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, 1998
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 (I.R.S. Employer Identification Number)
incorporation of organization)
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 22, 1999
Common stock, no par value 1,099,287 Shares
Based on bid price for shares of common stock on March 22 , 1999, the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $3,637,445.
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 1998 Annual Report to
Shareholders (Parts I and II), and (2) Proxy Statement dated April 6, 1999 for
Registrant's Annual Meeting of Stockholders to be held April 27, 1999 (Part
III).
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
FORM 10-K
INDEX
PAGE
----
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . .11
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . .11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . .11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . 12
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . .12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . .12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 12
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . .13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
FORM 10-K
PART I
In addition to historical information, this report contains statements
which constitute forward-looking statements and information which are based on
management's beliefs, plans, expectations and assumptions and on information
currently available to management. The words "may," "should," "expect,"
"anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and
similar expressions used in this report that do not relate to historical facts
are intended to identify forward-looking statements. These statements appear in
a number of places in this report, including, but not limited to, statements
found in Item 1 "Business" and in Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations." All phases of the Company's
operations are subject to a number of risks and uncertainties. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projections in the forward-looking statements.
Among the factors that could cause actual results to differ materially are the
risks and uncertainties discussed in this report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to time
in the Company's other public reports and filings and public statements, many of
which are beyond the control of the Company, and many of which, or a combination
of which, could materially affect the results of the Company's operations and
whether forward-looking statements made by the Company ultimately prove to be
accurate.
ITEM 1. BUSINESS
General
American Public Holdings, Inc. (the "Company") is a Mississippi 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 became a wholly-owned subsidiary of the Company, and each
share of outstanding American Public Life common stock was converted into one
share of the Company's 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,
dental insurance and supplemental group insurance products such as group dental,
group disability and group hospital. American Public Life also offers whole life
and term life insurance contracts.
<PAGE>
The following table sets forth earned premiums by product line for the last
three (3) years ended December 31.
Year ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Premium revenue:
Cancer $16,671,263 $17,309,712 $18,154,674
Life insurance 653,941 532,294 552,908
Accident 1,073,187 1,105,802 1,149,841
DentaCare (Dental) 6,469,047 5,705,409 4,906,975
Group Accident & Health 4,514,499 2,377,267 993,026
Other Accident & Health 638,396 325,027 312,424
------------ ------------ ------------
$30,020,333 $27,355,511 $26,069,848
============ ============ ============
Underwriting income:
Life insurance $ (149,541) $ (31,870) $ (346,527)
Accident & Health (1,419,473) (3,404,419) (1,719,138)
Net Investment income 2,523,875 2,536,674 2,387,010
Other income 29,331 34,711 26,067
Realized investment gains
(losses) 65,807 (24,118) (80,291)
------------ ------------ ------------
Income (loss) before income
tax provision (benefit) $ 1,049,999 $ (889,022) $ 174,212
============ ============ ============
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
twenty-five (25) states. The Company markets life insurance business utilizing
individual policies written on both a direct and a payroll deduction basis.
Plans available include one (1), five (5) and ten (10) year renewable term
insurance issued up to $1,000,000 (Maximum Retention by company $50,000). Rates
for these three products are based on male and female non tobacco use and
standard basis. Underwriting requirements vary by age and amount of insurance
applied for. Issue ages are twenty (20) through seventy (70). The following
table indicates those states which accounted for five percent (5%) or more of
the total direct life insurance premiums collected by American Public Life
during 1998.
($) (%)
Alabama 36,287 5.21
Arkansas 48,531 6.97
Louisiana 112,345 16.14
Mississippi 317,064 45.56
Oklahoma 45,502 6.54
Texas 76,194 10.95
Others 59,969 8.63
--------- ------
Total $695,892 100%
========= ======
<PAGE>
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 $40,000. Rates are based on 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 age twenty-five (25)
where it may then be converted to permanent coverage not to exceed $25,000. This
product is issued to persons aged fifteen (15) through sixty-five (65) either
individually or by payroll deduction.
The family life protector is a decreasing term plan renewable to age
seventy (70). Issue ages are fifteen (15) through sixty (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 has developed a Basic and Voluntary Group Term Life Policy that
will compliment its existing portfolio of voluntary payroll deduction accident
and health products. The Basic Policy offers coverage up to $150,000 for the
insured and the Voluntary Policy offers coverage up to $100,000. A spouse rider
is available with both policies, with $5,000 on the Basic Policy and $10,000 on
the Voluntary Policy. Children can be insured for up to $2,500 under the Basic
Policy and $10,000 under the Voluntary Policy. The maximum retention by the
Company is $50,000, with the remainder being reinsured by another company.
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.
The following table sets forth certain information concerning the
development of American Public Life's life insurance business.
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- ------- ---------
(in thousands)
Life insurance in force at the end of period:
Ordinary - whole life 44,233 34,772 $35,285
- term 10,387 12,657 15,390
Industrial 0 0
Group life 6,960 0 0
-------- -------- --------
Total $61,580 $47,379 $50,675
======== ======== ========
New life insurance issued:
Ordinary - whole life 11,537 3,411 3,191
- term 326 819 678
Industrial 0 0
Group life 6,960 0 0
-------- -------- ---------
Total $18,823 $ 4,230 $ 3,869
======== ======== =========
Premium Income $ 654 $ 532 $ 553
======== ======== =========
<PAGE>
Accident and Health Insurance
American Public Life is licensed to write accident and health ("A&H")
insurance in twenty-five (25) states. The following table indicates those states
which accounted for five percent (5%) or more of the total direct A&H premiums
collected by American Public Life during 1998.
Alabama $ 1,456,790 5.00%
Arkansas 1,509,662 5.15%
Louisiana 9,227,591 31.45%
Mississippi 6,474,667 22.07%
Oklahoma 2,471,243 8.42%
Texas 4,484,878 15.29%
Others 3,715,879 12.62%
------------ ---------
Total $29,340,710 100.00%
============ =========
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 products are also being successfully marketed on a
payroll deduction basis.
