UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (913) 338-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 21, 1997, was approximately $65,334,951
As of March 21, 1997, the shares outstanding of the registrant's common stock
was 7,972,251.
DOCUMENTS INCORPORATED BY REFERENCE
None
Part I
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings other
than as described below, the adverse outcome of which individually or in the
aggregate, in the Company's opinion, would have a material adverse effect on the
Company's results of operations, financial position or liquidity.
INDEPENDENT COUNSEL INVESTIGATION. On January 21, 1997, the court in the
matter of UNITED STATES OF AMERICA V. CROP GROWERS CORPORATION, JOHN J.
HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181(GK)) accepted Crop Growers
Corporation's (the "Company") plea of NOLO CONTENDERE to two charges brought
against it by the Independent Counsel ("IC") appointed to investigate former
Secretary of Agriculture Mike Espy. Pursuant to an agreement with the IC, the
Company also agreed to pay a fine of $2.0 million. The settlement concludes
matters between the Company and the IC. The entire amount of the settlement has
been accrued for at December 31, 1996.
The indictment as initially filed against the Company alleged conspiracy to
violate federal election laws, false statements to a government agency,
falsification of books and records, false statements to auditors, various
securities law violations and other matters. The allegations were made in
connection with alleged corporate reimbursement of individual campaign
contributions to the 1993 Congressional primary campaign of Henry Espy, brother
of Mike Espy and an amount paid as a retainer to an attorney who used the funds,
allegedly with the knowledge of an officer of the Company, to retire certain
Congressional primary campaign debts of Henry Espy. In January 1997, the court
dismissed (i) 10 of the counts against the Company based on its ruling that the
Company had no duty to disclose uncharged criminal conduct under the concealment
prong of 18 U.S.C. ("Section 1001") and because the indictment did not
adequately allege the use of an affirmatively false writing under the false
statement prong of Section 1001 on various grounds, (ii) one count against the
Company based on its ruling that the Company had no duty to disclose the alleged
omissions to the investing public and (iii) one count based on its ruling that
venue did not lie in the District of Columbia for the charge of making and
keeping false records and accounts, but rather venue is determined by the laws
of the offense (the making and keeping of books, records and accounts).
By its terms, the Company's agreement with the IC 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.
SECURITIES CLASS ACTION. On February 28, 1997, the Company agreed to a
settlement of the matter entitled IN RE CROP GROWERS SECURITIES LITIGATION (Civ.
No. 95-58-GF-PGH) with members of the class consisting of purchasers of the
Company's common stock during the period from February 15, 1995 to May 16,
1995. The complaint alleged, among other things, that the Company made false
and misleading statements in publicly filed or disseminated documents to
inflate artificially the price of its stock. Under the settlement, the
Company has agreed to pay $2.5 million, $1.22 million of which is payable by
the Company, with the remainder to be paid out under the terms of a
directors' and officers' insurance policy. The $1.22 million has been
accrued for at December 31, 1996. The settlement is subject to court approval.
2
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere in the Company's
Annual Report on Form 10-K.
AGENCY OPERATIONS
SERVICE FEES
The Company's agency operations revenues include service fees related to
the 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 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 and 1995 crop years, the expense reimbursement for Buy-Up
Coverage was established by the FCIC at 31%.
For 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 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 reductions in the level of expense reimbursement. Prior to the 1996 crop
year, the impact of FCIC expense reimbursement level reductions on the Company's
net earnings had been minimized because the Company had reduced its agents'
commissions in order to minimize the impact on its margin on MPCI business.
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. The Company believes, based on
competitive factors within the industry, that it will have to absorb a
significant portion of the expense reimbursement reduction in the 1997 crop
year.
On March 20, 1997, a draft of the SRA (effective for the 1998 crop year)
was released by the FCIC. The draft SRA proposes to revise the expense
reimbursement 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 $50
per policy plus 4.8% of the
3
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. The FCIC has requested written comments on
the proposed SRA draft by April 11, 1997. 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 expects 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.
