UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-22479
AMERICAN PUBLIC HOLDINGS, INC.
(exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0874171
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
of organization) Number)
2305 Lakeland Drive, Jackson, Mississippi 39208
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601-936-6600)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value (Title of Class)
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 if
1934 during the preceding 12 months (or for such shorted 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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 27, 1998
Common stock, no par value 1,099,278 Shares
Based on bid price for shares of Common Stock on March 27, 1998, the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $4,824,671.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference to
Part I, II, and III of the Form 10-K report: (1) Registrant's 1997 Annual Report
to Shareholders (Parts I and II), and (2) Proxy Statement dated April 6, 1998
for Registrant's Annual Meeting of Stockholders to be held April 28, 1998 (Part
III).
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AMERICAN PUBLIC HOLDINGS, INC.
FORM 10-K
INDEX
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PAGE
PART I
<S> <C> <C> <C>
ITEM 1. BUSINESS....................................................................................2
ITEM 2. PROPERTIES.................................................................................15
ITEM 3. LEGAL PROCEEDINGS..........................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...................................................................16
ITEM 6. SELECTED FINANCIAL DATA....................................................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................16
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................17
ITEM 11. EXECUTIVE COMPENSATION.....................................................................17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................................17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..............................................................................18
SIGNATURES..............................................................................................19
EXHIBIT INDEX...........................................................................................21
</TABLE>
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AMERICAN PUBLIC HOLDINGS, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
General
American Public Holdings, Inc. (the "Company") is a Mississippi
business corporation organized on December 21, 1995 by American Public Life
Insurance Company ("American Public Life"), also a Mississippi corporation. The
Company was formed to serve as a holding company for American Public Life.
On February 20, 1996 the Mississippi Commissioner of Insurance approved
an Agreement and Plan of Exchange (the "Plan of Exchange") pursuant to which
American Public Life would become a wholly-owned subsidiary of American Public
Holdings, Inc., and each share of outstanding American Public Life Common Stock
would be converted into one share of Company Common Stock. The Plan of Exchange
was approved by the stockholders of American Public Life at a Special Meeting
held on October 29, 1996 and became effective on November 30, 1996.
The Company has no significant assets other than the stock of American
Public Life. The assets and liabilities of the Company on a consolidated basis
are not materially different from the assets and liabilities of American Public
Life. As a holding company, the Company may make investments and engage in
businesses not permitted for an insurance company, but there are no present
plans to engage in additional activities or to make additional investments.
American Public Life is a Mississippi life and health insurance
company, which began operations in 1945. It is licensed to do business in
twenty-five (25) states. American Public Life specializes in supplemental health
insurance products, including cancer, accident, intensive care, heart
attack/stroke and dental insurance policies. American Public Life also offers
whole life and term life insurance contracts.
<TABLE>
<CAPTION>
The following table sets forth earned premiums by product line for the
last three years ended December 31.
Year ended December 31,
-------------------------------------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Premium revenue:
Cancer $17,309,712 $18,154,674 $18,300,716
Life insurance 532,294 552,908 578,342
Accident 1,105,802 1,149,841 1,202,815
DentaCare (Dental) 5,705,409 4,906,975 4,296,655
Group Accident & Health 2,377,267 993,026 693,629
Other Accident & Health 325,027 312,424 313,814
---------- ----------- -----------
27,355,511 $26,069,848 $25,385,971
========== =========== ==========
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Underwriting income:
Life insurance $(31,870) $ (346,527) $ (269,699)
Accident & Health (3,404,419) (1,719,138) (2,901,606)
Investment income 2,536,674 2,387,010 2,300,624
Other income 34,711 26,067 28,129
Realized investment losses (24,118) (80,291) (82,117)
------------- ------------- ------------
Income (loss) before income tax
provision (889,022) $ 174,212 $ (924,669)
======== ======== ========
</TABLE>
The following is a discussion of the characteristics of the categories
of insurance currently marketed or in force. Products are described in general
terms as there are many variations resulting principally from differing state
laws and regulations.
Life Insurance
American Public Life conducts its life insurance business on a
non-participating basis. American Public Life is licensed to write insurance in
25 states. The Company markets life insurance business utilizing individual
policies written on both a direct and a payroll deduction basis. Plans available
include 1, 5, & 10 year renewable term insurance issued up to $1,000,000
(Maximum Retention by company $50,000). Rates for these three products are male
and female non tobacco use and standard basis. Underwriting requirements vary by
age and amount of insurance applied for. Issue ages are 20-70. The following
table indicates those states which accounted for 5% or more of the total direct
life insurance premiums collected by American Public Life during 1997.
($) (%)
Alabama 35,747 6.23
Arkansas 47,117 8.21
Louisiana 107,038 18.66
Mississippi 200,585 34.96
Oklahoma 44,985 7.84
Texas 71,150 12.40
Others 67,152 11.70
---------- ----------
Total $573,774 100.00 %
======= =======
American Public Life offers a simplified issue whole life policy with
face amounts based on monthly payroll deduction amounts of $5-$20. The maximum
issue amount is $40,134. Rates are uni-sex and do not distinguish between smoker
and non smoker. A spouse rider is available with up to $10,000 coverage. The
children's protection rider provides up to $5,000 to
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age 25 where it may then be converted to permanent coverage not to exceed
$25,000. This product is issued to persons aged 15-65 either individually or by
payroll deduction.
The family life protector is a decreasing term plan renewable to age
70. Issue ages are 15 to age 60. Coverage is provided individually or on the
entire family. Maximum issue on the primary insured per unit is $15,000. Family
coverage maximums are spouse $3,000 and children $1,000. Accidental death and
dismemberment coverage is included on the primary insured and spouse. Premiums
may be paid individually or by payroll deduction.
The Company is in the process of developing a voluntary group term life
plan that will compliment its existing portfolio of voluntary payroll deduction
accident and health products.
Term life insurance policies provide death benefits if the insured's
death occurs during the specific premium paying term of the policy and generally
do not include a savings or investment element in the policy premium. Whole life
insurance policies provide death benefits which are payable under effective
policies regardless of the time of the insured's death and have a savings and
investment element which may result in the accumulation of a cash surrender
value.
<TABLE>
<CAPTION>
The following table sets forth certain information concerning the
development of American Public Life's life insurance business.
Year Ended December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Life insurance in force at the end of period:
Ordinary - whole life 34,772 $35,285 $33,144
- term 12,657 15,390 18,476
Industrial 0 0 0
Other 0 0 0
---------- ---------- ----------
Total 47,379 $50,675 $51,620
======= ======= =======
New life insurance issued:
Ordinary - whole life 3,411 3,191 2,474
- term 819 678 2,692
Industrial 0 0 0
Other 0 0 0
-------- ------- -------
Total 4,230 $ 3,869 $ 5,166
===== ===== =====
Premium Income $ 532 $ 553 $ 578
===== ===== =====
</TABLE>
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Accident and Health Insurance (A&H)
American Public Life is licensed to write accident and health insurance
in 25 states. The following table indicates those states which accounted for 5%
or more of the total direct A&H premiums collected by American Public Life
during 1997.
Louisiana 8,833,456 32.86%
Mississippi 6,155,706 22.90%
Oklahoma 2,629,106 9.78%
Texas 4,227,356 15.73%
Others 5,035,905 18.73%
---------- -------
Total 26,881,529 100.00%
======== =======
American Public Life's A&H portfolio includes plans that may be
marketed either on an individual basis or by payroll deduction. The bulk of new
sales are by payroll deduction with American Public Life taking advantage of the
popularity of this distribution method. The Company's Supplemental Cancer plans,
once the Company's lead products, have been restructured and as a result,
Voluntary Group Dental, DentaCare (American Public Life's PPO Dental Plan),
Disability Income, both group and guaranteed renewal along with medical
supplement plans have become the Company's leading products. Accident, Heart
Disease, and Intensive Care are also being successfully marketed on a payroll
deduction basis.
American Public Life's marketing structure consist of 53 general agents
and 725 soliciting agents. The Company has expanded its general agent network
with the contracting of four general agent's. Three of these new general agent's
will give the Company activity in states where there has been no significant
production in the past.
As it increases its product base and general agent network, the Company
will continue to grow along with the popularity of payroll deduction as a means
of distribution. It is expected that American Public Life's knowledge and
experience in this distribution method will give it a significant advantage in
the future.
Investments
American Public Life is regulated as to the types of investments which
it can make and the amount of funds which it may maintain in any one type of
investment. American Public Life's investment policy emphasizes investment grade
corporate bonds, political subdivision bonds, mortgage backed securities issued
by government agencies and United States Treasury securities. Investment real
estate and mortgage loans are gradually being liquidated as markets present
themselves.
4
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<TABLE>
<CAPTION>
The following table sets forth certain information concerning American
Public Life's investments at the dates shown.
Year Ended December 31,
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Securities:
Available for sale 34,626,186 $32,720,388 ---
Held to maturity --- --- $31,084,657
Mortgage loans on real estate 989,859 1,075,268 1,257,771
Investment real estate 727,700 781,542 710,326
Policy loans 1,490,154 1,600,398 1,641,192
Short-term investments --- --- 15,000
---------- ---------- -----------
Total investments 37,833,899 $36,177,596 $34,708,946
========== =========== ===========
The results with respect to the foregoing investments are as follows:
Net investment income 2,536,674 $2,387,010 $2,300,624
Net realized losses on investments
(before income taxes) (24,118) (80,291) (82,117)
Average yield on investments 6.94% 6.73% 6.79%
Economic yield on investments
(includes realized and unrealized capital gains) 8.33% 6.51% 6.55%
</TABLE>
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As of December 31, 1997 the maturity schedule for all bonds and notes
held by American Public Life at amortized cost was as follows:
Maturity Schedule
Amortized
Maturity Cost Percentage of Total
- ---------------------------- -------------- --------------------
Due in one year or less $ 200,000 .59%
Due in one to five years 2,029,739 6.02%
Due in five to ten years 3,406,033 10.09%
Due after ten years 6,011,153 17.82%
------------- -----------
11,646,925 34.52%
Mortgage-backed securities 22,096,362 65.48%
------------- ----------
$33,743,287 100.00%
=========== =======
Actual maturities may differ from contractual maturities because of the
borrowers' right to call or prepay obligations.
The Company's supplemental health insurance coverages have a relatively
short duration. The Company's investment policy directs that bond investments be
made with an average duration of five to ten years. This policy is based on the
recommendation of an investment consultant and the Company's independent
actuaries. A majority of the Company's government agency, mortgage-backed
securities were purchased with an anticipated average maturity falling within
these guidelines.
The Company's investment policy is to invest in state and federal
obligations as well as corporate obligations with a Standard & Poors rating of
"BBB" or greater. In 1996 the Company discontinued the purchase of government
agency, mortgage-backed securities and disposed of a significant amount of
government agency, mortgage-backed securities, and shifted these funds into
bonds with short to medium maturities. Such government agency, mortgage-backed
securities continue to be the largest component of the portfolio. Because of
prepayments, such securities present a greater interest rate risk than
traditional fixed income securities. The intent of the effort to change the mix
of the portfolio is to reduce the risk, volatility and active management
required of the portfolio since a change in market interest rates results in a
related change in such securities' prepayment risk.
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Marketing and Distribution
American Public Life's insurance products are marketed through an
independent field force of 53 general agents and 725 producing agents. The
American Public Life marketing department provides training support to its field
force on a periodic basis throughout the year. Agents are compensated through
the payment of commissions which are calculated as a percentage of collected
premium revenue.
The following agencies have accounted for more than 10% of the new
coverage issued in 1995, 1996, and 1997.
