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, 1996
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)
7228 England Drive, Suite 24, 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 $2,379,050
Aggregate market value of the Common Stock held by non-affiliates
of the Registrant on December 31, 1996 was: $891,470.
VOTING COMMON SHARES
8,765,415 shares of Registrant's Common Stock were outstanding as
of March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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 the majority of its business through
its wholly-owned subsidiary National Affiliated Investors
Life Insurance Company.
Business segment information is provided in Note 11 to
the Registrant's consolidated financial statements.
The Company plans to expand the business through the
acquisition and consolidation of other profitable life
insurance companies or blocks of insurance
business. See "Acquisition of Insurance Companies."
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 (see Regulation). NAIL's
products are marketed primarily to individuals and groups
located in exurban and rural areas through its contracted
field force of more than 400 independent agents and National
Affiliated Marketing Company ("NAMC"), a wholly-owned
subsidiary of NAC. At December 31, 1996, NAIL had
approximately $108 million of life insurance in force and
collected approximately $1.6 million in accident and
health insurance premiums.
From 1984 to 1988, NAIL was financed from contributions
of two public offerings of NAC common stock and by the
sale of FLA-100 "founders" participating whole life
policies by NAIL. During that period of time, 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, but
NAIL has not been successful in obtaining profitability
since that time. In June 1997, the Board of Directors
again replaced management. See "Item 9: Executive Officers
and Directors of Registrant."
Products
Life Products
The majority of NAIL's life insurance products are sold
under the "StarFlex Series" 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 issued more than 14,000 individual FLA-100
founders policies from 1984 to 1988. These policies
were "participating" life policies that paid dividends
to the policyholders. At December 31, 1996, approximately
1,200 of these policies remained in force of which
approximately 600 were premium paying.
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.
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 - Adustable 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
TLC is a modified whole life policy offered to those age 50 to 80.
TLCII is a simplified issue whole life policy issued to those
age 20 to 80.
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 three primary health products - a group
hospitalization and surgical care policy (GHSC), an
alternative benefit option policy (ABO) and a true group
health policy.
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 urban areas who 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.
True Group Health
This is currently offered to the Native American Health
and Welfare Trust of New Mexico and provides complete
health benefits to all employees and their dependents of
the schools that are members of the Native American
Trust.
Future Plans
NAIL's marketing plan will be implemented as profits
permit. NAIL is negotiating with a large Canadian
insurer, which markets in all 50 states, to market
NAIL's products. ERISA Trust Health administration
is being negotiated with three marketing groups.
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.
NAIL's investments at year end at market value for each
of the last two fiscal years were allocated as follows:
<TABLE>
<S> <C> <C> <C> <C>
Type of Investment 1996 % 1995 %
Bonds:
U.S. Government $1,293,415 26.9 $3,006,781 60.0
Political subdivisions -0- 0.0 25,862 2.5
Public utility 63,000 1.3 111,000 2.2
Corporate 428,487 8.9 877,481 17.5
Less restricted bonds (557,000) (565,162)
Net fixed maturities 1,227,902 3,555,962
Common stocks 80,938 1.7 1,250 -0-
Other long-term investments 127,775 2.7 173,673 3.5
Mortgage loans 1,425,000 29.7 -0-
Collateral loans 881,822 18.4 -0-
Certificates of deposit and
time deposits 499,673 10.4 714,851 14.3
Less: restricted CDs (475,000) (475,000)
Net CDs & time deposits 24,673 239,851
Subtotal 3,768,110 3,960,736
Restricted assets 1,032,000 1,050,162
Total $4,800,110 100% $5,010,898 100%
</TABLE>
The Louisiana Insurance Code allows an insurance company
a lesser premium tax if at least one third of its
investments are qualifying Louisiana investments, that is,
they're assets located in the state of Louisiana. It has
been the policy of NAIL when possible to invest its
assets in a percentage in excess of the Louisiana
requirement for purposes of incurring the lower
premium tax.
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) by which the reinsurer accepts 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.
Under a YRT agreement, the reinsurer establishes 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. Under coinsurance, the
reinsurer is paid the same premium rate
charged by the issuing insurance company for each $1,000
of risk assumed, and a percentage of this
premium rate is 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 remains liable to
perform all obligations of its policies
and is liable if its reinsurer should be unable to
meet its obligations under the reinsurance agreements.
NAIL reinsures life insurance coverage above $50,000
on any one life.
Health insurance benefits in excess of $25,000 (other
than alternative 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, 1996, approximately $37,459,000 in
face amount of life insurance and $19,966,000 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, ERC Life, Phoenix
Home Life and Reliastar Life Insurance Company.
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. This agreement was
terminated December 31, 1996 and the ceded business was
recaptured by NAIL.
Reserves
NAIL has had an actuary compute the amount of reserves it needs to
meet its anticipated obligations on its policies.
These reserves are based on industry standard
interest rates, mortality and policy withdrawal assumptions,
and provide for the possibility of more adverse circumstances.
The liability for cash values of
interest-sensitive and annuity products is accumulated
based on rates stated in the policies, which are subject to
periodic adjustment. The reserves reported in statutory
filings, which are reports filed with state insurance departments,
are calculated on a basis that meets the requirements
of Louisiana law.
Regulation
General
All life insurance companies, including the Company's
life insurance subsidiary NAIL, are subject to extensive
regulation, supervision and licensing by state
authorities. These regulatory agencies have broad
authority to review and to regulate the activities of
life insurance companies such as NAIL and in certain
instances the activities of the Company as an insurance
holding company. There can be no assurance that more
restrictive laws or regulations will not be adopted or
that regulatory review and oversight regarding existing
laws and regulations may not increase with respect to the
Company or NAIL, which could make compliance in the
future more difficult or more expensive. Legislative and
regulatory proposals are frequently advanced which, if
adopted, could adversely affect the Company's
profitability or the manner in which the Company conducts
its activities.
State Regulation of Insurance Companies
NAIL is subject to regulation by the State of Louisiana,
its state of domicile, and the other states in which it
transacts business. The laws of such states are designed
for the protection of policyholders rather than
securityholders. The Company and its wholly- owned
subsidiary, NAIL, are members of a holding company
system in Louisiana. All transactions within a holding
company system affecting insurers must be both reasonable
in relation to its outstanding liabilities and adequate
for its needs. State laws also require prior notice or
regulatory agency approval of changes in control of an
insurer or its holding company and of material
intercorporate transfers of assets within the holding
company structure. Generally, under insurance holding
company statutes, a state insurance authority must
approve in advance the direct or indirect acquisition of
10% or more of the voting securities of an insurance
company chartered in its state. According to such
regulations, the State of Louisiana Insurance Department
approved, in October 1996, the acquisition of shares of
common stock of the Company by The Southern Group, Inc.
("TSG"). See "Related Party Transactions."
The laws of the various states establish regulatory
agencies with broad administrative powers to approve
policy forms, grant and revoke licenses to transact
business, regulate trade practices, license agents, and
prescribe the type and amount of investments permitted.
Insurance companies are required to file detailed annual
statements with the state insurance regulators in each of
the states in which they do business, and their business
and accounts are subject to examination by such agencies
at any time. In addition, insurance regulators
periodically examine the insurer's financial condition,
adherence to statutory accounting practices, and
compliance with insurance department rules and
regulations. As part of their routine regulatory
oversight process, state insurance departments conduct
detailed examinations periodically (generally once every
three years) of the books, records and accounts of
insurance companies domiciled in their states. Such
examinations are generally conducted in cooperation with
the departments of two or three other states under
guidelines set by the National Association of
Insurance Commissioners ("NAIC"). 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.
During the first quarter of 1997, the Louisiana Insurance
Department began a review of the assets and operations of NAIL.
In connection with that review, the
Louisiana Insurance Department reviewed the transaction
in which TSG acquired control of the Company,
including individual assets transferred to the Company by
TSG and by the Company to NAIL. During the course of
this regulatory examination, Company management agreed to
increase the liquidity of the asset portfolio of NAIL,
by causing the Company, as the parent corporation of NAIL,
to reacquire for $1,350,000 in cash, certain long-term mortgage
notes and corporate securities held by NAIL and to agree to
acquire an additional mortgage note of $475,000 on or before
July 31, 1997. The result of this was to provide additional
cash assets to NAIL, thereby increasing its liquidity and reducing
the average maturity of its investment portfolio. To obtain
additional cash for this portfolio reorganization, the Company
sold convertible debentures. See "Debenture."
As a part of this portfolio reorganization
and regulatory review, NAIL appointed an investment
committee to be responsible for all aspects of asset
acquisition and disposition, including continued
compliance with applicable governmental regulations. NAIL also
amended its applicable governmental filings to reflect
accurately the change of control of the Company through
acquisition of common stock by TSG and the results of the
reacquistion transaction. The Company anticipates that
its portfolio management activities and other business
operations will continue to be reviewed by the Louisiana
Insurance Department. The Company does not anticipate
that any such reviews or examinations will adversely
affect the business or operations of the Company.
Due to the decline in surplus and operating losses
suffered by NAIL in 1996 and past years, NAIL was
notified during 1996 that its certificates of authority
to sell insurance were suspended in the states of
Alabama, Tennessee and Wyoming. The principal result of
these regulatory actions was to suspend the authority of
NAIL to sell new insurance policies in these states,
although NAIL is authorized to continue to collect
premiums and provide coverage with respect to existing
policies in such states. NAIL believes that the
suspension of these state licenses and the resulting
suspension of sales of new policies have not had a
material adverse effect on the revenues of NAIL.
Following the recent addition of capital to NAIL from the
sale of the Company's common stock to TSG, NAIL has
commenced the regulatory processes to request that these
suspended licenses be reinstated and believes that these
licenses will be reinstated.
Federal Regulation of Insurance Companies
Although the federal government generally does not
directly regulate the insurance business, federal
initiatives often have an impact on the business in a
variety of ways. Current and proposed federal measures
that may significantly affect the insurance business
include limitations on antitrust immunity, minimum
solvency requirements and the removal of barriers
restricting banks from engaging in the insurance and
mutual fund business.
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. The
policies allowed NAIL to change this rate formula after
July 1, 1996, but no changes have been made.
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 benefitted 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. See Item 3, "Legal
Proceedings."
Employees and Agents
At December 31, 1996, NAC and its subsidiaries had 13
permanent employees, of whom two are located in remote
marketing offices.
Insurance policies are sold by approximately 400 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.
Administrative Services Agreements
On April 9, 1996, NAIL entered into a Master Services
Agreement with Transaction Applications Group, Inc.
("TAG") to provide certain third party administration
services including policy administration and policy
accounting. During 1996, NAIL paid to TAG $91,000 for
such services.
On September 1, 1996, NAIL entered into an Administrative
Services Agreement with Pat Haney and Son Administrators,
Inc. ("HSA") to provide certain third party
administration services including policy administration
and policy accounting with respect to the Native American
Health and Welfare Trust and New Mexico Health Industries
Health Benefit Trust. During 1996, NAIL paid to HSA
$17,000 for such services.
