SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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: 0-23830
CROP GROWERS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0491497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10895 LOWELL, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive offices) (zip code)
(913) 338-7800
(Registrant's telephone number, including area code)
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
--- ---
The number of shares outstanding of the registrant's common stock on May 1, 1997
was 7,972,551 shares.
CROP GROWERS CORPORATION
FORM 10-Q
Quarter ended March 31, 1997
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited) for
the Three Months Ended March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1997 and March 31, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
ASSETS ------------ ------------
Investments:
Fixed maturities, held to maturity $ 1,307,963 $ 1,308,439
Fixed maturities, available for sale 5,986,459 5,199,708
------------ ------------
Total investments 7,294,422 6,508,147
Cash and cash equivalents 7,404,434 16,132,126
Premiums receivable, net 167,710,319 71,854,123
Reinsurance balances recoverable 114,827,975 32,625,869
Property and equipment, net 5,114,830 5,242,447
Intangible assets, net 9,462,719 9,857,238
Other assets 14,168,477 16,709,178
------------ ------------
$325,983,176 $158,929,128
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums and commissions payable $ 63,387,643 $ 46,961,297
Accounts payable and accrued liabilities 18,938,547 15,767,331
Reinsurance balances payable 81,135,802 17,010,461
Loss reserves 113,361,632 32,147,342
Long-term debt 2,964,564 3,290,672
------------ ------------
Total liabilities 279,788,188 115,177,103
Redeemable preferred stock 10,000,000 10,000,000
Stockholders' equity:
Common stock (par value $.01):
40,000,000 shares authorized; 7,972,251
and 7,970,251 shares issued and outstanding
at March 31, 1997 and December 31, 1996,
respectively 79,723 79,702
Paid-in capital 36,744,095 36,729,115
Accumulated deficit (653,953) (3,086,499)
Unrealized appreciation of fixed maturity
investments, net of taxes 37,623 54,707
Unearned compensation (12,500) (25,000)
------------ ------------
Total stockholders' equity 36,194,988 33,752,025
------------ ------------
$325,983,176 $158,929,128
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated financial statements.
3
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Revenues:
Service fees $49,736,836 $66,272,697
Premiums earned and other income 521,968 780,020
Investment income 206,483 561,512
----------- -----------
Total revenues 50,465,287 67,614,229
Expenses:
Agent commissions and other direct costs 36,010,211 46,280,011
Losses incurred and other expense 142,358 444,613
General and administrative expense 7,481,595 8,028,484
Non-recurring expenses 1,375,000 --
Legal matters 1,134,518 551,396
Interest expense 93,165 834,037
----------- -----------
Total expenses 46,236,847 56,138,541
----------- -----------
Income before income tax expense 4,228,440 11,475,688
Income tax expense (1,682,919) (4,503,163)
----------- -----------
Net income 2,545,521 6,972,525
Redeemable preferred stock dividend (125,000) --
----------- -----------
Net income attributable to common stock $ 2,420,521 $ 6,972,525
----------- -----------
----------- -----------
Net income per common share $ .30 $ .84
----------- -----------
----------- -----------
Weighted average common shares
outstanding 7,984,847 8,348,429
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated financial statements.
4
CROP GROWERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996
------------- ------------
Operating activities:
Net income $ 2,545,521 $ 6,972,525
Adjustments to reconcile net income to
net cash (used) provided by operating activities:
Depreciation 396,450 423,297
Amortization 394,519 451,239
Other changes:
Premiums receivable (95,856,196) (114,023,552)
Premiums and commissions payable 16,426,346 28,221,592
Accounts payable and accrued liabilities 3,171,216 8,822,382
Loss reserves 81,214,290 63,615,408
Reinsurance balances recoverable (82,202,106) (63,681,920)
Reinsurance balances payable 64,125,341 69,072,866
Other 2,585,487 4,440,964
------------- ------------
Net cash (used) provided by operating activities (7,199,132) 4,314,801
Investing activities:
Change in company financed premiums -- 20,616,941
Purchases of securities - available for sale (1,240,645) (575,793)
Proceeds from sale and maturity of securities -
available for sale 405,000 570,613
Capitalization of intangible assets -- (26,847)
Purchase of property and equipment (268,833) (1,168,773)
------------- ------------
Net cash (used) provided by investing activities (1,104,478) 19,416,141
Financing activities:
Net repayments of note payable to bank -- (29,336,900)
Redeemable preferred stock dividend (125,000) --
Proceeds from issuance of long-term debt -- 20,034
Repayments on long-term debt (326,108) (370,097)
Repurchase of common stock (77,975) (394,063)
Issuance of common stock 105,001 6,000
------------- ------------
Net cash used by financing activities (424,082) (30,075,026)
------------- ------------
Net decrease in cash and cash equivalents (8,727,692) (6,344,084)
Cash and cash equivalents, beginning of quarter 16,132,126 6,980,570
------------- ------------
Cash and cash equivalents, end of quarter $ 7,404,434 $ 636,486
------------- ------------
------------- ------------
See accompanying notes to unaudited consolidated financial statements.
