) income applicable to common stockholders $ (22,805) $ (98,716) $ 6,611 Adjustments to reconcile net (loss) income to cash provided by (used for) operating activities: Equity in undistributed net loss (income) of subsidiaries 8,782 86,419 (10,402) Depreciation expense 89 422 452 Accrued investment income 75 (238) (16) Decrease (increase) in other assets 1,043 51 (7) Advances (due from) due to subsidiaries, net (2,105) (2,536) 1,471 Increase (decrease) in other liabilities 6,263 665 (137) Increase (decrease) in interest and dividend payable 6,454 4,446 (1) Other, net 595 2,980 457 --------------- --------------- --------------- Net Cash Used For Operating Activities (1,609) (6,507) (1,572) --------------- --------------- --------------- Cash Flows From Investing Activities: Proceeds from sale of investments 5,176 42,268 - Cost of investments acquired - (57,366) - Additions to leasehold improvements and equipment, net of retirements (27) (349) (165) (Increase) decrease in other assets (283) 288 158 Investment in subsidiaries (6,321) (43,105) 1,038 --------------- --------------- --------------- Net Cash (Used For) Provided by Investing Activities (1,455) (58,264) 1,031 --------------- --------------- --------------- Cash Flows From Financing Activities: Decrease (increase) in other assets 732 (1,914) 218 Issuance of convertible notes - 70,000 - (Retirement) issuance of note payable - (1,103) 103 Issuance of common stock - 140 140 Purchase and cancellation of common stock - (276) (125) --------------- --------------- --------------- Net Cash Provided By Financing Activities 732 66,847 336 --------------- --------------- --------------- (Decrease) increase in Cash and Short-Term Investments During the Year (2,332) 2,076 (205) Cash and Other Short-Term Investments at Beginning of Year 3,317 1,241 1,446 =============== =============== =============== Cash and Other Short-Term Investments at End of Year $ 985 $ 3,317 $ 1,241 =============== =============== ===============
The condensed financial information should be read in conjunction with the Westbridge Capital Corp. consolidated financial statements as of December 31, 1998 and notes thereto. SCHEDULE III WESTBRIDGE CAPITAL CORP. SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
Other Policy Deferred Claims Benefits Amortization Policy Future and Net and of Policy Other Acquisition Policy Benefits Premium Investment Claims Acquisition Operating Premiums Segment Costs Benefits Payable Revenue Income Expense Costs Expenses Written* - - ----------------------------- -------- --------- ------- --------- --------- ------- -------- ------- -------- YEAR ENDED DECEMBER 31, 1998: Insurance operations $14,177 $53,871 $44,116 $135,717 $ 8,314 $ 99,419 $ 4,411 $ 44,447 $ 31,216 Other activities -- -- -- -- 2,607 -- -- 23,828 ======= Corporate (parent company) -- -- -- -- 1,090 -- -- 16,009 ======= ======= ======= ======= ======= ======= ======= ======== Total $14,177 $53,871 $44,116 $135,717 $12,011 $ 99,419 $ 4,411 $ 84,284 ======= ======= ======= ======= ======= ======= ======= ======== YEAR ENDED DECEMBER 31, 1997: Insurance operations $19,165 $55,811 $51,784 $161,097 $ 7,325 $136,866 $30,873 $ 91,633 $ 73,611 Other activities -- -- -- -- 1,547 -- -- 27,564 ======= Corporate (parent company) -- -- -- -- 2,151 -- -- 11,373 ======= ======= ======= ======= ======= ======= ======= ======== Total $19,165 $55,811 $51,784 $161,097 $11,023 $136,866 $30,873 $130,570 ======= ======= ======= ======= ======= ======= ======= ======== YEAR ENDED DECEMBER 31, 1996: Insurance operations $83,871 $54,204 $39,186 $156,780 $ 6,514 $ 94,187 $22,907 $ 16,385 $107,149 Other activities -- -- -- -- 1,784 -- -- 24,433 ======= Corporate (parent company) -- -- -- -- 438 -- -- 4,637 ======= ======= ======= ======= ======= ======= ======= ======== Total $83,871 $54,204 $39,186 $156,780 $ 8,736 $ 94,187 $22,907 $ 45,455 ======= ======= ======= ======= ======= ======= ======= ========
*Premiums Written--Amounts do not apply to life insurance. WESTBRIDGE CAPITAL CORP. SCHEDULE IV REINSURANCE (IN THOUSANDS, EXCEPT PERCENTAGES)
Assumed Percentage Ceded to From of Amount Gross Other Other Net Assumed Amount Companies Companies Amount to Net --------------- -------------- -------------- --------------- -------------- YEAR ENDED DECEMBER 31, 1998: Life insurance in force $ 44,815 $ 7,275 $ - $ 37,540 - =============== ============== ============== =============== Premiums: Life $ 664 $ 22 $ - $ 642 - Accident and health 136,291 2,812 1,596 135,075 1.18% --------------- -------------- -------------- --------------- Total premiums $ 136,955 $ 2,834 $ 1,596 $ 135,717 1.18% =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 1997: Life insurance in force $ 53,065 $ - $ - $ 53,065 - =============== ============== ============== =============== Premiums: Life $ 832 $ - $ - $ 832 - Accident and health 161,865 3,635 2,035 160,265 1.27% --------------- -------------- -------------- --------------- Total premiums $ 162,697 $ 3,635 $ 2,035 $ 161,097 1.26% =============== ============== ============== =============== YEAR ENDED DECEMBER 31, 1996: Life insurance in force $ 86,978 $ - $ - $ 86,978 - =============== ============== ============== =============== Premiums: Life $ 889 $ - $ - $ 889 - Accident and health 155,952 4,063 4,002 155,891 2.57% --------------- -------------- -------------- --------------- Total premiums $ 156,841 $ 4,063 $ 4,002 $ 156,780 2.55% =============== ============== ============== ===============
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, 1998: Allowance for doubtful agents' balances $ 4,531 $ 645 $ - $ 5,176 ================ ================ ================ =============== YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful agents' balances $ 1,729 $ 2,802 $ - $ 4,531 ================ ================ ================ =============== YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful agents' balances $ 1,187 $ 1,462 $ (920) $ 1,729 ================ ================ ================ ===============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to directors is incorporated herein by reference to "Election of Directors" from the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders, which will be filed on or before April 30, 1999. Information relating to executive officers is contained under the heading "Executive Officers" in PART I hereof. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation is incorporated herein by reference to "Election of Directors -- Executive Compensation" from the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders, which will be filed on or before April 30, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of certain beneficial owners and management is incorporated herein by reference to "Principal Stockholders" and "Election of Directors -- Security Ownership of Management" from the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders, which will be filed on or before April 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transaction is incorporated herein by reference to "Principal Stockholders" and "Election of Directors" from the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders, which will be filed on or before April 30, 1999. PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) The documents set forth below are filed as part of this report. (1) FINANCIAL STATEMENTS: Reference is made to ITEM 8, "Index to Financial Statements and Financial Statement Schedules." (2) FINANCIAL STATEMENT SCHEDULES: Reference is made to ITEM 8, "Index to Financial Statements and Financial Statement Schedules." All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (3) EXHIBITS: The following exhibits are filed herewith. Exhibits incorporated by reference are indicated in the parentheses following the description. 2.1 First Amended Plan of Reorganization of Westbridge Capital Corp. Under Chapter 11 of the Bankruptcy Code, dated as of October 30, 1998 (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on September 21, 1998). 2.2 Amended Disclosure Schedule Accompanying the First Amended Plan of Reorganization of Westbridge Capital Corp. under Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on September 21, 1998). 2.3 Findings of Fact, Conclusions of Law, and Order confirming the First Amended Plan of Reorganization of Westbridge Capital Corp. dated October 30, 1998, as modified (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on December 29, 1998). 3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 24, 1999 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-A filed on March 25, 1999). 3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Form 8-A filed on March 25, 1999). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed on March 25, 1999). 4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed on March 25, 1999). 4.3 Form of Warrant Agreement dated as of March 24, 1999, between the Company and LaSalle National Bank, as warrant agent (incorporated by reference to Exhibit 4.3 to the Company's Form 8-A filed on March 25, 1999). 4.4* Form of Preferred Stock Certificate. 10.1 Credit Agreement dated as of June 6, 1997 between Westbridge Funding Corporation and LaSalle National Bank (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.2 Guaranty Agreement dated as of June 6, 1997 by Westbridge Capital Corp. in favor of LaSalle National Bank (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.3 Pledge Agreement dated as of June 6, 1997 between Westbridge Marketing Corporation and LaSalle National Bank (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.4 Security Agreement dated as of June 6, 1997 between Westbridge Funding Corporation for the benefit of LaSalle National Bank (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.5 Second Amended and Restated Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between National Foundation Life Insurance Company, National Financial Insurance Company, American Insurance Company of Texas, Freedom Life Insurance Company of America, and Westbridge Funding Corporation (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.6 Amended and Restated Non-Insurance Company Sellers Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between American Senior Security Plans, L.L.C., Freedom Marketing, Inc., Health Care-One Insurance Agency, Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of Texas, Inc., and Westbridge Marketing Corporation (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.7 Lock-Up Agreement, dated as of September 16, 1998, by and among the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on September 21, 1998). 10.8 Stock Purchase Agreement, dated as of September 16, 1998, between the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed on September 21, 1998). 10.9 Employment Agreement, dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed on September 21, 1998). 10.10Employment Agreement dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick H. O'Neill (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed on September 21, 1998). 10.11* First Amendment and Waiver to Credit Agreement among Westbridge Funding Corporation, Westbridge Capital Corp. and LaSalle National Bank dated as of September 8, 1998. 10.12* First Amendment to Guaranty Agreement dated as of March 24, 1999 between Westbridge Capital Corp. in favor of LaSalle National Bank. 10.13* Registration Rights Agreement dated as of March 24, 1999 between the Company and Special Situations Holdings, Inc. - Westbridge. 10.14* 1999 Stock Option Plan dated as of March 24, 1999. 21.1* List of Subsidiaries of Ascent Assurance, Inc. 24.1* Consent of PricewaterhouseCoopers LLP 27.1* Financial Data Schedule. (b) REPORT ON FORM 8-K. The Registrant filed a Report on Form 8-K dated March 25, 1999 in response to Item 5, Other Events, to report its emergence on March 24, 1999 from the Chapter 11 Case commenced on September 16, 1998. The Registrant filed a Report on Form 8-K dated December 29, 1998 in response to Item 3, Bankruptcy or Receivership, to report the confirmation of its First Amended Plan of Reorganization (the "Plan") under Chapter 11 of Title 11 of the United States Bankruptcy Court in the District of Delaware. In conjunction with this filing, the Company submitted a copy of the Confirmation Order with accompanying exhibits, including a copy of the Plan as confirmed. - - ------------------------ * Filed Herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 1999. ASCENT ASSURANCE, INC. (FORMERLY, WESTBRIDGE CAPITAL CORP.) /S/ PATRICK J. MITCHELL (Patrick J. Mitchell, Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - - ------------------------------------------------ ------------------------------------------ ---------------- /S/ PATRICK J. MITCHELL Director, Chairman of the Board March 29, 1999 (Patrick J. Mitchell) and Chief Executive Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) /S/ JOHN H. GUTFREUND Director March 29, 1999 (John H. Gutfreund) /S/ RICHARD H. HERSHMAN Director March 29, 1999 (Richard H. Hershman) /S/ MICHAEL A. KRAMER Director March 29, 1999 (Michael A. Kramer) /S/ ROBERT A. PEISER Director March 29, 1999 (Robert A. Peiser) /S/ JAMES K. STEEN Director March 29, 1999 (James K. Steen)
INDEX OF EXHIBITS Exhibit NUMBER DESCRIPTION OF EXHIBIT 4.4* Form of Preferred Stock Certificate. 10.11* First Amendment and Waiver to Credit Agreement among Westbridge Funding Corporation, Westbridge Capital Corp. and LaSalle National Bank dated as of September 8, 1998. 10.12* First Amendment to Guaranty Agreement dated as of March 24, 1999 between Westbridge Capital Corp. in favor of LaSalle National Bank. 10.13* Registration Rights Agreement dated as of March 24, 1999 between the Company and Special Situations Holdings, Inc. - Westbridge. 10.14* 1999 Stock Option Plan dated as of March 24, 1999. 21.1* List of Subsidiaries of Ascent Assurance, Inc. 24.1* Consent of PricewaterhouseCoopers LLP 27.1* Financial Data Schedule. * Filed Herewith EXHIBIT 21.1 SUBSIDIARIES OF ASCENT ASSURANCE, INC. (FORMERLY, WESTBRIDGE CAPITAL CORP.)
