SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 OR 15 (d) of
the Securities Exchange Act of 1934
For The Period Ended September 30, 1995
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 0-15373
U.S. Capital Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3357749
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
7 Cambridge Drive, Trumbull, CT. 06611
(address of principal executive offices)
(Zip Code)
203 - 373 - 1006
(Registrant's telephone number, including area code)
4 West Red Oak Lane, White Plains, New York 10604
(Former name, former address and former fiscal year, if changed since last
year)
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding
Title Of Each Class As Of August 10, 1995,
Common Stock, $.10 Par Value 560,546
U.S. CAPITAL GROUP INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1995 and
December 31, 1994
.....................................................................__ 3
Condensed Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 1995 and September 30, 1994 __...... 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 1995 ......................._.....
6
Condensed Consolidated Statements of Cash Flow - Nine Months
Ended September 30, 1995 and September 30, 1994...................._..... 7
Notes To Condensed Consolidated Financial Statements .....................
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
............................................................._..... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on form 8 -
K........................................._.......... 14
Signatures......................................................................
....................._.......... 15
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1995 1994
Fixed maturities, available for sale,
at market value (amortized cost:
$64,417,840 in 1995 and
$71,427,231 in 1994) $ 64,723,417 $ 66,467,779
Equity securities, at market value
(cost: $1,683 in 1995 and
$610,307 in 1994) 314 631,102
Short-term investments, at cost,
which approximates market 18,318,377 23,684,147
Total Investments 83,042,108 90,783,028
Cash 43,853 48,107
Accrued investment income 1,024,207 1,325,514
Reinsurance balances receivable 14,438,444 8,167,320
Reinsurance recoverable 67,771,521 68,499,850
Deferred charges 7,987,173 11,838,981
Land, property, and equipment 1,335,256 1,327,848
Other assets 10,472,428 11,267,966
Total $ 186,114,990 $ 193,258,614
See Notes to Condensed Consolidated Financial Statements.
3
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND September 30, December 31,
STOCKHOLDERS' EQUITY 1995 1994
Liabilities
Reserves for unpaid losses and loss
adjustment expenses $ 116,705,607 $ 122,776,285
Reinsurance balances payable 32,912,343 49,176,367
Funds held for reinsurers 2,732,869 2,399,027
Unearned premiums 22,088,482 9,044,504
Other liabilities 5,218,141 1,794,318
Total Liabilities 179,657,442 185,190,501
Investment Deposits and Contingencies -- (Note 3)
Stockholders' Equity
Preferred stock, par value $1.00 per share -
authorized 250,000 shares, none issued
Common stock, par value $.10 per share -
authorized 2,500,000 shares; issued
1,112,542 (includes 551,996 shares in 1995
and 1994 held in the treasury) 111,254 111,254
Additional paid-in capital 29,480,880 29,480,880
Unrealized appreciation(depreciation)
on securities 156,640 (5,638,655)
Foreign exchange translation adjustment 2,273,999 2,116,590
Retained earnings (9,005,939) (1,442,670)
23,016,834 24,627,399
Less: Treasury stock at cost 16,559,286 16,559,286
Total Stockholders' Equity 6,457,548 8,068,113
Total $ 186,114,990 $193,258,614
See Notes to Condensed Consolidated Financial Statements.
4
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- - - - - - -----------------------------------------(Unaudited)-----------------------
Three Months Ended
Nine Months Ended
September 30,
September 30,
1995 1994 1995 1994
REVENUES:
Premiums earned $13,073,006 $5,524,186 $31,395,479 $15,159,281
Investment income 1,051,123 1,676,960 4,318,077 5,091,083
Realized investment gain(loss) (70,519) 285,308 209,606 310,656
Underwriting fees & commissions (253,011) 85,573 (98,665) 240,986
Other income 346,165 145,855 825,331 242,656
Total revenues 14,146,764 7,717,882 36,649,828 21,044,662
LOSSES AND EXPENSES:
Loss and loss adjustment
expenses 6,893,795 6,983,342 19,297,509 11,362,055
Policy acquisition cost 2,142,083 (605,255) 5,477,390 695,795
Other acquisition and operating
expenses 9,682,558 1,381,899 15,727,976 7,145,274
Amortization of deferred charge 3,283,936 295,252 3,851,808
885,756
Total losses and expenses 22,002,372 8,055,238 44,354,683 20,088
,880
Income(loss) before following item: (7,855,608) (337,356) (7,704,855)
955,
782
Equity in income(loss) of
unconsolidated affiliate (8,476)
141,586 (67,282)
Net Income(loss) ($7,855,608) ($345,832) ($7,563,269) $ 888,500
Net income per common share ($14.01) ($0.61)
($13.49) $1.56
See Notes to Condensed Consolidated Financial Statements.
