UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 001-10997
--------------------------------
INTEGON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3559471
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Fifth Street, Winston-Salem, North Carolina 27152
- ------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(910) 770-2000
- ------------------------------------------------------------
(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
---
As of July 31, 1997, there were 15,957,039 shares outstanding of
Integon Corporation's Common Stock.
Page 1
<PAGE>
INTEGON CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
-------
Item 1. Financial Statements.
Balance Sheets - June 30, 1997 and December 31, 1996.......... 3
Statements of Operations - Three Months Ended June 30,
1997 and 1996 and six months ended June 30, 1997 and
1996 ..................................................... 4
Statements of Cash Flows - Six Months Ended June 30,
1997 and 1996............................................. 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters To a Vote of
Security Holders................................... 19
Item 6. Exhibits and Reports on Form 8-K..................... 20
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
June 30, December 31,
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities available for sale--at market
(amortized cost $635,533 and $522,452) .......................... $ 633,239 $ 521,311
Other long-term investments .......................................... 1,098 2,743
Short-term investments ............................................... 5,796 --
----------- -----------
640,133 524,054
Cash and cash equivalents ............................................ 45,766 43,838
Reinsurance receivable ............................................... 175,349 185,077
Premiums due and uncollected (less allowance for
doubtful accounts of $5,282 and $5,282) ......................... 238,395 248,537
Prepaid reinsurance premiums ......................................... 49,833 48,909
Accounts receivable, primarily financing receivables
(less allowance for doubtful accounts of $1,260
and $1,112) ..................................................... 40,181 32,957
Accrued investment income ............................................ 9,345 8,933
Deferred policy acquisition costs .................................... 49,688 55,106
Property and equipment (less accumulated depreciation
of $14,749 and $10,808) ......................................... 77,596 68,271
Goodwill (less accumulated amortization of $15,412
and $13,885) .................................................... 105,429 106,957
Deferred income taxes ................................................ 26,823 22,044
Other assets ......................................................... 25,899 12,116
----------- -----------
$ 1,484,437 $ 1,356,799
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums .................................................... $ 358,883 $ 364,081
Loss and loss adjustment expenses payable ............................ 531,027 478,031
Accrued expenses and other liabilities ............................... 144,561 104,536
Short-term debt ...................................................... 26,000 44,000
Notes payable ........................................................ 150,714 150,760
----------- -----------
1,211,185 1,141,408
----------- -----------
Company-obligated mandatorily redeemable capital securities
of subsidiary trust holding solely Integon Corporation
Junior Subordinated Deferrable Interest Debentures
100,000 --
----------- -----------
STOCKHOLDERS' EQUITY
$3.875 Convertible Preferred Stock--$.01 par value
per share, 1,437,500 shares authorized, issued and
outstanding ..................................................... 14 14
Common Stock--$.01 par value per share, authorized--
35,000,000 shares; issued--17,318,155 and
17,271,707 shares ............................................... 173 173
Class A Non-Voting Common Stock--$.01 par value per
share, authorized 20,000,000 shares; issued and
outstanding--none ............................................... -- --
Additional paid-in capital ........................................... 148,803 147,891
Net unrealized depreciation of securities ............................ (1,345) (700)
Retained earnings .................................................... 63,428 105,834
Treasury stock--at cost, 1,567,200 shares ............................ (37,821) (37,821)
---------- ----------
173,252 215,391
---------- ----------
$1,484,437 $1,356,799
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE>
Item 1. Financial Statements. (continued)
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Net premiums written ............................. $ 185,909 $ 197,811 $ 388,463 $ 392,073
========= ========= ========= =========
Premiums earned .................................. $ 198,468 $ 180,240 $ 394,585 $ 345,055
Net investment income ............................ 10,270 7,858 19,313 15,611
Net realized investment gains (losses) ........... (1,592) (857) (2,073) 1,220
Other income ..................................... 4,660 4,035 9,200 8,210
--------- --------- --------- ---------
211,806 191,276 421,025 370,096
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Loss and loss adjustment expenses ................ 156,173 134,032 355,411 264,590
Policy acquisition and other underwriting
expenses ....................................... 48,658 37,094 99,801 72,065
Other expenses ................................... 5,170 3,322 9,917 7,371
Amortization of goodwill ......................... 764 770 1,528 1,539
Interest expense ................................. 3,687 3,724 7,454 7,355
