<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 Identification
incorporation or organization) No.)
222 NORTH LASALLE STREET, CHICAGO, 60601-1105
ILLINOIS (Zip Code)
(Address of principal executive office)
(312) 456-2000
Registrant's telephone number, including area code:
------------------------
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. Yes /X/ No / /
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding August 9, 1999 was 32,023,633.
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<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1999 (Unaudited) and
December 31, 1998.............................................. 3
Consolidated Statements of Income (Unaudited) for the Six Months
and Three Months Ended June 30, 1999 and 1998.................. 4
Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 1999 and 1998............................ 5
Consolidated Statements of Comprehensive Income (unaudited) at
June 30, 1999 and 1998......................................... 6
Notes to Consolidated Financial Statements (Unaudited)........... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................ 15
Item 2. Changes in Securities............................................ 15
Item 3. Defaults upon Senior Securities.................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signature................................................................. 17
</TABLE>
2
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Investments:
Available-for-sale
Fixed maturities--At fair value (amortized cost: 1999--$124,733; 1998--$122,010)....... $ 123,825 $ 125,086
Equity securities--At fair value (cost: 1999--$353; 1998--$353)........................ 399 402
Collateral loans (at amortized cost, which approximate fair value)......................... 1,764 540
---------- ------------
Total investments.......................................................................... 125,988 126,028
Cash and cash equivalents.................................................................. 8,103 10,353
Premiums receivable (net of allowance: 1999--$293; 1998--$262)............................. 26,867 7,378
Reinsurance recoverable.................................................................... 16,173 13,402
Deferred income taxes...................................................................... 3,935 3,624
Deferred policy acquisition cost........................................................... 4,225 2,355
Accrued investment income.................................................................. 1,660 1,705
Property and equipment..................................................................... 779 820
Other assets............................................................................... 1,312 2,640
---------- ------------
Total assets............................................................................... $ 189,042 $ 168,305
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expense................................................ $ 98,531 $ 92,417
Unearned premiums........................................................................ 35,804 14,461
Note payable............................................................................. 9,800 9,300
Accrued expenses......................................................................... 3,736 3,854
Premium deposits......................................................................... 5 2,894
Drafts outstanding....................................................................... 2,405 3,792
Income taxes payable..................................................................... (729) 465
Payable for securities................................................................... 735 0
---------- ------------
Total liabilities.......................................................................... 150,287 127,183
Commitments and contingent liabilities
Stockholders' equity:
Common stock--$.01 par value:
Authorized--60,000,000 shares Issued and outstanding--shares: 1999--32,023,627;
1998--32,045,214..................................................................... 320 320
Preferred stock:
Authorized--2,000,000 shares; issued and outstanding--0 shares......................... -- --
Additional paid-in capital............................................................... 36,864 36,864
Accumulated other comprehensive income................................................... (696) 2,553
Retained earnings........................................................................ 2,267 1,385
---------- ------------
Total stockholders' equity................................................................. 38,755 41,122
---------- ------------
$ 189,042 $ 168,305
---------- ------------
---------- ------------
</TABLE>
See Notes to the Consolidated Financial Statements.
