<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
AMERICAN BANKERS INSURANCE GROUP, INC.
11222 QUAIL ROOST DRIVE
MIAMI, FLORIDA 33157
(305) 253-2244
Commission File Number: 0-9633
State of Incorporation: Florida
I.R.S. Employer Identification Number: 59-1985922
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 report), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
Common Stock - Par Value $1.00
42,966,805 Shares Outstanding on May 04, 1998
<PAGE> 2
Form 10-Q
Company or group of companies for which report is filed:
AMERICAN BANKERS INSURANCE GROUP, INC.
This quarterly report, filed pursuant to Rule 13A-13 of the General Rules and
Regulations under the Securities Exchange Act of 1934, consists of the following
information as specified in Form 10-Q.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
1. Consolidated Balance Sheets at March 31, 1998 and December 31, 1997.
2. Consolidated Statements of Income for the three months ended March 31,
1998 and 1997.
3. Consolidated Statements of Comprehensive Income for the three months
ended March 31, 1998 and 1997.
4. Consolidated Statements of Cash Flows for the three months ended March
31, 1998 and 1997.
5. Notes to Consolidated Financial Statements.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 6 - Exhibits and Reports
a. Exhibits.
The following exhibits are included herein:
(11) Statement re: Computation of Earnings Per Share
(27) Financial Data Schedule
b. Report on Form 8-K.
Form 8-K, filed on January 13, 1998.
Form 8-K/A, filed on January 20, 1998.
Form 8-K/A, filed on February 3, 1998.
<PAGE> 3
Form 10-Q
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BANKERS
INSURANCE GROUP, INC.
May 14, 1998
Date
/s/ Robert Hill
----------------------------
Robert Hill
Principal Accounting Officer
3
<PAGE> 4
PART I
FINANCIAL INFORMATION
4
<PAGE> 5
AMERICAN BANKERS INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Investments
Held-to-maturity securities, at amortized cost $ 813,298 $ 836,608
Available-for-sale securities, at fair value 1,034,941 973,790
Equity securities, at approximate market value 146,556 141,274
Mortgage loans on real estate 9,114 9,322
Policy loans 9,522 9,315
Short-term and other investments 206,376 192,802
------------- -------------
Total investments 2,219,807 2,163,111
------------- -------------
Cash 3,038 23,265
Accounts receivable, net of allowance for doubtful
accounts of $4,267 in 1998 and $4,290 in 1997 123,505 144,330
Reinsurance receivable 287,985 270,692
Accrued investment income 26,415 25,228
Deferred policy acquisition costs 456,953 458,289
Prepaid reinsurance premiums 586,691 565,162
Other assets 144,267 132,374
------------- -------------
Total assets $ 3,848,661 $ 3,782,451
============= =============
Liabilities and Stockholders' Equity
Policy liabilities $ 316,091 $ 311,181
Unearned premiums 1,453,753 1,436,034
Claim liabilities 570,270 555,797
------------- -------------
2,340,114 2,303,012
Other policyholders' funds 5,063 4,786
Notes payable 346,093 242,592
Deferred income taxes 48,929 51,666
Accrued commissions and other expenses 140,750 150,147
Other liabilities 183,465 216,379
------------- -------------
Total liabilities 3,064,414 2,968,582
------------- -------------
Commitments and Contingencies (Note 5)
Stockholders' Equity
Preferred stock: $3.125 Series B Cumulative Convertible Preferred Stock.
Authorized 10,000 shares.
Issued and Outstanding 2,101 shares in 1998 and 2,300 shares in 1997. $ 105,025 $ 115,000
Common stock of $1 par value. Authorized 100,000 shares.
