-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E+bd+8EAqJZkaYkASVbLHm2UTYeFXYFwSsHugj/GfhwDf7z1OeiBKHG+wYc/ME3E d7S1DwCx4EtD/tmXxsFPnQ== /in/edgar/work/0000919607-00-000445/0000919607-00-000445.txt : 20001115 0000919607-00-000445.hdr.sgml : 20001115 ACCESSION NUMBER: 0000919607-00-000445 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOBILE AMERICA CORP CENTRAL INDEX KEY: 0000067199 STANDARD INDUSTRIAL CLASSIFICATION: [6331 ] IRS NUMBER: 591218935 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06764 FILM NUMBER: 767002 BUSINESS ADDRESS: STREET 1: 10475 FORTUNE PARKWAY STREET 2: SUITE 110 CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9043636339 MAIL ADDRESS: STREET 1: 10475 FORTUNE PARKWAY STREET 2: SUITE 110 CITY: JACKSONVILLE STATE: FL ZIP: 32256 10-Q 1 0001.txt THIRD QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarter ended September 30, 2000 Commission File No. 0-6764 ------------------ ------ Fortune Financial, Inc. ------------------------- (Exact name of registrant as specified in its charter) Florida 59-1218935 - -------------------------------- -------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 10475-103 Fortune Parkway, Jacksonville, Florida 32256 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (904) 363-6339 ----------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No _. --- --- (Applicable only to corporate issuers) There were 7,467,542 shares of common stock, par value $.025 per share, outstanding as of the close of business on November 10, 2000. Fortune Financial, Inc. Index Page Part I. Financial Information - ------------------------------ Item 1. Financial Statements Consolidated Balance Sheets 3 Unaudited Consolidated Statements of Operations 4 Unaudited Consolidated Statements of Comprehensive Income 5 Unaudited Consolidated Statements of Cash Flows 6 Unaudited Consolidated Statements of Changes in Stockholders' Equity 7 Notes to Financial Statements 8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits 18 Signatures 19 - ---------- Exhibits 20 - -------- -2- Fortune Financial, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2000 (Unaudited) and December 31, 1999 Assets 2000 1999 - -------------------------------------------------------------------------------- Investments: Securities available for sale at fair value (amortized cost $14,349,480 and $32,553,832) $14,328,119 $32,567,745 Short-term investments 1,618,375 9,033,284 ------------------------------- Total investments 15,946,494 41,601,029 ------------------------------- Cash 2,563,146 1,178,791 Receivables: Insurance premiums 145,962 789,274 Accrued investment income 261,599 515,636 Reinsurance, paid losses and other 16,089,575 12,314,049 Reinsurance recoverable, unpaid losses 5,779,773 13,706,562 Other receivables 190,688 238,258 Current income taxes 1,505,633 1,979,781 ------------------------------- Total receivables 23,973,230 29,543,560 ------------------------------- Deferred income tax 10,617,579 6,724,450 Ceded unearned premium 8,538,075 8,320,995 Deferred policy acquisition costs (215,807) (598,592) Property and equipment 1,804,685 2,038,187 Equity in pools and associations 943,131 943,130 Other assets 356,480 400,124 ------------------------------- $64,527,013 $90,151,674 =============================== (continued) Liabilities and Stockholders' Equity 2000 1999 - -------------------------------------------------------------------------------- Insurance loss reserves, including life insurance policy benefits of $10,032 and $18,477 $14,839,403 $26,024,918 Unearned premium 20,366,233 18,376,039 Unearned service fees 1,816 93,305 Contractholders funds 1,411,466 1,550,109 Reinsurance funds withheld and balances payable 2,475,259 7,129,761 Claim payments outstanding 2,623,301 3,039,004 Accrued expenses and other liabilities 1,462,001 2,307,233 Notes payable 3,294,835 7,200,000 --------------------------- Total liabilities 46,474,314 65,720,369 --------------------------- Stockholders' equity: Common stock, $.025 par value per share Authorized - 18,000,000 shares Issued - 7,944,414 shares 198,610 198,610 Preferred stock, $.10 par value