UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995 .
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 0-13538
NATIONAL AFFILIATED CORPORATION
(Exact Name of small business issuer as specified in its charter)
Louisiana 72-0947819
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1500 Lee Street, Suite A, P.O. Box 12190, Alexandria, LA 71315
(Address of principal executive offices)
(318) 473-4355
(Insurer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 3,279,489 Voting Common Shares outstanding on June
30, 1995.<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements are attached beginning at page 4 .
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations is attached beginning at page 8 .
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Description of Sequential Numberings
Exhibit Table Number Exhibit Location
11 Statement of Page 12
Computation of
Per Share
Earnings
(b) Reports on Form 8-K
None<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NATIONAL AFFILIATED CORPORATION
(Registrant)
Date August 10, 1995 By: Jerry L Johnston
Jerry L. Johnston
Vice President and Chief Financial Officer
<PAGE>
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<C> <C>
1995 1994
ASSETS:
Cash $ 129,101 $ 361,430
Invested assets:
Fixed maturities available-for-sale at market 4,124,569 4,179,539
Equity securities at market ($33,398 cost) 2,493 2,504
Other long-term investments at equity 147,664 156,052
Other long-term investments at market 27,000 34,000
Certificates of deposit and time deposits 82,492 455,763
Restricted assets at market 1,139,375 1,132,200
Accrued investment income 88,135 97,821
Finance notes receivable - net 16,261 47,463
Policy loans 108,687 95,193
Reinsurance receivable 525,719 380,400
Other amounts receivable:
Premiums due 36,629 34,238
Agents' balances (net of allowance for uncollectible
accounts of $52,800 in 1995 and 1994) 284,123 234,387
Other 52,152 92,731
Property - net 135,753 141,054
Deferred policy acquisition costs 1,096,073 1,219,714
Other assets 235,374 63,714
TOTAL $ 8,231,600 $ 8,728,203
LIABILITIES AND STOCKHOLDERS' EQUITY:
Policy benefit reserves $ 3,441,520 $ 3,210,661
Policy claims 444,961 617,508
Unearned premiums 47,354 63,037
Dividends left on deposit 455,962 539,503
Advance premium deposits 181,684 193,684
Other policyholders' funds 29,635 26,431
Accounts payable and accruals 140,527 247,348
Total liabilities 4,741,643 4,898,172
Commitments and contingent liabilities
Stockholders' equity:
Voting common shares, no par;
14,000,000 shares authorized;
3,461,028 shares outstanding 5,846,901 5,846,901
Additional paid-in capital 154,500 154,500
Net unrealized investment losses 25,441 (284,084)
Accumulated deficit (1,804,385) (1,154,786)
Subtotal 4,222,457 4,562,531
Less treasury stock - at cost (181,539 shares) 732,500 732,500
Total stockholders' equity 3,489,957 3,830,031
TOTAL $ 8,231,600 $ 8,728,203
</TABLE>
<PAGE>
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
Three Months Six Months
<C> <C> <C> <C>
1995 1994 1995 1994
REVENUES:
Insurance premiums $ 593,254 $ 982,863 $ 1,309,853 $ 1,932,991
Net investment income 107,535 63,627 205,050 186,024
Finance company int/fees 144 16,520 966 40,561
Other income 17,749 43,920 40,028 56,559
Total revenues 718,682 1,106,930 1,555,897 2,216,135
EXPENSES:
(Decrease) Increase in policy
benefit reserves 31,332 (138,940) ( 2,880) (260,595)
Claims and other benefits 159,948 591,490 558,039 1,105,893
Policyholders' dividends 4,497 7,986 7,614 14,520
Commission expense 211,533 346,522 481,704 612,230
Depreciation and amort 4,150 21,451 8,757 42,793
Interest expense 21,689 24,549 31,935 37,675
Salaries, wages and taxes 192,716 224,145 390,987 443,200
Other operating expenses 312,720 289,921 605,700 755,560
Decrease in deferred policy
acquisition costs 40,897 169,549 123,641 134,418
Total expenses 979,482 1,536,673 2,205,497 2,885,694
LOSS BEFORE INCOME TAXES (260,800) (429,743) (649,600) (669,559)
PROVISION FOR INCOME TAXES -- -- -- --
NET (LOSS) INCOME $ (260,800) $ (429,743) $ (649,600) $ (669,559)
EARNINGS PER COMMON SHARE $ (.08) $ (.13) $ (.20) $ (.20)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,279,489 3,279,489 3,279,489 3,279,489
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<C> <C>
1995 1994
Cash flows from operating activities:
Net loss $ (649,600) $ (669,558)
Non-cash and non-operating items:
Gain on sale of invested assets (14,369) (11,993)
Depreciation and amortization 8,755 42,793
Undistributed losses of investee 11 32,382
Change in assets and liabilities:
Deferred policy acquisition costs 123,641 134,418
Policy benefit reserves/unearned premiums 69,857 (202,487)
Policy claims (172,547) 146,448