Issued and Outstanding 42,686 shares in 1998 and 41,806 shares in 1997. 42,686 41,806
Additional paid-in capital 231,178 212,010
Accumulated Other Comprehensive Income 20,775 12,096
Retained earnings 400,320 449,444
Less:
Treasury stock, at cost - 271 shares in 1998 and 271 shares in 1997 (8,110) (8,110)
Unamortized restricted stock (6,033) (6,252)
Collateralization of loan to Leveraged Employee
Stock Ownership Plan (1,594) (2,125)
------------- -------------
Total stockholders' equity 784,247 813,869
------------- -------------
Total liabilities and stockholders' equity $ 3,848,661 $ 3,782,451
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AMERICAN BANKERS INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands except per common share data)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Gross collected premiums $ 697,871 $ 637,126
========= =========
Premiums and other revenues:
Net premiums earned $ 356,847 $ 363,775
Net investment income 35,178 32,106
Realized investment gains 2,178 1,930
Other income 5,964 7,070
--------- ---------
Total premiums and other revenues 400,167 404,881
--------- ---------
Benefits and expenses:
Net benefits, claims, losses and settlement expenses 122,938 138,890
Commissions 153,765 151,637
Operating expense 88,903 73,083
Merger termination fee 100,000 0
Interest expense 4,177 3,957
--------- ---------
Total benefits and expenses 469,783 367,567
--------- ---------
(Loss) Income before taxes (69,616) 37,314
--------- ---------
Income tax (benefit) expense:
Current (19,947) 9,504
Deferred (6,990) 1,391
--------- ---------
(26,937) 10,895
--------- ---------
Net (Loss) Income $ (42,679) $ 26,419
========= =========
Per common share and common equivalent share data
Basic:
Net (Loss) Income $ (1.06) $ 0.60
========= =========
Weighted average number of shares outstanding 41,959 41,206
========= =========
Diluted:
Net Income $ N/A $ 0.57
========= =========
Weighted average number of shares outstanding 46,940 46,790
========= =========
Dividends per common share $ 0.11 $ 0.10
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
AMERICAN BANKERS INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net (loss) income $(42,679) $ 26,419
-------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (395) (1,038)
Unrealized gains on securities:
Unrealized holding gains arising during period 9,305 12,671
Less: reclassification adjustment for gains included in net income (231) 0
-------- --------
Subtotal unrealized gains on securities 9,074 12,671
Minimum pension liability adjustment 0 0
-------- --------
Other comprehensive income 8,679 11,633
-------- --------
Comprehensive (loss) income $(34,000) $ 38,052
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE> 8
AMERICAN BANKERS INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net (loss) income $ (42,679) $ 26,419
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in policy liabilities, unearned premiums, claim
liabilities, reinsurance receivable and prepaid reinsurance premiums (1,030) 36,830
Change in other assets and other liabilities (49,116) (10,668)
Decrease in accounts receivable 21,173 26,515
Increase in accrued investment income (1,187) (1,702)
Decrease in accrued commissions and expenses (9,397) (28,791)
Increase in policyholders' funds 277 1,100
Increase in policy loans (207) (231)
Amortization of deferred policy acquisition costs 153,453 145,018
Amortization of cost of insurance acquired 309 381
Policy acquisition costs deferred (152,117) (168,005)
Provision for amortization and depreciation 3,015 3,721
Provision for deferred income taxes (6,752) 1,798
Net gain on sale of investments (2,178) (1,930)
Compensation and tax effect on stock option shares 5,940 477
Net cash flow from purchases and sales of trading securities 0 13,808
--------- ---------
Net cash (used in) provided by operating activities (80,496) 44,740
--------- ---------
Investing activities:
Purchase of investments
Held-to-maturity securities (5,325) (34,343)
Available-for-sale securities (172,819) (293,753)
Proceeds from sale of investments
Available-for-sale securities 92,993 248,286
Mortgage loans 201 152
Real Estate 1 18
Proceeds from maturities of investments
Held-to-maturity securities 28,126 26,363
Available-for-sale securities 28,665 13,309
Increase in short-term investments (11,399) (4,433)
Transactions related to capital assets
Capital expenditures (1,806) (6,565)
Sales of capital assets 29 58
--------- ---------
Net cash used in investing activities (41,334) (50,908)
--------- ---------
Financing activities:
Proceeds from issuance of debt 107,765 1,493
Dividends paid to shareholders (6,457) (5,904)
Proceeds from issuance of stock 277 1,322
--------- ---------
Net cash provided by (used in) financing activities 101,585 (3,089)
--------- ---------
Net decrease in cash (20,245) (9,257)
Cash at beginning of period 23,265 30,434
Rate change effect on cash flow 18 (80)
--------- ---------
Cash at end of period $ 3,038 $ 21,097
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 2,751 $ 2,365
Income taxes $ 3,003 $ 6,457
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
AMERICAN BANKERS INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. These statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report Form 10-K for the year ended December 31, 1997. Certain
items have been reclassed to conform with 1998 presentation.
