UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 0-8738
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BANCINSURANCE CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
250 East Broad Street, Columbus, Ohio 43215
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(614) 228-2800
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of outstanding Common Shares of the registrant as of July 31, 2003
was 4,920,081.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002.......................................................... 3
Consolidated Statements of Income for the three months
and six months ended June 30, 2003 and 2002 (unaudited)..................................... 5
Consolidated Statements of Comprehensive Income for the
three months and six months ended June 30, 2003 and 2002 (unaudited)........................ 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 (unaudited)......................................... 7
Notes to Consolidated Financial Statements (unaudited).............................................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................................. 23
Item 4. Controls and Procedures........................................................................... 23
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings.................................................................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds.......................................... Not Applicable
Item 3. Defaults Upon Senior Securities.................................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 24
Item 5. Other Information.................................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
Signatures................................................................................................ 25
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 2003 2002
- ------ -------------- ---------------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,812,235 in 2003 and $4,691,903 in 2002)................................. $ 4,564,177 $ 4,487,749
Available for sale:
Fixed maturities, at fair value (amortized cost
$20,650,147 in 2003 and $15,557,400 in 2002)............................... 20,969,858 15,912,650
Common stock, at fair value (cost $5,547,209
in 2003 and $5,176,040 in 2002)............................................ 7,295,524 6,286,350
Preferred stock, at fair value (cost $7,625,003
in 2003 and $875,003 in 2002).............................................. 7,733,451 917,300
Short-term investments, at cost which
approximates fair value...................................................... 23,054,314 25,135,305
-------------- ---------------
Total investments..................................................... 63,617,324 52,739,354
-------------- ---------------
Cash ............................................................................... 2,532,072 4,306,007
Premiums receivable................................................................. 8,905,685 5,910,719
Accounts receivable, net of allowance for doubtful accounts......................... 561,839 844,059
Reinsurance receivable.............................................................. 1,296,031 283,417
Prepaid reinsurance premiums........................................................ 6,171,649 1,228,632
Deferred policy acquisition costs................................................... 4,835,217 2,653,826
Estimated earnings in excess of billings on uncompleted codification contracts...... 236,697 224,837
Loans to affiliates................................................................. 772,490 685,856
Prepaid federal income taxes........................................................ - 295,235
Excess of investment over net assets of subsidiaries, net........................... 753,737 753,737
Intangible asset, net............................................................... 957,307 994,566
Accrued investment income........................................................... 443,384 328,751
Other assets........................................................................ 1,122,102 1,206,208
-------------- ---------------
Total assets.......................................................... $ 92,205,534 $ 72,455,204
============== ===============
(Continued)
3
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
June 30, December 31,
Liabilities and Shareholders' Equity 2003 2002
- ------------------------------------ ------------- -------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses.............................. $ 9,443,461 $ 7,559,503
Unearned premiums................................................................... 21,342,797 10,304,769
Experience rating adjustments payable............................................... 6,920,670 4,764,329
Retrospective premium adjustments payable........................................... 2,555,173 3,951,898
Funds held under reinsurance treaties............................................... 2,637,657 1,513,297
Contract funds on deposit........................................................... 2,028,134 1,317,663
Note payable........................................................................ 2,952,315 2,166,355
Taxes, licenses, and fees payable................................................... 780,452 297,418
Federal income taxes payable........................................................ 197,834 -
Deferred federal income taxes....................................................... 701,616 82,027
Commissions payable................................................................. 2,242,249 1,990,436
Billings in excess of estimated earnings on uncompleted codification contracts...... 95,383 93,894
Other............................................................................... 1,161,053 1,511,777
------------- -------------
Total liabilities..................................................... 53,058,794 35,553,366
------------- -------------
Minority interest in consolidated subsidiary:
Redeemable preferred securities of subsidiary trust............................ 8,000,000 8,000,000
------------- -------------
Shareholders' equity:
Non-voting preferred shares:
Class A Serial Preference Shares without par value; authorized 100,000
shares; no shares issued or outstanding................................... - -
Class B Serial Preference Shares without par value; authorized 98,646
shares; no shares issued or outstanding................................... - -
Common Shares without par value; authorized 20,000,000 shares;
6,170,341 shares issued at June 30, 2003 and December 31, 2002,
4,920,081 shares outstanding at June 30, 2003 and 5,000,291 shares
outstanding at December 31, 2002........................................... 1,794,141 1,794,141
Additional paid-in capital..................................................... 1,337,138 1,337,138
Accumulated other comprehensive income......................................... 1,436,473 995,186
Retained earnings.............................................................. 32,604,645 30,429,515
------------- -------------
37,172,397 34,555,980
Less: Treasury shares, at cost (1,250,260 at June 30, 2003 and 1,170,050
at December 31, 2002 common shares)........................................ (6,025,657) (5,654,142)
------------- -------------
Total shareholders' equity............................................ 31,146,740 28,901,838
------------- -------------
Total liabilities and shareholders' equity............................ $ 92,205,534 $ 72,455,204
============= =============
See accompanying notes to consolidated financial statements.
4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Income: 2003 2002 2003 2002
------------ ------------ ------------ ------------
Premiums earned ............................................. $ 19,169,063 $ 10,396,182 $ 31,863,297 $ 19,464,801
Premiums ceded ........................................... (4,073,273) (298,956) (5,606,531) (380,115)
------------ ------------ ------------ ------------
Net premiums earned ......................................... 15,095,790 10,097,226 26,256,766 19,084,686
Net investment income ....................................... 432,203 332,231 804,997 648,751
Net realized gain (loss) on investments ..................... 233,025 (55,966) 467,060 (149,685)
Codification and subscription fees .......................... 876,960 766,348 1,756,676 1,514,709
Management fees ............................................. 71,307 138,353 199,423 459,866
Commission fees ............................................. 936 5,321 1,645 6,727
Other income ................................................ 41,024 17,019 55,204 161,408
------------ ------------ ------------ ------------
Total revenue ......................................... 16,751,245 11,300,532 29,541,771 21,726,462
------------ ------------ ------------ ------------
Losses and operating expenses:
Losses and loss adjustment expenses ......................... 10,948,049 5,696,982 18,282,961 12,117,888
Reinsurance recoveries ...................................... (1,153,142) (134,530) (2,349,144) (174,496)
Experience rating adjustments ............................... 582,210 578,821 2,156,341 214,587
Commission expense .......................................... 1,934,038 1,826,242 3,325,288 3,284,302
Other insurance operating expenses .......................... 1,458,237 897,779 2,693,425 1,753,526
Codification and subscription expenses ...................... 895,759 634,846 1,625,983 1,208,916
General and administrative expenses ......................... 353,811 433,141 527,267 510,183
Interest expense ............................................ 1,732 35,230 3,610 39,863
------------ ------------ ------------ ------------
Total expenses ........................................ 15,020,694 9,968,511 26,265,731 18,954,769
------------ ------------ ------------ ------------
Income before federal income taxes, provision for
trust preferred securities dividends and cumulative
effect of change in accounting principle .............. 1,730,551 1,332,021 3,276,040 2,771,693
Federal income tax expense ..................................... 476,796 381,070 885,328 800,258
------------ ------------ ------------ ------------
Income before provision for trust preferred
securities dividends and cumulative effect of
change in accounting principle ........................ 1,253,755 950,951 2,390,712 1,971,435
Preferred dividends in minority interest in consolidated
subsidiary - redeemable preferred securities of
subsidiary trust ............................................ 107,627 - 215,581 -
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle .................................. 1,146,128 950,951 2,175,131 1,971,435
Cumulative effect of change in accounting principle ............ - - - (1,481,858)
------------ ------------ ------------ ------------
Net income ............................................ $ 1,146,128 $ 950,951 $ 2,175,131 $ 489,577
============ ============ ============ ============
Basic net income per share:
Before cumulative effect of change in accounting