Equity writedown-other long-term investments 8,388 21,155
Accounts payable and accruals (106,820) ( 85,032)
Other (120,582) ( 28,594)
Net cash used in operating activities (853,266) (620,468)
Cash flows from investing activities:
Acquisitions of:
Invested assets
Fixed maturities available-for-sale (554,943) (478,212)
Finance notes receivable --- (293,068)
Property ( 3,454) ( 1,498)
Proceeds from:
Invested assets
Fixed maturities available-for-sale 933,632 609,730
Certificates of deposit and time deposits 373,271 393,038
Finance notes receivable 31,202 365,210
Policy Loans ( 13,494) ( 14,040)
Agents' balances - net ( 49,736) ( 82,685)
Net cash provided from investing activities 716,478 498,475
Cash flows from financing activities:
Withdrawals of dividends/advance premiums ( 95,541) (149,827)
Payments of debt --- ( 41,271)
Net cash used in financing activities ( 95,541) (191,098)
Net (decrease) increase in cash (232,329) (313,091)
Cash at beginning of year 361,430 470,312
Cash at end of period $ 129,101 $ 157,221
Supplemental cash flows disclosures:
Interest paid $ 23,202 $ 32,088
Income taxes paid $ --- $ ---
</TABLE>
See notes to consolidated financial statements.<PAGE>
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
NOTE 1 - REPRESENTATION BY MANAGEMENT
The unaudited consolidated financial statements included herein reflect all
normal, recurring adjustments which are necessary to a fair presentation of
the consolidated financial position, results of operations and cash flows
for the interim periods presented.
The results of operations for the six month period ended June 30,1995 are
not necessarily indicative of the results to be expected for the entire
year of 1995.
NOTE 2 - ACCOUNTING CHANGE
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." This standard requires classification of investment
securities into three categories: held-to-maturity, trading, and available
for sale. The Company has classified all of its investment securities as
available for sale. As a result, these securities are now required to be
reported in the balance sheet at their fair value, with unrealized gains
and losses reported in a separate component of stockholders' equity.
Prior to 1994, the debt securities included in the Company's investment
portfolio were reported at their amortized cost. The cumulative effect of
this accounting change as of January 1, 1994, representing the net
unrealized gains on the Company's debt securities as of that date, resulted
in a $446,290 increase in the fair value of the Company's debt securities
will now be included in the net unrealized investment gains.<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company issues life and accident and health insurance policies to
customers in targeted niche markets in exurban and rural areas. The
Company's principal life insurance products include universal life,
interest sensitive whole life, adjustable premium whole life and term
insurance policies which target middle income ($25,000-$75,000) families,
senior citizens and government employees. The Company's principal accident
and health insurance policies include short term major medical (which was
discontinued March 31, 1995), an association and group hospital and
surgical policy and a supplemental alternative benefit option policy, which
target middle income consumers who do not participate in other full
coverage major medical policies, as well as participants in group plans who
desire supplemental coverages.
As of January 1, 1995 the Company established NAMC as its marketing
subsidiary and is currently engaged in transferring agent relationship and
management responsibilities from NAIL to NAMC. This action is expected to
reduce the business acquisition costs incurred by NAIL and to facilitate
the Company's entry into marketing relationships with other insurers, which
will allow the Company to efficiently offer its agents additional products
and to realize additional commission income on sales of third party
products. Effective March 31, 1995, NAMC commenced a marketing arrangement
with Continental General Life Insurance Company which provides the
Company's agents with short-term major medical and other health policies
issued by Continental to replace sales of the Company's short-term
policies and provides NAMC with additional commission income.
Results of Operations
1995 Compared to 1994
The Company had a net loss for the first half of 1995 of $649,600 compared
to a loss of $669,559 for the six months ended June 30, 1994. The loss per
common share was $.20 for 1995 and 1994. Total revenues decreased to
$1,555,897 in 1995 from $2,216,135 in 1994. Premium revenues decreased to
$1,309,853 in 1995 from $1,932,991 in 1994.
