SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X For the quarterly period ended March 31, 1998
- ---------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- ---------
Commission File Number 0-16748
------------------------------
INTERCARGO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3414667
(State or other jurisdiction of (IRS Employer
incorporation) Identification No.)
1450 East American Lane, 20th Floor, Schaumburg, Illinois 60173
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (847) 517-2510
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at May 6, 1998
---------------------------------- -----------------------------------
Common Stock, $1 par value 7,699,981 shares
<PAGE>
INTERCARGO CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income for the three
months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1998 (unaudited)
and March 31, 1997 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 1998 (unaudited)
and March 31, 1997 (unaudited) 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 9
PART II. OTHER INFORMATION 12
SIGNATURES 13
EXHIBITS 14
2
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities at fair value $ 63,488 $ 60,676
Equity securities at fair value 4,661 4,234
----------------------------
Total investments 68,149 64,910
Cash and cash equivalents 42,469 49,400
Premiums receivable 16,364 15,677
Accrued investment income 1,174 1,023
Deferred policy acquisition costs 3,471 2,939
Reinsurance recoverable on loss and loss expense:
Paid claims 4,132 1,137
Unpaid claims 7,885 11,970
Prepaid reinsurance premiums 4,813 5,119
Notes receivable 89 99
Income tax recoverable 406 1,365
Deferred income tax 2,013 2,226
Equipment, at cost less accumulated depreciation 1,994 1,933
Goodwill 1,955 1,991
Other assets 5,586 5,623
----------------------------
Total assets $160,500 $165,412
============================
LIABILITIES
Losses and loss adjustment expenses $ 49,388 55,355
Unearned premiums 19,720 17,948
Funds held by Company 434 372
Supplemental duty deposits 1,924 2,016
Accrued expenses and other liabilities 6,964 7,520
----------------------------
Total liabilities 78,430 83,211
Commitments and Contingencies -- --
STOCKHOLDERS' EQUITY
Common stock--$1 par value; authorized 20,000,000 shares; issued and
outstanding, 7,699,981 shares in 1998 and in 1997 7,700 7,700
Additional paid-in capital 24,400 24,400
Net unrealized gain on foreign currency translation 38 23
Net unrealized gain on available for sale securities 2,331 2,153
Retained earnings 47,601 47,925
----------------------------
Total stockholders' equity 82,070 82,201
----------------------------
Total liabilities and stockholders' equity $160,500 $165,412
============================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES
Insurance premium income $11,675 $13,725
Net investment income 1,589 1,047
Commission income 175 156
Other income 57 53
-----------------------------
Total 13,496 14,981
LOSSES AND EXPENSES
Losses and loss adjustment expenses 6,372 7,233
Policy acquisition costs 3,185 3,134
Other underwriting expenses 3,352 3,225
Interest expense - 184
-----------------------------
Total 12,909 13,776
Operating income 587 1,171
-----------------------------
Income tax expense 218 377
-----------------------------
Net income before equity in net income of investee 369 828
Equity in net income of investee - 967
-----------------------------
Net Income $ 369 $ 1,795
=============================
Basic weighted average shares outstanding 7,700 7,660
Diluted weighted average shares outstanding 7,712 7,673
NET INCOME PER SHARE, BASIC AND DILUTED $ 0.05 $ 0.23
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
1998 1997
----------- --------------
<S> <C> <C> <C> <C>
Net Income $ 369 $1,795
Other comprehensive income:
Foreign currency translation adjustments, net of tax 15 (39)
Unrealized gains and (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period, net of tax $178 $(805)
Less: Reclassification adjustment for gains included in earnings, net of tax (5) 173 (7) (812)
-----------------------------------
Comprehensive income $ 557 $ 944
===================================
Comprehensive income per share, basic and diluted $0.07 $ 0.12
</TABLE>
5
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Net
Unrealized Net
(Loss) Unrealized
Additional On Foreign Gain (Loss)
Number of Common Paid-in Currency on
Shares Stock Capital Translation Investments