principle ................................................. $ .23 $ .17 $ .43 $ .35
Cumulative effect of change in accounting principle ......... - - - (.26)
------------ ------------ ------------ ------------
Basic net income per share .................................. $ .23 $ .17 $ .43 $ .09
============ ============ ============ ============
Diluted net income per share:
Before cumulative effect of change in accounting
principle ................................................. $ .23 $ .17 $ .43 $ .34
Cumulative effect of change in accounting principle ......... - - - (.25)
------------ ------------ ------------ ------------
Diluted net income per share ................................ $ .23 $ .17 $ .43 $ .09
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income ................................................ $1,146,128 $ 950,951 $2,175,131 $ 489,577
Other comprehensive income:
Unrealized holding gains (losses) on securities
arising during period, net of tax and
reclassification adjustment .......................... 738,053 (104,525) 441,288 18,787
---------- ---------- ---------- ----------
Comprehensive income ...................................... $1,884,181 $ 846,426 $2,616,419 $ 508,364
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
Cash flows from operating activities: 2003 2002
------------ ------------
Net income ................................................................................ $ 2,175,131 $ 489,577
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gain) loss on investments ................................................ (467,060) 149,685
Net realized loss on goodwill impairment ............................................... - 1,481,858
Depreciation and amortization .......................................................... 186,686 158,902
Deferred federal income tax expense .................................................... 392,259 143,016
Change in operating assets and liabilities:
Premiums receivable ................................................................. (2,994,966) 679,525
Accounts and reinsurance receivable, net ............................................ (5,673,411) (369,156)
Deferred policy acquisition costs ................................................... (2,181,391) (893,384)
Other assets ........................................................................ 166,214 27,853
Reserve for unpaid losses and loss adjustment expenses .............................. 1,883,958 (1,634,584)
Unearned premiums ................................................................... 11,038,028 3,579,456
Experience rating adjustments payable ............................................... 2,156,341 214,588
Retrospective premium adjustments payable ........................................... (1,396,725) (2,383,371)
Funds held under reinsurance treaties ............................................... 1,124,360 310,172
Contract funds on deposit ........................................................... 710,471 (458,925)
Other liabilities ................................................................... 569,406 (1,078,196)
------------ ------------
Net cash provided by operating activities ......................................... 7,689,301 417,016
------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity ............ 1,100,000 850,400
Proceeds from available for sale: fixed maturities sold, redeemed or matured .............. 4,751,480 2,223,813
Proceeds from equity securities sold ...................................................... 10,164,502 10,382,269
Cost of investments purchased:
Held to maturity: fixed maturities ..................................................... (1,185,607) (902,131)
Available for sale: fixed maturities ................................................... (9,894,749) (2,609,055)
Equity securities ...................................................................... (16,828,768) (10,124,723)
Net change in short-term investments ...................................................... 2,080,991 (429,170)
Purchase of furniture, equipment and leasehold improvements ............................... (79,570)
------------ ------------
(86,467)
Net cash used in investing activities ............................................. (9,891,721) (695,064)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank ........................................................ 5,900,000 12,590,000
Repayments of note payable to bank ........................................................ (5,100,000) (10,590,000)
Acquisition of treasury shares ............................................................ (371,515) (2,800,105)
------------ ------------
Net cash provided by (used in) financing activities .............................. 428,485 (800,105)
------------ ------------
See accompanying notes to consolidated financial statements.
7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------ ------------
Net decrease in cash ..................................................................... (1,773,935) (1,078,153)
------------ ------------
Cash at December 31 ...................................................................... 4,306,007 19,547,132
------------ ------------
Cash at June 30 .......................................................................... $ 2,532,072 $ 18,468,979
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ............................................................................ $ 225,148 $ 35,291
============ ============
Income taxes ........................................................................ $ - $ 860,000
============ ============
See accompanying notes to consolidated financial statements.
8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. We prepared the Consolidated Balance Sheet as of June 30, 2003, the
Consolidated Statements of Income for the three and six months ended June
30, 2003 and 2002, the Consolidated Statements of Comprehensive Income for
the three and six months ended June 30, 2003 and 2002, and the Consolidated
Statements of Cash Flows for the six months ended June 30, 2003 and 2002,
without an audit. In the opinion of management, all adjustments necessary
to fairly present the financial position, results of operations and cash
flows at June 30, 2003 and for all periods presented have been made.
We prepared the accompanying unaudited Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to the
Quarterly Report on Form 10-Q and Article 10 of Regulation S-X.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. We recommend that your
read these unaudited Consolidated Financial Statements together with the
financial statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2002. The results of operations
for the period ended June 30, 2003 are not necessarily indicative of the
results of operations for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3. Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under
SFAS 142, we no longer amortize goodwill and intangibles which have
indefinite lives. SFAS 142 requires that we assess goodwill and intangibles
with indefinite lives for impairment at least annually, based on the fair
value of the related reporting unit. Our annual impairment assessment will
be performed in the fourth quarter on an on-going basis.
As an initial step in the SFAS 142 implementation process, we assigned
goodwill and intangibles to our property/casualty insurance, insurance
agency and municipal code publishing business units. Following such
assignment, the fair value of each reporting unit was compared to its
carrying value. Fair values were determined by discounting estimated future
cash flows.
Based on our impairment testing, a net after-tax impairment charge of
$1,481,858 was recognized as a cumulative effect of change in accounting
principle in the first quarter of 2002. The impairment charge was
associated with the August 1999 acquisition of Paul Boardway and
Associates, Inc.
We dissolved Paul Boardway and Associates, Inc. in 2002. As a result, the
remaining goodwill of $179,000 was recorded as a pre-tax impairment charge
to income in 2002.
Intangible assets as of June 30, 2003 and December 31, 2002 were as follows:
As of June 30, 2003 As of December 31, 2002
--------------------------------------- ------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
----------- ------------ ---------- ---------- ------------ ---------
Amortization Intangibles:
Databases $ 1,008,773 $ (127,781) $ 880,992 $ 1,008,773 $ (102,562) $ 906,211
Noncompete agreement 120,394 (44,079) 76,315 120,394 (32,039) 88,355
----------- ----------- ---------- ----------- ---------- ----------
Total intangible assets $ 1,129,167 $ (171,860) $ 957,307 $ 1,129,167 $ (134,601) $ 994,566
=========== =========== ========== =========== ========== ==========
9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Amortization expense related to amortizable intangible assets was $18,629 and
$37,259 for the three and six months ended June 30, 2003, respectively, and
$17,491 and $42,982 for the three and six months ended June 30, 2002,
respectively. The estimated amortization expense of intangible assets for the
next six fiscal years ending December 31 is as follows:
2003 $ 74,518
2004 74,518
2005 74,518
2006 66,518
2007 50,477
4. Supplemental Disclosure For Earnings Per Share:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -------------------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Net income............................. $ 1,146,128 $ 950,951 $ 2,175,131 $ 489,577
------------- ------------ ------------- -------------
Weighted average common shares
outstanding........................ 4,931,486 5,530,177 4,963,765 5,649,518
Adjustments for dilutive securities:
Dilutive effect of outstanding
options............................ 60,638 187,303 50,248 113,982
------------- ------------ ------------- -------------
Diluted common shares.................. 4,992,124 5,717,480 5,014,013 5,763,500
============= ============ ============= =============
Basic and diluted earnings per
share.............................. $ .23 $ .17 $ .43 $ .09
============= ============ ============= =============
5. On April 25, 2002, the Board of Directors adopted a common share repurchase
program. On May 23, 2002, the Board of Directors increased the aggregate
number of common shares available for repurchase under the repurchase
program to 700,000 common shares from 600,000 common shares previously
approved. The repurchase program expires on December 31, 2003. Through June
30, 2003, we repurchased 699,434 common shares at an average price per
share of $5.00 under this program. Repurchases were funded by cash flows
from operations.
6. We have three reportable business segments: property/casualty insurance,
insurance agency and municipal code publishing. The following provides
financial information regarding our reportable segments. There are
intersegment management and commission fees. The allocations of certain
general expenses within segments are based on a number of assumptions, and
the reported operating results would change if different assumptions were
applied. Depreciation and capital expenditures are not considered material.
