UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 2000 Commission File No. 0-6764
------------- ------
Fortune Financial, Inc.
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1218935
- --------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10475-103 Fortune Parkway, Jacksonville, Florida 32256
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (904) 363-6339
--------------------
Mobile America Corporation
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
(APPLICABLE ONLY TO CORPORATE ISSUERS)
There were 7,467,542 shares of common stock, par value $.025 per share,
outstanding as of the close of business on August 10, 2000.
Fortune Financial, Inc.
INDEX
Page
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Comprehensive Income 5
Unaudited Consolidated Statements of Cash Flows 6
Unaudited Consolidated Statements of Changes
in Stockholders' Equity 7
Notes to Financial Statements 8-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits 18
(b) Reports on Form 8-K 18
Signatures 19
- ----------
Exhibits 20
- --------
-2-
Fortune Financial, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Assets 2000 1999
- -------------------------------------------------------------------------------
Investments:
Securities available for sale at fair value
(amortized cost $19,848,755
and $32,553,832) $ 19,707,522 $32,567,745
Short-term investments 3,469,737 9,033,284
----------------------------
Total investments 23,177,259 41,601,029
----------------------------
Cash 4,713,255 1,178,791
Receivables:
Insurance premiums 370,557 789,274
Accrued investment income 347,017 515,636
Reinsurance, paid losses and other 14,849,326 12,314,049
Reinsurance recoverable, unpaid losses 10,075,622 13,706,562
Other receivables 58,350 238,258
Current income taxes 1,597,889 1,979,781
-----------------------------
Total receivables 27,298,761 29,543,560
-----------------------------
Deferred income tax 9,774,432 6,724,450
Ceded unearned premium 8,793,607 8,320,995
Deferred policy acquisition costs (377,162) (598,592)
Property and equipment 1,911,285 2,038,187
Equity in pools and associations 943,131 943,130
Other assets 376,050 400,124
----------------------------
$76,610,618 $90,151,674
============================
See notes to consolidated financial statements.
Fortune Financial, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Liabilities and Stockholders' Equity 2000 1999
------------------------------------------------------------------------------
Insurance loss reserves, including life insurance
policy benefits of $18,477 and $18,477 $20,493,433 $26,024,918
Unearned premium 20,181,482 18,376,039
Unearned service fees 8,945 93,305
Contractholders funds 1,168,597 1,550,109
Reinsurance funds withheld and
balances payable 6,305,852 7,129,761
Claim payments outstanding 2,992,765 3,039,004
Accrued expenses and other liabilities 1,969,162 2,307,233
Notes payable 4,125,436 7,200,000
----------------------------------
Total liabilities 57,245,672 65,720,369
----------------------------------
Stockholders' equity:
Common stock, $.025 par value per share
Authorized - 18,000,000 shares
Issued - 7,944,414 shares 198,610 198,610
Preferred stock, $.10 par value per share
Authorized - 500,000 shares
Issued and outstanding - none 0 0
Capital in excess of par value 5,185,092 5,185,092
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation)
on securities available for sale net of
deferred income taxes of $0 and $4,730 (143,104) 9,182
Treasury stock at cost, 476,872 shares (1,233,069) (1,233,069)
Shareholders' notes, 300,000 shares (843,750) (843,750)
Retained earnings 16,201,167 21,115,240
----------------------------------
Total stockholders' equity 19,364,946 24,431,305
----------------------------------
$76,610,618 $90,151,674
==================================
See notes to consolidated financial statements.
