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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, 2002
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
-----------------------------------------------------
Bancinsurance Corporation
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 31-0790882
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
250 East Broad Street, Columbus, Ohio 43215
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(614) 228-2800
- --------------------------------------------------------------------------------
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of outstanding Common Shares; without par value; of the registrant
as of July 25, 2002 was 5,208,003.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001............................................. 3
Consolidated Statements of Income for the three months and six
months ended June 30, 2002 and 2001 (unaudited)............................................. 5
Consolidated Statements of Comprehensive Income for the three
months and six months ended June 30, 2002 and 2001 (unaudited).............................. 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 (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................................................................................. 17
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 .............................................. 17
Item 5. Other Information................................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................................................. 19
Signatures................................................................................................ 21
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 2002 2001
- ------ -------------- ---------------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,757,058 in 2002 and $4,869,247 in 2001)................................. $ 4,596,126 $ 4,746,889
Available for sale:
Fixed maturities, at fair value (amortized cost
$14,722,313 in 2002 and $14,211,422 in 2001)............................... 14,820,115 14,273,152
Equity securities, at fair value (cost $5,587,083
in 2002 and $5,981,774 in 2001)............................................ 6,313,275 6,715,572
Short-term investments, at cost which
approximates fair value...................................................... 5,905,310 5,476,140
-------------- ---------------
Total investments..................................................... 31,634,826 31,211,753
-------------- ---------------
Cash ............................................................................... 18,468,979 19,547,132
Premiums receivable................................................................. 4,509,598 5,189,123
Accounts receivable, net of allowance for doubtful accounts......................... 675,829 590,401
Reinsurance receivable.............................................................. 243,143 90,018
Reinsurance recoverable on paid losses.............................................. - 32,027
Prepaid reinsurance premiums........................................................ 1,064,112 901,482
Deferred policy acquisition costs................................................... 2,415,917 1,522,533
Estimated earnings in excess of billings on uncompleted codification contracts...... 154,791 151,507
Loans to affiliates................................................................. 679,277 699,208
Notes receivable.................................................................... 332,500 400,000
Furniture, fixtures and leasehold improvements, net................................. 184,875 150,024
Excess of investment over net assets of subsidiaries, net........................... 932,737 2,534,596
Intangible asset, net............................................................... 941,930 864,912
Accrued investment income........................................................... 332,738 338,300
Other assets........................................................................ 509,518 447,661
-------------- ---------------
Total assets.......................................................... $ 63,080,770 $ 64,670,677
============== ===============
(Continued)
3
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Liabilities and Shareholders' Equity 2002 2001
- ------------------------------------ ------------- -------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses.............................. $ 3,238,014 $ 4,872,598
Unearned premiums................................................................... 9,609,729 6,030,273
Reinsurance premiums payable........................................................ 56,418 -
Experience rating adjustments payable............................................... 6,687,001 6,472,413
Retrospective premium adjustments payable........................................... 1,333,498 3,716,869
Funds held under reinsurance treaties............................................... 1,311,692 1,001,520
Contract funds on deposit........................................................... 1,478,999 1,937,924
Note payable........................................................................ 7,600,000 5,696,839
Taxes, licenses, and fees payable................................................... 173,262 552,873
Federal income taxes payable........................................................ 280,414 374,861
Deferred federal income taxes....................................................... 261,695 109,001
Commissions payable................................................................. 921,721 1,350,924
Billings in excess of estimated earnings on uncompleted codification contracts...... 101,088 107,452
Other............................................................................... 927,070 1,055,221
------------- -------------
Total liabilities..................................................... 33,980,601 33,278,768
------------- -------------
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................................................... 1,794,141 1,794,141
Additional paid-in capital..................................................... 1,337,242 1,337,242
Accumulated other comprehensive income......................................... 543,836 525,048
Retained earnings.............................................................. 30,029,479 29,539,902
------------- -------------
33,704,698 33,196,333
Less: Treasury shares, at cost (960,177 common shares in 2002 and
400,156 common shares in 2001)........................................ (4,604,529) (1,804,424)
------------- -------------
Total shareholders' equity............................................ 29,100,169 31,391,909
------------- -------------
Total liabilities and shareholders' equity............................ $ 63,080,770 $ 64,670,677
============= =============
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,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income:
Premiums written .............................. $ 11,013,899 $ 10,647,694 $ 23,044,259 $ 20,649,726
Increase in unearned premiums ................. (617,717) (18,516) (3,579,458) (2,915,633)
------------ ------------ ------------ ------------
Premiums earned ............................... 10,396,182 10,629,178 19,464,801 17,734,093
