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, 1996 .
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)
7228 England Drive, Suite 24, P.O. Box 12190, Alexandria, LA 71315
(Address of principal executive offices)
(318) 473-4355
(Insurer's telephone number, including area code)
1500 Lee Street, Suite A, P.O. Box 12190, Alexandria, LA 71315
(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 3,579,489 Voting Common Shares
outstanding on June 30, 1996.
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
On August 13, 1996, the Board of Directors authorized
the sale of 19,277 shares of $100 par value Class A
Preferred Stock to The Southern Group. (See
Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
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
<TABLE>
<C> <S> <C>
11 Statement of Page 13
Computation of
Per Share
Earnings
99 Amendment to Stock Page 14
Purchase Agreement
</TABLE>
(b) Reports on Form 8-K
None
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 14, 1996 By: Jerry L. Johnston
Jerry L. Johnston
Vice President and Chief Financial Officer
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
1996 1995
ASSETS:
<S> <C> <C>
Cash $99,972 $306,686
Invested assets:
Fixed maturities available-for-sale at mark 1,848,118 3,555,962
Equity securities at market ($32,144 cost) 251,250 1,250
Other long-term investments at equity 136,785 144,673
Other long-term investments at market 0 29,000
Certificates of deposit and time deposits 145,908 239,851
Restricted assets at market 1,033,075 1,040,162
Accrued investment income 51,257 63,360
Finance notes receivable - net 18,751 8,750
Policy loans 103,206 83,571
Reinsurance receivable 2,679,889 2,759,921
Other amounts receivable:
Premiums due and uncollected 14,670 21,028
Agents' balances (net of allowance for unco
account of $131,500 in 1996 and 1995) 129,122 150,009
Other 199,570 398,957
Property - net 184,205 192,794
Deferred policy acquisition costs 184,265 421,962
Other assets 229,024 217,890
TOTAL $7,309,067 $9,635,826
LIABILITIES AND STOCKHOLDERS' EQUITY:
Policy benefit reserves 3,346,806 $3,429,414
Policy claims 587,770 781,256
Unearned premiums 21,037 23,980
Dividends left on deposit 346,974 389,955
Advance premium deposits 162,678 174,678
Other policyholders' funds 19,106 17,152
Accounts payable and accruals 413,883 2,088,754
Total liabilities 4,898,254 6,905,189
Commitments and contingent liabilities
Stockholders' equity:
Non-voting convertible preferred stock, $100 par; 1,500,000
shares authorized; 5,000 shares outstandi 500,000 0
Voting common shares, no par; 14,000,000 sh
authorized; 3,579,489 shares outstanding 5,923,901 5,846,901
Additional paid-in capital 154,500 154,500
Net unrealized investment gains (losses) (32,696) 171,973
Accumulated deficit (4,134,892) (2,710,237)
Subtotal 2,410,813 3,463,137
Less treasury stock - at cost 0 732,500
Total stockholders' equity 2,410,813 2,730,637
TOTAL $7,309,067 $9,635,826
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
Three Months Six Months
1996 1995 1996 1995
REVENUES:
<S> <C> <C> <C> <C>
Insurance premiums $469,636 $593,254 1,003,555 1,309,853
Net investment income 180,238 107,535 314,846 205,050
Finance company interest and fee 0 144 0 966
Other income 18,662 17,749 31,835 40,028
Total revenues 668,536 718,682 1,350,236 1,555,897
EXPENSES:
Decrease in policy benefit reser (18,283) 31,332 (40,329) (2,880)
Claims and other benefits 361,961 159,948 695,523 558,039
Policyholder dividends 5,468 4,497 7,679 7,614
Commission expense 69,443 211,533 154,769 481,704
Depreciation and amortization 8,327 4,150 14,890 8,757
Interest expense 20,653 21,689 30,192 31,935
Salaries, wages and taxes 182,849 192,716 368,126 390,987
Other operating expense 382,058 312,720 691,842 605,700
Amortization of deferred acquisi 79,783 40,897 237,697 123,641
Total expenses 1,092,259 979,482 2,160,390 2,205,497
LOSS BEFORE INCOME TAXES (423,723) (260,800) (810,154) (649,600)
PROVISION FOR INCOME TAXES 0 0 0 0
NET LOSS ($423,723)($260,800)($810,154)($649,600)
LOSS PER COMMON SHARE ($0.12) ($0.08) ($0.23) ($0.20)
(primary and fully diluted)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,579,489 3,279,489 3,579,489 3,279,489
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net loss ($810,155) ($649,600)
Non-cash and non-operating items:
Gain on sale of invested assets (191,408) (14,358)
Depreciation and amortization 14,890 8,755
Change in assets and liabilities:
Deferred policy acquisition costs 237,697 123,641
Policy benefit reserves and unearned premiu (85,551) 69,857
Policy claims (193,486) (172,547)
Equity write-down of other long-term invest 7,888 8,388
