FIRST ACCEPTANCE CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended December 31, 2005
or
|
|
|
o |
|
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: 001-12117
First Acceptance Corporation
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction
of incorporation or organization)
|
|
75-1328153
(I.R.S. Employer
Identification No.) |
|
|
|
3813 Green Hills Village Drive
Nashville, Tennessee
(Address of principal executive offices)
|
|
37215
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
N/A
(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 þ No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of February 3, 2006, there were outstanding 47,520,133 shares of the registrants common stock,
par value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2005
INDEX
i
PART
I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
June 30, |
|
|
|
(Unaudited) |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale at market value
(amortized cost: $102,358 and $73,832) |
|
$ |
101,720 |
|
|
$ |
74,840 |
|
Investment in mutual fund, at market value |
|
|
11,239 |
|
|
|
10,920 |
|
Cash and cash equivalents |
|
|
15,533 |
|
|
|
24,762 |
|
Fiduciary
funds restricted |
|
|
424 |
|
|
|
935 |
|
Premiums and fees receivable from policyholders and agents |
|
|
45,666 |
|
|
|
42,908 |
|
Reinsurance recoverables |
|
|
3,108 |
|
|
|
4,490 |
|
Deferred tax asset |
|
|
44,795 |
|
|
|
48,106 |
|
Other assets |
|
|
5,487 |
|
|
|
4,863 |
|
Property and equipment, net |
|
|
2,307 |
|
|
|
1,962 |
|
Foreclosed real estate held for sale |
|
|
885 |
|
|
|
961 |
|
Deferred acquisition costs |
|
|
4,214 |
|
|
|
3,271 |
|
Goodwill |
|
|
107,837 |
|
|
|
107,837 |
|
Identifiable intangible assets |
|
|
4,813 |
|
|
|
4,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
348,028 |
|
|
$ |
330,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
50,377 |
|
|
$ |
42,897 |
|
Unearned premiums |
|
|
52,750 |
|
|
|
47,752 |
|
Deferred fee income |
|
|
1,502 |
|
|
|
2,272 |
|
Amounts due to insurance companies |
|
|
424 |
|
|
|
935 |
|
Other liabilities |
|
|
7,959 |
|
|
|
8,537 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
113,012 |
|
|
|
102,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
47,470 and 47,455 shares issued and outstanding |
|
|
475 |
|
|
|
475 |
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
458,372 |
|
|
|
457,905 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on investments |
|
|
(638 |
) |
|
|
655 |
|
Accumulated deficit |
|
|
(223,193 |
) |
|
|
(230,706 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
235,016 |
|
|
|
228,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
348,028 |
|
|
$ |
330,722 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
44,816 |
|
|
$ |
31,071 |
|
|
$ |
87,570 |
|
|
$ |
52,756 |
|
Commissions and fees |
|
|
6,624 |
|
|
|
6,321 |
|
|
|
13,029 |
|
|
|
12,993 |
|
Ceding commissions from reinsurer |
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
3,603 |
|
Gains on sales of foreclosed real estate |
|
|
821 |
|
|
|
755 |
|
|
|
821 |
|
|
|
755 |
|
Investment income |
|
|
1,216 |
|
|
|
741 |
|
|
|
2,315 |
|
|
|
1,350 |
|
Other gains |
|
|
4 |
|
|
|
171 |
|
|
|
4 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
53,481 |
|
|
|
40,725 |
|
|
|
103,739 |
|
|
|
71,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
30,438 |
|
|
|
20,317 |
|
|
|
58,929 |
|
|
|
33,747 |
|
Insurance operating expenses |
|
|
16,505 |
|
|
|
11,533 |
|
|
|
31,728 |
|
|
|
21,939 |
|
Other operating expenses |
|
|
609 |
|
|
|
899 |
|
|
|
1,222 |
|
|
|
1,267 |
|
Stock-based compensation |
|
|
262 |
|
|
|
91 |
|
|
|
346 |
|
|
|
152 |
|
Depreciation |
|
|
201 |
|
|
|
298 |
|
|
|
379 |
|
|
|
587 |
|
Amortization of identifiable intangible assets |
|
|
18 |
|
|
|
190 |
|
|
|
54 |
|
|
|
570 |
|
Interest expense |
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
48,033 |
|
|
|
33,397 |
|
|
|
92,658 |
|
|
|
58,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,448 |
|
|
|
7,328 |
|
|
|
11,081 |
|
|
|
13,227 |
|
Income tax expense |
|
|
1,648 |
|
|
|
2,641 |
|
|
|
3,568 |
|
|
|
4,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,800 |
|
|
$ |
4,687 |
|
|
$ |
7,513 |
|
|
$ |
8,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares |
|
|
47,457 |
|
|
|
46,686 |
|
|
|
47,456 |
|
|
|
46,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares |
|
|
49,490 |
|
|
|
48,519 |
|
|
|
49,489 |
|
|
|
48,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
Six Months Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
Treasury |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income/(loss) |
|
|
deficit |
|
|
stock |
|
|
equity |
|
Balances at July 1, 2004 |
|
|
46,535 |
|
|
$ |
465 |
|
|
$ |
450,658 |
|
|
$ |
(35 |
) |
|
$ |
(256,862 |
) |
|
$ |
|
|
|
$ |
194,226 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,551 |
|
|
|
|
|
|
|
8,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
change in unrealized
appreciation /(depreciation) on
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(639 |
) |
|
|
(639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
246 |
|
|
|
2 |
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004 |
|
|
46,781 |
|
|
$ |
467 |
|
|
$ |
451,528 |
|
|
$ |
290 |
|
|
$ |
(248,311 |
) |
|
$ |
(639 |
) |
|
$ |
203,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
Treasury |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
stock |
|
|
equity |
|
Balances at July 1, 2005 |
|
|
47,455 |
|
|
$ |
475 |
|
|
$ |
457,905 |
|
|
$ |
655 |
|
|
$ |
(230,706 |
) |
|
$ |
|
|
|
$ |
228,329 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,513 |
|
|
|
|
|
|
|
7,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
change in unrealized
appreciation
(depreciation) on
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,293 |
) |
|
|
|
|
|
|
|
|
|
|
(1,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
2 |
|
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under
Employee Stock Purchase
Plan |
|
|
13 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
47,470 |
|
|
$ |
475 |
|
|
$ |
458,372 |
|
|
$ |
(638 |
) |
|
$ |
(223,193 |
) |
|
$ |
|
|
|
$ |
235,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,513 |
|
|
$ |
8,551 |
|
Adjustments to reconcile net income to cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
433 |
|
|
|
1,157 |
|
Stock-based compensation |
|
|