The use of these third party administrators allowed NAIL
to reduce its full-time staff and office space
requirements and computer expenses. Implementation of
the third party administrative service agreements
resulted in one-time conversion expenses of $70,000. The
Company anticipates that the full benefit of the expense
reductions will be realized during 1997.
Item 2: Properties
NAC and all of its subsidiaries lease office space from
England Economic and Industrial Development District. The
two-year lease is for 4,016 square feet at an annual
rental rate of $24,369 to expire in May, 1998.
Item 3: Legal Proceedings
From time to time, the Company and NAIL are
involved in lawsuits related to their operations. In
most cases, such lawsuits involve claims under insurance
policies of NAIL or other contracts of the Company.
NAIL has outstanding two lawsuits related to
claims by purchasers of the FLA 100 founders policies.
NAIL issued more than 14,000 individual FLA-100 founders
policies from 1984 to 1988. At December 31, 1996, approximately
1,200 of these policies remained in force of which
approximately 600 were premium paying. These founders
policies were participating life policies that paid a dividend
to policyholders. According to the terms of the policy,
NAIL was not required to pay dividends after the third
anniversary date of each policy. While NAIL did pay dividends
during the required three anniversary dates on each policy, in
1992, NAIL ceased paying dividends with respect to any
FLA-100 policies. In Landreneau, et. al. v.
NAIL, the plaintiff filed a lawsuit in Louisiana's 13th
Judicial District Court on May 10, 1995, alleging breach
of contract and fraud regarding the sale of an FLA 100
founders policy. The plaintiff had purchased six units of
coverage and paid for renewal for a total of five years
on these policies. The trial court rendered a judgement in favor
of the plaintiff in the approximate amount of $34,000, less the
cost of insurance, which is approximately $7,000, plus interest.
This judgement was in general computed as the amount of premiums
paid less the value of the life insurance coverage provided
plus attorneys' fees. This judgement was affirmed by
the Third Circuit Court of Appeals of the State of Louisiana
and NAIL filed an appeal with the Supreme Court of the State
of Louisiana. On May 9, 1997, the Supreme Court of the State of
Louisiana denied the request of NAIL to hear an appeal of this
matter. Accordingly, NAIL will be required to pay the amount
of the judgement entered by the trial court. A
separate lawsuit, Classert, et. al. v. NAIL, et. al.,
filed in the 18th Judicial District Court, on August 26, 1996,
also relates to the FLA 100 founders policies. Five plaintiffs
asserting to represent the class of persons that purchased FLA 100
founders policies allege fraudulent sales practices by
former employees of NAIL and are seeking unspecified
damages. NAIL opposes the certification of these plaintiffs as
representatives of the class of persons that purchased FLA-100
policies and intends to continue to vigorously oppose such
certification and otherwise to defend this case. Although
discovery has begun in the Classert case there remain significant
procedural matters to be resolved and significant additional
discovery before NAIL will be able to make an accurate prediction
of the likely outcome of this case. Based on the best estimates
of the schedule for resolving the procedural and discovery
matters in connection with this case, management believes that
the issue of whether the case will proceed as a class action
will be heard by the trial court in the third or fourth quarter
of 1997 with a possible trial date not set until late 1998 or mid
1999. If the court certifies a class of persons including a
significant number of the former FLA-100 policyholders and
a judgement is rendered in favor of such a class of plaintiffs,
such an adverse judgement would have a material adverse effect on
NAIL.
The Company and NAIL are defendants in four separate lawsuits
related to a common series of events regarding a health policy
issued in Alabama: Johnson v. NAIL, Thomas v. NAIL,
Gooden v. NAIL, Allen v. NAIL. These cases, which have
been consolidated for purposes of discovery, relate to
claims regarding alleged misrepresentations by an agent
to employees of a garment plant in Greensboro, Alabama,
regarding the cost of health insurance policies.
Although NAIL believes that the amount of compensatory
damages based on the total amount of premiums paid by each
plaintiff is likely in the range of $1,000 per plaintiff,
the plaintiffs have made claims for punitive damages. The
Johnson, Thomas and Gooden cases were filed by individual
plaintiffs. The Allen case includes as plaintiffs, approximately
50 employees of the garment plant. NAIL believes
that not all of the plaintiffs in the Allen case paid any
policy premiums or were included in the policies. NAIL
is vigorously defending these cases and does not
anticipate that a resolution of these outstanding
lawsuits and claims will result in any additional
material impact on the financial condition of the
Company.
In a lawsuit styled Newsome v. NAIL, et. al., filed in
the Jefferson County Circuit Court in Alabama, the
plaintiff alleges breach of contract, fraud and related
causes of action based on the alleged failure of NAIL to
provide coverage under a short-term medical policy. The
plaintiff has claimed approximately $30,000 in medical
expenses and has requested other unspecified claims
including a claim for punitive damages. This claim
arises from an agent that was not a licensed agent of
NAIL allegedly failing to cause timely delivery to NAIL
of the plaintiff's insurance policy application and
premium payment during the required 30 day application
period, and the subsequent denial by NAIL to provide
coverage for claims related to injuries sustained by the
plaintiff before an application was delivered to NAIL's
home office. NAIL is vigorously defending this suit and
does not anticipate that a resolution of this outstanding
lawsuit and claim will result in any additional material
impact on the financial condition of the Company.
The Company and NAIL have other outstanding lawsuits as well as
other claims that arise in the ordinary course of business.
Even though the Company and NAIL may be contesting the validity
or extent of its liability in reponse to such lawsuits, the
Company has established reserves in its consolidated financial
statements that approximate its estimated potential liability.
Included in the financial statements is a total reserve of
$322,000 that has been established with respect to all of the
lawsuits and claims against the Company and NAIL. In establishing
this reserve, management has taken into account the facts and
circumstances of each case, the advice of counsel, the availability
of insurance coverages and other factors deemed by them to be
relevant.
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 Common Stock is traded in the over-the-counter
market. The following represents the high and low
bid prices of the Common Stock during the noted
periods:
<TABLE>
<S> <C> <C>
High Bid Low Bid
1996
First Quarter $ 1.00 $ .375
Second Quarter 1.64 1.12
Third Quarter 2.250 1.125
Fourth Quarter 2.125 1.125
1995
First Quarter $ .125 $ .125
Second Quarter .125 .03125
Third Quarter .125 .0625
Fourth Quarter .500 .0625
</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 31, 1997, there were 14,000,000
authorized and 8,765,415 issued and outstanding
shares of Registrant's Common Stock, no par value,
held of record by 3,483 persons.
(c)Dividends.
Registrant has not paid any cash dividends to date.
The Registrant does not have any plans to issue any
cash dividends in the reasonably foreseeable
future.
Item 6: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's discussion and analysis reviews the
consolidated financial condition of NAC at December 31,
1996 and 1995, the consolidated results of operations
for the years ended December 31, 1996 and 1995, and,
where appropriate, factors that may affect future
financial performance. This discussion should be read in
conjunction with the accompanying consolidated
financial statements, notes thereto and selected
financial data.
The Company cautions readers regarding certain
forward-looking statements contained in the following
discussion and elsewhere in this report and in any other
statements made by, or on behalf of, the Company, whether
or not in future filings with the Securities and
Exchange Commission ("SEC"). Forward-looking
statements are statements not based on historical
information. They relate to future operations,
strategies, financial results or other developments.
In particular, statements using verbs such as "expect,"
"anticipate," "believe" or similar words generally
involve forward-looking statements. Forward-looking
statements include statements that represent the
Company's beliefs concerning future or projected
levels of sales of the Company's products, investment
spreads or yields, or the earnings or profitability of
the Company's activities.
Forward-looking statements are
based upon estimates and assumptions that are subject to
significant business, economic and competitive
uncertainties, many of which are beyond the Company's
control and are subject to change. These uncertainties
can affect actual results and could cause actual results
to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ
materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable events or
developments, some of which may be national in scope,
such as general economic conditions and interest rates.
Some of these events may be related to the insurance
industry generally, such as pricing competition,
regulatory developments and industry consolidation.
Others may relate to NAC specifically, such as
credit, volatility and other risks associated with the
Company's investment portfolio, and other factors.
Investors are also directed to consider other risks and
uncertainties discussed in documents filed with the SEC.
NAC disclaims any obligation to update forward-looking
information.
The Company issues life and accident and health insurance
policies to customers in targeted niche markets in urban
and rural areas. The Company's principal life insurance
products include universal life, interest sensitive whole
life, adjustable premium whole life, and term insurance,
which targets 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 is a direct
result of a high level of operating expenses in relation
to the premium income. A contributing factor to the
losses was the failure to develop viable insurance
products or a stable field force of agents. Management's efforts
to build a portfolio of life and accident and health
products and to improve and expand its field force
has been hampered by NAIL's limited capital and surplus.
On January 15, 1996, a definitive Stock Purchase
Agreement was signed with The Southern Group whereby the
Company would sell 10,335,045 shares of authorized but
unissued shares and treasury stock to The Southern Group
for approximately $6.8 million. The stock sale to The
Southern Group was approved by the Louisiana Insurance
Department on October 31, 1996 and an initial closing
occurred on December 31, 1996. The initial closing
consisted of the completing of the sale of 5,435,928
shares of stock to The Southern Group for $3.5 million in
securities and other assets. This sale resulted in The
Southern Group acquiring 63% of the stock in the Company.
The Southern Group continues to have the right to
purchase the remaining 4,899,117 shares to total the
10,335,045 in the original purchase agreement. Pursuant
to an amendment to the Stock Purchase Agreement between
the Company and The Southern Group, the right of The
Southern Group to acquire additional shares is
subordinated to the right of the holders of the Company's
convertible debentures to convert such debentures into
shares of common stock and the dates upon which rights of
The Southern Group to acquire shares have been extended
by an additional 90 days. Each month the price at which
the shares are sold to The Southern Group increases by an
additional five cents per share. The prices at which The
Southern Group has the right to acquire each share are
$0.80 during April, $0.85 during May, $0.90 during June
and $0.95 during July. On July 31, 1997, the right of
The Southern Group to acquire additional shares of common
stock of the Company pursuant to the amended Stock
Purchase Agreement terminates.
Debenture
The Company also issued a convertible debenture totaling
$1.5 million on May 21, 1997. The proceeds of the
debenture offering were used by the Company to pay the
cost of the distribution of the debentures and to acquire
approximately $1,350,000 of mortgage notes and other
securities from NAIL and for the general working capital
of NAIL.
The terms of the debenture offering are as follows:
Maximum amount of debentures offered: $2,500,000
Interest Rate: 4 %
Maturity: April 1, 1999
Conversion Feature: Convertible at
holder's option
into shares of
common stock of NAC
Each holder of the debenture is entitled, at its option,
to convert at any time commencing forty-five (45) days
after the closing of the sale of the debenture. The
principal amount plus accrued interest on the debenture
is converted into shares of the Company's common stock.