5
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY PRESENTATION
The unaudited consolidated financial statements have been prepared by
Crop Growers Corporation (the Company) pursuant to the rules and regulations
of the Securities and Exchange Commission applicable to quarterly reports on
Form 10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. Results of
operations for interim periods are not indicative of results of operations to
be expected for the full year ending December 31, 1997. It is suggested that
these unaudited consolidated financial statements be read in conjunction with
the consolidated financial statements and related notes in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of management, the information furnished reflects all
adjustments which are of a normal recurring nature and are necessary for a fair
presentation of the Company's financial position as of March 31, 1997 and
December 31, 1996, and the results of its operations and its cash flows for the
three months ended March 31, 1997 and 1996.
2. RECONCILIATION OF STOCKHOLDERS' EQUITY 1997 1996
---- ----
Balance at January 1 $33,752,025 $44,342,224
Net income 2,545,521 6,972,525
Change in unrealized appreciation of
fixed maturity and equity investments,
net of taxes (17,084) (3,710)
Restricted stock compensation earned 12,500 12,500
Exercise of stock options 105,001 6,000
Repurchase of common stock (77,975) (394,062)
Dividend payment on redeemable
preferred stock (125,000) --
----------- -----------
Balance at March 31 $36,194,988 $50,935,477
----------- -----------
----------- -----------
3. NON-RECURRING EXPENSES
In connection with the dissolution of its multi-peril crop insurance
("MPCI") agency agreement with CNA Insurance Companies ("CNA") effective for
the 1997 crop year, the Company canceled and transferred MPCI policies,
previously written on CNA paper, to Fireman's Fund Insurance Company
("Fireman's Fund"), or one of the Company's insurance subsidiaries. The
Company offered incentive fees to agents to compensate them for obtaining the
necessary cancellation and rewrite forms from policyholders. In the quarter
ended March 31, 1997, the Company agreed to pay approximately $1.1 million in
incentive fees relating to transferred business. The Company also accrued
$275,000 related to the buy-out of a consulting agreement with a former
employee of a company previously acquired by the Company.
4. LEGAL MATTERS
On February 28, 1997, the Company entered into a settlement agreement
relating to a securities class action lawsuit which had been filed in May,
1995 for $2.5 million, $1.22 million of which was payable by the Company with
the remainder payable under the terms of a directors' and officers' insurance
policy. The $1.22 million was accrued at December 31, 1996 and paid on May
1, 1997. In the three months ended March 31, 1997, the Company incurred
legal fees of approximately $53,000 associated with this matter.
On January 21, 1997, the Company entered a NOLO CONTENDERE plea to two
charges in the matter of UNITED STATES OF AMERICA V. CROP GROWERS
CORPORATION, JOHN J. HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181(GK)),
filed in the United States Federal District Court in Washington, D.C. The
Company paid a fine in the amount of $2.0 million which was accrued at
December 31, 1996 and under the settlement agreement $1.5 million was paid in
February 1997 and $500,000 was paid in April 1997. In the three months ended
March 31, 1997 the Company incurred legal fees of $1.1 million associated
with this matter, including amounts advanced by the Company pursuant to
indemnification agreements between two former officers and the Company. The
counts with respect to which the Company entered its plea alleged conspiracy
to make and conceal illegal campaign contributions and the making and keeping
of false records and accounts under provisions of the Securities and Exchange
Act of 1934. A nono contendere plea is neither an admission nor a denial of
guilt. See also "Part II - Other Information -- Item 1 - Legal Proceedings."
