- ----------------------------------------------------------------
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 September 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 October 28, 1994 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 10,231,797
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ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1994 (unaudited) and December 31, 1993
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Nine Months Ended September 30, 1994
and 1993
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1994 1993
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale $ 151,769 $ 95,836
Fixed maturities held for investment - 51,756
Marketable equity securities - preferred stock 9,748 8,445
Marketable equity securities - common stock 6,752 5,427
Mortgage loans and other investments 2,320 2,852
Real estate 3,894 4,266
Short-term investments, at cost, which approximates
market 52,905 19,404
---------- ----------
227,388 187,986
Cash 6,562 2,894
Receivables, net 106,510 37,338
Reinsurance recoverable on paid loss and adjustment
expenses 21,420 10,828
Equity investment in Major Realty Corporation 5,157 5,376
Property and equipment, net 4,087 3,200
Reinsurance recoverable on unpaid loss and adjustment
expenses 92,072 95,886
Deferred policy acquisition costs 19,401 11,815
Prepaid reinsurance premiums 21,386 15,448
Deferred tax asset 8,537 -
Excess of cost over acquired net assets 38,400 33,254
Other assets 4,245 5,360
---------- ----------
Total assets $ 555,165 $ 409,385
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $ 229,080 $ 211,600
Unearned premiums 91,664 60,114
Amounts payable to reinsurers 83,364 7,186
Accounts payable and accrued liabilities 19,606 13,343
Bank borrowings, term debt and other borrowings 29,000 18,951
---------- ----------
Total liabilities 452,714 311,194
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; 10,266,481 and 9,976,415 shares issued 4,107 3,991
Capital in excess of par value 143,222 140,002
Unrealized gain (loss) on marketable equity securities;
and on fixed maturities available for sale, net of tax (9,785) 66
Accumulated deficit (30,829) (44,078)
---------- ----------
106,715 99,981
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
---------- ----------
Total stockholders' equity 102,451 95,717
---------- ----------
Total liabilities and stockholders' equity $ 555,165 $ 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 nine months ended September 30, 1994 and 1993
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
------------------ -------------------
1994 1993 1994 1993
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned $63,425 $34,438 $148,119 $88,948
Insurance agency commissions 837 952 2,639 2,998
Net investment income 3,553 2,475 9,230 7,740
Net realized capital gains 101 595 499 1,788
-------- -------- --------- --------
67,916 38,460 160,487 101,474
-------- -------- --------- --------
Costs and expenses:
Cost of revenues:
Insurance losses and loss adjustment
expenses 45,207 28,202 105,790 67,821
Insurance agency costs 755 988 2,422 2,908
Insurance underwriting expenses 13,719 5,282 36,015 20,669
General and administrative expenses 1,372 1,066 3,721 2,150
-------- -------- --------- --------
61,053 35,538 147,948 93,548
-------- -------- --------- --------
Operating profit 6,863 2,922 12,539 7,926
-------- -------- --------- --------
<PAGE>
Other income (expense):
Interest expense (461) (627) (1,160) (1,865)
Share of net loss of investee (65) (40) (219) (263)
Other, net (11) 50 34 (41)
--------- --------- --------- ---------
(537) (617) (1,345) (2,169)
--------- --------- --------- ---------
Income before income taxes and minority
interests 6,326 2,305 11,194 5,757
Current tax expense 1,301 85 1,366 175
Deferred tax benefit (1,301) - (3,501) -
Minority interests in net income of
consolidated subsidiaries - 53 80 148
-------- -------- --------- --------
Net income $ 6,326 $ 2,167 $ 13,249 $ 5,434
======== ======== ========= ========
Earnings per share:
Primary $ .51 $ .22 $ 1.12 $ .66
======== ======== ========= ========
Fully diluted $ .50 $ .22 $ 1.09 $ .64
======== ======== ========= ========
<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 nine months ended September 30, 1994 and 1993
(in thousands)
(unaudited)
1994 1993
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,249 $ 5,434
Net adjustment to reconcile net income to net cash
provided by operating activities 35,785 26,698
--------- ----------
Net cash provided by operating activities 49,034 32,132
--------- ----------
Cash flows from investing activities:
Proceeds from sales of investments 641 1,067
Proceeds from sales of investments available for sale 22,151 94,776
Proceeds from maturities of investments 6,545 4,201
Proceeds from maturities of investments held for
investment - 4,133
Proceeds from maturities of investments available
for sale 13,828 11,658
Purchases of investments (29,508) (6,821)
Purchases of investments available for sale (57,285) (149,619)