The conversion price shall equal the lesser of (a) $4.00
per share or (b) 80% of the Market Price on the
Conversion Date. The Market Price is the average closing
bid price of the common stock on the five (5) trading
days immediately preceding the Closing or Conversion
Date, as may be applicable, as reported by the National
Association of Securities Dealers, or the closing bid
price on the over-the-counter market on such date or, in
the event the common stock is listed on a stock exchange,
the Market Price shall be the closing price on the
exchange on such date, as reported in the Wall Street
Journal. Interest accrued or accruing from the date of
issuance to the date of conversion shall, at the option
of the holder, be paid in cash or common stock upon
conversion.
According to the terms of the debenture, the Company
agreed to pay certain penalties and liquidated damages to
the holders of the debentures for any delay in the
delivery of any certificates representing shares of
common stock of debenture holders that converted
debentures into shares of common stock. The Company
also agreed to register for resale any of the shares of
common stock of converting debenture holders if such
shares are not freely tradeable under applicale federal
securities laws. A copy of the debenture is attached as
Exhibit 10(h).
Financial Conditions
The Company's assets at December 31, 1996, totaled
$9,280,615 as compared to $9,635,826 on December 31,
1995. The liabilities totaled $5,422,283 and $6,905,189
on December 31, 1996 and 1995, respectively.
Stockholder's equity increased to $3,858,332 at December
31, 1996, from $2,730,637 at December 31, 1995. In 1996
the Company had a net operating loss of $1,737,588.
Investments with fixed maturities available for sale at
market decreased from $3,555,962 to $1,227,902 during
1996 in part as a result of the Company selling
securities to fund operations. As a result of the
continuing losses and a need for funding beyond the cash
flow of the Company, the Company began to seek additional
capital infusions. During 1996, the Company issued
5,279,887 shares of common stock which added $3,428,102
to the net equity of the Company. Mortgage loans and
collateral loans totaling $1,425,000 and $881,822
respectively, as reflected on the balance sheet, were
part of proceeds received from the issuance of the NAC
common stock. The remainder consisted of publicly-traded
common stocks and investment grade bonds.
The decrease in reinsurance recoverable from $2,759,921
at year end 1995 to $679,623 at December 31, 1996, is the
result of the ceding of life insurance totaling
$1,866,475 to Maryland Southern Life in 1995 and the
recapture of the business in 1996 totaling $1,859,964.
The $2,139,330 other amounts receivable consists for the
most part of $1,859,964 due from Maryland Southern Life
for the recapture of the coinsurance business at December
31, 1996. The ceding of life insurance totaling
$1,866,475 to Maryland Southern Life at December 31,
1995, resulted in a payable on the Company's books at
December 31, 1995, which was included in the $2,088,754
liability captioned accounts payable and accruals. This
liability decreased to $301,464 at December 31, 1996.
Results of Operations
1996 Compared to 1995
The Company had a net loss for 1996 of $1,737,588
compared to a loss of $1,555,451 for 1995. The loss per
common share was $.49 for 1996 and $.47 for 1995. Total
revenues decreased from $3,142,782 in 1995 to $2,379,050
in 1996. Premium revenues as shown below decreased to
$1,879,452 in 1996 from $2,727,313 in 1995.
<TABLE>
<S> <C> <C>
Year Ended December 31,
1996 1995
Life premium $ 976,271 $1,671,765
Life reinsurance premium (604,730) (273,819)
Accident and health premium 1,680,305 1,442,425
A&H reinsurance premium (172,394) (113,058)
Total premium revenues $ 1,879,452 $2,727,313
</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. Sales of life
products did not increase as planned during 1995 and 1996
as the Company focused more on its recapitalization plan.
When the Company did not continue to stress marketing and
recruiting in 1995 and 1996, the sale of new life
business decreased.
Effective December 31, 1995, NAIL and Maryland Southern
Life Insurance Company (MSLIC), a wholly-owned subsidiary
of The Southern Group, entered into a coinsurance
agreement whereby MSLIC assumed 80% of all the life
insurance business retained by NAIL resulting 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. This agreement was terminated December 31,
1996, and all business was recaptured by NAIL.
TSG has elected to utilize a $387,000 coinsurance
recapture fee as a pro rata reduction in price of options
to be exercised in the future.
The increase in the accident and health premium is the
result of adding additional new members to the New Mexico
group business. Management expects this business to
continue to expand in 1997.
The Company claims and benefits amounted to $1,520,601
for 1996 as compared to $1,376,242 in 1995. The
following schedule reflects the claims and other
benefits:
<TABLE>
<S> <C> <C>
1996 1995
Life benefits $ 61,442 $ 500,300
Accident and health benefits 1,459,159 875,942
Total benefits $1,520,601 $1,376,242
</TABLE>
The large amount of accident and health (A & H) claims
resulted from the operations of the New Mexico Group.
The Company expects the A & H claims will remain high,
but premiums will be increased by 20% in 1997.
Commission expense decreased during 1996 primarily as a
result of decreased life insurance sales and a lower
commission rate on the New Mexico Group A & H business.
The composition of commission expense was as follows:
<TABLE>
<S> <C> <C>
1996 1995
Life commissions $ 146,641 $ 338,034
Accident & health commissions 150,639 389,332
Total $ 297,280 $ 727,366
</TABLE>
Salaries and other operating expenses increased to
$2,367,460 in 1996 from $2,128,734 in 1995. The Company
expects a decrease in salaries and other operating
expenses in 1997. The Company has moved its offices and
decreased its rent, utility and maintenance costs. The
Company has downsized its office staff and outsourced its
computer and policy administrative services. This should
result in a substantial decrease in 1997. Management is
continuing to evaluate operations to further reduce
operating costs.
Amortization of deferred policy acquisition costs
decreased to $(544,583) in 1996 from $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. When the agreement was canceled at December
31, 1996, the DAC was also recaptured. The amortization
of deferred acquisition costs is allocated between life
and health as follows:
<TABLE>
<S> <C> <C>
1996 1995
Life $(617,727) $777,662
Accident and health 73,144 20,090
Total $(544,583) $797,752
</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.
Statutory losses over the last few years by NAIL have had
a substantial negative impact on the amount of its
surplus. Due to the decline in surplus and continual
operating losses, NAIL was notified during 1996 that its
licenses were suspended in the states of Alabama,
Tennessee and Wyoming. With the stock purchase by The
Southern Group, the Company contributed $2,766,913 to
NAIL's surplus at December 31, 1996. According to the
statutory statement filed, this enabled NAIL to end 1996
with $2,669,157 in capital and surplus.
On May 21, 1997 NAC issued $1,500,000 in convertible
debentures of which $1,350,000 were used to repurchase
from NAIL certain mortgage notes and securities.
Acquisition of Life Insurance Companies
The Company's business plans will focus on growth through
the acquisition and consolidation of other life
insurance companies. The Company plans to seek to
acquire undervalued life insurance companies in the $2 to
$50 million equity range. This acquisition strategy will
require acquisition candidates, evaluation, acquisition
finance, and regulatory approvals. The Southern Group
has implemented a program of identifying potential
acquisition candidates and the Company intends to review
acquisition opportunities presented by The Southern
Group.
The Southern Group signed a strategic alliance with
Conseco Capital Management (CCM), an asset management
company with $29 billion of assets under management, to
provide assistance in the evaluation of the assets of
life insurance companies identified by The Southern Group
or the Company.
The Company plans to rely on its controlling stockholder,
The Southern Group, to implement financing for
acquisitions. This will include prudent amounts of senior
debt, acquisition partnerships, a preferred stock issue,
and the limited use of the Company's common stock.
Two new principals of NAC have extensive insurance
experience: Michael J. Dugan, Director, former Director of
Insurance - State of Nebraska (see resume) and Edward J. Birrane,
Executive Vice President , former Commissioner of Insurance -
State of Maryland (see resume).
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) 53 Chairman of the Board
T. Brent Chapel, CPA (6) 50 Vice Chairman, Chief Financial
Officer
Ira L. Gottshall, FLMI (7) 39 President, Chief Executive
Officer and Director
Edward J. Birrane, Esq. 61 Executive Vice President
Clayton A. Carney, FLMI 57 Vice President and Chief
Operating Officer
Jayne Davis Chapel (6) 40 Secretary
Michael J. Dugan, Esq. 59 Director
Mary K. Descant, FLMI 38 Treasurer
Susan A. Davis 50 Director
Robert W. Chapel, CPA 40 Director
Sidney C. Shaw, II 50 Director
Robert F. Meredith, III (1)(2)(4) 45 Director
G. Vaughn Walton 48 Director
Bobby Williams (1)(3)(4)(5) 67 Director
Dan Van Wormer (1)(3) 54 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
(6) Was elected to office in June 1997
(7) Was elected to office of President in June 1997
Benjamin P. Wall. Mr. Wall joined the Board of
Directors of the Company in May 1990 and has served as
Chairman of the Board since June 1991. 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.
T. Brent Chapel, CPA. Mr. Chapel joined the Board of
Directors in March 1996 and was elected Vice Chairman in
January 1997. He was elected Chief Financial Officer in
June 1997. Mr. Chapel is Chairman of The Southern
Group, Inc., a life insurance holding company in
Maryland. The Southern Group is the controlling
stockholder of National Affiliated Corporation. Mr.
Chapel also serves on the Board and is Chairman of
Maryland Southern Life Insurance Company, a Maryland
domiciled life insurance company. He is a Director of
Delmay Energy Corporation, a Canadian public company, and
Badger Drilling Inc., a privately-held environmental
drilling company in Virginia. Mr. Chapel has been a
Certified Public Accountant since 1972. 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. Mr. Chapel is the spouse of Jayne Davis Chapel,
the Secretary of the Company.
Ira L. Gottshall, FLMI. Mr. Gottshall joined the Board
of Directors and was elected Chief Executive Officer in
January 1997. He was elected President in June 1997.
He currently is a Board member and President of
Maryland Southern Life Insurance Company, and a Board member
and President of The Southern Group, a life insurance
holding company in Maryland. The Southern Group is the
controlling stockholder of National Affiliated
Corporation. From January 1994 to December 1995, Mr.
Gottshall was the Operations Officer for Pierce
Financial, a real estate and insurance firm. From June
1984 to December 1993 he was with First Delaware Life
Insurance, a life insurance company domiciled in Delaware
where he served as President and Chief Executive Officer
from 1991 to December 1993. Mr. Gottshall was President
and Chief Executive Officer of Lincoln Liberty Life
Insurance Company from January 1993 to January 1994. Mr.
Gottshall will serve on the Company's Compensation
Committee and Executive Committee. He also serves as a
Board member for Regency Equities Corp. Mr. Gottshall
received a Bachelor of Science from the University of
Shippensburg, Shippensburg PA.
Edward J. Birrane, Esq. Mr. Birrane was elected
Executive Vice President of Acquisitions in January 1997.