Additionally, the Company has arrangements with its third party insurance
companies pursuant to which it is entitled to receive a percentage of the
underwriting gains, if any, on MPCI premiums it services. These gains, or
profit sharing, are reflected as additional service fees.
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 MPCI agreements
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 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.
4
The Company's service fees related to crop hail insurance are a percentage
of the premiums serviced for third party insurance companies.
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. Additionally, agent commissions and
other direct costs on crop hail insurance are generally direct obligations of
the Company and, therefore, are reflected as expenses of the Company. Under the
Company's crop hail contract with CNA, agent commissions and other direct costs,
except loss adjusting expense, are the direct obligations of CNA and therefore
are not reflected as an expense of the Company.
Other direct costs include overwrite fees payable to third party insurance
companies, loss adjusting expenses, premium taxes on crop hail insurance, bureau
fees and other costs. These costs, except for loss adjusting expense, vary
proportionally with the amount of premiums serviced. Beginning in the 1997 crop
year and as a result of the restructuring of its MPCI agreement with Fireman's
Fund, the Company will no longer pay any overwrite fees on MPCI premiums it
places with Fireman's Fund.
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
Crop Growers 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 effect 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 to be performed by the
Company. Direct costs such as agent commissions, loss adjusting and premium
taxes are recognized at the time service fees are recognized.
The Company recognizes service fees under the profit sharing provisions of
its agreements with third party insurance companies when a reasonable estimate
can be made. The Company generally recognizes profit sharing, if any, in the
third and fourth quarters.
5
SOFTWARE OPERATIONS
The Company's software operations revenues include sales of VisAgTM
software, mapping products, and hardware products. Costs include commissions on
software and mapping sales, mapping product development costs, hardware costs,
and other direct costs such as shipping, postage, and packaging. The VisAgTM
product is a PC-based map driven farm management system designed for use by
small family farms to large corporate operations. Mapping products are computer
generated geo-referenced maps which allow an agent or farmer to view an entire
agricultural operation on a single map. Hardware products represent various
hardware products manufactured by third parties sold to agents and other outside
customers. Revenues from the sale of VisAgTM, mapping products and hardware are
recognized upon shipment to the customer.
Sales of VisAgTM and other mapping products have not made a significant
contribution to revenues or earnings since their introduction. Management
continues to assess the VisAgTM product marketing and distribution strategy,
does not expect to achieve significant profitability in its software operations
in 1997 and will seek to manage these operations to a break even level. The
Company does, however, continue to believe map based technology is important in
supporting its crop insurance operations and will continue to develop products
or applications for use by its agency distribution network.
INSURANCE OPERATIONS
The Company's insurance operations include premiums earned and losses
incurred on Buy-Up and Basic Coverages, crop hail, and farm and ranch insurance
coverages underwritten and retained by the Company's property and casualty
insurance company 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. For the
1996 crop hail season, the Company retained 15% of crop hail premiums
underwritten by Dawson. In 1995, Dawson retained a certain amount of risk on
premiums underwritten and reinsured prior to its acquisition by the Company in
excess of the Company's risk retention strategy.
INVESTMENT INCOME
Historically, the Company has derived investment income from interest
charged to policyholders who elect not to pay their MPCI premiums on the FCIC
established due date and from investments. Under the MPCI program, the FCIC
charges interest at a rate of 1.25% per month on overdue premiums and the
insurance company, which is responsible for payment of the policyholder's
premiums to the FCIC, passes such interest cost on to the policyholder.
The Company has agreed with its contracting insurance companies to assume
the responsibility for such payments to the FCIC and, therefore, receives
interest payments made by policyholders on deferred premiums. In the event of
an insured loss, the Company deducts premium payments and interest, if any, from
the claim payment to the farmer.
The Company also earns investment income on interest and dividends 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 included in investment
income. Also included in investment income are income and losses on investments
in companies which are 50% or less owned by the Company, which are accounted for
under the equity method.
