UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996 .
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13538
NATIONAL AFFILIATED CORPORATION
(Exact Name of small business issuer as specified in its charter)
Louisiana 72-0947819
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1500 Lee Street, Suite A, P.O. Box 12190, Alexandria, LA 71315
(Address of principal executive offices)
(318) 473-4355
(Insurer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Registrant had 3,579,489 Voting Common Shares
outstanding on March 31, 1996.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements are attached beginning at page 4 .
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations is attached
beginning at page 8 .
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On May 10, 1996, the Board of Directors authorized the
sale of 5,000 shares of $100 par value Class A
Preferred Stock to The Southern Group. (See Part I,
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.) The
Amendment to the Stock Purchase Agreement (including
the Designation of Rights) is attached as an Exhibit in
Item 6.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Description of Sequential
Numberings
Exhibit Table Number Exhibit
Location
11 Statement of Page 13
Computation of
Per Share
Earnings
99 Amendment to Stock Page 14
Purchase Agreement
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
NATIONAL AFFILIATED CORPORATION
(Registrant)
Date May 15, 1996 By: Jerry L. Johnston
Jerry L. Johnston
Vice President and Chief
Financial Officer
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
1996 1995
<S> <C> <C>
ASSETS:
Cash ($52,467) $306,686
Invested assets:
Fixed maturities available-for-sale at mark 2,366,850 3,555,962
Equity securities at market ($32,144 cost) 1,250 1,250
Other long-term investments at equity 141,229 144,673
Other long-term investments at market 0 29,000
Certificates of deposit and time deposits 122,534 239,851
Restricted assets at market 1,039,400 1,040,162
Accrued investment income 50,870 63,360
Finance notes receivable - net 21,281 8,750
Policy loans 93,502 83,571
Reinsurance receivable 2,652,204 2,759,921
Other amounts receivable:
Premiums due and uncollected 26,070 21,028
Agents' balances (net of allowance for uncollectible
account of $131,500 in 1996 and 1995) 132,888 150,009
Other 107,735 398,957
Property - net 186,211 192,794
Deferred policy acquisition costs 264,048 421,962
Other assets 233,052 217,890
TOTAL $7,386,658 $9,635,826
LIABILITIES AND STOCKHOLDERS' EQUITY:
Policy benefit reserves $3,316,095 $3,429,414
Policy claims 585,322 781,256
Unearned premiums 24,162 23,980
Dividends left on deposit 360,389 389,955
Advance premium deposits 174,678 174,678
Other policyholders' funds 21,950 17,152
Accounts payable and accruals 530,994 2,088,754
Total liabilities 5,013,590 6,905,189
Commitments and contingent liabilities
Stockholders' equity:
Voting common shares, no par; 14,000,000 shares
authorized; 3,579,489 shares outstanding 5,923,901 5,846,901
Additional paid-in capital 154,500 154,500
Net unrealized investment gains (losses) 4,833 171,973
Accumulated deficit (3,710,167) (2,710,237)
Subtotal 2,373,067 3,463,137
Less treasury stock - at cost 0 732,500
Total stockholders' equity 2,373,067 2,730,637
TOTAL $7,386,657 $9,635,826
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<S> <C> <C>
1996 1995
REVENUES:
Insurance premiums $533,919 $716,599
Net investment income 135,608 97,515
Finance company interest and fees 0 822
Other income 13,173 22,279
Total revenues 682,700 837,215
EXPENSES:
Decrease in policy benefit reserves (22,046) (34,212)
Claims and other benefits 333,562 398,091
Policyholder dividends 2,211 3,117
Commission expense 85,326 270,171
Depreciation and amortization 6,563 4,607
Interest expense 9,539 10,246
Salaries, wages and taxes 185,277 198,271
Other operating expense 309,784 292,980
Amortization of deferred acquisition costs 157,914 82,744
Total expenses 1,068,130 1,226,015
LOSS BEFORE INCOME TAXES (385,430) (388,800)
PROVISION FOR INCOME TAXES 0 0
NET LOSS ($385,430) ($388,800)
LOSS PER COMMON SHARE ($0.11) ($0.12)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,579,489 3,279,489
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net loss ($385,430) ($388,800)
Non-cash and non-operating items:
Gain on sale of invested assets (77,501) (102)
Depreciation and amortization 6,583 4,607
Change in assets and liabilities:
Deferred policy acquisition costs 157,914 82,744
Policy benefit reserves and unearned premiu (113,137) 1,632
Policy claims (195,934) (31,623)
Equity write-down of other long-term invest 3,444 0
Accounts payable and accruals (1,557,760) (57,935)
Due from reinsurance companies 107,717 0
Other 275,775 (7,801)
Net cash used in operating activities (1,778,329) (397,278)
Cash flows from investing activities:
Acquisitions of:
Invested assets
Fixed maturities available-for-sale (872,640) (97,266)
Property 0 (3,455)
Proceeds from:
Invested assets