JUNE 30, 2003
----------------------------------------------------------------------------------------------
Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
----------------------------------------------------------------------------------------------
Revenues from external customers $27,200,665 $ 1,645 $ 1,756,676 $ 1,288 $ 28,960,274
Intersegment revenues........... 2,940 184,832 - 279,613 467,385
Interest revenue................ 808,676 6 - 240,200 1,048,882
Interest expense................ 354 - 1,041 2,215 3,610
Depreciation and amortization... 69,859 - 46,200 70,627 186,686
Segment profit (loss)........... 3,509,866 119,864 129,652 (15,957) 3,743,425
Income tax expense (benefit).... 998,952 40,554 52,953 (207,131) 885,328
Segment assets.................. 86,957,683 445,003 2,183,508 11,756,019 101,342,213
10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
June 30, 2002
----------------------------------------------------------------------------------------------
Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
----------------------------------------------------------------------------------------------
Revenues from external customers. $ 19,858,021 $ 6,727 $ 1,514,709 $ 1,323 $ 21,380,780
Intersegment revenues............ 2,940 139,681 - 55,620 198,241
Interest revenue................. 623,462 88 - 11,473 635,023
Interest expense................. 15,225 - 3,161 21,477 39,863
Depreciation and amortization.... 64,304 20,000 49,117 25,481 158,902
Segment profit (loss)............ 2,846,393 56,312 308,544 (241,315) 2,969,934
Income tax expense (benefit)..... 812,905 19,146 113,638 (145,431) 800,258
Segment assets................... 58,163,596 1,181,848 1,866,312 3,204,580 64,416,336
---------------------------------------------
June 30, June 30,
2003 2002
---------------------------------------------
Revenue
Total revenue for reportable segments...................................... $ 28,960,274 $ 21,380,780
Interest revenue........................................................... 1,048,882 635,023
Elimination of intersegment revenue........................................ (467,385) (198,241)
------------- -------------
Total consolidated revenue................................................. $ 29,541,771 $ 21,817,562
============= =============
Profit
Total profit for reportable segments....................................... $ 3,759,382 $ 3,211,249
Other loss................................................................. (15,957) (241,315)
Elimination of intersegment profit......................................... (467,385) (198,241)
------------- -------------
Income before income taxes, provision for trust preferred securities
dividends and cumulative effect of change in accounting principle........ $ 3,276,040 $ 2,771,693
============= =============
Assets
Total assets for reportable segments....................................... $ 89,586,194 $ 61,211,756
Other assets............................................................... 11,756,019 3,204,580
Elimination of intersegment receivables.................................... (9,136,679) (1,335,566)
------------- -------------
Consolidated assets........................................................ $ 92,205,534 $ 63,080,770
============= =============
7. We have three equity incentive plans which allow for granting options to
certain employees and directors of the Company. We account for compensation
expense related to such transactions using the "intrinsic value" based
method under the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123," to provide
alternative methods for transitioning (on a voluntary basis) to the "fair
value" based method of accounting for stock-based compensation and to
require prominent disclosures about the method of accounting used for
stock-based employee compensation and the effect of the method used on
reported results. The "fair value" of the second quarter and year to date
2003 and 2002 option grants were estimated on the date of the grant using
the Black Scholes option-pricing model with the following weighted average
assumptions:
------------------------------------------------------------------------
For the three months ended June 30, For the six months ended June 30,
2003 2002 2003 2002
--------------- --------------- -------------- --------------
Fair value of options granted........................ $ 5.25 $ 5.19 $ 5.23 $ 5.19
Expected volatility.................................. 27.67% 34.21% 27.67% 34.21%
Risk free interest rate.............................. 2.74% 4.81% 2.75% 4.81%
Expected life (in years)............................. 6 6 6 6
11
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
As we account for stock options using the "intrinsic value" based method,
no compensation cost has been recognized in net income for the equity
incentive plans. Had we accounted for all stock-based employee compensation
under the "fair value" method (SFAS No. 123), net income would have been
reduced as follows:
----------------------------------- --------------------------------
For the three months ended June 30, For the six months ended June 30,
2003 2002 2003 2002
-------------- -------------- --------------- --------------
Net income, as reported.............................. $ 1,146,128 $ 950,951 $ 2,175,131 $ 489,577
Deduct: Total stock-based employee
compensation expense determined
under "fair value" based method for
all awards, net of related tax effects.......... (17,092) (4,045) (17,794) (4,045)
------------- ------------ ------------- --------------
Pro forma net income.............................. $ 1,129,036 $ 946,906 $ 2,157,337 $ 485,532
============= ============ ============= ==============
Basic and diluted earnings per share would not be impacted if the fair
value based method had been applied to all awards. Compensation expense in
the pro forma disclosure is not indicative of future amounts as options
vest over several years and additional grants are generally made each year.
8. In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS
150"), effective for interim reporting periods beginning after June 15,
2003. Under SFAS 150, certain financial instruments classified as equity
will be required to be presented as liabilities. The Company will apply
SFAS 150 for the quarter ending September 30, 2003. The Company is
currently evaluating the impact of the adoption of SFAS 150 on our
consolidated financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
Bancinsurance is a specialty property insurance holding company. We have three
primary business segments: property/casualty insurance, municipal code
publishing and insurance agency.
Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio Indemnity Company
("Ohio Indemnity"), is a specialty property insurance company. Our principal
sources of revenue are premiums paid by insureds for insurance policies written
by Ohio Indemnity. Ohio Indemnity, an Ohio corporation, is licensed in 47 states
and the District of Columbia and for surplus lines in Texas. As such, Ohio
Indemnity is subject to the regulations of the Department of Insurance of the
State of Ohio (the "Department") and the regulations of each state in which it
operates. The majority of Ohio Indemnity's premiums are derived from two
distinct lines of business: (1) products designed for automobile lenders/dealers
and (2) unemployment insurance protection and bail bond products.
Our automobile lender/dealer group offers three types of products. First,
ultimate loss insurance, a blanket vendor single interest coverage, is the
primary product we offer to financial institutions nationwide. This product
insures banks and financial institutions against damage to pledged collateral in
cases where the collateral is not otherwise insured. An ultimate loss insurance
policy is generally written to cover a lender's complete portfolio of
collateralized personal property loans, typically automobiles. Second, creditor
placed insurance is an alternative to our traditional blanket vendor single
interest product. While both products cover the risk of damage to uninsured
collateral in a lender's automobile loan portfolio, creditor placed insurance
covers the portfolio through tracking individual borrower's insurance coverage.
The lender purchases physical damage coverage for loan collateral after a
borrower's insurance has lapsed. Third, our guaranteed auto protection insurance
("GAP") pays the difference or gap between the amount owed by the customer on a
lease or loan contract and the amount of primary insurance company coverage in
the event a vehicle is damaged beyond repair or stolen and never recovered. The
GAP product is sold to automobile dealers, lenders and lessors who then sell
coverage directly to the borrower at the time of purchasing or leasing an
automobile.
We offer three unemployment insurance protection products; (1) Bonded service,
(2) excess of loss and (3) mandated bonds. Our unemployment insurance protection
products are utilized by not-for-profit entities which elect not to pay the
unemployment compensation tax and instead reimburse the state unemployment
agencies for benefits paid by the agency to former employees. Certain national
cost containment firms provide programs to assure that reimbursing employers
discharge their unemployment compensation commitments. Ohio Indemnity bonds
these firms for their program service responsibilities. Ohio Indemnity also
provides excess of loss coverage to groups of not-for-profit entities, who want
to declare reimbursing status for their unemployment insurance obligations,
under trust
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
arrangements. We also underwrite state mandated surety bonds required by certain
state departments of labor. This coverage is normally written as a companion to
our other unemployment insurance protection products and may be necessary for an
employer to obtain reimbursing status. In addition, we entered into an assumed
reinsurance agreement for a 15% participation, with other insurers assuming the
remaining exposure. The agreement insures a bail bond company against losses
arising from the nonperformance of bail requirements.
Municipal Code Publishing. Our wholly-owned subsidiary, American Legal
Publishing Corporation ("ALPC"), codifies, publishes and distributes ordinances
for over 1,500 municipalities and counties nationwide in addition to state
governments. Ordinance codification is the process of collecting, organizing and
publishing legislation for state and local governments.
Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC, an Ohio
limited liability company ("USA"). We formed USA to act as an agency for placing
property and casualty insurance policies offered and underwritten by Ohio
Indemnity and by other property and casualty insurance companies. In the fourth
quarter of the 2002 fiscal year, we dissolved our wholly-owned subsidiary, Paul
Boardway and Associates, Inc., which previously acted as a property/casualty
insurance agency.
SUMMARY RESULTS
The following table sets forth period to period changes in selected financial
data:
-------------------------------------------------
PERIOD TO PERIOD INCREASE (DECREASE)
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
2002-2003
-------------------------------------------------
AMOUNT % CHANGE
-------------------------------------------------
Net premiums earned........................................... $ 7,172,080 37.6%
Investment income............................................. 156,246 24.1%
Net realized gain (loss) on investments....................... 616,745 412.0%
Total revenue................................................. 7,815,309 36.0%
Loss and loss adjustment expenses, net of reinsurance
recoveries 3,990,425 33.4%
Operating expenses............................................ 3,356,790 48.2%
Interest expense.............................................. (36,253) (90.9)%
Operating income, before federal income taxes and
dividends on trust preferred securities..................... 504,347 18.2%
Cumulative effect of change in accounting principle........... (1,481,858) (100.0)%
Net income.................................................... 1,685,554 344.3%
The combined ratio, which is the sum of the loss ratio and expense ratio, is the
traditional measure of underwriting experience for insurance companies. The
following table reflects Ohio Indemnity's loss, expense and combined ratios on
both a statutory and GAAP basis for the six months ended June 30:
2003 2002
--------- ---------
Statutory:
Loss ratio.................................................................. 66.1% 63.3%
Expense ratio............................................................... 27.4% 29.4%
---- ----
Combined ratio.............................................................. 93.5% 92.7%
==== ====
GAAP:
Loss ratio.................................................................. 60.7% 62.6%
Expense ratio............................................................... 26.9% 26.3%
---- ----
Combined ratio.............................................................. 87.6% 88.9%
==== ====
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
RESULTS OF OPERATIONS
JUNE 30, 2003 AS COMPARED TO JUNE 30, 2002
- ------------------------------------------
Premiums. Net premiums earned in the second quarter of 2003 increased 49.5% to
$15,095,790 from $10,097,226 in the same quarter of 2002. On a year-to-date
basis, net premiums earned increased 37.6% to $26,256,766 from $19,084,686 in
the same six-month period of 2002. We attribute these increases in net premiums
earned primarily to growth in our lender/dealer business.
Net premiums earned related to our ultimate loss and creditor placed insurance
products increased 53.0% to $12,899,228 in the second quarter of 2003 from
$8,430,594 in the second quarter of 2002. This increase included net premiums
earned of $2,209,749 for creditor placed insurance products which were
introduced in the fourth quarter of 2002. On a year-to-date basis, net premiums
earned for our ultimate loss and creditor placed insurance products increased
36.3% to $22,262,198 in the first half of 2003 from $16,336,067 in the same
period of 2002, including $2,902,541 for creditor placed insurance products in
the first half of 2003. We attribute these increases primarily to new business
growth in creditor placed insurance and an increase in ultimate loss insurance
premiums. The increase in ultimate loss insurance premiums is attributable to
both new policies added during 2003 and volume increases with existing
customers. An increase in automobile lending by some of our large financial
institution customers, driven by aggressive financing offers, was the primary
cause of the increased volume.
Net premiums earned related to our GAP insurance products increased 233.1% to
$665,589 in the second quarter of 2003 from $199,822 in the same period of 2002.
On a year-to-date basis, GAP net premiums earned increased 218.5% to $1,108,713
from $348,056 in the same period of 2002. We attribute this growth to two
existing large financial institution customers purchasing GAP coverage in the
first half of 2003.
Net premiums earned related to our unemployment insurance protection and bail
bond products increased 4.4% $1,530,973 in the second quarter of 2003 compared
to $1,466,810 in the same period of 2002. On a year-to-date basis, unemployment
insurance protection and bail bond net premiums earned increased 20.2% to
$2,885,855 from $2,400,563 in the same period of 2002. We attribute this growth
primarily to a premium rate increase on an existing customer.
Net Investment Income. As of June 30, 2003, our $63,617,324 investment portfolio
is allocated among fixed income securities, equity securities and short-term
investments. We seek to invest in investment grade obligations of states,
municipalities and political subdivisions because the majority of the interest
income from such investments is tax-exempt and such investments have generally
resulted in more favorable net yields. Net investment income increased 30.1% to
$432,203 in the second quarter of 2003 from $332,231 in the second quarter of
2002. On a year-to-date basis, net investment income increased 24.1% to $804,997
from $648,751 during the same period of 2002. This increase was primarily the
result of an increase in invested assets generated by increased cash flows
provided by operations. This increase, however, was partially offset by a
decline in the investment yield as our investment income for 2003 was impacted
by lower interest rates and investment yields. The effective duration of our
fixed income portfolio at June 30, 2003 was 6.2 years.
During the second quarter of 2003, we recorded net realized gains on investments
of $233,025 compared with net realized losses on investments of $55,966 during
the second quarter of 2002. On a year-to-date basis, we recorded net realized
gains on investments of $467,060 compared with net realized losses on
investments of $149,685 during the same period of 2002. The increase in net
realized gains was primarily caused by the timing of the sale of individual
securities. We generally decide whether to sell securities based upon investment
opportunities and tax consequences. We regularly evaluate the quality of our
investment portfolio. When we believe that a specific security has suffered an
other-than-temporary decline in value, the difference between cost and estimated
fair value is charged to income as a realized loss on investments. There were
$49,328 in impairment charges included in net realized gains on investments for
the three and six months ended June 30, 2003. There were no impairment charges
included in net realized losses on investments for the three and six months
ended June 30, 2002. For more information concerning impairment charges, see
"Other-Than-Temporary Impairment of Debt and Equity Securities" below.
Codification and subscription fees. ALPC's codification and subscription fees
accounted for $876,960 of our revenues in the second quarter of 2003 and
$766,348 of our revenues in the second quarter of 2002, an increase of 14.4%.
Codification and subscription fees increased 16.0% to $1,756,676 from $1,514,709
for the six months ended June 30, 2003 and 2002, respectively. This increase was
primarily the result of new state, city and municipal customers added in 2002.
Additional services, including specialized codification and integrated product
offerings, improved market penetration.
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BANCINSURANCE CORPORATION
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Management Fees. We have an agreement with a cost containment service firm to
control the unemployment compensation costs of certain non-profit employers.
Pursuant to this agreement, we have issued a surety bond insuring the payment of
certain reimbursable unemployment compensation benefits on behalf of the
employers enrolled in this program. We hold certain monies allocated toward the
payment of these benefits. Together with the cost containment service firm, we
share any residual resulting from the development of benefits to be paid from
the contract funds held on deposit. We record management fees in the period the
residual is shared with the cost containment service firm. Our management fees
in the second quarter of 2003 decreased 48.5 % to $71,307 from $138,353 in the
second quarter of 2002. We attribute this decrease primarily to rising
unemployment insurance protection obligations caused by higher unemployment. We
expect management fees to vary from period to period depending on unemployment
levels and claims experience.
Other Income. Other income increased 141.0% to $41,024 in the second quarter of
2003 from $17,019 in the second quarter of 2002. Other income increased as a
result of higher claims processing and other fee income. On a year-to-date
basis, other income decreased 65.8% to $55,204 from $161,408 in the first six
months of 2002. The year-to-date decrease was primarily the result of releasing
a $100,000 reserve during the first quarter of 2002, related to the dismissal of
a dispute with an unaffiliated party.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
represent claims associated with insured loss events and expenses associated
with adjusting and recording policy claims, respectively. Losses and loss
adjustment expenses, net of reinsurance recoveries, increased 76.1% to
$9,794,907 in the second quarter of 2003 from $5,562,452 in the same quarter of
2002. On a year-to-date basis, losses and loss adjustment expenses, net of
reinsurance recoveries, increased 33.4% to $15,933,817 from $11,943,392 in the
same six-month period of 2002. We attribute these increases in losses and loss
adjustment expenses primarily to our lender/dealer business.
