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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0742926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
222 South 15th St., Suite 600 N.
Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402)
344-8800
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 XX NO
---- ----
The number of shares of each class of the Registrant's common
stock outstanding on August 9, 1994 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 10,230,541
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<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1994 (unaudited) and December 31, 1993
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Six Months Ended June 30, 1994 and
1993
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1994 and 1993
Notes to Interim Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1994 1993
----------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale $150,432 $ 95,836
Fixed maturities held for investment -- 51,756
Marketable equity securities - preferred stock 9,972 8,445
Marketable equity securities - common stock 5,832 5,427
Mortgage loans and other investments 2,361 2,852
Real estate 3,897 4,266
Short-term investments, at cost, which approximates
market 40,536 19,404
------- -------
213,030 187,986
Cash 3,476 2,894
Receivables, net 66,806 48,166
Equity investment in Major Realty Corporation 5,222 5,376
Property and equipment, net 3,924 3,200
Reinsurance recoverable on unpaid loss and loss adjustment
expenses 78,614 95,886
Deferred policy acquisition costs 17,978 11,815
Prepaid reinsurance premiums 19,119 15,448
Deferred tax asset 6,262 --
<PAGE>
Excess of cost over acquired net assets 38,685 33,254
Other assets 7,942 5,360
------- -------
Total assets $461,058 $409,385
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $209,139 $211,600
Unearned premiums 84,208 60,114
Amounts payable to reinsurers 31,230 7,186
Accounts payable and accrued liabilities 9,285 13,343
Bank borrowings, term debt and other borrowings 29,031 18,951
------- -------
Total liabilities 362,893 311,194
Contingencies -- --
Minority interests -- 2,474
------- -------
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.40 par value, 20,000,000 shares
authorized; 10,265,397 and 9,976,415 shares issued 4,106 3,991
Capital in excess of par value 143,212 140,002
Unrealized gain (loss) on marketable equity securities;
and on fixed maturities available for sale, net of tax (7,734) 66
Accumulated deficit (37,155) (44,078)
------- -------
102,429 99,981
<PAGE>
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
------- -------
Total stockholders' equity 98,165 95,717
------- -------
Total liabilities and stockholders' equity $461,058 $409,385
======= =======
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and six months ended June 30, 1994 and 1993
(in thousands, except per share data)
(unaudited)
Three Months Six Months
------------------ ------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned $46,716 $28,042 $84,694 $54,510
Insurance agency commissions 949 1,107 1,802 2,046
Net investment income 3,040 2,760 5,677 5,265
Net realized capital gains 161 672 398 1,193
------ ------ ------ ------
50,866 32,581 92,571 63,014
Costs and expenses:
Cost of revenues:
Insurance losses and loss adjustment
expenses 34,363 20,089 60,583 39,619
Insurance agency costs 855 1,000 1,667 1,920
Insurance underwriting expenses 11,167 8,342 22,296 15,387
General and administrative expenses 1,278 594 2,349 1,084
------ ------ ------ ------
47,663 30,025 86,895 58,010
------ ------ ------ ------
Operating profit 3,203 2,556 5,676 5,004
------ ------ ------ ------
Other income (expense):
Interest expense (371) (534) (699) (1,238)
Share of net loss of investee (71) (82) (154) (223)
Other, net 58 (83) 45 (91)
------ ------ ------ -------
(384) (699) (808) (1,552)
<PAGE>
Income before income taxes and minority
interests 2,819 1,857 4,868 3,452
Current tax expense 65 90 65 90
Deferred tax benefit (2,200) -- (2,200) --
Minority interests in net income of
consolidated subsidiaries -- 52 80 95
------ ------ ------ ------
Net income $ 4,954 $ 1,715 $ 6,923 $ 3,267
====== ====== ====== ======
Earnings per share:
Primary $ .41 $ .20 $ .61 $ .44
====== ====== ====== ======
Fully diluted $ .40 $ .20 $ .59 $ .43
====== ====== ====== ======
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1994 and 1993
(in thousands)
(unaudited)
1994 1993
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,923 $ 3,267
Net adjustment to reconcile net income to net cash provided
by operating activities 20,990 22,384
------- -------
Net cash provided by operating activities 27,913 25,651
------- -------
Cash flows from investing activities:
Proceeds from sales of investments 641 1,067
Proceeds from sales of investments available for sale 13,631 58,173
Proceeds from maturities of investments 508 864
Proceeds from maturities of investments held for investment -- 1,848
Proceeds from maturities of investments available for sale 11,162 5,119
Purchases of investments (5,731) (4,829)
Purchases of investments available for sale (41,125) (99,721)
Purchases of property and equipment (678) (380)
------ ------