Premiums ceded ................................ (298,956) (10,915) (380,115) (101,136)
------------ ------------ ------------ ------------
Net premiums earned ........................ 10,097,226 10,618,263 19,084,686 17,632,957
Investment income ............................. 424,953 376,741 739,851 808,622
Net realized gain (loss) on investments ....... (55,966) (22,599) (149,685) 399,968
Gain on sale of property ...................... -- -- -- 15,848
Codification and subscription fees ............ 766,348 590,830 1,514,709 1,184,704
Management fees ............................... 138,353 321,839 459,866 436,417
Commission fees ............................... 5,321 3,732 6,727 67,192
Other income .................................. 17,019 21,426 161,408 48,638
------------ ------------ ------------ ------------
Total revenue ........................... 11,393,254 11,910,232 21,817,562 20,594,346
------------ ------------ ------------ ------------
Losses and operating expenses:
Losses and loss adjustment expenses ........... 5,696,982 4,635,553 12,117,888 9,835,346
Reinsurance recoveries ........................ (134,530) (12,101) (174,496) (73,377)
Experience rating adjustments ................. 578,821 2,691,380 214,587 2,829,287
Commission expense ............................ 1,826,242 1,716,386 3,284,302 2,719,454
Other insurance operating expenses ............ 990,501 960,894 1,844,626 1,805,645
General and administrative expenses ........... 1,067,987 727,931 1,719,099 1,387,411
Interest expense .............................. 35,230 8,246 39,863 15,033
------------ ------------ ------------ ------------
Total expenses .......................... 10,061,233 10,728,289 19,045,869 18,518,799
------------ ------------ ------------ ------------
Income before federal income taxes and
cumulative effect of change in accounting
principle ............................... 1,332,021 1,181,943 2,771,693 2,075,547
Federal income tax expense ....................... 381,070 335,685 800,258 575,226
------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle ................. 950,951 846,258 1,971,435 1,500,321
Cumulative effect of change in accounting
principle ..................................... -- -- (1,481,858) --
------------ ------------ ------------ ------------
Net income ................................. $ 950,951 $ 846,258 $ 489,577 $ 1,500,321
============ ============ ============ ============
Basic net income per share:
Before cumulative effect of change in
accounting principle ........................ $ .17 $ .15 $ .35 $ .26
Cumulative effect of change in accounting
principle ................................... -- -- (.26) --
------------ ------------ ------------ ------------
Basic net income per share .................. $ .17 $ .15 $ .09 $ .26
============ ============ ============ ============
Dilutive net income per share:
Before cumulative effect of change in
accounting principle ........................ $ .17 $ .15 $ .34 $ .26
Cumulative effect of change in accounting
principle ................................... -- -- (.25) --
------------ ------------ ------------ ------------
Diluted net income per share ................ $ .17 $ .15 $ .09 $ .26
============ ============ ============ ============
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,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income ......................................... $ 950,951 $ 846,258 $ 489,577 $ 1,500,321
Other comprehensive income:
Unrealized holding gains (losses) on securities
arising during period, net of tax ............. (104,525) 257,502 18,787 (514,267)
----------- ----------- ----------- -----------
Comprehensive income ............................... $ 846,426 $ 1,103,760 $ 508,364 $ 986,054
=========== =========== =========== ===========
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: .............................................. 2002 2001
------------ ------------
Net income ...................................................................... $ 489,577 $ 1,500,321
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gain) loss on investments ...................................... 149,685 (399,968)
Net realized gain on disposal of property and equipment ...................... -- (15,848)
Net realized loss on goodwill impairment ..................................... 1,481,858 --
Depreciation and amortization ................................................ 158,902 113,495
Deferred federal income tax expense .......................................... 143,016 165,858
Change in operating assets and liabilities:
Premiums receivable ....................................................... 679,525 (2,898,261)
Accounts and reinsurance receivable, net .................................. (369,156) (381,838)
Deferred policy acquisition costs ......................................... (893,384) (965,853)
Other assets .............................................................. 27,853 (60,110)
Reserve for unpaid losses and loss adjustment expenses .................... (1,634,584) 1,072,285
Unearned premiums ......................................................... 3,579,456 2,915,633
Funds held under reinsurance treaties ..................................... 310,172 416,683
Experience rating adjustments payable ..................................... 214,588 2,829,287
Retrospective premium adjustments payable ................................. (2,383,371) 745,385
Contract funds on deposit ................................................. (458,925) 40,077
Other liabilities ......................................................... (1,078,196) 551,846
------------ ------------
Net cash provided by operating activities ............................... 417,016 5,628,992
------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity .. 850,400 420,000
Proceeds from available for sale: fixed maturities sold, redeemed and matured ... 2,223,813 1,939,853
Proceeds from equity securities sold ............................................ 10,382,269 7,782,033
Cost of investments purchased:
Held to maturity: fixed maturities ........................................... (902,131) -
Available for sale: fixed maturities ......................................... (2,609,055) (4,117,264)
Equity securities ............................................................ (10,124,723) (9,363,343)
Net change in short-term investments ............................................ (429,170) 2,057,191
Purchase of furniture, automobiles and leasehold improvements ................... (86,467) (77,193)
Cash used in acquisition of assets .............................................. - (403,503)
------------ ------------
Net cash used in investing activities ................................... (695,064) (1,762,226)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank .............................................. 12,590,000 9,750,000
Repayments of note payable to bank .............................................. (10,590,000) (9,442,000)
Acquisition of treasury shares .................................................. (2,800,105) (4,541)
------------ ------------
Net cash provided by (used in) financing activities .................... (800,105) 303,459
------------ ------------
See accompanying notes to consolidated financial statements.