Accounts payable and accruals (1,674,871) (106,820)
Due from reinsurance companies 80,032 0
Other 208,667 (120,582)
Net cash used in operating activities (2,406,297) (853,266)
Cash flows from investing activities:
Acquisitions of:
Invested assets
Fixed maturities available-for-sale (1,269,585) (554,943)
Common stock (250,000) 0
Finance notes receivable (10,000)
Property (6,301) (3,454)
Proceeds from:
Invested assets
Fixed maturities available-for-sale 2,971,255 933,632
Other long-term investments 29,000 0
Certificates of deposit and time deposit 93,943 373,271
Finance notes receivable 0 31,202
Policy loans (19,635) (13,494)
Agent's balances - net 20,887 (49,736)
Net cash provided from investing activities 1,559,564 716,478
Cash flows from financing activities:
Withdrawals of dividends and advance premiums (54,981) (95,541)
Sale of preferred and common stock 695,000 0
Net cash provided from (used in) financing act 640,019 (95,541)
Net decrease in cash (206,714) (232,329)
Cash at beginning of year 306,686 361,430
Cash at end of period $99,972 $129,101
Supplemental cash flows disclosures:
Interest paid $18,264 $23,202
Income taxes paid $0 $0
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
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
30,1996 are not necessarily indicative of the results to be
expected for the entire year of 1996.
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.
NOTE 3 - PREFERRED STOCK
In the second quarter of 1996, the Company sold 5,000 shares of
Non-voting Convertible Preferred Stock with $100 par value to The
Southern Group. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
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 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.
The Company's history of operating losses has been attributable
in large part to the failure of NAIL to develop viable insurance
products or a stable field force of agents during the years
following the organization of NAIL in 1984. Following a
management change in 1991, NAIL has been engaged in efforts to
build a portfolio of accident and health and life insurance
products and to expand its field force of agents. Management's
efforts in this regard have been hampered by disruptive actions
by prior management during 1992, by NAIL's limited capacity to
incur the costs associated with building insurance sales, and by
the Company's limited management resources. The Company has
continued to incur losses in 1994, 1995 and the first half of
1996 primarily as a result of the low base of premium revenues of
the Company in relation to its operating costs. The Company also
experienced unexpected underwriting losses on NAIL's short-term
major medical policies and an acquired block of group
hospitalization and surgical insurance policies.
NAIL has implemented plans intended to reduce its losses,
including expanding and improving the quality of its field force
of agents, terminating NAIL's short-term major medical business
in 1995, modifying the basis of compensation of many of its
accident and health insurance agents, entering into a new
accident and health marketing partnership with Continental
General Life Insurance Company and planning for expansion of
NAIL's presence in states where it was previously not active,
including Texas. A key element of management's plan during 1995
was to recapitalize the Company either through the sale of its
Senior Convertible Debenture, or its authorized but unissued
common stock. (See "Liquidity and Capital Resources.") In
November 1995, the Company signed a "Letter of Intent" with The
Southern Group, a Maryland based financial holding company. On
January 15, 1996, a definitive stock purchase agreement was
signed with The Southern Group whereby the Company will sell
10,335,045 shares of authorized but unissued shares and treasury
stock to The Southern Group for certain specified assets,
including cash and securities, having an audited value at
December 31, 1995 of approximately $6.8 million. The Southern
Group will then own approximately 75% of the Company. The
Southern Group is currently in the process of completing the
regulatory requirements for this stock purchase.
On May 14, 1996, The Southern Group purchased 5,000 shares of
National Affiliated Corporation Class A Preferred Stock with a
par value of $100. This preferred stock will be converted into
common stock based on $.65 per share at the closing of the
already mentioned 10,335,045 share purchase. The converted
shares will be a part of the 10,335,045 shares. The $500,000
received by the Company was immediately contributed to National
Affiliated Investors Life.
