==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from to
Commission File Number 0-22922
AMERICAN COUNTRY HOLDINGS INC.
(Exact Name of Registrant as specified in its charter)
Delaware 06-0995978
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
222 North LaSalle Street, Chicago, Illinois 60601-1105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (312) 456-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
[ x ] Yes [ ] No
The aggregate number of shared of the Registrant's Common Stock, $.01 par value,
outstanding October 29, 1997 was 31,937,815.
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1
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
INDEX PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
September 30, 1997, (Unaudited) and December 31, 1996 ........ 3
Consolidated Statements of Income (Unaudited) for
the Nine and Three Months Ended September 30, 1997 and 1996 .. 4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1997 and 1996 ........ 5
Notes to Consolidated Financial Statements (Unaudited) ....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 19
Item 2. Changes in Securities .................................... 19
Item 3. Defaults upon Senior Securities .......................... 19
Item 4. Submission of Matters to a Vote of Security Holders ...... 19
Item 5. Other Information ........................................ 19
Item 6. Exhibits and Reports on Form 8-K ......................... 20
Signature .............................................................. 20
2
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
Assets (In thousands, except share data)
Investments: (Unaudited)
<S> <C> <C>
Available for sale:
Fixed maturities - At fair value $ 102,683 $ 73,025
Equity securities - At fair value:
Preferred 5,931 7,307
Common -- 2,436
Fixed maturities held-to-maturity - At amortized
cost -- 27,677
Mortgage loans 2,500 2,500
Collateral loans -- 62
Notes receivable 363 --
Short term investments 7,103 1,230
--------- ---------
Total investments 118,580 114,237
Cash 10,233 9,868
Premiums receivable 12,578 5,762
Reinsurance recoverable 14,335 12,900
Accrued investment income 1,919 1,917
Property & equipment 800 694
Deferred income taxes 1,521 3,319
Deferred policy acquisition costs 2,967 2,866
Other assets 347 227
--------- ---------
Total assets $ 163,280 $ 151,790
========= =========
Liabilities and stockholders' equity
Liabilities:
Unpaid losses and loss adjustment expenses $ 94,756 $ 90,965
Unearned premiums 20,765 13,243
Accrued expenses 5,734 4,404
Income taxes payable 960 365
Loan payable 4,800 --
Other liabilities 2,187 2,376
--------- ---------
Total liabilities 129,202 111,353
--------- ---------
Commitment and contingent liabilities
Stockholders' equity: (See Note F)
Common stock - (Par value: - $0.01)
Authorized - ( 60,000,000 shares)
Issued and outstanding - (1997 - 31,960,450
shares; 1996 - 35,557,080 shares) 320 356
Additional paid-in capital 36,709 --
Net unrealized investment gains 2,316 919
Retained earnings (deficit) (5,267) 39,162
--------- ---------
Total stockholders' equity 34,078 40,437
--------- ---------
$ 163,280 $ 151,790
========= =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Revenues
Premiums earned $ 44,897 $ 45,773 $ 15,397 $ 15,015
Net investment income 5,215 5,293 1,880 1,853
Realized gains on investments 654 932 679 266
Other income 304 200 100 74
------------ ------------ ------------ ------------
Total revenues 51,070 52,198 18,056 17,208
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss adjustment expenses 40,360 37,115 14,228 12,224
Amortization of deferred policy acquisition
costs acquisition costs 7,127 7,084 2,084 2,053
Insurance and general expenses 2,805 2,227 1,549 1,321
------------ ------------ ------------ ------------
Total losses and expenses 50,292 46,426 17,861 15,598
------------ ------------ ------------ ------------
Income before income taxes 778 5,772 195 1,610
------------ ------------ ------------ ------------
Provision for income tax
Current 1 1,731 30 412
Deferred (credit) (45) (132) (132) (206)
------------ ------------ ------------ ------------
(44) 1,599 (102) 206
------------ ------------ ------------ ------------
Net income $ 822 $ 4,173 $ 297 $ 1,404
============ ============ ============ ============
Net income per common share $ 0.02 $ 0.12 $ 0.01 $ 0.04
============ ============ ============ ============
Average common and common
equivalent shares outstanding 35,189,839 35,557,080 34,455,356 35,557,080
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
---------------- ---------------
(In thousands)
<S> <C> <C>
Net cash provided by operating activities $2,756 $7,312
Investing activities
Fixed maturities - available for sale
Purchases (124,558) (21,943)
Sales 117,673 18,910
Equity securities - available for sale
Purchases (11,263) 0
Sales 15,629 0
Sale or maturity of other investments 62 0
Property, equipment, and other (329) (120)
Business combination (net of cash acquired) 31,862 0
---------------------------------