per share Authorized - 500,000 shares Issued and outstanding - none 0 0 Capital in excess of par value 5,185,092 5,185,092 Accumulated other comprehensive income (loss): Net unrealized appreciation (depreciation) on securities available for sale net of deferred income taxes of $0 and $4,730 (21,361) 9,182 Treasury stock at cost, 476,872 shares (1,233,069) (1,233,069) Shareholders' notes, 300,000 shares (843,750) (843,750) Retained earnings 14,767,177 21,115,240 --------------------------- Total stockholders' equity 18,052,699 24,431,305 --------------------------- $64,527,013 $90,151,674 =========================== See notes to consolidated financial statements -3- Fortune Financial, Inc. and Subsidiaries Unaudited Consolidated Statements of Operations Quarters Ended September 30, 2000 and 1999, Nine Months Ended September 30, 2000 and 1999 Quarters Ended September 30 Nine Months Ended September 30 2000 1999 2000 1999 -------------------------------- -------------------------------- Revenues: Insurance premiums earned net of premiums ceded of $4,857,567, $8,096,408, $14,964,836 and $28,789,575 $5,340,628 $7,035,914 $16,638,227 $23,033,849 Service fees earned 572,366 729,638 2,223,026 4,040,039 Investment income 333,678 820,034 1,250,248 2,740,692 Other 8,428 8,669 126,848 23,598 Net realized gains (losses) on investments 34,084 90,227 (233,745) 147,533 -------------------------------- -------------------------------- Total revenues 6,289,184 8,684,482 20,004,604 29,985,711 -------------------------------- -------------------------------- Expenses: Losses and loss adjustment expenses, net of reinsurance recoveries of $2,012,840, $8,184,229, $10,942,880 and $29,663,651 4,706,202 5,853,756 15,911,658 22,360,102 Policy acquisition costs 327,443 2,131,792 2,885,391 5,518,173 Salaries and wages 1,560,546 1,667,747 4,839,511 5,018,313 General and administrative expenses 1,888,913 2,667,650 6,263,522 6,330,270 Interest expense 83,607 157,214 340,985 499,597 -------------------------------- -------------------------------- Total expenses 8,566,711 12,478,159 30,241,067 39,726,455 -------------------------------- -------------------------------- Loss before provision for income taxes (2,277,527) (3,793,677) (10,236,463) (9,740,744) -------------------------------- -------------------------------- Provision and (benefit) for income taxes: Current 0 (1,528,944) 0 (3,460,855) Deferred (843,147) 32,249 (3,888,400) (480,567) -------------------------------- -------------------------------- Total provision (benefit) for income taxes (843,147) (1,496,695) (3,888,400) (3,941,422) -------------------------------- -------------------------------- Net loss ($1,434,380) ($2,296,982) ($6,348,063) ($5,799,322) ================================ ================================ Basic and diluted loss per share: Net loss ($0.19) ($0.32) ($0.85) ($0.81) ================================ ================================ Dividends per share $0.00 $0.00 $0.00 $0.11 ================================ ================================ See notes to consolidated financial statements.
-4- Fortune Financial, Inc. and Subsidiaries Unaudited Statements of Comprehensive Income Quarters Ended September 30, 2000 and 1999 and Nine Months Ended September 30, 2000 and 1999 Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net loss ($1,434,380) ($2,296,982) ($6,348,063) ($5,799,322) ------------ ------------ ------------ ------------ Other comprehensive income (loss): Unrealized gains (loss) on securities: Unrealized holding gains (losses) arising during period net of taxes $54,336, $(70,173), $(132,552) and $(222,134) 84,114 (140,973) (278,669) (435,954) Reclassification adjustment for (gains) losses included in net income (loss) net of tax $54,336, ($1,210), ($127,822) and $8,883 (37,628) (2,349) (248,125) 17,244 -------- ------- --------- ------ Other comprehensive income (loss) 121,742 (138,624) (30,544) (453,198) -------- --------- -------- --------- Comprehensive loss ($1,312,638) ($2,435,606) ($6,378,607) ($6,252,520) ============ ============ ============ ============ See notes to consolidated financial statements.
