AMERICAN PUBLIC HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1999 Commission File Number 0-22479
AMERICAN PUBLIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Mississippi 64-0874171
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Registrant's telephone number: (601) 936-3201
No Change
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for shorter period that the registrant was required to
file such report), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
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 September 30, 1999
Common stock (no par value) 1,099,287 shares
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
Unaudited Quarterly Financial Statements
Page
Consolidated Balance Sheets 1
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations 2
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998
Changes in Stockholders' Equity 3
Twelve Months Ended December 31, 1998
Nine Months Ended September 30, 1999
Consolidated Statements of Cash Flows 4
Nine Months Ended September 30, 1999 and 1998
Notes To Consolidated Financial Statements 5
<PAGE>
American Public Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 1999 (Unaudited) and December 31, 1998
<TABLE>
<CAPTION>
1999 1998
ASSETS ---- ----
Investments:
Available for sale securities - at fair value (amortized cost
<S> <C> <C>
of $33,956,169 in 1999 and $34,638,162 in 1998) $ 33,833,557 $ 35,780,591
Mortgage loans 640,530 683,649
Investment real estate - net 633,477 673,858
Policy loans 1,434,332 1,419,072
------------- ------------
Total investments 36,541,896 38,557,170
OTHER ASSETS:
Cash and cash equivalents (527,424) 767,080
Accrued investment income 504,611 545,855
Accounts and notes receivable net of allowance for
uncollectible accounts of $25,000 (1999) and $29,000 (1998) 757,634 464,461
Deferred policy acquisition costs 8,934,838 9,285,999
Property and equipment - net 2,129,798 2,322,711
Real estate acquired in satisfaction of debt 334,055 427,185
Deferred income tax asset 490,885 255,624
Other 63,505 71,839
------------- ------------
TOTAL ASSETS $ 49,229,798 $ 52,697,924
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefits $ 32,399,637 $ 32,743,852
Unpaid claims 1,334,273 1,145,909
Unearned premiums 756,617 735,161
Policyholders' dividend accumulations 419,891 415,214
Accounts payable and other liabilities 1,087,814 1,106,557
------------- ------------
Total liabilities 35,998,232 36,146,693
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 25,000,000 shares
Common stock, $1 stated value, authorized
50,000,000 shares, issued and outstanding 1,099,287 shares in 1999
and 1,099,287 shares in 1998 52,347 52,347
Additional paid-in capital 2,066,752 2,066,752
Other comprehensive income- Unrealized gain (loss) on available
for sale securities, net of deferred taxes of $25,000 (1999)
and $228,000 (1998) (98,090) 913,943
Retained earnings 11,210,557 13,518,189
------------- ------------
Total stockholders' equity 13,231,566 16,551,231
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,229,798 $ 52,697,924
============= ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
American Public Holdings, Inc.
Consolidated Statements of Operations - GAAP Basis - Unaudited
For Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1999 1998 1999 1998
REVENUE: ---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums $ 7,366,601 $ 7,506,081 $ 22,295,785 $ 22,526,493
Net investment income 609,024 650,016 1,869,716 1,935,579
Realized investment gains (losses) (1,169) (14,450) 6,744 66,141
Other Income 6,410 4,724 13,326 22,549
---------------- ---------------- ---------------- ----------------
7,980,866 8,146,371 24,185,571 24,550,762
BENEFITS AND EXPENSES:
Benefits and claims 6,635,763 5,240,504 18,633,583 15,832,182
Commissions expense 382,894 422,300 1,843,935 1,657,705
Salaries and benefits 677,181 558,691 2,033,447 1,741,234
Amortization of deferred policy acquisition costs 1,122,741 1,099,875 2,004,158 2,595,382
Insurance taxes, licenses and fees 292,554 260,839 812,335 763,227
Other operating expenses 501,181 297,147 1,144,068 828,709
---------------- ---------------- ---------------- ----------------
9,612,314 7,879,356 26,471,526 23,418,439
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (1,631,448) 267,015 (2,285,955) 1,132,323
INCOME TAX PROVISION 24,372 365,479 18,042 301,006
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (1,655,820) $ (98,464) $ (2,303,997) $ 831,317
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Decrease in unrealized gain on investment securities 605,676 612,804 (1,012,033) 646,432
Reclassification of (gains) losses included
in net income (275,013) (44,506) (5,395) (52,913)
---------------- ---------------- ---------------- ----------------
COMPREHENSIVE INCOME (LOSS) $ (1,325,157) $ 469,834 $ (3,321,425) $ 1,424,836
================ ================ ================ ================
NET INCOME (LOSS) PER SHARE $ (1.51) (0.09) $ (2.10) 0.76
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
American Public Holdings, Inc.