(2) ADOPTION OF NEW FASB STATEMENT
The Company adopted FASB Statement No. 130, "Reporting Comprehensive Income."
FASB 130 is reflected in the Company's first quarter 1998 interim Financial
Statements. Components of comprehensive income for the Company include items
such as foreign currency translation and unrealized gain (losses) of
available-for-sale securities.
(3) COMPREHENSIVE INCOME
Related tax effects allocated to each component of other comprehensive income
(000's omitted)
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
<S> <C> <C> <C>
Foreign currency translation adjustments $ (552) $ 157 $ (395)
-------- -------- --------
Unrealized gains on securities:
Unrealized holding gains arising during period 13,361 (4,056) 9,305
Less: reclassification adjustment for gains
realized in net income 355 (124) 231
-------- -------- --------
Net unrealized gains 13,006 (3,932) 9,074
-------- -------- --------
Minimum pension liability adjustment 0 0 0
-------- -------- --------
Other comprehensive income $ 12,454 $ (3,775) $ 8,679
======== ======== ========
</TABLE>
9
<PAGE> 10
Accumulated Other Comprehensive Income Balances
<TABLE>
<CAPTION>
Accumulated
Foreign Unrealized Other
Currency Gains on Comprehensive
Items Securities Income
--------- --------- -------------
<S> <C> <C> <C>
Beginning balance $(14,141) $ 26,237 $ 12,096
Current-period change (395) 9,074 8,679
-------- -------- --------
Ending balance $(14,536) $ 35,311 $ 20,775
======== ======== ========
</TABLE>
The provisions of FASB Statement 130 were adopted as of January 1, 1998.
(4) REINSURANCE
The Company accounts for reinsurance contracts under Financial Accounting
Standards Board's Statement 113. The Company recognizes the income on
reinsurance contracts principally on a pro-rata basis over the life of the
policies covered under the reinsurance agreements. Reinsurance Recoverables on
Unpaid Losses are included as an asset in the Balance Sheet under the caption
"Reinsurance Receivable." Ceded Unearned Premiums are included as an asset in
the Balance Sheet under the caption "Prepaid Reinsurance Premiums."
The effect of reinsurance on premiums earned is as follows for the three months
ended March 31, 1998 and 1997:
(in thousands)
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Direct premiums $ 634,671 $ 596,607
Reinsurance assumed 37,038 35,072
Reinsurance ceded (314,862) (267,904)
--------- ---------
Net premiums earned $ 356,847 $ 363,775
========= =========
(5) COMMITMENTS AND CONTINGENCIES
For a comprehensive description of the Company's litigation, see Item III of the
Company's 1997 Form 10-K.
Alabama and Related Litigation:
Certain of ABIG's subsidiaries, including the Company, are presently parties to
a number of individual consumer and class action lawsuits pending in Alabama
involving premium, rate, marketing, sales practices, disclosure, and policy
coverage issues. While a number of similar suits have been filed in other
jurisdictions, the insurance and finance industries have been targeted in
Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The
Company typically has been named as a co-defendant with one or several retailer
or finance companies who have sold the Company's product to a consumer. Other
insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi and other
jurisdictions generally involve relatively small amounts of actual or
compensatory damages, they typically assert claims requesting substantial
punitive awards or purport to represent a large class of policyholders. The
Company denies any wrongdoing in any of these suits and believes that it has not
engaged in any conduct that would warrant an award of punitive damages or that
the class allegations have merit. The Company has been advised by legal counsel
that it has meritorious defenses to all claims being asserted against it.