-5- Fortune Financial, Inc. and Subsidiaries Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999 2000 1999 ---------------------------------- Cash flows from operating activities: Net loss ($6,348,063) ($5,799,322) Adjustments to reconcile net loss to Net cash used in operating activities: Provision for depreciation 395,516 432,953 Loss (gain) on sale of investments 233,745 (147,533) Change in assets and liabilities: Insurance premiums receivable 643,312 1,741,235 Accrued investment income and other receivables 301,607 755,440 Deferred policy acquisition costs (382,785) (1,833,619) Prepaid expenses and other assets 43,644 59,644 Insurance loss reserves (11,185,515) 1,029,862 Unearned premium 1,990,194 (4,183,910) Contractholder funds (138,643) (10,274,466) Reinsurance funds held and balances payable (4,654,502) (7,473,823) Claim payments outstanding (415,703) 1,008,064 Accrued expenses (845,232) 1,535,358 Current income taxes 474,148 (2,765,270) Deferred income taxes (3,893,129) (480,567) Ceded unearned premium (217,080) 6,049,422 Reinsurance receivable 4,151,263 (1,272,462) Unearned service fees (91,489) (300,169) ---------------------------------- Net cash used in operating activities (19,938,712) (21,919,163) ---------------------------------- Cash flows from investing activities: Net change in short term investments 7,414,909 9,305,026 Purchase of investments (13,496,387) (6,870,827) Proceeds from sale and maturity of investments 31,471,724 22,447,408 Purchase of property and equipment (162,014) (390,339) ---------------------------------- Net cash provided by investing activities 25,228,232 24,491,268 ---------------------------------- Cash flows from financing activities: Principal payment, note payable (4,000,000) (1,800,000) Principal, note payable, net 94,835 0 Dividends paid to stockholders 0 (807,140) ---------------------------------- Net cash used in financing activities (3,905,165) (2,607,140) ---------------------------------- Net change in cash 1,384,355 (35,035) Cash, beginning of period 1,178,791 1,082,422 ---------------------------------- Cash, end of period $2,563,146 $1,047,387 ================================== See notes to consolidated financial statements.
-6- Fortune Financial, Inc. and Subsidiaries Unaudited Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 2000 and 1999 2000 1999 ------------------------------ Common stock: No change during period $198,610 $191,110 ------------------------------ Preferred stock: No change during period 0 0 ------------------------------ Capital in excess of par value: No change during period 5,185,092 4,348,842 ------------------------------ Accumulated other comprehensive loss: Net unrealized gain (loss) on securities available for sale: Balance at beginning of period 9,182 448,444 Increase (decrease) (35,273) (684,215) Deferred taxes 4,730 231,017 ------------------------------ Balance at end of period (21,361) (4,754) ------------------------------ Treasury stock: No change during period (1,233,069) (1,233,069) ------------------------------ Shareholders' notes: No change during period (843,750) 0 ------------------------------ Retained earnings: Balance at beginning of period, restated for 1999 21,115,240 31,807,815 Net loss (6,348,063) (5,799,322) Cash dividends $.0 and $.11 per share 0 (807,140) ------------------------------ Balance at end of period 14,767,177 25,201,353 ------------------------------ Total stockholders' equity at end of period $18,052,699 $28,503,482 ============================== See notes to consolidated financial statements. -7- Fortune Financial, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 1. Basis of Presentation - ------------------------------ In the opinion of management, the accompanying balance sheets and related interim statements of operations, comprehensive income and cash flows include all adjustments (which include reclassifications and normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows at September 30, 2000 and for all periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and financial statements and notes thereto included in the Fortune Financial, Inc. 1999 10-K. Certain amounts in prior years' financial statements have been reclassified to conform to the 2000 presentation. Note 2. Prior Period Adjustment - -------------------------------- Beginning retained earnings for the period ended September 30, 1999 has been reduced by $996,283 from its previously reported amount of $32,804,098 to correct an error in applying the minimum ceding commission rate on one of Fortune Insurance Company's quota share reinsurance agreements during 1996. The impact of this adjustment was reported in the Company's 1999 10-K Report. Note 3 Credit Agreement - ------------------------ The Company has a Credit Agreement with SouthTrust Bank with a remaining principal balance at September 30, 2000 of $3.2 million. The Company resolved its issues with SouthTrust Bank through September 30, 2000 over certain financial covenants, with the Company agreeing to pay down the principal balance by $200,000 per month instead of by $600,000 per quarter. The balance of the loan as of November 10, 2000 is $2.8 million. -8- Fortune Financial, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 4. Earnings (Loss) Per Share - ---------------------------------- Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share presents the dilutive effect of options using the treasury stock method. Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Numerator: Loss available to common shareholders ($1,434,380) ($2,296,982) ($6,348,063) ($5,799,322) ============ ============ ============ ============ Denominator: Basic per share weighted average shares 7,467,542 7,167,542 7,467,542 7,167,542 Effect of dilution: Employee stock options 0 0 0 0 - - - - Diluted per share adjusted weighted average shares and assumed conversions 7,467,542 7,167,542 7,467,542 7,167,542 ========== =========== =========== ========== Basic loss per share ($0.19) ($0.32) ($0.85) ($0.81) ======= ======= ======= ======= Diluted loss per share ($0.19) ($0.32) ($0.85) ($0.81) ======= ======= ======= =======
-9- Fortune Financial, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 5. Business Segments - -------------------------- The Company and its subsidiaries operate exclusively in Florida within principally six business segments: automobile insurance, excess and surplus lines property insurance, fee for service administration, premium finance, corporate and other miscellaneous. The automobile insurance segment sells personal lines automobile insurance through independent insurance agents primarily in south Florida. The excess and surplus lines segment writes specialized property insurance coverage. The Company has not written any new excess and surplus line policies during 2000 due to the current high cost of reinsurance. The fee for service segment contracts as a servicing carrier for the Florida Residential Property and Casualty Joint Underwriting Association, the Florida Automobile Joint Underwriting Association and as a subcontractor for Policy Management Systems Corporation performing various underwriting and claims administration services for a fee. This segment is currently in run-off. The premium finance segment finances policies written through the Company's insurance subsidiaries; the operating activities of this segment have been transferred to a third party under a joint venture agreement. The corporate segment includes home office revenues and assets that are not specific to any particular segment. The other category is attributable to a life insurance company and other small inactive companies that do not meet the quantitative thresholds for a separate segment. Management evaluates performance and allocates assets based on the separate entities owned by the Company. The reportable segments are business units that offer different products or services. The reportable segments are each managed separately. The following schedule presents segment revenues and profit (loss) before taxes for the three and nine months ended September 30, 2000 and 1999 and assets by operating segment at September 30, 2000 and December 31, 1999. The reconciling items for assets include adjusting available for sale securities to market value and the reclassification of reinsurance recoverable balances and the elimination of intercompany holdings. -10- Fortune Financial, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 5. Business Segments (continued) - ------------------------------------- Quarters Ended September 30 Nine Months Ended September 30 --------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Segment revenues: Automobile insurance $5,759,088 $7,416,065 $17,430,639 $25,074,967 Excess and surplus lines insurance 492,136 1,641,896 2,002,060 3,594,251 Fee for service 17,910 384,631 102,243 1,412,015 Corporate (11,934) 151,629 170,472 496,989 Premium finance (1,758) (971,600) 68,019 (834,006) Other 35,611 61,630 200,439 170,116 -------------- ------------------- ------------------- -------------- Total segment revenues $6,291,053 $8,684,251 $19,973,872 $29,914,332 Intercompany eliminations (1,869) 231 30,732 71,379 -------------- ------------------- ------------------- -------------- Total consolidated revenues $6,289,184 $8,684,482 $20,004,604 $29,985,711 ============== =================== =================== ============== Segment profit (loss) before taxes: Automobile insurance ($2,875,645) ($2,863,380) ($9,978,051) ($8,991,851) Excess and surplus lines insurance 388,818 327,937 305,774 967,661 Fee for service (25,030) (45,589) (243,869) 296,733 Corporate 177,822 (188,742) (446,640) (987,525) Premium finance (16,789) (1,051,545) (35,767) (1,093,781) Other 73,297 27,642 162,090 68,019 -------------- ------------------- ------------------- -------------- Total consolidated profit(loss) before tax ($2,277,527) ($3,793,677) ($10,236,463) ($9,740,744) ============== =================== =================== ==============
