<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MARCH 31, 1996
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from __________ to ___________
Commission file Number 0-26896
ASSOCIATED PHYSICIANS CAPITAL, INC.
(Name of small business issuer in its charter)
Illinois 36-3530158
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
715 Enterprise Drive
Oak Brook, Illinois 60521-1974
(Address or principal executive offices)
Issuer's telephone number:
708-368-2000
(Former name, former address and former fiscal year, if changed since last
report):
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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___ No _X_
As of March 31, 1996, 82,375 shares of the registrant's Class A and 1,641 of
the Class B common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes___ No _X_
1
<PAGE> 2
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
FORM 10-QSB
QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets .......................................................................... 3
Consolidated Statements of Income .................................................................... 4-5
Consolidated Statements of Cash Flows ................................................ 6
Notes to Consolidated Financial Statements ........................................... 7-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 22-26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 26
Item 2. Changes in Securities ................................................................ 27
Item 3. Defaults Upon Senior Securities ...................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders .................................. 27
Item 5. Other Information .................................................................... 27
Item 6. Exhibits and Reports on Form 8-K ..................................................... 27-28
SIGNATURES ........................................................................................... 29
</TABLE>
2
<PAGE> 3
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH DECEMBER
1996 1995
============= ==============
<S> <C> <C>
ASSETS
Investments:
Available for sale:
U.S. Treasury notes $ 9,141,100 $ 11,160,118
Bonds 19,743,353 15,711,985
Real estate (net of accumulated depreciation of
$131,976 in 1995 ) 0 1,300,000
Short-term investments 1,606,905 5,853,427
Cash 170,497 140,682
------------- --------------
Cash and investments 30,661,855 34,166,212
Accrued investment income 379,263 332,635
Reinsurance receivables 22,163,445 26,070,317
Receivable on sale of renewals 1,854,402 2,693,477
Income tax recoverable 75,004 75,004
Security deposit 20,000 0
Electronic data processing equipment (net of accumulated
depreciation of $412,090 and $443,959 in March 31,
1996 and December 31, 1995, respectively) 167,215 225,839
------------- --------------
TOTAL ASSETS $ 55,321,184 $ 63,563,484
============= ==============
LIABILITIES
Losses and loss adjustment expenses $ 47,381,378 $ 54,404,374
Funds held under reinsurance treaties 5,808,566 5,904,816
Payable to former manager 0 26,644
Accrued expenses 210,802 216,435
------------- --------------
TOTAL LIABILITIES 53,400,746 60,552,269
------------- --------------
STOCKHOLDERS' EQUITY
Common stock (no par value or stated value,
600,000 shares authorized, 84,016 shares issued and
outstanding) 7,785,545 7,785,545
Retained earnings (deficit) (5,529,556) (5,153,388)
Unrealized gain (loss) on investment, net of taxes (335,551) 379,058
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,920,438 3,011,215
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,321,184 $ 63,563,484
============= ==============
</TABLE>
The accompanying notes are an
integral part of the consolidated financial statements.
UNAUDITED UNAUDITED
3
<PAGE> 4
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
REVENUE 1996 1995
============= ==============
<S> <C> <C>
Premiums earned $ 38,633 $ 237,369
Ceded reinsurance (20,143) (118,685)
------------- --------------
Premiums earned, net 18,490 118,684
Net investment income 456,319 531,326
Other income 0 761,417
------------- --------------
Total revenue 474,809 1,411,427
EXPENSES
Losses incurred 213,501 125,000
Loss adjustment expenses incurred 274,072 19,567
Other underwriting expenses 346,501 444,893
------------- --------------
Total expenses 834,074 589,460
------------- --------------
Loss before net realized capital gains (losses)
and income taxes (359,265) 821,967
Net realized capital gains (losses) (16,903) 83,605
------------- --------------
Loss before income taxes (376,168) 905,572
(Benefit) provision for income taxes:
Current 0 64,061
Deferred 0 0
------------- --------------
Net loss $ (376,168) $ 841,511
============= ==============
Net gain (loss) per common share: $ (4.48) $ 10.02
============= ==============
</TABLE>
The accompanying notes are an
integral part of the consolidated financial statements.
UNAUDITED UNAUDITED
4
<PAGE> 5
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1996 1995
============= ==============
<S> <C> <C>
COMMON STOCK:
Beginning balance $ 7,785,545 $ 7,785,545
Reclass of subscriptions receivable 0 0
------------- --------------
Ending balance 7,785,545 7,785,545
------------- --------------
RETAINED EARNINGS (DEFICIT):
Beginning balance (5,153,388) (4,269,176)
Net loss (376,168) 841,511
------------- --------------
Ending balance (5,529,556) (3,427,665)
------------- --------------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, NET OF TAXES
Beginning balance 379,058 (234,977)
Change for the year (714,609) 263,995
------------- --------------
Ending balance (335,551) 29,018
------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 1,920,438 $ 4,386,898
============= ==============
</TABLE>
The accompanying notes are an
integral part of the consolidated financial statements.
UNAUDITED UNAUDITED
5
<PAGE> 6
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1996 1995
============= ==============
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (376,168) $ 841,511
Items not affecting cash:
Capital (gains) losses 16,903 (83,605)
Amortization of securities' premium, net 61,657 142,112
Depreciation 28,183 42,659
------------- --------------
(269,425) 942,677
Items affecting cash due to changes in:
Unpaid losses and loss adjustment expense (7,022,996) (4,650,230)
Reinsurance receivables 3,906,872 1,295,676
Unallocated premium remittances 0 (294,839)
Premium receivable 0 16,587
Funds held under reinsurance treaties (96,250) (2,646,904)
Income tax recoverable 0 281,899
Receivable on sale of renewals 839,075 (978,654)
Other accruals (27,949) 264,709
------------- --------------
Net cash provided (used) by operating activities (2,670,673) (5,769,079)
------------- --------------
Cash flows from investing activities:
Securities available for sale:
Purchase of long term investments (3,916,917) (11,141,547)
Proceeds from sales, maturities and calls of
long-term investments 1,127,875 7,974,283
Sale of Real estate 1,300,000
Purchases of short-term investments (1,606,905) (1,285,126)
Proceeds from maturity of short-term investments 5,787,125 10,154,970
Sale of electronic data processing equipment 9,310 0
------------- --------------
Net cash used in investing activities 2,700,488 5,702,580
------------- --------------
Cash flows from financing activities:
Net cash provided from financing activities 0 0
------------- --------------
Net change in cash 29,815 (66,499)
Cash at beginning of the year 140,682 209,647
------------- --------------
Cash at the end of the year $ 170,497 $ 143,148
============= ==============
Supplemental Information: Income taxes paid (received) $ 0 $ (281,899)
============= ==============
</TABLE>
The accompanying notes are an
integral part of the consolidated financial statements.
