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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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 0-21933
SUMMIT HOLDING SOUTHEAST, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3409855
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2310 A-Z Park Road, Lakeland, Florida 33801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 941-665-6060
Indicate by check mark whether the registrant (1) has filed all documents and
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 the number of shares outstanding of each of the Issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Common Stock, $0.01 Par Value 5,791,600
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SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Table of Contents
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PAGE
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PART I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX TO EXHIBITS
</TABLE>
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
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JUNE 30 DECEMBER 31
1998 1997
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(UNAUDITED) (AUDITED)
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ASSETS
Investments:
Fixed maturities $ 222,954 $ 221,228
Equity securities 23,283 21,691
Short-term investments 97 6,537
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Total investments 246,334 249,456
Cash and cash equivalents 741 5,757
Premiums receivable (net of $2,853 and $2,672
allowance for doubtful accounts, respectively) 120,815 63,077
Reinsurance recoverable 149,593 117,722
Recoverable from Florida Special Disability Trust Fund 23,833 23,833
Deferred policy acquisition costs 2,481 973
Accrued investment income 3,743 3,906
Property and equipment, net 1,357 1,333
Goodwill, net 42,532 43,242
Other intangible assets, net 8,457 9,498
Deferred income taxes 10,504 11,701
Other assets 4,674 4,153
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Total assets $ 615,064 $ 534,651
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves $ 359,906 $ 347,068
Debt 14,124 16,540
Unearned premiums 91,545 36,633
Other policyholders' funds 13,693 14,015
Accounts payable and accrued expenses 23,957 15,000
Deferred revenue 5,236 4,653
Income taxes payable 521 2,408
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Total liabilities 508,982 436,317
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Shareholders' Equity:
Common stock, $.01 par; 20,000,000 shares authorized; 58 58
5,791,600 shares issued and outstanding
Additional paid-in capital 57,643 57,643
Series A, 4% cumulative preferred stock, $10.00 par;
5,000,000 shares authorized; 1,639,701 shares issued
and outstanding 16,397 16,397
Retained earnings 25,780 18,052
Net unrealized appreciation of available-for-sale
securities, less applicable deferred income taxes 6,204 6,184
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Total shareholders' equity 106,082 98,334
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Total liabilities and shareholders' equity $ 615,064 $ 534,651
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</TABLE>
See notes to condensed consolidated financial statements.
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SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
(in thousands, except shares and per share amounts)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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1998 1997 1998 1997
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REVENUE
Premiums earned $ 9,196 $ 4,683 $ 16,411 $ 27,495
Administrative fees 6,529 8,154 12,969 15,695
Net investment income 3,488 3,394 6,927 6,558
Net realized investment gains 1,605 878 2,193 1,199
Other income 148 116 210 240
---------- ---------- ---------- ---------
Total revenue 20,966 17,225 38,710 51,187
LOSSES AND EXPENSES
Losses and loss adjustment expenses 6,173 4,023 11,372 18,939
Other underwriting, general and administrative
expenses 6,894 7,312 12,645 22,150
Amortization and depreciation 1,118 1,149 2,253 2,153
Interest expense 250 749 512 1,551
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Total losses and expenses 14,435 13,233 26,782 44,793
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Income from continuing operations before income
taxes and minority interest 6,531 3,992 11,928 6,394
Income tax expense (2,338) (1,453) (4,212) (2,113)
Minority interest in net loss of consolidated subsidiary 8 -- 12 --
---------- ---------- ---------- ---------
Income from continuing operations before
extraordinary charge 4,201 2,539 7,728 4,281
Extraordinary charge for conversion costs
(inclusive of income tax charge of $146 in 1997) -- -- -- 700
---------- ---------- ---------- ---------
NET INCOME $ 4,201 $ 2,539 $ 7,728 $ 3,581
========== ========== ========== =========
Basic earnings per common share $ 0.70 $ 0.47 $ 1.28 N/A
========== ========== ========== =========
Weighted average number of common shares
outstanding ignoring all potentially dilutive securities 5,791,600 5,228,600 5,791,600 N/A
========== ========== ========== =========
Diluted earnings per common share $ 0.68 $ 0.46 $ 1.24 N/A
========== ========== ========== =========
Weighted average number of common shares
outstanding including all potentially dilutive securities 5,978,296 5,344,046 5,973,979 N/A
========== ========== ========== =========
</TABLE>
See notes to condensed consolidated financial statements.