6
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 or losses, if any, on the premiums it services or
underwrites in the third quarter. In the fourth quarter, the Company also
recognizes underwriting gains or losses, if any, on the premiums it services or
underwrites, 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. Crop Growers 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
YEARS ENDED DECEMBER 31, 1996 AND 1995
AGENCY OPERATIONS. Service fees in the year ended December 31, 1996
increased $19.6 million to $104.6 million from $85.0 million in the year ended
December 31, 1995. Although overall MPCI premiums serviced increased during
1996, the increase was primarily the result of the acquisition of Dawson and
FCIC established rate increases on MPCI premiums in the 1996 crop year. The
increase was partially offset by a loss of premiums written by certain agencies
who elected to have their premiums serviced by other insurance companies, a
reduction in the expense reimbursement paid by the FCIC from 31% in the 1996
crop year to 29% in the 1997 crop year and the impact of the dissolution of its
MPCI agreement with CNA. See "--Restructuring and Non-Core Expenses."
Management believes the Company's premiums in the first quarter of 1997 will
continue to be adversely impacted by certain factors including competitive
pressures, principally relating to commissions, and the dissolution of its MPCI
agreement with CNA.
Also included in service fees is $10.9 million in profit sharing revenue in
the year ended December 31, 1996 as compared to $9.1 million in the year ended
December 31, 1995. The increase in profit sharing was primarily the result of
the increase in premiums serviced in 1996 compared to 1995. Profit sharing
revenue as a percentage of premiums serviced decreased to 4.9% in 1996 from 5.8%
in 1995. The decrease was primarily attributed to less favorable underwriting
results on the premiums serviced in 1996 as compared with 1995.
In addition to profit sharing, the Company also recorded excess loss
adjusting expense reimbursement of $2.0 million in the year ended December 31,
1996 as compared to $3.3 million in the year ended December 31, 1995. Included
in the $3.3 million of excess loss adjusting expense reimbursement in 1995 was
$1.7 million of excess loss adjusting expense reimbursement associated with hold
harmless provisions on certain prevented planting claims specific to the 1995
crop year.
7
Agent commissions and other direct costs in the year ended December 31,
1996 increased by $18.5 million to $71.1 million from $52.6 million in the year
ended December 31, 1995. The increase in agent commissions and other direct
costs was primarily a result of the increased MPCI and crop hail premiums
serviced. Agent commissions increased as a percentage of premiums serviced in
1996 as compared to 1995 due to competitive pressures which forced the Company
to, in several areas of the country, increase commissions offered to agents.
Also included in agent commissions and other direct costs in the year ended
December 31, 1996 were $3.2 million in charges related to the Company's
assessment of its adequacy of the allowance for uncollectible receivables. The
Company reviewed the historical collection experience of receivables,
collectability of certain balances, and the growth in the volume of premiums
serviced and other receivables in determining the necessary allowance for
uncollectible receivables at December 31, 1996. In addition to the charges
included in agent commissions and other direct costs, the Company recorded
$655,000 and $697,000, respectively, in 1996 and 1995 to the provision for
uncollectible receivables which is included in general and administrative
expenses.
INSURANCE OPERATIONS. Premiums earned increased to $2.5 million in 1996
from $(182,000) in 1995. Losses incurred increased in 1996 to $1.3 million from
$(2.3) million. The increases were primarily due to crop hail premiums
underwritten and retained by Dawson in 1996. Dawson was not acquired until July
1995 which was after most crop hail premiums had been written for 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 16.6% in the year ended December 31, 1996 to $33.7 million from $28.9
million in the year ended December 31, 1995. The increase was due primarily to
the increase in the number of employees hired to service increased MPCI premium
and crop hail premium volume and additional general and administrative costs
incurred as a result of the acquisitions made by the Company in 1995 as the
operations have now been included for a full year.
Depreciation and amortization expenses increased to $3.3 million in the
year ended December 31, 1996 from $2.4 million in the year ended December 31,
1995. The increase was primarily a result of increased property and equipment
purchased in late 1995 and 1996 and an increase in the amortization of
intangible assets as a result of the acquisitions during 1995.