Fixed maturities available-for-sale 1,972,875 334,122
Other long-term investments 29,000 0
Certificates of deposit and time deposit 117,317 64,219
Finance notes receivable 0 24,609
Policy loans (9,931) (11,196)
Agent's balances - net 17,121 (33,706)
Net cash provided from investing activities 1,253,742 277,327
Cash flows from financing activities:
Withdrawals of dividends and advance premiums (29,566) (55,661)
Sale of additional common stock 195,000 0
Net cash provided from (used in) financing act 165,434 (55,661)
Net decrease in cash (359,153) (175,612)
Cash at beginning of year 306,686 361,430
Cash at end of period ($52,467) $185,818
Supplemental cash flows disclosures:
Interest paid $1,482 $3,379
Income taxes paid $0 $0
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
NOTE 1 - REPRESENTATION BY MANAGEMENT
The unaudited consolidated financial statements included herein
reflect all normal, recurring adjustments which are necessary to
a fair presentation of the consolidated financial position,
results of operations and cash flows for the interim periods
presented.
The results of operations for the three month period ended March
31,1996 are not necessarily indicative of the results to be
expected for the entire year of 1996.
NOTE 2 - ACCOUNTING CHANGE
Effective January 1, 1994 the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This standard
requires classification of investment securities into three
categories: held-to-maturity, trading, and available for sale.
The Company has classified all of its investment securities as
available for sale. As a result, these securities are now
required to be reported in the balance sheet at their fair value,
with unrealized gains and losses reported in a separate component
of stockholders' equity.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company issues life and accident and health insurance
policies to customers in targeted niche markets in exurban and
rural areas. The Company's principal life insurance products
include universal life, interest sensitive whole life, adjustable
premium whole life and term insurance policies which target
middle income ($25,000-$75,000) families, senior citizens and
government employees. The Company's principal accident and
health insurance policies include an association and group
hospital and surgical policy and a supplemental alternative
benefit option policy, which target middle income consumers who
do not participate in other full coverage major medical policies,
as well as participants in group plans who desire supplemental
coverages.
The Company's history of operating losses has been attributable
in large part to the failure of NAIL to develop viable insurance
products or a stable field force of agents during the years
following the organization of NAIL in 1984. Following a
management change in 1991, NAIL has been engaged in efforts to
build a portfolio of accident and health and life insurance
products and to expand its field force of agents. Management's
efforts in this regard have been hampered by disruptive actions
by prior management during 1992, by NAIL's limited capacity to
incur the costs associated with building insurance sales, and by
the Company's limited management resources. The Company has
continued to incur losses in 1994, 1995 and the first quarter of
1996 primarily as a result of the low base of premium revenues of
the Company in relation to its operating costs. The Company also
experienced unexpected underwriting losses on NAIL's short-term
major medical policies and an acquired block of group
hospitalization and surgical insurance policies.
NAIL has implemented plans intended to reduce its losses,
including expanding and improving the quality of its field force
of agents, terminating NAIL's short-term major medical business
in 1995, modifying the basis of compensation of many of its
accident and health insurance agents, entering into a new
accident and health marketing partnership with Continental
General Life Insurance Company and planning for expansion of
NAIL's presence in states where it was previously not active,
including Texas. A key element of management's plan during 1995
was to recapitalize the Company either through the sale of its
Senior Convertible Debenture, or its authorized but unissued
common stock. (See "Liquidity and Capital Resources.") In
November 1995, the Company signed a "Letter of Intent" with The
Southern Group, a Maryland based financial holding company. On
January 15, 1996, a definitive stock purchase agreement was
signed with The Southern Group whereby the Company will sell
10,335,045 shares of authorized but unissued shares and treasury
stock to The Southern Group for certain specified assets,
including cash and securities, having an audited value at
December 31, 1995 of approximately $6.8 million. The Southern
Group will then own approximately 75% of the Company. The
Southern Group is currently in the process of completing the
regulatory requirements for this stock purchase.
