<PAGE>
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 JUNE 30, 1999
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: 7,780,415 shares of Common
Stock, $1 par value, at August 13, 1999.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars shown in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
----------------- ----------------
<S> <C> <C>
Investments:
Debt securities, available-for-sale, at market (cost of $35,938
in 1999 and $38,788 in 1998) $ 35,793 $ 39,695
Equity securities, at market (cost of $1,315 in 1999 and $1,306 in 1998) 1,315 1,306
Cash and short-term investments 20,724 23,141
Other long-term investments 0 108
----------------- ----------------
Total cash and investments 57,832 64,250
Accrued investment income 889 880
Premiums and agents' balances receivable, net 10,866 14,728
Premium notes receivable 3,639 4,606
Reinsurance recoverable on paid losses and loss adjustment expenses 36,034 29,972
Reinsurance recoverable on unpaid losses and loss adjustment expenses 74,030 83,654
Property and equipment, net 6,291 6,028
Prepaid reinsurance premiums - ceded business 54,314 59,619
Deferred policy acquisition costs 4,099 2,472
Goodwill 23,156 20,892
Other assets 8,438 8,462
----------------- ----------------
Total assets $ 279,588 $ 295,563
----------------- ----------------
----------------- ----------------
LIABILITIES
Losses and loss adjustment expenses:
Reported and estimated losses and claims - retained business $ 29,809 $ 28,950
- ceded business 66,795 74,746
Adjustment expenses - retained business 6,372 7,372
- ceded business 7,235 8,908
Unearned premiums:
Property and casualty - retained business 20,451 12,919
- ceded business 54,314 59,619
Balances due other insurance companies 28,291 39,024
Debt 16,407 16,250
Other liabilities and deferred items 13,660 9,487
----------------- ----------------
Total liabilities 243,334 257,275
----------------- ----------------
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 2,200 2,200
Issued and outstanding 50,000 shares of cumulative $0.625 convertible, redeemable
nonvoting, special preferred stock, redemption value $500 500 500
----------------- ----------------
Total special stock 2,700 2,700
----------------- ----------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares, issued and
outstanding 7,774,788 and 7,773,075 shares in 1999 and 1998, respectively 7,775 7,773
Additional paid-in-capital 61,866 61,861
Accumulated other comprehensive income (145) 907
Accumulated deficit (35,942) (34,953)
----------------- ----------------
Total shareholders' equity 33,554 35,588
----------------- ----------------
Total liabilities and shareholders' equity $ 279,588 $ 295,563
----------------- ----------------
----------------- ----------------
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Premiums earned $ 22,759 $ 6,970 $ 12,229 $ 4,265
Commission & service income 21,759 22,593 9,992 11,701
Net investment income 2,059 2,351 971 1,389
Policy fees 1,444 806 660 574
Realized gains/(losses) 11 (1) 11 23
Other income 728 879 329 450
-------- -------- -------- --------
Total revenue 48,760 33,598 24,192 18,402
-------- -------- -------- --------
Expenses:
Losses & loss adjustment expenses 14,968 6,116 8,397 3,600
Policy acquisition costs 8,660 5,019 5,664 2,693
Interest expense 610 378 368 272
Other operating costs & expenses 25,404 22,373 12,620 11,588
Restructuring charge 0 546 0 546
-------- -------- -------- --------
Total expenses 49,642 34,432 27,049 18,699
-------- -------- -------- --------
Loss from operations, before provision for
income taxes and effect of change in accounting principle (882) (834) (2,857) (297)
Provision (benefit) for income taxes 23 0 (38) 0
-------- -------- -------- --------
Loss before effect of change in accounting principle (905) (834) (2,819) (297)
Effect of change in accounting principle 0 (601) 0 0
-------- -------- -------- --------
Net loss (905) (1,435) (2,819) (297)
Other Comprehensive Income
Change in value of marketable securities, less reclassification adjustment
of $7 and $43 for gains included in net loss for the six months ended
June 30, 1999 and 1998, respectively (1,052) 145 (573) 152
-------- -------- -------- --------
Comprehensive net loss $ (1,957) $ (1,290) $ (3,392) $ (145)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share before change in accounting principle:
