-----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, Fie7epxaTTM7l+MGsdGaZA09iNl1n0Kp5bLArCAZlpvvXWFMgLcKqEQdlxeASb7B xG9IDbBxp3qLe7yfXJ5ftA== 0000798085-97-000003.txt : 19970514 0000798085-97-000003.hdr.sgml : 19970514 ACCESSION NUMBER: 0000798085-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FACILITIES CORP CENTRAL INDEX KEY: 0000798085 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 330097221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12099 FILM NUMBER: 97602254 BUSINESS ADDRESS: STREET 1: 650 TOWN CENTER DR STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145491600 MAIL ADDRESS: STREET 1: 650 TOWN CENTER DRIVE STREET 2: STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626-1925 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission file Number: 0-15196 US FACILITIES CORPORATION ------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 33-0097221 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 650 Town Center Drive, Suite 1600, Costa Mesa, CA 92626 ------------------------------------------------------- (Address of principal executive offices) (Zip code) (714)549-1600 ------------- (Registrant's telephone number, including area code) Not applicable -------------- (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 Number of shares outstanding of each class of the Registrant's Common Stock as of May 7, 1997: Common Stock, par value $.01 per share: 5,960,148 Common Stock Purchase Rights: 5,960,148 INDEX Part I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Condensed Consolidated Financial Statements: Balance Sheets as of March 31, 1997 and December 31, 1996..................................................2 Income Statements for the Quarters Ended March 31, 1997 and 1996............................................3 Statements of Cash Flows for the Quarters Ended March 31, 1997 and 1996............................................4 Notes to Condensed Consolidated Financial Statements...............5 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................6 Part II OTHER INFORMATION Item 6. EXHIBITS and REPORTS ON FORM 8-K..................................12 SIGNATURES...................................................................14 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Condensed Consolidated Financial Statements: US FACILITIES CORPORATION Condensed Consolidated Balance Sheets (Dollars in thousands)
March 31, 1997 December 31,1996 -------------- ---------------- ASSETS Investments, at market (amortized cost $187,414 at March 31, 1997, $185,472 at December 31,1996) $ 193,003 $ 194,352 Cash and invested cash 10,470 11,132 Restricted cash and short term investments 25,582 23,771 Accrued investment income 2,489 2,653 Receivables: Reinsurance losses and reserves 22,809 23,975 Premiums 21,252 16,841 Prepaid reinsurance premiums 6,933 6,495 Deferred policy acquisition costs 3,740 3,644 Other assets 11,281 5,880 -------- -------- Total assets $297,559 $288,743 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Insurance liabilities: Amounts due insurance companies $ 30,872 $ 27,148 Losses and loss adjustment expenses 101,636 94,669 Unearned premiums 24,522 22,936 Note payable 34,375 35,000 Accounts payable and accrued expenses 2,712 6,626 ------- ------- Total liabilities 194,117 186,379 Stockholders' Equity 103,442 102,364 ------- ------- Total liabilities and stockholders' equity $297,559 $288,743 ======== ========
See accompanying notes to condensed consolidated financial statements. 2 US FACILITIES CORPORATION Condensed Consolidated Income Statements (Dollars in thousands, except per share data)
Quarter ended March 31, ----------------------- 1997 1996 ---- ---- Revenues: Premiums earned $39,283 $29,152 Commissions and fees 8,042 6,589 Net investment income 2,691 2,442 Realized investment gains 177 735 ------ ------- Total revenues 50,193 38,918 ------ ------ Operating Expenses: Losses and loss adjustment expenses incurred 27,996 20,842 Policy acquisition expenses 11,909 8,874 General and administrative expenses 4,454 3,545 Interest 614 680 ------ ------ Total operating expenses 44,973 33,941 ------ ------ Income before income taxes 5,220 4,977 Income tax expense 1,560 1,169 ----- ----- Net income $ 3,660 $ 3,808 ======= ======= Net income per common and common equivalent share $ 0.60 $ 0.64 ======= ======= Weighted average number of common and common equivalent shares outstanding during period 6,094 5,979 ===== =====
See accompanying notes to condensed consolidated financial statements. 3 US FACILITIES CORPORATION Condensed Consolidated Statements of Cash Flows (Dollars in thousands)
