<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD 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: 0-23830
CROP GROWERS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0491497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10895 LOWELL, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive offices) (zip code)
(913) 338-7800
(Registrant's telephone number, including area code)
201 CROP GROWERS DRIVE, GREAT FALLS, MONTANA, 59401
(Former name, former address and former fiscal year,
if changed since last report)
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 ________
The number of shares outstanding of the registrant's common stock on November 1,
1996 was 7,994,251 shares.
<PAGE>
CROP GROWERS CORPORATION
FORM 10-Q/A
Quarter ended September 30, 1996
INDEX
Page
-----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Income (Loss) (unaudited) for the
Three and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
ASSETS ----------- ------------
Investments:
Fixed maturities, held to maturity $ 2,309,335 $ 2,311,177
Fixed maturities, available for sale 5,860,577 5,838,391
Equity securities, available for sale 1,923,613 1,757,540
------------ ------------
Total investments 10,093,525 9,907,108
Cash and cash equivalents 4,136,565 6,980,570
Premiums receivable, net 220,058,231 73,870,654
Prepaids and other assets 12,996,836 8,556,765
Reinsurance balances receivable 109,692,949 31,779,006
Property and equipment, net 5,363,711 11,687,066
Intangible assets, net 8,304,249 9,264,662
------------ ------------
$370,646,066 $152,045,831
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums and commissions payable $ 79,635,400 $ 23,572,783
Accounts payable and other liabilities 8,577,179 8,183,036
Loss reserves 108,911,186 21,726,157
Reinsurance balances payable 108,961,418 17,787,552
Note payable to bank 7,580,000 32,245,539
Long-term debt 3,393,299 4,188,540
------------ ------------
317,058,482 107,703,607
Redeemable preferred stock 10,000,000 --
Stockholders' equity:
Common stock (par value $.01):
40,000,000 shares authorized;
8,006,251 and 8,172,581 shares issued and
outstanding at September 30, 1996 and
December 31, 1995, respectively 80,063 81,726
Paid-in capital 36,884,866 38,244,567
Retained earnings 6,427,549 5,881,973
Unrealized appreciation of fixed maturity
and equity investments, net of taxes 232,606 208,958
Unearned compensation (37,500) (75,000)
------------ ------------
Total stockholders' equity 43,587,584 44,342,224
Contingencies
------------ ------------
$370,646,066 $152,045,831
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Service fees $17,419,027 $16,492,215 $ 96,737,736 $79,069,394
Software and hardware sales 184,209 62,845 1,117,015 702,154
Premiums earned and other income 422,143 46,325 2,850,640 381,136
Investment income 363,571 669,079 1,077,882 1,383,350
----------- ----------- ------------ -----------
Total revenues 18,388,950 17,270,464 101,783,273 81,536,034
Expenses:
Agent commissions and other direct costs 6,928,570 6,938,947 62,255,866 49,887,534
Cost of software and hardware sold 166,172 82,764 878,524 100,564
Losses incurred and other expenses 31,387 (3,219,306) 2,415,879 (2,871,826)
General and administrative expenses 7,369,876 6,798,317 22,927,862 17,502,945
Restructuring and non-core expenses 4,791,404 -- 7,438,106 --
Depreciation expense 432,082 310,972 1,302,368 876,301
Amortization expense 382,413 234,026 1,216,142 663,292
Interest expense 251,077 276,121 1,381,826 791,077
----------- ----------- ------------ -----------
Total expenses 20,352,981 11,421,841 99,816,573 66,949,887
----------- ----------- ------------ -----------
Income (loss) before income taxes (1,964,031) 5,848,623 1,966,700 14,586,147
Income tax benefit (expense) 662,649 (2,416,370) (881,237) (5,764,556)
----------- ----------- ------------ -----------
Net income (loss) $(1,301,382) $ 3,432,253 $ 1,085,463 $ 8,821,591
Redeemable preferred stock dividend $ (113,889) $ -- $ (113,889) $ --
----------- ----------- ------------ -----------
Net income (loss) attributable to
common stock $(1,415,271) $ 3,432,253 $ 971,574 $ 8,821,591
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income (loss) per common share $ (.17) $ .41 $ .12 $ 1.06
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Weighted average common shares
outstanding 8,150,251 8,351,239 8,251,664 8,358,225
