=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 for the fiscal year
ended December 31, 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 offices) (Zip Code)
(312) 456-2000
==============
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which
Registered
======================== ==============================
Common Stock, $.01 par value NASDAQ (Small Cap Market)
Common Stock Purchase Warrants NASDAQ (Small Cap Market)
Entitling holders to purchase
one share Of Common Stock per warrant
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [X]
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 shares of the Registrant's Common Stock, $.01
par value, outstanding March 18, 1998 was 32,036,454.
The aggregate market share of the voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant was $18,525,079 on
March 18, 1998, based on the closing sales price of the Common Stock
on such date.
Documents incorporated by reference: Portions of the Registrant's
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders
(incorporated by reference under Part III).
=================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
American Country Holdings Inc. ("ACHI" or "the Company") is an
insurance holding company which through its direct subsidiaries
American Country Insurance Company ("American Country") and American
Country Financial Services Corp. ("Financial Services") conducts
business as a specialty property and casualty insurer and provides
premium financing for its insurance customers. Financial Services
also provides secured loans for certain of American Country's larger
customers.
American Country is an Illinois domestic insurance company that
specializes in the underwriting and marketing of commercial property
and casualty insurance for a focused book of business. American
Country concentrates on types of insurance in which it has expertise:
transportation, restaurant and artisan contractor lines. American
Country also writes personal lines auto and homeowners insurance.
Although American Country's specialty public-transportation coverages
(taxicab and limousine) are primarily written on risks in the City of
Chicago and the surrounding suburbs, American Country has begun to
extend its geographic coverage as part of its expansion program.
American Country is licensed in the states of Illinois, Indiana, Iowa,
Pennsylvania, Wisconsin and the District of Columbia and has
applications pending in Connecticut, Michigan and New York. American
Country also is admitted as an excess and surplus lines carrier in 26
states. American Country currently maintains an A.M. Best Company,
Inc. ("A.M. Best") rating of "A-" (Excellent).
American Country writes transportation, commercial and personal lines
insurance coverage. Transportation lines, which include automobile
liability, physical damage and workers' compensation coverages for
taxicabs and limousines, accounted for 43% of total gross premiums
written in 1997. Commercial lines, which include multi-peril risks,
workers' compensation and automobile liability and physical damage,
accounted for 44% of total gross premiums written in 1997. Personal
lines, which include both automobile and homeowners' coverages,
accounted for 13% of total gross premiums written in 1997. American
Country's business is written by in-house salaried employees and
through approximately 70 independent agents located in the states in
which American Country is licensed.
American Country is the successor to an insurance company that was
organized in 1978 under the name Calumet Insurance Company. In 1997,
American Country entered into a transaction with The Western Systems
Corp. ("Western Systems") in which a subsidiary of Western Systems
acquired substantially all the assets and assumed substantially all
the liabilities of American Country and its wholly owned subsidiary,
Financial Services, for a purchase price of $40.3 million (the
"Acquisition"). In connection with the Acquisition, Western Systems
sold 24 million shares of its common stock (approximately 75% of the
shares outstanding) to three investors, two of which were shareholders
<PAGE> 3
of the parent company of American Country. Following the Acquisition,
Western Systems changed its name to American Country Holdings Inc. to
better reflect its property and casualty and premium finance
businesses.
For financial reporting purposes, because two 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 Acquisition 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 Acquisition (July 29, 1997) are those
of American Country.
Prior to January 3, 1997, Western Systems primarily operated under a
franchise agreement with Transmedia Network, Inc. ("Transmedia") which
granted Western Systems the rights to receive food and beverage
credits from restaurants in California, Washington, Oregon and certain
parts of Nevada that accepted the Transmedia restaurant card. On
January 3, 1997, Western Systems sold its Transmedia franchise and had
no remaining operating activities; thereafter until the Acquisition,
its business consisted primarily of managing its cash and cash
equivalents as a publicly owned shell corporation actively seeking a
business combination with an operating business that could use its
available cash.
INSURANCE LINES
American Country currently writes business in three areas of
insurance: transportation, commercial and personal lines. American
Country's major insurance niche markets include taxicabs and
limousines, and workers' compensation, multi-peril, automobile and
umbrella coverages for specific risks (primarily artisan contractors
and restaurants). In early 1998 American Country reinsured its
personal lines business, and it intends to reduce significantly its
activities in this line and focus its resources on its other specialty
niches and expand them geographically.
The following table sets forth the gross and net premiums for the
principal lines of insurance written by American Country and the
related percentages of the total such premiums represented thereby for
the year ended December 31, 1997:
<TABLE>
<CAPTION>
Gross Premiums Written Net Premiums Written
Dollars Percentage Dollars Percentage
------- ---------- ------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Transportation $ 29,285 42.8% $ 28,297 47.1%
Commercial 30,002 43.9 23,470 39.1
Personal 9,129 13.3 8,311 13.8
---------- ----- ----------- ------
$ 68,416 100.0% $ 60,078 100.0%
========== ====== =========== ======
</TABLE>
<PAGE> 4
TRANSPORTATION
American Country's transportation business is comprised of liability,
physical damage and workers' compensation insurance for taxis,
limousines, ground shuttle and para-transit fleets (ambulance buses
and vans used to transport individuals to doctors' offices) and non-
fleet accounts. American Country's largest taxi fleets in Illinois and
Michigan, as well as numerous other fleets, are produced on a direct
basis by salaried employees of American Country. The remainder of
American Country's transportation business is produced through
independent insurance agents who specialize in this type of business
in their geographic regions.
Transportation lines accounted for 43% or $29.3 million of American
Country's total gross premiums written in 1997. American Country
believes that insuring taxicabs and limousines in a relatively large
geographic area provides both diversity in exposure and spread of
risk between urban and suburban environments. Liability coverage for
Yellow Cab Company (which is located in Chicago and is the largest
taxi cab company in the United States) accounted for $10.8 million of
total gross premium written in 1997. Other large risks include
liability and physical damage for the Checker Taxi Association in
Chicago, providing coverage to independent medallion owners who have
joined the association. American Country also provides liability
coverage to other taxi associations, limousine fleets, ground fleets,
para-transit fleets, and individual taxi cab and limousine owner-
operators in Chicago, surrounding communities and downstate Illinois.
In late 1997, American Country extended its taxi cab insurance
business to Michigan, Wisconsin and Pennsylvania and it plans
additional geographic expansion in 1998. (See "Marketing" below.)
COMMERCIAL
Commercial lines accounted for 44% or $30 million of 1997 total gross
premiums written. American Country writes general liability, workers'
compensation, multi-peril, automobile liability and physical damage
and umbrella excess for restaurants, artisan contractors and other low
hazard businesses primarily in Illinois and Wisconsin. American
Country plans to market its restaurant program in additional states in
1998. The commercial business is written through independent agents
specializing in these targeted classes.
American Country's restaurant program is primarily designed for "white
tablecloth" establishments, but can accommodate other types of
restaurants, including fast food outlets. Specialized coverages
written by American Country include liquor liability, food spoilage,
boiler and machinery and employment practices liability. American
Country also offers a separate tavern policy which is tailored to
neighborhood establishments rather than nightclubs. American
Country's artisan contractors program offers coverages for plumbing,
electrical, painting and carpentry contractors, but avoids roofing
operations. The artisan contractor program targets operations of at
least 10 employees and up to $5 million in payroll.
<PAGE> 5
PERSONAL
Personal lines represent both standard and preferred risks for
homeowners, private passenger auto liability and private passenger
automobile physical damage. Personal lines premium accounted for 13%
or $9.1 million of 1997 total gross premiums written. In early 1998,
American Country entered into a reinsurance agreement with Ohio
Casualty Insurance Company ("Ohio Casualty"), pursuant to which Ohio
Casualty reinsures American Country's personal lines business, thereby
assuming responsibility for such business. The agreement with Ohio
Casualty is retroactive to January 1, 1998 and includes an interim
service agreement on the part of American Country. This transaction
is part of American Country's overall business plan to refocus its
marketing concentration on its specialty underwriting niches, which
include public transportation, primarily taxi cabs and limousines, the
hospitality industry and artisan contractors.
REINSURANCE
American Country reinsures a portion of its exposure by paying to
reinsurers a portion of the premiums received on the policies that are
reinsured. Insurance is ceded primarily to reduce the net liability
on individual risks and to protect against catastrophic losses.
Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of coverage, it does make the
assuming reinsurer liable to the insurer to the extent of the losses
reinsured. American Country seeks to maintain its risk exposure at
appropriate levels by setting maximum coverage limits by class and
type of business. American Country's current reinsurance program is
divided into two main sections: Specialty Transportation Business and
Commercial and Personal Lines.
The majority of American Country's business is reinsured by Motors
Insurance Corporation (rated "Aq+" by A.M. Best), Kemper Reinsurance
Company (rated "A" by A.M. Best), Hannover Ruckversicherungs A G
(rated "A+" by A.M. Best), Underwriters Reinsurance Company (rated
"A+" by A.M. Best), Ohio Casualty Insurance Company (rated A+ by A.M.
Best) and various Syndicates at Lloyds of London.
TRANSPORTATION REINSURANCE
American Country currently purchases excess of loss reinsurance
protection for its transportation business. Excess of loss
reinsurance requires that a company retain a predetermined dollar
amount of loss, known as the "retention." The insurance company is
indemnified by the reinsurer for losses which exceed this dollar
amount up to the limit of the reinsurance agreement. Any portion of
the loss exceeding the agreement limit is either paid by the company
or by other reinsurance agreements. Under its excess of loss program
for its transportation business, American Country has a retention of
$350,000 and reinsurance coverage of up to $4.1 million per
occurrence.
<PAGE> 6
COMMERCIAL AND PERSONAL LINES REINSURANCE
American Country's commercial and personal lines business is
reinsured on a multi-line, multi-layer excess of loss basis.
Reinsurance coverage is as follows:
All Property Business - The reinsurer pays up to $3,750,000
in excess of American Country's
retention of $250,000 per risk.
All Casualty Business - The reinsurer pays up to
(including workers' compensation) $3,850,000 in excess of American
Country's retention of $250,000 per
occurrence.
Workers' Compensation Business Supplemental reinsurance of
$8,000,000 per occurrence and per
claimant is purchased in excess of
American Country's retention of
$4,100,000.
Property catastrophe reinsurance also is in force, which provides
American Country with $7,750,000 of protection after a retention of
$250,000 per catastrophic loss occurrence.
Excess (umbrella) liability business is reinsured under a separate
reinsurance agreement which provides coverage to American Country of
up to $4,000,000 per occurrence in excess of American Country's
$1,000,000 retention.
Effective January 1, 1998, nearly all of American Country's personal
lines business was reinsured by Ohio Casualty pursuant to a
reinsurance agreement.
MARKETING
American Country is licensed in Illinois, Indiana, Iowa, Pennsylvania,
Wisconsin and the District of Columbia. Applications are pending in
Connecticut, Michigan and New York. American Country also is
authorized to act as an excess and surplus lines insurer in 26 states.
American Country markets its insurance products through multiple
distribution sources consisting of independent insurance agents and
directly through salaried employees of American Country. American
Country relies on in-house personnel to produce its Yellow Cab taxi
liability, Checker Taxi Association liability and independent taxi
collision insurance policies, and approximately 70 independent agents
to market its other insurance products. American Country selects
agents based on their comprehensive knowledge of the industries to
which American Country provides coverages and the geographic market in
which the agent operates.
American Country's current marketing plan is to extend its
transportation program by expanding geographically. American Country
began writing taxi cab business in Michigan and Wisconsin in 1997 and
<PAGE> 7
expects to write more business in these states in 1998 on a direct
basis and through independent agents. American Country was licensed
in Pennsylvania at the end of 1997 and through an independent agent in
Pennsylvania expects to write taxi cab business for Philadelphia
taxicabs and the suburban Philadelphia market. In early 1998,
American Country became licensed in the District of Columbia and
Indiana and expects to write transportation business in both in 1998.
American Country has targeted Arizona, California, Connecticut,
Maryland, New Jersey, Rhode Island and Virginia as areas for
additional expansion. It has begun discussions with independent
agents in those areas and intends to seek licenses in those states in
1998.
The following tables set forth for the three years ended December 31,
1997 the gross and net premiums written, whether produced directly by
American Country employees or by independent agents:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ------------------------
Premiums Percent Premiums Percent Premiums Percent
Written of Total Written of Total Written of Total
--------- -------- -------- -------- -------- --------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
GROSS PREMIUMS
Transportation lines $ 29,285 42.8% 25,990 38.3% $ 23,568 36.3%
Commercial lines 30,002 43.9 32,417 47.8 34,003 52.4
Personal lines 9,129 13.3 9,421 13.9 7,327 11.3
--------- ----- -------- ----- ---------- ------
Total $ 68,416 100.0% $ 67,828 100.0% $ 64,898 100.0%
========= ====== ======== ====== ========== ======
NET PREMIUMS
Transportation lines $ 28,297 47.1% 25,362 41.7% $ 22,866 39.7%
Commercial lines 23,470 39.1 26,590 43.8 27,743 48.2
Personal lines 8,311 13.8 8,808 14.5 6,935 12.1
--------- ------ --------- ------ ---------- ------
Total $ 60,078 100.0% $ 60,760 100.0% $ 57,544 100.0%
========= ====== ========= ====== ========== ======
</TABLE>
OPERATING RATIOS
STATUTORY COMBINED RATIO
American Country's statutory combined ratio (the loss ratio plus the
expense ratio) expresses losses and expenses as a percentage of
premium revenues and is the traditional measure of underwriting
experience. Generally speaking, if the statutory combined ratio is
below 100%, an insurance company has an underwriting profit and if it
is above 100%, the insurer has an underwriting loss.
<PAGE> 8
The following table reflects the loss ratios, expense ratios and
combined ratios of American Country, determined in accordance with
statutory accounting practices, and the property and casualty
industry-wide statutory combined ratios after policyholders' dividends
as compiled by A.M. Best, for the years indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio Year Ended December 31,
- ------------------------ -----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss ratio 72.0% 63.6% 63.3% 63.5% 64.0%
Expense ratio 37.6% 38.2% 37.0% 36.6% 39.4%
------ ------ ----- ----- ------
Combined ratio 109.6% 101.8% 100.3% 100.1% 103.4%
====== ====== ====== ====== ======
Industry statutory combined ratio
after policyholders' dividends 101.6% 105.8% 106.4% 108.4% 106.9%
====== ====== ====== ====== ======
(industry ratios compiled by A.M. Best Co.)
</TABLE>
American Country has outperformed the industry average in four of the
past five years, with a substantial increase in American Country's
loss ratio in 1997 due to declines in business and adverse claims
experience in its commercial and personal lines.
PREMIUM-TO-SURPLUS RATIO
While there are no statutory provisions governing premium-to-surplus
ratios, regulatory authorities regard this ratio as an important
indicator since the lower the ratio, the greater the insurer's ability
to withstand abnormal loss experience. Guidelines established by the
National Association of Insurance Commissioners (the "NAIC") provide
that an insurer's premium-to-surplus ratio is satisfactory if it is
below 3 to 1.
The following table sets forth the ratio of net premiums written
during the year to statutory-basis capital and surplus at the end of
the year for American Country for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net premiums written during the year $60,078 $60,760 $57,544 $50,652 $40,732
Statutory-basis capital and surplus 34,555 34,080 31,288 27,483 28,500
at end of year
Ratio 1.74 to 1 1.78 to 1 1.84 to 1 1.84 to 1 1.43 to 1
</TABLE>
<PAGE> 9
American Country's premium-to-surplus ratio was below 3 to 1 for the
past five years and thereby satisfactory under the NAIC guidelines.
Reserves for Losses and Loss Adjustment Expenses
American Country maintains reserves for the payment of losses and loss
adjustment expenses ("LAE") for all lines of business. The
determination of reserves for losses and LAE is dependent on receipt
of information regarding claims and the historical loss experience of
the business. The vast majority of losses are reported to American
Country by its insureds in a timely fashion; however, there is always
a certain percentage of losses which have occurred but not been
reported ("IBNR") to American Country at any given time. American
Country establishes reserves for IBNR, and this reserve also includes
amounts for the potential adverse development of losses known to
American Country (in other words, subsequent developments may occur
that require that previously established reserves be increased). Upon
receipt of a claim, American Country establishes a reserve, which is
an estimate of the amount which will be paid upon conclusion of the
claim. The reserves for the known losses, IBNR reserve and the loss
adjustment expense reserve, represent the total amount American
Country has predicted will be needed to satisfy all losses (known and
unknown) which may be paid by American Country. These reserves are
reflected as liabilities on American Country's balance sheet.