On August 13, 1996, the Company approved the sale to The Southern
Group of 19,277 shares of National Affiliated Corporation Class A
Preferred Stock with a par value of $100.00. This preferred
stock will be converted into common stock based on $.65 per share
at the closing of the already mentioned 10,335,045 share
purchase. The converted shares will be a part of the 10,335,045
shares. The Board of Directors voted to contribute $1,486,888
from this sale to NAIL. See Liquidity and Capital Resources.
As of January 1, 1995 the Company established NAMC as its
marketing subsidiary and after recapitalization will transfer
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 which will replace
sales of the Company s short-term policies.
Results of Operations
1996 Compared to 1995
The Company had a net loss for the first half of 1996 of $810,154
compared to a loss of $649,600 for the six months ended June 30,
1995. The loss per common share was $.23 for 1996 and $.20 for
1995. Total revenues decreased to $1,350,236 in 1996 from
$1,555,897 in 1995. Premium revenues decreased to $1,003,555 in
1996 from $1,309,853 in 1995.
<TABLE>
Six months ended June 30,
<S> <C> <C>
1996 1995
Life premium $ 542,446 $ 577,679
Life reinsurance premiums (349,310) (18,078)
Accident & health premiums 912,790 809,466
A & H reinsurance premiums (102,371) (59,214)
Total premium revenues $1,003,555 $1,309,853
</TABLE>
The decline in life premiums is attributable to 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 when
the Board of Directors determined the projected dividend to be
excessive. This action caused the lapse rate of these policies
to increase substantially. Of the 762 premium paying FLA-100
policies in force at December 31, 1995, 123 lapsed in the first
six months of 1996 for a lapse rate of 16.1%, compared to a lapse
rate of 16.8% for the first six months of 1995. The Company
expects the FLA-100 policies to continue to lapse at a similar
rate in future years. Sales of other life products did not
increase as planned during 1995 as the Company focused more on
its recapitalization plan. When the Company did not continue to
stress recruiting in 1995, the sale of new life business
decreased. With the proposed sale of the Company stock to The
Southern Group, the Company plans to start an aggressive
recruiting program in the third quarter of 1996 and should
increase the life premium during the last half of 1996.
Effective December 31, 1995, NAIL and Maryland Southern Life
Insurance Company, (MSLIC), entered into a coinsurance agreement
whereby MSLIC assumed 80% of all the life insurance business
retained by NAIL. This resulted in a reserve transfer to MSLIC
in the amount of $1,866,475. MSLIC paid the Company a ceding
commission in the amount of $373,295 for a net decrease to
premium revenues of $1,493,180. MSLIC is a wholly owned
subsidiary of The Southern Group.
In November 1995, the Company became the insurer on two
association groups in New Mexico. The groups, which were self-
insured trusts, were told by the New Mexico Insurance Department
that they must be insured by a licensed insurer and that they
could not continue as self-insured. These two trusts, which are
group major medical plans., are expected to provide over one
million dollars of premium in 1996 for the Company.
Net investment income increased to $314,846 as of June 30, 1996
as compared to $205,050 at June 30, 1995. This is the result of
gain on sales of invested assets disposed of in completing
transfer of assets on MSLIC reinsurance.
The Company's claims and other benefits increased to $695,523 for
the first six months of 1996 from $558,039 for the first six
months of 1995. The composition of benefits and claims and
policyholder dividends for the six months ending June 30 are as
follows:
<TABLE>
Six months ended June 30,
<S> <C> <C>
1996 1995
Life benefits $ 23,770 $ 237,819
Policyholder
dividends 7,679 7,614
A & H benefits 671,753 320,220
Total benefits $ 703,202 $ 565,653
</TABLE>
Commission expense decreased to $154,769 for the first six months
of 1996 from $481,704 for the first six months of 1995,
primarily as a result of decreased sales of life policies. The
composition of commission expense was as follows:
<TABLE>
Six months ended June 30,
<S> <C> <C>
1996 1995
Life commissions $ 76,118 $ 200,194
Accident & health
commissions 78,651 281,510
Total $154,769 $ 481,704
</TABLE>
Other operating expenses increased to $691,842 for the first six
months in 1996 from $605,700 for the first six months in 1995.
Deferred policy acquisition costs increased to $237,697 for the
first six months of 1996 as compared to $123,641 for the first
six months of 1995. The lapse of FLA-100 policies is still
causing 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 in deferred acquisition
costs is allocated between life and health as follows:
<TABLE>
Six months ended June 30,
<S> <C> <C>
1996 1995
Life $ 146,763 $ 70,675
Accident and health 90,934 52,966
Total $ 237,697 $ 123,641
</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.