Purchase of Redland, net of cash and cash
equivalents acquired - (4,106)
Purchases of property and equipment (1,172) (730)
--------- ----------
Net cash used for investing activities (44,800) (45,441)
--------- ----------
<PAGE>
Cash flows from financing activities:
Repayments of bank borrowing (18,597) (7,211)
Proceeds from bank borrowings 29,000 6,500
Repayments of term debt, other borrowings and notes
payable to affiliates (354) (10,588)
Minority interests 7 823
Proceeds from issuance of common stock 236 31,205
Other (340) -
--------- ----------
Net cash provided by financing activities 9,952 20,729
--------- ----------
Net increase (decrease) in cash and short-term investments 14,186 7,420
Cash and short-term investments at beginning of period 17,561 12,471
--------- ----------
Cash and short-term investments at end of period $ 31,747 $ 19,891
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,018 $ 2,144
========= ==========
Cash paid during the period for income taxes $ 78 $ 167
========= ==========
Non-cash financing activities:
Notes payable to affiliates converted to equity $ - $ 7,000
========= ==========
Issuance of common stock for merger with Statewide $ 3,100 $ -
========= ==========
Issuance of common stock for merger with Redland $ - $ 15,064
========= ==========
<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 September 30,
1994 and December 31, 1993, and the results of operations
for the three months and nine months ended September 30,
1994 and 1993 and cash flows for the nine months ended
September 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
September 30, 1994 approximately $27,720,000 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.
2. Subsequent Events:
On October 28, 1994 the Company called the approximate 4.8
million outstanding warrants to purchase the Company's
common stock. The warrants have a strike price of $11.00
per share and will allow the Company to realize
approximately $53 million in equity if exercised. The
warrant holders will have until 5:00 p.m. Eastern Time,
December 1, 1994 to exercise their warrants and any
unexercised warrants will be redeemed by the Company for
$.10 each.
3. 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.
4. 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 September 30, 1994
and approximately 12.5 million and 12.6 million,
respectively, for the three months ended September 30, 1993.
Primary earnings per share and fully diluted earnings per
share are based on the weighted average shares outstanding
of approximately 13.4 million and 13.6 million,
respectively, for the nine months ended September 30, 1994
and approximately 11.0 million and 11.4 million,
respectively, for the nine months ended September 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.
<PAGE>
5. 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 September 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>
September 30, 1994:
Fixed maturities available
for sale:
U.S. Treasury and
government securities $ 36,322 $ 14 $ 1,459 $ 34,877
States, municipalities and
political subdivisions 33,280 10 1,034 32,256
Mortgage-backed securities 72,936 136 10,891 62,181
Other debt securities 22,768 110 423 22,455
---------- ----------- ----------- ----------
$ 165,306 $ 270 $ 13,807 $ 151,769
========== =========== =========== ==========
Marketable equity securities
available for sale -
preferred stock $ 10,448 $ 17 $ 717 $ 9,748
========== =========== =========== ==========
Marketable equity securities
available for sale -
common stock $ 6,903 $ 414 $ 565 $ 6,752
========== =========== =========== ==========
<PAGE>
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
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>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
6. Insurance Premiums and Claims
Insurance premiums written and earned by the Company's
insurance subsidiaries for the three months and nine months
ended September 30, 1994 and 1993 are as follows (in
thousands):
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Direct premiums written $168,170 $96,986 $336,517 $177,093
Assumed premiums written 18,235 1,063 24,630 2,401
Ceded premiums written (117,792) (61,713) (187,415) (80,059)
--------- -------- --------- ---------
Net premiums written $ 68,613 $36,336 $173,732 $ 99,435
========= ======== ========= =========
Direct premiums earned $160,549 $96,131 $305,036 $171,352
Assumed premiums earned 18,401 1,073 24,560 3,360
Ceded premiums earned (115,525) (62,766) (181,477) (85,764)
--------- -------- --------- ---------
Net premiums earned $ 63,425 $34,438 $148,119 $ 88,948
========= ======== ========= =========
</TABLE>
<PAGE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $53,416,000 and $101,378,000 for the three
months and nine months ended September 30, 1994,
respectively.
7. 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 September 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 September 6, 1994 the Company elected LIBOR plus 1.25%
percent or 6.25% through December 6, 1994.
