UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 0-12666
AMERICAN FINANCIAL HOLDING, INC.
(Exact name of Company as specified in charter)
Delaware 87-0458888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 South 200 West, No. 302,
P.O. Box 683, Farmington, Utah 84025-0683
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (801) 451-9580
Telecopy: (801) 451-9582
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes / / No /x/
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $4,177,000
As of July 20, 1997, the Company had outstanding 4,279,449 shares of its common
stock, par value $0.01.
Documents Incorporated by Reference. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 31, 1990): None.
Transitional Small Business Disclosure Format (Check one):
Yes / / No /x/
SPECIAL NOTE
This annual report on Form 10-KSB for the year ended December 31, 1996, of
American Financial Holding, Inc., (the "Company"), is being filed in July 1997,
substantially after its due date. This report should be read in conjunction
with other periodic reports reporting events occurring after December 31, 1996,
to be filed soon, including quarterly reports on Form 10-QSB for the fiscal
quarters ended March 31 and June 30, 1997. Such other periodic reports and the
information set forth therein should be read together with this annual report on
Form 10-KSB, which contains information as of December 31, 1996, unless
otherwise indicated.
Caution Respecting Forward-Looking Information
This annual report contains certain forward-looking statements and
information relating to the Company that is based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view
of the Company respecting future events and are subject to certain risks,
uncertainties, and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction and History
American Financial Holding, Inc. (the "Company"), markets life insurance
and annuity products underwritten by other insurance providers, principally
through its marketing subsidiary, Income Builders, Inc. ("Income Builders").
The Company, through Income Builders, acts as an independent field
marketing organization for LifeUSA Holding, Inc. ("LifeUSA"), and has been a
leading national producer for LifeUSA for combined premium and life premium
sales in recent years. It is the goal of management to acquire, manage, and fund
the operations of a financial services holding company with broad-based
marketing of life insurance and annuities, including the products of other
insurance companies and ultimately the Company's own products. In connection
with the acquisition of Income Builders as a wholly-owned subsidiary in 1989,
the Company agreed to use its best efforts to seek additional equity financing
to fund the expansion of Income Builders. (See "Acquisition of Income Builders"
below.)
In 1995, The Company organized American Financial Reinsurance, Inc. ("AF
Reinsurance"), as a wholly-owned subsidiary of Triad Financial Systems, Inc.
("Triad"), a subsidiary of the Company, which was granted a charter by the
Arizona Insurance Department to conduct business as a reinsurance company in
that state and to coinsure a portion of the products sold by the Company. AF
Reinsurance has entered into coinsurance and reinsurance agreements with
Massachusetts General Life Insurance Company and its affiliated insurance
companies, particularly Life Partners Group, Inc., an Englewood, Colorado-based
insurance group (together, "Mass General"), a subsidiary of Conseco, through
which they may cede back to the Company a portion of the life insurance and
annuity cession allowances on policies marketed by the Company, as discussed
below. The Company has not initiated activities under its agreements with Mass
General.
Unless the context otherwise requires, when used herein, the term "AFH"
refers separately to the corporate parent and the term "the Company" refers to
AFH and its subsidiaries, Income Builders, Triad, and American Financial
Marketing, Inc., and Triad's subsidiary, AF Reinsurance.
The Company's Ability to Continue as a Going Concern--Shortage of Working
Capital and Continuing Losses
The Company has extremely limited working capital, no credit lines, and
insufficient revenue to meet its operating requirements. For the years ended
December 31, 1996 and 1995, the Company suffered net losses applicable to common
stockholders of $942,000 and $696,000, respectively, and as of December 31,
1996, had an accumulated deficit of $8,355,000. At December 31, 1996, the
Company had a stockholders' deficit of $960,000. The Company expects that it
will continue to incur operating losses and that its accumulated deficit will
increase. The Company has been dependent solely upon cash provided by financing
activities to fund its operations. The principal sources of capital from outside
sources during the preceding years have been receipts from the sale of
securities. All of the foregoing raises substantial concerns respecting the
ability of the Company to continue as a going concern.
The Company's operating plan for the balance of 1997 and early 1998 depends
on the receipt of additional funding from equity financing. There can be no
assurance that that the Company will be able to sell additional equity
securities to meet its capital requirements. The Company received $53,000 from
its sale of common stock during 1996.
The Company is considering possible organizational restructuring
alternatives. One plan being considered would consist of the consolidation of
the Company's principal marketing and most promising reinsurance activities in
Triad and the separation of Triad from AFH as its corporate parent, which has
significant net operating losses, a substantial amount of which are a part of
the losses previously accumulated by the publicly-held corporation when current
management acquired control in 1988. Management of the Company believes that
the separation of Triad from the Company would enhance the ability of Triad to
obtain additional financing and provide other long-term benefits to the
Company's stockholders. A portion of new financing obtained by Triad would be
paid to AFH in partial consideration of the transfer of certain assets to Triad,
thereby enhancing the ability of AFH to continue. The original plan to
effectuate the foregoing in connection with a proposed debt funding effort was
not implemented when the funding was not completed. Recently, the Company has
determined to reanalyze the possible restructuring plan after it has had the
opportunity to study the details of the recently announced Congressional
bipartisan approval of tax legislation that may impact certain tax aspects of a
restructuring such as that outlined above.
While the Company continues to review the above organizational
restructuring, it is also considering other corporate structures, joint
ventures, or other strategic or collaborative relationships to enable the
Company to capitalize on its marketing capabilities while participating in
reinsurance on products marketed by it.
There can be no assurance as to when, if ever, any restructuring may be
implemented or whether or when any funding that may be required can be obtained.
A restructuring would be subject to a number of regulatory and legal conditions.
(See "Possible Restructuring" below.)
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities if the Company were unable to continue
as a going concern. (See FINANCIAL STATEMENTS: Note 10 and "ITEM 6:
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.")
Business Strategy
The Company's business strategy is to grow by (i) expanding its marketing
organization, (ii) activating AF Reinsurance to reinsure and coinsure an
increasing amount of the insurance products that its independent contractor
agents sell, and (iii) acquiring portfolios of insurance in force and life
insurance companies with established products, markets, or other insurance
opportunities. The Company will require substantial amounts of additional equity
financing to fully implement this strategy.
The Company expands its marketing organization by recruiting through
national campaigns for new agents and regional seminars designed both to
increase the number of general agencies under contract as well as to enhance the
productivity of those general agencies already under contract. In addition, the
Company is seeking alliances with additional marketing organizations that market
both LifeUSA and other products and with other insurance underwriters that offer
additional insurance products that can be sold through the Company's marketing
organization.
The organization of AF Reinsurance in order to reinsure and coinsure life
insurance policies and annuities presently sold by the Company's marketing
organization was an initial step in the Company's long-term strategy of
developing an insurance underwriting capability. The Company does not now issue
its own life insurance policies or annuities, but sells several products
underwritten by others. As warranted, the Company will seek reinsurance and
coinsurance treaties with insurance carriers for products that are new or, if
necessary, replicate products when the terms are more attractive than those
currently marketed.
The Company investigates opportunities for acquisitions and the
availability of required funding and will consider an acquisition when most of
its acquisition criteria can be met, depending on the availability of required
funding. Key considerations include (i) an acquisition price that reflects
little, if any, goodwill; (ii) a book of business that is both profitable and
properly underwritten; (iii) licenses to sell insurance products in states in
which the Company is not currently authorized but finds attractive; (iv) a
management, sales force, or facilities that the Company would like to acquire;
(v) insurance and annuity products that are attractive; (vi) an investment
portfolio that is sound and properly valued; and (vii) an absence of contingent
liabilities or regulatory problems. To date, the Company has not been
successful in acquiring funding to enable it to complete acquisitions.
The Company's long-term goal is to write new insurance products that are
tailored to meet the market needs of the Company's marketing organization. The
Company intends to expand and diversify the array of products for its agents to
cross sell to their clients. The Company will reinsure these new insurance
products in an effort to penetrate the market with new products while minimizing
the impact on its surplus.
There can be no assurance, of course, that the Company will be able to
implement its long-term business strategy, identify any acquisition target or
complete any acquisition, obtain required expansion capital, or achieve
profitable operations.
As the Company acquires insurance carriers, it will be subject to the
regulation and supervision by the states in which it transacts business.
Possible Restructuring
As a result of a review of the corporate and capital structure of the
Company, management has developed one possible organizational restructuring plan
to separate AFH and its current operating subsidiaries. As a first step of this
plan, the Company would consolidate into Triad the Company's principal marketing
units, Income Builders and American Financial Marketing, Inc., and its proposed
reinsurance activities to be conducted through AF Reinsurance, already a Triad
subsidiary. This would be effected through the transfer of all of the
outstanding stock of Income Builders, Inc., and American Financial Marketing,
Inc., to Triad in consideration of certain cash payments and stock of Triad.
Triad, as so reorganized, would then be separated from the current corporate
parent, AFH, by distributing all of the outstanding shares of Triad common stock
to the current stockholders of AFH.
One of the goals of an organizational restructuring would be to separate
the most promising revenue producing activities of the Company from AFH, which
has significant net operating losses, a substantial amount of which are a part
of the losses previously accumulated by the publicly-held corporation when
current management acquired control in 1988. As a result of the proposed
reorganization being considered by management, Triad, as a separate publicly-
held corporation and its subsidiaries, would continue with its marketing
activities (Income Builders and American Financial Marketing) and its
reinsurance activities (AF Reinsurance) and would operate and seek financing on
its own.
Management of the Company believes that the separation of Triad from AFH as
proposed would enhance the ability of Triad to obtain additional financing and
provide other long-term benefits to the common stockholders of both Triad and
the Company. However, as a result of the recently announced Congressional
bipartisan approval of certain tax legislation that my impact certain tax
aspects of implementing the organizational restructuring plan outlined above,
the Company has determined to reanalyze the possible plan and may consider other
alternatives to accomplish its restructuring objectives. Such other
alternatives may include corporate structures, joint ventures, or other
strategic or collaborative relationships to enable the Company to capitalize on
its marketing capabilities while participating in reinsurance on products
marketed by it.
The Company is seeking a combination of debt and equity funding for Triad
to complete any organizational restructuring and the payment of agreed
consideration to AFH and to fund Triad's reinsurance company capital and
surplus, retire its outstanding surplus debenture, acquire other books of
business or insurance companies, and expand its marketing activities.
Completion of a restructuring such as that outlined above would likely be a
condition precedent to obtaining such funding. There can be no assurance as to
when, if ever, such funding could be obtained. The Company previously entered
into a letter of intent from a funding group for debt and equity funding for
these purposes, but the transaction was not completed and has now been
abandoned. The Company continues to work with other potential funding sources
for required capital, but there can be no assurance that funding in budgeted
amounts or on favorable terms can be obtained. The Company has not determined
whether a restructuring such as that outlined above would be implemented in the
absence of substantial amounts of additional funding for the Company's proposed
business activities. The source and terms of any additional funding obtained by
the Company may impact management's decision as to the implementation of any
restructuring alternative. (See "item 6. management'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.")