346 |
|
|
|
132 |
|
Amortization of premium on fixed maturities |
|
|
287 |
|
|
|
167 |
|
Deferred income taxes |
|
|
3,664 |
|
|
|
4,202 |
|
Gains on sales of foreclosed real estate |
|
|
(821 |
) |
|
|
(755 |
) |
Other gains |
|
|
(4 |
) |
|
|
(171 |
) |
Change in: |
|
|
|
|
|
|
|
|
Fiduciary
funds restricted |
|
|
511 |
|
|
|
21 |
|
Premiums and fees receivable from policyholders and agents |
|
|
(2,758 |
) |
|
|
1,242 |
|
Reinsurance recoverables |
|
|
1,382 |
|
|
|
1,449 |
|
Prepaid reinsurance premiums |
|
|
|
|
|
|
12,384 |
|
Other assets |
|
|
(624 |
) |
|
|
(63 |
) |
Deferred acquisition costs |
|
|
(943 |
) |
|
|
(2,514 |
) |
Loss and loss adjustment expense reserves |
|
|
7,480 |
|
|
|
4,809 |
|
Unearned premiums |
|
|
4,998 |
|
|
|
1,097 |
|
Deferred fee income |
|
|
(770 |
) |
|
|
(246 |
) |
Amounts due to reinsurers |
|
|
|
|
|
|
(11,899 |
) |
Amounts due to insurance companies |
|
|
(511 |
) |
|
|
(21 |
) |
Other liabilities |
|
|
(578 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,605 |
|
|
|
19,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of foreclosed real estate |
|
|
897 |
|
|
|
1,203 |
|
Addition to foreclosed real estate |
|
|
|
|
|
|
(300 |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
625 |
|
Acquisitions of property and equipment |
|
|
(724 |
) |
|
|
(399 |
) |
Purchases of fixed maturities, available-for-sale |
|
|
(32,394 |
) |
|
|
(18,608 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
|
|
3,046 |
|
|
|
1,344 |
|
Sales of fixed maturities, available for sale |
|
|
539 |
|
|
|
|
|
Purchases of investment in mutual fund |
|
|
(319 |
) |
|
|
(10,393 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(28,955 |
) |
|
|
(26,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
121 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(639 |
) |
Exercise of stock options |
|
|
|
|
|
|
740 |
|
Payments on borrowings |
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
121 |
|
|
|
(399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(9,229 |
) |
|
|
(7,636 |
) |
Cash and cash equivalents, beginning of period |
|
|
24,762 |
|
|
|
38,352 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
15,533 |
|
|
$ |
30,716 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)
1. General
First Acceptance Corporation (the Company) is a retailer, servicer and underwriter of
non-standard personal automobile insurance based in Nashville, Tennessee. As of December 31, 2005,
the Company wrote non-standard personal automobile insurance in 12 states, principally Georgia,
Alabama and Tennessee. The Company is licensed as an insurer in 12 additional states, and writes
business through two insurance company subsidiaries, First Acceptance Insurance Company, Inc.
(formerly known as USAuto Insurance Company, Inc.) and Village Insurance Company, Inc. In Alabama
and Texas, the Company has assumed risk through reinsurance contracts with unaffiliated insurance
companies.
2. Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) have been
condensed or omitted pursuant to such rules and regulations. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. Operating results for
the six months ended December 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2006. These unaudited consolidated financial statements and
the notes thereto should be read in conjunction with the Companys audited financial statements and
accompanying notes included in the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2005.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities. It also
requires disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
Certain amounts in the consolidated financial statements for the prior period have been
reclassified to conform with the current period presentation.
3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
3,800 |
|
|
$ |
4,687 |
|
|
$ |
7,513 |
|
|
$ |
8,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,457 |
|
|
|
46,686 |
|
|
|
47,456 |
|
|
|
46,672 |
|
Effect of
dilutive securities options |
|
|
2,033 |
|
|
|
1,833 |
|
|
|
2,033 |
|
|
|
1,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
49,490 |
|
|
|
48,519 |
|
|
|
49,489 |
|
|
|
48,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
4. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised),
Share Based Payment, (SFAS No. 123(R).) SFAS No. 123(R), which replaces SFAS No. 123,
Accounting for Stock-Based Compensation, supersedes Accounting Procedures Board Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values. SFAS No. 123(R)
is effective for public companies at the beginning of the first annual period beginning after June
15, 2005. The Company has already adopted the provisions of SFAS No. 148 Accounting for
Stock-Based Compensation Transition and Disclosure and uses the fair value method for expensing
stock-based compensation. Therefore, the Companys adoption of SFAS No. 123(R) as of July 1, 2005
had no impact on the Companys consolidated financial position, results of operations, cash flows
or net income per share.
The Company has issued stock options to employees under its 2002 Long Term Incentive Plan (the
Plan). There were no options granted, exercised or forfeited during the six months ended December
31, 2005. Shares remaining available for issuance under the Plan were 3,982 at December 31, 2005.
Options outstanding as of December 31, 2005 were as follows:
Options to purchase 3,736 shares at $3.00 per share issued to former employees that are all
fully vested and exercisable. These options expire on July 9, 2012 (3,726 shares) and on
June 30, 2013 (10 shares).
Options to purchase 200 shares at $6.64 per share issued to USAuto Holdings, Inc. (USAuto)
executives as a closing condition to the USAuto acquisition that vest monthly over a
five-year period (67 exercisable at December 31, 2005). These options expire on April 30,
2014.
Options to purchase 150 shares at $8.13 per share issued to employees that vest equally in
five annual installments (30 exercisable at December 31, 2005). These options expire on
October 27, 2014.
Options to purchase 50 shares at $8.13 per share issued to a former employee that are fully
vested and exercisable. These options were fully vested during the three months ended
December 31, 2005 upon resignation of the employee in accordance with an employment
agreement and now expire on November 30, 2006.