--------- --------- --------- ---------
214,452 178,942 474,111 352,920
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS BEFORE FEDERAL
INCOME TAX (BENEFIT) AND DISTRIBUTIONS ON
CAPITAL SECURITIES OF SUBSIDIARY TRUST ........... (2,646) 12,334 (53,086) 17,176
Federal income tax (benefit) ..................... (993) 4,037 (19,035) 5,494
--------- --------- --------- ---------
Income (loss) before distributions on capital
securities of subsidiary trust ................... (1,653) 8,297 (34,051) 11,682
Distributions on capital securities of
subsidiary trust, net of federal income tax
benefit of $940, $--, $1,473 and $-- ............. (1,747) -- (2,737) --
--------- --------- --------- ---------
NET INCOME (LOSS) ........................... (3,400) 8,297 (36,788) 11,682
Preferred stock dividends ........................ 1,392 1,392 2,785 2,785
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ (4,792) $ 6,905 $ (39,573) $ 8,897
========= ========= ========= =========
EARNINGS PER COMMON SHARE
Primary .......................................... $ (.30) $ .44 $ (2.51) $ .56
========= ========= ========= =========
Fully diluted .................................... $ (.30) $ .42 $ (2.51) $ .56
========= ========= ========= =========
Weighted average common shares outstanding:
Primary ........................................ 15,751 15,815 15,745 15,863
========= ========= ========= =========
Fully diluted .................................. 15,751 19,654 15,745 15,863
========= ========= ========= =========
Dividends declared per share ..................... $ .09 $ .09 $ .18 $ .18
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
Item 1. Financial Statements. (continued)
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss)...................................................................... $ (36,788) $ 11,682
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized investment (gains) losses............................................ 2,073 (1,220)
Depreciation and amortization..................................................... 5,702 4,604
Net amortization of discounts and premiums........................................ 292 491
Provision for deferred federal income taxes (benefit)............................. (4,437) 23
Net decrease in reinsurance assets................................................ 8,804 19,668
Net (increase) decrease in premiums due and uncollected........................... 10,142 (37,223)
Net (increase) decrease in deferred policy acquisition
costs.......................................................................... 5,418 (8,696)
Net increase in accounts and notes receivable,
accrued investment income and other assets..................................... (13,786) (3,787)
Increase (decrease) in unearned premiums.......................................... (5,198) 43,341
Increase in loss and loss adjustment expenses payable............................. 52,996 12,317
Net increase (decrease) in accrued expenses and
other liabilities.............................................................. 21,188 (3,575)
--------- ---------
Net cash flows provided by operating activities
from continuing operations..................................................... 46,406 37,625
--------- ---------
Cash Flows from Investing Activities
Investment securities sold............................................................. 527,222 284,536
Investment securities matured, called or redeemed...................................... 10,824 17,161
Investment securities purchased........................................................ (658,148) (322,064)
Other, net............................................................................. (12,615) (3,853)
--------- ---------
Net cash flows used in investing activities....................................... (132,717) (24,220)
--------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt............................................. (18,000) 5,000
Proceeds from Company-obligated mandatorily redeemable
capital securities of subsidiary trust............................................ 100,000 --
Proceeds from exercise of share options................................................ 767 --
Common stock dividends................................................................. (2,833) (2,831)
Preferred stock dividends.............................................................. (2,785) (2,785)
Decrease in notes payable.............................................................. (46) (64)
Increase in book cash overdrafts....................................................... 11,135 4,035
--------- ---------
Net cash flows provided by financing activities.................................... 88,238 3,355
--------- ---------
Net increase in cash and cash equivalents.............................................. 1,928 16,760
Cash and cash equivalents at beginning of period................................... 43,838 21,046
--------- ---------
Cash and cash equivalents at end of period............................................. $ 45,766 $ 37,806
========= =========
Supplemental Disclosures of Cash Flows Information
Interest paid during the period........................................................ $ 7,245 $ 7,169
Federal income taxes paid during the period............................................ -- 4,730
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
<PAGE>
Item 1. Financial Statements. (continued)
INTEGON CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
Note 1 - Accounting Policies
The accompanying unaudited consolidated financial statements of Integon
Corporation and subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim periods.