Net loss $ (0.12) $ (0.11) $ (0.36) $ (0.04)
Weighted average shares outstanding 7,774 7,755 7,775 7,746
Diluted earnings per share before change in accounting principle:
Net loss $ (0.12) $ (0.11) $ (0.36) $ (0.04)
Weighted average shares outstanding 7,774 7,755 7,775 7,746
Basic earnings per share after change in accounting principle:
Net loss $ (0.12) $ (0.19) $ (0.36) $ (0.04)
Weighted average shares outstanding 7,774 7,755 7,775 7,746
Diluted earnings per share after change in accounting principle:
Net loss $ (0.12) $ (0.19) $ (0.36) $ (0.04)
Weighted average shares outstanding 7,774 7,755 7,775 7,746
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (905) $ (1,435)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Equity in earnings of unconsolidated subsidiary (56) (144)
Depreciation and amortization 1,346 637
Realized (gains) losses (11) 1
Net change in assets and liabilities affecting
cash flows from operating activities (5,630) 1,946
------------- -------------
Net cash (used in) provided by operating activities (5,256) 1,005
------------- -------------
Cash flows from investing activities:
Proceeds from investments sold or matured 8,438 15,671
Cost of investments acquired (5,468) (18,610)
Collections on (issuance of) premium notes receivable, net 967 (664)
Proceeds from property and equipment sold 3 6
Purchase of property and equipment (1,181) (364)
------------- -------------
Net provided by (used in) investing activities 2,759 (3,961)
------------- -------------
Cash flows from financing activities:
Net issuance of debt 157 10,808
Issuance of capital stock 7 85
Dividends paid on special stock (84) (110)
Cost of purchased subsidiary 0 (3,736)
------------- -------------
Net cash provided by financing activities 80 7,047
------------- -------------
Net (decrease) increase in cash and short term investments (2,417) 4,091
Cash and short term investments, January 1 23,141 8,922
------------- -------------
Cash and short term investments, June 30 $ 20,724 $ 13,013
------------- -------------
------------- -------------
Supplemental cash flow information:
Interest paid $ 649 $ 340
Income taxes paid 0 0
------------- -------------
------------- -------------
Noncash investing activities:
Acquisitions -
Cash paid $ 0 $ (9,650)
Issuance of debt 0 (2,700)
Preferred stock issued 0 (500)
Assets acquired, at estimated fair value 0 22,671
Liabilities assumed 0 (28,106)
Goodwill 0 335
------------- -------------
$ 0 $ (17,950)
------------- -------------
------------- -------------
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars shown in thousands)
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 Seibels Bruce Group, Inc.'s (the "Company") annual report on Form 10-K
for the year ended December 31, 1998.
NOTE 2. ACQUISITIONS
Effective May 1, 1998, the Company acquired Graward General Companies, Inc.
("Graward") for a tentative purchase price of $10,250, consisting of $7,550
in cash and $2,700 in Convertible Subordinated Promissory Notes. The Company
accounted for the transaction as a purchase. The excess purchase price over
the fair value of the assets was $16.2 million. The Company has delivered to
the sellers of Graward a final balance sheet as required under the purchase
agreement (the "Final Balance Sheet"). The Final Balance Sheet identified
significant purchase price adjustments which the Company believes are valid
reductions of the purchase price and expects an eventual reduction in the
purchase price and a resulting reduction in the goodwill recorded above.
During the quarter ended June 30, 1999, an additional purchase price
adjustment of $2,545 was identified. As with the other purchase price
adjustments, the Company believes this additional adjustment is a valid
reduction of the purchase price and expects an eventual reduction in the
purchase price and a corresponding reduction in recorded goodwill.
Effective March 31, 1998, the Company acquired America's Flood Services, Inc.
("AFS") for $2,600, consisting of $2,100 in cash and $500 in Cumulative,
Convertible, Redeemable, Nonvoting Special Preferred Stock. The Company
accounted for the transaction as a purchase. The excess purchase price over
the fair value of the assets was $2.3 million. AFS provides flood zone
determinations, flood insurance, and flood compliance tracking.