-11- Fortune Financial, Inc. and Subsidiaries Notes to Unaudited Consolidated Financial Statements Note 5. Business Segments (continued) - ------------------------------------- September 30,2000 December 31,1999 -------------------------------------- Segment assets: Automobile insurance $58,847,593 $52,065,243 Excess and surplus lines insurance 7,466,067 10,316,250 Fee for service 105,063 3,863,040 Corporate 21,507,869 30,258,990 Premium finance 295,333 1,030,189 Other 1,776,850 3,468,619 ------------------ ------------------ Total segment assets $89,998,775 $101,002,331 GAAP adjustments & reclassifications 19,775,746 38,992,962 Intercompany eliminations (45,247,508) (49,843,619) ------------------ ------------------ Total consolidated segment assets $64,527,013 $90,151,674 ================== ================== Note 6. Regulatory Restrictions - -------------------------------- The Company's Fortune Insurance Company subsidiary ("Fortune") had statutory surplus at September 30, 2000 of $0.7 million. Under Florida statutes, Fortune must maintain minimum surplus in 2000 of $2.5 million. The Company anticipates contributing funds in the form of a surplus note sufficient to bring Fortune's surplus above the minimum prior to filing Fortune's third quarter statement with the Department of Insurance. In addition, the Company continues to work on a capital plan to significantly increase Fortune's surplus prior to year-end. The components of that plan include the potential sale of its Fortune Life Insurance Company and Pegasus Insurance Company subsidiaries, as well as a potential additional equity investment by one or more strategic investment partners. The Company expects to successfully conclude its capital plan prior to year-end. -12- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------ Forward-Looking Statements - -------------------------- Statements made in this Form 10-Q, including those relating to future cash flow, management of the Company's investment portfolio, arbitration proceedings, the adequacy of loss reserves, increasing earned premium and the Company's capital plan are forward-looking within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may use words such as "believes", "expects", "intends", "may", "will", "should", "anticipates", or the negative forms of those words, and describe strategies, goals and expectations of future results involving risks and uncertainties which may cause actual results to differ materially from those set forth. Among other things, an increase in future cash flow is based upon expectations that current trends in new business volume / pricing and claims settlement that the Company is experiencing will continue; the Company's opinion on the settlement of arbitration proceedings is based upon facts as it knows and interprets them; the adequacy of loss reserves is based upon extrapolations of current experience which may or may not be repeated in the future; estimates of increasing earned premium are based upon the Company's expectation that it will be able to maintain its volume momentum, pricing structure and policy cancellation patterns; and estimates of increased capital through the implementation of the capital plan are based upon the Company's assessment of the level of investor interest in the Company. In addition to the factors set forth elsewhere in this Form 10-Q, the economic, competitive, governmental, weather-related and other factors identified in the Company's 1999 Form 10-K filed with the Securities and Exchange Commission could affect the forward looking statements contained in this Form 10-Q. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise. Financial Condition - ------------------- Cash flow from operations continued to be negative during the third quarter. During the quarter the Company paid $3.7 million to reinsurers under the terms of its reinsurance treaties. The Company's new treaties effective April 1, 2000 are not structured on a funds withheld basis. As a result, cash flow in the third quarter remained negatively impacted as premiums were remitted to reinsurers in advance of remittance back to the Company for losses paid. While the Company will continue to remit ceded premiums in advance of receiving reimbursements for ceded losses, the heaviest net cash drain on the Company is subsiding as reimbursements for ceded losses begin to be received. Similar to the first six months of the year, the third quarter's cash inflow from new -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ------------------------------------------------------------ policies (net of cancellations) continued to average $3.2 million per month and cash outflow to pay claims continued to average $4.3 million per month. Claims payment outflows are outpacing new policy inflows as the inventory of claims continues to shrink. Claims inventory is down 6% from the end of the second quarter to the end of the third quarter, and is down 27% since the end of 1999. The Company's investment portfolio consists almost entirely of high-grade bonds. During the third quarter the Company outsourced the management of its investment portfolio to a company that specializes in managing investment