SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-21572
AMERICAN INVESTMENT NETWORK, INC.
(formerly Great American Investment Network, Inc.)
Name of Small Business Issuer in Its Charter
Mississippi 74-2447294
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
660 Lakeland East Drive, Flowood, Mississippi 39208
(Address of Principal Executive Offices) (Zip Code)
(601)936-2090
(Issuer's telephone Number, Including Area Code)
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
CLASS "A" COMMON, 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 10-KSB, 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
The Registrant's revenues for its most recent fiscal year were
$3,105,403.
The aggregate market value of the voting stock held by non-
affiliates (computed by reference to the average of the high and
low sales prices for 1996 of $.50 per share) as of March 1, 1997
was $2,512,132.
The number of shares issued of AIN's Class A and Class B Common
Stock as of March 1, 1997 was 5,025,490 and 2,500, respectively.
There were 3,276 shares of treasury stock held as of March 1, 1997.
The total number of shares outstanding as of March 1, 1997 was
5,024,264.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of AIN's Proxy Statement to be filed in connection with
AIN's 1997 Annual Meeting of Shareholders are incorporated by
reference into Part III of this report.
ITEM I. BUSINESS
American Investment Network, Inc., (formerly Great American Investment
Network, Inc.) a Mississippi corporation, ("AIN") was incorporated January 15,
1987. The Company was organized to serve as a parent company of a life insurance
company and other subsidiary companies dealing with insurance and financial
services.
Presently, the Company owns 100% of the outstanding capital stock of United
Security Life Insurance Company, a Mississippi domestic life insurance company
("USLI") and The Gain Agency, Inc., a Mississippi corporation ("Agency").
From the inception of the Company in January, 1987, until May 1990, the
Company was in a development stage of organizational planning, receiving capital
through a private intrastate offering and a public intrastate offering,
establishing operating procedures, training a staff in USLI, acquiring its
insurance agency business, and buying and renting an office building. Its
principal revenues were from interest on invested capital, rental from the
portion of its building rented to outsiders and agency commissions.
AIN's Board of Directors has entered into a Plan and Agreement of Exchange
of shares between and among Citizens, Inc. and Citizens Insurance Company of
America located in Austin, Texas. The Plan and Agreement is dated October 28,
1996. It provides for the holders of each issued and outstanding share of AIN's
Class A and Class B common stock to be exchanged for shares of Citizens, Inc.
The shareholders of AIN are to receive one (1) share of Citizens Class A common
stock for each seven and two-tenths (7.2) shares of American's Class A or Class
B stock. The Plan and Agreement is subject to the approval of regulatory
authorities and shareholders. Neither of these approvals had been received on
March 28, 1997.
UNITED SECURITY LIFE INSURANCE COMPANY
Effective December 31, 1994, AIN purchased Financial Security Life of
Mississippi (FSL), a Mississippi domestic life insurance company and USLI and
FSL were merged. FSL was the surviving company and simultaneously with the
merger the name of the surviving company was changed to United Security Life
Insurance Company. In compliance with the requirements of the Mississippi
Department of Insurance, certain operating transactions of both companies were
combined in the annual statutory financial statement for 1994. Statutory gain
from operations in 1996 and 1995 were approximately $4,000 and $13,000. On a
generally accepted accounting principle basis, net (loss) income of USLI
approximated $(203,000) in 1996 and $293,000 in 1995.
As of December 31, 1996, USLI had $55,585,000 of life insurance in force
and $19,277,000 in accidental death benefits. Of the life insurance in force,
USLI reinsured $30,760,000 and retained $24,825,000. The maximum retention by
USLI on any one life for life insurance policies is $20,000. It reinsured all
of the accidental death benefit coverage. USLI had 6,214 accident and health
policies with $2,037,000 of annualized premium in-force. Reinsurance is provided
for amounts in excess of $25,000 on any one claim in any calendar year on the
cancer policy. Additionally, during 1996, the Company entered into reinsurance
agreements which provide coverage of claims in excess of various amounts on
several of its other accident and health policies and riders.
USLI has approximately 300 full and part time licensed representatives.
These agents are licensed to sell life, accident and health insurance products
and USLI will be recruiting additional agents in the nine states it is
authorized to sell its products.
INSURANCE PRODUCTS
USLI offers customary forms of life insurance, including non-participating
whole life, decreasing term, level term policies, and a participating whole life
policy. It has begun offering a limited line of supplementary health policies.
Its leading life policy in the past has been the "Lifetime Accumulator," a
participating whole life insurance policy. This policy differs from the usual
offering of life insurance in that the premium is uniform but the amount of
insurance varies by the age of the proposed insured. The product is sold,
therefore, in premium units rather than in face amount units. While this policy
is written only on persons at ages 0 - 40, other life insurance products are
offered at ages 0 - 70.
The Lifetime Accumulator, by being sold at ages less than 40 and in small
insurance amounts,does not usually require a medical examination of the proposed
insured. Examinations are obtained if the amounts exceed the usual published
guidelines of the company. These guidelines affect all of its life insurance
products.Electrocardiograms, X-rays, blood profiles and urinalysis are obtained.
USLI can, and does, request records from the proposed insured's attending
physician, and it obtains investigative consumer reports as well. Applications
must be submitted on every proposed insured with questions of a medical nature
asked. Also questions regarding driving, habits, hazardous sports and flying
re asked. Supplementary questionnaires are also obtained where required on
aviation and hazardous avocations.The underwriting department may always request
additional information of this nature where indicated by responses on the
application.
Through 1993, USLI had written primarily the Lifetime Accumulator, which
accounted for approximately 98% of premium income. During latter 1993, the
company shifted its marketing thrust to non-participating ordinary life products
and supplementary accident and health products. For 1996, 36% of premium income
was from life policies and 64% was from accident and health policies. The
persistency of the products has followed the Company's actuarial projection for
the products and lapses have not exceeded the assumptions. It is anticipated
that a major portion of the premium revenues in 1997 will come from the accident
and health products.
As mentioned above, USLI writes various forms of life insurance, and since
early 1994 it has developed several new supplementary health insurance products,
ie:cancer, hospital indemnity, mental illness, outpatient sickness, catastrophic
illness, emergency accident, intensive care, disability income, and Medicare
supplement.
USLI plans to aggressively mass market these products through various
companies employee groups. Premiums will be employer paid or paid through
payroll deduction. USLI has been very selective in its acceptance of the life
insurance risks. USLI can issue life insurance on a rated premium substandard
basis up through Table 16 (400% extra mortality), but in so doing it will
reinsure all of the risk. USLI only issues through Table 4(100% extra mortality)
on its Lifetime Accumulator policy to improve the mortality and potential
profitability on that product line. The substandard risks are those that by
reason of health, occupation or avocation fall outside the normal anticipated
mortality levels of the general population as developed by the actuarial
sciences. USLI, prior to January 8, 1993, retained $15,000 of life insurance
on any one life; on January 8, 1993 it increased its retention to $20,000 on any
one life. It reinsures all of its accidental death risk. USLI also has a
reinsurance agreement on its cancer policy which limits its claim risk to
$25,000 in any calendar year on any one claim. It also reinsures various amounts
on several other health products.
The applications for accident and health policies which USLI issues are
underwritten. Applications or applicants personal medical history records which
show pre-existing medical conditions will be declined or the policy will be
issued with exclusion endorsements. In those instances where the employer pays
a portion of the premium and at least 75% of the employees apply for the
coverage, the policies may be issued covering pre-existing conditions.
USLI's selling efforts are not usually concentrated on any one economic,
occupational, hazard or age group. The Lifetime Accumulator is the only
exception, and that is an exception due to limiting the age of proposed insureds
to a maximum of 40. As a result of the acquisition of FSL, the marketing
territory for USLI was expanded from three to nine states. The direct sale of
policies for the immediate future is limited to Alabama, Arizona, Arkansas,
Indiana, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. The company's
products are generally competitive with those of other insurers in those states.
The Company's actual lapse ratios are well within the lapse assumptions
used in the development of the liability for future policy benefits.
The Company has a conservation program in place where a representative of
the Company contacts any policyholder whose policy has lapsed in an attempt to
retain the business. Because the Lifetime Accumulator product was sold primarily
to company shareholders as opposed to sophisticated product shoppers in a
competitive environment, no excess lapsation is expected to occur even though
dividend reductions have and will occur.
Substandard life risk will not be offered with the supplementary health
insurance products. Standard and substandard life risk are offered separately
from the health products. All of the company's life policies may be issued sub-
standard whereby an extra premium is charged the insured provided there is an
increased mortality risk due to health or life style of the individual.
Additionally, a special guaranteed issue whole life policy is offered
exclusively to individuals who are substandard risk.
ADMINISTRATION
Prior to 1996, the issuance of policies, billing, preparation of
commission and production statements, posting of premium payments and serving
policyholders through computerized communications was performed by Wakely &
Associates, an unaffiliated service company in Florida. Management developed in
1995 its own data processing equipment and programs for the administration of
the accident and health business, life products and general accounting. All
policy administration and general accounting functions began being processed in
the Company's home office effective March 31, 1996. This eliminated
approximately $5,000 each month in service fee expenses.
Actuarial services for the development of new policies and rates are per-
formed by the actuarial firm of Allen Bailey and Associates, Austin, Texas.
SALES
USLI's policies are being sold by direct licensed representatives and
licensed general agents. None of these agents has underwriting authority. The
commissions paid are believed by Management to be competitive with commissions
paid by other life insurance companies in the states in which the company is
licensed to operate. USLI is aware that there is considerable competition for
obtaining qualified agents and that it will be competing with well-established
life insurance companies for agents to sell its policies. USLI will also recruit
agents from among persons who are not now engaged in the selling of life and
accident and health insurance, and USLI expects to train such agents. USLI
presently has approximately 300 licensed agents. The agents recruited and
licensed by USLI hold licenses with other companies and possibly could sell
other companies' policies that are similar in some respects to USLI's policies.
This arrangement is quite common with companies that recruit and license general
agents.
Effective with the acquisition and merger of FSL on December 31, 1994,
USLI became licensed in the states of Alabama, Arizona, Arkansas, Georgia,
Indiana, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. The Company's
insurance policies are being submitted to all these states Insurance Departments
for approval and agents are being recruited to sell the products in those
states, except Georgia, in which USLI does not meet that states minimum capital
and surplus requirements in order to sell its products.
INVESTMENTS
USLI invests and reinvests certain of its reserves and other funds. A
part of its income will be derived from this source. The investments of USLI
are limited as to type and amount by the Mississippi insurance laws which are
designed to insure prudent investment policies.