3
Fortune Financial, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
Quarters ended June 30, 2000 and 1999, Six Months Ended June 30, 2000 and 1999
Quarters Ended June 30 Six Months Ended June 30
2000 1999 2000 1999
----------------------------- ------------------------------
Revenues:
Insurance premiums earned net of
premiums ceded of $5,135,867, $9,483,587,
$10,107,269 and $20,693,167 $5,643,879 $7,565,290 $11,297,599 $15,997,935
Service fees earned 843,566 1,430,199 1,611,314 3,310,401
Investment income 443,576 919,077 916,570 1,920,658
Other 113,336 7,476 157,766 14,929
Net realized gains(losses) on investments 136,068 65,397 (267,829) 57,306
----------------------------- ------------------------------
Total revenues 7,180,425 9,987,439 13,715,420 21,301,229
----------------------------- ------------------------------
Expenses:
Losses and loss adjustment expenses, net of
reinsurance recoveries of $4,146,494,
$12,933,684, $8,930,040 and
$21,479,422 7,500,605 8,951,509 11,205,456 16,506,346
Policy acquisition costs 1,149,021 3,625,641 2,557,948 3,386,381
Salaries and wages 1,588,634 1,730,073 3,278,965 3,350,566
General and administrative expenses 2,501,932 2,154,073 4,374,609 3,662,620
Interest expense 105,625 163,616 257,378 342,383
----------------------------- ------------------------------
Total expenses 12,845,817 16,624,912 21,674,356 27,248,296
----------------------------- ------------------------------
Income (loss) before provision for income
taxes (5,665,392) (6,637,473) (7,958,936) (5,947,067)
----------------------------- ------------------------------
Provision and (benefit) for income taxes:
Current 0 (2,493,871) 0 (1,931,911)
Deferred (2,152,086) (106,867) (3,045,253) (512,816)
----------------------------- ------------------------------
Total provision (benefit) for
income taxes (2,152,086) (2,600,738) (3,045,253) (2,444,727)
----------------------------- ------------------------------
Net income (loss) ($3,513,306) ($4,036,735) ($4,913,683) ($3,502,340)
============================= ==============================
Basic and diluted earnings (loss) per share:
Net income (loss) ($0.47) ($0.56) ($0.66) ($0.49)
============================= ==============================
Dividends per share $0.00 $0.00 $0.00 $0.11
============================= ==============================
See notes to consolidated financial statements.
-4-
Fortune Financial, Inc. and Subsidiaries
Unaudited Statements of Comprehensive Income
Quarters Ended June 30, 2000 and 1999 and Six Months Ended June 30, 2000 and 1999
Quarters Ended June 30 Six Months Ended June 30
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net income (loss) ($3,513,306) ($4,036,735) ($4,913,683) ($3,502,340)
------------- -------------- -------------- --------------
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period net of taxes
$6,863, $(82,113), $(138,232) and
$(151,960) (129,783) (159,397) (411,438) (294,982)
Reclassification adjustment for (gain) losses
included in net income (loss) net of
taxes $6,863, $(13,107), $133,502
and $(10,093) (4,380) (25,443) 259,152 (19,593)
------------ -------------- -------------- --------------
Other comprehensive income (loss) (134,163) (184,840) (152,286) (314,575)
------------ -------------- -------------- --------------
Comprehensive income (loss) ($3,647,469) ($4,221,575) ($5,065,969) ($3,816,915)
============ ============== ============== ==============
See notes to consolidated financial statements.
-5-
Fortune Financial, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
2000 1999
-----------------------------
Cash Flows from Operating Activities:
Net income (loss) ($4,913,683) ($3,502,340)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Provision for depreciation 260,213 188,409
Loss (gain) on sale of investments 267,829 (57,306)
Change in assets and liabilities:
Insurance premiums receivable 418,717 388,998
Accrued investment income and other receivables 348,527 349,249
Deferred policy acquisition costs (221,430) (1,163,222)
Prepaid expenses and other assets 24,074 35,542
Insurance loss reserves (5,531,485) 1,957,964
Unearned premium 1,805,443 450,886
Contractholder funds (381,512) (9,643,041)
Reinsurance funds held and balances payable (823,909) (3,523,201)
Claim payments outstanding (46,239) 1,598,856
Accrued expenses (338,071) (86,133)
Current income taxes 381,892 (1,236,326)
Deferred income taxes (3,049,982) (512,816)
Ceded unearned premium (472,612) 2,990,791
Reinsurance receivable 1,095,663 (1,968,671)
Unearned service fees (84,360) (254,340)
-----------------------------
Net cash used in operating activities (11,260,925) (13,986,701)
-----------------------------
Cash Flows from Investing Activities:
Net change in short term investments 5,563,547 9,593,600
Purchase of investments (13,175,586) (4,222,339)
Proceeds from sale and maturity of investments 25,615,303 11,088,492
Purchase of property and equipment (133,311) (113,240)
-----------------------------
Net cash provided by investing activities 17,869,953 16,346,513
-----------------------------
Cash Flows from Financing Activities:
Principal payment, note payable (3,200,000) (1,200,000)
Principal, note payable 125,436 0
Dividends paid to stockholders 0 (783,110)
-----------------------------
Net cash used in financing activities (3,074,564) (1,983,110)
-----------------------------
Net change in cash 3,534,464 376,702
Cash, beginning of period 1,178,791 1,082,422
-----------------------------
Cash, end of period $4,713,255 $1,459,124
=============================
See notes to consolidated financial statements.
