<PAGE> 1
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 Quarter Ended September 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 0-8804
THE SEIBELS BRUCE GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0672136
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 Lady Street (PO Box 1), Columbia, SC 29201(2)
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 748-2000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 7,774,852 shares of Common
Stock, $1 par value, at November 6, 1998.
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars shown in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
------------------- ------------------
<S> <C> <C>
Investments:
Debt securities, available-for-sale, at market (amortized cost of $41,650 $ 42,720 $ 41,934
in 1998 and $41,845 in 1997)
Equity securities, at market (cost of $906 in 1998 and 1997) 1,143 915
Cash and short-term investments 21,356 8,922
Other long-term investments 8 22
------------------- ------------------
Total cash and investments 65,227 51,793
Accrued investment income 437 785
Premiums and agents' balances receivable, net 13,301 5,674
Premium notes receivable 5,023 3,233
Reinsurance recoverable on paid losses and loss adjustment expense 26,139 30,244
Reinsurance recoverable on unpaid losses and loss adjustment expense 85,670 75,616
Property and equipment, net 6,049 5,462
Prepaid reinsurance premiums - ceded business 62,281 50,602
Deferred policy acquisition costs 3,253 1,580
Goodwill 20,720 2,557
Other assets 8,138 7,072
------------------- ------------------
Total assets $ 296,238 $ 234,618
=================== ==================
LIABILITIES
Losses and claims:
Reported and estimated losses and claims
- retained business $ 28,582 $ 30,847
- ceded business 76,799 66,262
Adjustment expenses
- retained business 7,382 8,307
- ceded business 8,871 9,354
Unearned premiums:
Property and casualty
- retained business 12,566 3,739
- ceded business 62,281 50,602
Credit life 41 41
Balances due other insurance companies 34,226 15,489
Debt 16,250 3,036
Current income taxes payable 0 41
Other liabilities and deferred items 9,616 7,156
------------------- ------------------
Total liabilities 256,614 194,874
------------------- ------------------
COMMITMENTS AND CONTINGENCIES
SPECIAL STOCK, no par value, authorized 5,000,000 shares
Issued and Outstanding 220,000 shares of Cumulative $0.62 Convertible Redeemable
Nonvoting Special Preferred Stock, Redemption value $2,200,000 2,200 2,200
Issued and Outstanding 50,000 shares of Cumulative $0.625 Convertible Redeemable
Nonvoting Special Preferred Stock, Redemption value $500,000 500 0
------------------- ------------------
Total special stock 2,700 2,200
------------------- ------------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares in 1998 and 12,500,000 in
1997, issued and outstanding 7,772,728 and 7,730,725 shares in 1998 and 1997 7,773 7,731
Additional paid-in-capital 61,722 61,665
Accumulated other comprehensive income 1,070 47
Accumulated deficit (33,641) (31,899)
------------------- ------------------
Total shareholders' equity 36,924 37,544
------------------- ------------------
Total liabilities and shareholders' equity $ 296,238 $ 234,618
=================== ==================
</TABLE>
<PAGE> 3
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts shown in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------------- -----------------------
1998 1997 (1) 1998 1997 (1)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commission & service income $39,032 $33,623 $13,114 $11,022
Premiums earned 13,871 4,909 6,901 1,673
Net investment income 2,518 2,292 973 785
Other interest income 1,024 471 218 95
Realized gains 40 544 41 326
Other income 3,270 76 2,391 29
---------- ----------- ---------- -----------
Total revenue 59,755 41,915 23,638 13,930
---------- ----------- ---------- -----------
Expenses:
Losses & loss adjustment expenses 17,425 6,784 7,482 1,620
Policy acquisition costs 6,404 951 1,046 348
Interest expense 756 49 377 16
Other operating costs & expenses 35,591 31,295 14,866 10,921
Restructuring charge 546 0 0 0
---------- ----------- ---------- -----------
Total expenses 60,722 39,079 23,771 12,905
---------- ----------- ---------- -----------
(Loss)/income from operations, before provision for
