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 March 31, 2006
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 |
|
75-1328153 |
(State or other jurisdiction
of incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
3813 Green Hills Village Drive |
|
|
Nashville, Tennessee |
|
37215 |
(Address of principal executive offices)
|
|
(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 May 5, 2006, there were outstanding 47,525,134 shares of the registrants common stock, par
value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2006 |
|
|
June 30, |
|
|
|
(Unaudited) |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale at market value
(amortized cost: $107,421 and $73,832) |
|
$ |
105,131 |
|
|
$ |
74,840 |
|
Investment in mutual fund, at market value |
|
|
241 |
|
|
|
10,920 |
|
Cash and cash equivalents |
|
|
46,514 |
|
|
|
24,762 |
|
Fiduciary funds restricted |
|
|
341 |
|
|
|
935 |
|
Premiums and fees receivable from policyholders and agents |
|
|
65,813 |
|
|
|
42,908 |
|
Reinsurance recoverables |
|
|
2,094 |
|
|
|
4,490 |
|
Deferred tax asset |
|
|
41,936 |
|
|
|
48,106 |
|
Other assets |
|
|
7,163 |
|
|
|
4,863 |
|
Property and equipment, net |
|
|
2,659 |
|
|
|
1,962 |
|
Foreclosed real estate held for sale |
|
|
87 |
|
|
|
961 |
|
Deferred acquisition costs |
|
|
5,407 |
|
|
|
3,271 |
|
Goodwill |
|
|
136,268 |
|
|
|
107,837 |
|
Identifiable intangible assets |
|
|
6,092 |
|
|
|
4,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
419,746 |
|
|
$ |
330,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
57,622 |
|
|
$ |
42,897 |
|
Unearned premiums |
|
|
77,988 |
|
|
|
47,752 |
|
Deferred fee income |
|
|
2,174 |
|
|
|
2,272 |
|
Amounts due to insurance companies |
|
|
341 |
|
|
|
935 |
|
Notes payable to banks |
|
|
30,000 |
|
|
|
|
|
Payable for securities |
|
|
1,436 |
|
|
|
|
|
Other liabilities |
|
|
10,464 |
|
|
|
8,537 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
180,025 |
|
|
|
102,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
47,525 and 47,455 shares issued and outstanding |
|
|
475 |
|
|
|
475 |
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
458,865 |
|
|
|
457,905 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on investments |
|
|
(2,290 |
) |
|
|
655 |
|
Accumulated deficit |
|
|
(217,329 |
) |
|
|
(230,706 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
239,721 |
|
|
|
228,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
419,746 |
|
|
$ |
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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
55,147 |
|
|
$ |
37,979 |
|
|
$ |
142,717 |
|
|
$ |
90,735 |
|
Commissions and fees |
|
|
7,311 |
|
|
|
6,290 |
|
|
|
20,340 |
|
|
|
19,283 |
|
Transaction
service fee |
|
|
3,100 |
|
|
|
|
|
|
|
3,100 |
|
|
|
|
|
Ceding commissions from reinsurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,603 |
|
Gains on sales of foreclosed real estate |
|
|
2,817 |
|
|
|
|
|
|
|
3,638 |
|
|
|
755 |
|
Investment income |
|
|
1,646 |
|
|
|
1,106 |
|
|
|
3,961 |
|
|
|
2,455 |
|
Other gains |
|
|
47 |
|
|
|
20 |
|
|
|
51 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
70,068 |
|
|
|
45,395 |
|
|
|
173,807 |
|
|
|
117,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
38,374 |
|
|
|
25,130 |
|
|
|
97,303 |
|
|
|
58,877 |
|
Insurance operating expenses |
|
|
21,046 |
|
|
|
12,176 |
|
|
|
52,774 |
|
|
|
34,115 |
|
Other operating expenses |
|
|
742 |
|
|
|
715 |
|
|
|
1,964 |
|
|
|
1,983 |
|
Stock-based compensation |
|
|
72 |
|
|
|
84 |
|
|
|
418 |
|
|
|
236 |
|
Depreciation |
|
|
225 |
|
|
|
243 |
|
|
|
604 |
|
|
|
829 |
|
Amortization of identifiable intangible assets |
|
|
121 |
|
|
|
199 |
|
|
|
175 |
|
|
|
769 |
|
Interest expense |
|
|
457 |
|
|
|
69 |
|
|
|
457 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
61,037 |
|
|
|
38,616 |
|
|
|
153,695 |
|
|
|
97,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,031 |
|
|
|
6,779 |
|
|
|
20,112 |
|
|
|
20,005 |
|
Income tax expense |
|
|
3,167 |
|
|
|
2,374 |
|
|
|
6,735 |
|
|
|
7,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,864 |
|
|
$ |
4,405 |
|
|
$ |
13,377 |
|
|
$ |
12,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares |
|
|
47,510 |
|
|
|
47,444 |
|
|
|
47,474 |
|
|
|
46,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares |
|
|
49,570 |
|
|
|
49,350 |
|
|
|
49,541 |
|
|
|
48,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
Nine Months Ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,955 |
|
|
|
|
|
|