Net cash provided (used) by investing activities 29,076 (3,153)
Financing activities
Loan payable 4,800 0
Issuance of common stock (Note F) 26,667 0
Dividends paid 0 2,500
---------------------------------
Net cash used by financing activities 31,467 2,500
---------------------------------
Net increase (decrease) in cash 365 1,659
Cash at beginning of year 9,868 6,612
---------------------------------
Cash at end of period $10,233 $8,271
=================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
PART I
FINANCIAL INFORMATION
(See Financial Statements and Exhibits Attached)
Notes to the Consolidated Financial Statements
(Unaudited)
A. BUSINESS COMBINATION
On July 29, 1997 The Western Systems Corp. (Western Systems) acquired
substantially all the assets and assumed substantially all the liabilities of
American Country Insurance Company ("American Country") and its wholly owned
subsidiary, American Country Financial Services Corp. for a purchase price of
$40.3 million. Financing for the Acquisition was provided by Western Systems'
cash on hand, the issuance of Western Systems Common Stock, and a line of credit
agreement. Following the Acquisition, Western Systems changed its name to
American Country Holdings Inc. ("ACHI" or the "Company") to better reflect its
core property and casualty and premium finance business.
For financial reporting purposes, because certain former shareholders of the
previous Parent of American Country acquired a 50% interest in the Company as a
result of purchasing shares of Common Stock that were issued in connection with
the Acquisition, the business combination has been accounted for as a reverse
Acquisition whereby American Country was deemed to have acquired the Company.
Financial statements for the Company for periods prior to the business
combination date (July 29, 1997) are those of American Country. The operations
of the Company are included in the accompanying financial statements from the
date of the business combination.
The valuation of ACHI assets and liabilities were recorded at fair market value
that is consistent with their historical book value based on the nature of the
transaction. The following pro forma data is presented as if the Acquisition had
occurred on January 1, 1996:
Nine Months Ended
September 30,
1997 1996
-----------------------
(Amounts in thousands
except for per share data)
Revenues $51,100 $52,200
Net income 450 3,800
Net income per share 0.01 0.12
6
<PAGE>
B. NATURE OF OPERATIONS
American Country is a property and casualty insurance company, domiciled in the
State of Illinois, which underwrites and markets specialty transportation,
commercial and personal lines of insurance. Specialty lines, principally
liability and collision coverage for taxicabs and limousine companies in the
city of Chicago and surrounding suburbs, accounted for approximately 39% of
American Country's 1996 direct premiums. Commercial lines, principally workers'
compensation, multi-peril and auto liability and physical damage accounted for
approximately 47% of American Country's direct premiums written in 1996, and the
related policies were marketed to artisan contractors and distributors,
restaurants and transportation companies. Personal lines, primarily auto and
homeowners' policies accounted for the balance. American Country Financial
Services Corp. operates principally as a premium finance company.
Prior to January 3, 1997, Western Systems primarily operated under a franchise
agreement with Transmedia Network, Inc. ("Transmedia") which granted Western
Systems the right to operate a franchise in California, Washington, Oregon and
certain parts of Nevada. The franchise provided the Rights to Receive food and
beverage credits from restaurants that accept the Transmedia restaurant card. On
January 3, 1997, Western Systems sold its Transmedia franchise. At July 29,
1997, Western Systems had no operating activities and its business consisted
primarily of managing the cash and cash equivalents of Western Systems. Prior to
the agreement with American Country, Western Systems was a public shell actively
seeking a business combination with an operating business that would use all of
its available cash.
C. ACCOUNTING PRINCIPLES
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
financial statements should be read in conjunction with the consolidated
financial statements of American Country included in the Company's Proxy
Statement filed on June 30, 1997
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Certain amounts in the 1996 financial
statements have been reclassified to conform to the 1997 presentation. Operating
results for the three and nine-month period ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
7
<PAGE>
Earnings per share information is presented on the basis of weighted average
shares outstanding for the period. The weighted average number of shares used
for the periods prior to July 29, 1997 is 35,557,080 shares based on the
business combination discussed in Note A.