income taxes and effect of change in accounting principle (967) 2,836 (133) 1,025
Provision for income taxes (9) (50) (9) (17)
---------- ----------- ---------- -----------
(Loss)/income before effect of change in accounting principle (976) 2,786 (142) 1,008
Effect of change in accounting principle (601) 0 0 0
---------- ----------- ---------- -----------
Net (loss)/income (1,577) 2,786 (142) 1,008
Other Comprehensive Income
Change in value of marketable securities, less reclassification adjustment
of $3 and $46 for losses included in net income in the nine months and
three months ended September 30, 1998, respectively 1,023 323 878 354
---------- ----------- ---------- -----------
Comprehensive net (loss)/income $ (554) $ 3,109 $ 736 $ 1,362
========== =========== ========== ===========
Basic earnings per share before change in accounting principle:
Net (loss)/income $ (0.13) $ 0.41 $ (0.02) $ 0.13
Weighted average shares outstanding 7,760 6,757 7,770 7,685
Diluted earnings per share before change in accounting principle:
Net (loss)/income $ (0.13) $ 0.41 $ (0.02) $ 0.13
Weighted average shares outstanding 7,760 6,757 7,770 7,685
Basic earnings per share after change in accounting principle:
Net (loss)/income $ (0.20) $ 0.41 $ (0.02) $ 0.13
Weighted average shares outstanding 7,760 6,757 7,770 7,685
Diluted earnings per share after change in accounting principle:
Net (loss)/income $ (0.20) $ 0.41 $ (0.02) $ 0.13
Weighted average shares outstanding 7,760 6,757 7,770 7,685
</TABLE>
(1) Reclassified. See Note 1 of the Notes to Consolidated Financial Statements
<PAGE> 4
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (1,577) $ 2,786
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in earnings of unconsolidated subsidiary (228) 0
Depreciation and amortization 1,820 625
Realized gains (40) (544)
Net change in assets and liabilities affecting
cash flows from operating activities 10,291 (5,031)
------------ -----------
Net cash provided by/(used in) operating activities 10,266 (2,164)
------------ -----------
Cash flows from investing activities:
Proceeds from investments sold or matured 27,674 2,031
Cost of investments acquired (26,645) 0
Issuance of premium notes receivable, net of collections (1,790) 0
Proceeds from property and equipment sold 0 521
Purchase of property and equipment (1,337) (138)
------------ -----------
Net cash (used in)/provided by investing activities (2,098) 2,414
------------ -----------
Cash flows from financing activities:
Net proceeds from notes payable and line of credit 10,514 0
Stock issued under stock option plans net of repurchase 99 483
Stock issued under exercise of warrants 0 2
Issuance of capital stock 0 8,578
Dividends paid on special stock (163) 0
Cost of purchased subsidiary, net of $5,914 cash acquired (6,184) 0
------------ -----------
Net cash provided by financing activities 4,266 9,063
------------ -----------
Net increase in cash and short term investments 12,434 9,313
Cash and short term investments, January 1 8,922 2,664
------------ -----------
Cash and short term investments, September 30 $ 21,356 $ 11,977
============ ===========
Supplemental cash flow information:
Cash paid for - interest $ 639 $ 36
- income taxes $ 9 $ 69
============ ===========
Acquisitions-
Cash paid $ (9,650) $ 0
Issuance of debt (2,700) 0
Preferred stock issued (500) 0
Assets acquired, at estimated fair value 21,675 0
Liabilities assumed (27,248) 0
------------ -----------
Goodwill $(18,423) $ 0
============ ===========
</TABLE>
<PAGE> 5
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim financial statements are unaudited, but in the opinion of
management, reflect all adjustments necessary for fair presentation of results
for such periods. All such adjustments are of a normal recurring nature. The
results of operations for any interim period are not necessarily indicative of
results for the full year. Certain prior period amounts have been reclassified
to conform to the current period presentation. These financial statements should
be read in conjunction with the financial statements and notes thereto contained
in the Company's annual report on Form 10-K for the year ended December 31,
1997.
NOTE 2. MERGERS AND ACQUISITIONS
Effective March 31, 1998, the Company acquired America's Flood Services, Inc.