Net cash used for investing activities (21,592) (37,859)
------ ------
Cash flows from financing activities:
Repayments of bank borrowing (18,597) (1,750)
Proceeds from bank borrowings 29,000 --
Repayments of term debt, other borrowings and notes
payable to affiliates (323) (10,190)
Minority interests 7 814
<PAGE>
Proceeds from issuance of common stock 225 31,163
Other (340) --
------ ------
Net cash provided by financing activities 9,972 20,037
------ ------
Net increase (decrease) in cash and short-term investments 16,293 7,829
Cash and short-term investments at beginning of period 17,561 12,471
------ ------
Cash and short-term investments at end of period $ 33,854 $ 20,300
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 572 $ 1,615
======= =======
Cash paid during the period for income taxes $ 58 $ 109
======= =======
Non-cash financing activities:
Notes payable to affiliates converted to equity $ -- $ 7,000
======= =======
Issuance of common stock for merger with Statewide $ 3,100 $ --
======= =======
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the
accounts of Acceptance Insurance Companies Inc. and majority
owned subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect
all adjustments, consisting only of normal recurring
adjustments except as otherwise disclosed, which in the
opinion of management are considered necessary to fairly
present the Company's financial position as of June 30, 1994
and December 31, 1993, and the results of operations for the
three months and six months ended June 30, 1994 and 1993 and
cash flows for the six months ended June 30, 1994 and 1993.
Statements of Cash Flows
The Company aggregates cash and short-term investments with
maturity dates of three months or less from the date of
purchase for purposes of reporting cash flows. As of June
30, 1994 approximately $10,158,000 of short-term investments
had a maturity date at acquisition of greater than three
months.
Excess of Cost Over Acquired Net Assets
The excess of cost over equity in acquired net assets is
being amortized principally using the straight-line method
over periods not exceeding 40 years. Recoverability of this
asset is evaluated periodically based on Management's
estimate of future undiscounted earnings of the businesses
acquired.
Reclassifications
Certain prior year accounts have been reclassified to
conform with current period presentation.
<PAGE>
2. Statewide Merger:
On March 31, 1994, the Company entered into an Agreement and
Plan of Merger with Statewide Insurance Corporation
("Statewide"), the exclusive general agent for the Company's
non-standard automobile insurance program underwritten by
Phoenix Indemnity Insurance Company ("Phoenix Indemnity"),
and the owner of 20% of the outstanding shares of common
stock of Phoenix Indemnity, pursuant to which the Company
acquired by merger (the "Merger") Statewide (except for
certain assets and liabilities relating to its agency
operations other than the non-standard automobile program
which were divested prior to the merger). The Merger was
effective at the beginning of business on April 1, 1994.
The purchase price of approximately $3.1 million, comprised
of approximately 266,000 shares of the Company's common
stock, was allocated based upon the estimated fair market
value of assets acquired and liabilities assumed. The
purchase price in excess of the fair market value of the net
assets acquired is being amortized using the straight-line
method over 40 years.
3. Per Share Data:
Primary earnings per share and fully diluted earnings per
share are based on the weighted average shares outstanding
of approximately 13.5 million and 13.7 million,
respectively, for the three months ended June 30, 1994 and
approximately 11.9 million and 12.1 million, respectively,
for the three months ended June 30, 1993. Primary earnings
per share and fully diluted earnings per share are based on
the weighted average shares outstanding of approximately
13.3 million and 13.5 million, respectively, for the six
months ended June 30, 1994 and approximately 10.3 million
and 11.2 million, respectively, for the six months ended
June 30, 1993. Included in weighted average shares
outstanding is the assumed conversion of all outstanding
options and warrants utilizing the treasury stock method
with appropriate adjustment to net income attributable to
the assumed use of proceeds.
4. Investments:
On January 1, 1994 the Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity
Securities." In conjunction with the adoption of SFAS 115,
the Company reclassified its debt and equity securities to
meet the requirements of the statement. SFAS 115 requires
investments in debt and equity securities to be classified
at acquisition into one of three categories: held to
maturity, available for sale, or trading. Securities are
classified as trading when they are bought and held
principally for the purpose of selling them in the near
future. Securities are classified as available for sale
when the securities may be sold from time to time to
effectively manage interest rate exposure and liquidity
needs. Securities are classifed as held to maturity
securities when the Company has the positive intent and
ability to hold these securities until maturity.
