=================================================================
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, 1997
[ ] 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 for 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 6, 1997 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 15,337,618
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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
June 30, 1997 (unaudited) and December 31, 1996
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Six Months Ended June 30, 1997
and 1996
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1997 and 1996
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 6. Exhibits and Reports on Form 8-K
Signatures<PAGE>
PART 1. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1997 1996
------------ -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for
sale $ 291,387 $268,004
Marketable equity securities -
preferred stock 60,597 62,964
Marketable equity securities -
common stock 23,953 20,873
Mortgage loans and other
investments 11,142 11,149
Real estate 3,335 3,342
Short-term investments, at cost,
which approximates market 69,029 39,594
---------- ----------
459,443 405,926
Cash 10,154 10,697
Equity investment in Major
Realty Corporation 9,015 8,827
Receivables, net 112,930 133,363
Reinsurance recoverable on
unpaid loss and loss
adjustment expenses 182,565 185,421
Prepaid reinsurance premiums 48,279 36,140
Property and equipment, net 13,966 8,988
Deferred policy acquisition costs 29,781 29,437
Excess of cost over acquired net
assets 35,380 35,783
Deferred income tax 17,011 21,172
Other assets 14,099 8,626
---------- ----------
Total assets $ 932,623 $ 884,380
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $ 440,237 $432,173
Unearned premiums 151,542 140,217
Amounts payable to reinsurers 19,450 10,157
Accounts payable and accrued
liabilities 10,624 25,013
Bank borrowings 90,000 69,000
---------- ---------
Total liabilities 711,853 676,560
Contingencies -- --
Stockholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized,
none issued -- --
Common stock, $.40 par value,
40,000,000 shares authorized;
15,336,379 and 15,256,507
shares issued 6,135 6,103
Capital in excess of par value 196,878 196,090
Unrealized gain (loss) on
available-for-sale securities,
net of tax 2,498 (1,476)
Retained earnings 19,588 11,432
---------- ---------
225,099 212,149
Less:
Treasury stock, at cost, 38,681
and 38,680 shares (1,629) (1,629)
Contingent stock, 240,000 shares (2,700) (2,700)
---------- ---------
Total stockholders' equity 220,770 207,820
---------- ---------
Total liabilities and
stockholders' equity $ 932,623 $884,380
========== =========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and six months ended
June 30, 1997 and 1996
(in thousands, except per share data)
(unaudited)
Three Months Six Months
-------------------- ------------------
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums
earned $ 72,944 $ 76,896 $144,006 $144,400
Net investment
income 6,791 6,528 13,311 12,992
Net realized capital
gains 2,020 1,586 3,331 2,767
-------- -------- -------- --------
81,755 85,010 160,648 160,159
-------- -------- -------- --------
Costs and expenses:
Cost of revenues:
Insurance losses
and loss adjust-
ment expenses 52,588 55,239 102,395 101,122
Insurance under-
writing expenses 21,459 23,868 43,503 45,142
General and
administrative
expenses 573 528 1,097 1,063
-------- -------- -------- --------
74,620 79,635 146,995 147,327
-------- -------- -------- --------
Operating profit 7,135 5,375 13,653 12,832
-------- -------- -------- --------
Other income
(expense):
Interest expense (1,247) (1,242) (2,404) (2,495)
Loss on investee (63) (53) (117) (117)
Other, net (4) (35) 12 121
-------- -------- -------- --------
(1,314) (1,330) (2,509) (2,491)
-------- -------- -------- --------
Income before
income taxes 5,821 4,045 11,144 10,341
Income tax
expense (benefit):
Current 2,390 1,098 969 1,853
Deferred (811) (78) 2,019 985
--------- -------- -------- ---------
Net income $ 4,242 $ 3,025 $ 8,156 $ 7,503
======== ======== ======== ========
Net income
per share:
Primary $ .28 $ .20 $ .54 $ .50
======== ======== ======== ========
Fully diluted $ .27 $ .20 $ .53 $ .49
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(in thousands)
(unaudited)
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ 8,156 $ 7,503
Net adjustment to reconcile net
income to net cash provided by
operating activities 19,995 16,645
--------- ---------
Net cash provided by operating
activities 28,151 24,148
--------- ---------
Cash flows from investing
activities:
Proceeds from sales of investments
available for sale 45,717 73,930
Proceeds from maturities of
investments 3,932 15,637
Proceeds from maturities of
investments available for sale 26,662 5,315
Purchases of investment (5,837) (11,106)
Purchases of investments available
for sale (86,907) (139,650)
Purchases of property and equipment (6,383) (2,958)
--------- ---------
Net cash used for investing
activities (22,816) (58,832)
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings 21,000 --
Proceeds from issuance of
common stock 820 1,015
--------- ---------
Net cash provided by financing
activities 21,820 1,015
--------- ---------
Net increase (decrease) in cash and
short-term investments 27,155 (33,669)
Cash and short-term investments
at beginning of period 41,627 84,740
--------- ---------
Cash and short-term investments
at end of period $ 68,782 $ 51,071
========= =========
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest $ 2,721 $ 2,420
========= =========
Cash paid during the period for
income taxes $ (1,878) $ 2,050
========= =========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements
</FN>
</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 its
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, 1997
and December 31, 1996, and the results of operations for the
three months and six months ended June 30, 1997 and 1996 and
cash flows for the six months ended June 30, 1997 and 1996.