American Public Life's marketing structure consists of fifty-three (53)
general agents and seven hundred fifty (750) soliciting agents. The Company has
expanded its general agent network with the contracting of four (4) general
agents. Three (3) of these new general agents will give the Company activity in
states where there has been no significant production in the past.
As the Company increases its product base and general agent network,
together with the popularity of payroll deduction as a means of distribution, it
is anticipated that the Company will continue to grow and it is expected that
American Public Life's knowledge and experience in this distribution method will
give it a significant advantage over its competitors 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.
<PAGE>
The following table sets forth certain information concerning American
Public Life's investments at the dates shown.
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Securities:
Available for sale $35,780,591 $34,626,186 $32,720,388
Held to maturity --- --- ---
Mortgage loans on real estate 683,649 989,859 1,075,268
Investment real estate 673,858 727,700 781,542
Policy loans 1,419,072 1,490,154 1,600,398
Short-term investments --- --- ---
------------ ------------ ------------
Total investments $38,557,170 $37,833,899 $36,177,596
============ ============ ============
The results with respect to the foregoing investments are as follows:
Net investment income $2,523,875 $2,536,674 $2,387,010
Realized investment gains (losses)
(before income taxes) 65,807 (24,118) (80,291)
Average yield on investments 6.79% 6.94% 6.73%
Economic yield on investments
(includes realized and unrealized
capital gains) 7.49% 8.33% 6.51%
As of December 31, 1998 the maturity schedule for all available for sale
securities 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 $ 99,763 .29%
Due in one to five years 2,609,770 7.53%
Due in five to ten years 3,131,559 9.04%
Due after ten years 12,001,113 34.65%
------------- ---------
17,842,205 51.51%
Mortgage-backed securities 16,795,957 48.49%
------------- ---------
$ 34,638,162 100.00%
============= =========
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.
<PAGE>
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.
Marketing and Distribution
American Public Life's insurance products are marketed through an
independent field force of fifty- three (53) general agents and seven hundred
fifty (750) 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 ten percent (10%) of
the new coverage issued in 1996, 1997 and 1998.
1998 1997 1996
---- ---- ----
Clinton, Ruston, LA 9% 8% 11%
Benoit, Kenner, LA 19% 18% 31%
MGM, Plano, TX 24% 26% 23%
These percentages generally reflect the percentage of distribution of premium
income. The Clinton agency has exceeded ten percent (10%) for nine (9) years,
excluding 1997 and 1998, the Benoit agency has exceeded ten percent (10%) for
six (6) years, and the MGM agency has exceeded ten percent (10%) for twenty-four
(24) 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, 1998, the total reserves of
American Public Life were $34,624,922. 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.
<PAGE>
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 eight (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, and through its review of medical histories furnished upon
request.
In certain instances American Public Life conducts telephone interviews to
verify the information on the application and to obtain additional information
necessary 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 eighteen (18) 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
CNA
American Public Life also has a small amount of reinsurance on its accident
and health insurance. Lonestar Life Insurance Company reinsures twenty-five
percent (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 one hundred percent (100%) reinsured 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 purpose the protection of policyholders and do not
necessarily confer a benefit upon stockholders.
<PAGE>
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 (12) month period is limited
to the lesser of (i) ten percent (10%) of surplus; or (ii) net gain from
operations for the past three (3) years, less dividends paid in the past two (2)
years.
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.
<PAGE>
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 seventy-eight (78) persons, all of whom are
full-time, as follows:
New Business 8
Customer Service 17
Financial & Data Processing 6
Marketing 7
Legal, Compliance & Services 5
Claims 18
DentaCare Services 8
All Other 9
-----
78
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 (5)
years are as follows:
Dianne D. Aycock. Age 38. 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.
<PAGE>
Joseph C. Hartley, Jr. Age 57. 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 53. Mr. James is a Vice President and Agency Director
of American Public Life.
Frank K. Junkin, Jr. Age 48. 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 56. Mr. Mills is Vice President-Sales 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 35. 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 62. 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.
William F. Weems. Age 42. Mr. Weems is 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.
Lawrence Powers. Age 45. Mr. Powers is Senior Vice President-Administration
of American Public Life Insurance Company. He has been employed in a senior
position at American Public Life Insurance Company since September 1998. Prior
to September 1998, Mr. Powers was a Division Vice President of Owens & Minor,
Inc.
Chippy V. Barton. Age 58. Mr. Barton is Vice President-Underwriting/New
Business, a position he has held since July 1998. Prior to July 1998, he was
employed as a Vice President of New Business Administration with Southern Farm
Bureau Life Insurance 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
<PAGE>
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, though 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 will be capitalized and amortized over the useful life of the
system. Costs incurred in 1998 were not material to the Company's financial
statements.
The Company has identified policy administration, policy records, billing
and collections, claims processing and telephones 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
administration, billing and collections, and the automated portion of claims
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.
The Company outsources one significant function, payroll processing, to a
third party which has certified Year 2000 readiness to the Company.
Certifications of Year 2000 readiness have also been received from all
significant business partners identified by the Company, including its actuary,
the manger of its investment portfolio and its primary bank. 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 counter parties for its business.
ITEM 2. PROPERTIES
American Public Life owns its principal executive offices located at 2305
Lakeland Drive, Jackson, Mississippi. The building consists of approximately
thirty thousand (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
fifteen thousand (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 1998.
<PAGE>
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 1998 Annual Report to Shareholders
and is incorporated
herein by reference.
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 1998 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 1998 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 1998 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 (2) year period
ended December 31, 1998.
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, 1999, 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, 1999, and is incorporated
herein by reference.
<PAGE>
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, 1999, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
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 subsidiaries are included in the Registrant's 1998 Annual Report
to Shareholders and are incorporated into Part II, Item 8, herein by
reference.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations and Comprehensive Income (Loss) -
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996
Notes to the Consolidated Financial Statements
A-2. Financial Statement Schedules
Independent Auditors' Report on 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.
**10.1 Form of Bonus Arrangement
13 Portions of Annual Report to Stockholders
*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.
** Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated by reference herein.
B. Reports on Form 8-K
None
<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
(PRINCIPAL EXECUTIVE OFFICER)
BY: /s/ William F. Weems
-----------------------------------------
WILLIAM F. WEEMS
VICE PRESIDENT FINANCIAL
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
DATE: MARCH 30, 1999
<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 30, 1999 BY: /s/ Warren I. Hammett
-----------------------------------------
Warren I. Hammett, Director
DATE: March 30, 1999 BY: /s/ F. Harrell Josey
-----------------------------------------
F. Harrell Josey, D.V.M., Director
DATE: March 30, 1999 BY: /s/ Frank K. Junkin, Jr.
-----------------------------------------
Frank K. Junkin, Jr., Director
DATE: March 30, 1999 BY: /s/ David A. New, Sr.
-----------------------------------------
David A. New, Sr., Director
DATE: March 30, 1999 BY: /s/ David A. New, Jr.
-----------------------------------------
David A. New, Jr., Director
DATE: March 30, 1999 BY: /s/ Paul H. Watson, Jr.
-----------------------------------------
Paul H. Watson, Jr., Director
<PAGE>
EXHIBIT INDEX
13 Portions of Annual Report to Stockholders
27 Financial Data Schedule
AMERICAN PUBLIC HOLDINGS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW
The Company experienced a net gain in 1998, a net loss in 1997, and
relatively low net income in 1996. The Company's net income gain in 1998 was
primarily the result of increased revenues, limited growth in benefits, claims,
losses, and settlement expenses, and reductions in general expenses. Revenues
increased due to the addition of new lines of business over the past five years
and rate increases. The Company continues to implement rate increases on its
unlimited chemotherapy cancer policies. Additionally, as warranted, supplemental
group insurance premium rates are increased on the policy anniversary date.
Reductions in reserve requirements due substantially to significant lapses of
costly in-force cancer policies with unlimited chemotherapy and radiation
benefits resulted in limited growth in benefits, claims, losses, and settlement
expenses. General expenses were reduced due primarily to cost-cutting measures.
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
in-force policies due to rate increases on cancer products and refocusing
of 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, the Company 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 continues to transform 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 the Company's alternative cancer products are improving as fewer
unlimited chemotherapy cancer products are made available by competitors. The
Company is attempting to manage its existing block of cancer policies with rate
increase assessments and by continuing to offer a conversion option.
In an effort to attract additional marketing groups, the Company is
revising and/or enhancing the benefit packages of several existing products to
make them more attractive in the market place. Also, the Company is filing all
of its products in licensed states in which it has had minimal sales growth.
RESULTS OF OPERATIONS
The following table sets forth the Company's condensed statement of
operations for the years ended December 31, 1994 through 1998, expressed as a
percentage of total revenues.
Years ended December 31
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
REVENUES:
Premium 92.0% 91.4% 91.8% 91.9% 91.5%
Net investment income 7.7% 8.5% 8.4% 8.3% 8.4%
Other .3% .1% (.2)% (.2)% .1%
------ ------ ------- ------- -------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ======= ======= =======
<PAGE>
BENEFITS AND EXPENSES:
Benefits, claims, losses
and settlement expenses 64.6% 67.3% 62.1% 65.2% 64.2%
Commission expense 6.8% 7.54% 8.3% 8.3% 9.1%
Salaries and benefits 7.8% 8.1% 9.1% 8.2% 8.0%
Amortization of
deferred policy 11.9% 13.0% 11.0% 13.1% 9.2%
Acquisition costs
Other operating expenses 5.7% 7.1% 8.9% 8.5% 7.8%
------- ------ ------ ------ ------
TOTAL BENEFITS AND
EXPENSES 96.8% 103.0% 99.4% 103.3% 98.3%
------ ------ ------ ------ ------
Income before income taxes 3.2% (3.0)% .6% (3.3)% 1.7%
Provision for federal
income taxes .8% (.5)% .1% (1.2)% (.4)%
------- ------- ------ ------- ------
NET INCOME (LOSS) 2.4% (2.5)% .5% (2.1)% 2.1%
======= ======= ====== ======= ======
Premium income has shown an increase in each year illustrated. Prior to
1994, cancer insurance was the only significant product sold in volume by agents
of the Company. In the fourth quarter of 1993, the Company acquired an existing
block of dental business, and this acquisition has contributed to premium growth
in each subsequent year. Rate increases on cancer insurance and supplemental
group insurance products (less lapses) have also contributed to the increase in
premium income. The components of annualized premiums in force are summarized
below:
Annualized Premium In Force
Years ended December 31, Percentage change
---------------------------------------------------------------
1998 1997 1996 1998 vs. 1997 1997 vs. 1996
---------------------------------------------------------------
Cancer $17,142 $17,826 $19,694 (3.84)% (9.49)%
Dental Care 7,654 6,310 5,466 21.30 15.44
Accident 1,054 1,072 1,130 (1.68) (5.13)
Life insurance 277 375 415 (26.13) (9.64)
Group 4,792 3,468 1,513 38.18% 129.21%
Other 629 419 284 50.12 47.54
-------- -------- -------- ------- --------
Total
Annualized
Premium in
Force $31,548 $29,470 $28,502 7.05% 3.40%
======== ======== ======== ======= ========
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 claims 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. Additionally, in 1998 and 1997, the Company has experienced
limited success with sales of individual health products such as hospital
indemnity, heart attack stroke and disability income.
<PAGE>
Total new business premiums are summarized by line of business below:
New Business Summary
(In thousands)
Years ended December 31, Percentage change
---------------------------------------------------------------
1998 1997 1996 1998 vs. 1997 1997 vs. 1996
---------------------------------------------------------------
Cancer $ 950 $ 730 $ 708 30.14% 3.11%
Dental Care 2,353 2,249 2,095 4.62 7.35
Accident 280 385 364 (27.27) 5.77
Life insurance 388 95 45 308.42 111.11
Other 457 435 163 5.06 166.87
Group 2,854 3,086 1,372 (7.52)% 124.93%
------- ------- ------- -------- -------
Total
Annualized
Premium
Solicited $ 7,282 $ 6,980 $ 4,747 4.33% 47.04%
======= ======= ======= ======== =======
Net investment income has increased each year, with the exception of 1998.