7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------ ------------
Net increase (decrease) in cash ......................... (1,078,153) 4,170,225
------------ ------------
Cash at December 31 ..................................... 19,547,132 6,560,778
------------ ------------
Cash at June 30 ......................................... $ 18,468,979 $ 10,731,003
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................... $ 35,291 $ 8,372
============ ============
Income taxes ....................................... $ 860,000 $ 300,000
============ ============
Supplemental disclosure of non-cash investing activities:
Common shares issued in purchase acquisition ....... - $ 9,456
============ ============
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, 2002, the
Consolidated Statements of Income for the three and six months ended June
30, 2002 and 2001, the Consolidated Statements of Comprehensive Income for
the three and six months ended June 30, 2002 and 2001, and the Consolidated
Statements of Cash Flows for the six months ended June 30, 2002 and 2001,
without an audit. In the opinion of management, we made all adjustments
necessary to fairly present the financial position, results of operations
and cash flows at June 30, 2002 and for all periods presented.
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, 2001. The results of operations
for the period ended June 30, 2002 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. In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS 141), which eliminates the pooling-of-interest method of accounting
for business combinations and requires the use of the purchase method. In
addition, SFAS 141 requires the reassessment of intangible assets to
determine if they are appropriately classified either separately or within
goodwill. SFAS 141 is effective for business combinations initiated after
June 30, 2001. We adopted SFAS 141 on July 1, 2001, with no material impact
on the financial statements.
Effective January 1, 2002, we adopted SFAS 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 have not yet determined which quarter our annual
impairment assessment will be performed 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 units. As a result of this assignment,
we identified a noncompete agreement in the amount of $120,001 that was
separately classified as an intangible with a definite life. 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 ($0.25 per diluted share) 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.
The changes in the carrying amount of goodwill by segment for the
quarter ended June 30, 2002 are as follows:
Property/Casualty Insurance
Insurance Agency Total
----------- ----------- -----------
Balance,
Dec. 31, 2001 $ 753,737 $ 1,780,859 $ 2,534,596
Impairment
write-offs - (1,481,858) (1,481,858)
Noncompete
agreement recognition - (120,001) (120,001)
----------- ----------- -----------
Balance,
June 30, 2002 $ 753,737 $ 179,000 $ 932,737
=========== =========== ===========
9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Intangible assets as of June 30, 2002 and December 31, 2001 were as follows:
As of June 30, 2002 As of December 31, 2001
----------------------------------------- -----------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---------- ---------- ---------- ---------- ---------- ----------
Amortization Intangibles:
Databases $ 919,272 $ (77,343) $ 841,929 $ 919,273 $ (54,361) $ 864,912
Noncompete agreement 120,001 (20,000) 100,001 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total intangible assets $1,039,273 $ (97,343) $ 941,930 $ 919,273 $ (54,361) $ 864,912
========== ========== ========== ========== ========== ==========
Amortization expense related to amortizable intangible assets was $42,982 and
$17,491 for the six and three months ended June 30, 2002, respectively, and
$13,013 and $7,503 for the six and three months ended June 30, 2001,
respectively. The estimated amortization expense of intangible assets for the
next six fiscal years ending December 31 is as follows:
2002 $ 77,964
2003 69,964
2004 69,964
2005 69,964
2006 61,964
2007 45,964
A reconciliation of the previously reported 2001 statement of income information
to pro forma amounts that reflect the elimination of amortization of goodwill is
presented below:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------------------------------------- -----------------
Per Share Per Share
--------------- -----------------
Amount Basic Diluted Amount Basic Diluted
------ ----- ------- ------ ----- -------
Net income, as reported $ 846,258 $.15 $.15 $1,500,321 $.26 $.26
Amortization of goodwill 25,565 - - 50,675 .01 .01
---------- ---- ---- ---------- ---- ----
Pro forma net income $ 871,823 $.15 $.15 $1,550,996 $.27 $.27
========== ==== ==== ========== ==== ====
4. Supplemental Disclosure For Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income ................................... $ 950,951 $ 846,258 $ 489,577 $1,500,321
---------- ---------- ---------- ----------
Weighted average common shares outstanding ... 5,530,177 5,768,427 5,649,518 5,768,481
Adjustments for dilutive securities:
Dilutive effect of outstanding options .... 187,303 20,337 113,982 17,999
---------- ---------- ---------- ----------
Diluted common shares ........................ 5,717,480 5,788,764 5,763,500 5,786,480
========== ========== ========== ==========
Basic and diluted earnings per share ......... $ .17 $ .15 $ .09 $ .26
========== ========== ========== ==========
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 originally
approved on April 25, 2002. The program will expire on December 31, 2003.
Through June 30, 2002, we purchased 560,021 shares at an average price per
share of $5.00 under this program.