("AFS") for $2,600,000, consisting of $2,100,000 in cash and $500,000 in
Cumulative Convertible Redeemable Nonvoting Special Preferred Stock. AFS manages
flood zone determinations, flood insurance, and flood compliance tracking. AFS
had revenues of $644,000 and net income of $138,000 for the first quarter of
1998.
Effective May 1, 1998, the Company acquired Graward General Companies, Inc.
("Graward") for a tentative purchase price of $10,250,000, consisting of
$7,550,000 in cash and $2,700,000 in Convertible Subordinated Promissory Notes.
The tentative purchase price may be adjusted as a result of any adjustments
identified in accordance with the underlying purchase agreement. As of the date
of acquisition, Graward processed approximately $60,000,000 of nonstandard
automobile insurance on an annual basis and acted as a managing general agent
for another insurance company until April 30, 1998. Graward now processes this
business on the behalf of three of the Company's subsidiaries. Graward had
revenues of $7,072,000 and a net loss of $1,212,000 after taxes for the first
four months of 1998. These numbers differ from those previously reported for the
first four months of 1998 due to adjustments necessary to report the results in
accordance with GAAP.
Had the Company owned both Graward and AFS since the beginning of 1998, the
Company's revenues and net loss for the nine months ended September 30, 1998
would have been $67,471,000 and $2,651,000 respectively.
On July 1, 1998, The Innovative Company ("Innovative"), a wholly-owned
subsidiary of the Company, was merged into the Company. The Board of Directors
of the Company approved the Plan of Merger (the "Plan") on February 10, 1998.
The Plan did not require approval of the shareholders of either company. The
capital stock of Innovative was cancelled and no cash, securities or other
consideration of any kind was issued or paid for the shares.
NOTE 3. DEBT
Effective March 31, 1998, the Company closed a $15,000,000 Credit Facility (the
"Facility") with a major lending institution for the purpose of financing its
acquisition activity and other general corporate purposes. Principal payments
are due quarterly beginning March 1999 with a final payment of all remaining
principal and accrued interest due in June 2004. Accrued interest is payable
monthly on the outstanding balance under the Facility and is calculated, at the
Company's discretion, using a pre-determined spread over LIBOR or the prime
interest rate of the lending institution. The effective interest rate as of
September 30, 1998 was 8.375%. The Facility is secured by a lien on the assets
of the Company. As of September 30, 1998, the outstanding balance under the
Facility was $13,550,000.
NOTE 4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted the provisions of SOP 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," and recorded it as a cumulative effect of a change in accounting
principle of $601,000. As a result, the Company's participation in the North
Carolina Reinsurance Facility (the "NC Facility") is no longer being treated as
assumed reinsurance and all amounts assumed from the NC Facility have been
eliminated. The NC Facility is now treated as an assessment organization. The
effect of the change in accounting principle was a reduction of $.08 per share
on both a basic and diluted basis. Below are the pro forma EPS for the nine
months ended September 30, 1998 and 1997, assuming the change in accounting
principle was applied retroactively.
<PAGE> 6
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
--------------------------- ----------------------------
1998 1997 1998 1997
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net (loss)/income $ (976) $2,327 $ (142) $1,008
Earnings per common share:
Basic $ (0.13) $ 0.34 $ (0.02) $ 0.13
Diluted $ (0.13) $ 0.34 $ (0.02) $ 0.13
</TABLE>
NOTE 5. RESTRUCTURING CHARGE
During the second quarter of 1998, the Company recorded a pre-tax restructuring
charge of $546,000 related to the consolidation of its automobile and claims
operations. The charges relate to employee severance and other termination
benefits from moving the processing of the Company's automobile insurance
business from Winston-Salem, North Carolina to Nashville, Tennessee and from the
consolidation of claims management and staff positions in the Columbia, South
Carolina office.