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,700 7,700 24,400 23 2,153
Net Income -- -- -- -- --
Change in foreign currency translation -- -- -- 15 --
Change in unrealized gain (loss) on marketable securities -- -- -- -- 178
Dividends paid to stockholders -- -- -- -- --
----- ------ ------ ------- ------
Balance at March 31, 1998 7,700 $7,700 24,400 38 2,331
===== ====== ====== ======= ======
Balance at December 31, 1996 7,660 7,660 24,180 (978) (366)
Net income -- -- -- -- --
Change in foreign currency translation -- -- -- (39) --
Change in unrealized gain (loss) on marketable securities -- -- -- -- (805)
Dividends paid to stockholders -- -- -- -- --
----- ------ ------ ------- -------
Balance at March 31, 1997 7,660 $7,660 24,180 (1,017) (1,171)
===== ====== ====== ======= =======
Retained Stockholders'
Earnings Equity
-------- -------------
<S> <C> <C>
Balance at December 31, 1997 47,925 82,201
Net Income 369 369
Change in foreign currency translation -- 15
Change in unrealized gain (loss) on marketable securities -- 178
Dividends paid to stockholders (693) (693)
------- -------
Balance at March 31, 1998 47,601 82,070
======= =======
Balance at December 31, 1996 17,516 48,012
Net income 1,795 1,795
Change in foreign currency translation -- (39)
Change in unrealized gain (loss) on marketable securities -- (805)
Dividends paid to stockholders (690) (690)
------- -------
Balance at March 31, 1997 18,621 48,273
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 369 $ 1,795
Adjustments to reconcile net income to net cash provided from
operating activities:
Realized gains (7) (10)
Depreciation and amortization 322 393
Amortization of premiums on investments 27 12
Undistributed earnings of affiliate - (967)
Increase in premiums receivable (687) (3,421)
Increase in deferred policy acquisition costs (532) (366)
Decrease (increase) in reinsurance balances 1,396 (2,826)
Change in income tax accounts 1,079 58
Increase in accrued investment income (152) (126)
Decrease (increase) in other assets (76) 48
Decrease in liability for losses and loss
adjustment expenses (5,967) (548)
Increase in unearned premiums 1,771 3,481
Increase in funds held 63 140
Decrease in supplemental duty deposits (91) (80)
Increase (decrease) in accounts payable and accrued expenses (556) 101
Other, net 25 9
--------- ---------
Net cash used in operating activities (3,016) (2,307)
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities:
Purchases (5,281) (6,996)
Sales - 1,547
Maturities and calls 2,292 200
Equity securities:
Purchases - (498)
Sales - 301
Net sales (purchases) of short-term investments - (102)
Purchase of property and equipment, net (233) (113)
--------- ---------
Net cash used in investing activities (3,222) (5,661)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid to stockholders (693) (690)
--------- ---------
Net cash used in financing activities (693) (690)
--------- ---------
Net decrease in cash and cash equivalents (6,931) (8,658)
Cash and cash equivalents:
Beginning of the period 49,400 18,492
--------- ---------
End of the period $42,469 $ 9,834
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
INTERCARGO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements of the Company have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company
believes that the accompanying consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to
present fairly the Company's consolidated financial position as of March
31, 1998, and December 31, 1997, and the consolidated results of
operations and the consolidated cash flows for the three month periods
ended March 31, 1998, and 1997.
The results of operations for the three month period ended March 31,
1998, are not necessarily indicative of the results to be expected for
the full year.
These consolidated unaudited interim financial statements should be read
in conjunction with the financial statements and notes thereto contained
in the December 31, 1997 Form 10-K filed by the Company.
2. Earnings per Share
Basic earnings per share are computed based on the weighted average
number of shares outstanding each period. Diluted earnings per share are
computed based on the weighted average number of shares of common stock
and common stock equivalents (to the extent dilutive) outstanding each
period.
The Company's common stock at March 31, 1998, consists of 7.7 million
shares outstanding $1.00 par value per share. The Company also has 147
thousand outstanding stock options.