In the opinion of management, these financial statements include all
adjustments, including all normal recurring accruals, necessary for a fair
presentation of the consolidated financial position at June 30, 1997 and
December 31, 1996 and the consolidated results of operations and cash flows for
the periods ended June 30, 1997 and 1996.
The operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year ending December 31,
1997.
Note 2 - Financing Activity
On February 10, 1997, Integon Capital I, a wholly-owned subsidiary trust of the
Company, issued $100.0 million of 10 3/4% capital securities due February 15,
2027 (the "Capital Securities"), the proceeds of which were invested in 10 3/4%
junior subordinated debentures of the Company due February 15, 2027.
The sole asset of Integon Capital I consists of $103.1 million of 10 3/4% junior
subordinated debentures of Integon Corporation due February 15, 2027. The
obligations of Integon Capital I under the Capital Securities are fully and
unconditionally guaranteed by the Company.
Holders of the Capital Securities are entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1997, at the annual rate of 10 3/4% of the liquidation
amount of
Page 6
<PAGE>
Item 1. Financial Statements. (continued)
$1,000 per Capital Security. The distribution rate and the distribution payment
dates and other payment dates for the Capital Securities will correspond to the
payments and payment dates on the junior subordinated debentures of Integon
Corporation. Distributions on the Capital Securities are deferrable at the
Company's option for up to five years. The Company, subject to certain
exceptions, may not pay dividends on its capital stock during such deferral
periods.
For financial reporting purposes, Integon Capital I is treated as a subsidiary
of the Company and, accordingly, its accounts are included in the consolidated
financial statements of the Company. The Capital Securities are presented in the
consolidated balance sheet of the Company as a separate line item directly above
stockholders' equity under the caption "Company-obligated mandatorily redeemable
capital securities of subsidiary trust holding solely Integon Corporation junior
subordinated deferrable interest debentures." The Company records distributions
payable on the Capital Securities as "Distributions on capital securities of
subsidiary trust" in its consolidated statement of income.
The Company paid $10.75 million of the proceeds from the transaction into a
reserve account which will be used to pay the first two interest payments on the
Capital Securities. The remaining net proceeds to the Company were used to
contribute $50.0 million to the insurance subsidiaries in the form of
certificates of contribution bearing interest at 10 3/4% per annum, not
compounded; to reduce the Company's short-term debt by $32.0 million and for
general corporate purposes.
Underwriting fees and other costs of $4.0 million relating to the issuance of
the Capital Securities have been capitalized. Such costs are being amortized
using the interest-rate method.
Note 3 - Stock Option and Incentive Plans
The Company applies APB 25 and related Interpretations in accounting for stock
option and incentive plans. Accordingly, no compensation cost has been
recognized for stock options issued under either the 1992 Stock Option Plan or
the Amended and Restated Omnibus Long-Term Performance Incentive Compensation
Plan. Had compensation cost for stock-based compensation under these two plans
been determined consistent with Statement of Financial Accounting Standards
("SFAS") No. 123, the Company's net income and earnings per share on a pro forma
basis for the period ended June 30, would have been as follows:
Page 7
<PAGE>
Item 1. Financial Statements. (continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma net income (loss). $ (3,638) $ 8,169 $ (37,245) $ 11,427
Pro forma primary earnings
per share .............. $ (.31) $ .43 $ (2.53) $ .55
Pro forma fully diluted
earnings per share...... $ (.31) $ .42 $ (2.53) $ .55
</TABLE>
Note 4 - Accounting Standards Issued But Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share" which changes the method of calculating earnings per share.
SFAS No. 128 requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement. Basic earnings
per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per share
except that the denominator includes dilutive common stock equivalents such as
stock options and warrants. The statement is effective for financial statements
for periods ending after December 31, 1997, and early adoption is not permitted.