At January 1, 1994 and June 30, 1994 all debt and equity
securities were classified as available for sale. Available
for sale securities are stated at fair value with the
unrealized gains and losses reported as a separate component
of stockholders' equity.
The amortized cost and related market values of debt and
equity securities in the accompanying balance sheets are as
follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
June 30, 1994:
Fixed maturities available
for sale:
U.S. Treasury and
government securities $ 34,969 $ 53 $ 1,226 $ 33,796
States, municipalities and
political subdivisions 33,415 9 995 32,429
Mortgage-backed securities 75,198 386 8,554 67,030
Other debt securities 17,433 177 433 17,177
------- ----- ------ -------
$161,015 $ 625 $11,208 $150,432
======= ===== ====== =======
Marketable equity securities
available for sale -
preferred stock $ 10,484 $ 12 $ 524 $ 9,972
======= ===== ====== =======
Marketable equity securities
available for sale -
common stock $ 6,069 $ 355 $ 592 $ 5,832
======= ===== ====== =======
December 31, 1993:
Fixed maturities held for
investment:
U.S. Treasury and government
securities $ 9,076 $ 360 $ -- $ 9,436
States, municipalities and
political subdivisions 504 26 -- 530
Mortgage-backed securities 33,070 1,330 81 34,319
<PAGE>
Other debt securities 9,106 663 -- 9,769
------- ----- ------ -------
$ 51,756 $2,379 $ 81 $ 54,054
======= ===== ====== =======
Fixed maturities available for
sale:
U.S. Treasury and government
securities $ 17,379 $ 241 $ 206 $ 17,414
States, municipalities and
political subdivisions 33,370 407 4 33,773
Mortgage-backed securities 40,687 302 203 40,786
Other debt securities 4,400 88 11 4,477
------- ----- ------ -------
$ 95,836 $1,038 $ 424 $ 96,450
======= ===== ====== =======
Marketable equity securities -
preferred stock $ 8,367 $ 179 $ 101 $ 8,445
======= ===== ====== =======
Marketable equity securities -
common stock $ 5,439 $ 347 $ 359 $ 5,427
======= ===== ====== =======
/TABLE
<PAGE>
5. Insurance Premiums and Claims
Insurance premiums written and earned by the Company's
insurance subsidiaries for the three months and six months
ended June 30, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
----------------- ------------------
1994 1993 1994 1993
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Direct premiums written $94,077 $40,872 $168,347 $80,107
Assumed premiums written 5,246 349 6,395 1,338
Ceded premiums written (41,691) (9,470) (69,623) (18,346)
------ ------ ------- ------
Net premiums written $57,632 $31,751 $105,119 $63,099
====== ====== ======= ======
Direct premiums earned $81,705 $38,440 144,487 75,221
Assumed premiums earned 5,256 605 6,159 2,287
Ceded premiums earned (40,245) (11,003) (65,952) (22,998)
------ ------ ------ ------
Net premiums earned $46,716 $28,042 $84,694 $54,510
====== ====== ====== ======
</TABLE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $30,828,000 and $47,962,000 for the three
months and six months ended June 30, 1994, respectively.
6. Bank Borrowings, Term Debt and Other Borrowings:
On March 31, 1994, the Company amended its borrowing
arrangements with its bank lenders. The new structure is a
$35 million line of credit with interest payable quarterly
at the Company's option of the prime rate or LIBOR plus a
margin of 1% to 1.75%, depending on the Company's debt to
equity ratio. The line of credit will mature in four years
and may be extended to five years by the bank lenders.
At June 30, 1994, the Company had $29 million outstanding
under this arrangement. The proceeds were used to retire
bank borrowings and accrued interest of $17.7 million and to
provide capital for insurance subsidiaries. On June 6, 1994
the Company elected LIBOR plus 1.25% percent or 6% through
September 6, 1994.
7. Income Taxes:
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Tax",
effective January 1, 1993.
SFAS No. 109 requires that the Company recognize a deferred
tax asset for all temporary differences and net operating
loss carryforwards and a related valuation allowance account
when realization of the asset is uncertain. The Company
had reported pre-tax losses from 1989 through 1992.
Although the circumstances that generated these losses were
not indicative of operating income, management was uncertain
of future earnings and recorded the related !valuation
allowance account.