Mr. Birrane is also a Board member and Executive Vice President of
Acquisitions for the board of The Southern Group, the controlling
stockholder of National Affiliated Corporation. Mr.
Birrane serves on the Board and is General Counsel to
Maryland Southern Life Insurance Company. Mr. Birrane
was Commissioner of Insurance for the Maryland Insurance
Administration from 1976 - 1983. He served on the
regional Executive Committee for the National Association
of Insurance Commissioners and chaired the Securities
Valuation Office Oversight Committee and the Property and
Casualty Committee. Mr. Birrane serves on the Board of
Directors for Lexington National Insurance Corporation,
and is General Counsel and Board member for the Flagship
Insurance Agency. He is also Counsel to the Maryland
Health Underwriters Association and the Baltimore Health
Underwriters Association, and is Liaison on health
legislative issues for the National Health Underwriters
Association. Mr. Birrane received a Bachelor of Science
from Loyola College, Baltimore, Maryland and a Juris
Doctorate from the University of Maryland, College Park,
Maryland.
Clayton A. Carney, FLMI. 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.
Michael J. Dugan, Esq. Mr. Dugan joined the Board of
Directors in January 1997. Mr. Dugan is also a Board member
and Director of Regulatory Relations for the Board, and
General Counsel to The Southern Group, the controlling
stockholder of National Affiliated Corporation. Mr. Dugan
will direct regulatory relations with the state insurance
commissioners and the National Association of Insurance
Commissioners. He also serves as the Director of
Insurance Law for Kennedy, Holland, DeLacy, & Svoboda in
Omaha, Nebraska. Mr. Dugan was the Commissioner of
Insurance for the State of Nebraska from 1983 - 1987. He
also served as Chairman of the state Democratic Party.
Mr. Dugan serves on the Board of Directors for the
following companies: Farmers Union Co-operative Insurance
Company of Nebraska, First Delaware Life Insurance
Company, First Landmark Life Insurance Company, Lincoln
Indemnity Company, Lincoln Liberty Life Insurance
Company, National American Insurance Company, and Risk
Capital Reinsurance Company. He received a Bachelor of
Philosophy from Notre Dame in South Bend, Indiana in 1959
and a Juris Doctorate from Creighton University in Omaha,
Nebraska in 1962 .
Mary K. Descant, FLMI. 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 received a Bachelor of Science from
Louisiana Tech University.
Susan A. Davis. Ms. Davis joined the Board of Directors
in January 1997. Ms. Davis is also a Board member of and advises
on public affairs and marketing for The Southern Group, the
controlling stockholder of National Affiliated
Corporation. She is a Director of Maryland Southern Life
Insurance Company. Ms. Davis is the Chief Executive
Officer and Board member of Susan Davis International,
Ltd., a communications and public affairs firm
headquartered in Washington, D.C. She has managed
national media, public policy and political campaigns for
20 years. Washingtonian magazine called Ms. Davis one of
"Washington's Most Powerful Women." She is a trustee and
the Past President of the International Women's Forum, a
worldwide organization of 1,500 women leaders. She serves
on the Board of Directors for The Center for Democracy,
the National Alliance to End Homelessness, Techmatics,
Inc., and is a Board member and Vice Chairman of the
International Business Council. Ms. Davis was honored as
"National Business Woman of the Year" in 1994 and "Woman
Business Advocate of the United States" by the Small
Business Administration. She received a Bachelor of Arts
from the University of Wisconsin, Madison, Wisconsin.
Robert W. Chapel, CPA. Mr. Chapel joined the Board of
Directors in January 1997. Mr. Chapel is also a Director
of The Southern Group, the controlling stockholder of
National Affiliated Corporation. He currently is the Vice
President of Finance for Volunteer Hospital Association,
Inc., a healthcare alliance of 1,500 hospitals. Mr.
Chapel was previously a manager with the Dallas office of
Price Waterhouse, a big six CPA firm. Mr. Chapel received
a Bachelor of Science and a Master Of Science in
Accounting from Oklahoma State University.
Sidney Clark "Rusty" Shaw II. Mr. Shaw joined the Board
of Directors in January 1997. Mr. Shaw is a Director of
The Southern Group, the controlling stockholder of
National Affiliated Corporation, and a Director of
Maryland Southern Life Insurance Company. Mr. Shaw is
President of Shaw's Gulf, Inc., a retail sales firm
located in Stillwater, Oklahoma, and he has held that
position since 1971. Mr. Shaw received a Bachelor of Arts
degree in Business Administration from Oklahoma State
University, Stillwater, Oklahoma.
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
received a Bachelor of Science 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 of NAMC. Mr. Walton is the owner of Royal
Investment Company, Inc. and co-owner of The Oil Exchange
in Alexandria, Louisiana. Mr. Walton received a Bachelor
of Science 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; Managing 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 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 former 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.
Jayne Davis Chapel. Ms. Chapel became Corporate Secretary of
the Company and National Affiliated Investors Life in June 1997.
Ms. Chapel is Director of Communications for and a Board member
of The Southern Group, the controlling stockholder of National
Affiliated Corporation. She is also on the Boards of Maryland
Southern Life Insurance Company and Badger Drilling of Virginia,
Inc. Prior to joining the Company, Ms. Chapel was Associate
Director of Communications for the Chemical Manufacturers
Association. Prior to that she worked at The White House during
the Reagan Administration as a communications specialist.
Ms. Chapel received a Bachelor of Arts from the University of
Wisconsin, Madison, Wisconsin. Ms. Chapel is the spouse of
Mr. Brent Chapel, the Vice Chairman and Chief Financial Officer
of the Company.
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." Additionally, the Company pays Mr. Wall
$18,000 a year as compensation for his position as
Chairman of the Board of the Company.
Executive Compensation
The following table sets forth the salary and bonus paid
by the Company to the Company's former President and the chief
executive officer of the Company. As mentioned
above, Benjamin P. Wall receives compensation for his
services as Chairman of the Board.
<TABLE>
Summary Compensation Table
Name and
Principal Position Year Salary Bonus Car Allowance 401(k)
Contribution
<S> <C> <C> <C> <C> <C>
Edward A. Carroll, Jr.
Former President 1996 $ 92,000 $ 5,355 $ 5,198 $ 2,760
1995 $ 92,000 $ 5,355 $ 5,198 $ 2,760
1994 $ 92,000 $ 7,624 $ 5,198 $ 2,760
Ira Gottshall, CEO 1996 $ 72,000
</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 non-qualified
stock options to directors, officers and employees of the
Company. The Stock Option Plan provides for the issuance
of up to 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.
No options were issued to the individuals named in the
executive compensation table during the last fiscal year.
Employment Agreements
The Company had 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 the employment
agreement with the former President of the Company,
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. Other officers are each entitled to
six month's salary and benefits under the terms of their
respective employment agreements. In June 1997, the President,
Chief Financial Officer and Secretary were replaced. No
new employment contracts have been entered into by the Company.
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 31, 1997 by each
director of the Company, each executive officer named in
the executive compensation table and all officers and
directors as a group.
<TABLE>
Name of Number of Shares Ownership
Beneficial Owner Beneficially Owned Percentage
<S> <C> <C> <C>
Michael J. Dugan 15,000 *
Sidney Clark Shaw, II 20,000 *
Robert F. Meredith, III 16,474 *
Dan Van Wormer 7,580 *
Benjamin P. Wall 51,397 *
G. Vaughn Walton 19,476 * 1/
Bobby Williams 14,325 * 2/
T. Brent Chapel 10,335,045 73.8% 3/
Ira L. Gottshall 20,000 *
Susan A. Davis 20,000 *
Robert W. Chapel 20,000 *
Clayton A. Carney 28,500 *
Mary K. Descant 16,500 *
The Southern Group 10,335,045 73.8% 4/
7212 Old Stage Road
North Bethesda, MD 20852
All Directors and 10,504,297 75.03%
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 and its wholly-
owned subsidiary, Maryland Southern Life Insurance Company,
as to which Mr. Chapel has voting and investment power.
4/ Includes the 5,435,928 held by The Southern Group and the
additional 4,899,117 shares for which The Southern Group
holds the right to acquire subject to the conversion
rights of the Debenture holders.
</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,
1997. This policy, which provides coverage for alleged
wrongful acts occurring on or after March 31, 1989,
contains numerous exclusions. For the policy term of
April 1, 1996 to April 1, 1997 the policy premium was
$56,805 and for the policy term of April 1, 1997 to April
1, 1998 the policy premium was $70,350.
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.
The Company is involved in a transaction with The
Southern Group, as indicated in the Stock Purchase
Agreement at Exhibit (10)(b). The Southern Group is
controlled by T. Brent Chapel, who is also a Director of
the Company. This transaction provided to The Southern
Group, which owns 5,435,928 shares of the Company, the
ability to purchase 4,899,117 additional shares of the
Company. The ability of The Southern Group to acquire
the additional 4,899,117 is subordinated to the rights of
holders of the debentures to convert the debentures into
shares of the Company's common stock. See "Related Party
Transacations" and "Debenture Offering."
Related Party Transactions
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 reserve transfer of
$1,493,180. MSLIC is a wholly-owned subsidiary of The
Southern Group. This agreement was terminated December
31, 1996, and all business was recaptured by NAIL. The
fees earned by MSLIC upon the recapture of this business
are to be applied as an offset to the price of options to
be acquired in the future.
On January 16, 1996, TSG and the Company entered into a
Stock Purchase Agreement, dated January 15, 1996
("Stock Purchase Agreement"), to which TSG agreed, subject
to required state insurance regulatory
approvals, to acquire an aggregate of 10,335,045 shares
of common stock, or approximately 75% of the outstanding
common stock of the Company for a purchase price of $6.8
million. In connection with the Stock Purchase Agreement the
following transactions occurred:
On February 26, 1996, TSG and the Company entered into the
First Amendment to the Stock Purchase Agreement. TSG
transferred $400,000 of investment grade corporate
and governmental bonds from its working capital to
National Affiliated Corporation for 300,000 shares (approximately
9%) of NAC common stock at $.65 per share, the balance
represented a payable due to TSG which was to be
used to purchase additional NAC common stock after
approval of the acquisition by the Louisiana Insurance Commission.
On May 13, 1996, TSG and the Company entered into the
Second Amendment to the Stock Purchase Agreement.
TSG purchased $500,000 of National Affiliated Corporation
convertible preferred stock by transferring $250,000 of
investment grade corporate and governmental bonds and $250,000 of
publicly-traded common stocks from its working capital.
On August 13, 1996, TSG and the Company entered into the
Third Amendment to the Stock Purchase Agreement. TSG
purchased $881,822 of NAC convertible preferred stock by
transferring $881,822 in notes collateralized by publicly-traded
stock. TSG acquired these notes in an exchange
transaction with two parties unrelated to TSG. No
profit was realized in this transaction.
On September 5, 1996, TSG purchased 108,539 shares of common
stock by drawing on $70,550 of the balance remaining from the
February 26, 1996 transaction.