NOTE 3. DEBT
On May 1, 1998, in connection with the Graward acquisitions, the Company issued
subordinated convertible notes (the "Notes") with a principal amount of $2.7
million. The Notes bear interest at a rate equal to 5% per annum. The entire
principal amount due under the Notes is payable in full on December 31, 2004,
provided however, that if certain outstanding debt is paid in full and upon 60
days prior written notice, the Notes will become payable six months after such
debt is paid in full provided, however, that in no event will the Notes become
payable earlier than April 1, 2003. At the election of the holder of the Notes,
the Notes may be converted into 300,000 shares of Common Stock on the maturity
date, provided, however, that notice has been given of such election at any time
on or after the 45th day prior to the maturity date of the Notes up to but not
including the 15th day prior to the maturity date. Interest accruals and
payments on the Notes were suspended after the delivery of the final balance
sheet.
On March 31, 1998, the Company entered into a $15,000 Credit Facility (the
"Facility") with a major lending institution for the purpose of financing its
acquisition activity and other general corporate purposes. Quarterly
principal payments began in March 1999. The final payment of all remaining
principal and accrued interest is 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 June 30, 1999 and March 31, 1999 was 8.00% and 7.75%,
respectively. The Facility is secured by a lien on the assets of the Company.
As of June 30, 1999 and March 31, 1999, the outstanding balance under the
Facility was $12,918 and 13,234 respectively.
The Credit Agreement stipulates that the Company demonstrate compliance with a
number of affirmative and negative covenants on a quarterly basis. Significant
financial covenants include minimum statutory surplus levels, ratios of debt to
total capitalization and cash flow coverage. As of June 30, 1999, the Company
was in compliance with all covenants.
<PAGE>
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. 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 an
increase in the loss per share of $.08 per share on both a basic and diluted
basis.
<PAGE>
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>
June 30, December 31,
FINANCIAL CONDITION 1999 1998
---- ----
<S> <C> <C>
Total cash and investments $ 57,832 $ 64,250
Total assets 279,588 295,563
Total liabilities 243,334 257,275
Special stock 2,700 2,700
Shareholders' equity 33,554 35,588
Per share 4.32 4.58
</TABLE>
<TABLE>
<CAPTION>
Six months ended Three months ended
---------------------------- ----------------------------
RESULTS OF OPERATIONS June 30, June 30,
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Premiums earned $22,759 $ 6,970 $ 12,229 $ 4,265
Commission and service income 21,759 22,593 9,992 11,701
Net investment and interest 2,059 2,351 971 1,389
income
Service fees/policy fees 1,444 806 660 574
Realized gains/(losses) 11 (1) 11 23
Other income 728 879 329 450
------------ ------------- ------------- ------------
Total revenue 48,760 33,598 24,192 18,402
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Loss from operations, before provision for income taxes
and effect of change in accounting principle (882) (834) (2,857) (297)
Provision (benefit) for income taxes 23 0 (38) 0
------------ ------------- ------------- ------------
Loss before effect of change in accounting principle (905) (834) (2,819) (297)
Effect of change in accounting - (601) - 0
------------ ------------- ------------- ------------
Net loss $ (905) $ (1,435) $ (2,819) $ (297)
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Weighted average shares outstanding 7,774 7,755 7,775 7,746
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
OVERVIEW
(Dollars shown in thousands)
Total revenues for the six-month period increased $15,162 or 45.1% over the
same period last year. This increase is primarily due to increased premium
volume contributed by our auto operations. The loss of $882 for the six
months ended June 30, 1999, before provision for income taxes and effect of
change in accounting principle represents a $48 increase over the
corresponding period in 1998. The net loss for the six-month period decreased
$530 after taxes, restructuring charges and effect of change in accounting
principle, which were recorded during the first six months of 1998.