Losses and loss adjustment expenses related to our ultimate loss and creditor
placed insurance products increased 84.9% to $8,949,584 in the second quarter of
2003 from $4,839,864 in the second quarter of 2002. On a year-to-date basis,
losses and loss adjustment expenses for our ultimate loss and creditor place
insurance products increased 28.6% to $14,201,862 in the first half of 2003 from
$11,042,181 in the same period of 2002. We attribute these increases primarily
to our growth in premiums for our ultimate loss and creditor placed insurance
products. In addition, higher frequency of losses and loss adjustment experience
contributed to these increases. With the continued slowdown in the U.S. economy
and high consumer debt, financial institutions are experiencing a rise in
delinquency dollars. As loan defaults, bankruptcies and automobile repossessions
increased, we experienced a higher frequency of losses and loss adjustment
experience. However, the increased frequency of losses and loss adjustment
experience has been partly offset by a decrease in the severity of losses and
loss adjustment experience. In 2003, prices for used cars have declined compared
to 2002 due to large dealer/manufacturer incentives offered on new cars. As used
car prices declined, the severity of losses and loss adjustment experience has
decreased.
Losses and loss adjustment expenses related to GAP insurance products increased
23.5% to $412,738 in the second quarter of 2003 from $334,163 in the same period
of 2002. On a year-to-date basis, GAP losses and loss adjustment expenses
increased 65.4% to $843,291 from $509,816 in the same period of 2002. We
attribute this growth in GAP losses and loss adjustment expenses primarily to
our growth in GAP premiums in 2003. In addition, the severity of GAP losses and
loss adjustment experience has increased as a result of the depressed value of
the used car market which created a larger difference between the outstanding
balance of a customer's loan or lease and the amount of primary insurance
coverage if a vehicle is damaged beyond repair or is stolen and not recovered.
Losses and loss adjustment expenses related to our unemployment insurance
protection and bail bond products increased 11.4% to $432,585 in the second
quarter of 2003 from $388,425 in the same period of 2002. On a year-to-date
basis, unemployment insurance protection and bail bond losses and loss
adjustment expenses incurred increased 127.1% to $888,664 from $391,395 in the
same period of 2002. We attribute this growth in losses and loss adjustment
expenses primarily to reserve strengthening and increased benefit payments
associated with rising unemployment insurance obligations. We strengthened loss
adjustment expense reserves due to persistent weakness in the national economy.
For more information concerning losses and loss adjustment expenses, see "Losses
and Loss Adjustment Expense Reserves" below.
Operating Expenses. Our operating expenses consist of experience rating
adjustments, commission expense, other insurance operating expenses,
codification and subscription expenses and general and administrative expenses.
Experience rating adjustments remained relatively constant at $582,210 in the
second quarter of 2003 up from $578,821 in the second quarter of 2002. On a
year-to-date basis, experience rating adjustments increased 904.9% to $2,156,341
from $214,587 in the same six month period of 2002. Experience rating
adjustments are calculated and adjusted from period to period based on policy
experience to date and premium growth. We anticipate that experience rating
adjustments may fluctuate in future years based upon this calculation.
Commission expense increased 5.9% to
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
$1,934,038 in the second quarter of 2003 from $1,826,242 in the second quarter
of 2002 due to growth in premiums written. On a year-to-date basis, commission
expense remained relatively constant primarily due to ceding commissions
associated with our creditor placed insurance product and commission rate
adjustments. Other insurance operating expenses increased 62.4% to $1,458,237 in
the second quarter of 2003 from $897,779 in the second quarter of 2002. Other
insurance operating expenses increased 53.6% to $2,693,425 for the six months
ended June 30, 2003 from $1,753,526 for the same period of 2002. We attribute
these increases to higher premium taxes and to a lesser extent salary expenses
and related benefits. Codification and subscription expenses incurred by ALPC
increased 41.1% to $895,759 during the second quarter of 2003 from $634,846 in
the same period of 2002. Codification and subscription expenses increased 34.5%
to $1,625,983 during the first half of 2003 from $1,208,916 during the same
period of 2002. These increases were consistent with growth in codification and
subscription revenues and were primarily attributable to increases in outside
printing, supplies and consulting fees. General and administrative expenses
decreased 18.3% to $353,811 in the second quarter of 2003 from $433,141 in the
three months ended June 30, 2002. This decrease was primarily attributable to
decreases in auditing and consulting expenses. General and administrative
expenses increased 3.3% to $527,267 in the first six months of 2003 from
$510,183 in the first six months of 2002. This increase was primarily the result
of increase in salaries and related benefits.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
we adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). Under SFAS 142, we no longer amortize
goodwill and intangibles which have indefinite lives. SFAS 142 requires that we
assess goodwill and intangibles with indefinite lives for impairment at least
annually based on the fair value of the related reporting unit. We will perform
our annual impairment assessment in the fourth quarter on an on-going basis.
As an initial step in the SFAS 142 implementation process, we assigned goodwill
and intangibles to our property/casualty insurance, insurance agency and
municipal code publishing business segments. Following such assignment, the fair
value of each business segment was compared to its carrying value. Fair values
were determined by discounting estimated future cash flows.
Based on our impairment testing, a net after-tax impairment charge of $1,481,858
was recognized as a cumulative effect of the change in accounting principle in
the first quarter of 2002. The impairment charge was associated with the August
1999 acquisition of Paul Boardway and Associates, Inc.
We dissolved Paul Boardway and Associates, Inc. in the fourth quarter of 2002.
As a result, the remaining goodwill of $179,000 was recorded as a pre-tax
impairment charge to income in 2002.
Amortization expense related to definite-lived intangible assets was $18,629 and
$37,259 for the three and six months ended June 30, 2003 and $17,491 and $42,982
for the three and six months ended June 30, 2002, respectively.
Interest expense. Interest expense decreased 95.1% to $1,732 for the three
months ended June 30, 2003 from $35,230 for the three months ended June 30,
2002. Interest expense decreased 90.9% to $3,610 for the six months ended June
30, 2003 from $39,863 in the six months ended June 30, 2002. These decreases
were primarily attributable to lower borrowing levels on the Company's revolving
credit line.
Federal Income Taxes. In the second quarter of 2003, we recorded a provision of
$476,796 for income taxes, as compared to a provision for income taxes of
$381,070 in the second quarter of 2002. On a year-to-date basis, federal income
tax expense increased 10.6% to $885,328 from $800,258 in the same six-month
period of 2002. The effective consolidated income tax rate was 29.4% and 28.6%
in the second quarter of 2003 and 2002, respectively; and 28.9% in both the six
months ended June 30, 2003 and 2002, respectively.
Preferred Dividends. In December 2002, we organized BIC Statutory Trust I ("BIC
Trust"), a Connecticut special purpose business trust, which issued $8,000,000
of floating rate trust preferred capital securities in an exempt private
placement transaction. BIC Trust was formed for the sole purpose of issuing and
selling the floating rate trust preferred capital securities and investing the
proceeds from such securities in junior subordinated debentures of the Company.
The floating rate trust preferred capital securities and the junior subordinated
debentures have substantially the same terms and conditions. BIC Trust
distributes the interest it receives on the junior subordinated debentures to
the holder of the floating rate trust preferred capital securities to fulfill
its dividend obligations with respect to such trust preferred securities. The
junior subordinated debentures and the floating rate trust preferred capital
securities pay interest and dividends on a quarterly basis at a rate equal to
three month LIBOR plus four hundred basis points (5.28% at June 30, 2003).
Dividends on floating rate trust preferred capital securities are charged to
income as they accrue.