If and when a possible restructuring plan is implemented, the Company will
undertake the necessary regulatory and other compliance measures to complete
such restructuring, which will likely take several months and require
substantial expenditures for transaction costs. It is not anticipated that
shareholder approval will be required for any such restructuring. The completion
of any restructuring will be subject to the completion of certain regulatory
filings, the resolution of certain legal and accounting issues, and other
requirements. To the extent that the restructuring includes the offer and sale
of securities, it will be effected only by means of a prospectus.
Although management believes that it is probable that a restructuring such
as outlined herein will be completed, there can be no assurance that it will in
fact be effected, that the Company will be able to fund the legal, accounting,
and other work necessary, or that such a restructuring will be beneficial to the
Company's stockholders.
Product Lines
The Company markets life insurance and annuity products underwritten by
unrelated insurance companies. LifeUSA, however, presently underwrites most
products marketed by the Company. LifeUSA currently underwrites approximately
12 life insurance and annuity products, of which the Company has primarily
marketed the Accumulator 8 Series of Annuities and Universal Annuity Life I and
III policies.
As the Company implements its reinsurance arrangement through AF
Reinsurance, as discussed below under "AF Reinsurance," it intends to offer
additional insurance, annuity and specialty products developed by Mass General
and other insurance companies through marketing, reinsurance, or other
arrangements with such companies.
Marketing
The Company sells life insurance and annuity products underwritten by other
insurance providers exclusively through agents under an independent contractor
relationship. These individuals may be agents of other life insurance companies
or independent insurance brokers. The relationship can be terminated by either
party on specified notice. The Company does not intend to have career agents
who sell life insurance exclusively for it. Relying upon independent agents
allows the Company to expand its sales force without significant expense, but it
does require that the Company obtain the right to market competitive products,
as the independent agents customarily handle product lines of several different
insurance companies. The Company recruits and trains the independent agents in
its specific marketing approach to selling life insurance and annuities.
As of December 1996, the Company had contracted with over 1,930 independent
contractor-agents to participate in its marketing organization, with 1996 annual
premium production of over $36 million. The number of independent agents at
December 31, 1996, is lower than the approximately 5,500 agents under contract
on December 31, 1995, reflecting the efforts of the Company, in conjunction with
LifeUSA, to terminate their marketing relationship with agents that had not
generated premiums within the preceding 24 months.
It is customary for insurance companies which market products through
independent agents to advance to certain agents, at the time the policy is
issued, a substantial portion of the first year commission payable to the agent,
even if the policy holder pays the first year insurance premium in monthly
installments. Annualization of the first year commissions and, in effect,
prepayment of such commissions, provides the agent with funds to meet current
operating needs. The insurance providers that underwrite the products marketed
by the Company typically advance up to an aggregate of 50% to 75% of the agent's
first year commissions on submission of an insurance application and/or issuance
of the policy. The commission advances are credited against the agent's account
as policy premiums are received by the underwriter and the agent earns the
related commission. If an application for insurance is rejected or the
policyholder discontinues the policy prior to the thirteenth month, an
appropriate amount is charged back against the agent's account. As a
consequence, the Company assumes certain credit risks because the selling agent
could cease further sales of Company products or policies could lapse before
earned premiums are sufficient to pay the agent's indebtedness. The Company is
required to repay commission advances only if the agent cannot. Historically,
the Company has not been required to reimburse any material amount of unearned
commissions.
AF Reinsurance
Triad organized AF Reinsurance as a wholly-owned subsidiary under the laws
of Arizona. After obtaining initial capitalization, as discussed below, AF
Reinsurance applied for and was granted, effective November 24, 1995, by the
Arizona Insurance Department a Certificate of Authority to operate as a
reinsurance company in Arizona, initially for the purpose of implementing a
reinsurance program with Mass General and LifeUSA of Minneapolis, Minnesota.
The Company obtained an aggregate of $864,000 in initial capital and
surplus for AF Reinsurance, consisting of $439,000 in net proceeds from the sale
of 8% Payable in Cash and in Kind Cumulative Convertible Preferred Stock of
Triad ("Triad Preferred Stock") and $425,000 in proceeds from a subordinated
surplus debenture issued to Mass General, consistent with that insurance
company's practice of assisting associated reinsurance carriers in meeting their
surplus requirements.
AF Reinsurance entered into an agreement to establish a reinsurance
arrangement with Mass General for various life insurance products underwritten
by Mass General and to be marketed through the Company's marketing organization.
AF Reinsurance also intends to implement a reinsurance arrangement with LifeUSA
for annuity and other products underwritten by it. However, AF Reinsurance's
arrangement with Mass General precludes the use of capital resulting from its
purchase of the subordinated surplus debenture as discussed above to provide
reinsurance for policies issued by other underwriters. Accordingly, the Company
would be required to repay such debenture with an outstanding balance of
$425,000 at December 31, 1996, or obtain additional financing for AF Reinsurance
before it could begin reinsurance of LifeUSA products. There can be no
assurance that planned reinsurance arrangements can be reached, that reinsurance
arrangements with insurance companies can be implemented effectively through AF
Reinsurance without substantially impacting its capital and surplus, thus
requiring the infusion into AF Reinsurance of additional funding, that such
business will result in gross operating margins to AF Reinsurance, that Triad
will be able to meet its debt service obligations on its outstanding debentures,
or that such activities will in general be profitable.
In order to implement the reinsurance program with Mass General, the
Company is now developing a program to introduce Mass General's products for
sale through the Income Builders independent contractor sales force on a limited
basis. Depending on the level of production, under its agreement with Mass
General the Company will receive a cede back of 33.3% of the annualized premium
produced for Mass General and assume 33.3% of the related policy obligations.
To date, the Company has been unable to launch this marketing program due to
shortages of working capital. There can be no assurance that the Company will
be able to commence this marketing program without substantial amounts of
additional funding or that such marketing program will be successful even if
funded and undertaken. Further, there can be no assurance that the terms of the
Company's existing reinsurance arrangements will result in a financial return to
the Company.
While planning the product offerings and marketing effort for Triad, in
1995 it agreed to market a product underwritten by American Physicians Life
("APL"), Columbus, Ohio, and agreed that it would pay APL an amount equal to 10%
of the amount by which $1,000,000 exceeded the premium for the APL product
generated by the Company by September 30, 1996. Because of the inadequate
funding of Triad, the Company was unable to initiate marketing of the APL
product and generated no premium income under the APL agreement. Accordingly,
APL has demanded that the Company pay APL $100,000. In lieu of such payment,
the Company agreed to repurchase for $224,000 the shares of Triad Preferred
Stock that APL purchased in 1995 for $200,000, plus dividends, payable in four
equal consecutive monthly installments commencing in October 1996. This
purchase has now been completed and funded from the cash of AF Reinsurance, and
the $100,000 claim has been canceled. The Company still intends to introduce
the APL product to independent contractor agencies recruited in the future.
AF Reinsurance is required by the Arizona Department of Insurance to
maintain combined capital and surplus of at least $150,000 in order to maintain
its reinsurance charter. During 1996, AF Reinsurance used $520,000 of its cash
for advances to AF Reinsurance's parent, Triad, and/or its parent, AFH, to pay
$112,000 to redeem Triad Preferred Stock from APL as discussed above, $28,000 in
interest on the subordinated surplus debenture held by Mass General and, in
turn, AFH, and $380,000 for general and administrative expenses, including
advances to officers and directors of AFH. The resulting $520,000 in inter-
corporate advances is not an admitted asset for purposes of determining AF
Reinsurance's capital and surplus under the requirements of the Arizona
Department of Insurance. The Company believes that AF Reinsurance meets the
applicable capital and surplus requirements of the Arizona Department of
Insurance. On June 6, 1997, the Arizona Department of Insurance entered a
Suspension Order suspending the certificate of authority of AF Reinsurance for
its failure to file by March 31, 1997, its annual statement of financial
condition and pay the related fees. The Company intends to file the required
reports and pay the required fees and penalties during the third quarter of 1997
and expects that its certificate of authority will be reinstated.
Regulation
The insurance industry is subject to regulation and supervision by the
states in which business is transacted. The laws of the various states
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating trade
practices, licensing agents, approving policy forms, filing premium rates on
certain business, setting reserve requirements, determining the form and content
of required financial statements, determining the reasonableness and adequacy of
capital and surplus, and prescribing the maximum concentration of certain
classes of investment held by insurance companies.
Most states have also enacted legislation that regulates insurance holding
company systems, including acquisitions, extraordinary and intercorporate
dividends, the terms of surplus debentures, the terms of affiliated
transactions, and other related matters. Recently, increased scrutiny has been
placed on the insurance regulatory framework, and a number of state legislatures
have considered or enacted legislative proposals that alter, and in many cases
increase, state authority to regulate insurance companies and holding company
systems. Insurance departments in the various states require insurance
companies to make annual and quarterly filings. These statutory filings require
classifications of investments and the establishment of mandatory reserves.
AF Reinsurance is subject to the jurisdiction of the Arizona Department of
Insurance and is required to comply with its rules and regulations, to file
specified reports, and to be subject to examination of its books and records.
Competition
The insurance industry is highly competitive. The Company is subject to
intense competition in its current operations and is expected to have similar
competition in the areas of its future planned expansion. There are many
insurance companies offering a variety of insurance products, and in order to
obtain competitive product lines, the Company must continue to perform at a high
level. The Company is dependent on its ability to attract and retain productive
independent agents to sell its products. The Company pays customary and
competitive commissions, but competition among insurance companies is intense
for independent agents with demonstrated ability. There can be no assurance
that the Company will be able to continue to attract and retain productive
independent agents.
Personnel
The Company has four employees, all of whom are officers and directors of
the parent company, American Financial Holding, Inc., and two of whom are
executive officers and directors of Income Builders, Inc. In addition to its
employees, the Company contracts with regional independent agencies and
insurance salesmen on an independent contractor basis as discussed above. (See
" Marketing.")
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its principal executive offices at 225 South 200
West, Suite 302, Farmington, Utah 84025-0683. These offices are located in
approximately 1,000 square feet of office space that the Company currently rents
from an unrelated third party under an oral month-to-month rental agreement.
The operations of Income Builders are conducted from approximately 2,000
square feet of office space located at 42 East Claybourne Avenue, Salt Lake
City, Utah 84115, that are rented on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and, except
as noted below, no such proceedings have been threatened by or, to the best of
its knowledge, against it.
On October 9, 1996, the Company was advised by the Enforcement Division of
the Securities and Exchange Commission (the "Commission") that it is considering
recommending that the Commission bring an enforcement action, which could
include a civil penalty, against the Company in U.S. District Court for failing
to file timely periodic reports in violation of Section 13(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") and the rules thereunder. Between
March 31, 1997, and the filing of this report, this advice was reaffirmed
vigorously in view of the Company's repeated delinquency and failure to meet its
reporting and filing obligations under the Exchange Act.