Management fees charged by NAC to NAIL are sufficient to fund
NAC's operating expenses. NAC does not have any material long
term debt or debt service requirements. NAIL has incurred
statutory losses in each of 1995 and 1994 and is expected to
continue to incur statutory losses in 1996.
Statutory losses by NAIL have had a substantial negative impact
on the amount of its surplus. Due to the decline of surplus and
continued operating losses, NAIL has been notified that its
license was suspended in the states of Alabama, Tennessee and
Wyoming. The Company has been working on a plan to recapitalize
the Company to alleviate this surplus problem and to give the
Company funds for expansion. In November 1995, the Company
entered a letter of intent with The Southern Group for the
purchase of authorized but unissued stock of the Company. In
January 1996, a definitive stock purchase agreement was signed
whereby The Southern Group will purchase 10,153,506 shares of
authorized but unissued common stock and 181,539 shares of
treasury stock for certain specified assets, including cash and
securities, having an audited value at December 31, 1995 of
approximately $6.8 million. This transaction is currently
pending regulatory approval. This transaction is expected to be
approved and completed in the third quarter of 1996.
In December 1995, NAIL and Maryland Southern Life Insurance
Company, a wholly owned subsidiary of The Southern Group, entered
into an 80-20 reinsurance contract with Maryland Southern Life
assuming 80% of all life insurance reserve liabilities held by
NAIL. With the payment of a $373,295 ceding commission to NAIL
by Maryland Southern Life in February 1996, the surplus of NAIL
was increased by $373,295.
On February 26, 1996, The Southern Group made an initial purchase
of 300,000 shares of NAC stock for cash and government securities
having a value of approximately $400,000. The Company Board of
Directors then approved a surplus contribution to NAIL of
$400,000 to increase its surplus.
On May 14, 1996, The Southern Group purchased 5,000 shares of
National Affiliated Corporation Class A Preferred Stock with a
par value of $100. This preferred stock will be converted into
common stock based on $.65 per share at the closing of the
already mentioned 10,335,045 share purchase. The converted
shares will be a part of the 10,335,045 shares. The $500,000
received by the Company was immediately contributed to National
Affiliated Investors Life. The statutory capital and surplus for
National Affiliated Investors Life at March 31, 1996 totaled
$1,761,884. Based on March 31, 1996 capital and surplus, the
$500,000 surplus contribution would bring the total capital and
surplus of NAIL to $2,261,884.
On August 13, 1996, the Company approved the sale to The Southern
Group of 19,277 shares of Class A Non-Voting Convertible
Preferred Stock with a par value of 100. This preferred stock
will be converted into common stock based on $.65 per share at
the closing of the already mentioned 10,335,045 share purchase.
The converted shares will be a part of the 10,335,045 shares.
The Company will receive mortgage loans and collaterized loans
totaling $1,927,700 as payment for the Preferred Stock. The
Board of Directors immediately voted to transfer the mortgage
loans and one collateral loan which total $1,486,888 to NAIL as a
surplus contribution. The statutory capital and surplus for
National Affiliated Investors Life at June 30, 1996 totaled
$1,907,198. Based on June 30, 1996 capital and surplus, the
$1,486,888 surplus contribution would bring the total capital and
surplus of NAIL to $3,394,086. The necessary legal documents to
complete this transaction are being prepared and are to be completed
in no more than ten business days.
Management is also taking steps to control administrative costs,
reduce policy claims and increase the Company premium revenues.
With the surplus increase due to the proposed sale of stock to
The Southern Group and with the new direction and leadership from
The Southern Group, the Company expects to see improvement in the
Company's operations by the end of 1996. Any failure of the
Company to complete the stock purchase transaction with The
Southern Group would have a material negative impact on the
Company's operations, and would likely result in regulatory
action by the Louisiana Insurance Commissioner to take over
supervision of NAIL, the loss of NAIL's licenses in most or all
jurisdictions in which it presently operates, and would possibly
require the Company to seek protection under United States
bankruptcy laws.
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, 1996 was computed as follows:
<TABLE>
<S> <C>
Shares outstanding, beginning of period 3,279,489
Shares issued, first quarter, 1996 118,461
Treasury shares reissued, first quarter, 1996 181,539
Shares issued, second quarter, 1996 0
Shares outstanding, end of period 3,579,489
</TABLE>
THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT
This Third Amendment ("Amendment") is to that
certain Stock Purchase Agreement ("Agreement") dated
January 15, 1996, and as amended as of February 26,
1996 and May 13, 1996, by and between National
Affiliated Corporation, a Louisiana corporation and
registered insurance holding corporation ("Seller" or
"NAC"), and The Southern Group, Inc. a Maryland
corporation ("Buyer").