The prior year increases in investment income are attributable to an increase in
the volume of investments. The current year decrease in investment income is the
result of a significant number of higher yield bond calls during the first part
of the year. Additionally, several mortgage loans yielding ten percent were paid
in full during the year.
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. Additional dispositions of these securities were
done in the first quarter of 1998. 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 a realized investment gain in 1998, and realized
investment losses in the years 1997 and 1996. The 1998 realized investment gain
was the result of gains from the sale of mortgage-backed securities and the
liquidation of several bonds that were called during the year. Investment losses
in prior years are the result of partial liquidations of non-performing real
estate holdings. The Company continues to liquidate non-performing assets as
opportunities arise.
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:
Benefits To Policyholders
(In thousands)
Years ended December 31, Percentage change
---------------------------------------------------------------
1998 1997 1996 1995 1998 vs. 1997 1997 vs. 1996
-------- -------- -------- ------- -------------- -------------
Paid Claims $21,822 $19,669 $16,672 $16,185 10.9% 17.9%
Reserve increase
(decrease) (748) 448 979 1,840 (266.9)% 54.2%
-------- -------- -------- -------- ------------- -------------
Total benefits $21,074 $20,117 $17,651 $18,025 4.8% 14.0%
======== ======== ======== ======== ============= =============
<PAGE>
Benefits To Policyholders
As a % of Total Premium
---------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------
Paid Claims 72.69% 71.90% 63.95% 63.75%
Reserve increase
(decrease) (2.49)% 1.64% 3.76% 7.25%
-------- -------- -------- --------
Total benefits 70.20% 73.54% 67.71% 71.00%
======== ======== ======== ========
Claims have increased due primarily 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.
Reductions in reserve requirements due to significant lapses of costly in-force
cancer policies with unlimited chemotherapy and radiation benefits resulted in
limited growth in benefits, claims, losses, and settlement expenses.
Commission expense has increased because of the increase in premium income.
However, the percentage of commission expense to premium 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 that pay lower commissions.
Salaries and benefits decreased in 1998 compared to 1997 due to changes in
administrative personnel. The Company was able to reduce the number of
administrative personnel in 1998 and 1997 through attrition. Increases in prior
years were due to increased staffing requirements needed to service the block of
dental coverage acquired in 1993, as well as the Company's attempt to increase
the level of employee compensation to be more competitive in the Company's
recruitment of qualified personnel. The Company's salary costs are still
somewhat high relative to the volume of policies in force.
The net change in deferred acquisition costs ("DAC") is comprised of two
components, as shown in the following table:
1998 1997 1996 1995
--------- --------- --------- ---------
Amortization of DAC 3,884,512 3,899,794 3,129,605 3,627,023
Current year deferred costs 3,372,217 2,380,598 2,049,305 2,872,745
Net change in DAC 512,295 1,519,196 1,080,300 754,278
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 increase in current year deferred costs for 1998 over 1997 and 1996 is the
result of sales of several individual accident and health insurance products
with higher commission rates, specifically hospital indemnity, disability
income, and heart attack stroke. The company also experienced significant
growth in sales of its final expense life insurance products, which typically
have high deferrable expenses.
The amortization of DAC has been relatively steady from 1995 through 1998
because of the steady decline in in-force cancer policies, due to discontinued
sales and lapses which are attributable to annual rate increase assessments. As
the number of lapsed policies remains constant, the amount of amortization of
DAC also remains about the same. The sales of group insurance have no impact on
the amortization of DAC because there is no deferral of expense on these
products.
<PAGE>
Other operating expense decreased by $107,710 in 1998 compared to a decrease
of $540,431 in 1997 and an increase of $16,259 in 1996. In 1997, the Company
implemented cost saving measures, including staff reductions through attrition
to reduce administrative expenses. These measures continued to be effective in
1998. In 1996 the Company reduced expenses by reducing the staff of its off-site
dental administration office; however, the Company incurred substantial expenses
in connection with the acquisition of American Public Life.
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, 1998 and 1997, one hundred percent (100%) of the Company's
investments were in fixed maturity securities, mortgage loans, investment real
estate, and policy loans. Total investments, combined with cash and cash
equivalents, increased to $39,324,250 at December 31, 1998 compared to
$38,442,333 at December 31, 1997 and $36,780,066 at December 31, 1996, 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. Additional repurchases of shares of common stock
were made in 1998 at a cost of $191,620. The Company also issued shares of
common stock in 1997, 1996 and 1995 for an 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) ten percent (10%) of surplus: or (ii) net
gain from operations for the past three (3) years, less dividends paid in the
past two (2) 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 Commissions ("NAIC") measures the
adequacy of a company's capital by its risk-based capital ratio (the ratio of
its 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 for items with greater underlying risk.
<PAGE>
The NAIC has provided levels of progressively increasingly regulatory action
for remedies when an insurance company's risk-based capital ratio falls below a
ratio of 1:1. As of December 31, 1998, American Public Life was in compliance
with these minimum capital requirements as follows:
Total adjusted capital $8,874,413
Authorized control level risk-based capital $1,617,072
Ratio of adjusted capital to risk-based capital 5.49:1
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 (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 will be capitalized and amortized over the useful
life of the system. Costs incurred in 1998 were not material to the Company's
financial statements.
The Company has identified policy administration, policy records, billing and
collections, claims processing and telephones as mission critical functions. No
automated systems are used in policy records and claim processing is a partially
manual function. Year 2000 issues with respect to policy administration, billing
and collections, and the automated portion of claim 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.
The Company outsources one significant function, payroll processing, to a
third party, which has certified Year 2000 readiness to the Company.
Certifications of Year 2000 readiness have also been received from all
significant business partners identified by the Company, including its actuary,
the manager of its investment portfolio, and its primary bank. 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 counter parties for its business.
DESCRIPTION OF BUSINESS
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. 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.
<PAGE>
MARKET INFORMATION AND DIVIDENDS
MARKET INFORMATION
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 following table sets forth the range of high and low bid prices on the
OTC Bulletin Board of American Public Holding, Inc.'s Common Stock for 1998 and
is based on information provided by the National Quotation Bureau. The price
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
---------------------
Low High
--------- ---------
1998
First Quarter 14.75 14.75
Second Quarter 14.25 15.75
Third Quarter 12.00 14.75
Fourth Quarter 10.25 12.00
HOLDERS
As of March 22, 1999, there were 1,627 holders of common stock of the
Company.