3
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Premiums earned..................................................... $ 32,310 $ 27,005 $ 17,758 $ 13,876
Net investment income............................................... 3,667 3,588 1,830 1,841
Net realized gains on investments................................... 194 589 (171) 216
Other income........................................................ 132 188 66 40
--------- --------- --------- ---------
Total revenues...................................................... 36,303 31,370 19,483 15,973
LOSSES AND EXPENSES:
Losses and loss adjustment expenses................................. 28,685 21,713 15,294 11,536
Amortization of deferred policy acquisition costs................... 5,491 4,767 2,785 1,741
Administrative and general expenses................................. 1,028 1,445 875 998
--------- --------- --------- ---------
Total losses and expenses........................................... 35,204 27,925 18,954 14,275
--------- --------- --------- ---------
Operating Income...................................................... 1,099 3,445 529 1,698
Interest Expense...................................................... 273 219 140 126
--------- --------- --------- ---------
Income before income taxes............................................ 826 3,226 389 1,572
Provision for income tax
Current............................................................... (644) 424 (83) 215
Deferred.............................................................. 587 653 114 388
--------- --------- --------- ---------
Total provision for income tax........................................ (57) 1,077 31 603
--------- --------- --------- ---------
Net income............................................................ $ 883 $ 2,149 $ 358 $ 969
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and dilutive earnings per share................................. $ .03 $ .07 $ .01 $ .03
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
<S> <C> <C>
1999 1998
--------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................................................... $ 1,523 1,982
INVESTING ACTIVITIES
Fixed maturities--available-for-sale:
Purchases................................................................................. (97,606) (104,720)
Sales..................................................................................... 87,068 92,632
Maturities, calls, and prepayments........................................................ 7,603 6,475
Equity securities--available-for-sale:
Maturities, calls, and prepayments........................................................ -- 852
Sale or maturity of other investments....................................................... 163 107
Property, equipment and other............................................................... (1,499) (536)
--------- ----------
Net cash used by investing activities....................................................... (4,271) (5,190)
FINANCING ACTIVITIES
Proceeds from note payable.................................................................. 500 3,000
Issuance of options and warrants............................................................ -- 12
--------- ----------
Net cash provided by financing activities................................................... 500 3,012
--------- ----------
Net decrease in cash........................................................................ (2,248) (196)
Cash at beginning of period................................................................. 10,351 8,499
--------- ----------
Cash at end of period....................................................................... $ 8,103 $ 8,303
--------- ----------
--------- ----------
</TABLE>
See Notes to the Consolidated Financial Statements.
5
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
Net income..................................................................................... $ 883 $ 2,149
Other comprehensive income:
Unrealized depreciation of investments--net of reclassification adjustments.................. (4,924) 218
Deferred income tax benefit on changes....................................................... 1,674 (74)
Other........................................................................................ 0 151
Other comprehensive income..................................................................... (3,250) 296
--------- ---------
Comprehensive income........................................................................... (2,367) 2,444
--------- ---------
--------- ---------
</TABLE>
See Notes to the Consolidated Financial Statements
6
<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
PART I
FINANCIAL INFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(SEE FINANCIAL STATEMENTS AND EXHIBITS ATTACHED)
A. NATURE OF OPERATIONS
American Country Holdings Inc. (the "Company") is an insurance holding
company which operates through its direct subsidiaries American Country
Insurance Company ("American Country"), American Country Financial Services
Corp. ("Financial Services") and American Country Professional Services Corp.
("Professional Services"). American Country is an Illinois domestic property and
casualty 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, hospitality and other commercial lines. American Country also
writes a nominal amount of personal lines, automobile and homeowners insurance.
Financial Services operates principally as a premium finance company and also
provides secured loans for certain of American Country's larger customers.
Professional Services is a third-party administrator claims processing service
for American Country's insurance customers.
B. ACCOUNTING PRINCIPLES
The accompanying financial statements have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the
consolidated financial statements of the Company included in the Company's
Annual Report on Form 10-K filed on March 31, 1999.
Operating results for the six-month period ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
Earnings per share information is presented on the basis of weighted average
shares outstanding for the period.
C. CAPITAL STOCK
No dividends have been declared or paid by the Company during the periods
presented in the accompanying financial statements. At June 30, 1999, the
Company had 2,019,424 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, 1999.