The investment of capital, paid-in and operating surplus and other
funds of insurers organized under the laws of the State of Mississippi is
specified by Mississippi Insurance Code 83-19-51. This statute includes general
and specific limitations on investments, records of investments and other
matters. The Mississippi insurance law regulating investments and other aspects
of the management of insurance companies is designed primarily for the protec-
tion of policyholders rather than investors.
The administration of USLI's investment portfolio is handled by a
committee of its Board of Directors with consultation and advice from
experienced professional investment experts from J. C. Bradford and Company.
The guidelines used require that bonds, both government and corporate, are of
the highest quality and comprise a majority of the investment portfolio. The
assets selected are intended to mature in accordance with the average maturity
of the insurance products and to provide the cash flow for USLI to meet its
policyholder obligations. The type, quality and mix will enable USLI to compete
effectively in the life insurance marketplace and to provide appropriate
interest margins to assure its continued solvency and attain profitability.
The Mississippi Insurance Code allows an insurance company a lesser
premium tax if up to 25% of its investments are invested in the State of
Mississippi including Mississippi corporation, state, county, and other sub-
division bonds. It is and has been the policy of USLI to invest its assets in a
percentage in excess of the Mississippi requirement, contingent on the
availability in the market of these securities, both for purposes of incurring
the lower premium tax and returning USLI's appreciation for the support given
to it by the AIN shareholders and USLI policyholders.
In both 1996 and 1995 net investment income represented approximately
9.4%, and 9.0% respectively of the Company's total revenues. Investment balances
which are held principally by USLI, and investment results for the two years
ended December 31, 1996, are as follows:
Investments at Unrestricted Investment Investment
Amortized Costs Cash Total Income Yield
1996 $3,702,365 $282,277 $3,984,642 $290,417 7.3%
1995 $3,599,517 $121,102 $3,720,619 $294,807 7.6%
Investment yield reflects net investment income on the sum of average
invested assets plus average investment income accrued.
The following table compares USLI's fixed maturity investment portfolio at
amortized cost by investment rating category as of December 31, 1996 and 1995.
Rating 12/31/96 Rating 12/31/95
Class Amount Percent Class Amount Percent
U. S. Treasury and other
government agencies $ 461,608 17.0 $ 580,371 22.2
Public utilities and industrial
and miscellaneous:
Class 1 1,344,680 49.5 1 1,056,888 40.5
Class 2 810,167 29.9 2 876,574 33.6
Class 3 98,673 3.6 3 98,477 3.7
$2,715,128 100.0 $2,612,280 100.0
The ratings used in the above schedule are those used by the Securities
Valuation Office of the National Association of Insurance Commissioners and
compare generally to the Moody and Standard and Poor's bond ratings as follows:
SVO RATING MOODY & STANDARD & POOR
1 AAA, AA, A Highest Quality
2 Baa, BBB High Quality
3 Ba, BB Medium Quality
4 B Low Quality
5 Caa, Ca, CCC, CC Lower Quality
6 CI, D In or Near Default
The Company has classified all its investments as securities available-for-sale
which are carried at fair value. As of December 31, 1996, the unrealized loss
of the Company's available-for-sale security portfolio approximated $15,000 and
was presented as a component of stockholders' equity.
REINSURANCE
As is customary among insurance companies, USLI will reinsure with other
companies portions of the life insurance risks it will underwrite. The two
principal types of reinsurance treaties commonly in use in the industry are the
"automatic" and the "facultative" agreements. Under an "automatic" treaty,
the reinsurer agrees that it will assume liability automatically for the excess
over the company's retention limits on any application acceptable to USLI. Under
a "facultative" treaty, the reinsurer retains the right to accept or reject any
reinsurance submitted, after a survey of each individual application. In order
to gain advantage of the reinsurer's underwriting experience in evaluating
applications for insurance, USLI may submit some applications for insurance to
the reinsurer on a facultative basis, and, if the reinsurer rejects any such
application as an unsatisfactory risk, USLI will also reject the application.
If the application exceeds the Company's automatic binding limit, it must
send the application and all underwriting papers to the appropriate reinsurer
according to the alphabetical split (per the reinsurance treaty) for their
underwriting action. The amount of the automatic binding limit is set at
$200,000. This limit is ten times the Company's life retention, and it may be
increased as USLI's retention increases. USLI may send any application on a
facultative basis to the appropriate reinsurer, if after evaluation of the
underwriting information, USLI's underwriter wishes to take advantage of the
reinsurer's enlarged data base and experience for additional underwriting input.
If the case is rejected by the reinsurer, USLI must also reject the application.
The primary purpose of reinsurance agreements is to enable an insurance
company to reduce the amount of its risk on any particular policy and, by re-
insuring the amount exceeding the maximum amount the insurance company is
willing to retain, to write policies in amounts larger than it could without
such agreements. The effect of reinsurance is to transfer a portion of the
profit, if any, on the insurance ceded to the reinsurer. Even though a portion
of the risk may be reinsured, USLI will remain liable to perform all obligations
imposed by the policies issued by it and is liable if its reinsurer should be
unable to meet its obligation under the reinsurance agreements. It should be
noted that when insurance is reinsured under either a facultative or automatic
arrangement, a portion of the premium received on that policy is still utilized
to post the required actuarial reserves to cover the risk. USLI's general
policy is to reinsure business with insurance companies with an A.M. Best and
Company rating of "A" or better.
USLI's life reinsurance is being ceded through automatic and facultative
treaties to two unaffiliated insurance companies. These reinsurance companies
are Business Men's Assurance Company, Kansas City, Missouri, and Optimum Re,
Irving, Texas, both rated "A" by A.M. Best and Company.
It is the practice of USLI to reinsure all accidental death benefit risks
that are written with the Participating Lifetime Accumulator or with other forms
of insurance.
USLI has reinsurance agreements with Reliastar Financial Corporation,
Minneapolis, Minnesota, Life Reassurance Corporation of American, Stanford,
Connecticut, and Reassurance Company of Hanover, Orlando, Florida which provide
coverage of claims in excess of various amounts on several of its accident
and health policies.
RESERVES
In accordance with the Mississippi insurance laws and regulations under
which USLI operates, USLI has set up actuarially computed reserves as
liabilities to meet the obligations on the policies it writes. These reserves
are the amounts which, with additions from premiums to be received and with
interest on such reserves, compounded annually at certain assumed rates, are
calculated to be sufficient according to accepted actuarial principles to meet
USLI policy obligations as they mature. The various actuarial factors are
determined from mortality tables and interest rates in effect when the policies
are issued. The reserves to be included in statutory filings will be valued on
a basis that meets the requirements of law in Mississippi.
REGULATION AND SPECIAL ACCOUNTING PRACTICES RELATING TO LIFE INSURANCE
COMPANIES
Mississippi insurance laws and regulations generally govern the accounting
practices and prescribe the procedures and forms for financial reports of
insurance companies. Reports prepared in accordance with the prescribed
statutory accounting practices are primarily intended to insure the ability of
an insurance company to meet its obligations to policyholders and do not
necessarily reflect going concern value. Balance sheets prepared in accordance
with statutory accounting practices are designed primarily to reflect the
financial position of insurance companies from the standpoint of solvency.
Certain of the prescribed or permitted accounting practices differ in some
respects from generally accepted accounting principles (GAAP) followed by other
business enterprises in determining financial position and results of
operations.
Basically, a life insurance company's gross income is generated from two
sources, premiums and investment income. The cost of placing new policies in
force may exceed the premiums received for the first year. In subsequent policy
years some of these costs, such as commissions, medical examinations and
investigative expenses, are reduced substantially or do not recur. Also, policy
lapses and surrenders are generally greater in the first few years that policies
are in force. Although the costs of acquiring new business are large and
generally not duplicated thereafter, statutory accounting procedures for
insurance companies and state laws and regulations designed to protect
policyholders provide that the entire amount of acquisition costs must be
charged to operations currently, instead of being spread over the life of the
policies. As a result of this and other factors, new insurance companies
normally show no profit on a statutory accounting basis in their early years
of operation.
The interests of policyholders and of the public in the financial integrity
of the life insurance industry make it important and proper that the solvency of
life insurance companies be demonstrated to insurance regulatory authorities.
Solvency must be continuously demonstrated for a life insurance company to be
permitted to offer its services to the public.
The National Association of Insurance Commissioners has established a model
act for insurance companies regarding risk-based capital. Risk based capital is
a method of measuring the amount of capital appropriate for an insurance company
to support its overall business operations in light of its size and risk
profile. It provides a means of setting the capital requirement in which the
degrees of risk taken by the insurer is the primary determinant. The four major
risks involved are:
Asset risk. This is the risk of asset default.
Insurance risk. This is the risk of adverse mortality and
morbidity experience.
Interest rate risk. This is the disintermediation risk of
policyholders withdrawing funds.
Business risk. This is normal business and management risk.
A company's risk based capital is calculated by applying a factor to
various assets, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items. The adequacy
of a company's actual capital may then be measured by its risk based capital
ratio, that is, the ratio of its total capital, as defined by the formula, to
its risk based capital. In addition to providing a new standard for minimum
capital, risk based capital standards will be used by regulations to set in
motion appropriate regulatory actions relating to insurers which show signs of
weak or deteriorating condition. The first level requires company action. The
three levels of regulatory action and involvement are:
Level A: Identifies situations requiring the initial level of regulatory
scrutiny.
Level B: Identifies situations requiring a detailed investigation of the
company.
Level C: Identifies the minimum level of total adjusted capital below which
state conservatorship shall be required.
As of December 31, 1996, USLI had a statutory-basis paid-in capital and
surplus of $2,325,096. This capital and surplus is invested in government
obligations, corporate bonds, and other investments currently permitted by the
insurance company investment laws of the State of Mississippi.
Pursuant to the laws and regulations of the State of Mississippi, USLI is
presently required to maintain minimum capital of $400,000 and minimum surplus
of $600,000. These minimum requirements may require amendment as a result of
recently adopted risk based capital requirements effective for 1993 as issued by
the National Association of Insurance Commissioners. The Total Adjusted Capital
for USLI at December 31, 1996 was $2,388,568 and the Risk Based Capital was
$112,211. No action is required by USLI regarding its capital and surplus.
The insurance laws of the State of Mississippi also provide that a life
insurance company will be assessed a lower premium tax if up to 25% of the life
company's investments are in Mississippi securities. The management of USLI has
invested its assets in a manner to incur the lower tax rate.
