<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 1-11446
--------------
ACORDIA, INC.
----------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 31-1278880
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
120 Monument Circle
Indianapolis, Indiana 46204
---------------------------------
(Address of principal executive offices)
(Zip Code)
(317) 488-6666
--------------------------------------
(Registrant's telephone number, including area code)
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 _______
----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30, 1996
----- ------------------------------------
Common Stock, par value $1.00 a share 14,060,223 shares
This document is comprised of 19 pages.
<PAGE>
ACORDIA, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS,
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995............... 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS
AND QUARTER ENDED SEPTEMBER 30, 1996 AND 1995.......... 2
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND YEAR ENDED
DECEMBER 31, 1995...................................... 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995.......... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................. 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................... 14
ITEM 2. CHANGES IN SECURITIES................................ 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 14
ITEM 5. OTHER INFORMATION.................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 14
SIGNATURES.............................................................. 15
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE.......................... 16
EXHIBIT 27 - FINANCIAL DATA SCHEDULE.................................... 17
<PAGE>
CONSOLIDATED BALANCE SHEETS
ACORDIA, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
1996 1995
ASSETS -------- --------
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,189 $ 11,160
Cash and cash equivalents held in
a fiduciary capacity 95,613 71,612
Premiums receivable, less
allowance for doubtful accounts
(1996 - $3,416; 1995 - $3,967) 96,503 149,639
Accounts receivable, less
allowance for doubtful accounts
(1996 - $568; 1995 - $421) 60,648 42,481
Accrued investment income 1,531 1,066
Deferred income taxes 2,403 1,515
Prepaid and other current assets 7,319 8,572
-------- --------
Total current assets 274,206 286,045
Securities available-for-sale held in a
fiduciary capacity, at fair value 47,432 49,866
Other assets:
Cash escrow 6,791 6,562
Furniture, equipment and leasehold
improvements, less
accumulated depreciation 47,437 41,577
Goodwill and other intangible
assets, less accumulated
amortization 357,741 340,199
Other assets 19,278 12,202
-------- --------
Total assets $752,885 $736,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Premiums due insurance companies $226,516 $248,546
Accounts payable 911 2,291
Accrued payroll and related
liabilities 20,893 15,479
Income taxes payable 2,399 505
Other liabilities and accrued
expenses 50,567 51,777
Current portion of long-term debt 9,112 15,053
-------- --------
Total current liabilities 310,398 333,651
Long-term debt, less current portion 146,607 131,551
Other long-term liabilities, less
current portion 42,547 34,238
Deferred income taxes 26,870 24,936
-------- --------
Total liabilities 526,422 524,376
Stockholders' equity:
Common stock, par value $1 per
share:
Authorized 100,000,000 shares;
issued and outstanding
(1996 - 14,060,223; 1995 -
13,961,741) 14,060 13,962
Additional paid-in capital 74,278 72,073
Stock warrants 10,000 10,000
Net unrealized (losses) gains on
securities (156) 360
Retained earnings 128,281 115,680
-------- --------
Total stockholders' equity 226,463 212,075
-------- --------
Total liabilities and stockholders'
equity $752,885 $736,451
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
ACORDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Commissions and fees $ 482,597 $ 396,275 $ 159,898 $ 134,704
Investment income 4,916 4,793 1,721 1,528
Net realized investment gains 62 525 24 105
Other 2,424 1,537 760 628
----------- ----------- ----------- -----------
Total revenues 489,999 403,130 162,403 136,965
Operating Expenses:
Employee compensation and benefits 269,250 218,425 90,287 75,525
Other 156,722 131,462 51,759 47,866
----------- ----------- ----------- -----------
425,972 349,887 142,046 123,391
----------- ----------- ----------- -----------
Operating profit 64,027 53,243 20,357 13,574
Interest expense (7,440) (6,334) (2,579) (2,052)
Amortization of goodwill and other