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 1,085,463 $ 8,821,591
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 1,302,368 876,301
Amortization 1,216,142 663,292
Gain on sale of securities - available for sale (61,736) (426,879)
Other changes:
Premiums receivable (146,187,577) (146,026,044)
Premiums and commissions payable 38,208,102 48,889,840
Accounts payable and other liabilities 376,005 6,798,349
Loss reserves 87,185,029 64,987,281
Reinsurance balances receivable (77,913,943) (53,834,108)
Reinsurance balances payable 91,173,866 58,959,982
Other 3,286,074 435,419
------------- ------------
Net cash used by operating activities (330,207) (9,854,976)
Investing activities:
Decrease in company financed premiums 17,854,515 24,780,160
Purchases of equity securities - available for sale (1,177,987) --
Purchases of fixed maturity securities -
available for sale (214,612) (10,047,852)
Proceeds from sale of equity securities -
available for sale 1,186,525 --
Proceeds from sale and maturities of fixed
maturity securities - available for sale 115,000 19,131,051
Acquisition of Dawson, net of cash received -- (5,571,421)
Capitalization of intangible assets, including
acquisitions of businesses (391,964) (6,432,132)
Proceeds from sale of property and equipment 166,975 --
Purchases of property and equipment (2,043,219) (4,713,996)
------------ -----------
Net cash provided by investing activities 15,495,233 17,145,810
Financing activities:
Net repayments of note payable to bank (24,665,539) (13,052,000)
Proceeds from issuance of long-term debt 30,903 4,120,937
Issuance of redeemable preferred stock 10,000,000 --
Redeemable preferred stock issuance costs (647,000) --
Payment of dividend on redeemable preferred stock (113,889) --
Repayments on long-term debt (826,144) (696,525)
Repurchase of common stock (1,801,762) --
Issuance of common stock 14,400 284,850
------------ -----------
Net cash used by financing activities (18,009,031) (9,342,738)
------------ -----------
Net decrease in cash and cash equivalents (2,844,005) (2,051,904)
Cash and cash equivalents, beginning of year 6,980,570 2,975,363
------------- ------------
Cash and cash equivalents, end of period $ 4,136,565 $ 923,459
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY PRESENTATION
The unaudited consolidated financial statements have been prepared by Crop
Growers Corporation (the Company), pursuant to the rules and regulations of
the Securities and Exchange Commission applicable to quarterly reports on
Form 10-Q. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. Results of
operations for interim periods are not indicative of results of operations
to be expected for the full year ending December 31, 1996. It is suggested
that these unaudited consolidated financial statements be read in
conjunction with the consolidated financial statements and related notes in
the Company's Form 10-K for the year ended December 31, 1995, as amended.
In the opinion of management, the information furnished reflects all
adjustments which are of a normal recurring nature and are necessary for a
fair presentation of the Company's financial position as of September 30,
1996 and December 31, 1995, and the results of its operations for the three
and nine months ended September 30, 1996 and 1995, and its cash flows for
the nine months ended September 30, 1996 and 1995.
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the presentation in 1996.
2. RECONCILIATION OF STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
Balance at January 1, $44,342,224 $38,668,720
Net income 1,085,463 8,821,591
Change in unrealized appreciation of
fixed maturity and equity investments,
net of taxes 23,648 371,309
Restricted stock compensation earned 37,500 37,500
Exercise of stock options 14,400 284,850
Redeemable preferred stock dividend paid (113,889) --
Issuance of common stock -- 759,500
Repurchase of common stock (1,801,762) --
----------- -----------
Balance at September 30, $43,587,584 $48,943,470
----------- -----------
----------- -----------
Included in the repurchase of common stock is the purchase of 76,000 and
68,000 shares of the Company's common stock from its former President and
Chief Executive Officer John Hemmingson and its former Executive Vice
President Gary Black, respectively. See footnote 5, "Separation
Agreements" for further discussion on the repurchase of common stock.