By its terms, the Company's settlement does not compromise or preclude
civil actions by other governmental regulatory authorities, such as the
Federal Election Commission, Securities and Exchange Commission, the USDA, or
state or federal insurance regulatory authorities, or shareholders as a
result of the allegations made by the IC and the Company's NOLO CONTENDERE
plea. No assurance can be given as to what action a regulatory authority
might take in response to the Company's plea and its agreement with the IC.
6
CROP GROWERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITION AGREEMENT
On March 5, 1997, the Company and Fireman's Fund entered into a
definitive agreement by which Fireman's Fund would acquire the Company in a
cash merger at $10.25 per share. Fireman's Fund presently owns convertible
preferred stock of the Company and has exercised its rights to purchase an
additional 1,827,477 shares of common stock from former Company executives
for $10.00 per share. The Company consented to such purchases, subject to
certain restrictions. The transaction is subject to, among other things,
Company stockholder approval, regulatory approvals and other customary
conditions. On May 8, 1997, the Company filed a preliminary proxy statement
with the Securities and Exchange Commission relating to this transaction.
Because of regulatory approvals and clearances, the transaction is not
expected to close until mid-1997.
6. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 31, 1997. Retroactive application will be required. The
Company believes the adoption of Statement No. 128 will not have a significant
affect on its reported earnings per share.
7
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Quarterly Report on
Form 10-Q, matters discussed herein may constitute forward-looking information.
Such forward-looking information reflects the Company's current best estimates
regarding future operations, but, since they are only estimates, actual results
may differ materially from such estimates.
A variety of events, most of which are outside the Company's control,
cannot be accurately predicted and may materially impact estimates of future
operations. Important among such factors are weather conditions, natural
disasters, changes in federal or state laws or regulations including, without
limitation, changes to the multi-peril crop insurance ("MPCI") program
currently being considered and future changes which may be made by the
Federal Crop Insurance Corporation ("FCIC") (the federal agency which
administers the MPCI program), funding for the MPCI program, price
competition impacting premium levels and agent commissions, and general
economic conditions. Federal regulations governing aspects of crop insurance
are frequently modified, and any such changes may impact the Company's
results of operations.
AGENCY OPERATIONS
SERVICE FEES
The Company's agency operations annual revenues include service fees
related to servicing of MPCI and crop hail insurance, excess loss adjusting
expense reimbursement related to MPCI premiums serviced and profit sharing
amounts, if any, resulting from underwriting gains, if any, on the premiums
it services.
For coverage exceeding the basic level of MPCI coverage ("Buy-Up
Coverage"), the Company is entitled to the expense reimbursement payable by
the FCIC. This expense reimbursement is passed through to the Company under
its MPCI contracts with third party insurance companies and is paid directly
to the Company for MPCI premiums underwritten by its property and casualty
insurance subsidiaries. For the 1997 crop year (beginning July 1, 1996), the
expense reimbursement for Buy-Up Coverage was established by the FCIC at 29%.
For the 1996 crop year, the expense reimbursement for Buy-Up Coverage was
established by the FCIC at 31%.
For the basic level of MPCI coverage ("Basic Coverage"), the Company
retains a portion of the administrative fee paid by the insured and receives
an amount for loss adjusting expenses (regardless of the loss experience of
the insureds), which amounts are passed through or paid directly to the
Company under its MPCI contracts. For Basic Coverage, the Company's portion
of the administrative fee is up to the first $100 of the fee paid by the
insured and the loss adjusting expense reimbursement which is equal to 4.7%
of an imputed premium (based upon a 65% production guarantee at a 100% price
election).
The expense reimbursement level for the 1998 and 1999 crop years for
Buy-Up Coverage is limited under the Federal Crop Insurance Reform Act of
1994 (the "Reform Act") to levels not to exceed 28% and 27.5%, respectively.
See the following paragraph for a discussion of proposed changes to the
expense reimbursement level for the 1998 crop year. Because the Company's
MPCI service fees are directly related to the expense reimbursement
established by the FCIC, the Company's future MPCI service fees will be
affected by the reductions in the level of expense reimbursement. MPCI agent
commissions vary by agent depending on such factors as the volume of premium
produced by the agent, whether or not the agent is responsible for any direct
costs and other competitive factors.