10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
6. We operate primarily in the property/casualty insurance industry. 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, 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, 2001
-----------------------------------------------------------------------------------------------
Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
-----------------------------------------------------------------------------------------------
Revenues from external customers $18,827,080 $ 67,192 $ 1,184,704 $ 8,745 $20,087,721
Intersegment revenues........... 2,940 153,432 - 40,620 196,992
Interest revenue................ 683,616 70 - 19,931 703,617
Interest expense................ 4,635 - - 10,398 15,033
Depreciation and amortization... 6,114 51,482 30,437 25,462 113,495
Segment profit (loss)........... 2,025,879 113,368 134,402 (1,110) 2,272,539
Income tax expense (benefit).... 528,897 61,174 51,105 (65,950) 575,226
Segment assets.................. 49,515,044 2,552,626 1,748,687 3,185,411 57,001,768
June 30, June 30,
2002 2001
------------ ------------
Revenue
-------
Total revenue for reportable segments .... $ 21,380,780 $ 20,087,721
Interest revenue ......................... 635,023 703,617
Elimination of intersegment revenue ...... (198,241) (196,992)
------------ ------------
Total consolidated revenue ............... $ 21,817,562 $ 20,594,346
============ ============
Profit
------
Total profit for reportable segments ..... $ 3,211,249 $ 2,273,649
Other loss ............................... (241,315) (1,110)
Elimination of intersegment profit ....... (198,241) (196,992)
------------ ------------
Income before income taxes and cumulative
effect of change in accounting principle $ 2,771,693 $ 2,075,547
============ ============
Assets
------
Total assets for reportable segments ..... $ 61,211,756 $ 53,816,357
Other assets ............................. 3,204,580 3,185,411
Elimination of intersegment receivables .. (1,335,566) (1,236,012)
------------ ------------
Consolidated assets ...................... $ 63,080,770 $ 55,765,756
============ ============
11
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
OVERVIEW
Bancinsurance Corporation is a specialty property insurance holding company. Our
principal sources of revenue are premiums paid by insureds for insurance
policies issued by our wholly-owned subsidiary, Ohio Indemnity Company. Premium
volume principally is earned as written due to the nature of the monthly
policies we issue. Our principal costs are losses and loss adjustment expenses.
The principal factor in determining the level of our profit is the difference
between (i) the sum of the premiums earned and investment income and (ii) the
sum of the losses and loss adjustment expenses incurred.
Loss and loss adjustment expense reserves are estimates of what an insurer
expects to pay on behalf of claimants. We are required to maintain reserves for
payment of estimated losses and loss adjustment expenses for both reported
claims and incurred but not reported claims. Our ultimate liability may be
different from our current reserve estimates.
We estimate losses and loss adjustment expense reserves for incurred but not
reported claims based on many variables, including historical and statistical
information, inflation, legal developments, economic conditions, general trends
in claim severity and frequency and other factors that could affect the adequacy
of loss reserves. We review case and incurred but not reported reserves monthly
and make appropriate adjustments.
Our wholly-owned subsidiary, American Legal Publishing Corporation, offers a
wide range of publishing services for state and local governments. Our
wholly-owned subsidiary, Paul Boardway and Associates, Inc., is a
property/casualty insurance agency serving lending institutions.
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,
-----------------------------------
2001-2002
-----------------------------------
Amount % Change
-----------------------------------
Premiums written .................................... $ 2,394,533 11.6%
Net premiums earned ................................. 1,451,729 8.2%
Net investment income ............................... (618,424) (51.2)%
Total revenue ....................................... 1,223,216 5.9%
Loss and loss adjustment expenses, net of reinsurance
recoveries ........................................ 2,181,423 22.3%
Operating expenses .................................. (1,679,183) (19.2)%
Interest expense .................................... 24,830 165.2%
Operating income .................................... 696,146 33.5%
Cumulative effect of change in accounting principle . 1,481,858 100.0%
Net income .......................................... (1,210,744) (67.4)%
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:
12
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
2002 2001
----------------------
Statutory:
Loss ratio....................................... 63.3% 62.7%
Expense ratio.................................... 29.4% 27.1%
---- ----
Combined ratio................................... 92.7% 89.8%
==== ====
GAAP:
Loss ratio....................................... 62.6% 55.4%
Expense ratio.................................... 26.3% 35.9%
---- ----
Combined ratio................................... 88.9% 91.3%
==== ====
RESULTS OF OPERATIONS
JUNE 30, 2001 AS COMPARED TO JUNE 30, 2000
- ------------------------------------------
Premiums. Premiums written increased 3.4% in the second quarter of 2002 to
$11,013,899 from $10,647,694 in the same quarter of 2001. On a year-to-date
basis, premiums written increased 11.6% to $23,044,259 from $20,649,726 in the
same six-month period of 2001. The growth in premiums written was primarily
attributable to both policies added during 2001 and volume increases with
existing customers. This volume increase was the result of geographic expansion
and more competitive automobile financing by some of our customers, which
increased their share of the automobile lending market. Net premiums earned for
the second quarter of 2002 decreased 4.9% to $10,097,226 from $10,618,263 for
the same quarter of 2001. The decrease in net premiums earned during the second
quarter was attributable to increases in unearned premium reserves associated
with advance premium collections and ceded reinsurance premiums. Year-to-date
net premiums earned increased 8.2% to $19,084,686 from $17,632,957 in 2001.
Premiums written related to our ultimate loss insurance products decreased 9.8%
to $9,187,817 in the second quarter of 2002 from $10,182,076 in the second
quarter of 2001. The decrease in premiums written was primarily attributable to
continuing unfavorable economic conditions and increased competition from other
financial services companies during 2002. On a year-to-date basis, premiums
written for our ultimate loss insurance products increased 8.2% to $17,777,864
in the first half of 2002 from $16,432,225 in the same period of 2001. This
growth was attributable to policies added during 2001. Premiums written related
to our Guaranteed Auto Protection products ("GAP") increased 157.1% to $707,656
in the second quarter of 2002 from $275,289 in the same period of 2001. On a
year-to-date basis, GAP premiums written increased 200.3% to $1,131,279 from
$376,729 in the same period of 2001. This growth in GAP premium was due
primarily to an agent transferring a book of business to us during the third
quarter of 2001. Premiums written related to our unemployment insurance
protection products increased 330.6% to $819,499 in the second quarter of 2002
from $190,329 in the same period of 2001. This increase was primarily due to
timing differences on billings issuance related to mandated surety bonds. On a
year-to-date basis, unemployment insurance protection premiums written remained
relatively constant at $3,913,916 during the first six months of 2002 and
$3,840,772 during the same period of 2001. During the third quarter of 2001, we
assumed bail bond coverage in New Jersey. Premiums written for this product were
$298,927 during the second quarter of 2002 and $221,200 on a year-to-date basis.