1997 1996 1997
-----------------------------------------
Clinton, Ruston, LA 8% 11% 12%
Benoit, Kenner, LA 18% 31% 23%
MGM, Plano, TX 26% 23% 29%
These percentages generally reflect the percentage of distribution of premium
income. The Clinton agency has exceeded 10% for eight years, excluding 1997, the
Benoit agency has exceeded 10% for four years, and the MGM agency has exceeded
10% for twenty-two years.
Reserve Liabilities
American Public Life maintains reserves for future policy benefits to
meet future obligations under outstanding policies. These reserves are
calculated by an independent actuarial firm, Wakely and Associates, Inc., and
are certified to be sufficient to meet policy and contract obligations as they
mature. Liabilities for future policy benefits are calculated using assumptions
for interest, mortality, morbidity, expense and withdrawals determined at the
time the policies were issued. As of December 31, 1997, the total reserves of
American Public Life were $35,322,925. American Public Life believes that such
reserves for future policy benefits were calculated in accordance with generally
accepted actuarial methods and that such reserves are adequate to provide for
future policy benefits with respect to American Public Life.
Underwriting Activities
American Public Life maintains an underwriting department which seeks
to evaluate the risks associated with the issuance of an insurance policy.
American Public Life's underwriting and policy issue department is staffed by 8
employees. The department is responsible for data entry, underwriting and policy
issue. Underwriters determine whether an application is accepted or declined.
The underwriting process consists of a review of the information contained in
the application in conjunction with information obtained through the medical
information bureau (MIB), and through its review of medical histories furnished
upon request.
7
<PAGE>
American Public Life conducts some telephone interviews to verify the
information on the application and to obtain such additional information as to
enable American Public Life to make an assessment of the applicant's functional
and cognitive capacities. American Public Life does not require physical
examinations as part of the underwriting process, as this is not generally
required for the type of coverages offered.
Claims Administration
Claims under American Public Life's policies are administered by a
claims department comprised of 15 employees. The claim adjudication process
principally includes verification of coverage, analysis of medical records,
interpretation of policy language and computation and payment of benefits.
American Public Life utilizes a physician who provides advice and direction with
regard to medical matters as they relate to American Public Life's claim
adjudication process.
Reinsurance
American Public Life's maximum retention on any one life is $50,000 for
life insurance and waiver of premium benefits. All accidental death benefits are
reinsured. There is minimal risk because of the reinsurers used and the
relatively low amount of reinsurance credits taken.
The principal reinsurers of American Public Life are as follows:
Business Men's Assurance
Life Reassurance Corp.
Lincoln National Life
Munich American
Swiss Re
CNA
American Public Life also has a small amount of reinsurance on its
accident and health insurance. Lonestar Life Insurance Company reinsures 25% of
a small block of cancer insurance that was assumed from another company in 1992.
Additionally, the heart transplant benefit on the heart attack-stroke policy is
reinsured 100% with Cologne Life Reinsurance Company.
Supervision and Regulation
American Public Life is subject to regulation by the insurance
departments of those states in which it is licensed to conduct business.
Although the extent of regulation varies from state to state, the insurance laws
of the various states generally establish supervisory departments having broad
administrative powers with respect to, among other matters, the granting and
revocation of licenses to transact business, the licensing of agents, the
establishment of standards of financial solvency, including reserves to be
maintained, the nature of investments and, in most cases, premium rates, the
approval of forms and policies and the form and content of financial statements.
These regulations have as their primary
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purpose the protection of policyholders and do not necessarily confer a benefit
upon stockholders.
Numerous proposals to reform the current health care system have been
introduced in Congress and state legislatures. Proposals have included, among
other things, modifications to the existing employer-based insurance system, a
quasi-regulated system of "managed competition" among health plans, and a
single-payer, public program. A number of states have passed or are considering
legislation that would limit the differentials in rates that insurers could
charge for health care coverages between new business and renewal business for
similar demographic groups. State legislation has also 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 benefits as well as a standard plan, or
by establishing a mechanism to spread the risk of high risk employees to all
small group insurers.
Changes in regulation of health insurance could adversely affect
American Public Life's business. Changes in regulation of health insurance could
also benefit American Public Life's business by increasing the demand for
supplemental insurance products.
Most states in which American Public Life operates have laws which
require that insurers become members of guaranty associations. These
associations guarantee that benefits due policyholders of insurance companies
will continue to be provided even if the insurance company which wrote the
business is financially unable to fulfill its obligations. To provide these
benefits, the associations assess the insurance companies licensed in a state to
write that type of insurance for which coverage is guaranteed. The amount of an
insurer's assessment is generally based on the relationship between that
company's premium volume in the state and the premium volume of all of the
companies writing the particular type of insurance in the state.
American Public Life is subject to periodic financial and market
conduct examinations. The last completed financial examination of American
Public Life was conducted by the Mississippi Insurance Department for the period
ended December 31, 1992. American Public Life is currently under examination for
the three-year period ended December 31, 1995. In addition, American Public Life
is subject to state imposed mandatory annual audits by independent certified
public accountants. These are conducted by the Company's independent public
accounting firm in conjunction with its audit of the Company's financial
statements.
Payment of dividends by American Public Life is restricted by law to
available net surplus computed on a statutory basis. In addition, without the
prior approval of the Mississippi Commissioner of Insurance, the size of any
dividend by American Public Life during any twelve-month period is limited to
the lesser of (i) 10% of surplus; or (ii) net gain from operations for the past
three years, less dividends paid in the past two years.
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Premiums
Premium rates for all of American Public Life's products are generally
subject to state regulation. Premium regulations vary greatly among
jurisdictions and product lines. Rates are established by American Public Life's
consulting actuary and are reviewed by the regulatory authorities in most
states. Rate changes must generally be filed and approved by these authorities.
Competition
American Public Life is engaged in a highly competitive business and
competes with many insurance companies of substantially greater financial
resources, including stock and mutual insurance companies. Mutual insurance
companies return profits, if any, to policyholders rather than stockholders;
therefore, mutual insurance companies may be able to charge lower net premiums
than those charged by stock insurers. Accordingly, stock insurers such as
American Public Life must attempt to achieve competitive premium rates through
greater volume, efficiency of operation and control of expenses. A large number
of insurance companies are licensed to sell accident and health insurance,
cancer insurance, and dental insurance. These include substantially all of the
major carriers in the United States. A number of these companies specialize in
supplemental health insurance and may have considerably greater financial
resources and larger networks of agents than American Public Life.
American Public Life competes with insurers which offer similar
policies in attracting new agents and attempts to attract and maintain agents
through a combination of competitive products, competitive agent commission
rates and quality underwriting and claims service. Management believes that
flexibility and sensitivity to changes in the marketplace are a major
consideration in competing for business.
Number of Employees
The Company employs a total of 80 persons as follows:
New Business 8
Customer Service 20
Financial & Data Processing 7
Marketing 6
Legal, Compliance & Services 9
Claims 16
DentaCare Services 8
All Other 6
--
80
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Business Acquisitions
The Company's growth strategy includes the investigation and evaluation
of acquisition opportunities with respect to existing blocks of insurance
business underwritten by other companies. It is anticipated that these
acquisitions will allow the Company to increase business in force without
incurring high first year commission and administrative expenses associated with
business produced directly by agents. No such acquisitions have been completed
recently. Management intends to continue to evaluate acquisition opportunities
as they arise. However, there can be no assurance that any acquisition
opportunities will arise or that the Company will be successful in completing
any such acquisitions.
Executive Officers of the Registrant
The executive officers of the Registrant including their positions with
the Registrant, their ages and their principal occupations for the last five
years are as follows:
Dianne D. Aycock. Age 37. Ms. Aycock is Vice President-Claims of
American Public Life, a position she has held since April 1, 1997. From January
1, 1995 to April 1, 1997, she was Vice President - Administration. From March
1, 1994 to January 1, 1995, she was a Director of Administration. Prior to
March 1, 1994, she was Manager of Policy Owner Services.
Joseph C. Hartley, Jr. Age 56. Mr. Hartley is Senior Vice President,
Counsel and Secretary/Treasurer of American Public Life, and Secretary of the
Company. He has been employed in a senior position with American Public Life
since December, 1993. Prior to December, 1993, Mr. Hartley was employed as an
attorney with David New Oil Company.
Alison James, Jr. Age 52. Mr. James is a Vice President and Agency
Director of American Public Life.
Frank K. Junkin, Jr. Age 47. Mr. Junkin has been Senior Vice
President, Marketing of American Public Life for more than five years. He has
served as a director of American Public Life since 1987 and of the Company since
its organization in December, 1995.
Richard K. Mills. Age 55. Mr. Mills is Vice President-Manpower
Development of American Public Life, a position he has held since January, 1997.
He was employed by American Public Life in January, 1994, and prior to that
time was self-employed in the insurance business.
Sharon D. Starnes. Age 34. Ms. Starnes is Vice President-Customer
Service of American Public Life, a position she has held since February 1, 1997.
From August 15, 1996 to February 1, 1997, she was a Senior Manager -
Accounting. Prior to that time she was a Manager - Accounting.
Jerry C. Stovall. Age 61. Mr. Stovall was elected President and Chief
Executive Officer
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of the Company and American Public Life effective September 2, 1997. Mr.
Stovall was Executive Vice President of American Public Life from October, 1996
through August, 1997. Until May, 1995, when he retired, Mr. Stovall was
President of Lamar Life Insurance Company.
William F. Weems. Age 41. Mr. Weems is a Vice President - Financial
of American Public Life and Treasurer of the Company. Mr. Weems has been
employed by American Public Life in a senior position since November, 1993.
Prior to November, 1993, he was employed as an accountant with The Andrew
Jackson Life Insurance Company.
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ITEM 2. PROPERTIES
American Public Life owns its principal executive offices located at
2305 Lakeland Drive, Jackson, Mississippi. The building consists of
approximately 30,000 square feet, and was constructed in 1985. The Company also
owns a building on 480 E. Woodrow Wilson Drive, Jackson, Mississippi, the old
home office, which is being leased. The building consists of approximately
15,000 square feet. There are no encumbrances on these properties. Management
believes the buildings are in good condition and adequate for the Company's
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
American Public Life is involved in litigation arising in the normal
course of business. Management of the Company, based on the advice of counsel,
is of the opinion that American Public Life's ultimate liability, if any, which
may result from the litigation, will not have a material adverse effect on the
financial condition of the Company and American Public Life.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's shareholders during
the fourth quarter of 1997.
13
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The information required by this item can be found in "Market
Information and Dividends" included in the Registrant's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
On June 18, 1997 the Company sold 75 shares of common stock to one
purchaser at a purchase price of $335 per share pursuant to the private
placement exemption provided by Section 4(2) of the Securities Act of 1933. The
purchaser was a person who has a personal and business relationship with Mr.
David A. New, Sr., the Company's principal shareholder. The proceeds from this
sale was $25,215.