In October 1996 the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission related
to the resignation of Coopers & Lybrand LLP, the dismissal of Arthur Andersen
LLP, and the appointment of Jones, Jensen & Company as the Company's independent
accountant and the reasons therefor. In addition, the Company is requested to
provide certain information respecting its previous sales of securities. The
Company has not been advised of the outcome of the foregoing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of its shareholders during the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has been no established, consistent trading market for AFH's common
stock during significant portions of the preceding two years. Although the
Company has learned of various isolated transactions, apparently at prices
negotiated in the individual circumstances, there is no reliable information
from which to present data respecting regular trading prices and market
activity.
Although the common stock of AFH has been listed on the Electronic Bulletin
Board of the National Association of Securities Dealers, Inc., system ("EBB")
under the symbol "ANFH", quotations have been published only intermittently.
However, the trading volume of the common stock of AFH is limited, creating
significant changes in the trading price of the common stock as a result of
relatively minor changes in the supply and demand. Consequently, the price of
the common stock in the trading market fluctuates dramatically over short
periods as a result of factors unrelated to the business activities of the
Company.
Because of the lack of specific transaction information and the Company's
belief that quotations are particularly sensitive to actual or anticipated
volume of supply and demand, the Company does not believe that quotations are
reliable indicators of a viable trading market for AFH's common stock. In this
limited market, brokers typically publish no fixed quotations to purchase a
minimum number of shares at a published price, but express a willingness to buy
or sell the stock and from time to time complete transactions in the securities
at negotiated prices. As of July 21, 1997, the AFH's common stock was quoted,
subject to the foregoing limitations and qualifications, at $0.125 bid, $0.1875
asked. The foregoing bid quotations do not reflect dealer mark-ups, markdowns,
brokerage commissions, or other charges and do not reflect actual transactions.
As of July 20, 1997, there were 4,279,449 shares of common stock issued and
outstanding, held by approximately 653 shareholders.
AFH has not paid dividends on its common stock and does not anticipate that
it will pay dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's Ability to Continue as a Going Concern--Shortage of Working
Capital and Continuing Losses
The Company has extremely limited working capital, no credit lines, and
insufficient revenue to meet its operating requirements. For the years ended
December 31, 1996 and 1995, the Company suffered net losses applicable to common
stockholders of $942,000 and $696,000, respectively, and as of December 31,
1996, had an accumulated deficit of $8,355,000. At December 31, 1996, the
Company had a stockholders' deficit of $960,000. The Company expects that it
will continue to incur operating losses and that its accumulated deficit will
increase. During 1996, the Company has used the cash of its reinsurance
subsidiary, AF Reinsurance, to fund its operating, investing, and financing
activities. The principal source of cash from outside sources has been receipts
from the sale of securities. All of the foregoing raise substantial concerns
respecting the ability of the Company to continue as a going concern.
The Company's operating plan for the balance of 1997 and into 1998 is
dependent upon the receipt of additional funding from equity financing.
Although the Company received $53,000 in net proceeds from the sale of common
stock during 1996, these proceeds were inadequate to offset cash required for
other financing activities, including redemption of Triad Preferred Stock,
advances to shareholders, and principal payments on borrowings. As discussed in
"Item 1. Business" above, the Company proposes to undertake an organization
restructuring which management believes will enhance the ability of the Company
to obtain equity of from $1 million to $5 million to fund the activation of its
reinsurance subsidiary and expansion of marketing which, together with proceeds
from the financing, should enable the Company to continue. Prior to
implementing any organizational restructuring, it will be necessary for the
Company to obtain interim funds to pay related legal, accounting, and other
expenditures. There can be no assurance that any required initial funding can
be obtained for any of the foregoing or that the Company will be able to
continue.
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities if the Company were unable to continue
as a going concern. (See Financial Statements: Note 10.)
Liquidity and Capital Resources
The Company's cash requirements of $628,000 for 1996 were provided by cash
balances at the beginning of the year, principally cash proceeds from debt and
equity financings completed by Triad in 1995. For the year ended December 31,
1996, the Company experienced negative cash flow from operating activities of
$733,000, compared with negative cash flow from operating activities of $466,000
in 1995. The increased cash required to fund operating activities in 1996 as
compared to 1995 is principally due to the higher operating loss in 1996 due to
increased general and administrative expenses as discussed below.
Investing activities used cash of $125,000 in 1996 as compared to $10,000
in 1995. The largest component of the Company's investing activities in 1996
consisted of $108,000 used to purchase a condominium for the anticipated use of
an executive being recruited. The executive did not join the Company and the
condominium was sold in the first quarter of 1997.
During 1996, the Company's financing activities provided net cash of
$231,000, consisting principally of $384,000 decrease in stockholder notes
receivable that were expensed because management determined that the ultimate
collectibility of such notes was uncertain and $53,000 in proceeds received from
the sale of common stock. These increases more than offset the $94,000 (net)
for redeeming Triad Preferred Stock, $48,000 for principal payments on short-
and long-term borrowings, and $64,000 for advances to shareholders, all of which
more than offset the $53,000 in proceeds received from the sale of common stock.
At December 31, 1996, the Company had notes and open accounts receivable of
$3,087,745 due from officers, directors and stockholders of the Company. The
loans were initially made as unsecured advances with no due dates specified. On
March 31, 1992, all advances were converted to promissory notes that bear
interest at eight percent and are due on demand. The promissory notes have been
amended for additional advances and accrued interest through December 31, 1995.
Approximately 100,000 shares of common stock of the Company are pledged as
partial collateral for all except one of the notes. Additional advances
subsequent to December 31, 1995, were made on an open account basis.
At December 31, 1993, management determined that the ultimate
collectibility of certain of the stockholders' notes receivable was uncertain.
Accordingly, management recorded a reserve of $869,255 against those portions of
the stockholders' notes receivable that had not previously been expensed for
financial reporting purposes. The Company has expensed for financial reporting
purposes the remaining $2,218,490 of the notes receivable in each year as
compensation expense to certain officers and directors. Of this amount,
$786,662 and $588,140 was expensed in the years ended December 31, 1996 and
1995, respectively. However, these individuals are obligated under the
promissory notes to repay the entire stated principal of the loans.
During the years ended December 31, 1996 and 1995, the Company recognized
$202,803 and $166,632 respectively, of interest income related to these notes
receivable. The interest income was not paid by the shareholders but was added
to the balance of the notes receivable. (See FINANCIAL STATEMENTS: Note 9.)
The Company does not expect that payments under these notes will provide
capital during the next 12 months.
Capital Requirements
The Company believes that the remaining capitalization of AF Reinsurance is
sufficient for the subsidiary to begin operations, although the Company is
seeking additional funding in order to launch new product introduction and
marketing expansion and, in general, to form a broader base for planned
activities. In addition to funding for AF Reinsurance, the Company would
benefit from additional funds to cover accrued liabilities and accounts payable
inasmuch as most of the Company's $1,395,000 current liabilities were past due
at December 31, 1996, to pay ongoing operating losses, and to provide funds for
additional marketing by Income Builders.
By activating AF Reinsurance, the Company desires to continue to expand its
marketing organization and acquire additional insurance company assets. The
Company will require additional equity or debt capital to fund this expansion,
and there can be no assurance that such funding will be available on terms
viable to the Company.
As of December 31, 1996, Triad had issued and outstanding 44,702 shares of
Triad Preferred Stock with a liquidation preference of $12 per share, or an
aggregate of $536,424, and AF Reinsurance had outstanding $425,000 in principal
amount of surplus debentures, bearing interest at 7.66% per annum, due
quarterly, with annual principal payments of $42,500 due annually, commencing
September 30, 1996. All interest payments required through December 31, 1996,
have been paid. The Company tendered the September 30, 1996, principal payment
of $42,500, but the payment was not deposited and the Company and Mass General
are discussing extended repayment terms. The Company expects to continue to
utilize proceeds from these surplus debentures, which form a portion of the
surplus of AF Reinsurance, to pay the principal portion of the amount due in the
future.
The Company has issued a promissory note aggregating $340,000 at December
31, 1996, bearing interest at 8% (12% after default) and due five days after
demand, but in any event, by March 31, 1997. This note is currently in default,
but the Company does not expect that collection efforts will be commenced as
long as the payee, in its sole discretion, concludes that the Company is making
substantial progress toward obtaining sufficient financing to pay the note.
This note is secured by a pledge of officer and director notes payable to the
Company aggregating approximately $2,606,000 at December 31, 1995.
Inasmuch as the 1995 offering of Triad Preferred Stock was not successful
in obtaining the amount of funding anticipated, the Company has been unable to
launch its product introduction and marketing effort and has been using the cash
proceeds from that offering and from the related sale of a surplus debenture to
meet the Company's cash requirements, as discussed above. Therefore, the
Company is exploring other financing alternatives, including the sale of
additional equity securities. Net proceeds from such funding would be utilized
to fund marketing expansion and related new product introduction, to increase
the surplus of AF Reinsurance, to cover ongoing general and administrative
expenses (including payments to executive officers and directors), and perhaps
to reduce the outstanding Triad surplus debenture or to redeem Triad Preferred
Stock. There can be no assurance that any of the Company's efforts to obtain
additional funding will be successful or that the Company will be able to
continue.
As discussed above, AFH intends to separate its Triad reinsurance
activities, Income Builders, and currently inactive American Financial Marketing
from the holding company parent. There can be no assurance as to whether any
such organizational restructuring will be pursued, whether it will be
implemented, or the business or financial effects thereof.
Certain Uncertainties
AFH and Triad have sold securities in reliance on exemptions from
registration under the Securities Act and applicable state securities laws.
Management believes that the Company has materially complied with the
requirements of the applicable exemptions. However, since compliance with these
exemptions is highly technical, it is possible that the Company could be faced
with certain contingencies based on civil liabilities resulting from the failure
to meet the terms and conditions of such exemptions, which could have a material
adverse impact on the Company's financial condition. Neither AFH nor Triad has
received any demand from any shareholder requesting a return of his investment,
damages, or other remedies in connection with the purchase of securities by such
shareholder.
Results of Operations
Commission revenue for the year ended December 31, 1996, decreased
$583,000, or 12.2%, to $4,177,000 from $4,759,000 during 1995. The 1996
decrease is due to the absence of special marketing incentive programs and
generally more moderate prevailing interest rates during 1996 than during the
previous year, when the underwriter of the Company's principal annuity products
conducted an aggressive sales incentive program. In addition, during the
earlier months of 1995, prevailing interest rates were relatively higher than in
1996, during which equity markets enjoyed record increases, which generally
aided in the sale during 1995 of annuity products such as those marketed by the
Company. As investors shifted from fixed-yield annuities to equities in 1996,
industry-wide annuity sales generally declined. Low interest rates continue
into 1997. Commission expense declined $630,000, or 15.4%, to $3,466,000 in
1996 as compared to $4,096,000 in 1995. This fluctuation reflects ordinary
variations in the commission schedule of various products, the age and other
demographics of policy purchasers, the size of individual annuity and insurance
policies sold, the commission schedules of the individual insurance agents
selling particular policies, and similar factors, which will likely continue to
fluctuate in the future.