8
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On March 20, 1997, a draft of the Standard Reinsurance Agreement ("SRA")
(effective for the 1998 crop year) was released by the FCIC. The draft SRA
proposes to revise the expense reimbursement level for Buy-Up Coverage to an
amount equal to a flat $100 per policy plus 18% of the premium related to
that policy (17% in the case of Crop Revenue Coverage policies, a revenue
protection coverage introduced by the FCIC in the 1997 crop year). For Basic
Coverage, private companies would receive a flat dollar amount per policy
(not to exceed $100 per policyholder per county) plus 4.8% of the premium
related to that policy (based on a 50% production guarantee at a 60% price
election). The draft SRA also proposes certain changes to the risk sharing
arrangement (calculation of underwriting gain or loss on premiums retained by
private companies) between private companies and the FCIC. Under the
proposed draft, private companies would receive the expense reimbursement in
one installment at the time acreage reports are reported to and validated by
the FCIC. The draft SRA also proposes certain other changes to the
administration of the MPCI program, including certain compliance and program
integrity issues. Earlier in 1997 and as a part of the Clinton
Administration's budget proposal for the government's 1998 fiscal year,
funding for the expense reimbursement was proposed at 24.5% for the 1998 crop
year.
The Company is not able to predict whether any or all of the proposed
revisions to the SRA will ultimately be adopted, but believes that the proposed
revisions (particularly the revisions to the expense reimbursement), if
implemented as proposed, would have an adverse impact on the Company's results
of operations in the 1998 crop year (as proposed, the impact on the Company's
service fee revenues based on its 1997 crop year book of business, would have
been to reduce service fee revenues by approximately 16%). The Company cannot
predict what the final terms of the SRA will ultimately be or what other
legislative or administrative actions may occur as a part of the SRA revision
process or the federal budget process. For the 1998 crop year, the Company
intends to negotiate with agents regarding reduced commissions on Buy-Up
Coverage to offset expense reimbursement reductions, however, there is no
assurance that any reduction will be able to be passed through to agents as a
result of competitive or other factors.
Under its MPCI contracts, the Company is also entitled to receive any
excess loss adjustment expense reimbursement from the FCIC. The FCIC pays
contracting insurance companies an amount up to 4% of premium on Buy-Up Coverage
for excess loss adjusting expenses on such coverage if loss ratios on the
Company's total book of MPCI business, by state and by risk retention fund, are
in excess of the ratios established by the FCIC. Generally, the excess loss
adjustment expense reimbursement increases as the loss ratio increases. Under
Basic Coverage policies, the FCIC pays contracting insurance companies an amount
up to 1.7% of the imputed premium for excess loss adjusting expenses in the
event loss ratios on the overall book of Basic Coverage are in excess of loss
ratios established by the FCIC. Effective with the 1998 crop year, the FCIC
will no longer pay excess loss adjustment expense reimbursement to contracting
companies. In the 1996 crop year, the Company received approximately $1.6
million in excess loss adjusting expense reimbursements and expects to receive a
similar amount in the 1997 crop year.
Additionally, for the 1997 crop year, the Company has an arrangement with
Fireman's Fund pursuant to which it is entitled to receive a percentage of the
underwriting gains, if any, on crop insurance it services.
The Company's operating results may vary significantly depending on the
underwriting results of the premiums serviced and underwritten by it. The
Company does not assume any of the underwriting loss under its servicing
contracts with third party insurers and under the Company's MPCI agreement
with Fireman's Fund, there is no loss carryforward to reduce future
underwriting gains. Underwriting gains or losses on crop insurance are
generally not determinable until sometime after the second quarter of any
year and, accordingly, the Company expects that revenues, if any, from these
arrangements will typically be recognized in the third and fourth quarters.
Underwriting gains on premiums serviced by the Company are recognized by
9
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the Company as additional service fees and, because they generally have very low
related expenses, can have a material impact on the Company's operating results.
Accordingly, although the Company's risk management strategy is to minimize its
exposure to underwriting risk, the Company's earnings can be materially affected
by factors which impact underwriting results and, accordingly, its portion of
any underwriting gains, including the timing and severity of losses from storms
and other natural perils.
AGENT COMMISSIONS AND OTHER DIRECT COSTS
Agent commissions and other direct costs related to marketing and servicing
MPCI are obligations of the Company under its MPCI agreements and, accordingly,
are reflected as expenses of the Company. Other direct costs include loss
adjusting expenses, bureau fees and other costs. These costs, except for loss
adjusting expenses, vary proportionally with the amount of premiums serviced.