There can be a significant period of time between the occurrence of an
insured loss, the reporting of the loss to American Country, and the
payment of such loss. Liability claims have a greater period of time
elapsing between the occurrence of a loss and payment than property
claims. General liability claims, and in particular claims arising
from construction accidents, have the longest time lag between the
occurrence and final payment of the loss. Many factors are considered
when establishing the IBNR reserve for a particular line of business,
and the lag time between the occurrence and final payment of the loss
is an important component.
Most claims are investigated, supervised, and adjusted by personnel of
American Country. In-house counsel for American Country handle the
defense of most cases for insureds located in the Chicago Metropolitan
Area. All outside counsel are chosen by American Country, and American
Country's staff monitors all cases and grants settlement authority on
all files.
Automobile property damage and physical damage reserves are
established on a formula case reserve basis. Automobile theft losses
and total losses are reserved for book value of the vehicle as of the
time of the loss. All other lines of business are reserved based on
an analysis of each individual case. The case basis reserve is an
estimate of the amount of ultimate payment projected by the personnel
of American Country based upon their knowledge of similar cases. All
bodily injury claims are reviewed and reserves adjusted thirty days
after the file is opened and every six months thereafter for the life
of the file. Adjustments are made to reserves at these mandatory
intervals or whenever the known exposure changes.
<PAGE> 10
The following table sets forth a reconciliation of the beginning and
ending losses and LAE reserve balances, net of reinsurance ceded for
the past three years:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE, beginning of year $79,450 $74,582 $66,493
Incurred losses and LAE for claims relating to:
Current year 53,613 47,878 48,382
Prior years (464) 967 (3,077)
-------- ------- -------
Total net claims incurred 53,149 48,845 45,305
------- ------- -------
Losses and LAE payments for claims relating to:
Current year 19,624 18,044 14,709
Prior years 29,002 25,933 22,507
------- ------- -------
Total net claims paid 48,626 43,977 37,216
------- ------- -------
Net reserves for losses and LAE, end of year 83,973 79,450 74,582
Total reinsurance recoverable on unpaid losses and LAE 15,114 11,515 7,051
------- ------- -------
Gross reserves for losses and LAE, end of year $99,087 $90,965 $81,633
======= ======= =======
</TABLE>
The $464,000 decrease in the prior years' reserves in 1997 are
attributable to American Country's overall favorable development for
the period, particularly in the transportation lines, which was offset
slightly by higher settlements than initially reserved for in
commercial and personal lines.
The increase of $967,000 in prior years' reserves in 1996 also is the
result of higher settlements than initially reserved for in American
Country's commercial and personal lines.
The following table reflects American Country's losses and LAE reserve
development, net of estimated salvage and subrogation recoveries,
through December 31, 1997, for each of the preceding ten years:
<PAGE> 11
<TABLE>
<CAPTION>
Cumulative Redundancy (Deficiency)
Year Ended December 31,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
--------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for loss and loss expenses
net of reinsurance recoverables $38,108 $43,263 $49,526 $57,846 $62,234 $64,274 $66,494 $74,582 $79,450 $83,973
Reserve re-estimate as of:
One year later 40,399 46,561 50,581 56,477 61,651 71,985 63,417 75,549 78,986
Two years later 41,923 46,102 54,463 58,410 70,729 66,535 64,441 78,598
Three years later 42,248 48,083 55,729 66,260 64,482 68,338 65,915
Four years later 45,594 48,901 61,593 61,351 64,786 69,296
Five years later 43,215 53,248 57,585 61,694 65,508
Six years later 46,906 50,802 58,008 62,033
Seven years later 45,205 51,364 58,319
Eight years later 45,739 51,586
Nine years later 45,861
Ten years later
Cumulative redundancy (deficiency) (7,753) (8,323) (8,793) (4,187) (3,274) (5,022) 579 (4,016) 464
Percentage -20.3% -19.2% -17.8% -7.2% -5.3% -7.8% 0.9% -5.4% 0.6%
Reserve for claims and expenses, 75,780 73,922 73,209 81,633 90,965 99,087
direct
Reinsurance recoverables 13,546 9,652 6,716 7,051 11,515 15,114
------- ------- ------- ------- ------- -------
- - -
Reserve for claims and expenses, net $62,234 $64,270 $66,493 $74,582 $79,450 $83,973
======= ======= ======= ======= ======= =======
Paid Losses
Cumulative amount of losses paid, net of
Reinsurance recoverables through: 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
--------------
One year later $11,234 $12,747 $16,627 $16,934 $19,411 $29,388 $19,247 $25,910 $29,000
Two years later 19,174 23,287 26,737 29,294 41,900 40,619 34,909 43,549
Three years later 26,403 29,819 35,998 47,613 49,391 50,957 45,401
Four years later 31,054 36,807 49,089 51,971 56,958 57,408
Five years later 36,490 47,662 51,834 57,586 59,530
Six years later 44,535 48,417 55,898 58,960
Seven years later 43,793 50,161 56,628
Eight years later 44,938 50,492
Nine years later 45,157
Ten years later
</TABLE>
<PAGE> 12
INVESTMENTS
Funds, including reserve funds, are invested until required for
American Country's operations, subject to restrictions on permissible
investments established by applicable state insurance codes. American
Country's investment policy is to maximize after-tax income while
generally limiting investments to investment grade securities with
high liquidity. American Country's investment portfolio is jointly
managed by BlackRock Financial Management, Inc. and Alliance Capital
Management Corporation.
The following table contains information concerning American Country's
investment portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Amortized Fair Amount Reflected Percent
Cost Value On Balance Sheet of Total
-------------- ------------ ---------------- --------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S.
Government corporations and agencies $ 21,105 $ 21,328 $ 21,328 17.6%
Obligations of states and political 37,001 37,700 37,700 31.1%
Foreign governments 249 260 260 0.2%
Corporate securities 43,659 44,779 44,779 37.0%
Mortgage-backed securities 15,528 15,409 15,409 12.7%
-------- -------- -------- ------
Total fixed maturity securities 117,542 119,476 119,476 98.7%
Equity securities 1,487 1,622 1,622 1.3%
-------- -------- -------- ------
Total available-for-sale securities $119,029 $121,098 $121,098 100.0%
-------- -------- -------- ------
</TABLE>
<PAGE> 13
The following table sets forth a profile of American Country's fixed
maturity investment portfolio by rating at December 31, 1997:
Fair Percent
S&P/Moody's Rating (1) Value of Total
- ---------------------- --------- ------
(in thousands)
AAA/Aaa (including U.S. Treasuries of $20,520) $ 65,061 54.5%
AA/Aa 17,617 14.7%
A/A 24,781 20.7%
BBB/Ba 8,072 6.8%
All other 3,945 3.3%
--------- ------
Total $ 119,476 100.0%
--------- ------
________________
(1) Ratings are as assigned primarily by Standard & Poor's
Corporation, with remaining ratings as assigned by Moody's
Investors Service Inc.
The following table sets forth a profile of American Country's fixed
maturity investment portfolio by maturity at December 31, 1997:
Fair Percent
Value of Total
-------- --------
(in thousands)
Maturity
- --------
Due in one year or less $ 1,596 1.3%
Due after one year through five years 46,816 39.2%
Due after five years through ten years 28,573 23.5%
Due after ten years 27,082 22.7%
Mortgage-backed securities 15,409 12.9%
-------- ------
Total fixed maturity securities $119,476 100.0%
-------- ------
The following table summarizes the Company's investment results for
the five years ended December 31, 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total net investment income $7,025 $7,032 $6,465 $5,600 $6,462
Average annual pre-tax yield 6.4% 6.7% 6.7% 6.9% 6.6%
Average annual after-tax yield 4.6% 4.6% 4.7% 4.5% 4.3%
Effective federal income tax
investment income 31.1% 25.3% 24.9% 22.9% 26.3%
</TABLE>
<PAGE> 14
REGULATION
American Country is subject to varying degrees of regulation and
supervision in the jurisdictions in which it transacts business under
statutes which delegate regulatory, supervisory and administrative
powers to state insurance commissioners. Such regulation is designed
to protect policyholders rather than investors and relates to such
matters as standards of solvency, which must be met and maintained;
the licensing of insurers and their agents and producers; the nature
of and examination of the affairs of insurance companies, which
includes periodic financial and market conduct examinations by the
regulatory authorities; annual and other reports, prepared on a
statutory accounting principles basis, required to be filed on the
financial condition of insurers or for other purposes; establishment
and maintenance of reserves for unearned premiums, losses and loss
adjustment expenses; and requirements regarding numerous other
matters. In general, American Country must file all rates for
insurance directly underwritten with the insurance department of each
state in which it operates on an admitted basis; reinsurance generally
is not subject to state regulation. Further, state insurance statutes
typically place limitations on the amount of dividends or other
distributions payable by insurance companies in order to protect their
solvency. Illinois, the domicile state of American Country, requires
that dividends be paid only out of earned surplus, and limits the
annual amount payable without prior approval of the Department to the
greater of 10% of policyholders' surplus or the amount of the prior
years statutory net income.
American Country is also subject to statutes governing insurance
holding company systems in various jurisdictions. Such statutes
require American Country to file an annual Holding Company System
Registration statement with the state insurance regulatory
authorities, which includes information concerning its capital
structure, ownership, financial condition and general business
operation. Under the terms of applicable state statutes, any person
or entity desiring to purchase more than a specified percentage
(commonly 10%) of American Country's outstanding voting securities is
required to obtain regulatory approval for the purchase of such voting
securities. Section 131.2 of the Illinois Insurance Code relating to
holding companies, to which American Country is subject, requires
disclosure of transactions between American Country and its
subsidiaries and affiliates. Such transactions must satisfy certain
standards, including that they be fair, equitable and reasonable and
that certain material transactions be specifically non-disapproved by
the Director of Insurance. Further, prior approval by the Director is
required of affiliated sales, purchases, exchanges, loans or
extensions of credit, or investments, any of which involve 10% or more
of American Country's admitted assets as of the preceding
December 31st.
The National Association of Insurance Commissioners facilitates the
regulation of multi-state companies through uniform reporting
requirements, standardized procedures for financial examinations, and
uniform regulatory procedures embodied in model acts and regulations.
<PAGE> 15
Current developments address the reporting and regulation of the
adequacy of capital and surplus. The NAIC has finalized its risk-
based capital model act for property/casualty companies, which
calculates a minimum required statutory policyholders' surplus based
on the underwriting, investment, credit loss reserve and other
business risks applicable to the insurance company's operations. At
December 31, 1997, American Country's required risk-based capital was
$6.4 million; and its reported capital and surplus was $34.6 million,
so that at December 31, 1997, American Country substantially exceeded
the risk-based capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations
Regulation" for additional information.
COMPETITION
The property and casualty insurance business is highly competitive on
the basis of both price and service. In recent years, the property
and casualty insurance industry has been characterized by relatively
high levels of competition and aggressive pricing and marketing.
American Country faces its most active competition in public
transportation lines from captive insurance programs that are put
together by agents and reinsurers using an insurance company that
writes the insurance business as a fronting carrier and then reinsures
all of the business with the reinsurer. Many of these programs are
short-lived but they generally enter the market with extremely
aggressive pricing. Besides creating instability, they generally do
not provide continuity of claims practices and settlements, which
adversely affects future pricing for property and casualty insurance
generally. Presently, there are two national carriers still pursuing
taxi/livery business through general agents, but both of these
carriers have reduced their presence in certain geographic areas
(Midwest, California, New Jersey). A few smaller regional carriers
remain that continue to target smaller accounts.
In Illinois, the competition for coverage of artisan contractors is
primarily from national carriers, regional carriers and mono-line
workers' compensation carriers. The competition for restaurants is
mainly from regional carriers.
American Country benefits in both classes of its business by
maintaining long term agency relationships. In addition, American
Country's agents have specialized in these classes of business for
many years. American Country believes it has been able to compete
successfully by underwriting specialty coverages for niche areas in
which American Country has expertise.
ENVIRONMENTAL ISSUES
American Country believes that it has extremely limited risk of claims
arising from environmental exposures. The underwriting philosophy of
American Country excludes writing insurance for business which
presents possible environmental exposures. Its liability policies
contain an absolute pollution coverage exclusion and a lead paint
exclusion.
<PAGE> 16
Although the industry has seen a dramatic increase in the number of
environmental claims being presented to insurers for defense and
indemnification, and recent court cases have diminished the protection
granted by the absolute pollution exclusion, the management of
American Country believes that American Country has no material
exposure from environmental claims.
PREMIUM FINANCING
Financial Services operates principally as a premium finance company
under the regulations of the Illinois Department of Insurance,
financing commercial insurance premiums and providing collateral loan
financing to members of the Checker Taxi Association. All loans are
secured either through unearned premiums on insurance policies or, in
the case of Checker Taxi Association, by assets. For the year ended
December 31, 1997, Financial Services had a net income of $211,000, a
33% increase from 1996.
EMPLOYEES
As of December 31, 1997, American Country employed approximately 140
full time employees, 9 of whom are executive management, and 4 part-
time employees. American Country is not a party to any collective
bargaining agreement and believes its relationship with its employees
to be good.
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding certain forward-looking
statements contained in the foregoing and elsewhere and in any other
statements made by, or on behalf of, the Company, whether or not in
future filings with the Securities and Exchange Commission. Forward-
looking statements are statements not based on historical facts. In
particular, statements using verbs such as "expect," "intend," "plan,"
"anticipate," "believe" or similar words generally involve forward-
looking statements. Forward-looking statements include but may not be
limited to, statements relating to future plans, targets and
objectives, financial results, cyclical industry conditions,
government and regulatory policies, the uncertainties of the reserving
process and the competitive environment in which the Company operates.
Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond the Company's control and
subject to change. These uncertainties can affect actual results and
could cause actual results to differ materially from those expressed
in any forward-looking statements. Whether or not actual results
differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable events or developments, some of
which may be national in scope, such as general economic conditions
and interest rates. Some of these events or developments may be
related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
<PAGE> 17
portfolio, and other factors. Investors are also directed to consider
other risks and uncertainties discussed in documents filed by the
Company with the SEC, including Exhibit 99 to the Annual Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1997. The Company disclaims any obligation to update
forward-looking information.
ITEM 2. PROPERTIES
The Company leases office space at 222 N. LaSalle Street, Chicago,
Illinois, for its executive offices and insurance operations. The
39,000 square feet facility has a monthly rental of approximately
$63,000. The current lease expires in May 2002.
The Company leases space at two additional locations in the Chicago
area for purposes of storage and claim handling. The aggregate
monthly rental is approximately $6,000.
The Company believes that it currently has adequate space for
expansion at its existing facilities.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company
or its subsidiaries is a party or of which any of the properties of
the Company or its subsidiaries is subject, except for claims arising
in the ordinary course of business. Most of these lawsuits involve
claims under insurance policies issued by American Country. These
lawsuits are considered by American Country in estimating the reserves
for losses and loss adjustment expenses. In the opinion of
management, the ultimate resolution of such litigation will not have a
material effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ (Small Cap Market)
under symbol ("ACHI") and the Company's Warrants are traded on the
NASDAQ (Small Cap Market) under the symbol ("ACHIW"). The following
table sets forth the high and low bid prices as reported on NASDAQ for
the Company's Common Stock during the quarters indicated. The prices
reported reflect inter-dealer quotations and may not represent actual
transactions and do not include retail mark-ups, markdowns or
commissions.
<PAGE> 18
COMMON STOCK
------------
Quarter Ended High Low
------------- ---- ---
March 31, 1996 $2.50 $1.00
June 30, 1996 2.62 1.50
September 30, 1996 2.18 1.12
December 31, 1996 1.37 0.75
March 31, 1997 $2.06 $0.81
June 30, 1997 2.75 1.44
September 30, 1997 2.81 1.81
December 31, 1997 2.94 1.50
At March 18, 1998, there were approximately 250 holders of record of
the Company's Common Stock. This number does not include an
indeterminate number of stockholders whose shares are held by brokers
in "street name." The Company has not paid any cash dividends on the
Common Stock since it became publicly traded. (See "Business
Regulation" for restrictions on the payment of dividends by the
Company's insurance subsidiary.)
WARRANTS
The following table sets forth the high and low bid prices as reported
on NASDAQ for the Company's Common Warrants during the quarters
indicated. The prices reported reflect inter-dealer quotations and
may not represent actual transactions and do not include retail mark-
ups, markdowns or commissions.
COMMON WARRANTS
---------------
Quarter Ended High Low
------------- ---- ----
March 31, 1996 $0.50 $0.25
June 30, 1996 0.50 0.25
September 30, 1996 0.50 0.25
December 31, 1996 0.25 0.03
March 31, 1997 $0.38 $0.19
June 30, 1997 1.81 0.25
September 30, 1997 2.50 0.88
December 31, 1997 1.50 0.16
At March 18, 1998, the Company had 2,057,129 warrants outstanding. The
warrants give the warrant holder the right to purchase 2.19 shares of
the Company's Common Stock at a price of $1.83 per share through
August 31, 1998.