D. DEBT
In connection with the Acquisition, the Company entered into a line of credit
agreement with a bank. Under the terms of the agreement the Company may borrow
up to $7 million at a floating rate of interest. The amount of funds that may be
borrowed under the agreement is reduced to $2.3 million at July 2000 and expires
in July 2001. At September 30, 1997, the unused portion of the line of credit is
$2.2 million. The weighted average interest rate on the outstanding line of
credit is 7.5% as of September 30, 1997.
The line of credit agreement contains various debt covenants including certain
financial covenants and commitment fees, which are .3875% per annum of the
unused line of credit.
E. CAPITAL STOCK
In July 1997 the Company changed the par value of its Common Stock to $.01 per
share from $.60 per share. The change in the par value of the Common Stock
resulted in a decrease to Common Stock and a corresponding increase in
additional paid-in capital and has been reflected retroactively in the
accompanying balance sheet.
In connection with the Acquisition, the Company sold and issued 16 million
shares of its Common Stock to certain former shareholders of the former parent
of American Country and 8 million shares of its Common Stock to Frontier
Insurance Group. The proceeds from the issuance of the Common Stock were $26.7
million.
No dividends have been declared by the Board of Directors or paid by the Company
during the periods presented in the accompanying financial statements.
At September 30, 1997, the Company has 2,092,834 warrants outstanding. The
warrants allow the warrant holder to purchase 2.19 shares of Common Stock at a
price of $1.83 per share through December 31, 1997.
8
<PAGE>
F. SHAREHOLDERS' EQUITY
In connection with reverse Acquisition accounting, shareholders' equity has been
restated as follows:
<TABLE>
<CAPTION>
Additional Unrealized
Number of Common Paid-in Gains. Retained
Shares Stock Capital (Losses) Earnings Total
--------- ------ ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as previously
reported, 1/1/95 2,500,000 $ 2,500 $ 621 $(2,060) $32,790 $ 33,851
Adjusted for reverse
Acquisition 33,057,080 (2,144) 2,144 --
Net income 4,969 4,969
Change in unrealized gains (losses) 4,247 4,247
Dividend to shareholders' (3,000) (3,000)
-------------------------------------------------------------------------------------
Balance 12/31/95 35,557,080 356 621 2,187 36,903 40,067
Net income 5,025 5,025
Change in unrealized gains (losses) (1,268) (1,268)
Dividend to shareholders' (2,500) (2,500)
Recognize unfunded
pension liability, net
of deferred taxes (621) (266) (887)
-------------------------------------------------------------------------------------
Balance 12/31/96 35,557,080 356 -- 919 39,162 40,437
Net income 822 822
Change in unrealized gains (losses) 1,397 1,397
Redemption of shares
recognized as part of
the reverse Acquisition (35,557,080) (356) (39,894) (40,250)
Acquisition of Western
Systems 7,903,421 79 10,205 (5,357) 4,927
Issue additional shares 24,001,029 240 26,427 26,667
Issue additional shares
upon exercise of options 56,000 1 77 78
-------------------------------------------------------------------------------------
Balance 9/30/97 31,960,450 $ 320 $36,709 $ 2,316 ($ 5,267) $ 34,078
=====================================================================================
</TABLE>
The "Adjusted for reverse Acquisition" in 1995 reflects the restatement of
American Country equity in terms of ACHI common stock. The "Redemption of shares
recognized as part of the reverse Acquisition in 1997 reflects the legal sale of
American Country to ACHI on July 29, 1997. The "Acquisition of Western Systems"
in 1997 reflects the equity of Western Systems at the Acquisition date. The
"Issue additional shares" in 1997 reflects issuance of 16 million shares of
Common Stock to certain former shareholders of the former parent of American
Country and 8 million shares of Common Stock to Frontier Insurance Group.
9
<PAGE>
G. STOCK OPTION PLAN
The Company has established a Stock Option Plan (the "Plan"), as amended, under
which options to purchase up to a maximum number of 750,000 shares of common
stock may be granted to officers and other key employees. Stock options granted
under this Plan, which may be either incentive stock options or nonqualified
stock options for federal income tax purposes, expire up to ten years after date
of grant and become exercisable over a three year period. Employees who have
left the Company have 90 days to exercise their options. In December 1996, the
stockholders agreed to an amendment to the Plan, whereby in the event of a sale
of the assets of the Company, all options outstanding would become immediately
exercisable without regard to any vesting provisions. At September 30, 1997, the
Company had 418,000 options outstanding with exercise prices ranging from $0.60
per share to $3.75 per share.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under Financial Accounting Standards Board "FASB"
Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
If the accounting provisions of FASB Statement No. 123 had been followed, the
effect on net income and net income per share would have been immaterial.