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SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
(in thousands)
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SIX MONTHS ENDED
JUNE 30
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1998 1997
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CASH FLOWS USED IN OPERATING ACTIVITIES $ (7,202) (3,384)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (49,369) (124,053)
Disposal and maturity of investment securities 54,497 70,534
Purchases of property and equipment (292) (153)
Majority interest acquisition of subsidiary (234) --
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Net cash provided by (used in) investing activities 4,602 (53,672)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the issuance of capital stock -- 57,772
Payments on debt (2,416) (1,100)
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Net cash (used in) provided by financing activities (2,416) 56,672
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Net decrease in cash and cash equivalents (5,016) (384)
Cash and cash equivalents at beginning of period 5,757 7,433
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Cash and cash equivalents at end of period $ 741 $ 7,049
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</TABLE>
See notes to condensed consolidated financial statements.
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SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
Organization
Summit Holding Southeast, Inc. ("Summit") is the holding company for
Bridgefield Employers Insurance Company ("Bridgefield"), and Summit Holding
Corporation ("SHC"). These wholly owned subsidiaries head Summit's two major
operating segments. Bridgefield and its wholly owned subsidiary, Bridgefield
Casualty Insurance Company ("Bridgefield Casualty"), substantially represent
Summit's insurance subsidiaries (the "insurance subsidiaries"), who underwrite
and assume the underwriting risks with respect to workers' compensation
insurance policies for Florida employers of all sizes primarily in the
construction, manufacturing, wholesale and retail, and service industries.
Summit's administrative subsidiaries (SHC and subsidiaries) (the "administrative
subsidiaries") provide insurance administrative services (including sales and
agency relations, underwriting, claims administration, loss control, policy
administration, and financial management) to the insurance subsidiaries and
several unaffiliated workers' compensation self-insurance funds and
municipalities.
In the accompanying notes to condensed consolidated financial
statements, the "Company" refers to Summit and its consolidated subsidiaries.
Basis of Financial Reporting
The accompanying condensed consolidated financial statements include
the accounts, after intercompany eliminations, of Summit and its consolidated
subsidiaries and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In the opinion of the Company's management, all
adjustments (consisting solely of normal recurring adjustments and certain
reclassifications) necessary for a fair presentation in the accompanying
condensed consolidated financial statements have been made. The information
included in this Form 10-Q should be read in conjunction with Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as of and for the nine
months ended December 31, 1997.
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
condensed consolidated financial statements and notes thereto. Actual results
may differ from these estimates, and interim results reflected in the
accompanying financial statements are not necessarily indicative of results for
a full year.
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NOTE 2 - ACQUISITION
In March 1998, the Company purchased 80% of the outstanding capital
stock of Turnkey Resources, Inc. ("Turnkey"), a Clearwater, Florida based
insurance administrative service company. This acquisition has been accounted
for using the purchase method of accounting. Turnkey's actual results of
operations from the date of acquisition through June 30, 1998, included in the
corresponding accompanying condensed consolidated statement of income, are
immaterial. Pro forma results of operations for the quarter and six months ended
June 30, 1998 and 1997 resulting from this acquisition were not materially
different from the results of operations as reported herein.
NOTE 3 - REINSURANCE
In addition to excess-of-loss reinsurance agreements, and for most of
the periods reported in the accompanying condensed consolidated statements of
income, the insurance subsidiaries have maintained significant quota share
reinsurance arrangements with quality reinsurers. Specifically, on April 1, 1997
Bridgefield entered into quota share reinsurance agreements with American
Re-Insurance Company, St. Paul Fire and Marine Insurance Company, Constitution
Reinsurance Corp., and Transatlantic Reinsurance Company. Beginning on that date
and for a one-year term ended March 31, 1998, Bridgefield ceded an aggregate of
75% of the net premiums on workers' compensation policies earned during such
period, and the reinsurers, in their respective proportions, have assumed that
same percentage of the risks under such policies subject to specified
limitations. On April 1, 1998, Bridgefield continued this type of coverage by
entering into a one-year 75% quota share policy with Reliance Insurance Company.