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, 1997 approximately $10,401,000 of short-term investments
had a maturity date at acquisition of greater than three
months.
Recent Statements of Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 123,
(SFAS No. 123), "Accounting for Stock-Based Compensation,"
which is effective for the Company on January 1, 1996. SFAS
No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on
the fair value of the equity instrument awarded. Companies
are permitted, however, to continue to apply APB Opinion No.
25, which recognizes compensation cost based on the
intrinsic value of the equity instruments awarded. The
Company continued to apply APB No. 25 in its accounting for
stock-based compensation awards to employees and directors,
while expanding its disclosures as required by SFAS No. 123.
Reclassifications
Certain prior year accounts have been reclassified to
conform with current period presentation.
2. Investments:
The amortized cost and related estimated fair values of debt
and equity securities in the accompanying balance sheets are
as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
June 30, 1997:
Fixed maturities
available for sale:
U.S. Treasury and
government
securities $ 95,981 $ 207 $ 287 $ 95,901
States, municipalities
and political sub-
divisions 111,933 2,048 380 113,601
Mortgage-backed
securities 54,051 164 6,114 48,101
Other debt securities 33,408 928 552 33,784
-------- ------- ------- --------
$295,373 $ 3,347 $ 7,333 $291,387
======== ======= ======= ========
Marketable equity
securities -
preferred stock $ 59,006 $ 2,163 $ 572 $ 60,597
======== ======= ======= ========
Marketable equity
securities -
common stock $ 17,714 $ 7,288 $ 1,049 $ 23,953
======== ======= ======= ========
December 31, 1996:
Fixed maturities
available for sale:
U.S. Treasury and
government
securities $ 86,359 $ 154 $ 260 $ 86,253
States, municipalities
and political sub-
divisions 93,293 1,620 306 94,607
Mortgage-backed
securities 60,138 205 7,508 52,835
Other debt securities 34,581 685 957 34,309
-------- ------- ------- --------
$274,371 $ 2,664 $ 9,031 $268,004
======== ======= ======= ========
Marketable equity
securities -
preferred stock $ 62,628 $ 932 $ 596 $ 62,964
======== ======= ======= ========
Marketable equity
securities -
common stock $ 17,112 $ 4,641 $ 880 $ 20,873
======== ======= ======= ========
</TABLE>
3. 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, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
------------------- -----------------
1997 1996 1997 1996
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Direct premiums written $138,512 $135,487 $258,888 $249,196
Assumed premiums written 7,315 9,564 12,284 19,584
Ceded premiums written (73,952) (49,727) (127,982) (102,622)
-------- -------- -------- --------
Net premiums written $ 71,875 $ 95,324 $143,190 $166,158
======== ======== ======== ========
Direct premiums earned $133,931 $123,970 $249,836 $232,186
Assumed premiums earned 6,053 9,341 10,009 18,323
Ceded premiums earned (67,040) (56,415) (115,839) (106,109)
======== ======== ======== ========
Net premiums earned $ 72,944 $ 76,896 $114,006 $144,400
======== ======== ======== ========
</TABLE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $74,710,000 and $99,897,000 for the three
months ended June 30, 1997 and 1996, respectively.