RESTRUCTURING AND NON-CORE EXPENSES. In 1996, as a result of management's
assessment of the Company's core operation and focus on improving the
consistency of its financial performance and improving shareholder returns, the
Company recorded costs related to the relocation of the Company's corporate
headquarters and main office to Overland Park, Kansas, of $2.0 million, write
downs and losses on assets to be disposed of consisting of real estate and
software mapping of $1.3 million, losses on the discontinuation of certain
non-core business operations of $2.0 million, and costs accrued as a result of
the cancellation of certain agreements and contracts with third parties of $1.1
million.
Additionally, as a result of the dissolution of its MPCI agreement with
CNA, the Company was required to request agents to cancel and rewrite MPCI
policies previously written on CNA paper to Fireman's Fund, or one of its
insurance subsidiaries paper. For other competitive factors, including
significant incentive fees being offered to agents by competitors to induce
agents to transfer their books of business, the Company offered incentive fees
to agents to compensate them for obtaining the necessary cancellation and
rewrite forms from policyholders. In the year ended December 31, 1996, the
Company agreed to pay approximately $300,000 relating to
8
transferred business. The Company expects to pay approximately $1.5 million to
$1.8 million of additional incentive fees in the first quarter of 1997 as part
of the cancellation and rewrite process. The Company anticipates accruing these
amounts consistent with the Company's revenue recognition method. The Company
believes these costs are a one-time expenditure.
LEGAL MATTERS. In the year ended December 31, 1996, the Company incurred
approximately $4.0 million in expenses, primarily legal fees, in connection with
indictments of the Company and certain of its former officers by the Independent
Counsel appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. Included in this amount, are amounts advanced by the
Company pursuant to indemnification agreements between the former officers and
the Company. In January 1997, the Company settled this matter and agreed to pay
$2.0 million. This amount, which is not tax deductible, was accrued as an
expense in 1996.
The Company also incurred approximately $200,000 in the year ended December
31, 1996 in connection with defending a shareholder class action lawsuit filed
in May 1995. In February 1997, the Company settled this matter and agreed to
pay $2.5 million, $1.22 million of which is payable by the Company and the
remainder of which is payable under the terms of a directors' and officers'
insurance policy. The $1.22 million was accrued as an expense in 1996.
INTEREST EXPENSE. Interest expense increased to $1.5 million in the year
ended December 31, 1996 from $859,000 in the year ended December 31, 1995. The
increase in interest expense was a result of additional borrowings necessary to
finance operating expenses attributed to the increase in premium volumes as well
as MPCI deferred premiums in the 1996 crop year.
YEARS ENDED DECEMBER 31, 1995 AND 1994
AGENCY OPERATIONS. Service fees in the year ended December 31, 1995
increased $36.9 million to $85.0 million from $48.1 million in the year ended
December 31, 1994. The increase in service fees was primarily the result of an
increase in MPCI and crop hail premiums serviced, underwriting gains and
revenues from excess loss adjustment expense reimbursement. The increase in
MPCI premiums serviced was due, in part, to the overall increase in the Buy-Up
Coverage market as a result of the Reform Act, and the addition of Basic
Coverage beginning with the 1995 crop year. Actual premiums serviced by the
Company (including Dawson) during the 1995 crop year were $191.4 million and
$39.5 million for Buy-Up and Basic Coverage, respectively. During the 1995 crop
year, the FCIC made a one time change (in large part due to excess moisture
which delayed planting in certain states) to excess loss adjustment expense
reimbursement to allow companies to recover additional loss adjusting expenses
associated with adjusting prevented planting claims. The Company recognized
$3.3 million in excess loss adjustment expense reimbursement from the FCIC
attributable to the 1995 crop year. A significant portion of this was related
to preventive planting claims. Crop hail premiums serviced increased as a
result of growth in the Company's business and as a result of the Dawson
acquisition.
Service fees also increased as the Company recognized $9.1 million of
underwriting gains in the year ended December 31, 1995 compared to $3.1 million
in the year ended December 31, 1994. The increase in the Company's share of
underwriting gains was primarily a result of increased premiums serviced, the
fact that there was no loss carryforward remaining under its MPCI contract with
CNA and favorable underwriting results on premiums retained by Dawson.