Consolidated Statements of Changes in Stockholders' Equity - GAAP Basis
- Unaudited
For Periods Indicated
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Comp- Total
----------------------- Paid-in rehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
------------ ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 1,111,299 52,919 2,257,800 706,319 12,606,764 15,623,802
Change in net unrealized gain(loss) 207,624 207,624
Stock retired (12,012) (572) (191,048) (191,620)
Dividends to stockholders (10,347) (10,347)
Net income 921,772 921,772
0
------------ ---------- ----------- ------------ ------------ -------------
BALANCE, DECEMBER 31, 1998 1,099,287 52,347 2,066,752 913,943 13,518,189 16,551,231
Change in net unrealized gain(loss) (1,012,033) (1,012,033)
Dividends to stockholders (3,635) (3,635)
Net income (loss) (2,303,997) (2,303,997)
0
------------ ---------- ----------- ------------ ------------ -------------
BALANCE, SEPTEMBER 30, 1999 1,099,287 52,347 2,066,752 (98,090) 11,210,557 13,231,566
============ ========== =========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
American Public Holdings, Inc.
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1999 and 1998 - Unaudited
<TABLE>
<CAPTION>
September September
1999 1998
OPERATING ACTIVITIES: ---- ----
<S> <C> <C>
Net income (loss) (2,303,997) 831,317
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Realized loss (gain) on sale of assets (6,744) (66,141)
Depreciation 302,362 275,955
Amortization of deferred policy acquisition costs 2,004,158 2,595,382
Deferred income tax expense (benefit) 17,747 152,943
Decrease (increase) in receivables (251,929) (104,650)
Decrease (increase) in other assets 8,334 111,735
Policy acquisition costs deferred (1,652,997) (2,343,799)
Increase (decrease) in liability for future policy benefits (344,215) 150,291
Increase (decrease) in other liabilities 195,754 65,364
------------- -------------
Net cash (used) provided by operating activities (2,031,527) 1,668,397
INVESTING ACTIVITIES:
Proceeds from sale of real estate 57,765 40,484
Purchase of fixed maturity and short-term investments (36,957,029) (44,477,812)
Mortgage and policy loan repayments 27,859 149,970
Proceeds from maturities and calls of fixed-maturity
and short-term investments 37,681,130 43,175,393
Property and equipment purchased (69,067) (478,356)
------------- -------------
Net cash (used) provided in investing activities 740,658 (1,590,321)
FINANCING ACTIVITIES:
Dividends paid to shareholders (3,635) (8,340)
Payments to retire common stock (191,620)
------------- -------------
Net cash used in financing activities (3,635) (199,960)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,294,504) (121,884)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 767,080 608,434
------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD (527,424) $ 486,550
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION-
Income taxes paid 0 $ 100,000
============= =============
Income taxes refunded 0 $ (100,000)
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include those of American Public
Holdings, Inc., and its wholly owned subsidiary, American Public life
Insurance Company (APL), and APL's wholly owned subsidiary, DentaCare
Marketing and Administration, Inc. All significant inter-company balances
and transactions have been eliminated.
These interim financial statements have been prepared on the basis of
accounting principles used in the annual financial statements ended
December 31, 1998, and must be read in conjunction with the 1998
statements. In the opinion of management, the accompanying interim
unaudited consolidated financial statements contain all adjustments
necessary for a fair statement of consolidated financial position and
results of operations of the Company for the interim periods.
2. STOCKHOLDERS' EQUITY
In January 1998 the Company acquired and retired 12,012 shares of common
stock, which were purchased from a former director and past president of
the Company.