<TABLE>
Three Months ended Six Months ended
June 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Life premiums
FLA-100 $ 148,181 $ 232,501 $ 295,437 $ 407,755
All other life 116,563 94,187 264,165 190,213
Total 264,744 326,688 559,602 597,968
Accident and health premiums
Group hospital/surgical 74,891 97,541 160,727 197,143
Alternative benefit 94,322 103,232 181,741 134,115
Short term major medical 40,766 267,190 158,949 577,592
Other 118,531 188,212 248,834 426,173
Total 328,510 656,175 720,251 1,335,023
Total premium revenues $ 593,254 $ 982,863 $1,309,853 $1,932,991
</TABLE>
Life premium on the FLA-100 policies continues to decrease due to the
continuing lapses of FLA-100 policies. The FLA-100 participating life
policies were the primary policies sold from 1984 to 1988. The Company
ceased paying projected dividends on these policies in 1992, which the Board
of Directors had determined to be excessive. This action caused the lapse
rate of these policies to increase substantially. Of the 1,116 premium
paying FLA-100 policies in force at December 31, 1994, 187 lapsed in the
first six months of 1995 for a lapse rate of 16.8%, compared to a lapse
rate of 17.5% for the first six months of 1994. The Company expects the
FLA-100 policies to continue to lapse at a similar rate in future years.
Sales of other life products showed a 39% increase during the first half
of 1995 as the Company focused on expanding its force of life agents.
From July 1989 until December 1994, the Company had a marketing
partnership with Commonwealth Life, a subsidiary of Providian Corporation
(formerly Capital Holding), for marketing interest sensitive life products.
Under the partnership, the Company coinsured 80% of life premiums with
Commonwealth Life Insurance Co. This partnership terminated effective
December 31, 1994 for new business. Commonwealth Life will continue to
maintain existing business until the Company completes its recapitalization,
at which time the Company expects to assume these policies.
Accident and health premium decreased during the first quarter of 1995 as
compared to the first quarter of 1994 due to decreased sales of the short
term major medical policy. The Alternative Benefit Option policy, which was
introduced in 1994, did not produce the sales expected in the first half of
1995. The Company expects these sales to increase during the last six
months of the year. The Company also purchased a block of association
group business during the first quarter of 1994 which increased the premium
for that quarter.
Net investment income increased to $205,050 as of June 30, 1995 as compared
to $186,024 at June 30, 1994. This is the result of higher interest rates
and realized gains offsetting the lower level of invested assets caused by
the Company's losses and payment of cash values to holders of lapsed FLA-100
policies.
Finance company interest and fees decreased to $966 for the first six
months of 1995 compared to $40,561 for the first six months of 1994, as
the result of the Company's decision to discontinue the finance company's
operations.
The Company's claims and other benefits decreased to $558,039 for the first
six months of 1995 from $1,105,893 for the first six months of 1994. This
decrease in accident and health claims is the result of a decrease in short
term major medical business inforce. The Company made significant changes
in its short term major medical in September 1994 and these changes
substantially reduced the volume of new business. The Company also
discontinued sales of short term major medical policies as of March 31, 1995.
All of the current short term major medical business will expire no later
than September 30, 1995. A number of changes were also implemented in the
association group hospital and surgical business which was purchased in
1994. These changes effectively have terminated new sales in this
product. The composition of benefits and claims and policyholder dividends
for the six months ending June 30 are as follows:
<TABLE>
<S> <C> <C>
Six months ended June 30,
1995 1994
Life benefits $ 237,819 $ 222,756
Policyholder dividends 7,614 14,520
A & H benefits 320,220 883,137
Total benefits $ 565,653 $1,120,413
</TABLE>
Commission expense decreased to $481,704 for the first six months of 1995
from $612,230 for the first six months of 1994, primarily as a result of
decreased sales of A&H policies. The composition of commission expense was
as follows:
<TABLE>
<S> <C> <C>
Six months ended June 30,
1995 1994
Life commissions $ 200,036 $ 102,830
Accident & health commissions 281,668 505,600
Other --- 3,800
Total $ 481,704 $ 612,230
</TABLE>
Other operating expenses decreased to $605,700 for the first six months in
1995 from $755,550 for the first six months in 1994. This resulted primarily
from a decrease in marketing costs in 1995 compared to 1994, when NAIL
incurred increased printing and actuarial fees in connection with the
introduction of new health products.
Deferred policy acquisition costs decreased to $123,641 for the first six
months of 1995 as compared to $134,418 for the first six months of 1994.
The lapse of FLA-100 policies is contributing to a decrease in deferred
acquisition costs, but the increase in new business has resulted in the
decrease being less than in previous years. The decrease (increase) in
deferred acquisition costs is allocated between life and health as follows:
<TABLE>
<S> <C> <C>
Six months ended June 30,
1995 1994
Life $ 70,675 $207,984
Accident and health 52,966 ( 73,566)
Total $123,641 $134,418
</TABLE>
Liquidity and Capital Resources
The liquidity requirements for the Company's operations generally arise
from the insurance operations of NAIL and the administrative activities of
NAC, and include payment of claims to policyholders, payment of
commissions and other costs of acquiring new business, payment of operating
costs, and payment of cash values upon termination of policies. These
demands have generally been met by NAIL with funds generated by its
operations, from its reserves and liquid assets, and from capital
contributions by NAC. NAC has funded its operations primarily through
management fees charged to its subsidiaries, including NAIL. NAIL is
prohibited by Louisiana law from paying any dividends to NAC other than
from statutory profits.