UNAUDITED UNAUDITED
6
<PAGE> 7
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
1. Organization and Significant Accounting Policies
A. Organization
Associated Physicians Capital, Inc., an Illinois Corporation (the
Company), is a holding company and owns all of the common stock of
Associated Physicians Insurance Company ("APIC"), a stock
insurance company incorporated in the state of Illinois. The
Company was incorporated on March 16, 1987. It has no separate
operations. APIC was incorporated on March 22, 1987, and was
licensed to underwrite medical malpractice insurance in the State
of Illinois on July 31, 1987.
APIC specialized in the underwriting of professional liability
coverage on a claims-made basis for Illinois physicians and
clinics. Prior to 1991, physicians and medical corporations
became stockholders of the Company as a condition to the purchase
of insurance from APIC. As a result, a significant number of
stockholders are policyholders.
During 1994, the Board of Directors of APIC decided to cease
operations, sell its book of business and go into voluntary runoff
effective January 1, 1995. APIC intends to manage its own affairs
during the runoff period (see Note 8). The Company plans to
liquidate and distribute the stock of its subsidiary, APIC, to its
stockholders (see Note 10).
Historically, APIC has operated under management and agency
agreements (see Note 3) with Associated Physicians Management
Company, Inc. (the Management Company). Under the agreements, the
Management Company provided all administrative, operating, and
underwriting services. APIC reimbursed the Management Company for
all costs and expenses incurred by the Management Company under
the agreements, including, but not limited to, commissions to
agents, salaries, and other general overhead expenses. In
addition, APIC paid the Management Company two percent of gross
premiums earned for the period April 1, 1993 through December 31,
1993 and two and one-half percent of gross premiums earned for the
period January 1, 1992 through March 31, 1993 and from January,
1994 through the final premium amounts collected. As an
incentive, APIC also paid the Management Company ten percent
of any underwriting profit for each calendar year. On March 16,
1995, the Management Agreement with the Management Company was
terminated. As part of the termination agreement, the Management
Company continued to provide certain personnel under a "leased
employee" arrangement for claims handling and accounting functions
through December 31, 1995. APIC paid the Management Company
$187,298 in 1995 for these leased employees.
UNAUDITED UNAUDITED
7
<PAGE> 8
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective September 1, 1995, APIC entered into a claims service
agreement with Physicians Insurance Company of Illinois (PICOM)
for the handling of APIC's claims through the runoff phase of
APIC's operations. This is a three year contract which provides
for an annual cancellation notice. The fees charged by PICOM for
each open claim are $750, $725 and $550 for each respective year
the file is open. The fees incurred by APIC under this claims
service agreement was $83,035 for the three month period ended
March 31, 1996. The fees are recorded in the statement of
operations as other underwriting expenses.
B. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles (GAAP). APIC is currently in voluntary runoff. As
liquidation of APIC is not imminent, the Company's consolidated
financial statements continue to be prepared on a going-concern
basis. The following are the significant accounting policies:
Subject to the uncertainty associated with APIC's liability for
losses and loss adjustment expenses, management believes that the
interim financial statements contained herein contain all
adjustments necessary to make the financial statements not
misleading and present fairly, in all material respects, the
consolidated financial position of the Company and APIC at March
31, 1996 and the consolidated results of their operations and
their cash flows for the three months then ended.
Consolidation
All significant intercompany transactions and accounts are
eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
UNAUDITED UNAUDITED
8
<PAGE> 9
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investments
Effective January 1, 1994, the Company adopted the Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Initially,
upon adoption of SFAS No. 115, approximately $15,861,000 of U.S.
Treasury notes were classified as "held to maturity." On December
30, 1995, the Company, pursuant to SFAS No. 115, transferred all
investments classified as "held to maturity" to the "available for
sale" category. The amortized cost and net unrealized loss on
investments transferred were $9,234,302 and ($19,302),
respectively.
As of March 31, 1996 and December 31, 1995, the Company did not
have the ability and positive intent to hold all debt securities
to maturity. As a result, the Company considers all its bonds and
Treasury notes as "available-for-sale." Available-for-sale
securities are reported at fair value, with unrealized gains and
losses, net of deferred income taxes, reported as a separate
component of stockholders' equity until realized. Cash flows from
purchases, sales and maturities are reported gross in the
investing activities section of the cash flow statement. Held to
maturity securities are reported at amortized cost on the balance
sheet. Cash flows from purchases, sales and maturities are
reported gross in the investing activities section of the cash
flow statement.
Previous to 1994, all debt securities were carried at amortized
cost. At January 1, 1994, net unrealized gains on securities
which were classified as "available for sale" were approximately
$735,545. The Company does not have a trading portfolio.
Short-term investments are carried at cost which approximates
market value. Investment income is recorded when earned.
Realized gains and losses on the sale of investments are recorded
when realized on the basis of specific identification. U.S.
Treasury notes with a carrying value of approximately $1,551,324
and $1,580,242 as of March 31, 1996 and December 31, 1995 were on
deposit with the Insurance Department of the State of Illinois
(IDI) to meet regulatory requirements.
UNAUDITED UNAUDITED
9
<PAGE> 10
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premiums
Premium income is recognized on a pro rata basis over the
respective terms of the policies. All policies, regardless of
effective dates, expire on December 31 of the current year. The
1996 and 1995 premiums reflect the small amount of residual
premiums APIC expects to continue to recognize on installment
payments of tail-purchases during 1996. APIC has issued no new or
renewal policies in 1996 or 1995.