DIVIDENDS
In 1998, the Company did not pay a cash dividend. In 1997, the Company paid
an annual cash dividend of $.22 (restated for March, 1998 twenty for one 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, 1998, was $5,980,278. 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) ten percent (10%) of surplus; or (ii) net gain from operations for the past
three (3) years, less dividends paid in the past two (2) years. At December 31,
1998, accumulated unpaid dividends available for payment without prior approval
of the Commissioner of Insurance approximated $208,000. 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>
AMERICAN PUBLIC HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
For the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums $30,020,333 $27,355,511 $26,069,848 $25,385,971 $24,172,890
Net investment income 2,523,875 2,536,674 2,387,010 2,300,624 2,214,311
Realized investment gains (losses) 65,807 (24,118) (80,291) (82,117) (5,235)
Other income 29,331 34,711 26,067 28,129 38,594
Benefits and expenses:
Benefits, claims, losses and settlement expenses 21,073,775 20,117,037 17,650,892 18,025,211 16,957,140
Expenses 10,515,572 10,674,763 10,577,530 10,532,065 9,013,565
Income (loss) before income tax provision (benefit) 1,049,999 (889,022) 174,212 (924,669) 449,855
Income tax provision (benefit) 128,227 (146,371) 17,328 (337,013) (105,545)
Net income (loss) 921,772 (742,651) 156,884 (587,656) 555,400
Net income (loss) per share* .84 (.67) .14 (.51) .48
Other selected financial data:
Stockholders' equity $16,551,231 $15,623,802 $16,136,588 $16,597,309 $17,663,109
Book value per share* 15.05 14.07 14.29 14.34 15.28
Dividends per share* .00 .22 .22 .22 .27
Total assets 52,697,924 52,346,775 52,184,610 51,724,155 51,281,469
<FN>
*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, and 1994 were$4.70, $4.70 and $5.67 respectively.
</FN>
</TABLE>
<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, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income (loss), of
changes in stockholders' equity and of cash flows for each of the three years in
the period ended December 31, 1998. 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 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 5, 1999
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1998 1997
Investments:
Available for sale securities - at fair value
(amortized cost of approximately $34,638,000
in 1998 and $33,743,000 in 1997) $35,780,591 $34,626,186
Mortgage loans 683,649 989,859
Investment real estate - net 673,858 727,700
Policy loans 1,419,072 1,490,154
------------ ------------
Total investments 38,557,170 37,833,899
Cash and cash equivalents 767,080 608,434
Accrued investment income 545,855 440,614
Accounts and notes receivable, net of allowance for
uncollectible accounts of $29,000 (1998) and
$41,000 (1997) 464,461 455,848
Deferred policy acquisition costs 9,285,999 9,798,294
Property and equipment - net 2,322,711 2,193,163
Real estate acquired in satisfaction of debt 427,185 504,660
Deferred income tax asset 255,624 399,160
Other 71,839 112,703
------------ ------------
TOTAL ASSETS $52,697,924 $52,346,775
============ ============
See notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
LIABILITIES:
Future policy benefits $32,743,852 $33,393,109
Unpaid claims 1,145,909 1,086,795
Unearned premiums 735,161 843,021
Policyholders' dividend accumulations 415,214 406,456
Accounts payable and other liabilities 1,106,557 993,592
------------ ------------
Total liabilities 36,146,693 36,722,973
COMMITMENTS AND CONTINGENCIES (Notes 5, 8 and 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized
25,000,000 shares
Common stock, no par value, authorized
50,000,000 shares, issued 1,099,287 (1998) and 52,347 52,919
1,111,299 (1997) shares
Additional paid-in capital 2,066,752 2,257,800
Accumulated other comprehensive income -
Unrealized gain on available for sale securities,
net of deferred taxes of $228,000 (1998) and
$177,000 (1997) 913,943 706,319
Retained earnings 13,518,189 12,606,764
------------ ------------
Total stockholders' equity 16,551,231 15,623,802
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,697,924 $52,346,775
============ ============
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
REVENUE:
Premiums $30,020,333 $27,355,511 $26,069,848
Net investment income 2,523,875 2,536,674 2,387,010
Realized investment gains (losses) 65,807 (24,118) (80,291)
Other income 29,331 34,711 26,067
------------ ------------ ------------
32,639,346 29,902,778 28,402,634
BENEFITS AND EXPENSES:
Benefits, claims, losses and
settlement expenses 21,073,775 20,117,037 17,650,892
Commission expense 2,220,908 2,242,620 2,346,428
Salaries and benefits 2,548,957 2,409,323 2,584,925
Amortization of deferred policy
acquisition costs 3,884,512 3,899,794 3,129,605
Insurance taxes, licenses and fees 1,012,059 1,166,180 1,019,295
Other operating expenses 849,136 956,846 1,497,277
------------ ------------ ------------
31,589,347 30,791,800 28,228,422
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) 1,049,999 (889,022) 174,212
INCOME TAX PROVISION (BENEFIT) 128,227 (146,371) 17,328
------------ ------------ ------------
NET INCOME (LOSS) 921,772 (742,651) 156,884
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Increase in unrealized gain on
investment securities 260,270 435,617 187,175
Reclassification of (gains) losses
included in net income (52,646) 19,294 64,233
----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $1,129,396 $( 287,740) $ 408,292
=========== ============ ============
NET INCOME (LOSS) PER SHARE $ 0.84 $ (0.67) $ 0.14
=========== ============ ============
See notes to consolidated financial statements.