D. STOCK OPTION PLAN
The Company has established a Stock Option Plan (the "Plan"), as amended,
under which options to purchase up to a total of 750,000 shares of common stock
may be granted to officers and other key employees. Stock options granted under
this Plan, which may be either incentive stock options or nonqualified stock
options for federal income tax purposes, expire up to ten years after date of
grant and become exercisable over a three year period. Employees who have left
the Company have 90 days to exercise their options. In December 1996, the
stockholders approved an amendment to the Plan, whereby in the event of a sale
of the assets of the Company, all options outstanding would become immediately
exercisable without regard to any vesting provisions. In January 1998,
additional stock options were
7
<PAGE>
granted to employees of the Company. These additional options have five-year
terms and vest at 20% per year and become fully exercisable five years after the
date of grant. In May 1999, the stockholders of the Company agreed to an
amendment of the Plan, whereby options to purchase 1.1 million shares
(approximately 3% of the Company's total shares outstanding) were granted to
certain officers and directors of the Company. These additional options have a
ten-year term. Options to purchase one million shares are immediately vested and
exercisable. The remainder vest at 33 1/3% per year and become fully exercisable
three years after the date of grant. At June 30, 1999, the Company had 1,488,320
options outstanding with exercise prices ranging from $0.60 per share to $3.75
per share.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under Financial Accounting
Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options is greater than or equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
E. REINSURANCE
The components of the net reinsurance recoverable balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Ceded paid losses recoverable................... $ 412 $ 425
Ceded unpaid losses and loss adjustment expenses
("LAE")....................................... 14,715 11,952
Ceded unearned premiums......................... 1,046 1,025
----------- -------
Total........................................... $ 16,173 $ 13,402
----------- -------
----------- -------
</TABLE>
The components of the reinsurance ceded relating to the accompanying
statements of income were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Ceded premiums earned....................................... $ 2,063 $ 6,198
Ceded incurred losses....................................... 5,966 2,583
Ceded incurred LAE.......................................... 483 321
</TABLE>
The effect of reinsurance on premiums written and earned for the six months
ended June 30, 1999, and 1998 was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1999 1998
PREMIUMS PREMIUMS
-------------------- --------------------
WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct............................................ $ 54,563 $ 33,025 $ 47,921 $ 32,628
Assumed........................................... 1,081 1,348 1,279 575
Ceded............................................. (2,084) (2,063) (8,202) (6,198)
--------- --------- --------- ---------
Net............................................... $ 53,560 $ 32,310 $ 40,998 $ 27,005
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report.
OVERVIEW
American Country Holdings Inc. (the "Company") is an insurance holding
company which operates through its direct subsidiaries American Country
Insurance Company ("American Country"), American Country Financial Services
Corp. ("Financial Services") and American Country Professional Services Corp.
("Professional Services").
American Country is an Illinois domestic property and casualty 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,
hospitality and other commercial lines. American Country also writes a nominal
amount of personal lines, automobile and homeowners insurance. Financial
Services operates principally as a premium finance company and also provides
secured loans for certain of American Country's larger customers. Professional
Services is a third-party administrator claims processing service for American
Country's insurance customers.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
Overall premium revenues increased 28% in the second quarter of 1999 to
$17.8 million from $13.9 million in the comparable period in 1998, primarily due
to geographic expansion of the transportation and hospitality lines. American
Country also realized additional savings from renegotiated reinsurance costs for
its commercial lines.
The following table sets forth the net premiums earned by the principal
lines of insurance underwritten by American Country for the periods indicated
and the dollar amount and percentage of change therein from period to period:
NET PREMIUMS EARNED
<TABLE>
<CAPTION>
THREE MONTHS INCREASE
ENDED (DECREASE)
JUNE 30, 1999 FROM 1998
---------------- ---------------
1999 1998 AMOUNT PERCENT
------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transportation lines............... $ 9,877 $ 7,663 $2,214 28.9
Hospitality Lines.................. 1,902 1,193 709 59.4
Commercial lines................... 5,954 4,982 972 19.5
Personal lines..................... 25 38 (13) (34.2)
------- ------- ------ -------
Totals........................... $17,758 $13,876 $3,882 28.0%
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
Transportation lines, which consist of taxicab and limousine liability and
physical damage programs, increased in the second quarter of 1999 by 28.9% to
$9.9 million. The major contributor to this increase was the geographic
expansion of American Country's taxicab product outside of the Chicago
metropolitan area into the states of Connecticut, Minnesota and New York.