The Company has reported eight consecutive quarters with
pre-tax earnings. The Company has generated AMT credit
carryforwards and has reduced its net operating loss
carryforwards in 18 months by $3.9 million. Managment
continued assessing the weight of evidence at each balance
sheet and believes now it is more likely than not the
Company will realize a portion of the deferred tax asset.
The Company has reduced the valuation allowance by
approximately $6.3 million.
<TABLE>
<S> <C>
Net operating loss carryforwards
expiring in varying amounts through 2006 $ 1,372
Unpaid losses and loss adjustment expenses 6,852
Unearned premiums 4,426
Allowances for doubtful accounts 902
Unrealized loss on marketable equity securities 255
Unrealized loss on fixed maturities
available for sale 3,598
Major Realty basis difference 7,584
------
Deferred tax asset 24,989
------
Deferred policy acquisition costs (6,113)
Other (695)
------
Deferred tax liability (6,808)
------
18,181
Valuation allowance (11,919)
------
Net deferred tax asset $ 6,262
======
</TABLE>
<PAGE>
PART I.
Item 2.
ACCEPTANCE INSURANCE COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition
and results of operations of the Company and its consolidated
subsidiaries is based upon the Company's interim consolidated
financial statement and the notes thereto included in this
report.
RESULTS OF OPERATIONS
Three months and six months ended June 30, 1994
Compared to three months and six months ended June 30, 1993
The Company's net income increased by 188.9% and 111.9% during
the three and six months ended June 30, 1994 as compared to
similar periods during 1993. The principal components of this
increase in net income were an increase in insurance premiums
earned, improvement in the Company's combined underwriting loss
and expense ratios, an increase in investment income, a reduction
in interest expense and a deferred tax benefit. These positive
additions to net income were partially offset by reductions in
the Company's net realized capital gains, as well as an increase
in the general and administrative expense of the Company.
Insurance premiums earned increased 66.6% and 55.4% respectively
in the three and six months ended June 30, 1994 as compared to
the same periods a year earlier. This increase resulted
primarily from an increase in the direct premiums written by the
Company. The principal components of this increase in direct
written premiums were premiums written by The Redland Group,
which was acquired in the third quarter of 1993, and an increase
in premiums written by the Company's general agency division,
primarily resulting from the expansion of this division through
the establishment of a new branch office in Scottsdale, Arizona
in August of 1993. These new operations accounted for over 90%
of the increase in direct premiums written during the first half
of 1994 as compared to the same period in 1993.
The increase in premium revenue was also accompanied by an
improvement in the Company's underwriting combined loss and
expense ratio during both the three and six months ended June 30,
1994. This improvement can be attributed to the addition of the
operations of The Redland Group and the operations of the
Company's nonstandard automobile unit, Phoenix Indemnity. While
the combined ratios of the other Company operations approximated
102% during all periods being compared, the combined loss and
expense ratio for Phoenix Indemnity fell from 98.4% and 98.8%
during the three and six months ended June 30, 1993 to 92.6% and
95.1% during the same periods in 1994. In addition, the Redland
operations recorded a combined ratio of 91.1% and 89.0% during
the three and six months ended June 30, 1994. The seasonal and
short term nature of the business written by The Redland Group
produces more volatility in the operating ratios on a quarter to
quarter basis than have historically been present in the
operations of the Company. For example, during the first three
months of 1994, The Redland Group's loss ratios were lower during
a period when loss activity is historically lower in rural
communities, but elevated during the second quarter as storm
activity as well as business activity, increased in the rural
communities where Redland writes the majority of its business.
On the other hand, Redland's expense ratios were higher during
the first quarter when little or no crop insurance was written,
but during the second quarter of 1994 ceded commissions from
large quota share treaties benefited The Redland Group's expense
ratio reducing net expenses. The effect of these ceding
commissions can be seen in the Company's expense ratio which fell
from 29.7% and 28.2% during the three and six months period ended
June 30, 1993, when no Redland operations were included, compared
to 23.9% and 26.3% during the three and six months ended June 30,
1994.
While the Company's investment yield fell slightly from 6.50% and
6.69% respectively during the three and six months ended June 30,
1993 to 6.13% and 5.92% during the same periods of 1994, the
average size of the investment portfolio increased from
approximately $157 million during the six months ended June 30,
1993 to approximately $192 million during the same period in
1994. The net effect was an increase in investment income of
approximately 10.1% and 7.8% during the three and six months
ended June 30, 1994 as compared to the same periods a year
earlier. This increase in investment income was offset, however,
by a reduction in realized capital gains. During the three and
six months ended June 30, 1994 realized capital gains were
reduced by $511,000 and $795,000 respectively from the similar
periods a year earlier. This reduction in realized capital gains
resulted from the upward shift in the prevailing interest rates
during the first half of 1994 as compared to a decline in
interest rates during the similar period in 1993. The decline
during 1993 created opportunities for the Company to realize
selected gains within its portfolio whereas the rising interest
rate environment of 1994 provided little opportunity for realized
gains in the portfolio.