Statutory accounting requires that the policy reserve liabilities be
increased in each year that a policy is in force. The amount of the reserves is
recorded as an expense for statutory accounting purposes. Cash received from
renewal premiums, net of amounts used for current operations, is invested by
a life insurance company in accordance with applicable state law. Income earned
on invested assets becomes operating income to the life insurance company to the
extent that it exceeds the interest required to be added to reserves.
The financial statements presented to shareholders, the public, and the
Securities and Exchange Commission are required to be prepared in conformity
with generally accepted accounting principles. The objective of these statements
is to provide reliable financial information about economic resources and
obligations of a business enterprise and changes in net resources resulting from
its business activities, measured as a going concern. To the extent that the
accounting practices prescribed or permitted by state regulatory authorities
differ from generally accepted accounting principles, appropriate adjustments
will be made including, but not limited to the following:
1. Premiums are recognized as revenues over the premium-paying period and
future benefits and expenses are related to such premium revenues resulting in
the recognition of profits over the life of the insurance contracts. This
relationship is accomplished by a provision for future policy benefit
liabilities and amortization of deferred policy acquisition costs.
2. Certain assets designated as "non-admitted assets" for statutory
purposes (normally office equipment and agents' balances) are included in the
balance sheet. In this connection, the Registrant will purchase all office
equipment and lease it to USLI at prevailing lease rates for purposes of
generating operating revenues for the Registrant.
3. The Asset Valuation Reserve is reclassified as retained earnings
rather than as a liability.
4. Deferred federal income taxes are provided for differences in the
timing of recognition of certain items of income or expense for tax and
financial statement purposes. These temporary differences relate primarily to
different methods of calculating policy reserves, treatment of acquisition
costs, and recognition of deferred and uncollected premiums.
In common with other insurance companies operating in Mississippi, USLI is
subject to the regulation and supervision of the Mississippi Insurance
Commissioner. After making application for admission and receiving proper
license, USLI will operate in other states and, at that time, will be subject
to regulation and supervision in any other state where it may be permitted to
transact business. Such regulation is primarily for the benefit and protection
of insurance policyholders rather than shareholders of insurance companies.
Broad administrative powers are possessed by the Mississippi Department of
Insurance and other supervising agencies. Although the powers differ from state
to state, in general they include authority to grant and revoke licenses to
transact business, to be an agent, to supervise premium rates, to approve the
form of insurance contracts, to supervise the form of financial statements filed
with such agency, to regulate capital requirements, to regulate the investment
portfolio, to regulate insurable interest on one life and to require the filing
of a detailed annual report. USLI's business and accounts will be subject to
examination by the Mississippi Department of Insurance. Such regulation
includes the filing of financial statements by USLI, periodic reporting and
examination by the insurance regulatory authorities, and review of transactions
between members of the holding company group.
State laws regulating insurance holding companies such as AIN may signifi-
cantly limit the ability of USLI to pay, or AIN's ability to cause USLI to pay
or make dividends, loans or advances to AIN.
Under insurance guaranty fund laws, insurers doing business in states
having such laws can be assessed up to prescribed limits for policyholder losses
incurred by insolvent companies. Mississippi and the other states in which USLI
is licensed have guaranty fund laws and USLI has been assessed amounts under
these laws of $41,695 for 1996 and $446 for 1995. While actual assessments
for the last three years have been immaterial, the amount of any future assess-
ments on USLI under this law cannot be reasonably estimated. State laws provide
for carrying the assessed amounts as an asset and amortizing the amount over
a five year period by deductions from premium taxes. Management is not aware of
any known uncertainties relating to future assessments that would materially
impact the Company's liquidity or results of operations. Additional discussion
regarding the guaranty fund is included in the Management's Discussion and
Analysis.
Mississippi, in which USLI is licensed to do business, regulates insurers
and their affiliates under insurance holding company legislation. Under such
laws, transactions by USLI with GAIN or any other future affiliates may be
subject to prior notice or approval depending on the size of the transaction in
relation to their financial position.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
securities regulation concerning insurance products, tax law changes affecting
the taxation of insurance companies, the tax treatment of insurance products and
its impact on the relative desirability of various personal investment vehicles
and proposed legislation to more fully subject insurance companies to antitrust
laws.
COMPETITION
The life insurance industry is highly competitive. There are approximately
2,100 life insurance companies in the United States and approximately 750 life
insurance companies licensed to do business in Mississippi. Many of them are
well-established firms with fine reputations, offering a broader line of
insurance policies, having larger selling organizations and having greater
financial resources than USLI. Many of these companies operate on a mutual
basis, which may give them a competitive advantage over USLI on certain types of
policies due to the fact that all profits accrue to the policyholders.
EMPLOYEES
As of December 31, 1996, AIN had 18 full time and 4 temporary employees.
Agents marketing USLI's insurance portfolio are designated by the USLI as
independent contractors and are not considered employees.
THE GAIN AGENCY, INC.
Prior to April 1995 the Agency was a general insurance agency selling
property and casualty insurance for various insurance companies. In April 1995,
the Agency sold its inforce business and certain net assets. Prior to this
sale, the Agency received commissions from various insurance companies on the
premiums collected from the policies sold by the Agency. Commission and other
income received by the Agency approximated $65,000 in 1995. The Agency had no
business activity in 1996 except the receipt of principal and interest on a note
receivable executed in April 1995 for the sale of its assets.
After negotiations between AIN's management and Mr. John U. White, Jr., the
manager of the Gain Agency, Inc., an agreement was reached to sell to Mr. White
the in-force property and casualty business which had been produced by the Gain
Agency, Inc. The agreement also included the sale of net book value of certain
assets and liabilities in The Gain Agency, Inc. After an independent appraisal
of the in-force business and the other assets, the Board of Director's approved
the sale for the sum of $180,000 and a definitive contract was executed
effective April 1, 1995.
The gain on disposition and the income (loss) from operations of the Agency
have been accounted for as discontinued operations.
The Board of Directors has no immediate plans for the future use of The
Gain Agency, Inc.
U.S. STAR INTERNATIONAL, INC.
On November 5, 1993, AIN acquired controlling interest in U. S. Star
International, Inc., a Cayman Island corporation. This company was acquired
to serve as an entity to purchase the foreign reinsurance license in Mexico for
USLI and to serve as the marketing agency for USLI's international sales opera-
tion. USLI was licensed in Mexico as a foreign reinsurer on March 14, 1994.
The Board of Directors determined that the objective to get USLI licensed
in Mexico as a foreign reinsurer had been accomplished and that U. S. Star
International could not serve any other immediate useful purpose. The Board
decided to terminate AIN's interest in U. S. Star International and a contract
was executed to this effect on April 28, 1995. Accordingly, the Company's
investment of $30,000 was written off in 1995 as foreign operations marketing
expense.
ITEM 2: DESCRIPTION OF PROPERTY
AIN owns a two story brick building and lot located at 660 Lakeland East
Drive, Flowood, Mississippi. There is approximately 13,600 square feet in the
building which is leased to USLI. AIN and its wholly owned subsidiaries occupy
approximately 7,500 square feet. The remaining space in the building is leased
to third party tenants at approximately $8 per square foot. As of December 31,
1996, the building and lot had a cost basis of approximately $564,000. The
building is being depreciated over thirty-two years by the straight-line method.
Its carrying value as of December 31, 1996 approximated $371,000.
On December 19, 1994, the mortgage on the property was refinanced with
Merchants and Farmers Bank, Brandon, Mississippi. The refinancing allowed AIN
to receive cash of $175,000 from the equity in the property which was used to
purchase Financial Security Life of Mississippi. The property received a current
appraisal of $925,000. The mortgage amount at December 31, 1996 was
approximately $509,000 with an interest rate of prime plus 1 and 1/2 percent.
Principal and interest payments are approximately $5,800 per month. The note is
secured by a deed of trust on the building and lot. The rental income received
from third party tenants totaled $54,000 in 1996 and $52,000 in 1995.
There are several commercial office buildings located in the area of the
property which have rentable office space. This creates a highly competitive
market and there may be periods of time when AIN is unable to find suitable
tenants.
AIN carries insurance on the property of $750,000 which represents approxi-
mately $200,000 more than the purchase price paid by AIN. It is management's
judgement that there is adequate insurance coverage on the property.
The occupancy rate of the property was 100% as of December 31, 1996.
The tax value is carried at $438,000 with a tax base of approximately
$66,000. The realty tax rate is .11187 and the current annual realty taxes
approximate $7,000.
Management believes that its corporate office building will be adequate for
AIN and its subsidiaries' anticipated growth for the next several years.
ITEM 3: LEGAL PROCEEDINGS
The Registrant was a party to legal proceeding filed on December 20, 1990
in the Chancery Court, First Judicial District, Hinds County, Mississippi.
The principal parties: Plaintiffs were Tillman Insurance Agency, Inc. and
Robert Tillman. Defendants were the Gain Agency, Inc., American Investment
Network, Inc., Walter L. Shelton, Jesse L. Byrd, and Sam Dunlap.
Description of facts underlying the proceedings: In 1988, the Gain Agency,
Inc., a wholly owned subsidiary of American Investment Network, Inc. bought the
book of business of a general insurance agency in Philadelphia, Mississippi;
namely, the Tillman Insurance Agency, Inc. The purchase price was to be twenty-
five percent (25%) of the commission income from the book of business for the
life of the plaintiff, Robert Tillman. The commission income was not as great
as the plaintiff anticipated and in fact has ceased altogether. The plaintiff
claims the conduct of the defendants caused this reduction in the commission
income and was seeking actual and punitive damages.
Relief sought: Actual damages of $500,000 and punitive damage of $5,000,000.
On March 3, 1995, an out of court settlement agreement was executed by all
parties wherein the defendants will pay to the plaintiffs the sum of $180,000
including attorneys fees (discounted to a present value of $150,000). An
initial amount of $35,000 was paid on the settlement date and the balance will
be paid in installments over a period of 5 years beginning April 1, 1995.
Nothing contained in any of the settlement documents shall be deemed an
admission by any party thereto for purposes of the Civil Action. Adequate
reserve provisions have been included in the 1995 and 1996 consolidated
financial statement.
USLI is a party to legal proceedings filed on December 5, 1995 with the
Circuit Court of Lee County, Mississippi.
The principal parties are Donald and Karen Mayo, Plaintiffs and United
Security Life Insurance Company, Defendant.