5
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Appreciation Foreign
Shares of Additional
(Depreciation) Exchange
Total
Common Stock
Common Paid-in on Equity Translation
Retained Treasury
Stockholders'
Issued Treasury Stock Capita
l Securities Adjustment Earnings Stock Equity
Balance, December 31, 1994 1,112,542 551,996 $111,254 $29,480,880 ($5,63
8,655) $2,116,590 ($1,442,670) ($16,559,286) $8,068,113
(Unaudited)
Net income for nine months
ended Septembere 30, 1995 (7,563,269)
(7,56
3,269)
Change in unrealized
appreciation (depreciation)
on securities 5,795,295 5,795,295
Foreign currency translation __________ ________ _________ ____________
___
_______ 157,409 ____________ ___________ __ 157,409
(233,441)
Balance, September, 1995 1,112,542 551,996 $111,254 $29,480,880
$156,640 $2,273,999 ($9,005,939) ($16,559,286) $6,457,548
See Notes to Condensed Consolidated Financial Statements.
6
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
Months Ended
September 30,
1995 1994
OPERATING ACTIVITIES:
Net cash used by operating activities ($14,024,551) ($5,086,465)
INVESTING ACTIVITIES:
Proceeds from sale of fixed maturities
and equity securities 25,203,897 17,133,159
Purchase of fixed maturities & equity
securities (16,882,474) (3,892,037)
Net decrease (increase) in short-term
investments 5,390,770 (6,769,820)
Sales (purchases) of fixed assets, net 3,661 (1,134,937)
Net cash provided(used) by investing
activities 13,715,853 5,336,365
FINANCING ACTIVITIES:
Increase (decrease) in funds held 307,843 (220,094)
Net cash provided (used) by financing
activities 307,843 (220,094)
Effect of exchange rate changes on cash (3,400) 30,437
Increase(decrease) in cash (4,255) 60,243
Cash - beginning of period 48,108 12,372
Cash - end of period $ 43,853 $72,615
7
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1994
(Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements include those of the Company
and its subsidiaries and GoldStreet Syndicate Corporation which is accounted
for on the equity method. The condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
condensed financial information and with the instructions to Form 10Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Condensed consolidated financial information included herein is unaudited;
however, in the opinion of management, such information reflects all
adjustments necessary for a fair presentation of the results for the interim
periods. Operating results for the nine months ended September 30, 1995 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. These statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Form 10-K
as filed on March 31, 1995.
Note 2 - Net Income Per Share
Net income per share is calculated based on the weighted average outstanding
common stock and common stock equivalents for the nine months ended September
30, 1995 and 1994 of 560,546 and 568,896, respectively.
Note 3 - Commitments and Contingent Liabilities
Pursuant to the requirements of the Constitution and By-Laws of the New York
Insurance Exchange (the Exchange) and the Insurance laws of the State of New
York, Pan Atlantic Investors Ltd. (PAIL), the Company's wholly owned
subsidiary, and GoldStreet Syndicate Corporation (GoldStreet), a 30% owned
affiliate of the Company, are contingently liable as underwriting members on
the Exchange for up to a maximum of $500,000 each for the unpaid contractual
obligations of underwriting members found to be insolvent.
On October 21, 1994 certain subsidiaries of the Company received an unfavorable
arbitration award. On October 21, 1994 a second arbitration award was
purportedly issued against the Company and certain subsidiaries. These disputes
and certain unfavorable arbitration awards were referenced in USCG's 10K for
the fiscal year ended Dcember 31, 1994 at Note I to the financial statements.
8
Note 3 - Commitments and Contingent Liabilities -- continued
On November 9, 1995 U.S. Capital Group Inc. and its subsidiaries ("USCG")
entered into a settlement agreement with Republic Insurance Company
("Republic") in order to settle the various disputes between the parties ("the
Settlement"). These disputes and certain unfavorable arbitration awards were
referenced in USCG's 10K for the fiscal year ended December 31, 1994 at Note I
to the financial statements.