PERCENTAGE SUBSIDIARY OWNERSHIP 1. National Foundation Life Insurance Company (Delaware) 100% 2. American Insurance Company of Texas (Texas) 100% 3. National Financial Insurance Company (Texas) 100% 4. Freedom Life Insurance Company of America (Mississippi) 100% 5. Freedom Holding Company (Kentucky) 100% 6. Ascent Funding, Inc. (Delaware) 100% (formerly, Westbridge Funding Corporation) 7. Foundation Financial Services, Inc. (Nevada) 100% 8. NationalCare(R) Marketing, Inc. (Delaware) 100% (formerly, Westbridge Marketing Corporation) 9. Westbridge Printing Services, Inc. (Delaware) 100% 10. Ascent Management, Inc. (Delaware) 100% (formerly, Westbridge Management Corp.) 11. Ascent Financial, Inc. (Delaware) 100% (formerly, Westbridge Financial Corp.) 12. Precision Dialing Services, Inc. (Delaware) 100% 13. Senior Benefits, LLC (Arizona) 100% 14. American Senior Security Plans, LLC (Delaware) 100% 15. Health Care-One Marketing Group, Inc. (Texas) 80% 16. LifeStyles Marketing Group, Inc. (Delaware) 100% 17. Health Care-One Insurance Agency, Inc. (California) 50%
EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 (No. 33-55192) of Westbridge Capital Corp. and its subsidiaries of our report dated March 29, 1999, appearing on page 40 of this Form 10-K. /S/ PRICWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Dallas, Texas March 29, 1999 EXHIBIT 4.4 NY1:#3209613v1 Incorporated under the Laws of the State of Delaware ASCENT ASSURANCE, INC. SERIES A CONVERTIBLE PREFERRED STOCK CERTIFICATE This certifies that ______________ is the owner of __________ fully paid and non-assessable shares of the Series A Convertible Preferred Stock of the par value of $0.01 per share of Ascent Assurance, Inc. (hereinafter called the "Corporation") transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation and By-Laws of the Corporation and the amendments from time to time made thereto, copies of which are or will be on file at the principal office of the Corporation, to all of which the holder by acceptance hereof assents. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. ASCENT ASSURANCE, INC. By /S/ PATRICK J. MITCHELL Chairman of the Board Attest: /S/ PATRICK H. O'NEILL Secretary THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, UPON REQUEST AND WITHOUT CHARGE, A FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AUTHORIZED TO BE ISSUED AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AN/OR RIGHTS. ANY SUCH REQUEST MAY BE ADDRESSED TO THE SECRETARY OF THE CORPORATION. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT - ....Custodian... TEN ENT -as by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors Survivorship and not as tenants Act......................... in common (State) Additional abbreviations may also be used though not in the above list. For Value Received, ___________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - - ------------------------------------------------------------------------------ (Please print or typewrite name and address of Assignee) - - ------------------------------------------------------------------------------ _________________________________________________Shares of the stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ___________________ ____________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _________________________ Signature(s) Guaranteed ___________________________________________ Notice: The Signature to this Assignment must correspond with the name as written upon the Fact of the Certificate, in every particular, without alteration or enlargement, or any change whatever. By______________________________ The Signature should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17 Ad-15. EXHIBIT 10.11 FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT AMONG WESTBRIDGE FUNDING CORPORATION, WESTBRIDGE CAPITAL CORPORATION, AND LASALLE NATIONAL BANK Dated September 8, 1998 The First Amendment and Waiver ("Amendment") to that certain Credit Agreement, dated as of June 6, 1997, as amended from time to time (collectively, "Credit Agreement"), by and between LaSalle National Bank ("Bank") and Westbridge Funding Corporation ("Borrower") is entered into as of the date stated above by the Borrower, the Bank and Westbridge Capital Corporation (the "Guarantor"). Capitalized terms used herein without definition shall have the respective meanings assigned thereto in the Credit Agreement. WITNESSETH: WHEREAS, the Bank and the Borrower are parties to the Credit Agreement; and WHEREAS, as condition to the Credit Agreement, the Guarantor issued its Guaranty to the Bank of all of the Obligations of the Borrower to the Bank pursuant to the Credit Agreement and the related Loan Documents; WHEREAS, the Borrower and the Guarantor have advised the Bank that the Guarantor intends to file a voluntary petition for relief in the United States Bankruptcy Court, District of Delaware, pursuant to Chapter 11 of the Bankruptcy Code (the "Proceeding") on or about September 10, 1998; and WHEREAS, pursuant to the Credit Agreement, the commencement of the Proceeding constitutes one or more Events of Default; and WHEREAS, upon the occurrence of any Event of Default, the Bank may exercise various rights and remedies provided to it in the Loan Documents, or by applicable law or in equity, including, without limitation, terminating the Commitment, declaring all amounts owing under the Credit Agreement to be forthwith due and payable, and exercising any and all rights that it may have with respect to the Collateral (as such term is defined in the Security Agreement); and WHEREAS, the Borrower and Guarantor have requested, and the Bank has agreed, subject to the terms and conditions herein, to waive the occurrence and continuance of the Events of Default occasioned by the commencement of the Proceeding; and WHEREAS, the Borrower has also requested, and the Bank has agreed, to modify and amend certain provisions of the Credit Agreement to more accurately reflect certain obligations actually incurred from time to time by the Borrower; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy and sufficiency of which are hereby acknowledged, the Bank, the Borrower and the Guarantor hereby agree as follows: 1. WAIVER OF EVENTS OF DEFAULT. Subject to the terms hereof, the Bank hereby waives the Events of Default occasioned as a result of the commencement of the Proceeding by the Guarantor. Such Waiver is limited to the Events of Default occasioned by the commencement of the Proceeding and it is not a waiver with respect to any other Default or Event of Default which has or may occur pursuant to the terms of the Credit Agreement generally. In particular, during the term of this Waiver, the Bank hereby waives any Event of Default arising under the following provisions of the Credit Agreement, insofar as they apply to the Guarantor and are occasioned by the commencement of the Proceeding: (i) Section 8.1(c); (ii) Section 8.1(e), to the extent relating to compliance with Sections 6.3, 6.4 and 6.9 of the Guaranty, or Section 9(ii) of the Pledge Agreement, or to the extent performance of other provisions thereof by the Guarantor is prohibited by the pendency of the Proceeding; (iii) Section 8.1(j); and (iv) Section 8.1.(k). 2. WAIVER FEE; TERM OF WAIVER. In addition to the conditions set forth in Section 4 hereof, this Amendment and the effectiveness of the waiver herein contained is conditioned upon the payment by Borrower to the Bank of a waiver fee on the date hereof in the amount of $50,000. In consideration of such fee, and subject to the conditions precedent set forth in Section 4 hereof, the waiver herein granted shall continue from the date of the commencement of the Proceeding through and including March 9, 1999. Thereafter, in the event that a final, non-applicable order of confirmation has not yet been entered in the Proceeding, in the sole discretion of the Bank, and so long as no Default or Event of Default other than those waived hereby has occurred and is continuing, the Bank may elect to extend the waiver for one or more 30-day periods, upon the payment by the Borrower to the Bank of an extension fee for each such 30-day period in the amount of $15,000. Nothing herein contained shall obligate the Bank to extend the waiver beyond March 9, 1999, or to grant any additional extensions after such date. Notwithstanding anything contained in this Section 2 to the contrary, in the event that Guarantor in any way seeks to modify the treatment of the LaSalle Claim form that provided for in the Plan (as herein defined) without the Bank's consent, or should an order of confirmation be entered with respect to any plan of reorganization which would have the effect of impairing the LaSalle Claim without the Bank's consent, the waiver contained herein shall immediately and automatically terminate. 3. AMENDMENT TO CREDIT AGREEMENT. Section 1.1 of the Credit Agreement is hereby amended, effective as of June 30, 1998, by deleting the defined term "INTEREST COVERAGE RATIO" and inserting the following in its stead: "INTEREST COVERAGE RATIO" at the end of any fiscal quarter means the ratios of (i) an amount equal to the sum of (a) consolidated GAAP EBIT of the Borrower and all Subsidiaries for the immediately preceding four fiscal quarters (ending on such date) PLUS (b) Deferred Revenues for the immediately preceding four fiscal quarters (ending on such date), to (2) total Interest Expense of the Borrower and its Subsidiaries on a consolidated basis for the immediately preceding four fiscal quarters (ending on such date). 4. CONDITIONS PRECEDENT. This Amendment and the waiver herein contained is subject to the satisfaction of the following condition precedent: i. The Guarantor shall file a plan of reorganization and related disclosure statement substantially in the form delivered by the Guarantor's counsel to the Bank on August 25, 1998 (the "Plan"). 5. COVENANTS OF GUARANTOR. So long as the Proceeding shall continue, Guarantor hereby covenants and agrees to deliver to the Bank, promptly following their delivery to the Court, copies of all filings, pleadings, financial reports, budgets, studies and the like filed in the Proceeding. All such deliveries shall be in addition to any and all reporting requirements set forth in the Credit Agreement. 6. REAFFIRMATION. The Borrower hereby reaffirms to the Bank that, except as modified hereby, the Credit Agreement and all of the Loan Documents remain in full force and effect and have not been otherwise waived, modified or amended. 7. GOVERNING LAW AND INTERPRETATION. This Amendment has been delivered in Chicago, Illinois, and shall be governed by and construed in accordance with the provisions of the Credit Agreement and the laws and decisions of the State of Illinois without giving effect to the conflict of law principles thereunder. 8. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. One or more counterparts of this waiver may be delivered by telecopier, with the intention that they shall have the same effect as an original counterpart thereof. IN WITNESS WHEREOF, each of the parties hereto has caused this Waiver to be duly executed and delivered as of the day and year first above written. BANK: LASALLE NATIONAL BANK By: /S/ JANET R. GATES Its: FIRST VICE PRESIDENT BORROWER: WESTBRIDGE FUNDING CORPORATION By: /S/ PATRICK J. MITCHELL Its: PRESIDENT GUARANTOR: WESTBRIDGE CAPITAL CORP. By: /S/ PATRICK J. MITCHELL Its: PRESIDENT EXHIBIT 10.12 FIRST AMENDMENT TO GUARANTY AGREEMENT This FIRST AMENDMENT TO GUARANTY AGREEMENT (this "Amendment") dated as of March 24, 1999, is made by Westbridge Capital Corp., a Delaware corporation (the "Guarantor") for the benefit of LaSalle National Bank (the "Bank"), its successors and assigns and any and all other Beneficiaries. Capitalized terms used herein without definition shall have the respective meanings assigned to them in that certain Guaranty Agreement made by Guarantor in favor of Bank and dated as of June 26, 1997 (the "Guaranty Agreement"). R E C I TA L S A. Pursuant to that certain Credit Agreement dated as of June 6, 1997 (the "Credit Agreement") between Westbridge Funding Corporation (the "Debtor") and the Bank, the Bank agreed, on certain terms and conditions, to make revolving loans to the Debtor from time to time in an aggregate principal amount at any one time outstanding not to exceed $20,000,000 (the "Revolving Loans"). B. The Debtor is an indirect wholly-owned subsidiary of the Guarantor. C. As a condition to making the Revolving Loans, the Bank required that the Guarantor execute and deliver the Guaranty Agreement. D. On September 16, 1998, Guarantor filed its voluntary petition for relief pursuant to Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, District of Delaware, Case No. 98-2105 (the "Proceeding"). E. Pursuant to the Credit Agreement, the commencement of the Proceeding constitutes one or more Events of Default. F. Pursuant to that certain First Amendment and Waiver to Credit Agreement dated as of September 8, 1998 among Debtor, Guarantor and the Bank, the Bank agreed to waive the Events of Default occasioned as a result of the commencement of the Proceeding, on the condition, among other things, that the Guarantor agree to restate and reaffirm the Guaranty Agreement and certain other agreements between Guarantor and the Bank, including, without limitation, that certain Pledge Agreement dated as of June 26, 1997, made by Guarantor in favor of the Bank, all pursuant to a Plan of Reorganization acceptable to the Bank (the "Plan"). G. On December 17, 1998, a confirmation hearing was held with respect to Guarantor's Plan, and such Plan was approved in all respects. NOW, THEREFORE, the Guarantor hereby agrees as follows: 1. AMENDMENTS TO GUARANTY AGREEMENT. 1.1 GENERAL. Each ARTICLE of the Guaranty Agreement is hereby renumbered so as to be in proper numerical sequence, commencing with ARTICLE 1 and ending with ARTICLE 7. 1.2 DEFINITIONS. The defined term "Consolidated GAAP Net Worth" contained in Section 1.2 of the Guaranty Agreement is hereby amended by deleting the parenthetical phrase contained in subsection (d) and inserting the following in its stead: "(without giving effect to any increase or decrease to Consolidated GAAP Net Worth attributable to the application of SFAS Nos. 115 and 130)". 1.3 FINANCIAL COVENANTS. (a) Section 6.3 of the Guaranty Agreement is hereby amended by deleting the reference to "$62,500,000" contained therein and inserting "$45,000,000" in its stead. (b) Section 6.4 of the Guaranty Agreement is hereby deleted in its entirety and INTENTIONALLY DELETED is inserted in its stead. (c) Section 6.6 of the Guaranty Agreement is hereby amended by deleting the first sentence thereof and inserting the following in its stead: "At any time that the Obligations remain outstanding, permit the RBC Ratio of any Insurance Subsidiary (excluding NFIC) to be less than 105%." (d) Section 6.7 of the Guaranty Agreement is hereby deleted in its entirety and INTENTIONALLY DELETED is inserted in its stead, and the Bank hereby consents to any Insurance Subsidiary having an A.M. Best Rating of NR. (e) SCHEDULE 6.8 to the Guaranty Agreement is hereby deleted in its entirety and SCHEDULE 6.8 attached hereto is substituted in its stead. 