Losses and Loss Adjustment Expenses
APIC wrote professional liability insurance for physicians and
clinics on a claims-made policy form and offered tail coverage.
Losses and loss adjustment expenses include estimates for reported
losses, an estimate of losses incurred but not reported, related
loss adjustment expenses, less amounts for reinsurance placed with
reinsurers. APIC discounts the liabilities for losses and loss
adjustment expenses using a 4% interest rate (see Note 4). The
Company considers its experience and industry data in determining
its liabilities. These estimates are periodically reviewed and
updated based on estimates calculated by an independent actuarial
consulting firm. Any adjustments are reflected currently in the
statements of operations. APIC provided extended reporting
coverage to its insureds at no additional charge in the event of
death, disability or retirement (DD&R). APIC records within the
liabilities for losses and loss adjustment expenses an estimated
amount for losses and loss adjustment expenses related to those
insureds who have died, become disabled, or retired by year end.
For the years ended December 31, 1995 and 1994, APIC experienced
significant adverse losses and loss adjustment reserve
development. Based on the long tailed nature of APIC's business
and the reasonably complex and dynamic process of establishing
these reserves, which could be influenced by a variety of factors,
the ultimate losses which may emerge in 1996 could differ
significantly from the amounts recorded in the financial
statements. These differences may be material to the Company's
stockholders' equity at March 31, 1996.
UNAUDITED UNAUDITED
10
<PAGE> 11
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation
Real estate and electronic data processing equipment are recorded
at cost net of accumulated depreciation. Real estate represents
Company-occupied property. The Company's subsidiary, APIC, sold
this real estate (see Note 6) and also sold over half of its
computer hardware in January of 1996. The Company depreciates its
real estate and electronic data processing equipment primarily by
applying the straight-line method over the estimated useful lives,
ranging from 3 to 32 years, of the depreciable assets. Total
depreciation expense is $28,183 and $42,659 for first quarter of
1996 and 1995, respectively.
Income Taxes
The provision for income taxes may include deferred taxes
resulting from temporary differences between the financial
reporting and tax bases of assets and liabilities, using the asset
and liability method required by SFAS No. 109 "Accounting for
Income Taxes." Under the asset and liability method, deferred
income taxes are established for the future tax effects of
temporary differences between the tax and financial reporting
bases of assets and liabilities using currently enacted tax rates.
Such temporary differences primarily relate to net operating loss
carryforwards and losses and loss adjustment expense reserve
discounting. The measurement of deferred tax assets is subject to
a valuation allowance based upon the expectation of future
realization. For the three months ended on March 31, 1996 and
year ended December 31, 1995, a 100% valuation allowance has been
recorded to reduce the net deferred tax asset to zero in both
periods. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period of
enactment.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured
policy and are reported as reinsurance receivables rather than
netted against the liability for unpaid losses and loss adjustment
expenses. Losses and loss adjustment expenses incurred are
reported net of estimated recoveries under reinsurance contracts.
Net Loss Per Common Share
Net loss per common share on the statement of operations for the
years ended March 31, 1996 and 1995 is calculated by dividing the
net income (loss) by the weighted average number of common shares
outstanding during the year.
UNAUDITED UNAUDITED
11
<PAGE> 12
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
The amortized cost and estimated market value of bonds and U.S. Treasury
notes at March 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1996 Cost Gains Losses Value
-------------- ----------- ------- --------- ----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $16,852,061 $218,283 $(110,102) $16,960,242
Obligations of states and
political subdivisions 1,272,105 14,747 ( 6,852) 1,280,000
Corporate bonds 11,095,838 91,895 (201,479) 10,986,254
----------- ------- --------- ----------
Totals $29,220,004 $324,925 $(318,433) $29,226,496
=========== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Losses Value Value
---------------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $16,367,912 $211,147 $(37,772) $16,541,287
Obligations of states and
political subdivisions 1,273,942 23,532 (7,474) 1,290,000
Corporate bonds <8,851,191 191,629 ( 2,004) 9,040,816
----------- -------- -------- -----------
Totals $26,493,045 $426,308 $(47,250) $26,872,103
=========== ======== ======== ===========
</TABLE>
UNAUDITED UNAUDITED
12
<PAGE> 13
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and estimated market value of bonds and U.S. Treasury
notes at March 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may exercise the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
AVAILABLE-FOR-SALE-SECURITIES:
Due in one year or less $ 8,269,729 $ 8,227,189
Due after one year through five years 7,291,052 7,359,713
Due after five years through ten years 7,402,538 7,263,600
Over Ten Years 6,256,685 6,375,993
----------- -----------
$29,220,004 $29,226,495
=========== ===========
</TABLE>
Proceeds from sales of "available for sale" investments during the three
month period ended March 31, 1996 and 1995 were $1,127,875 and $7,974,283
respectively. Gross gains of $-0- and $109,701 and gross losses of $16,903
and $26,096 were realized in the first quarter of 1996 and 1995 sales,
respectively.
3. Underwriting Management and Agency Agreements
APIC incurred fees related to Underwriting Management and Agency Agreements
with the Management Company for the period ended March 31, 1996 and 1995 of
$-0- and $95,483 respectively.