intangibles (19,200) (17,016) (6,554) (5,750)
Gain on sale of assets 1,361 -- 1,361 --
----------- ----------- ----------- -----------
Income before income taxes 38,748 29,893 12,585 5,772
Income taxes 17,730 13,754 5,695 2,895
----------- ----------- ----------- -----------
Net income $ 21,018 $ 16,139 $ 6,890 $ 2,877
=========== =========== =========== ===========
Earnings per share $1.46 $1.12 $0.48 $0.20
=========== =========== =========== ===========
Weighted average shares outstanding 14,435,530 14,423,886 14,496,604 14,322,372
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
ACORDIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK GAINS
--------------------- ADDITIONAL (LOSSES)
NUMBER OF PAID-IN STOCK ON RETAINED
SHARES PAR VALUE CAPITAL WARRANTS SECURITIES EARNINGS
---------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 13,871,331 $13,871 $69,840 $10,000 $(1,823) $102,142
Issuance of stock for Company
plans 90,410 91 2,233 -- -- --
Net income -- -- -- -- -- 23,582
Dividends paid ($0.72 per share) -- -- -- -- -- (10,044)
Decrease in net unrealized losses
on securities available-for-
sale, less taxes of $230 -- -- -- -- 2,183 --
---------- --------- --------- -------- ---------- --------
Balance at December 31, 1995 13,961,741 13,962 72,073 10,000 360 115,680
Issuance of stock for Company
plans 98,482 98 2,205 -- -- --
Net income -- -- -- -- -- 21,018
Dividends paid ($0.60 per share) -- -- -- -- -- (8,417)
Decrease in net unrealized gains
on securities available-for-
sale, less taxes of $230 -- -- -- -- (516) --
---------- --------- --------- -------- ---------- --------
Balance at September 30, 1996 -
(unaudited) 14,060,223 $14,060 $74,278 $10,000 $ (156) $128,281
========== ========= ========= ======== ========== ========
</TABLE>
See accompanying notes.
3
<PAGE>
ACORDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 21,018 $ 16,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,466 26,244
Deferred income taxes (6,267) (3,028)
Gain on sale of assets (1,361) --
Losses on receivables 999 788
Loss on sale of furniture and equipment 82 109
Changes in operating assets and liabilities,
net of effect of purchases of subsidiaries:
Premiums receivable 60,364 8,055
Accounts receivable (13,030) 7,644
Accrued investment income (465) 299
Other assets (1,894) (3,438)
Premiums due insurance companies (55,375) (20,538)
Accounts payable and accrued liabilities (25) (13,749)
Income taxes payable 1,248 (7,533)
-------- --------
Net cash provided by operating activities 35,760 10,992
INVESTING ACTIVITIES:
Furniture, equipment and leasehold improvement additions (17,289) (15,865)
Proceeds from sales of furniture and equipment 1,540 5,405
Purchases of subsidiaries, net of cash
acquired and cash escrow (15,111) (18,536)
-------- --------
Net cash used in investing activities (30,860) (28,996)
FINANCING ACTIVITIES:
Proceeds from borrowings 14,000 24,501
Payments on borrowings (13,757) (9,684)
Issuance of stock for Company plans 2,303 2,208
Dividends paid (8,417) (7,530)
-------- --------
Net cash (used in) provided by financing activities (5,871) 9,495
-------- --------
Net decrease in cash and cash equivalents (971) (8,509)
Cash and cash equivalents at beginning of period 11,160 13,374
-------- --------
Cash and cash equivalents at end of period $ 10,189 $ 4,865
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
ACORDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 -- BASIS OF PRESENTATION
- ----------------------------------
The accompanying unaudited consolidated financial statements of Acordia, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1996, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
NOTE 2 -- NEW ACCOUNTING STANDARD
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. In accordance with the statement, the
Company will provide new footnote disclosures in its 1996 annual report
presenting pro forma net income and earnings per share amounts as if employee
stock options had been expensed based on their estimated fair value on the grant
date, determined by using certain option pricing models.
NOTE 3 -- ACQUISITIONS
- -------------------------
During the first nine months of 1996, the Company made acquisitions at an
aggregate cost, including future contingent payments, of approximately $40.1
million. The excess of the total acquisition cost over the net assets acquired
of approximately $44.9 million was assigned to goodwill and other intangible
assets. At September 30, 1996, the cash escrow represents funds on deposit to
fund future obligations related to prior acquisitions.