|
12,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss change in
unrealized depreciation on
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of contingent shares
related to acquisition |
|
|
750 |
|
|
|
8 |
|
|
|
6,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
3 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(639 |
) |
|
|
(639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock, at cost |
|
|
(90 |
) |
|
|
(1 |
) |
|
|
(638 |
) |
|
|
|
|
|
|
|
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
246 |
|
|
|
2 |
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2005 |
|
|
47,444 |
|
|
$ |
474 |
|
|
$ |
457,706 |
|
|
$ |
(299 |
) |
|
$ |
(243,907 |
) |
|
$ |
|
|
|
$ |
213,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,377 |
|
|
|
|
|
|
|
13,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
change in unrealized
appreciation
(depreciation) on
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,945 |
) |
|
|
|
|
|
|
|
|
|
|
(2,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
2 |
|
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under
Employee Stock Purchase
Plan |
|
|
13 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
55 |
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2006 |
|
|
47,525 |
|
|
$ |
475 |
|
|
$ |
458,865 |
|
|
$ |
(2,290 |
) |
|
$ |
(217,329 |
) |
|
$ |
|
|
|
$ |
239,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,377 |
|
|
$ |
12,955 |
|
Adjustments to reconcile net income to cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
779 |
|
|
|
1,598 |
|
Stock-based compensation |
|
|
418 |
|
|
|
236 |
|
Amortization of premium on fixed maturities |
|
|
386 |
|
|
|
242 |
|
Deferred income taxes |
|
|
6,523 |
|
|
|
6,440 |
|
Gains on sales of foreclosed real estate |
|
|
(3,638 |
) |
|
|
(755 |
) |
Other gains |
|
|
(51 |
) |
|
|
(191 |
) |
Change in: |
|
|
|
|
|
|
|
|
Fiduciary funds restricted |
|
|
594 |
|
|
|
(127 |
) |
Premiums and fees receivable from policyholders and agents |
|
|
(22,905 |
) |
|
|
(16,016 |
) |
Reinsurance recoverables |
|
|
2,396 |
|
|
|
4,891 |
|
Prepaid reinsurance premiums |
|
|
|
|
|
|
12,384 |
|
Other assets |
|
|
(2,300 |
) |
|
|
(240 |
) |
Deferred acquisition costs |
|
|
(2,136 |
) |
|
|
(3,289 |
) |
Loss and loss adjustment expense reserves |
|
|
14,725 |
|
|
|
8,560 |
|
Unearned premiums |
|
|
30,236 |
|
|
|
17,373 |
|
Deferred fee income |
|
|
(98 |
) |
|
|
72 |
|
Amounts due to reinsurers |
|
|
|
|
|
|
(11,899 |
) |
Amounts due to insurance companies |
|
|
(594 |
) |
|
|
127 |
|
Other liabilities |
|
|
1,927 |
|
|
|
(353 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
39,639 |
|
|
|
32,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of foreclosed real estate |
|
|
4,512 |
|
|
|
1,203 |
|
Addition to foreclosed real estate |
|
|
|
|
|
|
(300 |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
666 |
|
Acquisitions of property and equipment |
|
|
(1,301 |
) |
|
|
(660 |
) |
Purchases of fixed maturities, available-for-sale |
|
|
(49,778 |
) |
|
|
(36,517 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
|
|
6,065 |
|
|
|
3,494 |
|
Sales of fixed maturities, available-for-sale |
|
|
9,789 |
|
|
|
3,000 |
|
Sales (purchases) of investment in mutual fund, net |
|
|
10,679 |
|
|
|
(10,785 |
) |
Net increase in receivable/payable for securities |
|
|
1,436 |
|
|
|
3,854 |
|
Business acquired through asset purchase |
|
|
(29,831 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(48,429 |
) |
|
|
(40,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowing |
|
|
30,000 |
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
121 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(639 |
) |
Exercise of stock options |
|
|
421 |
|
|
|
740 |
|
Payments on borrowings |
|
|
|
|
|
|
(750 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
30,542 |
|
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
21,752 |
|
|
|
(8,686 |
) |
Cash and cash equivalents, beginning of period |
|
|
24,762 |
|
|
|
38,352 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
46,514 |
|
|
$ |
29,666 |
|
|
|
|
|
|
|
|
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 March 31, 2006,
the Company wrote non-standard personal automobile insurance in 12 states and was licensed as an
insurer in 12 additional states. The Company writes business through two insurance company
subsidiaries, First Acceptance Insurance Company, Inc. (formerly known as USAuto Insurance Company,
Inc.) and Village Auto Insurance Company, Inc.
