UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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 Street, Suite 600 North
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 has been required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
The number of shares of each class of the Registrant's common stock outstanding
on May 5, 2000 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 14,300,250
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
_________ ____________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value...................... $ 237,964 $ 250,389
Marketable equity securities - preferred stock available-for-sale, at
fair value.......................................................... 14,208 14,178
Marketable equity securities - common stock available-for-sale, at
fair value.......................................................... 8,357 10,903
Mortgage loan .......................................................... 8,787 8,914
Real estate........................................................... 3,177 3,182
Short-term investments, at cost, which approximates market............. 104,098 104,702
Restricted short-term investments, at cost, which approximates market.. 31,350 31,350
____________ ____________
407,941 423,618
Cash....................................................................... 1,564 2,579
Receivables, net........................................................... 138,301 177,296
Income tax receivable...................................................... 12,482 14,177
Reinsurance recoverable on unpaid losses and loss adjustment expenses...... 358,049 502,537
Prepaid reinsurance premiums............................................... 49,146 54,888
Property and equipment, net................................................ 19,047 18,723
Deferred policy acquisition costs.......................................... 13,820 17,495
Excess of cost over acquired net assets.................................... 28,277 28,515
Deferred income tax........................................................ 27,526 27,387
Other assets............................................................... 19,366 11,097
____________ ____________
Total assets........................................................ $ 1,075,519 $1,278,312
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses........................................ $ 625,634 $ 781,377
Unearned premiums.......................................................... 108,581 127,938
Amounts payable to reinsurers.............................................. 33,067 49,224
Accounts payable and accrued liabilities................................... 29,681 41,400
Company-obligated mandatorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures
of the Company........................................................... 94,875 94,875
____________ ____________
Total liabilities ................................................. 891,838 1,094,814
Common stock subject to redemption ........................................ 2,541 2,540
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued -- --
Common stock, $.40 par value, 40,000,000
shares authorized; 15,524,665 and 15,494,334 shares issued.......... 6,210 6,198
Capital in excess of par value.......................................... 199,027 198,932
Accumulated other comprehensive income (loss), net of tax.............. (10,602) (12,568)
Retained earnings....................................................... 15,322 17,212
Common stock subject to redemption.................................... (2,541) (2,540)
Treasury stock, at cost, 1,209,520 shares.............................. (26,047) (26,047)
Contingent stock, 20,396 shares........................................ (229) (229)
_____________ ___________
Total stockholders' equity............................................ 181,140 180,958
_____________ ___________
Total liabilities and stockholders' equity............................ $ 1,075,519 $1,278,312
============= ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
for the three months ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
_________ _________
<S> <C> <C>
Revenues:
Insurance premiums earned............................................... $ 52,396 $53,571
Net investment income................................................... 5,418 6,244
Net realized capital gains.............................................. 1,565 2,480
_________ ________
59,379 62,295
Costs and expenses:
Costs of revenues:
Insurance losses and loss adjustment expenses.......................... 39,713 36,876
Insurance underwriting expenses........................................ 20,299 18,168
General and administrative expenses.................................... 489 553
_________ ________
60,501 55,597
_________ ________
Operating profit (loss).................................................... (1,122) 6,698
_________ ________
Other income (expense):
Interest expense....................................................... (2,168) (2,390)
Other, net............................................................. -- 14
__________ ________
(2,168) (2,376)
Income (loss) before income taxes and cumulative effect
of change in accounting principle ..................................... (3,290) 4,322
Income tax expense (benefit):
Current..................................................... .......... (202) (2,567)
Deferred................................................................ (1,198) 3,527
__________ ________
Income (loss) before cumulative effect of change in
accounting principle..................................................... (1,890) 3,362
Cumulative effect of change in accounting principle........................ -- (338)
__________ ________
Net income (loss).......................................................... $ (1,890) $ 3,024
========== ========
Income (loss) per share:
Basic:
Income (loss) before cumulative effect of change in
accounting principle................................................ $ (.13) $ .24
Cumulative effect of change in accounting principle..................... -- (.02)
Net income (loss)....................................................... (.13) .21
Diluted:
Income (loss) before cumulative effect of change in
accounting principle.................................................. $ (.13) $ .23
Cumulative effect of change in accounting principle.................... -- (.02)
Net income (loss)....................................................... (.13) .21
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
for the three months ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
__________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................... $ (1,890) $ 3,024
Adjustments to reconcile net income (loss) to net cash from
operating activities.......................................................... (18,208) 14,064
__________ __________
Net cash from operating activities.......................................... (20,098) 17,088
__________ __________
Cash flows from investing activities:
Proceeds from sales of investments available-for-sale......................... 25,189 49,422
Proceeds from sales of short-term investments................................... 12,185 --
Proceeds from maturities of short-term investments ............................. 718 989
Proceeds from maturities of investments available-for-sale...................... 10,626 16,712
Purchases of short-term investments............................................. (83,952) (22,918)
Purchases of investments available-for-sale..................................... (16,349) (75,247)
Other, net...................................................................... (1,575) (1,607)
__________ ___________
Net cash from investing activities......................................... (53,158) (32,649)
___________ ___________
Cash flows from financing activities:
Proceeds from issuance of common stock.......................................... 107 94
___________ __________
Net cash from financing activities......................................... 107 94
___________ __________
Net increase (decrease) in cash and short-term investments......................... (73,149) (15,467)
Cash and short-term investments at beginning of period............................. 105,724 72,822
___________ __________
Cash and short-term investments at end of period................................... $ 32,575 $ 57,355
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................................ $ 2,135 $ 2,360
============= ===========
Cash paid during the period for income taxes.................................... $ -- $ --
============= ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 2000 and
December 31, 1999, and the results of operations for the three months ended
March 31, 2000 and 1999 and cash flows for the three months ended March 31,
2000 and 1999.
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 March 31, 2000 approximately $73,087,000 of short-term
investments had a maturity date at acquisition of greater than three months.
Restricted short-term investments are not considered a cash equivalent.
Restricted Short-Term Investments
The restricted short-term investments balance is comprised of investments
deposited with a trustee for the Company's issuance of an outstanding
letter of credit relating to reinsurance coverage on certain crop insurance
products.
Recent Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company has not
completed the process of evaluating the impact of the adoption of SFAS
No. 133 on the Company's consolidated financial statements.
Change in Accounting Principle
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement
of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and
when an asset may be recognized for the recovery of such assessments
through premium tax offsets. The Company adopted SOP 97-3 on January 1,
1999 resulting in a cumulative effect of change in accounting principles of
$338,000.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
year presentation.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Investments:
The amortized cost and related estimated fair values of investments 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>
March 31, 2000:
Fixed maturities available-for-sale:
U.S. Treasury and government
securities............................. $ 94,790 $ -- $ 2,485 $ 92,305
States, municipalities and political
subdivisions........................... 111,900 175 4,247 107,828
Mortgage-backed securities............... 19,089 -- 1,508 17,581
Other debt securities.................... 23,153 10 2,913 20,250
__________ __________ ___________ ____________
$ 248,932 $ 185 $ 11,153 $ 237,964
========== ========== =========== ============
Marketable equity securities -
preferred stock........................ $ 15,111 $ 33 $ 936 $ 14,208
========== ========== =========== ============
Marketable equity securities -
common stock........................... $ 12,796 $ 303 $ 4,742 $ 8,357
========== ========== =========== ============
December 31, 1999:
Fixed maturities available-for-sale:
U.S. Treasury and government
securities............................. $ 87,421 $ 31 $ 2,358 $ 85,094
States, municipalities and political
subdivisions........................... 132,805 323 6,933 126,195
Mortgage-backed securities............... 19,191 -- 1,368 17,823
Other debt securities.................... 24,902 -- 3,625 21,277
_________ __________ ___________ ____________
$ 264,319 $ 354 $ 14,284 $ 250,389
========== ========== =========== ============
Marketable equity securities -
preferred stock........................ $ 15,111 $ 87 $ 1,020 $ 14,178
========== ========== =========== =============
Marketable equity securities -
common stock........................... $ 15,377 $ 1,241 $ 5,715 $ 10,903
========== ========== =========== =============
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Insurance Premiums and Claims:
Insurance premiums written and earned by the Company's insurance
subsidiaries for the three months ended March 31, 2000 and 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
_________ __________
<S> <C> <C>
Direct premiums written.......................................... $ 112,426 $ 121,647
Assumed premiums written......................................... 3,620 4,467
Ceded premiums written........................................... (77,264) (75,062)
__________ __________
Net premiums written......................................... $ 38,782 $ 51,052
========== ==========
Direct premiums earned........................................... $ 126,354 $126,799
Assumed premiums earned.......................................... 9,049 6,497
Ceded premiums earned............................................ (83,007) (79,725)
___________ _________
Net premiums earned.......................................... $ 52,396 $ 53,571
=========== ==========
</TABLE>
Insurance losses and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of $86.9 million
and $62.5 million for the three months ended March 31, 2000 and 1999,
respectively.