All of these acquisitions have been accounted for as purchases, and the net
assets and results of operations are included in the Company's consolidated
financial statements from the respective purchase dates.
NOTE 4 -- RELATED PARTIES
- ----------------------------
In October 1995, Anthem Insurance Companies, Inc. ("Anthem") Board of Directors
authorized the purchase of up to one million shares of the Company's common
stock. Purchases are made from time to time in the open market at prevailing
prices or in privately negotiated transactions. Since October 1995, Anthem has
purchased 481,500 shares of the Company's stock resulting in Anthem's ownership
increasing to 62% as of September 30, 1996. Approximately 43% of the Company's
revenues during the
5
<PAGE>
nine months ended September 30, 1996 are related to insurance products placed
with Anthem and its wholly owned insurance affiliates.
During October 1995 and March 1996, the Company entered into additional
agreements with Anthem and its affiliates to perform certain marketing services
in connection with Anthem's insurance products in select geographic and
demographic markets.
NOTE 5 -- CONTINGENCIES
- --------------------------
The Company and its subsidiaries are subject to claims and lawsuits that arise
in the ordinary course of business. Some of these cases are being litigated in
jurisdictions which have judicial precedence and evidentiary rules which are
generally believed to favor individual plaintiffs against corporate defendants.
The damages that may be claimed in such cases can be substantial, but are often
covered by insurance. Accruals for these claims and lawsuits have been provided
to the extent that losses are deemed probable and are estimable.
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on the Company or its
subsidiaries, on the basis of present information, and advice received from
counsel, it is the opinion of management that the disposition or ultimate
determination of such claims and lawsuits will not have a material effect on the
consolidated financial position of the Company.
The Company is unaware of any current recommendations by regulatory authorities
that could have a material effect on liquidity, capital resources or operations
of the Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ---------------------------------------------
Operating profit for the nine months ended September 30, 1996, was $64.0
million, an increase of 20 percent over operating profit of $53.2 million for
the comparable period in 1995. Net income for the nine months ended September
30, 1996, was $21.0 million, an increase of 30 percent over net income of $16.1
million for the comparable period in 1995. Total stockholders' equity was $226.5
million at September 30, 1996, compared to $212.1 million at December 31, 1995.
REVENUES
Total revenues for the nine months ended September 30, 1996, were $490.0
million, an increase of 22% over revenues of $403.1 million for the comparable
period in 1995.
Total related party revenues were $212.2 million and $170.2 million for the nine
months ended September 30, 1996 and 1995, respectively.
Commissions and Fees
Commissions and fees for the nine months ended September 30, 1996 were $482.6
million, an increase of 22% over commissions and fees of $396.3 million for the
comparable period in 1995. New acquisitions accounted for approximately $32.9
million of the increase. New business derived from Anthem accounted for
approximately $42.0 million of the increase. The remaining increase of $11.4
million resulted primarily from net new business and growth in contingent
commissions from unaffiliated carriers.
Investment Income
Investment income and net realized investment gains, in aggregate, were
$5.0 million and $5.3 million for the nine months ended September 30, 1996
and 1995, respectively. Investment income consists primarily of interest earned
on premiums and claims collected and held prior to being remitted to insurers
and clients. Such funds are held in a fiduciary capacity. Net investment yield
was approximately 5.0% and 5.5% for the nine months ended September 30, 1996 and
1995, respectively.
Other Revenues
Other revenues include revenues from consulting services, gains and losses on
the sale of fixed assets and other miscellaneous items. Such revenues were $2.4
million and $1.5 million for the nine months ended September 30, 1996 and 1995,
respectively.
7
<PAGE>
EXPENSES
- --------
Total operating expenses for the nine months ended September 30, 1996, were
$426.0 million, an increase of 22% over operating expenses of $349.9 million for
the comparable period in 1995. The majority of the increase was due to new
acquisitions and expansion of existing operations.
Reimbursements to Anthem pursuant to an intercompany services agreement were
$68.7 million and $35.4 million for the nine months ended September 30, 1996 and
1995, respectively. Of the increase, $10.8 million is related to transition
employees currently being leased from Anthem. In 1997, these employees will
become employees of the Company and the salaries and benefits of these employees
will be paid by the Company. In 1996, the Company converted from a self-insured
health plan to an insured plan where Anthem is the insurer. Premiums paid to
Anthem year-to-date totaled $10.2 million at September 30, 1996. The remaining
increase of $12.3 is primarily due to expenses associated with new marketing
agreements with Anthem.