The pro forma basic earnings per share and diluted earnings per share calculated
in accordance with SFAS No. 128 for the period ended June 30, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma basic earnings per
share ................. $ (.30) $ .44 $ (2.51) $ .57
Pro forma diluted earnings
per share ............. $ (.30) $ .42 $ (2.51) $ .56
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other
Page 8
<PAGE>
Item 1. Financial Statements. (continued)
comprehensive income separately in the shareholders' equity section of the
statement of financial condition. The Company will adopt SFAS No. 130 on January
1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments. Operating segments are components of a
company about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and assess performance. The standard sets criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers. The Company will adopt SFAS No. 131 on January 1, 1998 as
required.
Note 5 - Loss and Loss Adjustment Expenses Payable
Loss and loss adjustment expenses payable represent the estimated liability on
claims reported to the Company plus reserves for claims incurred but not yet
reported and the estimated settlement expenses related to these claims. The
liabilities for claims and related settlement expenses are determined using
"case basis" evaluations and statistical analysis and represent estimates of the
ultimate net cost of all losses incurred through the balance sheet date.
Although considerable variability is inherent in such estimates, management
believes that the liabilities for unpaid claims and related settlement expenses
are adequate; however, there can be no assurance that future adjustments to loss
and loss adjustment expenses payable will not be required. The estimates are
reviewed by management and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations.
Note 6 - Sale of the Company
On June 23, 1997, the Company signed a definitive agreement with General Motors
Acceptance Corporation ("GMAC") providing for the Company's merger with a
subsidiary of GMAC. Subject to shareholder and regulatory approval, the
definitive agreement calls for each share of the Company's Common Stock to
receive $26.00 in cash, without interest. Each share of the Company's $3.875
Convertible Preferred Stock, which is converted into Common Stock prior to the
effective date of the merger, will thereafter represent the right to receive
$26.00 per share of
Page 9
<PAGE>
Item 1. Financial Statements. (continued)
Common Stock issued upon conversion (or $68.24 per share of Convertible
Preferred Stock so converted) in cash, without interest. After the merger, each
share of Convertible Preferred Stock will be convertible into the right to
receive $68.24 per share, in cash, without interest, and any shares of
Convertible Preferred Stock not so converted will be redeemed at $52.33 per
share shortly following the effective time of the merger. The payment is to be
made upon closing of the transaction, subject to obtaining all necessary
regulatory and stockholder approvals.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes on pages 3 through 9 of this
Quarterly Report on Form 10-Q. The reader is presumed to have read or have
access to Integon Corporation's 1996 Annual Report on Form 10-K.
Results of Continuing Operations
Six Months Ended June 30, 1997 ("1997") Compared with Six Months Ended June 30,
1996 ("1996")
Net premiums written decreased 0.9% from $392.1 million in 1996 to
$388.5 million in 1997. Nonstandard automobile insurance net premiums written
decreased from $355.7 million in 1996 to $339.8 million in 1997 or 4.5%. Price
increases taken during the fourth quarter of 1996 and the first two quarters of
1997 have had the effect of slowing premium growth. Specialty auto products net
premiums written increased 54.0% from $23.5 million in 1996 to $36.2 million in
1997. Premiums earned on all lines of business increased 14.4% from $345.1
million in 1996 to $394.6 million in 1997 and reflects primarily the increase in
net premiums written during 1996 compared to 1995.
Loss and loss adjustment expenses increased 34.3% from $264.6 million
in 1996 to $355.4 million in 1997. The loss ratio, defined as loss and loss
adjustment expenses as a percentage of premiums earned, increased from 76.7% in
1996 to 90.1% in 1997 due primarily to an increase to loss reserves of $42.0
million during the first quarter of 1997 following a comprehensive review and
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
analysis by the Company's actuarial staff and independent consulting actuaries.
Policy acquisition and other underwriting expenses increased $27.7
million from $72.1 million in 1996 to $99.8 million in 1997. The expense ratio,
defined as policy acquisition and other underwriting expenses as a percentage of
premiums earned, increased from 20.9% in 1996 to 25.3% in 1997. The increase in
the expense ratio was due primarily to a write-off of deferred policy
acquisition costs of $3.7 million due to the increase in the loss ratio for
accident year 1996 and due to an increase in personnel-related and information
systems costs. Such costs were incurred primarily to enhance the Company's
operations, and included expenses for modifications necessary to accommodate the
Year 2000.