NOTE 6. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income." Statement No. 130 requires reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table indicates the more significant financial comparisons with
the applicable prior periods (dollars shown in thousands, except per share
amounts):
<TABLE>
<CAPTION>
September 30, December 31,
FINANCIAL CONDITION 1998 1997
---- ----
<S> <C> <C>
Total cash and investments $ 65,227 $ 51,793
Total assets 296,238 234,618
Total liabilities 256,614 194,874
Special stock 2,700 2,200
Shareholders' equity 36,924 37,544
Per share 4.75 4.86
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
RESULTS OF OPERATIONS September 30 September 30
------------------------ -----------------------
1998 1997 (1) 1998 1997 (1)
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Commission & service income $ 39,032 $ 33,623 $ 13,114 $ 11,022
Premiums earned 13,871 4,909 6,901 1,673
Net investment income 2,518 2,292 973 785
Other interest income 1,024 471 218 95
Realized gains 40 544 41 326
Other income 3,270 76 2,391 29
---------- ------------ ---------- -----------
Total revenue 59,755 41,915 23,638 13,930
---------- ------------ ---------- -----------
(Loss)/income from operations, before provision for
income taxes and effect of change in accounting principle (967) 2,836 (133) 1,025
Provision for income taxes (9) (50) (9) (17)
---------- ------------ ---------- -----------
(Loss)/income before effect of change in accounting principle (976) 2,786 (142) 1,008
Effect of change in accounting principle (601) 0 0 0
---------- ------------ ---------- -----------
Net (loss)/income (1,577) 2,786 (142) 1,008
Weighted average shares outstanding 7,760 6,757 7,770 7,685
</TABLE>
(1) Reclassified. See Note 1 of the Notes to Consolidated Financial Statements
OVERVIEW
(Dollars shown in thousands)
Total revenues for the nine-month period increased 42.6% over the same period
last year. This increase is primarily due to increased premium volume and fee
income contributed by recent acquisitions. The net loss of $967 for the nine
months ended September 30, 1998, before provision for income taxes and before
change in accounting principle, represents a $3,803 decrease over the
corresponding period in 1997. The net loss is due mainly to slower revenue
recognition of the risk-based revenue as compared to the fee-based revenue, a
$546 restructuring charge and legal expenses of $509 related to the Prudential
Securities, Inc. arbitration (See Part II, Item 1).
<PAGE> 8
RESULTS OF OPERATIONS
(Dollars shown in thousands)
Nine Months Ended September 30, 1998 and 1997
Commission & Service Income
Commission and service income increased $5,409 or 16.2%, to $39,032 for the nine
months ended September 30, 1998 from $33,623 for the nine months ended September
30, 1997. Flood related fee income increased for the first nine months of 1998
by $2,695 due to an increase in the number of policies serviced, winter storm
related claims activity and Hurricane Bonnie. The acquisition of Universal
Insurance Company ("Universal"), an insurance company the Company purchased in
the fourth quarter of 1997, AFS and Graward also contributed to increased
commission and service income. These three companies, Universal, AFS and
Graward, added $2,669, $1,228 and $764 respectively. The increase in commission
and service income from flood business, Universal, AFS and Graward was offset by
decreased activity in the South Carolina Reinsurance Facility premium-based fees
and a decrease in fees generated by the former managing general agency
relationship in the Company's commercial lines business unit, which ceased to
operate on a fee income basis after February 1, 1998.
Premiums Earned
Net premiums earned increased $8,962 or 182.6%, to $13,871 for the nine months
ended September 30, 1998 from $4,909 for the nine months ended September 30,
1997. In 1997, $3,609 was related to assumed business that the Company no longer
records as earned premiums in 1998 per NOTE 4. The commercial business unit,
which began to retain risk in February 1998 contributed $2,040 or 14.7% of the
total earned premium. The new South Carolina automobile business unit, which
began underwriting during the fourth quarter of 1997, contributed $2,793 or
20.1% of the total earned premium. Universal contributed $6,388 or 46.1% of the
earned premiums. Business written through Graward, which was acquired on May 1,
1998, generated $1,235 or 8.9% of the earned premium. The remaining 10.2% came
from runoff operations.
Net Investment and Interest Income
Net investment and other interest income increased $779 or 28.2%, to $3,542 for
the nine months ended September 30, 1998 from $2,763 for the nine months ended
September 30, 1997. This increase is due to the acquisition of Universal, AFS,
Graward and Premium Budget Plan, Inc., a premium finance company acquired with
Innovative and Universal.