WHEREAS, the parties entered into that certain
Amendment to Stock Purchase Agreement dated as February
26, 1996 whereby Buyer acquired approximately 9% of the
issued and outstanding capital shares of NAC, or
300,000 shares of NAC Common Stock (181,539 shares
issued and held by the Seller as treasury stock, and
118,461 shares of authorized but unissued shares), for
$400,000, which preliminary transaction was treated as
part of the acquisition of the NAC Shares contemplated
in the Agreement;
WHEREAS, the approval of the Louisiana Department
of Insurance and the Maryland Department of Insurance
of the acquisition of the NAC Shares as contemplated by
the Agreement has not been obtained by the parties;
WHEREAS, the parties entered into that certain
Second Amendment to the Stock Purchase Agreement
("Second Amendment") to evidence the acquisition of
5,000 shares of NAC non-voting preferred stock, having
a par value and liquidation preference of $100 per
share ("NAC Preferred Stock") by the Buyer in exchange
for the assets listed in such Second Amendment, which
assets had a stated value of $500,000;
WHEREAS, the parties desire to enter into this
Third Amendment to evidence the acquisition of nineteen
thousand two hundred seventy seven (19,277) additional
shares of NAC non-voting preferred stock, having a par
value and liquidation preference of $100 per share
("Additional NAC Preferred Stock") by the Buyer in
exchange for the assets listed on Exhibit "A"
("Additional Southern Group Assets");
WHEREAS, the parties desire for the acquisition of
the NAC Preferred Stock, Additional NAC Preferred
Stock and the NAC Shares, as described in the Second
Amendment, the Third Amendment and the Agreement, to
constitute a series of acquisitions all part of a
common plan of transfer of assets from Buyer to NAC in
a transaction that will qualify as a non-taxable
corporate reorganization under section 368 of the
Internal Revenue Code of 1986, as amended as soon as
the parties have received the approval of the Louisiana
Department of Insurance and the Maryland Department of
Insurance of the transaction;
WHEREAS, the parties wish to amend the Agreement
to provide for this preliminary acquisition of the
Additional NAC Preferred Stock and transfer of the
Southern Group Assets;
NOW THEREFORE, the parties hereby agree to modify
the terms of the Agreement as follows:
1. At a second preliminary Closing ("Second
Preliminary Preferred Closing") to be held within ten
business days, Seller shall grant, convey, assign,
transfer, and deliver to Buyer, and Buyer shall
purchase and acquire from Seller the Additional NAC
Preferred Stock, which Additional NAC Preferred Stock,
when added to the shares of NAC Preferred Stock
acquired by Buyer according to the Second Amendment,
shall represent 100% of the issued and outstanding
preferred stock of NAC. Accordingly, the Closing of
Buyer's purchase of the Additional NAC Preferred Shares
from Seller, as such event is described in Section 3 of
the Agreement, shall be modified to be comprised of
four separate transactions, (i) the Preliminary
Closing, (ii) the Preliminary Preferred Closing, (iii)
the Second Preliminary Preferred Closing and (iv) the
Closing, as described in the Agreement.
2. At the Second Preliminary Closing, Seller
shall deliver to Buyer certificates representing the
Additional NAC Preferred Stock, free and clear of all
liens and encumbrances, and Buyer shall grant, convey,
assign, transfer and deliver to Seller and Seller shall
purchase and acquire from Buyer the Southern Group
Assets free and clear of all liens and encumbrances.
The Southern Group Assets are represented by Buyer to
satisfy all of the representations and warranties
contained in the Agreement with respect to the
Transferred Assets.
3. At the Closing, the NAC Preferred Stock
(5,000 shares) and the Additional NAC Preferred Stock
(19,277shares) shall be converted into 3,713,103 shares
of NAC Common Stock ($2,427,798 divided by $0.65 per
share of NAC Common Stock) in accordance with the
conversion rights set out in the Preferred Stock
Designation for CLASS A PREFERRED STOCK -- SERIES ONE,
which was attached to the Second Amendement and for
CLASS A PREFERRED STOCK -- SERIES TWO, which is
attached hereto as Exhibit "B".