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $89,731,000 and $125,337,000 for the six
months ended June 30, 1997 and 1996, respectively.
4. Bank Borrowings, Term Debt and Other Borrowings:
On June 6, 1997, the Company amended its borrowing
arrangements with its bank lenders providing a $100 million
five year Revolving Credit Facility. Further the Company
selects its interest rate as either the prime rate or LIBOR
plus a margin of .50% to 1.25% depending on the Company's
debt to equity ratio. Interest is payable quarterly. At
June 30, 1997, the Company had $90 million outstanding under
this arrangement at a weighted average interest cost of
7.0%.
On August 4, 1997, the Company used the net proceeds of
$79.6 million from the issuance of Junior Subordinated
Debentures to repay a portion of the Company's outstanding
indebtedness under the Revolving Credit Facility. As of
that date, the outstanding indebtedness under the Revolving
Credit Facility was reduced from $90.0 million to $10.4
million. The net proceeds to be received on August 18, 1997
from the additional issuance of Junior Subordinated
Debentures in connection with the underwriters exercise of
the Option will be used primarily to pay down the remaining
$10.4 million in outstanding indebtedness under the
Revolving Credit Facility. As a result of the issuance of
the Junior Subordinated Debentures, the Revolving Credit
Facility will be reduced from $100 million to approximately
$63.6 million. (See Note 7).
5. Income Taxes:
As of June 30, 1997, management believes it is more likely
than not that the Company will realize a portion of the
deferred tax asset. The valuation allowance at June 30,
1997 primarily relates to capital loss items whose
realization is uncertain. The net deferred tax asset is as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- ----------
<S> <C> <C>
Unpaid losses and loss adjustment
expenses 13,059 13,322
Unearned premiums 7,228 7,283
Allowances for doubtful accounts 1,422 1,213
Other 2,560 2,689
Unrealized loss on fixed maturities
available for sale 1,395 2,229
Major Realty basis difference 8,359 8,317
------- -------
Deferred tax asset 34,023 35,053
------- -------
Deferred policy acquisition costs (10,423) (10,303)
Other (2,710) (1,071)
Unrealized gain on marketable
equity securities (2,741) (1,434)
------- -------
Deferred tax liability (15,874) (12,808)
------- -------
18,149 22,245
Valuation allowance (1,138) (1,073)
------- -------
Net deferred tax asset $17,011 $21,172
======= =======
</TABLE>
Income taxes computed by applying statutory rates to income
before income taxes are reconciled to the provision for
income taxes set forth in the consolidated financial
statements as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
1997 1996
---------- ---------
<S> <C> <C>
Computed U.S. federal income taxes $ 3,906 $ 3,619
Nondeductible amortization of
goodwill and other intangibles 284 284
Tax-exempt interest income (893) (669)
Dividends received deduction (612) (497)
Other 303 101
-------- -------
Income taxes provided $ 2,988 $ 2,838
======== =======
</TABLE>
6. Per Share Data:
Primary and fully diluted earnings per share are based on
the weighted average shares outstanding of approximately
15.2 million and 15.5 million, respectively, for the three
months ended June 30, 1997 and approximately 15.1 million
and 15.3 million, respectively, for the three months ended
June 30, 1996. Primary and fully diluted earnings per share
are based on the weighted average shares outstanding of
approximately 15.2 million and 15.5 million, respectively,
for the six months ended June 30, 1997 and approximately
15.0 million and 15.3 million, respectively, for the six
months ended June 30, 1996.