-6-
Fortune Financial, Inc. and Subsidiaries
Unaudited Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2000 and 1999
2000 1999
-------------------------
Common stock:
No change during period $198,610 $191,110
-------------------------
Preferred stock:
No change during period 0 0
-------------------------
Capital in excess of par value:
No change during period 5,185,092 4,348,842
-------------------------
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation)
on securities available for sale:
Balance at beginning of period 9,182 448,444
Increase (decrease) (157,016) (476,628)
Deferred taxes on unrealized gains 4,730 162,054
-------------------------
Balance at end of period (143,104) 133,870
-------------------------
Treasury stock:
No change during period (1,233,069) (1,233,069)
-------------------------
Shareholders' notes:
No change during period (843,750) 0
-------------------------
Retained earnings:
Balance at beginning of period, restated
for 1999 21,115,240 31,807,815
Net income (loss) (4,913,683) (3,502,340)
Cash dividends $0 and $.11 per share (390) (783,110)
-------------------------
Balance at end of period 16,201,167 27,522,365
-------------------------
Total stockholders' equity at end of period $19,364,946 $30,963,118
=========================
See notes to consolidated financial statements.
-7-
Fortune Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
- ------------------------------
In the opinion of management, the accompanying balance sheets and related
interim statements of income, comprehensive income and cash flows include all
adjustments (which include reclassifications and normal recurring adjustments)
necessary to present fairly the financial position and results of operations and
cash flows at June 30, 2000 and for all periods presented. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Actual results
may differ from these estimates. Interim results are not necessarily indicative
of results for a full year. The information included in this Form 10-Q should be
read in conjunction with Management's Discussion and Analysis and financial
statements and notes thereto included in the Fortune Financial, Inc. 1999 10-K.
Certain amounts in prior years' financial statements have been reclassified to
conform to the 2000 presentation.
Note 2. Prior Period Adjustment
- --------------------------------
Beginning retained earnings for the period ended June 30, 1999 has been reduced
by $996,283 from its previously reported amount of $32,804,098 to correct an
error in applying the minimum ceding commission rate on one of Fortune Insurance
Company's quota share reinsurance agreements during 1996. The impact of this
adjustment was reported in the Company's 1999 10-K Report.
Note 3 Credit Agreement
- ------------------------
The Company has a Credit Agreement with SouthTrust Bank with a remaining
principal balance at June 30, 2000 of $4 million. That Credit Agreement contains
certain financial covenants which, because of its second quarter results, the
Company did not meet. The covenants require the Company to maintain a combined
minimum statutory surplus in its insurance subsidiaries of $11 million, maintain
minimum consolidated shareholders' equity of $22 million, and not incur
cumulative net losses commencing in 2000 in excess of $2 million. At June 30,
2000 the Company reported combined
-8-
Fortune Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 3 Credit Agreement (continued)
- -----------------------------------
statutory surplus of $9.3 million, shareholders' equity of $19.4 million, and a
year-to-date net loss of $4.9 million. The Company has notified the Bank of its
failure to meet the financial covenants and will work with the Bank to resolve
the issues. Under the terms of the Credit Agreement the Bank may give written
notice of the failures to meet the financial covenants, demanding cure. Should
the Company be unable to comply with the Bank's demand for cure within 30 days
of such notice an event of default will occur, at which time the Bank may
declare the remaining amounts immediately due and payable, or pursue other
rights at law under the terms of the Credit Agreement.
Note 4. Earnings Per Share
- ---------------------------
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted earnings per share presents
the dilutive effect of options using the treasury stock method.