4. Sections 3.2 and 3.3 of the Agreement shall
be modified to reflect the transfers made at the
Preliminary Preferred Closing and the Second
Preliminary Preferred Closing, such that the NAC Shares
delivered by Seller to Buyer at Closing pursuant to
3.2(a) shall be offset by (i) the Preliminary NAC
Shares and (ii) the NAC Common Stock into which the
Preliminary NAC Preferred Shares were converted and the
Purchase Price delivered by Buyer to Seller at Closing
pursuant to 3.3(a) shall be reduced by (x) $400,000
with respect to the Preliminary Closing, (y) an
additional $500,000 with respect to the Preliminary
Preferred Closing and (z) an additional $1,927,798 with
respect to the Second Preliminary Preferred Closing.
5. If for any reason, the Closing does not take
place before December 31, 1996, the parties agree to
provide, each to the other, within 15 days of either
party's written request, the consents, certificates,
registration rights agreement, and other documents
required to be delivered by the parties to the other by
the terms of the Agreement, which documents shall
reflect only the transfer to Buyer of the Preliminary
NAC Shares, the Preliminary NAC Preferred Shares and
the Additional Preliminary NAC Preferred Shares.
6. Except as expressly amended hereby, the
Agreement, specifically including Sections 3.1, 3.2,
and 3.3, and all obligations, duties, rights and powers
created thereby or thereunder are in all respects
ratified and confirmed and remain in full force and
effect. Where any section, subsection or clause of the
Agreement is modified or deleted by this Amendment, any
unaltered provision of such section, subsection or
clause of the Agreement shall remain in full force and
effect. However, where any provision of this Amendment
conflicts or is inconsistent with the Agreement, the
provision of this Amendment shall control.
7. Terms used herein, which are not otherwise
defined or modified herein, but which are defined in
the Agreement, shall have the meanings therein ascribed
to them.
8. This Amendment (a) shall be binding upon and
inure to the benefit of the parties hereto and their
respective successors and assigns; (b) may be modified
or amended only in writing signed by each party hereto;
(c) may be executed by facsimile signatures and in
several counterparts, and by the parties hereto on
separate counterparts, and each counterpart, when so
executed and delivered, shall constitute an original
agreement, and all such separate counterparts shall
constitute one and the same agreement; and (d) embodies
the entire Amendment and understanding between the
parties with respect to the subject matter hereof and
supersedes all prior agreements relating to such
subject matter.
IN WITNESS WHEREOF, the parties have duly executed
this Agreement on this the 13th day of August, 1996.
SELLER:
NATIONAL AFFILIATED CORPORATION
By:______________________________
Name:___________________________
Its:______________________________
SUBSIDIARIES:
NATIONAL AFFILIATED INVESTORS LIFE INSURANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED MARKETING COMPANY
By:______________________________
Name:___________________________
Its:______________________________
AFFILIATED INVESTMENT MARKETING
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED FINANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
PRACTICAL LEASING UNLIMITED SYSTEMS
By:______________________________
Name:___________________________
Its:______________________________
BUYER:
THE SOUTHERN GROUP, INC.
By:______________________________
Name:___________________________
Its:______________________________
<PAGE>
EXHIBIT "A"
THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT
National Affiliated Corporation, as Seller and
The Southern Group, Inc., as Buyer
SOUTHERN GROUP ASSETS
$ 440,911 RRI Collateral Note secured by 31,908 shares of ProSoft
Development Inc.
440,911 Doug Hartman Collateral Note secured by 31,908 shares of
ProSoft Development Inc.
495,000 Mortgage Note on the Southern Portion of Pinon Ranch -
Appraised value $1,000,000
550,977 Mortgage Note on the Northern Portion of Pinon Ranch -
Appraised value $1,500,000
_________
$1,927,799
EXHIBIT "B"
THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT
National Affiliated Corporation, as Seller and
The Southern Group, Inc., as Buyer
DESIGNATION OF RIGHTS OF CLASS A PREFERRED STOCK
NATIONAL AFFILIATED CORPORATION
DESIGNATION OF RIGHTS
CLASS A PREFERRED STOCK -- SERIES TWO
(1) Number of Shares, Class, and Par Value. This designation of rights creates
Class A Preferred Stock -- Series Two, consisting of FIFTY THOUSAND
(50,000) shares having a $100.00 par value per share and an aggregate
value of FIVE MILLION DOLLARS ($5,000,000).
(2) Dividends
(a) The holders of the Class A Preferred Stock -- Series Two shall not be
entitled to dividends.