The complaint results from USLI's denial of a claim for benefits under a
policy issued by USLI. The policy provides benefits for up to twelve (12) out-
patient treatments for Chiropractic service for an individual and up to thirty-
six (36) for a family. The complainant had thirty-two treatments. USLI paid
for the first twelve and denied benefits for the additional treatments which
is in accordance with the policy provisions. The plaintiff contends she was
entitled to benefits for the additional treatments because she purchased a
policy with family coverage.
The plaintiff is requesting in her suit that she be awarded actual and
punitive damages in an amount to be determined by a jury, but no less than
$100,000.
Legal counsel is unable to render an opinion on the estimated outcome of
these matters as they are presently in discovery stage. However, management
intends to vigorously defend these matters and, is of the opinion that the
ultimate outcome of these matters will not result in a material adverse effect
on the consolidated financial statements. Accordingly, no provision for any
loss or liability has been provided in the consolidated financial statements.
USLI is a party to legal proceedings filed on February 5, 1996 in the
Circuit Court of Lee County, Mississippi.
The principal parties are David Anderson and Marty Stanford, d/b/a Premier
Insurance Agency and Chiropractic National Associations, Plaintiffs; United
Security Life Insurance Company, Defendant.
The plaintiffs were licensed in 1994 with USLI as insurance agents to
solicit and sell insurance policies to pay primarily for chiropractic services.
The plaintiffs allege the following: (1) that the defendant refused to pay
claims which were owed, (2) that the defendant arbitrarily refused to pay the
chiropractic doctors five percent fees claiming that it was illegal, (3) that
the defendant placed "riders" on certain of the policies which were so broad to
eliminate any coverage at all, (4) that the company threatened plaintiffs with
potential criminal prosecution if false claims were made of which the purpose
for this was to discourage the making of claims. The plaintiffs allege that
they have suffered damages because their reputations have been greatly damaged
and they have suffered extreme mental anxiety and stress by reason of the
defendant's action in these matters. The plaintiffs are claiming for unspecified
punitive damages.
Legal counsel is unable to render an opinion on the estimated outcome of
these matters as they are presently in discovery stage. However, management
intends to vigorously defend these matters and, is of the opinion that the
ultimate outcome of these matters will not result in a material adverse effect
on the consolidated financial statements. Accordingly, no provision for any
loss or liability has been provided in the consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, since the last annual meeting held May
7, 1996.
PART II
ITEM 5: MARKET AND DIVIDENDS ON AIN'S CLASS A AND B COMMON EQUITIES
AND RELATED STOCKHOLDER MATTERS.
There are 15,000,000 shares authorized of Class "A" common stock of which
5,025,490 shares are issued and held by approximately 2,300 shareholders. There
are 2,500 shares of authorized and issued Class "B" common stock which are held
equally (833.33 shares) by Jesse L. Byrd, Walter L. Shelton, and Ben S. Yandell.
There are 3,726 shares of Treasury stock.
The Class "A" common shares have been traded on a very limited basis
between individuals. On January 30, 1996, the National Association of
Securities Dealers, Inc. cleared a request to allow the buy and sell trans-
actions of the Class A Common stock to be shown on Over-The-Counter Electronic
Bulletin Board. Over-The-Counter Electronic Bulletin Board is an electronic
computer system whereby securities dealers have access to information regarding
the trading of shares of various companies' stock. The symbol for the
Registrant's stock is GANI. Morgan Keegan and Company has agreed to match
buyers and sellers of the stock to the best of their ability in an effort to
create a market. None of the Class B Common stock has traded and there is no
market.
The present policy of AIN's Board of Directors is to retain funds for the
operation and expansion of AIN and its subsidiaries. There have been no cash
dividends paid on the Class A Common or the Class B Common, and the Board of
Directors of AIN has no immediate plans for the payment of dividends but, from
time to time will review this policy in light of AIN's earnings, financial
condition and other relevant factors. AIN currently intends to retain the major
portion of any future earnings to finance the development and expansion of its
business and does not contemplate the payment of cash dividends in the
foreseeable future. See Item 6 for a discussion of USLI's regulatory dividend
restrictions.
An Incentive Stock Plan for employees was approved by shareholders on May 3,
1994. There were 147,500 share options outstanding on December 31, 1996. No
options have been exercised. A copy of the Employee Stock Plan is included by
reference to the proxy statement sent to the shareholders for the annual share-
holders meeting of May 3, 1994.
AIN's shareholders adopted, at the Annual meeting on May 3, 1994, an amend-
ment to the Articles of Incorporation wherein the Articles were restructured to
equalize the rights of the shareholders of the Class A Common and the Class B
Common. A copy of the amendment is included by reference to the proxy statement
sent to the shareholders for the annual shareholders meeting of May 3, 1994.
AIN's Board of Directors adopted on November 11, 1994, an Executive Compen-
sation Plan and Agreement for Walter L. Shelton, Chairman and Jesse L. Byrd,
Vice Chairman. The compensation plan and agreement was presented to Share-
holders and approved at the annual meeting on May 2, 1995. A copy of the plan
is enclosed herewith by reference to the proxy statement filed in connection
with the 1995 Annual Shareholders' meeting. In connection with the adoption of
this plan, the Company accrued the minimum obligation relative to past services
which approximated $55,000 at December 31, 1996 and 1995.
On May 7, 1996, stockholders of the Company approved the adoption of an
Agents' Stock Option Plan for eligible agents licensed with the Company wherein
200,000 shares of Class A common stock were reserved for option as directed by
the Board of Directors. Under the terms of the plan, agents writing premiums
which exceed certain minimum levels will be granted options at an exercise price
equal to fair value at the date of grant. There have been no options granted
under the arrangement.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This section discusses and analyzes AIN's results of operations,
financial condition, and the changes in financial condition. Also included is
information regarding AIN's operation that may not be evident in the financial
statements. This analysis should be read in conjunction with AIN's consolidated
Financial Statements and related notes included elsewhere in this form.
Proposed Sale of Company
On October 25, 1996, the Company signed a definitive written agreement
whereby Citizens Insurance Company of America, (CICA), Austin, Texas, a wholly-
owned subsidiary of Citizens, Inc. (Citizens) will acquire 100% of the
outstanding shares of the Company for shares of Citizens Class A common stock.
Pursuant to the terms of the agreement, which is subject to approval of
regulatory authorities and shareholders of the Company, CICA will issue one
share of Citizens Class A common stock it owns for each 7.2 shares of the
Company's Class A and Class B common stock issued and outstanding. CICA expects
to issue approximately 700,000 shares of Citizens common stock to consummate the
transaction. Management anticipates that the sale will occur during 1997.
Liquidity and Capital Resources
AIN was initially capitalized though a private placement of stock
followed by two intrastate stock offerings. A total of $4,481,000, net of
commission and other costs of issuance, was received through these offerings
principally for the purchase and capitalization of the insurance subsidiary,
USLI, and the insurance agency subsidiary, The GAIN Agency.
The capital funds contributed to USLI were invested in fixed maturities
and equity securities. The fair values of the Company's total portfolio
approximated $3,687,000 as of December 31, 1996. The net investment income
received from these investments, plus unrestricted cash (effective yield of 7.3%
in 1996) and premiums received from insurance policies represent the primary
sources of operating funds for USLI. Investment income and portions of the asset
account provide sources for operating funds as needed. In addition, AIN receives
rental income from the lease of office space in its home office building. USLI
leases the entire building from AIN and in 1996 and 1995 paid approximately
$136,000 in rental income (approximately $10 per square foot) to AIN. Another
possible source of operating funds to AIN is dividends from its subsidiaries.
There have been no dividends paid to AIN by either subsidiary. Mississippi
insurance regulations limit the amount of dividends USLI is permitted to pay
without prior approval by the Department of Insurance of the State of
Mississippi to the lesser of statutory earnings, as defined to include the prior
two years, or ten percent of capital and surplus. As of December 31, 1996,
approximately $201,000 was available for dividends to AIN without such approval.
Management believes that AIN's retained cash, its investment and lease
income, and its source for subsidiary dividends, as well as principal and
interest collections received from a note receivable relating to the sale,
during 1995, of its in-force business and certain other net assets of its agency
subsidiary will be sufficient to finance its short term operations and its
present forecast of long term needs.
For its principal subsidiary, USLI, management believes that cash flows
from operations and proceeds from investment maturities will be sufficient to
finance current and forecasted operations, which do not anticipate significant
outlays of cash for ordinary life claim settlements within the next three to
five years due to the type of insureds covered. During 1996, USLI continued a
significant increase in the volume of accident and health claims as a result of
its penetration and emphasis into the limited benefit accident and health
insurance business. Total claims paid increased to $618,000 in 1996 compared to
$490,000 in 1995. USLI anticipates that the volume of accident and health
claims will increase in 1997. However, the Company's positive cash flow in 1996
and the maturities of investments should provide proceeds more than sufficient
for its operations. The Company has classified its marketable securities as
available-for-sale which will provide an additional source of liquidity as
needed.
Since 1993, the Company has had an aggressive mass marketing program to
sell limited benefit accident and health policies the premiums for which are
collected through company monthly payroll deduction from the policyholder's
employer. Total revenues in 1996 included approximately $1,725,000 of accident
and sickness premiums. The accident and health polices in force on December 31,
1996, will generate approximately $2,037,000 in annualized premiums. Management
anticipates this program will generate additional sources for liquidity and
operational needs for USLI through increased revenues.
A regular triennial examination of USLI was conducted by the Mississippi
Department of Insurance in 1994 for the period of January 1, 1990 through
December 31, 1993. Recommendations of the examiners had no material effect on
the financial conditions or operational results of the Company.
AIN, or its insurance subsidiary are not a party to any surplus relief re-
insurance or any other agreement wherein reserve credits would be disallowed and
the likelihood of such an agreement is remote. Further, there are no transaction
or items in USLI's statutory surplus which has enhanced the statutory surplus
and which has been eliminated in the preparation of the consolidated GAAP
financial statements.
Financial Condition
Total assets as of December 31, 1996 were $7,688,000, an increase of
$200,000 from December 31, 1995. Significant changes within the Company's
composition of assets and liabilities compared to the 1995 year end related
principally to (i) a general decline in the fair values of the Company's fixed
maturity and preferred stock securities resulting from market and economic
changes, (ii) anticipated increases in assets and liabilities related to the
Company's growth in the accident and health insurance market, and (iii) the
payment of contingent liabilities resulting from a prior acquisition. As of
December 31, 1996, the Company's unrealized loss on marketable securities
available for sale was $15,000 compared to an unrealized gain of $48,000 as of
December 31, 1995.