Employee Compensation and Benefits
Employee compensation and benefits costs for the nine months ended September 30,
1996, were $269.3 million, an increase of 23% over employee compensation and
benefits of $218.4 million for the comparable period in 1995. New acquisitions
accounted for approximately $30.9 million of the increase. The remaining
increase of $20.0 million was principally due to the expansion of existing
operations.
Other Operating Expenses
Other operating expenses for the nine months ended September 30, 1996, were
$156.7 million, an increase of 19% over other operating expenses of $131.5
million for the comparable period in 1995. New acquisitions accounted for the
majority of this increase with the remaining costs associated with the expansion
of existing operations.
Interest Expense and Amortization of Goodwill and Other Intangible Assets
Interest expense for the nine months ended September 30, 1996 and 1995,
respectively, was $7.4 million and $6.3 million. Interest expense increased due
to additional borrowings under the revolving credit agreement. These
borrowings were used to finance acquisitions and the general needs of the
Company.
Acquisitions made subsequent to September 30, 1995, resulted in additional
goodwill and other intangible assets. Such increases, less the effect of certain
assets being fully amortized, caused amortization expense to increase to $19.2
million for the nine months ended September 30, 1996 compared to $17.0 million
in the comparable period in 1995.
Income Taxes
The Company's effective income tax rates for the nine months ended September 30,
1996 and 1995, were 45.8% and 46.0%, respectively. Income taxes include both
federal and state income taxes. The effective tax rates are higher than the
U.S. statutory rate of 35 percent primarily due to U.S. state and local income
taxes and to the non-deductibility of certain expenses, including meals and
entertainment and amortization of goodwill and other intangible assets related
to prior and current year acquisitions.
8
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ----------------------------------------------
Operating profit for the three months ended September 30, 1996, was $20.4
million, an increase of 50 percent over operating profit of $13.6 million for
the comparable period in 1995. Net income for the three months ended September
30, 1996, was $6.9 million, an increase of 138 percent over net income of $2.9
million for the comparable period in 1995. Total stockholders' equity was $226.5
million at September 30, 1996, compared to $222.0 million at June 30, 1996.
REVENUES
Total revenues for the three months ended September 30, 1996, were $162.4
million, an increase of 19% over revenues of $137.0 million for the comparable
period in 1995.
Total related party revenues were $71.7 million and $60.4 million for the three
months ended September 30, 1996 and 1995, respectively.
Commissions and Fees
Commissions and fees for the three months ended September 30, 1996 were $159.9
million, an increase of 19% over commissions and fees of $134.7 million for the
comparable period in 1995. New acquisitions accounted for approximately $13.1
million of the increase. New business derived from Anthem accounted for
approximately $11.3 million of the increase. The remaining increase of
approximately $0.8 million resulted primarily from net new business.
Investment Income
Investment income and net realized investment gains, in aggregate, were
$1.7 million and $1.6 million for the three months ended September 30, 1996 and
1995, respectively. Investment income consists primarily of interest earned on
premiums and claims collected and held prior to being remitted to insurers and
clients. Such funds are held in a fiduciary capacity.
Other Revenues
Other revenues include revenues from consulting services, gains and losses on
the sale of fixed assets and other miscellaneous items. Such revenues were $0.8
million and $0.6 million for the three months ended September 30, 1996 and 1995,
respectively.
EXPENSES
- --------
Total operating expenses for the three months ended September 30, 1996, were
$142.0 million, an increase of 15% over operating expenses of $123.4 million for
the comparable period in 1995. The majority of the increase was due to new
acquisitions and expansion of existing operations.
Reimbursement to Anthem pursuant to an intercompany services agreement were
$30.8 million and $12.6 million for the three months ended September 30, 1996
and 1995, respectively. Of the increase, $7.5 million is related to transition
employees currently being leased from Anthem. In 1997, these employees will
become employees of the Company and the salaries and benefits of these employees
will be paid by the Company. In 1996, the Company converted from a self-insured
health plan to an insured plan where
9
<PAGE>
Anthem is the insurer. Premiums paid to Anthem totaled $6.1 million for the
three months ended September 30, 1996. The remaining increase of $4.6 is
primarily due to expenses associated with new marketing agreements with Anthem.