4. Commitments and Contingencies:
The Company is involved in various insurance related claims arising
from the normal conduct of business. Management believes that the
outcome of these proceedings will not have a material adverse effect
on the consolidated financial statements of the Company.
The Company is a defendant in a class-action lawsuit filed in August
1999 and transferred to the Arkansas United States District Court.
Plaintiffs in this suit assert the Company made false representations
and engaged in deceptive trade practices related to the Company's 1999
CropRevenue CoveragePlus (R) coverage for rice. The plaintiffs seek
compensatory damages, interest, attorney fees and all appropriate
damages or relief. The District Court denied plaintiffs' request for
class action status on March 10, 2000 but the denial of class
certification did not preclude filing of additional class and
individual actions against the Company. The Company pursued settling
the case to avoid further litigation expense and the distraction of
burdensome and protracted litigation. On May 1, 2000 the Court entered
an Order finding a proposed settlement of $3.7 million is within the
range of possible final judicial approval. The proposed settlement is
subject to final approval by the Court and requires acceptance by
substantially all of the approximately 6,000 rice producers who are
members of a proposed settlement class. The Company has accrued
approximately $4.0 million for this settlement and related estimated
costs.
In December 1999, the Company and certain of its officers and
directors were sued in the Nebraska United States District Court by a
plaintiff alleging, on behalf of a putative class of persons who
purchased the Company's common stock, that the Company knowingly and
intentionally understated the Company's liabilities and made untrue
statements of material fact in order to maintain the market price of
the Company's common stock at artificially high levels. The plaintiff
seeks compensatory damages, interest, costs and attorney fees.
Subsequently several additional actions making substantially identical
allegations and seeking substantially identical relief, as to both
the Company's common stock and the Company's Redeemable Preferred
Securities also were filed in the Nebraska United States District
Court. On April 24, 2000 the Court entered an order consolidating all
such actions presently known to the Company as "In Re Acceptance
Insurance Companies Securities Litigation Master File No. 8:99CV547"
and appointed Lead Plaintiffs and Co-Lead Counsel as required by law.
While the Company believes these actions are without merit, the
ultimate outcome of this litigation cannot be predicted at this time
and the Company currently is unable to determine the potential effect
on the Company's financial position, results of operations or cash
flows. The Company intends to vigorously contest the pending lawsuits
and all similar suits.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Company-Obligated Mandatorily Redeemable Preferred Securities of AICI
Capital Trust, Holding Solely Junior Subordinated Debentures of the
Company:
In August 1997, AICI Capital Trust, a Delaware business trust
organized by the Company (the "Issuer Trust") issued 3.795 million
shares or $94.875 million aggregate liquidation amount of its 9%
Preferred Securities (liquidation amount $25 per Preferred Security).
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 in 2027, which were issued in
August 1997 in an amount equal to the total of the Preferred
Securities and the Common Securities.
Distributions on the Preferred Securities and Junior Subordinated
Debentures are cumulative, accrue from the date of issuance and are
payable quarterly in arrears. 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 can be
called at par value after September 30, 2002, all as described in the
Junior Debenture Indenture. At March 31, 2000, the Company had
Preferred Securities of $94.875 million outstanding at a weighted
average interest cost of 9.1%.
6. Income Taxes:
The Company recognizes a net deferred tax asset or liability for all
temporary differences and a related valuation allowance when
realization of the asset is uncertain. The valuation allowance at
March 31, 2000 and December 31, 1999 relates to capital loss items.
The net deferred tax as of March 31, is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
____________ _____________
<S> <C> <C>
Unpaid losses and loss adjustment expenses................................ $ 9,290 $ 11,075
Unearned premiums......................................................... 4,160 5,113
Allowances for doubtful accounts.......................................... 2,433 2,463
Net operating loss carryforward............................... . . . 7,756 6,109
Unrealized loss on marketable equity securities available-for-sale . . . . 1,870 1,892
Unrealized loss on fixed maturities available-for-sale......... . . . . 3,839 4,876
Other...................................................................... 7,003 5,389
__________ _________
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . 36,351 36,917
__________ _________
Deferred policy acquisition costs.......................................... (4,837) (6,123)
Other...................................................................... (3,913) (3,332)
__________ _________
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . (8,750) (9,455)
__________ _________
27,601 27,462
Valuation allowance........................................................ (75) (75)
_________ _________
Net deferred tax asset..................................................... $ 27,526 $ 27,387
========= =========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
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>
March 31,
______________________
2000 1999
_________ _________
<S> <C> <C>
Computed U.S. federal income taxes.................................... $(1,152) $ 1,513
Nondeductible amortization of goodwill and other intangibles.......... 99 114
Tax-exempt interest income............................................ (464) (622)
Dividends received deduction.......................................... (99) (205)
State income tax...................................................... (202) --
Other................................................................. 418 160
_________ ________
Income tax expense (benefit)............................... $(1,400) $ 960
========= ========
</TABLE>
7. Net Income (Loss) Per Share:
The net income (loss) per share for both basic and diluted for the
three months ended March 31, 2000 and 1999 are as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
March 31,
_____________________
2000 1999
________ ________
<S> <C> <C>
Income (loss) before cumulative effect of change in accounting principle $(1,890) $ 3,362
Cumulative effect of change in accounting principle -- (338)
_________ ________
Net income (loss) $(1,890) $ 3,024
========= ========
Weighted average common shares outstanding 14,285 14,241
Dilutive effect of contingent shares -- 21
Dilutive effect of stock options -- 80
________ ________
Diluted weighted average common and equivalent shares outstanding 14,285 14,342
======== ========
Income (loss) per share:
Basic:
Income (loss) before cumulative effect of change in
accounting principle $ (.13) $ .24
Cumulative effect of change in accounting principle -- (.02)
Net income (loss) (.13) .21
Diluted:
Income (loss) before cumulative effect of change in
accounting principle $ (.13) $ .23
Cumulative effect of change in accounting principle -- (.02)
Net income (loss) (.13) .21
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Other Comprehensive Income:
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Other comprehensive income (loss) determined in
accordance with SFAS No. 130 for the three months ended March 31,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
_____________________________
2000 1999
_________ _________
<S> <C> <C>
Net income (loss) $ (1,890) $ 3,024
Unrealized holding gains (losses) of investments,
net of reclassification adjustment 3,024 (5,726)
Income tax expense (benefit) 1,058 (2,004)
_________ _________
1,966 (3,722)
_________ __________
Other comprehensive income (loss) $ 76 $ (698)
========= ==========
</TABLE>
9. Business Segments:
The Company is engaged in the specialty property and casualty and the
crop insurance business. The property and casualty insurance segment
primarily consists of commercial property, commercial casualty, inland
marine and workers' compensation. The principal lines of the Crop
Insurance segment are MPCI, supplemental coverages and named peril
insurance.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 1).
Management evaluates the performance of and allocates its resources to
its operating segments based on income before income taxes. Interest
income and interest expense are primarily allocated to segments based
upon estimated investments and capital, respectively. For the three
months ended March 31, 2000 and 1999, there were no material
intersegment transactions. Management does not utilize assets as a
significant measurement tool for evaluating segments.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
Segment revenues and segment operating profit (loss) for the three
months ended March 31, are as follows (in thousands):
<TABLE>
<CAPTION>
Property and
Casualty Crop
Insurance Insurance Total
_____________ _________ __________
<S> <C> <C> <C>
2000
Revenues $ 49,893 $ 9,486 $ 59,379
========== ========= ==========
Operating profit (loss) (258) (864) (1,122)
Interest expense and other 667 1,501 2,168
__________ _________ __________
Income (loss) before income taxes $ (925) $ (2,365) $ (3,290)
========== ========= ==========
1999
Revenues $ 61,123 $ 1,172 $ 62,295
========= ========= ==========
Operating profit (loss) 5,511 1,187 6,698
Interest expense and other 1,435 941 2,376
_________ _________ __________
Income before income taxes and
cumulative effect of change in
accounting principle $ 4,076 $ 246 $ 4,322
========= ========= ==========
</TABLE>
10. Sale of Redland Insurance Company:
In April 2000, the Company signed a Definitive Contract for the sale of
Redland Insurance Company ("Redland") to Clarendon National Insurance
Company ("Clarendon"). The Contract is consistent with the agreement in
principle announced in January 2000 and is subject to various
regulatory approvals. The proposed transaction includes the appointment
of other Company subsidiaries as the exclusive producer and
administrator of Redland for the business the Company currently writes
through Redland. The Company would also reinsure certain portions of
the business written by Redland in the future and the Company and
Clarendon would jointly develop additional specialty program business.
The sale would be a cash transaction based upon the market value of
Redland after the divestiture of various assets, including the Redland
subsidiaries to The Redland Group, Inc. The Company does not expect to
realize a significant gain or loss from the proposed transaction which
is expected to close on or about July 1, 2000.