portfolios for insurance companies. The Company believes that the quality and consistency of the management of its portfolio, as well as the investment returns achieved, will be enhanced by this outsourcing. The Company has historically reinsured a substantial portion of its private passenger automobile insurance business, including approximately 75% of such business in 1998 and 60% of such business in 1999 and the first quarter of 2000. Effective April 1,2000 the Company reduced the amount of its private passenger automobile insurance business reinsured to 40%. The Company is currently involved in an arbitration proceeding with a reinsurer who reinsured the Company's private passenger automobile business under quota share treaties from 1985 to 1998. The Company has a receivable from the reinsurer in the amount of $8.8 million, and, along with its legal and reinsurance advisors, firmly believes that it is owed the full amount of the receivable. The Company is vigorously pursuing recovery of the amount owed, as well as interest and damages. The organizational meeting for the arbitration took place in September, and the arbitration panel has set a hearing date of May 2001. Private passenger automobile reserve strengthening in the third quarter related to prior accident quarters amounted to less than $0.4 million. This was down significantly from the first two quarters of the year, which included prior quarters' reserve strengthening of over $3.7 million. The Company believes that adverse loss development has now begun to abate, as policies written by agents the Company canceled over the past year begin to expire. The Company has a Credit Agreement with SouthTrust Bank with a remaining principal balance at September 30, 2000 of $3.2 million. The Company resolved its issues with SouthTrust Bank through September 30, 2000 over certain financial covenants, with the Company agreeing to pay down the principal balance by $200,000 per month instead of by $600,000 per quarter. The balance of the loan as of November 10, 2000 is $2.8 million. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ------------------------------------------------------------ The Company's Fortune Insurance Company subsidiary ("Fortune") had statutory surplus at September 30, 2000 of $0.7 million. Under Florida statutes, Fortune must maintain minimum surplus in 2000 of $2.5 million. The Company anticipates contributing funds in the form of a surplus note sufficient to bring Fortune's surplus above the minimum prior to filing Fortune's third quarter statement with the Department of Insurance. In addition, the Company continues to work on a capital plan to significantly increase Fortune's surplus prior to year-end. The components of that plan include the potential sale of its Fortune Life Insurance Company and Pegasus Insurance Company subsidiaries, as well as a potential additional equity investment by one or more strategic investment partners. The Company expects to successfully conclude its capital plan prior to year-end. Results of Operations - --------------------- The Company recorded net earned premiums of $5.3 million in the third quarter of 2000, down 24% from the third quarter of 1999. Year-to-date net earned premiums of $16.6 million exhibited a similar decline from the first nine months of 1999. The decline in net earned premium in 2000 reflects in large part the result of the Company's initiative to terminate the unprofitable portion of its independent agency base. Policies are currently being written through approximately 500 independent agents, less than one-third the number of agents in place a year ago. The Company terminated relationships with the other two-thirds primarily as a result of unacceptable loss ratios incurred on business written by those agents. During the first nine months of 2000 the Company wrote approximately 74,000 new private passenger automobile policies compared with approximately 139,000 during the comparable period of 1999. The impact on earned premium from the decline in the number of policies written was offset somewhat by a reduction in the amount of business reinsured under quota share agreements; effective April 1, 2000, the Company reduced the percentage of its private passenger auto business ceded from 60% to 40%. Between September 1999 and September 2000, the Company's average written premium per new business private passenger auto policy increased by 50%, further mitigating the impact of the decline in the number of policies written. Most of this increase in rate has occurred as a result of rate increases implemented March 1, 2000 and June 1, 2000, and will positively impact earned premium more substantially over the next several quarters. The Company has implemented another rate increase effective November 1, 2000, which, given the Company's current mix of coverages, raises average rates on new business private passenger automobile policies by almost 19%. Fee income equaled $2.2 million in the first nine months of 2000, down $1.8 million from the same period last year. The Company's fee income