In June of 1997 American Public Life sold 150 shares of Company Common
Stock to Chester Montgomery who was at that time a newly elected director of the
Company, pursuant to the private placement exemption provided by Section 4(2) of
the Securities Act of 1933 for a purchase price of $335 per share. The proceeds
of this sale were $50,250.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item can be found in the table
captioned "American Public Holdings, Inc. Summary of Consolidated Selected
Financial Data" in the Registrant's 1997 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item can be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Registrant's 1997 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and the
accompanying notes to the financial statements along with the report of the
independent public accountants and the supplementary financial information are
contained in the Registrant's 1997 Annual Report to Shareholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in accountants within the two year period
ended December 31, 1997.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the directors and executive officers of the Registrant
can be found under Item 1 Description of Business of this Report on Form 10-K
and under the headings "Election of Directors" and "Executive Compensation" in
the Proxy Statement to shareholders dated April 6, 1998, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item can be found under the heading
"Executive Compensation" in the Proxy Statement dated April 6, 1998, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and the officers and directors can be found under the headings "Stock Ownership
of Principal Stockholder" and "Stock Ownership of Directors and Officers" in the
Proxy Statement dated April 6, 1998, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
can be found under the caption "Other Transactions with Management," in the
Proxy Statement dated April 6, 1998, and is incorporated herein by reference.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
A-1. Financial Statements
The report of Deloitte & Touche LLP, independent auditors, and the
following consolidated financial statements of American Public
Holdings, Inc. and consolidated subsidiaries are included in the
Registrant's 1997 Annual Report to Shareholders and are incorporated
into Part II, Item 8, herein by reference.
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows Years ended December 31, 1997,
1996 and 1995
Notes to the Consolidated Financial Statements
A-2. Financial Statement Schedules
Schedule II - Condensed Financial Information of Registrant
Schedule V - Valuation and Qualifying Accounts
A-3. Exhibits Required by Item 601 of Regulation S-K
*2 Agreement and Plan of Exchange
*3(a) Articles of Incorporation of American Public Holdings, Inc.
*3(b) Bylaws of American Public Holdings, Inc.
*10 Consulting Agreement between American Public Life Insurance
Company and Johnny Williamson
10.1 Form of Bonus Agreement
*21 Subsidiaries of Registrant
27 Financial Data Schedule
* These Exhibits were originally filed as exhibits to the Registrant's
Form 10 filed April 30, 1997, (File No. 000-22479) and are incorporated
herein by reference.
B. Reports on Form 8-K
None
16
<PAGE>
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.
AMERICAN PUBLIC HOLDINGS, INC.
BY: /s/ Jerry C. Stovall
--------------------------
JERRY C. STOVALL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: MARCH 31, 1998
By: /s/ William F. Weems
-------------------------
WILLIAM F. WEEMS
VICE PRESIDENT FINANCIAL
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
DATE: March 31, 1998 BY: /S/ Warren I. Hammett
------------------------------------------
Warren I. Hammett, Director
DATE: March 31, 1998 BY: /S/ Frank K. Junkin, Jr.
------------------------------------------
Frank K. Junkin, Jr., Director
DATE: March 31, 1998 BY: /S/ David A. New, Sr.
-------------------------------------------
David A. New, Sr., Director
DATE: March 31, 1998 BY: /S/ David A. New, Jr.
--------------------------------------------
David A. New, Jr., Director
DATE: March 31, 1998 BY: /S/ Paul H. Watson, Jr.
--------------------------------------------
Paul H. Watson, Jr., Director
18
<PAGE>
EXHIBIT INDEX
10.1 Form of Bonus Arrangement
13 Only those portions of the Registrant's Annual Report to Shareholders
expressly incorporated by reference herein are included in this
exhibit and, therefore, are filed as a part of this report of Form
10-K.
21 Only those portions of the Proxy Statement dated April 6, 1998
Registrant's Annual Meeting of Shareholders to be held April 28, 1998
expressly incorporated by reference herein are included in this
exhibit and, therefore, are filed as a part of this report of Form
10-K.
27 Financial Data Schedule.
All other exhibits are omitted as they are inapplicable or are not
required by the related instructions.
19
FORM OF EXECUTIVE BONUS ARRANGEMENT
The position you hold with American Public Life is a very important and vital
one. The manner in which you perform the responsibilities of your position has a
direct effect on the profit level of this company. In recognition of your value
to APL you have been selected as a participant in a newly developed Executive
Bonus Program (EBP).
The EBP will be based on the annual performance of APL from October 1 through
September 30 each year or until otherwise notified. The first bonus for which
you will be eligible will be earned based on the results beginning October 1,
1997 through September 30, 1998.
The EBP will be as outlined:
1. The procedures will be as follows:
a. Calculate the before tax value of APL as of September 30
using actuarial assumptions agreed upon by the CEO and Board
of Directors. No rule of thumb will be used.
b. From the above calculations, determine the general expense level
under which the company should be operating.
c. The above calculations will be performed during the fourth quarter
each calendar year.
2. The Executive Bonuses will be calculated as follows:
a. First component: Assume a shareholder's minimum rate of
return on the value of the company. A 7 1/2% pre-tax or 5%
after tax minimum annual rate of return is required. A bonus
of 10% of the value added over the minimum return is earned.
b. Second component: Calculate the difference between the assumed
general expense level under which the company should be operating and
the actual general expense level. A bonus equal to 10% of this
difference from one year to the next will be earned.
<PAGE>
3. Example of estimated values and bonus calculations at the end of '97:
a. Calculated values 9/30/96 9/30/97
----------- -----------
1) Pre-tax value of company $20,000,000 $22,500,500
2) Assumed General Expense Level 2,000,000 2,200,000
3) Actual General Expense Level 4,000,000 3,900,000
4) Difference between Actual and 2,000,000 1,700,000
assumed General Expense
b. First Bonus Component
1) Increase in company value $2,500,000
2) Minimum required shareholder return 1,500,000
(.075 x 20,000,000)
3) Value added over minimum return 1,000,000
4) Bonus amount (10% of value added) 100,000
c. Second Bonus Component
1) Decrease in Excess General Expenses $ 300,000
($2,000,000 - $1,700,000)
2) Bonus amount (10% of decrease) 30,000
d. Total Bonus Amount
1) First Component $ 100,000
2) Second Component 30,000
-------
3) Total Bonus $ 130,000
<PAGE>
BONUS ALLOCATION
The driving force for the increase in value added comes from the addition of new
business. Therefore, marketing participants will have their bonus tied to new
production.
The following allocations will be made for participating executives:
a) Marketing participants - 1% of first year collected premium in the last 12
months (Oct. 1 -Sep 30) not to exceed 50% of the total bonus pool.
b) Other executive participants - difference between total executive bonus pool
and that paid to Marketing participants.
Based upon your responsibilities, you will be eligible for a bonus under (b) in
the "Bonus Allocation" outlined above.
The CEO and Board of Directors (outside) will approve the allocations among
participants. Allocations will be based upon subjective evaluation of your
contribution to the overall financial results as outlined in the bonus
calculations.
The bonus earned is not vested and you must be an employee of the company on the
date the bonus is paid. The company reserves the right to cancel or modify this
program at any time.
It is anticipated that the bonuses will be distributed in December of each year
unless you are otherwise notified. Your participation in this plan is
confidential. I know I can count on your help in reaching the company
objectives, resulting in the accelerated growth of the company and the bonus
pool!
<TABLE>
<CAPTION>
AMERICAN PUBLIC HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
For the years
ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums $27,355,511 $26,069,848 $25,385,971 $24,172,890 $21,300,631
Net investment income 2,536,674 2,387,010 2,300,624 2,214,311 2,351,929
Realized investment gains (losses) (24,118) (80,291) (82,117) (5,235) 339,381
Other income 34,711 26,067 28,129 38,594 35,071
Benefits and expenses:
Benefits, claims, losses and
settlement expenses 20,117,037 17,650,892 18,025,211 16,957,140 12,756,312
Expenses 10,674,763 10,577,530 10,532,065 9,013,565 8,863,845
Income (loss) before income
tax provision (benefit) (889,022) 174,212 (924,669) 449,855 2,406,855
Income tax provision (benefit) (146,371) 17,328 (337,013) (105,545) 763,050
Net income (loss) (742,651) 156,884 (587,656) 555,400 1,643,805
======== ======= ======== ======= =========
Net income (loss) per share* (0.67) 0.14 (0.51) .48 1.41
Other selected financial data:
Stockholders' equity $15,623,802 $16,136,588 $16,597,309 $17,663,109 $17,407,462
Book value per share* 14.07 14.29 14.34 15.28 14.93
Dividends per share* .22 .22 .22 .27 .25
Total assets 52,346,775 52,184,610 51,724,155 51,281,469 50,015,268
</TABLE>
*Based upon the number of shares after giving retroactive effect for a 20
for 1 stock dividend in March, 1998. Actual dividends paid in 1996, 1995,
1994 and 1993 were $4.70, $4.70, $4.70, $5.67, and $5.25, respectively.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Overview
The Company experienced net losses in 1995 and 1997, and relatively low
net income in 1996. The decline in net income is attributable to increased
benefit costs on cancer products, specifically chemotherapy and radiation
treatment. The Company has been implementing rate increases on its unlimited
chemotherapy cancer policies, and this has contributed to the decline in the in
force policy inventory.
The Company incurred a net loss in 1995, as a result of higher benefit
costs on its cancer insurance. Rate increases on cancer insurance and sales of
dental insurance provided the increase in premium income over 1994. Benefit
costs increased as sales of dental insurance progressed, in addition to the
increase in cancer claims. Operating expenses continued to rise in 1995 as the
Company continued developing new products to market to replace the declining
sales of cancer insurance.
Net income improved in 1996 compared to 1995 as new group insurance
products were introduced. Additionally, benefits were down, as the Company
received fewer cancer claims as compared to the previous year. Premium growth
was attributable to additional rate increases on cancer insurance, and to sales
of dental insurance, group disability, group dental insurance and group hospital
indemnity insurance, all of which are supplemental health products.
The Company's net loss in 1997 was due to increased claims on unlimited
benefit cancer insurance policies. The Company has discontinued sales of
unlimited benefit policies. Also contributing to the loss was a decrease in
our in force policies due to rate increases on cancer products and the
Company's efforts to diversify its product mix in order to dilute the amount
of cancer insurance that is in force. Although the Company's decision to
discontinue the sale of unlimited benefit cancer policies had a negative effect
on the Company's sales force, it has been able to attract new agents with new
products. As a result, the Company experienced increased sales of new
business in 1997 to a record level of approximately $7,000,000 of annualized
premium.
Known Trends
The Company's marketing strategy has been transformed from primarily a
single product offering, specifically cancer insurance, to a more diversified
product mix, which includes various group insurance products and dental
insurance. As part of this change in marketing strategy, unlimited chemotherapy
cancer products were removed from the product mix. Sales of alternative cancer
products have been weak. However, sales of our dental and group insurance
products have filled the void left by the departure of cancer sales.
The Company is attempting to manage its existing block of cancer
policies with rate increase assessments and by offering a conversion option.
5
<PAGE>
The Company is attempting to further diversify its product mix with the
introduction of new individual hospital indemnity and individual disability
income insurance. In 1997, the Company became licensed to market products in
Kansas, Illinois, Indiana, and Utah bringing the number of authorized states to
twenty-five.
Results of Operations
The following table sets forth the Company's condensed statement of
operations for the years ended December 31, 1993 through 1997, expressed as a
percentage of total revenues.