1.4 AMENDMENT TO OFFICER'S CERTIFICATE. Attachment 4 to the Officer's Certificate attached as Exhibit A to the Guaranty Agreement is hereby deleted in its entirety and Attachment 4 attached hereto is substituted in its stead. 2. CONSENT TO CHANGE OF NAME. The Bank hereby consents to the Guarantor's change of its name to Ascent Assurance, Inc. effective on or about March 24, 1999. 3. CONDITIONS PRECEDENT. This Amendment is subject to the satisfaction of the following condition precedent, and thereupon shall be effective as of March 24, 1999: (i) The confirmation of the Guarantor' s Plan shall be come final and non-appealable, and shall in all respects be satisfactory to the Bank. 4. REAFFIRMATION OF PLEDGE AGREEMENT. The Guarantor hereby reaffirms to the Bank that the Pledge Agreement is hereby restated in its entirety and remains in full force and effect as it relates to the Guaranty Agreement as hereby amended. 5. REAFFIRMATION OF GUARANTY AGREEMENT. The Guarantor hereby reaffirms to the Bank that, except as modified hereby, the Guaranty Agreement is hereby restated in its entirety and remains in full force and effect. 6. GOVERNING LAW. This Amendment has been delivered in Chicago, Illinois and shall be governed by and construed in accordance with the provisions of the laws and decisions of the State of Illinois, without giving effect to the conflict of law principles thereunder. 7. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. One or more counterparts of this Amendment may be delivered by telecopier, with the intention that they shall have the same effect as an original counterpart thereof. EXHIBIT 10.12 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed and delivered as of the day and year first above written. BANK: LASALLE NATIONAL BANK By: /S/ JANET R. GATES Its: SENIOR VICE PRESIDENT GUARANTOR: ASCENT ASSURANCE, INC. (FORMERLY, WESTBRIDGE CAPITAL CORP.) By: /S/ PATRICK J. MITCHELL Its: CHAIRMAN AND CEO EXHIBIT 10.12 SCHEDULE 6.8 MINIMUM STATUTORY SURPLUS REQUIREMENTS (in million $) INSURANCE SUBSIDIARY 1999 - - ------------------------------------------------------------- NFL $13.5 - - ------------------------------------------------------------- NFIC $ 1.4 - - ------------------------------------------------------------- AIC $ 1.4 - - ------------------------------------------------------------- FLICA $ 9.5 - - ------------------------------------------------------------- EXHIBIT 10.12 Attachment 4 to Officer's Certificate Computations and Information Showing Compliance with Sections 6.3 to 6.9 of the Guaranty Agreement
Except as otherwise defined herein, terms used herein shall have the meanings set forth in the Guaranty Agreement. SECTION 6.3. MINIMUM CONSOLIDATED GAAP NET WORTH 1. Consolidated GAAP Net Worth as of the Guarantor the fiscal quarter ending ______________, 199__. = ________________ 2. Consolidated positive Net Income of the Guarantor for each fiscal quarter following the fiscal quarter ending _________________ was: [INCLUDE DATA FOR EACH QUARTER, AS APPLICABLE] 2a. The sum of the positive Net Income for each of the quarters set forth in Line 2 above = ________________ 2b. 50% of line 2a = ________________ 3. 100% of proceeds resulting from any issuance by Guarantor of its capital stock = ________________ 4. The sum of $45,000,000 and line 2b and line 3 = ________________ 5. Line 1 is not less than line 4.
EXHIBIT 10.12 SECTION 6.4. INTENTIONALLY DELETED SECTION 6.5. INVESTMENT GRADE ASSETS. 1. Total consolidated Investment of the Insurance Subsidiaries and Eligible Non-Insurance Company Sellers in Investment Grade Securities: = ________________ 2. Total Invested Assets: = ________________ 3. The ratio of line 1 to line 2: = ___ : ___ 4. The ratio in line 3 is at least .95 to 1.00. SECTION 6.6. RBC RATIO. NFL AIC FLICA - - ------------------------------------------------------------------------------ 1. Adjusted Capital and Surplus as of the fiscal [quarter/year] ending [_____,], 199_: - - ------------------------------------------------------------------------------ 2. Authorized Control Level RBC as of the fiscal year ending [_____,], 199_: - - ------------------------------------------------------------------------------ 3. The ratio of line 1 to line 2. - - ------------------------------------------------------------------------------ 4. The ratio in line 3 is at least 1.05 to 1.0. - - ------------------------------------------------------------------------------ SECTION 6.7. INTENTIONALLY DELETED SECTION 6.8. MINIMUM STATUTORY SURPLUS OF INSURANCE SUBSIDIARIES NFL NFIC AIC FLI - - ------------------------------------------------------------------------------- 1 Positive Statutory Capital and Surplus of Insurance Subsidiary as of the fiscal quarter ending ___________ - - ------------------------------------------------- --------------- ------------- 2 Positive Statutory Net Income for each fiscal quarter following the fiscal quarter ending ______________ was [INCLUDE DATA FOR EACH QUARTER, AS APPLICABLE] - - ------------------------------------------------- --------------- ------------- 2.a The sum of positive Statutory Net Income for each of the quarters set forth in line 2 above - - ------------------------------------------------- --------------- ------------- 2.b 50% of line 2.a. - - ------------------------------------------------- --------------- ------------- 3 Contributions to surplus made by Debtor to any Insurance Subsidiary with Positive Statutory Net Income during each fiscal quarter were: [INCLUDE DATA FOR EACH QUARTER, AS APPLICABLE] - - ------------------------------------------------- --------------- ------------- 3.a The sum of the contributions to surplus for each of the quarters - - ------------------------------------------------- --------------- ------------- 4 Applicable Annual Base Statutory Surplus from Schedule 6.8 - - ------------------------------------------------- --------------- ------------- 5 The sum of line 2.b., line 3.a. and line 4 - - ------------------------------------------------- --------------- ------------- 6 Line 1 is not less than line 5 - - ------------------------------------------------------------------------------- EXHIBIT 10.12 SECTION 6.9 FUNDED DEBT RATIO 1. Funded Debt _____________ 2. Consolidated GAAP Net Worth _____________ 3. Total Capitalization (the sum of line 1 and line 2) _____________ 4. The ratio of line 1 to line 3 _____________ 5. The ratio in line 4 is not greater than .65 to 1.0. _____________ EXHIBIT 10.13 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of March 24, 1999, among Ascent Assurance, Inc. (formerly Westbridge Capital Corp.), a Delaware corporation (the "COMPANY") and the holders of Common Stock and the holders of New Convertible Preferred Stock of the Company listed on Schedule I hereto (the "INITIAL HOLDERS"). W I T N E S S E T H: WHEREAS, pursuant to Section VII.A. of the First Amended Plan of Reorganization of the Company under Chapter 11 of the Bankruptcy Code dated October 30, 1998, as the same may have been amended or supplemented from time to time prior to the date hereof (the "PLAN"), as of the Effective Date (as defined in the Plan) the Company is obligated to enter into a registration rights agreement substantially in the form of Exhibit "B" thereto; and WHEREAS, the parties hereto have agreed that the execution and delivery by the Company and the Initial Holders of this Agreement will satisfy such obligation under the Plan; NOW, THEREFORE, in consideration of the premises and of the mutual promises and agreements set forth herein, the parties hereby agree as follows: 1. DEFINITIONS. (a) Capitalized terms used in this Agreement but not otherwise defined herein shall have the meanings given to them in the Plan. Each reference herein to an agreement, document or instrument shall mean that agreement, document or instrument as from time to time amended, modified or supplemented in accordance with its terms, including in each case all exhibits, annexes and schedules to such agreement, document or instrument, all of which are incorporated by reference to such agreement, document or instrument. The use herein of the word "or" shall not be deemed exclusive. (b) As used in this Exhibit, the following capitalized terms shall have the meanings ascribed to them below: "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company being issued and sold pursuant to the Plan. "EFFECTIVE DATE" means the effective date as defined in the Plan. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar federal statute then in effect, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar federal statute. "HOLDER" means a registered holder of Registrable Securities who is an Initial Holder . "PERSON" means an individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization or government or any department or agency thereof. "PREFERRED STOCK" means the Series A Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share, of the Company being issued pursuant to the Plan. "PROSPECTUS" means the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement or any other amendments and supplements to such prospectus, including without limitation any preliminary prospectus, any pre-effective or post-effective amendment and all material incorporated by reference in any prospectus. "REGISTRABLE SECURITIES" means (i) the shares of Common Stock issued to any Initial Holder pursuant to the Plan, (ii) the shares of Preferred Stock issued to any Initial Holder pursuant to the Plan or the Stock Purchase Agreement dated as of September 16, 1998 between the Company and Credit Suisse First Boston Corporation (the "Stock Purchase Agreement"), (iii) any shares of Common Stock issued upon conversion of shares of Preferred Stock issued to any Initial Holder pursuant to the Plan or the Stock Purchase Agreement and (iv) any securities issued or issuable in respect of or in exchange for any of the shares of Common Stock or Preferred Stock referred to in clause (i), (ii) or (iii) by way of a stock dividend or other distribution, stock split, reverse stock split or other combination of shares, recapitalization, reclassification, merger, consolidation or exchange offer. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall be eligible to be disposed of in accordance with such Registration Statement, (ii) such securities shall (x) have been sold, or (y) with respect to any Registrable Securities held by any Holder, all Registrable Securities then owned by such Holder can be sold in any three-month period, in either case pursuant to Rule 144 (or any successor provision) under the Securities Act ("RULE 144"), (iii) such securities shall have been otherwise transferred and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company or (iv) such securities shall have ceased to be outstanding. Shares of Common Stock available upon the conversion of the Preferred Stock shall not constitute "REGISTRABLE SECURITIES" for purposes of this Agreement and shall not be available for inclusion in a Registration Statement to be filed pursuant to Section 2 or 5 hereof until such shares are actually obtained upon conversion of the Preferred Stock. "REGISTRATION EXPENSES" has the meaning set forth in Section 4 hereof. "REGISTRATION STATEMENT" means any registration statement of the Company which covers Registrable Securities pursuant to the provisions of this Registration Rights Agreement, all amendments and supplements to such Registration Statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such Registration Statement. "SEC" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal statute then in effect, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar federal statute. 2. DEMAND REGISTRATION. (a) REQUESTS FOR REGISTRATION. Subject to the provisions of paragraphs (b), (c) and (d) of this Section 2, at any time during the period beginning on the Effective Date and ending on the first date on which there are no Registrable Securities (the "DEMAND REGISTRATION PERIOD"), any Holder or group of Holders holding at least 10% of any class of the aggregate Registrable Securities still outstanding on a fully-diluted basis may make a written request for registration under the Securities Act of all or any part of such Holder's or Holders' Registrable Securities (a "DEMAND REGISTRATION"). Such request shall specify the amount of Registrable Securities to be registered and the intended method or methods of disposition. Within 10 days after receipt of such request, the Company shall send written notice of such request to all Holders and shall, subject to the provisions of paragraphs (b), (c) and (d) of this Section 2, include in such Demand Registration all Registrable Securities with respect to which the Company receives written requests (specifying the amount of Registrable Securities to be registered and the intended method or methods of disposition) for inclusion therein within 30 days after such notice is sent. The Company shall file with the SEC a Registration Statement, registering all Registrable Securities that any Holders have requested the Company to register, for disposition in accordance with the intended method or methods set forth in their notices to the Company, and the Company shall use good faith efforts to make such filing within 30 days of such request. The Company shall use its best efforts to cause such Registration Statement to be declared effective as soon as practicable after filing and to remain effective until the earlier of (i) 90 days following the date on which it was declared effective and (ii) the date on which all of the Registrable Securities covered thereby are disposed of in accordance with the method or methods of disposition stated therein. (b) NUMBER OF REGISTRATIONS. The Holders shall be entitled to request an aggregate of five (5) Demand Registrations during the Demand Registration Period; PROVIDED, HOWEVER, that the Company will not be obligated to comply with any such request unless (i) such request is made by Persons holding at least 10% of the aggregate amount of any class of Registrable Securities at the time outstanding and (ii) the Company has not effected another Demand Registration in accordance with the provisions of this Agreement within the previous six months. (c) SUSPENSION OF REGISTRATION. The Company shall have the right to delay the filing or effectiveness of a Registration Statement for any Demand Registration and to require the Holders not to sell under any such Registration Statement, during one or more periods aggregating not more than 60 days in each twelve-month period during the Demand Registration Period in the event that (i) the Company would, in accordance with the advice of its counsel, be required to disclose in the Prospectus information not otherwise then required by law to be publicly disclosed and (ii) in the judgment of the Company, there is a reasonable likelihood that such disclosure, or any other action to be taken in connection with the Prospectus, would materially and adversely affect any existing or prospective material business situation, transaction or negotiation or otherwise materially and adversely affect the Company. (d) OFFERING BY THE COMPANY. The Company may include in any Demand Registration additional shares of capital stock to be sold for the Company's account pursuant to such registration; PROVIDED, HOWEVER, that if the managing underwriter for a Demand Registration that involves an underwritten offering shall advise the Company that, in its opinion, the inclusion of the amount and kind of shares of capital stock to be sold for the Company's account would adversely affect the success of the offering for the selling Holders, then the number and kind of shares of capital stock to be sold for the Company's account shall be reduced (and may be reduced to zero) in accordance with the managing underwriter's recommendation. (e) SUSPENSION OF EFFECTIVENESS. In the event that a Demand Registration which has been declared or ordered effective in accordance with the rules of the SEC is not kept effective for the period of time contemplated by Section 2(a) (after taking into account any suspensions and extensions thereof), then such Demand Registration shall not be counted as a Demand Registration for purposes of Section 2(b). 