Gross profit of $711,000 in 1996, or 17.0% of commission revenue, is a
significant improvement over the $664,000 in gross profit in 1995, equivalent to
14.0% of commission revenue. This significant improvement in gross profit in
1996 is due to the foregoing factors and may not be indicative of the gross
profit that may be expected in future periods.
General and administrative expenses increased $290,849 or 19.6%, to
$1,777,000 in 1996 as compared to $1,486,000 a year earlier. The 1996 increase
is due principally to the recognition as an expense of $384,000 in stockholder
notes receivable based on management's determination that the ultimate
collectibility of such notes was uncertain. Total other income (expense)
increased $10,000, or 6.1%, in 1996 to $174,000 as compared to $164,000 in 1995.
The principal component of other income (expense) in both years ($239,000 in
1996 and $196,000 in 1995), consisted of interest accrued on notes and open
accounts receivable from executive officers and directors with outstanding
balances of $3,088,000 and $2,685,000 at December 31, 1996 and 1995,
respectively. As noted above, the Company has recorded reserves aggregating
$869,000 against the $3,088,000 face amounts of these notes and open accounts
receivable based on management's conclusion that the ultimate collectibility of
these notes is uncertain. Such accrued interest has not been paid by the
officers and directors but has been added to the principal amount of the notes
receivable. For financial reporting purposes, the difference of $2,219,000
between the gross amount of the stockholder notes and open accounts receivable
of $3,088,000 and as of December 31, 1996, and the recorded reserve of $869,000
has been expensed as executive compensation (See FINANCIAL STATEMENTS: Note 9,
and "Item 10. Executive Compensation.")
As a result of the foregoing, the Company's loss before income taxes
increased $233,000 or 35.4%, to $892,000 in 1996 as compared to $659,000 in
1995. After income tax provision and preferred stock dividend, the net loss
applicable to common stockholders increased $246,000 or 35.3% to $942,000 in
1996, or a loss of $0.22 per share on a weighted average of 4,264,000 shares
issued and outstanding, as compared to $696,000 in 1995, or a loss of $0.18 on a
weighted average of 3,873,000 shares outstanding.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the required
accountant's reports, are included following a table of contents beginning
immediately following the signature page to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 10, 1996, the Company engaged Coopers & Lybrand LLP ("Coopers &
Lybrand"), Salt Lake City, Utah, to audit and report on the Company's financial
statements for the year ended December 31, 1995.
On such date, the board of directors also approved the dismissal of Arthur
Andersen LLP ("Arthur Andersen"), Salt Lake City, Utah, as the Company's
previous auditors.
The most recent report of Arthur Andersen on the Company's financial
statements, consisting of consolidated balance sheets as of December 31, 1994,
and 1993, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1994, did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to audit scope or accounting principles.
However, the report contained an explanatory paragraph regarding the uncertainty
of the Company's ability to continue as a going concern.
During the period following December 31, 1994, and preceding the dismissal
of Arthur Andersen, there were no disagreements with Arthur Andersen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure, which disagreement, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreement in connection with its report.
In June 1993, Arthur Andersen had advised the Company of concern over
material weaknesses in the Company's internal controls that the accountant
believed could adversely affect the Company's ability to develop reliable
financial statements. The Company implemented Arthur Andersen's recommendations
for strengthening its internal controls. During the period following December
31, 1994, and the subsequent interim period preceding Arthur Andersen's
dismissal, the Company was not advised by Arthur Andersen that internal controls
necessary for the Company to develop reliable financial statements did not exist
nor that information had come to its attention that led it to no longer be able
to rely on management's representations or that made it unwilling to be
associated with the financial statements prepared by management.
The Company was not advised by Arthur Andersen of the need to expand
significantly the scope of the Company's audit, nor was the Company advised that
during the period following December 31,1994, and preceding its dismissal, that
information had come to the attention of Arthur Andersen that on further
investigation could potentially (i) materially impact the fairness or
reliability of either a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal period subsequent to the date of the most recent financial
statements (December 31, 1994) covered by their audit report, or (ii) cause
Arthur Andersen to be unwilling to rely on management's representations or be
associated with the Company's financial statements. The Company was not advised
by Arthur Andersen that information had come to its attention that it concluded
materially impacted the fairness or reliability of a previously issued audit
report or the underlying financial statements.
No consultations occurred between the Company and Coopers & Lybrand during
the two most recent fiscal years and any subsequent interim period prior to
Coopers & Lybrand's appointment regarding the application of accounting
principles to a specific completed or contemplated transaction, the type of
audit opinion, or other information considered by the Company in reaching a
decision as to an accounting, auditing, or financial reporting issue.
On June 17, 1996, Coopers & Lybrand resigned as the independent accountants
of the Company. Coopers & Lybrand did not complete or issue any report on its
audit of the December 31, 1995, financial statements of the Company.
In connection with its resignation, Coopers & Lybrand advised the Company
that information had come to its attention that, if investigated further, could
materially impact the fairness or reliability of previously issued audit reports
or the underlying financial statements relating to the extent of and the method
of accounting for shareholder advances and stock issuance costs.
Between the date of its appointment and dismissal, there were no
disagreements with Coopers & Lybrand on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
On July 8, 1996, the board of directors approved the engagement of Jones,
Jensen & Company, Salt Lake City, Utah, to audit and report on the Company's
financial statements for the year ended December 31, 1995, which audit report
was included in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1995.
No consultations occurred between the Company and Jones, Jensen & Company
during either of the two fiscal years ended December 31, 1994 and 1993, and any
subsequent interim period prior to Jones, Jensen & Company's appointment
regarding the application of accounting principles to a specific completed or
contemplated transaction, the type of audit opinion, or other information
considered by the Company in reaching a decision as to an accounting, auditing,
or financial reporting issue. Jones, Jensen & Company was engaged to audit the
Company's financial statements for the year ended December 31, 1996, and its
audit report is included with this annual report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Current Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
Kenton L. Stanger 64 Chief Executive Officer, President, Director
Raymond L. Punta 47 Executive Vice President, Director
Chelton S. Feeny 74 Director
Ray P. Brown 53 Executive Vice President-Marketing, Director
Tim L. Hansen 48 Executive Vice President-Marketing, Director
</TABLE>
Directors are elected at the annual shareholders' meeting of the Company to
serve for a period of one year and until their successors are elected and
qualified. Officers serve at the pleasure of the board of directors.
Kenton L. Stanger has served as Chairman of the Board, President, and Chief
Executive Officer of the Company since 1988. From 1986 to 1988, he was
President of American Financial Marketing, Inc., which was acquired by the
Company in 1988. From 1969 to 1986, Mr. Stanger was Chairman, President and
Chief Executive Officer of Balanced Security Corporation, a financial services
holding company which owned its own life insurance and annuity marketing
company, and an insurance related audio visual production company. During 1985,
he also served as a director for Service Life Insurance Company. From 1965 to
1969, he was President and Chief Executive Officer of Sentinel's Southern Agency
Corporation. Mr. Stanger was the District Sales Manager for Country Mutual Life
and Farm Bureau Insurance Companies from 1958 to 1965. Mr. Stanger is the
father-in-law of Raymond L. Punta.
Raymond L. Punta has served as Executive Vice President and a director of
the Company from 1989 through the present. From 1988 through 1989, Mr. Punta
was a co-owner of American Safety Products, an entity that marketed Halon fire
extinguishers, door entry systems, and other commercial and residential safety
products. Mr. Punta was a national sales trainer for Novar Corporation,
Barberton, Ohio, from 1984 to 1988. From 1973 to 1984, Mr. Punta served as a
law enforcement officer with the San Joaquin County Sheriff's Department and the
Lodi Police Department, both in California. Mr. Punta is the son-in-law of Mr.
Stanger.
Chelton S. Feeny has served as a director of the Company from 1988 through
the present. Dr. Feeny was engaged in the practice of medicine between 1959 and
1988 in Ogden, Utah. Since 1989, he has been employed by the Veterans
Administration Regional Office in Anchorage, Alaska. He currently serves as a
member of the Finance Committee of the Ogden Surgical Society and the Alaska and
Anchorage Surgical Societies.
Ray P. Brown is Executive Vice President-Marketing and has been a director
of the Company since 1989. In 1987, Mr. Brown, in conjunction with Mr. Hansen,
formed Income Builders, Inc., a field marketing organization to sell life
insurance and annuity products offered by LifeUSA. In 1989, Messrs. Brown and
Hansen, exchanged their shares of Income Builders for shares of the Company, and
Income Builders became a wholly owned subsidiary of the Company. Mr. Brown has
been active in the insurance industry since 1972.
Tim L. Hansen is Executive Vice President-Marketing and has served as a
director of the Company since 1989. In 1987, Mr. Hansen, in conjunction with
Mr. Brown, formed Income Builders, Inc., a field marketing organization to sell
life insurance and annuity products offered by LifeUSA. In 1989, Messrs. Hansen
and Brown exchanged their shares of Income Builders for shares of the Company,
and Income Builders became a wholly owned subsidiary of the Company. Mr. Hansen
has been active in the insurance industry since 1973.
Board Meetings and Committees
Members of the board of directors discussed various business matters
informally on numerous occasions throughout the year. All formal actions were
taken by vote in one board meeting that occurred throughout the year or by
unanimous consent during 1996. The directors who are not employees received
reimbursement of direct expenses incurred on behalf of the Company. Directors
who are employees of the Company receive no compensation for services as
directors.