(b) The holders of Class A Preferred Stock -- Series Two shall be entitled
to receive, when and as declared by the Board of Directors of the
Corporation, out of the assets of the Corporation legally available
therefor, dividends equal to the amount of dividends that would be
payable on the shares of Common stock, into which toh shares of Class
A Preferred Stock -- Series Two are convertible at the date of
declaration of any dividends on the Common Stock, payable on the
respective dividend payment dates set forth above.
(c) For so long as any shares of Class A Preferred Stock -- Series Two are
outstanding, the Corporation shall not declare or pay any dividend on,
nor shall the Corporation make any distribution of assets to any holder
of Common Stock or other capital stock of the Corporation also ranking
junior to the Class A Preferred Stock -- Series Two as to dividends
unless all dividends on the Class A Preferred Stock -- Series Two for all
previous periods shall have been paid.
(3) Liquidation. In the event of the voluntary liquidation, dissolution or
winding up of the Corporation, the holders of Class A Preferred Stock -- Series
Two shall be entitled to receive, prior to any payment or distribution of the
assets of the Corporation to the holders of any class of stock of the
Corporation, the sum of ONE HUNDRED DOLLARS ($100.00) per share of Class A
Preferred Stock -- Series Two held by such holders. If, upon any such
liquidation, dissolution or winding up of the Corporation,
net assets are insufficient to permit the payment in full of the respective
amounts to which the holders of all outstanding Class A Preferred Stock --
Series Two are entitled, the entire remaining net assets of the Corporation
must be distributed among the holders of the Class A Preferred Stock -- Series
Two in amounts proportionate to the full amounts to which they are respectively
so entitled.
(4) Redemption. On January 1, 1997, the Redemption Commencement Date, and
from time to time thereafter, the Corporation shall have the unilateral right
to redeem all or any number of shares of Class A Preferred Stock -- Series Two
in accordance with the provisions of this section (4). The Corporation shall
pay to each holder of shares of Class A Preferred Stock -- Series Two the sum
of ONE HUNDRED DOLLARS ($100.00) per share; plus an amount equal to any accrued
and unpaid dividends thereon (accrued through the Redemption Date described
below) payable in kind, with such aggregate sum referred to as the Redemption
Price.
Any shares of the Class A Preferred Stock -- Series Two redeemed pursuant to
this section or otherwise acquired by the Corporation in any manner whatsoever
shall be permanently retired immediately on the acquisition thereof, and shall
not under any circumstances be reissued. The Corporation shall from time to
time take such appropriate action as may be necessary to reduce the authorized
number of shares of Class A Preferred Stock -- Series Two accordingly.
If fewer than all of the issued and outstanding shares of Class A Preferred
Stock -- Series Two are redeemed at any time, all shares of Class Preferred
Stock to be redeemed shall be selected pro rata, and there shall be so redeemed
from each registered holder in whole shares, as nearly as practicable to the
nearest share, the proportion of all of the shares to be redeemed which the
number of shares held of record by such holder bears to the total number of
shares of Class A Preferred Stock -- Series Two at the time outstanding.
Notice of redemption of Class A Preferred Stock -- Series Two specifying the
date (the "Redemption Date") and place of redemption and the number of shares
and the certificate number thereof which are to be redeemed, shall be mailed
to each holder of record of shares to be redeemed at its address as shown by
the records of the Corporation not more than sixty (60) nor less than then
ten (10) days prior to the date on which such redemption is to be made.
Notice of redemption having been so mailed and provision for payment of the
Redemption Price for such shares on the specified Redemption Date having been
made by the Corporation, then, unless default be made in the payment of the
Redemption Price for such shares when and as due, (i) the shares of Class A
Preferred Stock -- Series Two designated for redemption in such notice shall
not be entitled to any dividends accruing after the Redemption Date specified,
(ii) on such Redemption Date all rights of the respective holders of such
shares, as shareholders of the Corporation by reason of the ownership of such
shares, shall cease, except the right to receive the Redemption Price of such
shares upon presentation and surrender of the respective certificates
representing such shares, and (iii) such shares shall not after such
Redemption Date be deemed to be outstanding. In case less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
Except as set forth in this Section (4), the Corporation shall not purchase or
redeem shares of the Class A Preferred Stock -- Series Two at the time
outstanding unless all dividends on such stock for all past periods (accrued
through the Redemption Date) shall have been paid or declared and a sum
sufficient for the payment thereof set apart. If applicable law relating to
the sources of funds for the payment of accrued and unpaid dividends on any
shares of Class A Preferred Stock would prohibit the payment in full on a
Redemption Date of the Redemption Price for any shares of Class A Preferred
Stock -- Series Two, (i) such Redemption Price shall
be deemed reduced by the amount of accrued and unpaid dividends that the
Corporation is prohibited by law from payment, (ii) such shares shall otherwise
be redeemed in accordance with the requirements of this Section (4), and
(iii) such unpayable accrued and unpaid dividends shall be added in equal
amounts per share to the accrued and unpaid dividends on the shares of Class A
Preferred Stock -- Series Two remaining outstanding in the hands of such holder.