16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
GAAP Combined Ratio. Ohio Indemnity underwrites the Company's specialty
insurance products. Our combined ratio improved to 87.6% for the six months
ended June 30, 2003 from 88.9% for the same period last year. The loss ratio
declined to 60.7% for the six months ended June 30, 2003 from 62.6% during the
same period of 2002 primarily due to significant growth in premiums and a
decrease in the severity of losses associated with our ultimate loss and
creditor placed insurance products. This decrease was partially offset by
reserve strengthening in anticipation of higher losses in future quarters as a
result of prolonged weakness in the national economy and recent automobile
credit experience of Ohio Indemnity's customers. The expense ratio increased
slightly to 26.9% for the six months ended June 30, 2003 from 26.3% during the
same period of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to generate sufficient cash flows to meet
the short and long-term cash requirements of our business operations. The
short-term cash needs of our property/casualty business primarily consist of
paying losses and loss adjustment expenses and day-to-day operating expenses.
Those needs are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income. Our investment
portfolio is also a source of additional liquidity through the sale of readily
marketable fixed maturities, equity securities and short-term investments. After
satisfying our cash requirements, excess cash flows from these underwriting and
investment activities are used to build the investment portfolio and thereby
increase future investment income.
Cash flows used in operating activities totaled $7,689,301 in the six months
ended June 30, 2003 compared to $417,016 during the same period of 2002. The
increase was primarily the result of net premiums collected of $28,348,851 in
the first six months of 2003 which were 36.2% higher than the $20,809,771 of net
premiums collected in the six months ended June 30, 2002.
We maintain a level of cash and liquid short-term investments which we believe
will be adequate to meet our anticipated cash needs without being required to
liquidate intermediate-term and long-term investments through the end of 2003.
Because of the nature of the risks we insure, losses and loss adjustment
expenses emanating from the insurance policies that we issue are characterized
by relatively short settlement periods and quick development of ultimate losses
compared to claims emanating from other types of insurance products. Therefore,
we believe that we can estimate our cash needs to meet our losses and expenses
through the end of 2003.
Our investment portfolio is allocated among investment-grade fixed income
securities, equity securities and short-term investments with fixed income
securities constituting the largest allocation. Cash and short-term investments
at June 30, 2003 amounted to $25,586,386 or 38.7% of our total cash and invested
assets. The fair values of our held to maturity fixed income securities are
subject to market fluctuations but are carried on our balance sheet at amortized
cost because we have the positive ability and intent to hold held to maturity
fixed income securities to maturity date. Available for sale fixed income
securities and equity securities are reported at fair value with unrealized
gains or losses, net of applicable deferred taxes, reflected in accumulated
other comprehensive income. Short-term investments are reported at cost, which
approximates fair value.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. We mitigate this risk by
attempting to ladder the maturity schedule of our investments with the expected
payouts of our liabilities. To the extent that liabilities come due more quickly
than assets mature, we would have to sell assets prior to maturity and recognize
a gain or loss.
As of June 30, 2003, we have a $13,000,000 unsecured revolving line of credit
with a maturity date of June 30, 2006 with an outstanding balance of $2,900,000.
The revolving line of credit provides for interest payable quarterly at an
annual rate equal to 0.75% less than the prime rate. Under the terms of the
revolving credit agreement, we are not permitted to allow our consolidated
shareholders equity to fall below $20,000,000 and Ohio Indemnity's ratio of net
premiums written to policyholders surplus to exceed 3:1.
We do not anticipate receiving any cash dividends from Ohio Indemnity in 2003.
As of June 30, 2003, we have sufficient capital resources available at the
parent company to fund interest payments, interest payments on our junior
subordinated debentures issued to fund BIC Trust's distributions on floating
rate trust preferred capital securities and other administrative expenses.
Dividends from Ohio Indemnity and our line of credit provide us with additional
liquidity that could be used for short-term cash requirements if cash from
operations and investments is not sufficient.
All our material capital commitments and financial obligations are reflected in
our financial statements, except our risk on surety bonds and state mandated
performance bonds, written in connection with our unemployment insurance
protection products. Our financial statements include reserves for losses on
this business for any claims filed and for an estimate of incurred but not
reported losses. Such reserves were $686,000 and $888,000 at June 30, 2003 and
December 31, 2002, respectively.
Under applicable insurance statutes and regulations, Ohio Indemnity is required
to maintain prescribed amounts of capital and surplus as well as statutory
deposits with the appropriate insurance authorities. Ohio Indemnity is in
compliance with all applicable statutory capital and surplus requirements. Ohio
Indemnity's investments consist only of permitted investments under Ohio
insurance laws.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
ALPC derives its funds principally from codification and subscription fees which
are currently sufficient to meet its operating expenses. USA derives its funds
principally from commission fees which are currently sufficient to meet its
operating expenses.
On December 4, 2002, BIC Trust, sold $8,000,000 of floating rate trust preferred
capital securities in an exempt private placement transaction. BIC Trust
contributed the proceeds from the issuance of the floating rate trust preferred
capital securities to Bancinsurance who in turn issued the junior subordinated
debentures with the same terms and conditions. We have used the proceeds for
general corporate purposes. We have fully and unconditionally guaranteed BIC
Trust's obligations with respect to the floating rate trust preferred capital
securities.
DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, commodity
prices and other relevant market rate or price changes. Market risk is
influenced by the volatility and liquidity in the markets in which the related
underlying assets are traded. The following is a discussion of our primary
market risk exposures and how we manage those exposures as of June 30, 2003. Our
market risk sensitive instruments are entered into for purposes other than
trading.
The carrying value of our investment portfolio as of June 30, 2003 was
$63,617,324, 40.1% of which is invested in fixed income securities, 23.6% in
equity securities and 36.3% in short-term investments. The primary market risks
to the investment portfolio are equity price risk associated with investments in
equity securities and interest rate risk associated with investments in fixed
income securities as well as fixed-rate short-term investments. We have no
foreign exchange risk or direct commodity risk.
For fixed income securities, our short-term liquidity needs and the potential
liquidity needs of our business are key factors in managing our portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions.
With respect to our investment portfolio, during the quarter ended June 30,
2003, there were no material changes in our primary market risk exposures or in
how these exposures were managed compared to the year ended December 31, 2002.
We do not anticipate material changes in our primary market risk exposures or in
how those exposures are managed in future reporting periods based upon what is
known or expected to be in effect during future reporting periods.
TRENDS
The Company's results of operations have historically varied from quarter to
quarter principally because of fluctuations in underwriting results, and we
expect this trend to continue. The majority of our revenues are dependent on the
demand for our customers' automobile financing programs. [Increased automobile
sales generally cause increased demand for automobile financing and our
products.] An increase in automobile lending, driven by continued aggressive
financing offers by some of our larger financial institution customers, helped
lender/dealer premium growth during the first and second quarters of 2003. We
anticipate that as financing incentives are phased-out, consumer spending on
automobiles may decline. In such event, we would anticipate that automobile
lending may also decrease during the third quarter of 2003 and cause a decline
in the demand for our automobile lender/dealer products. With the continued
downturn in the economy, continued corporate downsizing and high consumer debt,
financial institutions are seeing a rise in delinquency dollars. As loan
defaults, bankruptcies and automobile repossessions continue to increase in
frequency and benefit charges associated with rising unemployment insurance
protection obligations increase, we anticipate an increase in the frequency of
losses and loss adjustment experience in the third quarter of 2003. Increased
incentives being offered on new cars by dealers and manufacturers has depressed
the value of the used car market. As used car prices decline, we anticipate an
increase in the severity of losses and loss adjustment experience for our GAP
product and a decrease in the severity of loss and loss adjustment experience
for our ultimate loss insurance and creditor placed insurance products. In
addition, ALPC's municipal code publishing fees may decline due to state and
local government budget reductions associated with current economic conditions.
Our outlook for the remainder of 2003 remains cautious.
FORWARD-LOOKING INFORMATION
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that indicate our intentions, hopes, beliefs,
expectations or predictions of the future are forward-looking statements for
which we claim the protection of the safe harbor provided in the Private
Securities Litigation Reform Act of 1995. It is important to note that our
actual results could differ materially from those projected in such
forward-looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Many of the
factors that will determine our actual results are beyond
18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
our ability to control or predict. We caution you not to put undue reliance on
forward-looking statements. In addition, we have no obligation, and we do not
intend, to update forward-looking statements after the date hereof, even if new
information, future events, or other circumstances have made them incorrect or
misleading.