UNAUDITED UNAUDITED
13
<PAGE> 14
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses at
March 31, 1996 and 1995 are summarized as follows (rounded to the nearest
thousand dollars):
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Balance at January 1 $57,723,000 $72,077,000
Less reinsurance recoverables 24,195,000 30,310,000
----------- -----------
Net balance at 1/1 33,528,000 41,767,000
----------- -----------
Incurred related to:
Current year -0- -0-
Prior years (109,000) (113,000)
----------- ------------
Total incurred (109,000) (113,000)
----------- ------------
Paid related to:
Current year -0- -0-
Prior years 4,824,000 2,437,000
----------- ----------
Total paid 4,824,000 2,437,000
----------- ---------
Net balance at 12/31 28,595,000 39,217,000
----------- ----------
Plus reinsurance recoverables 23,242,000 27,952,000
----------- ----------
Undiscounted Bal. at 12/31 51,837,000 67,169,000
Discount at 12/31 2,806,000 4,202,000
----------- ---------
Discounted Bal. at 12/31 $49,031,000 $62,967,000
=========== ===========
</TABLE>
During 1994, the IDI permitted APIC to discount its liabilities for
losses and loss adjustment expenses retroactively to January 1, 1993,
utilizing an interest rate of 4%. The liabilities for losses and loss
adjustment expenses at March 31, 1996 and 1995 have been reduced by a
discount of $2,806,000 and $4,202,000, respectively. The IDI has
approved the continued use of the 4% discount rate through December
31, 1996. Should the IDI withdraw this approval, APIC's capital and
surplus would fall below the $1,500,000 minimum required under
Illinois law. Were this to occur, the IDI would likely be compelled
to take over APIC.
UNAUDITED UNAUDITED
14
<PAGE> 15
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Reinsurance
For 1994, APIC's excess reinsurance agreements provided for coverage
of up to $2,000,000 per claim in excess of the Company's $100,000 net
retention. The cost of the reinsurance is a fixed rate determined on
a policy-by-policy basis as APIC cedes to the reinsurers 100% of the
increased limits premium above $100,000 less a ceding commission.
For 1993, the Company's excess reinsurance agreements provided for
coverage of up to $775,000 per claim in excess of the Company's
$225,000 net retention, and $1,000,000 per claim in excess of
$1,000,000, and up to $8,000,000 in excess of $2,000,000. In
addition, the agreements provide for coverage of loss adjustment
expenses on a pro rata basis and provided for clash coverage in the
event that more than one insured physician is named on a single claim.
The reinsurance contracts covering $775,000 of losses in excess of
$225,000 are subject to retrospectively rated calculations where the
ultimate amount of premium ceded varies based upon actual loss
experience. The ultimate cost is subject to a specific maximum
limitation. APIC also receives a ceding commission under these
reinsurance agreements.
The difference between the provisional premium paid to the reinsurer
and the estimated ultimate reinsurance cost is recorded as funds held
under reinsurance treaties. Based on expected ultimate losses and
loss adjustment expenses, the 1991 and 1992 treaty years are expected
to close out below the maximum estimated ultimate reinsurance cost of
these programs. Total additional reinsurance premium costs that could
be recognized should loss experience worsen for these treaty years is
$100,718.
Reinsurance arrangements are utilized to limit maximum losses and
minimize exposures on larger risks. The losses and loss adjustment
expenses incurred are presented in the Statements of Operations after
deducting reinsurance ceded. APIC remains liable to the extent that
the reinsurers are unable to fulfill their obligations under the
reinsurance agreements. Reinsurance recoverables on loss payments at
March 31, 1996 and December 31, 1995, were $571,251 and $1,874,290,
respectively, and are included in reinsurance receivables in the
Balance Sheets.
UNAUDITED 15 UNAUDITED
<PAGE> 16
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Sale of Real Estate
On January 4, 1996, APIC sold its real estate, office furniture and
some equipment for a selling price of $1,300,000. No gain or loss was
recognized on this sale. APIC has agreed to lease back a portion of
the space in this building from the buyer for one year with an option
for an additional two years, the expense of which will be shared with
PICOM which also shares space in the same building. This space will
be used by APIC during its runoff phase of operations. This is the
only lease that APIC has under contract.
7. Income Taxes
The Company files a consolidated federal income tax return with APIC.
At March 31, 1996 and December 31, 1995, components of the net
deferred tax asset consists primarily of the tax effects of losses and
loss adjustment expense reserves, the net operating loss carryforward
and the unrealized gains (losses) on investments.
As of March 31, 1996, approximately $4,350,000 of a consolidated net
operating loss carryforward is available to offset future taxable
income of the Company and APIC. Approximately $1,500,000 of the
carryforward expires in 2009 and $2,850,000 in 2010. Due to the
uncertainty of future taxable income, the lack of sufficient future
taxable temporary differences, and the lack of taxable income in prior
taxable years to which losses may be carried back, a 100% valuation
allowance was established in 1996 and 1995 reducing the net deferred
tax asset to zero.
8. Sale of APIC's Business
In 1994, the Board of Directors of APIC decided to cease operations,
sell its book of business to PICOM and go into voluntary runoff. APIC
intends to manage its own affairs during the runoff. The terms of the
sale of the book of business to PICOM call for a series of future
payments which are, in turn, dependent on periodic valuations of the
amount of renewal premiums PICOM is able to sustain. The following
summarizes the terms of the consideration to be paid to APIC:
a) Payable 4.25% on April 15, 1995 and 5% on March 15, 1996, an
amount equal to 9.25% of the annualized gross written premium
of the book of business that is in force with the buyer on
March 31, 1995.
b) Payable on April 15, 1997, an amount equal to 6% of the
annualized gross written premium of the book of business that
is in force with PICOM on March 31, 1997, but in no event less
than $600,000.
UNAUDITED 16 UNAUDITED
<PAGE> 17
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
c) Payable on April 15, 1998, an amount equal to 6% of the
annualized gross written premium that is in force with PICOM
on March 31, 1998, but in no event less than $600,000.
d) Payable on April 15, 1999, an amount equal to 7% of the
annualized gross written premium that is in force with PICOM
on March 31, 1999, but in no event less than $600,000.
There are certain conditions and limitations that could affect the
above valuation and payment schedule.
APIC recognized $3,452,932 (net of $0 taxes) from the sale of its
business for the year ended December 31, 1995. This revenue has been
recognized as other income in the statement of operations. The amount
consists of the first installment of $759,455 paid on April 13, 1995
and an estimate of future installments of $2,693,477. The receivable
on sale of renewals on APIC's balance sheet at December 31, 1995, in
the amount of $2,693,477, consists of the $893,477 due to APIC on or
before March 15, 1996 (received on March 14, 1996) plus the three
expected minimum payments of $600,000 payable at April 15, 1997, 1998
and 1999. Due to the uncertainty of the amount of written premium
inforce on the dates specified above, no additional receivable has
been accrued at December 31, 1995 which exceeds the minimum payments.