H. REINSURANCE
Contingent reinsurance premiums and commissions are accounted for on an earned
or incurred basis and are accrued, in accordance with the terms of the
applicable reinsurance agreements, based on the estimated level of developed
experience or profitability relating to such reinsured business. During the
three months ended September 30, 1997, and 1996, such earned premiums accrued
were ($.8 million) and $.6 million respectively. During the nine months ended
September 30, 1997, and 1996, such earned premiums accrued were ($.1 million)
and ($1.6 million) respectively. The estimated profitability of the reinsured
business is continually reviewed and as adjustments become necessary, such
adjustments are reflected in current operations.
The components of the net reinsurance recoverable balances in the accompanying
balance sheets were as follows:
10
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-----------------------------------------
(In thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 500 $ 588
Ceded unpaid losses and LAE 12,836 11,515
Ceded unearned premiums 999 797
------- -------
Total $14,335 $12,900
======= =======
</TABLE>
The reinsurance ceded components of the amounts relating to the accompanying
statement of income was as follows:
Nine months ended September 30,
1997 1996
-------------------------------
(In thousands)
Ceded premiums earned $6,475 $4,851
Ceded incurred losses 5,365 4,053
Ceded incurred LAE 207 455
The effect of reinsurance on premiums written and earned for the nine months
ended September 30, 1997, and 1996 was as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
(In Thousands)
Premiums Premiums
-------- --------
Written Earned Written Earned
<S> <C> <C> <C> <C>
------- -------------------------------------
Direct $58,265 $ 50,726 $58,432 $49,533
Assumed 628 646 986 1,091
Ceded (6,677) (6,475) (5,083) (4,851)
------- -------------------------------------
Net $ 52,216 $ 44,897 $54,335 $45,773
========= =====================================
</TABLE>
I. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share," which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be excluded.
Basic earnings per share is expected to be consistent with the current primary
earnings per share. The impact on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
11
<PAGE>
J. COMMITMENTS
In connection with Western Systems sale of its Transmedia franchise, Western
Systems and Transmedia exchanged general releases of all liabilities and
obligations under the franchise agreement. However, pursuant to the terms of the
contract, Western Systems is obligated to repurchase certain receivable balances
in the event the receivable balances become uncollectible. At September 30,
1997, approximately $75,000 of receivable balances that are subject to
repurchase remain outstanding.
K. INVESTMENTS
The Company follows FASB Statement No. 115 "Accounting for Certain Investments
in Debt and Equity Securities", which requires categorization of fixed
maturities either as held to maturity, available for sale or trading and equity
securities as available for sale or trading. FASB Statement No. 115 allows
companies to transfer securities between categories for events that are
isolated, nonrecurring and unusual for the reporting enterprise that could not
have been reasonably anticipated. In connection with the Acquisition, the
Company chose to reclassify all held to maturity securities to available for
sale. As a result, the Company transferred its $23 million of held to maturity
fixed maturities to available for sale resulting in a $300,000 increase to
unrealized investment gains. The Company no longer holds any fixed maturities as
held to maturity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report and with the Proxy Statement filed by the Company on June 27, 1997.
Overview
American Country, is a property and casualty insurance carrier domiciled
in the State of Illinois. Through its predecessor companies, American Country
has been a writer of commercial and personal lines of insurance, specializing in
public transportation risks, principally taxicabs and limousines, for nearly
forty years. It has been and continues to be the writer of liability and
12
<PAGE>
physical damage coverage for the country's largest fleets of taxicabs located in
the City of Chicago.
Prior to its Acquisition by the Company, American Country was required by its
previous parent to fund certain annual commitments exceeding $1 million over the
past several years and also for the period during 1997. In addition, American
Country's expansion into personal lines of insurance had not been profitable,
with underwriting losses of $1.9 million for 1996 and $1.7 million for the nine
months ended September 30, 1997. As a result, a decision is being made as to
whether or not to withdraw from this line of business. The Company's senior
management is currently evaluating several methods of implementing this business
plan.