Net investment income increased 23.7% from $15.6 million in 1996 to
$19.3 million in 1997 as a result of the $120.5 million increase in average
invested assets and a lower percentage invested in tax-exempt securities. The
pre-tax yield of the portfolio was 6.0% in 1997 and 1996. The percentage of cash
and invested assets invested in tax-exempt securities was 3.9% and 22.4% in 1997
and 1996, respectively. In addition to the variances discussed above, there were
pre-tax net realized investment losses of $2.1 million in 1997 compared to
pre-tax net realized investment gains of $1.2 million in 1996.
Other income less other expenses decreased from income of $.8 million
in 1996 to an expense of $.7 million in 1997 due to one time expenses incurred
during the period leading to the merger. See Note 6.
Interest expense increased 1.4% from $7.4 million in 1996 to $7.5
million in 1997 due to increased short-term borrowings.
Federal income taxes decreased $24.5 million from $5.5 million tax
expense in 1996 to a $19.0 million tax benefit in 1997 due to a loss from
operations before federal income tax. The effective tax rate increased from
32.0% in 1996 to 35.9% in 1997 due primarily to the underwriting loss in 1997.
Based on available information, the Company has concluded it is more
likely than not that the deferred tax asset will be realized.
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
Distributions on capital securities of subsidiary trust resulted in an
after-tax charge of $2.7 million in 1997, representing the Company's minority
interest in the earnings of Integon Capital I, a single-purpose wholly-owned
subsidiary trust. The charge is due to the obligations incurred by Integon
Capital I on the Capital Securities issued February 10, 1997. See Note 2.
Net income decreased $48.5 million from $11.7 million in 1996 to a loss
of $36.8 million in 1997.
Three Months Ended June 30, 1997 ("1997") Compared with Three Months Ended June
30, 1996 ("1996")
Net premiums written decreased 6.0% from $197.8 in 1996 to $185.9
million in 1997. Nonstandard automobile insurance net premiums written decreased
from $178.9 million in 1996 to $159.6 million in 1997 or 10.8%. Price increases
taken during the fourth quarter of 1996 and the first two quarters of 1997 have
had the effect of slowing premium growth. Specialty auto products net premiums
written increased 59.9% from $12.5 million in 1996 to $20.0 million in 1997.
Premiums earned on all lines of business increased 10.1% from $180.2 million in
1996 to $198.5 million in 1997 and reflects primarily the increase in net
premiums written during 1996 compared to 1995.
Loss and loss adjustment expenses increased 16.5% from $134.0 million
in 1996 to $156.2 million in 1997. The loss ratio, defined as loss and loss
adjustment expenses as a percentage of premiums earned, increased from 74.3% in
1996 to 78.7% in 1997. A comprehensive actuarial review conducted in the first
quarter of 1997 showed that loss and loss adjustment expenses relating to
accident year 1996 increased significantly compared to the amounts previously
reported in 1996.
Policy acquisition and other underwriting expenses increased $11.6
million from $37.1 million in 1996 to $48.7 million in 1997. The expense ratio,
defined as policy acquisition and other underwriting expenses as a percentage of
premiums earned, increased from 20.6% in 1996 to 24.5% in 1997. The increase in
the expense ratio was due primarily to an increase in personnel-related and
other information systems costs. Such costs were incurred primarily to enhance
the Company's operations, and also
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
included expenditures for modifications necessary to accommodate the Year 2000.
Net investment income increased 30.7% from $7.9 million in 1996 to
$10.3 million in 1997 as a result of the $139.6 million increase in average
invested assets and a lower percentage invested in tax-exempt securities. The
pre-tax yield of the portfolio was 6.1% in 1997 compared to 5.9% in 1996. The
percentage of cash and invested assets invested in tax-exempt securities was
3.9% and 22.4% in 1997 and 1996, respectively. In addition to the variances
discussed above, there were pre-tax net realized investment losses of $1.6
million in 1997 and $.9 million in 1996.
Other income less other expenses decreased from income of $.7 million
in 1996 to an expense of $.5 million in 1997 due to one time expenses incurred
during the period leading to the merger. See Note 6.
Interest expense remained at $3.7 million in 1996 and 1997.