Investment Income. Net investment income increased 4.2% to $368,987 in the
second quarter of 2002 from $354,142 in the second quarter of 2001. On a
year-to-date basis, net investment income decreased 51.2% to $590,166 from
$1,208,590 during the same period of 2001. This decrease was primarily due to
realized losses of $149,685 in 2002 as compared with realized gains of $399,968
in the same period of 2001. The relatively small growth in investment income in
the second quarter reflected the impact of lower reinvestment rates that
resulted from the decline in interest rates during the past year. The annualized
pre-tax equivalent investment yield on fixed income investments, which is
investment income divided by the average amount of fixed income assets, was 4.5%
during the first six months of 2002 and 4.8% during the first six months of
2001.
Investment of Ohio Indemnity's assets is restricted to the investments permitted
by the Ohio insurance laws. Our overall investment policy is determined by our
Board of Directors and is reviewed periodically. We principally 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 favorable net
yields. We have the ability and intent to hold held to maturity fixed income
securities to maturity or to the put date, and, as a result, we carry held to
maturity fixed income securities at amortized cost for GAAP purposes. As our
fixed income securities mature, there can be no assurance that we will be able
to reinvest in securities with comparable yields.
13
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Codification and Subscription Fees. Codification and subscription fees generated
by American Legal Publishing increased 29.7% in the second quarter of 2002 to
$766,348 from $590,830 in the same quarter of 2001. On a year-to-date basis,
American Legal Publishing's codification and subscription fees increased 27.9%
to $1,514,709 from $1,184,704 in the same six-month period of 2001. The increase
in fees was primarily the result of our acquisition in June 2001 of Justinian
Publishing Company, which contributed $111,881 in additional codification fees
in the second quarter of 2002 and $294,745 in additional codification fees in
the first six months of 2002.
Management Fees. Our management fees in the second quarter of 2002 decreased
57.0% to $138,353 from $321,839 in the same quarter of 2001. The decrease was
primarily attributable to timing differences of unemployment insurance
protection benefits. Year-to-date management fees increased 5.4% to $459,866
from $436,417 in the same period of 2001. This increase was the result of a 3.7%
decline in calendar year benefit charges which were partially offset by a 2.9%
reduction in fees from our bonded service business, one of our unemployment
insurance protection products. We expect management fees to vary from period to
period depending on unemployment levels and claims experience in bonded service.
Other Income. Other income decreased 20.6% to $17,019 in the second quarter of
2002 from $21,426 in the same quarter of 2001. On a year-to-date basis, other
income increased 231.9% to $161,408 from $48,638 in the same period of 2001. The
increase in the year-to-date period was primarily the result of releasing a
$100,000 reserve related to the dismissal of a dispute with an unaffiliated
party.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses (net of
reinsurance recoveries) in the second quarter of 2002 increased 20.3% to
$5,562,452 from $4,623,452 in the second quarter of 2001. This increase was
primarily the result of growth in premiums written and weak economic conditions.
Losses paid with respect to our ultimate loss insurance products in the second
quarter of 2002 were $5,066,822 on a pre-tax basis compared with $4,214,321 in
the same quarter of 2001. On a year-to-date basis, losses paid with respect to
our ultimate loss insurance products increased 55.5% to $11,866,492 from
$7,629,331 for the same six-month period in 2001. This increase was due
primarily to growth in net premiums earned.
Operating Expenses. Operating expenses consist of experience rating adjustments,
commission expenses and other insurance operating expenses. Operating expense
decreased 26.8% in the second quarter to $4,463,551 from $6,096,591 in the same
quarter of 2001. On a year-to-date basis, operating expenses decreased 19.2% to
$7,062,614 from $8,741,797 in the same six-month period of 2001. Experience
rating adjustments decreased in the second quarter of 2002 to $578,821 from
$2,691,380 in the same quarter of 2001. On a year-to-date basis, experience
rating adjustments decreased to $214,587 from $2,829,287 in the same six month
period of 2001. These decreases were primarily attributable to a significant
policy added in 2001. Experience rating adjustments are calculated and adjusted
from period to period based on policy experience to date and premium growth.
Management anticipates that experience rating adjustments may fluctuate in
future quarters based upon this calculation. Commissions, other insurance
operating and administrative expenses in the second quarter increased 14.1% to
$3,884,730 from $3,405,211 in the second quarter of 2001. On a year-to-date
basis, commissions, operating and administrative expenses in the first six
months of 2002 increased 15.8% to $6,848,027 from $5,912,510 in the same
six-month period of 2001. Commission expense increases were consistent with
overall premium activity in 2002. Increases in administrative expenses were
primarily the result of increases in salaries and related benefits and
consulting. American Legal Publishing incurred operating and administrative
expenses of $734,847 and $1,308,917 for the second quarter and first six months
of 2002, respectively, compared with $564,701 and $1,050,426 for the second
quarter and first six months of year-to-date in 2001, respectively. These
increases were attributable to both salary and printing increases.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, the Company
will no longer amortize goodwill and intangibles which have indefinite lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit. The Company has not yet determined which quarter its
annual impairment assessment will be performed on an on-going basis.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to three of its reporting units. As a result of
this allocation, the Company identified a noncompete agreement in the amount of
$120,001 that was separately classified as an intangible with a definite life.