<TABLE>
Years ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues:
Premium 91.4% 91.8% 91.9% 91.5% 88.7%
Net investment income 8.5% 8.4% 8.3% 8.4% 9.8%
Other .1% (.2)% (.2)% .1% 1.5%
--- ---- ---- -- ---
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Benefits and expenses:
Benefits, claims, losses and
settlement expenses 67.3% 62.1% 65.2% 64.2% 53.1%
Commission expense 7.5% 8.3% 8.3% 9.1% 9.8%
Salaries and benefits 8.1% 9.1% 8.2% 8.0% 8.1%
Amortization of deferred policy
acquisition costs 13.0 11.0% 13.1% 9.2% 12.0%
Other operating expenses 7.1% 8.9% 8.5% 7.8% 7.0%
--- --- --- --- ---
Total benefits and
expenses 103.0% 99.4% 103.3% 98.3% 90.0%
----- ---- ----- ---- ----
Income before income taxes (3.0)% .6% (3.3)% 1.7% 10.0%
Provision for federal income taxes (.5)% .1% (1.2)% (.4)% 3.2%
------ ---- ----- ---- ----
Net income (loss) (2.5)% .5% (2.1)% 2.1% 6.8%
====== ===== ====== ==== =====
</TABLE>
Premium income has shown an increase in each year illustrated. Prior to
1994, cancer insurance was the only significant product sold in volume by the
agents of the Company. In the fourth quarter of 1993, the Company acquired an
existing block of dental business, and this acquisition contributed to premium
growth in the years 1995, 1996 and 1997. Rate increases on cancer insurance
(less lapses) have also contributed to the increase in premium income. The
components of annualized premiums in force are summarized below:
6
<PAGE>
<TABLE>
<CAPTION>
Annualized Premiums In Force
(In thousands)
Years ended December 31, Percentage change
1997 1996 1995 1994 1997 vs.1996 1996 vs.1995 1995 vs. 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Cancer $17,826 $19,694 $19,271 $19,159 (9.49)% 2.20% .58%
Dental Care 6,310 5,466 4,132 4,075 15.44 32.28 1.40
Accident 1,072 1,130 1,195 1,256 (5.13) (5.44) (4.86)
Life insurance 375 415 442 479 (9.64) (6.11) (7.72)
Other 419 284 281 157 47.54 1.07 78.98
Group 3,468 1,513 1,109 764 129.21 36.43 45.16
------- ------- ------- ------- ------ ----- ------
Total annualized
premium
in force $29,470 $28,502 $26,430 $25,890 3.40% 7.84% 2.09%
======= ======= ======= ======= ====== ===== =====
</TABLE>
As the above table illustrates, annualized cancer premium has begun to
decrease due to lapses attributable to rate increases assessed on policyholders.
In 1995 the Company discontinued sales of unlimited chemotherapy cancer products
due to higher claim costs. As a result, the sales of cancer products plummeted.
The void created by lower cancer sales has been replaced with sales of dental
insurance and supplemental group health insurance, such as group dental and
group disability.
Total new business premiums are summarized by line of business below:
<TABLE>
<CAPTION>
New Business Summary
(In thousands)
Years ended December 31, Percentage change
-----------------------------------------------------------------------
1997 1996 1995 1994 1997 vs. 19 1996 vs. 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cancer $ 730 $ 708 $1,785 $2,990 3.11% (60.34)%
Dental Care 2,249 2,095 1,590 1,268 7.35 31.76
Accident 385 364 520 432 5.77 (30.00)
Life insurance 95 45 46 57 111.11 (2.17)
Other 435 163 245 248 166.87 (33.47)
Group 3,086 1,372 372 283 124.93 268.82
----- ----- --- --- ------ ------
Total annualized $6,980 $4,747 $4,558 $5,278 47.04% 4.15 %
====== ====== ====== ====== ====== ======
premium solicited
</TABLE>
Net investment income has increased each year. The increases in
investment income are attributable to an increase in the volume of investments.
The Company's investment policy is to invest in state and federal
obligations as well as corporate obligations with a Standard & Poors rating of
"BBB" or greater. In 1996 the Company
discontinued the purchase of government agency, mortgage-backed securities and
disposed of a significant amount of government agency, mortgage-backed
securities, and shifted these funds
7
<PAGE>
into bonds with short to medium maturities. Such government agency,
mortgage-backed securities continue to be the largest component of the
portfolio. Because of prepayments, such securities present a greater interest
rate risk than traditional fixed income securities. The intent of the effort to
change the mix of the portfolio is to reduce the risk, volatility and active
management required of the portfolio since a change in market interest rates
results in a related change in such securities' prepayment risk.
The Company experienced realized investment losses in the years 1997,
1996, and 1995. The investment losses are the result of partial liquidations of
non-performing real estate holdings.
Benefits, claims, losses and settlement expenses which is the sum of
claims paid and changes in reserves for claims and future policy benefits, has
shown increases each year, with the exception of 1996. The components of
benefits, claims, losses and settlement expenses are as follows:
<TABLE>
<CAPTION>
Benefits To Policyholders
(In thousands)
Years ended December 31, Percentage change
------------------------------------------- -------------------------------
1997 1996 1995 1994 1997 vs. 1996 1996 vs. 1995
------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paid claims $19,669 $16,672 $16,185 $15,620 17.9% 3.0%
Reserve increase 448 979 1,840 1,337 (54.2)% (46.8)%
--- --- ----- ----- ------- -------
Total benefits $20,117 $17,651 $18,025 $16,957 14.0% (2.1)%
======= ======= ======= ======= ===== ======
</TABLE>
Benefits to Policyholders
As a % of Total Premium
1997 1996 1995 1994
------------------------------------------------
Paid claims 71.90% 63.95% 63.75% 64.62%
Reserve increase 1.64% 3.76% 7.25% 5.53%
------- ------ ------ ------
Total benefits 73.54% 67.71% 71.00% 70.15%
====== ====== ====== ======
Claims have increased due to increased costs in cancer treatments such
as chemotherapy. Also, the Company's expansion into other products such as
dental insurance has exposed it to products with high claim utilization costs.
8
<PAGE>
Commission expense has increased in proportion to the increase in
premium income. However, the percentage of commission expense to premium income
has decreased because the Company does not pay commission on cancer premium rate
increases and also the Company has shifted its focus to product lines which pay
lower commissions.
Salaries and benefits decreased in 1997 compared to 1996 due to
cost-cutting measures. The Company was able to reduce staffing in 1997 through
attrition. Increases in prior years were due to the staffing requirements needed
to service the block of dental coverages acquired in 1993, as well as the
Company's attempt to increase the level of employee compensation to be more
competitive in its recruitment of qualified personnel. The Company's salary
costs are still somewhat high relative to the volume of policies in force.
The amortization of deferred acquisition costs (DAC) is comprised of
two components, as shown in the following table:
<TABLE>
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Amortization of DAC 3,899,794 3,129,605 3,627,023 2,430,081
Current year deferred costs 2,380,598 2,049,305 2,872,745 2,772,789
Net change in DAC 1,519,196 1,080,300 754,278 (342,708)
</TABLE>
The current year deferred costs represent the costs of acquisition of
new business in the current year. The amortization of DAC represents the annual
charge off against the asset and also all of the unamortized deferred expenses
on current year lapses.
The Company discontinued marketing unlimited chemotherapy cancer
products in 1995. Consequently, the Company has changed its marketing focus to
other product lines, specifically group accident and health insurance and dental
insurance. The amount of current year deferred costs for 1997 and 1996 is lower
than 1995 and prior years because our 1996 new business was less than 1995 (and
prior years) and because our new product mix is sold at significantly lower
commission rates.
The amortization of DAC has risen in 1997, 1996 and 1995 as compared to
prior years due to an increasing decline in our in force cancer policies.
Because of the discontinued sales of unlimited chemotherapy cancer policies,
policy lapses have exceeded new business. In addition, rate increases assessed
on cancer policies have also attributed to increases in lapsed policies. As the
number of lapsed policies rise, the amount of amortization of DAC also rises.
Additionally, fewer costs are deferred on group insurance products such as group
dental and group disability.
Other operating expenses decreased by $540,431 in 1997 compared to an
increase of $16,259 in 1996, due to cost-cutting measures implemented by the
Company. Other operating expenses increased $16,259 in 1996 and increased
$294,325 in 1995. In 1996 the Company incurred substantial expenses in
connection with the acquisition of American Public Life by the Company. In 1997
the Company implemented cost saving measures including staff reductions through
attrition. In 1996 the Company reduced expenses by reducing the staff of its
off-site dental administration office.
9
<PAGE>
In 1995 the Company incurred significant expenses related to a limited benefit
offer made to policyholders as opposed to a rate increase. These costs are
somewhat high relative to the volume of policies in force.
Liquidity and Capital Resources
The Company's insurance operations provide the primary source of
liquidity for the Company. The Company needs liquidity for benefit payments,
policy acquisition costs and operating expenses on a recurring basis. The
Company currently is not aware of any other short-term or long-term liquidity
needs, although it is possible that additional demands for liquidity will arise
in the future.
The Company's principal sources of cash to meet its liquidity needs are
premiums and investment income. The Company typically generates excess cash flow
each year from operations. Should an occasion arise where additional resources
are needed, the Company's investments provide an additional source of liquidity.
At December 31, 1997 and 1996, 100% of the Company's investments were in fixed
maturity securities, mortgage loans, investment real estate, policy loans and
short-term certificates of deposit. Total investments, combined with cash and
cash equivalents, increased to $37,833,899 at December 31, 1997 compared to
$36,780,066 at December 31, 1996, and $35,010,048 at December 31, 1995, due to
increases in operational cash flow.
Prior to the establishment of the Company as a holding company for
American Public Life, American Public Life paid annual cash dividends to
stockholders of $4.70 per share in 1996 and 1995. In March, 1997, the Board of
Directors of the Company declared an annual cash dividend for 1997 of $4.70 per
share (or $.22 per share, post stock dividend in March, 1998) which was paid in
May 1997. In 1996 and 1995, the Company repurchased shares of its common stock
for an aggregate cost of $1,629,445. The Company also issued shares of common
stock in 1997, 1996 and 1995 for aggregate consideration of $812,375.
The Company's ability to pay dividends is limited by the amount of
dividends it receives from American Public Life. Payment of dividends by
American Public Life is restricted by law to available net surplus computed on a
statutory basis. In addition, without the prior approval of the Mississippi
Commissioner of Insurance, the size of any dividend by American Public Life
during any one year is limited to the lesser of (i) 10% of surplus; or (ii) net
gain from operations for the past three years, less dividends paid in the past
two years.
Pursuant to the laws and regulations of the State of Mississippi,
American Public Life is required to maintain minimum statutory capital of
$400,000 and additional minimum statutory surplus of $600,000. Other states have
similar restrictions for licensing purposes, the largest being a minimum capital
requirement of $2,000,000 in the State of Georgia.
The National Association of Insurance Commissioners ("NAIC") measures
the adequacy of a company's capital by its risk-based capital ratio (the ratio
of its total capital, as defined, to its risk-based capital). These requirements
provide a measurement of minimum capital appropriate for
10
<PAGE>
an insurance company to support its overall business operations based upon its
size and risk profile which considers (i) asset risk, (ii) insurance risk, (iii)
interest rate risk, and (iv) business risk. An insurance company's risk-based
capital is calculated by applying a defined factor to various statutory based
assets, premiums and reserve items, wherein the factor is higher for items with
greater underlying risk.
The NAIC has provided levels of progressively increasing regulatory
action for remedies when an insurance company's risk-based capital ratio falls
below a ratio of 1:1. As of December 31, 1997, American Public Life was in
compliance with these minimum capital requirements as follows:
Total adjusted capital $8,759,856
Authorized control level risk-based capital $2,220,903
Ratio of adjusted capital to risk-based capital 3.94:1
The Company has no outstanding material commitments for capital
expenditures as of the end of the latest fiscal period.
Year 2000
The year 2000 computer issue is caused by computer programs being
written using two digits rather than four to identify the applicable year. Since
most application software only contains the two digits, many systems will
identify January 1, 2000 as January 1, 1900 which has the potential to cause
many computer systems and software programs to generate incorrect results, or
worse, not function at all. The magnitude of the problem extends beyond the
computer environment as many business machines and other office equipment also
have date sensitive functions. In 1996, for reasons unrelated to the Year 2000
issues, the Company retained a third party to design a new computer system
including software applications to replace the Company's current system. This
system which will begin running in June of 1998, will be Year 2000 compliant.