Federal income taxes decreased $5.0 million from $4.0 million tax
expense in 1996 to an $1.0 million tax benefit in 1997 due to a loss from
operations before federal income tax. The effective tax rate increased from
32.7% in 1996 to 37.5% in 1997 due primarily to the underwriting loss in 1997.
Based on available information, the Company has concluded it is more
likely than not that the deferred tax asset will be realized.
Distributions on capital securities of subsidiary trust resulted in an
after-tax charge of $1.7 million in 1997, representing the Company's minority
interest in the earnings of Integon Capital I, a single-purpose wholly-owned
subsidiary trust. The charge is due to the obligations incurred by Integon
Capital I on the Capital Securities issued February 10, 1997. See Note 2.
Net income decreased $11.7 million from $8.3 million in 1996 to a loss
of $3.4 million in 1997.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Analysis of Financial Condition
Information regarding the Company's investment portfolio at June 30,
1997 is as follows:
<TABLE>
<CAPTION>
June 30, 1997
Type/Ratings of Investments (1) Carrying Amount (2) Percentage
- ------------------------------- ------------------- ---------------
(in thousands)
<S> <C> <C>
Fixed maturities:
Government and agencies .............. $158,058 23.0%
Aaa .................................. 110,201 16.1%
Aa ................................... 81,808 11.9%
A (3) ................................ 274,533 40.0%
Baa .................................. 6,165 .9%
-------- ------
Total investment grade ........... 630,765 91.9%
Below investment grade ............... 2,474 .4%
-------- ------
Subtotal ......................... 633,239 92.3%
Other long-term investments .............. 1,098 .2%
Short-term investments ................... 5,796 .8%
Cash and cash equivalents ................ 45,766 6.7%
-------- ------
Total invested assets ............ $685,899 100.0%
======== ======
</TABLE>
(1) The ratings set forth above are based on the ratings, if any, assigned
by Moody's Investors Service, Inc. ("Moody's"). If Moody's ratings were
unavailable, the equivalent ratings supplied by Standard & Poor's
Corporation ("S&P") or the National Association of Insurance
Commissioners ("NAIC") were used where available. The percentage of
rated securities that were not assigned a rating by Moody's at June 30,
1997 was 6.7%.
(2) Carrying amount is estimated market value for fixed maturities
available for sale.
(3) The "A" category includes $21.2 million of securities which were not
rated by Moody's or S&P, but were rated "1" by the NAIC.
Page 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Liquidity and Capital Resources
Sources of Funds. The Company's major sources of operating funds have
been (i) dividends from its subsidiaries, (ii) reimbursements of costs and
expenses in connection with the management agreement among the Company and its
subsidiaries pursuant to which the Company provides certain services to such
subsidiaries, (iii) tax sharing payments from the operating subsidiaries of the
Company and (iv) borrowings under credit facilities. The Company files a
consolidated federal income tax return including its subsidiaries and receives
payments pursuant to a tax sharing agreement among the Company and its
subsidiaries. Taxes are computed for each subsidiary and paid to the Company as
if such subsidiary were filing a tax return on a stand-alone basis, thereby
providing additional funds to the Company, because the aggregate of such
payments generally exceeds taxes to be paid by the Company on a consolidated
basis. These sources are expected to be available for future needs except for
dividends from the Company's subsidiaries. Dividends will be retained by the
subsidiaries as needed. The Company's insurance subsidiaries are limited as to
the amount of ordinary dividends they may pay (see "Regulation" below). In
addition, in determining the ability of its subsidiaries to pay dividends, the
Company monitors its subsidiaries' operating leverage based on the level of net
premiums written to statutory surplus. Currently, the Company seeks to maintain
its subsidiaries' ratio of net premiums written to statutory surplus at a level
of approximately 3.0x in accordance with industry standards. The ratio was 2.9x
for the twelve months ended June 30, 1997. On February 13, 1997, Integon
Corporation contributed $50.0 million to the domestic insurance subsidiaries in
the form of certificates of contribution. Interest on the certificates accrues
at the rate of 10 3/4% per annum, not compounded, and is due and payable
semiannually to the extent funds exist pursuant to regulatory requirements.
As of June 30, 1997, Integon Corporation, the parent company, had approximately
$1.9 million of cash and cash equivalents that were available for general
corporate purposes, including debt service, dividend payments and working
capital. The Company believes that the sources of funds available to it,
including the $75.0 million
Page 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
committed credit facility described in "Financing Activities" below, are and
will be sufficient to satisfy its short-term needs.
