AMERICAN PUBLIC HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1999 Commission File Number 0-22479
AMERICAN PUBLIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Mississippi 64-0874171
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Registrant's telephone number: (601) 936-6600 ext. 201
No Change
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for shorter period that the registrant was required to
file such report), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
Common stock (no par value) 1,099,287 shares
AMERICAN PUBLIC HOLDINGS, INC.
Unaudited Quarterly Financial Statements
Page
Consolidated Balance Sheets 1
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations 2
Three Months Ended June 30, 1999 and 1998
Six Months Ended June 30, 1999 and 1998
Changes in Stockholders' Equity 3
Twelve Months Ended December 31, 1998
Six Months Ended June 30, 1999
Consolidated Statements of Cash Flows 4
Six Months Ended June 30, 1999 and 1998
Notes To Consolidated Financial Statements 5
AMERICAN PUBLIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 (Unaudited) and December 31, 1998 (Audited)
1999 1998
ASSETS ---- ----
Investments:
Available for sale securities - at fair value (amortized cost
of $34,056,414 in 1999 and $34,638,162 in 1998) $33,850,752 $35,780,591
Mortgage loans 652,287 683,649
Investment real estate - net 646,938 673,858
Policy loans 1,430,021 1,419,072
----------- -----------
Total investments 36,579,998 38,557,170
OTHER ASSETS:
Cash and cash equivalents 525,689 767,080
Accrued investment income 565,146 545,855
Accounts and notes receivable net of allowance for
uncollectible accounts of $23,000 (1999) and $29,000 (1998) 705,804 464,461
Deferred policy acquisition costs 9,312,593 9,285,999
Property and equipment - net 2,219,277 2,322,711
Real estate acquired in satisfaction of debt 345,523 427,185
Deferred income tax asset 526,418 255,624
Other 149,384 71,839
----------- -----------
TOTAL ASSETS $50,929,832 $52,697,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefits $32,475,454 $32,743,852
Unpaid claims 1,325,459 1,145,909
Unearned premiums 746,709 735,161
Policyholders' dividend accumulations 420,541 415,214
Accounts payable and other liabilities 1,060,121 1,106,557
----------- -----------
Total liabilities 36,028,284 36,146,693
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 25,000,000 shares
Common stock, $1 stated value, authorized 50,000,000 shares,
issued and outstanding 1,099,287 shares in 1999 and 1,099,287
shares in 1998 52,347 52,347
Additional paid-in capital 2,066,752 2,066,752
Other Comprehensive Income- Unrealized gain (loss) on available
for sale securities, net of deferred taxes of $41,000 (1999)
and $228,000 (1998) (164,530) 913,943
Retained earnings 12,946,979 13,518,189
------------ -----------
Total stockholders' equity 14,901,548 16,551,231
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,929,832 $52,697,924
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
American Public Holdings, Inc.
Consolidated Statements of Operations - GAAP Basis
For Six Months Ended June 30, 1999 and 1998
Three Months Ended June 30 Six Months Ended June 30
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUE:
Premiums $ 7,597,464 $ 7,465,585 $14,929,184 $15,020,412
Net investment income 608,880 656,805 1,260,692 1,285,563
Realized investment gains (losses) 21,836 5,023 7,913 80,591
Other Income 2,700 10,501 6,916 17,825
------------ ------------- ------------ -----------
8,230,880 8,137,914 16,204,705 16,404,391
BENEFITS AND EXPENSES:
Benefits and claims 6,524,139 5,318,382 11,997,820 10,591,678
Commissions expense 868,536 622,496 1,461,041 1,235,405
Salaries and benefits 690,838 608,342 1,356,266 1,182,543
Amortization of deferred policy
acquisition costs 47,864 757,305 881,417 1,495,507
Insurance taxes, licenses and fees 256,274 274,898 519,781 502,388
Other operating expenses 311,493 259,579 642,887 531,562
------------ ------------- ------------ -----------
8,699,144 7,841,002 16,859,212 15,539,083
------------ ------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) (468,264) 296,912 (654,507) 865,308
INCOME TAX PROVISION (BENEFIT) (57,247) 24,554 (86,760) 249,472
------------ ------------- ------------ -----------
NET INCOME (LOSS) $ (411,017) $ 272,358 $ (567,747) $ 615,836
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Decrease in unrealized gain on investment
securities (857,875) 105,941 (1,348,091) 42,035
Reclassification of (gains) losses included
in net income 171,575 (21,188) 269,618 (8,407)
------------ ------------- ------------ ------------
COMPREHENSIVE INCOME (1,097,317) 357,111 (1,646,220) 649,464
============ ============= ============ ============
NET INCOME (LOSS) PER SHARE $ (0.37) $ 0.25 $ (0.52) $ 0.56
============ ============= ============ ============
<FN>
See notes to consolidated financial statements.
