The Company currently leases from unaffiliated parties (i) approximately 15,000 square feet of office space in Brewster, New York, under a lease expiring in October 2001, with an earlier termination on October 31, 1997 at the sole option of the Company (the Company notified the landlord of its intention to terminate the lease as of October 31, 1997), (ii) 18,000 square feet in Orlando, Florida, under a lease expiring in January, 2002; (iii) 22,000 square feet in Pensacola, Florida, under a lease expiring in November, 1997, with annual renewals at the Company's option for a period of three years and (iv) 8,000 square feet in Miami, Florida, under a month to month lease arrangement. These leases represent the principal offices of American Progressive, American Pioneer and WorldNet, respectively, and carry an aggregate annual rental of approximately $688,000. The Company also leases a smaller office in Andalusia, Alabama, for an aggregate annual rental of approximately $17,000.
Year ended December 31, ---------------------------------------- 1992 1993 1994 1995 1996 (In thousands, except for per share data)
--------------------------- (1)	The extraordinary credit reported in the year ended December 31, 1992 represents the realization of the tax benefit for operating loss carryforwards accounted for prior to Financial Accounting Standards Board Statement 109, "Accounting for Income Taxes," which Statement was adopted by the Company as of January 1, 1993.
(2)	After provision for Series A Preferred Stock dividends of $487,000, $529,000 and $576,000 for the years ended December 31, 1992, 1993 and 1994, respectively.
(4)	Stockholders' equity per share of common stock represents stockholders' equity less the Series A and Series B Preferred Stock divided by outstanding shares of common stock.
Net Income. For the year ended December 31, 1996, the Company earned net income of approximately $104,000 resulting in an earnings per share applicable to common shareholders of $0.01. For the year ended December 31, 1995, the Company earned net income of approximately $2,642,000, resulting in an earnings per share of $0.25.
$8,945,000 in 1995 to $9,850,000 in 1996. This increase is attributed to higher invested assets in 1996 compared to 1995.
Benefits, Claims and Other Deductions. Total benefits, claims and other deductions increased approximately $5,754,000 to $53,014,000 for the year ended December 31, 1996. The change in future policy benefits amounted to an increase of approximately $3,192,000. The increase in reserves for the year ended December 31, 1996 was $1,855,000 and primarily relates to the increase in life reserves at American Pioneer of $971,000, the increase in the unearned premium reserve at NAIU of $256,000 and the increase in the senior market supplemental health insurance unearned premium reserves of $628,000. This increase compares to a decrease in 1995 of approximately $1,337,000, which decrease in 1995 primarily relates to the reduction in the 1995 NAIU premium ($491,000), the runoff accident and health business of American Progressive ($827,000) and the major hospital and major medical of American Pioneer ($430,000) offset by an increase in the senior market supplemental health insurance reserves ($559,000). Claims and other benefits increased approximately $1,676,000. This increase is a result of increased mortality of approximately $516,000, increased American Progressive's senior market supplemental health benefits of approximately $1,062,000 and the claims incurred on the First National business acquired of $1,077,000, and increased morbidity of $388,000 on the group dental business. The runoff health business at both insurance companies had a reduction in benefits totalling $3,145,000 due to the decision to reinsure 75% of the major hospital and major medical benefits at American Pioneer. The benefits incurred on the NAIU business increased $1,083,000 and NYS DBL benefits increased $695,000. The increase in deferred acquisition costs decreased approximately $1,106,000 and was due to the decrease in capitalized expenses of $228,000 and the increase in amortization of $878,000.
The results of operations for the year ended December 31, 1994 and 1995 include the operations of American Progressive, American Pioneer and WorldNet.
Benefits, Claims and Other Deductions. Total benefits, claims and other deductions decreased approximately $4,551,000 to $47,161,000 for the year ended December 31, 1995. The change in future policy benefits amounted to a decrease of approximately $4,267,000. The decrease in reserves for the year ended December 31, 1995 was $1,337,000 and primarily relates to the reduction in the 1995 NAIU premium, (approximately $491,000) the non-marketed accident and health business of American Progressive ($827,000) and the major hospital and major medical of American Pioneer ($430,000) offset by an increase in the supplemental health insurance reserves currently being sold (approximately $559,000). This decrease compares to an increase in 1994 of approximately $2,930,000, which increase in 1994 primarily relates to the increase in reserves of American Progressive when it entered the NAIU accident pool and assumed the North American Company businesses of approximately $2,556,000 (See "Business - Reinsurance"). Claims and other benefits increased approximately $1,247,000. This increase is a result of increased mortality of approximately $344,000 at American Progressive and increased supplemental health benefits of approximately $2,456,000 and increased morbidity of approximately $651,000 on the non-marketed health business at both insurance companies. This increase was offset by a reduction of approximately $2,204,000 in major hospital and major medical benefits at American Pioneer, which reduction is a result of the lower premium revenue discussed above. Interest credited to policyholders increased $173,000 to $6,090,000 due to higher outstanding policyholder account balances in 1995. The increase in deferred acquisition costs increased approximately $386,000 and was due to the increase in new business production noted above.