Compensation expense related to stock options is calculated under the fair value method and is
recorded on a straight-line basis over the vesting period. Fair value of the options was estimated
at the grant dates using the Black-Sholes option pricing model, which includes the following
assumptions: risk-free interest rate based on the ten-year U.S. Treasury Note rate; expected option
life of ten years; expected volatility of 36% to 38%; and no expected dividends. Compensation
expense related to stock options was $308 for the six months ended December 31, 2005 which included
$142 related to the full vesting of existing options upon the resignation of a former employee.
Total unamortized compensation cost related to non-vested awards at December 31, 2005 was $1,036,
of which $492 will be amortized through April 2009 and $544 will be amortized through October 2009.
Stock-based compensation for the six months ended December 31, 2005 also includes $25 related
to shares issued to directors that were recorded based on the closing market price on the date of
issuance and $13 related to shares issued under the Companys Employee Stock Purchase Plan.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
5. Segment Information
The Company operates in two business segments with its primary focus in the selling, servicing
and underwriting of non-standard personal automobile insurance. The real estate and corporate
segment consists of activities related to the disposition of foreclosed real estate held for sale,
interest expense associated with all debt and other general corporate overhead expenses. Total
assets by segment are those assets used in the operation of each segment.
The following tables present selected financial data by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
and |
|
|
Consolidated |
|
|
|
Insurance |
|
|
Corporate |
|
|
Total |
|
Three Months Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
44,816 |
|
|
$ |
|
|
|
$ |
44,816 |
|
Commissions and fees |
|
|
6,624 |
|
|
|
|
|
|
|
6,624 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
821 |
|
|
|
821 |
|
Investment income |
|
|
1,104 |
|
|
|
112 |
|
|
|
1,216 |
|
Other gains |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
52,548 |
|
|
|
933 |
|
|
|
53,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
30,438 |
|
|
|
|
|
|
|
30,438 |
|
Operating expenses |
|
|
16,505 |
|
|
|
609 |
|
|
|
17,114 |
|
Stock-based compensation |
|
|
|
|
|
|
262 |
|
|
|
262 |
|
Depreciation and amortization |
|
|
219 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
47,162 |
|
|
|
871 |
|
|
|
48,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,386 |
|
|
$ |
62 |
|
|
$ |
5,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
87,570 |
|
|
$ |
|
|
|
$ |
87,570 |
|
Commissions and fees |
|
|
13,029 |
|
|
|
|
|
|
|
13,029 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
821 |
|
|
|
821 |
|
Investment income |
|
|
1,991 |
|
|
|
324 |
|
|
|
2,315 |
|
Other gains |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
102,594 |
|
|
|
1,145 |
|
|
|
103,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
58,929 |
|
|
|
|
|
|
|
58,929 |
|
Operating expenses |
|
|
31,728 |
|
|
|
1,222 |
|
|
|
32,950 |
|
Stock-based compensation |
|
|
|
|
|
|
346 |
|
|
|
346 |
|
Depreciation and amortization |
|
|
433 |
|
|
|
|
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
91,090 |
|
|
|
1,568 |
|
|
|
92,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
11,504 |
|
|
$ |
(423 |
) |
|
$ |
11,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31, 2005 |
|
$ |
186,671 |
|
|
$ |
161,357 |
|
|
$ |
348,028 |
|
|
|
|
|
|
|
|
|
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
and |
|
|
Consolidated |
|
|
|
Insurance |
|
|
Corporate |
|
|
Total |
|
Three Months Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
31,071 |
|
|
$ |
|
|
|
$ |
31,071 |
|
Commissions and fees |
|
|
6,321 |
|
|
|
|
|
|
|
6,321 |
|
Ceding commissions from reinsurer |
|
|
1,666 |
|
|
|
|
|
|
|
1,666 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
755 |
|
|
|
755 |
|
Investment income |
|
|
500 |
|
|
|
241 |
|
|
|
741 |
|
Other |
|
|
171 |
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
39,729 |
|
|
|
996 |
|
|
|
40,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
20,317 |
|
|
|
|
|
|
|
20,317 |
|
Operating expenses |
|
|
11,533 |
|
|
|
899 |
|
|
|
12,432 |
|
Stock-based compensation |
|
|
|
|
|
|
91 |
|
|
|
91 |
|
Depreciation and amortization |
|
|
488 |
|
|
|
|
|
|
|
488 |
|
Interest expense |
|
|
|
|
|
|
69 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
32,338 |
|
|
|
1,059 |
|
|
|
33,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
7,391 |
|
|
$ |
(63 |
) |
|
$ |
7,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
52,756 |
|
|
$ |
|
|
|
$ |
52,756 |
|
Commissions and fees |
|
|
12,993 |
|
|
|
|
|
|
|
12,993 |
|
Ceding commissions from reinsurer |
|
|
3,603 |
|
|
|
|
|
|
|
3,603 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
755 |
|
|
|
755 |
|
Investment income |
|
|
855 |
|
|
|
495 |
|
|
|
1,350 |
|
Other |
|
|
171 |
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
70,378 |
|
|
|
1,250 |
|
|
|
71,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
33,747 |
|
|
|
|
|
|
|
33,747 |
|
Operating expenses |
|
|
21,939 |
|
|
|
1,267 |
|
|
|
23,206 |
|
Stock-based compensation |
|
|
|
|
|
|
152 |
|
|
|
152 |
|
Depreciation and amortization |
|
|
1,157 |
|
|
|
|
|
|
|
1,157 |
|
Interest expense |
|
|
|
|
|
|
139 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
56,843 |
|
|
|
1,558 |
|
|
|
58,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
13,535 |
|
|
$ |
(308 |
) |
|
$ |
13,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31, 2004 |
|
$ |
129,926 |
|
|
$ |
164,259 |
|
|
$ |
294,185 |
|
|
|
|
|
|
|
|
|
|
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
6. Subsequent Events
A. Business Acquired
On January 12, 2006, the Company acquired certain assets (principally the customer expiration
rights and the lease rights to 73 retail locations) of two non-standard automobile insurance
agencies under common control in Chicago, Illinois for $30,000 in cash. The purchase price was
financed through a newly executed credit agreement (see note 6.B.). Up to $4,000 in additional
consideration may also be paid to the agencies if certain financial targets through January 31,
2007 are reached. As a result of this acquisition, the Company is now writing business through
First Acceptance Insurance Company, Inc. from these locations. The Company will also receive a
monthly fee from the agencies through December 31, 2006 as compensation for servicing the run-off
of business previously written by the agencies through other insurance companies.