Quarter ended March 31, ----------------------- 1997 1996 ---- ---- Cash provided by operating activities $ 2,381 $ 7,787 Cash flows from investing activities: Purchases of fixed maturity investments (9,572) (11,835) Purchases of equity securities ( 189) (487) Proceeds from sales of investment securities 4,612 10,619 Net sales (purchases) of short term investments 3,529 (6,365) Purchases of property and equipment (443) (243) --------- ----------- Cash used in investing activities (2,063) (8,311) ---------- ----------- Cash flows from financing activities: Dividends paid (358) (350) Exercise of stock options 3 626 Payments on note payable (625) - ---------- ----------- Cash (used in) provided by financing (980) 276 ---------- ----------- activities Net decrease in cash and invested cash (662) (248) Cash and invested cash at beginning of period 11,132 8,165 ---------- ---------- Cash and invested cash at end of period $ 10,470 $ 7,917 ========= ========== Supplemental disclosure of cash flow information: Interest paid $ 582 $ --- ========== ========== Income taxes paid, net $ 818 $ 61 ========== ===========
See accompanying notes to condensed consolidated financial statements. 4 US FACILITIES CORPORATION Notes to Condensed Consolidated Financial Statements 1. General The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31,1997 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31,1996 included in the US Facilities Corporation (the "Company") 1996 Annual Report to Stockholders. 2. Other SFAS No. 128, "Earnings per Share and Disclosure of Information about Capital Structure" will be adopted by the Company for the year ended December 31, 1997. Adoption of this pronouncement is not expected to have a material effect on the financial statements or the related disclosures of the Company. 3. Acquisition Effective January 1,1997, the Company acquired the medical stop loss business of Global Excess Re, Inc.("Global") in a transaction accounted for as a purchase. The purchase transaction was not material to the financial statements of the Company. The results of operations of Global since the acquisition date are included in the accompanying condensed consolidated financial statements. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results Of Operations - --------------------- Consolidated revenues for the 1997 first quarter increased 29% to $50,193,000 from $38,918,000 in the 1996 quarter. Revenue improvements in the first quarter of 1997 were primarily attributable to growth in the property/casualty segment, additional medical stop loss business resulting from the acquisition of Global Excess Re in January 1997, and increased production of provider excess coverage. Net investment income reflects a 10% increase over the 1996 period as a result of higher levels of invested assets. Consolidated net income decreased to $3,660,000 in the 1997 first quarter from $3,808,000 in the 1996 quarter, primarily due to a decline in realized gains to $177,000 from $735,000 in the 1996 quarter. The level of realized gains in the 1996 period resulted primarily from two transactions. First quarter 1997 results reflect the changes in revenues noted above, an increase in medical lines claims cost experience, and increases in income tax expenses as prior tax benefits were no longer available. US Facilities Corporation's (the "Company") continued focus on productivity and expense control maintained general and administrative expenses at 9% of revenues in both periods. Income taxes as a percentage of pre-tax income fluctuate depending on the proportion of tax exempt investment income to total pre-tax income, the effect of available tax benefits, and the proportion of total income subject to state income taxes. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. Loss and loss adjustment expense reserve development is reviewed on a regular basis, incorporating analysis of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data becomes available, the Company's actuarial estimates may be revised. Such revisions may impact earnings. Policy acquisition expenses vary on the basis of market conditions and mix of business. 