UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-13538
NATIONAL AFFILIATED CORPORATION
(Name of Small Business Issuer in its charter)
Louisiana 72-0947819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 Lee Street, Suite A, P.O. Box 12190,Alexandria, LA 71315
(address of principal executive office)
Issuer's telephone number, including area code (318) 473-4355
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (No Par Value)
(Title of class)
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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
Issuer's revenues for its most recent fiscal year $1,276,307
Aggregate market value of the Common Stock held by non-affiliates
of the Registrant on December 31, 1995: $891,470.
VOTING COMMON SHARES
3,579,489 shares of Registrant's Common Stock were outstanding as
of March 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None.<PAGE>
PART I
Item 1: Business
National Affiliated Corporation (hereinafter variously
referred to as "NAC", the "Company", or "Registrant") is
a Louisiana Corporation incorporated on August 4, 1982.
Registrant conducts its business through two wholly-owned
subsidiaries: National Affiliated Investors Life
Insurance Company and National Affiliated Marketing
Company (formerly Affiliated Investment Marketing, Inc).
Business segment information is provided in Note 11 to
the Registrant's consolidated financial statements.
INSURANCE OPERATIONS
National Affiliated Investors Life Insurance Company
National Affiliated Investors Life Insurance Company
("NAIL"), incorporated in Louisiana on March 4, 1983,
underwrites a portfolio of life insurance and accident
and health insurance products focused on selected niche
markets. NAIL is admitted for part or all of its
insurance products in seventeen states and the District
of Columbia, including Alabama, Florida, Indiana,
Louisiana, Maryland, New Mexico, Oklahoma, South
Carolina, Tennessee and Texas. NAIL's products are
marketed primarily to individuals and groups located in
exurban and rural areas through NAC's marketing
subsidiary, National Affiliated Marketing Company
("NAMC") and a contracted field force of more than 650
independent agents. At December 31, 1995 NAIL had
approximately $145 million of life insurance in force and
collected approximately $1.4 million in accident and
health insurance premiums.
NAIL's offices are located at 1500 Lee Street,
Alexandria, Louisiana 71301.
From 1984 to 1991, NAIL was financed through two public
offerings of Common Stock and by the sale of FLA-100
"founders" participating whole life policies by NAIL.
NAIL failed to develop a stable field force of agents or
sustainable insurance products, instead relying on
premiums from the FLA-100 policies to fund operations.
In 1991 the Board of Directors replaced management.
Since that time NAIL has sought to develop a portfolio of
viable life and accident and health insurance products
and an agent network capable of distributing NAIL's
products.
Products
NAIL has developed a portfolio of life and health
products since 1991 that are well suited to NAIL's target
market of middle income families, senior citizens and
government employees.
Life Products
NAIL's life insurance products are sold under the name
"StarFlex" and can be divided into four subgroups of
policies: Universal life and interest sensitive whole
life; term life; adjustable premium whole life; and an
annuity product. NAIL marketed FLA-100 "founders"
participating life policies prior to July 1988. NAIL is
presently engaged in a program intended to expand the
number of life agents and sales by encouraging NAIL's
health agents to begin selling life products.
Universal Life and Interest Sensitive Whole Life
StarFlex I - Individual universal life
StarFlex II - Joint universal life
StarFlex IV - Individual interest sensitive whole life
StarFlex V - Joint interest sensitive whole life
StarFlex VI - Senior interest sensitive whole life
StarFlex VIII - Executive interest sensitive whole life
StarFlex XIII - IRA alternative
StarFlex I & II are marketed primarily to government
employees and to families in rural areas to assist with
accelerated mortgage payoffs. StarFlex IV, V and VIII
are offered to middle income families as supplemental
retirement coverage. StarFlex XIII is also a
supplemental retirement alternative and provides for a 1%
"bonus" increase in the interest rates in the 10th and
20th year. StarFlex VI is coupled with NAIL's "TLC"
(Total Life Care) final expense policy and offered to the
senior market to fill final expense needs of individuals
over 50 years of age.
The universal life and interest sensitive policies were
until December 1994 sold through a joint marketing
program with Commonwealth Life, a subsidiary of Providian
Corporation (formerly Capital Holding) in which NAIL
coinsured 80% of the insurance sold. After December 31,
1994, NAIL issued these policies for its own account.
Term Life
StarFlex XIV - Ten year level term (renewable and
convertible)
This policy is offered as a traditional life insurance
product to middle income families.
Adjustable Premium Whole Life
StarFlex XV - Adjustable premium whole life
This policy is offered with the StarFlex XIV policy as a
traditional life insurance product to middle income
families.
Annuities
StarFlex XI - Flexible premium deferred annuity
This product is offered to the IRA market and provides
for payment of a 1% "bonus" on accumulated cash balances
after completion of the 10th and 20th years.
Other
In addition to offering these policies, NAIL in 1992
purchased a block of whole life policies from Companion
Life and anticipates that as funds are available
additional blocks of life policies may be purchased.
Health Products
NAIL offers two primary health products - a group
hospitalization and surgical care policy (GHSC) and an
alternative benefit option policy (ABO).
Group Hospitalization and Surgical Care and Limited
Benefit Policies
These are limited benefit policies offered to individuals
who join one of two consumer groups for purposes of
obtaining this coverage. The basic policies provide
limited benefits covering hospitalization and surgical
care only, but may be expanded to include limited
outpatient coverage and other benefits. These policies
are marketed to individuals and small business employees
in rural and exurban areas who frequently do not have
access to group coverage through an employer.
NAIL purchased a block of limited benefit
hospitalization/surgical care policies from another
insurer in 1994, which produced unexpected loss rates.
NAIL has taken action to increase premiums and enhance
underwriting standards to limit losses under these
policies.
Alternative Benefit Option
This is a limited benefit policy offered by employers on
a voluntary basis to individuals already covered by a
general group policy. Policyholders can choose any or
all of a group of twelve individual coverages to fill
specific needs. The available coverages include hospital
indemnity, first occurrence, intensive care and
outpatient coverages, which are effective to pay
deductibles and initial copayment requirements under the
base policy. Options to provide supplemental benefits in
the event of cancer, heart disease or stroke or other
specified serious illnesses are available as are
supplemental payments upon accidental death and upon
disability. These coverages generally provide specified
amounts of supplemental income in addition to any other
coverages and assist the policyholder with copayment and
uncovered charges associated with the specified
conditions.
Marketing and Distribution
At the end of 1995 NAIL had approximately 650 licensed
and contracted agents. The majority of these agents
(approximately 400) are writing health products and have
been contracted through one of six managing general
agents with whom NAIL has relationships. Of NAIL's
approximately 250 life agents, approximately 45 are
personal producing general agents and general agents and
the remainder are subagents working through them.
Management has initiated a program to encourage health
agents to commence life sales in 1996 and has been
holding seminars to expose the life products available
from NAIL. Management believes that health agents
dealing with families have a natural market for NAIL's
life products.
In addition, NAIL is conducting recruiting seminars to
attract life and accident and health agents. The
targeted agents come from rural areas, cities of less
than 250,000 people, and market to middle income
families.
The Company is transferring its agent activities from
NAIL to the marketing subsidiary, National Affiliated
Marketing Company ( NAMC ). NAMC has entered into a
joint marketing agreement with Continental General Life
Insurance Company which allows NAIL s agents to sell
short-term major medical and other health policies issued
by Continental in addition to NAIL s two health products.
Management believes that replacing the short-term major
medical policies issued by NAIL with these policies will
help in attracting and retaining health agents and will
provide additional commission income to the Company,
while allowing NAIL to avoid the underwriting risk
associated with these policies.
NAIL intends to build to a 1,000 person field force and
then maintain the field force at that size by attracting
additional qualified agents and purging those agents who
are not productive. Management believes that building
the field force in this manner will increase the loyalty
of the agents and improve the renewal commissions of
policies sold by them.
Investments
The investments of NAIL are limited as to type and amount
by Louisiana insurance laws, which are designed to
protect against imprudent investment policies. The
investment of capital, paid-in-capital, operating surplus
and other funds of insurers organized under the laws of
Louisiana is specified by R.S. 22:841 et seq. This
statute includes general and specific limitations on
investments, records of investments and other matters.
The Louisiana insurance law regulating investments and
other aspects of the management of insurance companies is
designed primarily for the protection of policyholders
rather than investors.