The risks and uncertainties that may affect the operations, performance,
development and results of our business include the following: changes in
property and casualty reserves; premium and investment growth; product pricing
environment; availability of credit; performance of financial markets;
fluctuations in interest rates; availability and pricing of reinsurance; acts of
war and terrorist activities; rating agency actions; competition; adverse state
and federal legislation and regulation, including limitations on premium levels,
and increases in prescribed amounts of capital and surplus; litigation and
administrative proceedings; ability to achieve targeted expense savings; ability
to achieve premium targets and profitability goals; and general economic
conditions.
INFLATION
We do not consider the impact of inflation to be material in the analysis of our
overall operations.
INSURANCE REGULATORY MATTERS
The NAIC has developed a risk-based capital measurement formula to be applied to
all property/casualty insurance companies. The risk based capital measurement
formula has been enacted into the Ohio Revised Code. This formula calculates a
minimum required statutory net worth based on the underwriting, investment,
credit, loss reserve and other business risks inherent in an individual
company's operations. Under the current formula, any insurance company which
does not meet the applicable risk-based capital measurement threshold could be
forced to reduce the scope of its operations and ultimately could become subject
to statutory receivership proceedings. Based on our analysis, our statutory net
worth is in excess of the applicable thresholds and no corrective action is
necessary.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets,
revenues, liabilities and expenses and related disclosures of contingent assets
and liabilities. We regularly evaluate these estimates, assumptions and
judgments, including those related to insurance revenue and expense recognition,
asset impairment, loss reserves and valuation and impairment of intangible
assets such as goodwill. We base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies require significant
judgments and estimates in the preparation of our consolidated financial
statements.
OTHER-THAN-TEMPORARY IMPAIRMENT OF DEBT AND EQUITY SECURITIES
We continually monitor the difference between our cost and the estimated fair
value of our investments, which involves uncertainty as to whether declines in
value are temporary in nature. If we believe a decline in the value of a
particular available for sale investment is temporary, we record the decline as
an unrealized loss in our shareholders' equity. If we believe the decline in any
investment is "other-than-temporarily impaired," we write down the carrying
value of the investment and record a realized loss on our consolidated statement
of income. Our assessment of a decline in value includes our current judgment as
to the financial position and future prospects of the entity that issued the
investment security. If that judgment changes in the future, we may ultimately
record a realized loss after having originally concluded that the decline in
value was temporary.
The following table summarizes the total pretax gross unrealized loss recorded
in our shareholders' equity at June 30, 2003 and 2002, respectively, by invested
asset class.
-----------------------------
JUNE 30, JUNE 30,
2003 2002
-----------------------------
Fixed maturities:
Obligations of states, municipalities and political subdivisions......... $ 110,726 $ 213,576
Equity securities:
Financial services....................................................... 3,793 108,504
Industrial and miscellaneous............................................. 110,936 568,871
------------- -------------
$ 225,455 $ 890,951
============= =============
19
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
At June 30, 2003, we did not own any material non-investment grade securities.
We believe that a high quality investment portfolio is more likely to generate a
stable and predictable investment return. Aside from interest rate risk, we do
not believe a material risk, relative to earnings or liquidity, is inherent in
holding investment grade securities.
The following table summarizes, for all securities in an unrealized loss
position at June 30, 2003, the estimated fair value and gross unrealized loss by
length of time those securities have been continuously in an unrealized loss
position.
--------------------------------
GROSS
ESTIMATED UNREALIZED
FAIR VALUE LOSS
--------------------------------
Fixed maturities:
0-6 months.................................................................. $ 3,841,351 $ 58,439
7-12 months................................................................. 822,094 8,787
Greater than 12 months...................................................... 1,542,394 43,500
------------ -------------
Total................................................................. 6,205,839 110,726
------------ -------------
Equities:
0-6 months.................................................................. 383,070 68,332
7-12 months................................................................. 106,200 12,000
Greater than 12 months...................................................... 336,697 34,397
------------ -------------
Total................................................................. 825,967 114,729
------------ -------------
Total................................................................. $ 7,031,806 $ 225,455
============ =============
Based on our evaluation, we do not believe that any of the above securities have
suffered an other-than-temporary decline in value as of June 30, 2003. However,
additional material impairments within the portfolio during the remainder of
2003 are possible if current economic and financial conditions worsen.
The following table presents information regarding our fixed maturity
investments, by remaining period to maturity date, that were in an unrealized
loss position at June 30, 2003.
----------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
Remaining period to maturity date:
One year or less...................................................... $ - $ -
Greater than one year but less than or equal to five years............ 750,646 747,326
Greater than five years but less than or equal to ten years........... 848,952 836,016
Greater than ten years................................................ 4,872,187 4,777,717
------------- -------------
Total $ 6,471,785 $ 6,361,059
============= =============
The following discussion summarizes our process of reviewing our investments for
possible impairment.
Fixed Maturities. On a monthly basis, we review our fixed maturities for
impairment. We consider the following factors when evaluating potential
impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- the degree to which any appearance of impairment is attributable to an
overall change in market conditions (e.g., interest rates);
- the degree to which an issuer is current or in arrears in making
principle and interest payments on the debt securities in question;
- the financial condition and short-term prospects of the issuer,
including any specific events that may influence the issuer's
operations and its ability to make future scheduled principal and
interest payments on a timely basis;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts;
- relevant rating history, analysis and guidance provided by rating
agencies and analysts; and
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value.
20
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Equities. On a monthly basis, we review our equity investments for impairment.
We consider the following factors when evaluating potential impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- whether the decline appears to be related to general market or
industry conditions or is issuer-specific;
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value;
- the financial condition and near-term prospects of the issuer,
including any specific events that may influence the issuer's
operations;
- the recent income or loss of the issuer;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts; and
- rating agency announcements.
In addition to the monthly valuation procedures described above, we continually
monitor developments affecting those invested assets, paying particular
attention to events that might give rise to impairment write-downs. There were
$49,328 in impairment charges included in net realized gains on investments for
the three and six months ended June 30, 2003. There were no impairment charges
included in net realized losses on investments for the three and six months
ended June 30, 2002.
Included in our $233,025 of net realized gain on investments during the second
quarter of 2003, were aggregate losses of $63,244 on $653,411 in sales of fixed
maturity securities. We realized losses of $8,201 in the second quarter of 2003
on $22,399 in sales of equity securities. Although we had the ability to
continue holding these investments, our intent to hold them changed in 2003 due
primarily to decisions to modify our asset allocation and duration within the
portfolio to lessen exposure to particular credit industry or tax
considerations. None of these securities were sold out of necessity to raise
cash.
The size of our investment portfolio provides us with flexibility in determining
which individual investments should be sold to achieve our primary investment
goals of assuring our ability to meet our commitments to policyholders and other
creditors and maximizing our investment returns. In order to meet the objective
of maintaining a flexible portfolio that can achieve these goals, our equity and
a majority of our fixed maturity investments are classified as
available-for-sale. We continually evaluate these securities, and our purchases
and sales of investments are based on our cash requirements, the characteristics
of our insurance liabilities and current market conditions. At the time we
determine an other-than-temporary impairment in the value of a particular
investment has occurred, we consider the current facts and circumstances and
make a decision to either record a write-down in the carrying value of the
security or sell the security; in either case, recognizing a realized loss.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
Our projection of ultimate loss and loss adjustment expense ("LAE") reserves are
estimates of future events, the outcomes of which are unknown to us at the time
the projection is made. Considerable uncertainty and variability are inherent in
the estimation of loss reserves. As a result, it is possible that actual
experience may be materially different than the estimates reported. As such, we
cannot guarantee that future experience will be as expected or recorded by us.
In establishing our June 30, 2003 reserves, we tested our data for
reasonableness, such as ensuring there are no case outstanding reserves on
closed claims, and consistency with data used in our previous estimates. We
found no material discrepancies or inconsistencies in our data.
Our estimates of ultimate loss are based on historical loss development
experience. In using this historical information, we assume that past loss
development is predictive of future development. The majority of our losses are
short-tail in nature and adjustments to reserve amounts occur quickly.