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the Company's
consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements, related notes
and other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
American Country
Holdings Inc.
Selected Financial Data
Income Statement Data: Year Ended December 31,
- ---------------------- -----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Gross premiums written $68,416 $67,828 $64,898 $57,635 $46,085
======= ======= ======= ======= =======
Net premiums written $60,078 $60,760 $57,544 $50,652 $40,732
======= ======= ======= ======= =======
Net premiums earned $59,814 $60,550 $56,909 $48,312 $40,836
Net investment income 7,025 7,032 6,465 5,600 6,462
Realized capital gains 1,613 915 222 282 476
Other income 331 219 150 107 0
======= ======= ======= ======= =======
Total revenues 68,783 68,716 63,746 54,301 47,774
Expenses:
Losses and loss adjustment expenses 53,149 48,845 45,305 38,925 32,739
Amortization of policy acquisition
costs, underwriting, and other
expenses 12,911 12,860 11,185 9,639 9,823
Interest expense 161 0 0 0 0
------- ------- ------- ------- -------
Total expenses 66,221 61,705 56,490 48,564 42,562
------- ------- ------- ------- -------
Income before income taxes 2,562 7,011 7,256 5,737 5,212
Income taxes 493 1,986 2,287 1,472 1,353
------ ------- ------- ------- -------
Net Income 2,069 5,025 4,969 4,265 3,859
====== ======= ======= ======= =======
Net income per share - basic $0.06 $0.14 $0.14 $0.12 $0.11
======= ======= ======= ======= =======
Net income per share - diluted $0.06 $0.14 $0.14 $0.12 $0.11
======= ======= ======= ======= =======
Cash dividends declared per share(1) $0.00 $0.07 $0.08 $0.08 $0.08
======= ======= ======= ======= =======
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993
- ------------------- ==== ==== ==== ==== ====
<S> <C> <C> <C> <C> <C>
Total investments $122,098 $114,237 $113,687 $91,094 $90,837
Total assets 162,661 151,790 140,627 123,173 126,980
Liabilities for gross unpaid losses and
loss adjustment expenses 99,087 90,965 81,633 73,209 71,179
Notes payable 4,800 0 0 0 0
Total liabilities 127,521 111,353 100,560 89,322 92,261
Total shareholders' equity 35,140 40,437 40,067 33,851 34,719
Book value per share $1.10 $1.14 $1.13 $0.95 $0.98
- ------------------------
Statutory Combined Ratio 109.6% 101.8% 100.3% 100.1% 103.4%
GAAP Combined Ratio 109.9% 101.3% 98.8% 101.9% 105.4%
</TABLE>
(1) Cash dividends declared are those of American Country. Dividends
per share declared by Western Systems prior to the Acquisition were
$0 for each year presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the 1997 Consolidated Financial Statement and notes thereto.
OVERVIEW
American Country Holdings Inc. (the "Company") is engaged in the
specialty property and casualty insurance and premium finance business
through its subsidiaries American Country Insurance ("American
Country") and American Country Financial Services Corp. ("Financial
Services").
American Country is a property and casualty insurance carrier
domiciled in the State of Illinois. American Country and its
predecessor has been a writer of commercial and personal lines of
business, specializing in public transportation risks, principally
taxicabs and limousines, for nearly twenty years.
American Country is the successor to an insurance company that was
organized in 1978 under the name Calumet Insurance Company. In 1997,
American Country entered into a transaction with The Western Systems
Corp. ("Western Systems") in which a subsidiary of Western Systems
acquired substantially all the assets and assumed substantially all
the liabilities of American Country and its wholly owned subsidiary,
Financial Services, for a purchase price of $40.3 million (the
"Acquisition"), and contemporaneously Western Systems sold 24 million
shares of its common stock to three investors, two of whom were
shareholders of the parent company of American Country. Following the
<PAGE> 21
Acquisition, Western Systems changed its name to American Country
Holdings Inc. to better reflect its property and casualty and premium
finance business.
American Country and Financial Services experienced non-recurring
costs related to the Acquisition of approximately $1 million in late
1996 and the first nine months of 1997 which will not impact future
operations and subsequent to the Acquisition in July, 1997, American
Country no longer pays annual management fees and administrative fees
in excess of $1 million. Since the Acquisition, American Country has
been repositioning and refocusing its strategic philosophy to expand
its transportation and restaurant and hospitality products,
significantly reduce its personal lines business (which had an
underwriting loss of $1.7 million for 1997 and $1.9 million for 1996),
implement plans to improve operating efficiencies and reduce the costs
of managing its business. American Country will not market any
personal lines business and will not accept any new personal lines
business from independent agents. As a result of these efforts,
American Country has recorded a charge of approximately $400,000 in
1997 primarily for termination benefits that were paid in 1997 that is
estimated to result in future annual savings in salaries and benefits.
In addition, fixed income advisors have been engaged to enhance the
quality and yield on the portfolio of invested assets.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
Premium revenues during the quarter ended December 31, 1997 increased
nearly 1% to $14.9 million in the comparable quarter of 1997 from
$14.8 million in 1996.
Transportation lines premium revenues increased in 1997 by 4.3%, from
$7.0 million for the fourth quarter of 1996 to $7.4 million for the
fourth quarter of 1997. The expansion during the quarter into new
geographical regions was responsible for the largest increase in this
line. American Country also experienced increases in 1997 in its
suburban Chicago taxi cab and limousine business.
Revenues generated from commercial lines decreased 3% from the same
period in 1996 to $5.5 million from $5.6 million, attributable to
aggressive competition and declining premium rates for this line of
business.
Personal lines revenues remained constant in the 1997 quarter at $2.1
million. Revenues for homeowners' insurance, however, increased 8%
from 1996, while revenues for automobile business decreased by 3%.
Loss and LAE incurred during the 1997 quarter increased from $11.7
million to $12.8 million, a 9.0% increase, resulting in loss ratios of
85.7% and 79.4% in 1997 and 1996, respectively.
Loss ratios for transportation lines decreased from 80.3% to 69.5%.
The decreases in ratios were spread across product lines and were the
result of improved loss experience and increased revenues.
<PAGE> 22
Commercial lines loss ratios increased from 78.3% for the quarter
ending December 31, 1996 to 106.0% in 1997 as a result of increased
claims and pricing competition.
Personal lines experienced worsening results during the 1997 quarter,
the result of higher claims in automobile liability insurance and to
increased frequency of claims in the homeowners' line.
Policy acquisition costs decreased during the 1997 period due to
reduced incentive profit sharing commissions, which resulted from
American Country's poor underwriting performance for the period.
Selling and general expenses also decreased during the fourth quarter
of 1997 as compared to 1996 due to savings initiated with the
Acquisition and also due to the results of repositioning and
refocusing of operations since the Acquisition.
Total investment income and realized investment gains for the quarter
increased $1.1 million from $1.7 million in 1996 to $2.8 million in
1997. The increase in realized gains accounted for most of this
increase. This increase was the result of a change in investment
philosophy after the Acquisition and the appointment of independent
fixed income managers that occurred at the end of the third quarter.
Other income for the period, which represents interest and fees earned
on premium finance activities, increased 41% to $26,000 in 1997 from
$19,000 for 1996.
CALENDAR YEAR 1997 COMPARED TO CALENDAR YEAR 1996
The following table sets forth the net premiums earned by the
principal lines or products of insurance underwritten by American
Country for the periods indicated and the dollar amount and percentage
of change therein from year to year:
NET PREMIUMS EARNED
YEAR ENDED Increase (Decrease)
December 31, 1996 to 1997
------------ -------------------
(in thousands)
1997 1996 Amount %
---- ---- ------ ---
Transportation lines $ 28,056 $25,540 $ 2,516 9.9%
Commercial lines 23,181 26,774 ( 3,593) (3.4)
Personal lines 8,577 8,236 339 4.1
-------- ------- --------- -----
Totals $ 59,814 $60,550 ($ 736) (1.2%)
======== ======= ======== ======
Transportation lines, which consists of taxi and limousine liability
and physical damage programs, grew during the period as more accounts
were underwritten and American Country began its geographic
diversification program after the Acquisition in July, 1997.
<PAGE> 23
Total premium revenues generated by this line increased nearly 10%
over the prior year to $28.1 million in 1997 from $25.5 million in
1996. This increase is attributable to coverage written for Chicago
suburban taxis and limousines and American Country's expansion into
the states of Michigan and Wisconsin.
Commercial lines continued its decline in revenue contribution by
decreasing more than 13% over 1996. This decrease was due to the
continuing soft market being experienced industry-wide. Average
premiums on American Country's workers' compensation line (its largest
commercial lines product) decreased 30.5% on new business over the
same period for 1996 and 10.7% on renewal business. Management is
observing this situation very closely and in the fourth quarter of
1997 instituted a re-underwriting program to reevaluate each risk on
the policy's renewal date.
Personal lines' premiums generated revenues of $8.6 million in 1997,
representing a 4.1% increase over 1996 that was almost entirely
attributable to homeowners' insurance. This slower growth rate over
the recent years represents action taken by management due to its
concern with the poor returns experienced for this line. Effective as
of January 1, 1998, an agreement was entered into with Ohio Casualty,
a major writer of personal lines business, pursuant to which Ohio
Casualty reinsures nearly all of American Country's personal lines
business.
With an increase in invested assets of 6.0% in 1997, net investment
income and realized gains on investments increased 8.7% over 1996, due
principally to increased realized gains. Although investment expenses
increased more than 38% for the full year 1997, since the Acquisition
investment expense has been substantially reduced on an ongoing basis
by eliminating investment fees previously paid to the former parent of
the Company and by changing the custodial bank. Early in the fourth
quarter, the Company engaged two professional fixed income investment
advisors to review and manage its investment portfolio. Since this
engagement, the Company has seen improvement in its investment
returns.
Other income, principally income generated by the premium financing
activity of Financial Services, increased from $219,000 in 1996 to
$331,000 for 1997, an increase of 51%.
The following table sets forth American Country's Statutory Combined
Ratio and GAAP Combined Ratio for the periods indicated:
<PAGE> 24
Statutory Combined GAAP Combined
Ratio - Year ended Ratio - Year ended
December 31, December 31,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
Losses 72.0% 63.6% 72.0% 63.6%
Loss Adjustment Expenses (LAE) 16.8 17.1 16.8 17.1
---- ---- ---- ----
Losses and LAE 88.8 80.7 88.8 80.7
Policy acquisition, other
underwriting expenses 20.8 21.2 21.1 20.6
---- ---- ---- ----
Total combined ratio 109.6% 01.8% 109.9% 101.3%
===== ==== ===== =====
Losses and loss adjustment expenses for 1997 increased from 80.7% of
premium revenues during 1996 to 88.1% for 1997. This increase is
attributable to higher claims in personal and commercial lines.
American Country's transportation lines continued to perform well,
resulting in a combined ratio of 90.0% for 1997. This compared to a
combined ratio 88.3% for 1996. This slight deterioration is
attributable to a slight increase in the loss and LAE ratio and to
increased acquisition costs due to geographic expansion of this
program during the fourth quarter.
The loss ratio for the commercial lines increased from 77.4% during
1996 to 95.6% in 1997, resulting in an increase of the combined ratio
of 19.5% from 108.3% to 129.4% in 1996 and 1997, respectively. The
increase reflects the continuing industry-wide decline in net premiums
written for this type of insurance primarily due to price competition.
As with the personal lines, management is closely evaluating this
line, with special emphasis being placed on re-underwriting individual
risks and programs to improve returns.
The loss ratio for personal lines during 1997 increased to 94.5%
compared to 91.6% for 1996, due to a general increase in claims, and
the occurrence of two catastrophic losses during the period. As a
result of the poor results derived from this line of business,
management decided to significantly reduce its business in this line,
and effective January 1, 1998, entered into an agreement with Ohio
Casualty pursuant to which nearly all of this line was reinsured by
Ohio Casualty without further exposure to American Country.
Commission and acquisition costs were slightly higher for 1997, which
is attributable to the fact that American Country's business written
by independent producers increased in 1997. General and
administrative expenses increased due in part to nonrecurring expenses
of approximately $1 million associated with the Acquisition and
related activities and with interest expense on the bank loan
incurred in connection with the Acquisition.
The Company is aware of the issues that are associated with the
programming code in many computer systems as the millennium
<PAGE> 25
approaches. During 1997, the Company reviewed its programs in
connection with the Year 2000 issue. During 1998, the Company plans
to upgrade its Policy Maintenance and Rating Systems in order to
comply with Year 2000. Also in early 1998, the Company
completely upgraded its network and personal computer environment,
including supportable operating systems. The Company expects that
expenses associated with Year 2000 compliance will not exceed
$100,000. The Company has also discussed Year 2000 issues with
American Country's policy maintenance and claims service providers,
and it is management's belief that these providers are properly
addressing Year 2000 issues. With these changes and others planned,
it is management's belief that the Company should have no material
exposure to the Year 2000 issue.
THE CALENDAR YEAR 1996 COMPARED TO THE CALENDAR YEAR 1995
The following table sets forth the net premiums earned by the
principal lines or products of insurance written by American Country
for the periods indicated and the dollar amount and percentage of
change therein from period to period:
Net Premiums Earned
Year ended Increase (Decrease)
December 31, 1995 to 1996
------------------- --------------------
1996 1995 Amount %
---- ---- ------ --
(in Thousands)
Transportation lines $ 25,540 $22,806 $2,734 12.0%
Commercial lines 26,774 28,364 (1,590) (5.6)
Personal lines 8,236 5,739 2,497 43.5
-------- ------- ------ ----
Totals $ 60,550 $56,909 $3,641 6.4%
======== ======= ====== ====
Transportation lines, which consists of American Country's taxi and
limousine liability and physical damage programs underwritten in the
Chicago metropolitan area, experienced growth during 1996 as compared
to 1995 in its suburban and association taxi cab business. The
revenues generated by this line when expressed as a percentage of
total premiums earned, increased from 40.1% in 1995 to 42.1% during
1996.
Commercial lines premiums decreased as a result of continuing price
competition, especially in the workers' compensation and non-specialty
commercial automobile products lines.
The 43% increase in revenues generated from personal lines was
principally due to the continued expansion of this line, which was
initiated in 1993. The greatest increase was in homeowners'
insurance, which increased during 1996 by more than 112% over 1995.
<PAGE> 26
Net investment income increased in 1996 primarily as a result of the
10% increase in interest earned on the Company's portfolio of fixed
maturities and to slightly improved yields over 1995. Dividends
earned decreased during 1996 due to the significant reduction in the
common equity position during the year.
Other interest earned, largely on short term commercial paper
decreased as a result of lower yields on these investments.
The increase in realized gains during 1996 was achieved as a result of
the strong performance in the securities markets throughout the year.
Additionally, management utilized the opportunity to realize losses on
certain invested assets which had been previously written down which
enabled the Company to take the realized loss on these securities for
tax purposes and thereby achieve tax advantages.
Other income, which consists of interest and fees earned on premium
finance activities, increased 46% during 1996 to $219,000 due entirely
to the increase in the number of contracts financed.
The following table sets forth the Company's Statutory Combined Ratio
and GAAP Combined Ratio for the periods indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
Year ended December 31, Year ended December 31,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 63.6% 63.3% 63.6% 63.3%
Loss Adjustment Expenses (LAE) 17.1 16.3 17.1 16.3
----- ----- ----- -----
Losses and LAE 80.7 79.6 80.7 79.6
Policy acquisition, other
underwriting expenses 21.2 20.7 20.6 19.2
----- ----- ----- -----
Total combined ratio 101.8% 100.3% 101.3% 98.8%
===== ===== ===== =====
</TABLE>
Losses and loss adjustment expenses for 1996 increased over 1995 in
about the same proportion as did premium revenues.
Transportation lines experienced a decrease in its losses and loss
adjustment expense ratio from 90.0% for 1995 to 80.5% for 1996. This
decrease is attributable to lower claims under taxi and limousine
policies, as well as a 10% decrease in loss adjustment expenses.
The Commercial lines loss ratio increased from 70.2% in 1995 to 77.4%
as a result of continuing higher losses and the continuing effects of
aggressive competition resulting in lower premiums for the commercial
lines business.
<PAGE> 27
The increase in personal lines loss ratio is principally due to
American Country experiencing its first catastrophic loss in July
1996 in its homeowners' insurance line.