<PAGE>
NAIL's investments at year end at market value for each
of the last two fiscal years were allocated as follows:
<TABLE>
Year Ended December 31,
<S> <C> <C> <C> <C>
Type of Investment 1995 % 1994 %
Bonds:
U.S. Government $3,006,781 60.0 $3,493,275 58.6
Political subdivisions 125,862 2.5 126,500 2.1
Public utility 111,000 2.2 288,000 4.9
Corporate 877,481 17.5 828,964 13.9
Less restricted bonds (565,162) (557,200)
Net fixed maturities 3,555,962 4,179,539
Common stocks 1,250 0 1,250 0
Investment in and
advances to Travel
Network Telephone 0 0 1,254 0
Net Equity Securities 1,250 2,504
Other long-term investments 173,673 3.5 190,052 3.2
Certificates of deposit and
time deposits 714,851 14.3 1,030,763 17.3
Less: restricted CDs (475,000) (575,000)
Net CDs & time deposits 239,851 455,763
Subtotal 3,970,736 4,827,858
Restricted assets 1,040,162 1,132,200
Total $5,010,898 100.0% $5,960,058 100.0%
</TABLE>
The administration of NAIL's investment portfolio is managed by
Legg Mason Capital Management, Inc.
The Louisiana Insurance Code allows an insurance company a lesser premium
tax if at least one third of its investments are qualifying Louisiana
investments. It has been the policy of NAIL when possible to invest its
assets in a percentage in excess of the Louisiana requirement both for
purposes of incurring the lower premium tax and returning NAIL's appreciation
for the support given to it by NAIL's shareholders and policyholders, a
majority of whom are Louisiana residents.
Reinsurance
As is customary among insurance companies, NAIL reinsures with other
companies portions of the insurance risks it underwrites. The primary purpose
of reinsurance is to enable an insurance company to reduce the amount of its
risk on any particular policy and to write policies in amounts larger than it
could without such agreements.
The two principal types of life reinsurance treaties commonly in use in the
industry are the yearly renewable term ("YRT") agreement and the coinsurance
agreement (both are explained below) which offer acceptance of risk on an
"automatic" or "facultative" basis. Under an "automatic" treaty, the reinsurer
agrees that it will assume liability automatically for the excess over NAIL's
retention limits on any application acceptable to NAIL up to the amount
specified in the reinsurance treaty. Applications in excess of that amount
would be ceded on a facultative basis. Under a "facultative" treaty, the
reinsurer retains the right to accept or reject any reinsurance submitted
after a survey of each individual application.
A YRT agreement applies a set premium for each $1,000 of risk assumed. This
premium changes each year as the age of the insured changes. This contract is
bought by NAIL from another insurance company. Coinsurance, on the other
hand, pays the reinsurer the same premium rate charged by the issuing
insurance company for each $1,000 of risk assumed and provides for a
percentage of said premium rate to be returned to the issuing insurance
company as commissions. Coinsurance allows insurance companies to
effectively share risk, premiums and statutory reserves.
The effect of reinsurance is to transfer a portion of the risk, as well as a
portion
of the profit, if any, on the insurance ceded to the reinsurer. Even though a
portion of the risk may be reinsured, NAIL will remain liable to perform all
obligations imposed by the policies issued by it and is liable if its reinsurer
should be unable to meet its obligations under the reinsurance agreements.
NAIL's maximum net retention on any one life is $50,000. Health insurance
benefits in excess of $25,000 (other than alternate benefit option policies, for
which the limit is $50,000) for any one individual during any contract year are
reinsured. NAIL reinsures all accidental death benefit risks written.
As of December 31, 1995, approximately $44,450,000 in face amount of life
insurance and $26,562,000 of accidental death benefits were reinsured by NAIL.
The principal reinsurers utilized by NAIL are Optimum Re, Business Men's
Assurance, Cigna Re, Continental Assurance, Employer's Reassurance, Frankona
American Life and Phoenix Home Life. Each of these companies carries a
Best s rating of A or better, except for Optimum Re, which is rated A-.
Management believes that the financial condition of each of these companies is
more than adequate to carry the amounts of reinsurance ceded to them.
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.
NAC has not assumed any liability for the primary and reinsurance activities
of its subsidiary companies.
Reserves
NAIL has established actuarially computed reserves to meet its anticipated
obligations on the policies it has written. These reserves are based on
industry standard interest rates, mortality and withdrawal assumptions, with
provision for possible adverse deviation. The liability for policy benefits
related to cash values of interest-sensitive and annuity products is
accumulated based on credited rates of interest which are subject to periodic
adjustment. The reserves reported in statutory filings are valued on a basis
that meets the requirements of Louisiana law.
Regulation
Insurance company regulation is primarily for the benefit and protection of
insurance policyholders rather than shareholders of insurance companies. NAIL
is subject to regulation and supervision by the insurance department of each
state or other jurisdiction in which it is licensed to do business. These
supervisory agencies have broad administrative powers relating to the granting
and revocation of licenses to transact business, the licensing of agents, the
approval of policy forms, premium levels, the form and content of mandatory
financial statements, capital, surplus, reserve requirements and the types of
investments which may be made. NAIL is required to file detailed reports with
each supervisory agency, and its books and records are subject to examination
by each. In accordance with the insurance codes in the states in which it
operates and the rules and practices of the National Association of Insurance
Commissioners, NAIL is examined periodically by examiners from the
Louisiana Insurance Department and by representatives (on an "association" or
"zone" basis) of the other states in which it is licensed to do business. NAIL
has been examined through the end of 1994.
Material transactions between registered insurance companies and members of
the holding company system are required to be "fair and reasonable" and in
some cases are subject to administrative approval. The books, accounts and
records of each party are required to be maintained so as to clearly and
accurately disclose the precise nature and details of the transaction. Notice
to or approval by regulatory authorities is frequently required for dividends
paid by insurance companies, and their surplus following any dividend is
required to be reasonable in relation to outstanding liabilities and adequate
for financial
needs. Broad examination and enforcement powers are conferred on regulatory
authorities. NAIL has registered as a member of an insurance holding company
system with the Louisiana Commissioner of Insurance. Management is pursuing
a number of strategies to reduce the possibility of regulatory action. See
"Management Discussion and Analysis - Liquidity and Capital Resources."
Competition
The life and health insurance industry remains highly competitive. Many of the
larger competitors offer a broader line of insurance policies, including
variable
products, have larger distribution organizations and are highly capitalized. For
NAIL to compete in the industry, the Company has had to target certain niche
markets in which management feels it can distribute and service in a profitable
manner. The pricing of the products offered in these niche markets is
competitive with other companies also marketing in the targeted markets.
Life insurance companies are not the only competition that NAIL must contend
with for market share. Security brokerage operations and banks are now
entering into the industry. Competition from these financial institutions and
other insurance companies is strong. The rates of return offered on interest
sensitive products are subject to a 4% minimum per year, with excess interest
accrued according to a quarterly determined rate based on the Salomon Brothers
Index of the estimated yield on new-issue long-term AAA rated industrial
bonds. NAIL may change this rate formula after July 1, 1996.
NAIL must compete with other insurers to obtain agents to sell NAIL's
products. NAIL had been limited in its ability to contract qualified agents by
ineffective efforts to develop a viable portfolio of insurance products during
the period from 1986 to 1991. While management believes that NAIL has benefited
in the last two years, and will continue to benefit, from trends in the industry
which include a decreasing focus by larger insurers on the markets targeted by
NAIL, NAIL will continue to face stiff competition from other insurers in these
markets. During 1994, NAIL shifted its focus on agent recruitment to the
development of relationships with a smaller number of managing general agents,
who bring access to larger numbers of subagents.
Litigation
NAIL is from time to time involved in pursuing and defending claims made by
beneficiaries of its insurance policies and disputes with its agents. While
NAIL reinsures coverage risks as described elsewhere herein, NAIL retains the
risk of any other damages, including punitive damages, that might be assessed
from the failure of NAIL to pay a disputed claim. The legal climate existing
today has encouraged claimants to pursue punitive damage claims, and the
exposure of defendants, including NAIL, to such claims introduces substantial
and unpredictable elements of risk into their business. NAIL has pending
against it several claims for denial of benefits which also request
unspecified punitive damages. Were any of such claims to succeed, NAIL s
operations could be impaired or the resulting loss of capital and surplus
could lead to regulatory action. NAIL believes it has valid defenses to all
pending claims and is vigorously contesting them.
Employees and Agents
At December 31, 1995, NAC and its subsidiaries had sixteen (16) permanent
employees, of whom one (1) is located in a remote marketing office.
Insurance policies are sold by approximately 650 licensed agents. The agents
are independent contractors and are compensated on a commission basis. The
commissions paid, along with a sales incentive bonus, are believed by
management to be competitive with other life insurance companies. NAIL faces
considerable competition in recruiting qualified agents. As a result, NAIL
seeks to recruit agents from its targeted geographic markets and retrain them to
sell its products effectively in its niche markets.
OTHER OPERATIONS
National Affiliated Finance Company
Until July 1, 1994, National Affiliated Finance Company, Inc. ("NAFCO") was
engaged in premium finance lending. As of July 1, 1994, NAFCO discontinued
accepting new applications for financing. Information with respect to
NAFCO's finance notes receivable is contained in Note 4 to the attached
consolidated financial statements.