is generated primarily from policy fees assessed at the time of policy issuance, and therefore varies in direct -15- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ------------------------------------------------------------ relation to the number of policies written. During the fall of 1999 the Company stopped servicing new policies for both the Florida Residential and Auto Joint Underwriting Associations as those books of business became too small to profitably service. Income for servicing remaining existing policies totaled only $15,000 in the third quarter of 2000 and will cease by the end of the year. Investment income declined to $333,000 in the third quarter of 2000, compared to $820,000 for the comparable period a year earlier. The Company recorded $34,000 in net gains on investments during the third quarter of 2000. The Company's loss and loss adjustment expenses for the third quarter and first nine months of 2000 were down $1.1 million and $6.4 million, respectively, from the same periods a year ago, both declines reflecting the reduced volume of business. In July 2000 the Company settled a reinsurance dispute with Everest Re, resulting in a write-off of $1.9 million in ceded reinsurance receivables in the second quarter. Without the impact of the Everest Re settlement, loss and loss adjustment expenses for the nine months ended September 30, 2000 would have been down $8.3 million from the same period in 1999. For the third quarter of 2000 policy acquisition costs were $1.8 million lower than the third quarter of 1999, and for the first nine months of 2000 were $2.6 million lower than 1999's comparable period. The decrease was a result of the decreased volume of business, as well as the changes made to ceding commissions in the new reinsurance treaties. Policy acquisition costs represent the commissions paid by the Company to its agents, offset by ceding commission credits received by the Company from its reinsurers. Under the Company's old reinsurance treaties, which terminated on March 31, 2000, ceding commission credits adjusted over time depending upon changes in loss ratios of the underlying business ceded. Under the new reinsurance treaties ceding commissions are not adjusted based upon loss ratios. As changes in loss ratios under the old treaties stabilize through development, the sizeable quarterly fluctuations reported for these costs will not reoccur. Salaries and wages of $4.8 million in the first nine months of 2000 were $179,000 lower than during the same period in 1999, and were $107,000 lower in the third quarter of 2000 compared to the third quarter of 1999. Voluntary and involuntary staff reductions over the course of the last 12 months have reduced expenses, offset by general salary and wage increases for remaining employees. -16- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ------------------------------------------------------------ Third quarter 2000 general and administrative expenses of $1.9 million were down $779,000 from the third quarter of 1999, primarily due to a $500,000 write-off of premium receivable balances reported during the third quarter of 1999. For the first nine months of 2000, general and administrative expenses totaled $6.3 million, approximately equal to last year's first nine months. Interest expense continued to decline as the Company made further principal payments on its loan with SouthTrust Bank. Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- Market risk is the risk of potential loss in fair value of financial instruments arising from adverse fluctuations in interest rates, market rates and prices, foreign currency exchange rates, and other relevant market rate or price changes. The Company's exposure to market risk in interest rates is concentrated in its investment portfolio and to a lesser extent in its debt obligation. There have been no material changes in the Company's exposure to market risk since December 31, 1999. -17- Part II Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits: 11. Unaudited computations of earnings per share. 27. Financial Data Schedule (electronic filing only) -18- Signatures Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fortune Financial, Inc. Registrant November 14, 2000 By /s/ Mark P. Brockelman - ----------------- ---------------------------- Date Mark P. Brockelman Vice President and Chief Financial Officer -19- EX-11 2 0002.txt UNAUDITED COMPUTATIONS OF EARNINGS PER SHARE Exhibits Exhibit 11. Unaudited computations of earnings per share See Note 4 to financial statements. EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
7 9-MOS Dec-31-2000 Jan-01-2000 Sep-30-2000 13,822,549 0 0 505,569 0 0 15,946,494 2,563,146 16,089,575 (215,807) 64,527,013 14,839,403 20,366,233 0 1,411,466 3,294,835 0 0 198,610 17,854,089 64,527,013 16,638,227 1,250,248 (233,745) 2,349,874 15,911,658 2,885,391 11,444,018 (10,236,463) (3,888,400) (6,348,063) 0 0 0 (6,348,063) (.85) (.85) 12,299,879 15,097,234 802,868 9,236,504 9,913,881 9,049,598 802,868
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