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
--------------------- Paid-in Comprehensive Retained Treasury Stockholders'
Shares Amount Capital Income Earnings Stock Equity
----------- -------- ----------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,202,250 $57,250 $2,232,750 $14,705,318 $ (398,009) $16,597,309
Change in net unrealized gain $251,408 251,408
Treasury stock acquired (1,068,650) (1,068,650)
Treasury stock reissued 452,250 452,250
Dividends paid to stockholders
($.22 per share) (252,613) (252,613)
Net income 156,884 156,884
----------- -------- ----------- ------------ ------------ ----------- -------------
BALANCE, DECEMBER 31, 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
Dividends paid to stockholders
($.22 per share) (250,171) (250,171)
Net loss (742,651) (742,651)
----------- -------- ----------- ------------ ------------ ----------- --------------
BALANCE, DECEMBER 31, 1997 1,111,299 52,919 2,257,800 706,319 12,606,764 0 15,623,802
Change in net unrealized gain 207,624 207,624
Stock retired (12,012) (572) (191,048) (191,620)
Dividends paid to stockholders
($.01 per share) (10,347) (10,347)
Net income 921,772 921,772
----------- -------- ------------ ---------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1998 1,099,287 $52,347 $2,066,752 $913,943 $13,518,189 $ 0 $16,551,231
=========== ======== ============ ========== ============= =========== =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 921,772 $( 742,651) $ 156,884
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Realized investment (gains) losses (65,807) 24,118 80,291
Amortization of deferred policy acquisition
costs 3,884,512 3,899,794 3,129,605
Depreciation and other amortization 423,449 422,617 410,970
Deferred income tax provision (benefit) 91,630 (155,616) (274,768)
Decrease (increase) in receivables (113,854) 41,249 171,817
Decrease (increase) in other assets 40,864 (109,044) 4,765
Policy acquisition costs deferred (3,372,217) (2,380,598) (2,049,305)
Increase (decrease) in liability for future
policy benefits (649,257) 474,937 883,361
Increase in other liabilities 72,977 200,014 37,815
----------- ----------- -----------
Net cash provided by operating
activities 1,234,069 1,674,820 2,551,435
INVESTING ACTIVITIES:
Proceeds from sale of real estate 51,885 47,222 59,326
Purchase of securities and short-term
investments (55,747,848) (36,675,342) (22,339,700)
Mortgage and policy loan repayments 377,292 195,653 223,297
Proceeds from sales of securities 1,128,156
Proceeds from maturities, redemptions, and calls
of securities and short-term investments 54,956,152 35,353,646 19,890,844
Property and equipment purchased (510,937) (364,989) (567,977)
Refund of deposit 225,000
------------ ------------ -------------
Net cash used in investing activities (873,456) (1,443,810) (1,381,054)
(Continued)
</TABLE>
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
FINANCING ACTIVITIES:
Dividends paid to shareholders $(10,347) $(250,171) $(252,613)
Proceeds from stock issued 25,125 452,250
Payments to acquire treasury stock (191,620) (1,068,650)
--------- --------- ----------
Net cash used in financing activities (201,967) (225,046) (869,013)
--------- --------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 158,646 5,964 301,368
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR 608,434 602,470 301,102
--------- --------- ----------
AT END OF YEAR $767,080 $608,434 $602,470
========= ========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION-
Income taxes paid $ 0 $137,000 $270,000
========= ========= ==========
See notes to consolidated financial statements. (Concluded)
<PAGE>
AMERICAN PUBLIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 consolidated 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. COMPREHENSIVE INCOME - The Company has adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" in 1998.
This standard expands or modifies disclosures, and accordingly, has no
impact on the Company's financial position, results of operations or
cash flows.
D. AVAILABLE FOR SALE 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.
<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.
E. 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 the 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.
F. 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.
G. 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.
H. 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.
I. 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:
LIFE ACCIDENT AND HEALTH
Mortality for policies 100% of 1965-70 100% of 1965-70
issued prior to 1982 S & U male mortality table Ultimate male mortality
table
Mortality for policies 100% of 1975-80 100% of 1975-80
issued after 1982 S & U male mortality table Ultimate male mortality
table
Interest Rates 5-7% 5-7%
Withdrawals (lapse 30% first year graded to 5% 30% first year graded
rates) in year 21 and later to 5% in year 21 and
later
<PAGE>
J. 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.
K. 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 or loss.
L. 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.
M. 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 $30,000 in
1998 and $29,000 in 1997 and 1996.
N. NET INCOME (LOSS) PER SHARE - Net 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
1,099,487 in 1998, 1,110,459 in 1997 and 1,129,044 in 1996.
2. AVAILABLE FOR SALE SECURITIES
The amortized cost and related approximate fair value of available for sale
securities were as follows:
Net realized gains (losses) are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1998
U. S. Treasury and government
<S> <C> <C> <C> <C>
corporations and agencies $ 5,595,670 $ 287,911 $ 5,883,581
States and political subdivisions 3,317,554 258,902 3,576,456
Public utility bonds 703,954 9,262 $ 1,295 711,921
Industrial and miscellaneous 8,225,027 219,876 20,106 8,424,797
Mortgage-backed securities 16,795,957 408,620 20,741 17,183,836
------------ ----------- --------- -----------
$34,638,162 $1,184,571 $ 42,142 $35,780,591
============ =========== ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1997
U. S. Treasury and government
<S> <C> <C> <C> <C>
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 $34,626,186
============ =========== ========= ============
</TABLE>
Net realized gains (losses) are summarized as follows:
1998 1997 1996
Investment security sales $ 91,039 $ 7,393 $(25,392)
Real estate acquired in
satisfaction of debt (25,232) (31,511) (54,899)
--------- -------- ---------
$ 65,807 $(24,118) $(80,291)
========= ========= =========
The following is an analysis of the amortized cost and fair value of
available for sale securities at December 31, 1998 by contractual maturity:
Amortized Fair
Cost Value
Due in one year or less $ 99,763 $ 100,369
Due in one to five years 2,609,770 2,655,185
Due in five to ten years 3,131,559 3,324,451
Due after ten years 12,001,113 12,516,750
------------ ------------
17,842,205 18,596,755
Mortgage-backed securities 16,795,957 17,183,836
------------ ------------
$34,638,162 $35,780,591
============ ============
Actual maturities may differ from contractual maturities because of the
borrower's right to call or prepay obligations.