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 nine months ended March 31, 2006 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 |
|
|
Nine Months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
5,864 |
|
|
$ |
4,405 |
|
|
$ |
13,377 |
|
|
$ |
12,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares |
|
|
47,510 |
|
|
|
47,444 |
|
|
|
47,474 |
|
|
|
46,926 |
|
Effect of
dilutive securities options |
|
|
2,060 |
|
|
|
1,906 |
|
|
|
2,067 |
|
|
|
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares |
|
|
49,570 |
|
|
|
49,350 |
|
|
|
49,541 |
|
|
|
48,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 replaced SFAS No. 123,
Accounting for Stock-Based Compensation, superseded Accounting Procedures Board Opinion No. 25,
Accounting for Stock Issued to Employees, and amended 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)
was effective for public companies at the beginning of the first annual period beginning after June
15, 2005. The Company previously had 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). During the nine months ended March 31, 2006, cash of $421 was received from the exercise
of options to purchase 55 shares and there were no options issued or forfeited. At March 31, 2006,
there were 3,982 shares remaining available for issuance under the Plan and options outstanding
were as follows:
Options to purchase 3,731 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 (5 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 (77 exercisable at March 31, 2006). 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 March 31, 2006). These options expire on October
27, 2014.
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 $418 for the nine months ended March 31, 2006, 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 March 31, 2006 was $963, of
which $455 will be amortized through April 2009 and $508 will be amortized through October 2009.
Stock-based compensation for the nine months ended March 31, 2006 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. Business Acquired
In order to gain a presence in the market, on January 12, 2006, the Company acquired certain
assets (principally the trade names, customer lists and relationships and the lease rights to 72
retail locations) of two non-standard automobile insurance agencies under common control in
Chicago, Illinois for $30,000 in cash plus $162 in acquisition expenses. The purchase
price was financed through a newly executed credit agreement (see note 6). Up to $4,000 in
additional consideration must also be paid to the agencies if certain financial targets relating to
the acquired business for the twelve months ending 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 is also receiving a monthly fee from the agencies through
December 31, 2006 totaling $5,000 ($3,100 for the three months ended March 31, 2006) as
compensation for servicing the run-off of business previously written by the agencies through other
insurance companies. The fee is being paid and earned in accordance with the estimated runoff of
the number of policies being serviced.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. The Company is in the process of obtaining
third-party valuations of certain intangible assets; thus, the allocation of the purchase price is
subject to refinement.
|
|
|
|
|
Net tangible assets |
|
$ |
331 |
|
Identifiable intangible assets |
|
|
1,400 |
|
Goodwill |
|
|
28,431 |
|
|
|
|
|
Total assets acquired |
|
$ |
30,162 |
|
|
|
|
|
Of the $1,400 in acquired identifiable intangible assets, $1,100 was assigned to trademark and
trade names that is not subject to amortization. The remaining $300 of acquired identifiable
intangible assets relates to the value of customer lists and relationships and is being amortized
in proportion to anticipated policy expirations. Amortization for the three months ended March 31,
2006 was $110.
Pro forma financial information has not been presented for this acquisition since the nature
of the revenue-producing activity of this business has changed from a retail insurance agency to
the underwriting results of an insurance company. The results of the operations of the business
acquired are included in the Companys statement of income beginning on January 12, 2006, the date
of acquisition.