Premium revenue also increased for American Country's historical region of the
Chicago metropolitan area.
Premium revenues for hospitality lines increased 59.4% to approximately $1.9
million, as compared to $1.2 million for 1998. This increase is attributable to
the growth in the number of policies written for multiple peril package and
other liability products and slightly offset by a decrease in revenues generated
by American Country's workers compensation policies.
9
<PAGE>
Commercial lines experienced an increase of 19.5% to $6.0 million in the
second quarter of 1999, as a result of increased volume from commercial
multi-peril and commercial automobile products. In addition, a portion of this
increase is attributable to reinsurance adjustments which resulted from the
renegotiation of certain reinsurance agreements.
The decrease of 34.2% in premiums earned from personal lines is due American
Country's exit from personal lines in early 1998. As a result, premium revenues
from personal lines decreased to $25,000 for 1999 from $38,000 for the 1998
period. Gross written premium for this line decreased approximately 98% over the
same period in 1998.
Net investment income decreased less than 0.6%, to $1.8 million in the
second quarter of 1999, as compared to $1.8 million in the comparable period in
1998. Realized losses amounted to $171,000 in the second quarter of 1999,
compared to gains of $216,000 in the comparable period in 1998. Interest income
remained flat in the second quarter of 1999.
Other income, which is net of other expenses, increased 65.0% in the second
quarter of 1999, as compared to the second quarter of 1998. Income produced from
the Company's premium financing activities decreased to $66,000 in the second
quarter of 1999 from $97,000 in the second quarter of 1998, a decrease of 32.0%.
This decrease is attributable to the lower volume of financed premiums. Other
expenses decreased due to expenses at the parent company in 1998, which were
non-recurring.
Losses and loss adjustment expenses (LAE) increased 33.0% or $3.8 million in
the second quarter of 1999, to $15.3 million in the second quarter of 1999 from
$11.5 million in the second quarter of 1998, resulting in a loss ratio of 86.1%
in the second quarter of 1999 compared to 83.1% in the comparable period in
1998. This increase is largely due to higher frequency and severity of workers
compensation claims.
Losses and LAE for transportation lines increased $1.7 million in the second
quarter of 1999 or 27.9% over the comparable period in 1998, but the loss ratio
declined to 79.4% as compared to 79.7% for the same period in 1998. This decline
in the loss ratio was primarily due to a decrease in loss severity and frequency
of claims. Pure loss ratios for this line in the second quarter of 1998 were
65.6% compared to 64.1% in the comparable period in 1999.
The loss ratio for hospitality lines increased to 105.3% compared to 82.3%
in the same period in 1998, as a result of a higher severity of claims in the
second quarter of 1999.
Commercial lines experienced a 15.5% decrease in losses and LAE that
resulted in a loss ratio of 88.2% in the second quarter of 1999 as compared to
91.2% in the comparable period in 1998. The decrease was concentrated in the
commercial automobile liability products and was due to a decrease in the
severity and frequency of claims in this line, offset by an increase in workers
compensation claims. In addition, the loss ratio was further reduced by the
increase in premium resulting from the reinsurance adjustments referred to
earlier.
Personal lines experienced a $300,000 increase in losses and LAE in the
second quarter of 1999. This increase is attributable to the reduced premium
volume that resulted from American Country's exit from personal lines referred
to earlier, as well the expiration of an expense-sharing agreement with Ohio
Casualty Insurance Company ("Ohio Casualty") which was part of the reinsurance
agreement entered into with Ohio Casualty in 1998.
Amortization of deferred policy acquisition costs increased approximately $1
million in the second quarter of 1999 due to increased policy acquisition costs
related to the geographic expansion of American Country's transportation and
hospitality products.
Administrative and general expenses decreased $123,000 or 12.3% in the
second quarter of 1999, due to reduced salary and other expenses resulting from
American Country's exit from the personal lines market.