Then, 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 the Company's impairment testing a net after-tax impairment charge of
$1,481,858 ($0.25 per diluted share) 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.
14
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Amortization expense related to amortizable intangible assets was $17,491 and
$42,982 for second quarter and year-to-date in 2002 and $7,503 and $13,013 for
second quarter and year-to-date 2001, respectively.
Federal Income Taxes. Federal income tax expense increased to $381,070 in the
second quarter of 2002 from $335,685 in the same quarter of 2001. On a
year-to-date basis, federal income tax expense increased to $800,258 from
$575,226 in the same six-month period of 2001. The effective federal income tax
rate was 28.6% and 28.4% for the second quarter of 2002 and 2001, respectively,
and 28.8% and 27.7% for the first six months of 2002 and 2001, respectively.
GAAP Combined Ratio. Our combined ratio for the second quarter and the first six
months of 2002 was 83.5% and 88.9%, respectively, and 90.8% and 91.3% for the
second quarter and the first six months of 2001, respectively. These decreases
were the result of higher expense ratios in 2001 as a result of a change in
experience rating adjustments related to the addition of a significant policy in
the second quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
We are an insurance holding company whose principal asset is the capital stock
of Ohio Indemnity. We are, and will continue to be, dependent on dividends from
Ohio Indemnity to meet our liquidity requirements, including our debt service
obligations. We have a $13 million credit facility to fund working capital
requirements. Based on statutory limitations, the maximum amount of dividends
that we would be able to receive in 2002 from Ohio Indemnity, absent regulatory
consent, is $2,963,288. Ohio Indemnity derives its funds principally from net
premiums written, reinsurance recoveries, investment income and contributions of
capital from us. Ohio Indemnity's principal use of these funds is for payment of
losses and loss adjustment expenses, commissions, operating expenses and income
taxes. Net cash provided by operating activities equaled $417,016 and $5,628,992
for the six months ended June 30, 2002 and 2001, respectively. Net cash provided
by (used in) financing activities equaled $(800,105) and $303,459 for the six
months ended June 30, 2002 and 2001, respectively. Net cash used in our
investing activities was $695,064 and $1,762,226 for the six months ended June
30, 2002 and 2001, respectively.
American Legal Publishing derives its funds principally from codification and
subscription fees which are currently sufficient to meet its operating expenses.
Paul Boardway and Associates derives its funds principally from commission fees
which are currently sufficient to meet its operating expenses. When expanding
our business through acquisitions, we have selected growth opportunities to
build upon existing strengths and industry experience. As each business segment
is continually evaluated with goals of increased revenue and profitability,
management will reposition assets to those areas which contribute to our overall
financial objectives.
We maintain a level of cash and liquid short-term investments which we believe
will be adequate to meet our anticipated expenses without being required to
liquidate intermediate-term and long-term investments through the next 12
months. 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 loss and expense
obligations through the next 12 months.
Our investments at June 30, 2002 consisted primarily of investment-grade fixed
income securities. Cash and short-term investments at June 30, 2002 amounted to
$24,374,289 or 48.6% 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
ability and intent to hold held to maturity fixed income securities to maturity
or put date. Available for sale fixed income securities are reported at fair
values with unrealized gains or losses, net of applicable deferred taxes,
reflected in accumulated other comprehensive income. We earned net investment
income of $590,166 and $1,208,590 for the six months ended June 30, 2002 and
2001, respectively. The 51.2% decrease was primarily due to realized losses on
certain securities in our investment portfolio, and, to a lesser extent, lower
investment yields that resulted from declines in interest rates during the past
year.
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 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.
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 product. 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 $225,500 and $425,500 at June 30, 2002 and December
31, 2001, respectively.
15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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.
DISCLOSURE ABOUT MARKET RISK
The following discussion about our risk-management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
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 those exposures are currently managed as of June
30, 2002. Our market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of our investment portfolio as of June 30, 2002 was
$31,634,826, 61.4% of which is invested in fixed income securities, 20.0% in
equity securities and 18.6% in short-term investments. The primary market risk
to the investment portfolio is 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. For additional information regarding our
objectives and strategies pertaining to our investment portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
For our investment portfolio, during the quarter ended June 30, 2002, 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, 2001. 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.
FACTORS TO CONSIDER FORWARD-LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit our strategy of penetrating specialized insurance
markets within the financial services industry. These opportunities will be in
areas where management believes we have an understanding of the underwriting and
inherent risks. Management intends to add independent agents to expand our
market presence. We will also further concentrate on penetrating larger
financial institutions for collateral protection insurance and expanding
financial institution programs and auto dealer service contract programs. In
addition, we will also consider opportunities for underwriting additional
non-profit organizations as they continue to consolidate into national trusts
and seek to retain and transfer their unemployment claim exposure.