On December 31, 1996, TSG and the Company entered into the
Fourth Amendment to the Stock Purchase Agreement. TSG
purchased 5,027,389 of NAC common stock by converting the NAC
convertible preferred stock, contributing $1,425,000 in
mortgages and $326,531 in publicly-traded common stock.
TSG acquired the mortgages by issuing preferred stock and the
stock was held in its investment portfolio.
Subject to the voting agreement described below, through the
ownership of more than a majority of the common stock of the
Company, TSG has the ability to elect or remove all of the
directors of the Company and, generally, as a result thereof,
to exercise control over the management and affairs of the
Company. By agreement between TSG and the Company, following
the acquisition by TSG of a majority of the common stock of the
Company, a Board of Directors meeting of the Company was held
January 7, 1997, for the purpose of electing five persons
nominated by TSG to serve on the Board of Directors of the
Company. In order to make room on the Board of Directors for the
nominees of TSG, John Boxberger, a member of the Board of
Directors of the Company, voluntarily resigned his position on
the Board. At the meeting, TSG nominated Sidney Shaw, Michael
Dugan, Susan Davis, Robert Chapel and Ira Gottshall to the Board
of Directors of the Company and the remaining members of the
Board of Directors of the Company duly elected such persons to
serve as directors until the next annual meeting of stockholders.
In addition, Brent Chapel was elected to serve as Vice Chairman
and Mr Gottshall was elected to serve as Chief Executive Officer
of the Company. Accordingly, certain persons nominated by TSG,
who also serve on the Board of Directors of TSG, now comprise a
majority of the Board of Directors of the Company and occupy
certain executive officer positions.
Pursuant to the terms of the Fourth Amendment to the Stock
Purchase Agreement, TSG has agreed to vote its shares of common
stock of the Company for five persons designated by the Company
to serve as directors of the Company. In addition, TSG has agreed
for a period of two years (commencing December 31, 1996) to vote
its shares of common stock of the Company in favor of the election
of not fewer than three persons designated by the Company to serve
as directors of the Company and to cause all committees of the
Board of Directors of the Company to have at least one member who
is a designee of the Company. The Fourth Amendment also provides
that if TSG does not complete the purchase of 6,321,942 shares of
common stock of the Company remaining unissued on or before
April 30, 1997, TSG will for two years after vote its common stock
to elect such number of designees of the Company to the Board of
Directors of the Company as is necessary to constitute a majority.
Brent Chapel, Chairman of the Board of Directors of TSG, owns
approximately 67% of the voting securities of TSG and, therefore,
has the ability to control the management and affairs of TSG
through the election and removal of its directors. Certain shares
of preferred stock of TSG owned by Mr Chapel has been pledged by
him to secure certain promissory notes issued by him in connection
with the acquisition of certain notes and assets that were
contributed by Mr Chapel to TSG in exchange for shares of TSG stock.
Certain of these notes and assets have been used by TSG to purchase
the common and preferred stock of the Company, as set forth above.
To the knowledge of the Company, an event of default by Mr Chapel
under the notes or documents securing such notes and the forclosure
by the holders thereof upon the preferred stock of TSG securing
same would not result in any change of control of TSG or of the
Company.
On May 20, 1997, TSG and the Company entered into the Fifth Amendment
to the Stock Purchase Agreement. The purpose of the Fifth Amendment
was to subordinate the rights of TSG to acquire additional shares of
common stock to allow the Company to have sufficient shares
available for the holders of the debentures to convert such debentures
into shares of common stock. This Fifth Amendment extended the time
periods for TSG to acquire additional shares of common stock until
July 31, 1997, and also extended the April 30, 1997 date in the
above referenced voting agreement until July 31, 1997. The Company
agreed to take all steps to increase the number of authorized shares
of common stock to allow TSG to purchase the full number of shares
of common stock as provided in the Stock Purchase Agreement. A
copy of this amendment is provided as an exhibit.
The assets transferred by TSG to the Company in
connection with the NAC Agreement were acquired by TSG
during 1995 and 1996. The cost of these assets to the
Company was the same as the cost of such assets to TSG.
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
Form 8-K filed January 15, 1997
(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 1/
(10)(c) First Amendment to Stock Purchase Agreement
(10)(d) Second Amendment to Stock Purchase Agreement,
incorporated by reference from Form 10QSB,
filed May 15, 1996.
(10)(e) Third Amendment to Stock Purchase Agreement,
incorporated by reference from Form 10QSB,
filed August 15, 1996.
(10)(f) Fourth Amendment to Stock Purchase Agreement,
incorporated by reference from Form 8-K,
filed January 15, 1997.
(10)(g) Fifth Amendment to Stock Purchase Agreement
(10)(h) Debenture Agreement - 4% Convertible Debenture,
due April 1, 1999.
(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, hereunto duly
authorized.
(Registrant) National Affiliated Corporation
By (Signature and Title) Ira L. Gottshall, FLMI
Ira L. Gottshall, FLMI, President and Chief Executive Officer, Director
Date June 19, 1997
By (Signature and Title) T. Brent Chapel, CPA
T. Brent Chapel, CPA, Vice Chairman of the Board and
Chief Financial Officer, Director
Date June 19, 1997
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
Date June 19, 1997
By (Signature and Title) Michael J. Dugan, Esq.
Michael J. Dugan, Esq., Director
Date June 19, 1997
By (Signature and Title) Susan A. Davis
Susan A. Davis, Director
Date June 19, 1997
By (Signature and Title) Sidney Clark ("Rusty") Shaw, II
Sidney Clark ("Rusty") Shaw, II, Director
Date June 19, 1997
By (Signature and Title) Robert W. Chapel, CPA
Robert W. Chapel, CPA, Director
Date June 19, 1997
By (Signature and Title) Robert F. Meredith, III
Robert F. Meredith, III, Director
Date June 19, 1997
By (Signature and Title) Gary Vaughn Walton
Gary Vaughn Walton, Director
Date June 19, 1997
By (Signature and Title) Bobby Williams
Bobby Williams, Director
Date June 19, 1997
By (Signature and Title) Dan Van Wormer
Dan Van Wormer, Director
Date June 19, 1997
INDEPENDENT AUDITOR'S 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, 1996 and 1995,
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, 1996 and 1995, 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 13 to
the financial statements, the insurance operations of the Company have sustained
significant losses over the last five 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 13. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Deloitte & Touche, LLP
March 21, 1997, except for Note 7, as to which
the date is May 9, 1997 and except for Note 16,
as to which the date is May 21, 1997
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
Notes 1996 1995
ASSETS:
Cash $195,835 $306,686
Invested assets: 3
Fixed maturities available-for-sale at mark 1,227,902 3,555,962
Equity securities available-for-sale at mar 80,938 1,250
Mortgage loans 15 1,425,000 0
Collateral loans 15 881,822 0
Other long-term investments at equity 127,775 144,673
Other long-term investments at market 0 29,000
Certificates of deposit and time deposits 24,673 239,851
Restricted assets at market 1,032,000 1,040,162
Accrued investment income 62,313 63,360
Finance notes receivable - net 4 7,117 8,750
Policy loans 107,830 83,571
Reinsurance receivable 679,623 2,759,921
Other amounts receivable:
Premiums due and uncollected 25,458 21,028
Agents' balances (net of allowance for unco 138,133 150,009
account of $150,000 in 1996 and $131,500 in 1995)
Other 2,139,330 398,957
Property - net 5,6 136,839 192,794
Deferred policy acquisition costs 12 966,545 421,962
Other assets 21,482 217,890
TOTAL $9,280,615 $9,635,826
LIABILITIES AND STOCKHOLDERS' EQUITY:
Policy benefit reserves $3,650,190 $3,429,414
Policy claims 961,697 781,256
Unearned premiums 24,642 23,980
Dividends left on deposit 304,697 389,955
Advance premium deposits 168,141 174,678
Other policyholders' funds 11,452 17,152
Accounts payable and accruals 301,464 2,088,754
Total liabilities 5,422,283 6,905,189
Commitments and contingent liabilities 7,10
Stockholders' equity: 3,8
Voting common shares, no par; 14,000,000 sh
authorized; 8,740,915 and 3,461,028 share 9,275,003 5,846,901
Additional paid-in capital 154,500 154,500
Net unrealized investment gains (losses) (508,846) 171,973
Accumulated deficit (5,062,325) (2,710,237)
Subtotal 3,858,332 3,463,137
Less treasury stock - at cost (181,539 shar 0 732,500
Total stockholders' equity 3,858,332 2,730,637
TOTAL $9,280,615 $9,635,826
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
Notes 1996 1995
REVENUES:
Insurance premiums $1,879,452 $2,727,313
Net investment income 3 450,836 366,431
Finance company interest and fees 1,136 1,360
Other income 47,626 47,678
Total revenues 2,379,050 3,142,782
EXPENSES:
Increase (decrease) in policy benefit reserves 385,307 (428,664)
Claims and other benefits 1,520,601 1,376,242
Policyholder dividends 12,523 13,347
Commission expense 297,280 727,366
Depreciation and amortization 20,186 29,446
Interest expense 57,864 54,010
Salaries, wages and taxes 729,611 786,628
Other operating expense 1,637,849 1,342,106
Amortization of deferred acquisition cost 12 (544,583) 797,752
Total expenses 4,116,638 4,698,233
LOSS BEFORE INCOME TAXES (1,737,588) (1,555,451)
PROVISION FOR INCOME TAXES 9 0 0
NET LOSS ($1,737,588)($1,555,451)
LOSS PER COMMON SHARE ($0.49) ($0.47)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,576,718 3,279,489
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance Stock Change in Balance
12-21-94 Issued Unrealized Net Loss 12-31-95
Gain/Loss
Voting Common Shar
Number 3,461,028 3,461,028
Amount $5,846,901 $5,846,901
Additional Paid-In $154,500 $154,500
Net Unrealized Los ($284,084) $456,057 $171,973
Accumulated Defici($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 $0 $456,057 ($1,555,451) $2,730,637
Balance Stock Change in Balance
12-31-95 Issued Unrealized Net Loss 12-31-96
Gain/Loss
Voting Common Shares
Number 3,461,028 5,279,887 8,740,915
Amount $5,846,901 $3,428,102 $9,275,003
Additional Paid-In $154,500 $154,500
Convertible Preferred 24,277 24,277
Stock Issued $2,427,700 $2,427,700
Preferred Stock (24,277) (24,277)
Converted to Common ($2,427,700) ($2,427,700)
Net Unrealized Los $171,973 ($680,819) ($508,846)
Accumulated Defici($2,710,237) ($614,500) ($1,737,588) ($5,062,325)
Treasury Stock
Number (181,539) 181,539 0
Amount ($732,500) $732,500 $0
TOTAL $2,730,637 $3,546,102 ($680,819) ($1,737,588) $3,858,332
</TABLE>
See notes to consolidated financial statements.