6. Notes Payable to Banks
In connection with the acquisition of the non-standard automobile insurance agencies, on
January 12, 2006, the Company 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 (6.35% at March
31, 2006). 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
28, 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. At March 31, 2006, the Company was in compliance
with all such covenants except for a covenant regarding net premiums written to surplus for which a
waiver has been obtained. The maturities of the notes payable as of March 31, 2006 are as follows:
|
|
|
|
|
Years Ending June 30, |
|
Amount |
|
2006 |
|
$ |
1,388 |
|
2007 |
|
|
5,552 |
|
2008 |
|
|
5,552 |
|
2009 |
|
|
5,552 |
|
2010 |
|
|
11,956 |
|
|
|
|
|
|
|
$ |
30,000 |
|
|
|
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
7. 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 |
|
|
|
|
|
|
Insurance |
|
|
and |
|
|
Consolidated |
|
Three Months Ended March 31, 2006 |
|
Operations |
|
|
Corporate |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
55,147 |
|
|
$ |
|
|
|
$ |
55,147 |
|
Commissions and fees |
|
|
7,311 |
|
|
|
|
|
|
|
7,311 |
|
Transaction
service fee |
|
|
3,100 |
|
|
|
|
|
|
|
3,100 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
2,817 |
|
|
|
2,817 |
|
Investment income |
|
|
1,271 |
|
|
|
375 |
|
|
|
1,646 |
|
Other gains |
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
66,876 |
|
|
|
3,192 |
|
|
|
70,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
38,374 |
|
|
|
|
|
|
|
38,374 |
|
Operating expenses |
|
|
21,046 |
|
|
|
742 |
|
|
|
21,788 |
|
Stock-based compensation |
|
|
|
|
|
|
72 |
|
|
|
72 |
|
Depreciation and amortization |
|
|
346 |
|
|
|
|
|
|
|
346 |
|
Interest expense |
|
|
|
|
|
|
457 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
59,766 |
|
|
|
1,271 |
|
|
|
61,037 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,110 |
|
|
$ |
1,921 |
|
|
$ |
9,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
142,717 |
|
|
$ |
|
|
|
$ |
142,717 |
|
Commissions and fees |
|
|
20,340 |
|
|
|
|
|
|
|
20,340 |
|
Transaction
service fee |
|
|
3,100 |
|
|
|
|
|
|
|
3,100 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
3,638 |
|
|
|
3,638 |
|
Investment income |
|
|
3,262 |
|
|
|
699 |
|
|
|
3,961 |
|
Other gains |
|
|
51 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
169,470 |
|
|
|
4,337 |
|
|
|
173,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
97,303 |
|
|
|
|
|
|
|
97,303 |
|
Operating expenses |
|
|
52,774 |
|
|
|
1,964 |
|
|
|
54,738 |
|
Stock-based compensation |
|
|
|
|
|
|
418 |
|
|
|
418 |
|
Depreciation and amortization |
|
|
779 |
|
|
|
|
|
|
|
779 |
|
Interest expense |
|
|
|
|
|
|
457 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
150,856 |
|
|
|
2,839 |
|
|
|
153,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
18,614 |
|
|
$ |
1,498 |
|
|
$ |
20,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at March 31, 2006 |
|
$ |
231,546 |
|
|
$ |
188,200 |
|
|
$ |
419,746 |
|
|
|
|
|
|
|
|
|
|
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
Insurance |
|
|
and |
|
|
Consolidated |
|
Three Months Ended March 31, 2005 |
|
Operations |
|
|
Corporate |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
37,979 |
|
|
$ |
|
|
|
$ |
37,979 |
|
Commissions and fees |
|
|
6,290 |
|
|
|
|
|
|
|
6,290 |
|
Investment income |
|
|
676 |
|
|
|
430 |
|
|
|
1,106 |
|
Other |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
44,965 |
|
|
|
430 |
|
|
|
45,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
25,130 |
|
|
|
|
|
|
|
25,130 |
|
Operating expenses |
|
|
12,176 |
|
|
|
715 |
|
|
|
12,891 |
|
Stock-based compensation |
|
|
|
|
|
|
84 |
|
|
|
84 |
|
Depreciation and amortization |
|
|
442 |
|
|
|
|
|
|
|
442 |
|
Interest expense |
|
|
|
|
|
|
69 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
37,748 |
|
|
|
868 |
|
|
|
38,616 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
7,217 |
|
|
$ |
(438 |
) |
|
$ |
6,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
90,735 |
|
|
$ |
|
|
|
$ |
90,735 |
|
Commissions and fees |
|
|
19,283 |
|
|
|
|
|
|
|
19,283 |
|
Ceding commissions from reinsurer |
|
|
3,603 |
|
|
|
|
|
|
|
3,603 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
755 |
|
|
|
755 |
|
Investment income |
|
|
1,531 |
|
|
|
924 |
|
|
|
2,455 |
|
Other |
|
|
191 |
|
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
115,343 |
|
|
|
1,679 |
|
|
|
117,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
58,877 |
|
|
|
|
|
|
|
58,877 |
|
Operating expenses |
|
|
34,115 |
|
|
|
1,983 |
|
|
|
36,098 |
|
Stock-based compensation |