3. LINE OF CREDIT
The Company had two secured revolving line of credit agreements in the
amount of $35 and $15 million which matured on October 15, 1996. The $35
million facility has been extended through November 25, 1996. The $15
million facility was available solely to pay crop hail losses with
respect to policies issued, serviced or managed by or through the
company or its subsidiaries. No amounts were drawn on this line during
1996 and the Company does not anticipate needing to renew this line in
1997. The $7.6 million outstanding under the $35 million facility at
September 30, 1996 was repaid during October. Since then, the Company
has not borrowed any additional amounts under the line of credit.
Historically, the Company has utilized the line of credit during the 4th
quarter to finance premiums due to the Federal Crop Insurance Corporation
"FCIC" which have not yet been paid to the Company by the policyholder.
Under the Standard Reinsurance Agreement "SRA", the FCIC charges interest
at a rate of 1.25% per month
6
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
on overdue premiums and the insurance company, which is responsible for
payment of the policyholder's premiums to the FCIC, passes such interest
cost on to the policyholder. The Company has agreed with its contracting
insurance companies to assume the responsibility for such payments to the
FCIC and, therefore, receives interest payments made by policyholders on
deferred premiums. The Company and Fireman's Fund Insurance Company are
currently negotiating an agreement whereby Fireman's Fund would finance
the premiums and the Company would receive a service fee as its
compensation for administering the ultimate collection of premium
payments by policy holders. The Company has and is also discussing
financing these premiums using a line of credit.
The FCIC provides an expense reimbursement advance to the Company once
the premium due from a policyholder has been calculated and accepted
by the FCIC which is in advance of when the premium is paid. The Company
also uses the line of credit to finance working capital needs prior to
receiving this advance from the FCIC. The Company generally utilizes
the line of credit for this purpose from April through September. The
Company has and is currently in the process of negotiating with lenders to
secure additional working capital financing. If the Company were unable
to secure a credit facility, it would be required to seek additional
sources of financing for its working capital needs. Such sources could
include dividends from its insurance subsidiaries, issuance of debt or
equity securities, or the sale of assets.
4. LEGAL MATTERS
INDEPENDENT COUNSEL INVESTIGATION. On May 30, 1996, the Company, its
former President and Chief Executive Officer John Hemmingson and its
former Executive Vice President Gary Black were indicted by a federal
grand jury in Washington, D.C. in connection with the previously
announced investigation being conducted by the Independent Counsel
appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. (UNITED STATES OF AMERICA V. CROP GROWERS
CORPORATION, JOHN J. HEMMINGSON, AND GARY A. BLACK (CRIMINAL ACTION NO.
96-0181 (6K))) The indictment alleges conspiracy to violate federal
election laws, false statements to a government agency, falsification of
books and records, false statements to auditors, various securities law
violations and other matters. The trial is scheduled to begin on
January 23, 1997 in federal court in Washington D.C. The Company formed
a special committee (the "Special Committee"), consisting of outside
directors of the Board of Directors, which had the authority and discretion
to take any and all appropriate actions relating to the investigation to
review matters related to the investigation. In August 1996, the
Company announced that the Board of Directors would have the authority to
take actions with respect to the investigation and the special
committee's function would end. On August 6, 1996, Mr. Hemmingson, but
not the Company, was added to a previous federal indictment in New
Orleans of Henry Espy, Alvarez Ferrouillet and other entities. The
charges against Mr. Hemmingson involve money laundering and other matters
being investigated by the Independent Counsel. The trial is scheduled to
begin on December 2, 1996 in federal court in New Orleans. The Company
believes that Mr. Hemmingson intends to defend the New Orleans matter
vigorously. It is not possible to predict what adverse consequences, if
any, would flow to the Company from an outcome unfavorable to Mr.