<PAGE>
PART I.
_______
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
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 should be read in
conjunction with the Company's Interim Consolidated Financial Statements and
the notes thereto included elsewhere herein.
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,
within the meaning of the Private Securities Litigation Reform Act of 1995.
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 commodity prices, 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. Estimated results from the crop lines are not
generally recorded until the fourth quarter of the year, after crops are
harvested and final market prices are established. Crop segment results are
particularly dependent on events beyond the Company's control, notably weather
conditions during the crop growing seasons in the states where the Company
writes a substantial amount of its crop insurance, the market price of grains
on various commodity exchanges and overall worldwide supply and demand, the
continuing globalization of the crop industry and its effect on the export of
crops to other countries and the volatility of crop prices resulting from
domestic and foreign policy decisions. 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 2000 crop season, or the
various other factors noted below which may affect crop and noncrop operation
results.
General
The Company underwrites its insurance products through five wholly owned
insurance company subsidiaries: Acceptance Insurance Company ("Acceptance
Insurance"), Acceptance Indemnity Insurance Company ("Acceptance Indemnity"),
Acceptance Casualty Insurance Company ("Acceptance Casualty"), American Growers
Insurance Company ("American Growers") and Redland Insurance Company
("Redland") (collectively referred to herein as the "Insurance Companies").
The Company continues to focus its emphasis on its crop segment which has
recorded operating profits during each of the last six years. The principal
lines of the Company's crop insurance segment are MPCI, supplemental coverages,
and named peril insurance. MPCI is a federally subsidized risk management
program designed to encourage farmers to manage their risk through the purchase
of insurance policies. MPCI provides farmers with yield coverage for crop
damage from substantially all natural perils. CRC is an extension of the MPCI
program which provides farmers with protection from revenue loss caused by
changes in crop prices, low yields or both. As used herein, the term MPCI
includes CRC, unless the context indicates otherwise.
<PAGE>
The accounting treatment for MPCI is different than the more traditional
property and casualty insurance lines. For income statement purposes, gross
premiums written consist of the aggregate amount of MPCI premiums paid by
farmers, and does not include any related federal premium subsidies. The
Company's profit or loss from its MPCI business is determined after the
crop season ends on the basis of a profit sharing formula established by law
and the RMA. For income statement purposes, any such profit share earned by
the Company, net of the cost of third party reinsurance, is shown as net
premiums written, which equals net premiums earned for MPCI business; whereas,
any share of losses payable by the Company is charged to losses and loss
adjustment expenses. Due to various factors, including timing and severity of
losses from storms and other natural perils and crop production cycles, the
profit or loss on MPCI premiums is primarily recognized in the fourth quarter
of the year. The Company relies on loss information from the field to
determine (utilizing a formula established by the RMA) the level of losses that
should be considered in estimating the profit or loss during this period.
Based upon available loss information, the Company has historically recorded an
estimate of the profit or loss during the third quarter and then re-evaluated
the estimate using additional loss information available. Due to the nature of
the CRC product whereby results are influenced by changes in the market prices
of various commodities in the fourth quarter and the increasing significance of
CRC as a percentage of MPCI, the Company intends to record its initial estimate
of the profit or loss for the 2000 crop results in the fourth quarter of 2000.
Certain characteristics of the Company's crop business may affect comparisons,
including: (i) the seasonal nature of the business whereby profits or losses
generally can not be estimated until the fourth quarter of the year; (ii) the
nature of crop business whereby losses are known within a one year period; and
(iii) the limited amount of investment income associated with crop business.
In addition, cash flows from such business differ from cash flows from certain
more traditional lines. With the Company's increased emphasis on the crop
segment, the seasonal and short term nature of the Company's crop business, as
well as the impact on the crop business of weather and other natural perils,
may produce more volatility in the Company's operating results on a quarter to
quarter or year to year basis than has historically been the case.
Results of Operations
Three Months Ended March 31, 2000
Compared to Three Months Ended March 31, 1999
The Company's net income decreased from $3.0 million for the three months ended
March 31, 1999 to a net loss of $1.9 million for the three months ended March
31, 2000. The reduction in net income was primarily a result of the $4.0
million charge related to the proposed settlement of the class action suit by
rice producers and the development of CRCPlus losses in first quarter of 2000,
the decrease in investment income and realized gains and an increase in the
loss ratio in the Company's property and casualty segment. Partially
offsetting these effects was the additional profit sharing earned in the
current year under the Company's 1999 MPCI program.
The underwriting loss in the Company's crop segment increased by approximately
$2.0 million in the first quarter of 2000 in comparison to the same period in
1999. The results for 2000 include a $4.0 million expense related to the
proposed settlement of the class action suit by rice producers. The Arkansas
United States District Court has entered an Order finding that the proposed
settlement is within the range of possible final judicial approval. The
proposed settlement is subject to final approval by the Court and requires
acceptance by substantially all of the approximately 6,000 rice producers who
are members of the proposed settlement class. Additionally, the first quarter
2000 results include $4.9 million in underwriting charges related to loss
development resulting from higher than expected payments on the settlement of
CRCPlus losses in the first quarter of 2000. Approximately 95% of the CRCPlus
claims outstanding at December 31, 1999 were settled in the first quarter of
2000. The results for the crop segment also included approximately $6.8 in
underwriting profits recognized in the first quarter of 2000 primarily related
to an increase in the estimated 1999 MPCI profit share.
<PAGE>
The Company's property and casualty segment was impacted in the first quarter
of 2000 by the sale of its nonstandard automobile business in third quarter of
1999, and by the transfer in the first quarter of 2000 of renewal rights for
all business previously produced and serviced by the Company's Scottsdale,
Arizona office and for its "long haul" trucking business. Accordingly, gross
written premiums and net earned premiums decreased approximately 32% and 18%,
respectively, from the first quarter of 1999 to the same period in 2000. The
Company expects further reductions in property and casualty segment premiums as
approximately 66% of the net earned premiums for the three months ended March
31, 2000 are from discontinued lines of business. The underwriting loss for the
three months ended March 31, 2000 in the Company's property and casualty
segment was approximately $4.1 million higher than the same period in the
previous year. This was attributable to an increase in the loss ratio from
approximately 68% in the first quarter of 1999 compared to approximately 80%
in the first quarter of 2000. The first quarter loss ratio of 80% is
impacted by the 82% loss ratio on discontinued lines. The loss ratio for
continuing lines for the three months ended March 31, 2000 is approximately
75%.
The Company's net investment income declined from approximately $6.2 million
during the first three months of 1999 to $5.4 million during the three months
of 2000. This decline in investment income was affected by a decline in the
size of the average outstanding portfolio of the Company from approximately
$487 million during the three months ended March 31, 1999 to $430 million in
the same period in 2000. To a lessor extent, the yield on the portfolio
decreased from 5.1% during the first quarter of 1999 to 5.0% during the first
quarter of 2000. Net realized gains approximated $1.6 million for the three
months ended March 31, 2000 as compared to $2.5 million for the three months
ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company - Parent Only
As an insurance holding company, the Company's assets consist primarily of the
capital stock of its subsidiaries, surplus notes issued by two of its insurance
company subsidiaries and investments held at the holding company level. The
Company's primary sources of liquidity are receipts from interest payments on
the surplus notes, payments from the profit sharing agreement with American
Agrisurance, the Company's wholly owned subsidiary which operates as the
general agent for the Company's crop insurance programs, tax sharing payments
from its subsidiaries, investment income from, and proceeds from the sale of,
holding company investments, and dividends and other distributions from
subsidiaries of the Company. The Company's liquidity needs are primarily to
service debt, pay operating expenses and taxes, make investments in
subsidiaries, and repurchase shares of the Company's stock.
The Company currently holds two surplus notes, each in the amount of $20
million, issued by two of its insurance company subsidiaries, bearing interest
at the rate of 9% per annum payable quarterly. Although repayment of all or
part of the principal of these surplus notes requires prior insurance
department approval, no prior approval of interest payment is currently
required.
Under the American Agrisurance profit sharing agreement, American Agrisurance
receives up to 50% of the crop insurance profit after certain expenses and a
margin retained by the Insurance Companies based upon a formula established by
the Company and approved by the Nebraska Department of Insurance. If the
calculated profit share is negative, such negative amounts are carried forward
and offset future profit sharing payments. These amounts are distributed from
time to time in the form of a dividend to the Company.
Dividends from the Insurance Companies are regulated by the 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. In 2000, the statutory
limitation on dividends from the Insurance Companies to the Company without
further insurance departmental approval is approximately $7.4 million. If the
proposed transactions related to the sale of Redland are completed, the
Company expects that the statutory limitation on dividends from the Insurance
Companies to the Company without further insurance department approval will
increase to approximately $21.8 million for the remainder of 2000. This
anticipated increase would result from the additional dividends that are
expected to be available from American Growers if these proposed transactions
are completed.