<PAGE>
RESULTS OF OPERATIONS
(Dollars shown in thousands)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
PREMIUMS EARNED
Net premiums earned increased $15,789 or 226.5%, to $22,759 for the six
months ended June 30, 1999 from $6,970 for the six months ended June 30,
1998. The automobile business unit contributed $19,983 or 87.8% of the 1999
earned premium. This is an increase of $14,088, or 239.0%, over the $5,895
earned in the first six months of 1998. The commercial business unit
contributed $2,632 or 11.6% of the 1999 earned premiums, an increase of
$1,850 or 236.6%, above the $782 earned in the first five months of 1998.
Effective March 31, 1999, the Company entered into a 90% Quota Share
Reinsurance arrangement to reinsure its commercial book of business. The
Company believes that this arrangement will allow it to continue to offer
commercial lines as a complementary product to its automobile and flood
product lines while limiting the risk to shareholder's equity.
The remaining 0.6% of earned premium for the first six months of 1999 came from
all other operations.
COMMISSION & SERVICE INCOME
Commission and service income decreased $834 or 3.7%, to $21,759 for the six
months ended June 30, 1999 from $22,593 for the six months ended June 30,
1998. The decrease is mainly a result of a decrease in the number of policies
in the South Carolina Reinsurance Facility ("SC Facility"), a residual market
for the automobile insurance in the state of South Carolina. The commission
and service income attributable to the SC Facility is $8,527, which
represents a decrease of $3,962 over the same period last year. The SC
Facility is currently being phased out and the new South Carolina Associated
Auto Insurers Plan ("SCAAIP") is intended to take its place. Effective March
1, 1999, no new policies may be ceded to the SC Facility, and no voluntary
renewals may be ceded to the SC Facility after September 1999. Designated
agents are able to renew in the SC Facility through 2001. The new SCAAIP will
provide insurance to drivers unable to obtain coverage in the voluntary
market. The rates in the SCAAIP are expected to be approximately 150% of the
SC Facility rates. Although the Company has an arrangement with the SCAAIP to
handle 50% of the policies written, there has been very little activity to
date. The Company believes that this activity will increase after renewals
cease in the SC Facility. The Company also expects to attract certain of
these policyholders by offering attractive rates below the SCAAIP rates.
Commission and service income increased for the Company's North Carolina
automobile operations over the same period last year by $861 to $2,852 due to
increased premium activity and cessions to the North Carolina Reinsurance
Facility. America's Flood Service added $1,367 to commission and service income
representing an increase of $757 over the same period last year. The Company
acquired AFS March 31, 1998, thus only three months are included in the 1998
figures. The Company's Nashville operations produced $2,341 in commission and
service income for the six months ended June 30, 1999. The Company purchased
this operation in May of 1998. The Company's flood unit produced $5,463 in
commission and service income, which is a decrease of $173 over the same period
in 1998. This decrease is due to a decrease in claims activity.
POLICY FEES
The Company had $1,444 in income from policy processing fees for the six months
ended June 30, 1999 compared to $806 for May and June, 1998. This income is
associated with the Company's Nashville operations, which was purchased in May
1998. The decrease in the policy fees is due to fee reductions taken to remain
competitive in certain markets in which the Nashville operation competes.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income decreased $292 or 12.4%, to $2,059
for the six months ended June 30, 1999 from $2,351 for the six months ended
June 30, 1998. A significant factor affecting this decrease is the large
working capital requirement to process SC Facility business in a runoff mode.
This has caused the investment portfolio to decrease as the Company continues
to settle SC Facility claims with quarterly reimbursement. To a lesser
degree, the Company has had multiple bonds called during the previous three
months, which has had a negative impact on investment income. Many of these
bonds have been on deposit with various state agencies and the Company has
not been notified of these calls, which has resulted in lower yields.
<PAGE>
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses increased $8,852 or 144.7% to $14,968 for
the six months ended June 30, 1999 from $6,116 for the six months ended June
30, 1998. The increase in loss and loss adjustment expenses in 1999
corresponds to the increased activity in all risk operations over the same
period last year and a change in the automobile reinsurance program.
Effective April 1, 1999 the Company ceased ceding on a quota share basis to
outside reinsurers. These quota share reinsurance agreements allowed the
Company to cede from 20 percent to 75 percent of its losses. The Company
replaced the quota share reinsurance agreement with an aggregate excess of
loss agreement, which allows the Company to retain more of its earned
premiums.