Hemmingson in that proceeding.
The Company intends to vigorously defend the charges brought against it
by the Independent Counsel. Although the ultimate outcome of the
proceedings cannot be determined, if the outcome is unfavorable, the
Company could be subject to substantial monetary fines and other
sanctions. In addition, the charges or convictions could effect the
ability of the Company to participate in the MPCI program or could
result in state insurance regulatory issues. Any such result would
likely have a material adverse effect on the Company, its results of
operations, financial position and liquidity. No provision for any
liability that may result from events relating to the charges or
convictions have been made in the Company's Consolidated Financial
Statements.
7
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
SHAREHOLDER LITIGATION. On May 22, 1995, a complaint in an action entitled
JEANNE M. WEILEIN VS. JOHN HEMMINGSON, GARY BLACK AND CROP GROWERS
CORPORATION (CIV. NO. 95-58-GF-PGH) was filed in the United States District
Court for the District of Montana. On May 26, 1995, a complaint in an
action entitled SANDRA L. ING. VS. JOHN HEMMINGSON, GARY BLACK AND CROP
GROWERS CORPORATION (CIV. NO. 95-59-GF-PGH) was filed in the same court.
Each suit was filed by one shareholder of the Company as a class action on
behalf of all persons who purchased the Company's common stock between
February 13, 1995 and May 16, 1995. Except for the identities of the named
plaintiffs, the complaints are identical in all respects. The two suits
have been consolidated by the court into a single action entitled IN RE
CROP GROWERS SECURITIES LITIGATION (CIV. NO. 95-58-GF-PGH). The complaint
alleges, among other things, that the Company made false and misleading
statements in publicly filed or disseminated documents to inflate
artificially the price of its common stock. The complaint seeks
compensatory damages for the class. On March 20, 1996, the Magistrate Judge
issued a Report and Recommendation granting the plaintiffs' motion for
class certification and issued an Order denying defendants' motion to
dismiss. The Company has filed objections to the Magistrate's Report and
Recommendation and appealed his Order to the District Court. The District
Court currently has the Company's objections and appeal under advisement.
The parties are engaging in discovery, which to date has primarily involved
the answering of written questions and production of documents. Deposition
discovery has just commenced.
The Company considers the claims made in the complaint to be without merit
and intends to continue to vigorously defend against them. However, an
unfavorable decision in this case would likely have a material adverse
effect on the Company's results of operations, financial position or
liquidity. No provision for any liability that may result from events
relating to the charges have been made in the Company's Consolidated
Financial Statements.
5. SEPARATION AGREEMENTS
On September 23, 1996, the Company entered into separation agreements with
its former President and Chief Executive Officer John Hemmingson and its
former Executive Vice President Gary Black. These agreements terminated
the existing leave of absence agreements between the Company and each of
Messrs. Hemmingson and Black as of June 30, 1996. As part of the
arrangement, Messrs. Hemmingson and Black no longer receive any
compensation or benefits from the Company and the Company agreed to
purchase 68,000 and 64,000 shares of its common stock from Messrs.
Hemmingson and Black, respectively, at a price of $9.88 per share (based
on, among other factors, the market price of the stock on the date the
agreement in principle was reached, and the termination of compensation and
benefits to Messrs. Hemmingson and Black).
Additionally, the Company agreed to purchase up to an additional 8,000
and 4,000 shares of common stock monthly from each of Messrs. Hemmingson
and Black on the first day of September through January of 1997 at
prices related to the then bid and asked price of the stock.
Additionally, Mr. Hemmingson agreed to reduce his ownership in the
Company to less than 10% of the voting stock on an as converted basis by
June 30, 1998. As a part of the separation agreements, Messrs.