The components of net investment income were as follows:
1998 1997 1996
Fixed maturities $2,496,808 $2,485,844 $2,405,619
Mortgage loans 76,047 90,686 106,630
Investment real estate 168,740 168,108 78,770
Policy loans 72,816 78,640 83,878
Short-term investments 26,453 20,015 20,701
Real estate acquired in satisfaction of debt 19,244 17,102 18,299
----------- ----------- ----------
Total investment income 2,860,108 2,860,395 2,713,897
Investment expenses 336,233 323,721 326,887
----------- ----------- ----------
Net investment income $2,523,875 $2,536,674 $2,387,010
=========== =========== ==========
<PAGE>
Bonds with an approximate carrying value of $2,679,000 in 1998 and
$2,685,000 in 1997 were pledged to the respective states in which the
Company transacts business for the security and benefit of policyholders.
At December 31, 1998, assets on deposit met minimum statutory requirements.
3. INVESTMENT REAL ESTATE AND PROPERTY AND EQUIPMENT
Investment real estate and property and equipment were as follows:
Investment Real Estate Property and Equipment
------------------------- ------------------------
1998 1997 1998 1997
Land $ 170,000 $ 170,000 $ 322,477 $ 322,477
Buildings and improvements 1,057,399 1,057,399 1,312,752 1,312,752
Furniture and equipment 2,820,244 2,332,806
------------ ------------ ------------ -----------
1,227,399 1,227,399 4,455,473 3,968,035
Less accumulated depreciation (553,541) (499,699) (2,132,762) (1,774,872)
------------ ------------ ------------ -----------
Property and equipment, net $ 673,858 $ 727,700 $2,322,711 $2,193,163
============ ============ ============ ===========
4. PARTICIPATING POLICIES
APL had in force approximately $2,534,000 in 1998 and $2,624,000 in 1997 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
$30,000 in 1998 and $34,000 in 1997, relating to insurance in force of
$6,248,000 in 1998 and $3,294,000 in 1997. The reinsurance portion of
accident and health reserves deducted in developing the net liability was
approximately $24,000 in 1998 and 1997.
6. POLICY CLAIMS
Activity in the liability for unpaid policy claims is summarized as follows:
<PAGE>
1998 1997
Balance at January 1 $ 1,086,795 $ 856,085
Less reinsurance recoverables 12,703 1,360
------------- ------------
Net balance at January 1 1,074,092 854,725
------------- ------------
Incurred related to:
Current year 17,794,652 15,726,945
Prior years 3,689,286 3,569,717
------------- ------------
Total incurred 21,483,938 19,296,662
------------- ------------
Paid related to:
Current year 17,122,689 14,981,297
Prior years 4,297,868 4,095,998
------------- ------------
Total paid 21,420,557 19,077,295
------------- ------------
Net balance at December 31 1,137,473 1,074,092
Plus reinsurance recoverables 8,436 12,703
------------- ------------
Balance at December 31 $1,145,909 $1,086,795
============= ============
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 $4,065,000 in 1998 and
$3,719,000 in 1997 which represents the present value of future claims.
7. INCOME TAXES
The components of the provision for income taxes were as follows:
1998 1997 1996
Current provision $ 36,597 $ 9,245 $ 292,096
Deferred provision (benefit) 91,630 (155,616) (274,768)
---------- ----------- -----------
Income tax provision (benefit) $ 128,227 $ (146,371) $ 17,328
========== =========== ===========
Refundable income taxes of $63,000 (1998) and $100,000 (1997) are included
in other assets.
<PAGE>
The tax effects of significant items comprising the net deferred tax asset
are as follows:
1998 1997
Deferred tax liabilities:
Unrealized gain on available for sale securities $(388,426) $(300,186)
Deferred policy acquisition costs (1,512,919) (1,722,080)
----------- -----------
Total deferred tax liabilities (1,901,345) (2,022,266)
Deferred tax assets:
Unrealized loss on real estate acquired
in satisfaction of debt 45,502 54,179
Future policy benefit liabilities 2,080,042 2,423,224
Capital loss carryforward 183,252 218,162
Alternative minimum tax credits 287,158 288,050
Other 55,718 55,092
----------- -----------
Total deferred tax assets 2,651,672 3,038,707
Valuation allowance (494,703) (617,281)
----------- -----------
Net deferred tax asset $255,624 $399,160
=========== ===========
The valuation allowance decreased approximately $123,000 in 1998 and
increased approximately $73,000 in 1997.
At December 31, 1998, 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.
The income tax provision (benefit) differed from the statutory federal
income tax rate of 35% for the following reasons:
1998 1997 1996
Federal income tax (benefit) at statutory rates $367,500 $(311,158) $60,974
Small life insurance company deduction (955) (196,163)
Utilization of operating loss carryforward (353)
Valuation allowance on deferred tax assets (86,246) 152,885 174,221
Other (22,269) 11,902 (21,704)
--------- ---------- ---------
Income tax provision (benefit) $128,227 $(146,371) $17,328
========= ========== =========
The alternative minimum tax credit carryover approximated $287,000 at
December 31, 1998.
<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 size 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, 1998, accumulated
unpaid dividends available for payment without prior approval of the
Commissioner of Insurance approximated $208,000.
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 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 common
stock or 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 49,581 (1996) and 12,012 (1998) shares of its common
stock from a former officer and director and other directors of the Company
at $15.95 per share.
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, 1998, APL was in compliance with
these minimum capital requirements as follows:
Total adjusted capital $8,874,413
Authorized control level risk-based capital 1,617,072
Ratio of adjusted capital to risk-based capital 5.49:1
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 (loss) and stockholders' equity as reported under generally accepted
accounting principles (GAAP basis) and statutory net income and
stockholders' equity of APL follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- ----------
Net Stockholders' Net Stockholders' Net
Income Equity Loss Equity Income
<S> <C> <C> <C> <C> <C>
GAAP basis $921,772 $16,551,231 ($742,651) $15,623,802 $156,884
Adjustments to:
Policy reserves (1,081,801) 4,236,650 (1,062,502) 5,318,451 (476,697)
Non-admitted assets (1,455,322) (1,225,251)
Deferred acquisition costs 512,295 (9,285,999) 1,519,196 (9,798,294) 1,080,300
Deferred income taxes 91,630 (255,624) (155,616) (399,160) (274,768)
Unrealized gain on
invested securities (1,142,429) (882,899)
Other (45,408) 57,296 (40,551) (67,403) 131,076
----------- ----------- ----------- ------------ -----------
Statutory basis $ 398,488 $8,705,803 ($482,124) $8,569,246 $616,795
=========== =========== =========== ============ ===========
</TABLE>
10. 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
nonfinancial 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.