9
Agent commissions and other direct costs increased by $22.1 million to
$52.6 million for the year ended December 31, 1995 compared to $30.5 million for
the year ended December 31, 1994. The increase in agent commissions and other
direct costs was a result of the increased MPCI premiums serviced by the Company
during the year ended December 31, 1995 compared to the same period in 1994 and
as a result of the loss adjusting costs associated with adjusting of claims
incurred in prevented planting. These increases were partially offset by the
agency acquisitions completed during the year which had the effect of moving
direct costs to general and administrative expenses as these agents became
employees. In addition, overwrite fees payable to third party insurance
companies decreased slightly as Plains and Dawson underwrote a larger percentage
of the premiums serviced by the Company in the year ended December 31, 1995
compared to 1994. As a percentage of service fees, related agent commissions
and other direct costs decreased to 62.5% in 1995 from 63.5% in 1994.
INSURANCE OPERATIONS. Premiums earned decreased in 1995 to $(182,000) from
$1.3 million in 1994. Losses incurred decreased in 1995 to $(2.3) million from
$1.3 million in 1994. The decreases were due primarily to the acquisition of
Dawson. In connection with the purchase of Dawson, at July 14, 1995, initial
estimates were made of premiums and losses related to the MPCI and crop hail
business underwritten by Dawson prior to the acquisition. The Company's
practice is to estimate a breakeven underwriting result until late in the third
quarter, when more information is available on the underwriting results of its
premiums serviced. Subsequent to the acquisition, the FCIC changed the MPCI
program to provide insurance companies relief for most of the prevented planting
losses, and as a result the level of loss reserves estimated at the acquisition
date was higher than the amount ultimately necessary. This reduction of loss
reserves along with other changes in estimates made as of the acquisition date,
resulted in the business acquired having an underwriting gain of approximately
$2.3 million.
INVESTMENT INCOME. Investment income increased $766,000 in the year ended
December 31, 1995 to $2.2 million from $1.4 million in the year ended December
31, 1994. The increase in investment income was due primarily to realized gains
on investment securities sold during 1995 to fund the Dawson acquisition.
INTEREST EXPENSE. The increase in interest expense was primarily due to
additional borrowings necessary to finance MPCI deferred premiums and operating
expenses attributed to the increase in premium volume as a result of the
extension by the FCIC of reporting deadlines for the 1995 crop year (which
delayed the Company's receipt of a portion of the expense reimbursement payable
to the Company on MPCI premiums) as well as additional long-term debt incurred
on the permanent financing of the Company's former headquarters in Great Falls,
Montana.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 150.6% to $28.9 million in the year ended December 31, 1995 from $11.5
million in the year ended December 31, 1994. The increase was due primarily to
the increase in the number of employees hired to service the increased MPCI
premium volume and additional general and administrative costs incurred as a
result of the acquisitions made by the Company in 1995. At December 31, 1995 the
Company had 524 employees, 142 of which were hired in 1995 as a result of
acquisitions, compared to 228 at December 31, 1994. The Company also incurred
significant start-up costs including development and marketing costs associated
with the initial release of VisAgTM in December 1995.
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Depreciation and amortization expenses increased to $2.4 million in
the year ended December 31, 1995 from $1.0 million for the year ended December
31, 1994. The increase was primarily a result of increased property and
equipment purchased to support the growth of the Company and an increase in the
amortization of intangible assets as a result of acquisitions.
INCOME TAXES. For the year ended December 31, 1994, the Company recognized
approximately $264,000 of a rehabilitation tax credit related to the renovation
of the Company's new office building which qualified as a historic structure.
This had the effect of reducing the Company's effective tax rate as compared to
the year ended December 31, 1995.
MINORITY INTEREST. Minority interest represents dividends accrued and the
accretion of discount on preferred stock issued in March of 1995, to fund the
Dawson acquisition. Also included in minority interest are earnings attributed
to minority shareholders.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities was $5.4 million and $2.9 million
during 1996 and 1994, respectively, compared with cash used by operating
activities of $16.0 million in 1995. In 1995, the FCIC extended the payment due
dates for the 1995 crop year by one month for policyholders which delayed
policyholders payments to the Company for MPCI premiums due. This had the effect
of delaying the Company's receipt of a portion of the expense reimbursement
payable to the Company on MPCI premiums serviced. This delay, which did not
happen in 1994, nor reoccur in 1996, substantially increased cash used for
operations during 1995.