8
<PAGE>
FORWARD LOOKING STATEMENTS
This statement includes forward-looking information as that term is defined in
the Private Securities Litigation Reform Act of 1995 and is therefore subject
to certain risks and uncertainties. There can be no assurance that actual
results, business conditions, business developments, losses and contingencies
and local and foreign factors will not differ materially from that suggested
in the forward looking statements as a result of various factors including
market conditions, competition, reinsurance availability, foreign affairs, and
natural disasters.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
OPERATING RESULTS
Consolidated earned premium for the first quarter of 1998 decreased $2.05
million or 14.9% to $11.7 million compared to a decrease of 6.9% or $1.0
million in the comparable period in 1997. Surety earned premiums and marine
earned premiums were each down approximately $1.1 million due primarily to
highly competitive markets, and in the case of marine premiums, to short term
disruptions in the agency operations of the Company following the departure of
several employees to a competing entity. The Company transferred its insurance
brokerage agency business to The Roanoke Companies, Inc. for cash, convertible
preferred shares and a secured note. Reference is made herein to Form 8-K
filed May 11, 1998 regarding this transaction. The Company expects this new
alliance to enhance its distribution capability. The Company is expecting to
open three regional offices during the second quarter of 1998 to expand its
distribution capability further through independent agents. However, the
Company expects its markets to remain highly competitive for the foreseeable
future.
Consolidated net investment income for the first quarter of 1998 increased
51.8% to $1.6 million as compared to an increase of 5.8% to $1.0 million for
the first quarter of 1997. The increase in 1998 is attributable primarily to
the increase of cash equivalents as the result of the proceeds received on the
sale of substantially all of the Company's shares of Kingsway Financial
Services, Inc. in the third quarter of 1997.
Consolidated losses and loss adjustment expenses for the first quarter of 1998
decreased 11.9% to $6.4 million as compared to a decrease of approximately
1.0% to $7.2 million in the first quarter of 1997. The decrease in 1998 is due
primarily to the decrease in volume. The loss ratio for the first quarters of
1998 and 1997 was 54.6% and 52.7%, respectively.
Consolidated policy acquisition costs for the first quarter of 1998 increased
$51 thousand, or 1.6%, to $3.2 million as compared to a decrease in the first
quarter of 1997 of $1.5 million, or 32% to $3.1 million. The 1997 amount
included a credit of $488 thousand arising from reinsurance ceding allowances
on a discontinued program of crane liability coverage. Giving effect to this,
the ratio of acquisition costs to earned premium in 1998 of 27.3% is
comparable to the adjusted ratio of 26.4% in 1997.
Consolidated other underwriting expenses increased $127 thousand or 3.9% in
the first quarter of 1998, compared to an increase during the first quarter of
1997 of $234 thousand or 7.8%. Expenses in the first quarter of 1998 include
approximately $200 thousand relating to legal and other outside services as a
result of the aforementioned departure of certain personnel.
Equity in net income of investee in the first quarter of 1997 arose due to the
Company's investment in Kingsway Financial Services, Inc. As a result of the
sale of substantially all of the Company's interest therein, equity in the
income of investee is no longer recorded.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets at March 31, 1998 decreased to $160.5 million from
$165.4 million at December 31, 1997. This was due primarily to a decrease to
$42.5 million from $49.4 million in cash and cash equivalents resulting from
the payment of losses and loss adjustment expenses. Stockholders' equity
decreased to $80.1 million during the first quarter of 1998 from $80.2 million
at December 31, 997. Dividends paid to shareholders exceeded net income and
the changes in foreign currency translation and unrealized gains in marketable
securities. The Company declared a dividend of $0.09 per share to shareholders
of record as of March 11, 1998, which was paid on March 16, 1998.
The company's operations required $6.9 million and $8.7 million of cash flow
for the three month periods ended March 31, 1998 and 1997, respectively. As
the Company retains a higher than normal level of cash and cash equivalents as
a result of the disposition of substantially all of its holdings in Kingsway
Financial Services in August 1997, it has chosen to discontinue its bank line
of credit at this time. The Company believes that it can re-establish a line
of credit should it be prudent to do so.