Cash and cash equivalents increased $66,000 as compared to December 31,
1995, exclusive of the decrease in cash previously restricted. Included in this
amount were the proceeds from the issuer of one of the fixed maturity invest-
ments held by the Company, the proceeds of which were invested in cash
equivalents. Restricted cash decreased $95,000 (as well as the corresponding
liability included in accounts payable and other liabilities at December 31,
1995) as a result of the settlement of certain liabilities and contingencies of
a prior acquisition for which seller funds were escrowed. As of December 31,
1996, the Company's deferred policy acquisition cost increased $64,000 as
compared to December 31, 1995 and future policy benefit and unpaid claims
liabilities increased an aggregate of $429,000. Substantially all of this
increase is related primarily to accident and health products. Other policy-
holder funds increased $105,000 principally as a result of dividend
accumulations relating to the insurance subsidiary's life products (principally
the Lifetime Accumulator Policy which is a participating policy requiring
dividend benefit accruals).
Notes and accounts receivable decreased $33,000 as compared to December 31,
1995. Of this decrease, approximately $12,000 related to collections on a note
receivable pursuant to the sale of the inforce business and certain net assets
of the Company's insurance agency subsidiary to a former officer. This sale
occurred in 1995 and the note which bears interest at 7.5% per annum, is payable
in monthly installments of $2,006, including interest, and approximated $152,000
as of December 31, 1996. Additionally, due and unreceived premiums which are
included in notes and accounts receivable, decreased approximately $21,000 as
remittances by corporate employers of the premiums collected through payroll
deductions.
Other assets increased $41,000 as compared to December 31, 1995. This was
primarily due to guaranty fund assessments of approximately $40,000 for which
the Company is entitled to future credits against future premium taxes.
Included in accounts payable and other liabilities as of December 31, 1996
and 1995 was approximately $55,000 accrued as a minimum obligation under an
executive compensation plan for two executives. The plan provides for future
and past services in the form of benefits that could range from a minimum fixed
benefit of $20,000 to a maximum benefit of $100,000 annually for each of the
executives over a ten year period. Benefits in excess of the fixed minimum are
based upon a specified ratio of statutory net gain from operations to gross
statutory premiums of the insurance subsidiary. Payments under the plan
approximated $40,000 in 1996 and $27,000 in 1995. Management evaluates the
propriety of the recorded obligation for past services at each reporting period
based upon their best estimates of anticipated future statutory premium revenues
and statutory operating gains.
Results of Operations
Total revenues for the year ended December 31, 1996 were $3,105,000
compared with revenues of $3,151,000 for 1995 or a decrease of $46,000.
Total premiums earned by the Company's insurance subsidiary decreased
$44,000 compared to December 1995. The primary reason for the decrease relates
to the decrease in the insurance subsidiary's life business. Life premiums
decreased approximately $187,000 to $1,028,000 in 1996 compared to $1,215,000
in 1995. This is the result of the policyholders allowing coverage to lapse
during 1996 as a result of the general decline in life insurance business and
related marketing efforts. Accident and health premiums continued to increase
in 1996 with premium revenues of $1,725,000 in 1996 compared with $1,582,000 in
1995. The Company began issuing accident and health products in latter 1993 and
anticipates that this will represent its major market emphasis in 1997. The
insurance subsidiary offers limited pay accident and health products principally
through a mass marketing payroll deduction process.
Net investment income decreased $4,000 or 1.5% for 1996 as compared to the
prior year. Included in net investment income was interest income on the note
receivable from the sale of the Agency of approximately $7,000.
Policy benefits and claims increased $299,000 for year ended December 31,
1996 as compared to 1995. This increase is principally related to the growth in
accident and health business. During 1996, accident and health benefits
approximated $1,057,000 compared to total accident and health benefits in 1995
of $557,000. This included an increase in claims paid of approximately $128,000
and an increase in accident and health future policy benefits and unpaid claim
liabilities of $372,000. Future policy benefits relating to life insurance
policies decreased by $17,000 as policyholders allowed coverage to lapse during
1996 as a result of the general decline in life insurance business and related
marketing efforts. As a result the change in future policy benefits decreased
by $192,000. In addition claims paid, net of reinsurance, on life policies
decreased by approximately $25,000. The remaining change related to a net
increase in policyholder dividends of approximately $16,000.
Amortization of deferred policy acquisition cost increased $196,000 for
1996 as compared to the same period of the prior year. Approximately $87,000 of
this increase is due to anticipated increases related to the amortization of
accident and health acquisition cost which approximated $257,000 in 1996 as
compared to $170,000 in 1995. The remaining increase relates to anticipated
run-off of the insurance subsidiary's life insurance business and related policy
lapses or terminations during the year.
Interest expense decreased $9,000 as a result of variable interest rate
changes and reductions of amounts outstanding on the mortgage obligation.
Depreciation and amortization approximated $77,000 during both 1996 and
1995. Approximately $85,000 of data processing equipment and related software
was acquired during the year, however the resulting increase in depreciation was
offset by assets which became fully depreciated in 1995.
Other general operating expenses decreased approximately $68,000 for 1996
as compared to 1995. This decrease was a combination of several factors
including a decrease in computer expenses of approximately $58,000. This
decrease resulted from managements efforts to better utilize current data
processing capabilities available from the Company's own computer equipment.
Additionally, renewal commissions relating to the Company's insurance
subsidiary's life insurance business decreased by approximately $26,000 as
compared to the prior year. In 1995, the company conveyed its interest in US
Star International, Inc., an inactive Cayman Island Corporation, to US Star's
other shareholder and wrote-off its remaining investment of $30,000 which was
included in total general operating expenses for 1995 as a reduction of foreign
marketing subsidiary investment.
Management believes that the cash flow generated from the Company's
insurance operations, investment income and proceeds from sales and maturities
of investments will be sufficient to meet its current and future operating
requirements. The Company is monitoring the volume of new accident and health
business written in order to manage the possible cash flow and statutory surplus
effects resulting from the related acquisition expenses to secure such business
in the first year.
All insurers licensed to transact a life and health insurance business in
Mississippi are members of the Mississippi Life and Health Insurance Guaranty
Association. Membership in the association is required as a condition for
authority to transact insurance in the State. For the purpose of providing
funds necessary to carry out the powers and duties of the association each
member insurer is assessed amounts that are required to pay the administrative,
legal, and other expenses of the association and assessed amounts necessary to
carry out the duties of the association regarding impaired or insolvent insurers
operating in Mississippi. Actual assessments during 1996 approximated $42,000
while assessments in 1995 were immaterial. Future assessments cannot be
reasonably estimated. Assessments are based on a factor calculated by the
amount of premiums received by each company as it relates to the total premiums
collected by all companies operating in the State and the amount of funds needed
by the Association. USLI is subject to assessments by each state's Life and
Health Guaranty Association in the states in which it is licensed to operate.
Generally, each state will allow a percentage of the assessment as a credit
against premium taxes each year until the total of the credits equal the
assessment.
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See index to consolidated financial statements on page F1.
ITEM 8: CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There was no change in or disagreement with the Registrant's certified
public accountants during the last two year period.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required under this item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days from the
fiscal year end.
ITEM 10: EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days from the
fiscal year end.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under this item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days from the
fiscal year end.
ITEM 12: CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
AIN maintains regular bank checking and money market accounts at a local
bank of which one of AIN's founders and shareholders is a director. This bank
also holds the mortgage on AIN's home office building. No compensation has been
paid to this shareholder as a result of these account.
Non-management directors of AIN and its life insurance subsidiary receive
director's fees in the amount of $200 plus reimbursement for out-of-pocket
travel expenses in connection with the attendance of each meeting of the Board
of Directors. Messrs. Elton Cook, Will Henderson, and Shannon Williford, non-
management directors, who are members of the Executive and Finance Committees,
also receive $500 each month in connection with the monthly or more frequent
meetings of the Executive and Finance committees.
During September 1992, the Company entered into consulting arrangements
with 13 of its original founders who subscribed for stock pursuant to its 1992
intrastate offering for purposes of solicitation of their advice, support and
promotion of the Company through a consulting group. Consulting fees are based
upon an 8.33% return on each respective founder's investment during the 1992
intrastate offering and payable over twelve years. Consulting fees paid
approximated $42,000 in 1996 and in 1995. Future consulting fees will be
approximately $42,000 annually.
As indicated above, the primary purpose of the consulting arrangements with
AIN's founders is for AIN to benefit from the expertise and influence through
the advice, support, and promotion of a group of very successful business and
professional individuals located in various areas of the State of Mississippi.
AIN invites these founders to an annual meeting at the home office at which the
management solicits their advice regarding marketing, investments and various
other aspects of its operations. All through the year these founders are
contacted by management and sales representatives for their recommendations as
to prospects for insurance agents in their communities and applicants for life
insurance coverage and, in addition, for property and casualty insurance written
through AIN's subsidiary, The GAIN Agency. During AIN's stock offerings,
numerous stock sales were made as a result of the promotion and recommendations
given by these founders. None of the founders received any commission from
stock sold during the offering which began October 2, 1991 and ended September
30, 1992.
On August 23, 1996, the Company entered into employment agreements with
four executive officers of the Company for a five year period. Under the terms
of the agreements, severance benefits equal to one year's annual salary are
available to these officers in the event the Company is sold or merged and the
officers are required to relocate or terminate employment. No liability existed
under these agreements at December 31, 1996.
ITEM 13: FINANCIAL STATEMENTS AND EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
13.1 Audited Consolidated Financial Statements for the years ended
December 31, 1996 and 1995
21 Subsidiaries of Registrant
_______________________________________________
All other exhibits are either not applicable or have been
previously filed and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN INVESTMENT NETWORK, INC.
BY:s/H. Harold Crumpler
H. Harold Crumpler, Executive Vice President,
Treasurer, Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURES DATE
s/H. Shannon Williford 03/25/97
H. Shannon Williford, Chairman of the Board of Directors
s/Jesse L. Byrd 03/25/97
Jesse L. Byrd, Vice Chairman of the Board of Directors
s/John S. Camara 03/25/97
John S. Camara, President, Director
s/H. Harold Crumpler 03/25/97
H. Harold Crumpler, Executive Vice President, Treasurer, Director
s/Phillip E. Faller 03/25/97
Phillip E. Faller, Vice President, Secretary, Director
______________________________________
H. Elton Cook, Director
______________________________________
Thomas S. Hayes, Jr., Director
______________________________________
Billy George Janous, Director
______________________________________
John T. Keeton, Jr., Director
______________________________________
L. Homer Martin, Jr., Director
s/Walter L. Shelton 03/25/97
Walter L. Shelton, Director
SUBSIDIARIES OF REGISTRANT
NAME: UNITED SECURITY LIFE INSURANCE COMPANY
STATE OF INCORPORATION: MISSISSIPPI
NAME: THE GAIN AGENCY, INC.