Bridgefield Casualty has maintained an 80% quota share reinsurance
agreement with American Re-Insurance Company throughout all periods reported in
the accompanying condensed consolidated statements of income.
The premiums ceded under these quota share agreements, along with the
corresponding incurred losses and loss adjustment expenses ("LAE"), are reported
in the applicable accompanying statements of income as reductions to premiums
earned and losses and LAE, respectively. In addition, the Company realizes
ceding commissions relating to these quota share agreements, and such
commissions are recognized on an earned basis and reported in the applicable
accompanying statements of income as a reduction to other underwriting, general
and administrative expenses.
These quota share agreements do not relieve the insurance subsidiaries
from their respective liability under the workers' compensation policies issued,
but they do make the assuming reinsurers liable to the insurance subsidiaries
for the reinsurance ceded. Therefore, the Company is subject to credit risk with
respect to the obligations of its reinsurers involved in these and all other
existing reinsurance agreements. Although each of the aforementioned quota share
reinsurers are currently rated "A-" or better by AM Best Company, any failure on
the part of these reinsurers, as well as those involved in the Company's other
existing reinsurance arrangements, could have a material adverse effect on the
Company's business, financial condition, and results of operations.
NOTE 4 - DEBT
In December 1997, Summit secured, with SunTrust Bank of Tampa Bay,
access to $30.0 million under a revolving line of credit which offered more
favorable terms than that of the then existing debt. Of this amount, $25.0
million was immediately utilized to extinguish all other debt consisting of a
bank term loan. Interest on this new revolving debt ranges from LIBOR plus 1.5%
to LIBOR plus 2.25%. Availability under this revolving line of credit reduces by
$4.0 million annually beginning on December 31, 1998.
As collateral for the debt outstanding, Summit has pledged all of the
issued and outstanding capital stock of two subsidiaries of SHC, Summit
Consulting, Inc. and Summit Healthcare Holdings, Inc. As a condition for this
debt, the Company must comply with certain financial covenants and operating
restrictions, to which the Company has so complied.
NOTE 5 - RESTRICTION ON RETAINED EARNINGS
Of the Company's retained earnings as of June 30, 1998 reported in the
corresponding accompanying condensed consolidated balance sheet, approximately
$0.7 million is restricted as such amount represents the aggregate value of the
preferred stock preferences, including liquidation and unpaid cumulative
dividend preferences, in excess of the stated value of preferred stock reported
in such balance sheet.
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NOTE 6 - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share," basic earnings per share is calculated by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding during the respective period reflected in the
accompanying statements of income, ignoring any effects of potentially dilutive
securities. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Prior to Summit's initial
subscription and public offerings in May 1997, common shares and earnings per
share were inapplicable to the Company.
NOTE 7 - CONTINGENCIES
The Internal Revenue Service is currently conducting an audit of SHC.
The Company's management cannot predict the results of the audit, and no
assurance can be given that such results will not have a material adverse
effect on the Company's business, financial condition, or results of
operations.
The Company, in the normal course of business, is named as a defendant
in various legal actions arising principally from claims made under insurance
policies and contracts. Those actions are considered by the Company's
management in estimating the loss and the LAE reserves. The Company's
management believes that the resolution of these actions will not have a
material effect on the Company's financial position or results of operations.
NOTE 8 - PENDING CHANGE IN OWNERSHIP
On June 30, 1998, the Summit announced it had signed an agreement to
be acquired by Boston-based Liberty Mutual Group. Pursuant to the terms of this
agreement, Liberty Mutual will acquire each share of Summit's common
stock outstanding. In addition, and upon consummation of the sale, all of the
outstanding shares of Summit's Series A preferred stock will be redeemed in
accordance with the Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of Summit, a copy of which is filed as an exhibit to
Summit's Registration Statement on Form S-1 (No. 333-16499).
The sale of Summit to Liberty Mutual remains subject to the approval
of Summit's common shareholders, the Securities and Exchange Commission, the
Department of Justice, and the Florida Department of Insurance. Management
anticipates this transaction to be finalized during the third quarter of 1998.
Once completed, Summit will become a wholly owned subsidiary of Liberty Mutual.
NOTE 9 - OTHER
In May 1998, Bridgefield Casualty successfully obtained a license to
operate and underwrite risks in Louisiana although no such risks were
underwritten as of or prior to June 30, 1998.