6 The statutory combined ratio is the traditional indicator of the potential underwriting profitability of an insurance company's business. Statutory combined ratios as previously reported by the Company have been revised to conform to rating agency and industry association presentations which recognize insurance company net management fee revenues in calculating such ratios. The Company's statutory combined ratio, as revised, was 98.8 and 98.4 for the quarters ended March 31, 1997 and 1996, respectively. Business Segments - ----------------- The Company conducts business in two segments: Medical lines includes medical stop-loss and provider excess coverages underwritten by the Company's subsidiary, USBenefits Insurance Services, Inc. ("USBenefits") on behalf of The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies, and reinsurance of 50% of such business by the Company's USF RE INSURANCE COMPANY ("USF RE") subsidiary. USBenefits is the managing general underwriter and marketing organization for medical lines coverages issued by Continental. Medical stop-loss coverage is a form of insurance that protects employers that self-insure their employee healthcare plans by limiting their exposure from the risk of loss to a pre-established amount. Provider excess coverage limits the financial risks healthcare providers face from medical plans that prepay the providers fixed sums per plan participant (capitated fees) or provide specified rates for services. USBenefits also markets other employee benefits related products on behalf of several national life insurance companies. Medical lines products are marketed through a network of unaffiliated third party administrators, insurance agents, brokers and consultants ("Producers"). Producers have non-exclusive arrangements with USBenefits that enable them to submit requests for coverage quotations. Property/Casualty reinsurance and insurance underwriting is conducted by USF RE and its wholly-owned subsidiary USF Insurance Company ("USFIC"). These subsidiaries both carry an A (Excellent) rating from A.M. Best Company. Insurance companies purchase reinsurance in order to control and manage the risk they accept when they issue policies. USF RE assumes facultative and treaty reinsurance from unaffiliated insurance companies, primarily through reinsurance intermediaries. Facultative is reinsurance of an individual risk; while reinsurance treaties cover risks written or assumed by another insurer in a particular class or classes of business. USF RE concentrates its casualty writings in general liability, commercial auto liability and products liability. It also provides a broad range of coverages for most types of property exposures. USFIC writes surplus lines insurance on commercial property/casualty risks which are marketed through independent excess and surplus lines brokers. 7 The tables set forth below present pre-tax operating information by business segment and holding company operations (including realized gains) for the quarters ended March 31, 1997 and 1996, respectively. Medical Lines - --------------
(Dollars in thousands) Quarter Ended March 31 1997 1996 % Change ---- ---- -------- Revenues: Premiums earned $25,032 $20,321 23 % Commissions and fees 8,042 6,589 22 % Investment income 865 749 15 % ------- --- Total revenues 33,939 27,659 23 % ------- ------- Expenses: Losses and loss adjustment 17,886 13,838 29 % Policy acquisition 8,606 6,856 26 % General and administrative 3,339 2,472 35 % ------- ------- Total expenses 29,831 23,166 29 % ------ ------ Income before income taxes $4,108 $ 4,493 (9)% ====== ======= ====
Increases in revenues for the first quarter of 1997 are due to growth in the provider excess line and additional medical stop loss business from the acquisition of Global Excess Re in January 1997. As a result, medical lines segment production increased 23% in the 1997 quarter over the 1996 quarter, generating the changes noted above in premiums earned and commissions and fees revenues. Loss and loss adjustment expenses in the 1997 quarter reflect increases in the cost of healthcare which are not mitigated by increases in premium rates due to continued competitive industry conditions as well as an increase in claims cost experience. Policy acquisition expenses vary due to the mix of business and market conditions. Increases in such expenses between periods presented are a result of higher production levels during the 1997 period. Increases in general and administrative expenses in the 1997 quarter primarily result from expenses related to the operations of Global Excess Re. 8 Property/Casualty - -----------------
(Dollars in thousands) Quarter ended March 31 1997 1996 % Change ---- ---- -------- Revenues: Premiums earned $ 14,251 $8,831 61 % Investment income 1,814 1,674 8 % -------- ------ Total revenues 16,065 10,505 53 % -------- ------ Expenses: Losses and loss adjustment 10,110 7,004 44 % Policy acquisition 3,303 2,018 64 % General and administrative 898 850 6 % ------ ------ Total expenses 14,311 9,872 45 % ------ ----- Income before income taxes $ 1,754 $ 633 177 % ======= ===== =====