POLICY ACQUISITION COSTS
During the six months ended June 30, 1999, $8,660 of policy acquisition costs
were expensed and $1,627 were deferred while during the same period in 1998,
$5,019 were expensed and $1,304 were deferred. Of the $8,660 policy acquisition
costs expensed in the first six months of 1999, $878 relate to costs previously
deferred on the Company's commercial book of business. These costs must now be
expensed due to the Company's new 90% quota share reinsurance agreement.
INTEREST EXPENSE
Interest expense was $610 and $378 for the six months ended June 30, 1999 and
1998, respectively. The increase is due to the Company's acquisitions of AFS and
Graward in March and May 1998, respectively, and the increased debt
associated with those acquisitions. Interest expense on the $2.7 million
Notes related to the Graward acquisition has been neither accrued nor paid
due to the current purchase price arbitration.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses increased $3,031, or 13.5%, to $25,404 for
the six months ended June 30, 1999 from $22,373 for the six months ended June
30, 1998. Salaries and fringe benefits for the Company included in other
operating costs and expenses were $8,122 and $6,777 for the six months ended
June 30, 1999 and 1998, respectively. The increase is attributable to
increased staffing related to the increased production in our automobile
unit. Bad debt expense included in other operating costs and expenses
increased to $2,476 from $822 for the six months ended June 30, 1999 compared
to the six months ended June 30, 1998. This increase is due to the Company's
increase in premium writings for nonstandard automobile, which generates a
higher percentage of bad debt. Premium tax expense increased to $1,793 from
$1,339 due to an increase in premiums written for the six months ended June
30, 1999 compared to the same period in 1998. Agent commissions included in
other operating costs and expenses were $5,833 and $5,558 for the six months
ended June 30, 1999 and 1998, respectively. The increase in agents'
commissions is due to increased premium writings during the second quarter of
1999 and a change in the automobile reinsurance program. The former
reinsurance program would pay the Company a ceding commission, which would
partially offset commission expenses. The remainder of the increase is spread
across several expense classifications and is due to expenses generated by
the acquisitions.
<PAGE>
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 sales and
maturities of investments. Principal uses of cash are payments of claims,
principal and interest payments on debt, operating expenses, and purchases of
investments. Cash outflows can be variable because of the uncertainties
regarding settlement dates for liabilities for unpaid losses and because of the
potential for large losses. Accordingly, the Company maintains investment and
reinsurance programs generally intended to avoid the forced sale of investments
to meet claims obligations.
Net cash used in operating activities totaled $5,256. Net change in assets
and liabilities used $5,630 of cash in operating activities. The net change
in assets and liabilities were impacted by an increase of $7,532 in unearned
premiums on retained business, a $10,733 decrease in balances due other
insurance companies, a $6,062 increase in reinsurance recoverable on paid
losses and loss adjustment expenses, and a $3,862 decrease in premium and
agents' balances receivable. These relate primarily to the Company's
continued growth in the retained risk business.
Investing activities provided cash in the amount of $2,759 primarily due to
proceeds from investments sold or matured less the cost of investments acquired
relating primarily to the new SCAAIP contract and the purchase of processing and
office equipment previously leased. Net cash provided by financing activities
totaled $80 and related primarily to the financing of corporate insurance
policies less the repayment of debt principal.
YEAR 2000 COMPLIANCE
(Dollars shown in thousands)
In 1997, The Seibels Bruce Group, Inc., including its subsidiaries, initiated
a company-wide program (the "Compliance 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 arrangements with 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.
Vendor systems that process policies and claims outside the Company's internal
system present the same exposure as above and an 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 regard to internal systems, the Compliance Program calls for full
conformity to meet all internal policy expiration dates. Work on the
Compliance Program began in 1997 since the Company issues three-year
commercial policies. Remediation has been completed on the Company's
Nashville, Tennessee system and it has been issuing policies with expiration
dates beyond the year 2000 since November 30, 1998. The Company believes that
its Columbia, South Carolina processing system has been fully compliant since
mid December 1998 and the Company has been issuing policies with expiration
dates beyond the year 2000 on that system since that time. The processing
system in Winston-Salem, North Carolina has been remediated and has been
issuing policies with expirations beyond the year 2000 since May 15, 1999.