The methods and assumptions used to estimate fair value are as follows:
* 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.
* 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. Fair value
approximates the carrying market.
* 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.
* 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.
<PAGE>
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 $35,780,591 $35,780,591 $34,626,186 $34,626,186
Mortgage loans 683,649 660,000 989,859 960,000
11. OPERATING SEGMENT DISCLOSURE
During 1998, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates as a life and health insurance company,
with substantially all of its premium revenue derived from accident and
health insurance. Therefore, the Company does not report but one operating
segment.
12. ACCOUNTING STANDARD TO BE ADOPTED IN THE FUTURE
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999. SFAS 133 requires, among other things, that derivatives
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives may, depending on circumstances, be recognized in earnings or
deferred as a component of shareholders' equity until a hedged transaction
occurs. The Company has not determined what impact, if any, the adoption of
SFAS 133 will have on its financial position or results of operations.
13. 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 leases various land, buildings and operating equipment under
monthly lease arrangements. Expenses incurred under all operating leases
approximated $159,000 (1998), $185,000 (1997) and $163,000 (1996). 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 follow:
Lessee Lessor
Commitments Receipts
1999 $167,000 $160,000
2000 167,000 156,000
2001 167,000 52,000
2002 27,000
2003 27,000
------------ ----------
$555,000 $368,000
============ ==========
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>
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.
* * * * * *
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders of
American Public Holdings, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of American Public Holdings, Inc. and
subsidiary included in this Form 10-K and have issued our report thereon dated
March 5, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
to financial statement schedules are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 5, 1999
<PAGE>
Article 7. Schedule II - Condensed Financial Information of Registrant
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
ASSETS:
Cash $ 21,139 $ 36,610
Investment in American Public Life Insurance Company 16,749,553 15,617,765
------------ -----------
Total assets $16,770,692 $15,654,375
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Due to American Public Life Insurance Company $ 213,651 $ 20,952
Dividends payable 5,810 9,621
------------ -----------
219,461 30,573
STOCKHOLDERS' EQUITY 16,551,231 15,623,802
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,770,692 $15,654,375
============ ===========
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARY $934,510 $(714,299) $314,253
COSTS AND EXPENSES:
Professional and administrative fees 12,738 28,352 134,142
Amortization 23,227
--------- ---------- ---------
12,738 28,352 157,369
--------- ---------- ---------
NET INCOME (LOSS) $921,772 $(742,651) $156,884
========= ========== =========
<PAGE>
Article 7. Schedule II - Condensed Financial Information of Registrant
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 921,772 $( 742,651) $ 156,884
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Equity in (earnings) loss of subsidiary (934,510) 714,299 (314,253)
Dividends received from American Public Life
Insurance Company 10,347 415,000 252,613
Increase (decrease) in liabilities 181,984 (136,417) 157,369
---------- ----------- ----------
Net cash provided by operating activities 179,593 250,231 252,613
FINANCING ACTIVITIES:
Dividends paid (3,444) (238,746) (252,613)
Treasury stock acquired and retired (191,620)
Common stock issued 25,125
----------- ----------- ----------
Net cash used in financing activities (195,064) (252,613) (252,349)
----------- ----------- ----------
INCREASE IN CASH (15,471) 36,610 0
CASH, BEGINNING OF YEAR 36,610
----------- ----------- ----------
CASH, END OF YEAR $ 21,139 $ 36,610 $ 0
=========== =========== ==========
</TABLE>
<PAGE>
Article 7. Schedule V - Valuation and Qualifying Accounts
Col. A. Col. B Col. C Col. D Col. E
Description Balance at Additions Deductions -- Balance at
Beginning ------------------- End of
of Period (1) (2) Period
Charged Charged
to Costs to Other
and Accounts --
Expenses Describe
1998
Allowance for
real estate
acquired in
satisfaction
of debt $159,349 $ 25,521 $133,828
(sales)
Allowance for
uncollectible
agent balances 41,269 12,441 28,828
(collections)
Valuation allowance
for deferred tax
assets 617,281 122,578 494,703
(recovery)
-------- --------- --------
$817,899 $ 160,540 $657,359
======== ========= ========
1997
Allowance for real
estate acquired
in satisfaction
of debt $238,546 $ 79,197 $159,349
(sales)
Allowance for
uncollectible
agent balances 46,375 5,106 41,269
(collections)
Valuation allowance
for deferred tax
assets 544,006 73,275 617,281
-------- --------- --------- --------
$828,927 $ 73,275 $ 84,303 $817,899
======== ========= ========= ========
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001037559
<NAME> American Public Holdings, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 35,780,591
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 683,649
<REAL-ESTATE> 673,858
<TOTAL-INVEST> 38,557,170
<CASH> 767,080
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 9,285,999
<TOTAL-ASSETS> 52,697,924
<POLICY-LOSSES> 32,743,852
<UNEARNED-PREMIUMS> 735,161
<POLICY-OTHER> 1,145,909
<POLICY-HOLDER-FUNDS> 415,214
<NOTES-PAYABLE> 0
0
0
<COMMON> 52,347
<OTHER-SE> 16,551,231
<TOTAL-LIABILITY-AND-EQUITY> 52,697,924
30,020,333
<INVESTMENT-INCOME> 2,523,875
<INVESTMENT-GAINS> 65,807
<OTHER-INCOME> 29,331
<BENEFITS> 21,073,775
<UNDERWRITING-AMORTIZATION> 3,884,512
<UNDERWRITING-OTHER> 6,631,060
<INCOME-PRETAX> 1,049,999
<INCOME-TAX> 128,227
<INCOME-CONTINUING> 921,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921,772
<EPS-PRIMARY> (.84)
<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>