In February 1998 the Board of Directors approved a 20 for 1 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.
3. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are based on net income (loss) and the
weighted average number of shares outstanding during each interim period.
The number of shares used in computing the earnings per share was 1,099,287
for the quarter ended September 30, 1999 and 1,099,687 for the quarter
ended September 30, 1998.
4. 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 from the insolvency of other insurers.
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 consolidated financial condition or results of operations of
the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1999
AND 1998
Financial Condition September 30, 1999 Compared to December 31, 1998
Total stockholders' equity decreased by $3,319,665 or 20.06% from
$16,551,231 at December 31, 1998, to $13,231,566 at September 30, 1999. This
decrease was due to a net loss of $2,303,997 for the first nine months, plus a
decrease of $1,012,033 on unrealized gain on available for sale securities. The
net loss was the result of poor claims experience. The decrease in unrealized
gain on available for sale securities was the result of bond market adjustments
resulting from an increase in the Federal Reserve discount rate.
Total assets decreased by $3,468,126 or 6.58% at September 30, 1999
compared to December 31, 1998. Securities decreased by $1,947,034, or 5.44%, as
the result of adjustments in the market value of the portfolio. Additionally,
portions of the proceeds from the repayment of principal on mortgage backed
securities were used to pay claims. Deferred policy acquisition costs decreased
by $351,161 or 3.78% due to decreased production of new sales of insurance
products through nine months. Accounts and notes receivable increased $293,173,
or 63.12% due to increases in due premium. Deferred income tax asset increased
$235,261 or 92.03% due to increases in the timing differences between statutory
and GAAP policy reserves.
Total liabilities decreased $148,461 at September 30, 1999 compared to
December 31, 1998. Future policy benefits and unpaid claims decreased $156,851
or .46 % because of lapses in old in force policies and the discontinuance of
sales of actual treatment coverage policies. Accounts payable and other
liabilities decreased $18,743 as a result of decreases in amounts due for
premium taxes.
Results of Operations - Third Quarter 1999 Compared to Third Quarter 1998:
The Company experienced a net loss in the third quarter of 1999 of
$1,736,250 compared to net gain of $215,481 in the third quarter of 1998,
primarily due to an increase of $1,395,259 in benefits and claims. Revenue for
the current quarter decreased $139,480 as compared to the same period last year
due to policy lapses due to rate increases and lower volumes of new sales. The
Company continues to focus its sales efforts on sales of supplemental group
insurance products. However, rate increases have adversely affected the sale of
these products and caused lapses in the existing in force cancer coverage. Net
investment income decreased as a result of reductions of assets available for
investment during the period. Benefits and expenses increased by $1,732,958 in
the third quarter of 1999 compared to the third quarter of 1998, a 21.99%
increase. This increase was due to a $1,395,259 increase in benefits and claims.
Benefits and claims increased because of bad claims experience on cancer
policies with unlimited treatment benefits. The Company also had bad claims
experience on group disability coverage on several recently cancelled groups.
Commissions expense decreased because of the decrease in premium income.
Amortization of deferred policy acquisition costs (DPAC) decreased due to higher
lapses of in force policies in the prior year. The lapses are the result of
implementations of rate increases. Other operating expenses have increased due
to additional staffing in the claims department and also higher advertising
expenditures during the period.
<PAGE>
Results of Operations - nine months ended September 30, 1999 compared to nine
months ended September 30, 1998:
The Company experienced a net loss in the nine months ended September 30,
1999 of $2,303,997 compared to a net gain of $831,317 in the nine months ended
September 30, 1998. The loss is attributed to an increase in benefits and
claims of $2,801,401 and a decrease in operating revenue.
Revenue decreased $365,191 in 1999 as compared to 1998. The decrease in
revenue is due to a drop in new sales and also lapses of coverage as the result
of rate increases to cancer, group dental and group disability policies. Net
investment income decreased as the result of declines in assets available for
investment.
Benefits and expenses increased $3,053,087 in 1999 as compared to 1998. The
increase in these expenses is due to a 17.69% increase in benefits and claims.