Selling and general expenses increased $1.7 million or 13.5% in 1996
as compared to 1995 due primarily to the increase in acquisition
expense as a result of increased premium revenues. Also, due to this
increased premium volume, salaries and benefits expense increased
17.2% over the previous year.
ASSET PORTFOLIO REVIEW
At December 31, 1997, the Company's total assets of $162.7 million was
comprised of the following: Cash and investments, 79.7%; reinsurance
recoverables, 10.0%, premiums receivable, 4.3%; deferred expenses
(policy acquisition costs and deferred taxes) 4.0%; fixed assets, .5%;
and other assets, 1.5%.
The Company generally invests in securities with fixed maturities with
the objective of providing reasonable returns while limiting liquidity
and credit risk. As a result, its investment portfolio consists
primarily of fixed income debt securities which are rated as
investment grade with a carrying value of $115.5 million and
constituting 97% of the Company's fixed maturity investments.
At December 31, 1997 and 1996, the Company's fixed asset maturity
securities included mortgage-backed bonds of $15.4 million and
$460,000, respectively, which are subject to risks associated with
variable prepayments of the underlying mortgage loans. Prepayments
can cause those securities to have different actual maturities than
that expected at the time of purchase. Securities that have an
amortized cost greater than par that are backed by mortgages that
prepay faster than expected will incur a reduction in yield or loss,
while securities that have an amortized cost less than par that are
backed by mortgages that prepay faster that expected will generate an
increase in gain or yield. The degree to which a security is
susceptible to either gains or losses is influenced by the difference
between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing
interest rate environment and the repayment priority of the securities
in the overall securitization structure.
At December 31, 1997, the following table provides a profile of the
Company's fixed maturity investment portfolio by rating:
<PAGE> 28
S&P/Moody's Rating
- ------------------
Amount
Market Percent of
Value Portfolio
------ ----------
AAA/Aaa
(including US Treasuries
of $20,520) $ 65,061 54.5%
AA/Aa 17,617 14.7%
A/A 24,781 20.7%
BBB/Bbb 8,072 6.8%
All other 3,945 3.3%
------ ----------
Total $119,476 100.0%
====== ==========
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company receives cash principally through
fees and dividends from subsidiaries and borrowings, certain of which
are subject to dividend restrictions and regulatory approval. The
ability of insurance companies to underwrite insurance is based on
maintaining liquidity and capital resources sufficient to pay claims
and expenses as they become due. The primary sources of liquidity for
American Country are funds generated from insurance premiums,
investment income, commissions and fee income, capital contributions
from the Company and proceeds from the sales and maturities of
portfolio investments. The principal expenditures are for payment of
losses and LAE, operating expenses, commissions and dividends to
shareholders. The Company believes its sources of liquidity are
sufficient to meet its cash requirements.
The Company maintains a liquid operating position and follows
investment guidelines that are intended to provide acceptable return
on investment while preserving capital, maintaining sufficient
liquidity to meet obligations and maintaining a sufficient margin of
capital and surplus to ensure American Country's unimpaired ability to
write insurance.
Cash flow generated from operations for the year ended December 31,
1997 and 1996 was $4.0 million and $7.4 million respectively, which
amounts were adequate to meet all obligations during the periods. The
decrease in cash flow for the year ended December 31, 1997 compared to
the year ended December 31, 1996 is primarily related to the decrease
in net income.
On July 28, 1997, the Company obtained a $7 million revolving loan
credit facility under 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 paid in connection with the Acquisition.
Under the terms of the revolving credit agreement, the Company may
borrow up to $7 million at a floating rate of interest. The amount
<PAGE> 29
that may be borrowed under the agreement is reduced to $4.7 million at
July 2000, $2.3 million at July 2001, and expires in July 2002. At
December 31, 1997, the unused portion of the line of credit was $2.2
million. The weighted average interest rate on the outstanding line
of credit was 7.5% as of December 31, 1997. Total interest expense
and interest paid in 1997 was $161,000 and $129,000, respectively.
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. The Company is in compliance with
all covenants of the agreement.
INCOME TAXES
The Company's federal income tax returns for all periods prior to the
Acquisition were consolidated with those of its former owner. Income
tax expenses were computed on a separate company basis.
For the period April 17, 1997, through July 29, 1997, American Country
and Financial Services will file a consolidated return with its
previous parent, American Country Holdings Corp.
Effective with the Acquisition, the Company will file its tax return
on a consolidated basis with its subsidiaries.
REGULATION
In its ongoing effort to improve solvency regulation, the NAIC and
individual states have enacted certain laws and financial statement
changes. The NAIC has adopted Risk-Based Capital ("RBC") requirements
for property and casualty insurance companies to evaluate the adequacy
of statutory capital and surplus in relation to investment and
insurance risks such as asset quality, mortality and morbidity, asset
and liability matching, benefit and loss reserve adequacy, and other
business factors. The RBC formula is used by state insurance
regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that potentially are
inadequately capitalized. In addition, the formula defines new
minimum capital standards that supplement the current system of low
fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is determined by a ratio of the
company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC.
Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specific corrective
action. The levels and ratios are as follows:
<PAGE> 30
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
- ---------------- ----------------------------------
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
*Or, 2.5 with negative trend.
The ratios of total adjusted capital to authorized control level RBC
for American Company were in excess of their required amounts at both
December 31, 1997 and 1996.
The NAIC is currently in the process of recodifying statutory
accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed, statutory accounting
practices, and may result in changes in the Company's insurance
subsidiary's statutory surplus.
The purpose of these regulatory efforts at all levels is to improve
the solvency of insurers. These regulatory initiatives, and the
overall focus on solvency, may intensify the restructuring and
consolidation of the insurance industry. While the impact of these
regulatory efforts on the Company's operations cannot be quantified
until enacted, the Company believes it will be adequately positioned
to compete in an environment of more stringent regulation.
IMPACT OF INFLATION
Property and casualty insurance premiums are established before the
amount of losses and LAE, or the extent to which inflation may affect
such expenses, are known. Consequently, American Country attempts, in
establishing its premiums, to anticipate the potential impact of
inflation. However, for competitive and regulatory reasons, American
Country may be limited in raising its premiums commensurate with
anticipated inflation, in which event American Country, rather than
its insureds, would absorb inflation costs. Inflation also affects
the rate of investment return on American Country's investment
portfolio with a corresponding effect on American Country's investment
income.
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding certain forward-looking
statements contained in the foregoing and elsewhere and in any other
statements made by, or on behalf of, the Company, whether or not in
future filings with the Securities and Exchange Commission. Forward-
looking statements are statements not based on historical facts. In
particular, statements using verbs such as "expect," "intend," "plan,"
<PAGE> 31
"anticipate," "believe" or similar words generally involve forward-
looking statements. Forward-looking statements also include but may
not be limited to, statements relating to future plans, targets and
objectives, financial results, cyclical industry conditions,
government and regulatory policies, the uncertainties of the reserving
process and the competitive environment in which the Company operates.
Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond the Company's control and
subject to change. These uncertainties can affect actual results and
could cause actual results to differ materially from those expressed
in any forward-looking statements. Whether or not actual results
differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable events or developments, some of
which may be national in scope, such as general economic conditions
and interest rates. Some of these events or developments may be
related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
portfolio, and other factors. Investors are also directed to consider
other risks and uncertainties discussed in documents filed by the
Company with the SEC, including Exhibit 99 to the Annual Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1997. The Company disclaims any obligation to update
forward-looking information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on Page F-1.
SUPPLEMENTAL DATA
Unaudited Quarterly Results of American Country Holdings Inc. and Subsidiaries
The following is a summary of unaudited quarterly results of operations for
1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $14,823 $14,677 $15,397 $14,917 $15,231 $15,527 $15,015 $14,777
Total net investment 1,699 1,636 1,880 1,810 1,683 1,757 1,853 1,739
income
Income before (478) 1,061 195 1,784 2,255 1,907 1,610 1,239
income tax
Net income (loss) (118) 642 297 1,248 1,521 1,248 1,404 852
Per share data: Basic
earnings per
common share 0.00 0.02 0.01 0.04 0.04 0.04 0.04 0.02
Diluted earnings
per common share 0.00 0.02 0.01 0.04 0.04 0.04 0.04 0.02
</TABLE>
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On January 15, 1998 the Board of Directors of the Company, upon the
advice of its Audit Committee, elected to not retain Ernst & Young LLP
as its independent auditors, effective for fiscal year 1998. The
decision to change accountants was based upon a cost analysis of
services provided. There were no disagreements between management of
the Company and the former accountants on any matters of accounting
principles or practices, financial statement disclosures, or auditing
scopes or procedures during the Company's two most recent fiscal years
and any subsequent interim period through the date of dismissal. The
accountant's reports on the financial statements of the Company for
the 1996 and 1997 fiscal years were unqualified, not modified as to
uncertainty, audit scope or accounting principles, and did not express
any adverse opinion or disclaimer of opinion.
In addition, on January 15, 1998, the Audit Committee recommended, and
the Board of Directors approved, the appointment of Coopers & Lybrand
L.L.P. as the Company's new independent accountants, effective for
fiscal year 1998. The selection of Coopers & Lybrand L.L.P. was
through a request for proposal process with no consideration requested
or made on the application of accounting principles, the type of audit
<PAGE> 33
opinion that might be rendered on the financial statements, or any
other factor for reaching a decision as to accounting, auditing or
financial reporting issues.
Prior to the Acquisition, Lazar, Levine & Company LLP was engaged as
the Company's principal accountant to audit its financial statements.
Lazar, Levine & Company LLP was replaced by Ernst & Young LLP
effective July 29, 1997.
The reports of Lazar, Levine & Company LLP with respect to the
Company's financial statements for the prior two fiscal years (which
were included in the Annual Report on Form 10-K for the year ending
December 31, 1996, but are not presented herein as a result of the
reverse Acquisition) did not contain an adverse opinion or disclaimer
of an opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles. The Company had no disagreements with
Lazar, Levine & Company LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, but in view of the acquisition by the Company of the assets
of American Country and Financial Services, decided, upon the
recommendation of its Board of Directors, it would be advisable to
retain Ernst & Young LLP, American Country's independent auditors, as
its independent auditors effective after the closing of the
Acquisition.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information regarding directors and executive officers of the
Registrant, reference is made to the Registrant's definitive proxy
statement for its Annual Meeting of Stockholders to be held on May 22,
1998, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1997, which is incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
For information regarding executive compensation, reference is made to
the Registrant's definitive proxy statement for its Annual Meeting of
Stockholders to be held on May 22, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31,
1997, which is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
For information regarding security ownership of certain beneficial
owners and management, reference is made to the Registrant's
definitive proxy statement for its Annual Meeting of Stockholders to
be held on May 22, 1998, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1997, which is
incorporated by reference.
<PAGE> 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information regarding certain relationships and related
transactions, reference is made to the Registrant's definitive Proxy
Statement for its annual meeting of stockholders to be held on May 22,
1998, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1997 which is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
ON FORM 8-K.
List of documents filed as part of this report.
(a)(1) Financial Statements and Schedules.
See List of Financial Statements and Financial Statement
Schedules on page F-1.
(a)(2) The following consolidated financial statement schedules of
the Company listed below are contained in the index to
Financial Statement Schedules on page FS-1 herein:
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information concerning
property/casualty operations
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed in the fourth
quarter of 1997.
(c) Exhibits. See Exhibit Index immediately following financial
statement schedules.
(d) Financial statements, fifty percent or less owned persons.
Not applicable.
<PAGE> 35
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a)(1) and (2), (c), and (d)
LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
AMERICAN COUNTRY HOLDINGS INC.
CHICAGO, ILLINOIS
<TABLE>
<S> <C>
Item 14.
Schedule II Condensed Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . F-2
Condensed Statement of Income . . . . . . . . . . . . . . . . . . . . F-3
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . F-4
Condensed Statement of Stockholders' Equity . . . . . . . . . . . . . F-5
Schedule IV Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Schedule V Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . F-8
Schedule VI Supplemental Information Concerning
Property/Casualty Insurance Operations. . . . . . . . . . . . . . . . F-9
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . . . . . F-14
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . F-15
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . F-17
</TABLE>
F-1
<PAGE> 36
Schedule II
Condensed Financial Information of Registrant
AMERICAN COUNTRY HOLDINGS INC.
Condensed Balance Sheet
(Parent Company Only)
(In Thousands, except par value data)
December 31, 1997
-----------------
ASSETS
- ------
Cash and cash equivalents $ 183
Investments in subsidiaries -
American Country Insurance Company 42,633
American Country Financial Services Corp. 1,659
Due from subsidiaries 169
Prepaid expenses 33
-------
$44,677
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Accrued expenses $ 477
Income taxes payable 2,814
Notes payable - from subsidiary 1,310
Deferred income taxes 136
Note payable 4,800
-------
9,537
-------
Stockholders' equity:
Common stock 320
Preferred stock -
Additional paid in capital 36,848
Net unrealized investment gains
of subsidiaries 1,930
Unfunded pension loss (854)
Retained earnings deficit (3,104)
-------
Total equity 35,140
=======
$44,677
=======
See notes to condensed financial statements.
F-2
<PAGE> 37
Schedule II - Continued
Condensed Financial Information of Registrant - Cont.
AMERICAN COUNTRY HOLDINGS INC.
Condensed Statements of Income
(Parent Company Only)
(In Thousands)
For the period July 29, 1997
thru
December 31, 1997
REVENUES
Net investment income $ 7
Management fees from subsidiaries 250
-------
Total Revenues 257
-------
EXPENSES
General and administrative expenses 186
Interest expense 171
-------
Total Expenses 357
-------
Loss before income tax benefit and
equity in undistributed income of (100)
subsidiaries
Income tax benefit (47)
-------
Loss before equity in undistributed
income of subsidiaries (53)
Undistributed income of subsidiaries 1,344
-------
Net income $1,291
=======
See notes to condensed financial statements.
F-3
<PAGE> 38
SCHEDULE II
Condensed Financial Information of Registrant - Continued
American Country Holdings Inc.
Statement of Cash Flows
(Parent Company Only)
(In Thousands)
For the Period
July 29, 1997 thru
December 31, 1997
Net cash provided by operating activities $ 361
Investing Activities:
Business combination-net of cash acquired (31,862)
-----------
Net cash used by investing activities (31,862)
Financing activities:
Proceeds from note payable 4,800
Issuance of common stock 26,667
Issuance of options and warrants 217
-----------
Net cash provided by financing activities 31,684
-----------
Cash at end of year $ 183
===========
See notes to condensed financial statements.
F-4
<PAGE> 39
Schedule II
Condensed Financial Information of Registrant - Cont.
AMERICAN COUNTRY HOLDINGS INC.
Condensed Statement of Stockholders' Equity
(Parent Company Only)
(In Thousands)
For the period July 29, 1997 thru December 31, 1997
<TABLE>
<CAPTION>
Addi- Net Total
tional Unrealized Unfunded Retained Stock-
Number Common Paid-in Investments Pension Earnings holders'
Of Shares Stock Capital Gains (Losses) Loss Deficit Equity
------- ------ ------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period:
July 29, 1997 pre-
acquisition 7,903 $ 79 $10,205 $-- $-- $(1,548) $8,736
Adjustment for reverse
acquisition 3,398 (887) (2,847) (336)
Issuance of additional
shares 24,001 240 26,427 -- -- -- 26,667
------- ------ ------- -------------- -------- -------- --------
Adjusted beginning
balance at
July 29, 1997 31,904 319 36,632 3,398 (887) (4,395) 35,067
Issuance of
additional shares
upon exercise of
options and
warrants 132 1 216 -- -- -- 217
Net income
(for period from
July 29, 1997 to
December 31, 1997) -- -- -- -- -- 1,291 1,291
Change in pension
liability, net of
deferred taxes -- -- -- -- 33 -- 33
Change in net
unrealized gains -- -- -- (1,468) -- -- (1,468)
------- ------ ------- -------------- -------- -------- --------
Balance at
December 31, 1997 32,026 $320 $36,848 $1,930 $(854) $(3,104) $35,140
======= ====== ======= ============== ======== ======== ========
</TABLE>
See notes to condensed financial statements.
F-5
<PAGE> 40
Schedule II
Condensed Financial Information of Registrant - Cont.
AMERICAN COUNTRY HOLDINGS INC.
(Parent Company Only)
Notes to Condensed Financial Statements
1. These condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto.
2. As discussed in Note 1 to the consolidated financial statements,
on July 29, 1997, the Registrant entered into a business
combination with American Country Insurance Company ("American
Country") that was accounted for as a reverse acquisition (the
"Acquisition"). As a result, the historical financial statements
of the Registrant prior to July 29, 1997 are those of American
Country. The Registrant is the parent company of American
Country only from the date of the Acquisition. Accordingly, the
condensed financial statements of the parent company only
included herein reflect the period from July 29, 1997 through
December 31, 1997. The Company has presented a condensed
statement of stockholders' equity for purposes of disclosing the
beginning equity balances of the Registrant when it became the
parent company of American Country.