10
<PAGE> 11
While no one case is necessarily significant in terms of financial risk to the
Company, the judicial climate in Alabama and Mississippi is such that the
outcome of these cases is extremely unpredictable. Moreover, class action
lawsuits to which the Company is a party do not lend themselves to potential
damage calculation. Without admitting any wrongdoing, the Company has settled a
number of these suits, but there are still a significant number of cases
pending, and it is expected that more suits alleging essentially the same causes
of action are likely to continue to be filed during 1998. The Company intends to
continue to defend itself vigorously against all such suits and believes, based
on information currently available, that any liabilities that could result are
not expected to have a material effect on the Company's financial position.
Merger-related Litigation:
In late January and early February 1998, Cendant Corporation ("Cendant")
commenced litigation (the "Cendant Florida Litigation") in the United States
District Court for the Southern District of Florida, Miami Division, against the
Company, members of the Company's Board, American International Group, Inc.
("AIG") and a wholly owned subsidiary of AIG, challenging the validity of
certain provisions in the merger agreement the Company originally entered into
with AIG on December 21, 1997, which agreement was amended in January 1998 and
again at the end of February 1998 ("AIG Merger Agreement"), with respect to
acquisition proposals by third parties. Cendant's complaint in the Cendant
Florida Litigation also challenged the terms of the stock option agreement
between the Company and AIG. Pursuant to the terms of a settlement agreement
providing for the termination of the AIG Merger Agreement and the payment to AIG
by the Company of $100 million and by Cendant of $10 million (the "Settlement
Agreement"), Cendant has taken the necessary actions to cause the dismissal of
all claims asserted in the Cendant Florida Litigation against all defendants,
including the Company and members of the Company's Board. Also pursuant to the
terms of the Settlement Agreement, AIG has taken the necessary actions to cause
the dismissal of claims against Cendant alleging violations of the federal
securities laws in connection with Cendant's bid to acquire the Company.
In late January and early February 1998, five putative class actions on behalf
of American Bankers' shareholders were filed in United States District Court for
the Southern District of Florida alleging causes of action arising out of the
proposed merger with AIG including claims that certain members of the Company's
Board breached their fiduciary duties and that the Company violated certain
provision of the federal securities laws in connection with the proposed merger
with AIG. The Company and its directors believe that the claims asserted in
these actions are totally without merit and intend to vigorously contest them.
The District Court judge ordered that these cases be consolidated and that the
plaintiffs file a consolidated complaint.
Other:
The Company is involved with a number of cases in the ordinary course of
business relating to insurance matters, or more infrequently, certain corporate
matters. Generally, the Company's liability is limited to specific amounts
relating to insurance or policy coverage for which provision has been made in
the financial statements. Other cases involve general corporate matters which
generally do not represent significant contingencies for the Company.
11
<PAGE> 12
(6) SEGMENT INFORMATION
Gross collected premiums, net premiums earned and (loss) income before
federal income taxes are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
GROSS COLLECTED PREMIUMS:
Life $ 248,635 $ 188,468
Property and Casualty 449,236 448,658
--------- ---------
Total $ 697,871 $ 637,126
========= =========
NET PREMIUMS EARNED:
Life $ 106,380 $ 100,494
Property and Casualty 250,467 263,281
--------- ---------
Total $ 356,847 $ 363,775
========= =========
(LOSS) INCOME BEFORE INCOME TAXES:
Life $ 16,984 $ 19,752
Property and Casualty 28,107 24,934
Other (110,530) (3,415)
--------- ---------
(65,439) 41,271
Interest Expense 4,177 3,957
--------- ---------
Total (Loss) Income before Income Taxes $ (69,616) $ 37,314
========= =========
</TABLE>
(7) ACCOUNTING FOR INVESTMENTS
The Company accounts for its investments according to the Financial Accounting
Standards Board's Statement 115 - Accounting for Certain Investments in Debt and
Equity Securities.
This Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those investments are to be classified in three categories and
accounted for as follows:
HELD-TO-MATURITY - Securities for which the enterprise has the positive intent
and ability to hold to maturity. These securities are carried at amortized cost.
AVAILABLE-FOR-SALE - Securities not classified as trading or held-to-maturity.
These securities are carried at market value with the unrealized holding gain or
loss reported as a separate component of equity, net of the income tax effect.
TRADING SECURITIES - Securities that are bought and held principally for the
purpose of selling them in the near term. These securities are carried at market
value with the unrealized holding gain or loss included in earnings.
12
<PAGE> 13
The detail of Cost and Statement Value for the Fixed Maturities and Equity
Securities held at March 31, 1998 is as follows:
(in thousands)
Amortized Statement
Cost Value
---------- ----------
FIXED MATURITIES
Held-to-Maturity Securities $ 813,298 $ 813,298
Available-for-Sale Securities 1,013,224 1,034,941
Trading Securities -- --
---------- ----------
Total Fixed Maturities $1,826,522 $1,848,239
========== ==========
Net unrealized gain $ 21,717
==========
Market
Cost Value
---------- ----------
EQUITY SECURITIES
Held-to-Maturity Securities $ -- $ --
Available-for-Sale Securities 115,963 146,556
Trading Securities -- --
---------- ----------
Total Equity Securities $ 115,963 $ 146,556
========== ==========
Net unrealized gain $ 30,593
==========
The net unrealized gain for "Available-for-Sale Securities" increased by
$9,074,000 (net of $3,932,000 in deferred income taxes) from December 31, 1997
to March 31, 1998.
An analysis of the realized gains and losses of the Company for the three months
ended March 31, 1998, is as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Gross realized gains from sales of Available-for-Sale Securities $ 4,337
Gross realized losses from sales of Available-for-Sale Securities (2,174)
Gross realized gains from sales of Trading Securities 0
Gross realized losses from sales of Trading Securities 0
-------
Net realized gain from investment activity 2,163
Net realized gain from other investment activity 15
-------
Total realized gain $ 2,178
=======
</TABLE>
The Company uses the specific identification method to determine cost for
computing the realized gains and losses.
13
<PAGE> 14
(8) EARNINGS PER SHARE
The Company adopted FASB Statement 128 "Earnings per Share" for the period
ending December 31, 1997. This Statement replaces the presentation of primary
and fully diluted EPS with a presentation of basic and diluted EPS. All prior
year data has been restated to conform with the provisions of this Statement and
to reflect the two-for-one stock split effective September 1997. The following
is the required reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
<TABLE>
<CAPTION>
For the three months ending March 31,
(in thousands)
1998 1997
----------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income (42,679) 26,419
less: Preferred stock dividends 1,797 1,797
-------- -------
BASIC EPS:
(Loss) income available to
common stockholders (44,476) 41,959 (1.06) 24,622 41,206 .60
======== ======
EFFECT OF DILUTIVE SECURITIES:
Common stock options 785 690
Convertible preferred stock 1,797 4,196 1,797 4,594
Convertible Debentures 0 0 15 300
-------- -------- -------- --------
DILUTED EPS:
Income available to common
stockholders plus assumed
conversions N/A 46,940 N/A 26,434 46,790 .57
======== ======== ======== ======== ======== ======
</TABLE>
14
<PAGE> 15
AMERICAN BANKERS INSURANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Gross collected premiums increased $60.8 million or 10% to $697.9 million for
the three months ended March 31, 1998, from $637.1 million for the same period
of 1997. Approximately 73% or $44.6 million of the increase came from the
Company's largest product lines - Credit Unemployment, Credit A&H, and Credit
Life.