10
<PAGE>
Interest expense increased $14,000 or 11.1% in the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Overall premium revenues increased 19.6% in the six months ended June 30,
1999 to $32.3 million from $27.0 million in the comparable period in 1998, due
to the geographic expansion of American Country's transportation and hospitality
lines and the recognition of the reinsurance savings previously mentioned.
The following table sets forth the net premiums earned by the principal
lines of insurance underwritten by American Country for the periods indicated
and the dollar amount and percentage of change therein from period to period:
NET PREMIUMS EARNED
<TABLE>
<CAPTION>
INCREASE
SIX MONTHS ENDED (DECREASE)
JUNE 30, 1999 FROM 1998
---------------- ---------------
1999 1998 AMOUNT PERCENT
------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transportation lines............... $18,515 $14,852 $3,663 24.7%
Hospitality lines.................. 3,269 2,140 1,129 52.8%
Commercial lines................... 10,475 9,916 559 5.6%
Personal lines..................... 51 97 (46) (47.4%)
------- ------- ------ -------
Totals........................... $32,310 $27,005 $5,305 19.6%
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
Transportation lines, which consist of taxicab and limousine liability and
physical damage programs, expanded in the six months ended June 30, 1999 by
24.7% to $18.5 million over the comparable period in 1998. Nearly all the
transportation programs offered by American Country generated premium revenue
increases, especially those products representing American Country's expansion
outside its historical region of the Chicago metropolitan area. This
geographical expansion was accomplished by underwriting programs in the states
of Connecticut, Minnesota and New York.
Premium revenues for hospitality lines increased 52.8% to approximately $3.3
million as compared to $2.1 million for 1998. This increase is attributable to
the growth in the number of policies written for multiple peril package and
other liability products and was slightly offset by a decrease in revenues
generated by American Country's workers compensation policies.
Commercial lines experienced an increase of 5.6% to $10.5 million in the six
months ended June 30, 1999, as compared to $9.9 million for the same period in
1998, the result of increased revenues from the commercial multi-peril and
automobile products, offset by a decrease in revenues from workers compensation
products.
The decrease of 47.4% in Personal lines is a direct result of management's
decision to exit the personal lines market in order to focus on its commercial
lines program. As a result, premium revenues decreased to $51,000 in the six
months ended June 30, 1999 from $97,000 in the comparable period in 1998.
Net investment income increased $79,000 or approximately 2.8%, to $3.7
million in the six months ended June 30, 1999, as compared to $3.6 million in
the same period in 1998. Realized gains amounted to $194,000 in the six months
ended June 30, 1999 compared to a gain of $589,000 in the same period in 1998.
In addition, in the six months ended June 30, 1999, costs relative to the
investment activities of the Company decreased 8.1%, resulting in savings of
$28,000 over the comparable period in 1998.
11
<PAGE>
Other income, which is net of other expenses, decreased 29.8% in the six
months ended June 30, 1999 as compared to the six months ended June 30, 1998.
Income produced from the Company's premium financing activities decreased from
$188,000 in the six months ended June 30, 1998 to $132,000 in the six months
ended June 30, 1999. This decrease is attributable to the lower volume of
financed premiums. Other expenses decreased due to expenses at the Company in
1998, which were non-recurring.
Losses and loss adjustment expenses (LAE) increased 32.3% or $7.0 million in
the six months ended June 30, 1999, from $21.7 million in the comparable period
in 1998 to $28.7 million in the six months ended June 30, 1999, resulting in a
loss ratio of 88.8% in the six months ended June 30, 1999 compared to 80.4% in
the comparable period in 1998. This is primarily due to the substantial increase
in the loss ratio for commercial lines described below.
Losses and LAE for Transportation lines increased $733,000 or 6.1% in the
six months ended June 30, 1999, over the comparable period in 1998, due to
American Country's geographic expansion. Although the dollar amount of losses
increased, the loss ratio for this line decreased significantly in the first
half of 1999. Loss ratios for this line in the six months ended June 30, 1999
were 69.3% compared to 81.5% in the comparable period in 1998. This decrease is
attributable to both a lower frequency and severity of claims for this line.