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.
<PAGE>
In 1997, AICI Capital Trust, a Delaware business trust organized by the Company
(the "Issuer Trust") issued 3.795 million shares or $94.875 million aggregate
liquidation amount of its 9% Preferred Securities (liquidation amount $25 per
Preferred Security). 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 in 1997 in an amount equal
to the Preferred Securities and the Common Securities. Distributions on the
Preferred Securities and Junior Subordinated Debentures are cumulative, accrue
from the date of issuance and are payable quarterly in arrears. 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 redemptive provisions, all described in the Junior Debenture Indenture. At
March 31, 2000, the Company had $94.875 million outstanding at a weighted
average interest cost of 9.1%.
During the first quarter of 2000, the Company replaced its $31.4 million Credit
Facility with a Security and Letter Loan Agreement for the same amount. The
entire amount of this loan was used as security for an existing outstanding
letter of credit relating to reinsurance coverage on certain crop insurance
products. Under this Agreement, the Company was not required to pledge the
stock of Redland Insurance Company or Acceptance Insurance Company, restrict
payment of dividends, or maintain certain financial covenants, all of which
were required by the previous Credit Facility. The Company believes the
$20 million surplus note payment to it in December 1999 by one of its
Insurance Companies and the transfer of $20 million from Acceptance Insurance
Company to American Growers Insurance Company in December of 1999 in the form
of a surplus note, have met the short-term capital needs of the Company. The
Company continually reviews its capital needs and the surplus needs of the
Insurance Companies and from time to time may seek additional funding which may
include, among other things, an account receivable financing at the Insurance
Companies level, a new bank line of credit, placement of equity or debt
securities, or the disposition or acquisition of certain lines of property and
casualty operations to satisfy liquidity needs that may arise in the future.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to fund losses and
loss adjustment expense payments and to pay underwriting expenses, including
commissions and other expenses. The available sources to fund these
requirements are net premiums received and, to a lesser extent, cash flows from
the Company's investment activities, which together have been adequate to meet
such requirements on a timely basis. The Company monitors the cash flows of
the Insurance Companies 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 payments of
losses and loss adjustment expenses.
<PAGE>
Cash flows from the Company's crop business differs 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 remitted within approximately 30 days of receipt 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 acquisition and administration expenses.
The Company's profit or loss from its MPCI business is determined after the
crop season ends on the basis of a profit sharing formula established by law
and the RMA. Commencing with the 1997 year, the Company receives a profit
share in cash, with 60% of the amount in excess of 17.5% of its MPCI Retention
(as defined in the profit sharing agreement) in any year carried forward to
future years, or it must pay its share of losses. The Company received
$51.5 million in payments under the MPCI program in March of 1999. The Company
received a net payment of approximately $62.5 million under the MPCI program in
March of 2000.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately $.2 million at
March 31, 2000 as compared to December 31, 1999. The principal component of
this increase was an increase in the value of the Company's investment
portfolio causing the unrealized loss on available-for-sale securities, net of
tax, to decrease from $12.6 million at December 31, 1999 to $10.6 million at
March 31, 2000. This increase was partially offset by the net loss of $1.9
million for the three months ended March 31, 2000.
Consolidated Cash Flows
Cash used by operating activities was $20.1 million for the three months ended
March 31, 2000 compared to cash provided from operations for the same period in
1999 of $17.1 million. This decrease in cash flow from period to period was
primarily a result of the declining premium volume in the Company's property
and casualty segment and loss payments related to CRCPlus.
Inflation
The Company does not believe that inflation has had a material impact on its
financial condition or the results of operations.
Sale of Redland Insurance Company
In April 2000, the Company signed a Definitive Contract for the sale of Redland
to Clarendon National Insurance Company ("Clarendon"). The Contract is
consistent with the agreement in principle announced in January 2000 and is
subject to various regulatory approvals. The proposed transaction includes the
appointment of other Company subsidiaries as the exclusive producer and
administrator of Redland for the business the Company currently writes through
Redland. The Company would also reinsure certain portions of the business
written by Redland in the future and the Company and Clarendon would jointly
develop additional specialty program business. The sale would be a cash
transaction based upon the market value of Redland after the divestiture of
various assets, including the Redland subsidiaries to The Redland Group, Inc.
The Company does not expect to realize a significant gain or loss from the
proposed transaction which is expected to close on or about July 1, 2000. The
Company will retain an option to repurchase Redland under certain
circumstances. Upon closing, Redland is expected to cede most of its business
to Clarendon which maintains the rating of A (Excellent) rating from A.M. Best.
The Company is pursuing the proposed transaction as part of its overall
strategy to focus its property and casualty operations on core lines of
profitable specialty business and to meet the requirements of current and
future agents and customers for insurance products issued by an insurance
company that is rated A- or better by A.M. Best. The Company and Clarendon have
entered into an interim agreement that allows Redland to issue policies with
Clarendon endorsements. The Company has no reason to believe that the proposed
sale of Redland will not be completed. If, however, the sale is not completed,
the Company intends to seek other agreements with Clarendon, similar to the
interim agreements, in order to retain the A rating on the policies.
<PAGE>
Recent Statement of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), " Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company has not completed the process of evaluating
the impact of the adoption of SFAS No. 133 on the Company's consolidated
financial statements.
PART I
ITEM 3.
Quantitative and Qualitative Disclosure about Market Risk
The Company's balance sheet includes a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the
risk of loss arising from adverse changes in market interest rates or prices.
The Company currently has interest rate risk as it relates to its fixed
maturity securities and mortgage loans and equity price risk as it relates to
its marketable equity securities. In addition, the Company is also subject to
interest rate risk at the time of refinancing as it relates to its mandatorily
redeemable Preferred Securities. The Company's market risk sensitive
instruments are entered into for purposes other than trading.
At March 31, 2000, the Company had $246.8 million of fixed maturity
investments and mortgage loans and $22.6 million of marketable equity
securities that were subject to market risk. The Company's investment strategy
is to manage the duration of the portfolio relative to the duration of the
liabilities while managing interest rate risk. In addition, the Company has the
ability to hold its fixed maturity investments until maturity and therefore
would not expect to realize a material adverse impact on income or cash flows.
The Company's Preferred Securities of $94.875 million at March 31, 2000,
mature in August 2027 and are redeemable at the Company's option in September
2002. The Company will continue to monitor the interest rate environment and
evaluate refinancing opportunities as the redemption and maturity date
approaches.
The Company uses two models to analyze the sensitivity of its market risk
assets and liabilities. For its fixed maturity securities, mortgage loans and
mandatorily redeemable Preferred Securities, the Company uses duration modeling
to calculate changes in fair value. For its marketable equity securities, the
Company uses a hypothetical 20% decrease in the fair value of these securities.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because fair values of securities may be affected by
credit concerns of the issuer, prepayment speeds, liquidity of the security and
other general market conditions. The sensitivity analysis duration model used
by the Company produces a loss in fair value of $10.5 million on its fixed
maturity securities and mortgage loans and a gain in fair value of $5.4
million on its mandatorily redeemable Preferred Securities, based on a 100
basis point increase in interest rates. The hypothetical 20% decrease in fair
value of the Company's marketable equity securities produces a loss in fair
value of $4.5 million.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in a class-action lawsuit filed in August 1999 and
transferred to the Arkansas United States District Court. Plaintiffs in this
suit assert the Company made false representations and engaged in deceptive
trade practices related to the Company's 1999 CropRevenue CoveragePlus (R)
coverage for rice. The plaintiffs seek compensatory damages, interest, attorney
fees and all appropriate damages or relief. The District Court denied
plaintiffs' request for class action status on March 10, 2000 but the denial of
class certification did not preclude filing of additional class and individual
actions against the Company. The Company pursued settling the case to avoid
further litigation expense and the distraction of burdensome and protracted
litigation. On May 1, 2000 the Court entered an Order finding a proposed
settlement of $3.7 million is within the range of possible final judicial
approval. The proposed settlement is subject to final approval by the Court and
requires acceptance by substantially all of the approximately 6,000 rice
producers who are members of a proposed settlement class. The Company has
accrued approximately $4.0 million for this settlement and related estimated
costs.
In December 1999, the Company and certain of its officers and directors were
sued in the Nebraska United States District Court by a plaintiff alleging, on
behalf of a putative class of persons who purchased the Company's common
stock, that the Company knowingly and intentionally understated the Company's
liabilities and made untrue statements of material fact in order to maintain
the market price of the Company's common stock at artificially high levels. The
plaintiff seeks compensatory damages, interest, costs and attorney fees.