Testing of the system will be completed by the end of 1998. The costs to replace
the system will be capitalized and amortized over the useful life of the system.
Costs for replacement incurred during 1997 were not material to the
Company's consolidated financial statements. Costs to be incurred in 1998 are
not expected to have a material adverse effect on the Company's financial
statements.
Although replacement and testing costs related to the new system have
not been and are not expected to have a material adverse effect on the Company's
financial statements, failure to address the Year 2000 issues would have a
material adverse effect on the Company's business and financial results. The
Company does not believe that the non-compliance of vendors or counter parties
would have a material effect on the Company's financial statements as the
Company does not rely on any significant vendors or counterparties for its
business.
DESCRIPTION OF BUSINESS
11
<PAGE>
The Company is a Mississippi business corporation organized on December
21, 1995 by American Public Life to serve as a holding company for American
Public Life. On February 20, 1996 the Mississippi Commissioner of Insurance
approved an Agreement and Plan of Exchange pursuant to which American Public
Life became a wholly-owned subsidiary of the Company, and
each share of outstanding American Public Life Common Stock was converted into
one share of Company Common Stock. The Plan of Exchange became effective on
November 30, 1996.
The Company has no significant assets other than the stock of American
Public Life. American Public Life is a Mississippi life and health insurance
company, which began operations in 1945. It is licensed to do business in
twenty-five (25) states. American Public Life specializes in supplemental health
insurance products, including cancer, accident, intensive care, heart
attack/stroke and dental insurance policies. American Public Life also offers
whole life and term life insurance contracts.
MARKET INFORMATION AND DIVIDENDS
Market Information
Before it became a subsidiary of the Company, American Public Life's
Common Stock was traded on a limited and sporadic basis in the over-the-counter
market. The following table sets forth the range of high and low bid prices on
the OTC Bulletin Board of American Public Life's Common Stock for 1996 and is
based on information provided by the National Quotation Bureau. The prices
reported by the National Quotation Bureau reflect inter-dealer prices and do
not include retail mark-ups, mark-downs or commissions and may not have
represented actual transactions.
Bid Prices, Restated*
Low High
1996
First Quarter 6.81 7.67
Second Quarter 7.19 7.62
Third Quarter 7.62 7.69
Fourth Quarter 7.73 7.73
*These figures have been restated to reflect the effect of a 20 for 1 stock
dividend on the Company's common stock paid in March of 1998.
During 1997, while the Company was in the process of registering its
common stock with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, there were no quotations made on the OTC Bulletin Board.
The Company's Common Stock began to be quoted on the OTC Bulletin Board in
February of 1998.
Holders
As of March 16, 1998, there were 1,780 holders of record of Common Stock of
the Company.
12
<PAGE>
Dividends
In 1996, prior to its acquisition by the Company, American Public Life
paid annual cash dividends to its stockholders of $.22 per share (restated for
March, 1998 20 for 1 Company stock dividend). In 1997, the Company paid an
annual cash dividend of $.22 (restated for March, 1998 20 for 1 Company stock
dividend).
The Company's ability to pay dividends is limited by the amount of
dividends it receives from American Public Life. Payment of dividends by
American Public Life is restricted by law to available net surplus computed on a
statutory basis, which, as of December 31, 1997, was $5,889,437. In addition,
without the prior approval of the Mississippi Commissioner of Insurance, the
size of any dividend by American Public Life during any one year is limited to
the lesser of (i) 10% of surplus; or (ii) net gain from operations for the past
three years, less dividends paid in the past two years. Under this test,
American Public Life has only approximately $30,000 available for the payment of
dividends to the Company in 1998. As a result, the Company does not intend to
pay a cash dividend in 1998. The payment of future cash dividends will depend on
a variety of factors, including the net income of the Company and the Company's
capital needs.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Public Holdings, Inc.:
We have audited the consolidated balance sheets of American Public Holdings,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of American Public
Holdings, Inc. and subsidiary as of December 3l, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- ---------------------------
Deloitte & Touche LLP
Jackson, Mississippi
March 6, 1998
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
---------------------------------------------------------- ------------ ------------
<S> <C> <C>
Investments:
Available for sale securities - at fair value (amortized
cost of $33,743,287 in 1997 and $32,406,128 in 1996) $ 34,626,186 $ 32,720,388
Mortgage loans 989,859 1,075,268
Investment real estate - net 727,700 781,542
Policy loans 1,490,154 1,600,398
------------ ------------
Total investments 37,833,899 36,177,596
Cash and cash equivalents 608,434 602,470
Accrued investment income 440,614 424,805
Accounts and notes receivable, net of allowance for
uncollectible accounts of $41,000 (1997) and $46,000 (1996) 455,848 512,906
Deferred policy acquisition costs 9,798,294 11,317,490
Property and equipment - net 2,193,163 2,205,019
Real estate acquired in satisfaction of debt 504,660 583,393
Deferred income tax asset 399,160 357,272
Other 112,703 3,659
------------ ------------
TOTAL ASSETS $52,346,775 $52,184,610
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES:
Future policy benefits $33,393,109 $32,918,172
Unpaid claims 1,086,795 856,085
Unearned premiums 843,021 879,437
Policyholders' dividend accumulations 406,456 396,952
Accounts payable and other liabilities 993,592 997,376
----------- -----------
Total liabilities 36,722,973 36,048,022
COMMITMENTS AND CONTINGENCIES (Notes 5, 8 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 25,000,000 shares
Common stock, no par value, authorized 50,000,000 shares,
issued 1,111,299 (1997) and 1,202,250 (1996) shares 52,919 57,250
Additional paid-in capital 2,257,800 2,232,750
Unrealized gain on available for sale securities, net of
Retained earnings 706,319 251,408
Retained earnings deferred taxes of $177,000 (1997) and $63,000 (1996) 12,606,764 14,609,589
----------- ----------
15,623,802 17,150,997
Less cost of treasury stock - 92,526 shares (1,014,409)
----------- ----------
Total stockholders' equity 15,623,802 16,136,588
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,346,775 $52,184,610
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997,1996 AND 1995
1997 1996 1995
----------- ----------- ----------
REVENUE:
<S> <C> <C> <C>
Premiums $27,355,511 $26,069,848 $25,385,971
Net investment income 2,536,674 2,387,010 2,300,624
Realized investment losses (24,118) (80,291) (82,117)
Other income 34,711 26,067 28,129
------------ ------------ ------------
29,902,778 28,402,634 27,632,607
BENEFITS AND EXPENSES:
Benefits, claims, losses and
settlement expenses 20,117,037 17,650,892 18,025,211
Commission expense 2,242,620 2,346,428 2,301,863
Salaries and benefits 2,409,323 2,584,925 2,265,737
Amortization of deferred policy
acquisition costs 3,899,794 3,129,605 3,627,023
Insurance taxes, licenses and fees 1,166,180 1,019,295 856,424
Other operating expenses 956,846 1,497,277 1,481,018
------------ ------------ -----------
30,791,800 28,228,422 28,557,276
---------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) (889,022) 174,212 (924,669)
INCOME TAX PROVISION (BENEFIT) (146,371) 17,328 (337,013)
----------- ----------- ------------
NET INCOME (LOSS) $ (742,651) $ 156,884 $ (587,656)
=========== =========== ============
NET INCOME (LOSS) PER SHARE $ (0.67) $ 0.14 $ (0.51)
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUTY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Unrealized
Additional Gain on Total
Common Stock Paid-in Available for Retained Treasury Stockholders'
Shares Amount Capital Sale Securities Earnings Stock Equity
----------- ------- --------------------------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 1,202,250 $57,250 $ 2,232,750 $15,545,323 $ (172,214) $ 17,663,109
Treasury stock acquired (560,795) (560,795)
Treasury stock reissued 335,000 335,000
Dividends to stockholders ($.22 per share) (252,349) (252,349)
Net loss (586,656) (587,656)
--------- ------- ----------- -------- ------------- ---------- ------------
BALANCE, DECEMBER 31, 1995 1,202,250 57,250 2,232,750 14,705,318 (398,009) 16,597,309
Change in net unrealized gain $251,408 251,408
Treasury stock acquired , (1,068,650) (1,068,650)
Treasury stock reissued 452,250 452,250
Dividends to stockholders ($.22 per share) (252,613) (252,613)
Net income 156,884 156,884
---------- ------ ----------- -------- ------------ ---------- -----------
BALANCE,DECEMBER31, 1996 1,202,250 57,250 2,232,750 251,408 14,609,589 (1,014,409) 16,136,588
Change in net unrealized gain 454,911 454,911
Stock issued 1,575 75 25,050 25,125
Treasury stock retired (92,526) (4,406) (1,010,003) 1,014,409 0
Dividends to stockholders ($.22 per share) (250,171) (250,171)
Net loss (742,651) (742,651)
---------- ------- ---------- --------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1997 1,111,299 $ 52,919 $ 2,257,800 $ 706,319 $ 12,606,764 $ O $ 15,623,802
========= ========= =========== ========= ============ ========== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (742,651) $ 156,884 $ (587,656)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Realized investment losses 24,118 80,291 82,117
Amortization of deferred policy
acquisition costs 3,899,794 3,129,605 3,627,023
Depreciation and other amortization 422,617 410,970 319,082
Deferred income tax benefit (155,616) (274,768) (492,970)
Decrease (increase) in receivables 41,249 171,817 (80,162)
Decrease (increase) in other assets (109,044) 4,765 41,485
Policy acquisition costs deferred (2,380,598) (2,049,305) (2,872,745)
Increase in liability for future policy benefits 474,937 883,361 1,880,558
Increase (decrease) in other liabilities 200,014 37,815 (24,461)
------------ ------------ ------------
Net cash provided by operating activities 1,674,820 2,551,435 1,892,271
INVESTING ACTIVITIES:
Proceeds from sale of real estate 47,222 59,326 160,948
Purchase of securities and short-term
investments (36,675,342) (22,339,700) (19,910,815)
Mortgage and policy loan repayments 195,653 223,297 280,834
Proceeds from sales of securities 1,128,156
Proceeds from maturities, redemptions, and
calls of securities and short-term investments 35,353,646 19,890,844 17,919,027
Property and equipment purchased (364,989) (567,977) (475,889)
Refund of deposit 225,000
------------ ------------ -----------
Net cash used in investing activities (1,443,810) (1,381,054) (2,025,895)
FINANCING ACTIVITIES:
Dividends paid to shareholders (250,171) (252,613) (252,349)
Proceeds from stock issued 25,125 452,250 335,000
Payments to acquire treasury stock (1,068,650) (560,795)
------------ ------------ -----------
Net cash used in financing activities (225,046) (869,013) (478,144)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,964 301,368 (611,768)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR 602,470 301,102 912,870
=========== =========== ==========
AT END OF YEAR $ 608,434 $ 602,470 $ 301,102
------------ ------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $137,000 $270,000 $113,000
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES
a. Nature of Operations and Basis of Presentation - American Public Holdings,
Inc. (the Company) is a Mississippi corporation organized in December, 1995 by
American Public Life Insurance Company (APL). In 1996, the Mississippi
Commissioner of Insurance and APL stockholders approved an Agreement and Plan of
Exchange pursuant to which APL became a wholly-owned subsidiary of the Company,
and each share of outstanding common stock of APL was converted into one share
of common stock of the Company. APL is a stock life insurance company that
insures against risk of loss under various types of coverages, with the majority
of revenue derived from cancer and other health policy premiums. APL is licensed
to operate in twenty-five states but operates primarily in Mississippi (where it
is domiciled), Louisiana and Texas.