All of the policy processing systems went through a testing phase where the
dates were run beyond January 1, 2000. The
<PAGE>
Company also tested other critical dates during the testing phase such as
February 29, 2000 to make sure that the systems could handle such dates.
With regard to the third party vendor's processing systems, the Company has
reviewed the compliance status of this company. The vendor has been
processing three-year policy contracts beginning in 1997 on a Year 2000
compliant basis and is currently on target to process policies of shorter
terms. This company has completed remediation and is currently in the testing
phase. Testing ran through the end of the second quarter 1999 and the
remediated software moved into production on July 1, 1999. The Company's
overall Year 2000 plan includes procedures for assessing all third party
vendors. While not processing policies on their systems, the Company must
submit statistical data to several reporting bureaus, which, if not Year 2000
compliant, could impede the Company's ability to collect funds owed to it by
the agencies for which these bureaus collect data. The largest of these
bureaus believes that it has been compliant since June 1998 and the other
government agency bureau is not issuing any statements as to its readiness.
The Company has no plans to conduct independent testing of these bureaus. The
Company is also in the process of surveying all of its major reinsurers to
evaluate their Year 2000 compliance.
In accordance with the Compliance Program, the Company expects to complete an
upgrade of its Columbia and Nashville phone systems by August 31, 1999. This
date is two months later than originally planned due to the Company's decision
to put the equipment contract out for competitive bid and the subsequent
scheduling of the contractor. The Winston-Salem phone system which handles the
calls for Universal Insurance Company and South Carolina Insurance Company's
business written in North Carolina has been year 2000 compliant since June 7,
1999. Work on any other equipment that is not Year 2000 compliant is scheduled
to be completed 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 the Compliance Plan.
The Company expects to spend between $850 and $1,100 on Year 2000 compliance
covering both external and internal costs through out the remediation
process, of which a significant portion, approximately $650, was expensed in
1998. This is an increase in the estimate from year-end of approximately
$100. The increase is related to lease expenses the Company will incur
related to telephone equipment in its Winston-Salem, North Carolina location.
Of the $650 expense, approximately $520 was paid to outside providers. The
Company also spent approximately $25 in 1997. All charges in 1998 were to
modify software; all 1997 charges were paid to consultants to assist in the
identification of Year 2000 issues. All charges related to Y2K are expensed
when they are incurred.
The Company also believes that the completed and planned modifications of its
internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner; however, there can be no assurance 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 and consolidated financial statements.
The Audit Committee of the Company's Board of Directors is updated at least
quarterly as to the status of the Company's readiness. In addition, the
Company's Vice President of Planning and Budgeting monitors the status of all
Year 2000 projects and has direct access to all Information Services personnel
and the Audit Committee of the Board of Directors.
FORWARD-LOOKING STATEMENTS
This Form 10-Q, as well as the preceding Year 2000 compliance statement,
contains various forward-looking statements which represent the Company's
beliefs or expectations regarding future events. When used herein, the words
"believes", "anticipates" and "expects" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements regarding
Year 2000 compliance 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 regarding Year 2000 compliance 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
<PAGE>
or to replace embedded computer chips in affected systems of equipment; and the
actions of third parties with respect to Year 2000 compliance.
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 1, 1998, the Company completed its acquisition of Graward. In
completing the Final Balance Sheet in accordance with the purchase agreement
for the Graward acquisition, the Company identified certain purchase price
adjustments which it believes were known to certain of the sellers, but were
not disclosed to the Company during its due diligence process. The purchase
agreement with Graward provides methods for resolving the differences as to
the appropriate adjustments to the Final Balance Sheet. On December 7, 1998,
the sellers notified the Company that they intended to submit to arbitration
two matters currently in dispute between the parties. Management believes
that the purchase price will be adjusted appropriately under the purchase
agreement.
Seibels, Bruce & Company ("SB&C"), a subsidiary of the Company, was served with
a complaint dated November 19, 1997 by Norwest Financial Resources, Inc.