|
|
|
|
|
|
236 |
|
|
|
236 |
|
Depreciation and amortization |
|
|
1,598 |
|
|
|
|
|
|
|
1,598 |
|
Interest expense |
|
|
|
|
|
|
208 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
94,590 |
|
|
|
2,427 |
|
|
|
97,017 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
20,753 |
|
|
$ |
(748 |
) |
|
$ |
20,005 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at March 31, 2005 |
|
$ |
157,376 |
|
|
$ |
165,383 |
|
|
$ |
322,759 |
|
|
|
|
|
|
|
|
|
|
|
9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed 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 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 May 1, 2006, we leased and operated 450 retail locations, staffed by employee-agents,
including 72 operating locations in Chicago, Illinois acquired on January 12, 2006. Our
employee-agents exclusively sell insurance products either underwritten or serviced by us. As of
March 31, 2006, 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. Retail location counts are based upon the date that a location commenced writing
business. We had previously reported this information based upon the date that a location was
leased and first incurred operating expenses. Count information for all prior periods presented
has been restated to conform to the current periods method of presentation. Under the prior basis
of presentation, we would have reported a total of 463 locations leased at March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail locations beginning of
period |
|
|
351 |
|
|
|
162 |
|
|
|
248 |
|
|
|
133 |
|
Opened |
|
|
28 |
|
|
|
31 |
|
|
|
132 |
|
|
|
61 |
|
Acquired |
|
|
72 |
|
|
|
15 |
|
|
|
72 |
|
|
|
15 |
|
Closed |
|
|
(4 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
447 |
|
|
|
208 |
|
|
|
447 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the breakdown of our retail locations by state for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Locations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the Three Months |
|
|
|
Retail Locations as of |
|
|
Retail Locations as of |
|
|
Ended |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
Alabama |
|
|
25 |
|
|
|
24 |
|
|
|
25 |
|
|
|
23 |
|
|
|
|
|
|
|
1 |
|
Florida |
|
|
40 |
|
|
|
14 |
|
|
|
35 |
|
|
|
1 |
|
|
|
5 |
|
|
|
13 |
|
Georgia |
|
|
63 |
|
|
|
62 |
|
|
|
63 |
|
|
|
60 |
|
|
|
|
|
|
|
2 |
|
Illinois |
|
|
86 |
|
|
|
3 |
|
|
|
15 |
|
|
|
1 |
|
|
|
71 |
|
|
|
2 |
|
Indiana |
|
|
25 |
|
|
|
21 |
|
|
|
26 |
|
|
|
11 |
|
|
|
(1 |
) |
|
|
10 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
6 |
|
|
|
|
|
|
|
2 |
|
Missouri |
|
|
20 |
|
|
|
14 |
|
|
|
19 |
|
|
|
14 |
|
|
|
1 |
|
|
|
|
|
Ohio |
|
|
30 |
|
|
|
28 |
|
|
|
30 |
|
|
|
27 |
|
|
|
|
|
|
|
1 |
|
Pennsylvania |
|
|
20 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
South Carolina |
|
|
12 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
19 |
|
|
|
|
|
|
|
1 |
|
Texas |
|
|
98 |
|
|
|
14 |
|
|
|
88 |
|
|
|
|
|
|
|
10 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
447 |
|
|
|
208 |
|
|
|
351 |
|
|
|
162 |
|
|
|
96 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Locations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the Nine Months |
|
|
|
Retail Locations as of |
|
|
Retail Locations as of |
|
|
Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
Alabama |
|
|
25 |
|
|
|
24 |
|
|
|
25 |
|
|
|
21 |
|
|
|
|
|
|
|
3 |
|
Florida |
|
|
40 |
|
|
|
14 |
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
14 |
|
Georgia |
|
|
63 |
|
|
|
62 |
|
|
|
62 |
|
|
|
54 |
|
|
|
1 |
|
|
|
8 |
|
Illinois |
|
|
86 |
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
81 |
|
|
|
3 |
|
Indiana |
|
|
25 |
|
|
|
21 |
|
|
|
21 |
|
|
|
4 |
|
|
|
4 |
|
|
|
17 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
3 |
|
Missouri |
|
|
20 |
|
|
|
14 |
|
|
|
14 |
|
|
|
10 |
|
|
|
6 |
|
|
|
4 |
|
Ohio |
|
|
30 |
|
|
|
28 |
|
|
|
29 |
|
|
|
23 |
|
|
|
1 |
|
|
|
5 |
|
Pennsylvania |
|
|
20 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
South Carolina |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
16 |
|
|
|
|
|
|
|
4 |
|
Texas |
|
|
98 |
|
|
|
14 |
|
|
|
37 |
|
|
|
|
|
|
|
61 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
447 |
|
|
|
208 |
|
|
|
248 |
|
|
|
133 |
|
|
|
199 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, |
|
|
Nine Months Ended March 31, |
|
Insurance Operations |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
55,147 |
|
|
$ |
37,979 |
|
|
$ |
142,717 |
|
|
$ |
90,735 |
|
Commissions and fees |
|
|
7,311 |
|
|
|
6,290 |
|
|
|
20,340 |
|
|
|
19,283 |
|
Transaction
service fee |
|
|
3,100 |
|
|
|