On May 14, 1996, The Southern Group purchased 5,000 shares of
National Affiliated Corporation Class A Preferred Stock with a
par value of $100.00. This preferred stock will be converted
into common stock based on $.65 per share at the closing of the
already mentioned 10,335,045 share purchase. The converted
shares will be a part of the 10,335,045 shares. The $500,000
received by the Company was immediately contributed to National
Affiliated Investors Life.
As of January 1, 1995 the Company established NAMC as its
marketing subsidiary and after recapitalization will transfer
agent relationship and management responsibilities from NAIL to
NAMC. This action is expected to reduce the business acquisition
costs incurred by NAIL and to facilitate the Company's entry into
marketing relationships with other insurers, which will allow the
Company to efficiently offer its agents additional products and
to realize additional commission income on sales of third party
products. Effective March 31, 1995, NAMC commenced a marketing
arrangement with Continental General Life Insurance Company which
provides the Company s agents with short-term major medical and
other health policies issued by Continental which will replace
sales of the Company s short-term policies.
Results of Operations
1996 Compared to 1995
The Company had a net loss for the first quarter of 1996 of
$385,430 compared to a loss of $388,800 for the three months
ended March 31, 1995. The loss per common share was $.11 for
1996 and $.12 for 1995. Total revenues decreased to $682,700 in
1996 from $837,215 in 1995. Premium revenues decreased to
$533,919 in 1996 from $716,599 in 1995.
Three months ended March 31,
<TABLE>
1996 1995
<S> <C> <C>
Life premium $259,762 $305,250
Life reinsurance premiums (151,490) (10,394)
Accident & health premiums 497,062 467,539
A & H reinsurance premiums (71,415) (45,796)
Total premium revenues $533,919 $716,599
</TABLE>
The decline in life premiums is attributable to continuing lapses
of FLA-100 policies. The FLA-100 participating life policies
were the primary policies sold from 1984 to 1988. The Company
ceased paying projected dividends on these policies in 1992 when
the Board of Directors determined the projected dividend to be
excessive. This action caused the lapse rate of these policies
to increase substantially. Of the 762 premium paying FLA-100
policies in force at December 31, 1995, 70 lapsed in the first
three months of 1996 for a lapse rate of 9.2%, compared to a
lapse rate of 8.4% for the first three months of 1995. The
Company expects the FLA-100 policies to continue to lapse at a
similar rate in future years. Sales of other life products did
not increase as planned during 1995 as the Company focused more
on its recapitalization plan. When the Company did not continue
to stress recruiting in 1995, the sale of new life business
decreased. With the proposed sale of the Company stock to The
Southern Group, the Company plans to start an aggressive
recruiting program in the second quarter of 1996 and should
increase the life premium during the last half of 1996.
Effective December 31, 1995, NAIL and Maryland Southern Life
Insurance Company, (MSLIC), entered into a coinsurance agreement
whereby MSLIC assumed 80% of all the life insurance business
retained by NAIL. This resulted in a reserve transfer to MSLIC
in the amount of $1,866,475. MSLIC paid the Company a ceding
commission in the amount of $373,295 for a net decrease to
premium revenues of $1,493,180. MSLIC is a wholly owned
subsidiary of The Southern Group.
In November 1995, the Company became the insurer on two
association groups in New Mexico. The groups, which were self-
insured trusts, were told by the New Mexico Insurance Department
that they must be insured by a licensed insurer and that they
could not continue as self-insured. These two trusts, which are
group major medical plans., are expected to provide over one
million dollars of premium in 1996 for the Company.
Net investment income increased to $135,608 as of March 31, 1996
as compared to $97,515 at March 31, 1995. This is the result of
gain on sales of invested assets disposed of in completing
transfer of assets on MSLIC reinsurance.
The Company's claims and other benefits decreased to $333,562 for
the first three months of 1996 from $398,091 for the first three
months of 1995. The composition of benefits and claims and
policyholder dividends for the three months ending March 31 are
as follows:
<TABLE>
Three months ended March 31,
1996 1995
<S> <C> <C>
Life benefits $ 29,137 $ 113,130
Policyholder
dividends 2,211 3,117
A & H benefits 304,425 284,961
Total benefits $ 335,773 $ 401,208
</TABLE>
Commission expense decreased to $85,326 for the first three
months of 1996 from $270,171 for the first three months of 1995,
primarily as a result of decreased sales of life policies. The
composition of commission expense was as follows:
<TABLE>
Three months ended March 31,
1996 1995
<S> <C> <C>
Life commissions $ 55,817 $ 115,574
Accident & health
commissions 29,509 154,597
Total $ 85,326 $ 270,171
</TABLE>
Other operating expenses increased to $309,784 for the first
three months in 1996 from $292,980 for the first three months in
1995.