</FN>
American Public Holdings, Inc.
Consolidated Statements of Changes in Stockholders' Equity - GAAP Basis
For Periods Indicated
Accumulated
Common Stock Additional Other Comp- Total
---------------------- Paid-in rehensive Retained Treasury Stockholders'
Shares Amount Capital Income Earnings Stock Equity
---------- ----------- ------------ ------------ ------------- --------- --------------
BALANCE, January 1, 1998 1,111,299 $ 52,919 $ 2,257,800 $ 706,319 $ 12,606,764 $ 0 $ 15,623,802
Change in net unrealized gain(loss) 207,624 207,624
Stock Retired (12,012) (572) (191,048) (191,620)
Dividends to stockholders (10,347) (10,347)
Net income 921,772 921,772
0
---------- ----------- ------------ ------------ ------------- --------- --------------
BALANCE, DECEMBER 31, 1998 1,099,287 52,347 2,066,752 913,943 13,518,189 0 16,551,231
Change in net unrealized gain(loss) (1,078,473) (1,078,473)
Dividends to stockholders (3,463) (3,463)
Net income (loss) (567,747) (567,747)
0
---------- ----------- ------------ ------------ ------------- --------- --------------
BALANCE, JUNE 30, 1999 1,099,287 $ 52,347 $ 2,066,752 $ (164,530) $ 12,946,979 $ 0 $ 14,901,548
========== =========== ============ ============ ============= ========= ==============
<FN>
See notes to consolidated financial statements.
</FN>
American Public Holdings, Inc.
Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 1999 and June 30, 1998
June June
1999 1998
----- -----
OPERATING ACTIVITIES:
Net income (loss) $ (567,747) $ 615,836
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Realized loss (gain) on sale of assets (7,913) (80,591)
Depreciation 198,280 166,916
Amortization of deferred policy acquisition costs 881,417 1,495,507
Deferred income tax expense (benefit) (1,176) 159,473
Decrease (increase) in receivables (260,634) (229,964)
Decrease (increase) in other assets (77,545) 109,414
Policy acquisition costs deferred (908,011) (1,444,691)
Increase (decrease) in liability for future
policy benefits (268,398) 43,826
Increase (decrease) in other liabilities 149,987 27,139
------------ ----------
Net cash (used) provided by operating
activities (861,740) 862,865
INVESTING ACTIVITIES:
Proceeds from sale of real estate 47,467 23,147
Purchase of fixed maturity and short-term
investments (28,854,788) (30,270,045)
Mortgage and policy loan repayments 20,413 126,986
Proceeds from maturities and calls of
fixed-maturity and short-term investments 29,478,644 29,735,913
Property and equipment purchased (67,924) (309,289)
----------- -----------
Net cash (used) provided in investing
activities 623,812 (693,288)
FINANCING ACTIVITIES:
Dividends paid to shareholders (3,463) (2,751)
Payments to retire common stock (191,620)
----------- -----------
Net cash used in financing activities (3,463) (194,371)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (241,391) (24,794)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 767,080 608,434
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 525,689 $ 583,640
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION-
Income taxes paid (refunded) $ 0 $ (100,000)
=========== ===========
See notes to consolidated financial statements.
AMERICAN PUBLIC HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include those of American Public
Holdings, Inc., and its wholly owned subsidiary, American Public life
Insurance Company (APL), and APL's wholly owned subsidiary, DentaCare
Marketing and Administration, Inc. All significant inter-company balances
and transactions have been eliminated.
These interim financial statements have been prepared on the basis of
accounting principles used in the annual financial statements ended
December 31, 1998, and must be read in conjunction with the 1998
statements. In the opinion of management, the accompanying interim
unaudited consolidated financial statements contain all adjustments
necessary for a fair statement of consolidated financial position and
results of operations of the Company for the interim periods.