Subsequently several additional actions making substantially identical
allegations and seeking substantially identical relief, as to both the
Company's common stock and the Company's Redeemable Preferred Securities also
were filed in the Nebraska United States District Court. On April 24, 2000 the
Court entered an order consolidating all such actions presently known to the
Company as "In Re Acceptance Insurance Companies Securities Litigation Master
File No. 8:99CV547" and appointed Lead Plaintiffs and Co-Lead Counsel as
required by law. While the Company believes these actions are without merit,
the ultimate outcome of this litigation cannot be predicted at this time and
the Company currently is unable to determine the potential effect on the
Company's financial position, results of operations or cash flows. The Company
intends to vigorously contest the pending lawsuits and all similar suits.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Form 8-K
The following Current Reports on Form 8-K have been filed
during the last fiscal quarter of the period covered by this
report:
<TABLE>
<CAPTION>
Financial Statements Date of
Item Filed Report
______________________ _____________________ ___________________
<S> <C> <C>
Item 5. Other Events. No December 29, 1999
Item 5. Other Events. No December 30, 1999
Item 5. Other Events. No January 13, 2000
Item 5. Other Events. No January 17, 2000
Item 5. Other Events. No January 26, 2000
Item 5. Other Events. No February 11, 2000
Item 5. Other Events. No February 28, 2000
Item 5. Other Events. No March 15, 2000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ JOHN E. MARTIN
_____________________________________
Dated: May 12 , 2000 John E. Martin
President and Chief Executive Officer
By: /s/ GEORGIA M. MACE
_____________________________________
Dated: May 12 , 2000 Georgia M. Mace
Chief Financial Officer and Treasurer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
10.9 Security Agreement and Letter Loan Agreement Between
Acceptance Insurance Companies Inc. and Comerica Bank.
27 Financial Data Schedule.
March 30, 2000
Acceptance Insurance Companies Inc.
222 S. 15th Street
Suite 600 North
Omaha, Nebraska 68102
Ladies and Gentlemen:
This letter constitutes an agreement by and between COMERICA BANK, a
Michigan banking corporation (herein called "Bank"), and ACCEPTANCE INSURANCE
COMPANIES INC., a Delaware corporation (herein called "Company"), pertaining to
certain credit which Bank has made and/or may from time to time hereafter make
available to Company.
In consideration of the issuance by Bank of the letter of credit
described in attached Exhibit "A" (the "Letter of Credit"), and in
consideration of all present and future liabilities, obligations and
indebtedness of Company to Bank, howsoever created, evidenced, existing or
arising, whether direct or indirect, absolute or contingent, joint or several,
now or hereafter existing or arising, or due or to become due (herein
collectively called the "Liabilities"), Company represents, warrants, covenants
and agrees as follows:
This Agreement supercedes and replaces the Amended and Restated Credit
Agreement dated December 22, 1999 between Company, Comerica Bank, as Agent and
the lenders party thereto ("Credit Agreement"). Upon the execution of this
Agreement, the Credit Agreement, the Guaranty, the Pledge Agreements and the
Subordination and Contribution Agreement (each as defined in the Credit
Agreement) shall be terminated and Bank in its capacity as Agent shall arrange
for the prompt return to Company of the Revolving Credit Notes marked
"Cancelled" and the Pledged Surplus Notes and pledged stock collateral.
1. Company hereby represents and warrants, and such
representations and warranties shall be deemed to be continuing representations
and warranties during the entire life of this Agreement, and thereafter, so
long as any Liabilities remain unpaid and outstanding:
(a) It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, it is
duly qualified and authorized to do business in each
jurisdiction where the character of its assets or the nature
of its activities makes such qualification necessary, and it
has the legal power and authority to own its properties and
assets and to carry out its business in each such
jurisdiction wherein such qualification is necessary and
where the failure to so qualify would have a material adverse
effect on the Company; execution, delivery and performance of
this Agreement, the Standby Letter of Credit Application and
Agreement dated December 20, 1999 and the Security Agreement
(Negotiable Collateral) dated March 30, 2000 by Company in
favor of Bank (collectively the "Loan Documents") are within
Company's corporate powers and authorities, have been duly
authorized by all requisite corporate or other necessary or
appropriate action, and are not in contravention or violation
of law or the terms of Company's Articles of Incorporation or
Bylaws, and do not require the consent or approval of any
governmental body, agency or authority; and this Agreement,
and any other Loan Documents contemplated hereby, when
executed, issued and/or delivered by Company, or by which
Company is otherwise bound, will be valid and binding and
legally enforceable against Company in accordance with their
terms.
(b) The execution, delivery and performance of this Agreement,
and any other Loan Documents required under or contemplated
by this Agreement to which Company is a party or by which it
is otherwise bound, and the issuance of this Agreement and
any such other Loan Documents by Company, and the
transactions contemplated hereby and thereby, are not in
contravention or violation of the unwaived terms of any
indenture, agreement or undertaking to which Company is a
party or by which it or any of its property or assets is
bound, and will not result in the creation or imposition of
any lien or encumbrance of any nature whatsoever upon any of
the property or assets of Company, except to or in favor of
Bank.
(c) There exists no Event of Default (as hereinafter defined), or
any condition or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of
Default (any such condition or event is herein called a
"Default") under any of the Liabilities. The term
"Liabilities" shall not include liabilities under the Credit
Agreement.
<PAGE>
2. So long as the Letter of Credit is outstanding and so long as
any Liabilities remain unpaid and outstanding, Company covenants and agrees
that it shall:
(a) Furnish to Bank, or cause to be furnished to Bank, in each
case, in form and detail and on a reporting basis
satisfactory to Bank, the following:
(i) As soon as available and in any event within 45 days
after the end of each of the first three fiscal
quarters of each fiscal year of the Company, the
consolidated balance sheet of the Company and its
Subsidiaries as of the end of such quarter, and the
related consolidated statements of income, retained
earnings and cash flows of the Company and its
Subsidiaries for the period commencing at the end of
the previous fiscal year and ending with the end of
such quarter, setting forth in each case in
comparative form the corresponding figures for the
corresponding date or period of the preceding fiscal
year, all in reasonable detail and duly certified
(subject to year-end audit adjustments)by the chief
financial officer of the Company as having been
prepared in accordance with generally accepted
accounting principles;
(ii) As soon as available and in any event within 120
days after the end of each fiscal year of the
Company, a copy of the consolidated balance sheets
of the Company and its Subsidiaries as of the end of
such fiscal year and the related consolidated
statements of income, retained earnings and cash
flows of the Company and its Subsidiaries for such
fiscal year, with an audit report of Deloitte &
Touche, or other independent certified public
accountants of comparable standing selected by the
Company, with respect to such consolidated
statements, which report shall be without
qualifications unacceptable to the Bank;
(iii) as soon as possible, and in any event within three
(3) Business Days after becoming aware of the
occurrence or existence of any Default or Event of
Default, a written statement of an authorized
officer of Company setting forth the details of such
Default or Event of Default and the action which
Company has taken or caused to be taken, or proposes
to take or cause to be taken with respect thereto.
(b) Do or cause to be done all things necessary to preserve and
keep in full force and effect Company's corporate existence,
rights and franchises.
3. So long as the Letter of Credit is outstanding, and so long
as any Liabilities remain unpaid and outstanding, Company covenants and agrees
that it shall not, without the prior written consent of Bank:
(a) Consolidate with or merge into any other corporation or
permit any other corporation to merge into it, except for any
merger in which Company is the survivor.
(b) Furnish Bank with any certificate or other document that
contains any untrue statement of a material fact or omits to
state a material fact necessary to make such certificate or
document not misleading in light of the circumstances under
which it was furnished.
<PAGE>
4. The Company shall pay to the Bank Letter of Credit fees as
follows:
(a) A per annum Letter of Credit fee with respect to the undrawn
amount of the Letter of Credit equal to 1% per annum
multiplied by the undrawn amount of the Letter of Credit,
exclusive of the issuance fee of one-quarter of one
percentage point (1/4%)per annum on the face amount thereof
to be paid to Bank under paragraph 4(c)hereof.
(b) If any change in any law or regulation or in the
interpretation thereof by any court or administrative or
governmental authority charged with the administration
thereof shall either (i) impose, modify or cause to be
deemed applicable any reserve, special deposit, limitation or
similar requirement against letters of credit issued by, or
assets held by, or deposits in or for the account of, Bank or
any of the lenders having a risk participation in the Letter
of Credit (each a "Participant") or (ii) impose on Bank or
any Participant any other condition regarding this Agreement
or the Letter of Credit, and the result of any event referred
to in clause (i) or (ii) above shall be to increase in an
amount deemed material by Bank or any Participant the cost or
expense to Bank or any Participant of issuing or maintaining
or participating in the Letters of Credit (which increase in
cost or expense shall be determined by the Bank's or such
Participant's reasonable allocation of the aggregate of such
cost increases and expense resulting from such events), then,
upon demand by the Bank or such Participant, as the case may
be, the Company shall, within ten days following demand for
payment, pay to Bank or such Participant, as the case may be,
from time to time as specified by the Bank or such
Participant, additional amounts which shall be sufficient to
compensate the Bank or such Participant for such increased
cost and expense, together with interest on each such amount
from ten days after the date demanded until payment in full
thereof at the Bank's Prime Rate. A certificate as to such
increased cost or expense incurred by the Bank or such
Participant, as the case may be, as a result of any event
mentioned in clause (i) or (ii) above, shall be promptly
submitted to the Company and shall be conclusive, absent
manifest error, as to the amount thereof. The Bank shall give
the Company reasonable notice of any change contemplated by
this paragraph if the Bank has advance notice of such change.