Deferred policy acquisition costs increased to $157,914 for the
first three months of 1996 as compared to $82,744 for the first
three months of 1995. The lapse of FLA-100 policies is still
causing a decrease in deferred acquisition costs, but the
increase in new business has resulted in the decrease being less
than in previous years. The decrease in deferred acquisition
costs is allocated between life and health as follows:
<TABLE>
Three months ended March 31,
<S> <C> <C>
1996 1995
Life $ 103,607 $55,375
Accident and health 54,307 27,369
Total $ 157,914 $82,744
</TABLE>
Liquidity and Capital Resources
The liquidity requirements for the Company's operations generally
arise from the insurance operations of NAIL and the
administrative activities of NAC, and include payment of claims
to policyholders, payment of commissions and other costs of
acquiring new business, payment of operating costs, and payment
of cash values upon termination of policies. These demands have
generally been met by NAIL with funds generated by its
operations, from its reserves and liquid assets, and from capital
contributions by NAC. NAC has funded its operations primarily
through management fees charged to its subsidiaries, including
NAIL. NAIL is prohibited by Louisiana law from paying any
dividends to NAC other than from statutory profits.
Management fees charged by NAC to NAIL are sufficient to fund
NAC's operating expenses. NAC does not have any material long
term debt or debt service requirements. NAIL has incurred
statutory losses in each of 1995 and 1994 and is expected to
continue to incur statutory losses in 1996.
Statutory losses by NAIL have had a substantial negative impact
on the amount of its surplus. Due to the decline of surplus and
continued operating losses, NAIL has been notified that its
license was suspended in the states of Alabama, Tennessee and
Wyoming. The Company has been working on a plan to recapitalize
the Company to alleviate this surplus problem and to give the
Company funds for expansion. In November 1995, the Company
entered a letter of intent with The Southern Group for the
purchase of authorized but unissued stock of the Company. In
January 1996, a definitive stock purchase agreement was signed
whereby The Southern Group will purchase 10,153,506 shares of
authorized but unissued common stock and 181,539 shares of
treasury stock for certain specified assets, including cash and
securities, having an audited value at December 31, 1995 of
approximately $6.8 million. This transaction is currently
pending regulatory approval. This transaction is expected to be
approved and completed in the second quarter of 1996.
In December 1995, NAIL and Maryland Southern Life Insurance
Company, a wholly owned subsidiary of The Southern Group, entered
into an 80-20 reinsurance contract with Maryland Southern Life
assuming 80% of all life insurance reserve liabilities held by
NAIL. With the payment of a $373,295 ceding commission to NAIL
by Maryland Southern Life in February 1996, the surplus of NAIL
was increased by $373,295.
On February 26, 1996, The Southern Group made an initial purchase
of 300,000 shares of NAC stock for cash and government securities
having a value of approximately $400,000. The Company Board of
Directors then approved a surplus contribution to NAIL of
$400,000 to increase its surplus.
On May 14, 1996, The Southern Group purchased 5,000 shares of
National Affiliated Corporation Class A Preferred Stock with a
par value of $100.00. This preferred stock will be converted
into common stock based on $.65 per share at the closing of the
already mentioned 10,335,045 share purchase. The converted
shares will be a part of the 10,335,045 shares. The $500,000
received by the Company was immediately contributed to National
Affiliated Investors Life. The statutory capital and surplus for
National Affiliated Investors Life at March 31, 1996 totaled
$1,761,884. Based on March 31, 1996 capital and surplus, the
$500,000 surplus contribution would bring the total capital and
surplus of NAIL to $2,261,884.
Management is also taking steps to control administrative costs,
reduce policy claims and increase the Company premium revenues.
With the surplus increase due to the proposed sale of stock to
The Southern Group and with the new direction and leadership from
The Southern Group, the Company expects to see improvement in the
Company's operations by the end of 1996. Any failure of the
Company to complete the stock purchase transaction with The
Southern Group would have a material negative impact on the
Company's operations, and would likely result in regulatory
action by the Louisiana Insurance Commissioner to take over
supervision of NAIL, the loss of NAIL's licenses in most or all
jurisdictions in which it presently operates, and would possibly
require the Company to seek protection under United States
bankruptcy laws.