2. STOCKHOLDERS' EQUITY
In January 1998 the Company acquired and retired 12,012 shares of common
stock, which were purchased from a former director and past president of
the Company.
In February 1998 the Board of Directors approved a 20 for 1 stock split-up
effected in the form of a stock dividend of the Company's common stock
payable on March 31, 1998. The split did not change the value of paid-in
capital and is reflected in the accompanying financial statements as though
the split had occurred at the beginning of the earliest year presented.
3. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are based on net income (loss) and the
weighted average number of shares outstanding during each interim period.
The number of shares used in computing the earnings per share was 1,099,287
for the quarter ended June 30, 1999 and 1,099,687 for the quarter ended
June 30, 1998.
4. COMMITMENTS AND CONTINGENCIES
The Company is required to participate in certain guaranty funds and
involuntary pools of insurance and is therefore exposed to undeterminable
future assessments resulting from the insolvency of other insurers.
The Company is involved in litigation incurred in the normal course of
business. Management of the Company, based upon the advice of legal
counsel, is of the opinion that the Company's ultimate liability, if any,
which may result from the litigation will not have a material adverse
effect on the consolidated financial condition or results of operations of
the Company.
The Board of Directors of the Company has signed an agreement to negotiate
the sale of the Company to Central Benefits Mutual Insurance Company, of
Columbus, Ohio. The proposed transaction will be subject to further
negotiations between the two parties, completion of due diligence, approval
by the Boards of Directors of both organizations, approval of the holders
of a majority of the outstanding shares of the Company, and regulatory
approvals.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
Financial Condition - June 30, 1999 Compared to December 31, 1998:
Total stockholders' equity decreased by $1,649,683 or 9.97% from
$16,551,231 at December 31, 1998, to $14,901,548 at June 30, 1999. This
decrease was due to a net loss of $567,747 for the first six months, plus a
decrease of $1,078,473 on unrealized gain on available for sale securities. The
decrease in unrealized gain on available for sale securities was the result of
bond market adjustments resulting from an increase in the Federal Reserve
discount rate.
Total assets decreased by $1,768,092 or 3.36% at June 30, 1999 compared to
December 31, 1998. Securities decreased by $1,929,839, or 5.39%, as the result
of adjustments in the market value of the portfolio. Additionally, portions of
the proceeds from the repayment of principal on mortgage backed securities were
used to pay claims. Deferred policy acquisition costs increased by $26,594 or
.28% due to increased writings of individual life insurance during the second
quarter. Accounts and notes receivable increased $241,343, or 51.9% due to
increases in due premium. Deferred income tax asset increased $270,794 or 105.9%
due to increases in the timing differences between statutory and GAAP policy
reserves.
Total liabilities decreased $118,409 at June 30, 1999 compared to
December 31, 1998. Future policy benefits and unpaid claims decreased $88,848
or .26 % because of lapses in old in force policies and the discontinuance of
sales of actual treatment coverage policies. Accounts payable and other
liabilities decreased $ 29,561 as a result of decreases in amounts due for
premium taxes.
Results of Operations- Second Quarter 1999 Compared to Second Quarter 1998:
The Company experienced a net loss in the second quarter of 1999 of
$411,017 compared to net gain of $272,358 in the second quarter of 1998,
primarily due to an increase of $1,205,757 in benefits and claims. Revenue,
which increased $92,966 for the period, is level with the prior year due to
policy lapses due to rate increases and lower volumes of new sales. The Company
continues to focus its sales efforts on sales of supplemental group insurance
products, however these products and the existing in force cancer coverage are
subject to lapses due to rate increases. Net investment income decreased as a
result of bond calls and also declines in assets available for investment during
the period. Benefits and expenses increased by $858,142 in the second quarter of
1999 compared to the second quarter of 1998, a 10.9% increase. This increase was
due to a $1,205,757 increase in benefits and claims. Benefits and claims
increased because of increased claims exposure from new sales of group
supplemental products such as group dental. Commissions expense increased
because of the increase in premium income. Amortization of deferred policy
acquisition costs (DPAC) decreased due to higher lapses of in force policies in
the prior year. The lapses are the result of implementations of rate increases.
Other operating expenses have increased due to additional staffing in the claims
department and also higher advertising expenditures during the period.