During the three months ended March 31, 1998, total premiums and other revenues
were $400.2 million, a decrease of $4.7 million over total premiums and other
revenues of $404.9 million for the same period in 1997. The overall growth in
invested assets generated an additional $3.1 million of investment income for
the first quarter of 1998 as compared to the same period of 1997.
The benefits and claims ratio improved to 34% for the three months ended March
31, 1998 compared to 38% for the same period of 1997. However, this improvement
was partially offset by an increase in the commission ratio from 42% for the
three months ended March 31, 1997, to 43% for the same period in 1998.
Net loss for the first quarter of 1998 was $42.7 million. Included in the net
loss are the termination fee and merger related expenses of approximately $72.1
million, net of tax. Excluding these expenses, the Company reported net income
of $29.4 million. This compares with net income of $26.4 million for the same
period in 1997. (See discussion in "Change of Control of the Company" below.)
Cash flow from operations was negatively impacted by merger-related expenses of
$103.3 million.
FINANCIAL CONDITION
Stockholders' Equity decreased $29.7 million from $813.9 million at December 31,
1997, to $784.2 million at March 31, 1998. The primary cause for the decrease
was the net loss of $42.7 million.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1998, $2.2 billion of securities, short-term investments and cash
comprised 57% of the Company's total assets. The securities were principally
readily marketable and did not include any significant concentration in private
placements.
In connection with the execution of the Cendant Merger Agreement, (as discussed
in the "Change of Control of the Company" below) the Company paid American
International Group, Inc. (AIG) a fee of $100 million for the termination of the
AIG Merger Agreement and certain other related agreements. The Company paid the
fee using principally funds provided by its credit facility. The Cendant Merger
Agreement also requires the Company, under certain circumstances, to pay Cendant
a fee of $94.9 million plus expenses, if the Merger is not consummated. If such
payments were required, the Company expects to obtain such funds from available
credit facilities and/or operating cash flows.
Under the short-term credit facility and medium-term note programs, the Company
has available $105 million for short-term liquidity needs as of the end of first
quarter 1998. Consummation of the merger as contemplated by the Cendant Merger
Agreement will, unless consents or waivers are obtained from the group of banks
under the credit facility, constitute an event of default and result in the
termination of the credit facility. This event may impact the Company's
liquidity if it is required to repay all outstanding loans and advances pursuant
to the credit facility and the unavailability of further loans and advances
under the credit facility.
The Company does not hold significant investments in equity securities;
consequently, market changes in the equity securities markets do not
significantly affect the investment portfolio.
15
<PAGE> 16
Prior to the closing of the pending merger with Cendant Corporation, the Company
expects to continue its policy of paying regular cash dividends; however, future
dividends are dependent on the Company's future earnings, capital requirements
and financial condition. In addition, the payment of dividends is subject to the
restrictions, and conditions described in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
CHANGE OF CONTROL OF THE COMPANY
The Company entered into an Agreement and Plan of Merger, dated March 23, 1998,
by and among Cendant Corporation ("Cendant"), Season Acquisition Corporation
("Season") and the Company (the "Cendant Merger Agreement") pursuant to which
(i) the previously announced tender offer by Season is being conducted (the
"Offer") and (ii) upon consummation of the Offer, the merger of the Company with
and into Season will be consummated (the "Merger"). The execution of the Cendant
Merger Agreement followed the public announcement by Cendant on January 27, 1998
of its proposal to acquire the Company for $58 per share of Common Stock, to be
paid in cash and common stock of Cendant and the subsequent announcement by
Cendant on March 16, 1998, increasing the per share price for its proposal from
$58 to $67.