During the latter part of 1996 and up until the Acquisition, the Company and its
subsidiaries experienced costs related to the Acquisition of approximately $1
million which are nonrecurring, will not impact future operations and were
incurred principally in the nine months of 1997. Since the Acquisition, the
Company has been repositioning and refocusing its strategic philosophy to expand
its transportation and restaurant and hospitality lines, withdrawing from
personal lines, implementing plans to improve its operating efficiencies,
reducing the costs of managing its business and, as such, has recorded a charge
of approximately $.4 million that should result in future annual savings of
approximately $1.6 million in salaries and benefits.
Further, fixed income investment advisors have been engaged to enhance the
quality and yield on the portfolio of invested assets, which should have
positive effects on the company's future income potential.
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
The following table sets forth the net premiums earned by the principal lines or
products of insurance written by the Company for the periods indicated and the
dollar amount and percentage of change therein from period to period:
<TABLE>
<CAPTION>
Three Months Increase (Decrease)
Ended September 30, 1996 to 1997
------------------- -------------------
1997 1996 Amount %
---- ---- ------ ---
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Transportation $7,071 $6,369 $703 11.0%
Personal lines 2,215 2,151 64 3.0%
Commercial lines 6,111 6,495 (384) (5.9%)
------------------- ==== =====
Total $15,397 $15,015 $383 2.5%
=================== ==== =====
</TABLE>
13
<PAGE>
The principal cause for the 2.5% increase in premium revenues was due to the
continuing expansion of the Company's transportation line of business, it's core
line. For the period, net premiums earned on this line increased 11% over the
same period for the previous year. Revenues generated from our personal lines
increased 3.0% to $2.2 million from $2.1 million while those of our commercial
lines decreased nearly 5.9% due to the continuing price competition for this
line, especially for the workers' compensation and non-specialty commercial auto
products.
Net investment income before realized capital gains increased slightly over the
previous year due to an increase in invested assets and enhanced yields. This
increase was slightly offset by the increase in investment expense during the
first month of the period.
Other income, principally interest and fees generated from premium financing
activities increased by more than 34%, from $74,000 for the three month period
ended September 30, 1996, to $100,000 for the same period 1997.
The following table sets forth the Company's combined ratio calculated on a
statutory basis ("Statutory Combined Ratio") and on the basis of generally
accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
Three Months Three Months
Ended September 30, Ended September 30
------------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 73.3% 63.2% 73.3% 63.2%
Loss Adjustment Expense (LAE) 19.1 18.2 19.1 18.2
----- ----- ----- ------
Losses and LAE 92.4 81.4 92.4 81.4
Acquisition, underwriting,
interest and other expenses 39.5 37.6 23.6 22.5
----- ----- ----- ------
Total combined ratio 131.9% 119.0% 116.0% 103.9%
===== ===== ===== ======
</TABLE>
Losses and loss adjustment expenses for 1997 increased over the same period 1996
by $2.0 million or 16.4% and from 81.4% of net earned premiums in 1996 to 92.4%
in 1997. While some of this increase is attributed to evolution of reserve
development, most is the result of rate pressures in our commercial lines. The
loss ratio for the commercial line for the three months ending September 30,
1996, totaled 71.6% while for the same period, 1997, it totaled 97.4%. While
management is hopeful that this situation will begin to abate itself within the
industry, it cannot be certain that a continuation is necessarily short-lived
and, therefore, management is developing alternatives to correct this adverse
operational development.
Personal lines loss ratio decreased from 93.1% for the three months ended
September 30, 1996, to 89.5% for the same period 1997. This was the result of a
significantly lower loss ratio on the homeowners' product (100.3% for 1997 as
compared to 185.1% for 1996) which was due entirely to the catastrophic losses
in 1997 being smaller than that of the catastrophic losses occurring during the
same period of 1996.
14
<PAGE>
Losses for the transportation line were at approximately the same level for the
1997 period as they were for the comparable period in 1996; 88.9% of net
premiums earned versus 87.5%, respectively.
Commission and Acquisition costs were slightly higher for 1997, which can be
accredited to the fact that the Company's direct written premiums, those not
placed through independent producers, were a lower percentage of total premiums
than they were for 1996.