INVESTING ACTIVITIES
Cash provided by investing activities was $22.4 million and $699,000 for
1996 and 1995, respectively, compared with cash used by investing activities of
$37.3 million in 1994. 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. The increase in cash provided by investing activities
in 1996 was primarily a result of the Company not financing the premiums payable
to the FCIC on the 1996 crop year. In November 1996, Crop Growers and Fireman's
Fund amended their MPCI agreement pursuant to which Fireman's Fund financed 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. Deferred premiums financed at December 31, 1995, were $22.1
million compared to $27.6 million at December 31, 1994. The portion of deferred
premiums financed at December 31, 1995, was less than 1994, due to less
available funds to finance premiums, primarily as a result of the Company's use
of funds to finance the acquisition of Dawson and the delay in receiving the
excess loss adjusting expense reimbursement from the FCIC for prevented planting
until January, 1996.
The remaining investing activities of the Company have been primarily
purchases and sales of investment securities, acquisitions and purchases of
property and equipment needed as a result of the growth of the Company. During
1996, a portion of the proceeds from the $6.1 million sale of investment
securities were used by the
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Company to assist in funding operations during 1996 and early 1997.
Additionally, during 1995, the Company used $9.1 million in proceeds from the
sale of investment securities to fund the acquisition of Dawson. During 1994,
the Company invested $13.5 million in investment securities. This amount
represented proceeds from the Company's two public offerings pending the need
for corporate use.
FINANCING ACTIVITIES
Cash used by financing activities was $25.4 million in 1996, compared with
cash provided by financing activities of $18.6 million and $34.1 million for
1995 and 1994, respectively. The primary source of cash during 1996 was $10
million from the issuance of redeemable preferred stock to Fireman's Fund. The
primary use of cash during 1996 was to repay amounts outstanding under the
Company's line of credit of $32.2 million. The primary sources of cash during
1995 and 1994 were from draws on the Company's line of credit to pay the
deferred premiums due to the FCIC on behalf of policyholders and $35.9 million
in 1994 of net proceeds received in the Company's two public offerings. The
Company also redeemed $3.5 million of subsidiary preferred stock during 1994.
In addition, during 1996, the Company repurchased $2.1 million of common
stock from employees and certain former executive officers under separation
agreements with the officers and employees. The Company purchased an additional
$85,000 of stock in January 1997 as the last required purchases under the
agreements. See Note 8 of Notes to Consolidated Financial Statements.
The Company paid $239,000 in dividends during 1996 relating to its
preferred stock issued to Fireman's Fund in July 1996. The Company has not paid
dividends on its common stock. The Company currently intends to retain earnings
to finance the growth and development of its business and does not currently
anticipate paying cash dividends on its common stock in the foreseeable future.
CAPITAL RESOURCES
Historically, the Company has maintained lines of credit to finance working
capital needs and premiums on behalf of policyholders who elect not to pay their
MPCI premiums on the FCIC established due date and to fund crop hail losses in
advance of reimbursement from the contracting insurance companies. These lines
of credit expired in October and November 1996 and were not renewed.
In connection with the March 1997 acquisition agreement between the Company
and Fireman's Fund, Fireman's Fund has agreed to provide the Company with a
working capital line of credit of up to $15 million subject to certain borrowing
base limitations in the event that the Company is not able to secure third party
financing. The credit agreement includes restrictive covenants and the
requirement to maintain certain financial ratios and minimum net worth. The
commitment which will expire in March 1998, does not contain any loan or
commitment fees and borrowings bear interest at 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.
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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 commitment to provide
working capital 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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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Independent Auditors' Report 15
Consolidated Financial Statements:
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 16
Balance Sheets as of December 31, 1996 and 1995 17
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 18
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 19
Notes to Consolidated Financial Statements 20
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Crop Growers Corporation:
We have audited the accompanying consolidated balance sheets of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 28, 1997
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