The increase in premiums earned during the first quarter of 1997 over the 1996 period primarily resulted from growth in the treaty reinsurance line based on the foundation developed during the last two years. Changes in losses and loss adjustment expenses between periods reflect improved loss experience in 1997. The increase in policy acquisition expenses in 1997 as compared to 1996 results from the continued growth of the property/casualty business lines and changes in the mix of business. Holding Company - ---------------
(Dollars in thousands) Quarter ended March 31 1997 1996 % Change ---- ---- -------- Revenues: Investment income $ 12 $ 19 (37) % Realized gains 177 735 (76) % ---- ---- Total revenues 189 754 (75) % ---- ---- Expenses: General and administrative 217 223 (3) % Interest 614 680 (10) % ---- ---- Total expenses 831 903 (8) % ---- ---- Loss before income taxes $(642) $(149) ====== ======
9 Inflation - --------- Inflation can negatively impact insurance and reinsurance operations by causing higher claims settlements than may have originally been estimated, while not necessarily allowing an immediate increase in premiums to a level necessary to maintain profit margins. Historically, the Company has made no explicit provisions for inflation, but trends are considered when setting underwriting terms and claim reserves. Such reserves are subjected to a continual internal and external review process to assess their adequacy and are adjusted as deemed appropriate. Overall economic trends also affect interest rates, which in turn affect investment income and the market value of the Company's investment portfolio. Liquidity and Capital Resources - ------------------------------- The Company utilizes cash from operations and maturing investments to meet its insurance obligations to policyholders and claimants, as well as to meet operating costs. Primary sources of cash from operations include premium collections, investment income and commissions and fees. The principal uses of cash from operations are for premium payments to insurance companies, payments of claims under USF RE's and USFIC's reinsurance and insurance contracts, and operating expenses such as salaries, commissions, taxes and general overhead. The Credit Agreement with the Company's lender contains certain covenants, restrictions and dividend payment limitations with which the Company was in compliance at March 31, 1997. The Company anticipates that it will continue to generate sufficient cash flow from operations to cover its short-term (1-18 months) and long-term (18 months to 3 years) liquidity needs. While the Company currently has no immediate plans for significant capital outlays, from time to time it contemplates acquisition opportunities that complement its business operations. The Company currently invests primarily in the highest grades of bonds, equities, certificates of deposit and short-term instruments. At March 31, 1997, 99% of the fixed income portfolio was in securities rated A or better. All such securities are carried at quoted market values at the latest balance sheet date. The Company does not invest in real estate, derivatives or high yield bonds. 10 Legislative and Regulatory Developments - --------------------------------------- As noted in prior filings with the Securities and Exchange Commission by the Company, various federal and state healthcare legislative and regulatory proposals which could impact the financing and delivery of healthcare have been considered. The 104th Congress enacted certain federal proposals, some covering self-insured benefit plans, and the 105th Congress is considering other legislative proposals. Management cannot predict at this time what impact, if any, these enactments or new legislative proposals would have on the Company's medical lines business. However, based on management's review of the latest information received, management believes that these enactments and proposals will not have an adverse impact on our business. Some of the statements included within Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes may be considered to be forward looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), and which are subject to certain risks and uncertainties. Among those factors which could cause the actual results to differ materially from those suggested by such statements are: catastrophe losses in the Company's insurance lines or a material aggregation of losses; changes in federal or state law affecting an employer's ability to self-insure; availability of adequate retrocessional insurance coverage at appropriate prices; a downturn in the general economy; the effects of competitive market pressures within the stop-loss or property/casualty marketplaces; the effect of changes required by generally accepted accounting practices or statutory accounting practices; and other risks which are described from time to time in the Company's filings with the Securities and Exchange Commission. 