However, it is possible that the actual payments could exceed the
minimum payments accrued at December 31, 1995.
On April 13, 1995, APIC received its first payment from PICOM based on
the above valuation schedule. The amount received was $759,455 and
represented 4.25% of the $17,869,536 determined as the annualized
gross written premium in force with PICOM as of March 31, 1995.
On March 14, 1996, APIC received the second payment based on the above
valuation schedule. The amount received was $893,477 and represented
5.0% of the $17,869,536 determined as the annualized gross written
premium in force with PICOM as of March 31, 1995.
UNAUDITED 17 UNAUDITED
<PAGE> 18
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Financial Data
APIC files annual financial statements prepared in accordance with
statutory accounting practices or permitted by applicable insurance
regulatory authorities. Prescribed statutory accounting practices
include state laws, regulations and general administrative rules, as
well as guidance provided in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed. Such practices may differ from state to state, may differ
from company to company within a state, and may change in the future.
APIC's permitted statutory accounting practices had a material effect
on reported statutory surplus. Their permitted statutory accounting
practices included recording software as an admitted asset,
discounting the liabilities for losses and loss adjustment expenses
and recording the receivable on sale of renewals to PICOM as an
admitted asset.
The principal differences between statutory financial statements and
financial statements prepared in accordance with generally accepted
accounting principles are that statutory financial statements do not
reflect deferred policy acquisition costs and deferred taxes, debt
securities are generally carried at amortized cost in statutory
financial statements and reinsurance receivables are recorded gross
and are not offset against the related claim liabilities.
APIC is subject to regulation and supervision by the various state
insurance regulatory authorities in the which they conduct business.
Such regulation is generally designed to protect policyholders and
includes such matters as maintenance of minimum statutory surplus and
restrictions on the payment of dividends. Generally, statutory
surplus of APIC in excess of the statutory prescribed minimum is
available for transfer to the Company. However, such distributions as
dividends may be subject to prior regulatory approval. Without prior
regulatory approval, dividends are restricted by the statutory
unassigned surplus and net income as defined. As a result of this
restriction, no dividends can be paid in 1996.
Statutory surplus and net income for APIC as reported to regulatory
authorities at March 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Statutory capital & surplus $1,929,529 $ 4,076,050
Statutory net loss $( 339,680) $ 921,816
</TABLE>
UNAUDITED 18 UNAUDITED
<PAGE> 19
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Planned Liquidation of APCI's Stock
The Class A common stockholders of the Company will vote to liquidate
the Company in 1996 and distribute the shares of its subsidiary, APIC.
APIC would be the sole remaining entity during its runoff of business.
The plans on this liquidation will be assessed on May 11, 1996 at the
stockholders' special meeting.
11. IDI Order Relating to Administration of APIC
The IDI and APIC agreed that it would be in the best interests of the
policyholders for APIC to agree to certain administrative procedures
to ensure that APIC continues to operate in a manner acceptable to the
IDI. Therefore, on July 26, 1995, the IDI issued an Order relating
to the administration of APIC. This Order identifies certain
administrative procedures that APIC must follow, such as the
following:
o APIC shall not solicit and/or issue any new or renewal
policies or contracts of insurance without permission of the
IDI.
o By April 1st each year APIC shall file with the IDI proforma
financials projecting the ultimate financial status of APIC as
well as a budget which sets forth anticipated income and
expenditures for the calendar year.
o APIC shall file monthly reports with the IDI within 30 days
following the end of the month to which such reports applies
setting forth a summary of cash receipts, cash disbursements,
claims information and a listing of any expenses incurred to
one vendor or claimant in excess of $25,000.
o APIC shall not enter into management agreements without the
prior approval of the IDI.
o APIC shall not make any distributions or dividends to
stockholders or transactions with any affiliates without the
prior approval of the IDI.
o APIC shall notify the IDI of any change in its investment
policy.
On March 21, 1996, the IDI further agreed to the following permitted
practices:
o To continue to allow the Company to discount its loss and loss
adjustment expense reserves at the 4% through December 31,
1996 (see Note 4).
UNAUDITED 19 UNAUDITED
<PAGE> 20
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
o To allow the Company to record as an admitted asset a
receivable from PICOM of $2,693,477 which represents the
amount due to the Company on or before March 15, 1996
($893,477) plus the expected minimum payments of $1,800,000
due to the Company in 1997, 1998 and 1999 (see Note 8).
o To exempt the Company from Risk Based Capital reporting
requirements.
In the event APIC does not comply with these administrative
requirements or the IDI withdraws their approval of APIC's permitted
practices such that capital and surplus falls below the $1,500,000
minimum required under Illinois law, the IDI would likely be compelled
to take over APIC.
12. Related Party Transactions
A partner of the firm which provides legal services to the Company and
serves as the Company's General Counsel also serves on the Board of
Directors of the Company.
All but one of the members of the Company's Board of Directors are
also stockholders of the Company.
13. Common Stock
The Company is authorized to issue 400,000 shares of no par value
Class A voting common stock, of which 82,375 shares were outstanding
as of March 31, 1996 and December 31, 1995 and 200,000 shares of no
par value Class B non-voting common stock of which 1,641 shares were
outstanding as of March 31, 1996 and December 31, 1995. All of the
outstanding shares of common stock are fully paid and are
non-assessable.
Class A shares are restricted to ownership by licensed physicians,
Illinois medical corporations and Illinois professional corporations
who employ or contract with physicians whose principal profession is
the practice of medicine, or any other entity capable of being a named
insured under an APIC professional liability policy. Each Class A
share is entitled to one vote on all matters submitted to a vote of
the stockholders.
Class B shares are owned by all entities other than those entities
which qualify for the ownership of Class A shares. The holders of
Class B shares have no voting rights.