8. 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 nine consecutive quarters with pre-
tax earnings. The Company has generated AMT credit
carryforwards and has used all of its net operating loss
carryforwards. Management continued assessing the weight of
evidence at each balance sheet and continues to believe it
is more likely than not that the Company will realize a
portion of the deferred tax asset. During 1994 the Company
has reduced the valuation allowance by approximately $5.9
million.
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Unpaid losses and loss adjustment expenses 7,031
Unearned premiums 4,779
Allowances for doubtful accounts 1,098
Other 607
Unrealized loss on marketable equity
securities 264
Unrealized loss on fixed maturities
available for sale 4,603
Major Realty basis difference 7,606
--------
Deferred tax asset 25,988
--------
Deferred policy acquisition costs (6,596)
Other (466)
--------
Deferred tax liability (7,062)
--------
18,926
Valuation allowance (10,389)
--------
Net deferred tax asset $ 8,537
========
</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 nine months ended September 30, 1994
Compared to three months and nine months ended September 30, 1993
The Company's net income increased by 191.9% and 143.8% during
the three and nine months ended September 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 84.2% and 66.5% respectively
in the three and nine months ended September 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 three
months and nine months ended September 30, 1994 as compared to
the same periods in 1993.
The increase in premium revenue was also accompanied by an
improvement in the Company's underwriting combined loss and
expense ratio during the three and nine months ended September
30, 1994. This improvement in the Company's combined ratio was
related to the growth in the percentage of the Company's total
premium revenue represented by The Redland Group, which
historically has operated at lower underwriting ratios than the
remainder of the Company's operations. For example, while the
combined ratio for the remainder of the Company's operations were
between 101.2% and 102.7% in the three and nine month periods
ending September 30, 1993 and September 30, 1994, the combined
ratio for The Redland Group were between 75.6% and 84.0% in the
similar three and nine month periods. At the same time, The
Redland Group's premiums earned increased from 17.4% of the
Company's total premiums earned in the three months ended
September 30, 1993 to 44.3% of the Company's total premiums
earned in the same period in 1994.
While the underwriting ratios of The Redland Group have been
historically lower over time than the other operations of the
Company, 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.
Thus, while the acquisition of The Redland Group in August of
1993 will likely lower the underwriting combined ratios of the
Company over an extended period, it will also produce more
volatility in the Company's results when viewed as quarter to
quarter comparisons.
The Company's investment yield remained constant at approximately
6.2% during the nine months ended September 30, 1994 and 1993 and
increased from 5.2% during the three months ended September 30,
1993 to 6.6% during the same three month period in 1994. The
increase in yield during the third quarter of 1994 was a result
of the increase in interest rate environment experienced in 1994
and not from a change in the quality of the Company's investment
portfolio. The average size of the investment portfolio
increased from approximately $168 million and $190 million during
the nine months and three months ended September 30, 1993 to
approximately $200 million and $216 million during the similar
periods in 1994. The effect was an increase in investment income
of approximately 43.5% and 19.3% during the three and nine months
ended September 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
nine months ended September 30, 1994 realized capital gains were
reduced by $494,000 and $1,289,000 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 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 28.7%
and 73.1% respectively during the three and nine months ended
September 30, 1994 compared with the same periods during 1993.
The increase in the nine month results was primarily due to 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's increase in general and administrative expenses during
the three month periods was significantly less. 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 modest level.
During the nine months ended September 30, 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 1994 as
compared to 1993. At the same time, the Company's outstanding
loan balances increased during 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.
The Company's net income benefited from a deferred tax benefit of
$1.3 million and 3.5 million during the three and nine months
ended September 30, 1994. No such deferred tax benefit was
realized during the three and nine months ended September 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 nine consecutive quarters with pre-tax earnings.
The Company has generated Alternative Minimum Tax credit
carryforwards and has used all of its net operating loss
carryforwards. Management continued assessing the weight of
evidence at each balance sheet and continues to believe it is
more likely than not the Company will realize a portion of the
deferred tax asset.
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 amended 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
September 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 September 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.
The Federal Government has been considering a revenue raising tax
plan designed to augment the pollution Superfund. This enactment
of the Superfund could impose a new layer of tax on certain
property and casualty insurance companies. The new layer is
described as the Environmental Insurance Resolution Fund with a
target of $8.1 billion over a ten year period. This fund would
handle coverage disputes between insurance companies and
potentially responsible parties under the Superfund reform. This
plan was not approved by the 103rd Congress, and therefore, the
final form and effect of any future Superfund tax plan remains
unknown.