TRENDS
The Company's results of operations have varied from quarter to quarter
principally because of fluctuations in underwriting results. In addition, the
majority of our products are dependent on the demand for our customers'
automobile financing programs. Automobile sales in the second quarter of 2002
were lower than in the prior two quarters. We expect that the recent
introduction of zero percent financing by captive automobile finance companies,
with less stringent qualifications than in the past, should increase automobile
sales in the third quarter of 2002. However, we are not certain what share of
these sales will be financed by our customers.
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. 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 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. For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Some of the factors that could cause our actual results to differ from our
forward-looking statements include: (i) the demand for our ultimate loss, GAP
and unemployment insurance products is affected by factors beyond our control
such as changes in interest rates, level of automobile financing activity, cost
of automobiles, consumer confidence, unemployment levels, and general economic
activity; (ii) the risk that losses from claims are greater than anticipated
such that reserves for potential claims are inadequate; (iii) the risk that
unanticipated adverse changes in the securities markets could result in material
losses in our investments; and (iv) the dependence on key management personnel
with skills critical to our long-term success.
INFLATION
We do not consider the impact of inflation to be material in the analysis of our
overall operations.
INSURANCE REGULATORY MATTERS
The National Association of Insurance Commissioners has developed a risk-based
capital measurement formula to be applied to all property/casualty insurance
companies. 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 threshold
and no corrective action is necessary. The risk-based capital provisions have
been enacted into the Ohio Revised Code.
RESERVES
The amount of our incurred losses and loss adjustment expenses is dependent upon
a number of factors, including claims frequency and severity, the nature and
types of losses incurred and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating incurred but not
reported claims based upon past experience modified for current trends.
Notwithstanding the variability inherent in such estimates, management believes
that the provisions made for unpaid losses and loss adjustment expenses are
adequate to meet our claim obligations. Such estimates are reviewed monthly by
management and annually by an independent consulting actuary and, as adjustments
thereto become necessary, such adjustments are reflected in our results of
operations. Our independent consulting actuary has opined that loss and loss
adjustment expense reserve levels, as of December 31, 2001, were reasonable.
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".
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On June 3, 2002, Bancinsurance held its 2002 Annual Meeting of Shareholders. The
shareholders voted on the election of six 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 2002. The results of the voting are as
follows:
1. Election of Officers:
Votes For Votes Withheld
--------- --------------
John S. Sokol 4,574,169 324,358
Saul Sokol 4,592,602 305,925
Si Sokol 4,574,152 324,375
William S. Sheley 4,587,410 311,117
Matthew D. Walter 4,597,139 301,388
Daniel D. Harkins 4,597,139 301,388
All six directors were reelected.
17
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
2. To ratify the appointment of Ernst & Young LLP as the independent
accountants and auditors for fiscal year 2002:
Votes For 4,856,333
Votes Against 733
Abstentions 41,161
The proposal was approved.
Item 5. Other Information
-----------------
The following paragraphs provide an updated summary of the material attributes
of the capital stock of Bancinsurance. The summary is qualified in its entirety
by reference to Bancinsurance's Amended and Restated Articles of Incorporation
(the "Amended Articles") and Amended and Restated Code of Regulations (the
"Amended Regulations"), copies of which have been filed with the Securities and
Exchange Commission.
GENERAL
Bancinsurance's authorized capital stock consists of (1) 20,000,000 Common
Shares, without par value (the "Common Shares"); (2) 100,000 Class A Serial
Preference Shares, without par value (the "Class A Serial Preference Shares");
and (3) 98,646 Class B Serial Preference Shares, without par value (the "Class B
Serial Preference Shares"). As of July 25, 2002, 5,208,003 Common Shares were
outstanding and no Class A Serial Preference Shares or Class B Serial Preference
Shares were outstanding. The Common Shares are traded on The Nasdaq National
Market.
COMMON SHARES
The holders of Common Shares are entitled to one vote per share on all matters
to be voted upon by Bancinsurance's shareholders. Upon due notice by any holder
of Common Shares desiring to cumulate his or her votes at an election of
directors, each holder of Common Shares is entitled under Ohio law to cumulate
his or her votes according to the number of directors to be elected.
Elections of directors are determined by a plurality of the votes cast. Subject
to any special voting rights or requirements provided for in the Amended
Articles, in the Amended Regulations or by law, all other matters to be voted
upon by Bancinsurance's shareholders must be approved by the holders of Common
Shares entitling them to exercise a majority of the voting power of
Bancinsurance. The holders of the Common Shares have no preemptive rights to
purchase or subscribe for any Common Shares or other securities of Bancinsurance
and are not subject to any further calls or assessments by Bancinsurance. In
addition, there are no conversion rights or redemption or sinking fund
provisions with respect to the Common Shares.
Subject to the rights of the holders of any Class A Serial Preference Shares
and/or Class B Serial Preference Shares which may be outstanding, each holder of
Common Shares on the applicable record date is entitled to receive dividends,
when and if declared by the Board of Directors out of funds legally available
therefor, on a pro-rata basis according to the number of Common Shares held. In.
the event of a liquidation, dissolution or winding up of Bancinsurance, each
holder of Common Shares is entitled to share pro-rata in any distribution of
Bancinsurance's assets after payment or provision for payment of Bancinsurance's
liabilities and the liquidation preference of any Class A Serial Preference
Shares and/or Class B Serial Preference Shares which may be outstanding.