National Affiliated Marketing Company and Travel Network Telephone
National Affiliated Marketing Company (formerly Affiliated Investment
Marketing) was a corporate general partner of Travel Network Telephone, a
partnership in commendam ("TNT"), organized under the laws of the State of
Louisiana in 1983. It is owned 35% by NAMC, managing partner, and 65% by
17 individuals and businesses. TNT was formed to apply for and obtain licenses
for purposes of operating cellular telephone systems. TNT was awarded the
licenses, or ownership interests in the licenses, for the market areas of
Shreveport and Monroe, Louisiana; Modesto, California; and Lincoln, Nebraska.
In order to obtain financing and managerial expertise for the Monroe market,
the Monroe license was transferred in 1990 to a limited partnership in which
TNT owns a 20% limited partnership interest. The 80% general partner of this
partnership is an affiliate of McCaw Cellular. In November 1994, TNT sold
the 20% ownership interest in Monroe Cellular. After retaining a small sum for
closing costs, all proceeds were distributed to partners and proceedings were
begun to dissolve the partnership. The partnership was dissolved in September
1995.
Item 2: Properties
NAC and all of its subsidiaries lease office space from W. Ray Frye, a deceased
director of the Registrant. The two-year lease is for 9,182 square feet at an
annual rental rate of $67,947 and expired in July, 1995. Currently the Company
is on a month to month lease at a rate of $4,750 per month. Management
believes that such rental is comparable to rentals on other similar property
available from unrelated parties.
Item 3: Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which the Registrant or any of its
subsidiaries is a party or of which any of their property is the subject.
Item 4: Submission of Matters to a Vote of Security Holders
None
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is traded in the over-the-counter
market. In March 1995, the Company started the proceedings necessary
to have NAC stock listed on the NASDAQ Exchange.
<TABLE>
High Bid Low Bid
1995
<S> <C> <C>
First Quarter .125 .125
Second Quarter .125 .03125
Third Quarter .125 .0625
Fourth Quarter .500 .0625
1994
First Quarter .250 .0625
Second Quarter .250 .0625
Third Quarter .125 .125
Fourth Quarter .125 .125
</TABLE>
This information was obtained from the National Quotation Bureau. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
(b) Holders
As of March 25, 1996, there were 14,000,000 authorized and 3,579,489
outstanding shares of Registrant's Common Stock, no par value, held of
record by 3,568 persons.
(c) Dividends
Registrant has not paid any cash dividends to date.
Item 6: 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 a group
major medical policy, 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 coverage. (See
Business - Products for a more detailed description of the Company s
insurance products.)
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 and 1995 primarily as a result of the low base of
premium revenues 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.
As of January 1, 1995 the Company established NAMC as its marketing
subsidiary and after recapitalization will transfer agent relationship and
marketing 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 the Company s short-term policies.
Results of Operations
1995 Compared to 1994
The Company had a net loss for 1995 of $1,555,451 compared to a loss of
$419,983 for 1994. The loss per common share was $.47 for 1995 and $.13 for
1994. Total revenues decreased from $5,026,937 in 1994 to $1,276,307 in 1995.
Premium revenues decreased to $860,838 in 1995 from $3,640,191 in 1994.
<TABLE>
Year Ended December 31,
<S> <C> <C>
1995 1994
Life premiums
FLA-100 $ 564,896 $ 814,366
All other life 1,106,896 738,063
Subtotal life 1,671,765 1,552,429
Reinsurance premium (273,819) (356,340)
Coinsurance premium MSLIC (1,866,475) 0
Total life (468,529) 1,196,089
Accident and health premiums
Group hospital & surgical 297,747 401,540
Alternative benefit 306,544 348,967
Short-term major medical 213,631 1,167,170
Other 624,503 778,825
Subtotal A&H 1,442,425 2,696,502
Reinsurance premium (113,058) (252,400)
Total A&H 1,329,367 2,444,102
Total premium revenues $ 860,838 $3,640,191
</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 1,116 premium paying FLA-100 policies in force
at December 31, 1994, 354 lapsed in 1995 for a lapse rate of 31.7%, compared to
a lapse rate of 32.4% for 1994. 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 second quarter of 1996 and should increase
the life premium during the last half of 1996.
Commencing in July of 1989, the Company entered into 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 its 80% of existing business and the Company will take 100% of its
new business.
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.
Accident and health premiums decreased in 1995 due to the Company exiting
the short-term major medical market. 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 decreased to $366,431 in 1995 as compared to $1,214,347
in 1994. This is the result of lower interest rates and the lower level of
invested assets caused by the Company's losses and payment of cash values to
holders of lapsed FLA-100 policies. In 1994 the Company sold its interest in a
cellular telephone business which increased the investment income by
approximately $800,000.
Finance company interest and fees decreased to $1,360 in 1995 compared to
$62,333 in 1994, primarily as the result of the Company's decision to
discontinue the finance company's operations in 1994.
The Company's claims and other benefits decreased from $2,030,843 in 1994 to
$1,376,242 in 1995. This is the result of a large decrease in accident and
health claims. The Company had made the decision to cease writing the
short-term major medical business no later than March 31, 1995. A number of
changes were 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 years ending December 31 are as follows:
<TABLE>
1995 1994
<S> <C> <C>
Life benefits $ 500,300 $ 388,112
Policyholder dividends 13,347 26,114
A & H benefits 875,942 1,642,731
Total benefits $1,389,589 $2,056,957
</TABLE>
Commission expense decreased from $1,210,647 in 1994 to $727,366 in 1995,
primarily as a result of decreased sales of new accident and health policies.
The composition of commission expense was as follows:
<TABLE>
1995 1994
<S> <C> <C>
Life commissions $ 338,034 $ 241,012
Accident & health commissions 389,332 964,915
Other 0 4,720
Total $ 727,366 $1,210,647
</TABLE>
Other operating expenses decreased from $1,665,842 in 1994 to $1,342,106 in
1995. In 1994 a number of new insurance products were developed. The
Company did not have these expenses in 1995. This decrease, plus cost saving
measures introduced, resulted in lower operating expenses.
Amortization of deferred policy acquisition costs increased from $263,799 in
1994 to $797,752 in 1995. Due to the reinsurance contract with Maryland
Southern Life, the Company was required to write off 80% of the deferred
acquisition costs on the business which was 80% reinsured. This amounted to
a write off of $748,986. The amortization of deferred acquisition costs is
allocated between life and health as follows:
<TABLE>
1995 1994
<S> <C> <C>
Life $777,662 $418,930
Accident and health 20,090 ( 155,131)
Total $797,752 $263,799
</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 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 second quarter of 1996.
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. 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.
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.
Item 7: Financial Statements and Supplementary Data
Attached following the Signature Pages and Exhibits.
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9: Executive Officers and Directors of the Registrant
Name Age Position
Benjamin P. Wall
(1),(2),(3),(4),(5) 52 Chairman of the Board and Chief
Executive Officer
Edward A. Carroll, Jr. 60 President
Jerry L. Johnston 54 Vice President and Chief Financial
Officer
Clayton A. Carney 56 Vice President and Chief Operating
Officer
Mary K. Descant 37 Treasurer
Sharon G. Chelette 44 Secretary
John I. Boxberger
(2) 68 Director
Lynn Parks Clayton 55 Director
(3),(4)
Robert F. Meredith, III
(1),(2),(4) 44 Director
G. Vaughn Walton
(1),(2),(3),(4) 47 Director
Bobby Williams
(1),(3),(4),(5) 66 Director
Dan Van Wormer
(1),(3) 53 Vice Chairman and Director
(1) Member of Executive Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
(4) Member of Audit Committee
(5) Member of Investment Committee
Benjamin P. Wall. Mr. Wall joined the Board of Directors of the Company in
May 1990 and has served as Chairman of the Board and Chief Executive Officer
since June 1991. Mr. Wall also serves as Chairman of the Board of NAIL and
NAMC. Mr. Wall is also President of Paul Wall Farm Service Center, Inc.,
President of Cenla Computers, Inc., Vice President of Mid-State Elevator, Inc.,
and Vice President of Paul Wall Truck Line, Inc., and is a former board
member of Louisiana Agriculture Industries Association. Mr. Wall studied
Agri-Business at Louisiana State University.
Edward A. Carroll, Jr. Mr. Carroll was elected as President of the Company in
August 1993. Mr. Carroll joined the Company in 1989 as Vice President and
Chief Marketing Officer of NAIL. In 1990, Mr. Carroll was elected to the
Board of Directors of NAIL. In June 1991, Mr. Carroll was elected President,
Chief Executive Officer and Chief Marketing Officer of NAIL and in January
1995, became the President and Chief Executive Officer and a director of
NAMC. Mr. Carroll's insurance career spans over thirty years and has included
a number of executive positions with larger insurance companies. Prior to
coming to the Company, Mr. Carroll served as Senior Vice President, Chief
Marketing Officer and member of the Board of Directors of State Reserve Life
Insurance Company, a Fort Worth, Texas based life insurance carrier. Mr.
Carroll is a Fellow of the LIMRA Life Insurance Institute, and holds a BSBA
from Alabama Polytechnic Institute. Mr. Carroll is a member of the
Practitioner Division of the International Association For Financial Planning.