STATE OF INCORPORATION: MISSISSIPPI
EXHIBIT 1
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES (FORMERLY GREAT
AMERICAN INVESTMENT NETWORK, INC.)
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995, and
Independent Auditors Report
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Independent Auditors Report F-2
Consolidated Balance Sheets - December 31, 1996 and 1995 F-3
Consolidated Statements of Operations - Years Ended
December 31, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders Equity - Years Ended
December 31, 1996 and 1995 F-7
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996 and 1995 F-9
Notes to Consolidated Financial Statements F-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
American Investment Network, Inc.
Jackson, Mississippi
We have audited the consolidated balance sheets of American Investment Network,
Inc. (formerly Great American Investment Network, Inc.) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders equity and cash flows for the years then
ended. These financial statements are the responsibility of the Companys
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 consolidated financial position of American Investment
Network, Inc. and subsidiaries as of 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.
/s/ DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 17, 1997
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
SECURITIES AVAILABLE FOR SALE - AT FAIR VALUE:
Fixed maturities $ 2,706,059 $ 2,666,979
Equity securities 981,163 980,600
3,687,222 3,647,579
OTHER ASSETS:
Cash and cash equivalents 282,277 121,102
Restricted cash 95,000
Accrued investment income 86,830 76,737
Notes and accounts receivable, no allowance for uncollectible
accounts deemed necessary 305,795 339,172
Reinsurance receivable 34,552 35,393
Property and equipment - net 738,522 723,864
Deferred policy acquisition costs 2,305,365 2,241,403
$18,000 (1996) and $7,000 (1995) 247,423 206,338
TOTAL ASSETS $ 7,687,986 $7,486,588
See notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
LIABILITIES:
Future policy benefits $ 2,405,250 $ 1,998,386
Unpaid claims 163,214 140,777
Unearned premiums 110,336 71,724
Policyholders' dividend accumulations 836,352 731,454
Accounts payable and other liabilities 202,559 315,976
Note payable 509,128 526,447
Total liabilities 4,226,839 3,784,764
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, participating,
no par value; authorized 15,000,000
shares, issued 5,025,490 4,480,620 4,480,620
Class B common stock participating,
$1 par value; 2,500 shares authorized,
issued and outstanding 2,500 2,500
Unrealized (loss) gain on securities
available for sale (15,143) 48,062
Retained earnings (deficit) (999,378) (821,906)
3,468,599 3,709,276
Less cost of treasury stock - 3,726 shares (7,452) (7,452)
Total stockholders' equity 3,461,147 3,701,824
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,687,986 $ 7,486,588
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
REVENUE:
Premiums (net of ceded premium of $149,000 (1996) and
$70,000 (1995) $2,752,914 $ 2,797,260
Net investment income 290,417 294,807
Rental income 54,008 51,608
Realized investment losses (2,325)
Other income 8,064 9,365
3,105,403 3,150,715
BENEFITS AND EXPENSES:
Benefits and claims 1,406,297 1,107,183
Amortization of deferred policy acquisition costs 644,754 449,204
Interest expense 61,517 70,148
Actuarial and other professional fees 156,725 175,620
Depreciation and amortization 76,926 77,721
Other expenses 240,602 308,273
Reduction of foreign marketing subsidiary investment 30,000
3,282,875 2,961,789
(LOSS) EARNINGS FROM CONTINUING OPERATIONS (177,472) 188,926
DISCONTINUED OPERATIONS:
Loss from operations (9,871)
Gain on sale of agency subsidiary 47,133
37,262
NET (LOSS) EARNINGS $ (177,472) $ 226,188
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
NET (LOSS) EARNINGS PER COMMON SHARE:
Continuing operations $ (0.04) $ 0.04
Discontinued operations 0.01
Net (loss) earnings $ (0.04) $ 0.05
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 5,024,264 5,024,264
See notes to consolidated financial statements.
(Concluded)
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
Common Stock
Class A Class B
Shares Amount Shares Amount
BALANCE, JANUARY 1, 1995 5,025,490 $4,480,620 2,500 $2,500
Unrealized gain on securities
available for sale
Net earnings
BALANCE, DECEMBER 31, 1995 5,025,490 4,480,620 2,500 2,500
Unrealized (loss) on securities
available for sale
Net (loss)
5,025,490 $4,480,620 2,500 $2,500
See notes to consolidated finanicial statements.
Unrealized
Gain (Loss) Retained Total
on Marketable Earnings Treasury Stockholders'
Securities (Deficit) Stock Equity
$ (374,653) $ (1,048,094) $ (7,452) $ 3,052,921
422,715 422,715
226,188 226,188
48,062 (821,906) (7,452) 3,701,824
(63,205) (63,205)
(177,472) (177,472)
$ (15,143) $ (999,378) $ (7,452) $ 3,461,147
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
OPERATING ACTIVITIES:
Net (loss) earnings $ (177,472) $ 226,188
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Discontinued operations (37,262)
Realized loss on sale of investments 2,325
Reduction of foreign marketing subsidiary investment 30,000
Provision for doubtful accounts 3,140 4,243
Amortization on investment premium and discounts 192 (157)
Depreciation and amortization 76,926 77,721
Amortization of deferred policy acquisition costs 644,754 449,204
Policy acquisition costs deferred (708,716) (849,139)
Decrease in restricted cash 95,000 161,000
Increase in accrued investment income (10,092) (26,417)
Decrease (increase) in accounts receivable 18,062 (27,544)
Decrease (increase) in other assets (48,085) (5,335)
Decrease (increase) in reinsurance receivables 841 1,282
Increase in liability for future policy benefits 406,864 212,382
Increase in unpaid claims 22,437 27,448
Increase in unearned premiums and policyholders' dividend
accumulations 143,510 160,593
Increase in accounts payable and other liabilities(113,417) (297,291)
Decrease in net assets of discontinued operations 16,676
Net cash provided by operating activities 353,943 125,917
INVESTING ACTIVITIES:
Cost of investments acquired (330,220) (429,368)
Proceeds from sale of investments 210,000 238,000
Proceeds from maturities and repayments of
fixed-maturities investments 17,180 22,053
Property and equipment purchased (84,584) (115,886)
Collections on note receivable 12,175 5,755
Net cash used in investing activities (175,449) (279,446)
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
FINANCING ACTIVITIES -
Repayments on notes payable $ (17,319) $ (9,116)
Net cash used in financing activities (17,319) (9,116)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 161,175 (162,645)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 121,102 283,747
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 282,277 $ 121,102
SUPPLEMENTAL INFORMATION:
Non-cash activities:
Change in unrealized (loss) gain on
securities available for sale $ (63,000) $ 423,000
Sale of agency subsidiary in exchange for note receivable $ 170,000
Interest paid $ 54,000 $ 60,000
See notes to consolidated financial statements. (Concluded)
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business - American Investment Network, Inc. (formerly Great
American Investment Network, Inc.) (AIN) was incorporated in 1987 for the
purpose of acquiring stock in existing insurance companies and organizing and
operating other companies in the financial services industry. AIN has two wholly
owned subsidiaries, United Security Life Insurance Company (USLI) and The Gain
Agency, Inc. (The Agency). Prior to 1995, AIN owned a 50.025% interest in U. S.
Star International, Inc. (US Star), an inactive Cayman Island Corporation. In
1995, the Company conveyed its interest in US Star to US Stars other shareholder
and wrote-off its remaining investment of $30,000, which is included in
reduction of foreign marketing subsidiary investment.
Prior to April 1995, the Agency was a general insurance agency selling property
and casualty insurance. In April 1995, the Agency sold all of its inforce
business and certain net assets (see Note 2).
On May 10, 1990, USLI began selling and underwriting a participating modified
whole life insurance policy which accounts for over 98% of its inforce life
insurance policies and, in latter 1993, began a mass marketing program to offer
limited benefit accident and health policies. The sale of accident and health
products has been USLIs major focus during the past three years and presently it
plans to offer additional competitive insurance products.
Prior to 1990 the Company incurred operating losses resulting from its develop-
mental stages and as of December 31, 1996 had a cumulative deficit in retained
earnings of approximately $999,000. For continued expansion of its operations,
the Company will be dependent on (i) attaining and maintaining profitable opera-
tions, (ii) possible additional equity offerings, and (iii) obtaining such
additional financing as may be required from time to time. See Note 2 to the
consolidated financial statements concerning a proposed sale of the Company.
a. Basis of Presentation - The accounts of AIN and its subsidiaries are
stated on the basis of generally accepted accounting principles. For USLI, these
principles differ in some respects from the statutory basis of accounting
required by the Mississippi Insurance Department.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of AIN and its wholly-owned subsidiaries, USLI and The
Agency (collectively the Company). All significant intercompany balances and
transactions have been eliminated.
In preparing the consolidated financial statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the balance sheets and the reported amounts of revenues and expenses for the
years then ended. Actual results could differ significantly from those
estimates.
c. Securities Available for Sale - Fixed maturities of the Company include
all debt securities and consists of bonds and notes with maturities beyond one
year. Equity securities consist of non-redeemable preferred stocks.
The Company has classified all its equity and fixed maturity securities as
securities available for sale, which are carried at fair value. Unrealized
gains and losses are excluded from earnings and reported net of tax, as a
separate component of stockholders equity. Securities within the available for
sale portfolio may be used as part of the Company's asset/liability strategy and
may be sold in response to changes in interest rate risk, prepayment risk or
other similar economic factors. The specific identification method is used to
compute gains or losses on the sale of these assets. Interest and dividends
earned on these assets are included in net investment income.
Fixed maturities and equity securities that reflect a market decline below cost
or amortized cost that is deemed other than temporary are written down to net
realizable value by a charge to earnings. Investment premiums and discounts are
amortized by a method which approximates the interest method.
d. Cash and Cash Equivalents - For purposes of the consolidated statements
of cash flows, the Company considers checking accounts and cash on hand to be
cash and cash equivalents. Short-term investments are included in the invest-
ments category in order to conform to insurance company reporting requirements.
e. Property and Equipment - Property and equipment are stated at cost.