Realized Gains on Investments
Realized gains on investments was $40 for the nine months ended September 30,
1998 compared to a gain of $544 for the nine months ended September 30, 1997.
Other Income
Other income was $3,270 and $76 for the nine months ended September 30, 1998 and
1997, respectively. The increase is due to revenues produced by PBP and Graward.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $10,641 or 156.9%, to $17,425 for
the nine months ended September 30, 1998 from $6,784 for the nine months ended
September 30, 1997. The increase in loss and loss adjustment expenses in 1998
corresponds to the increased activity in all risk operations over the same
period last year. In 1997, $2,796 was related to assumed business that the
Company no longer records as losses per NOTE 4. During 1997 the Company served
as a general agent in its commercial insurance operation, thus the Company had
no losses related to that business. Also in 1997, the Company had minimal
automobile insurance on which it retained risk.
<PAGE> 9
Policy Acquisition Costs
With the Company's re-entry into the risk market, the Company has begun to defer
policy acquisition costs. During the nine months ended September 30, 1998,
$8,092 of policy acquisition costs were expensed and $1,688 were deferred while
during the same period in 1997, $951 were expensed and none were deferred.
Interest Expense
Interest expense was $756 and $49 for the nine months ended September 30, 1998
and 1997, respectively. The increase is due to the Company's acquisitions of
Innovative, AFS and Graward in December 1997, March 1998 and May 1998
respectively and the debt associated with those acquisitions.
Other Operating Costs and Expenses
Other operating costs and expenses increased $4,296, or 13.7%, to $35,591 for
the nine months ended September 30, 1998 from $31,295 for the nine months ended
September 30, 1997. Salaries and fringe benefits for the Company included in
other operating costs and expenses including the acquisitions were $11,886 and
$7,642 for the nine months ended September 30, 1998 and 1997, respectively.
Agent commissions included in other operating costs and expenses were $7,922 and
$13,004 for the nine months ended September 30, 1998 and 1997, respectively. The
reduction in agents' commissions is due to the fact that the Company is now
writing risk-retaining business and a portion of the agents' commission expense
in 1998 is now also allocated to policy acquisition costs.
LIQUIDITY AND CAPITAL RESOURCES
(Dollars shown in thousands)
Liquidity relates to the Company's ability to produce sufficient cash to fulfill
contractual obligations, primarily to policyholders. Sources of liquidity
include service fee income, premium collections, investment income and sale or
maturity of investments.
Net cash, provided by operating activities, totaled $10,266. Net Change in
Assets and Liabilities provided $10,291 of cash from operating activities.
Individual sources of cash flows from operating activities included changes of
$8,827 in unearned premiums on retained business and $18,737 in balances due
other insurance companies, which are related to the Company's continued re-entry
into the retained risk business. Individual uses of cash include a $7,627
increase in Premiums and Agents' Balances Receivable, a $1,066 increase in other
assets, and a $3,190 reduction in reported and estimated losses and claims and
loss adjustment expense on retained business. The first two uses are primarily
the result of the acquisition of Graward. The $3,190 reduction in reported and
estimated losses and claims and loss adjustment expense on retained business is
primarily the result of the settlement of claims from runoff business.
Investing activities used cash in the amount of $2,098 as premium notes
receivable grew for Universal business, and the Company purchased additional
software and data processing equipment. Cash flows from financing activities
were primarily related to the purchase of AFS and Graward in the second quarter.
YEAR 2000 COMPLIANCE
In 1997, the Company initiated a company wide program to identify and address
issues associated with the ability of its date-sensitive information, policy and
claims processing systems and other equipment, to properly recognize the Year
2000 in order that the Company will not suffer any business interruptions as a
result of the century change on January 1, 2000. As well as reviewing internal
compliance issues, a program is actively in place to review all third party
vendors as well as non-IT providers with which the Company does business.