Jerry L. Johnston. Mr. Johnston joined the Company as Vice President and
Chief Financial Officer in June 1994. Mr. Johnston also serves as Vice
President and CFO of NAIL and, beginning January 1995, of NAMC. From March 1994
to June 1994, Mr. Johnston served as a contract examiner for the Arizona
Department of Insurance. Mr. Johnston served as Senior Vice-President and
Controller of United Companies Life Insurance Co. from September 1988 to
December 1993. Mr. Johnston has over thirty years experience in the insurance
industry, serving over twenty-four years in various executive financial
positions, and holds a B.S. degree from the University of Nebraska.
Clayton A. Carney. Mr. Carney joined the Company in October 1993 as Vice
President and Chief Operating Officer. Mr. Carney also serves as Vice
President and Chief Operating Officer of NAIL and in January 1995, became
Vice President of NAMC. From 1980 to September 1993, Mr. Carney was
employed by United Companies Life Insurance Co., serving as Vice President
and Chief Underwriter. From 1962 to 1979, Mr. Carney was employed by
Continental Service Life Insurance Co. in various capacities, including
Assistant Vice President and Chief Underwriter. Mr. Carney attended Louisiana
State University and also received Fellowship Diplomas from the Life Management
Institute and from the International Claims Association, each located in
Atlanta, Georgia.
Mary K. Descant. Mrs. Descant joined the Company as an Accounting
Supervisor in January 1986 and became Treasurer in August 1994. Mrs. Descant
also serves as a Treasurer of NAIL and NAMC. From June 1982 until October
1985, Mrs. Descant was a computer programmer with Delta Computers. From
June 1980 until January 1982, Mrs. Descant served as a software engineer with
E Systems, Inc. Mrs. Descant holds a B.S. degree from Louisiana Tech
University.
Sharon G. Chelette. Mrs. Chelette joined the Company in October 1983. She
has served as Director of Human Resources since July 1993 and Secretary of the
Company since August 1994. Mrs. Chelette also serves as Secretary of NAIL
and NAMC. Prior to joining the Company, Mrs. Chelette served as a teller,
cashier or bookkeeper for several Louisiana businesses. Mrs. Chelette attended
Louisiana Tech University.
John I. Boxberger. Mr. Boxberger joined the Board of Directors in November
1982. Mr. Boxberger is also a director of the Poudre Valley Rural Electric
Association, Inc. of Fort Collins, Colorado and has served as a director of
Western United Electric Supply Corporation of Denver, Colorado.
Lynn Parks Clayton. Mr. Clayton joined the Board of Directors of the
Company in October 1992, and also serves as a director of NAIL. Mr. Clayton
is the Editor of the Louisiana Baptist Message. Prior to joining the Baptist
Message in 1978, Mr. Clayton served as Editor of the Baptist Digest and
Director of Evangelism of the Kansas-Nebraska Convention of Southern Baptists
for six years. Mr. Clayton also served as Pastor of University Baptist Church
of Wichita, Kansas and Youth and College Minister at First Baptist Church of
Waco, Texas. Mr. Clayton has served as a member of the National Boards and
Committees, Southern Baptist Convention and the Kansas-Nebraska Convention
of Southern Baptists and is a member of the Southern Baptist Press Association,
which has honored him with numerous awards. Mr. Clayton is the writer and
producer of "On Second Thought" which appears on the American Christian
Television System and is the author of numerous books and articles. Mr.
Clayton is the recipient of the 1991 Louisiana Moral and Civic Foundation J.
D. Grey Award for Moral and Ethical Preaching. Mr. Clayton earned a
Bachelor of Arts degree from Baylor University and a Master of Divinity degree
from Southwestern Baptist Theological Seminary.
Robert F. Meredith, III. Mr. Meredith joined the Board of Directors of the
Company and NAIL in June 1994, and the Board of Directors of NAMC in
January 1995. Mr. Meredith also serves as a director of the Louisiana
Independent Oil & Gas Association, the Louisiana Association of Business &
Industry, and Caldwell Bank & Trust Company. Mr. Meredith is the co-owner
of Hogan Exploration, Inc. and Hogan Energy Corporation which operates in
Louisiana and Mississippi. Mr. Meredith holds a B.S. from Louisiana State
University.
G. Vaughn Walton. Mr. Walton joined the Board of Directors in March 1993
and also serves as a director of NAIL and NAMC. Mr. Walton is the owner
of Royal Investment Company, Inc. and co-owner of The Oil Exchange in
Alexandria, Louisiana. Mr. Walton holds a B.S. from Louisiana Tech
University.
Bobby Williams. Mr. Williams joined the Board of Directors in May 1986 and
also serves as a director of NAIL. Mr. Williams is the President of Williams
Brothers Furniture & Appliance Center in Many, Louisiana; President of Bob
Ray Williams Enterprises, a real estate investment firm; management partner of
Bobby & Ray Williams Partnership, a real estate and timber firm; former
President of the Sabine Parish School Board; Director of Sabine State Bank in
Many, Louisiana; and Commissioner, Sabine Parish Sales Tax Commission. Mr.
Williams attended Northwestern State University.
Dan Van Wormer. Mr. Van Wormer joined the Board of Directors of the
Company in 1992 and also serves as Vice Chairman of the Company and NAIL
and as a director of NAMC. Mr. Van Wormer served as Vice President and
Chief Marketing Officer of Providian Corporation, formerly Capital Holding
Corporation until his retirement in October 1994. Mr. Van Wormer joined
Capital Holding Corporation in 1979 and, in addition to his current position,
has held the positions of Vice President, Corporate Services and Vice President,
Agency Group. Prior to joining Capital Holding Corporation, Mr. Van
Wormer served as an Underwriter, Manager of the New Business Department,
Agent, and Vice President of Policy Services for People's Life Insurance
Company. Mr. Van Wormer, who has over thirty years of experience in the
life insurance industry, is a Fellow with the Life Insurance Management
Institute and a member of LIMRA's committee for marketing through
supplemental distribution systems. Mr. Van Wormer is a member of the Board
of Directors of Inter Company Marketing and a past member of the Life
Insurance Conference's committee on pre-need marketing. Mr. Van Wormer
earned a BSBA from Prince Georges College.
T. Brent Chapel. Mr. Chapel joined the Board of Directors in March 1996. Mr.
Chapel is Chairman of The Southern Group, Inc. and Atlantic International
Resources Corporation, both of which are life insurance holding companies in
Maryland. He is also Chairman of Maryland Southern Life Insurance
Company, a Maryland domiciled life insurance company. Mr. Chapel also
serves as President of Chapel Capital Corporation. He also serves as a director
of Delmay Energy Corporation, a public oil and gas company on the Alberta
Stock Exchange and Badger Drilling Inc., a privately-held environmental drilling
company in Virginia. Mr. Chapel is a Certified Public Accountant licensed to
practice in Maryland and Oklahoma. He received a Bachelor of Science in
Accounting from Oklahoma State University in Stillwater, Oklahoma and a
Master of Accountancy from the University of Georgia in Athens, Georgia.
Item 10: Director and Officer Compensation
Director Compensation
The Company pays its outside directors (directors who are not employees or
officers of the Company) a director's fee of $200 for each board meeting
attended. Each director except Benjamin P. Wall has received options to
purchase 10,000 shares of the Company s Common Stock pursuant to the
Company s Stock Option Plan. Mr. Wall received options to purchase 25,000
shares of Common Stock. During the term of the Stock Option Plan, each new
director that joins the Board of Directors will also receive options to purchase
10,000 shares of Common Stock. See Executive Compensation -- Stock Option
Plan and Security Ownership of Certain Beneficial Owners and Management.
Executive Compensation
The following table sets forth the salary and bonus paid by the Company to the
Company's Chairman of the Board and Chief Executive Officer, other executive
officers of the Company, and the officers of the Company as a group during
1995.
<TABLE>
<S> <C> <C>
Name and
Principal Position Salary Bonus
Benjamin P. Wall,
Chairman of the Board and
Chief Executive Officer $ 18,000 $ --
Edward A. Carroll, Jr.
President 92,000 761
Jerry L. Johnston
Vice President and Chief
Financial Officer 65,120 812
Clayton A. Carney
Vice President and Chief
Operating Officer 55,212 812
All officers as a group
(7 persons) 379,925 4,442
</TABLE>
Stock Option Plan
In January 1995, the Board of Directors of NAC adopted the National
Affiliated Corporation Stock Option Plan, which provides for grants of
incentive and nonqualified stock options to directors, officers and employees of
the Company. The Stock Option Plan covers 385,466 shares of Common
Stock. Any shares subject to unexercised portions of stock options that have
terminated may be reissued under new stock option grants.
The Stock Option Plan is administered by a committee of disinterested directors
(the "Stock Option Committee"), which has the authority to determine who
will receive stock options, the number of shares of Common Stock subject to
such stock options, and the terms of such stock options, including the exercise
price of stock options and any vesting periods.