Loss adjustment expenses are based on management's estimate of all Company
adjusting costs to settle claims incurred or to be incurred on policies on which
revenue has been recognized. The estimate is reviewed periodically and
variances, if any, in estimated versus actual amounts are reflected in current
operations. In some instances, agents are responsible for loss adjusting
expenses or other direct costs associated with policies sold by them, and those
agents generally receive higher commissions in return for the assumption of
those direct costs. Bureau fees are fees charged by NCIS for providing rates
and procedures required to be used by the FCIC.
RECOGNITION OF SERVICE FEES AND DIRECT COSTS
The Company recognizes service fees from MPCI policies and the related
direct costs as of the sales closing date for the particular policy. The sales
closing date, which is established by the FCIC, is the date on which coverage
for a crop must be bound or renewed by the policyholder and when substantially
all required services relating to placing the insurance have been rendered by
the Company. Unless canceled by the farmer, policies in place from the prior
year automatically renew on the same terms on the sales closing date.
Since sales closing dates precede the date on which farmers plant their
insured crop, MPCI coverage and related premiums are estimated by the Company
until the farmer subsequently submits his or her report on actual acreage
planted. The effects of changes in such estimated premiums are included in the
results of operations in the period in which the estimates are changed.
For crop hail insurance, service fees are recognized when the insurance
coverage is accepted by the insurance company, which is concurrent with the
completion of substantially all services required by the Company. Direct costs
such as agent commissions, loss adjusting and premium taxes are recognized at
the time service fees are recognized.
INSURANCE OPERATIONS
The Company's insurance operations include premiums earned and losses
incurred on MPCI Buy-up, Basic, crop hail, and other coverages underwritten and
retained by the Company's property and casualty insurance subsidiaries.
For the 1996 and 1997 crop years, the Company did not and will not retain
any MPCI premiums underwritten by its insurance company subsidiaries.
Additionally, the Company will not retain any crop hail premiums underwritten by
its insurance company subsidiaries for the 1997 crop hail season.
10
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INVESTMENT INCOME
The Company earns investment income on investment securities and excess
cash invested at certain times of the year, which typically occurs after MPCI
and crop hail premiums are collected. Realized gains and losses on the sale
of investments are also included in investment income.
SEASONALITY
The Company's quarterly operating results vary substantially from quarter
to quarter as a result of various factors, including MPCI sales closing dates,
crop production cycles and recognition of underwriting gains, if any. The
Company recognizes the highest amount of service fees and related direct costs
in the first quarter because the sales closing date for the majority of spring
crops is March 15. The majority of these amounts are attributed to service fees
related to MPCI. Virtually all of the Company's service fees and direct costs
related to crop hail insurance are recognized in the second quarter. The
Company generally recognizes its second highest amount of revenues and related
direct costs in the third quarter because the MPCI sales closing date for the
majority of fall crops is September 30. In addition, the Company may recognize a
portion of underwriting gains, if any, on the premiums it underwrites
or services in the third quarter. In the fourth quarter, the Company also
recognizes underwriting gains, if any, on the premiums it underwrites
or services, most of the interest income on MPCI deferred premium financing and
service fees on MPCI premiums with sales closing dates occurring in the fourth
quarter. The Company cannot predict whether MPCI sales closing dates will be
changed in the future, but any such change could have a material effect on the
Company's quarterly results of operations. Because the Company's business is
directly tied to the production cycle of crops, the Company expects that
seasonal patterns in its operating results will continue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
AGENCY OPERATIONS. Service fees decreased $16.6 million to $49.7
million for the three months ended March 31, 1997 compared to $66.3 million
in the three months ended March 31, 1996. The decrease in service fees was
primarily the result of decreased MPCI premiums serviced in the 1997 crop
year due to, among other things, a loss of premiums due to certain agencies
electing to have their premiums serviced by other insurance companies, the
dissolution of the Company's relationship with CNA (and the need to cancel
and transfer policies to Fireman's Fund), the overall lower level of
commodity prices on the Company's insured crops, and the reduction in the
reimbursement rate on MPCI Buy-Up premiums to 29% for the 1997 crop year from
31% for the 1996 crop year. MPCI Buy-Up and Basic premiums serviced in the
three months ended March 31, 1997 were $144.2 million and $32.2 million,
respectively, as compared to $187.4 million and $38.5 million, respectively,
in the three months ended March 31, 1996.