The Company faces the following major risks related to the Year 2000 compliance
issue:
The Company's internal transaction systems that process and issue policies and
changes to those policies, verify policyholder's coverage and process and make
claim payments must be Year 2000 compliant. Without compliance, system
recognition for appropriate renewal, expiration, coverage verification and all
other processing would be impaired.
<PAGE> 10
Vendor systems that process policies and claims outside the Company's internal
system present the same exposure as above and the identical impairment. The
Company's telecommunication systems, if not compliant, would impair the ability
to adequately communicate with policyholders and related constituency at current
service levels.
The Status of the above business risks is as follows:
In regards to internal systems, the established plan calls for full compliance
to meet all internal policy expiration dates. Compliance began in 1997, since
the Company issues three-year commercial policies. All other internal systems
processing policies with expiration dates of shorter terms of one year and six
months are currently on target for compliance to process all policy contract
obligations. Two of the companies processing systems are in the testing phase
and the Company believes that they will be completed by mid December and the
third system is scheduled to have remediation begin in January, with an April 1,
1999 completion date.
In regards to vendor external systems, vendor compliance status has been
reviewed. The vendor has been processing three year policy contracts beginning
in 1997 on a Year 2000 compliance basis and is currently on target to process
policies of shorter terms in line with their appropriate expiration dates. The
Company's plan includes procedures for assessing third party vendors.
In regards to our telecommunications systems and in accordance with the overall
remediation plan, the Company is upgrading the phone system, and any other
equipment, which is not Year 2000 compliant by October 1, 1999. An inventory has
been taken of all software, equipment and facilities related items that may be
date sensitive, such as elevators, alarm systems and heating and cooling
systems, and a log is kept showing the Year 2000 compliance status. The Company
anticipates successful remediation in accordance with our current plan.
The Company expects to spend between $750,000 and $1,000,000 on Year 2000
compliance covering both external and internal costs through the remediation
process, of which a significant portion, approximately $500,000, will be
expensed in 1998. Of the 1998 expenses, approximately $350,000 will be to
outside providers. All of these expenses are to modify software.
Due to the Company's success with the remediation process to date, and the time
frames involved, the Company did not feel it necessary to develop a contingency
plan and currently does not have plans to create one. The Company believes that
the completed and planned modifications of its internal systems and equipment
will allow the Company to be Year 2000 compliant in a timely manner. There can
be no assurance, however, that the Company's internal systems or equipment, or
those of third parties on which the Company relies, will be Year 2000 compliant
in a timely manner or that contingency plans of any third parties will mitigate
the effects of noncompliance. The failure of systems or equipment of the Company
or third parties could have a material adverse effect on the Company's business
or consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The preceding Year 2000 compliance statement contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 compliance discussion the words
"believes" "anticipates" and "expects" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 program and those of its third
party vendors; its estimated cost of achieving Year 2000 compliance; and the
Company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all the
date sensitive lines of computer code or to replace embedded computer chips in
affected systems of equipment; and the actions of third parties with respect to
Year 2000 compliance.
<PAGE> 11
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1996, the Company filed a Statement of Claim for arbitration
before the National Association of Securities Dealers, naming Prudential
Securities, Inc. ("Prudential") and William B. Danzell as Respondents. The
arbitration involved a contract between the Company and Prudential Securities,
Inc., governing the investment of the Company's insurance reserves. The Company
sought to rescind the contract and asked for restitution of all losses resulting
from the mismanagement of the investments of the insurance reserve, along with
other appropriate relief. On October 14, 1998, the Company and the Respondents
reached a settlement of the dispute whereby the Company's claims were dismissed
and the Company paid a portion of the Respondents' legal fees.
On May 1, 1998, the Company executed a Stock Purchase Agreement
("Purchase Agreement") with Graward and the then shareholders of Graward
(collectively, the "Sellers"), pursuant to which the Company purchased all of
the issued and outstanding shares of capital stock of Graward owned by the
Sellers. As provided by the Purchase Agreement, Graward prepared a balance sheet
detailing its assets and liabilities as of April 30, 1998. As further provided
by the Purchase Agreement, the Company examined the balance sheet and prepared a
final balance sheet as of the same date (the "Final Balance Sheet").