In accordance with the Stock Option Plan, the exercise price of stock options
issued in January 1995 was set at $.50 per share, which the Board of Directors
determined to be a fair market value of the Common Stock on the date of
grant. The options expire in January 2005. The Stock Option Plan permits the
exercise of stock options by delivery of shares of Common Stock owned by the
optionee in lieu of or in addition to cash or by financing made available by the
Company.
Options granted generally vest over a two or three year period, with 25% or
50% (depending on years of service) vested immediately upon the later of the
first anniversary of employment or the date of grant and an additional 25%
vesting upon each anniversary. Non-vested portions will vest automatically if
there is a sale of NAIL, a change of control of NAC, or the employee dies,
retires due to disability or is terminated by the Company without cause.
Options issued to the individuals named in the executive compensation table in
January 1995 were as follows:
<TABLE>
<S> <C> <C> <C>
Total Options Percent of Total Options Vested
Name Granted Options Granted Upon Issuance
Benjamin P. Wall 25,000 6.5% 12,500
Edward A. Carroll, Jr. 46,000 11.9% 23,000
Jerry L. Johnston 32,500 8.4% ---
Clayton A. Carney 27,500 7.1% 6,875
All officers as a group 162,500 42.2% 58,125
</TABLE>
Employment Agreements
The Company has employment agreements with each of the executive officers.
The employment agreements, which have three year terms, were renewed by
the Company in July 1995. Pursuant to the terms of Mr. Carroll's employment
agreement, the Company is obligated to pay to Mr. Carroll one year's salary
and benefits in the event Mr. Carroll is terminated other than for cause. The
others are each entitled to six month's salary and benefits under the terms of
their respective employment agreements.
Item 11: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of March 25,
1996 by each director of the Company, each executive officer named in the
executive compensation table and all officers and directors as a group.
<TABLE>
<S> <C> <C>
Name of Number of Shares Ownership
Beneficial Owner Beneficially Owned Percentage
John I. Boxberger 44,875 *
Lynn Parks Clayton 7,600 *
Robert F. Meredith, III 13,974 *
Dan Van Wormer 7,580 *
Benjamin P. Wall 47,983 *
G. Vaughn Walton 19,476 * 1/
Bobby Williams 20,331 * 2/
T. Brent Chapel 10,335,045 75.91% 3/
Edward A. Carroll, Jr. 44,100 *
Jerry L. Johnston 17,250 *
Clayton A. Carney 14,750 *
Sharon G. Chelette 11,399 *
The Southern Group 10,335,045 75.91% 4/
7212 Old Stage Road
North Bethesda, MD 20852
All Directors and 10,607,488 75.77%
Officers as a Group
(13 Persons)
* Less than .01%
1/Includes 598 shares held by Mr. Walton's children.
2/Includes 500 shares held by a partnership composed of Mr. Williams
and his family.
3/Reflects shares owned by The Southern Group as to which Mr. Chapel
shares voting and investment power.
4/Reference Stock Purchase Agreement Exhibit (10)(b)
</TABLE>
Item 12: Certain Relationships and Related Transactions
The Company renewed a $2,000,000 face amount Directors and Officers
Liability and Corporation Reimbursement Policy from Lexington Insurance
Company on March 31, 1994. This policy, which provides coverage for alleged
wrongful acts occurring on or after March 31, 1989, contains numerous
exclusions and requires an annual payment of $59,126.
It is the policy of the Company that all transactions with officers and
directors be on terms that are no less favorable to the Company than would be
available from unaffiliated parties. The Board of Directors believes that all
transactions described under "Certain Transactions" meet this standard.
PART IV
ITEM 13: Exhibits and Reports on Form 8-K
(a) Financial Statements (included in Item 8):
1) Independent Auditors' Report
2) Consolidated Balance Sheets
3) Consolidated Statements of Operations
4) Consolidated Statements of Cash Flows
5) Consolidated Statements of Stockholders' Equity
6) Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
Form 8-K filed January 26, 1996
Stock Purchase Agreement
(c) Exhibits:
Exhibit
Table Note/
Number Description of Exhibit Page Number
(3)(a) Articles of Incorporation of 1/
Registrant (8/4/82)
(3)(b) Articles of Amendment of 1/
Registrant (8/27/83)
(3)(c) By-Laws 1/
(10)(a) National Affiliated Corporation 1995 1/
Stock Option Plan and forms of
Option Agreements
(10)(b) Stock Purchase Agreement hereby incorporated
by reference from 8-K filed on January 26, 1996
(22) Subsidiaries of the Registrant 1/
1/ Exhibits (3)(a) and (3)(b) are hereby incorporated by reference from
Registrant's Amended Form 10 dated September 14, 1985. Exhibit (3)(c)
is incorporated by reference from Registrant's Form 10-KSB for the fiscal
year ended December 31, 1993. Exhibit (10)(a) is incorporated by
reference from Registrant's Form 10-KSB for the fiscal year ended
December 31, 1994. Exhibit (22) is incorporated by reference from Item
1 of this Form 10-KSB.
SIGNATURES
Pursuant to the requirements of Section 13 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.
(Registrant) National Affiliated Corporation
By (Signature and Title) Edward A. Carroll, Jr.
Edward A. Carroll, Jr., President
Date March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By (Signature and Title) Benjamin P. Wall
Benjamin P. Wall, Chairman of the Board, Director,
Chief Executive Officer
Date March 22, 1996
By (Signature and Title) Jerry L. Johnston
Jerry L. Johnston, Vice President and Chief Financial Officer
Date March 22, 1996
By (Signature and Title) Robert F. Meredith, III
Robert F. Meredith, III, Director
Date March 22, 1996
By (Signature and Title) Bobby Williams
Bobby Williams, Director
Date March 22, 1996
By (Signature and Title) John I. Boxberger
John I. Boxberger, Director
Date March 22, 1996
By (Signature and Title) Lynn Parks Clayton
Lynn Parks Clayton, Director
Date March 22, 1996
By (Signature and Title) Dan Van Wormer
Dan Van Wormer, Director
Date March 22, 1996
By (Signature and Title) Gary Vaughn Walton
Gary Vaughn Walton, Director
Date March 22, 1996
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors of National Affiliated Corporation
We have audited the accompanying consolidated balance sheets of National
Affiliated Corporation and its subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of National Affiliated Corporation
and its subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended 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 14 to
the financial statements, the insurance operations of the Company have sustained
significant losses over the last four years, which has adversely affected its
working capital and its net equity. Should the losses continue, the Company's
ability to maintain minimum capital requirements of the various states in
which the Company is licensed may also be affected. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 14. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, in 1994, the Company changed
its method of accounting for investments in debt and equity securities, to
conform with Statement of Financial Accounting Standards No. 115.
March 6, 1996
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<S> <C> <C> <C>
Notes 1995 1994
ASSETS:
Cash $ 306,686 $ 361,430
Invested assets: 3,12
Fixed maturities avail-for-sale at market 3,555,962 4,179,539
Equity security at market ($32,144;$33,398) 1,250 2,504
Other long-term investments at equity 144,673 156,052
Other long-term investments at market 29,000 34,000
Certificates of deposit and time deposits 239,851 455,763
Restricted assets at market 1,040,162 1,132,200
Accrued investment income 63,360 97,821
Finance notes receivable - net 4 8,750 47,463
Policy loans 83,571 95,193
Reinsurance receivable 2,759,921 380,400
Other amounts receivable:
Premiums due and uncollected 21,028 34,238
Agents' balances (net of allowance for unco 150,009 234,387
account of $131,500 in 1995 and $52,800 in 1994)
Other 398,957 92,731
Property - net 5,6 192,794 141,054
Deferred policy acquisition costs 13 421,962 1,219,714
Other assets 217,890 63,714
TOTAL $9,635,826 $8,728,203
LIABILITIES AND STOCKHOLDERS' EQUITY:
Policy benefit reserves $3,429,414 $3,210,661
Policy claims 781,256 617,508
Unearned premiums 23,980 63,037
Dividends left on deposit 389,955 539,503
Advance premium deposits 174,678 193,684
Other policyholders' funds 17,152 26,431
Accounts payable and accruals 2,088,754 247,348
Total liabilities 6,905,189 4,898,172
Commitments and contingent liabilities 7,10
Stockholders' equity: 3,8
Voting common shares, no par; 14,000,000 sh
authorized; 3,461,028 shares outstanding 5,846,901 5,846,901
Additional paid-in capital 154,500 154,500
Net unrealized investment gains (losses) 171,973 (284,084)
Accumulated deficit (2,710,237) (1,154,786)
Subtotal 3,463,137 4,562,531
Less treasury stock - at cost (181,539 shar 732,500 732,500
Total stockholders' equity 2,730,637 3,830,031
TOTAL $9,635,826 $8,728,203
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<S> <C> <C> <C>
Notes 1995 1994
REVENUES:
Insurance premiums $ 860,838 $3,640,191
Net investment income 3,12 366,431 1,214,347
Finance company interest and fees 1,360 62,333
Other income 47,678 110,066
Total revenues 1,276,307 5,026,937
EXPENSES:
Decrease in policy benefit reserves (2,295,139) (709,358)
Claims and other benefits 1,376,242 2,030,843
Policyholder dividends 13,347 26,114
Commission expense 727,366 1,210,647
Depreciation and amortization 29,446 67,698
Interest expense 54,010 53,380
Salaries, wages and taxes 786,628 837,955
Other operating expense 1,342,106 1,665,842
Amortization of deferred acquisition cost 13 797,752 263,799
Total expenses 2,831,758 5,446,920
LOSS BEFORE INCOME TAXES (1,555,451) (419,983)
PROVISION FOR INCOME TAXES 9 0 0
NET LOSS ($1,555,451) ($419,983)
LOSS PER COMMON SHARE ($0.47) ($0.13)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,279,489 3,279,489
See notes to consolidated financial statements.