Quarters Ended June 30 Six Months Ended June 30
---------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Income (loss) available to common shareholders ($3,513,306) ($4,036,735) ($4,913,683) ($3,502,340)
============ ============ ============ ============
Denominator:
Basic earnings per share
Weighted average shares 7,467,542 7,167,542 7,467,542 7,167,542
Effect of dilution:
Employee stock options 0 0 0 0
- - - -
Diluted earnings per share adjusted weighted
average shares and assumed conversions 7,467,542 7,167,542 7,467,542 7,167,542
========== ========== ========== =========
Basic earnings (loss) per share ($0.47) ($0.56) ($0.66) ($0.49)
======= ======= ======= =======
Diluted earnings (loss) per share ($0.47) ($0.56) ($0.66) ($0.49)
======= ======= ======= =======
-9-
Fortune Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 5. Business Segments
- --------------------------
The Company and its subsidiaries operate exclusively in Florida within
principally six business segments: automobile insurance, excess and surplus
lines property insurance, fee for service administration, premium finance,
corporate and other miscellaneous. The automobile insurance segment sells
personal lines automobile insurance through independent insurance agents
primarily in south Florida. The excess and surplus lines segment writes
specialized property insurance coverage. The Company has not written any new
policies during 2000 due to the current high cost of reinsurance. The fee for
service segment contracts as a servicing carrier for the Florida Residential
Property and Casualty Joint Underwriting Association, the Florida Automobile
Joint Underwriting Association and as a subcontractor for Policy Management
Systems Corporation performing various underwriting and claims administration
services for a fee. This segment is currently in run-off. The premium finance
segment finances policies written through the Company's insurance subsidiaries;
the operating activities of this segment have been transferred to a third party
under a joint venture agreement. The corporate segment includes home office
revenues and assets that are not specific to any particular segment. The other
category is attributable to a life insurance company and other small inactive
companies that do not meet the quantitative thresholds for a separate segment.
Management evaluates performance and allocates assets based on the separate
entities owned by the Company. The reportable segments are business units that
offer different products or services. The reportable segments are each managed
separately. The following schedule presents segment revenues and profit (loss)
before taxes for the three and six months ended June 30, 2000 and 1999 and
assets by operating segment at June 30, 2000 and December 31, 1999. The
reconciling items for revenues and assets include adjusting available for sale
securities to market value and the reclassification of reinsurance recoverable
balances and the elimination of intercompany holdings.
-10-
Fortune Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 5. Business Segments (continued)
- -------------------------------------
Quarters Ended June 30 Six Months Ended June 30
---------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
Segment revenues:
Automobile insurance $6,265,863 $8,325,060 $11,671,551 $17,658,902
Excess and surplus lines insurance 697,393 1,052,865 1,509,924 1,952,355
Fee for service 15,036 391,149 84,333 1,027,384
Corporate (172,781) 347,963 182,406 690,037
Premium finance (4,424) (54,303) 69,777 137,594
Other 154,995 53,916 164,828 108,486
-------------- --------------- ------------------ ---------------
Total segment revenues $6,956,082 $10,116,650 $13,682,819 $21,574,758
Intercompany eliminations 224,343 (129,211) 32,601 (273,529)
-------------- --------------- ------------------ ---------------
Total consolidated revenues $7,180,425 $9,987,439 $13,715,420 $21,301,229
============== =============== ================== ===============
Segment profit before taxes:
Automobile insurance ($5,151,015) ($6,155,241) ($7,102,406) ($6,128,471)
Excess and surplus lines insurance (203) 341,930 (83,044) 639,724
Fee for service (122,234) 43,619 (218,839) 342,322
Corporate (453,533) (741,536) (624,462) (798,783)
Premium finance (47,047) (145,012) (18,978) (42,236)
Other 108,640 18,767 88,793 40,377
-------------- --------------- ------------------ ---------------
Total consolidated profit(loss) before tax ($5,665,392) ($6,637,473) ($7,958,936) ($5,947,067)
============== =============== ================== ===============
-11-
Fortune Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 5. Business Segments (continued)
- -------------------------------------
June 30,2000 December 31,1999
----------------- -------------------
Segment assets:
Automobile insurance $73,998,345 $52,065,243
Excess and surplus lines insurance 10,526,365 10,316,250
Fee for service 451,187 3,863,040
Corporate 26,152,276 30,258,990
Premium finance 458,252 1,030,189
Other 1,765,080 3,468,619
-------------- ---------------
Total segment assets $113,351,505 $101,002,331
GAAP adjustments & reclassifications 21,792,572 38,992,962
Intercompany Eliminations (58,533,459) (49,843,619)
-------------- ---------------
Total consolidated segment assets $76,610,618 $90,151,674
============== ===============
Note 6. Regulatory Restrictions
- --------------------------------
The Company's Fortune Insurance Company subsidiary ("Fortune") had statutory
surplus at June 30, 2000 of $4.8 million. The Company estimates that its surplus
level would put it in the Authorized Control Level category under the National
Association of Insurance Commissioners' Risk-Based Capital calculation if that
annual, calendar year calculation were run as of June 30, 2000. The Company has
already prepared and submitted a Risk-Based Capital plan to the Florida
Department of Insurance outlining steps it will take to strengthen its surplus,
and is working with the Department to finalize that plan.