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
Notes 1996 1995
Cash flows from operating activities:
Net loss ($1,737,588) ($1,555,451)
Non-cash and non-operating items:
Gain on sale of invested assets (208,840) (1,390)
Undistributed losses of investee 0 1,254
Increase of uncollectible accounts receivab 28,062 78,700
Depreciation and amortization 20,186 29,446
Loss on disposal of property 47,300 0
Change in assets and liabilities:
Deferred policy acquisition costs 13 (544,583) 797,752
Policy benefit reserves and unearned premiu 221,438 179,696
Policy claims 180,441 163,748
Equity write-down of other long-term invest 16,898 11,379
Accounts payable and accruals (1,787,290) 1,841,406
Due from reinsurance companies 2,080,298 (2,379,521)
Other (1,549,726) (426,929)
Net cash used in operating activities (3,233,404) (1,259,910)
Cash flows from investing activities:
Acquisitions of:
Invested assets
Fixed maturities available-for-sale (849,958) (1,283,330)
Finance notes receivable (10,000) 0
Property (11,531) (81,186)
Proceeds from:
Invested assets
Fixed maturities available-for-sale 3,861,044 2,361,392
Other long-term investments 29,000 0
Certificates of deposit and time deposit 215,178 315,912
Finance notes receivable 2,071 38,713
Policy loans (24,259) 11,622
Agent's balances - net (6,624) 5,678
Net cash provided from investing activities 3,204,921 1,368,801
Cash flows from financing activities:
Withdrawals of dividends and advance premiums (95,117) (163,635)
Sale of common stock 12,749 0
Net cash provided from (used in) financing act (82,368) (163,635)
Net decrease in cash (110,851) (54,744)
Cash at beginning of year 306,686 361,430
Cash at end of year $195,835 $306,686
</TABLE>
NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Continued
1996 1995
Supplemental Cash Flows Disclosures:
Interest paid $30,497 $46,330
Income taxes paid $0 $0
Supplemental Schedule of Noncash Investing and Financing Activities:
181,539 shares of treasury stock was converted to issued shares and fixed
maturity investments of $118,000 were acquired.
227,000 shares of common stock was issued and fixed maturity investments of
$147,550 were acquired.
24,277 shares of preferred stock was issued and the following assets were
assumed:
Equity investments $120,878
Mortgage loans 1,425,000
Collateral loans 881,822
$2,427,700
5,027,389 shares of common stock was issued upon the conversion of preferred
stock and the assumption of the following assets:
Preferred stock conversion $2,427,700
Fixed maturity investments 384,450
Equity investments 455,653
$3,267,803
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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. All significant
intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
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 - For all financial instruments affected by this
statement recorded or disclosed in the Company's financial
statements, the carrying amount is a reasonable estimate of
fair value.
Invested Assets consist of common and preferred stocks,
bonds and government securities carried at market value,
mortgage loans, collateral loans and 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.
Investment securities are classified 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
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.
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.
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, 1996,
there were approximately $16,200 in unsettled life claims
and $13,900 in health claims in the process of settlement.
The liability for health claims incurred but not yet
reported was estimated using a claim lag approach or
ultimate completion approach. As of December 31, 1996,
approximately $916,000 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 32% of total
life insurance in force at December 31, 1996. 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 $107,891,000 and
$145,395,000 December 31, 1996 and 1995, 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. At
December 31, 1996, the agreement was terminated and NAIL
recaptured the ceded amount.
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>
<S> <C> <C>
1996 1995
Direct premiums $2,834,940 $3,114,190
Premiums ceded (955,488) (386,877)
Net premiums $1,879,452 $2,727,313
</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 as filed March 1, 1997 was $2,469,157
and $1,238,325 at December 31, 1996 and 1995, respectively.
Regulatory accounting basis net loss for the years ended
December 31, 1996 and 1995 was $1,709,728 and $1,056,397,
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, 1996, 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, 1996 and 1995 consisted of the
following:
<TABLE>
Gross Gross
Amortized UnrealizedUnrealized Market
<S> <C> <C> <C> <C>
Value Gains Losses Value
1996
Fixed maturities available-for-sale
US Government and agencies $1,289,787 $10,876 $7,248 $1,293,415
Public utilities 60,063 2,937 0 63,000
Corporate 416,503 14,703 2,719 428,487
Less restricted bonds (556,752) (421) (173) (557,000)
Total fixed maturities 1,209,601 28,095 9,794 1,227,902
Redeemable preferred stock 2,144 0 2,144 0
Common stocks:
Banks 30,000 0 28,750 1,250
Corporate 576,531 0 496,843 79,688
Total equity securities 608,675 0 527,737 80,938
Other long-term investments 127,775 0 0 127,775
Mortgage loans 1,425,000 0 0 1,425,000
Collateral loans 881,822 0 0 881,822
Certificates of deposit and time 499,673 0 0 499,673
Less restricted CDs (475,000) 0 0 (475,000)
Total CDs and time deposits 24,673 0 0 24,673
Subtotal 4,277,546 28,095 537,531 3,768,110
Restricted assets 1,031,752 421 173 1,032,000
Total invested assets $5,309,298 $28,516 $537,704 $4,800,110
1995
Fixed maturities available-for-sale
US Government and agencies $2,826,739 $183,067 $3,025 $3,006,781
States, municipalities, and 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 avail3,318,882 242,131 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 and 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
</TABLE>
The amortized value and market value of debt securities at
December 31, 1996, 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 $ 680,818 $ 681,868
Due in years 6 through 10 322,458 325,189
Due after 10 years 300,158 312,911
Fixed maturities 1,303,434 1,319,968
Mortgage-backed securities 462,919 464,934
Total $1,766,353 $1,784,902
</TABLE>
Certificates of deposit and fixed maturities in the aggregate amount of
$1,032,000 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, 1996.
The composition of net investment income for the two years ended December 31
follows:
<TABLE>
<S> <C> <C>
1996 1995
Gross investment income:
Equity securities $ 730 $ 50
Certificates of deposit and time deposits 28,081 43,054
Fixed maturities and long-term investments 227,690 346,617
Subtotal 256,501 389,721
Net realized gains 208,840 1,390
Investment expenses ( 14,505) (24,680)
Net investment income $ 450,836 $ 366,431
</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
1996
Fixed maturities $3,861,044 $282,702 $25,217
Other long term investments 29,000 0 48,645
Total $3,890,044 $282,702 $73,862
1995
Fixed maturities $2,361,392 $30,291 $28,901
</TABLE>
NOTE 4 - FINANCE NOTES RECEIVABLE
Components of the finance notes receivable at December 31 were as follows:
<TABLE>
<S> <C> <C>
1996 1995
Premium finance $ 157,000 $ 157,000
Precomputed direct 9,075 9,075
Interest bearing direct 35,774 27,845
Total 201,849 193,920
Less: Allowance for uncollectible
accounts (194,732) (185,170)
Total $ 7,117 $ 8,750
</TABLE>
NOTE 5 - LEASES
Company as Lessee - The Company is committed under operating leases involving
office facilities and various equipment. The lease with England Economic and
Industrial Development District for office space will expire May 1, 1998.
Rent expense under operating leases was: 1996 - $85,370; 1995 - $103,437.
NOTE 6 - PROPERTY
Property at December 31 is summarized as follows:
<TABLE>
<S> <C> <C>
1996 1995
Land held for future development $ 124,303 $ 124,303
Furniture and equipment 220,620 369,069
Subtotal 344,923 493,372
Less accumulated depreciation (208,840) (300,78)
Property - net $ 136,839 $ 192,794
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996 and
1995 was $20,186 and $29,446, 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)
From time to time, the Company and its subsidiaries are involved in lawsuits
related to their operations. In most cases, such lawsuits involve claims under
insurance policies or other contracts of the Company. Even though the Company
may be contesting the validity or extent of its liability in response to such
lawsuits, the Company has established reserves in the consolidated financial
statements that approximate its estimated potential liability. Included in
the financial statements is a total reserve of $322,000 that has been
established with respect to all of the lawsuits and claims against the Company.
In management's opinion, resolution of these outstanding lawsuits and claims
will not result in any additional material impact on the financial condition of
the Company.
The Company has two lawsuits outstanding related to claims by purchasers of the
FLA 100 founders policies issued from 1984 to 1988. In one of the suits, the
plaintiff is alleging breach of contract and fraud regarding the sale of an
FLA 100 founders policy. The trial court rendered a judgement in the
approximate amount of $34,000 plus interest in favor of the plaintiff. This
judgement was affirmed by the Third Circuit Court of Appeals and NAIL filed an
appeal with the Supreme Court of State of Louisiana. On May 9, 1997, the
Supreme Court of the State of Louisiana denied the request of NAIL to hear an
appeal on this matter. In a separate lawsuit also
related to the FLA 100 founders policies, plaintiffs representing the class of
persons that purchased FLA 100 founders policies allege fraudulent sales
practices by former employees of NAIL and are seeking unspecified damages.
While the Company intends to vigorously defend these lawsuits, an adverse
judgement in the class action lawsuit would have a material adverse effect on
the Company.
NAIL is a defendant in four separate lawsuits related to a common series of
events regarding a health policy issued in Alabama. These cases involve alleged
misrepresentations by an agent to employees of a garment plant in Greensboro,
Alabama regarding the use of earned income credit to fund the cost of health
insurance policies. Although NAIL believes that the amount of compensatory
damages claimed for each plaintiff are likely in the range of $1,000 the
plaintiffs have made claims for punitive damages. Three of the cases were filed
by individual plaintiffs. The fourth case includes as plaintiffs approximately
50 employees of the garment plant and a stipulation that the
maximum recovery for any one plaintiff would be $50,000. NAIL believes that
not all of the plaintiffs in the fourth case paid any policy premiums or were
included in the policies. NAIL is vigorously defending these cases and does not
anticipate that a resolution of the outstanding lawsuits and claims will result
in any additional material impact on the financial condition of the Company.
In an additional lawsuit in Alabama the plaintiff alleges breach of contract,
fraud and related causes of action based on the alleged failure of NAIL to
provide coverage under a short-term medical policy. The plaintiff has claimed
approximately $30,000 in medical expenses and has requested other unspecified
claims including a claim for punitive damages. This claim arises from an agent
that was not a licensed agent of NAIL allegedly
failing to cause timely delivery to NAIL of the plaintiff's insurance policy
application and premium payment during the required 30 day application period,
and the subsequent denial by NAIL to provide coverage for claims related to
injuries sustained by the plaintiff before a policy was delivered to NAIL's
home office. NAIL is vigorously defending this suit and
does not anticipate that a resolution of this outstanding lawsuit and claim
will result in any additional material impact on the financial condition of
the Company.
The Company has other outstanding lawsuits as well as other claims that arise
in the ordinary course of business.
NOTE 8 - CAPITAL STOCK
The classes of stock outstanding at December 31, 1996 and 1995 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 is outstanding at either
December 31, 1996 or 1995.