10
<PAGE>
RESULTS BY LINE
The following table illustrates the premium earned (dollars in thousands) for
each major line of business for the three month periods ended March 31, 1998
and 1997. It also sets forth the combined ratios by line and in the aggregate
for the Company.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PROFESSIONAL OTHER
SURETY MARINE LIABILITY PROPERTY & CASUALTY TOTAL
------------------------------------------------------------------------------------------------
Earned Combined Earned Combined Earned Combined Earned Combined Earned Combined
Premium Ratio Premium Ratio Premium Ratio Premium Ratio Premium Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended March 31,
1998 $ 3,760 94.9 $ 5,643 104.9 $ 546 115.1 $1,726 130.6 $11,675 106.7
1997 4,921 93.4 6,754 99.6 919 120.6 1,131 91.8 13,725 98.3
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 $17,947 94.0 $27,906 112.9 $3,206 174.2 $8,351 130.2 $57,410 112.9
1996 25,846 85.2 26,826 113.5 2,644 151.3 5,631 135.3 $60,947 105.2
1995 24,700 83.5 20,808 124.7 3,069 160.3 5,498 146.8 54,075 110.2
1994 23,019 80.4 14,996 114.2 2,377 195.4 3,362 106.3 43,754 100.2
1993 19,739 106.5 12,154 85.8 1,681 175.2 772 156.2 34,346 103.6
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net earned premium for the first three months of 1998 decreased $2.0 million
over the comparable period in 1997. Earned premiums for the surety and marine
lines were impacted by the short term disruption in the Company's agency
operations prior to and after the departure of several employees to a
competing entity. Professional liability earned premiums were impacted by the
implementation of a re-underwriting strategy, resulting in the non-renewal of
certain historically unprofitable accounts. All lines are subject to the
highly competitive market in the insurance industry and its resultant
pressures on price levels.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - There have been no material developments in
the legal proceedings addressed in the Company's Form 10-K or
new legal proceedings during the fiscal quarter covered by this
report on form 10-Q.
Item 2. Changes in Securities - Not Applicable.
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - Not
Applicable.
Item 5. Other Information - Not Applicable.
Item 6(a) Exhibits - See Exhibit Index immediately following the signature
page.
Item 6(b) Reports on Form 8-K - The Company filed a Form 8-K on May 11,
1998. The report addressed the sale of certain subsidiaries of
the Company. This disposition did not involve a significant
amount of assets.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1998.
(Registrant) INTERCARGO CORPORATION
By: /s/ Stanley A. Galanski
---------------------------------------
Stanley A. Galanski
President and Chief Executive Officer
By: /s/ Michael L. Rybak
---------------------------------------
Michael L. Rybak
Treasurer and Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
-------------
11.0 Computation of Earnings per share.
14
EXHIBIT 11.0
INTERCARGO CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousand, except for per share data)
<TABLE>
<CAPTION>
For the three months
ended March 31,
1998 1997
------ ------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 369 $1,795
Average common shares outstanding 7,700 7,660
Per common share amount $ 0.05 $ 0.23
======================
DILUTED EARNINGS PER SHARE:
Net income $ 369 $1,795
Average common shares outstanding 7,700 7,660
Incremental shares from assumed converstions at the average market
prices of $12.604 and $9.186, respectively 12 13
----------------------
Weighted average number of common shares outstanding as adjusted 7,712 7,673
======================
Fully diluted earnings per share $ 0.05 $ 0.23
======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 63,488
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,661
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 68,149
<CASH> 42,469
<RECOVER-REINSURE> 4,132
<DEFERRED-ACQUISITION> 3,471
<TOTAL-ASSETS> 160,500
<POLICY-LOSSES> 49,388
<UNEARNED-PREMIUMS> 19,720
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,700
<OTHER-SE> 74,370
<TOTAL-LIABILITY-AND-EQUITY> 160,500
11,675
<INVESTMENT-INCOME> 1,589
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 232
<BENEFITS> 6,372
<UNDERWRITING-AMORTIZATION> 3,185
<UNDERWRITING-OTHER> 3,352
<INCOME-PRETAX> 587
<INCOME-TAX> 218
<INCOME-CONTINUING> 369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 369
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<RESERVE-OPEN> 43,385
<PROVISION-CURRENT> 5,579
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 173
<PAYMENTS-PRIOR> 7,288
<RESERVE-CLOSE> 41,503
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