F-6
<PAGE> 41
Schedule IV - Reinsurance
-----------------------------------------------
American Country Holdings Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Col A. Col. B Col. C Col. D Col. E
------ ------ ------ ------ -------
Percentage
Ceded to Assumed of Amount
Other from Other Net Assumed
Description Direct Companies Companies Amount to Net
----------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1997
Premiums written: $ 67,576 $ 8,338 $ 840 $ 60,078 1.4%
========= ========= ========= ========= ====
Year ended
December 31, 1996
Premiums written: $ 66,622 $ 7,068 $ 1,206 $ 60,760 2.0%
========= ========= ========= ========= ====
Year ended
December 31, 1995
Premiums written: $ 62,860 $ 7,354 $ 2,038 $ 57,544 3.5%
========= ========= ========= ========= ====
</TABLE>
F-7
<PAGE> 42
Schedule V
Valuation and Qualifying Accounts
American Country Holdings Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Charged to Charged to (A)
Balance at Costs Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses (Describe) (Describe) Period
- ----------- --------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Reserves and allowances
deducted from asset
accounts:
Allowance for bad debts $(155) $ (94) $ (16) $ (265)
Provision for possible
uncollectible reinsurance
recoveries
Year ended December 31, 1996
Reserves and allowances
deducted from asset
accounts:
Allowance for bad debts $ (22) $ (84) $(49) $ (155)
Provision for possible
uncollectible reinsurance
recoveries
Year ended December 31, 1995
Reserves and allowances
deducted from asset
accounts:
Allowance for bad debts $ 0 $ (72) $ 50 $ (22)
Provision for possible
uncollectible reinsurance
recoveries
</TABLE>
(A) Amounts charged off less recoveries
F-8
<PAGE> 43
Schedule VI - Supplemental Information
Concerning Property/Casualty Insurance Operations
American Country Holdings Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
December 31, Year Ended December 31,
------------------------------------------------- --------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Col. K
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Losses and Loss Amortiza-
Reserves Adjustment tion of
Deferred for Unpaid Discount, Total Expenses Deferred Paid Losses
Policy and Claim if any, Net Incurred Related to Policy and Loss
Acquisi- Adjustment Deducted in Unearned Earned Investment Current Prior Acquisi- Adjustment Premiums
Period tion Expenses Column C Premiums Premiums Income Year Year tion Costs Expenses Written
- ------ -------- ---------- ----------- -------- -------- --------- ------ ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $2,544 $99,087 - $13,413 $59,814 $7,025 $53,613 $(464) $9,104 $48,626 $60,078
1996 2,866 90,965 - 13,243 60,550 7,032 47,878 967 8,993 43,977 60,760
1995 2,971 81,633 - 12,969 56,909 6,465 48,382 (3,077) 8,119 37,216 57,544
</TABLE>
F-9
<PAGE> 44
Report of Independent Auditors
Board of Directors
American Country Holdings Inc.
We have audited the accompanying consolidated balance sheets of
American Country Holdings Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of American Country Holdings Inc. at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set
forth therein.
/s/Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
February 24, 1998
F-10
<PAGE> 45
American Country Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
ASSETS (IN THOUSANDS)
Investments (NOTES 2 AND 3):
Available-for-sale:
Fixed maturities - At fair value (amortized cost: 1997 -
$117,542,000; 1996 - $71,961,000) $119,476 $ 73,025
Equity securities - At fair value (cost: 1997 -
$1,487,000; 1996 - $9,393,000) 1,622 9,743
Fixed maturities held-to-maturity - At amortized cost
(fair value: 1996 - $27,895,000) - 27,677
Mortgage loans - 2,500
Collateral loans - 62
Short-term investments - 1,230
-------- --------
Total investments 121,098 114,237
Cash and cash equivalents 8,499 9,868
Premiums receivable (net of allowance: 1997 - $265,000;
1996 - $155,000) 7,021 5,762
Reinsurance recoverable 16,254 12,900
Deferred income taxes 3,899 3,319
Deferred policy acquisition costs 2,544 2,866
Accrued investment income 1,765 1,917
Property and equipment 882 694
Other assets 699 227
-------- --------
Total assets $162,661 $151,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 99,087 $ 90,965
Unearned premiums 13,413 13,243
Note payable (NOTE 8) 4,800 -
Accrued expenses 4,388 4,404
Income taxes payable 2,694 365
Other liabilities 3,139 2,376
-------- --------
Total liabilities 127,521 111,353
F-11
<PAGE> 46
Commitments and contingent liabilities (NOTES 11 AND 12)
Stockholders' equity (NOTES 1 AND 7):
Common stock - $.01 par value:
Authorized - 60,000,000 shares
Issued and outstanding - shares: 1997 - 32,036,000;
1996 - 35,557,000 320 356
Preferred stock: Authorized - 2,000,000 shares; Issued -- --
and outstanding - 0 shares
Additional paid-in capital 36,848 621
Net unrealized investment gains 1,930 919
Unfunded pension loss (854) (887)
Retained earnings (deficit) (3,104) 39,428
-------- --------
Total stockholders' equity 35,140 40,437
-------- --------
$162,661 $151,790
========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE> 47
American Country Holdings Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Premiums earned $59,814 $60,550 $56,909
Net investment income 7,025 7,032 6,465
Net realized gains on investments 1,613 915 222
Other income 331 219 150
-------- -------- --------
Total revenues 68,783 68,716 63,746
LOSSES AND EXPENSES
Losses and loss adjustment expenses 53,149 48,845 45,305
Amortization of deferred policy acquisition costs
9,104 8,993 8,119
3,968 3,867 3,066
Administrative and general expenses -------- -------- --------
Total losses and expenses 66,221 61,705 56,490
-------- -------- --------
Income before income taxes 2,562 7,011 7,256
Provision for income tax (NOTE 5):
Current 4,163 2,320 2,195
Deferred (credit) (3,670) (334) 92
-------- -------- --------
493 1,986 2,287
-------- -------- -------
Net income $ 2,069 $ 5,025 $ 4,969
======== ======== ========
Basic and dilutive earnings per share $ .06 $ .14 $ .14
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE> 48
American Country Holdings Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
ADDI- UNREALIZED TOTAL
TIONAL INVESTMENT UNFUNDED RETAINED STOCK-
NUMBER COMMON PAID-IN GAINS PENSION EARNINGS HOLDERS'
OF SHARES STOCK CAPITAL (LOSSES) LOSS (DEFICIT) EQUITY
--------- ------ ------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 2,500 $2,500 $621 $(2,060) $ - $32,790 $33,851
Adjusted for reverse acquisition (NOTES 1 33,057 (2,144) - - - 2,144 -
and 7)
Net income - - - - - 4,969 4,969
Change in net unrealized investment gains - - - 4,247 - - 4,247
Dividends to stockholders - - - - - (3,000) (3,000)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 35,557 356 621 2,187 - 36,903 40,067
Net income - - - - - 5,025 5,025
Change in net unrealized investment gains - - - (1,268) - - (1,268)
Dividends to stockholders - - - - - (2,500) (2,500)
Pension liability, net of deferred taxes - - - - (887) - (887)
(NOTE 9) -------- -------- -------- --------- -------- -------- --------
Balance at December 31, 1996 35,557 356 621 919 (887) 39,428 40,437
Redemption of shares recognized as part of
reverse acquisition (35,557) (356) (621) - - (39,273) (40,250)
Acquisition of Western Systems 7,903 79 10,205 - - (5,328) 4,956
Issuance of additional shares 24,001 240 26,427 - - - 26,667
Issuance of additional shares upon exercise
of options and warrants 132 1 216 - - - 217
Net income - - - - - 2,069 2,069
Change in net unrealized investment gains - - - 1,011 - - 1,011
Change in pension liability, net of
deferred taxes (NOTE 9) - - - - 33 - 33
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 32,036 $ 320 $36,848 $ 1,930 $(854) $ (3,104) $35,140
======== ======== ======== ======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<PAGE> 49
American Country Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,069 $ 5,025 $ 4,969
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in premiums receivables and
reinsurance recoverables (4,613) (6,203) 717
Change in reserve for unpaid losses
and loss adjustment expenses 8,122 9,332 8,424
Change in reserve for unearned premiums 170 274 459
Amortization of deferred policy
acquisition costs 9,104 8,993 8,119
Deferred policy acquisition costs (8,782) (8,888) (8,831)
capitalized
Net realized gains on investments (1,613) (915) (222)
Provision for depreciation 308 252 502
Other (809) (440) (823)
-------- -------- --------
Net cash provided by operating activities 3,956 7,430 13,314
INVESTING ACTIVITIES
Fixed maturities - Available-for-sale:
Purchases (141,633) (22,924) (24,211)
Sales 109,759 592 208
Maturities, calls, and prepayments 10,038 5,965 1,338
Equity securities - Available-for-sale:
Purchases (1,968) (2,595) (1,817)
Sales 10,646 5,193 6,884
Fixed maturities - Held-to-maturity:
Purchases - (482) (3,388)
Maturities, calls, and prepayments 4,715 8,252 8,680
Net sales of short-term investments 1,230 3,314 166
Sale or maturity of other investments 2,562 1,066 1,706
Property and equipment and other (496) (55) (380)
Business combination - Net of cash acquired (31,862) - -
-------- -------- --------
Net cash used by investing activities (37,009) (1,674) (10,814)
F-15
<PAGE> 50
FINANCING ACTIVITIES
Proceeds from note payable 4,800 - -
Issuance of common stock 26,667 - -
Issuance of options and warrants 217 - -
Dividends paid to stockholders - (2,500) (3,000)
-------- -------- --------
Net cash provided (used) by financing activities 31,684 (2,500) (3,000)
-------- -------- --------
Net increase (decrease) in cash (1,369) 3,256 (500)
Cash and cash equivalents at beginning of year 9,868 6,612 7,112
-------- -------- --------
Cash and cash equivalents at end of year $ 8,499 $ 9,868 $ 6,612
========= ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-16
<PAGE> 51
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION
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 $40,300,000 (the "Acquisition").
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
businesses.
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:
YEAR ENDED DECEMBER 31
1997 1996
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues $68,783 $68,716
Net income 1,769 4,528
Net income per share .05 .13
F-17
<PAGE> 52
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Transportation lines, principally liability and collision coverage for
taxicabs and limousine companies in the city of Chicago and
surrounding suburbs, accounted for approximately 43% of American
Country's 1997 gross premiums written. Commercial lines, principally
workers' compensation, multiperil and auto liability and physical
damage accounted for approximately 44% of American Country's gross
premiums written in 1997, 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. The Company
classifies its business in one operating segment, property/casualty
insurance.
Yellow Cab Company was an affiliate of American Country prior to
December 31, 1996, and accounted for $10,972,000, $11,299,000, and
$11,080,000 of premiums earned in 1997, 1996, and 1995, respectively.
In addition, included in premiums earned is $7,447,000, $7,590,000,
and $6,179,000 in 1997, 1966, and 1995, respectively, related to
Checker Taxi members.
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 Acquisition, Western Systems was a
public shell actively seeking a business combination with an operating
business that would use its available cash.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting
principles and include the accounts and operations of ACHI and its
wholly owned subsidiaries, American Country and ACFS. Significant
intercompany accounts and transactions have been eliminated.
F-18
<PAGE> 53
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
USE OF ESTIMATES
The preparation of financial statements of insurance companies
requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions could change in the future as more
information becomes known which could impact the amounts reported and
disclosed herein.
PREMIUM REVENUE
Premiums are earned pro rata over the terms of the policies. The
reserve for unearned premiums is determined on a daily basis.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses (LAE) represent the estimated
ultimate net cost of all reported and unreported losses incurred
through December 31. The reserves for unpaid losses and LAE are
estimated using individual case-basis valuations and statistical
analyses and are not discounted. Those estimates are subject to the
effects of trends in loss severity and frequency. Although
considerable variability is inherent in the estimates of reserves for
losses and LAE, management believes that the reserves for losses and
LAE are adequate. The estimates are continually reviewed and adjusted
as necessary as experience develops or new information becomes known;
such adjustments are included in current operations. Salvage and
subrogation recoveries are accrued when the related losses are
incurred.
REINSURANCE
Reinsurance premiums, losses, and LAE are accounted for on bases
consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts. Premiums earned
and losses incurred ceded to other companies have been reported as a
reduction of premium revenue and losses and LAE. Commissions allowed
by reinsurers on business ceded have been accounted for as a reduction
of the related policy acquisition costs. Reinsurance recoverables are
reported relating to the portion of reserves and paid losses and LAE
that are ceded to other companies.
DEFERRED POLICY ACQUISITION COSTS
Costs of acquiring new business, principally commissions and premium
taxes, are deferred and amortized as the related premium is earned.
F-19
<PAGE> 54
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
INVESTMENTS
The Company follows Financial Accounting Standards Board (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.
Fixed maturities (bonds and redeemable preferred stocks) that the
Company has both the positive intent and ability to hold to maturity
are carried at amortized cost. Fixed maturities that the Company does
not have the positive intent and ability to hold to maturity and all
equity securities (common stocks and nonredeemable preferred stocks)
are classified as available-for-sale and are reported at fair value.
Unrealized gains and temporary unrealized losses on fixed maturities
available for sale and equity securities are excluded from income and
are recorded directly to stockholders' equity, net of related deferred
income taxes. The Company has not classified any fixed maturity or
equity securities as trading.
FASB Statement No. 115 allows companies to transfer securities between
categories for events that are isolated, nonrecurring, and unusual
that could not have been reasonably anticipated. Accordingly, 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 $23,000,000 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.
Mortgage and collateral loans are carried at amortized cost. Short-
term investments are carried at cost, which approximates fair value,
and include investments with maturities of less than one year at the
date of acquisition.
Net investment income consists primarily of interest and dividends
less expenses. Interest on fixed maturities and mortgage loans,
adjusted for any amortization of discount or premium, is recorded as
income when earned and includes adjustments resulting from anticipated
prepayments of collateralized mortgage obligations. Investment
expenses are accrued as incurred. Realized investment gains or losses
are computed using specific costs of securities sold, and include
write-downs on investments having an other-than-temporary decline in
value.
INCOME TAXES
American Country's federal income tax return was consolidated with
Great Dane Holdings Inc. and subsidiaries for the years ending
December 31, 1995 and 1996, and for the period January 1, 1997 to
F-20
<PAGE> 55
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
April 16, 1997. Income tax expense during those periods was 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, American Country
Holdings Corp. Effective with the Acquisition the Company will file
its tax return on a consolidated basis with its subsidiaries.
Deferred income tax has been provided for the effects of temporary
differences between financial reporting and tax bases of assets and
liabilities and has been measured using the enacted marginal tax rates
and laws that are currently in effect.
PROPERTY AND EQUIPMENT
Property and equipment, primarily data processing equipment and
leasehold improvements, are reported at depreciated cost, with
depreciation recorded on a straight-line basis with lives of five
years for data processing equipment and a range of six to eleven years
for leasehold improvements. Accumulated depreciation amounted to
$2,853,000 and $2,545,000 at December 31, 1997 and 1996, respectively.
STOCK OPTIONS
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.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted-average
number of common shares outstanding, excluding any dilutive effect of
options and warrants. Dilutive earnings per share is computed based
on the weighted-average number of common shares outstanding plus the
dilutive effects of options and warrants. The dilutive effect of
options and warrants is calculated under the treasury stock method
using the average market price for the period. Earnings per share is
calculated as follows (in thousands, except per share data):
F-21
<PAGE> 56
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Net income $ 2,069 $ 5,025 $ 4,969
======== ======== ========
Weighted average basic shares
outstanding 34,028 35,557 35,557
Shares for options and warrants 431 - -
-------- -------- --------
Dilutive shares outstanding 34,459 35,557 35,557
======== ======== ========
Basic and dilutive earnings per share $ .06 $ .14 $ .14
======== ======== ========
CASH FLOWS
Short-term investments, consisting principally of commercial paper
which have a maturity of 90 days or less at date of purchase, are
considered cash equivalents.
FINANCIAL INSTRUMENTS
Fair value for fixed maturity and equity securities is based on quoted
market prices or, if they are not actively traded, on estimated values
obtained from independent pricing services. Fair values of other
financial instruments approximate their carrying values.
ACCOUNTING CHANGES
In 1997, the FASB issued Statement No. 128, "Earnings Per Share." The
Company adopted this statement in its December 31, 1997 financial
statements and has restated prior periods presented as required.
Implementation of this Statement did not have any effect on the
Company's financial statements.