3. REGISTRATION PROCEDURES. (a) THE COMPANY TO USE BEST EFFORTS. In connection with the Company's Demand Registration obligations pursuant to Section 2 hereof, the Company shall use its best efforts to effect such registrations to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall use its best efforts: (i) to prepare and file with the SEC a Registration Statement relating to each Demand Registration on any appropriate form under the Securities Act, and to cause such Registration Statement to become effective as soon as practicable and to remain continuously effective for the time period required by the provisions of this Agreement to the extent permitted under the Securities Act, PROVIDED that as far in advance as practical before filing such Registration Statement or any amendment thereto, the Company will furnish to the Holders copies of reasonably complete drafts of all such documents proposed to be filed (including exhibits), and the Holders shall have the opportunity to (i) object to any information pertaining solely to the Holders that is contained therein and the Company will make the corrections reasonably requested by the Holders with respect to such information and (ii) comment on any other information contained therein and the Company will in good faith consider whether any changes or corrections are required, in each case, prior to filing any such Registration Statement or amendment; (ii) to prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in paragraph (a) of Section 2; and to cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed in accordance with the Securities Act and any rules and regulations promulgated thereunder; and otherwise to comply with the provisions of the Securities Act as may be necessary to facilitate the disposition of all Registrable Securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of disposition by the selling Holders thereof set forth in such Registration Statement or such Prospectus or Prospectus supplement; (iii) to notify the selling Holders and the managing underwriters, if any, promptly if at any time (A) any Prospectus, Registration Statement or amendment or supplement thereto is filed, (B) any Registration Statement, or any post-effective amendment thereto, becomes effective, (C) the SEC requests any amendment or supplement to, or any additional information in respect of, any Registration Statement or Prospectus, (D) the SEC issues any stop order suspending the effectiveness of a Registration Statement or initiates any proceedings for that purpose, (E) the representations and warranties of the Company contemplated by subclause (B) of clause (xii) of this paragraph (a) cease to be true and correct, (F) the Company receives any notice that the qualification of any Registrable Securities for sale in any jurisdiction has been suspended or that any proceeding has been initiated for the purpose of suspending such qualification, or (G) any event occurs which requires that any changes be made in such Registration Statement or any related Prospectus so that such Registration Statement or Prospectus will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) to make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the qualification of any Registrable Securities for sale in any jurisdiction, at the earliest possible moment; (v) to furnish to each selling Holder and each managing underwriter, if any, one signed copy of the applicable Registration Statement and any post-effective amendment thereto, including all financial statements and schedules thereto, all documents incorporated therein by reference and all exhibits thereto (including exhibits incorporated by reference) as promptly as practicable after filing such documents with the SEC; (vi) to deliver to each selling Holder and each underwriter, if any, as many copies of the Prospectus or Prospectuses (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons may reasonably request; and to consent to the use of such Prospectus or any amendment or supplement thereto by each such selling Holder and underwriter, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus, amendment or supplement; (vii) prior to any public offering of Registrable Securities, to register or qualify, or to cooperate with the selling Holders, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities, for offer and sale under the securities or blue sky laws of such jurisdictions as may be requested by the Holders of a majority of the Registrable Securities included in such Registration Statement; to keep each such registration or qualification effective during the period set forth in paragraph (a) of Section 2 that the applicable Registration Statement is required to be kept effective; and to do any and all other acts or things necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by such Registration Statement; PROVIDED, HOWEVER, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to taxation or general service of process in any jurisdiction where it is not then so subject; (viii) to cooperate with the selling Holders and the underwriters, if any, in the preparation and delivery of certificates representing the Registrable Securities to be sold, such certificates to be in such denominations and registered in such names as such selling Holders or managing underwriters may request at least three Business Days prior to any sale of Registrable Securities represented by such certificates; (ix) to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the sale of such Registrable Securities in conformity with federal law and the laws of the jurisdictions in which such Registrable Securities shall be registered or qualified pursuant to clause (viii) of this paragraph (a); (x) upon the occurrence of any event described in subclause (C) or (G) of clause (iii) of this paragraph (a), promptly to prepare and file a supplement or post-effective amendment to the applicable Registration Statement or Prospectus or any document incorporated therein by reference, and any other required document, either in accordance with the request of the SEC, or so that such Registration Statement and Prospectus will not thereafter contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, as the case may be, and to cause such supplement or post-effective amendment to become effective as soon as practicable; (xi) to cause all Registrable Securities covered by such Registration Statement to be listed or included on any securities exchange (or on any quotation system operated by a national securities association) on which such Registrable Securities are then listed or included, if any; to enter into customary agreements with any such securities exchange or system, including, if necessary, a listing application and indemnification agreement in customary form; and to provide a transfer agent for such Registrable Securities no later than the effective date of such Registration Statement; (xii) to take all other actions in connection therewith as are reasonably necessary or desirable in order to expedite or facilitate the disposition of the Registrable Securities included in such Registration Statement and, in the case of an underwritten offering: (A) to enter into an underwriting agreement in customary form for the managing underwriters with respect to issuers of similar market capitalization and reporting and financial histories; (B) to make representations and warranties to each Holder participating in such offering and to each of the underwriters, in such form, substance and scope as are customarily made to the managing underwriters by issuers of similar market capitalization and reporting and financial histories and to confirm the same to the extent customary if and when requested; (C) to obtain opinions of counsel to the Company (which may be the Company's inside counsel) and updates thereof addressed to each Holder participating in such offering and to each of the underwriters, such opinions and updates to be in customary form to cover the matters customarily covered in opinions obtained in underwritten offerings by the managing underwriters for issuers of similar market capitalization and reporting and financial histories; (D) to obtain "comfort" letters and updates thereof from the Company's independent certified public accountants addressed to each of the underwriters, such letters to be in customary form and to cover matters of the type customarily covered in "comfort" letters to the managing underwriters in connection with underwritten offerings by them for issuers of similar market capitalization and reporting and financial histories; (E) to provide, in the underwriting agreement to be entered into in connection with such offering, indemnification provisions and procedures no less favorable than those set forth in Section 6 hereof with respect to all parties to be indemnified pursuant to such Section 6; and (F) to deliver such customary documents and certificates as may be reasonably requested by Holders of a majority of the Registrable Securities included in such Registration Statement and the managing underwriters to evidence compliance with clause (B) of this paragraph (xii) and with any customary conditions contained in the underwriting agreement entered into by the Company in connection with such offering; (xiii) in the case of any offering other than an underwritten offering: (A) to make representations and warranties to each Holder participating in such offering, in such form, substance and scope as are customarily made in such offerings by issuers of similar market capitalization and reporting and financial histories and to confirm the same if and when requested, (B) to obtain "comfort" letters and updates thereof from the Company's independent certified public accountants, such letters to be in customary form and to cover the matters of the type customarily covered in "comfort" letters in such offerings for issuers of similar market capitalization and reporting and financial histories, (C) to obtain an opinion of counsel to the Company (which may be the Company's inside counsel) at the time of effectiveness of such Registration Statement covering such offering and an update thereof at the time of effectiveness of any post-effective amendment to such Registration Statement (other than by reason of incorporation by reference of documents filed with the SEC) addressed to each Holder of any Registrable Securities covered by such Registration Statement, covering matters customarily covered in opinions obtained in underwritten offerings by issuers with similar market capitalization and reporting and financial histories; and (D) to deliver a certificate of a senior executive officer of the Company at the time of effectiveness of such Registration Statement and, upon the request of Holders of a majority of the Registrable Securities included in such Registration Statement, updates thereof, such certificates to cover matters customarily covered in officers' certificates delivered in connection with underwritten offerings by issuers with similar market capitalization and reporting and financial histories; (xiv) to make available for inspection by representatives of the Holders of Registrable Securities being sold pursuant to any Demand Registration and of the underwriters, if any, participating in such sale all financial and other records, pertinent corporate documents and properties of the Company, and to cause the Company's officers, directors and employees to supply all information reasonably requested by any such representatives, in connection with such Demand Registration; PROVIDED, HOWEVER, that all information regarding such records, documents and properties shall be subject to customary confidentiality agreements to be entered into by such Persons with the Company; (xv) to comply with all applicable rules and regulations of the SEC relating to such Registration Statement and the distribution of the securities being offered or otherwise necessary in order to perform the Company's obligations under this paragraph (a); (xvi) to cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. and in the performance of any customary or required due diligence investigation by any underwriter; and (xvii) to take all other reasonable steps necessary and appropriate to effect such registration in the manner contemplated by the provisions of this Agreement. (b) HOLDERS' OBLIGATION TO FURNISH INFORMATION. The Company may require, as a condition precedent to the Company's obligations under this Section 3, each Holder of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request. (c) SUSPENSION OF SALES PENDING AMENDMENT OF PROSPECTUS. Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subclause (C), (D), (E), (F) or (G) of clause (iii) of paragraph (a) of this Section 3, such Holder will forthwith forego or delay the disposition of any Registrable Securities covered by such Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by clause (x) of such paragraph (a), or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in such Prospectus, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of any Prospectus covering such Registrable Securities. If the Company shall have given any such notice during a period when a Demand Registration is in effect, the 90-day period described in clause (i) of paragraph (a) of Section 3 shall be extended by the number of days from and including the date of the giving of such notice to and including the date when each Holder of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by clause (x) of such paragraph (a) or shall have been advised in writing by the Company that the use of the applicable Prospectus may be resumed. 4. REGISTRATION EXPENSES. All expenses incident to the Company's performance of or compliance with its obligations under the provisions of this Agreement shall be borne by the Company, including without limitation all (i) registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws, (iii) printing expenses (including expenses of printing Prospectuses), (iv) messenger and delivery expenses, (v) internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (vi) fees and disbursements of its counsel and its independent certified public accountants (including the expenses of any special audit or "comfort" letters required by or incident to such performance or compliance), (vii) securities acts liability insurance (if the Company elects to obtain such insurance), (viii) reasonable fees and expenses of any special experts retained by the Company in connection with any registration hereunder, (ix) reasonable fees and expenses of other Persons retained by the Company, and (x) reasonable fees and expenses of one counsel for the Holders of Registrable Securities covered by each Registration Statement, with such counsel to be selected by Holders of a majority of such Registrable Securities (all such expenses being herein referred to as "REGISTRATION EXPENSES"); PROVIDED, HOWEVER, that Registration Expenses shall not include any underwriting discounts, commissions, fees or expenses or transfer taxes attributable to the sale of the Registrable Securities. 