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings Per Share". This statement
establishes accounting standards for the presentation of
basic and diluted earnings per share. This statement is
effective for periods ending after December 15, 1997. While
early adoption of this statement is prohibited, disclosure
of pro forma data prior to adoption is permitted. For the
three months and six months ended June 30, 1997 and 1996 pro
forma earnings per share, based upon applying SFAS No. 128
are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Pro forma earnings
per share:
Basic $ .28 $ .20 $ .54 $.50
Diluted .28 .20 .53 $.50
</TABLE>
7. Subsequent Event:
On August 4, 1997, AICI Capital Trust, a Delaware business
trust organized by the Company (the "Issuer Trust") issued
3.3 million shares or $82.5 million aggregate liquidation
amount of its 9% Preferred Securities (liquidation amount
$25 per Preferred Security). In addition, the Company has
granted the underwriters an option, exercisable within 30
days of July 29, 1997, (the "Option") to purchase up to an
additional 495,000 shares or $12.375 million aggregate
liquidation amount of Preferred Securities on the same terms
as the Preferred Securities previously issued, solely to
cover over-allotments, if any. On August 12, 1997, the
Company was notified by Avest, Inc. that the underwriters
would exercise the Option and purchase an additional 495,000
shares or $12.375 million aggregate liquidation amount of
the Issuer Trust's 9% Preferred Securities. The Company
anticipates the closing for the sale of these Preferred
Securities to be completed on August 18, 1997.
The Company owns all of the common securities (the "Common
Securities") of the Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the
Issuer Trust's assets. The assets of the Issuer Trust
consist solely of the Company's 9% Junior Subordinated
Debentures due 2027 which were issued August 4, 1997 and are
intended to be issued on August 18, 1997 in an amount equal
to the total of the Preferred Securities and the Common
Securities. The Company used the net proceeds received on
August 4, 1997 in the amount of $79.6 million from the sale
of the Junior Subordinate Debentures to pay down borrowings
under its Revolving Credit Facility. The net proceeds to be
received on August 18, 1997 from the additional issuance of
Junior Subordinated Debentures will be used primarily to pay
down the remaining $10.4 million in outstanding indebtedness
under the Revolving Credit Facility.
Distribution on the Preferred Securities and Junior
Subordinate Debentures are cumulative, accrue from the date
of issuance and are payable quarterly in arrears commencing
September 30, 1997. The Junior Subordinated Debentures are
subordinate and junior in right of payment to all senior
indebtedness of the Company and are subject to certain
events of default and redemption provisions, all as
described in the Junior Debenture Indenture.<PAGE>
PART 1.
- -------
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 statements and the notes thereto included in this
report.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly
Report on Form 10-Q, matters discussed herein may constitute
forward-looking information. Such forward-looking information
reflects the Company's current best estimates regarding future
operations, but, since these are only estimates, actual results
may differ materially from such estimates.
A variety of events, most of which are outside the Company's
control, cannot be accurately predicted and may materially impact
estimates of future operations. Important among such factors are
weather conditions, natural disasters, changes in state and
federal regulations, price competition impacting premium levels,
changes in tax laws, financial market performance, changes in
court decisions effecting coverages, and general economic
conditions.
The Company's results are significantly impacted by its crop
business, particularly its MPCI line. Results from the crop
lines are not generally known until the third and fourth quarters
of the year, after crops are harvested. Crop results are
particularly dependent on events beyond the Company's control,
notably weather conditions during the crop growing season in the
states where the Company writes a substantial amount of its crop
insurance. Additionally, federal regulations governing aspects
of crop insurance are frequently modified, and any such changes
may impact crop insurance results.
Forward-looking information set forth herein does not take into
account any impact from any adverse weather conditions during the
1997 crop season, or the various other factors noted above which
may affect crop and non-crop operating results.
Three months and six months ended June 30, 1997
Compared to three months and six months ended June 30, 1996
The Company's net income for the three months and six months
ended June 30, 1997 increased 40.2% and 8.7% respectively from
the same periods in 1996. The first six months of 1997 were
positively impacted by an improvement in the profitability of the
Property and Casualty operations. This improvement in the
profitability of the Property and Casualty lines was partially
offset by reduced income realized in the Company's Crop Division
during the first three months of 1997 as compared to the first
three months of 1996. The net income during the first six months
of 1997 also benefited from an increase in the Company's net
investment income and net realized capital gains.