</TABLE>
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Balance Adoption Stock Change in Balance
12-21-93 of SFAS Issue Unrealize Net Loss 12-31-94
No. 115 Gain/Loss
Voting Common Shares
Number 3,459,925 1,103 3,461,028
Amount $5,846,427 $474 $5,846,901
Addtl Paid-In Cap $154,500 $154,500
Net Unrealized Loss ($70,232) $486,213 ($700,065) ($284,084)
Accumulated Deficit ($734,803) ($419,983)($1,154,786)
Treasury Stock
Number (181,539) (181,539)
Amount ($732,500) ($732,500)
TOTAL $4,463,392 $486,213 $474 ($700,065)($419,983) $3,830,031
Balance Adoption StockChange in Balance
12-31-94 of SFAS IssueUnrealize Net Loss 12-31-95
No. 115 Gain/Loss
Voting Common Shares
Number 3,461,028 3,461,028
Amount $5,846,901 $5,846,901
Addtl Paid-In Cap $154,500 $154,500
Net Unrealized Loss ($284,084) $456,057 $171,973
Accum Deficit ($1,154,786) ($1,555,451)($2,710,237)
Treasury Stock
Number (181,539) (181,539)
Amount ($732,500) ($732,500)
TOTAL $3,830,031 $456,057 ($1,555,451) $2,730,637
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<S> <C> <C>
Notes 1995 1994
Cash flows from operating activities:
Net loss ($1,555,451) ($419,983)
Non-cash and non-operating items:
Gain on sale of invested assets (1,390) (28,004)
Undistributed losses of investee 1,254 36,288
Increase of uncollectible accounts receivab 78,700 176,625
Depreciation and amortization 29,446 67,698
Change in assets and liabilities:
Deferred policy acquisition costs 13 797,752 263,799
Policy benefit reserves and unearned premiu 179,696 (614,981)
Policy claims 163,748 100,412
Equity write-down of other long-term invest 11,379 42,263
Accounts payable and accruals 1,841,406 (202,986)
Due from reinsurance companies (2,379,521) (67,323)
Other (426,929) (37,504)
Net cash used in operating activities (1,259,910) (683,696)
Cash flows from investing activities:
Acquisitions of:
Invested assets
Fixed maturities available-for-sale (1,283,330) (671,034)
Finance notes receivable 0 (319,873)
Property (81,186) (4,838)
Proceeds from:
Invested assets
Fixed maturities available-for-sale 2,361,392 1,094,319
Certificates of deposit and time deposit 315,912 431,543
Finance notes receivable 38,713 567,979
Policy loans 11,622 (17,238)
Agent's balances - net 5,678 (185,226)
Net cash provided from investing activities 1,368,801 895,632
Cash flows from financing activities:
Withdrawals of dividends and advance premiums (163,635) (252,557)
Payments of debt 5 0 (68,261)
Net cash used in financing activities (163,635) (320,818)
Net decrease in cash (54,744) (108,882)
Cash at beginning of year 361,430 470,312
Cash at end of year $306,686 $361,430
Supplemental cash flows disclosures:
Interest paid $46,330 $81,297
Income taxes paid $0 ($4,200)
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - The consolidated financial statements include
National Affiliated Corporation (the "Company") and its wholly-
owned subsidiaries. The Company's subsidiaries market and sell
life and health insurance.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Fair Value - Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments", is
effective for all entities for fiscal years ending after December
31, 1995. Statement 107 requires all entities to disclose the
fair value of financial instruments, both assets and liabilities
recognized and not recognized in the balance sheet, for which it
is practicable to estimate fair value. For all financial
instruments effected by this statement recorded or disclosed in
the Company's financial statements, the carrying amount is a
reasonable estimate of fair value.
All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Invested Assets consist of common and preferred stocks, bonds and
government securities carried at market value, certificates of
deposit carried at cost, and other investments (which are
investments in limited partnerships) carried at equity.
Permanent declines are accounted for as realized losses.
Effective January 1, 1994 the Company adopted SFAS 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 market 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 $486,213 increase in
net unrealized investment gains. Additionally, all subsequent
changes in the market value of the Company's debt securities are
included in net unrealized investment gains (losses).
Property is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which range from three to
eight years.
Income Taxes - The tax effect of temporary differences that
exist between the financial reporting basis and basis of assets
and liabilities for income tax reporting, primarily as a result
of deferred policy acquisition costs and differences in methods
of calculating policy benefit reserves, are recognized in
accordance with enacted tax rates, to the extent that realization
of such benefits is more likely than not.
Loss Per Common Share is based on the weighted average number of
Voting Common Shares outstanding.
Statement of Cash Flows - For purposes of reporting cash flows,
cash includes cash on hand and in demand deposit accounts with
banks.
Accounting Pronouncements - The American Institute of Certified
Public Accountants has issued Statement of Position 95-1 (SOP 95-
1) which provides accounting guidance for certain participating
insurance contracts. The SOP is effective for the Company's
fiscal year ending December 31, 1996 and is not expected to have
a material effect on the financial statements.
Reclassifications - Certain amounts have been reclassified for
comparative purposes. Such reclassifications had no effect on
net income for the respective years.
NOTE 2 - INSURANCE ACCOUNTING AND DISCLOSURES
Premiums on traditional life insurance contracts are recognized
as income when due from policyholders. Health premiums are
recognized ratably as earned over the term of the contracts.
Future policy benefits and policy acquisition costs are
associated with premiums as earned so as to result in recognition
of profits over the life of the contracts by means of the
provision for policy benefit reserves and the amortization of
deferred policy acquisition costs.
Revenues for universal life insurance, other interest-sensitive
life insurance, and annuity contracts include policy charges for
administration and cost of insurance, and surrender charges
assessed against policyholder account balances during the period.
Charges to expense relating to these policies and contracts
include interest credited as well as benefits paid during the
period in excess of related policy account balances.
Policy Benefit Reserves related to traditional life insurance
contracts have been calculated on a net level basis. Assumed
interest yields used in determining the majority of reserves are
7% graded to 4.5%. 1980 CSO mortality tables are used with
provision for possible adverse deviation. Policy benefit
reserves related to universal life-type and annuity contracts
represent the accumulated amounts which accrue to the benefit of
policyholders, and reflect interest credited at rates which are
subject to periodic adjustment.
Policy Claims - Life and health insurance claim costs are
accrued as they occur. The claim costs reported include
provisions for: (1) reported losses in the process of settlement;
and (2) estimated losses incurred but not yet reported. The
liability for reported losses in the process of settlement was
determined by estimating the anticipated amount payable on each
reported claim. At December 31, 1995, there were approximately
$75,800 in unsettled life claims and $314,600 in health claims in
the process of settlement.
Prior to 1994, the liability for health claims incurred but not
yet reported was estimated using the loss-ratio method. In 1994,
the method was changed to a claim lag approach or ultimate
completion approach. This method was adopted because it more
accurately matched expected claims with premiums as the health
business grew. The effect of this change in method was not
significant in 1994. As of December 31, 1995, approximately
$350,800 has been recorded as an estimate of the incurred but not
yet reported liability for health claims.
Deferred Policy Acquisition Costs - The Company defers the
costs of acquiring new business, principally commissions and
certain policy issue and underwriting expenses, which vary with
and are primarily related to the production of new business.
These deferred acquisition costs are being amortized over the
premium-paying periods in proportion to premium revenue
recognized using the same assumptions as to interest, mortality
and withdrawals as are used for computing liabilities for policy
benefit reserves.
Participating Policies comprise approximately 35% of total life
insurance in force at December 31, 1995. Dividends on such
policies are determined annually by the Board of Directors of the
insurance company. During 1984, the Company's management adopted
a policy providing that such policy dividends each year would
total at least 50% of the total earnings and profits of its life
insurance subsidiary, as determined in accordance with statutory
accounting practices prescribed by insurance regulatory
authorities. On December 10, 1991, the Board of Directors passed
a resolution to limit the amount of statutory earnings that may
be paid as dividends to holders of the above policies to 50% of
such earnings as determined at the end of each calendar year.