|
|
|
|
3,100 |
|
|
|
|
|
Ceding commissions from reinsurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,603 |
|
Investment income |
|
|
1,271 |
|
|
|
676 |
|
|
|
3,262 |
|
|
|
1,531 |
|
Other gains |
|
|
47 |
|
|
|
20 |
|
|
|
51 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
66,876 |
|
|
|
44,965 |
|
|
|
169,470 |
|
|
|
115,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustments expenses |
|
|
38,374 |
|
|
|
25,130 |
|
|
|
97,303 |
|
|
|
58,877 |
|
Operating expenses |
|
|
21,046 |
|
|
|
12,176 |
|
|
|
52,774 |
|
|
|
34,115 |
|
Depreciation and amortization |
|
|
346 |
|
|
|
442 |
|
|
|
779 |
|
|
|
1,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
59,766 |
|
|
|
37,748 |
|
|
|
150,856 |
|
|
|
94,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,110 |
|
|
$ |
7,217 |
|
|
$ |
18,614 |
|
|
$ |
20,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
Real Estate and Corporate |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of foreclosed real estate |
|
$ |
2,817 |
|
|
$ |
|
|
|
$ |
3,638 |
|
|
$ |
755 |
|
Investment income |
|
|
375 |
|
|
|
430 |
|
|
|
699 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
3,192 |
|
|
|
430 |
|
|
|
4,337 |
|
|
|
1,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
742 |
|
|
|
715 |
|
|
|
1,964 |
|
|
|
1,983 |
|
Stock-based compensation |
|
|
72 |
|
|
|
84 |
|
|
|
418 |
|
|
|
236 |
|
Interest expense |
|
|
457 |
|
|
|
69 |
|
|
|
457 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,271 |
|
|
|
868 |
|
|
|
2,839 |
|
|
|
2,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
1,921 |
|
|
$ |
(438 |
) |
|
$ |
1,498 |
|
|
$ |
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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); |
|
|
|
|
a transaction service fee for servicing the run-off business previously written
by the Chicago agencies whose business we acquired (for the period from January 12,
2006 through December 31, 2006); |
|
|
|
|
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
therefore one of our insurance companies assumed a percentage of the business written in Alabama
through an MGA subsidiary. The assumed percentage was 50% through February 1, 2005, at which time
it was increased to 100%. Since May 2005, all new Alabama business is written by one of our
insurance company subsidiaries on a direct basis. Although we are licensed in Texas, we currently
also write some business in Texas through the Texas county mutual insurance company system that 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. Effective April 14, 2006, we elected to not
renew our catastrophic reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Gross premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
17,409 |
|
|
$ |
17,756 |
|
|
$ |
51,481 |
|
|
$ |
51,977 |
|
Florida |
|
|
8,028 |
|
|
|
187 |
|
|
|
15,241 |
|
|
|
187 |
|
Alabama |
|
|
7,426 |
|
|
|
6,897 |
|
|
|
21,357 |
|
|
|
19,484 |
|
Tennessee |
|
|
6,082 |
|
|
|
6,688 |
|
|
|
18,293 |
|
|
|
19,495 |
|
Texas |
|
|
5,025 |
|
|
|
2,161 |
|
|
|
10,327 |
|
|
|
2,161 |
|
Ohio |
|
|
3,613 |
|
|
|
2,930 |
|
|
|
10,184 |
|
|
|
7,364 |
|
Illinois |
|
|
2,196 |
|
|
|
36 |
|
|
|
2,574 |
|
|
|
47 |
|
Indiana |
|
|
1,689 |
|
|
|
623 |
|
|
|
4,217 |
|
|
|
1,091 |
|
Missouri |
|
|
1,409 |
|
|
|
1,124 |
|
|
|
3,866 |
|
|
|
2,954 |
|
Mississippi |
|
|
1,355 |
|
|
|
1,210 |
|
|
|
3,833 |
|
|
|
3,184 |
|
Pennsylvania |
|
|
612 |
|
|
|
|
|
|
|
1,055 |
|
|
|
|
|
South Carolina |
|
|
331 |
|
|
|
|
|
|
|
365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums earned |
|
|
55,175 |
|
|
|
39,612 |
|
|
|
142,793 |
|
|
|
107,944 |
|
Premiums ceded |
|
|
(28 |
) |
|
|
(43 |
) |
|
|
(76 |
) |
|
|
(8,422 |
) |
Premiums not assumed |
|
|
|
|
|
|
(1,590 |
) |
|
|
|
|
|
|
(8,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned |
|
$ |
55,147 |
|
|
$ |
37,979 |
|
|
$ |
142,717 |
|
|
$ |
90,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Policies in force beginning of period |
|
|
132,861 |
|
|
|
94,273 |
|
|
|
119,422 |
|
|
|
91,385 |
|
Acquired |
|
|
|
|
|
|
6,473 |
|
|
|
|
|
|
|
6,473 |
|
Net increase during period |
|
|
54,187 |
|
|
|
21,617 |
|
|
|
67,626 |
|
|
|
24,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
187,048 |
|
|
|
122,363 |
|
|
|
187,048 |
|
|
|
122,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. (The expense ratio for fiscal 2005 excludes expenses and
fee income related to incidental MGA operations. For fiscal 2006, operating expenses are reduced
by the transaction service fee for servicing the run-off business previously written by the
Chicago agencies whose business we acquired.)