CLASS A SERIAL PREFERENCE SHARES
The Board of Directors is authorized, without further shareholder action, to
designate and issue any authorized and unissued Class A Serial Preference Shares
in one or more series and to determine and fix for each such series the dividend
rights (which for each series of Class A Serial Preference Shares shall be
cumulative), redemption rights, rights upon liquidation, dissolution or winding
up, conversion or exchange rights, sinking fund requirements and any
restrictions on issuance. Any series of Class A Serial Preference Shares so
issued will have priority over the Class B Serial Preference Shares and the
Common Shares with respect to dividends and rights upon liquidation, dissolution
or winding up and will be subject to a call for redemption at a price fixed by
the Board of
18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Directors. Except as otherwise provided by law, the holders of any series of
Class A Serial Preference Shares so issued will have no right to vote on any
matter to be voted upon by the shareholders generally. However, Bancinsurance
may not change the express terms of any series of Class A Serial Preference
Shares in any manner substantially prejudicial to the holders thereof, without
the affirmative vote or written consent, of the holders of at least a majority
of the Class A Serial Preference Shares of the particular series proposed to be
changed. The holders of any series of Class A Serial Preference Shares so issued
will have no pre-emptive rights to purchase or subscribe for any Common Shares
or other securities of Bancinsurance and will not be subject to any further
calls or assessments by Bancinsurance.
CLASS B SERIAL PREFERENCE SHARES
The Board of Directors is authorized, without further shareholder action, to
designate and issue any authorized and unissued Class B Serial Preference Shares
in one or more series and to determine and fix for each such series the dividend
rights, redemption rights, rights upon liquidation, dissolution or winding up,
conversion or exchange rights, sinking fund requirements and any restrictions on
issuance. Any series of Class B Serial Preference Shares so issued will have
priority over the Common Shares with respect to dividends and rights upon
liquidation, dissolution and winding up and will be subject to a call for
redemption at a price fixed by the Board of Directors. Except as otherwise
provided by law, the holders of any series of Class B Serial Preference Shares
so issued will have no right to vote on any matter to be voted upon by the
shareholders generally. However, Bancinsurance may not change the express terms
of any series of Class B Serial Preference Shares in any manner substantially
prejudicial to the holders thereof, without the affirmative vote or written
consent, of the holders of at least a majority of the Class B Serial Preference
Shares of the particular series proposed to be changed. The holders of any
series of Class B Serial Preference Shares so issued will have no pre-emptive
rights to purchase or subscribe for any Common Shares or other securities of
Bancinsurance and will not be subject to any further calls or assessments by
Bancinsurance.
ANTI-TAKEOVER PROVISIONS
The Amended Articles and the Amended Regulations include the following
provisions which may be considered to have the effect of delaying, deferring or
preventing a change of control of Bancinsurance: (1) the requirement of the
affirmative vote of three-fourths of the voting power of Bancinsurance as a
condition to certain major corporate transactions (e.g., adoption of certain
amendments to the Amended Articles or the Amended Regulations, approval of a
merger or consolidation involving Bancinsurance, approval of a combination or
majority share acquisition involving the issuance of shares of Bancinsurance,
approval of a sale, exchange, transfer or other disposition of all or
substantially all of Bancinsurance's assets or approval of the dissolution of
Bancinsurance), unless three-fourths of the directors of Bancinsurance recommend
the approval of such transaction; (2) the authorization of the Class A Serial
Preference Shares and the Class B Serial Preference Shares; (3) the limitation
on the night of Bancinsurance's shareholders to remove a director unless the
holders of at least three-fourths of the voting power vote in favor of such
removal; and (4) certain procedural requirements relating to shareholder
meetings, including provisions limiting who may call a special meeting of
shareholders of Bancinsurance and the requirements for a quorum at any meeting.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3(a) Amended and Restated Articles of Incorporation of
Bancinsurance Corporation (reference is made to Exhibit 3(a)
of Form 10-K for the fiscal year ended December 31, 1984 (file
number 0-8738), which is incorporated herein by reference).
3(b) Certificate of Amendment to the Amended and Restated Articles
of Incorporation of Bancinsurance Corporation dated March 10,
1993 (reference is made to Exhibit 3(b) of Form 10-K for the
fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).
19
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
3(c) Amended and Restated Articles of Incorporation of Bancinsurance
Corporation, (reflecting amendments through March 10, 1993)
(reference is made to Exhibit 3(c) of Form 10-K for the fiscal
year ended December 31, 2001 (file number 0-8738), which is
incorporated herein by reference).
3(d) Amended and Restated Code of Regulations of Bancinsurance
Corporation (reference is made to Exhibit 3(b) of Form 10-K for
the fiscal year ended December 31, 1984 (file number 0-8738),
which is incorporated herein by reference).
4(f)* Fifth Amendment to Credit Agreement dated July 1, 2002 by and
between Bancinsurance Corporation and the Fifth Third Bank of
Columbus, Ohio.
99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-------------
* Filed with this Report.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2002.
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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
-------------------------
Date: August 13, 2002 By: Si Sokol
----------------------- ---------------------------------------
Si Sokol
Chairman
(Principal Executive Officer)
Date: August 13, 2002 By: Sally Cress
----------------------- ---------------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
21