The board of directors has no standing audit or compensation committees.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3, 4, and 5 and amendments thereto,
furnished to the Company during or respecting its last fiscal year ended
December 31, 1995, any written representation referred to in paragraph (b)(2)(i)
of Item 405 of Regulation S-B, no person who, at any time during the most recent
fiscal year, was a director, officer, beneficial owner of more than 10% of any
class of equity securities of the Company or any other person known to be
subject to Section 16 of the Exchange Act failed to file, on a timely basis,
reports required by Section 16(a) of the Exchange Act, during the most recently
completed full fiscal year or prior fiscal year, except as noted in previous
reports on Form 10-K and except that Chelton S. Feeny failed to report purchases
of Common Stock from the Company as follows: 16,000 shares purchased on March
27, 1996.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth, for each of the last three fiscal years,
cash compensation received by any person serving as chief executive officer of
the Company during the last preceding fiscal year and any of the four remaining
most highly compensated other executive officers whose salary and bonus for all
services in all capacities exceeded $100,000 for the most recent fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------- ------------------------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other Securities All
Year Annual Restricted Underlying Other
Ended Compen- Stock Options/ LTIP Compen-
Dec. Salary Bonus sation Award(s) SARs Payouts sation
Name and Principal Position 31 ($) ($) ($)(1) ($) (#)(2) ($) ($)
- --------------------------- ----- -------- ----- -------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenton L. Stanger 1996 -- -- $179,420 -- -- -- --
Chief Executive Officer, 1995 -- -- 131,007 -- -- -- --
President, Director 1994 -- -- 140,580 -- -- -- --
Tim L. Hansen 1996 $178,643 $43,711 -- -- -- --
Vice President-Marketing, 1995 159,394 -- 94,788 -- -- -- --
Director 1994 169,033 -- 46,994 -- -- -- --
Ray P. Brown 1996 $213,291 $44,546 -- -- -- --
Vice President-Marketing, 1995 160,565 -- 87,000 -- -- -- --
Director 1994 173,781 -- 47,220 -- -- -- --
Raymond L. Punta 1996 -- -- $129,824 -- -- -- (2)
Executive Vice-President 1995 -- -- 94,149 -- -- -- --
Director 1994 -- -- 106,040 -- -- -- (2)
</TABLE>
(1) During 1995 and prior years, the Company made personal loans to the four
named executive officers and directors in the amounts set forth as "Other
Annual Compensation," which includes interest accrued during the year on
the unpaid balance of amounts previously outstanding. Such amounts
included cash advances as well as reimbursements for personal use of
Company automobiles and other items. (See Note 3 respecting Mr. Punta.)
(See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
Further, such amounts are treated as compensation for purposes of this
table, but remain an obligation payable by such persons. (See
FINANCIAL STATEMENTS: Note 9.) The Company will offset against the
amounts payable to it by such officers and directors documented
expenses paid by such officers and directors from their own funds
on behalf of the Company.
(2) In 1992, the Company purchased from an unrelated party for $106,000, a
condominium in which Mr. Punta resided. The Company purchased the
property in its name, made the $24,000 cash payment and makes the
payments due on the mortgage note in the original principal amount
of $82,000, bearing interest at 10.5% per annum, payable $722 per month,
with the entire unpaid principal due July 1997. The Company agreed with
Mr. Punta that he could purchase the property on reimbursement to the
Company of all expenditures not reimbursed by Mr. Punta to the date of
purchase or not charged to loans due the Company by Mr. Punta.
During the year ended December 31, 1996, Mr. Punta purchased the
condominium from the Company for $102,955. In addition, the Company advanced
Mr. Punta approximately $58,000 of additional funds. In return for the real
estate and cash, Mr. Punta signed a promissory note for $161,151. The note
bears interest at 7.50% per annum and was payable to the Company by June 30,
1997, or sooner if the condominium were sold by Mr. Punta prior to that date.
The balance of the note receivable at December 31, 1996, including interest, was
$167,194. Mr. Punta sold the condominium during July 1997 for approximately
$162,000. At that time, Mr. Punta repaid the Company approximately $107,000,
but the remaining $60,000 on the note receivable currently remains unpaid.
The following table sets forth information respecting the exercise of
options and SARs during the last completed fiscal year by each executive officer
named in the Summary Compensation Table above.
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Shares Options/SARs at FY End
Acquired at FY End (#) ($)
on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---------------- -------- -------- ------------- -------------
Kenton L. Stanger -- -- 75,000/-- $--/--
Tim L. Hansen -- -- 75,000/-- $--/--
Ray P. Brown -- -- 75,000/-- $--/--
Raymond L. Punta -- -- 75,000/-- $--/--
Employee Agreements and Benefits
During 1997, the Company expects to provide approximately $175,000 and
$125,000 to Kenton L. Stanger, and Raymond L. Punta respectively, the exact
amount of which will depend on the level of activities of the Company, the
sources and availability of funding, and the results of the Company's
operations. As in previous years, a large portion of such amount may be in the
form of loans, repayable by them. As before, the amounts of any such loan to
Messrs. Stanger and Punta will be treated as cash compensation for financial
reporting purposes but will remain a repayment obligation of such executive.
Effective July 1, 1995, the Company entered into executive employment
agreements with Tim L. Hansen and Ray P. Brown at annual salaries for 1995 at
the rate of $200,000 each, plus bonuses based on the income of Income Builders,
provided, however, that the aggregate amount of the compensation to Messrs.
Hansen and Brown in any year can in no event result in Income Builders'
incurring an operating loss. Each agreement provides for a three-year term,
renewed automatically each year and extended for an additional three-year term
unless the Company's board of directors resolves not to extend such agreement,
in which case the employment agreement will expire at the end of the then
current three-year term. Within ninety (90) days after the commencement of a
new fiscal year, the Company will negotiate with Messrs. Hansen and Brown to
determine the amount of any increase in each individual's respective salary for
such year.
The Company provides each of its executive officers and directors who are
full-time employees with health and accident insurance. In addition, the
Company provides to Messrs. Hansen and Brown automobiles for business use.
The Company reimburses its directors for costs of attending meetings of the
board of directors but does not otherwise compensate its directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information as to each person who owned of
record or was known by the Company to own beneficially more than 5% of the
4,279,449 shares of issued and outstanding Common Stock of the Company as of
July 20, 1997, and information as to the ownership of the Company's Common Stock
by each of its directors and by its officers and directors as a group. Except
as otherwise indicated, all shares are owned directly, and the persons named in
the table have sole voting and investment power with respect to shares shown as
beneficially owned by them.
Nature of Number of
Beneficial Owners Ownership Shares Owned Percent
----------------------------- ----------- ------------ -------
Principal Shareholder
Kenton L. Stanger Indirect(1) 200,000 4.67%
225 South 200 West, #302 Options 75,000 1.72
Farmington, Utah 84025-0683 Total 275,000 6.32
Tim L. Hansen Direct 191,826 4.48
42 East Claybourne Avenue Indirect(2) 50,272 1.17
Salt Lake City, Utah 84115 Options 75,000 1.72
Total 317,098 7.28
Ray P. Brown Direct 174,824 4.09
42 East Claybourne Avenue Indirect(2) 67,002 1.57
Salt Lake City, Utah 84115 Options 75,000 1.72
Total 316,826 7.28
Raymond L. Punta Direct 125,000 2.92
225 South 200 West, #302 Indirect(3) 210,579 4.92
Farmington, Utah 84025-0683 Options 75,000 1.72
Total 410,579 9.43
Chelton S. Feeny
2925 DeBarr Street Direct 98,500 2.30
VARO-11A Indirect(3) 107,522 2.51
Anchorage, Alaska 99508 Total 206,022 4.81
Directors
Kenton L. Stanger - - - - - - See Above - - -- - -- - -
Tim L. Hansen - - - -- - - See Above - - - - -- - -
Ray P. Brown - - - -- - - See Above - - - - -- - -
Raymond L. Punta - - - -- - - See Above - - - - - - -
Chelton S. Feeny - - - - - - See Above - - -- - -- - -
All Directors and Executive Direct 590,150 13.79
Officers, as a Group (5 Persons) Indirect 635,375 14.85
Options 300,000 6.55
Total 1,525,525 33.31
(1) Mr. Stanger is deemed to share voting and dispositive power over 175,000
shares owned by San Joaquin Trust and 25,000 shares owned by Debt Reduction
Trust. The 25,000 shares held by the Debt Reduction Trust have been
pledged to secure the Company's loans made to certain officers and
directors. (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.")
(2) Represents shares held by self-directed retirement account.
(3) Consists of 10,579 shares owned by Mr. Punta's wife and 175,000 shares
owned by San Joaquin Trust and 25,000 shares owned by Debt Reduction
Trust, of which his wife is co-trustee.
(4) Represents shares held by trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Loans
During each of the preceding two fiscal years the Company has continued the
practice of making certain personal loans to present and/or former officers and
directors in lieu of paying salaries. During 1996, funds for these loans were
derived from cash on hand at the beginning of the year from Triad's 1995 debt
and equity financings. In previous years, these loans were funded through the
sale of common stock of AFH, as discussed below. During 1991, AFH sold common
stock under an understanding with a trust to contribute back to the Company the
number of shares necessary to raise the funds required. The proceeds from the
sale of such shares were used for loans rather than salaries to officers. These
loans are currently evidenced by promissory notes dated December 31, 1995,
bearing interest at 8% per annum and are due and payable 30 days following
demand, but in any event by December 31, 1998. The loans of Kenton L. Stanger,
Raymond L. Punta, Maxine Heap, and Howard L. Smith are secured by the
accommodation pledge by Debt Reduction Trust, a trust over which Kenton L.
Stanger is deemed to share voting and dispositive power, of 15,000 shares of
Common Stock of the Company. The loans of Ray P. Brown and Timothy L. Hansen
are secured by the accommodation pledge by Debt Reduction Trust, a trust over
which Kenton L. Stanger is deemed to share voting and dispositive power, of
10,000 shares of common stock of the Company. In addition, each of Messrs.
Stanger, Punta, Brown, and Hansen has pledged options to purchase 75,000 shares
of common stock at $1.75 per share and the shares issuable on exercise of such
options to secure repayment of his loan. For financial reporting purposes, a
portion of such loans has been treated as cash compensation but remains an
obligation payable by such persons. Set forth below is the name of each such
borrower and the outstanding balance, including accrued interest, as of the
dates indicated:
<TABLE>
<CAPTION>
Balance Outstanding,
December 31,
-------------------------
Name 1996 1995
- ----------------- ---------- ----------
<S> <C> <C>
Kenton L. Stanger $ 917,634 $ 738,213
Tim L. Hansen 695,901 652,190
Ray P. Brown 710,135 665,589
Raymond L. Punta 679,971 550,147
Others 84,104 78,910
---------- ----------
$3,087,745 $2,685,049
========== ==========
</TABLE>
The Company will offset against the amounts payable to it by such officers
and directors documented expenses paid by such officers and directors from their
own funds on behalf of the Company. The terms of the foregoing transactions
were not determined in arm's length negotiations.
The above notes from Messrs. Stanger, Hansen, Brown, and Punta with an
aggregate amount due of $2,606,000 as of December 31, 1995 have been pledged as
collateral for payment of a promissory note due a third party, now past due,
with an outstanding balance of $340,000 as of December 31, 1996.
Common Stock
During 1996, the Company sold 16,000 shares of Common Stock to Chelton
Feeny, a director, for $20,000.