General and administrative expenses have increased by nearly 17% due in part to
repositioning costs of approximately $0.4 million recognized during the three
month period ended September 30, 1997, and to interest on the bank loan.
Nine months ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
The following table sets forth the net premiums earned by the principal lines or
products of insurance written by the Company for the periods indicated and the
dollar amount and percentage of change therein from period to period:
<TABLE>
<CAPTION>
Nine Months Increase (Decrease)
Ended September 30, 1996 to 1997
------------------- -------------------
1997 1996 Amount %
---- ---- ------ ---
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Transportation $20,702 $18,491 $2,211 12.0%
Personal lines 6,470 6,140 330 5.4
Commercial lines 17,725 21,142 (3,417) (16.2)
------- ------- ------ ------
Total $44,897 $45,773 ($876) (1.9%)
======= ======= ====== ======
</TABLE>
The principal cause for the 1.9% decrease in premium revenues was due to the
continuing price competition for commercial lines within the industry. Premium
revenues generated from this line decreased 16.2% over the same period in 1996
with workers' compensation, multiple peril and non-specialty auto products
contributing most significantly to this decrease.
Specialty Transportation lines, which contributed 46.1% of total premium revenue
for the period, increased 12% over 1996 where the premiums represented 40.4% of
total 1996 premium revenues. The suburban taxi and limousine product lines were
the lines that generated the greatest increases.
Personal lines revenues increased by 5.4% to $6.4 million, with most of the
increase generated by the Homeowner's product.
While an increase in invested assets as well as slightly higher yields generated
a modest increase to the Company's investment income, this increase was reduced
by higher expenses attributed to the investment activity, resulting in a net
decrease of 1.5% to investment income. This expense has been substantially
reduced on an ongoing basis.
15
<PAGE>
Realized gains on investments decreased nearly 30% over 1996, from $932,000 to
$654,000 for 1997.
Other income, principally income generated by premium financing activity
increased from $200,000 to $304,000 or 51.9%.
Total revenues for the period decreased by 2.2% over the same period 1996, from
$52.2 million to $51.1 million.
The following table sets forth the Company's Statutory Combined Ratio and GAAP
Combined Ratio for the periods indicated:
Statutory Combined Ratio GAAP Combined Ratio
Nine Months Nine Months
Ended September 30, Ended September 30
------------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
Losses 71.7% 63.7% 71.7% 63.7%
Loss Adjustment Expense (LAE) 18.2 17.4 18.2 17.4
----- ----- ----- -----
Losses and LAE 89.9 81.1 89.9 81.1
Acquisition, underwriting,
interest and other expenses 18.8 18.1 22.1 20.4
----- ----- ----- -----
Total combined ratio 108.7% 99.2% 112.0% 101.5%
===== ===== ===== =====
Loss and loss adjustment expenses for the nine month period ended September 30,
1997, increased 8.7% over the same period 1996. Most of the increase is directly
the result of the deterioration of the experience in the commercial and personal
lines.
The loss ratios in 1997 for the commercial lines segment increased from 77.2%
for 1996 to 92.4% for the same period 1997. This increase can be attributed to
insufficient premium rates. As to personal lines, while the loss ratios were
basically the same as they were in the prior period of 1996, the line continues
to develop unfavorably. As a result of the poor returns on this line over the
past several years, management is reevaluating its commitment to this segment
and is currently in the process of looking at alternatives to continuing in this
line of business and to redeploy the capital previously allocated to such
business.
Losses and expenses for the Company's specialty transportation line increased
from 80.6% for the nine months ended September 30, 1996, to 85.9% for the same
period of 1997.
Commission and Acquisition costs were at the same levels as those for 1996,
which can be accredited to the fact that premium levels were at approximately
the same levels as they were for 1996.
16
<PAGE>
General and administrative and other expenses increased by 13.6% due in part to
nonrecurring charges of $1 million associated with the sale of the Company,
repositioning charges of approximately $.4 million and interest expense on the
bank loan.
Liquidity and Capital Resources
The Company is a holding company, receiving cash principally through fees and
dividends from its subsidiaries and borrowings, certain of which are subject to
dividend restrictions and regulatory approval. The ability of insurance and
reinsurance companies to underwrite insurance and reinsurance is based on
maintaining liquidity and capital resources sufficient to pay claims and
expenses as they become due. The primary sources of liquidity for the Company's
subsidiaries are funds generated from insurance premiums, investment income,
commission and fee income, capital contributions from the Company and proceeds
from sales and maturities of portfolio investments. The principal expenditures
are for payment of losses and LAE, operating expenses, commissions and dividends
to shareholders.