11 PART II OTHER INFORMATION Item 6. EXHIBITS and REPORTS ON FORM 8-K. (a) The following is a list of exhibits required to be filed as part of this Form 10-Q by Item 601 of Regulation S-K: 3.1, 4.1 Restated Certificate of Incorporation, as amended, as presently in effect. Filed as Exhibits 3.1 and 3.1.1 to the Company's Form S-1 Registration Statement declared effective by the Securities and Exchange Commission on October 31, 1986 (the "Registration Statement"), and incorporated herein by this reference; and as Exhibit 3 to the Company's Current Report on Form 8-K dated May 24, 1990, and incorporated herein by this reference. 3.2, 4.2 Bylaws of US Facilities Corporation, as amended, as presently in effect. Filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by this reference. 4.3 Common Stock Certificate of US Facilities Corporation. Filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by this reference. 4.4 Rights Agreement. Filed as Exhibit 2 to the Company's Current Report on Form 8-K dated May 24, 1990, and incorporated herein by this reference. 4.5 First Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated January 16, 1992, and incorporated herein by this reference. 4.6 Second Amendment to Rights Agreement. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1994, and incorporated herein by this reference. 4.7 Third Amendment to Rights Agreement. Filed as Exhibit 4 to the Company's Current Report on Form 8-K dated September 28, 1995, and incorporated herein by this reference. 11* US Facilities Corporation and Subsidiaries Computation of Earnings Per Share. 12 15* Independent Auditors' letter regarding unaudited interim financial information. 27* Financial Data Schedules (b) No reports on Form 8-K were filed by the Company during the quarter ended March 31, 1997. * Describes the exhibits filed with this Quarterly Report on Form 10-Q. 13 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. US FACILITIES CORPORATION Date: May 13, 1997 By: /S/DAVID L. CARGILE -------------------- DAVID L. CARGILE Chairman of the Board, President and Chief Executive Officer Date: May 13, 1997 By: /S/MARK BURKE ------------- MARK BURKE Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 14 EX-11 2 EARNINGS PER SHARE EXHIBIT 11 US FACILITIES CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share The computation of per share income is based upon the weighted average number of common and common equivalent shares outstanding during each quarter ended March 31, as follows:
(000 Omitted) 1997 1996 ---- ---- Net Income $3,660 $3,808 ====== ====== Weighted average shares outstanding during the period 5,960 5,821 Common stock equivalent shares 134 156 ------- ------ Common and common stock equivalent shares outstanding for purposes of calculating income per share 6,094 5,979 Incremental shares to reflect full dilution 6 2 ------ ------ Total shares for purpose of calculating fully diluted income per share 6,100 5,981 ===== ===== Primary net income per share $ 0.60 $ 0.64 ======= ======= Fully diluted net income per share $ 0.60 $ 0.64 ======= =======
EX-15 3 AUDITORS' REVIEW REPORT EXHIBIT 15 Independent Auditors' Review Report The Board of Directors and Shareholders US Facilities Corporation: We have reviewed the condensed consolidated balance sheet of US Facilities Corporation and subsidiaries as of March 31, 1997, and the related condensed consolidated income statements and statements of cash flows for the three-month periods ended March 31, 1997 and 1996. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of US Facilities Corporation and subsidiaries as of December 31, 1996, and the related consolidated income statement and statements of stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 4, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ KPMG PEAT MARWICK LLP Los Angeles, California April 28, 1997 EX-27 4 EXHIBIT 27 (FDS)
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 0 0 0 0 0 0 193,003 36,052 22,809 3,740 297,559 101,636 24,522 0 0 34,375 0 0 0 0 297,559 39,283 2,691 177 8,042 27,996 11,909 5,068 5,220 1,560 0 0 0 0 3,660 0.60 0.60 0 0 0 0 0 0 0
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