Note 7. Subsequent Events
- --------------------------
In early July a settlement was reached in a reinsurance dispute with Everest Re
over the wording of a reinsurance treaty which had terminated in 1995. Under the
terms of the settlement Everest Re paid the Company $1.7 million and was
released from any further obligations potentially arising from the expired
treaty. As a result the Company reported a loss of $1.9 million in the second
quarter of 2000 associated with the settlement.
-12-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------
Forward-Looking Statements
- --------------------------
Statements made in this Form 10-Q, including those relating to future cash flow,
arbitration proceedings, the adequacy of loss reserves and increasing earned
premium are forward-looking within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may use words such as "believes", "expects", "intends", "may",
"will", "should", "anticipates", or the negative forms of those words, and
describe strategies, goals and expectations of future results involving risks
and uncertainties which may cause actual results to differ materially from those
set forth. Among other things, the increase in future cash flow is based upon
expectations that current trends in new business volume and claims settlement
that the Company is experiencing will continue; the Company's opinion on the
settlement of arbitration proceedings is based upon facts as it knows and
interprets them; the adequacy of loss reserves is based upon extrapolations of
current experience which may or may not be repeated in the future; and estimates
of increasing earned premium are based upon the Company's expectation that it
will be able to maintain its volume momentum, pricing structure and policy
cancellation patterns. In addition to the factors set forth elsewhere in this
Form 10-Q, the economic, competitive, governmental, weather-related and other
factors identified in the Company's 1999 Form 10-K filed with the Securities and
Exchange Commission could affect the forward looking statements contained in
this Form 10-Q. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
Financial Condition
- -------------------
During the second quarter of 2000 the Company continued to experience negative
cash flow from operations, although at a reduced rate from the first quarter.
Investment and cash holdings were reduced by $6.3 million in the second quarter
to fund operating needs, down from an $8.6 million reduction in the first
quarter. Cash inflow from new policies (net of cancellations) averaged $3.2
million a month during the first half of 2000, but cash outflow to pay claims
averaged $4.3 million a month for the same period. In addition, the Company's
new reinsurance treaties effective April 1, 2000 are not structured on a funds
withheld basis. As a result, cash flow is being negatively impacted in the early
months as premiums are remitted to the reinsurers in advance of remittance back
to the Company for losses paid. The Company still anticipates generating
positive cash flow by the end of 2000.
-13-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
------------------------------------------------------------
The Company has historically reinsured a substantial portion of its private
passenger automobile insurance business, including approximately 75% of such
business in 1998 and 60% of such business in 1999 and the first quarter of 2000.
Effective April 1, 2000 the Company reduced the amount of its private passenger
automobile insurance business reinsured to 40%. Since early 1999 the Company has
been engaged in a dispute with Everest Re over the wording of a reinsurance
treaty which had terminated in 1995. In early July, 2000 a settlement was
reached under which Everest Re paid the Company $1.7 million, and was released
from any further obligations. Accordingly, the Company has written off the
remaining $1.9 million Everest Re receivable as of June 30, 2000. Another
reinsurer has denied a payment request by the Company for $7.8 million of the
Company's receivable balance from the reinsurer. The Company and its legal and
reinsurance advisors firmly believe that it is owed the full amount of the
receivable and has initiated an arbitration proceeding against the reinsurer.