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
classifying components of comprehensive income in the financial
statements and requires that the accumulated balance of other
comprehensive income be displayed separately from retained earnings
and additional paid-in capital in the equity section of a balance
sheet. The FASB also issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in 1997. This
Statement establishes standards for providing disclosures related to
products and services, geographic area, and major customers. The
Company anticipates adopting these statements in its 1998 financial
statements as required. Implementation of these statements is not
expected to have a material effect on the Company's financial
statements.
F-22
<PAGE> 57
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
RECLASSIFICATION
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the 1997 presentation.
3. INVESTMENTS
The components of net investment income are as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Fixed maturities $6,724 $6,496 $5,719
Equity securities 524 695 768
Short-term investments 678 356 473
Other 224 299 424
-------- -------- --------
Gross investment income 8,150 7,846 7,384
Investment expenses 1,125 814 919
-------- -------- --------
Net investment income $7,025 $7,032 $6,465
======== ======== ========
Realized gains on investments are as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Fixed maturities:
Gross gains $1,053 $ 61 $ 100
Gross losses (213) (7) (82)
Equity securities:
Gross gains 904 991 560
Gross losses (131) (130) (356)
------- ------- -------
$1,613 $915 $ 222
======= ======= =======
F-23
<PAGE> 58
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The components of net unrealized investment gains are as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Fixed maturities available-for-sale $1,934 $1,064 $2,665
Equity securities available-for-sale 135 350 700
Deferred tax charge (139) (495) (1,178)
------- ------- -------
Net unrealized investment gains (losses) $1,930 $ 919 2,187
======= ======= =======
In connection with the Acquisition, the tax basis of certain assets
and liabilities changed. As a result, the deferred tax charge related
to the net unrealized investment gains at December 31, 1997 of
$139,000 does not represent the corporate federal income tax rate of
34%.
The changes in net unrealized investment gains (losses) are as
follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Fixed maturities available-for-sale $ 870 $(1,601) $4,221
Equity securities available-for-sale (215) (350) 2,399
Deferred tax credit (charge) 356 683 (2,373)
------- ------- -------
Total $1,011 $(1,268) $4,247
======= ======= =======
The change in net unrealized investment gains (losses) on fixed
maturities held-to-maturity was $(218,000), $(596,000), and $2,359,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
F-24
<PAGE> 59
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following is a summary of held-to-maturity securities and
available-for-sale securities:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -----------------------------
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
U.S. government $ 21,105 $ 233 $ 10 $ 21,328
States and political subdivision 37,001 775 76 37,700
Foreign governments 249 11 - 260
Corporate securities 43,659 1,223 103 44,779
Mortgage-backed securities 15,528 149 268 15,409
-------- -------- -------- --------
Total fixed maturities 117,542 2,391 457 119,476
Equity securities 1,487 137 2 1,622
-------- -------- -------- ---------
Total $119,029 $2,528 $459 $121,098
======== ======== ======== =========
DECEMBER 31, 1996
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
States and political subdivisions $ 19,501 $ 310 $ 37 $ 19,774
Foreign governments 248 5 - 253
Corporate and other 52,212 1,234 448 52,998
-------- -------- -------- --------
Total fixed maturities 71,961 1,549 485 73,025
Equity securities 9,393 568 218 9,743
-------- -------- -------- --------
Total $ 81,354 $2,117 $703 $ 82,768
======== ======== ======== ========
HELD-TO-MATURITY SECURITIES
Fixed maturities:
U.S. government and agencies $ 3,313 $ 124 $ 14 $ 3,423
States and political subdivisions 8,304 64 13 8,355
Corporate and other 16,002 173 118 16,057
Mortgage-backed securities 58 2 - 60
-------- -------- -------- --------
Total $ 27,677 $ 363 $145 $ 27,895
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of fixed maturities by contractual
maturity at December 31, 1997, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
F-25
<PAGE> 60
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
--------- -----
(IN THOUSANDS)
Due in one year or less $ 1,584 $ 1,596
Due after one year through five years 46,137 46,816
Due after five years through ten years 28,075 28,573
Due after ten years 26,218 27,082
Mortgage-backed-securities 15,528 15,409
-------- --------
$117,542 $119,476
======== ========
At December 31, 1997, investments in fixed maturities with an admitted
asset value of $2,718,000 were on deposit with state insurance
departments to satisfy regulatory requirements.
4. REINSURANCE
Certain premiums and losses and LAE are assumed from, and ceded to,
other insurance companies under various reinsurance agreements. Those
agreements principally provide the Company with increased capacity to
write larger risks and to maintain its exposure to loss within its
capital resources.
Assumed and ceded reinsurance arrangements are summarized as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
ASSUMED REINSURANCE
Premiums written $ 840 $ 1,206 $2,038
Premiums earned 862 1,344 1,921
Losses and LAE 598 495 1,165
Losses and LAE reserves* 2,575 2,769 3,332
Unearned premium reserves * 264 286 424
CEDED REINSURANCE
Premiums written 8,338 7,068 7,354
Premiums earned 8,432 7,004 7,530
Losses and LAE 6,261 7,184 3,929
Losses and LAE reserves* 15,114 11,515 7,051
Unearned premium reserves* 703 797 733
*As of year-end.
F-26
<PAGE> 61
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company remains obligated for amounts reinsured in the event that
reinsurers do not meet their obligations.
5. FEDERAL INCOME TAXES
Reconciliation of the corporate federal income tax rate to the
Company's effective income tax rates are as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Corporate federal income tax rate 34% 35% 35%
Nontaxable investment income (15) (9) (8)
State income taxes - 5 4
Other - (3) -
---- ---- ----
Effective income tax rate 19% 28% 31%
==== ==== ====
In connection with the Acquisition, the tax basis of certain assets
and liabilities changed. The current tax provision increased while
the deferred tax provision decreased as a result of the change in tax
basis.
F-27
<PAGE> 62
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31
1997 1996
---- ----
(IN THOUSANDS)
Deferred tax assets:
Insurance reserves $4,497 $4,433
Pension liability 440 478
Other - Net 274 338
------ ------
Total deferred tax assetS 5,211 5,249
Deferred tax liabilities:
Policy acquisition costs 865 1,003
Unrealized investment gains 139 495
Other - Net 308 432
------ ------
Total deferred tax liabilities 1,312 1,930
------ ------
Net deferred tax assets $3,899 $3,319
====== ======
The nature of the Company's deferred tax assets and liabilities is
such that the reversal pattern for these temporary differences should
generally result in realization of the deferred tax assets.
Accordingly, no valuation allowance is considered necessary.
Taxes paid amounted to $1,410,000, $1,550,000, and $1,796,000 for
1997, 1996, and 1995, respectively.
F-28
<PAGE> 63
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and
ending reserve balances for losses and LAE:
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Balance at January 1 $90,965 $81,633 $73,209
Less reinsurance recoverables 11,515 7,051 6,716
------- ------- -------
Net balance at January 1 79,450 74,582 66,493
Add net incurred claims related to:
Current year 53,613 47,878 48,382
Prior years (464) 967 (3,077)
------- ------- -------
Total net claims incurred 53,149 48,845 45,305
Deduct net claims paid related to:
Current year 19,624 18,044 14,709
Prior years 29,002 25,933 22,507
------- ------- -------
Total net claims paid 48,626 43,977 37,216
------- ------- -------
Net balance at December 31 83,973 79,450 74,582
Plus reinsurance recoverables 15,114 11,515 7,051
------- ------- -------
Balance at December 31 $99,087 $90,965 $81,633
======= ======= =======
7. STOCKHOLDER'S EQUITY
Statutory accounting practices prescribed or permitted for American
Country by regulatory authorities differ from generally accepted
accounting principles. American Country's statutory-basis capital and
surplus was $34,555,000 and $34,080,000 at December 31, 1997 and 1996,
respectively, and American Country's statutory-basis net income was
$2,590,000, $4,088,000, and $3,905,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Property/casualty insurance companies are subject to certain Risk-
Based Capital (RBC) requirements as specified by the National
Association of Insurance Commissioners. Under those requirements, the
amount of statutory capital and surplus maintained by a
property/casualty insurance company is to be determined based on the
various risk factors. At December 31, 1997, American Country exceeds
the RBC requirements.
F-29
<PAGE> 64
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The maximum amount of dividends that can be paid from American Country
to ACHI without regulatory approval is the greater of net income or
10% of capital and surplus, each as of the preceding December 31.
Accordingly, the maximum total dividend amount available in 1998 is
$3,455,000. American Country did not declare or pay dividends to ACHI
during 1997.
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
recorded retroactively in the accompanying consolidated balance
sheets.
In connection with the Acquisition, the Company restated the number of
shares of common stock outstanding as of January 1, 1995 to be
consistent with the equivalent shares of common stock outstanding
following the Acquisition. The restatement of common stock
outstanding resulted in an increase to common stock and a
corresponding decrease to retained earnings.
Also, in connection with the Acquisition, the Company sold and issued
16,000,000 shares of its common stock to certain former shareholders
of the former Parent of American Country and 8,000,000 shares of its
common stock to Frontier Insurance Group. The proceeds from the
issuance of the common stock were $26,700,000.
At December 31, 1997, the Company had 2,057,000 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 August 31, 1998.
8. 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 $7,000,000 at a floating rate of
interest. The amount of funds that may be borrowed under the
agreement is reduced to $4,667,000 at July 2000, $2,333,000 at July
2001, and expires in July 2002. At December 31, 1997, the unused
portion of the line of credit is $2,200,000. The weighted-average
interest rate on the outstanding line of credit is 7.5% as of December
31, 1997. Total interest expense and interest paid in 1997 was
$161,000 and $129,000, respectively.
The line-of-credit agreement contains various debt covenants including
certain financial covenants and commitments fees, which are .3875% per
annum of the unused line of credit.
F-30
<PAGE> 65
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. EMPLOYEE BENEFITS
RETIREMENT PLAN
Substantially all salaried employees of the Company who are at least
21 years of age are eligible to participate in a 401(k) retirement
plan. Employees may contribute from 1% to 15% of their eligible
compensation to the plan. The Company matches 25% of employee
contributions up to a maximum of 8% of eligible compensation. Total
contributions by the Company to the plan were $83,000, $76,000, and
$73,000 in 1997, 1996, and 1995, respectively.
PENSION PLAN
Prior to December 4, 1996, substantially all salaried employees of the
Company were covered by a defined-benefit pension plan sponsored by
its former Parent. Benefits were based on the employee's length of
service and wages and benefits, as defined by the plan. The former
Parent's funding policy of the plan was generally to contribute
amounts required to maintain funding standards in accordance with the
Employee Retirement Income Security Act. Pension cost allocated to
the Company amounted to $265,000 and $175,000 in 1996 and 1995,
respectively.
In connection with the change in ownership discussed in Note 1, the
plan was split up and a separate defined-benefit pension plan for the
Company was established. Accordingly, effective December 4, 1996,
substantially all salaried employees of the Company were covered by a
defined-benefit pension plan sponsored by the Company. Benefits and
funding for the new plan are consistent with the plan in which
employees were previously participants.
Effective December 31, 1997, upon resolution by the board of
directors, the plan is frozen.
A summary of the components of the net periodic pension cost for this
new plan, for the year ending December 31, 1997, is as follows (in
thousands):
Service cost $258
Interest cost 192
Actual return on plan assets (101)
Net amortized and deferral 24
----
Net periodic pension cost $373
====
The Company recognized a net accrued pension liability of $1,294,000
and $1,365,000 at December 31, 1997 and 1996, respectively,
representing the unfunded portion of the separate plan as a result of
F-31
<PAGE> 66
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
the split up of the previous pension plan. The net accrued pension
liability also resulted in a decrease of $854,000 and $887,000 at
December 31, 1997 and 1996, respectively, in stockholders' equity and
a deferred tax asset of $440,000 and $478,000 at December 31, 1997 and
1996, respectively.
The following table sets forth the funded status and amounts
recognized in the consolidated balance sheets as of December 31 for
the Company's defined-benefit pension plan:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $2,336 $1,902
====== ======
Accumulated benefit obligation $2,677 $2,208
====== ======
Projected benefit obligation $2,677 $2,518
Plan assets (principally guaranteed investment
contracts with insurance companies) 1,383 1,247
------ ------
Projected benefit obligation in excess of plan assets 1,294 1,271
Unrecognized net gain - (23)
Unrecognized prior service cost - (9)
Unrecognized net transition obligation - 126
------ ------
Accrued pension liability $1,294 $1,365
====== ======
</TABLE>
Prior to the determination to freeze the plan, the unrecognized net
gain, prior service cost, and transition obligation were being
amortized over a 15-year period. Other assumptions used in the
calculation of the actuarial present value of the projected benefit
obligation were as follows:
1997 1996
---- ----
Assumed discount rate 7.00% 7.50%
Rate of compensation increase 3.00 3.00
Expected long-term rate of return on plan assets 8.00 9.00
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined-benefit plan and the 401(k) retirement
plan, substantially all salaried employees of the Company are covered
by a postretirement benefit plan. The plan is noncontributory and
F-32
<PAGE> 67
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
provides medical and life insurance benefits for employees who retire
after attaining age 62 with 25 years of service. The net periodic
postretirement benefit cost was $70,000, $73,000, and $76,000 during
1997, 1996, and 1995, respectively. The accumulated postretirement
benefit cost at December 31, 1997 and 1996, was $584,000 and $537,000,
respectively.
10. STOCK OPTION PLAN
Effective with the Acquisition, the Company obtained a Stock Option
Plan (the Plan), as amended, under which options to purchase up to a
maximum 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 Western System's stockholders agreed to an
amendment to the Plan, whereby all options outstanding would become
immediately exercisable, without regard to vesting provisions, upon
the sale of the assets of the Company.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123. For the purposes of pro forma
disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. As a result of the Plan
amendment whereby the options were 100% vested prior to the
Acquisition, there is no pro forma effect on net income and earnings
per share for the Company, as any pro forma income statement impact
would have been recorded by Western Systems prior to the Acquisition.
A summary of the Company's stock option activity and related
information for the year ended December 31, 1997, consists of the
following:
F-33
<PAGE> 68
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
------- ------
July 29, 1997 - Obtained
through Acquisition 474,000 $2.24
Canceled (28,000) 1.34
Exercised (56,000) 1.39
------- -----
Outstanding at December 31, 1997 390,000 $2.43
======= =====
A summary of options outstanding at December 31, 1997, is as follows:
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF OPTIONS REMAINING LIFE AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
----- ----------- ------------ -----
$ .60 45,000 5.6 $ .60
1.76 - 2.75 125,000 3.2 2.13
2.76 - 3.75 220,000 5.9 2.97
------------- ------- --- ----
$ .60 - 3.75 390,000 4.3 $2.43
============= ======= === ====
All of the shares outstanding at December 31, 1997 are exercisable.
11. COMMITMENTS
American Country leases office space and equipment under noncancelable
operating leases expiring in various years through 2002. Certain of
those leases provide for escalation based on increases in operating
expenses and the Consumer Price Index. Rent expense was $870,000,
$816,000, and $821,000 in 1997, 1996, and 1995, respectively.
F-34
<PAGE> 69
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
At December 31, 1997, future rental commitments under those leases are
as follows (in thousands):
1998 $ 841
1999 873
2000 878
2001 884
2002 719
------
$4,195
======
12. CONTINGENCIES
The Company is named as defendant in various legal actions arising
principally from claims made under insurance policies and contracts.
Those actions are considered by the Company in estimating the reserves
for losses and LAE. The Company's management believes that the
resolution of those actions will not have a material adverse effect on
the Company's financial position or results of operations.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of fair values for certain
financial instruments. The fair value disclosures are not intended to
encompass the majority of claim liabilities, various other
nonfinancial instruments, or other assets related to the Company's
business. Accordingly, care should be exercised in deriving
conclusions about the Company's business or financial condition based
on the fair value disclosures.
The Company does not have any financial instruments held or issued for
trading purposes. The carrying value and fair value of certain of the
Company's financial instruments are as follows:
F-35
<PAGE> 70
American Country Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
DECEMBER 31
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(IN THOUSANDS)
ASSETS
Fixed maturities and equity
securities (NOTE 3) $121,098 $121,098 $110,445 $110,663
Mortgage loans on real estate - - 2,500 2,500
Collateral loans - - 62 62
Cash, receivables, and
short-term investments 15,520 15,520 16,860 16,860
Accrued investment income 1,765 1,765 1,917 1,917
LIABILITIES
Accrued expenses 4,388 4,388 4,404 4,404
F-36
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 COUNTRY HOLDINGS INC.