B. Note Payable to Banks
In connection with the acquisition of the non-standard automobile insurance agencies, on
January 12, 2006, the Company concurrently entered into, and borrowed under, a credit agreement
with two banks consisting of a $5,000 revolving facility and a $25,000 term loan facility, both
maturing on June 30, 2010. Both facilities bear interest at LIBOR plus 175 basis points per annum.
The Company entered into an interest rate swap agreement on January 17, 2006 that effectively
fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. The term loan
facility is due in equal quarterly installments of $1,388, plus interest, beginning April 30, 2006
and ending on April 30, 2010 with a final payment of $1,404 due on June 30, 2010. Both facilities
are secured by the common stock and certain assets of selected subsidiaries. The credit agreement
contains certain financial covenants commencing as of, and for the fiscal quarter ending March 31,
2006.
9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report.
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile
insurance, based in Nashville, Tennessee. Non-standard personal automobile insurance is made
available to individuals who are categorized as non-standard because of their inability or
unwillingness to obtain standard insurance coverage due to various factors, including payment
history, payment preference, failure in the past to maintain continuous insurance coverage, driving
record and/or vehicle type. In most instances, our customers are required by law to buy a minimum
amount of automobile insurance.
Prior to our April 30, 2004 acquisition of USAuto Holdings, Inc. (USAuto), we were engaged
in pursuing opportunities to acquire one or more operating companies. In addition, we marketed for
sale a portfolio of foreclosed real estate. We have entered into a
contract to sell three parcels of real estate, which we expect to
close during February 2006, for estimated net
proceeds of $3.6 million, which would result in a gain of $2.8 million. We will continue to market the
remaining real estate held (consisting of two tracts of land in San Antonio, Texas) and will
attempt to sell it on a basis that provides us with the best economic return. We do not anticipate
making any new investments in real estate.
As of February 1, 2006, we leased 457 retail locations, staffed by employee-agents, including
73 locations in Chicago, Illinois acquired on January 12, 2006. Our employee-agents exclusively
sell insurance products either underwritten or serviced by us. As of December 31, 2005, we wrote
non-standard personal automobile insurance in 12 states. We are currently licensed as an insurer
in 12 additional states.
The following table shows the changes in the number of our retail locations for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Beginning of period |
|
|
348 |
|
|
|
154 |
|
|
|
309 |
|
|
|
138 |
|
Opened |
|
|
25 |
|
|
|
24 |
|
|
|
65 |
|
|
|
40 |
|
Closed |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
373 |
|
|
|
178 |
|
|
|
373 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the breakdown of our retail locations by state for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Locations During |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the Three Months Ended |
|
|
As of December 31, |
|
As of September 30, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Alabama |
|
|
25 |
|
|
|
23 |
|
|
|
25 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
Florida |
|
|
37 |
|
|
|
7 |
|
|
|
36 |
|
|
|
1 |
|
|
|
1 |
|
|
|
6 |
|
Georgia |
|
|
63 |
|
|
|
61 |
|
|
|
63 |
|
|
|
57 |
|
|
|
|
|
|
|
4 |
|
Illinois |
|
|
15 |
|
|
|
1 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Indiana |
|
|
27 |
|
|
|
15 |
|
|
|
25 |
|
|
|
8 |
|
|
|
2 |
|
|
|
7 |
|
Mississippi |
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
1 |
|
Missouri |
|
|
21 |
|
|
|
14 |
|
|
|
21 |
|
|
|
11 |
|
|
|
|
|
|
|
3 |
|
Ohio |
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
|
|
28 |
|
|
|
|
|
|
|
1 |
|
Pennsylvania |
|
|
21 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
South Carolina |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Tennessee |
|
|
20 |
|
|
|
19 |
|
|
|
20 |
|
|
|
18 |
|
|
|
|
|
|
|
1 |
|
Texas |
|
|
96 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
373 |
|
|
|
178 |
|
|
|
348 |
|
|
|
154 |
|
|
|
25 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Locations During |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the Six Months Ended |
|
|
As of December 31, |
|
As of June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Alabama |
|
|
25 |
|
|
|
23 |
|
|
|
25 |
|
|
|
21 |
|
|
|
|
|
|
|
2 |
|
Florida |
|
|
37 |
|
|
|
7 |
|
|
|
24 |
|
|
|
|
|
|
|
13 |
|
|
|
7 |
|
Georgia |
|
|
63 |
|
|
|
61 |
|
|
|
63 |
|
|
|
55 |
|
|
|
|
|
|
|
6 |
|
Illinois |
|
|
15 |
|
|
|
1 |
|
|
|
12 |
|
|
|
|
|
|
|
3 |
|
|
|
1 |
|
Indiana |
|
|
27 |
|
|
|
15 |
|
|
|
22 |
|
|
|
4 |
|
|
|
5 |
|
|
|
11 |
|
Mississippi |
|
|
8 |
|
|
|
9 |
|
|
|
9 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
3 |
|
Missouri |
|
|
21 |
|
|
|
14 |
|
|
|
18 |
|
|
|
11 |
|
|
|
3 |
|
|
|
3 |
|
Ohio |
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
|
|
25 |
|
|
|
|
|
|
|
4 |
|
Pennsylvania |
|
|
21 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
South Carolina |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Tennessee |
|
|
20 |
|
|
|
19 |
|
|
|
20 |
|
|
|
16 |
|
|
|
|
|
|
|
3 |
|
Texas |
|
|
96 |
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
373 |
|
|
|
178 |
|
|
|
309 |
|
|
|
138 |
|
|
|
64 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of foreclosed real estate held for sale, interest expense associated with debt, and
other general corporate overhead expenses. The following tables show the results of operations for
our insurance operations and real estate and corporate segments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
Insurance Operations |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
(in thousands)
|
Revenues: |
|
|
Premiums earned |
|
$ |
44,816 |
|
|
$ |
31,071 |
|
|
$ |
87,570 |
|
|
$ |
52,756 |
|
Commissions and fees |
|
|
6,624 |
|
|
|
6,321 |
|
|
|
13,029 |
|
|
|
12,993 |
|
Ceding commissions from reinsurer |
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