Under the terms of the Cendant Merger Agreement, Season is offering to purchase
23,501,260 outstanding shares of Common Stock at a price of $67.00 per Common
Share, net to the seller in cash, without interest thereon. Following the
consummation of the Offer, the Company will be merged with and into Season with
Season continuing as the surviving corporation. Season will succeed to the
business of the Company and will assume the name American Bankers Insurance
Group, Inc. As a result of the Merger, each Common Share then outstanding (other
than Common Shares owned by Cendant, Season or any direct or indirect subsidiary
of the company and in each case not held on behalf of third parties) will be
converted into, and become exchangeable for, that number of shares of Cendant
Common Stock having a value equal to the amount derived by dividing $67.00 by
the average closing prices of the Cendant Common Stock as reported on the NYSE
composite transactions reporting system (as reported by the New York City
edition of the Wall Street Journal) for the ten trading days ending on the third
trading day prior to the date the Merger is consummated. In addition, pursuant
to the Merger, each of the then outstanding $3.125 Series B Cumulative
Convertible Preferred Shares ("Preferred Shares") will be converted into one
share of Cendant Preferred Stock having substantially similar terms to the
Preferred Shares, except that such shares shall be convertible into shares of
Cendant Common Stock in accordance with the terms of the Preferred Shares.
The consummation of the Merger is conditioned upon several requirements,
including shareholder and regulatory approval. If the Company fails to
consummate the Merger, under certain circumstances, the Company will be
obligated to pay a termination fee to Cendant of $94.9 million plus expenses.
Cendant's proposal to acquire the Company followed an announcement by the
Company that it had entered into an agreement with American International Group,
Inc. ("AIG") for the acquisition by AIG of 100 percent of the outstanding stock
of the Company pursuant to the merger (the "AIG Merger") of the Company with and
into AIGF, Inc., a Florida corporation and a newly formed wholly-owned
subsidiary of AIG, in accordance with the terms of the Agreement and Plan of
Merger, dated as of December 21, 1997 among the Company, AIG and AIGF as amended
and restated as of January 7, 1998, amended by Amendment No. 1 thereto dated as
of January 28, 1998, and as further amended and restated as of February 28, 1998
(the "AIG Merger Agreement"). In connection with the AIG Merger Agreement, the
Company had granted AIG an option to purchase a number of newly issued shares of
Common Stock equal to approximately 19.9% of the outstanding number of shares of
Common Stock pursuant to the Stock Option Agreement dated as of December 21,
1997, as amended and restated as of February 28, 1998 (the "Stock Option
Agreement"). In addition, Messrs. Landon and Gaston who hold approximately 8.3%
of the outstanding Common Stock had entered into a voting agreement (the "Voting
Agreement") with AIG pursuant to which these stockholders agreed to vote their
shares of Common Stock in favor of adoption of the AIG Merger Agreement and
approval of the AIG Merger and to grant to AIG an irrevocable proxy with respect
to such shares of Common Stock, subject to certain conditions.
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement have been
terminated. On March 18, 1998, the Company, AIG and Cendant entered into a
settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed
to temporarily waive certain provisions of the AIG Merger Agreement, which
waiver permitted the Company to terminate the AIG Merger Agreement and enter
into the Cendant Merger Agreement. On March 23, 1998, in accordance with the
terms of the Settlement Agreement, the Company paid to AIG a termination
16
<PAGE> 17
fee of $100 million principally from funds provided by its short-term credit
facility and Cendant paid $5 million, and agreed to pay an additional $5 million
to AIG in respect of AIG's expenses, and the Company and AIG entered into a
termination agreement which resulted in the termination of the AIG Merger
Agreement, the Stock Option Agreement and the Voting Agreement.
The merger is subject to approval by regulatory authorities and the Company's
shareholders which are expected to be obtained by the end of 1998. In connection
with the Merger, the Company will recognize certain expenses associated with the
accelerated vesting of benefits under several compensation plans, including
employee stock options and restricted stock. The Company estimates that the
after-tax charge related to the acceleration of such benefits will be
approximately $6 million. Certain officers of the Company have severance
agreements which entitle them to receive specified payments under certain
circumstances following a change in control. The maximum amount that the Company
could incur pursuant to such severance agreements is approximately $12.7
million, net of tax.