Real Estate Transactions
During the year ended December 31, 1996, the Company also sold a
condominium to Raymond L. Punta, an officer of the Company, for a note
receivable. The note bears interest at 7.50% per annum and was payable to the
Company by June 30, 1997, or sooner if the condominium were sold by Mr. Punta
prior to that date. The balance of the note receivable at December 31, 1996,
including interest, was $167,194. Mr. Punta sold the condominium during July
1997 for approximately $162,000. At that time, Mr. Punta repaid the Company
approximately $107,000, but the remaining $60,000 on the note receivable
currently remains unpaid.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits:
The following exhibits are included as part of this report at the location
indicated:
<TABLE>
<CAPTION>
EXHIBIT INDEX
SEC
Exhibit Reference
Number Number Title of Document Location
- -------- --------- -------------------------------------------------- ---------------
<S> <C> <C> <C>
Item 3. Articles of Incorporation and Bylaws
3.01 3 Certificate of Incorporation, as amended Incorporated by
Reference(1)
3.02 3 Bylaws Incorporated by
Reference(1)
Item 4
4.01 4 Form of Certificate Of Incorporation Of Triad Incorporated by
Financial Systems, Inc. Reference(6)
4.02 4 Form of Triad Financial Systems, Inc. Designation Incorporated by
Of Rights, Privileges, And Preferences Of 8% Reference(6)
Payable In Cash And In Kind Cumulative Convertible
Preferred Stock
Item 10. Material Contracts
10.01 10 Agreement dated July 20, 1992, among American Incorporated by
Financial Holding, Inc., Tim L. Hansen, and Reference(1)
Ray P. Brown, relating to Income Builders, Inc.,
and related form of proxy
10.02 10 Agent Agreement between LifeUSA Insurance Company Incorporated by
and Income Builders; also constitutes form of Reference(1)
agreement used for each independent agent
10.03 10 Form of Secured Promissory Note of certain Incorporated by
directors of American Financial Holding, Inc., and Reference(6)
related schedule, dated as of December 31, 1995*
10.04 10 Accommodation Stock Pledge Agreement for Stock Incorporated by
between American Financial Holding, Inc., and Mick Reference(1)
K. Stanger and Cheryl S. Punta, trustees of the
Debt Reduction Trust, dated March 31, 1992
10.05 10 Accommodation Stock Pledge Agreement for Stock Incorporated by
between Income Builders, Inc., and Mick K. Stanger Reference(1)
and Cheryl S. Punta, trustees of the Debt
Reduction Trust, dated March 31, 1992
10.6 10 Form of Nonqualified Stock Option with related Incorporated by
schedules of options* Reference(3)
10.7 10 Form of Option Pledge Agreement and related Incorporated by
schedule* Reference(3)
10.8 10 Letter agreement with Raymond L. Punta regarding Incorporated by
condominium as revised July 17, 1995* Reference(6)
10.9 10 Executive Employment Agreement between American Incorporated by
Financial Holding, Inc. and Ray P. Brown effective Reference(6)
July 1, 1995*
10.10 10 Executive Employment Agreement between American Incorporated by
Financial Holding, Inc. and Tim L. Hansen Reference(6)
effective July 1, 1995*
10.11 10 Promissory Note executed by American Financial Incorporated by
Holding, Inc., payable to Kruse, Landa & Maycock, Reference(6)
L.L.C., in the amount of $350,000, dated as of
September 30, 1996, with related Pledge Agreement
10.12 10 Marketing Agreement between Massachusetts General Incorporated by
Life Insurance Company, Wabash Life Insurance Reference(6)
Company, American Financial Reinsurance, Inc., and
American Financial Marketing, Inc., dated January
1, 1996; including exhibits a) General Agent
Contract; b) Co Insurance Agreement; c)
Administrative Services Agreement; and d)
Reinsurance Agreement.
10.13 10 Form of Surplus Debenture No. 1 by American Incorporated by
Financial Reinsurance, Inc. Reference(6)
10.14 10 Form of Security and Pledge Agreement between Incorporated by
American Financial Holding, Inc., American Reference(6)
Financial Reinsurance, Inc., and Massachusetts
General Life Insurance Company
10.15 10 Agreement for Purchase and Sale of Preferred Incorporated by
Shares of Triad Financial Systems, Inc., dated Reference(6)
October 22, 1996, between Triad and American
Physicians Life Insurance Company
Item 16 Letter on Change in Certifying Accountant
16.01 16 Letter from Arthur Andersen dated January 15, 1996 Incorporated by
Reference(4)
16.02 16 Letter from Coopers & Lybrand L.L.P. dated July 8, Incorporated by
1996 Reference(5)
Item 21. Subsidiaries of the Company
21.01 21 Subsidiaries of the Company Incorporated by
Reference(6)
</TABLE>
(1) Previously filed as exhibits to the Company's Form 10-K for the fiscal year
ended December 31, 1991, and incorporated herein by reference.
(2) Previously filed as exhibits to the Company's Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1993, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's current report on Form 8-K
dated January 10, 1996.
(5) Previously filed as an exhibit to the Company's current report on Form 8-K
dated July 8, 1996.
(6) Previously filed as exhibits to the Company's Form 10-KSB for the fiscal
year ended December 31, 1995, and incorporated herein by reference.
*Identifies management contract or compensatory plan or arrangement required
to be filed as an exhibit.
(b) Reports on Form 8-K:
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1996.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, dated as of
the 5th day of August, 1997.
AMERICAN FINANCIAL HOLDING, INC.
By /s/ Kenton L. Stanger
(Principal Executive and
Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and as of the 5th day of August, 1997.
/s/ Kenton L. Stanger, Director
/s/ Raymond L. Punta, Director
/s/ Ray P. Brown, Director
Chelton S. Feeny, Director
/s/ Tim L. Hansen, Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
American Financial Holding, Inc. and Subsidiaries
Farmington, Utah
We have audited the accompanying consolidated balance sheet of American
Financial Holding, Inc. and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Financial Holding, Inc. and Subsidiaries as of December 31, 1996 and
the results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered losses from
operations for the years ended December 31, 1996 and 1995, and has a
stockholders' deficit of $960,359 as of December 31, 1996 that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters also are described in Note 10. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
/s/ Jones, Jensen & Company
July 31, 1997
<PAGE>
C O N T E N T S
Report of Independent Public Accountants ............................... F - 3
Consolidated Balance Sheet as of December 31, 1996 ......................F - 4
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995..............................................F - 6
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1996 and 1995 ............................................ F - 7
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1996 and 1995 ............................................ F - 9
Notes to the Consolidated Financial Statements .................... .... F - 12
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
1996
------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 361,113
Marketable securities (Note 2) 78,641
Commissions receivable 127,136
Note receivable - related party (Note 9) 167,194
Prepaid lease 12,649
Interest receivable 6,487
----------
Total Current Assets 753,220
----------
PROPERTY AND EQUIPMENT - NET (Notes 1 and 3) 90,343
----------
OTHER ASSETS
Investment in real estate 107,584
Investments - other 63
Net deferred tax asset (Note 6) 195,560
Prepaid lease 5,993
Deposits 31,804
-----------
Total Other Assets 341,004
-----------
TOTAL ASSETS $ 1,184,567
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
1996
-----------
CURRENT LIABILITIES
Accounts payable $ 120,074
Commissions payable 127,136
Short-term borrowings (Note 7) 20,471
Accrued expenses 318,348
Income taxes payable 256,641
Dividends payable (Note 5) 34,868
Notes payable, current portion (Note 7) 517,765
----------
Total Current Liabilities 1,395,303
----------
LONG-TERM LIABILITIES
Notes payable (Note 7) 405,071
----------
Total Long-Term Liabilities 405,071
----------
Total Liabilities 1,800,374
----------
COMMITMENTS AND CONTINGENCIES (Note 8) -
----------
MINORITY INTEREST (preferred stock in
consolidated subsidiary) (Note 5) 344,552
----------
STOCKHOLDERS' DEFICIT
Common stock: 20,000,000 shares authorized of
$0.01 par value, 4,279,449 shares issued
and outstanding 42,794
Additional paid-in capital 7,358,451
Stockholders' notes receivable, net of reserve
of $869,255 (Note 9) -
Unrealized loss on marketable securities (Note 2) (6,150)
Accumulated deficit (8,355,454)
----------
Total Stockholders' Deficit (960,359)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,184,567
==========
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
---------------------
1996 1995
------ -------
COMMISSION REVENUE $4,176,774 $4,759,357
COMMISSION EXPENSE 3,466,248 4,095,800
---------- ----------
GROSS PROFIT 710,526 663,557
GENERAL AND ADMINISTRATIVE EXPENSES 1,777,169 1,486,320
---------- ----------
LOSS FROM OPERATIONS (1,066,643) (822,763)
---------- ----------
OTHER INCOME (EXPENSE)
Loss on sale of assets (7,973) -
Interest income 239,337 195,835
Interest expense (57,034) (32,305)
---------- ----------
Total Other Income (Expense) 174,330 163,530
---------- ----------
LOSS BEFORE INCOME TAXES (892,313) (659,233)
INCOME TAX PROVISION (Note 6) (422) (12,381)
---------- ----------
LOSS BEFORE PREFERRED STOCK DIVIDEND (892,735) (671,614)
PREFERRED STOCK DIVIDEND (48,855) (24,064)
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (941,590) $ (695,678)
========== ==========
NET LOSS PER COMMON SHARE $ (0.22) $ (0.18)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,264,297 3,872,672
========== ==========
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Common Stock Additional Stockholders' Stock From Sale Loss on
------------------ Paid-in Notes Issuance of Common Marketable Accumulated
Shares Amount Capital Receivable Costs Stock Securities Deficit
------ ------- -------- ------------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
S>
December 31, 1994 3,643,800 $ 36,438 $6,904,924 $(388,729) $ (87,009) $ (9,800) $ (61,516) $(6,791,105)
le of common stock
(net of $32,981 stock
issuance costs) at an
average price per share
of $0.81 580,765 5,808 465,744 - - - - -
Common stock issued for
services at an average
price per share of $1.00 7,834 78 7,756 - - - - -
Decrease in deferred
stock issuance costs, net - - - - 87,009 - - -
Collection of
note receivable - - - - - 9,800 - -
Reserve against
stockholders'
notes receivable - - - 4,763 - - - -
Unrealized loss on
marketable securities - - - - - - 8,104 -
Preferred stock
dividends declared - - (24,064) - - - - -
Net loss for
the year ended
December 31, 1995 - - - - - - - (671,614)
Balance,
December 31, 1995 4,232,399 $ 42,324 $7,354,360 $ (383,966) $ - $ - $ (53,412) $(7,462,719)
Sale of common stock
at an average price per
share of $1.35 47,050 470 52,946 - - - - -
Unrealized loss on
marketable
securities - - - - - - 47,262 -
Preferred stock
dividends declared - - (48,855) - - - - -
Reserve against
stockholders' notes
receivable - - - 83,966 - - - -
Net loss for
the year ended
December 31, 1996 - - - - - - - (892,735)
Balance,
December 31, 1996 4,279,449 $ 42,794 $7,358,451 $ - $ - $ - $ (6,150) $(8,355,454)
</TABLE>
The accompanying notes are an integral part of these financial statements.