NOTE 9 - INCOME TAXES
Reported income tax expense for the two years ended December 31, 1996, 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>
1996 1995
Normal tax benefit $ (599,659) $ (606,626)
Differences result from:
Operating losses not given
tax benefit 594,659 601,626
Other 5,000 5,000
Reported tax expense $ -0- $ -0-
</TABLE>
Deferred income taxes primarily consist of future tax benefits (liabilities)
attributable to:
<TABLE>
<S> <C> <C>
Assets (Liabilities) 1996 1995
Unamortized deferred acquisition costs $ (260,309) $ (136,425)
Policy benefit reserves (367,377) ( 87,730)
Unearned premiums (9,610) ( 9,352)
Net operating loss carryforward 1,616,205 880,796
Tax credits 13,708 13,708
Total 992,617 660,997
Less valuation allowance ( 992,617) (660,997)
Net deferred tax asset $ -0- $ -0-
</TABLE>
Based on conservatism, Management has elected to record a full valuation
allowance at this time.
At December 31, 1996, the Company has for tax purposes, approximately $4,144,000
of net operating loss carryforward expiring between 2007 and 2011. Additionally,
the Company has alternative minimum tax credits of $35,200 available to offset
future income taxes subject to certain limitations.
NOTE 10 - RELATED PARTY BALANCES AND TRANSACTIONS
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 which resulted in a net reserve transfer
of $1,493,180. MSLIC is a wholly-owned subsidiary of The Southern Group. This
agreement was terminated December 31, 1996 and all business was recaptured by
NAIL.
On January 16, 1996, TSG and the Company entered into a Stock Purchase
Agreement, dated as of January 15, 1996, pursuant to which TSG agreed, subject
to receipt of required state insurance regulatory approvals, to acquire an
aggregate of 10,335,045 shares of common stock, or approximately 75% of the
outstanding common stock of NAC for a purchase price of $6.8 million dollars.
In connection with the NAC agreement the following transactions occurred:
March 7, 1996 - The Southern Group, Inc. transferred $400,000 of investment
grade corporate and governmental bonds from its working capital to National
Affiliated Corporation for 300,000 shares of NAC common stock at $.65 per
share. The balance represented a payable due to TSG which was to be used to
purchase additional NAC common stock after approval of the acquisition by the
Louisiana Insurance Commission.
May 15, 1996 - TSG purchased $500,000 of National Affiliated Corporation
convertible preferred stock by transferring $250,000 of investment grade
corporate and governmental bonds and $250,000 of publicly-traded common
stocks from its working capital.
August 15, 1996 - TSG purchased $881,822 of NAC convertible preferred stock
by transferring $881,822 in notes collateralized by publicly-traded stock. TSG
acquired these notes in an exchange transaction with two parties unrelated to
TSG. No profit was realized in this transaction. TSG purchased 108,539 NAC
common shares by drawing on $70,550 of the balance remaining from the 3/7/96
transaction.
December 31, 1996 - TSG purchased 5,027,389 of NAC common stock by
converting the NAC convertible preferred stock, contributing $1,425,000 in
mortgages and $326,531 in publicly-traded common stock. TSG acquired the
mortgages by issuing preferred stock and the stock was held in its investment
portfolio.
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, 1996
and 1995.
<TABLE>
General Adjustments
Corporate and
<S> <C> <C> <C> <C>
Insurance and Other Eliminations Consolidated
Year ended December 31, 1996:
Revenues from unaffiliated
customers $ 2,351,442 $ 27,608 $ 2,379,050
Intersegment revenues 142,817 $ (142,817)
Total revenue $ 2,351,442 $ 170,425 $ (142,817) $ 2,379,050
Net (loss) income $(1,451,059) $ (286,529) $(1,737,588)
Assets $ 8,726,948 $ 8,689,576 $(8,135,909) $ 9,280,615
Deprec and amort $ 18,240 $ 1,946 $ 20,186
Capital expenditures $ 5,230 $ 6,301 $ 11,531
- -------------------------------------------------------------------------------
Year ended December 31, 1995:
Revenues from unaffiliated
customers $ 3,139,732 $ 3,050 $ 3,142,782
Intersegment revenues 241,319 $ (241,319)
Total revenue $ 3,139,732 $ 244,369 $ (241,319) $ 3,142,782
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
</TABLE>
Intersegment revenue is recorded at estimated fair market value and income from
intersegment transactions is included in operating income (loss).
NOTE 12 - 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 1996 and 1995 was $(544,583) and $797,752,
respectively. The high expense in 1995 resulted from the reinsurance ceded
to MSLIC and the high credit in 1996 was a result of the recapture of this
ceded amount.
NOTE 13 - 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 has begun an active program of reviewing potential candidates for
acquisition of profitable insurance companies and blocks of business as well as
reviewing proposals from sources of acquisition financing. The Company intends
to attempt to acquire at least on additional life insurance company during the
remainder of 1997.
NOTE 14 - 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 approximates 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>
Stock Options Number of Shares Option Price
<S> <C> <C>
Granted 435,466 $.50
Lapsed or canceled 83,857 .50
Exercised 49,998 .50
Outstanding at December 31, 1996 301,611 .50
Exercisable at December 31, 1996 301,611 .50
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for such plans. Had compensation cost been determined based on
the fair value at the grant dates for awards in 1996 and 1995 under the
plan consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company's pro forma net income and pro forma earnings per
share for the years ended December 31, 1996 and 1995, would have been as
follows:
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
As reported Pro forma As reported Pro forma
(Dollars in thousands, except per share amounts)
Net income (loss).......... $(1,738) $(1,613) $(1,555) $(2,204)
Primary earnings per share. (0.49) (0.45) (0.47) (0.67)
Fully diluted earnings per share(0.45) (0.42) (0.42) (0.59)
</TABLE>
The fair value of each option grant used for purposes of estimating the pro
forma amounts summarized above is estimated on the date of grant using the
Black-Scholes option-price model with the following weighted-average assumptions
for 1996 and 1995:
1995 Grants
Employee and Director Stock Option Plan
--------------------------------------------
Risk-free interest rates.............. 6.0%
Dividend yields....................... 0.0%
Volatility factors.................... 466%
Weighted average expected life........ 5 years
Weighted average fair value per share. $1.44
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because
changes in subjective assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not provide a
reliable single measure of the fair value of its employee stock options.
A summary of the Company's stock option activity and related information for
the years ended December 31, 1996 and 1995, is presented below:
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
---------- ----------------
Weighted Weighted
average Exercise average Exercise
shares price shares price
Outstanding at the beginning of year. 435,466 N/A 0
Granted.............................. 0 435,466 $0.50
Exercised............................ (49,998) $0.50
Forfeited............................ (83,857) $0.50
Outstanding at the end of the year... 301,611 $0.50 435,466 $0.50
Options exercisable at year-end...... 301,611 435,466
Available for future grant........... 83,857 0
</TABLE>
NOTE 15 - MORTGAGE LOANS/COLLATERAL LOANS
The Company has three mortgage loans dated December 30, 1996, for $475,000 each.
Principal and interest (8%) is payable semi-annually in forty equal installments
beginning June 30, 1997. The notes are secured by land with an estimated market
value of $1,900,000.
The Company has two collateral loans dated October 31, 1996 for $440,911 each.
Interest (8%) is payable quarterly and principal is payable at July 31, 1997.
The notes are secured by equity securities with a market value of $1,148,000 at
December 31, 1996.
NOTE 16 - SUBSEQUENT EVENTS
The Company also issued a convertible debenture totaling $1.5 million on
May 21, 1997. The proceeds of the debenture offering were used by the Company
to pay the cost of the distribution of the debentures and to acquire
approximately $1.35 million of mortgage notes and other securities from NAIL
and for the general working capital of NAIL.
The terms of the debenture offering are as follows:
Maximum amount of debentures offered: $2,500,000
Interest rate: 4 %
Maturity: April 1, 1999
Conversion feature: Convertible at holder's option into
shares of common stock of NAC
Each holder of the debenture is entitled, at its option, to convert at any time
commencing forty-five (45) days after the closing of the sale of the debenture
the principal amount plus accrued interest on the debenture into shares of the
Company's common stock. The conversion price shall equal the lesser of
(a) $4.00 per share or (b) 80% of the market price of the conversion date.
Exhibit 10(g)
FIFTH AMENDMENT TO STOCK PURCHASE AGREEMENT
This Fifth Amendment ("Amendment") is to that certain Stock Purchase
Agreement ("Agreement") dated January 15, 1996, and as amended as of
February 26, 1996, May 13, 1996, August 13, 1996 and December 31, 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" or "TSG").
WHEREAS, the board of directors of NAC and the board of directors
of TSG have determined that it is in the best interests of NAC and TSG to
allow NAC to obtain additional capital through the sale of certain convertible
debentures to unrelated persons;
WHEREAS, the terms of the convertible debentures provide each
holder of debentures with the right to convert any unpaid principal and accrued
interest with respect to the debentures into shares of common stock of NAC
("NAC Shares");
WHEREAS, the terms of the Stock Purchase Agreement, as amended,
provide to TSG as Buyer the right to purchase all remaining authorized but
unissued NAC Shares;
WHEREAS, the parties desire to enter into this Fifth Amendment to the
Stock Purchase Agreement ("Fifth Amendment") to provide for the
subordination of the rights of TSG to purchase additional NAC Shares to the
rights of any debenture holders to convert debentures into NAC Shares and for
the extension of the closing date for the acquisition of the NAC Shares by TSG
and for an adjustment in the price per share for any NAC Shares acquired by
TSG after April 30, 1997;
WHEREAS, the parties desire for the acquisition of the NAC Preferred
Stock, Additional NAC Preferred Stock and the NAC Shares, as described in
the Agreement, the Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment and the Fifth Amendment, to constitute
a series of acquisitions all part of a common plan of transfer of assets from
Buyer to NAC in a transaction that will qualify as a non-taxable corporate
reorganization under section 368 of the Internal Revenue Code of 1986, as
amended;
NOW THEREFORE, the parties hereby agree to modify the terms of
the Agreement as follows:
1.Subordination of Stock Purchase Rights.TSG hereby
subordinates its rights to purchase additional NAC Shares to the conversion
rights of holders of the 4% Convertible Debentures, which are being issued by
NAC in a maximum principal amount of two million five hundred thousand
dollars ($2,500,000) ("Debentures"). This subordination shall remain effective
so long as any Debenture remain outstanding. Once converted to NAC Shares,
a Debenture shall not be considered to be outstanding. This subordination
shall also terminate on the date that the Articles of Incorporation of NAC are
duly amended to authorize additional shares of common stock in a number,
sufficient in the reasonable opinion of the board of directors of NAC to allow
for the conversion of any outstanding Debentures and the purchase by TSG of
the same number of shares as TSG has the right to purchase on the date
immediately preceding the date of this Fifth Amendment.
2.Covenant to Propose Authorization of Additional NAC Shares.