Benefits and claims increased primarily because of policyholder utilization of
benefits provided under our cancer products, most of which have unlimited
treatment benefits. Commission expense has increased from 7.35% of premium in
1998 to 8.27% in 1999 due to an increase in sales of individual life insurance
policies, which have commission rates that are somewhat higher than those on
individual A&H and group A&H sales.
Insurance taxes licenses and fees increased $49,108 due to increased
payroll tax expense. Additionally, the Company is incurring fees related to its
triennial examination, which is underway.
Other operating expenses have increased $315,359 as a result of increased
advertising by the Company and also administrative costs related to processing
higher volumes of claims. Salaries and benefits are also higher due to staff
additions needed to process higher volumes of claims.
The Board of Directors of the Company had signed an agreement to negotiate
the sale of the Company to Central Benefits Mutual Insurance Company, of
Columbus, Ohio. The discussions with Central Benefits Mutual Insurance Company
have been terminated without reaching an agreement on the sale of the Company.
Year 2000
The year 2000 computer issue is caused by computer programs being written
using two (2) digits rather than four (4) to identify the applicable year. Since
most older 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 the Company decided to replace its
existing software, which had been developed in 1985, because of the age of the
system and the need to implement system enhancements to deal with a growing and
changing business which still handled many functions manually. This decision
had the collateral benefit of addressing Year 2000 problems. An outside
consultant was hired who, beginning in January 1996, developed new software for
all material automated functions, through some important functions are still
handled manually. New hardware was purchased to support the new software. The
new systems are designed to accommodate a four-digit year. Component testing
began January 1998. System testing began June 1998. The new system was
implemented on January 4, 1999 and is currently in use by the Company. The cost
incurred in replacing the Company's system was capitalized and is being
amortized over the useful life of the system. Costs incurred in 1998 were not
material to the Company's financial statements.
<PAGE>
The Company has identified policy administration, policy records, billing
and collections, claims processing and telephone as mission critical functions.
No automated systems are used in policy records, and claims processing is a
partially manual function. Year 2000 issues with respect to policy processing
have been addressed through the implementation of the new system. The Company
has also acquired and installed a new telephone system that is Year 2000
compliant.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
PART II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial data schedule
(b) The Company filed a Current Report on Form 8-K on October 1, 1999
reporting that its discussions with Central Benefits Mutual Insurance
Company of Columbus, Ohio, had ended without the parties reaching
agreement on the acquisition of the Company by Central Benefits Mutual
Insurance Company.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PUBLIC HOLDINGS, INC.
(Registrant)
DATE: November 15, 1999 BY: /s/ Joseph C. Hartley, Jr.
----------------------------------
Joseph C. Hartley, Jr., Secretary
DATE: November 15, 1999 BY: /s/ William F. Weems
----------------------------------
William F. Weems
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001037559
<NAME> American Public Holdings, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 33,956,169
<DEBT-MARKET-VALUE> 33,833,557
<EQUITIES> 0
<MORTGAGE> 640,530
<REAL-ESTATE> 633,477
<TOTAL-INVEST> 36,541,896
<CASH> (527,424)
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 8,934,838
<TOTAL-ASSETS> 49,229,798
<POLICY-LOSSES> 32,399,637
<UNEARNED-PREMIUMS> 756,617
<POLICY-OTHER> 1,334,273
<POLICY-HOLDER-FUNDS> 419,891
<NOTES-PAYABLE> 0
0
0
<COMMON> 52,347
<OTHER-SE> 13,179,219
<TOTAL-LIABILITY-AND-EQUITY> 49,229,798
22,295,785
<INVESTMENT-INCOME> 1,869,716
<INVESTMENT-GAINS> 6,744
<OTHER-INCOME> 13,326
<BENEFITS> 18,633,583
<UNDERWRITING-AMORTIZATION> 2,004,158
<UNDERWRITING-OTHER> 5,833,785
<INCOME-PRETAX> (2,285,955)
<INCOME-TAX> 18,042
<INCOME-CONTINUING> (2,303,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,303,997)
<EPS-BASIC> (2.10)
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