3,603 |
|
Investment income |
|
|
1,104 |
|
|
|
500 |
|
|
|
1,991 |
|
|
|
855 |
|
Other gains |
|
|
4 |
|
|
|
171 |
|
|
|
4 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
52,548 |
|
|
|
39,729 |
|
|
|
102,594 |
|
|
|
70,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustments expenses |
|
|
30,438 |
|
|
|
20,317 |
|
|
|
58,929 |
|
|
|
33,747 |
|
Operating expenses |
|
|
16,505 |
|
|
|
11,533 |
|
|
|
31,728 |
|
|
|
21,939 |
|
Depreciation and amortization |
|
|
219 |
|
|
|
488 |
|
|
|
433 |
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
47,162 |
|
|
|
32,338 |
|
|
|
91,090 |
|
|
|
56,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,386 |
|
|
$ |
7,391 |
|
|
$ |
11,504 |
|
|
$ |
13,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
Real Estate and Corporate |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands)
|
Revenues: |
|
|
Gains on sales of foreclosed real estate |
|
$ |
821 |
|
|
$ |
755 |
|
|
$ |
821 |
|
|
$ |
755 |
|
Investment income |
|
|
112 |
|
|
|
241 |
|
|
|
324 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
933 |
|
|
|
996 |
|
|
|
1,145 |
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
609 |
|
|
|
899 |
|
|
|
1,222 |
|
|
|
1,267 |
|
Stock-based compensation |
|
|
262 |
|
|
|
91 |
|
|
|
346 |
|
|
|
152 |
|
Interest expense |
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
871 |
|
|
|
1,059 |
|
|
|
1,568 |
|
|
|
1,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
62 |
|
|
$ |
(63 |
) |
|
$ |
(423 |
) |
|
$ |
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Our insurance operations derive revenues from selling, servicing and underwriting
non-standard personal automobile insurance policies in 12 states. We conduct our underwriting
operations through two insurance company subsidiaries, First Acceptance Insurance Company, Inc.
(formerly known as USAuto Insurance Company, Inc.) and Village Auto Insurance Company, Inc. Our
insurance operations revenues are primarily derived from:
|
|
|
premiums earned (which includes policy and renewal fees) from (i) sales of
policies issued by our insurance company subsidiaries, net of the portion of those
premiums that have been ceded to reinsurers, and (ii) the sales of policies issued
by our managing general agency (MGA) subsidiaries that are assumed 100% by our
insurance company subsidiaries through quota-share reinsurance; |
|
|
|
|
fee income, which includes installment billing fees on policies written as well
as fees for other ancillary services (principally a motor club product); |
|
|
|
|
commission income paid by our reinsurer to us for ceded premiums (ceasing with
the September 1, 2004 non-renewal of our quota-share reinsurance); and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents gross premiums earned by state and includes policies written by
the insurance company subsidiaries and policies issued by our MGA subsidiaries on behalf of other
insurance companies that are assumed by one of the insurance company subsidiaries through
quota-share reinsurance. Prior to May 2005, we were not licensed to write insurance in Alabama and
for the six months ended December 31, 2005 and 2004 we assumed 100% and 50%, respectively, of the
business written in Alabama through an MGA subsidiary. Since May 2005, all new Alabama business is
written by one of the insurance company subsidiaries on a direct basis. Although we are licensed
in Texas, we currently write most of our business in Texas through the Texas county mutual
insurance company system. Therefore, most of our business in Texas is written through an MGA
subsidiary and is assumed 100% by one of the insurance company subsidiaries. For the months of
July and August of 2004, we ceded 50% of our gross premiums earned to a reinsurer under a
quota-share reinsurance agreement that was non-renewed effective September 1, 2004. Premiums ceded
after September 1, 2004 reflect only the cost of catastrophic reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Gross premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
16,756 |
|
|
$ |
17,316 |
|
|
$ |
34,072 |
|
|
$ |
34,221 |
|
Alabama |
|
|
7,001 |
|
|
|
6,278 |
|
|
|
13,931 |
|
|
|
12,587 |
|
Tennessee |
|
|
5,880 |
|
|
|
6,406 |
|
|
|
12,211 |
|
|
|
12,807 |
|
Florida |
|
|
4,624 |
|
|
|
1 |
|
|
|
7,213 |
|
|
|
1 |
|
Ohio |
|
|
3,271 |
|
|
|
2,417 |
|
|
|
6,571 |
|
|
|
4,434 |
|
Texas |
|
|
2,843 |
|
|
|
|
|
|
|
5,302 |
|
|
|
|
|
Indiana |
|
|
1,367 |
|
|
|
335 |
|
|
|
2,528 |
|
|
|
468 |
|
Mississippi |
|
|
1,267 |
|
|
|
1,013 |
|
|
|
2,478 |
|
|
|
1,974 |
|
Missouri |
|
|
1,223 |
|
|
|
940 |
|
|
|
2,457 |
|
|
|
1,830 |
|
Pennsylvania |
|
|
318 |
|
|
|
|
|
|
|
443 |
|
|
|
|
|
Illinois |
|
|
256 |
|
|
|
10 |
|
|
|
378 |
|
|
|
10 |
|
South Carolina |
|
|
34 |
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums earned |
|
|
44,840 |
|
|
|
34,716 |
|
|
|
87,618 |
|
|
|
68,332 |
|
Premiums ceded |
|
|
(24 |
) |
|
|
(39 |
) |
|
|
(48 |
) |
|
|
(8,379 |
) |
Premiums not assumed |
|
|
|
|
|
|
(3,606 |
) |
|
|
|
|
|
|
(7,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned |
|
$ |
44,816 |
|
|
$ |
31,071 |
|
|
$ |
87,570 |
|
|
$ |
52,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table presents the change in the total number of policies in force for the
insurance operations for the periods presented. Policies in force increase as a result of new
policies issued and decrease as a result of policies that cancel or expire and are not renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Policies in
force beginning of period |
|
|
125,799 |
|
|
|
92,885 |
|
|
|
119,422 |
|
|
|
91,385 |
|
Net increase during period |
|
|
7,062 |
|
|
|
1,388 |
|
|
|
13,439 |
|
|
|
2,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in
force end of period |
|
|
132,861 |
|
|
|
94,273 |
|
|
|
132,861 |
|
|
|
94,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance companies present a combined ratio as a measure of their overall underwriting
profitability. The components of the combined ratio are as follows:
Loss Ratio Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment
expenses incurred to premiums earned and is a basic element of underwriting profitability. We
calculate this ratio based on all direct and assumed premiums earned, net of ceded reinsurance.