NAC agrees to take all reasonable efforts cause an increase in the
number of authorized shares of NAC common stock, including without
limitation proposing to its shareholders an amendment of the articles of
incorporation to increase the number of authorized shares of common stock.
3.Modification of Dates for Subsequent Purchases of NAC Shares
by TSG.
The Agreement is amended hereby to permit additional closings at any
time prior to July 31, 1997, at which Buyer may purchase any or all of the
6,321,942 NAC Shares which have not been issued as of the Closing
("Additional Closings"). At each Additional Closing, Seller will deliver to
Buyer the NAC Shares to be issued, free and clear of all liens and
encumbrances and Buyer will deliver to Seller the Purchase Price therefor, and
no other deliveries of documents contemplated by Section 3.2 or 3.3 of the
Agreement will be required. The price per share of each of the NAC Shares
shall be increased to $0.85 for any acquisition of NAC Shares that is closed
after April 30, 1997 but before May 31, 1997, and shall be increased to $0.90
for any acquisition of NAC Shares that is closed after May 31, 1997 but before
June 30, 1997, and shall be increased to $0.95 per share for any acquisition of
NAC Shares that closes after June 30, 1997 and before July 31, 1997.
4.Voting Agreement.The voting agreement provided in the
Fourth Amendment shall be amended to replace any reference to April 30,
1997 with a reference to July 31, 1997.
5.Miscellaneous.Any other references in the Fourth
Amendment to April 30, 1997, which in such document was the last day on
which TSG could acquire NAC Shares under the terms of that document, are
hereby replaced with references to July 31, 1997, the last day on which TSG
is authorized to acquire NAC Shares under the terms of this Fifth Amendment.
6.Interpretation.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.
7.Binding Effect.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 agreement and understanding between
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating to such subject matter. Accordingly, except as modified
by the terms of this Amendment, the terms of the Fourth Amendment shall
remain without amendment or modification. In the event of a conflict between
this Fifth Amendment and any other written agreement between the parties,
including the Fourth Amendment, the terms of this Fifth Amendment shall
control.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement on this the __ day of May, 1997.
SELLER:
NATIONAL AFFILIATED CORPORATION
By:______________________________
Name:___________________________
Its:______________________________
SUBSIDIARIES:
NATIONAL AFFILIATED INVESTORS LIFE INSURANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED MARKETING COMPANY
By:______________________________
Name:___________________________
Its:______________________________
AFFILIATED INVESTMENT MARKETING
By:______________________________
Name:___________________________
Its:______________________________
NATIONAL AFFILIATED FINANCE COMPANY
By:______________________________
Name:___________________________
Its:______________________________
PRACTICAL LEASING UNLIMITED SYSTEMS
By:______________________________
Name:___________________________
Its:______________________________
BUYER:
THE SOUTHERN GROUP, INC.
By:______________________________
Name:___________________________
Its:______________________________
Exhibit 10(h)
NEITHER THESE SECURITIES NOR THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE OR UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES ARE RESTRICTED AND MAY NOT BE
OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT
IN ACCORDANCE WITH REGULATION S UNDER THE ACT,
OR AS PERMITTED UNDER THE ACT PURSUANT TO
REGISTRATION OR EXEMPTION OR SAFE HARBOR
THEREFROM.
No. _________ US $
NATIONAL AFFILIATED CORPORATION
4% CONVERTIBLE DEBENTURE DUE APRIL 1, 1999
THIS DEBENTURE is one of a duly authorized issue of $2,500,000 in
Debentures of NATIONAL AFFILIATED CORPORATION, a corporation duly
organized and existing under the laws of the State of Florida (the "Company")
designated as its 4% Convertible Debenture Due April 1, 1999.
FOR VALUE RECEIVED, the Company promises to pay to
_____________________________, the registered holder hereof (the "Holder"),
the principal sum of ____________________________________ and no/100 (US
$_______________) Dollars on April 1, 1999 (the "Maturity Date") and to pay
interest on the principal sum outstanding from time to time in arrears on
April 1, 1999 at the rate of 4% per annum accruing from the date of initial
issuance. Accrual of interest shall commence on the first such business day to
occur after the date hereof until payment in full of the principal sum has
been made or duly provided for. Subject to the provisions of Paragraph 4
below, the principal of, and interest on, this Debenture are payable at the
option of the Holder, in shares of Common Stock of the Company or in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at
the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder from time to time. The Company will pay the
principal of and interest upon this Debenture on the Maturity Date, less any
amounts required by law to be deducted, to the registered holder of this
Debenture as of the tenth day prior to the Maturity Date and addressed to such
holder as the last address appearing on the Debenture Register. The forwarding
of such check shall constitute a payment of interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Debenture
to the extent of the sum represented by such check plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1.The Debentures are issuable in denominations of Ten Thousand
Dollars (US$ 10,000) and integral multiples thereof. The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2.The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws
or other applicable laws at the time of such payments, and Holder shall execute
and deliver all required documentation in connection therewith.
3.This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act"), and other applicable state and foreign securities laws. In the event of
any proposed transfer of this Debenture, the Company may require, prior to
issuance of a new Debenture in the name of such other person, that it receive
reasonable transfer documentation including opinions that the issuance of the
Debenture in such other name does not and will not cause a violation of the Act
or any applicable state or foreign securities laws. Prior to due presentment
for transfer of this Debenture, the Company and any agent of the Company may
treat the person in whose name this Debenture is duly registered on the
Company's Debenture Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this
Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
4.The Holder of this Debenture is entitled, at its option, to convert
at any time (a) commencing forty-five (45) days after the closing of sale of the
debenture (the "Closing"), the principal amount of this Debenture, provided that
the principal amount is at least US $10,000 (unless if at the time of such
election to convert the aggregate principal amount of all Debentures registered
to the Holder is less that Ten Thousand Dollars (US $10,000), then the whole
amount thereof) into shares of Common Stock of the Company at a conversion price
for each share of Common Stock equal to lesser of (a) $4.00 or (b) 80% of the
Market Price on the Conversion Date. For purposes of this Section 4, the Market
Price shall be the average closing bid price of the Common Stock on the five (5)
trading days immediately preceding the Closing or Conversion Date, as may be
applicable, as reported by the National Association of Securities Dealers, or
the closing bid price on the over-the-counter market on such date or, in the
event the Common Stock is listed on a stock exchange, the Market Price shall be
the closing price on the exchange on such date, as reported in the Wall Street
Journal. Conversion shall be effectuated by surrendering the Debentures to be
converted to the Company with the form of conversion notice attached hereto as
Exhibit A, executed by the Holder of the Debenture evidencing such Holder's
intention to convert this Debenture or a specified portion (as above provided)
hereof, and accompanied, if required by the
Company, by proper assignment hereof in blank. Interest accrued or accruing
from the date of issuance to the date of conversion shall, at the option of the
Holder, be paid in cash or Common Stock upon conversion. No fraction of Shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded to the nearest whole share. The date
on which notice of conversion is given (the "Conversion Date") shall be deemed
to be the date on which the Holder has delivered this Debenture, with the
conversion notice duly executed, to the Company or, if earlier, the date set
forth in such notice of conversion if the Debenture is received by the Company
within three (3) business days therefrom. Facsimile delivery of the conversion
notice shall be accepted by the Company at telephone number (318) 442-3318.
Certificates representing Common Stock upon conversion will be delivered within
two (2) business days from the date the notice of conversion is delivered to the
Company.
5.No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein proscribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6.No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7.If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee shall amend this Debenture to provide that it
may thereafter be converted on the terms and subject to the conditions set forth
above into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a holder of the number of shares
of Common Stock into which this Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, subject to adjustments
which shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right
to convert by delivering a Notice of Conversion to the Company within fifteen
(15) days of receipt of notice of such Sale from the Company. In the event the
Holder hereof shall elect not to convert, the Company may prepay all outstanding
principal and accrued interest on this Debenture, less all amounts required by
law to be deducted, upon wtice, the right of conversion shall terminate.
8.The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in
accordance with the laws of
the State of New York. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding in such
jurisdictions.
10.The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or
interest on this Debenture; or
b. Any of the representations or warranties made by the
Company herein, in the Subscription Agreement, or in any
certificate or financial or other written statements heretofore
or hereafter furnished by the Company in connection with
the execution and delivery of this Debenture or the
Subscription Agreement shall be false or misleading in any
material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the
Holder or to cause its Transfer Agent to issue shares of
Common Stock upon exercise by the Holder of the
Conversion rights of the Holder in accordance with the
terms of this Debenture, fails to transfer or to cause its
Transfer Agent to transfer any certificate for shares of
Common Stock issued to the Holder upon conversion of
this Debenture and when required by this Debenture, or fails
to remove any restrictive legend or to cause its Transfer
Agent to transfer on any certificate or any shares of
Common Stock issued to the Holder upon conversion of
this Debenture as when required by this Debenture, and any
such failure to the Company of such failure; or
. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of the Company under
this Debenture and such failure shall continue uncured for a
period of thirty (30) days after written notice from the
Holder of such failure; or
e. The Company shall (1) admit in writing its inability to pay
its debts generally as they mature; (2) make an assignment
for the benefit of creditors or commence proceedings for its
dissolution; or (3) apply for or consent to the appointment
of a trustee, liquidator or receiver for its or for a substantial
part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within sixty
(60) days after such appointment; or
g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall
assume custody or control of the whole or any substantial
portion of the properties or assets of the Company and shall
not be dismissed within sixty (60) days thereafter; or
h. Any money judgment, writ or warrant of attachment, or
similar process in excess of Two Hundred Thousand
($200,000) Dollars in the aggregate shall be entered or filed
against the Company or any of its properties or other assets
and shall remain unpaid, unvacated, unbonded or unstayed
for a period of sixty(60) days or in any event later than five
(5) days prior to the date of any proposed sale thereunder;
or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within sixty
(60) days after such institution or the Company shall by any
action or answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations of, or
default in answering a petition filed in any such proceeding;
or
j. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market from
trading.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
11.Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed
by an officer thereunto duly authorized.
Dated: __________________, 1997
NATIONAL AFFILIATED CORPORATION
By:
_________________________________________
_________________________________________
(Print Name)
_________________________________________
(Title)
ATTEST:
________________________________________
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $
________________ of the principal amount of the above Debenture No. ___ into
Shares of Common Stock of NATIONAL AFFILIATED CORPORATION. (the
"Company") according to the conditions hereof, as of the date written below.
The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933 and is not converting
the Debenture on Behalf of any U.S. Person.
Date of Conversion
_______________________________________________________________
Applicable Conversion Price
________________________________________________________
Signature
__________________________________________________________________
[Name]
Address:
__________________________________________________________________
__________________________________________________________________
* This original Debenture and Notice of Conversion must be received by the
Company by the fifth business date following the Date of Conversion.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,227,902
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<EQUITIES> 80,938
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<TOTAL-ASSETS> 9,280,615
<POLICY-LOSSES> 3,932,264
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0
0
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1,879,452
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