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 35.6% from December 31, 1993 to September 30,
1994 while stockholders' equity increased only 7.0% for the same
period. On August 29, 1994, A.M. Best and Company, placed the
Company's insurance company subsidiaries A- rating under review
due to the rapid growth in premiums with negative implications
regarding the Company's capital adequacy ratios. Subsequently,
the Company's management met with A.M. Best in order to explain
the reasons for and the quality of the Company's growth as well
as the Company's plans for capital contributions to its insurance
company subsidiaries. On October 28, 1994, the Company announced
its intent to redeem the outstanding common stock purchase
warrants issued in January 27, 1993 (the "Warrants") (see Item 5.
Other Information). The Warrants were due to expire on January
27, 1997 and entitle the holder thereof to purchase one share of
Company's common stock for a purchase price of $11.00 per share.
Warrants which have not been exercised and are outstanding after
December 1, 1994, will be redeemed at a price of $.10 per
warrant. The Company believes that substantially all of the
approximate 4.8 million Warrants will be exercised. Funds
utilized for insurance company capital from the exercise of the
Warrants will be sufficient to meet A.M. Best capital adequacy
tests and thus, allow the Company to maintain its A- rating and
be removed from its current under review status. In addition,
the Company has arranged a commitment for a credit facility with
its bank lenders in order to fund any shortfall in the exercise
of the Warrants at a level which will satisfy A.M. Best current
capital requirements.
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 $9.8 million loss as of September 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 September 30, 1994 balance sheet as
well as increasing the issued shares by approximately 266,000.
Consolidated Cash Flows
Cash flows from operations for the nine months ended September
30, 1994 were a positive $49.0 million as compared to a positive
$32.1 million for the first nine months of 1993. Cash flows from
operating activities during the first nine 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 nine 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 September 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 September 30, 1994, the Company had an
unrealized loss on these securities, net of taxes, of
approximately $9.8 million.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
PART II. OTHER INFORMATION
Item 5. Other Information
The Registrant delivered a Notice of Redemption to the
holders of its outstanding common stock purchase warrants issued
on January 27, 1993 (the "Warrants"). The Warrants were due to
expire on January 27, 1997 and entitle the holder thereof to
purchase one share of the Registrant's common stock, par value
$.40 per share, for a purchase price of $11.00 per share.
Warrants which have not been exercised and are outstanding at
5:00 p.m. Eastern time, December 1, 1994, will be redeemed at the
redemption price of $.10 per Warrant.
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
November 14, 1994 -----------------------------------
Kenneth C. Coon
Chairman and Chief Executive
Officer
/s/ Georgia M. Mace
November 14, 1994 -----------------------------------
Georgia M. Mace
Treasurer and Chief Accounting
Officer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
10.1 $35,000,000 Credit Agreement by and among the
Registrant, NBD Bank, N.A., First National Bank of
Omaha, FirsTier Bank, N.A., Comerica Bank and NBD Bank,
N.A., As Agent, dated as of March 31, 1994.
Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
three months ended March 31, 1994.
10.2 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and the Registrant dated April 12, 1990,
and related agreements. Incorporated by reference to
Exhibit 10i to the Registrant's Annual Report on Form
10-K for the fiscal year ended August 31, 1990.
10.3 Amended and Restated Registration Rights Agreement,
dated April 9, 1990, between the Registrant and
Patricia Investments, Inc. Incorporated by reference
to Exhibit 10d to the Registrant's Quarterly Report on
Form 10-Q for the period ended May 31, 1990.
10.4 Warrants to purchase a total of 389,507 shares of
common stock ($.10 par value) of the Registrant dated
April 10, 1992, issued by the Registrant 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 Registrant's 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., the Registrant and
Kenneth C. Coon. Incorporated by reference to Exhibit
10.65 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10.6 Employment Agreement dated July 2, 1993 between the
Registrant and John P. Nelson.
10.7 Employment Agreement dated July 2, 1993 between the
Registrant and Richard C. Gibson.
11 Computation of Income per share.
27 Financial Data Schedule.
99.1 The Registrant's 1992 Incentive Stock Option Plan
effective as of December 22, 1992. Incorporated by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-53730.
99.2 The Registrant's Employee Stock Purchase Plan,
effective as of December 22, 1992. Incorporated by
reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-53730.
99.3 The Registrant's 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 Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1990.
99.4 First Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan. Incorporated
by reference to Exhibit 99.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.