Life Insurance in force was approximately $145,395,000 and
$161,922,000 at December 31, 1995 and 1994, respectively.
Reinsurance - In the normal course of business, the Company
seeks to limit its exposure to loss on any single insured and to
recover a portion of benefits paid by ceding reinsurance to other
insurance enterprises under excess coverage and coinsurance
contracts. The Company retains a maximum of $50,000 per
individual for mortality and $25,000 for health claims (except
for ABO policies for which the stop-loss limit is $50,000).
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 the insurance subsidiary.
Amounts paid or deemed to have been paid under reinsurance
contracts are recorded as reinsurance receivables on the balance
sheet. The cost of reinsurance related to contracts is accounted
for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the
underlying policies. The Company is contingently liable for
insurance ceded in the event any reinsurer is unable to meet its
obligation and, consequently, the Company evaluates the financial
condition of its reinsurers. The effect of reinsurance on
premiums for the years ended December 31 is as follows:
<TABLE>
1995 1994
<S> <C> <C>
Direct premiums $3,114,190 $4,248,931
Premiums ceded (2,253,352) (608,740)
Net premiums $ 860,838 $3,640,191
</TABLE>
Regulatory Accounting - Accounting records of the insurance
subsidiary are also maintained in accordance with statutory
accounting practices prescribed or authorized by insurance
regulatory authorities. The insurance subsidiary's combined
equity pursuant to statutory accounting principles was $1,238,325
and $2,728,255 at December 31, 1995 and 1994, respectively.
Regulatory accounting basis net loss for the years ended December
31, 1995 and 1994 was $1,056,397 and $1,251,262, respectively.
Approval by regulatory authorities is required for payment of
common stock dividends by insurance companies other than from
unassigned retained earnings, as determined on a statutory
accounting basis. At December 31, 1995 no dividends could be
paid by the Company's insurance subsidiary. Loans and advances
by insurance companies to parents and affiliates are restricted
by law.
NOTE 3 - INVESTED ASSETS
The Company's invested assets at December 31, 1995 and 1994 consisted of the
following:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Market
Value Gains Losses Value
1995
Fixed maturities available-for-sale
US Goverment & agencies $2,826,739 $183,067 $ 3,025 $3,006,781
Political subdivisions 122,728 3,134 0 125,862
Public utilities 100,115 10,885 0 111,000
Corporate 820,332 59,175 2,026 877,481
Less restricted bonds (551,032) (14,130) 0 (565,162)
Total fixed maturities 3,318,882 242,131 5,051 3,555,962
Redeemable preferred stock 2,144 0 2,144 0
Common stocks:
Banks 30,000 0 28,750 1,250
Total equity securities 32,144 0 30,894 1,250
Other long term investments 222,358 0 48,685 173,673
Certificates of deposit/time 714,851 0 0 714,851
Less restricted CDs (475,000) 0 0 (475,000)
Total CDs and time deposits 239,851 0 0 239,851
Subtotal 3,813,235 242,131 84,630 3,970,736
Restricted assets 1,026,032 14,130 0 1,040,162
Total invested assets $4,839,267 $256,261 $84,630 $5,010,898
1994
Fixed maturities available-for-sale
US Government & agencies $3,684,222 $ 22,457 $213,404 $3,493,275
Political subdivisions 122,336 4,164 0 126,500
Public utilities 292,964 2,161 7,125 288,000
Corporate 847,067 1,903 20,006 828,964
Less restricted bonds (550,394) (8,864) (2,058) (557,200)
Total fixed maturities 4,396,195 21,821 238,477 4,179,539
Redeemable preferred stock 2,144 0 2,144 0
Common stocks
Banks 30,000 0 28,750 1,250
Investment in TNT 1,254 0 0 1,254
Total equity securities 33,398 0 30,894 2,504
Other long term investments 233,737 0 43,685 190,052
Certificates of deposits/time 1,030,763 0 0 1,030,763
Less retricted CDs (575,000) 0 0 (575,000)
Total CDs and time deposits 455,763 0 0 455,763
Subtotal 5,119,093 21,821 313,056 4,827,858
Restricted assets 1,125,394 8,864 2,058 1,132,200
Total invested assets $6,244,487 $30,865 $315,114 $5,960,058
</TABLE>
The amortized value and market value of debt securities at
December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
obligations.
<TABLE>
<S> <C> <C>
Amortized Market
Value Value
Due in years 1 through 5 $1,231,251 $1,247,132
Due in years 6 through 10 730,455 772,912
Due after 10 years 847,533 1,002,500
Fixed maturities 2,809,239 3,022,544
Mortgage-backed securities 1,060,675 1,098,580
Total $3,869,914 $4,121,124
</TABLE>
Certificates of deposit and fixed maturities in the aggregate amount of
$1,040,162 are being
held in safekeeping by banks for state insurance departments as required by
law and, as
such, these funds are not available for use in operations.
There were no fixed maturities and other long-term investments which were
non-income producing in the two year period ended December 31, 1995.
The composition of net investment income for the two years ended December 31
follows:
<TABLE>
<S> <C> <C>
1995 1994
Gross investment income:
Equity securities $ 50 $ 50
Certificates of deposit and time deposits 43,054 32,910
Fixed maturities and long-term investments 346,617 398,738
Equity in income from TNT 0 794,598
Subtotal 389,721 1,226,296
Net realized gains 1,390 28,004
Investment expenses (24,680) (39,953)
Net investment income $366,431 $1,214,347
</TABLE>
The cost of investments sold is generally determined using the specific
identification method. Proceeds, gains and losses from sales of investments,
all of which are related to fixed maturity securities, for the two years
ended December 31 are:
<TABLE>
<S> <C> <C> <C>
Proceeds Gains Losses
1995
Fixed maturities $2,355,410 $30,291 $28,901
1994
Fixed maturities $1,740,460 $29,342 $1,338
</TABLE>
NOTE 4 - FINANCE NOTES RECEIVABLE
Components of the finance notes receivable at December 31 were as follows:
<TABLE>
<S> <C> <C>
1995 1994
Premium finance $ 157,000 $ 290,876
Precomputed direct 9,075 9,075
Interest bearing direct 27,845 27,845
Total 193,920 327,796
Less: Unearned finance charges 0 (333)
Allowance for uncollectible
accounts (185,170) (280,000)
Total $ 8,750 $ 47,463
</TABLE>
NOTE 5 - LEASES
Company as Lessee - The Company is committed under operating leases involving
office facilities and various equipment.
The Company had capitalized a lease for computer hardware and software systems
that was fully paid off in September 1994.
Rent expense under operating leases was: 1995 - $103,437; 1994 - $99,927.
NOTE 6 - PROPERTY
Property at December 31 is summarized as follows:
<TABLE>
<S> <C> <C>
1995 1994
Land held for future development $ 124,303 $ 124,303
Furniture and equipment 369,069 641,281
Subtotal 493,372 765,584
Less accumulated depreciation (300,578) (624,530)
Property - net $ 192,794 $ 141,054
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995
and 1994 was $29,446 and $67,698, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable for insurance ceded to reinsurers in the
event that reinsurance companies are unable to meet their obligations.
(See Note 2)
The Company has outstanding lawsuits and other claims arising in the ordinary
course of business, which, in management's opinion, will not result in any
material impact on the financial condition of the Company.
NOTE 8 - CAPITAL STOCK
The classes of stock outstanding at December 31, 1995 and 1994 are as follows:
Voting Common Shares, no par value - The Company is authorized to issue
14,000,000 shares of this class of stock and, except as otherwise determined by
the Board of Directors, it is the only class of stock entitled to vote for the
directors of the Company.
Voting privileges attaching to the Voting Common Shares are subject to any
rights that may be conferred by the Board of Directors on holders of the
Preferred Stock of the Company should such class of stock be issued in the
future. Voting Common Shares do not have preemptive or cumulative voting
rights.
Preferred Stock, $100 par value - The Company has 1,500,000 authorized shares
of $100 par value Preferred Stock, none of which has been issued.
NOTE 9 - INCOME TAXES
Reported income tax expense for the two years ended December 31, 1995 differs
from the
amount computed by applying the normal federal and state income tax rates to
consolidated income before taxes for the following reasons:
<TABLE>
<S> <C> <C>
1995 1994
Normal tax benefit $ (606,626) $ (163,793)
Differences result from:
Operating losses not given
tax benefit 601,626 151,168
Other 5,000 12,625
Reported tax expense $ -0- $ -0-
</TABLE>
Deferred income taxes primarily consist of future tax benefits (liabilities)
attributable to:
<TABLE>
<S> <C> <C>
Assets (Liabilities) 1995 1994
Unamortized deferred acquisition costs $ (136,425) $ (329,702)
Policy benefit reserves (87,730) 323,463
Unearned premiums (9,352) 21,432
Capital loss carryforward -0- 79,806
Net operating loss carryforward 880,796 240,720
Tax credits 13,708 35,149
Total 660,997 370,868
Less valuation allowance (660,997) (370,868)
Net deferred tax asset $ -0- $ -0-
</TABLE>
Because of uncertainties facing the Company at January 1, 1994 as described in
Note 14, management was unable to conclude that the net deferred tax asset was
more likely than not to be utilized and consequently recorded a full valuation
allowance at that time. At December 31, 1995 this uncertainty in regards to
the Company still exists and accordingly the full valuation allowance has been
maintained.