EXHIBIT 11
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
The weighted average number of shares outstanding for the three
months ended March 31, 1996 was computed as follows:
<TABLE>
<S> <C>
Shares outstanding, beginning of period 3,279,489
Shares issued, first quarter, 1996 118,461
Treasury shares reissued, first quarter, 1996 181,539
Shares outstanding, end of period 3,579,489
</TABLE>
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
This Second Amendment ("Amendment") is to that certain Stock Purchase
Agreement ("Agreement") dated January 15, 1996, and as amended as of February
26, 1996, by and between National Affiliated Corporation, a Louisiana
corporation and registered insurance holding corporation ("Seller" or "NAC"),
and The Southern Group, Inc. a Maryland corporation ("Buyer").
WHEREAS, the parties entered into that certain Letter Agreement, of even
date with the Agreement ("Letter Agreement") regarding interim transactions,
whereby Buyer agreed to purchase 9.9% of the issued and outstanding capital
shares of NAC at a purchase price not to exceed $350,000, if on or before
March 31, 1996, the Louisiana Department of Insurance and the Maryland
Department of Insurance approved the consummation of the Coinsurance Agreement
("Coinsurance Agreement") between National Affiliated Life
Insurance Company ("NAIL") and Maryland Southern, among other conditions; and
WHEREAS, the conditions regarding the Coinsurance Agreement set forth in
the Letter Agreement have been met; and
WHEREAS, the parties entered into that certain Amendment to Stock Purchase
Agreement dated as February 26, 1996 whereby Buyer acquired approximately 9% of
the issued and outstanding capital shares of NAC, or 300,000 shares of NAC
Common Stock (181,539 shares issued and held by the Seller as treasury stock,
and 118,461 shares of authorized but unissued shares), for $400,000, which
preliminary transaction was treated as part of the acquisition of the NAC Shares
contemplated in the Agreement;
WHEREAS, the approval of the Louisiana Department of Insurance and the
Maryland Department of Insurance of the acquisition of the NAC Shares has not
been obtained by the parties;
WHEREAS, the parties desire to enter into this Second Amendment to evidence
the acquisition of 5,000 shares of NAC non-voting preferred stock, having a
par value and liquidation preference of $100 per share ("NAC Preferred Stock")
by the Buyer in exchange for the assets listed on Exhibit "A" ("Southern Group
Assets");
WHEREAS, the parties desire for the acquisition of the NAC Preferred Stock
and the acquisition of the NAC Shares as described in the Amendment and the
Agreement to constitute on series of acquisitions all part of a common plan of
transfer of assets from Buyer to NAC in a transaction that will qualify as a
non-taxable corporate reorganization under section 368 of the Internal Revenue
Code of 1986, as amended as soon as the parties have received the approval of
the Louisiana Department of Insurance and the Maryland Department of Insurance
of the transaction;
WHEREAS, the parties wish to amend the Agreement to provide for this
preliminary acquisition of the NAC Preferred Shares and transfer of the
Southern Group Assets;
NOW THEREFORE, the parties hereby agree to modify the terms of the
Agreement as follows:
1. Concurrently with the execution of this Amendment and prior to the Closing,
a preliminary Closing ("Preliminary Preferred Closing") shall take place,
whereby Seller shall grant, convey, assign, transfer, and deliver to Buyer,
and Buyer shall purchase and acquire from Seller 5,000 shares of NAC Preferred
Stock (the "Preliminary NAC Preferred Shares"), which Preliminary NAC Preferred
Shares shall represent 100% of NAC Preferred Stock. Accordingly, the Closing
of Buyer's purchase of the NAC Preferred Shares from Seller, as such event is
described in Section 3 of the Agreement, shall be modified to be comprised
of three separate transactions, (i) the Preliminary Closing, (iii) the
Preliminary Preferred Closing, and (iii) the Closing, as described in the
Agreement prior to the execution of this Amendment.
2. At the Preliminary Closing, Seller shall deliver to Buyer certificates
representing the Preliminary NAC Preferred Shares, free and clear of all liens
and encumbrances, and Buyer shall deliver to Seller the Southern Group Assets.
3. At the Closing, the NAC Preferred Shares shall be converted into shares
of 769,231 shares of NAC Common Stock ($500,000 divided by $0.65 per share
of NAC Common Stock) in accordance with the conversion rights set out in the
Preferred Stock Designation attached hereto as Exhibit "B".