99.5 Second Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan. Incorporated
by reference to Exhibit 99.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.
99.6 The Registrant's Amended 1992 Incentive Stock Option
Plan. Incorporated by reference to the Registrant's
Proxy Statement filed on or about April 29, 1994.
99.7 The Registrant's Amended Employee Stock Purchase
Agreement. Incorporated by reference to the
Registrant's Proxy Statement filed on or about April
29, 1994.
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of July 2, 1993, between
The Redland Group, Inc. ("Redland"), an Iowa corporation with its
principal place of business in Council Bluffs, Iowa, and John P.
Nelson of Council Bluffs, Iowa ("Nelson").
RECITALS:
Nelson is currently employed as President of Redland
and holds comparable positions in the Redland subsidiaries.
Redland has entered into an Agreement and Plan of
Exchange with Acceptance Insurance Companies Inc. ("Acceptance")
a Delaware corporation, dated as of July 2, 1993 (the "Exchange
Agreement"), pursuant to which Redland will become a wholly-owned
subsidiary of Acceptance. The execution of an employment
agreement with Nelson is a condition to Acceptance's obligations
to effect the Exchange. Nelson has agreed to continue to be
employed following the Exchange as President of Redland and
Redland Insurance Company ("Redland Insurance") in accordance
with the terms hereof. Acceptance is made a party hereto with
respect to the matters herein relating to Acceptance.
ACCORDINGLY, the parties hereto agree as follows:
1. Employment. Redland agrees to employ Nelson, and
Nelson agrees to accept employment as President of Redland and
Redland Insurance. Nelson shall continue to serve as a member of
the Redland Board of Directors (the "Board").
2. Employment Term. The term of employment under this
Agreement shall commence on the date of consummation of the
Exchange described in the Exchange Agreement and, unless extended
as provided herein, shall terminate on December 31, 1995 (such
term of Employment referred to herein as the "Employment Term").
3. Authority, Responsibilities and Duties. Nelson
shall have and shall be accountable for that authority and those
responsibilities and shall exercise and be accountable for those
duties normally associated with the offices to which he is
appointed hereunder and such duties as reasonably may be assigned
to him by the Board or established by the Bylaws. In connection
therewith, on behalf of and under the supervision of the Board,
he shall formulate policies and exercise executive management and
supervision of the insurance operations, and attendant business
activities of Redland and Redland Insurance, including the
appointment and removal of employees, officers, professionals and
executive staff of Redland and Redland Insurance.
4. Compensation.
4.a. Base Salary; Incentive Compensation. Commencing
on Closing of the Exchange, Nelson shall receive a base salary in
the amount of $195,000 annually, payable semi-monthly. It is
anticipated that such base salary shall be reviewed annually by
the Board of Redland. Nelson shall be eligible for inclusion in
incentive compensation, stock option, and similar plans
("Incentive Compensation Plans") established by Acceptance for
employees and senior executives of Acceptance and its
subsidiaries.
4.b. Employee Benefits. Nelson shall be included, to
the extent eligible thereunder, in all plans providing benefits
for employees and senior executives of Acceptance and its
subsidiary and affiliated companies.
4.c. Indemnification. Nelson shall be entitled to the
indemnification provided for in Section 7.5 of the Exchange
Agreement and such other indemnification as may, from time to
time be provided for officers of Acceptance or its subsidiaries.
5. Termination. Unless extended in accordance with
the provisions hereof, this Employment Agreement shall terminate
December 31, 1995. At each January 1, commencing January 1,
1995, after the date hereof, this Employment Agreement will be
automatically extended for an additional one year period unless,
not later than 45 days prior to each such January 1, either party
hereto shall give written notice to the other party indicating
that this Employment Agreement shall not be renewed for such
additional one year period. Notice of non-renewal shall not
constitute a termination of employment and Nelson's compensation
shall continue on the basis set forth herein until the date of
termination.
6. Termination for Cause. Redland shall have the
right to terminate the employment of Nelson for Cause. As used
herein, the term "Cause" shall mean (a) fraud or malfeasance, (b)
Nelson being convicted of a felony, (c) breach of this agreement
by Nelson. If Redland exercises such right, its obligation under
this Agreement to make any further payments to Nelson shall
thereupon cease and terminate. Termination of Nelson pursuant to
Section 6 shall be communicated by a "Notice of Termination"
which shall mean delivery to Nelson of written notice of
termination from an executive officer of Redland that its Board
has determined to terminate Nelson for Cause, specifying the
exact nature thereof. A Notice of Termination may be given only
after reasonable written notice to Nelson stating the reason for
proposed termination and the factual basis thereof and reasonable
opportunity for Nelson to be heard before the Board prior to such
determination. For purposes of this Agreement, no such purported
termination of Nelson's employment shall be effective without
such Notice of Termination.