The Company's general and administrative expenses increased 115%
and 117% respectively during the three and six months ended June
30, 1994 compared with the same periods during 1993. This
increase resulted primarily from the addition of the general and
administrative expenses of The Redland Group, as well as the need
to increase staff and systems at the holding company level in
order to monitor the larger operations of the Company during
1994. Since the general and administrative expenses of The
Redland Group were included in the Company's results beginning
with the third quarter of 1993, the Company does not expect to
see increases in general and administrative expenses of the same
magnitude during future reporting periods. The Company does
expect that the general increase in the Company's size will
result in some increase in general and administrative expenses in
future periods, but at a more modest level.
During the first half of 1993, the Company's interest expense was
effected by higher interest rates under bridge notes outstanding
during that period. These notes were retired or converted to
equity during 1993, and therefore, the Company's average interest
expense rate was lower for the first half of 1994 as compared to
the first half of 1993. At the same time, the Company's
outstanding loan balances have increased during the second
quarter of 1994. The Company borrowed an additional $7 million
on March 31, 1994 and an additional $4 million on June 30, 1994
from its line of credit. These amounts were used to infuse
capital into the Company's operating insurance company
subsidiaries. Thus, it is expected with these increased
borrowings that the Company's interest expense will increase
during subsequent quarters.
The Company's net income benefited from a deferred tax benefit of
$2.2 million during the three and six months ended June 30, 1994.
No such deferred tax benefit was realized during the three and
six months ended June 30, 1993. This deferred tax benefit
resulted from the Company meeting the realizability test under
SFAS No. 109, "Accounting for Income Taxes," adopted by the
Company in January 1993. SFAS No. 109 requires that the Company
recognize a deferred tax asset for all temporary differences and
net operating loss carryforwards and a related valuation
allowance account when realization of the asset is uncertain.
The Company had reported pre-tax losses from 1989 through 1992.
Although the circumstances that generated these losses were not
indicative of operating income, management was uncertain of
future earnings and recorded the related valuation allowance
account. The Company has reported eight consecutive quarters
with pre-tax earnings. The Company has generated Alternative
Minimum Tax credit carryforwards and has reduced its net
operating loss carryforwards in 18 months by $3.9 million.
Management continued assessing the weight of evidence at each
balance sheet and believes now it is more likely than not the
Company will realize a portion of the deferred tax asset. The
deferred tax benefit of $2.2 million in the three and six months
ended June 30, 1994 is the portion of the deferred tax asset that
is estimated to be realized in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and
capital resources requirements of the Company and the Company's
insurance subsidiaries.
The Company - Parent Only
Historically, dividends from the insurance subsidiaries have not
been available to the Company because of restrictive covenants
set forth in the term and revolving loan agreements of the
Company's insurance subsidiaries which prohibited dividends from
the insurance subsidiaries to the Company without the expressed
consent from the holders of the debt obligations. In March 1994,
the Company agreed to amend its borrowing arrangements with its
bank lenders. The new arrangements transferred the debt
obligations from the holding companies of the insurance
subsidiaries to the parent company. At such time, the new loan
agreements no longer imposed restrictions on dividends from the
insurance subsidiaries to the Company. The new loan agreement is
structured as a $35 million line of credit with interest payable
quarterly at the Company's option of the prime rate or at LIBOR
plus a margin of 1% to 1.75% depending on the Company's debt to
equity ratio. The line of credit will mature in four years and
may be extended to five years by the bank lenders.
On March 31, 1994, the Company borrowed $25 million under the
agreement. The proceeds were used to retire bank borrowings and
accrued interest of $17.7 million and to provide capital for the
insurance subsidiaries. On June 30, 1994 the Company borrowed an
additional $4 million under the agreement, the proceeds of which
were used to provide capital for the insurance subsidiaries.
In addition, dividends from the insurance subsidiaries of the
Company are regulated by the state regulatory authorities of the
states in which each subsidiary is domiciled. The laws of such
states generally restrict dividends from insurance companies to
parent companies to certain statutorily approved limits. As of
June 30, 1994, the statutory limitations on dividends from
insurance company subsidiaries to the parent without further
insurance department approval were approximately $3.4 million.