UNAUDITED 20 UNAUDITED
<PAGE> 21
UNAUDITED UNAUDITED
ASSOCIATED PHYSICIANS CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event that shares owned by any stockholder are to be resold to
any proposed transferee, the resale must be presented to the Board of
Directors of the Company prior to the time the sale can be accepted.
The presentation shall be for notification purposes only. In the
event that shares owned by any stockholder are to be resold to a
proposed transferee who is not licensed to practice medicine in
Illinois under a medical or professional statute, the sale must be
submitted to the Board of Directors of the Company for review and
approval.
Class A shares are convertible to an equal amount of Class B shares at
any time. Class B shares are convertible to an equal amount of Class
A shares at any time, provided that the purchaser of such shares is
qualified to purchase Class A shares.
UNAUDITED 21 UNAUDITED
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Some statements in this Form 10-QSB are forward looking and actual
results may differ materially from those stated. In addition to the factors
discussed, among the other factors which affect actual results are: changes in
future interest rates as well as changes in anticipated payout patterns of
remaining open claims; both of which might affect assumptions relating to the
discounting of liabilities for loss and loss adjustment expense reserves.
The Company has no operations other than its ownership of APIC, which
is its primary asset. The Board of Directors of the Company, following a
careful review of the current condition of the Company and of APIC and the
alternatives available to each, believes that the dissolution and liquidation
of the Company is in the best interests of Shareholders, policyholders and the
Company as the holding company structure now poses more of an administrative
and financial burden due to the need to maintain separate boards of directors,
separate accounts and reports and other administrative records and related
expenses that are no longer warranted with APIC being in runoff. If the
liquidation and dissolution proposal is adopted by the shareholders, this extra
administrative expense of the Company can be eliminated. Additionally,
management believes that the IDI will allow it to complete the ultimate
liquidation of APIC. If the Shareholders do not adopt the proposal to
liquidate and dissolve the Company, it is likely that the IDI will take over
operation of the Company and its ultimate liquidation as well as the
liquidation of APIC. Management believes that it is in a better position than
the IDI to maximize liquidation proceeds of the Company and APIC. There can
however, be no assurance that the liquidation will ultimately result in a
distribution to Shareholders.
The Company has only limited outstanding liabilities for which
management believes adequate reserves have been provided. Accordingly, upon
dissolution of the Company and distribution of APIC shares to Shareholders upon
management believes that it is unlikely that Shareholders receiving APIC shares
would have any liability to return such shares to cover Company obligations.
See also "Legal Proceedings" for certain potential liabilities of APIC. APIC
intends to manage its own affairs during the run-off period. Management
anticipates that it will take at least three to five years to terminate all
operations of APIC, liquidate and make final distributions to Shareholders
through their ownership of APIC shares. APIC is subject to supervision by the
IDI pursuant to an "Order" to monitor the adequacy of APIC's assets to ensure
that it can pay all future claims against APIC and to ensure that there are
adequate resources to manage its own affairs during the run-off period. The
following discussion relates to the Company's unaudited consolidated generally
accepted accounting principles ("GAAP") financials for the three months ended
March 31, 1996.
For the three months ended March 31, 1996 and 1995, the Company had
continued reductions in its consolidated GAAP stockholders' equity of $748,734
or 24.9%, in 1996, as valued with discounted loss and loss adjustment expense
reserves. This decline in stockholder's equity is a result of net operating
losses for the first three months of 1996 of $376,168 plus a reduction in the
unrealized gains on investments of $372,566. The net operating losses are due
principally to recognizing reductions in the discounted liabilities for loss
and loss adjustment expenses as a function of time and as a function of the
reduction in undiscounted liabilities for loss and loss adjustment expenses
caused by paid activity.
Assets. The Company's assets at March 31, 1996 were
$55,663,227. This is a decrease of $7,900,257 or 12.4% below the December 31,
1995 assets level of $63,563,484. Significant changes in the Company's assets
during the first three months of 1996 were:
22
<PAGE> 23
A decrease of $3,162,314 or 9.3% in cash and invested assets during
the first three months of 1996. These changes were in bonds and short term
investments as well as the elimination of $1,300,000 of real estate (see Note 6
"Sale of Real Estate" in the Notes to Consolidated Financial Statements). The
reduction in the unrealized gains of the Company's investment portfolio, as
noted above, is due to increases in market interest rates during the first
quarter of 1996. However, because the Company maintains a significant amount
of its portfolio in very short duration investments, the Company does not need
to liquidate those investments that reflect unrealized losses. The Company has
the ability to hold these investments to maturity, if necessary, thus realizing
100% of the par value.
Reinsurance receivables decreased by $3,906,872 or 15.0%, during the
first three months of 1996. The reduction in the reinsurance receivables
during the first three months of 1996 is due primarily to payments received
from reinsurers. Included in the reinsurance receivables are recoverables on
paid losses and loss adjustment expenses. Reinsurance recoverables on loss
payments at March 31, 1996 and December 31, 1995, were $571,251 and $1,874,290,
respectively.
Receivable on sale of renewals decreased by $839,075, or 31.2%, to
$1,854,402, during the first three months of 1996. This receivable consists of
three expected minimum payments of $600,000 payable by PICOM to APIC at April
15, 1997, 1998 and 1999 (see Note 6 "Sale of Real Estate" of accompanying
Consolidated Notes to Financial Statements for more details on the sale of
renewals to PICOM) and $54,402 as the prepaid portion of the quarterly claims
service agreement paid to PICOM on March 1, 1996.
Income tax recoverables did not change during the first three months
of 1996. The balance of $75,004 is the amount determined to be still remaining
due from the State of Illinois. Even though APIC is in run-off, the Company
anticipates, but is not certain of, having limited future income against which
to apply net operating loss carryforwards. Due to the uncertainty of being
able to realize those benefits a 100% valuation allowance has been established
to reduce the net deferred tax asset of the Company to zero beginning at March
31, 1996 and December 31, 1995.