The consolidated financial statements include those of the Company and its
wholly owned subsidiary, APL, and APL's wholly-owned subsidiary, DentaCare
Marketing and Administration, Inc. All significant intercompany balances and
transactions have been eliminated.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which vary in some respects from
accounting practices prescribed or permitted by the Insurance Department of the
State of Mississippi. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed (see Note 9)
b. Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Investment Securities - The Company's investment security portfolio is
comprised of fixed maturity securities and is classified as available for sale.
The portfolio is therefore carried at fair value with net unrealized gains
(losses) carried as a separate component of stockholders' equity. The portfolio
classification was changed in 1996 from held to maturity (carried at amortized
cost) to available for sale to better reflect management intent and to provide
greater flexibility for liquidating securities within the portfolio. The
specific identification method is used to compute gains or losses on the sale of
these assets. Interest earned on these assets is included in interest income.
17
<PAGE>
Securities that reflect a market decline below cost or amortized cost that is
deemed other than temporary are written down to net realizable value by a charge
to earnings. Investment premiums and discounts are amortized by a method which
approximates the interest method.
d. Mortgage Loans and Real Estate Acquired in Satisfaction of Debt - The Company
makes investments in mortgage loans collateralized by real estate. The return on
and ultimate recovery of these loans is generally dependent on the successful
operation, sale or refinancing of the real estate. The Company monitors the
effects of current and expected market conditions and other factors on the
collectibility of real estate loans. When, in management's judgment, the present
value of expected future cash flows from a loan is less than the recorded
investment in the loan, an impairment is recognized by creating a valuation
allowance with a corresponding charge to expense. Such estimates of impairment
necessarily include assumptions, which may include anticipated improvements in
market conditions for real estate, which may or may not occur. The more
significant assumptions management considers involve estimates of the following:
lease, absorption and sales rates; real estate values and rates of return;
operating expenses; inflation; and sufficiency of collateral independent of the
real estate including, in limited instances, personal guarantees.
Real estate acquired in satisfaction of debt is recorded at the lower of loan
balance, including accrued interest, if any, or fair value at acquisition.
Additional valuation adjustments are made when the carrying value exceeds fair
market value.
e. Cash and Cash Equivalents - For purposes of the consolidated statements of
cash flows, the Company considers checking accounts and cash on hand to be cash
and cash equivalents. Short-term investments are included in the investments
category in order to conform to insurance company reporting requirements.
f. Property and Equipment - Property and equipment is stated at cost and
depreciated and amortized by the straight-line method over the estimated useful
lives of the assets, which for building and improvements is thirty-nine years
and for furniture and equipment ranges from five to ten years. At each balance
sheet date the Company evaluates the recoverability of long-lived assets based
upon expectations of nondiscounted cash flows and operating income.
g. Deferred Policy Acquisition Costs - Commissions and other costs that both
vary with and are primarily related to the production of new and renewed
insurance business are deferred and amortized over the anticipated premium
paying period of the related policies on a pro-rata basis.
<PAGE>
h. Policy Reserves - The unearned premium reserve recognizes premiums as earned
pro rata over the policy term. The aggregate reserve for future policy benefits
has been actuarially determined using the following assumptions:
<TABLE>
<S> <C> <C>
Life Accident and Health
Mortality for policies issued 100% of 1965-70 100% of 1965-70
prior to 1982 S & U male mortality table Ultimate male mortality table
Mortality for policies issued 100% of 1975-80 100% of 1975-80
after 1982 S & U male mortality table Ultimate male mortality table
Interest rates 5-7% 5-7%
Withdrawals (lapse rates) 30% first year graded to 5% 30% first year graded to 5%
in year 21 and later in year 21 and later
</TABLE>
i. Unpaid Claims - Unpaid claims represent the estimated liabilities on claims
reported to the Company plus provision for claims incurred but not yet reported.
The liabilities for unpaid claims are determined using both evaluations of each
claim and statistical analyses and represent the estimated ultimate net cost of
all claims incurred through the end of the reporting period.
j. Income Taxes - Deferred tax liabilities and assets are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company files a consolidated income tax
return with its wholly-owned subsidiary. Income taxes are allocated based on
each company's separate taxable income (loss).
k. Revenue Recognition - Premiums are recognized as revenue when due from
policyholders. Policy benefits and expenses are deferred or accrued to result in
a matching of costs with the earned premiums over the life of the insurance
contracts. This matching is accomplished by accrual of the liability for future
policy benefits on insurance in force and the amortization of deferred policy
acquisition costs.
1. Profit Sharing Plan - Employees are eligible to participate in a profit
sharing plan (converted to a 401 (k) plan effective January 1, 1997) covering
substantially all employees with more than one year of service. Contributions
made to the plan were approximately $29,000 in 1997 and 1996 and $31,000 in
1995.
m. Income (Loss) Per Share - The income (loss) per share is based on the
weighted average number of common shares outstanding during each year after
restating prior years as though the 20 for 1 stock split-up in 1998 (Note 8) had
occurred at the beginning of the earliest year presented. The weighted average
number of shares outstanding was 1,110,459 in 1997, 1,129,044 in 1996 and
1,157,079 in 1995.
<PAGE>
2. INVESTMENTS
<TABLE>
<CAPTION>
The amortized cost and related approximate fair value of fixed maturity
securities were as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
1997
U. S. Treasury and government
corporations and agencies $ 1,303,080 $ 148,994 $ 1,452,074
States and political subdivisions 3,320,188 139,245 3,459,433
Public utility bonds 496,781 12,116 $ 3,381 505,516
Industrial and miscellaneous 6,526,876 116,413 6,308 6,636,981
Mortgage-backed securities 22,096,362 537,402 61,582 22,572,182
---------- ------- ------ ----------
$33,743,287 $954,170 $71,271 34,6226,186
=========== ======== ======= ===========
1996
U. S. Treasury and government
corporations and agencies $ 2,801,365 $ 47,351 $ 38,949 $ 2,809,767
States and political subdivisions 3,322,717 318,517 13,214 3,628,020
Public utility bonds 846,744 8,999 5,088 850,655
Industrial and miscellaneous 3,230,181 16,810 31,051 3,215,940
Mortgage-backed securities 22,205.121 370,787 359,902 22,216,006
----------- -------- -------- -----------
$32,406,128 $762,464 $448,204 $32,720,388
----------- -------- -------- -----------
Net realized gains (losses) are summarized as follows:
1997 1996 1995
---------- ---------- ---------
Calls of available for sale securities $ 7,393
Investment security sales $ (25,392)
Real estate acquired in satisfaction of debt (31 511) (54,899) $ (82,117)
---------- ---------- ----------
$ (24,118) $ (80,291) $ (82,117)
========== ========== ==========
</TABLE>
Bonds with an approximate carrying value of $2,685,000 in 1997 and $2,689,000 in
1996 were pledged to the respective states in which the Company transacts
business for the security and benefit of policyholders. At December 31, 1997,
assets on deposit met minimum statutory requirements.
<PAGE>
The following is an analysis of the amortized cost and fair value of investments
in fixed maturities at December 31, 1997 by contractual maturity:
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 200,000 $ 204,000
Due in one to five years 2,029,739 2,034,883
Due in five to ten years 3,406,033 3,521,659
Due after ten years 6,011,153 6,293,462
------------ ------------
11,646,925 12,054,004
Mortgage-backed securities 22,096,362 22 572,182
------------ ------------
$ 33,743,287 $ 34,626,186
============ ============
Actual maturities may differ from contractual maturities because of the
borrowers' right to call or prepay obligations.
<TABLE>
<CAPTION>
The components of net investment income were as follows:
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Fixed maturities $ 2,485,844 $ 2,405,619 $ 2,271,250
Mortgage loans 90,686 106,630 118,286
Investment real estate 168,108 78,770
Policy loans 78,640 83,878 87,850
Short-term investments 20,015 20,701 63,222
Real estate acquired in satisfaction of debt 17,102 18,299 18,341
---------- ---------- -----------
Total investment income 2,860,395 2,713,897 2,558,949
Investment expenses 323,721 326,887 258,325
---------- ---------- -----------
Net investment income $2,536,674 $2,387,010 $ 2,300,624
========== ========== ===========
</TABLE>
<PAGE>
3. INVESTMENT REAL ESTATE AND PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Investment real estate and property and equipment were as follows:
Investment Real Estate Property and Equipment
1997 1996 1997 1996
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Land $ 170,000 $ 170,000 $ 322,447 $ 322,447
Buildings and improvements 1,057,399 1,057,399 1,312,752 1,312,752
Furniture and equipment 2,332,836 1,967,848
---------- ---------- ---------- ----------
1,227,399 1,227,399 3,968,035 3,603,047
Less accumulated depreciation (499,699) (445,857) (1,774,872) (1,398,028)
---------- ---------- ---------- ----------
Property and equipment, net $ 727,700 $ 781,542 $ 2,193,163 $ 2,205,019
========== ========== ============ ============
</TABLE>
4. PARTICIPATING POLICIES
APL had in force approximately $2,624,000 in 1997 and $2,717,000 in 1996 in face
amount of annual dividend participating policies. Dividends on such policies are
based on mortality, interest and expense experience, and are payable only upon
declaration by the Board of Directors. All amounts allocable to policyholders
have been accrued and none of APL's retained earnings was allocable to
participating policies.
5. REINSURANCE
The maximum amount of risk that APL retains on any one life is $50,000 of life
insurance and waiver of premium benefits (all accidental death benefits are
reinsured), depending on age and classification of risk.
The reserves for life and accident and health policies were stated after
deduction for reinsurance with other companies. A contingent liability exists
with respect to such reinsurance, which could become a liability of APL in the
event that such reinsurance companies are unable to meet their obligation under
the existing reinsurance agreements. The reinsured portion of life reserves
deducted in developing the net liability was approximately $34,000 in 1997 and
$32,000 in 1996 relating to insurance in force of $3,294,000 in 1997 and
$4,302,000 in 1996. The reinsurance portion of accident and health reserves
deducted in developing the net liability was approximately $24,000 in 1997 and
1996.
<PAGE>
6. POLICY CLAIMS
<TABLE>
<CAPTION>
Activity in the liability for unpaid policy claims is summarized as follows:
1997 1996
------------ ----------
<S> <C> <C>
Balance at January 1 $ 856,085 $ 906,837
Less reinsurance recoverables 1,360 470
---------- ----------
Net balance at January 1 854,725 906,367
Incurred related to:
Current year 15,726,945 13,698,234
Prior years 3,569,717 2,727,849
---------- ----------
Total incurred 19,296,662 16,426,083
---------- ----------
Paid related to:
Current year 14,981,297 13,057,102
Prior years 4,095,998 3,420,623
---------- ----------
Total paid 19,077,295 16,477,725
---------- ----------
Net balance at December 31 1,074,092 854,725
Plus reinsurance recoverables 12,703 1,360
---------- ----------
Balance at December 31 $ 1,086,795 $ 856,085
=========== =========
</TABLE>
The liability for unpaid policy claims is composed of claims incurred but not
reported and claims reported and in course of settlement. The accident and
health policy reserve includes a claim reserve of $3,719,000 in 1997 and
$3,682,000 in 1996 which represents the present value of future claims.