5. PIGGYBACK REGISTRATION. (a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If at any time during the Demand Registration Period the Company proposes to register any Registrable Securities under the Securities Act, whether or not for sale for its own account (other than a registration on Form S-4 or Form S-8, or any successor or similar forms), in a manner that would permit registration of Registrable Securities of the same class for sale to the public under the Securities Act, it will each such time promptly give written notice to all Persons who hold of record any Registrable Securities of the same class of its intention to do so and of the intended method of disposition of the shares being registered, of the registration form of the SEC that has been selected by the Company and of rights of Holders under this Section 5 (the "SECTION 5 NOTICE"). The Company will use its best efforts to include in the proposed registration (and, if such registration involves an underwritten offering, in the underwriting) all Registrable Securities of the same class that the Company is requested in writing, within 15 days after the Section 5 Notice is given, to register by the Holders thereof; PROVIDED, HOWEVER, that (i) if, at any time after giving written notice of its intention to register any Registrable Securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company may, at its election, give written notice of such determination to all Persons who hold of record any Registrable Securities of the same class and, thereupon, shall be relieved of its obligation to register any Registrable Securities of the same class in connection with such abandoned registration, without prejudice, however, to the rights of Holders under Section 2 hereof and (ii) in case of a determination by the Company to delay registration of its Registrable Securities, the Company shall be permitted to delay the registration of such Registrable Securities of the same class for the same period as the delay in registering such Registrable Securities. No registration effected under this Section 5 shall relieve the Company of its obligations to effect registrations upon request under Section 2 and, notwithstanding anything to the contrary in Section 2, no Holder shall have the right to require the Company to register any Registrable Securities pursuant to Section 2 until the later of (A) the completion of the distribution of the securities offered and registered pursuant to the Section 5 Notice and (B) 90 days after the date each registration statement described in the first sentence of this paragraph (a) is declared effective. (b) EXPENSES. The Company shall pay all Registration Expenses in connection with each registration of Registrable Securities of the same class requested pursuant to this Section 5; PROVIDED, HOWEVER, that each Holder shall pay all underwriting discounts, commissions, fees or expenses or transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities of the same class pursuant to a Registration Statement effected pursuant to this Section 5. (c) PRIORITY IN INCIDENTAL REGISTRATION. If the managing underwriter for a registration pursuant to this Section 5 that involves an underwritten offering shall advise the Company that, in its opinion, the inclusion of the amount of Registrable Securities of the same class to be sold for the account of Holders would adversely affect the success of the offering for the Company, then the number of Registrable Securities of the same class to be sold for the account of such Holders shall be reduced (and may be reduced to zero) in accordance with the managing underwriter's recommendation. In the event that the number of Registrable Securities of the same class to be included in any registration is reduced (but not to zero), the number of such Registrable Securities of the same class included in such registration shall be allocated pro rata among all requesting Holders, on the basis of the relative number of shares of such Registrable Securities of the same class each such Holder has requested to be included in such registration. If, as a result of the proration provisions of this paragraph (c), any Holder shall not be entitled to include all Registrable Securities of the same class in a registration pursuant to this Section 5 that such Holder has requested be included, such Holder may elect to withdraw its Registrable Securities of the same class from the registration; PROVIDED, HOWEVER, that such withdrawal election shall be irrevocable and, after making a withdrawal election, a Holder shall no longer have any right to include Registrable Securities of the same class in the registration as to which such withdrawal election was made. (d) MERGER, CONSOLIDATION, ETC. Notwithstanding anything in this Section 5 to the contrary, Holders shall not have any right to include their Registrable Securities in any distribution or registration of equity securities by the Company, which is a result of a merger, consolidation, acquisition, exchange offer, recapitalization, other reorganization, dividend reinvestment plan, stock option plan or other employee benefit plan, or any similar transaction having the same effect. 6. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act pursuant to Section 2 or 5 hereof, the Company will, and hereby does, indemnify and hold harmless, to the extent permitted by law, the seller of any Registrable Securities covered by any Registration Statement filed to effect such registration, its directors and officers or general and limited partners (and the directors and officers thereof), each other Person who participates as an underwriter, if any, in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld) to which such seller or any such director, officer, general or limited partner, underwriter or controlling Person may become subject under the Securities Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such securities were registered under the Securities Act or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary Prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), if used prior to the effective date of such Registration Statement, or contained in the Prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company will reimburse such seller and each such director, officer, general or limited partner, underwriter and controlling Person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED, HOWEVER, that the Company shall not be liable to any such seller or any such director, officer, general or limited partner, underwriter or controlling Person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or amendment thereof or supplement thereto or in any such preliminary, final or summary Prospectus in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such seller or any such director, officer, general or limited partner, underwriter or controlling Person, for use in the preparation thereof; and PROVIDED FURTHER, that the Company will not be liable to any Person who participates as an underwriter in any underwritten offering or sale of Registrable Securities, or to any Person who is a seller in any non-underwritten offering or sale of Registrable Securities, or any other Person, if any, who controls such underwriter or seller within the meaning of the Securities Act, under the indemnity agreement in this paragraph (a) with respect to any preliminary Prospectus or the final Prospectus (including any amended or supplemented preliminary or final Prospectus), as the case may be, to the extent that any such loss, claim, damage or liability of such underwriter, seller or controlling Person results from the fact that such underwriter or seller sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final Prospectus or of the final Prospectus as then amended or supplemented, whichever is most recent, if the Company has previously furnished copies thereof to such underwriter or seller and such final Prospectus, as then amended or supplemented, has corrected any such misstatement or omission. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, general or limited partner, underwriter or controlling Person and shall survive the transfer of such securities by such underwriter or seller. (b) INDEMNIFICATION BY THE SELLERS. In consideration of the Company's including any Registrable Securities in any Registration Statement filed in accordance with Section 2 or 5 hereof, the prospective seller of such Registrable Securities hereby agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in paragraph (a) of this Section 6) the Company and its directors and officers and each person controlling the Company within the meaning of the Securities Act and all other prospective sellers and their directors, officers, general and limited partners and respective controlling Persons with respect to any statement or alleged statement in or omission or alleged omission from such Registration Statement, any preliminary, final or summary Prospectus contained therein, or any amendment or supplement, but only to the extent such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such seller for use in the preparation of such Registration Statement, preliminary, final or summary Prospectus or amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the prospective sellers or any of their respective directors, officers, general or limited partners or controlling Persons and shall survive the transfer of such securities by such seller. Any Holder's liability hereunder shall be limited to the amount of proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; PROVIDED, HOWEVER, that if, in any indemnified party's reasonable judgment, a conflict of interest between such indemnified party and the indemnifying party exists in respect of such claim, then such indemnified party shall have the right to participate in the defense of such claim and to employ one firm of attorneys at the indemnifying party's expense to represent such indemnified party. Once the indemnifying party has assumed the defense of any claim, no indemnified party will consent to entry of any judgment or enter into any settlement without the indemnifying party's consent to such judgment or settlement, which shall not be unreasonably withheld. (d) OTHER INDEMNIFICATION. Indemnification similar to that specified in the preceding paragraphs of this Section 6 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any state securities and "blue sky" laws. (e) CONTRIBUTION. If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a), (b) or (d) of this Section 6, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in such paragraph (a), (b) or (d) in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omission. The Company agrees, and the Holders (in consideration of the Company's including any Registrable Securities in any Registration Statement filed in accordance with Section 2 or 5 hereof) shall be deemed to have agreed, that it would not be just and equitable if contributions pursuant to this paragraph (e) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph (e). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this paragraph (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in paragraph (c) of this Section 6 if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) which is the subject of this paragraph (e). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this paragraph (e) of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this paragraph (e), such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in paragraph (c) of this Section 6 has not been given with respect to such action; PROVIDED, HOWEVER, that the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise under this paragraph (e), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. Notwithstanding anything in this paragraph (e) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this paragraph (e) to contribute any amount in excess of the proceeds received by such indemnifying party from the sale of Registrable Securities in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate. (f) SURVIVAL. The provisions of this Section 6 will survive indefinitely, notwithstanding any transfer of the Registrable Securities by any Holder. 7. RULES 144 AND 144A. The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, and shall take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitations of the exemptions provided by Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written statement stating whether it has complied with such information and requirements. Upon request, the Company shall furnish to each Holder such information as shall be reasonably required pursuant to Rule 144A(d)(4)(i) to permit such Holder to dispose of its Registrable Securities in a transaction pursuant to Rule 144A. 8. UNDERWRITTEN REGISTRATIONS. (a) SELECTION OF UNDERWRITERS. If any of the Registrable Securities covered by any Demand Registration are to be sold in an underwritten offering, the underwriter or underwriters and managing underwriter or managing underwriters that will administer the offering shall be selected by, and the terms of any underwriting agreement and other underwriting arrangements shall be approved by, the Company; PROVIDED, HOWEVER, that such underwriters and managing underwriters shall be subject to the approval of the Holders of a majority in aggregate amount of Registrable Securities included in such offering, which approval shall not be unreasonably withheld. (b) AGREEMENTS OF SELLING HOLDERS. No Holder shall sell any of its Registrable Securities in any underwritten offering pursuant to a registration hereunder unless such Holder (i) agrees to sell such Registrable Securities on the basis provided in any underwriting agreement or other underwriting arrangements approved by the Persons entitled hereunder to approve such agreements or arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting agreements or other underwriting arrangements. 