While the Company's insurance premiums earned decreased slightly
for both the three months and six months ended June 30, 1997 as
compared to the same periods a year earlier, the Company's
operating ratios in its Property and Casualty operations improved
during these same periods. The decrease in net insurance premiums
earned was a result of increased cessions to reinsurers rather
than a drop in direct premiums written. The increased cessions
to reinsurers resulted from a change in the mix of the Company's
business as well as increased cessions to reinsurers in lines in
which the Company was not meeting its profitability goals. These
changes in reinsurance structure and mix of business combined
with the Company's efforts to reduce operating expenses resulted
in a decrease of the Company's combined loss and expense ratio in
its Property and Casualty lines from 103.7% and 103.8% during the
three and six months ended June 30, 1996 respectively to 101.9%
and 102.1% during the three and six months ended June 30, 1997.
These improved ratios combined with a reduction in net earned
premiums resulted in a decrease of the Company's underwriting
loss from property and casualty operations from $2.6 million and
$5.1 million during the three and six months ended June 30, 1996
to $1.3 million and $3.0 million during the three and six months
ended June 30, 1997.
During the first quarter of 1996, the Company's operating income
benefited from a $2.8 million profit in the Company's Crop
Division. The principal component of this $2.8 million profit
was the recording of an additional $3.8 million in profit
sharing under the Company's Mutli-Peril Crop Insurance (MPCI)
program. The Company's estimate of its profit sharing under the
MPCI program at December 31, 1995 was effected by a volatile crop
growing season during which many of the rules pertaining to
preventive planting payments were changed and a combination of
unusual weather conditions manifested themselves in an unusually
late harvest. As claims were closed during the first quarter of
1996 and the final preventive planting rules applied to these
losses, the Company was able to earn additional profit sharing.
The 1996 growing year did not experience this same degree of
volatility, and the harvest was not delayed by unusual weather
conditions. Consequently, the MPCI profit sharing income
recorded at December 31, 1996 more accurately estimated actual
results than had the profit sharing recorded at December 31,
1995. During the first quarter of 1997, the Company experienced
operating income of approximately $900,000 from its Crop Division
operations. The Company believes that the crop results for the
first quarter of 1997 were more typical of a normal year than
those experienced in the first quarter of 1996. Crop results
during the second three months of 1996 and 1997 were roughly
equivalent with an underwriting income of approximately $400,000
for the three months ended June 30, 1996 and $200,000 for the
three months ended June 30, 1997. Thus, the Company experienced
a larger benefit during the first six months of 1996 from crop
operations than it did during the first six months of 1997.
The Company's net income was also positively impacted during the
three months and six months ended June 30, 1997 as compared to
the same period a year earlier by an increase in the Company's
investment income and net realized capital gains. The Company's
investment income increased 4.0% and 2.5% respectively in the
three and six months ended June 30, 1997 as compared to the same
period in 1996, while the Company's net realized capital gains
increased 27.4% and 20.4% in the three and six months ended June
30, 1997 respectively as compared to the same periods a year
earlier. The increase in the Company's net investment income
resulted from an increase in the average size of the Company's
portfolio from $386.6 million during the six months ended June
30, 1996 to $434.3 million during the six months ended June 30,
1997. This increase in the size of the portfolio was largely
offset by a decrease in the annualized investment yield of the
portfolio from 6.7% during the three and six months ended June
30, 1996 to 6.1% during the three and six months ended June 30,
1997. This decrease in annual investment yield was principally a
result of an increase in the average amount of tax advantaged
securities within the Company's portfolio during the first six
months of 1997 as compared to the first six months of 1996. The
impact of this shift to more tax advantaged securities can be
seen in the reduction in the Company's effective income tax rate
during the two six months periods being compared.
The Company's interest expense during the three months ended June
30, 1997 as compared to the same period a year earlier, was
relatively stable, while during the six months ended June 30,
1997 the Company's interest expense decreased by 3.6% from the
same period during 1996. This decrease in interest expense
resulted from a decrease in the Company's average interest rate
under its bank credit facility from 7.2% during the six months
ended June 30, 1996 to 7.0% during the six months ended June 30,
1997. The Company's average borrowings under the bank credit
facility were approximately $69 million during all periods being
compared.
Recent Statement of Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," which is
effective for the Company on January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to
continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity
instruments awarded. The Company continued to apply APB No. 25
in its accounting for stock-based compensation awards to
employees and directors, while expanding its disclosures as
required by SFAS No. 123.