The decrease in service fees was partially offset by $2.4 million in
additional profit sharing revenue recorded in the three months ended March
31, 1997, relating to the 1996 crop year. The additional profit sharing
resulted from better than expected development on estimated losses that were
not settled at December 31, 1996. As the Company continues to complete its
claim processing related to the 1996 crop year, underwriting results may
continue to develop favorably.
Agent commissions and other direct costs decreased $10.3 million to
$36.0 million for the three months ended March 31, 1997 compared to $46.3
million for the three months ended March 31, 1996. The decrease in agent
commissions and other direct costs was the result of the decreased MPCI
premiums serviced by the Company. However, agent commissions increased as a
percentage of premiums serviced in the first quarter of 1997 as compared to
1996 due to competitive pressures which forced the Company, in several areas
of the country, to maintain historical commission rates offered to agents.
The Company believes these competitive factors together with reductions in
the expense reimbursement level will continue to
11
CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
effect the Company's margins for the foreseeable future.
INSURANCE OPERATIONS. Virtually all of the premiums underwritten by the
Company's property and casualty insurance subsidiaries was reinsured with third
party insurance companies. Accordingly, the impact of the Company's insurance
operations are not material to first quarter operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $547,000 in the three months ended March 31, 1997 to $7.5
million from $8.0 million in the three months ended March 31, 1996. The
decrease was attributed to cost savings resulting from the restructuring of
the Company's operations in 1996 and continued efforts by the Company to
control expenses. The Company had 401 and 513 employees at March 31, 1997
and March 31, 1996, respectively.
NON-RECURRING EXPENSES. In connection with the dissolution of its MPCI
agency agreement with CNA effective for the 1997 crop year, the Company
canceled and transferred MPCI policies, previously written on CNA paper, to
Fireman's Fund, or one of the Company's insurance subsidiaries. The Company
offered incentive fees to agents to compensate them for obtaining the
necessary cancellation and rewrite forms from policyholders. In the quarter
ended March 31, 1997, the Company agreed to pay approximately $1.1 million in
incentive fees relating to transferred business. The Company also accrued
$275,000 related to the buy-out of a consulting agreement with a former
employee of a company previously acquired by the Company.
LEGAL MATTERS. On February 28, 1997, the Company entered into a
settlement agreement relating to a securities class action lawsuit which had
been filed in May, 1995 for $2.5 million, $1.22 million of which was payable
by the Company with the remainder payable under the terms of a directors' and
officers' insurance policy. The $1.22 million was accrued at December 31,
1996 and paid on May 1, 1997. In the three months ended March 31, 1997 the
Company incurred legal fees of approximately $53,000 associated with this
matter.
On January 21, 1997, the Company entered a NOLO CONTENDERE plea to two
charges in the matter of UNITED STATES OF AMERICA V. CROP GROWERS
CORPORATION, JOHN J. HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181(GK)),
filed in the United States Federal District Court in Washington, D.C. The
Company paid a fine in the amount of $2.0 million which was accrued at
December 31, 1996 and under the settlement agreement $1.5 million was paid in
February 1997 and $500,000 was paid in April 1997. In the three months ended
March 31, 1997 the Company incurred legal fees of $1.1 million associated
with this matter, including amounts advanced by the Company pursuant to
indemnification agreements between two former officers and the Company. The
counts with respect to which the Company entered its plea alleged conspiracy
to make and conceal illegal campaign contributions and the making and keeping
of false records and accounts under provisions of the Securities and Exchange
Act of 1934. A nono contendere plea is neither an admission nor a denial of
guilt. See also "Part II - Other Information -- Item 1 - Legal Proceedings."