7. Confidential Information. Nelson agrees that any
information about Redland or Acceptance, their policyholders,
employees, agents, reinsurers and the business of Redland and
Acceptance in general, and any information developed or acquired
by Redland or Acceptance (such information in the aggregate
called the "Confidential Information") is confidential and
proprietary to Redland and Acceptance, respectively (except for
publicly disseminated information); that he may use any such
information only in connection and consistent with his duties as
an officer, director and employee of Redland or Acceptance; and
that all business records of Redland and Acceptance are the
property of Redland and Acceptance, respectively, and shall
remain the property of Acceptance and Redland while Nelson is
employed hereunder and thereafter, without limitation.
8. Non-competition Agreement. Nelson acknowledges
that the nature of his employment is such that he will be in
possession of Confidential Information, and in personal contact
with policyholders, agents, reinsurers and others important to
Redland's business, and to acquire other valuable information as
to the nature and character of the business of Redland and
Acceptance, enabling him, by engaging in a competing business on
his own behalf, or for another, to take advantage of such
knowledge of or acquaintance with those with whom Redland and
Acceptance conduct business, and thereby gain an unfair
advantage. Nelson does hereby covenant and agree as follows and
acknowledges that the following covenants are reasonably
necessary for the protection of Acceptance and Redland and may be
enforced to the extent set forth herein or to such extent as any
court of competent jurisdiction may deem reasonable and proper:
(a) Nelson agrees that he will not directly or indirectly, on
his behalf or on behalf of anyone else, compete with
Acceptance or Redland in any manner during (i) the term of
this agreement or any extension of this agreement, (ii) one
year following the termination of his employment if such
termination is effected by Nelson under Section 5 hereof, or
(iii) if termination iseffected by Redland under Section 6
hereof, the later of the end of the current employment
period as described in Sections 2 and 5 hereof or one year
following the termination by Redland under Section 6 hereof.
(b) Nelson recognizes that any breach of the terms of the non-
compete provision of this Agreement may give rise to
irreparable harm to Redland and Acceptance for which money
damages would not be an adequate remedy, and accordingly
agrees that, in addition to other remedies, Redland and
Acceptance will be entitled to enforce the terms of this
non-compete provision by injunctive relief including a
temporary restraining order, temporary injunction and
permanent injunction, without the necessity of proving the
inadequacy of the remedy of money damages.
9. Assignment. This Agreement is not assignable by
either party hereto.
10. Governing Law. This Agreement shall be construed
and governed in accordance with the laws of the state of
Nebraska.
11. Contingent Upon Exchange. This Agreement shall
take effect upon consummation of the Exchange contemplated by the
Exchange Agreement and if such Exchange is not consummated shall
be void.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above
written.
ACCEPTANCE INSURANCE COMPANIES INC.
/s/ Kenneth C. Coon
By ________________________________
THE REDLAND GROUP, INC.
/s/ Richard C. Gibson
By ________________________________
/s/ John P. Nelson
___________________________________
John P. Nelson
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of July 2, 1993, between
The Redland Group, Inc. ("Redland"), an Iowa corporation with its
principal place of business in Council Bluffs, Iowa, and
Richard C. Gibson of Council Bluff, Iowa ("Gibson").
RECITALS:
Gibson is currently employed as Executive Vice
President of Redland and holds comparable positions in certain of
the Redland subsidiaries.
Redland has entered into an Agreement and Plan of
Exchange with Acceptance Insurance Companies Inc. ("Acceptance")
a Delaware corporation, dated as of July 2, 1993 (the "Exchange
Agreement"), pursuant to which Redland will become a wholly-owned
subsidiary of Acceptance. The execution of an employment
agreement with Gibson is a condition to Acceptance's obligations
to effect the Exchange. Gibson has agreed to be employed
following the Exchange as Executive Vice President of Redland,
and as President of American Agrisurance, Inc. ("Am Ag"), in
accordance with the terms hereof. Acceptance is made a party
hereto with respect to the matters herein relating to Acceptance.