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of operating expenses
to premiums earned. This is a measurement that illustrates relative management efficiency in
administering our operations. We calculate this ratio on a net basis as a percentage of net
premiums earned. Insurance operating expenses are reduced by fee income from insureds and ceding
commissions received from our quota-share reinsurer as compensation for the costs we incurred in
servicing this business on their behalf. (Ratios for fiscal 2005 exclude expenses and fee income
related to incidental MGA operations.)
Combined Ratio Combined ratio is the sum of the loss ratio and the expense ratio. If the
combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient
investment income. The following table presents the combined ratios for the insurance operations
for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Loss and loss adjustment expense |
|
|
67.9 |
% |
|
|
65.4 |
% |
|
|
67.3 |
% |
|
|
64.0 |
% |
Expense |
|
|
22.0 |
% |
|
|
14.2 |
% |
|
|
21.4 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.9 |
% |
|
|
79.6 |
% |
|
|
88.7 |
% |
|
|
78.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The invested assets of the insurance operations are generally highly liquid and consist
substantially of readily marketable, investment grade, municipal and corporate bonds and
collateralized mortgage obligations. At December 31, 2005, approximately 20% of our fixed
maturities portfolio was tax-exempt. All cash equivalents are taxable. Certain securities held
are issued by political subdivisions in the states of Georgia and Tennessee, as these type of
investments enable our insurance company subsidiaries to obtain premium tax credits. Investment
income is composed primarily of interest earned on these securities, net of related investment
expenses. Realized gains and losses on our investment portfolio may occur from time to time as
changes are made to our holdings based upon changes in interest rates and changes in the credit
quality of securities held.
The non-standard personal automobile insurance industry is somewhat cyclical in nature. In the
past, the industry has been characterized by periods of price competition and excess capacity
followed by periods of high premium rates and shortages of underwriting capacity. If new
competitors enter this market, existing competitors may attempt to increase market share by
lowering rates. Such conditions could lead to reduced prices, which would have a negative impact on
our revenues and profitability. However, we believe that between 2002 and 2004, the underwriting
results in the personal automobile insurance industry improved as a result of favorable pricing and
competitive conditions that allowed for broad increases in rate levels by insurers. Rates and
premium levels for non-standard automobile insurance stabilized or slightly increased during 2005.
13
Three and Six Months Ended December 31, 2005 Compared With Three and Six Months Ended December 31,
2004
Consolidated Results
Net income for the three months ended December 31, 2005 was $3.8 million, compared to $4.7
million for the three months ended December 31, 2004. Net income per share was $0.08 on both a
basic and diluted basis for the three months ended December 31, 2005 and $0.10 on both a basic and
diluted basis for the three months ended December 31, 2004. Total revenues for the three months
ended December 31, 2005 increased 31% from $40.7 million to $53.5 million, over the same period
last year.
Net income for the six months ended December 31, 2005 was $7.5 million, compared to $8.6
million for the six months ended December 31, 2004. Net income per share was $0.16 on a basic basis
and $0.15 on a diluted basis for the six months ended December 31, 2005 and $0.18 on both a basic
and diluted basis for the six months ended December 31, 2004. Total revenues for the six months
ended December 31, 2005 increased 45% from $71.6 million to $103.7 million, over the same period
last year.
The weighted average diluted shares outstanding for both periods increased from 48.5 million
to 49.5 million as a result of the issuance of 750,000 contingent shares pursuant to the USAuto
acquisition and from the increase in the dilutive effect of stock options, primarily as a result of
the increase in our average stock price when applying the Treasury Stock method.
Net income for the three and six months ended both December 31, 2005 and 2004 included gains
on sales of foreclosed real estate held for sale of $0.01 per share on a fully-diluted basis.
Insurance Operations
Income before income taxes was $5.4 million for the three months ended December 31, 2005
compared to $7.3 million for the three months ended December 31, 2004. Income before income taxes
was $11.1 million for the six months ended December 31, 2005 compared to $13.2 million for the six
months ended December 31, 2004.
Total gross premiums earned (before the effects of reinsurance) increased by $10.1 million, or
29%, to $44.8 million for the three months ended December 31, 2005, from $34.7 million for the
three months ended December 31, 2004. Such increases are due to the development of new stores in
existing states as well as our expansion into new states. Of this increase, $7.5 million was
attributable to the expansion of our business into Florida and Texas. Overall, the number of
insured policies in force at December 31, 2005 increased 41% over the same date in 2004 from 94,273
to 132,861. During the three months ended December 31, 2005, the number of retail locations (or
stores) increased by 25, from 348 stores at September 30, 2005 to 373 stores at December 31,
2005, including stores in the pre-opening stage.
For the six months ended December 31, 2005, total gross premiums earned (before the effects of
reinsurance) increased by $19.3 million, or 28%, to $87.6 million from $68.3 million for the six
months ended December 31, 2004. Of this increase, $12.5 million was attributable to the expansion
of our business into Florida and Texas.
Net premiums earned increased 44% and 66%, respectively, for the three and six-month periods
ended December 31, 2005, over the same periods last year. In addition to the increase in total
gross premiums earned, net premiums earned also increased as a result of two changes involving
reinsurance. Net premiums earned increased during both periods as a result of the change in the
assumed reinsurance percentage for our Alabama business (written through other insurance companies)
from 50% to 100% effective February 1, 2005. For the three and six-month periods ended December 31,
2004, $3.6 million and $7.1 million, respectively, in premiums earned in Alabama were not assumed
by us. We are now licensed in Alabama and, starting in May 2005, began writing all new policies in
Alabama on a direct basis. As a result, in Alabama, we no longer incur the contractual costs
associated with writing business through another insurance company. Net premiums earned for the six
months ended December 31, 2005 also increased as the result of eliminating our 50% quota share
reinsurance effective September 1, 2004. This reinsurance was in effect for two of the six months
ended December 31, 2004 and resulted in an $8.4 million reduction in net premiums earned, which we
ceded to the reinsurer.