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
As an insurance holding company, the Company's assets consist
primarily of the capital stock of its subsidiaries, three surplus
notes issued by its insurance company subsidiaries and
investments held at the holding company level. The Company's
primary sources of liquidity are dividends and other
distributions from subsidiaries, interest payments on the surplus
notes, tax sharing payments from its subsidiaries and net
investment income from, and proceeds from the sale of, holding
company investments. The Company's liquidity needs are primarily
to service debt, pay operating expenses and taxes and make
investments in subsidiaries.
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,
1997, the statutory limitation on dividends from insurance
company subsidiaries to the parent without further insurance
departmental approval was approximately $10.4 million. In
addition to dividends from the insurance companies, the Company
also may receive distributions from its non-insurance
subsidiaries which are engaged in agency, premium finance and
claim service operations.
The Company currently holds three surplus notes, each in the
amount of $20.0 million, issued by two of its insurance company
subsidiaries, bearing interest at the rate of 9% per annum,
payable semi-annually and quarterly. Although repayment of all
or part of the principal of this surplus note requires insurance
department approval, no prior approval of interest payment is
currently required.
The Company is currently a party to a tax sharing agreement with
its subsidiaries, under which such subsidiaries pay the Company
amounts in general equal to the federal income tax that would be
payable by such subsidiaries on a stand-alone basis.
On June 6, 1997, the Company amended its borrowing arrangements
with its bank lenders providing a $100 million five-year
Revolving Credit Facility. Further, the Company selects its
interest rate as either the prime rate or LIBOR plus a margin of
.50% to 1.25% depending on the Company's debt to equity ratio.
Interest is payable quarterly. At June 30, 1997, the Company had
$90 million outstanding under this arrangement at a weighted
average interest cost of 7.0%.
On August 4, 1997, AICI Capital Trust, a Delaware business trust
organized by the Company (the ""Issuer Trust") issued 3.3 million
shares or $82.5 million aggregate liquidation amount of its 9%
Preferred Securities (liquidation amount $25 per Preferred
Security). In addition, the Company has granted the underwriters
an option, exercisable within 30 days of July 29, 1997, (the
"Option") to purchase up to an additional 495,000 shares or
$12.375 million aggregate liquidation amount of Preferred
Securities on the same terms as the Preferred Securities
previously issued, solely to cover over-allotments, if any. On
August 12, 1997, the Company was notified by Advest, Inc. that
the underwriters would exercise the Option and purchase an
additional 495,000 shares or $12.375 million aggregate
liquidation amount of the Issuer Trust's 9% Preferred Securities.
The Company anticipates the closing for the sale of these
Preferred Securities to be completed on August 18, 1997.
The Company owns all of the common securities (the "Common
Securities") of the Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the Issuer
Trust's assets. The assets of the Issuer Trust consist solely of
the Company's 9% Junior Subordinated Debentures due 2027 which
were issued on August 4, 1997 and are intended to be issued on
August 18, 1997 in an amount equal to the total of the Preferred
Securities and the Common Securities. The Company used the net
proceeds received on August 4, 1997 in the amount of $79.6
million from the sale of the Junior Subordinated Debentures to
pay down borrowings under its Revolving Credit Facility. The net
proceeds to be received on August 18, 1997 from the additional
issuance of Junior Subordinated Debentures will be used primarily
to pay down the remaining $10.4 million in outstanding
indebtedness under the Revolving Credit Facility. As a result of
the issuance of the Junior Subordinated Debentures, the Revolving
Credit Facility will be reduced from $100 million to
approximately $63.6 million.
Distributions on the Preferred Securities and Junior Subordinated
Debentures are cumulative, accrue from the date of issuance and
are payable quarterly in arrears commencing September 30, 1997.
The Junior Subordinated Debentures are subordinate and junior in
right of payment to all senior indebtedness of the Company and
are subject to certain events of default and redemption
provisions, all as described in the Junior Subordinated
Indenture.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to
fund losses and loss adjustment expense payments, to pay
underwriting expenses, including commissions to agents, to pay
interest under the surplus notes described above and to make tax
payments. Available sources for these requirements are premiums
received and cash flows from investment activities. Together,
these sources historically have been adequate to meet the
described requirements on a timely basis. The Company monitors
the cash flows of its insurance company subsidiaries and attempts
to maintain sufficient cash to meet current operating expenses,
and to structure its investment portfolio at a duration which
approximates the estimated cash requirements for the payment of
loss and loss adjustment expenses.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately
$13.0 million at June 30, 1997 as compared to December 31, 1996.