The loss ratio for hospitality lines decreased to 83.7% compared to 85.7% in
the same period in 1998, as a result of slightly lower losses for multiple peril
package policies.
Commercial lines experienced a significant increase in losses and the
resulting loss ratios in the six months ended June 30, 1999. The increase was
most significant in the workers compensation and commercial multiple peril
products. The loss ratio was 119.6% in the six months ended June 30, 1999,
compared to 78.6% in the comparable period in 1998. This increase is
attributable to a higher severity of claims in the workers compensation line of
business as well as several large weather-related property losses in the first
quarter of 1999.
Personal lines experienced a $600,000 increase in losses and LAE as a result
of the expiration of an expense-sharing agreement with Ohio Casualty as part of
the reinsurance agreement in January 1998.
Amortization of deferred policy acquisition costs increased $724,000 in the
six months ended June 30, 1999. This is a direct result of American Country's
geographic expansion into new territories.
Administrative and general expenses decreased $417,000, or 28.9% in the six
months ended June 30, 1999. The decrease is primarily attributable to decreased
salary and other expenses resulting from American Country's exit from the
personal lines market referred to earlier.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company, receiving cash principally through fees
and dividends from its subsidiaries and borrowings. American Country, the
principal subsidiary of the Company, is the only subsidiary of the Company
subject to restrictions and regulatory approval on fees and dividends. The
ability of insurance and reinsurance companies to underwrite insurance and
reinsurance is based on maintaining liquidity and capital resources sufficient
to pay claims and expenses as they become due. The primary sources of liquidity
for the Company's insurance subsidiary are funds generated from insurance
premiums, investment income, commission and fee income, capital contributions
from the Company and proceeds from sales and maturities of portfolio
investments. The principal expenditures are for payment of losses and LAE,
operating expenses and commissions.
On April 30, 1998, the Company entered into a $15 million revolving loan
credit facility pursuant to which the Company initially borrowed $7.8 million at
an initial interest rate of 6.47%, of which $4.8 million was used to repay a
loan facility the Company previously had and $3.0 million was used to pay a tax
liability of the Company which resulted from the reverse acquisition of the
Company in 1997. The borrowing was
12
<PAGE>
subsequently increased to $9.8 million as of June 30, 1999. The line of credit
agreement contains various debt covenants including certain financial covenants
and commitment fees, which are .25% per annum of the unused line of credit, and
matures on April 30, 2001.
At June 30, 1999, the Company's total assets of $189.0 million was comprised
of the following: Cash and investments, 70.9%; premiums receivable, 14.2%;
reinsurance recoverables, 8.6%; deferred expenses (policy acquisition costs and
deferred taxes) 4.3%; fixed assets, .4%; and other assets, 1.6%.
The Company's subsidiaries seek to maintain liquid operating positions and
follow investment guidelines and state regulations for investments that are
intended to provide for an acceptable return on investment while preserving
capital, maintaining sufficient liquidity to meet its obligations and, as to the
Company's insurance subsidiary, maintaining a sufficient margin of capital and
surplus to ensure its unimpaired ability to write insurance and assume
reinsurance.
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at June 30, 1999:
<TABLE>
<CAPTION>
FAIR PERCENT
S&P/MOODY'S RATINGS(1) VALUE OF TOTAL
- ------------------------------------------------------------------------ ---------- -----------
<S> <C> <C>
AAA/Aaa (including US Treasuries of $3,343)............................. $ 66,648 53.9%
AA/Aa................................................................... 19,437 15.7%
A/A..................................................................... 26,536 21.4%
BBB/Ba.................................................................. 9,166 7.4%
All other............................................................... 2,038 1.6%
---------- -----
Total................................................................... $ 123,825 100.0%
---------- -----
---------- -----
</TABLE>
- ------------------------
(1) Ratings are assigned primarily by Standard & Poor's Corporation, with
remaining ratings as assigned by Moody's Investers Service, Inc.