By its terms, the Company's settlement does not compromise or preclude
civil actions by other governmental regulatory authorities, such as the
Federal Election Commission, Securities and Exchange Commission, the USDA, or
state or federal insurance regulatory authorities, or shareholders as a
result of the allegations made by the IC and the Company's NOLO CONTENDERE
plea. No assurance can be given as to what action a regulatory authority
might take in response to the Company's plea and its agreement with the IC.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Historically, most of the Company's cash flow has been used to pay
premiums due to the FCIC in the last quarter of the year on behalf of
policyholders in order to earn the spread between the interest charged to the
policyholders, which is equal to the rate established by the FCIC, and the
Company's cost of funds. In November 1996, the Company and Fireman's Fund
amended their MPCI agreement pursuant to which Fireman's Fund financed for
the 1996 crop year the premiums on behalf of the policyholders in exchange
for the interest charged on the deferred premiums. The Company continues to
administer the collection of the receivables and is ultimately responsible
for the collection of the balances. The Company receives a fee for
administrative costs related to the premiums financed.
OPERATING ACTIVITIES
Cash used by operating activities was $7.2 million in the three months
ended March 31, 1997 as compared to cash provided by operating activities of
$4.3 million in the three months ended March 31, 1996. The increase in cash
used by operating activities in the three months ended March 31, 1997 was
primarily due to the Company settling with insurance companies on crop hail and
MPCI premiums in the first quarter
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CROP GROWERS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of 1997 versus the fourth quarter of 1995. Additionally, the Company paid
Fireman's Fund approximately $5.0 million for premium receivables which were
financed by Fireman's Fund, and had not yet been paid by the policyholder.
Also, during the three months ended March 31, 1996 the Company received a
$4.0 million tax refund.
INVESTING ACTIVITIES
Cash used by investing activities was $1.1 million in the three months
ended March 31, 1997 compared with cash provided by investing activities of
$19.4 million in the three months ended March 31, 1996. The primary source of
cash provided by investing activities in 1996 was the receipt of a substantial
portion of the deferred MPCI premiums financed by the Company in the fourth
quarter of 1995.
FINANCING ACTIVITIES
The Company used cash for financing activities of $424,000 in the three
months ended March 31, 1997 and $30.1 million in the three months ended March
31, 1996. The primary use of cash in 1996 was to repay borrowings of $29.4
million under its line of credit.
CAPITAL RESOURCES
In connection with the March 1997 acquisition agreement between the
Company and Fireman's Fund, Fireman's Fund and the Company have entered into
a $15 million working capital line of credit subject to certain borrowing
base limitations. The credit agreement includes restrictive covenants and
the requirement to maintain certain financial ratios and minimum net worth.
The commitment, which expires in March 1998, does not contain any loan or
commitment fees and borrowings bear interest at a national bank's base rate.
If the Company were to terminate the acquisition agreement with Fireman's
Fund, any amounts then outstanding under the line of credit would become
immediately due and payable. The Company is evaluating whether to replace
this line of credit with a commercial line of credit from a financial
institution.
In addition, under the crop hail general agency agreement between the
Company and Fireman's Fund, Fireman's Fund will fund crop hail losses.
Accordingly, the Company will not need to finance crop hail losses in 1997.
The Company believes that the cash generated from operations and the
availability of borrowings under the Fireman's Fund working capital line of
credit will provide sufficient resources to finance the Company's current
operations and projected working capital needs for the next 12 months.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Part I, Item 3 and Part II, Item 8, Note 16 (Legal Matters), of
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated January 3,
1997 announcing the ruling from the United States District Court for the
District of Columbia on several of the Company's motions to dismiss certain
charges against it related to the investigation of former Secretary of
Agriculture Mike Espy by an Independent Counsel.
2. The Company filed a Current Report on Form 8-K dated January 21,
1997 announcing that the United States District Court for the District of
Columbia had accepted the Company's plea of nolo contendere to two charges
brought against it by the Independent Counsel appointed to investigate former
Secretary of Agriculture Mike Espy.
3. The Company filed a Current Report on Form 8-K dated February
28, 1997 announcing a settlement had been reached between the Company, John
Hemmingson and Gary A. Black, former executives of the Company, and
plaintiffs (on behalf of a class of purchasers of the Company's common stock
during the period February 13, 1995 and May 18, 1995, inclusive) in
connection with a securities class action lawsuit. In addition, the Company
announced they had entered into a definitive agreement with Fireman's Fund
Insurance Company whereby Fireman's Fund Insurance Company would acquire the
Company in a cash merger at $10.25 per share.
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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.
CROP GROWERS CORPORATION
May 15, 1997
-----------------------------------
David E. Hill
Chief Financial Officer
15