The principal components of this increase were net income of $8.2
million during the first six months of 1997 and an increase in
the value of the Company's investment portfolio causing the
unrealized gain (loss) on available for sale securities net of
tax to improve from a loss of $1.5 million to a gain of $2.5
million. This change in the unrealized gain (loss) on available
for sale securities was comprised of a decrease of $1.6 million
net of tax in the unrealized loss in the Company's fixed maturity
portfolio and an increase of $2.4 million net of tax in the
unrealized gains in the Company's equity portfolio.
Consolidated Cash Flow
Cash flows from operating activities increased from $24.1 million
during the first six months of 1996 to $28.2 million during the
same six months in 1997. The largest component of net cash
provided activities in both periods was profit sharing payments
received from the federal government's Multi-Peril Crop insurance
program. During the first six months of 1996 this component of
operating cash flows was $15.9 million while in the first six
months of 1997 it was $25.5 million.
Cash flows for the Company's MPCI and crop hail businesses differ
in certain respects from cash flows associated with more
traditional property and casualty lines. MPCI premiums are not
received from farmers until the covered crops are harvested, and
when received are promptly remitted by the Company in full to the
government. Covered losses are paid by the Company during the
growing season as incurred, with such expenditures reimbursed by
the government within three business days. Policy acquisition
and administration expenses are paid by the Company as incurred
during the year. The Company periodically throughout the year
receives a payment in reimbursement of its policy administration
expenses.
In the crop hail business, premiums are generally not received
until after the harvest, while losses and other expenses are paid
throughout the year.
Inflation
The Company does not believe that inflation has had a material
impact on its financial condition or the results of operation.
<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 on May 29,
1997, 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 for each such Director and the number of votes withheld for
each Director are set forth below:
<TABLE>
<CAPTION>
Name Number of Votes
For Withheld
<S> <C> <C>
Jay A. Bielfield 13,066,581 31,896
Kenneth C. Coon 13,070,331 28,146
Edward W. Elliott, Jr. 13,065,781 32,696
Robert LeBuhn 13,066,556 31,921
Michael R. McCarthy 13,066,431 32,046
John P. Nelson 13,066,581 31,896
R.L. Richards 13,066,581 31,896
David L. Treadwell 13,065,726 32,751
Doug T. Valassis 13,066,481 31,996
</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 the Registrant's 1997 Employee Stock Purchase
Plan, in the form of such Plan submitted with proxy materials for
the Annual Meeting. The Plan was approved by shareholders by the
following vote:
<TABLE>
<S> <C>
FOR 11,769,170
AGAINST 1,300,100
ABSTAIN 29,207
NO VOTE 0
</TABLE>
Also submitted to shareholders at such Annual Meeting was a
proposal to ratify the appointment of Deloitte & Touche as the
Company's principal independent public accountants for 1997. The
voting results of such proposal are as follows:
<TABLE>
<S> <C>
FOR 13,069,249
AGAINST 4,689
ABSTAIN 20,179
NO VOTE 4,360
</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.
August 13, 1997 /s/ KENNETH C. COON
---------------------------------
Kenneth C. Coon
Chief Executive Officer
August 13, 1996 /s/ GEORGIA M. MACE
---------------------------------
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, 1997
EXHIBIT INDEX
NUMBEREXHIBIT DESCRIPTION
3.1 Registrant's Restated Certificate of Incorporation, incorporated by
reference to Registrant's Annual Report of Form 10-K for the period
ending December 31, 1993, and Amendment thereto, incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1995.
3.2 Restated By-laws of Acceptance Insurance Companies Inc.,
incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
4.3 Form of Preferred Security (included in Exhibit 4.8).
Incorporated by reference to Form S-3 Registration
No.33-28749, filed July 29, 1997.
4.4 Form of Guarantee Agreement Between Acceptance Insurance Companies
Inc. and Bankers Trust Company. Incorporated by reference to Form
S-3 Registration No.33-28749, filed July 29, 1997.