Cash flow provided by operations for the quarter ended June 30, 1999 was
$1.5 million, as compared to $4.7 million for the same period in 1998. Such
amounts were adequate to meet all obligations during the periods. The decrease
in cash flow provided for the quarter ended June 30, 1999, as compared to the
same period in 1998 is attributable to increased claims payments and increased
reinsurance recoverables in 1999, as compared to the comparable period in 1998.
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 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,
13
<PAGE>
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, 1998. The Company disclaims any obligation to update
forward-looking information.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as noted in the following paragraph, 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. The
Company is subject to claims arising in the ordinary course of its business.
Most of these proceedings 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.
On May 20, 1999, Frontier Insurance Group, Inc. (which owns approximately
25% of the outstanding shares of the Company) filed a purported shareholder
derivative action in Delaware Chancery Court against the Company's directors and
the Company itself as a nominal defendant. The complaint seeks a declaration
that certain amendments to the Company's Stock Option Plan, which were approved
at the Company's Annual Meeting on May 18, 1999 are void or, alternatively,
should be rescinded. The complaint further challenges the grant of options to
purchase 1.1 million shares (approximately 3% of the Company's total shares
outstanding) to certain of its officers and directors. The defendants believe
that they have substantial defenses to the claims asserted by Frontier Insurance
Group, Inc.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of American Country Holdings Inc. was
held on May 18, 1999.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with
respect to such matters are as follows:
(1) Election of Directors.
<TABLE>
<CAPTION>
VOTES
DIRECTOR RECEIVED VOTES WITHHELD
- ----------------------------------------------------- ------------- --------------
<S> <C> <C>
Martin L. Solomon.................................... 23,503,375 8,265,965
William J. Barrett................................... 23,503,375 8,265,965
Edwin W. Elder....................................... 23,503,375 8,265,965
John G. McMillian.................................... 23,503,375 8,265,965
Wilmer J. Thomas, Jr................................. 23,503,375 8,265,965
</TABLE>
15
<PAGE>
(2) Approval of the Amendment and Restatement of the Company's Stock
Option Plan.
VOTES CAST
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NONVOTE
- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
23,157,893 8,509,188 102,259 0
</TABLE>
(3) Ratification of PricewaterhouseCoopers LLP, as the Company's
independent auditors for the fiscal year ended December 31, 1999.
VOTES CAST
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NONVOTE
- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
31,567,629 196,683 5,028 0
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
(27) Financial Data Schedule
b. Reports on Form 8-K:
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 1999
<TABLE>
<S> <C> <C>
AMERICAN COUNTRY HOLDINGS INC.
(Registrant)
By: /s/ JAMES P. BYRNE
-----------------------------------------
James P. Byrne
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999
<DEBT-HELD-FOR-SALE> 126,140 123,825
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 399 399
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 127,424 125,988
<CASH> 7,554 8,102
<RECOVER-REINSURE> 13,319 16,173
<DEFERRED-ACQUISITION> 3,999 3,935
<TOTAL-ASSETS> 190,797 189,042
<POLICY-LOSSES> 92,260 98,531
<UNEARNED-PREMIUMS> 40,298 35,804
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 9,300 9,800
0 0
0 0
<COMMON> 320 320
<OTHER-SE> 39,828 38,435
<TOTAL-LIABILITY-AND-EQUITY> 190,797 189,042
14,552 32,310
<INVESTMENT-INCOME> 1,836 3,667
<INVESTMENT-GAINS> 365 194
<OTHER-INCOME> 66 132
<BENEFITS> 13,390 28,685
<UNDERWRITING-AMORTIZATION> 2,706 5,491
<UNDERWRITING-OTHER> 286 1,301
<INCOME-PRETAX> 437 826
<INCOME-TAX> (88) (57)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 525 883
<EPS-BASIC> 0.02 0.03
<EPS-DILUTED> 0.02 0.03
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