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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Loss and loss adjustment expense |
|
|
69.6 |
% |
|
|
66.2 |
% |
|
|
68.2 |
% |
|
|
64.9 |
% |
Expense |
|
|
19.3 |
% |
|
|
18.3 |
% |
|
|
20.6 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
88.9 |
% |
|
|
84.5 |
% |
|
|
88.8 |
% |
|
|
80.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2006, approximately 14% 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
and thus far in 2006.
13
Three and Nine Months Ended March 31, 2006 Compared With Three and Nine Months Ended March 31, 2005
Consolidated Results
Net income for the three months ended March 31, 2006 was $5.9 million, compared to $4.4
million for the three months ended March 31, 2005. Net income per share was $0.12 on both a basic
and diluted basis for the three months ended March 31, 2006 and $0.09 on both a basic and diluted
basis for the three months ended March 31, 2005. Total revenues for the three months ended March
31, 2006 increased 54% from $45.4 million to $70.1 million over the same period last year.
Net income for the nine months ended March 31, 2006 was $13.4 million, compared to $13.0
million for the nine months ended March 31, 2005. Net income per share was $0.28 on a basic basis
and $0.27 on a diluted basis for both the nine months ended March 31, 2006 and 2005. Total
revenues for the nine months ended March 31, 2006 increased 49% from $117.0 million to $173.8
million over the same period last year.
The weighted average diluted shares outstanding for the nine months ended March 31, 2006
increased as a result of the issuance on January 1, 2005 of 750,000 contingent shares pursuant to
the USAuto acquisition and shares for both periods increased as a result of 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 per share for the three and nine months ended March 31, 2006 included gains on
sales of foreclosed real estate held for sale of $0.04 and $0.05, respectively, on a fully-diluted
basis as compared to $0.01 for the nine months ended March 31, 1005.
Insurance Operations
Income before income taxes was $7.1 million for the three months ended March 31, 2006,
compared to $7.2 million for the three months ended March 31, 2005. Income before income taxes was
$18.6 million for the nine months ended March 31, 2006 compared to $20.8 million for the nine
months ended March 31, 2005.
Total gross premiums earned (before the effects of reinsurance) increased by $15.6 million, or
39%, to $55.2 million for the three months ended March 31, 2006, from $39.6 million for the three
months ended March 31, 2005. Such increases were due to the development of new stores in existing
states as well as our expansion into new states. Of this increase, $7.8 million was attributable
to the expansion of our business into Florida. Overall, the number of insured policies in force at
March 31, 2006 increased 53% over the same date in 2005 from 122,363 to 187,048. At March 31,
2006, the number of operating retail locations (or stores) was 447 as compared to 208 stores at
March 31, 2005.
For the nine months ended March 31, 2006, total gross premiums earned (before the effects of
reinsurance) increased by $34.9 million, or 32%, to $142.8 million from $107.9 million for the nine
months ended March 31, 2005. Of this increase, $23.2 million was attributable to the expansion of
our business into Florida and Texas.
Net premiums earned increased 45% and 57%, respectively, for the three and nine month periods
ended March 31, 2006, 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 nine-month periods ended March 31,
2005, $1.6 million and $8.8 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
nine months ended March 31, 2006 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 nine months
ended March 31, 2005 and resulted in an $8.4 million reduction in net premiums earned, which we
ceded to the reinsurer.
14
Commissions
and fees declined as a percentage of net premiums earned during the
three and nine-month periods ended March 31, 2006 compared to
the prior year periods as a result of not renewing the quota share reinsurance and increasing the assumed
reinsurance percentage for our Alabama business. Ceding commissions
from our reinsurer were also eliminated with the non-renewal of the
quota share reinsurance. Total revenues for the three months ended
March 31, 2006 included a $3.1 million transaction service fee earned in connection with the Chicago acquisition for servicing the
run-off business previously written by the Chicago agencies whose assets we acquired on January 12,
2006.
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
5.10% at March 31, 2006 with an effective duration of 3.41 years. The yield for the comparable
Lehman Brothers indices at March 31, 2006 was 5.14%.