At September 30, 1997, $163.3 million in total assets were composed of the
following: 80.1% cash and investments, 8.8 % net reinsurance recoverables, 7.7%
premiums receivable, 0.5% net fixed assets, 2.7% deferred expenses (federal
income taxes and policy Acquisition costs), and 0.2% other assets.
The Company's subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide for an acceptable return on
investment while preserving capital, maintaining sufficient liquidity to meet
their obligations and, as to the Company's insurance subsidiary, maintaining a
sufficient margin of capital and surplus to ensure their unimpaired ability to
write insurance and assume reinsurance.
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at September 30, 1997:
Market Percent of
Value Portfolio
-----------------------------
AAA/Aaa (including US Treasuries of $10,568) $41,545 37.8%
AA/Aa 22,849 20.8
A/A 41,676 38.0
BBB/Baa 3,208 2.9
All other 508 0.5
-------- -----
Total $109,786 100.0%
======== =====
17
<PAGE>
Cash flow generated from operations for the nine month periods ended September
30, 1997, and 1996 was $ 2.7 million and $ 7.3 million, respectively, which were
amounts adequate to meet all obligations during the periods. The decrease in
cash flow for the nine months ended September 30, 1997 as compared to the 1996
nine month period is primarily related to the decrease in net income.
On July 28, 1997, the Company obtained a $7 million revolving loan credit
facility from First National Bank of Chicago, from which it borrowed $4.8
million at an initial rate of 7.5%, based upon LIBOR, payable quarterly, to fund
a portion of the $40.3 million Acquisition.
Income Taxes
American Country's federal income tax return for 1996 has been consolidated with
Great Dane Holdings Inc. and subsidiaries for the year ending December 31, 1996,
and for the period January 1, 1997, to April 16, 1997. American Country's
federal income tax return for 1995 was consolidated with Great Dane Holdings
Inc. and subsidiaries and was filed separately for 1994 and previous years.'
Income tax expense is computed on a separate company basis.
For the period April 17, 1997, through July 29, 1997, American Country will file
a consolidated return with its parent during that period, American Country
Holdings Corp.
Effective with the Acquisition, the Company will file its tax return on a
consolidated basis with its subsidiaries.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
At the July 25, 1997, a special meeting of the shareholders' of the
Company the par value of the Common Stock was changed from $0.60 per
share to $0.01 per share.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to Vote of Security Holders
On July 25, 1997, a special meeting of the shareholders of the Company
was held in New York, New York. The shareholders of 7,054,511 shares
of Common Stock were present or represented by proxy and, accordingly,
a quorum was present and matters were voted on as follows:
a. The following persons were elected directors of the Company:
Votes Votes
For Withheld
----------------------
William J. Barrett 7,027,955 26,556
Edwin W. Elder 7,027,958 26,553
Peter H. Foley 7,027,958 26,553
Herbert M. Gardner 7,027,958 26,553
Martin L. Solomon 7,027,958 26,553
Wilmer R. Thomas, Jr. 7,027,958 26,553
b. The vote to ratify the appointment of Ernst & Young LLP as
auditors of the Company for the year ending December 31, 1997,
also passed. Votes totaling 6,994,192 shares were in favor of
the ratification, -0- were against and 4,200 shares abstained.
c. The vote to change the name of the Company from The Western
Systems Corp. to American Country Holdings Inc. also passed.
Votes totaling 5,712,719 were in favor of the change, 62,156
were against and 6,700 shares abstained.
Item 5. Other Information
Not applicable
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
b. Reports on Form 8-K:
On August 2, 1997, the Company filed a report on Form 8-K
reporting its appointment of Ernst & Young LLP as auditors for the
year ending December 31, 1997.
On August 13, 1997, the Company filed a report on Form 8-K
reporting its Acquisition of American Country Insurance Company and
its subsidiary on July 29, 1997.
Also on August 13, 1997, the Company filed an amendment to its form
8-K on form 8- K/A, announcing its unaudited results for the quarter
and six months ended June 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997
American Country Holdings Inc.
(Registrant)
By: s/s James P. Byrne
_____________________________
James P. Byrne
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
20
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0
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44,897
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