In April 1998, Cendant announced that it had discovered potential accounting
irregularities in certain of its business units, and that it expects to restate
annual and quarterly net income and earnings per share for 1997 and may restate
certain other previous periods relating to those businesses. Cendant further
announced that the Audit Committee of its Board of Directors was performing an
investigation into those potential accounting irregularities.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR CAUTIONARY
STATEMENT
Except for the historical information contained herein, certain of the matters
discussed in this quarterly report are "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995, which involve certain
risks and uncertainties, including but not limited to, changes in general
economic conditions, interest rates, consumer confidence, competition,
environmental factors, and governmental regulations affecting the Company's
operations. See the Company's Annual Report Form on 10-K for the year ended
December 31, 1997, for a further discussion of these and other risks and
uncertainties applicable to the Company's business.
17
<PAGE> 18
PART II
OTHER INFORMATION
18
<PAGE> 19
ITEM 1 - LEGAL PROCEEDINGS
Commitments and Contingencies information which appears on page 10 elsewhere in
this report is incorporated by reference in this item. Additional information
regarding litigation can be found in the Company's 1997 Annual Report on Form
10-K.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6(a) - EXHIBITS
Exhibit 11 - Statement Re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule (for SEC use only)
ITEM 6(b) - REPORTS ON FORM 8-K
During the quarter ended March 31, 1998, the Company filed the following Current
Reports on Form 8-K:
(1) Current Report on Form 8-K, filed on January 13, 1998, reporting an Item 5
("Other Events") event and an Item 7 ("Financial Statements and Exhibits")
event.
(2) Current Report on Form 8-K/A, filed January 20, 1998.
(3) Current Report on Form 8-K/A, filed February 3, 1998.
19
<PAGE> 1
Item 6(a) Exhibits
Exhibit 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands except per common share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1998 1997
-------- -------
<S> <C> <C>
Basic:
Weighted average shares outstanding 41,959 41,206
======== =======
Net (Loss) Income $(42,679) $26,419
Less convertible preferred stock dividends 1,797 1,797
-------- -------
Total $(44,476) $24,622
======== =======
Net (Loss) Income - per share $ (1.06) $ 0.60
======== =======
Diluted:
Weighted average of shares outstanding 41,959 41,206
Assumed conversion of common stock equivalents 785 690
Assumed conversion of convertible securities 4,196 4,894
-------- -------
Total 46,940 46,790
======== =======
Net Income * $26,419
Add convertible debenture interest, net of federal income tax * 15
-------- -------
Total * $26,434
======== =======
Net Income - per share N/A $ 0.57
======== =======
</TABLE>
* Anti-dilutive
20
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 1,034,941
<DEBT-CARRYING-VALUE> 813,298
<DEBT-MARKET-VALUE> 813,298
<EQUITIES> 146,556
<MORTGAGE> 9,114
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,219,807
<CASH> 3,038
<RECOVER-REINSURE> 287,985
<DEFERRED-ACQUISITION> 456,953
<TOTAL-ASSETS> 3,848,661
<POLICY-LOSSES> 316,091
<UNEARNED-PREMIUMS> 1,453,753
<POLICY-OTHER> 570,270
<POLICY-HOLDER-FUNDS> 5,063
<NOTES-PAYABLE> 346,093
0
105,025
<COMMON> 42,686
<OTHER-SE> 636,536
<TOTAL-LIABILITY-AND-EQUITY> 3,848,661
356,847
<INVESTMENT-INCOME> 35,178
<INVESTMENT-GAINS> 2,178
<OTHER-INCOME> 5,964
<BENEFITS> 122,938
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (69,616)
<INCOME-TAX> (26,937)
<INCOME-CONTINUING> (42,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,679)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