Hemmingson and Black have also agreed to enter into proxy agreements
pursuant to which an independent third party institutional proxy holder
will exercise voting authority with respect to all matters on which
shares then owned by either Messrs. Hemmingson or Black are entitled to
vote. The proxy arrangements will not be effective until receipt of
necessary insurance regulatory approvals from the state insurance
commissioners of the states in which the Company's insurance companies
are domiciled. Messrs. Hemmingson and Black will, subject to certain
conditions, be able to dispose of their shares during the period that
the proxy agreements remain in effect. Under certain circumstances,
Fireman's Fund Insurance Company has a first right of refusal on shares
sold by either Messrs. Hemmingson or Black. The proxies will remain in
place until the earlier of the acquittal of Messrs. Hemmingson and Black
under the indictments obtained by the Independent Counsel or the end of
the suspension/debarment periods currently being imposed by the Federal
Crop Insurance Corporation on Messrs. Hemmingson and Black.
8
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
At September 30, 1996, the Company had purchased 76,000 and 68,000 shares
from Messrs. Hemmingson and Black, respectively at an average price of
$9.78 per share.
6. RESTRUCTURING AND NON-CORE EXPENSES
The following is a breakdown of restructuring and non-core expenses.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Write down and losses on assets to be disposed
and elimination of non-core operations $ 1,654,000 $ 1,847,000
Other restructuring charges 761,000 761,000
----------- -----------
Total restructuring charges 2,415,000 2,608,000
----------- -----------
Shareholder litigation - defense costs 33,000 168,000
Independent counsel matters - defense costs 1,313,000 2,732,000
----------- -----------
Total defense costs 1,346,000 2,900,000
----------- -----------
Relocation costs 1,030,000 1,930,000
----------- -----------
Total restructuring and
non-core expenses $ 4,791,000 $ 7,438,000
----------- -----------
----------- -----------
</TABLE>
As part of the Company's consolidation efforts, the Company has recorded
write downs and losses on assets to be disposed consisting of real estate
and software mapping inventory. The Company has also recorded expenses
related to the elimination of certain business operations including
travel agency and employee leasing ventures. These amounts were written
off or down to net realizable value in the three months ended September
30, 1996. At September 30, 1996, the Company had $7.2 million recorded as
assets to be disposed which are included in prepaids and other assets.
The Company anticipates selling these assets over the next twelve months.
The Company continues to vigorously defend the Independent Counsel
indictment and the shareholder litigation. Those costs incurred in
defending these actions, including the advancement of costs under the
indemnification agreements with Messrs. Hemmingson and Black, have been
recorded as defense costs.
On March 28, 1996, the Company announced that it was relocating its
headquarters and main office to Overland Park, Kansas. Since then, the
Company has substantially completed relocation efforts and anticipates
completion of these efforts by the end of 1996.
7. ISSUANCE OF REDEEMABLE PREFERRED STOCK
On July 10, 1996, Fireman's Fund Insurance Company purchased 10,000 shares
of a new series of preferred stock of the Company for $10 million. The
preferred stock is convertible into common stock at a price of $13.25 per
share (equivalent to 754,717 shares), subject to certain adjustments. The
preferred stock pays a quarterly dividend (on each January 1, April 1, July
1 and October 1 commencing October 1, 1996) of 5% per annum and is entitled
to vote on all matters brought before the common stockholders on an
as-converted basis. The preferred stock is redeemable at the option of the
Company on or after July 9, 1997, at $1,000 per share plus all dividends
accumulated and unpaid on the date fixed for redemption; however, the
Company may not redeem the shares prior to July 9, 2001 unless the price of
the common stock exceeds a redemption threshold set forth in the
certificate of designations creating the preferred stock. The preferred
stock is subject to mandatory redemption on July 9, 2006. Subsequent to
the issuance of preferred stock, the Company has 10,000,000 shares
authorized (par value $.01) and 10,000 shares issued and outstanding.
9
<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.
CROP GROWERS CORPORATION
December 24, 1996 ________________________
David E. Hill
Chief Financial Officer
10