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
---------------------
1996 1995
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stockholders $ (941,590) $ (695,678)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and amortization 26,490 21,669
Provision (benefit) for advance commission
chargebacks (23,168) 401
(Benefit) provision for valuation allowance on
marketable securities 47,262 8,104
Common stock issued for services rendered - 7,834
Change in Assets and Liabilities:
(Increase) decrease in marketable securities 9,459 (9,764)
(Increase) decrease in commissions receivable 42,878 (120,014)
(Increase) decrease in interest receivable (5,073) (1,414)
(Increase) decrease in prepaid leases 3,084 (6,747)
(Increase) decrease in other assets (5,000) (23,000)
Increase (decrease) in accounts payable 83,915 69,280
Increase (decrease) in commissions payable (42,878) 170,014
Increase (decrease) in accrued expenses 59,988 76,938
Increase (decrease) in income taxes payable 400 12,081
Increase (decrease) in dividends payable 10,804 24,064
--------- ---------
Net Cash Used in Operating Activities (733,429) (466,232)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate (107,647) -
Purchase of property and equipment (17,442) (9,823)
--------- ---------
Net Cash Used in Investing Activities $(125,089) $ (9,823)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock $ 53,416 $ 471,552
Proceeds from short-term borrowings - 4,707
Principal payments on short-term borrowings (33,007) -
Advances to shareholders (64,239) -
Proceeds from issuance of long-term debt - 425,000
Principal payments on long-term debt (15,457) (14,383)
Decrease (increase) in stockholders' notes
receivable, net 383,966 14,563
Minority interest from issuance of preferred stock
by subsidiary (93,952) 525,513
--------- ---------
Net Cash Provided by Financing Activities 230,727 1,426,952
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (627,791) 950,897
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 988,904 38,007
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 361,113 $988,904
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 45,122 $ 20,245
Cash paid during the year for income taxes $ 400 $ 300
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, the Company traded in an automobile
with a net book value of $15,638 and related debt of $18,595 in exchange for
an automobile valued at $32,977 and related debt of $35,933. The Company also
sold some real estate to an officer of the Company for a note receivable in
the amount of $102,955.
During the year ended December 31, 1996, the Company's subsidiary, Triad
Financial Systems, Inc., declared and accrued a preferred stock dividend in
the amount of $48,855.
During the year ended December 31, 1995, the Company traded in two automobiles
with total net book value of $31,888 and related debt of $35,505 in exchange
for two automobiles valued at $57,440 and related debt of $61,057.
During the year ended December 31, 1995, the Company's subsidiary, Triad
Financial Systems, Inc., declared and accrued a preferred stock dividend in
the amount of $24,064.
AMERICAN FINANCIAL HOLDING, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and Nature of Operations
American Financial Holding, Inc. and its wholly-owned subsidiaries,
American Financial Marketing, Inc., Income Builders, Inc., Triad
Financial Systems, Inc. and American Financial Reinsurance, Inc.
(collectively, the "Company") market life insurance and annuity
products underwritten by unrelated insurance providers. Products
underwritten by Life USA (a non-related provider of life insurance and
annuity products) accounted for substantially all of the commission
revenue for the years ended December 31, 1996 and 1995.
During 1989, the Company issued 300,000 shares of its common stock in
exchange for all of the outstanding common stock of Income Builders,
Inc. ("Income Builders"), a Utah corporation. Income Builders is a
national field marketing organization for life insurance and annuity
products. Under the terms of the agreement, Income Builders has become
the marketing arm of the Company. The business combination was
accounted for using the purchase method of accounting with acquired
assets and liabilities recorded at their fair market value.
Triad Financial Systems, Inc. ("Triad") formed a subsidiary corporation
during 1995 named American Financial Reinsurance, Inc. ("AF
Reinsurance"), an Arizona corporation which applied for a Certificate
of Authority to operate as a domestic insurer in Arizona. In August
1995, AF Reinsurance received $425,000 cash from the issuance of a
subordinated surplus debenture payable to Massachusetts General Life
Insurance Company (a member of the Conseco, Inc. Financial Services
Organization). This transaction was for the purpose of assisting AF
Reinsurance in meeting its surplus requirements for reinsurance
purposes. The subordinated surplus debenture is payable at the rate of
$42,500 per year, beginning September 30, 1996 (see Note 7). The State
of Arizona granted AF Reinsurance a Certificate of Authority to operate
as a domestic insurer in Arizona that became effective on November 24,
1995.
b. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition. The
Company maintains its cash accounts mainly in two commercial banks.
Accounts are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The amount in excess of the insured limits at
December 31, 1996 was $146,045.
d. Net Loss Per Common Share
The computations of net loss per share of common stock are based on the
weighted average number of common shares outstanding at the date of the
consolidated financial statements. Common stock equivalents are not
considered in the computation of the weighted average number of common
shares outstanding because they would decrease the net loss per common
share.
e. Principles of Consolidation
The consolidated financial statements include those of American
Financial Holding, Inc. and its wholly-owned subsidiaries, American
Financial Marketing, Inc., Income Builders, Inc., Triad Financial
Systems, Inc. and American Financial Reinsurance, Inc. All significant
intercompany accounts and transactions have been eliminated.
f. Stock Issuance Costs
During 1995, management determined that certain previously deferred
stock issuance costs related to the Company's efforts to raise capital
should be expensed. In 1995, the Company charged minority interest for
costs relating to the Triad preferred stock issuance.
g. Property and Equipment
Property and equipment are stated at cost. Expenditures for minor
replacements, maintenance and repairs which do not increase the useful
lives of the property and equipment are charged to operations as
incurred. Major additions and improvements are capitalized.
Depreciation is computed using the straight-line and accelerated
methods over estimated useful lives as follows:
Automobiles 5 years
Furniture and fixtures 5 to 7 years
Equipment 10 years
h. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases and the
reported amounts of assets and liabilities in the accompanying
consolidated balance sheets. These temporary differences will result
in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled.
i. Revenue Recognition
Revenues result from commissions earned from sales of life insurance
and annuity products. Revenues are recognized as earned over the life
of the policies. A reserve has been provided for the effect of
commissions advanced to agents which are potentially subject to
chargeback if the earnings process is not completed.
j. 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.
k. Concentrations of Risk
Products underwritten by Life USA account for substantially all of the
Company's commission revenue. It is at least reasonably possible that
business with Life USA could be lost in the near term thus resulting in
a material impact to the Company.
NOTE 2 - MARKETABLE SECURITIES
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's marketable
securities are classified as "available-for-sale." Accordingly,
unrealized gains and losses are excluded from earnings and reported in
a separate component of stockholders' equity. There has been no
restatement of previously issued financial statements in connection
with the adoption of this new accounting standard.
During 1996 and 1995, Income Builders received commission bonuses in
the form of options for the purchase of Life USA common stock. These
options are fully vested upon receipt and are exercisable for five
years from the date of receipt. The options carry an exercise price
equal to the greater of $10.00 or 150 percent of the market value of
Life USA's common stock on the date of grant. As of December 31, 1996,
the Company has received options to purchase approximately 137,206
shares of Life USA common stock. No value has been assigned to these
options in the accompanying consolidated financial statements because
the market value of Life USA's common stock is below the option
exercise prices and due to uncertainties regarding the Company's
ability to exercise these options.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the following:
December 31,
1996
-----------
Automobiles $ 90,417
Equipment 58,734
Furniture and fixtures 22,133
-----------
Total 171,284
Less accumulated depreciation (80,941)
-----------
Property and equipment - net $ 90,343
===========
Depreciation expense for the years ended December 31, 1996 and 1995 was
$26,490 and $21,669, respectively.
NOTE 4 - COMMON STOCK OPTIONS
On August 7, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan"). The Plan was approved by the stockholders in September 1992.
The Plan allows the board of directors (or a committee appointed by the
board) to issue options to purchase common stock to employees of the
Company and others deemed by the board of directors to have
substantially contributed to the business of the Company. Under the
terms of the Plan, the board of directors can grant options covering
500,000 shares of the Company's common stock. The options granted
shall be either incentive stock options as defined in Section 422 of
the Internal Revenue Code or non-qualified stock options. The exercise
price of each option issued under the Plan shall be determined by the
board of directors based upon the greater of the average trading price
of the Company's common stock over a thirty-day trading period as
determined by an independent reliable means or 110 percent of the cash
offering price at which the Company's common stock was sold for cash at
any time during the six month period that commenced September 15, 1992
and ended March 15, 1993. The option price for incentive stock options
must be in excess of 100 percent of the fair market value of the common
stock on the date the option is granted. Options granted under the
Plan may not have a term of more than ten years from the date of grant.
In addition, incentive stock options must be exercised by any holder
within three months following termination of employment. Options
granted under the Plan may be exercised at any time, or only after a
period of time, or in installments as established by the board of
directors at the time of grant.
In September 1993, the Board of Directors authorized the issuance of
non-qualified stock options to purchase 400,000 shares of common stock
at an exercise price of $1.75 per share. The options vested
immediately and expire on August 31, 1998. None of the stock options
were exercised during 1996 or 1995.
NOTE 5 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
On June 30, 1995, the Company's wholly-owned subsidiary, Triad
Financial Systems, Inc. ("Triad") met the minimum requirements of a
private placement offering of its 8% payable in cash and in kind
cumulative convertible preferred stock. Triad received $601,596 from
the issuance of 50,133 shares of its preferred stock at $12.00 per
share. The net proceeds of $438,504 (net of $163,092 of stock issuance
costs) were originally recorded as minority interest in consolidated
subsidiary. During 1996, 8,500 shares were repurchased by the Company
for $112,000 reducing the minority interest in consolidated subsidiary.
Subsequent to December 31, 1996, 8,500 additional shares were
repurchased for an additional $112,000. Dividends on the preferred
stock equivalent to $48,128 ($0.96 per share) annually are cumulative
and are payable semi-annually at the rate of $0.24 per share in cash
and $0.24 in additional shares of preferred stock on June 30 and
December 31 each year, commencing December 31, 1995. Stock dividends
accrued for 1996 have increased the minority interest in consolidated
subsidiary to $344,552 at December 31, 1996. The shares of preferred
stock have a liquidation preference equal to the original issuance
price of $12.00 per share plus an amount equal to all accumulated and
unpaid dividends on the shares to the date of final distribution. Each
share of preferred stock is convertible into three shares of the common
stock of the Company. Dividends payable at December 31, 1996 were
$34,868.
NOTE 6 -INCOME TAXES
The provision for income taxes consists of the following amounts:
For the Years Ended
December 31,
--------------------
1996 1995
------ ------
Current:
Federal $ (22) $(11,981)
State (400) (400)
------- --------
(422) (12,381)
------- --------
Deferred:
Federal - -
State - -
------- --------
- -
Total income tax provision $ (422) $(12,381)
------- --------
As of December 31, 1996, the Company has reported net operating loss
carryforwards of approximately $4,420,000 in its Federal income tax
returns which expire by 2011. Most of these net operating loss
carryforwards were generated by the Company prior to its merger with
American Financial Marketing, Inc. in May 1988. Based upon provisions
within the Internal Revenue Code, significant portions, if not all, of
the predecessor's net operating loss carryforwards may be limited as to
their use or unavailable for use by the Company. A valuation allowance
has been provided in the accompanying consolidated financial statements
reducing to zero the benefit that may result from the utilization of the
predecessor's net operating loss carryforwards.