9. CERTAIN COMPANY REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) NO EXISTING AGREEMENTS. The Company represents and warrants to the Initial Holders that there is not in effect on the date hereof any agreement by the Company (other than this Agreement) pursuant to which any holders of the securities of the Company to be issued pursuant to the Plan have a right to cause the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction. (b) FUTURE AGREEMENTS. Without the prior consent of each Holder that holds Registrable Securities, the Company shall not hereafter agree with the holders of any securities issued or to be issued by the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction unless the rights so granted, if exercised, would not materially conflict with, be materially inconsistent with or violate the provisions of this Agreement. (c) TRANSFERS; REMOVAL OF LEGEND. Following the Closing Date, upon delivery to the Company by a Holder of a certificate, in form and substance reasonably satisfactory to the Company and duly executed by an authorized officer of the Holder, to the effect that the Registrable Securities have been transferred (i) pursuant to a registration statement that has been declared effective by the SEC and was, at the time of such sale or other transfer, effective under the Securities Act or (ii) without registration pursuant to a transaction which complies with the requirements of Rule 144, the Company will, or will instruct its transfer agent to, issue upon surrender of the certificates representing such Registrable Securities, one or more new certificates evidencing the Registrable Securities so transferred, which new certificates will not bear a restrictive legend to the effect that the securities represented by such certificates have not been registered under the Securities Act and applicable state securities laws and may not be sold or otherwise transferred in the absence of such registration or an exemption therefrom. Other than with respect to any sale or other transfer for which any such certificate has been received by the Company or for which the Company has received a reasonably satisfactory opinion of counsel to the effect that such sale or other transfer is not required to be registered under the Securities Act or applicable state securities laws, the Company or the Company's transfer agent at the Company's instruction may refuse to transfer Registrable Securities on the transfer books of the Company and any such transfer shall be null and void. The holder of certificates representing Registrable Securities bearing a restrictive legend shall also be entitled to receive certificates not bearing such legend, upon furnishing the Company with a reasonably satisfactory opinion of counsel to the effect that such legend may be removed under the Securities Act and applicable state securities laws. 10. HOLDBACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALES BY HOLDERS. To the extent not inconsistent with applicable law, each Holder that is timely notified in writing by the managing underwriter or underwriters shall not effect any public sale or distribution (including a sale pursuant to Rule 144) of any of their shares of Common Stock if any other shares of Common Stock (or any securities of the Company convertible into or exchangeable for or exercisable for shares of Common Stock) are being registered by the Company for sale in an underwritten offering (other than pursuant to an employee stock option, stock purchase, stock bonus or similar plan, pursuant to a merger, an exchange offer or a transaction of the type specified in Rule 145(a) under the Securities Act or pursuant to a "shelf" registration), except as part of such registration, during the 10-day period prior to the effective date of the applicable registration statement, or during the period beginning on such effective date and ending on the later of (i) the completion of the distribution of such securities pursuant to such offering and (ii) 90 days after such effective date (or such shorter time period as the managing underwriter or underwriters shall deem appropriate). (b) RESTRICTIONS ON PUBLIC SALES BY THE COMPANY. The Company shall not effect any public sale or distribution of any shares of Common Stock (other than pursuant to an employee stock option, stock purchase, stock bonus or similar plan, pursuant to a merger, exchange offer or a transaction of the type specified in Rule 145(a) under the Securities Act or pursuant to a "shelf" registration), or any securities of the Company convertible into or exchangeable or exercisable for shares of Common Stock, except as part of such registration, during the 10-day period prior to the effective date of a Demand Registration to be effected as an underwritten offering, or during the period beginning on such effective date and ending on the later of (i) the completion of the distribution of such securities pursuant to such offering and (ii) 90 days after such effective date (or such shorter time period as the managing underwriter or underwriters shall deem appropriate). 11. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the Holders of a majority of the Registrable Securities then outstanding. Holders shall be bound from and after the date of the receipt of a written notice from the Company setting forth such amendment or waiver by any consent authorized by this paragraph (a), whether or not the certificates representing such Registrable Securities shall have been marked to indicate such consent. (b) SUCCESSORS, ASSIGNS AND TRANSFEREES. The provisions of this Agreement shall be binding upon and shall inure to the benefit of the Company, the Holders and their respective successors, assigns and transferees. (c) INTEGRATION. The provisions of this Agreement and the documents referred to herein or delivered pursuant hereto that form a part hereof contain the entire understanding of the Company and the Initial Holders with respect to its subject matter. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. The provisions of this Agreement supersede all prior agreements and understandings between the Company and the Initial Holders with respect to its subject matter. (d) NOTICES. All notices and other communications provided for hereunder shall be in writing and shall be sent by first class mail, telex, telecopier or hand delivery: if to the Company, to: Ascent Assurance, Inc. 110 West Seventh Street Suite #300 Fort Worth, Texas 76102 Attention: General Counsel Telecopier: (817) 878-3672 with a copy to: Milbank, Tweed, Hadley & McCloy 1 Chase Manhattan Plaza New York, New York 10005 Attention: Robert S. Reder, Esq. Telecopier: (212) 530-5219 If to any Holder, to the address of such Holder as shown in the stock record books of the Company. All such notices and communications shall be deemed to have been given or made (i) when delivered by hand, (ii) five Business Days after being deposited in the mail, postage prepaid, (iii) when telexed answer-back received or (iv) when telecopied, receipt acknowledged. (e) DESCRIPTIVE HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit, expand or otherwise affect the meaning of the provisions hereof. (f) SEVERABILITY. In the event that any one or more of the provisions, paragraphs, subparagraphs, sentences, clauses, subclauses, phrases or words contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability thereof in every other respect and of the remaining provisions, paragraphs, subparagraphs, sentences, clauses, subclauses, phrases and words hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the Company and the Holders hereunder shall be enforceable to the fullest extent permitted by law. (g) GOVERNING LAW. The provisions of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof, as if it were a contract between the Company and the Initial Holders made and to be performed entirely within that State. (h) TERMINATION. The provisions of this Agreement shall terminate, and thereby become null and void, at the end of the Demand Registration Period; PROVIDED, HOWEVER, that the provisions of Section 6 shall survive the termination of the provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. ASCENT ASSURANCE, INC. By: /S/ PATRICK J. MITCHELL Name: Patrick J. Mitchell Title: Chairman & CEO SPECIAL SITUATIONS HOLDINGS, INC. -- WESTBRIDGE By: /S/ DAVID J. MATLIN Name: David J. Matlin Title: Managing Director Schedule I INITIAL HOLDERS Initial Number of Shares Initial Number of Shares OF NEW COMMON STOCK OF NEW PREFERRED STOCK Special Situations Holdings, 3,093,999* 23,257 Inc.-- Westbridge * This represents the number of shares of New Common Stock which Special Situations Holdings, Inc. - Westbridge will receive on the Initial Distribution Date (as defined in the Plan). This number will be automatically adjusted upward to include any New Common Stock received as surplus on the Distribution Date (as defined in the Plan). EXHIBIT 10.14 NY2:#4259609v5 ASCENT ASSURANCE, INC. 1999 STOCK OPTION PLAN * * * * * 1. PURPOSE. The purpose of the 1999 Stock Option Plan (the "Plan") is to further and promote the interests of Ascent Assurance, Inc., its Subsidiaries and its shareholders by enabling the Company and its Subsidiaries to attract, retain and motivate employees, non-employee directors and consultants (including marketing agents) or those who will become employees, non-employee directors or consultants (including marketing agents), and to align the interests of those individuals and the Company's shareholders. To do this, the Plan offers equity-based opportunities providing such employees and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and its Subsidiaries. 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the meanings set forth below: 2.1 "AWARD" means an award or grant made to a Participant under Section 6 of the Plan. 2.2 "AWARD AGREEMENT" means the agreement executed by the Company and a Participant pursuant to Sections 3.2 and 12.7 of the Plan in connection with the granting of an Award. 2.2 "BOARD" means the Board of Directors of the Company, as constituted from time to time. 2.3 "CODE" means the Internal Revenue Code of 1986, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto. 2.4 "COMMITTEE" means the committee of the Board established to administer the Plan, as described in Section 3 of the Plan. 2.5 "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company or any security of the Company issued by the Company in substitution or exchange therefor. 2.6 "COMPANY" means Ascent Assurance, Inc., a Delaware corporation, or any successor corporation to Ascent Assurance, Inc.. 2.7 "DISABILITY" means disability as defined in the Participant's then effective employment agreement, or if the participant is not then a party to an effective employment agreement with the Company which defines disability, "Disability" means disability as determined by the Committee in accordance with standards and procedures similar to those under the Company's long-term disability plan, if any. Subject to the first sentence of this Section 2.7, at any time that the Company does not maintain a long-term disability plan, "Disability" shall mean any physical or mental disability which is determined to be total and permanent by a physician selected in good faith by the Company. 2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto. 2.9 "FAIR MARKET VALUE" means on, or with respect to, any given date(s), the last reported sale price or, in case no such sale takes place on such day, the average of the closing bid and asked prices of the Common Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If at any time the Common Stock is not so traded, the Fair Market Value of a share of the Common Stock shall be determined in good faith by the Board. 2.10 "INCENTIVE STOCK OPTION" means any stock option granted pursuant to the provisions of Section 6 of the Plan (and the relevant Award Agreement) that is intended to be (and is specifically designated as) an "incentive stock option" within the meaning of Section 422 of the Code. 2.11 "NON-QUALIFIED STOCK OPTION" means any stock option granted pursuant to the provisions of Section 6 of the Plan (and the relevant Award Agreement) that is not (and is specifically designated as not being) an Incentive Stock Option. 2.12 "PARTICIPANT" means any individual who is selected from time to time under Section 5 to receive an Award under the Plan. 2.13 "PLAN" means Ascent Assurance, Inc. 1999 Stock Option Plan, as set forth herein and as in effect and as amended from time to time (together with any rules and regulations promulgated by the Committee with respect thereto). 2.14 "RETIREMENT" means the voluntary retirement by the Participant from active employment with the Company and its Subsidiaries on or after the attainment of (i) age 65, or (ii) 60, with the consent of the Board. 2.15 "SUBSIDIARY(IES)" means any corporation (other than the Company) or other entity of which a majority of the outstanding capital stock or other equity interests having ordinary voting power in the election of directors or similar officials is owned, directly or indirectly through one or more corporations or other entities, by the Company. 3. ADMINISTRATION. 3.1 THE COMMITTEE. The Plan shall be administered by the Committee. The Committee shall be appointed from time to time by the Board and shall be comprised of not less than three (3) of the then members of the Board who are Non-Employee Directors (within the meaning of SEC Rule 16b-3(b)(3)) of the Company and "outside directors" (within the meaning of Section 162(m) of the Code). Consistent with the Bylaws of the Company, members of the Committee shall serve at the pleasure of the Board and the Board, subject to the immediately preceding sentence, may at any time and from time to time remove members from, or add members to, the Committee. 3.2 PLAN ADMINISTRATION AND PLAN RULES. The Committee is authorized to construe and interpret the Plan and to promulgate, amend and rescind rules and regulations relating to the implementation, administration and maintenance of the Plan. Subject to the terms and conditions of the Plan, the Committee shall make all determinations necessary or advisable for the implementation, administration and maintenance of the Plan including, without limitation, (a) selecting the Plan's Participants, (b) making Awards in such amounts and form as the Committee shall determine, (c) imposing such restrictions, terms and conditions upon such Awards as the Committee shall deem appropriate, and (d) correcting any technical defect(s) or technical omission(s), or reconciling any technical inconsistency(ies), in the Plan and/or any Award Agreement. The Committee may designate persons other than members of the Committee to carry out the day-to-day ministerial administration of the Plan under such conditions and limitations as it may prescribe, except that the Committee shall not delegate its authority with regard to the selection for participation in the Plan and/or the granting of any Awards to Participants. The Committee's determinations under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, implementation or maintenance of the Plan shall be final, conclusive and binding upon all Participants and any person(s) claiming under or through any Participants. The Company shall effect the granting of Awards under the Plan, in accordance with the determinations made by the Committee, by execution of written agreements and/or other instruments in such form as is approved by the Committee. 