Employee Compensation and Benefits
Employee compensation and benefits costs for the three months ended September
30, 1996, were $90.3 million, an increase of 20%, over employee compensation and
benefits of $75.5 million for the comparable period in 1995. New acquisitions
accounted for approximately $8.8 million of the increase. The remaining
increase of $6.0 million was principally due to the expansion of existing
operations.
Other Operating Expenses
Other operating expenses for the three months ended September 30, 1996, were
$51.8 million, an increase of 8% over other operating expenses of $47.9 million
for the comparable period in 1995. New acquisitions accounted for the majority
of this increase with the remaining costs associated with the expansion of
existing operations.
Interest Expense and Amortization of Goodwill and Other Intangible Assets
Interest expense for the three months ended September 30, 1996 and 1995,
respectively, was $2.6 million and $2.1 million. Interest expense increased due
to additional borrowings under the revolving credit agreement. These
borrowings were used to finance acquisitions and the general needs of the
Company.
Acquisitions, less the effect of certain assets being fully amortized, caused
amortization expense to increase to $6.6 million for the three months ended
September 30, 1996 compared to $5.8 million for the comparable period in 1995.
Income Taxes
The Company's effective income tax rates for the three months ended September
30, 1996 and 1995, were 45.3% and 50.2%, respectively. Income taxes include
both federal and state income taxes. The effective tax rates are higher than
the U.S. statutory rate of 35 percent primarily due to U.S. state and local
income taxes and to the non-deductibility of certain expenses, including
entertainment and amortization of goodwill and other intangible assets related
to prior and current year acquisitions.
FINANCIAL CONDITION
- -------------------
During 1996, cash flow generated from operations and funds available under the
revolving credit agreement were sufficient to fund the operating and capital
expenditure requirements of the Company. The Company's business is not capital
intensive. The Company anticipates that cash flow from operations and, if
necessary, borrowings under its existing credit agreement will be sufficient to
fund the liquidity needs of the Company. Cash generated from operating
activities was $35.8 million and $12.4 for the nine months ended September 30,
1996 and 1995, respectively.
The Company maintains a high quality investment portfolio consisting of
securities which the Company believes to be readily marketable. There are no
derivatives in the portfolio.
10
<PAGE>
The Company maintains a $150 million revolving credit agreement with a syndicate
of banks. The revolving credit agreement matures in November 1998, and with the
consent of the lenders it may be extended for an additional term of one year.
The revolving credit agreement requires the Company to maintain certain
financial ratios and comply with certain other covenants. Additionally, the cost
of funds increases and decreases with the Company's debt leverage. The agreement
does not restrict the payment of dividends.
As of September 30, 1996, long-term debt, excluding the current portion due,
totaled $146.6 million, which compares to $131.6 million at December 31, 1995.
Borrowings under the revolving credit agreement were $132.0 million at September
30, 1996 and $118.0 million at December 31, 1995.
Capital expenditures were $17.3 million and $16.0 million for the nine months
ended September 30, 1996 and 1995, respectively. The increase primarily
resulted from additional leasehold improvements made as a result of certain
existing company offices expanding into additional space.
Net cash flow from financing activities totaled ($5.9 million) and $9.5 million
for the nine months ended September 30, 1996 and 1995, respectively.
On January 31, 1996, the Board of Directors increased the quarterly
dividend by 11% to $0.20 per share of common stock. The dividend
had previously been increased by 20% to $0.18 per share of common stock on
February 6, 1995. The Company intends to continue to pay quarterly dividends.
Other long-term liabilities primarily consist of future payments relating to
contractual agreements negotiated with the previous owners of acquired
businesses, deferred lease incentives and other liabilities not due within one
year including liabilities relating to the Company's retirement and employee
benefit plans. The future contingent payments to the previous owners of acquired
businesses are generally based upon the amount of net commission income
generated from the books of business acquired. These amounts were $8.3 million
and $19.8 million at September 30, 1996 and December 31, 1995, respectively.