The Purchase Agreement provides for an adjustment to the purchase price
based on certain changes to stockholders' equity reflected on the Final Balance
Sheet. Based on the changes to stockholders' equity reflected on the Final
Balance Sheet, the Company has made a demand for payment from the Sellers in the
amount of approximately $6.5 million.
The Company anticipates that the Sellers will object to the Final
Balance Sheet and the demand for payment. If the Company and the Sellers are
unable to resolve their differences, the Purchase Agreement provides that the
parties must submit the matter for review by Arthur Andersen LLP. The Purchase
Agreement further provides that the determinations of Arthur Andersen LLP with
respect to the Final Balance Sheet and any additional Seller payment shall be
conclusive and binding on the Sellers and the Company. At this time, the Company
is unable to predict the ultimate outcome of the matter regarding the adjustment
to the Graward purchase price.
The Company and its subsidiaries are parties to various other legal
proceedings generally arising in the normal course of their insurance and
ancillary business.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders (the "Meeting") of the Company
was held on July 31, 1998. As of June 10, 1998, and for purposes
of the Meeting, there were 7,765,215 shares of common stock of
the Company, par value $1.00 per share (the "Common Stock"),
issued and outstanding. At the Meeting, there were 6,328,022
shares (81% of the outstanding shares entitled to vote)
represented in person or by proxy.
(c) The Meeting was called for the following purposes and with the
following results:
1) To ratify the Board of Directors' determination to fix the
number of directors at 12, subject to the approval of the
Shareholders. Passed with 6,247,977 votes (80% of the
shares outstanding) in favor, 52,610 against and 27,435
abstained.
2) To elect five (5) directors, A. Crawford Clarkson, Jr.,
Claude E. McCain, Kenneth W. Pavia, Susie H. VanHuss and
James L. Zech, to hold office until the 2001 Annual
<PAGE> 12
Meeting of Shareholders or until his/her successor shall
be elected and shall qualify. Each Director elected with
at least 6,207,361 votes (98% of the votes cast).
<TABLE>
<CAPTION>
Nominee Votes Cast Votes Votes Unvoted
For Cast Abstained
Against
<S> <C> <C> <C> <C>
A. Crawford Clarkson, Jr. 6,210,041 176,012 97 None
Claude E. McCain 6,207,361 178,691 97 None
Kenneth W. Pavia 6,209,360 176,692 97 None
Susie H. VanHuss 6,209,488 176,564 97 None
James L. Zech 6,210,041 176,012 97 None
</TABLE>
3) To ratify the Board's appointment of Arthur Andersen LLP
to audit the Company's books and records for the fiscal
year ending December 31, 1998. Passed with 6,320,909 votes
(99% of the votes cast) in favor, 2,392 against and 4,721
abstained.
4) To adopt amendments to the Company's Articles of
Incorporation to increase the authorized Common Stock of
the Company from 12,500,000 to 17,500,000 shares. Passed
with 6,145,857 votes (79% of the shares outstanding) in
favor, 143,207 against and 38,958 abstained.
5) To amend the 1996 Stock Option Plan for Employees (the
"Incentive Plan") to increase the aggregate number of
shares available for issuance under the Incentive Plan
from 1,250,000 to 2,500,000 shares of Common Stock. Passed
with 3,846,317 votes (79% of the votes cast) in favor,
987,968 against and 23,319 abstained.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
3.1 Articles of Incorporation of the Registrant, as amended,
incorporated herein by reference to the Annual Report on Form
10-K, Exhibit (3)(1)-1, for the year ended December 31, 1989.
Articles of Amendment dated June 18, 1994, June 13, 1995 and June
14, 1996, incorporated herein by reference to the Annual Report
on Form 10-K, Exhibit 3.1, for the year ended December 31, 1996.
Articles of Amendment dated April 10, 1997 and November 26, 1997,
incorporated herein by reference to the Annual Report on Form
10-K, Exhibit 3.1, for the year ended December 31, 1997. Articles
of Correction dated May 13, 1997, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit 3.1, for the
year ended December 31, 1997. Articles of Amendment dated March
30, 1998, incorporated herein by reference to the Quarterly
Report on Form 10-Q, Exhibit 3.1, for the quarterly ended June
30, 1998. Articles of Amendment dated October 7, 1998.