In no event shall the Corporation purchase or redeem the last share of Class A
Preferred Stock -- Series Two held by any holder unless the Corporation shall
have paid to such holder all accrued and unpaid dividends on all shares of
Class A Preferred Stock -- Series Two held by such holder at any time.
(5) Conversion. On the date of the closing of the acquisition of Common Stock
by The Southern Group, Inc., a Maryland corporation, as provided in that
certain Stock Purchase Agreement, dated as of January 15, 1996 and as amended
as of February 26, 1996, May 13, 1996 and August 15, 1996 ("Stock Purchase
Agreement") the shares of Class A Preferred Stock -- Series Two shall be
automatically converted without any further action, consent or approval into
shares of Common Stock using a conversion price of $0.65 per share of common
stock and an $100 per share of Class A Preferred Stock -- Series Two.
Accordingly, each share of Class A Preferred Stock -- Series
Two shall be convertible into one hundred fifty three and eighty five one
hundreds (153.85) shares of Common Stock.
(6) Voting. The holders of the Class A Preferred Stock -- Series Two shall
not be entitled to any voting rights on matters submitted to a vote of
shareholders of the Corporation, so long as any shares of the Class A Preferred
Stock -- Series Two shall be outstanding, except those rights provided by the
General Corporation Law of the State of Louisiana, and the following rights:
(a) The Corporation shall not, without the written consent of the holders of
two-thirds of the aggregate number of shares of the Class A Preferred Stock -
Series Two at the time outstanding;
(i) alter or change the powers, preferences or rights given to the
Class A Preferred Stock -- Series Two so as to affect the Class A Preferred
Stock -- Series Two adversely; or
(ii) authorize, create or increase the number of authorized shares of
any class of stock ranking, either as to payment of dividends or distribution
of assets upon liquidation of the Corporation, prior to or on parity with the
Class A Preferred Stock -- Series Two.
(b) The Corporation shall not, without the prior written consent of the
holders of a majority of the aggregate number of shares of the Class A
Preferred Stock -- Series Two at the time outstanding, increase the authorized
amount of the Class A Preferred Stock -- Series Two or authorize or create any
class of stock ranking, either as to payment of dividends or distribution of
assets, prior to or on parity with the Class A Preferred Stock -- Series Two.
(c) Each outstanding share of Preferred Stock shall entitle the holder thereof
to notice of, and the right to vote at, any meeting of stockholders at which
any director is to be elected by the preferred stockholders, or at which any
provision of the Corporation's certificate of incorporation or any of the
Corporation's bylaws is to be adopted, repealed, or amended or at which a
merger, consolidation, reorganization, dissolution, liquidation, winding up or
sale of all or substantially all of the corporation's assets is to be or is
voted upon.
(d) The holders of the Class A Preferred Stock -- Series Two shall be
entitled to elect one (1) director.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 1,848,118
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 251,250
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,415,136
<CASH> 99,972
<RECOVER-REINSURE> 183,513
<DEFERRED-ACQUISITION> 184,265
<TOTAL-ASSETS> 7,309,067
<POLICY-LOSSES> 1,254,687
<UNEARNED-PREMIUMS> 21,037
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 528,758
<NOTES-PAYABLE> 0
0
500,000
<COMMON> 5,923,901
<OTHER-SE> (4,013,088)
<TOTAL-LIABILITY-AND-EQUITY> 7,309,067
1,003,555
<INVESTMENT-INCOME> 314,846
<INVESTMENT-GAINS> 73,961
<OTHER-INCOME> 31,835
<BENEFITS> 662,873
<UNDERWRITING-AMORTIZATION> 237,697
<UNDERWRITING-OTHER> 1,259,819
<INCOME-PRETAX> (810,154)
<INCOME-TAX> 0
<INCOME-CONTINUING> (810,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (810,154)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
<RESERVE-OPEN> 781,256
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 587,770
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