(c) All payments by the Company to the Bank or any Participant
under this paragraph 4 shall be made in United States Dollars
and in immediately available funds at the Bank's office
located in Detroit, Michigan or such other office of the Bank
as may be designated from time to time by written notice to
the Company by the Bank. The aforesaid fees shall be
nonrefundable under all circumstances, shall be payable
quarter annually in arrears on the 1st day of each January,
April, July and October (commencing January 1, 2000) and on
the expiry date of the Letter of Credit, and shall be
calculated on the basis of a 360 day year and assessed for
the actual number of days from the date of the issuance
thereof to the stated expiration thereof.
(d) In connection with the Letter of Credit, the Company shall
pay to Bank a letter of credit issuance fee of one-quarter
percentage point (1/4%) per annum on the face amount of the
Letter of Credit. In addition to the Letter of Credit fees,
the Company shall pay, for the sole account of the Bank,
standard documentation, administration, payment and
cancellation charges assessed by Bank or its issuing office,
at the times, in the amounts and on the terms set forth or to
be set forth from time to time in the standard fee schedule
of Bank's issuing office in effect from time to time.
<PAGE>
5. An "Event of Default" shall be deemed to have occurred or
exist under this Agreement upon the occurrence and/or existence of any
"Default" or "Event of Default", as the case may be, set forth in any other
Loan Document, as such term is defined in paragraph 1(a) hereof.
6. Upon the occurrence and at any time during the continuance or
existence of any Event of Default, Bank may give notice to Company declaring
all outstanding Liabilities to be due and payable, whereupon all such
Liabilities then outstanding shall immediately become due and payable, without
further notice or demand, and any commitment or obligation, if any, on the part
of Bank to extend credit to or in favor of Company shall immediately terminate.
Further, upon the occurrence or at any time during the continuance or existence
of any Event of Default hereunder, Bank may collect, deal with and dispose of
all or any part of any security in any manner permitted or authorized by the
Michigan Uniform Commercial Code or other applicable law (including public or
private sale), and after deducting expenses (including, without limitation,
reasonable attorneys' fees and expenses), Bank may apply the proceeds thereof
in part or full payment of any of the Liabilities, whether due or not, in any
manner or order Bank elects. In addition to the foregoing, upon the occurrence
and at any time during the continuance or existence of any Event of Default
hereunder, Bank may exercise any and all rights and remedies available to it as
a result thereof, whether by agreement, by law, or otherwise.
7. No forbearance on the part of the Bank in enforcing any of
its rights or remedies under this Agreement or any other Loan Document, nor any
renewal, extension or rearrangement of any payment or covenant to be made or
performed by Company hereunder or any such other Loan Document, shall
constitute a waiver of any of the terms of this Agreement or such Loan Document
or of any such right or remedy.
8. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Michigan.
9. All covenants, agreements, representations and warranties by
or on behalf of Company made in connection with this Agreement and any other
Loan Documents shall survive the borrowing hereunder or thereunder and shall be
deemed to have been relied upon by Bank. All statements contained in any
certificate or other document delivered to Bank at any time by or on behalf of
Company pursuant hereto shall constitute representations and warranties by
Company.
10. Company agrees that it will pay all costs and expenses
incurred by Bank in connection with the preparation of this Agreement and any
other Loan Documents contemplated hereby, including, without limitation,
reasonable attorneys' fees and distributions of counsel for the Bank.
11. This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective successors and assigns;
provided, however, that Company shall not assign or transfer any of its rights
or obligations hereunder or otherwise in respect of any of the Liabilities
without the prior written consent of Bank.
<PAGE>
12. COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY
JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVE ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE LIABILITIES.
13. Company agrees that any legal action or proceeding with
respect to this Agreement or any other Loan Document or the transactions
contemplated hereby may be brought in any court of the State of Michigan, or in
any court of the United States of America sitting in Michigan, and Company
hereby submits to and accepts generally and unconditionally the non-exclusive
jurisdiction of those courts with respect to its person and property, and
irrevocably consents to the service of process in connection with any such
action or proceeding by personal delivery to Company or by the mailing thereof
by registered or certified mail, postage prepaid to Company, at the address set
forth above. Nothing in this paragraph shall affect the right of the Bank to
serve process in any other manner permitted by law or limit the right of the
Bank to bring any such action or proceeding against Company or property in the
courts of any other jurisdiction. Company hereby irrevocably waives any
objection to the laying of venue of any such suit or proceeding in the above
described courts.
If the foregoing is acceptable to Company, please indicate such with
the authorized signature(s) of Company as provided below.
Very truly yours,
COMERICA BANK
By:
Its: Vice President
ACCEPTED AND AGREED:
ACCEPTANCE INSURANCE
COMPANIES INC.
/S/ Georgia M. Mace
By:______________________
CFO
Its:______________________
Dated: March 30, 2000
[GRAPHIC OMITTED]
Security Agreement
(Negotiable Collateral)
- -------------------------------------------------------------------------------
As of March 30, 2000, for value received, the undersigned ("Debtor") grants to
Comerica Bank ("Bank"), a Michigan banking corporation, a continuing security
interest in the Collateral (as defined below) to secure payment when due,
whether by stated maturity, demand acceleration or otherwise, of all existing
and future indebtedness ("Indebtedness") to the Bank of Debtor arising under or
in connection with the Standby Letter of Credit Application and Agreement dated
December 20, 1999 by Debtor in favor of Bank, the letter of credit issued
pursuant thereto, the letter agreement dated March 30, 2000 between Debtor and
Bank or this Agreement (collectively, the "Loan Documents"). Indebtedness
includes without limit any and all obligations or liabilities of Debtor to the
Bank, whether absolute or contingent, direct or indirect, voluntary or
involuntary, liquidated or unliquidated, joint or several, known or unknown;
any and all obligations or liabilities for which Debtor would otherwise be
liable to the Bank were it not for the invalidity or unenforceability of them
by reason of any bankruptcy, insolvency or other law, or for any other reason;
any and all amendments, modifications, renewals and/or extensions of any of the
above; all costs incurred by Bank in establishing, determining, continuing, or
defending the validity or priority of its security interest, or in pursuing its
rights and remedies under this Agreement or under any other agreement between
Bank and Debtor or in connection with any proceeding involving Bank as a result
of any financial accommodation to Debtor; and all other costs of collecting
Indebtedness, including without limit attorney fees. Debtor agrees to pay Bank
all such costs incurred by the Bank, immediately upon demand, and until paid
all costs shall bear interest at the highest per annum rate applicable to any
of the Indebtedness, but not in excess of the maximum rate permitted by law.
Any reference in this Agreement to attorney fees shall be deemed a reference to
reasonable fees, costs, and expenses of both in-house and outside counsel and
paralegals, whether or not a suit or action is instituted, and to court costs
if a suit or action is instituted, and whether attorney fees or court costs are
incurred at the trial court level, on appeal, in a bankruptcy, administrative
or probate proceeding or otherwise.
<PAGE>
1. Collateral shall mean all of the following property Debtor now or
later owns or has an interest in, wherever located:
(a) specific items listed below:
time deposit accounts # 385103874363, 385103874371, 385103874397,
385103874389, 385103874058 in the name of Debtor maintained with
Bank; and
(b) all additions, replacements, substitutions, renewals,
interest, distributions, products, and proceeds of or
pertaining to the above including, without limit, cash or
other property which were proceeds and are recovered by a
bankruptcy trustee or otherwise as a preferential transfer
by Debtor.
2. Warranties, Covenants and Agreements. Debtor warrants, covenants and
agrees as follows:
2.1 Debtor shall furnish to Bank, in form and at intervals as
Bank may request, any information Bank may reasonably request
and allow Bank to examine, inspect, and copy any of Debtor's
books and records with respect to the Collateral. Debtor
shall, at the request of Bank, mark its records to clearly
indicate the security interest of Bank under this Agreement.
2.2 At the time any Collateral becomes, or is represented to be,
subject to a security interest in favor of Bank, Debtor shall
be deemed to have warranted that (a) Debtor is the lawful
owner of the Collateral and has the right and authority to
subject it to a security interest granted to Bank; (b) none
of the Collateral is subject to any security interest other
than that in favor of Bank and there are no financing
statements on file, other than in favor of Bank.
2.3 Debtor will keep the Collateral free at all times from all
claims, liens, security interests and encumbrances other than
those in favor of Bank. Debtor will not, without the prior
written consent of Bank, sell or transfer, or permit to be
sold or transferred, any or all of the Collateral.