All securities continue to be NAIC Category 1 investments. In
preparing statutory Annual Statements, insurance companies are required to show
the NAIC symbol designations for each investment owned by such insurance
companies. Bonds and short term promissory instruments are divided into six
quality categories for rating purposes, as assessed by the NAIC pursuant to
their standards, with "1" being the highest quality and "6" being the lowest
quality for bonds at or near default. An example of a category "1" bond would
be a U.S. Treasury Note. APIC's portfolio remains liquid, ensuring that APIC
will retain maximum flexibility. The Company and APIC have no intention of
investing securities outside of Category 1.
Liabilities. The reported liabilities for losses and loss adjustment
expenses decreased by $7,022,996 or 12.9% during the first three months of
1996. The liabilities for loss and loss adjustment expenses decreased during
the first three months of 1996 because claim payments made in 1996 have the
effect of reducing reserves carried at the end of 1995. As a result of being
in runoff, there are no new reserves established on earned premiums during
these periods. Accordingly, the account balance would be expected to decrease.
With the permission of the IDI, APIC and the Company began discounting
its liabilities for loss and loss adjustment expense in 1993 using a discount
rate of 4.0%. The amount of discount included in the liability for loss and
loss adjustment expense is:
23
<PAGE> 24
$4,500,000 at December 31, 1993
$4,460,000 at December 31, 1994
$3,320,000 at December 31, 1995
$2,806,000 at March 31, 1996
Among other liabilities, the Company maintains funds held on behalf of
reinsurers. These relate primarily to those retroactively rated reinsurance
treaties which APIC had in place during 1988 through 1993. Overall funds held
at March 31, 1996 was $5,808,566 and at December 31 ,1995 amounted to
$5,904,816. The reduction of $96,250, or 1.6%, is attributable primarily to
payments made to the 1994 treaty reinsurers during the first quarter of 1996.
As APIC went into runoff effective January 1, 1995, no new or renewal
reinsurance agreements were entered by APIC or the Company.
Stockholders' Equity. The Company's stockholders' equity, including
the effects of discounted reserves, declined during the first three months of
1996 by $748,734, or 24.9%.
Results of Operations
Direct Premium Written. Direct premiums written during the first
three months of 1996 and 1995 were $38,633 and $39,116, respectively. These
premiums reflect the small amount of residual premiums APIC expects to continue
to recognize on installment payments of tail-purchases during 1995 and, to
still a smaller extent, in 1996. Otherwise, with APIC in runoff as of January
1, 1995, APIC has issued no new or renewal policies.
Net Premium Written. Net premiums (after deducting the cost of
reinsurance) relative to direct premiums have fluctuated over the years, as
shown below:
<TABLE>
<CAPTION>
Direct Net
Year Premiums Premiums
---- -------- --------
<S> <C> <C>
1991 $16,121,576 $12,085,453
1992 $16,891,351 $ 9,883,261
1993 $21,663,270 $12,850,146
1994 $23,198,176 $ 8,622,357
1995 - 1st 3 months $ 237,369 $ 118,684
1995 - 12 months $ 391,116 $ (888,587)
1996 - 1st 3 months $ 38,633 $ 18,490
</TABLE>
The disproportionately low amount of net premiums written (amount of
direct premiums retained after deducting for the cost of reinsurance) to direct
premiums written in 1994 is due primarily to the increase in the cost of
reinsurance in 1994 which resulted from the lowering of APIC's net retention on
claims from $225,000 to $100,000. The negative net written premium in 1995 is
the result of adjustments to ceded premium written in 1995 relating to treaty
years 1988 through 1993 caused by the reserve adjustments commented on in other
sections.
24
<PAGE> 25
Reinsurance. Like many other insurance companies, APIC utilized the
London "swing-rated" reinsurance program from 1988 through 1993.
These were programs which offered a very low minimum premium charge if
claims experience under the treaty was low and established a maximum premium
charge if claims experience was high. For the range between the minimum and
maximum premium charge, premium costs were calculated by adding to the minimum
premium an amount determined by multiplying claim values covered by the treaty
by an agreed upon percentage. This is the "swing" part of the premium
calculation.
This approach contrasts sharply with the 1994 reinsurance treaty which
had a fixed premium charge. The method for determining the 1994 fixed cost for
reinsurance was unrelated to claims experience under the treaty. Rather, all
of the portion of premium on each policy that APIC wrote which was determined
to cover the cost of claims above $100,000 was passed on to the reinsurers as
its premium for accepting the risk, less a ceding commission to APIC to help
pay the expenses associated with evaluating the risk and for issuing the
policy. This is referred to as a "cessions" treaty. Under a "cessions"
reinsurance treaty, the total reinsurance premium for APIC can be determined as
soon as APIC has determined the total direct premiums for all policies it has
written during a given year.
APIC, through this new reinsurance structure, was able to
significantly reduce the volatility of reinsurance premiums. This is because
the premiums recorded under the older swing rated treaties would change each
year as APIC revised its estimates of the total value of claims which would be
covered by the treaties. Thus, reinsurance premiums in any given year would be
the sum of changes to reinsurance premiums for all previous years resulting
from changes in expected losses. The fixed nature of the 1994 treaty
eliminated this volatility.
Other Operational Issues. Other underwriting expenses were $346,501
during the first three months of 1996 and $444,893 for the first three months
of 1995. As APIC began its runoff phase of operations effective January 1,
1995, operating expenses were as compared to its normal operations. The 1996
operating expenses include $52,313 of commission expense paid to a former agent
of APIC for his efforts in transferring business to PICOM and ensuring that the
business continued to renew with PICOM, thereby ensuring that APIC will receive
a larger fee from PICOM (see Note 8 "Sale of APIC's Business" of the Notes to
the Consolidated Financial Statements for more detailed information about the
fees APIC receives from PICOM). There is also included in the underwriting
expenses for 1996 and 1995 a nominal amount of commissions paid on the
tail-premiums recognized during these periods.