7. INCOME TAXES
<TABLE>
<CAPTION>
The components of the provision for income taxes were as follows:
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Current provision $ 9,245 $ 292,096 $ 155,957
Deferred benefit (155,616) (274,768) (492,970)
---------- ---------- -----------
Income tax provision(benefit) $(146,371) $ 17,328 $ (337,013)
========== ========== ===========
</TABLE>
Refundable income taxes of $100,000 (1997) are included in other assets and
result from overpayments of estimated taxes.
<PAGE>
<TABLE>
<CAPTION>
The tax effects of significant items comprising the net deferred tax asset are
as follows:
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on available for sale securities $ (300,186) $ (106,848)
Deferred policy acquisition costs (1,722,080) (2,286,550
----------- -----------
Total deferred tax liabilities (2,022,266) (2,393,398)
Deferred tax assets:
Unrealized loss on real estate acquired in satisfaction of debt 54,179 81,106
Future policy benefit liabilities 2,423,224 2,721,345
Capital and operating loss carryforward 218,162 133,224
Alternative minimum tax credits 288,050 293,916
Other 55,092 65 085
----------- -----------
Total deferred tax assets 3,038,707 3,294,676
Valuation allowance (617,281) (544,006)
----------- -----------
Net deferred tax asset $ 399,160 $ 357,272
=========== ===========
</TABLE>
The valuation allowance increased by approximately $73,000 in 1997 and $223,000
in 1996.
At December 31, 1997, the Company had accumulated untaxed policyholders' surplus
of approximately $1,923,000. The Company is not required to pay tax on the
balance in the surplus account unless distributions to stockholders exceed
accumulated taxed earnings.
<TABLE>
<CAPTION>
The income tax provision (benefit) differed from the statutory federal income
tax rate of 35% for the following reasons:
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rates $ (311,158) $ 60,974 $ (323,634)
Small life insurance company deduction (196,163) (170,139
Valuation allowance on deferred tax assets 152,885 174,221 138,700
Other 11,902 (21,704) 18,060
----------- --------- -----------
Income tax provision (benefit) $ (146,371) $ 17,328 $ (337,013)
=========== ========= ===========
</TABLE>
The alternative minimum tax credit carryover approximated $288,000 at December
31, 1997.
<PAGE>
8. STOCKHOLDERS' EQUITY
The Company's ability to pay dividends is limited by the amount of dividends its
receives from APL. Payment of dividends by APL is restricted by law to available
net surplus computed on a statutory basis. In addition, without the prior
approval of the Mississippi Commissioner of Insurance, the amount of any
dividend by APL during any one year is limited to the lesser of (I) 10% of
surplus; or (ii) net gain from operations for the past three years, less
dividends paid in the past two years. At December 31, 1997 accumulated unpaid
dividends available for payment without prior approval of the Commissioner of
Insurance approximated $30,000.
Pursuant to the laws and regulations of the State of Mississippi, APL is
required to maintain minimum statutory capital of $400,000 and additional
minimum statutory surplus of $600,000. Other states have similar restrictions
for licensing purposes, the largest being a minimum capital requirement of
$2,000,000 in the State of Georgia.
In February, 1998 the Board of Directors approved a 20 for I stock split-up
effected in the form of a stock dividend of the Company's common stock payable
on March 31, 1998. The split did not change the value of paid-in capital and is
reflected in the accompanying financial statements as though the split had
occurred at the beginning of the earliest year presented.
The Company repurchased 18,018, 49,581 and 12,012 shares of its common stock
from a former officer and director and other directors of the Company at $15.95
per share in 1995, ]996 and January 1998, respectively.
The National Association of Insurance Commissioners measures the adequacy of a
company's capital by its risk-based capital ratio (the ratio of its total
capital, as defined, to its risk-based capital). These requirements provide a
measurement of minimum capital appropriate for an insurance company to support
its overall business operations based upon its size and risk profile which
considers (I) asset risk, (ii) insurance risk, (iii) interest rate risk, and
(iv) business risk. An insurance company's risk-based capital is calculated by
applying a defined factor to various statutory based assets, premiums and
reserve items, wherein the factor is higher for items with greater underlying
risk.
The NAIC has provided levels of progressively increasing regulatory action for
remedies when an insurance company's risk-based capital ratio falls below a
ratio of 1:1. As of December 31, 1997, APL was in compliance with these minimum
capital requirements as follows:
Total adjusted capital $8,759,856
Authorized control level risk-based capital 2,220,903
Ratio of adjusted capital to risk-based capital 3.94:1
<PAGE>
9. STATUTORY FINANCIAL INFORMATION
Generally accepted accounting principles differ in certain respects from the
accounting practices prescribed or permitted by insurance regulatory authorities
(statutory basis). A reconciliation between consolidated net income and
stockholders' equity as reported under generally accepted accounting principles
(GAAP basis) and statutory net income and stockholders' equity of APL follows:
<TABLE>
1997 1996 1995
----------------------------- --------------------------- -----------
Net Income Stockholders' Net Stockholders' Net Income
(Loss) Equity Income Equity (Loss)
----------- ------------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
GAAP basis $ (742,651) $ 15,623,802 $ 156,884 $ 16,136,588 $ (587,656)
Adjustments to:
Policy reserves (1,062,502) 5,318,451 (476,697) 6,380,953 557,013
Non-admitted assets (1,225,251) (1,392,981)
WfeTed acquisition costs 1,519,196 (9,798,294) 1,080,300 (11,317,490) 754,277
Wferred income taxes (155,616) (399,160) (274,768) (357,272) (492,970)
Unrealized gain on
invested secunties (882,899) (314,260)
Other (40,551) (67 403) 131,076 178,001 (109,130)
----------- ------------ -------- ------------ ----------
Statutory basis $ (482,l24) $ 8,569,246 $616,795 $ 9,313,539 $ 121,534
=========== ============ ======== ============ ==========
</TABLE>
l0. FAIR VALUES OF FINANCIAL INSTRUMENTS
In accordance with FAS Statement No. 107, "Disclosures about Fair Value of
Financial Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value. The
fair value amounts disclosed represent management's best estimates of fair
value. In accordance with FAS No. 107, this disclosure excludes certain
insurance policy related financial instruments and all non-financial
instruments. The aggregate fair value amounts presented are not intended to
represent the underlying aggregate fair value of the Company.
The estimated fair values are significantly affected by assumptions used,
principally the timing of future cash flows, the discount rate, judgments
regarding current economic conditions, risk characteristics of various financial
instruments and other factors. Because assumptions are inherently subjective in
nature, the estimated fair values cannot be substantiated by comparison to
independent quotes and, in many cases, the estimated fair values could not
necessarily be realized in an immediate sale or settlement of the instrument.
Potential tax ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement have not been
taken into consideration.
<PAGE>
The methods and assumptions used to estimate fair value are as follows:
o Fair value for securities is determined from quoted market prices, where
available. For securities not actively traded, fair value is estimated using
quoted market prices for similar securities.
o Fair value for mortgage loans is estimated by discounting cash flows and using
current interest rates on similar real estate loans considering credit ratings
and the remaining terms to maturity.
o Fair value for short-term investments and accrued investment income
approximates the carrying amount. Fair value for guaranteed interest and
supplementary contract liabilities also approximates the carrying amount since
those contracts are carried at redemption values and there are no applicable
surrender or mortality charges.
o Policy loans have no stated maturity dates and are an integral part of the
related insurance contract. Accordingly, it is not practicable to estimate a
fair value.
The estimated fair value of the Company's financial instruments for which it is
practicable to estimate that value, is as follows:
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ -------------- ------------ ------------
Securities $ 34,626,186 $ 34,626,186 $ 32,720,388 $ 32,720,388
Mortgage loans 989,859 960,000 1,075,268 1,107,000
11. ACCOUNTING STANDARD TO BE ADOPTED IN THE FUTURE
ln June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
redefines how operating segments are defined and requires disclosure of certain
financial and descriptive information about a company's operating segments. The
Company has not yet completed its analysis of how operating segments will be
reported.
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company is required to participate in certain guaranty funds and involuntary
pools of insurance and is therefore exposed to undeterminable future assessments
resulting *om the insolvency of other insurers.
The Company leases various land, buildings and operating equipment under monthly
lease arrangements. Expenses incurred under all operating leases approximated
$185,000 (1997), $163,000 (1996) and $91,000 (1995). The Company also receives
rent payments under an operating lease relative to investment real estate held.
Future minimum lease commitments and receipts for non-cancelable operating
leases are as follows:
Lessee Lessor
Commitments Receipts
----------- ---------
1998 $ 138,000 $ 168,000
1999 132,000 160,000
2000 115,000 156,000
2001 52,000
--------- ---------
$ 385,000 $ 536,000
--------- ---------
The Company is involved in litigation incurred in the normal course of business.
Management of the Company, based upon the advice of legal counsel, is of the
opinion that the Company's ultimate liability, if any, which may result from the
litigation will not have a material adverse effect on the financial condition or
results of operations of the Company.
<PAGE>
<TABLE>
<CAPTION>
Article 7, Schedule V - Valuation and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E
Description Balance at Additions Deductions - - Balance
Beginning ---------------------------- at End of
of Period (1) (2) Describe Period
Charged Charged
to Costs to Other
and Accounts--
Expenses Describe
----------------------------
1997
<S> <C> <C> <C> <C>
Allowance for real estate
acquired in satisfaction
of debt 238,546 79,197 $159,349
(sales)
Allowance for
uncollectible agent 5,106 41,269
balances 46,375 (collections)
Valuation allowance for
deferred tax assets
544,006 $73,275 617,281
------- ------- ------------- -------
$828,927 $73,275 $84,303 $817,899
-------- ------- ------- --------
1996
Allowance for real estate
acquired in satisfaction
of debt 284,596 46,050 238,546
sales
Allowance for
uncollectible agent 55,564 46,375
balances 101,939 (write-offs/collections)
Valuation allowance for
deferred tax assets 320,803 $223,203 544,006
-------- -------- -------- --------
$707,338 $223,203 $101,614 $828,927
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Article 7. Schedule II - Condensed Financial Information of Registrant
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- ----------
<S> <C> <C>
ASSETS:
Cash $36,610
Investment in American Public Life Insurance Company 15,617,765 16,293,957
----------- ----------
Total assets $15,654,375 $16,293,957
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Due to American Public Life Insurance Company $20,952 $157,369
Dividends payable 9,621
---------- ----------
30,573 157,369
STOCKHOLDERS' EQUITY 15,623,802 16,136,588
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,654,37 $16,293,957
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------------- -------------- ----------
<S> <C> <C> <C>
EQUITY IN EARNINGS (LOSS) OF $(714,299) $314,253 $(587,656)
SUBSIDIARY
COSTS AND EXPENSES:
Professional fees $28,352 $134,142
Amortization $23,227
------------- --------------
$28,352 $157,369
-------------- --------------
NET INCOME (LOSS) $(742,651) $156,884 $(587,656)
============== ============== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Article 7. Schedule II - Condensed Financial Informaiton of Registrant (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---------- --------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(742,651) $156,884 $587,656
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Equity in (earnings) loss of subsidiary 714,299 (314,253) 587,656
Dividends received from American Public Life
Insurance Company 415,000 252,613 252,349
Increase in due to stockholder (136,417) 157,369
--------- ------- ---------
Net cash provided by operating activities 250,231 252,613 252,349
FINANCING ACTIVITIES:
Dividends paid (238,746) (252,613) (252,349)
Common stock issued 25,125
---------
Net cash used in financing activities (213,621)
--------- --------- ---------
INCREASE IN CASH 36,610 0 0
CASH, BEGINNING OF YEAR
CASH, END OF YEAR 36,610 0 0
------------ --------- ---------
</TABLE>
ELECTION OF DIRECTORS
At the 1998 Annual Meeting, seven directors will be elected to hold
office until the 1999 Annual Meeting and until their successors have been
elected and have qualified. The nominees listed below, are all currently serving
as directors of the Company, with the exception of Jerry C. Stovall who is
currently President and Chief Executive Officer of the Company. The Board knows
of no reason why any nominee may be unable to serve as director. If any nominee
is unable to serve, the shares represented by all valid proxies will be voted
for the election of such other person as the Board may recommend.