2.4 Debtor will do all acts and will execute or cause to be
executed all writings requested by Bank to establish,
maintain and continue a perfected and first security interest
of Bank in the Collateral.
<PAGE>
2.5 Debtor will pay within the time that they can be paid without
interest or penalty all taxes, assessments and similar
charges which at any time are or may become a lien, charge,
or encumbrance upon any Collateral, except to the extent
contested in good faith and bonded in a manner satisfactory
to Bank. If Debtor fails to pay any of these taxes,
assessments, or other charges in the time provided above,
Bank has the option (but not the obligation) to do so and
Debtor agrees to repay all amounts so expended by Bank
immediately upon demand, together with interest at the
highest lawful default rate which could be charged by Bank on
any Indebtedness.
2.6 [Intentionally Left Blank]
2.7 If Bank, acting in its sole discretion, redelivers Collateral
to Debtor or Debtor's designee for the purpose of (a) the
ultimate sale or exchange thereof; or (b) presentation,
collection, renewal, or registration of transfer thereof;
such redelivery shall be in trust for the benefit of Bank and
shall not constitute a release of Bank's security interest in
it or in the proceeds or products of it unless Bank
specifically so agrees in writing. If Debtor requests any
such redelivery, Debtor will deliver with such request a duly
executed financing statement in form and substance
satisfactory to Bank. Any proceeds of Collateral coming into
Debtor's possession as a result of any such redelivery shall
be held in trust for Bank and immediately delivered to Bank
for application on the Indebtedness. Bank may (in its sole
discretion) deliver any or all of the Collateral to Debtor,
and such delivery by Bank shall discharge Bank from all
liability or responsibility for such Collateral. Bank, at
its option, may require delivery of any Collateral to Bank at
any time with such endorsements or assignments of the
Collateral as Bank may request.
2.8 At any time after the occurrence of an Event of Default and
without notice, Bank may (a) cause any or all of the
Collateral to be transferred to its name or to the name of
its nominees; (b) receive or collect by legal proceedings or
otherwise all dividends, interest, principal payments and
other sums and all other distributions at any time payable or
receivable on account of the Collateral, and hold the same as
Collateral, or apply the same to the Indebtedness, the manner
and distribution of the application to be in the sole
discretion of Bank; (c) enter into any extension,
subordination, reorganization, deposit, merger or
consolidation agreement or any other agreement relating to or
affecting the Collateral, and deposit or surrender control of
the Collateral, and accept other property in exchange for the
Collateral and hold or apply the property or money so
received pursuant to this Agreement.
2.9 Bank may assign any of the Indebtedness and deliver any or
all of the Collateral to its assignee, who then shall have
with respect to Collateral so delivered all the rights and
powers of Bank under this Agreement, and after that Bank
shall be fully discharged from all liability and
responsibility with respect to Collateral so delivered.
2.10 Debtor shall defend, indemnify and hold harmless Bank, its
employees, agents, shareholders, affiliates, officers, and
directors from and against any and all claims, damages,
fines, expenses, liabilities or causes of action of whatever
kind, including without limit consultant fees, legal
expenses, and attorney fees, suffered by any of them as a
direct or indirect result of any actual or asserted violation
by Debtor of any law.
<PAGE>
3. Collection of Proceeds. Debtor agrees to collect and enforce payment
of all Collateral until Bank shall direct Debtor to the contrary.
Immediately upon notice to Debtor by Bank and at all times after that,
Debtor agrees to fully and promptly cooperate and assist Bank in the
collection and enforcement of all Collateral and to hold in trust for
Bank all payments received in connection with Collateral and from the
sale, lease or other disposition of any Collateral, all rights by way
of suretyship or guaranty and all rights in the nature of a lien or
security interest which Debtor now or later has regarding Collateral.
Immediately upon and after such notice, Debtor agrees to (a) endorse
to Bank and immediately deliver to Bank all payments received on
Collateral or from the sale or other disposition of any Collateral or
arising from any other rights or interests of Debtor in the
Collateral, in the form received by Debtor without commingling with
any other funds, and (b) immediately deliver to Bank all property in
Debtor's possession or later coming into Debtor's possession through
enforcement of Debtor's rights or interests in the Collateral. Debtor
irrevocably authorizes Bank or any Bank employee or agent to endorse
the name of Debtor upon any checks or other items which are received
in payment for any Collateral, and to do any and all things necessary
in order to reduce these items to money. Bank shall have no duty as
to the collection or protection of Collateral or the proceeds of it,
nor as to the preservation of any related rights, beyond the use of
reasonable care in the custody and preservation of Collateral in the
possession of Bank. Debtor agrees to take all steps necessary to
preserve rights against prior parties with respect to the Collateral.
Nothing in this Section 3 shall be deemed a consent by Bank to any
sale or other disposition of any Collateral.
4. Defaults, Enforcement and Application of Proceeds.
4.1 Upon the occurrence of any of the following events (each an
"Event of Default"), Debtor shall be in default under this
Agreement:
(a) Any failure to pay the Indebtedness or any other
indebtedness when due, or such portion of it as may
be due, by acceleration or otherwise; or
(b) Any failure or neglect to comply with, or breach of
or default under, any term of this Agreement, or any
of the other Loan Documents; or
(c) Any warranty, representation, financial statement,
or other information made, given or furnished to
Bank by or on behalf of Debtor shall be, or shall
prove to have been, false or materially misleading
when made, given, or furnished; or
(d) The issuance or filing of any attachment, levy,
garnishment or the commencement of any proceeding
in connection with any Collateral or of any other
judicial process of, upon or in respect of Debtor or
any Collateral; or
(e) Voluntary suspension of the transaction of business
by Debtor, or dissolution, termination of existence,
merger, consolidation, insolvency, business failure,
or assignment for the benefit of creditors of or by
Debtor; or commencement of any proceedings under any
state or federal bankruptcy or insolvency laws or
laws for the relief of debtors by or against Debtor;
or the appointment of a receiver, trustee, court
appointee, sequestrator or otherwise, for all or
any part of the property of Debtor; or
(f) Bank deems the margin of Collateral insufficient or
itself insecure, in good faith believing that the
prospect of payment of the Indebtedness or
performance of this Agreement is impaired.
<PAGE>
4.2 Upon the occurrence of any Event of Default, Bank may at its
discretion and without prior notice to Debtor declare any or
all of the Indebtedness to be immediately due and payable,
and shall have and may exercise any one or more of the
following rights and remedies:
(a) Exercise all the rights and remedies upon default,
in foreclosure and otherwise, available to secured
parties under the provisions of the Uniform
Commercial Code and other applicable law;
(b) Institute legal proceedings to foreclose upon the
lien and security interest granted by this
Agreement, to recover judgment for all amounts then
due and owing as Indebtedness, and to collect the
same out of any Collateral or the proceeds of any
sale of it;
(c) Institute legal proceedings for the sale, under the
judgment or decree of any court of competent
jurisdiction, of any or all Collateral; and/or
(d) Take possession of all or any of the Collateral; and
without being responsible for loss to such
Collateral, sell or dispose of all or any Collateral
at one or more public or private sales or other
dispositions, at places and times and on terms and
conditions as Bank may deem fit, without any
previous demand or advertisement; and except as
provided in this Agreement, all notice of sale or
other disposition, and advertisement, and other
notice or demand, any right or equity of redemption,
and any obligation of a prospective purchaser or
lessee to inquire as to the power and authority of
Bank to sell or otherwise dispose of the Collateral
or as to the application by Bank of the proceeds
of sale or otherwise, which would otherwise be
required by, or available to Debtor under,
applicable law are expressly waived by Debtor to the
fullest extent permitted.
At any sale pursuant to this Section 4.2, whether
under the power of sale, by virtue of judicial
proceedings or otherwise, it shall not be necessary
for Bank or a public officer under order of a court
to have present physical or constructive possession
of Collateral to be sold. The recitals contained
in any conveyances and receipts made and given by
Bank or the public officer to any purchaser at
any sale made pursuant to this Agreement shall, to
the extent permitted by applicable law, conclusively
establish the truth and accuracy of the matters
stated (including, without limit, as to the amounts
of the principal of and interest on the
Indebtedness, the accrual and nonpayment of it and
advertisement and conduct of the sale); and all
prerequisites to the sale shall be presumed to have
been satisfied and performed. Upon any sale of any
Collateral, the receipt of the officer making the
sale under judicial proceedings or of Bank shall be
sufficient discharge to the purchaser for the
purchase money, and the purchaser shall not be
obligated to see to the application of the money.
Any sale of any Collateral under this Agreement
shall be a perpetual bar against Debtor with respect
to that Collateral.