By: /s/ Martin L. Solomon
===================================
Chairman of the Board and Chief
Executive Officer
Date: March 31, 1998
<PAGE> 72
Pursuant to the requirements of the Securities Exchange Act of
1934, this annual report on Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/Martin L. Solomon
===================== Chairman of the Board, March 31, 1998
Martin L. Solomon Chief Executive Officer
and Director
/s/James P. Byrne
===================== Treasurer, Vice March 31, 1998
James P. Byrne President, Chief
Financial Officer and
Principal Accounting
Officer
/s/Peter H. Foley
===================== Director March 31, 1998
Peter H. Foley
/s/Herbert M. Gardner
===================== Director March 31, 1998
Herbert M. Gardner
/s/William J. Barrett
===================== Director March 31, 1998
William J. Barrett
March 31, 1998
/s/Edwin W. Elder Director
=====================
Edwin W. Elder
/s/Wilmer J. Thomas, Jr.
===================== Director March 31, 1998
Wilmer J. Thomas, Jr.
<PAGE> 73
EXHIBIT INDEX
Exhibit
No. Description
======= ============================================================
3 ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated By-Laws of the Company
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4 Credit Agreement dated as of July 29, 1997 between the
Company and The First National Bank of Chicago, individually
and as agent, was filed with the Commission as Exhibit 4 to
the Company's Report on Form 8-K dated August 31, 1997 and
is incorporated herein by reference.
10 MATERIAL CONTRACTS
10.15a Asset Purchase Agreement dated April 30, 1997 by and among
The Western Systems Corp. (the predecessor of the Company),
American Country Insurance Company, American Country
Financial Services Corp., American Country Holdings Corp.,
David R. Markin, Martin L. Solomon, Allan R. Tessler, Wilmer
J. Thomas, Jr., Daniel R. DeLeo, Edwin W. Elder and Wayne R.
Hannah, Jr. was filed with the Commission as Exhibit 10.15a
to The Western Systems Corp.'s Form 10-Q for the quarter
ended June 30, 1997 and is incorporated herein by reference.
10.15b Amendment No. 1 to the Asset Purchase Agreement dated as of
May 30, 1997 was filed with the Commission as Exhibit 10.15b
to The Western Systems Corp.'s Form 10-Q for the quarter
ended June 30, 1997 and is incorporated herein by reference.
10.16 Investment Agreement, dated as of April 30, 1997 among The
Western Systems Corp., Frontier Insurance Group, Inc.,
Martin L. Solomon, and Wilmer J. Thomas, Jr. was filed with
the Commission as Exhibit 10.16 to The Western Systems
Corp.'s Form 10-Q for the quarter ended June 30, 1997 and is
incorporated herein by reference.
10.17 Agreement dated as of April 30, 1997 among The Western
Systems Corp., Frontier Insurance Group, Inc. William J.
Barrett, Herbert M. Gardner,. Martin L. Solomon and Wilmer
J. Thomas, Jr. to create executive committee was filed with
the Commission as Exhibit 10.17 to The Western Systems
Corp.'s Form 10-Q for the quarter ended June 30, 1997 and is
incorporated herein by reference.
<PAGE> 74
Exhibit
No. Description
======= ============================================================
10.18 Agreement dated as of April 30, 1997 among The Western
Systems Corp., William J. Barrett, Herbert M. Gardner,
Martin L. Solomon and Wilmer J. Thomas, Jr. regarding fees
for mergers and acquisition transactions was filed with the
Commission as Exhibit 10.18 to The Western Systems Corp.'s
Form 10-Q for the quarter ended June 30, 1997 and is
incorporated herein by reference.
21 SUBSIDIARIES OF THE REGISTRANT
21 Subsidiaries of American Country Holdings Inc.
23 CONSENTS OF EXPERTS AND COUNSEL
23 Consent of Ernst & Young LLP
27 FINANCIAL DATA SCHEDULE
27 Financial Data Schedule
99 ADDITIONAL EXHIBITS
99 American Country Holdings Inc. Safe Harbor Statement
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE WESTERN SYSTEMS CORP.
THE WESTERN SYSTEMS CORP. (the "Corporation"), a corporation
organized and existing under the laws of the State of Delaware, does
hereby certify:
I. The name of the Corporation is The Western Systems
Corp.
II. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the Stare of
Delaware on May 30, 1978 under then name Vigilance Systems Corp.
III. This Amended and Restated Certificate of Incorporation
of the Corporation further amends and restates the Certificate of
Incorporation of the Corporation, as amended prior to the date hereof,
by principally (a) revising those provisions of Article First relating
to the name of the Corporation, (b) deleting those provisions set
forth in Article Third as to the nature of the Corporation's business
or purposes to be conducted or promoted other than to engage in any
lawful act or activity for which corporations may be organized under
the General Corporation Law of the State of Delaware, (c) increasing
the number of shares of Common Stock authorized in Article Fourth and
decreasing the par value per share of such Common Stock, (d) deleting
Article Fifth in its entirety that sets forth the names and addresses
of the Incorporators, (e) deleting Article Sixth in its entirety
relating to the perpetual existence of the Corporation, (f) deleting
certain provisions of Article Seventh relating to specified powers of
the Board of Directors of the Corporation, including such Board's
ability to designate one or more committees of such Board, (g)
deleting certain provisions of Article Eighth relating to meetings of
stockholders being held and books of the Corporation being kept within
or outside of the State of Delaware, (h) deleting Article Ninth in its
entirety regarding the Corporation's reservation of the right to
amend, alter, change or repeal any provision contained in the
Certificate of Incorporation of the Corporation, (i) deleting Article
Tenth in its entirety relating to the classification of directors and
(j) revising those provisions of Article Eleventh relating to the
elimination of personal liability of directors and the indemnification
of persons acting on behalf of the Corporation.
IV. The amendments and the restatement of the Certificate
of Incorporation of the Corporation herein certified have been duly
adopted by the directors and stockholders of the Corporation in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
<PAGE> 76
V. The text of the Certificate of Incorporation of the
Corporation as amended or supplemented heretofore is hereby restated,
integrated and further amended to read in its entirety as follows:
"FIRST: The name of the Corporation is "American Country
Holdings Inc." (the "Corporation").
SECOND: The address of its registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, City
of Wilmington, County of New Castle. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be
conducted or promoted is to engage in any lawful act or activity
for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL").
FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is sixty-two million
(62,000,000) shares, of which sixty million (60,000,000) shares
are to be shares of Common Stock, $.01 par value per share, and
two million (2,000,000) are to be shares of Preferred Stock, $.10
par value per share.
The Board of Directors of the Corporation is authorized to
issue shares of Preferred Stock from time to time in one or more
series for such consideration as it may determine; to fix or
alter the voting powers, designations, preferences and rights,
including, but not limited to, dividend rights, dividend rate or
rates, conversion rights, and terms of redemption (including
sinking fund provisions), redemption price or prices and
liquidation preferences, or any of them, as to wholly unissued
series of shares of Preferred Stock; and to fix the number of
shares constituting any such series and designation thereof, or
any of them, and to increase or decrease the number of shares of
any series subsequent to the issue of shares of that series, but
not below the number of shares of that series then outstanding.
In case the number of shares of such series be so decreased, the
shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
FIFTH: In furtherance and not in limitation of the
rights, powers, privileges and discretionary authority granted or
conferred by the DGCL or other statutes or laws of the State of
Delaware, the Board of Directors of the Corporation is expressly
authorized to adopt, amend or repeal the By-Laws of the
Corporation. The Corporation may in its By-Laws confer powers
upon its Board of Directors in addition to the foregoing and in
addition to the powers and authorities expressly conferred upon
the Board of Directors of the Corporation by applicable law.
SIXTH: Elections of directors need not be by written
ballot unless and to the extent that the By-Laws of the
Corporation so provide.
<PAGE> 77
SEVENTH: To the fullest extent that the DGCL, as it exists
on the date hereof or as it may hereafter be amended, permits the
limitation or elimination or the liability of directors, no
person serving as a director of the Corporation shall be
personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal
benefit. Neither the amendment to or repeal of this Article
Seventh nor the adoption of any provision of any Certificate of
Incorporation of the Corporation inconsistent with this Article
Seventh shall adversely affect any right or protection existing
under this Article Seventh at the time of such amendment or
repeal.
EIGHTH: The Corporation shall, to the fullest extent
permitted by Section 145 of the DGCL, as the same may be amended
and supplemented, or by any successor thereto, indemnify any and
all persons whom it shall have power to indemnify under said
Section 145 from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said
Section 145. The Corporation shall advance expenses to the
fullest extent permitted by said Section 145. Such right to
indemnification and advancement of expenses shall continue as to
a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person. The indemnification and
advancement of expenses provided for herein shall not be deemed
exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under
any By-Law of the Corporation, agreement, vote of stockholders or
disinterested directors, or otherwise."
<PAGE> 78
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation of the Corporation to be
signed by its Acting Chief Executive Officer and to be attested to by
its Secretary on this 25th day of July, 1997.
THE WESTERN SYSTEMS CORP.
By: /s/ William J. Barrett
------------------------------
William J. Barrett
Acting Chief Executive Officer
Attest:
By: /s/ Ann C. W. Green
------------------------
Ann C. W. Green
Secretary
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
AMERICAN COUNTRY HOLDINGS INC.
(A Delaware Corporation)
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such
other places both within and without the State of Delaware as the
board of directors may from time to time determine or the business of
the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the
election of directors shall be held at such place as may be fixed from
time to time by the board of directors either within or without the
State of Delaware as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. Meetings
of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in
the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders shall be held
at such date and time as shall be designated from time to time by the
board of directors and stated in the notice of the meeting, at which
they shall elect by a plurality vote directors, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating
the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10)
nor more than sixty (60) days before the date of the meeting.
Section 4. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose germane to
<PAGE> 80
the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the chairman or vice-
chairman of the board of directors, or by the president, and shall be
called by the president or secretary at the request in writing of a
majority of the board of directors, or at the request in writing of
stockholders owning a majority in amount of the entire capital stock
of the corporation issued and outstanding and entitled to vote. Such
request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating
the place, date and hour of the meeting and the purpose or purposes
for which the meeting is called, shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise
provided by statute or by the certificate of incorporation. If,
however, such quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have
been transacted at the meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment
a new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by
express provision of the statutes or of the certificate of
incorporation, a different vote is required, in which case such
express provision shall govern and control the decision of such
question.
<PAGE> 81
Section 10. Unless otherwise provided in the certificate
of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one (1) vote in person or by proxy for
each share of the capital stock having voting power held by such
stockholder, but no proxy shall be voted on after three (3) years from
its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate
of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action that
may be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in
writing.
Section 12. The board of directors in advance of any
stockholders' meeting may appoint one (1) or more inspectors to act at
the meeting or any adjournment thereof. If inspectors are not so
appointed, the person presiding at a stockholders' meeting may, and on
the request of any stockholder entitled to vote thereat shall, appoint
one (1) or more inspectors. In case any person appointed as inspector
fails to appear or act, the vacancy may be filled by appointment made
by the board of directors in advance of the meeting or at the meeting
by the person presiding thereat. Each person appointed to serve as
inspector, in advance of his duties, shall take and sign an oath to
execute faithfully the duties of inspector at such meeting with strict
impartiality and according to the best of his ability.
ARTICLE III
DIRECTORS
Section 1. The number of directors shall be not less
than three (3) nor more than nine (9) as determined by the board of
directors from time to time. Directors shall be at least eighteen
(18) years of age and need not be shareholders of the corporation.
Each director elected shall serve until his successor shall have been
elected and qualified or until his earlier death, resignation or
removal.
Section 2. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may
be filled by a majority of the directors then in office, though less
than a quorum, or by a sole remaining director, and the directors so
chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify, unless sooner
displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the
time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the
<PAGE> 82
whole board (as constituted immediately prior to any such increase),
the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of
the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
Section 3. The business of the corporation shall be
managed by or under the direction of its board of directors, which may
exercise all such powers of the corporation and do all such lawful
acts and things as are not by statute or by the certificate of
incorporation or by these by-laws directed or required to be exercised
or done by the stockholders.
Section 4. The board of directors shall keep the books
of the corporation at such place or places as they may from time to
time determine, except as otherwise required by law.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. The board of directors of the corporation may
hold meetings, both regular and special, either within or without the
State of Delaware.
Section 2. The first meeting of each newly elected board
of directors shall be held at such time and place as shall be fixed by
the vote of the stockholders at the annual meeting and no notice of
such meeting shall be necessary to the newly elected directors in
order legally to constitute the meeting, provided a quorum shall be
present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of
directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall
be specified in a written waiver signed by all of the directors.
Section 3. Regular meetings of the board of directors
may be held without notice at such time and at such place as shall
from time to time be determined by the board.
Section 4. Special meetings of the board may be called
by the chairman or vice-chairman of the board of directors, or by the
president, on three (3) days notice to each director, given
personally, by mail, telegram, overnight courier, electronic mail, or
facsimile. Special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of
at least three (3) directors.
Section 5. Notice of a meeting need not be given to any
director who submits a signed waiver of notice whether before or after
the meeting, or who attends the meeting without protesting the lack of
notice prior thereto or at its commencement. Neither the business to
<PAGE> 83
be transacted at, nor the purpose of, any regular or special meeting
of the board of directors need be specified in the notice or waiver of
notice of such meeting.
Section 6. At all meetings of the board a majority of
the directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute
or by the certificate of incorporation. If a quorum shall not be
present at any meeting of the board of directors the directors present
thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be
present.
Section 7. Unless otherwise restricted by the
certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the board of directors or of
any committee thereof may be taken without a meeting, if all members
of the board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 8. Unless otherwise restricted by the
certificate of incorporation or these by-laws, members of the board of
directors, or any committee designated by the board of directors, may
participate in a meeting of the board of directors, or any committee,
by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute
presence in person at the meeting.
ARTICLE V
COMMITTEES OF DIRECTORS
Section 1. The board of directors may, by resolution
passed by a majority of the whole board, designate one (1) or more
committees, each committee to consist of one (1) or more of the
directors of the corporation. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or
disqualified member.
Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all
the powers and authority of the board of directors in the management
of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require
it; but no such committee shall have the power or authority in
<PAGE> 84
reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders
the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or
adopting, amending or repealing any by-law of the corporation; and,
unless the resolution adopted by the board of directors or the
certificate of incorporation expressly so provide, no such committee
shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall
have such name or names as may be determined from time to time by
resolution adopted by the board of directors.
Section 2. Each committee shall keep regular minutes of
its meetings and report the same to the board of directors when
required.
ARTICLE VI
COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the
authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the
board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No
such payment shall preclude any director from serving the corporation
in any other capacity and receiving compensation therefor. Members of
special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE VII
REMOVAL OF DIRECTORS
Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of
shares entitled to vote at an election of directors.
ARTICLE VIII
NOTICES
Section 1. Whenever, under the provisions of the
statutes or of the certificate of incorporation or of these by-laws,
notice is required to be given to any director or stockholder, it
shall not be construed to mean personal notice, but such notice may be
given in writing, by United States mail or overnight courier,
addressed to such director or stockholder, at his address as it
appears on the records of the corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail or with such
courier. Notice to directors may also be given by telegram,
electronic mail or facsimile and such notice shall be deemed given at
the time a confirmation of delivery is received therefor.
<PAGE> 85
Section 2. Whenever any notice is required to be given
under the provisions of the statutes or of the certificate of
incorporation or of these by-laws, a waiver thereof in writing, signed
by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE IX
OFFICERS
Section 1. The officers of the corporation shall be
chosen by the board of directors and shall consist of a president, a
vice-president, a secretary and a treasurer. The board of directors
may also choose a chairman or vice-chairman of the board of directors,
an executive vice-president, a chief operating officer, a chief
financial officer, additional vice-presidents, and one (1) or more
assistant secretaries and assistant treasurers. Any number of offices
may be held by the same person, unless the certificate of
incorporation or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting
after each annual meeting of stockholders shall choose a president,
one (1) or more vice-presidents, a secretary and a treasurer, and may
choose a chairman or vice-chairman of the board of directors, an
executive vice-president, a chief operating officer and a chief
financial officer.
Section 3. The board of directors may appoint such other
officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the board.
Section 4. The compensation of all officers and other
agents of the corporation shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold
office until their successors are chosen and qualify. Any officer
elected or appointed by the board of directors may be removed at any
time, with or without cause, by the affirmative vote of a majority of
the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
ARTICLE X
THE CHAIRMAN AND VICE-CHAIRMAN
The chairman of the board of directors, if there is one,
shall be a member of the board and shall preside at all meetings of
the board of directors and of the stockholders. He shall have and
perform such other powers and duties as the board of directors may
from time to time prescribe. The vice-chairman of the board of
directors, if there is one, shall, in the absence of the chairman or
in the event of his inability or refusal to act, perform the duties
and exercise the powers of the chairman and shall perform such other
duties and have such other powers as the board of directors may from
time to time prescribe.