Our estimates allow for changes in claims and underwriting expectations, as now
known or anticipated, which may impact the level of required reserves or the
emergence of losses. However, we do not anticipate any extraordinary changes in
the legal, social or economic environments that could affect the ultimate
outcome of claims or the emergence of claims from causes not currently
recognized in our historical data. Such extraordinary changes or claims
emergence may impact the level of required reserves in ways that are not
presently quantifiable. Thus, while we believe our reserve estimates are
reasonable given the information currently available, actual emergence of losses
could deviate from amounts recorded by us.
21
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
We conduct a reserve study using historical loss and loss adjustment expenses by
product line or coverage within product line. We compute a range of reasonable
estimates as well as select an estimate of indicated reserves. The indicated
range includes estimates of expected losses and loss adjustment expenses given
the information currently available to us.
Our indicated reserve range for loss and LAE is $8.1 million to $10.5 million.
As our June 30, 2003 gross reserve of $9.4 million falls within this range, we
believe it is a reasonable provision for our unpaid loss and LAE obligations as
of June 30, 2003.
Our reserves reflect anticipated salvage and subrogation, included as a
reduction to loss reserves in the amount of $156,706. We record reserves on an
undiscounted basis. We do not provide coverage that could reasonably be expected
to produce asbestos and/or environmental liability claims activity or material
levels of exposure to claims-made extended reporting options.
We prepared our analysis based on each category of our business. The first
category is ultimate loss collateral protection provided to banks on automobile
loans. Ultimate loss insurance coverage is provided in two forms. One is
standard coverage and the other is aggregate limit coverage in which the policy
runs at a maximum loss ratio. The second category is creditor placed insurance,
an alternative coverage to our ultimate loss blanket vendor single interest
product. The third category is GAP coverage. Fourth is unemployment insurance
protection coverage to cover the unemployment exposure on non-profit
organizations.
Our premiums written in the six months ended June 30, 2003 are summarized in the
following table:
Category Written Premium
-------- ---------------
Direct $ 41,364,441
Assumed 140,158
Ceded (10,549,548)
----------------
$ 30,955,051
We prepared our estimates of the gross and net loss and allocated LAE (expenses
that can be specifically assigned to a particular claim) liabilities using loss
development triangles for each of our principal insurance products:
- Ultimate Loss Insurance - non-aggregate limit
- Ultimate Loss Insurance - aggregate limit
- Creditor Placed Insurance
- GAP Insurance
- Unemployment Insurance Protection
Our reserve for these independently estimated principal insurance products
comprise the majority of our total recorded loss and allocated LAE reserves as
of June 30, 2003 on a gross and net of reinsurance basis. We prepared
independent estimates for unallocated LAE reserves (expenses associated with
adjusting and recording policy claims, other than those included in allocated
LAE).
Annual accident year loss development triangles were used to estimate ultimate
loss and allocated LAE for the ultimate loss non-aggregate limit policies,
creditor placed, GAP and unemployment insurance protection policies. Our data
for the ultimate loss aggregate limit policies consisted of premium and loss
data and maximum loss ratio by insured bank. This data was used to determine the
required reserve under the maximum loss ratio.
Historical "age-to-age" loss development factors ("LDF") were calculated to
measure the relative development of an accident year from one maturity point to
the next. We then selected appropriate age-to-age LDFs based on these historical
factors. We used the selected factors to project the ultimate losses.
We prepared our estimate of unallocated LAE reserves using the relationship of
calendar year unallocated LAE payments to calendar year loss payments. Our
selected unallocated LAE factor of 3% was selected judgmentally based on a
review of historical unallocated LAE-to-loss payments from 1998 to 2002. The
incurred but not reported ("IBNR") reserve is then split into IBNR on known
claims and IBNR on claims yet to be reported (pure IBNR). This is based on our
assumption that all of the unemployment insurance protection reserve is pure
IBNR and the ultimate loss, creditor placed and GAP policies will have a one
week lag in claim reporting. The unallocated LAE factor is applied to 50% of
pure IBNR reserves and 50% of the remaining reserves on the premise that half of
our unallocated LAE costs are incurred when the claim is reported and the other
half when the claim is closed.
22
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums for property and casualty related coverages, net of premium ceded to
reinsurers, are recognized as income over the policy period in proportion to the
risk assumed. Policy acquisition costs, primarily commission expenses and
premium taxes, are capitalized and expensed over the terms of the related
policies on the same basis as the related premiums are earned. Selling and
administrative expenses that are not primarily related to premiums written are
expensed as incurred.
CODIFICATION AND SUBSCRIPTION REVENUE AND EXPENSE RECOGNITION
Revenue from municipal code contracts is recognized on the
percentage-of-completion method; completion is measured based on the percentage
of direct labor costs incurred to date compared to estimated direct labor costs
for each contract. While we use available information to estimate total direct
labor costs on each contract, actual experience may vary from estimated amounts.
Under this method, the costs incurred and the related revenues are included in
the statements of operations as work progresses. Adjustments to contract cost
estimates are made in the periods in which the facts which require such
revisions become known. If a revised estimate indicates a loss, such loss is
provided for in its entirety. The amount by which revenues are earned in advance
of contractual collection dates is an unbilled receivable and the amount by
which contractual billings exceed earned revenues is unrealized revenue which is
carried as a liability.
STOCK OPTIONS
We account for compensation expense for stock options under the "intrinsic
value" based method in accordance with the provisions of Accounting Principles
Board Opinion No. 25. Accordingly, no compensation cost has been recognized for
the stock option plans.
INTANGIBLE ASSETS (GOODWILL)
As required by SFAS No. 142, we ceased amortizing goodwill effective January 1,
2002. Based on the impairment test required by SFAS No. 142 that we conducted in
the quarter ended March 31, 2002, a non-recurring, after tax charge of
$1,481,858 was taken against income and is reported as cumulative effect of
change in accounting principle in the income statement. As of June 30, 2003, our
remaining goodwill balance was $753,737.
SPECIAL PURPOSE VEHICLES OR OFF BALANCE SHEET BUSINESS ARRANGEMENTS
We do not utilize any special purpose financing vehicles or have any undisclosed
off-balance sheet arrangements. Similarly, we hold no fair value contracts for
which a lack of marketplace quotations would necessitate the use of fair value
techniques.
Item 3. Quantitative and Qualitative Disclosures
-----------------------------------------
About Market Risk
-----------------
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure About Market Risk".
Item 4. Controls and Procedures
-----------------------
With the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of
the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the
period covered by this report. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that such
disclosure controls and procedures are effective as of the end of the period
covered by this report to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to them, particularly
during the period for which our periodic reports, including this report, are
being prepared.
In addition, there were no significant changes during the period covered by this
report in our internal control over financial reporting (as defined in Rules
13a-15 and 15d-15 of the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
23
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On June 2, 2003 Bancinsurance held its 2003 Annual Meeting of Shareholders. The
shareholders voted on the election of seven directors to serve one year terms,
and a proposal to ratify the appointment of Ernst & Young LLP as the independent
accountants and auditors for fiscal year 2003. The results of the voting are as
follows:
1. Election of Directors:
Votes For Votes Withheld
--------- --------------
Kenton R. Bowen 4,433,032 2,630
Daniel D. Harkins 4,435,032 630
William S. Sheley 4,435,032 630
John S. Sokol 4,415,640 20,022
Saul Sokol 4,415,010 20,652
Si Sokol 4,415,010 20,652
Matthew D. Walter 4,433,032 2,630
All seven directors were reelected.
2. To ratify the appointment of Ernst & Young LLP as the independent
accountants and auditors for fiscal year 2003:
Votes For 4,412,652
Votes Against 3,050
Abstentions 19,960
The proposal was approved.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
31.1* Certification of Principal Executive Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1924, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, dated April 23, 2003, on April
24, 2003 to report the issuance of a press release by the Company
announcing results of operations for the first quarter ended March
31, 2003.
----------------------------
* Filed with this Report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Registrant)
Date: August 12, 2003 By: /s/Si Sokol
-------------------- --------------------------------------------
Si Sokol
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2003 By: /s/Sally Cress
-------------------- --------------------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
25