In addition to available dividends, the parent company may
receive additional liquidity from cash flows from the agency,
premium finance and claim service operations of its noninsurance
company subsidiaries.
Insurance Subsidiaries
The Company's insurance subsidiaries are highly liquid and are
able to meet their cash requirements on a timely basis. During
the first quarter of 1994, the Company retired all debt of the
insurance subsidiary holding companies as described above. Thus,
at June 30, 1994, the insurance subsidiaries had no outstanding
debt obligations.
On a longer term basis, principal liquidity needs of the
insurance company subsidiaries are to fund loss payments and loss
adjustment expenses required in the operation of its insurance
business. Primarily, the available sources to fund these
obligations are new premiums received and, to a lesser extent,
cash flows from the Company's portfolio operations. The Company
monitors it cash flow carefully and attempts to maintain its
portfolio at a duration which approximates the estimated cash
requirements for loss and loss adjustment expenses. The seasonal
nature of the Company's crop business generates a reverse cash
flow with acquisition costs in the first part of the year, losses
being paid over the summer months, and the related premiums not
collected until after the fall harvest. The cash flows from the
crop programs are similar in nature to cash flows in the farming
business.
The National Association of Insurance Commissioners (NAIC) has
released its proposed risk-based capital formula for property and
casualty insurance companies. The risk-based capital initiative
is designed to enhance the current regulatory framework for the
evaluation of the capital adequacy of a property and casualty
insurer. The formula requires an insurer to compute the amount
of capital necessary to support the elements of risk in (a)
assets (default and market decline), (b) credit (ceded
reinsurance recoverables), (c) off balance sheet/growth risk, (d)
loss and loss adjustment expense reserves (adverse development),
and (e) premium/price risk (combined ratio). The Company's five
insurance subsidiaries have reviewed and applied the proposed
NAIC formula for the 1993 year and have met these requirements.
Since the formula established by the proposed risk-based capital
rules are yet to be adopted by any of the states in which the
insurance subsidiaries are domiciled, it is uncertain the extent
to which these rules will be made applicable to the Company.
Changes in Financial Condition
Continued growth in the Company's direct written premiums placed
greater leverage on the Company's balance sheet as the Company's
assets increased by 12.6% from December 31, 1993 to June 30, 1994
while stockholder's equity increased only 2.6% for the same
period of time. In addition, the Company's insurance
subsidiaries are required by state regulatory authorities to
maintain certain levels of policyholder's surplus in relationship
to the amount of direct and net premiums written. Rating
agencies, such as A.M. Best & Company, also use certain leverage
and liquidity ratios in rating the Company's insurance company
subsidiaries. The Company believes that its current equity
position in relation to premiums written is adequate to maintain
its current status with state regulatory agencies as well as
independent rating agencies, but continued growth could impact
the ability of the Company to maintain future growth.
Accordingly, the Company believes that it may need to seek
additional capital in the future, and therefore, the Company is
studying various alternatives for raising such additional capital
funds. No definitive plan has yet been adopted by the Company
for such fund raising activities.
As mentioned above, the Company's unrealized gain or loss on
marketable equity securities and fixed maturities available for
sale, net of tax, changed from a $66,000 gain as of December 31,
1993 to an approximate $7.7 million loss as of June 30, 1994.
Such change was caused by the general upward movement in the
interest rate environment. The change in the valuation of the
Company's portfolio approximated the percentage change in the
valuation of the Five Year U.S. Treasury Notes during the same
period. The Company, however, has excellent liquidity in its
investment portfolio and does not expect to realize any of the
unrealized losses in its portfolio during the foreseeable future
(see Recent Statements of Financial Accounting Standards).
On March 31, 1994, the Company entered into an agreement and plan
of merger with Statewide Insurance Corporation, the exclusive
general agent for the company's nonstandard automobile insurance
program underwritten by Phoenix Indemnity Insurance Company
("Phoenix Indemnity"), and the owner of 20% of the outstanding
shares of common stock of Phoenix Indemnity pursuant to which the
Company acquired by merger (the "Merger") Statewide (except for
certain assets and liabilities pertaining to its agency operation
other than the nonstandard automobile program which were divested
prior to the Merger). The Merger was effective at the beginning
of business on April 1, 1994, thus eliminating any minority
interests on the Company's June 30, 1994 balance sheet as well as
increasing the issued shares by approximately 266,000.