In accordance with the provisions of SFAS No. 109, the Company has
recorded a net deferred tax asset in the accompanying 1996 consolidated
balance sheet as follows:
December 31,
1996
------------
Net operating losses $ 307,259
Future deductible temporary differences related
to reserves, accruals and compensation 1,017,276
Future taxable temporary differences related
to depreciation (9,007)
Valuation allowance (1,119,968)
------------
Net deferred tax asset $ 195,560
------------
The differences between the effective income tax rate and the Federal
statutory income tax rate are presented below.
For the Years Ended
December 31,
----------------------
1996 1995
--------- ---------
Benefit at the Federal
statutory rate of 34 percent $ 172,838 $ 204,243
Nondeductible expenses (1,828) (389)
Increase in deferred tax asset
valuation allowance (171,886) (205,549)
State income taxes, net of Federal benefit (264) (264)
Other 718 (10,422)
---------- ----------
Total income tax provision $ (422) $ (12,381)
========== ==========
NOTE 7 - NOTES PAYABLE AND SHORT-TERM BORROWINGS
Notes payable consisted of the following at December 31, 1996:
December 31,
1996
--------------
Notes payable to a credit union, monthly payments
ranging from $530 to $729 interest at rates ranging
from 7.90 to 8.90 percent, final payments due during
the period from February 2000 to January 2002,
secured by automobiles $ 81,591
Subordinated surplus debenture, interest at 7.56
percent is due quarterly, annual principal payments of
$42,500 commencing on September 30, 1996 and
ending on September 30, 2005, secured by 100,000
shares of common stock (see below) 425,000
Note payable to an individual, interest at 8% (12% after
default) due five days after demand, secured by a pledge
of officer and director notes payable to the Company 339,636
Mortgage note payable to an individual, interest at 10.5
percent, monthly payment of $722, balloon principal
payment of $76,903 due July 1997, secured by
real estate 76,609
---------
Total notes payable 922,836
Less: current portion (517,765)
---------
Long-term notes payable $ 405,071
=========
The first installment of $42,500 due on September 30, 1996 for the
subordinated surplus debenture was paid by the Company as scheduled.
However, the payment was never deposited by the lender and the check
was later voided during 1997. The Company and the lender are currently
making alternative arrangements for the payoff schedule on the
$425,000. At December 31, 1996, the note is not considered to be in
default although no principal payments have been recorded.
Scheduled principal payments of notes payable are as follows:
Year Ending December 31, Amount
------------------------ -----------
1997 $ 517,765
1998 60,491
1999 62,094
2000 58,372
2001 53,072
Thereafter 171,042
----------
$ 922,836
==========
As of December 31, 1996, Income Builders had a margin loan payable to
F - 31
an investment broker for $20,471. The margin loan bears interest at
9.25 percent as of December 31, 1996 and is payable on demand. The
loan is secured by marketable securities.
Based on the terms of the above notes payable being comparable to those
prevailing in the market, the fair values of the notes payable are
considered to approximate their book values.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Effective July 1, 1995, the Company entered into executive employment
agreements with two of its officers at annual salaries for 1995 and
1996 at the rate of $200,000 each for each year, plus bonuses based on
the income of Income Builders, provided, however, that the aggregate
amount of the compensation to them in any year can in no event result
in Income Builders incurring an operating loss. Each agreement
provides for a three-year term, renewed automatically each year and
extended for an additional three-year term unless the Company's board
of directors resolves not to extend such agreement, in which case the
employment agreement will expire at the end of the then current three-
year term. Within ninety (90) days after the commencement of a new
fiscal year, the Company will negotiate with the officers to determine
the amount of any increase in each individual's respective salary for
such year. The annual salaries under this agreement remain at $200,000
for 1997.
Marketing Agreement
American Financial Reinsurance, Inc., a wholly-owned subsidiary of the
Company, entered into an agreement with Wabash Life Insurance Company
for marketing services. The Company has advanced $25,000 to Wabash
Life Insurance Company (a member of the Conseco, Inc. Financial
Services Organization) as a deposit for its services. The deposit is
refundable after two years if the Company has generated a specified
level of revenue from reinsurance contracts.
SEC Enforcement
On October 9, 1996, the Company was advised by the Enforcement Division
of the Securities and Exchange Commission (the Commission) that it is
considering recommending that the Commission bring an enforcement
action, which could include a civil penalty, against the Company in
U.S. District Court for failing to file timely periodic reports in
violation of Section 13(a) of the Securities and Exchange Act of 1934
and the rules thereunder.
In October 1996, the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission
related to the resignation of Coopers & Lybrand LLP and the termination
of Arthur Andersen LLP and the appointment of Jones, Jensen & Company
as the Company's independent public accountants and the reasons
therefore. In addition, the Company was requested to provide certain
information respecting its previous sales of securities. The Company
has not been advised of the outcome of the foregoing.
NOTE 9 - RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company had notes and open accounts
receivable of $3,087,745 due from officers, directors and stockholders
of the Company. The loans were initially made as unsecured advances
with no due dates specified. On March 31, 1992, all advances were
converted to promissory notes which bear interest at eight percent and
are due on demand. The promissory notes have been amended for
additional advances and accrued interest through December 31, 1995.
Approximately 100,000 shares of common stock of the Company is pledged
as partial collateral for all except one of the notes. Additional
advances subsequent to December 31, 1995, were made on an open account
basis.
At December 31, 1993, management determined that the ultimate
collectibility of certain of the stockholders' notes receivable was
uncertain. Accordingly, management recorded a reserve of $869,255
against those portions of the stockholders' notes receivable which had
not previously been expensed for financial reporting purposes. The
Company has expensed for financial reporting purposes the remaining
$2,218,490 of the notes receivable in each year as compensation expense
to certain officers and directors. Of this amount, $786,662 and
$588,140 was expensed in the years ended December 31, 1996 and 1995,
respectively. However, these individuals are obligated under the
promissory notes to repay the entire stated principal of the loans.
During the years ended December 31, 1996 and 1995, the Company
recognized $202,803 and $166,632 respectively, of interest income
related to these notes receivable. The interest income was not paid by
the shareholders but was added to the balance of the notes receivable.
During the year ended December 31, 1996, the Company also sold some
real estate to an officer of the Company for $102,955. In addition, the
Company advanced the officer approximately $58,000 of additinoal funds.
In return for the real estate and cash, the officer signed a promissory
note for $161,151. The note bears interest at 7.5% per annum and was
payable to the Company by June 30, 1997, or sooner if the real estate
was sold by the officer prior to that date. The balance of the note
receivable at at December 31, 1996, inlcuding interest, was $167,194.
The officer sold the real estate during July 1997 for approximately
$162,000. At that time, the officer paid back to the Company
approximately $107,000 but the remaining $60,000 on the note receivable
currently remains unpaid.
NOTE 10 - GOING CONCERN
The Company has suffered losses from operations for the years ended
December 31, 1996 and 1995, and has a stockholders' deficit of $960,359
as of December 31, 1996. The Company's continued existence is
dependent upon its ability to achieve its 1997 operating plan, which
includes cost reductions and additional funding from equity financing.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result from the
outcome of this uncertainty.
The Company continues to rely on the sale of its securities to provide
cash to fund its operations as well as its acquisition and expansion
efforts. The Company received $53,416 in net proceeds from the sale of
its common stock during 1996.
Inasmuch as the offering of Triad preferred stock was not successful in
obtaining the amount of funding anticipated, the Company has been
unable to launch its product introduction and marketing effort.
Therefore, the Company is exploring other financing alternatives,
including borrowings, if available, and the sale of additional equity
securities. Net proceeds from such funding would be utilized to fund
marketing expansion and related new product introduction, to increase
the surplus of AF Reinsurance, to cover ongoing general and
administrative expenses (including payments to executive officers and
directors), and perhaps to reduce the outstanding Triad surplus
debenture or to redeem additional Triad preferred stock. There can be
no assurance that any of the Company's efforts to obtain additional
funding will be successful or that the Company will be able to continue
as a going concern.
In order to implement the reinsurance program with Life Partners, the
Company is now developing a program to introduce Life Partners'
products for sale through the Income Builders independent contractor
sales force on a limited basis. However, the Company would benefit
from additional capital to fund a marketing program throughout its
sales organization and intends to allocate a portion of additional
funding to the extent received, for this purpose, there can be no
assurance that the Company will be able to launch an effective
marketing program without substantial amounts of additional funding or
that such marketing program will be successful even if funded and
undertaken. Further, there can be no assurance that the terms of the
Company's existing reinsurance arrangements will result in a financial
return to the Company.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the following events occurred:
1 - The Company sold its investment in real estate for approximately
$109,800 resulting in a gain of approximately $2,000.
2 - During June 1997, American Financial Reinsurance was notified by
the State of Arizona Department of Insurance that their
certificate of authority to transact life and disability
reinsurance business was suspended because of their failure to
file an annual statement containing its financial condition and
affairs as of December 31, 1996. The Company intends to file the
required report upon issuance of its 10-K with the Securities and
Exchange Commission at which time the Company expects to have the
certificate of authority reinstated.
3 - As part of the Company's strategic analysis and planning, it had
originally considered a number of corporate restructuring
alternatives and had originally explored the possibility of
separating its Triad reinsurance activities and/or Income
Builders marketing organization from the holding company parent
and its essentially inactive subsidiary, American Financial
Marketing, Inc. The financing needed in order to accomplish the
restructuring was not obtained and the plans were abandoned. The
Company is currently seeking alternative methods and exploring
other financial efforts but has not made any determination as of
the date of this report. There can be no assurance as to whether
any such organizational restructuring will be pursued, whether it
will be implemented, or the business or financial effects thereof
will be successful.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET
AS OF DECEMBER 31, 1996, AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 361,113
<SECURITIES> 78,641
<RECEIVABLES> 300,817
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 753,220
<PP&E> 171,284
<DEPRECIATION> 80,941
<TOTAL-ASSETS> 1,184,567
<CURRENT-LIABILITIES> 1,395,303
<BONDS> 0
<COMMON> 42,794
0
0
<OTHER-SE> (1,003,153)
<TOTAL-LIABILITY-AND-EQUITY> 1,184,567
<SALES> 4,176,774
<TOTAL-REVENUES> 4,416,111
<CGS> 3,466,248
<TOTAL-COSTS> 3,466,248
<OTHER-EXPENSES> 1,777,169
<LOSS-PROVISION> 7,973
<INTEREST-EXPENSE> 57,034
<INCOME-PRETAX> (892,313)
<INCOME-TAX> 422
<INCOME-CONTINUING> (892,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (892,735)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