4.5 Form of Junior Subordinated Indentures Between Acceptance Insurance
Companies Inc. and Bankers Trust Company. Incorporated by
reference to Form S-3 Registration No. 33-28749, filed July 29,
1997.
4.6 Certification of Trust of AICI Capital Trust. Incorporated by
reference to Form S-3 Registration No. 33-28749, filed July 29,
1997.
4.7 Trust Agreement between Acceptance Insurance Companies Inc. and
Bankers Trust (Delaware). Incorporated by reference to Form S-3
Registration No. 33-28749, filed July 29, 1997.
4.8 Form of Amended and Restated Trust Agreement among Acceptance
Insurance Companies Inc., Bankers Trust Company and Bankers
Trust (Delaware). Incorporated by reference to Form S-3
Registration No.33.28749, filed July 29, 1997.
10.1 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.
10.2 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.
10.3 Employment Agreement dated July 2, 1993 between the Registrant and
John P. Nelson. Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
10.4 Employment Agreement dated July 2, 1993 between the Registrant and
Richard C. Gibson. Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
10.5 $100,000,000 Amended and Restated Credit Agreement by and Among the
Registrant, The First National Bank of Chicago, Comerica Bank,
First National Bank of Omaha, First Bank, N.A., Wells Fargo Bank,
National Association and Mercantile Bank, N.A. and The First
National Bank of Chicago, As Agent, and Comerica Bank, First
National Bank of Omaha, and First Bank, N.A., As Co-Agents,
dated as of June 6, 1997.
11 Computation of Income per share.
27 Financial Data Schedule.
99.1 The Registrant's Amended Employee Stock Purchase Plan. Incorporated
by reference to the Registrant's Proxy Statement filed on or about
April 29, 1994.
99.2 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.
99.3 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.
99.4 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.
99.5 The Registrant's 1996 Incentive Stock Option Plan. Incorporated by
reference to the Registrant's Proxy Statement filed on or about May
3, 1996.
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
for the three months and six months ended
June 30, 1997 and 1996
(in thousands, except per share data)
(unaudited)
Exhibit 11
Three Months Six Months
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS)
PER SHARE:
Net income $ 4,242 $ 3,025 $ 8,156 $ 7,503
======= ======= ======= =======
Weighted average number
of shares outstanding 15,052 14,917 15,021 14,892
Adjustment for stock
options 186 154 207 145
------- ------- ------- ------
Adjusted weighted
average number of
shares outstanding 15,238 15,071 15,228 15,037
======= ======= ======= =======
Primary income (loss)
per share $ .28 $ .20 $ .54 $ .50
======= ======= ======= =======
FULLY DILUTED INCOME
PER SHARE:
Net income $ 4,242 $ 3,025 $ 8,156 $ 7,503
======= ======= ======= =======
Weighted average number
of shares outstanding 15,292 15,157 15,261 15,132
Adjustment for stock
options 249 180 249 190
------- ------- ------- ------
Adjusted weighted
average number of
shares outstanding 15,541 15,337 15,510 15,322
======= ======= ======= =======
Fully diluted income
per share $ .27 $ .20 $ .53 $ .49
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements included in the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 291,387
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 84,550
<MORTGAGE> 11,142
<REAL-ESTATE> 3,335
<TOTAL-INVEST> 459,443
<CASH> 10,504
<RECOVER-REINSURE> 13,870
<DEFERRED-ACQUISITION> 29,781
<TOTAL-ASSETS> 932,623
<POLICY-LOSSES> 440,237
<UNEARNED-PREMIUMS> 151,542
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 90,000
0
0
<COMMON> 6,135
<OTHER-SE> 214,635
<TOTAL-LIABILITY-AND-EQUITY> 932,623
144,006
<INVESTMENT-INCOME> 13,311
<INVESTMENT-GAINS> 3,331
<OTHER-INCOME> 0
<BENEFITS> 102,395
<UNDERWRITING-AMORTIZATION> (344)
<UNDERWRITING-OTHER> 43,847
<INCOME-PRETAX> 11,114
<INCOME-TAX> 2,988
<INCOME-CONTINUING> 8,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,156
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
<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 12/31/96 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