ACCORDINGLY, the parties hereto agree as follows:
1. Employment. Redland agrees to employ Gibson, and
Gibson agrees to accept employment with Redland, as Executive
Vice President of Redland, and as President of Am Ag. Gibson
shall continue to serve as a member of the Redland Board of
Directors (the "Board").
2. Employment Term. The term of employment under this
Agreement shall commence on the date of consummation of the
Exchange described in the Exchange Agreement and, unless extended
as provided herein, shall terminate on December 31, 1995 (such
term of Employment referred to herein as the "Employment Term").
3. Authority, Responsibilities and Duties. Gibson
shall have and shall be accountable for that authority and those
responsibilities and shall exercise and be accountable for those
duties normally associated with the offices to which he is
appointed hereunder and such duties as reasonably may be assigned
to him by the Board or established by the Bylaws. In connection
therewith, on behalf of and under the supervision of the Board,
he shall formulate policies and exercise executive management and
supervision of Am Ag, and attendant business activities,
including the appointment and removal of employees, officers,
professionals and executive staff of Am Ag.
4. Compensation.
4.a. Base Salary; Incentive Compensation. Commencing
on Closing of the Exchange, Gibson shall receive a base salary in
the amount of $195,0000 annually, payable semi-monthly. It is
anticipated that such base salary shall be reviewed annually by
the Board of Redland. Gibson shall be eligible for inclusion in
incentive compensation, stock option, and similar plans
("Incentive Compensation Plans") established by Acceptance for
employees and senior executives of Acceptance and its
subsidiaries.
4.b. Employee Benefits. Gibson shall be included, to
the extent eligible thereunder, in all plans providing benefits
for employees and senior executives of Acceptance and its
subsidiary and affiliated companies.
4.c. Indemnification. Gibson shall be entitled to the
indemnification provided for in Section 7.5 of the Exchange
Agreement and such other indemnification as may, from time to
time be provided for officers of Acceptance or its subsidiaries.
5. Termination. Unless extended in accordance with
the provisions hereof, this Employment Agreement shall terminate
December 31, 1995. At each January 1, commencing January 1,
1995, after the date hereof, this Employment Agreement will be
automatically extended for an additional one year period unless,
not later than 45 days prior to each such January 1, either party
hereto shall give written notice to the other party indicating
that this Employment Agreement shall not be renewed for such
additional one year period. Notice of non-renewal shall not
constitute a termination of employment and Gibson's compensation
shall continue on the basis set forth herein until the date of
termination.
6. Termination for Cause. Redland shall have the
right to terminate the employment of Gibson for Cause. As used
herein, the term "Cause" shall mean (a) fraud or malfeasance, (b)
Gibson being convicted of a felony, (c) breach of this agreement
by Gibson. If Redland exercises such right, its obligation under
this Agreement to make any further payments to Gibson shall
thereupon cease and terminate. Termination of Gibson pursuant to
Section 6 shall be communicated by a "Notice of Termination"
which shall mean delivery to Gibson of written notice of
termination from an executive officer of Redland that its Board
has determined to terminate Gibson for Cause, specifying the
exact nature thereof. A Notice of Termination may be given only
after reasonable written notice to Gibson stating the reason for
proposed termination and the factual basis thereof and reasonable
opportunity for Gibson to be heard before the Board prior to such
determination. For purposes of this Agreement, no such purported
termination of Gibson's employment shall be effective without
such Notice of Termination.
7. Confidential Information. Gibson agrees that any
information about Redland or Acceptance, their policyholders,
employees, agents, reinsurers and the business of Redland and
Acceptance in general, and any information developed or acquired
by Redland or Acceptance (such information in the aggregate
called the "Confidential Information") is confidential and
proprietary to Redland and Acceptance, respectively (except for
publicly disseminated information); that he may use any such
information only in connection and consistent with his duties as
an officer, director and employee of Redland or Acceptance; and
that all business records of Redland and Acceptance are the
property of Redland and Acceptance, respectively and shall remain
the property of Acceptance and Redland while Gibson is employed
hereunder and thereafter, without limitation.