At December 31, 1995, the Company has for tax purposes, approximately
$2,905,000 of net operating loss carryforward, expiring between 2007 and 2010.
Additionally, the Company has alternative minimum tax credits of $35,149
available to offset future income taxes subject to certain limitations.
NOTE 10 - RELATED PARTY BALANCES AND TRANSACTIONS
RPM Investments Partnership ("RPM") acted as managing general agent for sales
of the participating, whole-life insurance product underwritten by the Company's
insurance subsidiary from June 1984 to July 1988. RPM was owned and managed by
senior officers of the Company and employed several directors of the Company
as consultants. In 1989, the Company required that all such officers and
directors either resign from the Company or from RPM. At the same time, the
Board of Directors set a policy that neither directors nor officers could
receive commissions from the sale of company products. In February
1995, an agreement was reached whereby NAIL is no longer required to pay any
further commissions to RPM.
NOTE 11 - SEGMENT INFORMATION
The Company's operations consist primarily of the sales of insurance products.
The following table indicates the Company's revenues, income (loss) from
operations and assets for each segment for the years ended
December 31, 1995 and 1994.
<TABLE>
<S> <C> <C> <C> <C>
General Adjustments
Corporate and
Insurance and Other Eliminations Consolidated
Year ended December 31, 1995:
Revenues from unaffiliated
customers $ 1,273,257 $ 3,050 $ 1,276,307
Intersegment revenues 241,319 $ (241,319)
Total revenue $ 1,273,257 $ 244,369 $ (241,319) $ 1,276,307
Net (loss) income $(1,545,203) $ (10,248) $(1,555,451)
Assets $ 9,391,125 $5,629,163 $(5,384,462) $ 9,635,826
Deprec and amort $ 21,473 $ 7,973 $ 29,446
Capital expenditures $ 81,186 $ 81,186
Year ended December 31, 1994:
Revenues from unaffiliated
customers $ 4,165,851 $ 861,086 $ 5,026,937
Intersegment revenues 274,683 $ (274,683)
Total revenue $ 4,165,851 $1,135,769 $ (274,683) $ 5,026,937
Operating loss $ (951,639) $ (262,942) $(1,214,581)
Equity in net income of TNT 794,598
Net loss $ (419,983)
Assets $ 8,451,985 $5,659,471 $(5,383,253) $ 8,728,203
Deprec and amort $ 52,605 $ 15,093 $ 67,698
Capital expenditures $ 4,838 $ 4,838
</TABLE>
Intersegment revenue is recorded at estimated fair market value and income from
intersegment transactions is included in operating income (loss).
NOTE 12 - CELLULAR TELEPHONE
One of the Company's wholly-owned subsidiaries owns a 35% interest in and is
general partner of Travel Network Telephone, ("TNT"), a limited partnership
organized to apply for non-wireline licenses in various cellular telephone
markets. The partnership interest was obtained without cost to the Company in
exchange for its efforts in organizing, promoting, and managing the
partnership's efforts.
In March 1990, TNT sold an 80% ownership interest in its Monroe, Louisiana
market for $6,000,000. The entire amount of sales proceeds was income to TNT as
no cost was being carried for this market. TNT retained approximately $500,000
to meet its future obligations for construction and initial operating expenses
and distributed the remainder to its partners. TNT met a capital call in
November 1992 of $60,200 and none in 1993. In November 1994, TNT sold the 20%
ownership interest in Monroe Cellular for $2,366,100.
In December 1994, TNT retained approximately $5,000 to meet closing costs and
distributed the remainder to its partners and began proceedings to dissolve
the partnership. The partnership was dissolved in September 1995.
Summarized financial information for TNT is as follows:
<TABLE>
<S> <C> <C>
1995 1994
Total assets $ 0 $ 90,408
Current liabilities $ 0 $ 86,803
Partners' equity 0 3,605
Total liabilities and equity $ 0 $ 90,408
Revenues $ 507 $2,371,562
Expenses 579 103,245
Net income (loss) $ (72) $2,268,317
</TABLE>
NOTE 13 - DEFERRED POLICY ACQUISITION COSTS
On an annual basis, the Company estimates its future experience on the policies
in force, projects future premiums, expenses and benefit payments, and compares
the present values of these with the unamortized deferred policy acquisition
costs (DAC). If future profits are not sufficient to amortize the recorded
deferred acquisition costs, additional amortization is taken. The total
amortization of DAC for 1995 and 1994 was $797,752 and $263,799, respectively.
NOTE 14 - GOING CONCERN
The Company's consolidated financial statements have been presented on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The net equity
and working capital of the Company have been adversely affected by significant
losses from the insurance operations over the last five
years. The Company's ability to maintain the minimum capital requirements of
the various insurance regulators may also be adversely impacted by the
continuing operating losses.
The Company and The Southern Group, a Maryland Financial Holding Company, signed
a definitive stock purchase agreement in January 1996. In this agreement, The
Southern Group agreed to purchase 10,153,506 shares of authorized but unissued
common stock and 181,539 shares of treasury stock of National Affiliated
Corporation for $6.8 million. This stock purchase would give The Southern Group
control of approximately 75% of the Company's stock. In February 1996, The
Southern Group made an initial purchase of 300,000 shares for $400,000. The
balance of the purchase will be completed upon obtaining
regulatory approval from the Louisiana Insurance Department. Once the stock
purchase is completed, 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. 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.
NOTE 15 - STOCK OPTION PLAN
In January 1995, the Board of Directors of NAC adopted the National Affiliated
Corporation Stock Option Plan, which provides for grants of incentive and
nonqualified stock options to directors, officers and employees of the Company.
The Stock Option Plan covers 385,466 shares of Common Stock. Any shares subject
to unexercised and terminated portions of stock options may be reissued under
new stock option grants.
The Stock Option Plan is administered by a committee of disinterested directors,
(the "Stock Option Committee"), which has the authority to determine who will
receive stock options, the number of shares of Common Stock subject to such
stock options, and the terms of such stock options, including the exercise price
of stock options and any vesting periods.
In accordance with the Stock Option Plan, the exercise price of stock options
issued in January 1995 was set at $.50 per share, which the Board of Directors
believes appropriates a fair market value of the Common Stock on the date of
grant. The options expire in January 2005. The Stock Option Plan permits the
exercise of stock options by delivery of shares of Common Stock owned by the
optionee in lieu of or in addition to cash or by
financing made available by the Company.
Granted options generally vest over a two or three year period, with 25% or 50%
(depending on years of service) vested immediately upon the later of the first
anniversary of employment or the date of grant and an additional 25% vesting
upon each anniversary. Non-vested portions will vest automatically if there
is a sale of NAIL, a change of control of NAC, or the employee dies, retires
due to disability or is terminated by the Company without cause.
In addition, the Company granted a one time stock option for 50,000 shares to a
professional financial public relations firm who assisted the Company in its
recapitalization efforts. This option may be exercised over a two year period
from May 1, 1995 at a cost of $.50 per share.
<TABLE>
<S> <C> <C>
Stock Options Number of Shares Option Price
Granted 435,466 $.50
Lapsed or cancelled 33,097 .50
Exercised -0- -0-
Outstanding at December 31, 1995 402,369 .50
Exercisable at December 31, 1995 198,980 .50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 3,555,962
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,250
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,010,898
<CASH> 306,686
<RECOVER-REINSURE> 5,633
<DEFERRED-ACQUISITION> 421,962
<TOTAL-ASSETS> 9,635,826
<POLICY-LOSSES> 1,450,749
<UNEARNED-PREMIUMS> 23,980
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 581,785
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,114,401
<OTHER-SE> (2,383,764)
<TOTAL-LIABILITY-AND-EQUITY> 9,635,826
860,838
<INVESTMENT-INCOME> 365,041
<INVESTMENT-GAINS> 1,390
<OTHER-INCOME> 49,037
<BENEFITS> (905,550)
<UNDERWRITING-AMORTIZATION> 797,752
<UNDERWRITING-OTHER> 2,939,556
<INCOME-PRETAX> (1,555,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,555,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,555,451)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> 0
<RESERVE-OPEN> 617,508
<PROVISION-CURRENT> 658,166
<PROVISION-PRIOR> 123,090
<PAYMENTS-CURRENT> 672,321
<PAYMENTS-PRIOR> 424,042
<RESERVE-CLOSE> 781,256
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