4. Sections 3.2 and 3.3 of the Agreement shall be modified to reflect the
transfers made at the Preliminary Preferred Closing, such that the NAC Shares
delivered by Seller to Buyer at Closing pursuant to 3.2(a) shall be offset by
(i) the Preliminary NAC Shares and (ii) the NAC Common Stock into which the
Preliminary NAC Preferred Shares were converted and the Purchase Price delivered
by Buyer to Seller at Closing pursuant to 3.3(a) shall be reduced by (x)
$400,000 with respect to the Preliminary Closing and (y) an additional
$500,000 with respect to the Preliminary Preferred Closing.
5. If for any reason, the Closing does not take place before August 15, 1996,
the parties agree to provide, each to the other, within 15 days of either
party's written request, the consents, certificates, registration rights
agreement, and other documents required to be delivered by the parties to the
other by the terms of the Agreement, which documents shall reflect only the
transfer of the Preliminary NAC Shares and the Preliminary NAC Preferred
Shares to Buyer.
6. Except as expressly amended hereby, the Agreement, specifically including
Sections 3.1, 3.2, and 3.3, and all obligations, duties, rights and powers
created thereby or thereunder are in all respects ratified and confirmed and
remain in full force and effect. Where any section, subsection or clause of
the Agreement is modified or deleted by this Amendment, any unaltered
provision of such section, subsection or clause of the Agreement shall remain
in full force and effect. However, where any provision of this Amendment
conflicts or is inconsistent with the Agreement, the provision of this
Amendment shall control.
7. Terms used herein, which are not otherwise defined or modified herein,
but which are defined in the Agreement, shall have the meanings therein
ascribed to them.
8. This Amendment (a) shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; (b) may be
modified or amended only in writing signed by each party hereto; (c) may be
executed by facsimile signatures and in several counterparts, and by the
parties hereto on separate counterparts, and each counterpart, when so
executed and delivered, shall constitute an original agreement, and all
such separate counterparts shall constitute one and the same agreement; and
(d) embodies the entire Amendment and understanding between the parties with
respect to the subject matter hereof and supersedes all prior agreements
relating to such subject matter.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on this
the 13th day of May, 1996.
SELLER:
NATIONAL AFFILIATED CORPORATION
By:______________________________
Name:___________________________
Its:______________________________
SUBSIDIARIES:
NATIONAL AFFILIATED INVESTORS LIFE INSURANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED MARKETING COMPANY
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED FINANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
PRACTICAL LEASING UNLIMITED SYSTEMS
By:______________________________
Name:___________________________
Its:______________________________
<PAGE>
BUYER:
THE SOUTHERN GROUP, INC.
By:______________________________
Name:___________________________
Its:______________________________
<PAGE>
EXHIBIT "A"
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
National Affiliated Corporation, as Seller and
The Southern Group, Inc., as Buyer
SOUTHERN GROUP ASSETS
CUSIP : DESCRIPTION : PAR : MARKET 4/30/96 : ACCRUED INTEREST
Bonds
74046R-BB-6 : Premier Auto Trust 4.22% 3/99 : $34,527.54 : $34,006.17 : $0.00
927804-CE-2:Virginia Electric & Power Co 7.65% 7/07: $40,000: $41,284: $1,147.50
362173-N6-9 : GNMA 8% 5/17 PL#211113 : $63,031.58 : $63,792.37 : $0.00
36205Q-QL-6 : GNMA 7.5% 6/94 PL#397459 : $95,229.98 : $94,151.02 : $0.00
362197-UK-9 : GNMA 9% 9/19 PL#269786 : $16,951.17 : $17,738.04 : $0.00
Common Stock
371834-20-1 : Genesis Capital Corporation : 500,000 shares @ .50 : $250,000.00
Totals $502,119.10
EXHIBIT "B"
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
National Affiliated Corporation, as Seller and
The Southern Group, Inc., as Buyer
DESIGNATION OF RIGHTS OF CLASS A PREFERRED STOCK
<PAGE>
NATIONAL AFFILIATED CORPORATION
DESIGNATION OF RIGHTS
CLASS A PREFERRED STOCK -- SERIES ONE
(1) Number of Shares, Class, and Par Value. This designation of rights
creates Class A Preferred Stock -- Series One, consisting of FIVE
THOUSAND (5,000) shares having a $100.00 par value per share and
an aggregate value of FIVE HUNDRED THOUSAND DOLLARS ($500,000).
(2) Dividends
(a) The holders of the Class A Preferred Stock -- Series One shall
not be entitled to dividends.
(b) The holders of Class A Preferred Stock -- Series One shall be entitled
to receive, when and as declared by the Board of Directors of the
Corporation, out of the assets of the Corporation legally available
therefor, dividends equal to the amount of dividends that would be
payable on the shares of Common stock, into which the shares of Class
A Preferred Stock -- Series One are convertible at the date of
declaration of any dividends on the Common Stock, payable on the
respective dividend payment dates set forth above.