Liquidity and Capital Resources
Sale of Book of Business. In November 1994, the Board of Directors of
APIC decided to cease operations, sell its Illinois book of business and go
into voluntary runoff. APIC determined that it was in the best interests of
Shareholders, policyholders and the Company for APIC to manage its own affairs
during the runoff rather than permit IDI to take over. The terms of the sale
of the Illinois book of business to PICOM were submitted to the IDI, and after
IDI approval, the sale was executed on December 31, 1994. Terms of the sale
call for a series of future payments which are dependent on periodic valuations
of the amount of renewal premiums PICOM is able to sustain. APIC anticipates
that it will ultimately realize approximately $3.6 million to $5.0 million in
funds from the sale transaction. The following summarizes the terms of the
consideration to be paid to APIC:
25
<PAGE> 26
Payable 4.25% on April 15, 1995 and 5% on March 15, 1996, an amount
equal to 9.25% of the annualized gross written premium of the book of
business that is in force with the buyer on March 31, 1995.
Payable on April 15, 1997, an amount equal to 6% of the annualized
gross written premium of the book of business that is in force with
the buyer on March 31, 1997, but in no event less than $600,000.
Payable on April 15, 1998, an amount equal to 6% of the annualized
gross written premium that is in force with the buyer on March 31,
1998, but in no event less than $600,000.
Payable on April 15, 1999, an amount equal to 7% of the annualized
gross written premium that is in force with the buyer on March 31,
1999, but in no event less than $600,000.
There are certain conditions and limitations that could affect the
above valuation and payment schedule. In consideration of certain covenants
given by the Company to PICOM in connection with the sale, the Company received
a one time payment of $134,021 (.75% of the annualized gross written premium in
force with the buyer as of March 31, 1995). As a condition to receiving this
payment and with the approval of the IDI, the Company has agreed to pay over to
APIC any balance of this amount remaining after the Company has satisfied all
outstanding obligations in connection with its liquidation. No additional
proceeds of the sale will be distributed to the Company.
On April 13, 1995, APIC received its first payment based on the above
valuation. The amount received was $759,455 and represented 4.25% of the
$17,869,536 determined as the annualized gross written premium in force with
the buyer as of March 31, 1995. The second payment, in the amount of $893,477
which was due on or before March 15, 1996, was received on March 14, 1996.
On a going-forward basis, and as noted earlier, management expects
APIC to realize revenues of approximately $3.6 million to $5.0 million from the
sale of its Illinois book of business which will help ensure that there are
adequate funds, along with investment income to satisfy all future claims
against APIC. With the permission of the IDI, APIC has recorded, at December
31, 1995, a receivable from PICOM of $2,693,477. This receivable is comprised
of: $893,477 as the amount received on March 14, 1996 plus $1.8 million as the
expected minimum payments due to APIC in 1997, 1998 and 1999.
Liquidity. As of March 31, 1996, invested assets total 122% of loss
and loss expense reserves, net of reinsurance recoverables. APIC continues to
match the maturity of its investments with its liabilities, with a strong bias
toward liquidity. This process is based upon actuarial projections which are
updated on a regular basis. Management believes APIC maintains adequate cash
and short-term securities to meet all contingencies. No material changes in
cash flow are foreseen by the Company or APIC.
PART II
ITEM 1. LEGAL PROCEEDINGS
A claim against APIC, APMC and a sub-agent of APMC in the amount of
$9,600 plus punitive damages has been filed by an insured whose policy was not
renewed by APIC. APIC believes this to be a frivolous and non-meritorious
claim.
26
<PAGE> 27
In addition, as of March 31, 1996, APIC had 479 open claims. APIC
does not anticipate having to pay all claims. However, APIC is unable to
estimate the number or amount of claims it will be required to settle or
litigate.
ITEM 2. CHANGES IN SECURITIES
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders in the first
quarter of 1996.
ITEM 5. OTHER INFORMATION
None to report
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(i) The following exhibits are incorporated by reference from the
Company's Registration Statement on Form 10-SB or the 1995 Form 10-KSB (SEC
file # 0-26896):
<TABLE>
<CAPTION>
Exhibit Number Exhibit
- - -----------------------------------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended to date
3.2 By-laws of the Company, as amended to date
3.3 Articles of Incorporation of APIC, as amended to date
3.4 By-laws of APIC, as amended to date
10.1 Agreement dated December 31, 1994 by and among APIC,
PICOM Insurance Company and APCI
10.2 Management Agreement dated March 19, 1988 by and between
</TABLE>
27
<PAGE> 28
APIC and The Hardy Group, Inc. and all amendments
thereto
10.3 Holding Company Management Agreement dated March
19, 198[8] by and between APCI and the Hardy Group,
Inc. and all amendments thereto
10.4 Agency Agreement dated March 19, 1988 by and
between APIC and The Hardy Group, Inc. and all
amendments thereto
10.5 Amendment Agreement dated March 16, 1995 by and
between APIC, APCI and APMC
10.6 Amendment to Order dated March 21, 1996, issued by
the State of Illinois Department of Insurance in
the matter of APIC
10.7 Letter from the Director of Insurance of the State
of Illinois Department of Insurance dated March 22,
1996, waiving 1995 Risk Based Capital reporting
requirements for APIC
(a)(ii) The following exhibits are filed with this Form 10-QSB.
27 Financial Data Schedule
(b) The Company filed no Reports on Form 8-K during the first quarter of
1996.
28
<PAGE> 29
SIGNATURES
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 dates indicated.
Name Title Date
/s/ JAMES J. SMITH, M.D.
- - ----------------------------
James J. Smith, M.D. Chairman of the Board May 13, 1996
of Directors and President
/s/ JOHN F. SNYDER
- - ----------------------------
John F. Snyder Chief Financial Officer May 13, 1996
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 170
<SECURITIES> 30,492
<RECEIVABLES> 24,492
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,154
<PP&E> 579
<DEPRECIATION> (412)
<TOTAL-ASSETS> 55,321
<CURRENT-LIABILITIES> 53,401
<BONDS> 0
7,786
0
<COMMON> 0
<OTHER-SE> (5,866)
<TOTAL-LIABILITY-AND-EQUITY> 55,321
<SALES> 18
<TOTAL-REVENUES> 475
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (376)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (376)
<EPS-PRIMARY> (4.48)
<EPS-DILUTED> (4.48)
</TABLE>