Effective June 1, 1998, the administrative subsidiaries no longer serve
as managing general agent or provide administrative services to one of the
unaffiliated self-insurance funds previously serviced. This fund, based in
Louisiana, recently completed a conversion from a self-insurance fund to a
mutual insurance company. Included in the accompanying statements of income for
the six months ended June 30, 1998 and 1997 is administrative fee revenue of
$0.9 million and $1.8 million, and direct operating expenses of $0.3 million and
$1.0 million, respectively, realized by the Company and pertaining to this fund.
NOTE 10 - YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has completed an assessment of its Year 2000 needs and is
currently modifying or replacing portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. Management anticipates that the Year 2000 project will be completed
by December 31, 1998, and that its total costs will not have a material adverse
effect on the Company's financial condition and results of operations.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
NET INCOME. The Company realized net income during the quarter ended
June 30, 1998 of $4.2 million, or $0.68 per diluted share, compared to $2.5
million, or $0.46 per diluted share, for the quarter ended June 30, 1997. For
the six months ended June 30, 1998 and 1997, net income was $7.7 million, or
$1.24 per diluted share, and $3.6 million, respectively. Significant factors
contributing to the increase in the Company's net income between these periods
are as follows:
REVENUE. The Company's revenue is generated principally from three
sources: premiums earned on insurance policies written by the insurance
subsidiaries, administration fees earned from the management of several
unaffiliated self-insurance workers' compensation funds, and investment income
and realized investment gains generated by the Company's investing activities.
For the quarter ended June 30, 1998, earned premiums increased $4.5
million, or 96%, from that of the same quarter of the prior year. Earned
premiums ceded under the quota share reinsurance agreements described in Note 3
to the accompanying condensed consolidated financial statements were $27.6
million and $22.0 million during the quarter ended June 30, 1998 and 1997,
respectively. Accordingly, the Company realized gross earned premiums, excluding
the effects of quota share reinsurance, of $36.8 million and $26.7 million
during the quarters ended June 30, 1998 and 1997, respectively.
Premiums earned during the six months ended June 30, 1998 declined by
$11.1 million compared to the six months ended June 30, 1997. This decline is
attributable primarily to the fact that Bridgefield originally entered into its
quota share reinsurance agreement effective April 1, 1997 and did not have
similar coverage during the quarter ended March 31, 1997. Accordingly, during
the six months ended June 30, 1998 and 1997, Bridgefield and Bridgefield
Casualty ceded combined earned premiums under the quota share agreements of
$51.7 million and $24.7 million, respectively. As a result, during these periods
the Company realized gross earned premiums, excluding the effects of quota share
reinsurance, of $68.1 million and $52.2 million, respectively, an increase of
$15.9 million or 30%. This growth in earned premiums is attributable to stronger
sales and improved account retention, both of which were enhanced by
Bridgefield's conversion, effective May 28, 1997, from a self-insurance fund to
a stock property and casualty insurance company.
ADMINISTRATIVE FEES. During the quarter and six months ended June 30,
1998, administrative fees declined $1.6 million and $2.7 million from the
respective period of the prior year. This decline is substantially the result of
the termination, effective June 1, 1998, of administrative services provided to
one of the unaffiliated self-insurance funds previously serviced by the
administrative subsidiaries as explained in Note 9 to the accompanying condensed
consolidated financial statements. In addition, premiums of the administrative
subsidiaries' other unaffiliated clients, upon which the Company's
administrative fees are based, continue to be adversely affected by the
competitive workers' compensation marketplace, particularly for self-insurance
funds.
NET INVESTMENT INCOME. Net investment income earned during the quarter
ended June 30, 1998 was $3.5 million compared to $3.4 million of the
corresponding quarter of the prior year. This result is evidence of the relative
consistency in the volume and mix of fixed maturity investments between the two
periods. For the six months ended June 30, 1998, net investment income increased
$0.4 million in comparison to that of the six months ended June 30, 1997.