The Company is vigorously pursuing recovery of the amount owed, as well as
interest and damages.
Due to continued adverse loss development, the Company found it necessary during
the second quarter to further strengthen reserves from prior accident quarters.
Adverse loss development has not abated as quickly as the Company had
anticipated. However, the benefit of the agency cancellations made by the
Company last fall and winter should start to have a significant positive impact
over the remainder of this year. The Company is currently analyzing its policy
and claims inventories to more accurately assess the remaining effect of its
cancelled agent base.
The Company has a Credit Agreement with SouthTrust Bank with a remaining
principal balance at June 30, 2000 of $4 million. That Credit Agreement contains
certain financial covenants which, because of its second quarter results, the
Company did not meet. The Company has notified the Bank of its failure to meet
the financial covenants and will work with the Bank to resolve the issues. Under
the terms of the Credit Agreement the Bank may give written notice of the
failure to meet the financial covenants, demanding cure. Should the Company be
unable to comply with the Bank's demand for cure within 30 days of such notice
an event of default will occur, at which time the Bank may declare the remaining
amounts immediately due and payable, or pursue other rights at law under the
terms of the Credit Agreement.
-14-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
------------------------------------------------------------
Financial Condition (continued)
- ------------------------------
The Company's Fortune Insurance Company subsidiary ("Fortune") had statutory
surplus at June 30, 2000 of $4.8 million. The Company estimates that its surplus
level would put it in the Authorized Control Level category under the National
Association of Insurance Commissioners' Risk-Based Capital calculation if that
annual, calendar year calculation were run as of June 30, 2000. The Company has
already prepared and submitted a Risk-Based Capital plan to the Florida
Department of Insurance outlining steps it will take to strengthen its surplus,
and is working with the Department to finalize that plan.
Results of Operations
- ---------------------
The Company recorded net earned premiums of $5.6 million in the second quarter
of 2000, down 26% from the second quarter of 1999. Year-to-date net earned
premiums of $11.3 million exhibited a similar decline from the first half of
1999. The decline in net earned premium in 2000 reflects in large part the
result of the Company's initiative to terminate the unprofitable portion of its
independent agency base. Policies are currently being written through only
one-third the number of agents in place a year ago, after the Company terminated
relationships with the other two-thirds primarily as a result of unacceptable
loss ratios incurred on business written by those agents. During the first half
of 2000 the Company wrote 55 thousand new private passenger automobile policies
compared with 79 thousand during the comparable period of 1999.
The impact on earned premium from the decline in the number of policies written
was offset somewhat by a reduction in the amount of business reinsured under
quota share agreements; effective April 1, 2000, the Company reduced the
percentage of its private passenger auto business ceded from 60% to 40%. The
Company's average written premium per private passenger auto policy has also
increased over 25% since the end of the second quarter of 1999, further
mitigating the impact of the decline in the number of policies written. Most of
this increase in rate has occurred as a result of rate increases implemented
March 1, 2000 and June 1, 2000, and will positively impact earned premium more
substantially over the next three quarters.
-15-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
------------------------------------------------------------
Results of Operations (continued)
- --------------------------------
Fee income equaled $1.6 million in the first half of 2000, down from $3.3
million for the same period last year. The Company's fee income is generated
primarily from policy fees assessed at the time of policy issuance, and
therefore varies in direct relation to the number of policies written. During
the fall of 1999 the Company stopped servicing new policies for both the Florida
Residential and Auto Joint Underwriting Associations as those books of business
became too small to profitably service. Income for servicing remaining existing
policies totaled only $41 thousand in the second quarter of 2000 and will
disappear by the end of the year.
Investment income declined to $444 thousand in the second quarter of 2000,
compared to $919 thousand for the comparable period a year earlier. The Company
anticipates that cash flow from operations will turn positive later this year,
at which time investment assets and income will once again increase.