The principal sources of funds for the Company's subsidiaries are net premiums
collected, proceeds from investment income and from investments that have been
sold, matured or repaid and premium financing revenues.
On a consolidated basis, net cash flows provided by operating activities for the
six months ended June 30, 1997 and 1996 were $46.4 million and $37.6 million,
respectively. Based on the Company's current financial plans, management
believes that its subsidiaries will continue to realize positive cash flows from
their operating activities and that the operating liquidity needs of such
subsidiaries can be funded from such cash flow. Statements concerning cash flows
look forward in time. The following important factors, among others, could cause
actual cash flows to differ materially from those set forth in the above forward
looking statement: claims frequency, claims severity, severe adverse weather
conditions, the cost of automobile repair, economic activity, competitive
pricing, and the regulatory environment in which the Company operates.
Uses of Funds. The Company's principal uses of funds are the payment of
corporate operating expenses, taxes, debt service and dividends on Common and
Preferred Stock. During the first quarter of 1997, the Company contributed $50.0
million of capital in the form of certificates of contribution to the insurance
subsidiaries to maintain the ratio of net premiums written to statutory surplus
at a level of 3.0x.
The principal uses of funds of the Company's subsidiaries are the payment of
claims on insurance policies, the payment of operating expenses, the payment of
interest on the certificates of contribution, distributions on the Capital
Securities, purchase of investments, tax sharing payments and dividends to the
Company.
The Company and its subsidiaries have no material commitments for capital
expenditures.
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Financing Activities: The Company has a committed credit facility of
$75.0 million. The interest rate charged on this credit facility is based on the
bids of the participating lenders and in the case of Eurodollar loans a margin
percentage ranging from .55% to .675% is added. The facility fee ranges from
.20% to .35% of the total amount of the facility.
On February 10, 1997, Integon Capital I issued $100.0 million of 10 3/4% capital
securities due February 15, 2027, the proceeds of which were invested in 10 3/4%
junior subordinated debentures of the Company, due February 15, 2027. See Note 2
of Notes to Financial Statements.
Investments. In accordance with the Company's investment policy, the
Company's investments at June 30, 1997 consisted primarily of investment-grade
securities (rated Baa or better by Moody's Investor Services, Inc. or the
equivalent). Consolidated cash and cash equivalents at June 30, 1997 amounted to
$45.8 million, or 6.7% of total cash and invested assets.
Management has determined that the entire fixed maturity portfolio should be
classified as "available for sale". Fixed maturity securities classified as
"available for sale" are carried at estimated market value. The market value and
amortized cost of all fixed maturity securities at June 30, 1997 were $633.2
million and $635.5 million, respectively.
Management believes that the securities in the Company's investment portfolio at
June 30, 1997 are readily marketable.
Regulation. Insurance laws and regulations impose certain restrictions
on the amount of dividends that may be paid by insurance companies. The maximum
amount of ordinary dividends that a North Carolina domiciled property and
casualty insurance company may pay at any point in time without regulatory
approval is the lesser of (a) 10% of the policyholders' statutory surplus of
such property and casualty insurance company as of the preceding December 31 or
(b) the statutory net income of such property and casualty insurance company for
the preceding calendar year, less the amount of dividends paid during the
Page 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
preceding twelve months. The Company's insurance subsidiaries have made no
payments of ordinary dividends during the twelve months ended June 30, 1997.
Dividends will be retained by the subsidiaries as needed.
If the insurance subsidiaries are not able to pay ordinary dividends and their
requests for the payment of extraordinary dividends are not granted, and if
amounts needed are in excess of the available funds under the credit facility,
additional borrowings, the issuance of additional securities or obtaining other
funds could be necessary to pay debt service, Common Stock and Preferred Stock
dividends and other expenses of the Company.
Page 18
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters To a Vote of Security Holders.
The annual meeting of stockholders of the Company was held on May 15, 1997 for
the following purposes: (i) electing three directors to serve for a term of
three years each expiring at the annual meeting of stockholders to be held in
2000, and (ii) considering and acting upon a proposal to ratify the appointment
of Deloitte & Touche LLP as independent auditors for the Company for the
calendar year 1997.