(c) For so long as any shares of Class A Preferred Stock -- Series One are
outstanding, the Corporation shall not declare or pay any dividend on,
nor shall the Corporation make any distribution of assets to any holder
of Common Stock or other capital stock of the Corporation also
ranking junior to the Class A Preferred Stock -- Series One as to
dividends unless all dividends on the Class A Preferred Stock -- Series
One for all previous periods shall have been paid.
(3) Liquidation. In the event of the voluntary liquidation, dissolution or
winding up of the Corporation, the holders of Class A Preferred Stock --
Series One shall be entitled to receive, prior to any payment or distribution
of the assets of the Corporation to the holders of any class of stock of the
Corporation, the sum of ONE HUNDRED DOLLARS ($100.00) per share of Class A
Preferred Stock -- Series One held by such holders plus an amount equal to
all dividends accrued and unpaid thereon to and including the date payment
was made available to the holders of the Class A Preferred Stock -- Series
One and holders of the Class A Preferred Stock -- Series One shall not be
entitled to any other amount upon liquidation, dissolution
or winding up of the Corporation. If, upon any such liquidation, dissolution or
winding up of the Corporation, net assets are insufficient to permit the
payment in full of the respective amounts to which the holders of all
outstanding Class A Preferred Stock -- Series One are entitled, the entire
remaining net assets of the Corporation must be distributed among the holders
of the Class A Preferred Stock -- Series One in amounts proportionate to the
full amounts to which they are respectively so entitled.
(4) Redemption. On January 1, 1997, the Redemption Commencement Date, and
from time to time thereafter, the Corporation shall have the unilateral right to
redeem all or any number of shares of Class A Preferred Stock -- Series One in
accordance with the provisions of this section (4). The Corporation shall pay
to each holder of shares of Class A Preferred Stock -- Series One the sum of ONE
HUNDRED DOLLARS ($100.00) per share; plus an amount equal to any accrued
and unpaid dividends thereon (accrued through the Redemption Date described
below) payable in kind, with such aggregate sum referred to as the Redemption
Price.
Any shares of the Class A Preferred Stock -- Series One redeemed pursuant
to this section or otherwise acquired by the Corporation in any manner
whatsoever shall be permanently retired immediately on the acquisition thereof,
and shall not under any circumstances be reissued. The Corporation shall from
time to time take such appropriate action as may be necessary to reduce the
authorized number of shares of Class A Preferred Stock --Series One accordingly.
If fewer than all of the issued and outstanding shares of Class A Preferred
Stock -- Series One are redeemed at any time, all shares of Class Preferred
Stock to be redeemed shall be selected pro rata, and there shall be so
redeemed from each registered holder in whole shares, as nearly as practicable
to the nearest share, the proportion of all of the shares to be redeemed which
the number of shares held of record by such holder bears to the total number of
shares of Class A Preferred Stock -- Series One at the time outstanding.
Notice of redemption of Class A Preferred Stock -- Series One specifying the
date (the "Redemption Date") and place of redemption and the number of shares
and the certificate number thereof which are to be redeemed, shall be mailed
to each holder of record of shares to be redeemed at its address as shown by
the records of the Corporation not more than sixty (60) nor less than then
ten (10) days prior to the date on which such redemption is to be made.
Notice of redemption having been so mailed and provision for payment of the
Redemption Price for such shares on the specified Redemption Date having been
made by the Corporation, then, unless default be made in the payment of the
Redemption Price for such shares when and as due, (i) the shares of Class A
Preferred Stock -- Series One designated for redemption in such notice shall
not be entitled to any dividends accruing after the Redemption Date specified,
(ii) on such Redemption Date all rights of the respective holders of such
shares, as shareholders of the Corporation by reason of the ownership of such
shares, shall cease, except the right to receive the Redemption Price of such
shares upon presentation and surrender of the respective certificates
representing such shares, and (iii) such shares shall not after such Redemption
Date be deemed to be outstanding. In case less than all the shares represented
by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof.