Consolidated Cash Flows
Cash flows from operations for the six months ended June 30, 1994
were a positive $27.9 million as compared to a positive $25.6
million for the first six months of 1993. Cash flows from
operating activities during the first six months of 1994 were
positively impacted by the net income of the Company, growth in
casualty lines of business and changes in the Company's
reinsurance structure whereby the Company retained more of its
business for its own account. Cash flows from financing
activities for the first six months of 1994 were primarily
impacted by the restructuring of the Company's bank borrowings as
described earlier.
Inflation
The Company does not believe that inflation has had a material
impact on its financial condition or the results of operation.
Recent Statements of Financial Accounting Standards
One January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In conjunction with
the adoption of SFAS 115, the Company reclassified its debt and
equity securities to meet the requirements of the statement.
SFAS 115 requires investments in debt and equity securities to be
classified at acquisition into one of three categories; held to
maturity, available for sale, or trading. Securities are
classified as trading when they are bought and held principally
for the purpose of selling them in the near future. Securities
are classified as available for sale when the securities may be
sold from time to time to effectively manage interest rate
exposure and liquidity needs. Securities are classified as held
to maturity when the Company has a positive intent and an ability
to hold the securities until maturity.
At January 1, 1994 and June 30, 1994, all debt and equity
securities were classified as available for sale. Available for
sale securities are stated at fair market value with the
unrealized gains and losses reported as a separate component of
stockholders' equity. At June 30, 1994, the Company had an
unrealized loss on these securities, net of taxes, of
approximately $7.7 million.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of shareholders was
held May 24, 1994, and the following matters were
submitted to a vote of shareholders at such Annual
Meeting.
At the Annual Meeting, nine Director nominees were
elected by shareholders to serve as Directors until the
next Annual Meeting of shareholders, and until their
successors are named. The number of votes voted for
each such Director and the number of votes withheld for
each Director is set forth below:
<TABLE>
<CAPTION>
NAME NUMBER OF VOTES
---- -------------------------
FOR WITHHELD
--------- --------
<S> <C> <C>
Jay A. Bielfield 8,518,368 20,433
Kenneth C. Coon 8,518,418 20,383
Edward W. Elliott, Jr. 8,517,202 21,599
Robert LeBuhn 8,516,817 21,984
Michael R. McCarthy 8,518,343 20,458
John P. Nelson 8,518,343 20,458
R.L. Richards 8,517,343 21,458
David L. Treadwell 8,516,463 22,338
Doug T. Valassis 8,517,631 21,270
</TABLE>
Each nominee received at least 99.7% of the votes cast.
At such Annual Meeting, there was submitted to
shareholders a proposal to approve amendments to the
Registrant's 1992 Incentive Stock Option Plan and the
Employee Stock Purchase Plan, in the form of such
amended Plans submitted with proxy materials for the
Annual Meeting. The amended Plans were approved by
shareholders by the following vote:
<TABLE>
<S> <C>
FOR 8,429,554
AGAINST 67,169
ABSTAIN 42,078
NO VOTE 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) No reports on Form 8-K were filed by the registrant
during the quarter for which this report is filed.
<PAGE>
SIGNATURES
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.
ACCEPTANCE INSURANCE COMPANIES INC.
/s/ Kenneth C. Coon
August 12, 1994 ___________________________________
Kenneth C. Coon
Chief Executive Officer
/s/ Georgia M. Mace
August 12, 1994 ___________________________________
Georgia M. Mace
Treasurer and Chief Accounting
Officer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1994
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
10.1 $35,000,000 Credit Agreement By and Among Acceptance
Insurance Companies Inc., NBD Bank, N.A., First
National Bank of Omaha, FirsTier Bank, N.A., Comerica
Bank and NBD Bank, N.A., As Agent, dated as of March
31, 1994. Incorporated by reference to Exhibit 10.1 to
Acceptance Insurance Companies Inc. Quarterly Report on
Form 10-Q for the three months ended March 31, 1994.
10.2 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and Stoneridge Resources, Inc. dated April
12, 1990, and related agreements. Incorporated by
reference to Exhibit 10i to Stoneridge Resources, Inc.
Annual Report on Form 10-K for the fiscal year ended
August 31, 1990.
10.3 Amended and Restated Registration Rights Agreement,
dated April 9, 1990, between Stoneridge Resources, Inc.
and Patricia Investments, Inc. Incorporated by
reference to Exhibit 10d to Stoneridge Resources, Inc.