Major additions and betterments are charged to the property accounts while
replacements, maintenance and repairs which do not improve or extend the lives
of the respective assets are expensed. Depreciation of property and equipment
is provided using the straight-line method over the estimated useful lives of
the related assets which range from five to thirty-two years.
f. Deferred Policy Acquisition Costs - The costs (consisting of commissions,
premium taxes and other costs) which both vary with and are primarily related to
the production of new insurance business are deferred and amortized over the
anticipated premium paying period of the related policies in proportion to the
ratio of the annual premium revenue to the total premium revenue anticipated.
Such anticipated premium revenue is estimated using the same assumptions as are
used for computing liabilities for future policy benefits.
g. Intangible Assets - Intangible assets consist of the cost of noncompete
and employment agreements, acquired insurance license agreements, and the excess
of cost over net assets of businesses acquired. These intangibles are being
amortized by the straight-line method over their estimated lives, which range
from five to twenty-five years.
h. Future Policy Benefits - The liabilities for future policy benefits have
been determined by the net level premium method. The significant assumptions
used to determine these liabilities are as follows:
Life Accident and Health
Interest rates 8% first five years graded to
7% at the fifteenth year 7%
Mortality and 85% of 1965-70 Male Select 50% (cancer) and 60%
Morbidity and Ultimate Table (non-cancer) of Underwriting
Selection graded to 100%
after five years, 1980 CSO ALB
Withdrawals 22.5% first year graded to 5% 25% first year graded to 7.5%
(Lapse Rates) in years eleven and later (cancer) and 10% (non-cancer)
in years five and later
i. Unpaid Claims - Unpaid claims represent the estimated liabilities on
claims reported to the Company plus a provision for claims incurred but not yet
reported. The liability for unpaid claims is determined using both evaluations
of each claim and statistical analyses and represents the estimated ultimate net
cost of all claims incurred through the end of the reporting period.
j. Income Taxes - Prior to 1995, AIN and The Agency filed a consolidated
income tax return and USLI filed its income tax return on a separate company
basis. Beginning in 1995, the Company included USLI in a consolidated income
tax return.
Deferred tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
k. Premium and Commission Revenue Recognition - Premiums are recognized as
revenue when due from policyholders. Benefits and expenses are associated with
the earned premiums to result in recognition of profits over the life of the
insurance contracts. This association is accomplished by accrual of the
liability for future policy benefits on insurance in force and the amortization
of deferred policy acquisition costs.
Loss from discontinued operations includes commission income (none of which was
received from USLI) for insurance coverage, principally property and casualty,
placed with underwriters. These revenues are recognized at the effective date
of the policy.
l. Net (Loss) Earnings - Net (loss) earnings per common share is computed on
the basis of the weighted average number of shares outstanding during the year.
m. Fair Values of Financial Instruments - The following methods and
assumptions were used by the Company to estimate the fair value of each class of
financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheets
for these financial instruments, including restricted cash, approximate their
fair value.
Securities Available for Sale: Fair values for these financial instruments are
based upon quoted market prices or dealer quotes, where available. If quoted
market prices are not available, fair values are based upon quoted market prices
of comparable instruments.
Note Receivable for Sale of Agency Assets: The fair value of the note receivable
from the sale of agency assets is estimated by discounting the future cash flows
using current rates at which a similar loan would be made to the borrower for
the same remaining maturity.
Note Payable: The fair value of the note payable is estimated using rates
currently available to the Company for debt with a similar term and remaining
maturity.
n. Stock-Based Compensation - During 1996, the Company adopted Statement of
Accounting Financial Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" and has applied the measurement requirements to the Agent's Stock
Option Plan adopted in 1996 (see Note 9). No compensation cost has been
recognized as no options have been granted under this plan.
The Company continues to measure compensation cost for the employee stock incen-
tive plan (see Note 9), using the intrinsic value based method of accounting
prescribed by Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees".
2. PROPOSED SALE OF COMPANY AND OTHER BUSINESS DISPOSITIONS
On October 25, 1996, the Company signed a definitive written agreement whereby
Citizens Insurance Company of America, (CICA), Austin, Texas, a wholly-owned
subsidiary of Citizens, Inc. (Citizens) will acquire 100% of the outstanding
shares of the Company for shares of Citizens Class A common stock.
Pursuant to the terms of the Agreement, which is subject to approval of
regulatory authorities and shareholders of the Company, CICA will issue one
share of Citizens Class A common stock it owns for each 7.2 shares of the
Company's Class A and Class B common stock issued and outstanding. CICA expects
to issue approximately 700,000 shares of Citizens common stock to consummate the
transaction. Management of the Company anticipates that the sale will occur
during 1997.
In April 1995, The Agency sold all of the inforce business and certain net
assets to a former officer of The Agency for approximately $180,000 of which
$170,000 was received in the form of a five year note receivable. The sale
resulted in a net gain of approximately $47,000. The gain on disposition of
this business segment has been accounted for as discontinued operations.
Revenues of the agency approximated $65,000 in 1995 prior to the sale. The note
receivable from the former officer, which is included in notes and accounts
receivables, approximated $152,000 (1996) and $164,000 (1995).
3. RESTRICTED CASH
Pursuant to a business acquisition in 1994, the Company and the seller entered
into certain agreements to indemnify the Company and the acquired company from
certain liabilities and contingencies. In connection therewith, an escrow
agreement was executed wherein $256,000 of the acquired company's assets, which
would have been transferred to the seller, were deposited in an escrow account.
In 1995, these assets were presented as restricted cash of the Company with a
corresponding liability in accounts payable and other liabilities for certain
potential contingencies. During March 1996, these contingencies were resolved
and the Company released the remaining funds which were distributed to the
seller and approximated $95,000.
4. SECURITIES
The amortized cost and related approximate fair value of securities available
for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1996
Fixed Maturities:
U.S. Treasury and other U.S. government
agencies obligations $ 305,253 $ 11,253 $ 294,000
State, county and municipal
obligations 409,258 $ 6,442 415,700
FHLB and GNMA certificates 156,355 5,996 150,359
Public utility bonds 781,614 14,614 767,000
Industrial bonds 1,062,648 16,352 1,079,000
$ 2,715,128 $ 22,794 $ 31,863 $2,706,059
Equity Securities $ 987,237 $ 12,448 $ 18,522 $ 981,163
1995
Fixed Maturities:
U. S. Treasury and other U.S. government
agencies obligations $ 306,458 $ 1,000 $ 4,458 $ 303,000
State, county and municipal
obligations 214,188 3,862 218,050
FHLB and GNMA certificates 273,913 2,000 4,985 270,928
Public utility bonds 806,544 10,671 3,714 813,501
Industrial bonds 1,011,177 50,323 1,061,500
$ 2,612,280 $ 67,856 $ 13,157 $2,666,979
Equity Securities $ 987,237 $ $ 6,637 $ 980,600
Fixed maturity investments with an amortized cost of $1,161,000 in 1996 and
$1,156,000 in 1995 (fair values of $1,160,000 in 1996 and $1,189,000 in 1995)
were held by and pledged to various states in which the Company is licensed
pursuant to regulatory requirements.
The components of net investment income were as follows:
1996 1995
Fixed maturities $ 193,246 $ 185,487
Equity securities 91,225 95,483
Short-term investments 4,033 3,860
Other 1,913 9,977
Net investment income $ 290,417 $ 294,807
Investment expenses were not material for any of the years presented.
The following is an analysis of the amortized cost and fair value of investments
in fixed maturities at December 31, 1996, by contractual maturity:
Amortized Fair
Cost Value
Due in one year $ 100,080 $ 101,000
Due after one year through five years 350,996 353,700
Due after five years through ten years 1,356,091 1,349,500
Due after ten years 908,302 901,859
$ 2,715,128 $ 2,706,059
Actual maturities may differ from contractual maturities because of the
borrowers right to call or prepay obligations.
Proceeds from sales of fixed maturity securities approximated $210,000 in 1996
and $238,000 in 1995. There were no gross realized gains in 1996 and 1995. Gross
realized losses approximately $2,000 in 1995 (none in 1996).
5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
1996 1995
Land $ 80,000 $ 80,000
Buildings 483,749 483,749
Furniture and equipment 427,783 385,704
991,532 949,453
Less accumulated depreciation 253,010 225,589
Property and equipment, net $ 738,522 $ 723,864
6. REINSURANCE
The maximum amount of risk that USLI retains on any one life is $20,000. Life
insurance coverage in excess of this retention limit, accidental death benefit
coverage and substandard insurance risks are ceded to other reinsurers. For
accident and health policies, the Company reinsures all of its cancer policies
to provide reinsurance for all individual claims over $25,000 in any calendar
year. In addition during 1996, the Company entered into other reinsurance
agreements which provide coverage of claims in excess of various amounts on
several other accident and health policies and riders. Under the terms of the
life reinsurance contracts dated in May 1990, USLI received a commission
allowance equal to 100% of first year premiums to be paid on the excess life
coverage. Premiums ceded for the excess life coverage relating to the second
and subsequent years approximated $71,000 in 1996 and $67,000 in 1995. Accident
and health premiums ceded approximated $79,000 in 1996 and $3,000 in 1995.
Although ceding of insurance does not discharge the primary liability of the
original insurer, insurance liabilities are presented net of reinsurance. The
reinsured portion of the liabilities for future policy benefits for life
products approximated $31,000 in 1996 and $35,000 in 1995 relating to insurance
in force of $39,760,000 and $39,236,000, respectively, and is included in re-
insurance receivables.
7. NOTE PAYABLE
Note payable consisted of the following:
1996 1995
Prime plus 1.5% mortgage note (effective rates of
9.75% in 1996 of 10.25% in 1995) payable in
monthly installments of $5,751, including
interest, with a balloon payment due on
December 19, 1999 and collateralized by
property with a carrying value of $371,000
in 1996 and $386,000 in 1995 $ 509,128 $526,447
Aggregate future principal payments on the note payable were as follows:
Year Ended December 31,
1997 $ 20,261
1998 22,328
1999 466,539
$ 509,128
8. REGULATORY DISCLOSURES AND RESTRICTIONS
Pursuant to the laws and regulations of the State of Mississippi, USLI is
required to maintain minimum capital of $400,000 and minimum surplus of
$600,000. The approximate statutory capital and surplus and net income of USLI,
as determined in accordance with statutory accounting practices required by the
Department of Insurance of the State of Mississippi (the Department), were as
follows:
1996 1995
Statutory capital and surplus $ 2,325,000 $ 2,372,000
Statutory net income and realized gains
and losses $ 4,000 $ 13,000
Stockholders' dividends are payable out of statutory surplus of USLI with the
approval of the Department, based upon limitations relating to statutory capital
and surplus and statutory net income. As of December 31, 1996, approximately
$201,000 was available for dividends to GAIN without prior approval by the
Department.