Except as set forth in this Section (4), the Corporation shall not purchase or
redeem shares of the Class A Preferred Stock -- Series One at the time
outstanding unless all dividends on such stock for all past periods (accrued
through the Redemption Date) shall have been paid or declared and a sum
sufficient for the payment thereof set apart. If applicable law relating to
the sources of funds for the payment of accrued and unpaid dividends on any
shares of Class A Preferred Stock would prohibit the payment in full on a
Redemption Date of the Redemption Price for any shares of Class A Preferred
Stock -- Series One, (i) such Redemption Price shall be deemed reduced by the
amount of accrued and unpaid dividends that the Corporation is prohibited by
law from payment, (ii) such shares shall otherwise be
redeemed in accordance with the requirements of this Section (4), and (iii) such
unpayable accrued and unpaid dividends shall be added in equal amounts per share
to the accrued and unpaid dividends on the shares of Class A Preferred Stock --
Series One remaining outstanding in the hands of such holder. In no event
shall the Corporation purchase or redeem the last share of Class A Preferred
Stock -- Series One held by any holder unless the Corporation shall have paid
to such holder all accrued and unpaid dividends on all shares of Class A
Preferred Stock -- Series One held by such holder at any time.
(5) Conversion. On the date of the closing of the acquisition of Common Stock
by The Southern Group, Inc., a Maryland corporation, as provided in that certain
Stock Purchase Agreement, dated as of January 15, 1996 and as amended as of
February 26, 1996 and May 13, 1996 ("Stock Purchase Agreement") the shares of
Class A Preferred Stock -- Series One shall be automatically converted without
any further action, consent or approval into shares of Common Stock using a
conversion price of $0.65 per share of common stock and an $100 per share of
Class A Preferred Stock -- Series One. Accordingly, 5,000 shares of Class A
Preferred Stock -- Series One shall be convertible into 769,231 shares of
Common Stock.
(6) Voting. The holders of the Class A Preferred Stock -- Series One shall not
be entitled to any voting rights on matters submitted to a vote of shareholders
of the Corporation, so long as any shares of the Class A Preferred Stock --
Series One shall be outstanding, except those rights provided by the General
Corporation Law of the State of Louisiana, and the following rights:
(a) The Corporation shall not, without the written consent of the holders
of two-thirds of the aggregate number of shares of the Class A Preferred
Stock -- Series One at the time outstanding;
(i) alter or change the powers, preferences or rights given to the
Class A Preferred Stock -- Series One so as to affect the Class A Preferred
Stock -- Series One adversely; or
(ii) authorize, create or increase the number of authorized shares
of any class of stock ranking, either as to payment of dividends or
distribution of assets upon liquidation of the Corporation, prior to or on
parity with the Class A Preferred Stock -- Series One.
(b) The Corporation shall not, without the prior written consent of the
holders of a majority of the aggregate number of shares of the Class A
Preferred Stock -- Series One at the time outstanding, increase the authorized
amount of the Class A Preferred Stock -- Series One or authorize or create
any class of stock ranking, either as to payment of dividends or distribution
of assets, prior to or on parity with the Class A Preferred Stock -- Series One.
(c) Each outstanding share of Preferred Stock shall entitle the holder
thereof to notice of, and the right to vote at, any meeting of stockholders at
which any director is to be elected by the preferred stockholders, or at which
any provision of the Corporation's certificate of incorporation or any of the
Corporation's bylaws is to be adopted, repealed, or amended or at which a
merger, consolidation, reorganization, dissolution, liquidation, winding up or
sale of all or substantially all of the corporation's assets is to be or is
voted upon.
(d) The holders of the Class A Preferred Stock -- Series One shall be
entitled to elect one (1) director.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 2,366,850
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,250
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,671,263
<CASH> 0
<RECOVER-REINSURE> 77,519
<DEFERRED-ACQUISITION> 264,048
<TOTAL-ASSETS> 7,386,658
<POLICY-LOSSES> 1,249,213
<UNEARNED-PREMIUMS> 24,162
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 557,017
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,923,901
<OTHER-SE> (3,550,834)
<TOTAL-LIABILITY-AND-EQUITY> 7,386,657
533,919
<INVESTMENT-INCOME> 135,608
<INVESTMENT-GAINS> 77,501
<OTHER-INCOME> 13,173
<BENEFITS> 313,727
<UNDERWRITING-AMORTIZATION> 157,914
<UNDERWRITING-OTHER> 596,489
<INCOME-PRETAX> (385,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (385,430)
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<EXTRAORDINARY> 0
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<NET-INCOME> (385,430)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
<RESERVE-OPEN> 781,256
<PROVISION-CURRENT> 338,345
<PROVISION-PRIOR> 139,677
<PAYMENTS-CURRENT> 19,271
<PAYMENTS-PRIOR> 575,153
<RESERVE-CLOSE> 585,322
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</TABLE>