NAIL has incurred statutory losses in each of 1993 and 1994 and is expected
to continue to incur statutory losses in 1995 and 1996 as a consequence of
its limited revenues and high business acquisition costs. The Company
incurred negative cash flows from operations of $853,266 and $620,468 in
the first half of 1995 and 1994, respectively.
Statutory losses by NAIL have had a substantial negative impact on the
amount of its surplus, which is required to be maintained at a level of at
least $2 million by a number of states where it does business. The Company
was able to maintain NAIL's capital at acceptable levels during 1994
through contributions of capital by NAC to NAIL of $1,919,000, which was
obtained by liquidating various assets held by NAC. NAC does not at present
have any additional liquid or other assets that can be contributed to NAIL's
capital in order to maintain it at required levels.
The Company is in the process of attempting to secure additional capital
through a private offering of $5,000,000 of Senior Convertible Debentures
due March 31, 2000. The sale of the Senior Debentures is contingent upon
subscriptions for at least $3,000,000 in principal amount by December 31,
1995. In addition to the sale of the Senior Debentures, the Company is also
investigating other methods of rasing additional capital. If successful,
the additional capital will remedy the potential problem posed by the
minimum capital and surplus requirements of certain states where NAIL is
licensed and currently issuing insurance. The additional capital will also
provide working capital and allow NAIL to increase its premium volume
either through increased sales or the acquisition of blocks of life
insurance. The financial losses encountered by the Company have not to
date impaired its ability to meet its obligations to creditors and
policyholders, and it is not expected that such impairment will occur in
the foreseeable future, although continuing losses could require NAIL to
suspend its new policy sales during 1995 unless the offering of Senior
Debentures or some other form of recapitalization is completed by December
31, 1995.
Management expects that losses at the level encountered during 1994 will
continue into 1995 as indicated by the loss for the first six months of
1995. Management has taken steps to control administrative costs, reduce
policy claims and continue the Company's increase in life premium revenue.
However, in order to operate at existing levels for the last half of 1995
and for 1996, the Company must complete the private placement to accredited
investors of up to $5,000,000 in principal amount of 6% Senior Convertible
Debentures due March 31, 2000. Each Senior Debenture would be issued at
92.5% of face amount and would be convertible into 740 shares of Common
Stock per $1,000 principal amount, an effective conversion price of $1.35
per share. If all $5,000,000 of Senior Debentures are sold, the holders
would, upon conversion, be entitled to receive 3,703,704 shares of Common
Stock, or 53.0% of the outstanding shares. Management believes that these
actions will allow the Company to operate through 1995, and to achieve a
break-even or profitable level of operations by 1997 based on current
expectations for premium growth and a reduction in claims. Any failure by
the Company to achieve the expected improvements in premium revenue and
claims or to receive the necessary funds for contribution to NAIL would
have a material negative impact on the Company's operations. It is expected
that NAIL's capital will fall below $2,000,000 as of September 30, 1995, unless
new capital is obtained, and that action will then be taken by certain of the
states where NAIL does business to restrict or terminate new sales of
insurance by NAIL in those states.
<PAGE>
EXHIBIT 11
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
The weighted average number of shares outstanding for the six months ended
June 30, 1995 was computed as follows:
Shares outstanding, beginning of period 3,279,489
Shares issued, first quarter, 1995 0
Shares issued, second quarter, 1995 0
Shares outstanding, end of period 3,279,489
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 4,124,569
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,493
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,483,593
<CASH> 129,101
<RECOVER-REINSURE> 26,044
<DEFERRED-ACQUISITION> 1,096,073
<TOTAL-ASSETS> 8,231,600
<POLICY-LOSSES> 3,886,481
<UNEARNED-PREMIUMS> 47,354
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 667,281
<NOTES-PAYABLE> 0
<COMMON> 5,114,401
0
0
<OTHER-SE> (1,624,444)
<TOTAL-LIABILITY-AND-EQUITY> 8,231,600
1,309,853
<INVESTMENT-INCOME> 205,050
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 40,994
<BENEFITS> 562,773
<UNDERWRITING-AMORTIZATION> 123,641
<UNDERWRITING-OTHER> 1,519,083
<INCOME-PRETAX> (649,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (649,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (649,600)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,828,169
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,886,481
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