Results of Operations - Six Months Ended June 30, 1999 Compared to Six Months
Ended June 30, 1998:
The Company experienced a net loss in the six months ended June 30, 1999 of
$567,747 compared to a net gain of $615,836 in the six months ended June 30,
1998. The loss is attributed to an increase in benefits and claims of
$1,406,142 and a decrease in operating revenue.
Revenue decreased $199,686 in 1999 as compared to 1998. The decrease in
revenue is due to a decline in new sales and also lapses of coverage as the
result of rate increases to cancer, group dental and group disability policies.
Net investment income decreased as the result of decreases in yield brought on
by several bond calls and also declines in assets available for investment.
Benefits and expenses increased $1,320,129 in 1999 as compared to 1998.
The increase in expenses is due to a 13.28% increase in benefits and claims.
Benefits and claims increased because of policyholder utilization of benefits
provided under our group dental product, which was introduced in the second half
of 1997. Commission expense has increased from 8.2% of premium in 1998 to 9.78%
in 1999 due to an increase in sales of individual life insurance policies, which
have commission rates that are somewhat higher than those on individual A&H and
group A&H sales.
Insurance, taxes, licenses and fees increased $17,393 due to increased
payroll tax expense.
Other operating expenses have increased $111,325 as a result of increased
advertising by the Company and also administrative costs related to processing
higher volumes of claims. Salaries and benefits are also higher due to staff
additions needed to process higher volumes of claims.
The Board of Directors of the Company has signed an agreement to negotiate
the sale of the Company to Central Benefits Mutual Insurance Company, of
Columbus, Ohio. Central Benefits is currently conducting its due diligence of
the company and its subsidiaries.
The proposed transaction will be subject to further negotiations between
the two parties, completion of due diligence, approval by the Boards of
Directors of both organizations, approval of the holders of a majority of the
outstanding shares of the Company, and regulatory approvals.
Year 2000
The year 2000 computer issue is caused by computer programs being written
using two (2) digits rather than four (4) to identify the applicable year. Since
most older application software only contains the two digits, many systems will
identify January 1, 2000 as January 1, 1900 which has the potential to cause
many computer systems and software programs to generate incorrect results, or
worse, not function at all. The magnitude of the problem extends beyond the
computer environment as many business machines and other office equipment also
have date sensitive functions. In 1996 the Company decided to replace its
existing software, which had been developed in 1985, because of the age of the
system and the need to implement system enhancements to deal with a growing and
changing business which still handled many functions manually. This decision had
the collateral benefit of addressing Year 2000 problems. An outside consultant
was hired who, beginning in January 1996, developed new software for all
material automated functions, though some important functions are still handled
manually. New hardware was purchased to support the new software. The new
systems are designed to accommodate a four-digit year. Component testing began
January 1998. System testing began June 1998. The new system was implemented
on January 4, 1999 and is currently in use by the Company. The cost incurred in
replacing the Company's system will be capitalized and amortized over the
useful life of the system. Costs incurred in 1998 were not material to the
Company's financial statements.
The Company has identified policy administration, policy records, billing
and collections, claims processing and telephones as mission critical functions.
No automated systems are used in policy records, and claims processing is a
partially manual function. Year 2000 issues with respect to policy
administration, billing and collections, and the automated portion of claims
processing have been addressed through the implementation of the new system. The
Company has also acquired and installed a new telephone system that is Year 2000
compliant.
The Company outsources one significant function, payroll processing, to a
third party which has certified Year 2000 readiness to the Company.
Certifications of Year 2000 readiness have also been received from all
significant business partners identified by the Company, including its actuary,
the manager of its investment portfolio and its primary bank. The Company does
not believe that the non-compliance of vendors or counter parties would have a
material effect on the Company's financial statements as the Company does not
rely on any significant vendors or counter parties for its business.
AMERICAN PUBLIC HOLDINGS, INC.
PART II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial data schedule
(b) The Company filed a Current Report on Form 8-K on June 10, 1999 reporting
that it has entered into an agreement to negotiate a sale of the company
to Central Benefits Mutual Insurance Company of Columbus, Ohio.
AMERICAN PUBLIC HOLDINGS, INC.
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 PUBLIC HOLDINGS, INC.
(Registrant)
DATE: August 16, 1999 BY:
----------------------------------
Joseph C. Hartley, Jr., Secretary
DATE: August 16, 1999 BY:
----------------------------------
William F. Weems
Chief Accounting Officer