3.3 LIABILITY LIMITATION. Neither the Board nor the Committee, nor any member of either, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan (or any Award Agreement), and the members of the Board and the Committee shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage which may be in effect from time to time. 4. TERM OF PLAN/COMMON STOCK SUBJECT TO PLAN. 4.1 TERM. The Plan shall terminate on December 31, 2008, except with respect to Awards then outstanding. After such date no further Awards shall be granted under the Plan. 4.2 COMMON STOCK. The maximum number of shares of Common Stock in respect of which Awards may be granted under the Plan to employees and non-employee directors, in the aggregate, subject to adjustment as provided in Section 10.2 of the Plan, shall not exceed 1,251,685 shares. The maximum number of shares of Common Stock in respect of which Awards may be granted under the Plan to consultants (including marketing agents), subject to adjustment as provided in Section 10.2 of the Plan, shall not exceed 387,119 shares. In the event of a change in the Common Stock of the Company that is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be the Common Stock for purposes of the Plan. Common Stock which may be issued under the Plan may be either authorized and unissued shares or issued shares which have been reacquired by the Company (in the open-market or in private transactions) and which are being held as treasury shares. No fractional shares of Common Stock shall be issued under the Plan. 4.3 COMPUTATION OF AVAILABLE SHARES. If any Awards expire unexercised or are forfeited, surrendered, cancelled, terminated or settled in cash in lieu of Common Stock, the shares of Common Stock which were theretofore subject (or potentially subject) to such Awards shall again be available for Awards under the Plan to the extent of such expiration, forfeiture, surrender, cancellation, termination or settlement of such Awards. 5. ELIGIBILITY. Individuals eligible for Awards under the Plan shall consist of all salaried employees, non-employee directors and consultants (including marketing agents), or those who will become such employees, non-employee directors and consultants (including marketing agents) of the Company and/or its Subsidiaries who are responsible for the management, growth and protection of the business of the Company and/or its Subsidiaries or whose performance or contribution, in the sole discretion of the Committee, benefits or will benefit the Company. 6. STOCK OPTIONS. 6.1 TERMS AND CONDITIONS. Stock options granted under the Plan shall be in respect of Common Stock and may be in the form of either Incentive Stock Options or Non-Qualified Stock Options (sometimes referred to collectively herein as the "Stock Option(s))". However, in no event may a non-employee director or a consultant (including a marketing agent) receive a grant of Incentive Stock Options under the Plan. Stock Options shall be subject to the terms and conditions set forth in this Section 6 and any additional terms and conditions, not inconsistent with the express terms and provisions of the Plan, as the Committee shall set forth in the relevant Award Agreement. 6.2 GRANT. Stock Options may be granted under the Plan in such form as the Committee may from time to time approve. Special provisions shall apply to Incentive Stock Options granted to any employee who owns (within the meaning of Section 422(b)(6) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent corporation or any subsidiary of the Company, within the meaning of Sections 424(e) and (f) of the Code (a "10% Shareholder"). 6.3 EXERCISE PRICE. The exercise price per share of Common Stock subject to a Stock Option shall be determined by the Committee, including, without limitation, a determination based on a formula determined by the Committee; PROVIDED, HOWEVER, that, except with respect to the Stock Options which, in accordance with the Company's First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, are being granted with an exercise price of $.01 per share of Common Stock, in no event shall any Stock Option granted pursuant to this Plan have an exercise price of less than $4.39 per share of Common Stock; PROVIDED, FURTHER, HOWEVER, that the exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of the grant of such Incentive Stock Option; PROVIDED, FURTHER, HOWEVER, that, in the case of a 10% Shareholder, the exercise price of an Incentive Stock Option shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant. 6.4 TERM. The term of each Stock Option shall be such period of time as is fixed by the Committee; PROVIDED, HOWEVER, that the term of any Stock Option shall not exceed ten (10) years (five (5) years, in the case of an Incentive Stock Option granted to a 10% Shareholder) after the date immediately preceding the date on which the Stock Option is granted. 6.5 METHOD OF EXERCISE. A Stock Option may be exercised, in whole or in part, by giving written notice of exercise to the Secretary of the Company, or the Secretary's designee, specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the exercise price in cash, by certified check, bank draft or money order payable to the order of the Company or, if permitted by the Committee (in its sole discretion) and applicable law, by delivery of, alone or in conjunction with a partial cash or instrument payment, (a) a fully-secured promissory note or notes, (b) shares of Common Stock already owned by the Participant for at least six (6) months, or (c) some other form of payment acceptable to the Committee. The Committee may also permit Participants (either on a selective or group basis) to simultaneously exercise Stock Options and sell the shares of Common Stock thereby acquired, pursuant to a "cashless exercise" arrangement or program, selected by and approved of in all respects in advance by the Committee. Payment instruments shall be received by the Company subject to collection. The proceeds received by the Company upon exercise of any Stock Option may be used by the Company for general corporate purposes. Any portion of a Stock Option that is exercised may not be exercised again. 6.6 EXERCISABILITY. In respect of any Stock Option granted under the Plan, unless otherwise (a) determined by the Committee (in its sole discretion) at any time and from time to time in respect of any such Stock Option, or (b) provided in the Award Agreement or in the Participant's employment agreement in respect of any such Stock Option, such Stock Option shall become exercisable as to the aggregate number of shares of Common Stock underlying such Stock Option, as determined on the date of grant, as follows: * 33%, on the first anniversary of the date of grant of the Stock Option, provided the Participant is then employed by or providing services to the Company and/or one of its Subsidiaries; * 66%, on the second anniversary of the date of grant of the Stock Option, provided the Participant is then employed by or providing services to the Company and/or one of its Subsidiaries; and * 100%, on the third anniversary of the date of grant of the Stock Option, provided the Participant is then employed by or providing services to the Company and/or one of its Subsidiaries. Notwithstanding anything to the contrary contained in this Section 6.6, such Stock Option shall become one hundred percent (100%) exercisable as to the aggregate number of shares of Common Stock underlying such Stock Option upon the death, Disability or Retirement of the Participant or upon a Change in Control. For the purpose of this Plan, "Change in Control" shall mean: 6.6.1 The acquisition, after the effective date of the Plan, by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 34% or more of either (a) the outstanding shares of the Common Stock (excluding any acquisition by Credit Suisse First Boston Corporation ("CSFB") or any Permitted Subsidiary (as defined below) of 34% or more of the Common Stock upon conversion of the shares of Series A Convertible Preferred Stock received by CSFB or CSFB's wholly-owned subsidiary, Special Situations Holdings, Inc.- Westbridge, pursuant to the effectiveness of the Company's First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated October 30, 1998, as modified), or (b) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"); PROVIDED, HOWEVER, that the following -------- ------- acquisitions shall not constitute a Change in Control: (x) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person or entity controlling, controlled by or under common control with the Company (an "Affiliate"), or (y) any acquisition by any corporation if, immediately following such acquisition, more than 66% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (entitled to vote generally in the election of directors), is beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who, immediately prior to such acquisition, were the beneficial owners of the Common Stock and the Voting Securities in substantially the same proportions, respectively, as their ownership, immediately prior to such acquisition, of the Common Stock and Voting Securities; or 6.6.2 Individuals who, on the 30th day after the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then serving and comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or 6.6.3 Approval by the shareholders of the Company of a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Common Stock and Voting Securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation, more than 66% of the then outstanding common stock and voting securities (entitled to vote generally in the election of directors) of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Common Stock and the Voting Securities; or 6.6.4 Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company, or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a Subsidiary, wholly-owned, directly or indirectly, by the Company. For purposes of Section 6.6.1, a "Permitted Subsidiary" shall mean Special Situations Holdings, Inc.- Westbridge and any other directly or indirectly wholly-owned subsidiary of Credit Suisse Group, a corporation organized and existing under the laws of Switzerland, to which shares of Series A Convertible Preferred Stock are transferred for tax, regulatory or other general corporate purposes, but excluding any subsidiary which either (i) is or intends to be engaged in any line of business in which the Company is engaged as of the date of such conversion, (ii) becomes a subsidiary after the Effective Date through any acquisition, merger or similar transaction, or (iii) intends to become, or becomes, engaged in the day to day management of the Company's business to such an extent that it alters the control of the Company's operations. 6.7 AUTOMATIC GRANTS. Any shares underlying Stock Options granted to consultants who are marketing agents and which are forfeited during any calendar year pursuant to Section 8 (the "Forfeited Shares") shall automatically become the subject of new Stock Options automatically granted under and pursuant to the terms of this Section 6.7 to all of the consultants who are marketing agents in good standing with the Company on January 2 of the calendar year immediately following the calendar year in which the forfeiture(s) occurred. Each such marketing agent consultant shall promptly receive a new Stock Option to acquire a number of shares of Common Stock equal to the aggregate number of Forfeited Shares in respect of such calendar year, multiplied by a fraction, the numerator of which shall be the aggregate commissions earned by such marketing agent consultant during such Calendar Year and the denominator of which shall be the aggregate commissions earned by all such marketing agent consultants during such calendar year, as determined by the Committee. The per share exercise price of such new Stock Options shall be equal to 100% of the Fair Market Value of the Common Stock on such January 2 of such calendar year and the term of the new Stock Options shall be ten years from the date of grant. The new Stock Options shall become exercisable in accordance with Section 6.6 of the Plan. 7. MAXIMUM YEARLY AWARDS. All Participants in the aggregate may not receive in any calendar year Awards of Options, exceeding 1,638,804 underlying shares of Common Stock. Each individual Participant may not receive in any calendar year Awards of Options exceeding 819,402 underlying shares of Common Stock. The maximum annual Common Stock amounts in this Section 7 are subject to adjustment under Section 10.2 and are subject to the Plan maximum under Section 4.2. 8. TERMINATION OF EMPLOYMENT. 8.1 GENERAL. Except as is otherwise provided (a) in the relevant Award Agreement as determined by the Committee (in its sole discretion), or (b) in the Participant's then effective employment agreement, if any, the following terms and conditions shall apply as appropriate and as not inconsistent with the terms and conditions, if any, contained in such Award Agreement and/or such employment agreement: 8.1.1 OPTIONS. Subject to any determination of the Committee pursuant to Section 6.6 of the Plan, if a Participant's employment with or provision of services to the Company and its Subsidiaries terminates for any reason any then unexercisable Stock Options shall be forfeited and cancelled by the Company. Except as otherwise provided in this Section 8.1.1, if a Participant's employment with or provision of services to the Company and its Subsidiaries terminates for any reason, such Participant's rights, if any, to exercise any then exercisable Stock Options shall terminate ninety (90) days after the date of such termination (but not beyond the stated term of any such Stock Option as determined under Section 6.4) and thereafter such Stock Options shall be forfeited and cancelled by the Company. The Committee, in its sole discretion, may determine that any such Participant's Stock Options to the extent exercisable immediately prior to any termination of employment with or provision of services to the Company, (other than a termination due to death, Retirement or Disability) may remain exercisable for an additional specified time period after such ninety (90) day period expires (subject to any other applicable terms and provisions of the Plan and the relevant Award Agreement), but not beyond the stated term of any such Stock Option. If any termination of employment with or provision of services to the Company is due to death, Retirement or Disability, a Participant (and such Participant's estate, designated beneficiary or other legal representative, as the case may be and as determined by the Committee) shall have the right to exercise such Stock Options, at any time within the one (1) year period following such termination due to death, Retirement or Disability (but not beyond the term of any such Stock Option as determined under Section 6.4). 9. NON-TRANSFERABILITY OF AWARDS. Unless otherwise provided in the Award Agreement, no Award under the Plan or any Award Agreement, and no rights or interests herein or therein, shall or may be assigned, transferred, sold, exchanged, encumbered, pledged, or otherwise hypothecated or disposed of by a Participant or any beneficiary(ies) of any Participant, except by testamentary disposition by the Participant or the laws of intestate succession. No such interest shall be subject to execution, attachment or similar legal process, including, without limitation, seizure for the payment of the Participant's debts, judgements, alimony, or separate maintenance. Unless otherwise provided in the Award Agreement, during the lifetime of a Participant, Stock Options are exercisable only by the Participant. 