14
As a result of not renewing the quota share reinsurance and increasing the assumed reinsurance
percentage for our Alabama business, commissions and fees declined as a percentage of net premiums
earned during the three and six-month periods ended December 31, 2005 compared to the prior year
periods and ceding commissions from our reinsurer were eliminated.
Investment income increased primarily as a result of the increase in invested assets as a
result of our growth. The weighted average investment yield for our fixed maturities portfolio was
4.65% at December 31, 2005 with a duration of 3.63 years. The yield for the comparable Lehman
Brothers indices at December 31, 2005 was 4.60%.
The loss and loss adjustment expense ratio increased to 67.9% for the three months ended
December 31, 2005 from 65.4% for the three months ended December 31, 2004, and to 67.3% for the six
months ended December 31, 2005 from 64.0% for the six months ended December 31, 2004. We did not
experience any significant development for losses occurring in prior accident periods. The loss
ratio for the three and six months ended December 31, 2005 increased primarily as a result of
increasing overall liability loss ratios, particularly in Georgia. Losses from hurricanes during
the six months ended December 31, 2005 were approximately $0.3 million and resulted in a 0.3% point
increase in the loss ratio.
Insurance operating expenses increased 43% to $16.5 million for the three months ended
December 31, 2005 from $11.5 million for the three months ended December 31, 2004, and increased
45% to $31.7 million for the six months ended December 31, 2005 from $21.9 million for the six
months ended December 31, 2004. These increases are primarily due to the addition of new retail
locations and expenses (advertising, employee-agent compensation, rent and premium taxes) that vary
along with the increase in net premiums earned.
The expense ratio increased from 14.2% for the three months ended December 31, 2004 to 22.0%
for the three months ended December 31, 2005, and from 14.0% for the six months ended December 31,
2004 to 21.4% for the six months ended December 31, 2005. The expense ratios for both the three
and six-month periods ended December 31, 2004 were positively impacted by an additional ceding
commission of $1.7 million, which was recorded based upon the favorable loss experience during the
last year of the quota share reinsurance which was non-renewed effective September 1, 2004.
Operating expenses incurred for new retail locations also contributed to these increases in the
expense ratio. In addition, the expense ratio increased as a result of declining fee income from
ancillary products (which reduces expenses in calculating the expense ratio), and for the six-month
period comparison, the fact that this fee income was spread over a larger base of net premiums
earned as a result of not renewing the quota share reinsurance.
Overall, the combined ratio increased to 89.9% for the three months ended December 31, 2005
from 79.6% for the three months ended December 31, 2004, and to 88.7% for the six months ended
December 31, 2005 from 78.0% for the six months ended December 31, 2004.
Real Estate and Corporate
Income before income taxes for the three months ended December 31, 2005 was $0.1 million
versus a loss before income taxes of $0.1 million for the three months ended December 31, 2004.
Loss before income taxes for the six months ended December 31, 2005 was $0.4 million versus a loss
before income taxes of $0.3 million for the six months ended December 31, 2004.
The three and six-month periods ended both December 31, 2005 and 2004 include gains on the
sales of foreclosed real estate held for sale of $0.8 million. During the three months ended
December 31, 2005, we incurred severance costs of $0.4 million in connection with the resignation
of the employment of our former Chief Financial Officer.
Other operating expenses primarily include other general corporate overhead expenses.
Liquidity and Capital Resources
Our primary sources of funds are premiums, commission and fee income and investment income.
Our primary uses of funds are the payment of claims and operating expenses. Operating activities
for the six months ended December 31, 2005 provided $19.6 million of cash, compared to $19.3
million provided in the same period in fiscal 2005. Net cash used by investing activities for the
six months ended December 31, 2005 was $29.0 million, as
15
compared to $26.5 million in the same period in fiscal 2005. Both periods reflect
additions to our investment portfolio as a result of the increase in net premiums earned. During
the six months ended December 31, 2005, we increased the statutory capital and surplus of the
insurance company subsidiaries by $7.5 million to support additional premium writings. This
capital contribution came from funds our holding company received from the insurance company
subsidiaries through an intercompany tax allocation agreement under which the holding company was
reimbursed for current tax benefits utilized through the recognition of tax net operating loss
carryforwards. At December 31, 2005, we had $11.4 million available in unrestricted cash and
investments outside of the insurance company subsidiaries.
We are part of an insurance holding company system with substantially all of our operations
conducted by our insurance company subsidiaries. Accordingly, the holding company will only
receive cash from operating activities as a result of investment income and the ultimate
liquidation of our foreclosed real estate held for sale. Cash could be made available through loans
from financial institutions, the sale of common stock, and dividends from our insurance company
subsidiaries. In addition, as a result of our tax net operating loss carryforwards, taxable income
generated by the insurance company subsidiaries will provide cash to the holding company through an
intercompany tax allocation agreement through which the insurance company subsidiaries reimburse
the holding company for current tax benefits utilized through recognition of the net operating loss
carryforwards.
State insurance laws limit the amount of dividends that may be paid from the insurance company
subsidiaries. These limitations relate to statutory capital and surplus and net income. In
addition, the National Association of Insurance Commissioners Model Act for risk-based capital
(RBC) provides formulas to determine the amount of statutory capital and surplus that an
insurance company needs to ensure that it has an acceptable expectation of not becoming financially
impaired. A low RBC ratio would prevent an insurance company from paying dividends. Statutory
guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net
premiums written to statutory capital and surplus of 3-to-1. We believe that the insurance company
subsidiaries have sufficient financial resources available to support their net premium writings in
both the short-term and the reasonably foreseeable future.
We believe that existing cash and investment balances, when combined with anticipated cash
flows generated from operations and dividends from our insurance company subsidiaries, will be
adequate to meet our expected liquidity needs in both the short term and the reasonably foreseeable
future. Our growth strategy includes possible acquisitions. Any acquisitions or other growth
opportunities may require external financing, and we may from time to time seek to obtain external
financing. We cannot assure you that additional sources of financing will be available to us or
that any such financing would not negatively impact our results of operations.