Derek V. Smith, Frederick B. Whittemore, and Ronald N. Zebeck were elected as
directors at the meeting. The votes cast for and withheld for each nominee for
director were as follows: Derek V. Smith 13,518,640 and 93,702; Frederick B.
Whittemore, 13,520,010 and 92,332; and Ronald N. Zebeck 13,518,700 and 93,642.
The number of votes cast for and against, and the number of abstentions for the
auditors were as follows: 13,539,210, 12,475, and 60,657.
Page 19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
------------------------------
Integon
Exhibit Registration
Number Exhibit No. or Report
- ------- -------- -------------
11.1 Computation of Earnings
per Share * NA
b. Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
June 30, 1997.
Filing Date Item No. Description
----------- -------- -----------
April 28, 1997 5 Other Events. Copy of press release
announcing retention of Goldman, Sachs &
Co. to review strategic alternatives and
reported first quarter 1997 results.
June 10, 1997 5 Other Events. Copy of press release
announcing the election of a new
President and Chief Executive Officer.
June 24, 1997 5 Other Events. Copy of press release
announcing the sale of the Company to
General Motors Acceptance Corporation.
June 24, 1997 5 Other Events. Copy of Plan of Merger and
Amendment to Rights Agreement.
Page 20
<PAGE>
SIGNATURE
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.
INTEGON CORPORATION
August 14, 1997 /s/ Brian T. Sheekey
--------------------
Brian T. Sheekey
(Duly Authorized Officer
and Principal Accounting Officer)
Page 21
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income available to common shareholders:
Net income (loss) ......................... $ (3,400) $ 8,297 $ (36,788) $ 11,682
Preferred stock dividends ................. 1,392 1,392 2,785 2,785
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders ........................ $ (4,792) $ 6,905 $ (39,573) $ 8,897
============ ============ ============ ============
Weighted average common shares outstanding:
Primary:
Common shares outstanding ............ 15,750,955 15,728,236 15,744,598 15,720,895
Assumed exercise of stock options .... -- 86,417 -- 142,436
------------ ------------ ------------ ------------
Total ................................. 15,750,955 15,814,653 15,744,598 15,863,331
============ ============ ============ ============
Fully diluted:
Common shares outstanding ............ 15,750,955 15,728,236 15,744,598 15,720,895
Assumed conversion of convertible
preferred stock .................... -- 3,772,966 -- --
Assumed exercise of stock options .... -- 152,769 -- 142,436
------------ ------------ ------------ ------------
Total ................................. 15,750,955 19,653,971 15,744,598 15,863,331
============ ============ ============ ============
Earnings per common share:
Primary ................................... $ (.30) $ .44 $ (2.51) $ .56
============ ============ ============ ============
Fully diluted ............................. $ (.30) $ .42 $ (2.51) $ .56
============ ============ ============ ============
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
---------------------------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- ------- ------------- ------------
11.1 Computation of Earnings
per Share 11.1 *
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> This statement contains summary financial information
extracted from Integon Corporation's June 30, 1997
finacial statements and is qualified in its entirety
by references to such financial statements.
</LEGEND>
<CIK> 0000878660
<NAME> Integon Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 633,239
<DEBT-CARRYING-VALUE> 633,239
<DEBT-MARKET-VALUE> 633,239
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 634,337
<CASH> 51,562
<RECOVER-REINSURE> 175,349
<DEFERRED-ACQUISITION> 49,688
<TOTAL-ASSETS> 1,484,437
<POLICY-LOSSES> 531,027
<UNEARNED-PREMIUMS> 358,883
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 150,714
0
14
<COMMON> 173
<OTHER-SE> 173,065
<TOTAL-LIABILITY-AND-EQUITY> 1,484,437
394,585
<INVESTMENT-INCOME> 19,313
<INVESTMENT-GAINS> (2,073)
<OTHER-INCOME> 9,200
<BENEFITS> 355,411
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 99,801
<INCOME-PRETAX> (57,296)
<INCOME-TAX> (20,508)
<INCOME-CONTINUING> (36,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,788)
<EPS-PRIMARY> (2.51)
<EPS-DILUTED> (2.51)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