Warren I. Hammett. Age 71. Mr. Hammett has been involved in the
operation and ownership of family farming operations for more than five years.
He has served as a director of American Public Life Insurance Company
("American Public Life"), the Company's subsidiary, since 1979 and of the
Company since its organization in December, 1995.
F. Harrell Josey, D.V.M. Age 73. Dr. Josey has been a veterinarian
and the director of Josey Animal Medical Center, Inc. for more than five years.
He has served as a director of American Public Life since 1974 and of the
Company since its organization in December, 1995.
Frank K. Junkin, Jr. Age 47. Mr. Junkin has been Senior Vice
President, Marketing of American Public Life for more than five years. He has
served as a director of American Public Life since 1987 and of the Company
since its organization in December, 1995.
David A. New, Sr. Age 70. Mr. New has been Chairman and Director of
David New Operating Company, David New Oil Company and David New Drilling
Company for more than five years. These companies are engaged in oil and gas
drilling and exploration. He has served as director of American Public Life
since 1979 and Chairman of the Board for more than five years and as Chairman of
the Board of the Company since its organization in December, 1995.
David A. New, Jr. Age 41. Mr. New has been Director and President of
David New Operating Company, David New Oil Company, David New Drilling Company
and W.T. Drilling Company for more than five years. These companies are engaged
in oil and gas drilling and exploration. David A. New, Jr. is the son of David
A. New, Sr. He has served as a director of American Public Life since 1983 and
of the Company since its organization in December, 1995.
2
<PAGE>
Jerry C. Stovall. Age 61. Mr. Stovall was elected President and Chief
Executive Officer of the Company and American Public Life effective September 2,
1997. Mr. Stovall was Executive Vice President of American Public Life
from October, 1996 through August, 1997. Until May, 1995, when he retired, Mr.
Stovall was President of Lamar Life Insurance Company.
Paul H. Watson, Jr. Age 59. Mr. Watson has been President of Farmers
Tractor Company, Inc., a farm equipment dealer, for more than five years. Mr.
Watson serves as Director of Trustmark Corp., Jackson, Mississippi. He has
served as a director of American Public Life since 1979 and of the Company since
its organization in December, 1995. Mr. Watson serves as Vice Chairman of the
Board of Directors of American Public Life.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE ELECTION OF ALL THE NOMINEES.
INFORMATION RELATING TO DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
Board Meetings and Committees
The Company had two Board meetings in 1997. All of the directors were
present at each meeting. The Board of Directors of the Company does not have an
audit, compensation or nominating committee.
All of the directors of the Company are also members of the Board of
Directors of American Public Life. The Board of Directors of American Public
Life met twelve times in 1997. No director of American Public Life attended less
than seventy-five percent of the Board meetings held in 1997.
Stock Ownership of Principal Stockholder
The following table sets forth information as to persons beneficially
owning more than five percent (5%) of the Company's Common Stock.
Amount and Nature Percentage of
of Beneficial Outstanding
Name Ownership(1) Common Stock
- -----------------------------------------------------------------------
New Family and 656,040 (2)(3) 59.68%
Affiliated Interests
P. O. Box 1487
Natchez, MS 39121
- --------
(1)Adjusted for twenty-for-one stock dividend to be paid on March 31, 1998 to
holders of record on March 16, 1998.
(2)Mr. New, Sr. and Mr. New, Jr. share voting and investment power with respect
to 29,400 shares held by David New Operating Company and 299,376 shares held by
David New Drilling Company. Mr. New, Sr. and his spouse share voting and
investment power with respect to 291,207 shares held by New Partners, L.P.
(3)Mr. New, Jr. owns 36,057 shares directly.
3
<PAGE>
Stock Ownership of Directors and Officers
The following table sets forth information as of March 23, 1998, as to
the number of shares of Company Common Stock beneficially owned by each of the
nominees for director, including the Company's CEO, and by the Company's
directors and executive officers as a group.
Amount and Nature Percentage of
of Beneficial Outstanding
Name Ownership(1) Common Stock
- -------------------------------------------------------------------------
Warren I. Hammett 28,959 2.63%
F. Harrell Josey 24,423 2.22%
Frank K. Junkin, Jr. 29,862 2.72%
David A. New, Sr. 619,983 (2)(3) 56.40%
David A. New, Jr. 364,833 (3) 33.19%
Jerry C. Stovall 0 0.00%
Paul H. Watson, Jr. 21,126 1.92%
13 Directors and
Executive Officers as a 761,620 69.28%
Group
- --------
(1)Adjusted for twenty-for-one stock dividend to be paid on March 31, 1998 to
holders of record on March 16, 1998.
(2)Mr. New, Sr. and Mr. New, Jr. share voting and investment power with respect
to 29,400 shares held by David New Operating Company and 299,376 shares held by
David New Drilling Company. Mr. New, Sr. and his spouse share voting and
investment power with respect to 291,207 shares held by New Partners, L.P.
(3)Mr. New, Jr. owns 36,057 shares directly.
4
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than ten
percent (10%) of Company Common Stock (collectively, "Reporting Persons") to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock of the Company. Reporting
Persons are required by Securities and Exchange Commission Regulations to
furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 1997 all Section 16(a)
filing requirements applicable to the Company's Reporting Persons were complied
with except as described herein. The Form 3 Initial Statements of Ownership for
the executive officers and directors of the Company(1) and for David New
Drilling Company (10% beneficial owner), David New Operating Company (as a
member of a group that is a 10% beneficial owner) and New Partners, L.P. (as a
member of a group that is a 10% beneficial owner) were filed late. In addition,
Johnny H. Williamson and David New, Sr. each filed a report late covering one
transaction.
Executive Compensation
The following table sets forth the total compensation paid by the
Company for the last fiscal year to each person who served as CEO of the
Company. No executive officer had total compensation in excess of $100,000 in
1997.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Annual Base Compensation
Name and Principal Position Year Salary ($)
- ------------------------------------------ ------ ------------------------
Johnny H. Williamson 1997 $78,769(1)
President & Chief Executive Officer of the
Company and American Public Life
(through September 1, 1997)
Jerry C. Stovall 1997 $95,075(1)
President & Chief Executive Officer of the
Company and American Public Life
(September 2, 1997 to Present), Executive
Vice President (through September 1,
1997)
- ----------------------
(1) Includes Director's fees.
The Company has agreed to pay Mr. Stovall $125,000 a year in salary,
plus an automobile allowance of $500 per month and standard benefits. This
salary and benefits will be paid for a minimum of 18 months beginning
September 1, 1997, even if Mr. Stovall resigns or is terminated.
- --------
(1)Dianne D. Aycock, Warren I. Hammett, E. Ray Hampton, Joseph C. Hartley, Jr.,
Garry V. Hughes, Alison James, Jr., F. Harrell Josey, D.V.M., Frank K. Junkin,
Jr., Richard K. Mills, Chester C. Montgomery, David A. New, Jr., David A. New,
Sr., Sharon D. Starnes, Jerry C. Stovall, Paul H. Watson, Jr., William F. Weems
and Johnny H. Williamson.
5
<PAGE>
Director Compensation
All Directors of American Public Life receive $750 for each monthly
meeting attended. No additional compensation is paid for attendance at Company
Board meetings.
Report of the Board of Directors on Executive Compensation
The Board of Directors of the Company approves the compensation of the
CEO and of the executive officers. Mr. Williamson retired from his position as
President and CEO of the Company in August, 1995. In July, 1996 the Board of
Directors asked Mr. Williamson to serve as President and CEO for an interim
period. Mr. Williamson served as President and CEO from July, 1996 to
September, 1997. Mr. Williamson's compensation for this period resulted from
negotiations between Mr. Williamson and the Board of Directors. Mr. Stovall was
appointed as President and CEO in September, 1997. The amount of his
compensation resulted from negotiations between the Board of Directors and Mr.
Stovall. Mr. Williamson's compensation was based on the need to obtain his
services as President and CEO for an interim period and was not based on
Company performance or similar factors. Mr. Stovall's compensation was based on
the need to employ a successor to Mr. Williamson and was not based on Company
performance or similar factors.
The compensation of the other executive officers is approved by the
Board of Directors after considering the recommendation of the President. In
making his recommendations, the President considers compensation levels for
executives in similar positions in the Jackson, Mississippi area, as well as the
compensation levels for executives in the insurance industry in the Southeast.
Although in recommending increases in compensation the President considers job
performance, no formal system or set of criteria has been used in making
compensation recommendations for executive officers.
The Board of Directors has established a bonus program for executive
officers of the Company. The first bonus will be determined based on company
performance in the period from October 1, 1997 through September 30, 1998. A
bonus pool will be established based on the growth of the value of the Company
based on an actuarial analysis of the Company's insurance business, targeted
general expense levels and targeted rates of return. The bonus pool will be
allocated to executives involved in marketing based on premium collections, and
to other executives based on subjective factors. The payment of bonuses will be
at the discretion of the Board of Directors and the bonus program may be
canceled or modified at any time.
Submitted by the Company's Board of Directors:
Warren I. Hammett David A. New, Sr.
F. Harrell Josey David A. New, Jr.
Frank K. Junkin, Jr. Paul H. Watson, Jr.
Performance Graph
The Company's Common Stock was not traded on a public market during any
part of fiscal year 1997. Accordingly, the performance graph is omitted. The
Company's Common Stock began to be quoted on the OTC Bulletin Board in February
of 1998.
Other Transactions with Management
On August 30, 1995, American Public Life entered into several
agreements with Johnny H. Williamson in connection with his resignation from the
position of President of the Company, including a Stock Purchase Agreement
pursuant to which American Public Life purchased 858 shares of Common Stock from
Mr. Williamson for an aggregate purchase price of $287,430. The Company, as
successor to American Public Life, agreed to purchase an additional 572 shares
of Company Common Stock from Mr. Williamson at a purchase price of $335 per
share, when Mr. Williamson ceased to be a director of the Company. Mr.
Williamson resigned from the Board of Directors on January 8, 1998 and on that
date the Company acquired the 572 shares of Company Common Stock for an
aggregate purchase price of $191,620.
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001037559
<NAME> American Public Holdings, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 34,626,186
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 989,859
<REAL-ESTATE> 727,700
<TOTAL-INVEST> 37,833,899
<CASH> 608,434
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 9,798,294
<TOTAL-ASSETS> 52,346,775
<POLICY-LOSSES> 34,479,904
<UNEARNED-PREMIUMS> 843,021
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 406,456
<NOTES-PAYABLE> 0
0
0
<COMMON> 52,919
<OTHER-SE> 15,570,883
<TOTAL-LIABILITY-AND-EQUITY> 52,346,775
27,335,511
<INVESTMENT-INCOME> 2,536,674
<INVESTMENT-GAINS> (24,118)
<OTHER-INCOME> 34,711
<BENEFITS> 20,117,037
<UNDERWRITING-AMORTIZATION> 3,899,794
<UNDERWRITING-OTHER> 6,774,969
<INCOME-PRETAX> (888,022)
<INCOME-TAX> (146,371)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (742,651)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