NET REALIZED INVESTMENT GAINS. During the quarter ended June 30, 1998,
net realized investment gains increased $0.7 million, or 82%, from that of the
same quarter of the prior year. Similarly, net realized investment gains for the
six months ended June 30, 1998 increased $1.0 million, or 83%, over that of the
six months ended June 30, 1997. Though the overall investment sales volume
declined during the six months ended June 30, 1998 compared to that of the prior
year, the increase in net realized investment gains is primarily attributable to
the growing strength of the United States stock markets. The Company's sales of
equity securities, in the normal course of business, accounted for $1.5 million
of the $2.2 million of net realized investment gains during the six month period
ended June 30, 1998. Likewise, the sales of equity securities during the six
months ended June 30, 1997 accounted for $1.1 million of the $1.2 million of net
investment gains realized.
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LOSSES AND LOSS ADJUSTMENT EXPENSES. During the quarter ended June 30,
1998, losses and LAE increased $2.2 million, or 53%, over that for the quarter
ended June 30, 1997. As discussed in Note 3 to the accompanying condensed
consolidated financial statements, the Company cedes a significant portion of
its losses and LAE to reinsurers under quota share reinsurance agreements.
During the quarter ended June 30, 1998 and 1997, the Company ceded losses and
LAE of $18.9 million and $15.6 million, respectively, thereby indicating that
the Company's gross losses and LAE incurred during these quarterly periods,
ignoring the effects of quota share reinsurance, were $25.1 million and $19.6
million, respectively. Excluding the effects of quota share reinsurance, the
Company's loss ratio was 68.1% and 73.5% during the quarter ended June 30, 1998
and 1997, respectively.
During the six months ended June 30, 1998, the Company's losses and LAE
were $11.4 million compared to $19.0 million for the six months ended June 30,
1997. This decline of $7.6 million results from the fact that Bridgefield
originally entered into its quota share reinsurance agreement effective April 1,
1997. Accordingly, combined losses and LAE ceded by the insurance subsidiaries
during the six months ended June 30, 1998 were $33.3 million compared to $17.7
million during the six months ended June 30, 1997. The Company's gross losses
and LAE incurred during these periods, excluding the effects of quota share
reinsurance, were $44.7 million and $36.6 million, respectively. Further
ignoring all effects of the quota share reinsurance, the Company's loss ratio
was 65.7% and 70.2% for the six months ended June 30, 1998 and 1997,
respectively.
OTHER UNDERWRITING, GENERAL, AND ADMINISTRATIVE EXPENSES. For the
quarter and six months ended June 30, 1998, other underwriting, general and
administrative expenses declined $0.4 million and $9.5 million, respectively,
from the corresponding periods of the prior year. As explained in Note 3 to the
accompanying condensed consolidated financial statements, the Company recognizes
ceding commissions corresponding to premiums ceded under the quota share
reinsurance agreements, and such commissions are reported as a reduction to
other underwriting, general, and administrative expenses. Due to the fact that
Bridgefield entered into its quota share reinsurance agreement effective April
1, 1997, the Company recognized ceding commissions of $21.9 million and $10.0
million during the six months ended June 30, 1998 and 1997, respectively.
INTEREST EXPENSE. Interest expense was $0.3 million and $0.7 million
during the quarter ended June 30, 1998 and 1997, respectively. For the six
months ended June 30, 1998 and 1997, interest expense was $0.5 million and $1.6
million, respectively. As discussed in Note 4 to the accompanying condensed
consolidated financial statements, these declines in 1998 are primarily
attributable to a $30.0 million line of credit secured in December 1997, thereby
replacing debt consisting of a bank term loan with less favorable terms. This
new line of credit requires interest ranging from LIBOR plus 1.5% to LIBOR plus
2.25%. The more favorable terms associated with this new debt, along with the
declining balance of debt outstanding, has resulted in the decline in interest
expense.
Liquidity and Capital Resources
The insurance subsidiaries' primary sources of cash flows are from
premiums earned, investment income, and the proceeds from the sale or maturity
of invested assets. Their primary cash requirements include the purchase of
investment securities and the payment of claims, agent commissions, reinsurance
premiums, and management fees to the administrative subsidiaries. The
administrative subsidiaries' primary source of cash flow is service fees
generated from the insurance subsidiaries and other unaffiliated clients. The
cash requirements of the administrative subsidiaries include primarily the
payment of salaries, employee benefits, debt obligations, and other operating
expenses.