<PAGE>
4.3 The proceeds of any sale or other disposition of Collateral
authorized by this Agreement shall be applied by Bank first
upon all expenses authorized by the Uniform Commercial Code
and all reasonable attorney fees and legal expenses incurred
by Bank; the balance of the proceeds of the sale or other
disposition shall be applied in the payment of the
Indebtedness, first to interest, then to principal, then to
remaining Indebtedness and the surplus, if any, shall be paid
over to Debtor or to such other person(s) as may be entitled
to it under applicable law. Debtor shall remain liable for
any deficiency, which it shall pay to Bank immediately upon
demand.
4.4 Nothing in this Agreement is intended, nor shall it be
construed, to preclude Bank from pursuing any other remedy
provided by law for the collection of the Indebtedness or for
the recovery of any other sum to which Bank may be entitled
for the breach of this Agreement by Debtor. Nothing in this
Agreement shall reduce or release in any way any rights or
security interests of Bank contained in any existing
agreement between Debtor and Bank.
4.5 No waiver of default or consent to any act by Debtor shall be
effective unless in writing and signed by an authorized
officer of Bank. No waiver of any default or forbearance on
the part of Bank in enforcing any of its rights under this
Agreement shall operate as a waiver of any other default or
of the same default on a future occasion or of any rights.
4.6 Debtor irrevocably appoints Bank or any agent of Bank (which
appointment is coupled with an interest) the true and lawful
attorney of Debtor (with full power of substitution) in the
name, place and stead of, and at the expense of, Debtor:
(a) to demand, receive, sue for, and give receipts or
acquittances for any moneys due or to become due
with respect to any Collateral and to endorse any
item representing any payment on or proceeds of
the Collateral;
(b) to execute and file in the name of and on behalf of
Debtor all financing statements or other filings
deemed necessary or desirable by Bank to evidence,
perfect, or continue the security interests
granted in this Agreement; and
(c) to do and perform any act on behalf of Debtor
permitted or required under this Agreement.
5. Miscellaneous.
5.1 Until Bank is advised in writing by Debtor to the contrary,
all notices, requests and demands required under this
Agreement or by law shall be given to, or made upon, Debtor
at the first address indicated in Section 5.13 below.
5.2 Debtor will give Bank not less than 90 days prior written
notice of all contemplated changes in Debtor's name, chief
executive office location, and/or location of any Collateral,
but the giving of this notice shall not cure any Event of
Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility
under any contracts contained within the Collateral.
5.4 Bank has the right to sell, assign, transfer, negotiate or
grant participations or any interest in, any or all of the
Indebtedness and any related obligations, including without
limit this Agreement. In connection with the above,
but without limiting its ability to make other disclosures to
the full extent allowable, Bank may disclose all documents
and information which Bank now or later has relating to
Debtor, the Indebtedness or this Agreement, however obtained.
Debtor further agrees that Bank may provide information
relating to this Agreement or relating to Debtor to the
Bank's parent, affiliates, subsidiaries, and service
providers.
5.5 In addition to Bank's other rights, any indebtedness owing
from Bank to Debtor can be set off and applied by Bank on any
Indebtedness at any time(s) either before or after maturity
or demand without notice to anyone.
<PAGE>
5.6 Debtor waives any right to require the Bank to: (a) proceed
against any person or property; (b) give notice of the terms,
time and place of any public or private sale of personal
property security held from Borrower or any other person, or
otherwise comply with the provisions of Section 9-504 of the
Uniform Commercial Code; or (c) pursue any other remedy in
the Bank's power. Debtor waives notice of acceptance of this
Agreement and presentment, demand, protest, notice of
protest, dishonor, notice of dishonor, notice of default,
notice of intent to accelerate or demand payment of any
Indebtedness, any and all other notices to which the
undersigned might otherwise be entitled, and diligence in
collecting any Indebtedness.
5.7 In the event that applicable law shall obligate Bank to give
prior notice to Debtor of any action to be taken under this
Agreement, Debtor agrees that a written notice given to
Debtor at least five days before the date of the act shall be
reasonable notice of the act and, specifically, reasonable
notification of the time and place of any public sale or of
the time after which any private sale, lease, or other
disposition is to be made, unless a shorter notice period is
reasonable under the circumstances. A notice shall be deemed
to be given under this Agreement when delivered to Debtor or
when placed in an envelope addressed to Debtor and deposited,
with postage prepaid, in a post office or official depository
under the exclusive care and custody of the United States
Postal Service or delivered to an overnight courier. The
mailing shall be by overnight courier, certified, or first
class mail.
5.8 Notwithstanding any prior revocation, termination, surrender,
or discharge of this Agreement in whole or in part, the
effectiveness of this Agreement shall automatically continue
or be reinstated in the event that any payment received or
credit given by Bank in respect of the Indebtedness is
returned, disgorged, or rescinded under any applicable law,
including, without limitation, bankruptcy or insolvency laws,
in which case this Agreement, shall be enforceable against
Debtor as if the returned, disgorged, or rescinded payment or
credit had not been received or given by Bank, and whether or
not Bank relied upon this payment or credit or changed its
position as a consequence of it. In the event of
continuation or reinstatement of this Agreement, Debtor
agrees upon demand by Bank to execute and deliver to Bank
those documents which Bank determines are appropriate to
further evidence (in the public records or otherwise) this
continuation or reinstatement, although the failure of Debtor
to do so shall not affect in any way the reinstatement or
continuation.
5.9 This Agreement and all the rights and remedies of Bank under
this Agreement shall inure to the benefit of Bank's
successors and assigns and to any other holder who derives
from Bank title to or an interest in the Indebtedness or any
portion of it, and shall bind Debtor and the heirs, legal
representatives, successors, and assigns of Debtor. Nothing
in this Section 5.9 is deemed a consent by Bank to any
assignment by Debtor.
5.10 If there is more than one Debtor, all undertakings,
warranties and covenants made by Debtor and all rights,
powers and authorities given to or conferred upon Bank are
made or given jointly and severally.
5.11 Except as otherwise provided in this Agreement, all terms in
this Agreement have the meanings assigned to them in Article
9 (or, absent definition in Article 9, in any other Article)
of the Uniform Commercial Code, as of the date of this
Agreement. "Uniform Commercial Code" means Act No. 174 of
the Michigan Public Acts of 1962, as amended.
5.12 No single or partial exercise, or delay in the exercise, of
any right or power under this Agreement, shall preclude other
or further exercise of the rights and powers under this
Agreement. The unenforceability of any provision of this
Agreement shall not affect the enforceability of the
remainder of this Agreement. This Agreement constitutes the
entire agreement of Debtor and Bank with respect to the
subject matter of this Agreement. No amendment or
modification of this Agreement shall be effective unless the
same shall be in writing and signed by Debtor and an
authorized officer of Bank. This Agreement shall be governed
by and construed in accordance with the internal laws of the
State of Michigan, without regard to conflict of laws
principles.
<PAGE>
5.13 Debtor's chief executive office is located and shall be
maintained at Suite 600 North, 222 S.15th Street
__________________________________
STREET ADDRESS
Omaha Nebraska 68102
__________________________________________________________
CITY STATE ZIP CODE COUNTY
5.14 A carbon, photographic or other reproduction of this
Agreement shall be sufficient as a financing statement under
the Uniform Commercial Code and may be filed by Bank in any
filing office.
5.15 This Agreement shall be terminated only by the filing of a
termination statement in accordance with the applicable
provisions of the Uniform Commercial Code, but the
obligations contained in Section 2.10 of this Agreement shall
survive termination.
5.16 The security interest granted under this Agreement is a
continuation of the security interest in the Collateral
granted by Debtor to Bank under the terms of the Amended and
Restated Credit Agreement dated December 22, 1999 and nothing
contained herein shall be deemed to adversely affect such
security interest (which remains in full force and effect).
6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT
WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS
AGREEMENT OR THE INDEBTEDNESS.
Debtor:
ACCEPTANCE INSURANCE COMPANIES INC.
DEBTOR NAME TYPED/PRINTED
By: /S/ Georgia M. Mace
______________________
SIGNATURE OF
Its: CFO
________________________
TITLE (If applicable)
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 237,964
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 22,565
<MORTGAGE> 8,787
<REAL-ESTATE> 3,177
<TOTAL-INVEST> 407,941
<CASH> 1,564
<RECOVER-REINSURE> 62,809
<DEFERRED-ACQUISITION> 13,820
<TOTAL-ASSETS> 1,075,519
<POLICY-LOSSES> 625,634
<UNEARNED-PREMIUMS> 108,581
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 94,875
0
0
<COMMON> 6,210
<OTHER-SE> 174,930
<TOTAL-LIABILITY-AND-EQUITY> 1,075,519
52,396
<INVESTMENT-INCOME> 5,418
<INVESTMENT-GAINS> 1,565
<OTHER-INCOME> 0
<BENEFITS> 39,713
<UNDERWRITING-AMORTIZATION> 3,675
<UNDERWRITING-OTHER> 16,624
<INCOME-PRETAX> (3,290)
<INCOME-TAX> (1,400)
<INCOME-CONTINUING> (1,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,890)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
<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 12/31/99 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