27.1 Financial Data Schedule
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE SEIBELS BRUCE GROUP, INC.
-----------------------------
(Registrant)
Date: November 16, 1998 /s/ R. Thomas Savage, Jr.
---------------------------------- ---------------------------
R. Thomas Savage, Jr.
Acting President and Chief
Executive Officer
Date: November 16, 1998 /s/ Matthew P. McClure
---------------------------------- --------------------------
Matthew P.McClure
General Counsel and Corporate
Secretary
Date: November 16, 1998 /s/ Elizabeth R. Monts
---------------------------------- ---------------------------
Elizabeth R. Monts
Controller (Principal Accounting
Officer)
<PAGE> 1
EXHIBIT 3.1
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 3-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is The Seibels Bruce Group, Inc.
2. On July 31, 1998, the corporation adopted the following Amendment(s) of
its Articles of Incorporation (Type or attach the complete text of each
Amendment):
The Articles of Incorporation of The Seibels Bruce Group, Inc., shall
be amended so as to increase the authorized number of shares of
common stock, par value $1.00 per share, from 12,500,000 shares
to 17,500,000 shares.
3. The manner, if not set forth in the Amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows (If not applicable, insert
"Not applicable" or "NA"):
Not applicable
4. Complete either a or b, whichever is applicable.
a. [X] Amendment(s) adopted by shareholder action.
At the date of adoption of the Amendment, the number of outstanding
shares of each voting group entitled to vote separately on the
Amendment, and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Undisputed(1)
Number of Number of Votes Number of Votes Shares Voted
Voting Group Outstanding Entitled to be Cast Represented at For Against
Shares the Meeting
- ----------------- ------------- -------------------- ------------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Common Stock 7,765,215 7,765,215 6,328,022 6,145,857 143,207
</TABLE>
b. [ ] Amendment(s) adopted by the incorporators or board of directors
without shareholder approval pursuant to Section 33-6-102(d).
33-10-102 and 33-10-105 of the 1976 South Carolina Code, as amended,
and shareholder action was not required.
5. Unless a delayed date is specified, the effective date of these Articles
of Amendment shall be the date of acceptance for filing by the Secretary
of State (See Section 33-1-230(b)):
-------------------------------------
Date: October 7, 1998 The Seibels Bruce Group, Inc.
--------------- -------------------------------------
(Name of Corporation)
By: /s/ Matt P. McClure
-------------------------------------
(Signature)
Matt P. McClure, Corporate Secretary
-------------------------------------
(Type or Print Name and Office)
- -----------------------
(1) Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of undisputed shares cast for the amendment by each
voting group together with a statement that the number of cast votes for the
amendment by each voting group was sufficient for approval by that voting group.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 42,720
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,143
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 43,863
<CASH> 21,356
<RECOVER-REINSURE> 26,139
<DEFERRED-ACQUISITION> 3,253
<TOTAL-ASSETS> 296,238
<POLICY-LOSSES> 121,634
<UNEARNED-PREMIUMS> 74,847
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,250
2,700
0
<COMMON> 7,773
<OTHER-SE> 29,151
<TOTAL-LIABILITY-AND-EQUITY> 296,238
13,871
<INVESTMENT-INCOME> 2,518
<INVESTMENT-GAINS> 40
<OTHER-INCOME> 43,326
<BENEFITS> 17,425
<UNDERWRITING-AMORTIZATION> 6,404
<UNDERWRITING-OTHER> 36,893
<INCOME-PRETAX> (967)
<INCOME-TAX> (9)
<INCOME-CONTINUING> (976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 422
<NET-INCOME> (554)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
<RESERVE-OPEN> 47,427
<PROVISION-CURRENT> 14,857
<PROVISION-PRIOR> (3,362)
<PAYMENTS-CURRENT> 8,845
<PAYMENTS-PRIOR> 10,923
<RESERVE-CLOSE> 39,154
<CUMULATIVE-DEFICIENCY> (363,000)
</TABLE>