The Company's need for capital has historically been to maintain or increase the surplus of its Insurance Subsidiaries and to support the Company as an insurance holding company, including the maintenance of its status as a public company. In addition, the Company requires capital to fund its anticipated growth through acquisitions of other companies and blocks of insurance business.
On September 30, 1996, the Company amended its loan agreement with its commercial bank, under which amendment, the Company borrowed $800,000 on a one year term loan, extendable by the Company for a second year. The loan is secured by the pledge of 100% of the outstanding common stock of Quincy Coverage Corp. ("Quincy"), an immaterial subsidiary engaged in the insurance brokerage business, the receivables of Quincy and WorldNet and 9.9% of the outstanding common stock of American Progressive. As of December 31, 1995 and December 31, 1996, $800,000 was outstanding on this loan agreement, which bears interest at 1.0% over prime.
Liquidity for the life insurance subsidiaries is measured by their ability to pay scheduled contractual benefits, pay operating expenses, and fund investment commitments. Sources of liquidity include scheduled and unscheduled principal and interest payments on investments, premium payments and deposits and the sale of liquid investments. These sources of liquidity for the insurance subsidiaries significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments including death benefits, benefits under accident and health policies and interest- sensitive policy surrenders and withdrawals. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the
The net yield on cash and invested assets increased from 6.97% in 1995 to 7.08% in 1996. A significant portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by management based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.
At December 31, 1996, the investment portfolios of the life insurance subsidiaries included cash and short-term investments totaling $15,044,000, as well as fixed maturity securities that could readily be converted to cash with carrying values (and fair values) of $121,492,000. The fair values of these liquid investments totalled more than $136,536,000 and constituted approximately 94% of the Company's investments at December 31, 1996. At December 31, 1996, all of the Company investments were income producing and current in interest and principal payments except for one security with a carrying value of $331,250. In addition, the Company has no investment in any derivative instruments or other hybrid securities that contain any off balance sheet risk or investments in other securities whose fair values and principal repayments would be highly volatile to changes in interest rates, except for GNMA's, FNMA's and investment grade corporate collateralized mortgage obligations.
Through December 31, 1995, the Company had provided approximately $3.4 million to WorldNet with no additional funding required during 1996. These funds were used to support WorldNet's start-up costs, a portion of the costs of acquiring the HAT assets and the cost of acquiring WorldNet's Dallas, Texas facility and later closing it and relocating certain of its operations to the facility purchased from HAT in Miami Beach, Florida. WorldNet's revenues were $4,068,000, $3,071,000 and $2,172,000 for 1994, 1995 and 1996, respectively. WorldNet incurred a net loss of approximately $1,375,000, $665,000 and $271,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The 1996 loss included certain non-cash expenses amounting to $136,000.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement 115, "Accounting for Certain Debt and Equity Securities", which is effective for fiscal years beginning after December 15, 1993, with earlier adoption permitted. Statement 115 requires that debt and equity securities be classified into three categories and accounted for as follows:
*	Debt and equity securities that are held for current resale would be classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings.
*	Debt and equity securities not classified as held to maturity or as trading securities would be classified as "available for sale" and reported at fair value. Unrealized gains and losses would not be reflected in earnings but would be reported as a separate component of stockholders' equity.
The Company adopted Statement 115 on January 1, 1994, the effect of which increased its unrealized gains by $494,541. In November, 1995, the FASB issued a Special Report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", which report allows enterprises to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassifications between the investment accounts. This one-time reassessment had to be made prior to December 31, 1996 and be appropriately disclosed in the financial statements. In December, 1995, the Company did reassess the appropriateness of the classifications of its securities and reclassified all of the securities contained in the held to maturity account to the available for sale account as they may be considered for sale prior to maturity as part of the asset/liability management strategy. The carrying value of the securities reclassed to available for sale amounted to $35,942,303 and the fair value amounted to $36,098,026. This transfer resulted in the Company increasing its unrealized gains by $155,723. As changes in interest rates occur, the carrying value of the securities classified as available for sale, as well as any securities which may in the future be classified as held for maturity, will be impacted. Typically, as interest rates rise, the carrying value of these securities may decline. Conversely, if interest rates decline, the carrying value of these securities may increase. Management cannot predict the impact that changes in future interest rates will have on the Company's financial statements.
In October, 1995, the FASB issued Statement 123, "Accounting for Stock- Based Compensation" (Statement 123) which requires companies to recognize compensation expense for stock options based on their fair value on the date of grant and is effective for financial statements for fiscal years beginning after December 15, 1995, with earlier adoption permitted. Statement 123 allows companies to remain under the existing method of accounting for stock options, Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). If companies elect to remain under APB 25 then the companies are required to disclose the pro forma effects of Statement 123 on their net income and earnings per share resulting from the grant of these options and other stock awards. Under APB 25, to the extent the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has elected to follow APB 25 and related interpretations in accounting for its stock options and will disclose the pro forma effects of Statement 123 on the Company's net income and earnings per share in the footnotes to the financial statements. The pro forma effects of Statement 123 result in additional compensation expense for December 31, 1995 and 1996 of $10,756 and $133,208, respectively. The results of which reduce earnings per share for December 31, 1995 and 1996, on a pro forma basis, $0.00 and $0.01, respectively.