The loss and loss adjustment expense ratio increased to 69.6% for the three months ended March
31, 2006 from 66.2% for the three months ended March 31, 2005, and to 68.2% for the nine months
ended March 31, 2006 from 64.9% for the nine months ended March 31, 2005. We did not experience any
significant development for losses occurring in prior accident periods. The loss ratio for the
three and nine months ended March 31, 2006 increased primarily as a result of higher loss ratios in
our expansion states and from an increase in storm losses.
Insurance operating expenses increased 72% to $21.0 million for the three months ended March
31, 2006 from $12.2 million for the three months ended March 31, 2005, and increased 55% to $52.8
million for the nine months ended March 31, 2006 from $34.1 million for the nine months ended March
31, 2005. These increases are primarily due to the addition of new retail locations (including
those acquired in Chicago) 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 18.3% for the three months ended March 31, 2005 to 19.3% for
the three months ended March 31, 2006, and increased from 15.8% for the nine months ended March 31,
2005 to 20.6% for the nine months ended March 31, 2006. The expense ratio for nine month period
ended March 31, 2005 was 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 increases in the expense ratio for both the three and nine
month periods ended March 31, 2006. 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 nine-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 88.9% for the three months ended March 31, 2006 from
84.5% for the three months ended March 31, 2005, and to 88.8% for the nine months ended March 31,
2006 from 80.7% for the nine months ended March 31, 2005.
Real Estate and Corporate
Income before income taxes for the three months ended March 31, 2006 was $1.9 million versus a
loss before income taxes of $0.4 million for the three months ended March 31, 2005. Income before
income taxes for the nine months ended March 31, 2006 was $1.5 million versus a loss before income
taxes of $0.7 million for the nine months ended March 31, 2005.
The three and nine-month periods ended March 31, 2006 included gains on the sales of
foreclosed real estate held for sale of $2.8 million and $3.6 million, respectively, as compared to
$0.8 million for the nine months ended March 31, 2005. There were no gains for the three months
ended March 31, 2005.
Other operating expenses primarily include other general corporate overhead expenses. During
the nine months ended March 31, 2006, we incurred severance costs of $0.4 million in connection
with the resignation of the employment of our former Chief Financial Officer. In addition, for the
three months ended March 31, 2006, $0.5 million of interest expense was incurred in connection with
the borrowing related to the Chicago acquisition.
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 nine months ended March 31, 2006 provided $39.6 million of cash, compared to $32.0 million
provided in the same period in fiscal 2005. Net cash used by investing activities for the nine
months ended March 31, 2006 was $48.4 million, as compared to $40.0 million in the same period in
fiscal 2005. Both periods reflect net additions to our investment
15
portfolio as a result of the increase in net premiums earned while the fiscal 2006 amount also
includes the $29.8 million paid for the Chicago acquisition, net of tangible assets acquired.
During the nine months ended March 31, 2006, 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 March 31, 2006, we had $14.5 million available in unrestricted cash and
investments outside of the insurance company subsidiaries. In April 2006, $6.9 million of this
amount was used to pay principal and interest on our notes payable to banks.
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
In order to gain a presence in the market, on January 12, 2006, we acquired certain assets
(principally the trade names, customer lists and relationships and the lease rights to 72 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
must pay the agencies up to $4 million in additional consideration if certain financial targets
relating to the acquired business for the twelve months ending 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.
However, we are under contract to receive a transaction service fee from the agencies as
compensation for servicing the run-off of the policies previously written by the agencies through
other insurance companies. The total contract is for $5.0 million of which $3.1 million was earned
during the three months ended March 31, 2006. The fee is being paid and earned in accordance with
the estimated run-off of the number of policies being serviced.
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 28, 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. At March 31, 2006, we were in compliance
with all such covenants except for a covenant regarding net premiums written to surplus for which a
waiver has been obtained.
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On April 28, 2006, we repaid the $5 million revolving facility out of current cash on hand.
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:
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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; |
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statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
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statements relating to our business and growth strategies; and |
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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
March 31, 2006, 86.3% of our investment portfolio was invested in securities rated AA or better
by Standard & Poors, and 98.3% 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 March 31, 2006, 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 3.4%, or approximately $3.6 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 3.3%, or approximately $3.5 million.
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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 million
revolving facility. Although we have effectively 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. All
borrowings under the revolving facility were repaid on April 28, 2006.
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 March 31, 2006. 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.
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PART II OTHER INFORMATION
Item 6. Exhibits
The following exhibits are attached to this report:
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
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31.2
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Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a). |
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32.1
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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. |
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32.2
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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. |
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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.
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FIRST ACCEPTANCE CORPORATION
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May 10, 2006 |
By: |
/s/ Stephen J. Harrison
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Stephen J. Harrison |
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Chief Executive Officer |
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May 10, 2006 |
By: |
/s/ Michael J. Bodayle
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Michael J. Bodayle |
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Acting Chief Financial Officer |
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