10. CHANGES IN CAPITALIZATION AND OTHER MATTERS. 10.1 NO CORPORATE ACTION RESTRICTION. The existence of the Plan, any Award Agreement and/or the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the Company's or any Subsidiary's capital structure or its business, (b) any merger, consolidation or change in the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the Company's or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Company or any Subsidiary. No Participant, beneficiary or any other person shall have any claim against any member of the Board or the Committee, the Company or any Subsidiary, or any employees, officers or agents of the Company or any subsidiary, as a result of any such action. 10.2 RECAPITALIZATION ADJUSTMENTS. In the event of any change in capitalization affecting the Common Stock of the Company, including, without limitation, a stock dividend or other non-cash distribution, stock split, reverse stock split, recapitalization, consolidation, subdivision, split-up, spin-off, split-off, combination or exchange of shares or other form of reorganization or recapitalization, or any other change affecting the Common Stock, the Board shall authorize and make such proportionate adjustments, if any, as the Board deems appropriate to reflect such change, including, without limitation, with respect to the aggregate number of shares of the Common Stock for which Awards in respect thereof may be granted under the Plan, the maximum number of shares of the Common Stock which may be granted or awarded to any Participant, the number of shares of the Common Stock covered by each outstanding Award, and the exercise price per share of Common Stock in respect of outstanding Awards. 10.3 CERTAIN MERGERS. 10.3.1 If the Company enters into or is involved in any merger, reorganization or other business combination with any person or entity (such merger, reorganization or other business combination to be referred to herein as a "Merger Event") and as a result of any such Merger Event the Company will be or is the surviving corporation, a Participant shall be entitled, as of the date of the execution of the agreement evidencing the Merger Event (the "Execution Date") and with respect to both exercisable and unexercisable Stock Options (but only to the extent not previously exercised), to receive substitute stock options in respect of the shares of the surviving corporation on such terms and conditions, as to the number of shares, pricing and otherwise, which shall substantially preserve the value, rights and benefits of any affected Stock Options granted hereunder as of the date of the consummation of the Merger Event. Notwithstanding anything to the contrary in this Section 10.3, if any Merger Event occurs, the Company shall have the right, but not the obligation, to pay to each affected Participant an amount in cash or certified check equal to the excess of the Fair Market Value of the Common Stock underlying any affected unexercised Stock Options as of the Execution Date (whether then exercisable or not) over the aggregate exercise price of such unexercised Stock Options. 10.3.2 If, in the case of a Merger Event in which the Company will not be, or is not, the surviving corporation and the Company determines not to make the cash or certified check payment described in Section 10.3.1 of the Plan, the Company shall compel and obligate, as a condition of the consummation of the Merger Event, the surviving or resulting corporation and/or the other party to the Merger Event, as necessary, or any parent, subsidiary or acquiring corporation thereof, to grant, with respect to both exercisable and unexercisable Stock Options (but only to the extent not previously exercised), substitute stock options in respect of the shares of common or other capital stock of such surviving or resulting corporation on such terms and conditions, as to the number of shares, pricing and otherwise, which shall substantially preserve the value, rights and benefits of any affected Stock Options previously granted hereunder as of the date of the consummation of the Merger Event. 10.3.3 Upon receipt by any affected Participant of any such cash, certified check, or substitute stock options as a result of any such Merger Event, such Participant's affected Stock Options for which such cash, certified check or substitute awards was received shall be thereupon cancelled without the need for obtaining the consent of any such affected Participant. 10.3.4 The foregoing adjustments and the manner of application of the foregoing provisions, including, without limitation, the issuance of any substitute stock options shall be determined in good faith by the Committee in its sole discretion. Any such adjustment may provide for the elimination of fractional shares. 11. AMENDMENT, SUSPENSION AND TERMINATION. 11.1 IN GENERAL. The Board may suspend or terminate the Plan (or any portion thereof) at any time and may amend the Plan at any time and from time to time in such respects as the Board may deem advisable to insure that any and all Awards conform to or otherwise reflect any change in applicable laws or regulations, or to permit the Company or the Participants to benefit from any change in applicable laws or regulations, or in any other respect the Board may deem to be in the best interests of the Company or any Subsidiary. No such amendment, suspension or termination shall (x) materially adversely effect the rights of any Participant under any outstanding Stock Options, without the consent of such Participant, or (y) make any change that would disqualify the Plan, or any other plan of the Company or any Subsidiary intended to be so qualified, from the benefits provided under Section 422 of the Code, or any successor provisions thereto. 11.2 AWARD AGREEMENT MODIFICATIONS. The Committee may (in its sole discretion) amend or modify at any time and from time to time the terms and provisions of any outstanding Stock Options, in any manner to the extent that the Committee under the Plan or any Award Agreement could have initially determined the restrictions, terms and provisions of such Stock Options, including, without limitation, changing or accelerating the date or dates as of which such Stock Options shall become exercisable. No such amendment or modification shall, however, materially adversely affect the rights of any Participant under any such Award without the consent of such Participant. 12. MISCELLANEOUS. 12.1 TAX WITHHOLDING. The Company shall have the right to deduct from any payment or settlement under the Plan, including, without limitation, the exercise of any Stock Option, or the delivery, transfer or vesting of any Common Stock, any federal, state, local or other taxes of any kind which the Committee, in its sole discretion, deems necessary to be withheld to comply with the Code and/or any other applicable law, rule or regulation. If the Committee, in its sole discretion, permits shares of Common Stock to be used to satisfy any such tax withholding, such Common Stock shall be valued based on the Fair Market Value of such stock as of the date the tax withholding is required to be made, such date to be determined by the Committee. The Committee may establish rules limiting the use of Common Stock to meet withholding requirements by Participants who are subject to Section 16 of the Exchange Act. 12.2 NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan, the granting of any Award, nor the execution of any Award Agreement, shall confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or any Subsidiary, as the case may be, nor shall it interfere in any way with the right, if any, of the Company or any Subsidiary to terminate the employment of any employee at any time for any reason. 12.3 UNFUNDED PLAN. The Plan shall be unfunded and the Company shall not be required to segregate any assets in connection with any Awards under the Plan. Any liability of the Company to any person with respect to any Award under the Plan or any Award Agreement shall be based solely upon the contractual obligations that may be created as a result of the Plan or any such award or agreement. No such obligation of the Company shall be deemed to be secured by any pledge of, encumbrance on, or other interest in, any property or asset of the Company or any Subsidiary. Nothing contained in the Plan or any Award Agreement shall be construed as creating in respect of any Participant (or beneficiary thereof or any other person) any equity or other interest of any kind in any assets of the Company or any Subsidiary or creating a trust of any kind or a fiduciary relationship of any kind between the Company, any Subsidiary and/or any such Participant, any beneficiary thereof or any other person. 12.4 PAYMENTS TO A TRUST. The Committee is authorized to cause to be established a trust agreement or several trust agreements or similar arrangements from which the Committee may make payments of amounts due or to become due to any Participants under the Plan. 12.5 OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's compensation for purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Company or any Subsidiary unless expressly provided in such other plans or arrangements, or except where the Board expressly determines in writing that inclusion of an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive annual base salary or other cash compensation. Awards under the Plan may be made in addition to, in combination with, or as alternatives to, grants, awards or payments under any other plans or arrangements of the Company or its Subsidiaries. The existence of the Plan notwithstanding, the Company or any Subsidiary may adopt such other compensation plans or programs and additional compensation arrangements as it deems necessary to attract, retain and motivate employees. 12.6 LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE. No Awards or shares of the Common Stock shall be required to be granted or issued under the Plan unless legal counsel for the Company shall be satisfied that such grant or issuance will be in compliance with all applicable federal and state securities laws and regulations and any other applicable laws or regulations. The Committee may require, as a condition of any payment or share issuance, that certain agreements, undertakings, representations, certificates, and/or information, as the Committee may deem necessary or advisable, be executed or provided to the Company to assure compliance with all such applicable laws or regulations. Certificates for shares of Common Stock delivered under the Plan may be subject to such stock-transfer orders and such other restrictions as the Committee may deem advisable under the rules, regulations, or other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. In addition, if, at any time specified herein (or in any Award Agreement or otherwise) for (a) the making of any Award, or the making of any determination, (b) the issuance or other distribution of Common Stock, or (c) the payment of amounts to or through a Participant with respect to any Award, any law, rule, regulation or other requirement of any governmental authority or agency shall require either the Company, any Subsidiary or any Participant (or any estate, designated beneficiary or other legal representative thereof) to take any action in connection with any such determination, any such shares to be issued or distributed, any such payment, or the making of any such determination, as the case may be, shall be deferred until such required action is taken. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of SEC Rule 16b-3. To the extent any provision of the Plan or any action by the administrators of the Plan fails to so comply with such rule, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 12.7 AWARD AGREEMENTS. Each Participant receiving an Award under the Plan shall enter into an Award Agreement with the Company in a form specified by the Committee. Each such Participant shall agree to the restrictions, terms and conditions of the Award set forth therein and in the Plan. 12.8 DESIGNATION OF BENEFICIARY. Each Participant to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any option or to receive any payment which under the terms of the Plan and the relevant Award Agreement may become exercisable or payable on or after the Participant's death. At any time, and from time to time, any such designation may be changed or cancelled by the Participant without the consent of any such beneficiary. Any such designation, change or cancellation must be on a form provided for that purpose by the Committee and shall not be effective until received by the Committee. If no beneficiary has been designated by a deceased Participant, or if the designated beneficiaries have predeceased the Participant, the beneficiary shall be the Participant's estate. If the Participant designates more than one beneficiary, any payments under the Plan to such beneficiaries shall be made in equal shares unless the Participant has expressly designated otherwise, in which case the payments shall be made in the shares designated by the Participant. 12.9 LEAVES OF ABSENCE/TRANSFERS. The Committee shall have the power to promulgate rules and regulations and to make determinations, as it deems appropriate, under the Plan in respect of any leave of absence from the Company or any Subsidiary granted to a Participant. Without limiting the generality of the foregoing, the Committee may determine whether any such leave of absence shall be treated as if the Participant has terminated employment with the Company or any such Subsidiary. If a Participant transfers within the Company, or to or from any Subsidiary, such Participant shall not be deemed to have terminated employment as a result of such transfers. 12.10 LOANS. Subject to applicable law, the Committee may provide, pursuant to Plan rules, for the Company or any Subsidiary to make loans to Participants to finance the exercise price of any Stock Options, as well as the withholding obligation under Section 12.1 of the Plan and/or the estimated or actual taxes payable by the Participant as a result of the exercise of such Stock Option and the Committee may prescribe the terms and conditions of any such loan. 12.11 GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to the principles of conflict of laws thereof. Any titles and headings herein are for reference purposes only, and shall in no way limit, define or otherwise affect the meaning, construction or interpretation of any provisions of the Plan. 12.12 EFFECTIVE DATE. The Plan shall be effective upon its approval by the Board and adoption by the Company, subject to the approval of the Plan by the Company's shareholders in accordance with Sections 162(m) and 422 of the Code. IN WITNESS WHEREOF, this Plan is adopted by the Company on this 24th day of March, 1999. ASCENT ASSURANCE, INC. By: /S/ PATRICK J. MITCHELL Name: Patrick J. Mitchell Title: Chairman and CEO EX-27 2 ARTICLE 7 FDS FOR 10-K
7 1,000 12-MOS DEC-31-1998 DEC-31-1998 122,864 0 0 2,575 318 0 131,430 278 2,155 14,177 169,741 97,987 0 0 0 95,715 11,935 0 703 (62,783) 169,741 135,717 12,011 2,142 16,191 99,419 4,411 33,097 (22,054) 231 (22,285) 0 0 0 (22,805) (3.43) (3.43) 0 0 0 0 0 0 0
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