8. Non-competition Agreement. Gibson acknowledges
that the nature of his employment is such that he will be in
possession of Confidential Information, and in personal contact
with policyholders, agents, reinsurers and others important to
Redland's business, and to acquire other valuable information as
to the nature and character of the business of Redland and
Acceptance, enabling him, by engaging in a competing business on
his own behalf, or for another, to take advantage of such
knowledge of or acquaintance with those with whom Redland and
Acceptance conduct business, and thereby gain an unfair
advantage. Gibson does hereby covenant and agree as follows and
acknowledges that the following covenants are reasonably
necessary for the protection of Acceptance and Redland and may be
enforced to the extent set forth herein or to such extent as any
court of competent jurisdiction may deem reasonable and proper:
(a) Gibson agrees that he will not directly or indirectly, on
his behalf or on behalf of anyone else, compete with
Acceptance or Redland in any manner during (i) the term of
this agreement or any extension of this agreement, (ii) one
year following the termination of his employment if such
termination is effected by Gibson under Section 5 hereof, or
(iii) if termination is effected by Redland under Section 6
hereof, the later of the end of the current employment
period as described in Sections 2 and 5 hereof or one year
following the termination by Redland under Section 6 hereof.
(b) Gibson recognizes that any breach of the terms of the non-
compete provision of this Agreement may give rise to
irreparable harm to Redland and Acceptance for which money
damages would not be an adequate remedy, and accordingly
agrees that, in addition to other remedies, Redland and
Acceptance will be entitled to enforce the terms of this
non-compete provision by injunctive relief including a
temporary restraining order, temporary injunction and
permanent injunction, without the necessity of proving the
inadequacy of the remedy of money damages.
9. Assignment. This Agreement is not assignable by
either party hereto.
10. Governing Law. This Agreement shall be construed
and governed in accordance with the laws of the state of
Nebraska.
11. Contingent Upon Exchange. This Agreement shall
take effect upon consummation of the Exchange contemplated by the
Exchange Agreement and if such Exchange is not consummated shall
be void.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above
written.
ACCEPTANCE INSURANCE COMPANIES INC.
/s/ Kenneth C. Coon
By ________________________________
THE REDLAND GROUP, INC.
/s/ John P. Nelson
By ________________________________
/s/ Richard C. Gibson
___________________________________
Richard C. Gibson
<TABLE>
<CAPTION>
EXHIBIT 11
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME PER SHARE
for the three months and nine months ended September 30, 1994 and 1993
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
------------------ --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $ 6,326 $ 2,167 $ 13,249 $ 5,434
Adjustment for interest expense
reduction and interest income
from assumed proceeds 527 597 1,690 1,821
Adjusted net income $ 6,853 $ 2,764 $ 14,939 $ 7,255
Weighted average number of shares
outstanding 9,991 9,065 9,896 7,877
Adjustment for shares issuable 3,497 3,455 3,495 3,152
Adjusted weighted average number of
shares outstanding 13,488 12,520 13,391 11,029
Primary earning per share $ .51 $ .22 $ 1.12 $ .66
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 6,326 $ 2,167 $ 13,249 $ 5,434
Adjustment for interest expense
reduction and interest income
from assumed proceeds 499 561 1,475 1,625
Adjustment for addback of interest
on convertible note - - - 239
Adjusted net income $ 6,825 $ 2,728 $ 14,724 $ 7,298
Weighted average number of shares
outstanding 10,231 9,193 10,136 7,920
Adjustment for shares issuable 3,449 3,408 3,434 3,153
Adjustment for convertible note - - - 333
Adjusted weighted average number of
shares outstanding 13,680 12,601 13,570 11,406
Fully diluted earnings per share $ .50 $ .22 $ 1.09 $ .64
<FN>
(a) As of September 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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 151,769
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,500
<MORTGAGE> 2,320
<REAL-ESTATE> 3,894
<TOTAL-INVEST> 227,388
<CASH> 31,747
<RECOVER-REINSURE> 21,420
<DEFERRED-ACQUISITION> 19,401
<TOTAL-ASSETS> 555,165
<POLICY-LOSSES> 229,080
<UNEARNED-PREMIUMS> 91,664
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 29,000
<COMMON> 4,107
0
0
<OTHER-SE> 98,344
<TOTAL-LIABILITY-AND-EQUITY> 555,165
148,119
<INVESTMENT-INCOME> 9,230
<INVESTMENT-GAINS> 499
<OTHER-INCOME> 2,639
<BENEFITS> 105,790
<UNDERWRITING-AMORTIZATION> (7,586)
<UNDERWRITING-OTHER> 51,089
<INCOME-PRETAX> 11,194
<INCOME-TAX> (2,135)
<INCOME-CONTINUING> 13,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,249
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.09
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/93 10-K for the
most recent reported amounts.
</FN>
</TABLE>