<PAGE> 86
ARTICLE XI
THE PRESIDENT
Section 1. The president shall be the chief executive
officer of the corporation, shall preside at all meetings of the
stockholders and the board of directors, shall have general and active
management of the business of the corporation and shall see that all
orders and resolutions of the board of directors are carried into
effect.
Section 2. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly
delegated by the board of directors to some other officer or agent of
the corporation.
ARTICLE XII
THE VICE-PRESIDENT
In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there
be an executive vice-president, the executive vice-president, and in
the event there not be an executive vice-president but more than one
(1) vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of
their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the
restrictions upon the president. The vice-presidents shall perform
such other duties and have such other powers as the board of directors
may from time to time prescribe.
ARTICLE XIII
THE SECRETARY AND ASSISTANT SECRETARY
Section 1. The secretary shall attend all meetings of
the board of directors and all meetings of the stockholders and record
all the proceedings of the meetings of the corporation and of the
board of directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. He
shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of
directors or president, under whose supervision he shall be. He shall
have custody of the corporate seal of the corporation and he, or an
assistant secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his
signature or by the signature of such assistant secretary. The board
of directors may give general authority to any other officer to affix
the seal of the corporation and to attest the affixing by his
signature.
Section 2. The assistant secretary, or if there be more
than one (1), the assistant secretaries in the order determined by the
board of directors (or if there be no such determination, then in the
<PAGE> 87
order of their election) shall, in the absence of the secretary or in
the event of his inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other
duties and have such other powers as the board of directors may from
time to time prescribe.
ARTICLE XIV
THE TREASURER AND ASSISTANT TREASURER
Section 1. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the corporation in such depositories as
may be designated by the board of directors.
Section 2. He shall disburse the funds of the
corporation as may be ordered by the board of directors, taking proper
vouchers for such disbursements, and shall render to the president and
the board of directors, at its regular meetings, or when the board of
directors so requires, an account of all his transactions as treasurer
and of the financial condition of the corporation.
Section 3. If required by the board of directors, he
shall give the corporation a bond (which shall be renewed every six
(6) years) in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of
the duties of his office and for the restoration to the corporation,
in case of his death, resignation, retirement or removal from office,
of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the
corporation.
Section 4. The assistant treasurer, or if there shall be
more than one (1), the assistant treasurers in the order determined by
the board of directors (or if there be no such determination, then in
the order of their election), shall, in the absence of the treasurer
or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the treasurer and shall perform such other
duties and have such other powers as the board of directors may from
time to time prescribe.
ARTICLE XV
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the corporation
shall be entitled to have a certificate, signed by, or in the name of
the corporation by, the chairman or vice-chairman of the board of
directors, or the president or a vice-president, and the treasurer or
an assistant treasurer, or the secretary or an assistant secretary of
the corporation, certifying the number of shares owned by him in the
corporation.
Certificates may be issued for partly paid shares
and in such case upon the face or back of the certificates issued to
<PAGE> 88
represent any such partly paid shares, the total amount of the
consideration to be paid therefor, and the amount paid thereon shall
be specified.
If the corporation shall be authorized to issue
more than one (1) class of stock or more than one (1) series of any
class, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions
of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock,
provided that, except as otherwise provided in section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class
or series of stock, a statement that the corporation will furnish
without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights.
Section 2. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
ARTICLE XVI
LOST CERTIFICATES
The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall
require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.
ARTICLE XVII
TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority
<PAGE> 89
to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate
and record the transaction upon its books.
ARTICLE XVIII
FIXING RECORD DATE
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the
board of directors may fix, in advance, a record date, which shall not
be more than sixty (60) nor less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the board of directors may fix a
new record date for the adjourned meeting.
ARTICLE XIX
REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for
calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of the State of Delaware.
ARTICLE XX
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the certificate of
incorporation, if any, may be declared by the board of directors at
any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject
to the provisions of the certificate of incorporation.
Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such
sum or sums as the directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose
as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve
in the manner in which it was created.
<PAGE> 90
Section 2. CHECKS. All checks or demands for money and
notes of the corporation shall be signed by such officer or officers
or such other person or persons as the board of directors may from
time to time designate.
Section 3. FISCAL YEAR. The fiscal year of the
corporation shall be fixed by resolution of the board of directors.
Section 4. SEAL. The corporate seal shall have
inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may
be used by causing it or a facsimile thereof to be impressed or
affixed or produced or otherwise.
Section 5. INDEMNIFICATION. The corporation shall
indemnify its officers and directors and may indemnify its other
employees and agents to an extent to be determined by the board of
directors and to the extent permitted by the General Corporation Law
of Delaware.
Section 6. PRONOUNS. Any masculine personal pronoun
shall be considered to mean the corresponding feminine or neuter
personal pronoun, as the context requires.
ARTICLE XXI
AMENDMENTS
These by-laws may be altered, amended or repealed or new by-
laws may be adopted by the stockholders or by the board of directors,
when such power is conferred upon the board of directors by the
certificate of incorporation, at any regular meeting of the
stockholders or of the board of directors or at any special meeting of
the stockholders or of the board of directors if notice of such
alteration, amendment, repeal or adoption of new by-laws be contained
in the notice of such special meeting. If the power to adopt, amend
or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation it shall not divest or limit the power of
the stockholders to adopt, amend or repeal by-laws.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Subsidiary State or Jurisdiction of
Incorporation
==================================== =========================
American Country Insurance Company Illinois
American Country Financial Services Corp. Illinois
American Country Professional Services Corp. Illinois
TM West Corp. (inactive) Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-39657) pertaining to the Stock Option
Plan of American Country Holdings Inc. of our report dated February
24, 1998, with respect to the consolidated financial statements and
schedules of American Country Holdings Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/Ernst & Young LLP
- ----------------------------
Ernst & Young LLP
Chicago, Illinois
March 31, 1998
EXHIBIT 99
AMERICAN COUNTRY HOLDINGS INC.
SAFE HARBOR STATEMENT
Information provided by the Company may contain certain forward-
looking information, which, as defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"), may relate to such matters
as future plans, targets and objectives, cyclical industry conditions,
government and regulatory policies, the uncertainties of the reserving
process and the competitive environment in which the Company operates
or the assumptions relating to any of the forward-looking information.
This Safe Harbor Statement is being made pursuant to the Act and with
the intention of obtaining the benefits of the so-called "safe harbor"
provisions of the Act. The Company cautions that forward-looking
statements are not guarantees since there are inherent difficulties in
predicting future results, and that actual results could differ
materially from those expressed or implied in the forward-looking
statements. Factors that could cause actual results to differ
include, but are not necessarily limited to, the following:
* Property and Casualty Insurance Industry. American Country's
business depends on its ability to retain its current insurance
customers and write new insurance business. The property and casualty
insurance industry is highly competitive on the basis of both price
and service. American Country faces competition from national and
regional insurance carriers and innovative insurance programs put
together by insurance agents and reinsurance companies. See
"Business--Competition" for additional information.
* Fluctuations in Industry Results. The financial results of
property and casualty insurers historically have been subject to
significant fluctuations. Profitability is affected significantly by
volatile and unpredictable developments (including catastrophes),
changes in loss reserves resulting from changing legal environments as
different types of claims arise and judicial interpretations develop
relating to the scope of insurers' liability, fluctuations in interest
rates and other changes in the investment environment which affect
returns on invested capital, and inflationary pressures that affect
the size of losses. Further, underwriting results have been cyclical
in the property and casualty insurance industry, with protracted
periods of overcapacity adversely impacting premium rates, resulting
in higher combined ratios, followed by periods of under capacity and
escalating premium rates, resulting in lower combined ratios.
* Regulation. American Country is subject to governmental
regulation in each of the jurisdictions in which it conducts business.
Insurance regulatory agencies have broad administrative powers with
respect to all aspects of an insurance company's business, including
rates, policy forms, dividend payments, capital adequacy and the
amount and type of investments it may have. These regulations are
intended primarily to protect policyholders rather than
securityholders. The insurance regulatory framework continues to be
<PAGE> 94
subject to scrutiny by the National Association of Insurance
Commissioners, state legislatures and the United States Congress. No
assurance can be given that future legislative or regulatory changes
resulting from such activity will not adversely affect American
Country. See "Business--Regulation" and "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--
Regulation" for additional information.
* Marketing. Becoming licensed as an authorized insurer and
writing business in additional states is one of the foundations of
American Country's growth strategy. American Country's ability to
enter and write new business in these markets is contingent upon its
becoming licensed by the insurance department of each jurisdiction.
Each jurisdiction has its own licensing requirements and it may be
difficult for American Country to obtain a license in the particular
jurisdiction in which it applies. See "Business--Marketing," and
"--Regulation" for additional information.
* Reinsurance. The majority of American Country's reinsurance is
placed with a limited number of reinsurers. American Country is
required to obtain reinsurance in a competitive marketplace and a
contingent liability exists to the extent that American Country's
reinsurers are unable to meet their contractual obligations.
* Adequacy of Loss Reserves. The liabilities for unpaid losses and
loss adjustment expenses are estimated by management utilizing methods
and procedures which they believe are reasonable. These liabilities
are necessarily subject to the impact of future changes in claims
severity and frequency, as well as numerous other factors. Although
management believes that the estimated liabilities for losses and loss
adjustment expenses are reasonable, because of the extended period of
time over which such losses are reported and settled, the subsequent
development of these liabilities may not conform to the assumptions
inherent in their determination and, accordingly, may vary
significantly from the amounts estimated by American Country.
* Ratings. Increased public and regulatory concerns with the
financial stability of insurers have resulted in greater emphasis by
policyholders upon insurance company ratings, with a resultant
potential competitive advantage for carriers with higher ratings.
American Country currently is rated "A-" by A.M. Best. In addition,
Standard & Poor's has given American Country an Insurer Claims-Paying
Ability Rating of "BBBq" (Adequate). There can be no assurance,
however, that American Country will maintain its ratings; any
downgrade could materially adversely affect its operations. A.M.
Best's and Standard & Poor's ratings are based on an analysis of the
financial condition and operations of American Country as they relate
to the industry in general and are not designed for the protection of
investors.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The financial data schedule has been restated for the reverse
acquisition for the periods prior to July 29, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 119,476 73,025 58,238
<DEBT-CARRYING-VALUE> 0 27,677 35,446
<DEBT-MARKET-VALUE> 0 27,895 36,260
<EQUITIES> 1,622 9,743 11,831
<MORTGAGE> 0 2,500 2,984
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 121,098 114,237 113,687
<CASH> 8,499 9,868 6,612
<RECOVER-REINSURE> 16,254 12,900 8,230
<DEFERRED-ACQUISITION> 2,544 2,866 2,971
<TOTAL-ASSETS> 162,661 151,790 140,627
<POLICY-LOSSES> 99,087 90,965 81,633
<UNEARNED-PREMIUMS> 13,413 13,243 12,969
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 4,800 0 0
0 0 0
0 0 0
<COMMON> 320 356 356
<OTHER-SE> 34,820 40,081 39,711
<TOTAL-LIABILITY-AND-EQUITY> 162,661 151,790 140,627
59,814 60,550 56,909
<INVESTMENT-INCOME> 7,025 7,032 6,465
<INVESTMENT-GAINS> 1,613 915 222
<OTHER-INCOME> 331 219 150
<BENEFITS> 53,149 48,845 45,305
<UNDERWRITING-AMORTIZATION> 9,104 8,993 8,119
<UNDERWRITING-OTHER> 3,968 3,867 3,066
<INCOME-PRETAX> 2,562 7,011 7,256
<INCOME-TAX> 493 1,986 2,287
<INCOME-CONTINUING> 2,069 5,025 4,969
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,069 5,025 4,969
<EPS-PRIMARY> 0.06 0.14 0.14
<EPS-DILUTED> 0.06 0.14 0.14
<RESERVE-OPEN> 90,965 81,633 73,209
<PROVISION-CURRENT> 53,613 47,878 48,382
<PROVISION-PRIOR> (464) 967 (3,077)
<PAYMENTS-CURRENT> 19,624 18,044 14,709
<PAYMENTS-PRIOR> 29,002 25,933 22,507
<RESERVE-CLOSE> 99,087 90,965 81,633
<CUMULATIVE-DEFICIENCY> 467 (4,016) 579
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The financial data schedule has been restated for the
reverse acquisition for the periods prior to July 29, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<DEBT-HELD-FOR-SALE> 75,847 79,875 102,683
<DEBT-CARRYING-VALUE> 25,883 24,925 0
<DEBT-MARKET-VALUE> 25,840 25,070 0
<EQUITIES> 9,079 10,260 5,931
<MORTGAGE> 2,511 2,500 2,500
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 113,320 118,696 118,580
<CASH> 9,676 8,872 10,233
<RECOVER-REINSURE> 11,884 12,843 14,335
<DEFERRED-ACQUISITION> 3,588 3,450 2,967
<TOTAL-ASSETS> 170,338 169,929 163,280
<POLICY-LOSSES> 88,120 92,557 94,756
<UNEARNED-PREMIUMS> 34,533 28,274 20,765
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 319 319 320
<OTHER-SE> 31,915 32,889 33,758
<TOTAL-LIABILITY-AND-EQUITY> 170,338 169,929 163,280
14,823 29,500 44,897
<INVESTMENT-INCOME> 1,699 3,335 5,215
<INVESTMENT-GAINS> (27) (25) 654
<OTHER-INCOME> 100 205 304
<BENEFITS> 13,570 26,132 40,360
<UNDERWRITING-AMORTIZATION> 3,081 5,043 7,127
<UNDERWRITING-OTHER> 422 1,256 2,805
<INCOME-PRETAX> (478) 583 778
<INCOME-TAX> (360) 58 (44)
<INCOME-CONTINUING> (118) 524 822
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (118) 524 822
<EPS-PRIMARY> 0.00 0.01 0.02
<EPS-DILUTED> 0.00 0.01 0.02
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0<F1> 0<F1> 0<F1>
<PROVISION-PRIOR> 0<F1> 0<F1> 0<F1>
<PAYMENTS-CURRENT> 0<F1> 0<F1> 0<F1>
<PAYMENTS-PRIOR> 0<F1> 0<F1> 0<F1>
<RESERVE-CLOSE> 0<F1> 0<F1> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1> 0<F1> 0<F1>
<FN>
<F1>Available on an annual basis only.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The financial data schedule has been restated for the
reverse acquisition for the periods prior to July 29, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<DEBT-HELD-FOR-SALE> 62,363 69,158 69,995
<DEBT-CARRYING-VALUE> 33,979 31,683 30,358
<DEBT-MARKET-VALUE> 34,200 31,717 30,426
<EQUITIES> 9,990 10,392 10,077
<MORTGAGE> 2,974 2,963 2,952
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 109,724 114,422 113,514
<CASH> 8,253 5,877 8,271
<RECOVER-REINSURE> 8,359 8,117 11,316
<DEFERRED-ACQUISITION> 3,955 3,921 3,444
<TOTAL-ASSETS> 159,287 155,621 152,315
<POLICY-LOSSES> 78,975 80,261 84,128
<UNEARNED-PREMIUMS> 33,727 28,514 21,444
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 356 356 356
<OTHER-SE> 37,325 38,134 39,427
<TOTAL-LIABILITY-AND-EQUITY> 159,287 155,621 152,315
15,231 30,758 45,773
<INVESTMENT-INCOME> 1,683 3,440 5,293
<INVESTMENT-GAINS> 679 665 932
<OTHER-INCOME> 63 126 200
<BENEFITS> 12,543 24,890 37,115
<UNDERWRITING-AMORTIZATION> 2,861 5,031 7,084
<UNDERWRITING-OTHER> (3) 905 2,227
<INCOME-PRETAX> 2,255 4,162 5,772
<INCOME-TAX> 734 1,393 1,599
<INCOME-CONTINUING> 1,521 2,769 4,173
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,521 2,769 4,173
<EPS-PRIMARY> 0.04 0.08 0.12
<EPS-DILUTED> 0.04 0.08 0.12
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0<F1> 0<F1> 0<F1>
<PROVISION-PRIOR> 0<F1> 0<F1> 0<F1>
<PAYMENTS-CURRENT> 0<F1> 0<F1> 0<F1>
<PAYMENTS-PRIOR> 0<F1> 0<F1> 0<F1>
<RESERVE-CLOSE> 0<F1> 0<F1> 0<F1>
<CUMULATIVE-DEFICIENCY> 0 0 0
<FN>
<F1>Available on an annual basis only.
</FN>
</TABLE>