Chicago Acquisition
On January 12, 2006, we acquired certain assets (principally the customer expiration rights
and the lease rights to 73 retail locations) of two non-standard automobile agencies under common
control in Chicago, Illinois for $30.0 million in cash. In addition, in accordance with the terms
of the acquisition, we may pay the agencies up to $4 million in additional consideration if certain
financial targets through January 31, 2007 are reached. As a result of this acquisition, we are
now writing business through First Acceptance Insurance Company, Inc. from these locations. We did
not acquire any policies in force as part of the transaction, but we will immediately incur the
operating costs of these agencies. Such costs, however, will be partially offset by a fee from the
agencies as compensation for our servicing the run-off of the business previously written by the
agencies through other insurance companies.
In connection with the acquisition, we concurrently entered into, and borrowed under, a credit
agreement with two banks consisting of a $5 million revolving facility and a $25 million term loan
facility, both maturing on June 30, 2010. Both facilities bear interest at LIBOR plus 175 basis
points per annum. We entered into an interest rate swap agreement on January 17, 2006 that
effectively fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. The
term loan facility is due in equal quarterly installments of $1.4 million, plus interest, beginning
April 30, 2006 and ending April 30, 2010 with a final payment of $1.4 million due on June 30, 2010.
Both facilities are secured by the common stock and certain assets of selected subsidiaries. The
credit agreement contains certain financial covenants commencing as of, and for the fiscal quarter
ending March 31, 2006.
16
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than leases accounted for as operating leases
in accordance with generally accepted accounting principles, or financing activities with
special-purpose entities.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms,
and similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
|
|
|
statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
|
|
|
|
statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
|
|
|
|
statements relating to our business and growth strategies; and |
|
|
|
|
any other statements or assumptions that are not historical facts. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other uncertainties in the Business
Risk Factors section of the Annual Report on Form 10-K for the year ended June 30, 2005.
You should not place undue reliance on any forward-looking statements contained herein. These
statements speak only as of the date of this report. Except as otherwise required by applicable
laws, we undertake no obligation to publicly update or revise any forward-looking statements or the
risk factors described in this report, whether as a result of new information, future events,
changed circumstances or any other reason after the date of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have an exposure to interest rate risk relating to fixed maturity investments. Changes in
market interest rates directly impact the market value of our fixed maturity securities. Some fixed
income securities have call or prepayment options. This subjects us to reinvestment risk as issuers
may call their securities, which could result in us reinvesting the proceeds at lower interest
rates. We manage exposure to interest rate risks by adhering to specific guidelines in connection
with our investment portfolio. We invest primarily in municipal and corporate bonds and
collateralized mortgage obligations that have been rated A or better by Standard & Poors. At
December 31, 2005, 83.0% of our investment portfolio was invested in securities rated AA or
better by Standard & Poors, and 98.5% was invested in securities rated A or better by Standard &
Poors. We have not recognized any other than temporary losses on our investment portfolio. We also
utilize the services of a professional fixed income investment manager.
As of December 31, 2005, the impact of an immediate 100 basis point increase in market
interest rates on our fixed maturities portfolio would have resulted in an estimated decrease in
fair value of 4.6%, or approximately $4.7 million. Conversely, as of the same date, the impact of
an immediate 100 basis point decrease in market interest rates on our fixed maturities portfolio
would have resulted in an estimated increase in fair value of 3.2%, or approximately $3.3 million.
In connection with the January 12, 2006 Chicago acquisition, we entered into a new $30.0
million credit facility that includes a $25.0 million term loan facility and a $5.0 revolving
facility. Although we have effectively
17
fixed the interest rate of the $25 million term loan
facility through an interest rate swap agreement, we have interest rate risk with respect to the
revolving facility which bears interest at a floating rate of LIBOR plus 175 basis points.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys chief executive officer and acting chief financial officer have reviewed and
evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act)
as of December 31, 2005. Based on that evaluation, the Companys chief executive officer and
acting chief financial officer have concluded that the Companys disclosure controls and procedures
effectively ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commissions rules and forms.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in the Companys internal
control over financial reporting that has materially affected or is reasonably likely to materially
affect the Companys internal control over financial reporting.
18
PART
II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Annual Meeting of Stockholders held on November 10, 2005, the following
persons were elected to the Companys Board of Directors for a one-year term:
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
Rhodes R. Bobbitt |
|
|
38,567,321 |
|
|
|
23,706 |
|
Harvey B. Cash |
|
|
38,508,549 |
|
|
|
82,478 |
|
Donald J. Edwards |
|
|
38,554,534 |
|
|
|
36,493 |
|
Gerald J. Ford |
|
|
38,511,984 |
|
|
|
79,043 |
|
Stephen J. Harrison |
|
|
38,561,334 |
|
|
|
29,693 |
|
Thomas M. Harrison, Jr. |
|
|
38,561,334 |
|
|
|
29,693 |
|
Tom C. Nichols |
|
|
38,566,971 |
|
|
|
24,056 |
|
Lyndon L. Olson, Jr. |
|
|
38,566,871 |
|
|
|
24,156 |
|
William A. Shipp, Jr. |
|
|
38,567,471 |
|
|
|
23,556 |
|
The following proposal was also considered and approved at the Annual Meeting by the vote set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Withheld |
|
|
Votes For |
|
Votes Against |
|
and Broker Non-Votes |
Ratification of the appointment of Ernst & Young, LLP as
the Companys independent auditors for fiscal 2006 |
|
|
38,572,946 |
|
|
|
14,898 |
|
|
|
3,183 |
|
Item 6. Exhibits
The following exhibits are attached to this report:
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|
31.2 |
|
Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a). |
|
32.1 |
|
Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Acting Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
19
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.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
|
|
|
February 9, 2006 |
By: |
/s/ Stephen J. Harrison
|
|
|
|
Stephen J. Harrison |
|
|
|
Chief Executive Officer |
|
|
|
|
|
February 9, 2006 |
By: |
/s/ Michael J. Bodayle
|
|
|
|
Michael J. Bodayle |
|
|
|
Acting Chief Financial Officer |
|
|
20