Quarterly Report on Form 10-Q for the period ended May
31, 1990.
10.4 Warrants to purchase a total of 389,507 shares of
common stock ($.10 par value) of Acceptance Insurance
Companies Inc. dated April 10, 1992, issued by
Acceptance Insurance Companies Inc. to the various
purchasers of the Floating Rate Secured Subordinated
Notes, due 1993, Series A and B. Incorporated by
reference to Exhibit 10.41 to the Stoneridge Resources,
Inc., Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10.5 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., Stoneridge
Resources, Inc. and Kenneth C. Coon. Incorporated by
reference to Exhibit 10.65 to the Stoneridge Resources,
Inc., Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
11 Computation of Income per share.
99.1 Acceptance Insurance Companies Inc., 1992 Incentive
Stock Option Plan effective as of December 22, 1992.
Incoporated by reference to Exhibit 10.1 to the
Stoneridge Resources, Inc. (now, by change of name,
Acceptance Insurance Companies Inc.) Registration
Statement on Form S-1, Registration No. 33-53730.
99.2 Acceptance Insurance Companies Inc., Employee Stock
Purchase Plan, effective as of December 22, 1992.
Incorporated by reference to Exhibit 10.2 to the
Stoneridge Resources, Inc. (now, by change of name,
Acceptance Insurance Companies Inc.) Registration
Statement on Form S-1, Registration No. 33-53730.
99.3 Acceptance Insurance Companies Inc., Employee Stock
Ownership and Tax Deferred Savings Plan as merged,
amended and restated effective October 1, 1990.
Incorporated by reference to Exhibit 10.4 to the
Stoneridge Resources Inc. Quarterly Report on Form 10-Q
for the quarter ended November 30, 1990.
99.4 First Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Exhibit 99.4 to the
Acceptance Insurance Companies Inc. Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
99.5 Second Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Exhibit 99.5 to the
Acceptance Insurance Companies Inc. Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
99.6 Acceptance Insurance Companies Inc. Amended 1992
Incentive Stock Option Plan. Incorporated by reference
to Acceptance Insurance Companies Inc. Proxy Statement
filed on or about April 29, 1994.
99.7 Acceptance Insurance Companies Inc. Amended Employee
Stock Purchase Agreement. Incorporated by reference to
Acceptance Insurance Companies Inc. Proxy Statement
filed on or about April 29, 1994.
<TABLE>
<CAPTION>
EXHIBIT 11
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME PER SHARE
for the three months and six months ended June 30, 1994 and 1993
(in thousands, except per share data)
(unaudited)
Three Months Six Months
----------------- -----------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $ 4,954 $ 1,715 $ 6,923 $ 3,267
Adjustment for interest expense reduction
and interest income from assumed proceeds 556 699 1,163 1,224
------ ------ ------ ------
Adjusted net income $ 5,510 $ 2,414 $ 8,086 $ 4,491
====== ====== ====== ======
Weighted average number of shares
outstanding 9,983 8,214 9,848 7,267
Adjustment for shares issuable 3,497 3,708 3,495 3,002
------ ------ ------ ------
Adjusted weighted average number of shares
outstanding 13,480 11,922 13,343 10,269
====== ====== ====== ======
Primary earning per share $ .41 $ .20 $ .61 $ .44
====== ====== ====== ======
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 4,954 $ 1,715 $ 6,923 $ 3,267
Adjustment for interest expense reduction
and interest income from assumed proceeds 508 716 1,059 1,351
Adjustment for addback of interest on
convertible note -- 32 -- 239
------ ------ ------ ------
Adjusted net income $ 5,462 $ 2,463 $ 7,982 $ 4,857
====== ====== ====== ======
Weighted average number of shares
outstanding 10,223 8,214 10,088 7,267
Adjustment for shares issuable 3,449 3,795 3,423 3,446
Adjustment for convertible note -- 135 -- 503
------ ------ ------ ------
Adjusted weighted average number of shares
outstanding 13,672 12,144 13,511 11,216
====== ====== ====== ======
Fully diluted earnings per share $ .40 $ .20 $ .59 $ .43
====== ====== ====== ======
<FN>
(a) As of June 30, 1994 and 1993, the number of shares of the Company's common stock
obtainable on exercise of outstanding options and warrants in the aggregate exceeds 20% of
the common shares outstanding. Therefore, the method of calculating earnings per share
has been adjusted accordingly as provided by APB Opinion No. 15.
</TABLE>