In the second quarter the Company realized a gain of $125 thousand on the sale
of a piece of real estate. This gain partially offset the $400 thousand in
losses on the sales of investments the Company incurred during the first quarter
as it repositioned investment assets to increase future yields and utilize tax
loss carryforwards. For comparison, the Company recorded $57 thousand in net
gains on investments during the first half of 1999.
During the first half of 2000 the Company reported miscellaneous income of $158
thousand. The income is primarily from a skybox at Alltel stadium which the
Company leased to third parties for NFL playoff games early in 2000, and then
subsequently sold.
The Company's loss and loss adjustment expenses for the second quarter and first
half of 2000 were down $1.5 million and $5.3 million, respectively, from the
same periods a year ago, both declines reflecting the reduced volume of
business. In July, 2000 the Company settled a reinsurance dispute with Everest
Re, resulting in a write-off of $1.9 million in ceded reinsurance receivables in
the second quarter. Without the impact of the Everest Re settlement, loss and
loss adjustment expenses for the second quarter and first half of 2000 would
have been down $3.4 million and $7.2 million, respectively, from the same
periods in 1999.
-16-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
------------------------------------------------------------
Results of Operations (continued)
- --------------------------------
For the second quarter of 2000 policy acquisition costs were $2.5 million lower
than the second quarter of 1999, and for the first half of 2000 were $800
thousand lower than 1999's comparable period. These costs represent the
commissions paid by the Company to its agents, offset by ceding commission
credits received by the Company from its reinsurers. Under the Company's old
reinsurance treaties, which terminated on March 31, 2000, ceding commission
credits adjusted over time depending upon changes in loss ratios of the
underlying business ceded. Under the new reinsurance treaties ceding commissions
are not adjusted based upon loss ratios. As changes in loss ratios under the old
treaties stabilize through development, the sizeable quarterly fluctuations
reported for these costs will not reoccur.
Salaries and wages of $3.3 million in the first half of 2000 remained relatively
flat from the first half of 1999. Reductions in force over the intervening time
were offset by general salary and wage increases.
Second quarter general and administrative expenses of $2.5 million were up $300
thousand over the second quarter of 1999, and the first half's $4.4 million
exceeded last year's first half by $700 thousand. For the first half of the year
legal fees were up $100 thousand, computer consulting fees were up $400
thousand, and computer equipment expense was up $200 thousand, all over the
comparable period last year.
Interest expense continued to decline as the Company made further principal
payments on its loan with SouthTrust Bank.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk is the risk of potential loss in fair value of financial instruments
arising from adverse fluctuations in interest rates, market rates and prices,
foreign currency exchange rates, and other relevant market rate or price
changes.
The Company's exposure to market risk in interest rates is concentrated in its
investment portfolio and to a lesser extent in its debt obligation. There have
been no material changes in the Company's exposure to market risk since March
31, 2000.
-17-
Part II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Company's annual meeting of stockholders held on May 16, 2000 the
following members were elected to the Board of Directors:
Allan J. McCorkle Thomas J. McCorkle R. Lee Smith
Robert Thomas III John Michael Garrity Thomas Edwin Perry
Holly J. McCorkle Arthur L. Cahoon
Approval was granted to amend the Incentive Plan increasing to 220,000 the limit
on the number of shares which may be granted to a new employee for recruitment
purposes.
Approval was granted to amend the Articles of Incorporation changing the name of
the Company from Mobile America Corporation to Fortune Financial, Inc.
Approval was granted to the Board of Directors to issue a 3-for-1 reverse stock
split at such time the Board deems such action most beneficial to the
organization and stockholders.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
11. Unaudited computations of earnings per share.
27. Financial Data Schedule (electronic filing only)
(b) Reports on Form 8K
On April 18, 2000, the Company filed a Current Report on Form 8-K reporting that
it had changed its certifying accountants from Cherry, Bekaert & Holland, LLP to
KPMG LLP. The change was not as a result of any disagreement with Cherry,
Bekaert & Holland, LLP over the scope or results of any of their audit work.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FORTUNE FINANCIAL, INC.
Registrant
August 14, 2000 By: /s/ Mark P. Brockelman
- --------------- ------------------------------
Date Mark P. Brockelman
Vice President and Chief Financial Officer
-19-