OUTLOOK
- -------
In 1995, the Company and Anthem, as a part of their continuing strategic
initiatives, began a project with the assistance of an outside consultant to
look at ways to reduce their administrative expenses. The Company believes that
the probable long-term outcome of this effort will be to reduce administrative
costs through the introduction of enabling technology in the Company's core
healthcare administrative processes, the consolidation of processing sites, the
increased use of automation in the Company's property and casualty brokerage
business and the outsourcing or elimination of non value-added services (mail
rooms, data entry, etc.). The Company and Anthem believe that these changes and
improved efficiencies will be necessary in order for the Company's products to
remain competitive over the next several years.
Since its inception in 1989, the Company has derived a substantial, although
declining, percentage of its revenues and profits from providing marketing and
administrative services for or on behalf of Anthem and its affiliates. Many
administrative functions are those related to claims processing. Due to market
driven pressures, over time the claims processing function will become more
standardized and automated and be
11
<PAGE>
less of a differentiating, value added service for the Company's clients. In
anticipation of these changes, the Company has initiated plans to improve
efficiencies and consolidate certain of these functions. As a part of these
efforts to improve efficiencies and consolidate functions, the Company and
Anthem have announced their intent for their relationship to evolve so that the
Company's relationship with Anthem is principally as a sales, marketing and
customer service arm with less involvement in underwriting management and claims
processing.
Specifically, Anthem and the Company have agreed that the Company will assume
virtually all of the existing wholesale marketing or distribution functions for
Anthem products nationwide while Anthem will reassume and consolidate certain
administrative functions currently being performed by the Company outside of the
midwest region. The revenue and profits from these new arrangements with Anthem
are expected to at least offset the lost profits from Anthem reassuming certain
administrative functions.
While Anthem's recent merger activity provides an opportunity to the Company
over the long-term, no assurances can be given with respect to the likelihood or
financial or business effect of these mergers. The Company will need to work
hard and diligently to market its distribution capabilities and then provide
workable and cost effective plans to transition from existing distribution
channels.
In October 1995, Anthem's Board of Directors authorized the purchase of up to
one million shares of the Company's common stock. Purchases are made from time
to time in the open market at prevailing prices or in privately negotiated
transactions. Since October 1995, Anthem has purchased 481,500 shares of the
Company's common stock resulting in Anthem's ownership increasing to 62% as of
September 30, 1996. Approximately 43% of the Company's revenues during the nine
months ended September 30, 1996 are related to insurance products placed with
Anthem and its wholly owned insurance affiliates.
In July 1995, the State of Kentucky legislature passed a comprehensive health
care reform bill. The new legislation, which was effective January 1, 1996,
created a statewide voluntary health care purchasing alliance (the "Alliance")
and guaranteed that every Kentucky resident had access to health care benefits.
Membership in the Alliance is mandatory for state workers, public school
employees, and voluntary for employees of state universities, counties and
cities. The company is a third party administrator for Anthem products offered
through the Alliance. Certain aspects of this legislation may result in
increased revenue for the company's group health self-insured products while
possibly lowering the revenues generated from the sale of small group and
individual health products. There can be no assurances that the legislation
will not have an adverse impact on the Company's business in the State of
Kentucky.
Acquisitions have been an important historical part of the Company's strategy to
become a full-service insurance broker to mid-market companies in targeted
areas. The Company is regularly engaged in discussions with third parties
regarding potential acquisitions but has no current commitments or agreements
which individually or in the aggregate would be material. No assurances can be
given with respect to the likelihood or financial or business effect of any
possible future acquisition.
Softness in the property and casualty insurance market and uncertainty about the
effects of national and state health care reform initiatives continue. The
underwriting capacity of property and casualty insurance companies has continued
to expand, increasing competition and decreasing premium rates, thereby reducing
related commissions and fees. Many states where the Company does business have
already initiated various healthcare reforms, and many more are considering
them. In these states and elsewhere, the Company has joined with providers and
has developed information systems to manage costs and is providing clients with
managed care products, services and advice.