The National Association of Insurance Commissioners (NAIC) adopted certain risk-
based capital requirements effective for all insurance companies. These
requirements provide a measurement of minimum capital appropriate for an
insurance company to support its overall business operations based upon its size
and risk profile which considers (i) asset risk, (ii) insurance risk, (iii)
interest rate risk, and (iv) business risk. An insurance company's risk-based
capital is calculated by applying a defined factor to various statutory based
assets, premiums and reserve items, wherein the factor is higher for items with
greater underlying risk. The adequacy of a company's capital is then measured
by its risk-based capital ratio (the ratio of its total capital, as defined, to
its risk-based capital).
The NAIC has provided levels of progressively increasing regulatory action for
remedies when an insurance company's risk-based capital ratio falls below a
ratio of 1:1. USLI was in compliance with these new minimum capital require-
ments as follows:
1996 1995
Total adjusted capital $ 2,389,000 $ 2,431,000
Authorized control level risk-based capital 112,000 107,000
Ratio (in percentages) 2,133 % 2,272%
9. STOCKHOLDERS' EQUITY
Prior to 1995, the Company amended its articles of incorporation to equalize the
rights of its two classes of common stock and provided for identical voting and
participating rights.
On May 7, 1996, stockholders of the Company approved the adoption of an Agents'
Stock Option Plan for eligible agents licensed with the Company wherein 200,000
shares of Class A common stock were reserved for option as directed by the Board
of Directors. Under the terms of the plan, agents writing premiums which exceed
certain minimum levels will be granted options at an exercise price equal to
fair value at the date of grant. There have been no options granted under the
arrangement.
Prior to 1995, the Company adopted a stock incentive plan for employees wherein
500,000 shares of unissued Class A common stock were reserved for option as
directed by the Board of Directors. As of December 31, 1996, the Company had
granted options to acquire 150,000 shares of Class A common stock at an exercise
price of $1.80 per share (estimated fair value at date of grant) which were
still outstanding. These options are exercisable at any time and expire at the
earlier of November 29, 2003 or termination of employment. During 1996, 2,500
shares of the options previously granted were forfeited due to the termination
of an employee.
10. PARTICIPATING POLICIES
Approximately 98% of the Company's life insurance in force and 37% of total
premium revenue in 1996 is participating whole life insurance. Dividends on
these policies are payable at the discretion of the Board of Directors from
divisible surplus as calculated using statutory accounting practices as required
by law. All amounts allocable to policyholders have been accrued and none of
the Company's retained earnings as reported was allocable to participating
policies. No dividends are paid until the second annual premium has been paid
in full. The accrued dividends on participating policies have been included in
the liability for future policy benefits. Dividends, included in benefits and
claims expense, approximated $356,000 in 1996 and $336,000 in 1995.
11. LIABILITY FOR UNPAID CLAIMS
Activity in the liability for unpaid claims is summarized as follows:
1996 1995
Balance at January 1 $ 140,777 $ 113,329
Less reinsurance recoverables
Net Balance at January 1 140,777 113,329
Incurred related to:
Current year 533,977 444,384
Prior years 106,319 73,514
Total incurred 640,296 517,898
Paid related to:
Current year 511,540 416,936
Prior years 106,319 73,514
Total paid 617,859 490,450
Net Balance at December 31 163,214 140,777
Plus reinsurance recoverables
Balance at December 31 $ 163,214 $ 140,777
Recoveries of settlements paid relating to reinsurance ceded approximated
$42,000 in 1995 and 1996.
12. INCOME TAXES
There was no provision for income taxes in 1996 and 1995 as a result of the
utilization of net operating loss carryforwards and the offset of potential net
deferred tax assets by valuation allowances. Deferred income taxes reflect the
net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) operating loss carryforwards. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax liabilities:
Property and equipment $ (61,754) $ (34,900)
Deferred policy acquisition costs (682,993) (681,889)
Unrealized gain on securities
available for sale - 17,927
$ (744,747) $ (734,716)
Deferred tax assets:
Unrealized loss on securities
available for sale $ 5,657 $ -
Future policy benefit liabilities 810,763 646,926
Deferred compensation liability 20,515 20,515
Accrual for litigation 25,664 35,127
Operating loss carryforwards 306,979 281,283
1,169,578 983,851
Valuation allowance (424,831) (249,135)
744,747 734,716
Net deferred tax asset $ - $ -
The valuation allowance increased by approximately $170,000 in 1996 and
decreased by approximately $115,000 in 1995, exclusive of valuation changes
related to the 1996 unrealized loss on securities available for sale.
The provision for federal income taxes differs from the amount computed by
applying the federal income tax statutory rate to income from operations before
income taxes as follows:
1996 1995
Taxes calculated at federal statutory rate $ (60,340) $ 76,904
Increases (decreases) resulting from:
Change in deferred tax valuation allowance
and utilization of operating loss
carryforwards 63,750 (61,888)
Other (3,410) (15,016)
$ - $ -
At December 31, 1996, the Company had net operating loss carryforwards for
income tax reporting purposes available to offset future taxable income as
follows:
Year of Expiration USLI Gain
2004 $ 263,000
2005 220,000
2006 46,000
2007 60,000
2008 96,000
2009 53,000
2010 58,000
2011 $ 24,000 3,000
$ 24,000 $ 796,000
The Company has not been examined by the Internal Revenue Service for any of the
periods presented.
13. TRANSACTIONS WITH RELATED PARTIES
In a prior year, the Board of Directors approved the expenditure of up to
$200,000 for purposes of determining the feasibility of marketing certain of its
products in Mexico and obtaining license approval of USLI as a foreign re-
insurer. As of December 31, 1994, the Company had expended the $200,000,
including the purchase of an investment in an inactive foreign corporation
approximating $30,000. Expenses charged to operations include the write-off of
the investment of the foreign corporation, US Star, in 1995 of $30,000.
Considering the current economic conditions in Mexico and the instability of the
current Mexican government, management has suspended any additional foreign
operations marketing activities and conveyed its interest in US Star to US
Star's other shareholder.
On May 2, 1995, shareholders of the Company approved an executive compensation
plan and agreement for the Company's Chairman and Vice Chairman of the Board.
Pursuant to the non-qualified compensation plan, the executives will receive the
greater of fixed annual compensation of $20,000 each or 1% of statutory premium
revenues of USLI up to a maximum premium amount of $10,000,000 (equivalent to
annual benefits of $100,000 each). The 1% is reduced based upon the ratio of
statutory net gain from operations to gross statutory revenues. The plan is
effective for a ten year period beginning May 2, 1995. In connection with the
adoption of this plan, the Company accrued the minimum obligation relative to
past services, based upon its best estimates of anticipated future statutory
premium revenues and statutory operating gains. This obligation, which
approximated $55,000 at December 31, 1996 and 1995, is included in accounts
payable and other liabilities. Compensation expense paid to the executive
officers pursuant to this plan approximated $40,000 in 1996 and $27,000 in 1995.
The Company entered into consulting arrangements with certain of its original
founders who subscribed for stock for purposes of solicitation of their advice,
support and promotion of the Company through a consulting group. Consulting
fees are based upon an 8.33% return on each respective founder's original
investment and payable over twelve years. Consulting fees incurred approximated
$42,000 in 1996 and in 1995.
Prior to the sale of its inforce business and certain net assets in April 1995,
The Agency had entered into an employment and non-competition agreement with an
officer of The Agency which provided for payment to the officer of amounts equal
to 40% of all commissions earned by The Agency while the officer was employed.
The agreement further provided that the officer would own 50% of all new
business produced after the date of his employment with a first right of refusal
between The Agency and the officer for the purchase or sell of its respective
50% ownership at such time as the officer retired or terminated employment.
This arrangement was considered in the negotiation and sale of the inforce
business (see Note 2). Compensation expense paid to the officer under this
arrangement approximated $18,000 in 1995.
14. COMMITMENTS AND CONTINGENCIES
The Company has been named defendant in two litigation matters resulting from
the denial of claim benefits under a policy issued by USLI. Legal counsel is
unable to render an opinion on the estimated outcome of these matters as they
are presently in discovery stage. However, management intends to vigorously
defend these matters and is of the opinion that the ultimate outcome of these
matters will not result in a material adverse effect on the consolidated
financial statements. Accordingly, no provision for any loss or liability has
been provided in the consolidated financial statements.
Prior to 1995, the Company was a defendant in litigation filed by the former
owner of an insurance agency acquired by the Agency wherein the plaintiff sought
damages for alleged failure to make payments due under a purchase agreement for
a specified percentage of renewal commissions. On March 3, 1995, an out-of-
court settlement was reached wherein the Company agreed to pay over a five year
period installments aggregating $180,000, including plaintiff legal costs. The
Company accrued the present value of this settlement which is included in
accounts payable and other liabilities and approximated $68,000 and $94,000,
respectively, as of December 31, 1996 and 1995.
On August 23, 1996, the Company entered into employment agreements with four
executive officers of the Company for a five year period. Under the terms of
these agreements, severance benefits equal to one year's annual salary are
available to these officers in the event the Company is sold or merged and the
officers are required to relocate or terminate employment. No liability existed
under these agreements at December 31, 1996.
15. FAIR VALUE DISCLOSURES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 were as follows:
1996 1995
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial Assets:
Securities available for sale $3,687,222 $3,687,222 $3,647,579 $3,647,579
Cash and cash equivalents 282,277 282,277 121,102 121,102
Restricted cash 95,000 95,000
Note receivable from sale of
agency assets 152,070 179,000 164,245 184,444
Financial Liabilities -
Notes payable $ 509,128 $ 510,000 $ 526,447 $ 522,337
The estimated fair values are significantly affected by assumptions used,
principally the timing of future cash flows, the discount rate, judgments
regarding current economic conditions, risk characteristics of various financial
instruments and other factors. Because assumptions are inherently subjective in
nature, the estimated fair values cannot be substantiated by comparison to
independent quotes and, in many cases, the estimated fair values could not
necessarily be realized in an immediate sale or settlement of the instrument.
Potential tax ramifications related to the realization of unrealized gains or
losses that would be incurred in an actual sale and/or settlement have not been
taken into consideration.
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