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The Company's cash and cash equivalents of $0.7 million at June 30,
1998 decreased by a net amount of $5.0 million from $5.7 million at December 31,
1997. During the six months ended June 30, 1998, $7.2 million of net cash was
used in operations, primarily as a result of the increase in reinsurance
recoverable pertaining to the quota share reinsurance agreements discussed in
Note 3 to the accompanying condensed consolidated financial statements. Net cash
of $5.1 million was generated from sales or maturities of investments in excess
of cash utilized to purchase investments. Finally, net cash of $2.4 million was
utilized to reduce the Company's debt obligation.
Included as a component of the Company's available-for-sale investments
at June 30, 1998 is unrealized appreciation, net of applicable deferred income
taxes, of $6.2 million.
As further explained in Note 4 to the accompanying condensed
consolidated financial statements, the Company has access to a $30.0 million
revolving line of credit of which $15.9 million remains presently available to
be borrowed at an interest rate ranging from LIBOR plus 1.5% to LIBOR plus
2.25%. Availability under this revolving line of credit reduces by $4.0 million
annually, beginning December 31, 1998.
At June 30, 1998, the Company's shareholders' equity equaled 17.2% of
total assets compared to 18.4% at December 31, 1997.
As described in the Company's Annual Report on Form 10-K as of and for
the nine months ended December 31, 1997, the insurance subsidiaries are subject
to state insurance laws and regulations that limit the amount of dividends or
distributions that may be paid by an insurance company to its shareholders. In
addition, the Florida Department of Insurance currently requires its approval
prior to the distribution of dividends, loans, or advances by the insurance
subsidiaries to their parent company. As a consequence of these legal
restrictions and other business considerations, the amount of dividends that may
be paid by the insurance subsidiaries to Summit may be limited, which may in
turn limit the amount of cash available to Summit for servicing its debt and
other purposes.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of common shareholders of Summit Holding Southeast,
Inc. was held on May 27, 1998, at which time the following matters were brought
before and voted upon by the shareholders.
1. The election of directors to serve until the year 2001 annual meeting of
shareholders. Duly elected were Greg C. Branch and Robert L. Noojin, Sr.
For Against Abstain
5,342,677 -0- 2,600
2. The appointment of the firm Ernst & Young, LLP, independent public
accountants, as auditors of the Company for the fiscal year ending
December 31, 1998 was ratified and approved.
For Against Abstain
5,336,977 6,000 2,300
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed herewith:
Exhibit No. Description
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11 Computation of Earnings Per Share
27 Financial Data Schedule (for SEC use only)
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(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 1998.
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.
Summit Holding Southeast, Inc.
Date: August 14, 1998 By: /s/ Russell L. Wall
---------------------------
Russell L. Wall,
Vice President of Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
12
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months
------------------ Ended
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net income $4,201 $2,539 $7,728
Unpaid preferred stock dividend (164) (61) (325)
------ ------ ------
Income available to common shareholders 4,037 2,478 7,403
Weighted shares outstanding 5,792 5,229 5,792
------ ------ ------
Basic earnings per share $0.697 $0.474 $1.278
====== ====== ======
Dilutive effect of stock options 186 115 182
Weighted shares for wholly diluted 5,978 5,344 5,974
------ ------ ------
Diluted earnings per share $0.675 $0.464 $1.239
====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF SUMMIT HOLDING SOUTHEAST, INC. AS OF AND
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH SUMMIT HOLDING SOUTHEAST, INC. AND SUBSIDIARIES FORM 10-Q
FOR THE QUARTER AND SIX MONTH PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 222,954
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23,283
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 246,334
<CASH> 741
<RECOVER-REINSURE> 10,548
<DEFERRED-ACQUISITION> 2,481
<TOTAL-ASSETS> 615,064
<POLICY-LOSSES> 359,906
<UNEARNED-PREMIUMS> 91,545
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 13,693
<NOTES-PAYABLE> 14,124
0
16,397
<COMMON> 58
<OTHER-SE> 89,627
<TOTAL-LIABILITY-AND-EQUITY> 615,064
16,411
<INVESTMENT-INCOME> 6,927
<INVESTMENT-GAINS> 2,193
<OTHER-INCOME> 13,179
<BENEFITS> 11,372
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,645
<INCOME-PRETAX> 11,928
<INCOME-TAX> 4,212
<INCOME-CONTINUING> 7,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,728
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