12
<PAGE>
The statements under "Outlook" and the other statements which are not historical
facts are forward looking. Such statements involve a number of risks and
uncertainties. While the statements represent the Company's current judgment as
to the near term future of its business, such risks and uncertainties could
cause actual results to differ from the above statements. Factors which could
cause actual results to differ include the following: the Company's relationship
with Anthem, the effect of economic conditions, cyclicality of property and
casualty and health insurance markets, the impact of competitive products and
pricing, product development, technological difficulties, the results of
financing efforts, the effect of the Company's accounting policies,
unanticipated regulatory changes and other risks.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to claims and lawsuits that arise
in the ordinary course of business. Some of these cases are being litigated in
jurisdictions which have judicial precedence and evidentiary rules which are
generally believed to favor individual plaintiffs against corporate defendants.
The damages that may be claimed in such cases can be substantial, but are often
covered by insurance. Accruals for these claims and lawsuits have been provided
to the extent that losses are deemed probable and are estimable.
Although the ultimate outcome of these suits cannot be ascertained and
liabilities in indeterminate amounts may be imposed on the Company or its
subsidiaries, on the basis of present information, and advice received from
counsel, it is the opinion of management that the disposition or ultimate
determination of such claims and lawsuits will not have a material effect on the
consolidated financial position of the Company.
On April 17, 1996, National Benefits Consultants, LLC ("plaintiff") filed suit
in California Superior Court against one of the Company's operating
subsidiaries, as well as Anthem. The suit alleged breach of an engagement letter
allegedly entered into among the parties. Plaintiff sought actual damages in
excess of $100 million, as well as additional unspecified damages and punitive
damages. The suit has been settled on terms which involve no cost to the
Company. The parties merely agreed to the performance of some of the services at
issue in the case. The settlement agreement includes mutual releases of
liability for all parties.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit (11) - Computation of earnings per share
During the third quarter of the fiscal year covered by this report, no report on
Form 8-K was filed.
14
<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.
ACORDIA, INC.
(Registrant)
Date: 9/13/96 /s/ Keith A. Maib
- ---------------------------------------- -----------------------------------
Keith A. Maib
Executive Vice President and
Chief Financial Officer
15
<PAGE>
EXHIBIT 11
ACORDIA, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
- -------
Average number of common shares
outstanding 14,021 13,951 14,057 13,964
Net effect of dilutive stock options
and warrants - based on the
treasury stock method of using
average market price 414 473 439 358
------- ------- ------- -------
Total average number of common shares
outstanding 14,435 14,424 14,496 14,322
======= ======= ======= =======
Net income $21,018 $16,139 $ 6,890 $ 2,877
======= ======= ======= =======
Earnings per share $ 1.46 $ 1.12 $ 0.48 $ 0.20
======= ======= ======= =======
FULLY DILUTED
- -------------
Average number of common shares
outstanding 14,021 13,951 14,057 13,964
Net effect of dilutive stock options
and warrants - based on the
treasury stock method of using
the period-end price if higher
than average market price 417 264 440 264
------- ------- ------- -------
Total average number of common shares
outstanding 14,438 14,215 14,497 14,228
======= ======= ======= =======
Net income $21,018 $16,139 $ 6,890 $ 2,877
======= ======= ======= =======
Earnings per share $ 1.46 $ 1.14 $ 0.48 $ 0.20
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10189
<SECURITIES> 47432
<RECEIVABLES> 157151
<ALLOWANCES> 3984
<INVENTORY> 0
<CURRENT-ASSETS> 274206
<PP&E> 47437
<DEPRECIATION> 42423
<TOTAL-ASSETS> 752885
<CURRENT-LIABILITIES> 310398
<BONDS> 0
0
0
<COMMON> 14060
<OTHER-SE> 212403
<TOTAL-LIABILITY-AND-EQUITY> 752885
<SALES> 482597
<TOTAL-REVENUES> 489999
<CGS> 0
<TOTAL-COSTS> 424973
<OTHER-EXPENSES> 17839
<LOSS-PROVISION> 999
<INTEREST-EXPENSE> 7440
<INCOME-PRETAX> 38748
<INCOME-TAX> 17730
<INCOME-CONTINUING> 21018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21018
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
</TABLE>