The Settlement provides for a restructuring of the complex business
relationships between the parties: the transfer to Republic of the control and
administration of reinsurance policies bound in Republic's name by certain
subsidiaries of USCG; the payment of a liability, carried by USCG of
$5,400,000, over ten years without interest, the payment being secured by a
pledge of all the shares of USCG's principal subsidiary, U.S. Capital Insurance
Company, with the option to discharge this obligation at any time by payment of
the net present value of the amount outstanding: the commutation and release of
the reinsurance obligations of various insurance company subsidiaries of USCG
to Republic, some of which are immediate and others of which are to be
determined at a future date; the commutation and immediate release of all
Republic's reinsurance obligations to USCG's subsidiaries; the payment by
Republic and other entities as parties to the settlement of up to $3,340,698 to
a USCG subsidiary; and the transfer to Republic of USCG's equity interest in
GoldStreet Syndicate Corporation in the amount of $4,297,026 which has been
included in "Other Acquisition and Operating Expenses". The Settlement provides
further for a number of continuing obligations on behalf of USCG, the
performance of which determine the extent and exact timing of the release from
the arbitration awards referenced above as well as from certain other
contractual and reinsurance obligations. In connection with the settlement,
the Company evaluated its deferred charges and recognized a reduction of this
asset in the amount of $3,000,000.
The Company or its subsidiaries are parties to various other lawsuits generally
arising in the normal course of the Company's insurance, reinsurance and
management businesses. The Company does not believe that the eventual outcome
of any such litigation will have a materially adverse effect on the financial
condition or business of the Company or its subsidiaries. The Company's
subsidiaries are regularly engaged in the investigation and defense of claims
arising out of its insurance and reinsurance business.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--
Overview
USCG is a holding company which, through its subsidiaries, engages in primary
insurance and reinsurance underwriting. Primary insurance underwriting is being
conducted by U.S. Capital Insurance Company ("USCIC"), which accounts for
virtually all of USCG's earned premiums and 92% of total revenues for the nine
months of 1995. The other companies in USCG, whose books of business are
currently in run off, are Pan Atlantic Investors Ltd. ("PAIL"), Pan Atlantic
Insurance Company ("PAICO"), and Pan Atlantic Reinsurance Company, Ltd
("PARCO").
In October 1994, certain subsidiaries of the Company received an unfavorable
arbitration award and in November 1995, USCG entered into a settlement
agreement with Republic Insurance Company in order to settle various disputes
between the parties. This matter is discussed at "Note 3" to the "Notes to the
Consolidated Financial Statements" on Pages 8 and 9.
Results of Operations
Revenue for the quarter and nine months ended September 30, 1995 were
$14,146,800 and $36,649,800 respectively, compared to $7,717,900 and
$21,044,700 for the comparable 1994 periods. This increase in revenues is
attributable to an increase in earned premiums generated by USCIC. USCIC is
primarily engaged in underwriting personal and commercial automobile insurance,
commercial property and liability insurance, general liability insurance and
reinsurance of specialty classes within niche markets.
The consolidated net loss for the quarter and nine months ended September 30,
1995 amounted to $7,855,600 or $14.01 per share and $7,563,300 or $13.49 per
share, as compared to a net loss of $345,800 or $.61 per share for the
comparable quarter ended September 30, 1994 and net income of $888,500 or $1.56
per share for the nine months ended September 30, 1994.
Quarter Ended September 30, 1995 Compared To Quarter Ended September 30, 1994
Premium earned in the three months ended September 30, 1995 was $13,073,000 as
compared to $5,524,000 for the same period in 1994. The increase in premiums
earned is due to the expansion of USCIC's passenger automobile business in New
York and California. Additionally, USCIC is writing commercial automobile and
property insurance in New York, Louisiana and California.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Continued
Investment income decreased $625,800 during the third quarter 1995 as compared
to the third quarter of 1994. This decrease is due to lower interest rates and
a reduction in the portfolio base due to commutation settlements, and claims
payments.
Realized losses in the third quarter of 1995 totaled $70,519 as compared to a
realized gain of $285,000 in the comparable quarter of 1994.
Underwriting fees and commissions decreased $338,600 in the third quarter of
1995 as compared to the same period in 1994 as a result of termination of an
agreement to manage the GoldStreet Syndicate and the write-off of uncollectible
management fees.
Other income increased $200,300 due mainly to the increase in policy and
service fees charged by USCIC in its private passenger automobile business.
LOSSES AND EXPENSES:
Loss and loss adjustment expenses decreased $89,500 as compared to the same
period in the prior year.
Policy acquisition costs increased by $2,747,300 due largely to the increased
direct premiums writings in USCIC.