("Norwest") that claimed indemnification against SB&C pursuant to the Asset
Purchase Agreement dated as of July 2, 1993 by and among Premium Service
Corporation of Columbia ("Premium"), SB&C and Norwest. The indemnification claim
relates to certain loans, which later were discovered to be incorrectly recorded
as realizable assets. Management believes neither SB&C nor the Company has any
liability in the case.
Catawba Insurance Company ("Catawba"), a subsidiary of the Company, was served
with a complaint dated November 7, 1997 by the Municipal Association of South
Carolina which claimed it has potential deficiency of approximately $1.75
million with respect to certain South Carolina municipality taxes. Management
and legal counsel believe Catawba has basis for non-payment of such amounts.
The Company and its subsidiaries are parties to various other lawsuits generally
arising in the normal course of their insurance and ancillary businesses. The
Company does not believe that the eventual outcome of such suits will have a
material effect on the financial condition or results of operations of the
Company.
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 May 19, 1999. As of March 22, 1999, and
for purposes of the Meeting, there were 7,778,707 shares of
Common Stock issued and outstanding. At the Meeting, there
were 7,360,476 shares (94.6% of the outstanding shares
entitled to vote) represented in person or by proxy.
(b) The following directors were elected at the Meeting: Walker S.
Powers and John P. Seibels. The following directors' terms of
office as a director continued after the Meeting: Frank H.
Avent, A. Crawford Clarkson, Jr., Claude E. McCain, Kenneth A.
Pavia, Charles H. Powers, Susie H. VanHuss, George R.P.
Walker, Jr. and James L. Zeck.
<PAGE>
(c) The Meeting was called for the following purposes and with the
following results:
1) To elect two (2) directors, Walker S. Powers and John
P. Seibels, to hold office until the 2002 Annual
Meeting of Shareholders or until his successor shall
be elected and shall qualify. Each director was
elected with at least 7,338,814 votes (99.7% of the
votes cast).
<TABLE>
<CAPTION>
Nominee Votes Cast Votes Cast Votes Broker
For Against Abstained Non-vote
<S> <C> <C> <C> <C>
Walker S. Powers 7,338,814 21,660 None None
John P. Seibels 7,343,396 17,079 None None
</TABLE>
2) 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, 1999. Passed with
7,354,879 votes (99.9% of the votes cast) in favor,
2,982 against and 2,610 abstained.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
27.1 Financial Data Schedule
<PAGE>
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: August 16, 1999 /s/R. Thomas Savage, Jr.
---------------------- -----------------------
R. Thomas Savage, Jr.
Acting President and Chief Executive Officer
Date: August 16, 1999 /s/Matthew P. Mcclure
---------------------- -----------------------
Matthew P. Mcclure
General Counsel and Corporate Secretary
Date: August 16, 1999 /s/Bryan D. Rivers, Cpa
---------------------- -----------------------
Bryan D. Rivers, CPA
Controller (Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 35,793
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,315
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 37,108
<CASH> 20,724
<RECOVER-REINSURE> 36,034
<DEFERRED-ACQUISITION> 4,099
<TOTAL-ASSETS> 279,588
<POLICY-LOSSES> 110,211
<UNEARNED-PREMIUMS> 74,765
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,407
2,700
0
<COMMON> 7,775
<OTHER-SE> 25,779
<TOTAL-LIABILITY-AND-EQUITY> 279,588
44,518
<INVESTMENT-INCOME> 2,059
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 2,172
<BENEFITS> 14,968
<UNDERWRITING-AMORTIZATION> 8,660
<UNDERWRITING-OTHER> 26,014
<INCOME-PRETAX> (882)
<INCOME-TAX> 23
<INCOME-CONTINUING> (905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (905)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
<RESERVE-OPEN> 39,154
<PROVISION-CURRENT> 24,450
<PROVISION-PRIOR> 819
<PAYMENTS-CURRENT> 18,398
<PAYMENTS-PRIOR> 9,703
<RESERVE-CLOSE> 36,322
<CUMULATIVE-DEFICIENCY> 819
</TABLE>