Other acquisition and operating expenses increased $8,300,700. This increase is
mainly due to the settlement reached in order to settle the various disputes
referenced at "Note 3" to the "Notes to the Consolidated Financial Statements".
Amortization of deferred charges increased $2,988,700 which is due to the
reduction of the deferred asset carried by the Company as a consequence of the
settlement referenced above.
Equity in income(loss) of unconsolidated affiliate remained unchanged from June
30, 1995.
As a result of the foregoing, the Company sustained a net loss in the third
quarter of 1995 of $7,855,600 as compared to a net loss in the comparable
quarter of 1994 of $345,800.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Continued
Nine Months Ended September 30, 1995 Compared To Nine Months Ended September
30, 1994
REVENUES:
Premium earned increased by $16,236,000 which is due to USCIC's increased
direct writings.
Investment income decreased $773,000. This decrease is due to lower interest
rates and a reduction in the portfolio base due to commutation settlements, and
claims payments.
Realized losses decreased $101,000. This decrease was caused by the partial
liquidation of the PAIL portfolio in order to meet reinsurance commutation
commitments.
Underwriting fees and commissions decreased $339,700 as a result of termination
of an agreement to manage the GoldStreet Syndicate and the write-off of
uncollectible management fees.
Other income increased $582,700 due mainly to the increase in policy and
service fees charged by USCIC in its private passenger automobile business.
LOSSES AND EXPENSES:
Loss and loss adjustment expenses increased $7,935,500. This increase is
largely due to the increased premium volume written by USCIC in 1995 as
compared to 1994.
Policy acquisition costs increased by $4,781,600 which is a direct result of
the increased writings in USCIC. These expenses mainly represent the commission
paid to brokers and or agents for placing business with USCIC.
Other acquisition and operating expenses increased $8,582,700. This increase is
mainly due to the settlement reached in order to settle the various disputes
referenced at "Note 3" to the "Notes to the Consolidated Financial Statements".
Amortization of deferred charges increased $2,966,000 which is due to the
reduction of the deferred asset carried by the Company as a result of the
settlement referenced above.
Equity in income of unconsolidated affiliate increased by $208,900 as a result
of favorable results in GoldStreet Syndicate.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Continued
As a result of the foregoing, the Company sustained a net loss for the nine
months ended September 30, 1995 of $7,563,300 compared to a net gain of
$888,500 for the comparable period of 1994.
Liquidity and Capital Resources
USCG is a holding company, receiving cash principally through sales of
equities, borrowings, and dividends from its subsidiaries, some of which are
subject to dividend restrictions. The ability of insurance and reinsurance
companies to underwrite insurance and reinsurance is based upon maintaining
liquidity and capital resources sufficient to pay claims and expenses as they
become due. The primary sources of liquidity for USCG subsidiaries are funds
generated from
insurance and reinsurance premiums, investment income, commission and fee
income, and
proceeds from sales and maturities of portfolio investments. The principal
expenditures are for payment of losses and loss adjustment expenses, operating
expenses, and commissions.
All of the subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide an acceptable return on
investment while preserving capital and maintaining sufficient liquidity to
meet their obligations. USCIC, the principal insurance underwriter, maintains a
sufficient margin of capital and surplus to ensure its unimpaired ability to
write insurance and assume reinsurance.
Net decrease in cash flow generated from operations for the nine months of 1995
was $14,024,600 compared to a negative cash flow of $5,086,500 for the same
period last year. This negative cash flow was offset by cash provided from
investing activities of $13,715,900 for the nine months of 1995 as compared to
$5,336,400 for the same period in 1994. Cash decreased in the nine months of
1995 by $4,255 as compared to an increase in cash of $60,243 in the nine months
of 1994. Cash from all Company operations has been adequate to meet obligations
and at this time, is believed by management to be adequate for the foreseeable
future. See "Note 3" to the Consolidated Financial Statements" on Pages 8 and 9.
At September 30, 1995, USCG's capital and surplus amounted to $6,457,500 as
compared to $8,068,100 at year end 1994. This decrease of $1,610,500 is due to
the settlement agreement discussed at "Note 3" to the "Notes to the
Consolidated Financial Statements."
13
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 1994
PART II
OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8 - K
(b) A Form 8 - K was filed on November 14, 1995.
As an Exhibit to Form 8 - K was a Press Release issued on November 13, 1995
which described the settlement of various disputes involving the Company.
14
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S CAPITAL GROUP INC.
November 17, 1995
/s/ Ronald H. Labenski
Ronald H. Labenski
Vice President Finance
(Principal Accounting Officer)
15