<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 MARCH 31, 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.
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(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: 7,778,705 SHARES OF COMMON
STOCK, $1 PAR VALUE, AT MAY 4, 1999.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars shown in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Investments:
Debt securities, available-for-sale, at market (cost of $39,990
in 1999 and $38,788 in 1998) $ 40,400 $ 39,695
Equity securities, at market (cost of $1,287 in 1999 and $1,306 in 1998) 1,305 1,306
Cash and short-term investments 21,751 23,141
Other long-term investments 3,082 108
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Total cash and investments 66,538 64,250
Accrued investment income 586 880
Premiums and agents' balances receivable, net 11,650 14,728
Premium notes receivable 4,616 4,606
Reinsurance recoverable on paid losses and loss adjustment expense 33,961 29,972
Reinsurance recoverable on unpaid losses and loss adjustment expense 77,477 83,654
Property and equipment, net 6,368 6,028
Prepaid reinsurance premiums - ceded business 66,181 59,619
Deferred policy acquisition costs 2,453 2,472
Goodwill 20,773 20,892
Other assets 6,354 8,462
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Total assets $ 296,957 $ 295,563
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--------- ---------
LIABILITIES
Losses and loss adjustment expenses:
Reported and estimated losses and claims - retained business $ 28,420 $ 28,950
- ceded business 69,537 74,746
Adjustment expenses - retained business 6,960 7,372
- ceded business 7,940 8,908
Unearned premiums:
Property and casualty - retained business 11,071 12,919
- ceded business 66,181 59,619
Credit life 22 22
Balances due other insurance companies 42,713 39,024
Debt 15,934 16,250
Current income taxes payable 21 --
Other liabilities and deferred items 8,476 9,465
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Total liabilities 257,275 257,275
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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
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Total special stock 2,700 2,700
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SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares in 1999 and
1998, issued and outstanding 7,773,075 shares in 1999 and 1998 7,773 7,773
Additional paid-in-capital 61,861 61,861
Accumulated other comprehensive income 428 907
Accumulated deficit (33,080) (34,953)
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Total shareholders' equity 36,982 35,588
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Total liabilities and shareholders' equity $ 296,957 $ 295,563
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--------- ---------
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended March 31,
(Amounts shown in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998 (1)
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<S> <C> <C>
Commission & service income $ 12,425 $ 11,820
Premiums earned 10,530 2,705
Net investment income 745 716
Other interest income 343 232
Realized losses -- (25)
Other income 1,183 429
-------- --------
Total revenue 25,226 15,877
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Expenses:
Losses & loss adjustment expenses 7,549 3,601
Policy acquisition costs 2,107 1,962
Interest expense 276 106
Other operating costs & expenses 13,318 10,745
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Total expenses 23,250 16,414
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Income (loss) from operations, before provision for
income taxes and effect of change in accounting principle 1,976 (537)
Provision for income taxes (61) 0
-------- --------
Income (loss) before effect of change in accounting principle 1,915 (537)
Effect of change in accounting principle -- (601)
-------- --------
Net income (loss) 1,915 (1,138)
Other Comprehensive Income
Change in value of marketable securities, less reclassification adjustment
of $0 and $3 for losses included in net income in 1999 and 1998 (479) (7)
-------- --------
Comprehensive net income (loss) $ 1,436 $ (1,145)
-------- --------
-------- --------
Basic earnings per share before change in accounting principle:
Net income (loss) $ 0.25 $ (0.07)
Weighted average shares outstanding 7,773 7,746
Diluted earnings per share before change in accounting principle:
Net income (loss) $ 0.25 $ (0.07)
Weighted average shares outstanding 7,774 7,746
Basic earnings per share after change in accounting principle:
Net income (loss) $ 0.25 $ (0.15)
Weighted average shares outstanding 7,773 7,746
Diluted earnings per share after change in accounting principle:
Net income (loss) $ 0.25 $ (0.15)
Weighted average shares outstanding 7,774 7,746
</TABLE>
(1) Reclassified. See Note 1 of the Notes to Consolidated Financial Statements
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31,
(Amounts shown in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,915 $ (1,138)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Equity in earnings of unconsolidated subsidiary (28) (13)
Depreciation and amortization 597 261
Realized losses 0 25
Net change in assets and liabilities affecting
cash flows from operating activities 1,423 (3,044)
-------- --------
Net cash provided by (used in) operating activities 3,907 (3,909)
-------- --------
Cash flows from investing activities:
Proceeds from investments sold or matured 1,414 13,133
Cost of investments acquired (5,569) (12,595)
Issuance of premium notes receivable, net of collections (10) (565)
Proceeds from property and equipment sold 0 6
Purchase of property and equipment (774) (36)
-------- --------
Net cash used in investing activities (4,939) (57)
-------- --------
Cash flows from financing activities:
Net (repayment) issuance of debts (316) 3,074
Issuance of capital stock -- 231
Dividends paid on special stock (42) --
Cost of purchased subsidiary -- (2,100)
-------- --------
Net cash (used in) provided by financing activities (358) 1,205
-------- --------
Net decrease in cash and short term investments (1,390) (2,761)
Cash and short term investments, January 1 23,141 8,922
-------- --------
Cash and short term investments, March 31 $ 21,751 $ 6,161
-------- --------
-------- --------
Supplemental cash flow information:
Interest paid $ 334 $ 70
Income taxes paid 11 --
-------- --------
-------- --------
Noncash investing activities:
Acquisitions:
Cash paid $ -- $ (2,100)
Preferred stock issued -- (500)
Assets acquired, at estimated fair value -- 335
-------- --------
Goodwill $ -- $ (2,265)
-------- --------
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</TABLE>
<PAGE>
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,
1998.
NOTE 2. 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. 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.
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 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 identified significant purchase
price adjustments which the Company believes are valid reductions in the
resolution of the purchase price and expects an eventual reduction in the
purchase price and a resulting reduction in the goodwill recorded above. As of
the date of acquisition, Graward processed approximately $60,000,000 of
nonstandard automobile insurance premiums 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.
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 $15,000,000 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 March 31, 1999 and
December 31, 1998 was 7.75% and 8.3125%, respectively. The Facility is secured
by a lien on the assets of the Company. As of March 31, 1999 and December 31,
1998, the outstanding balance under the Facility was $13,233,878 and 13,550,000
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 March 31, 1999, the Company
was either in compliance, or obtained waivers of noncompliance for all
covenants. Management is of the opinion that it will maintain compliance with
the 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 $601,000. As a result, the Company's participation in the North
Carolina Reinsurance Facility is no longer being treated as assumed reinsurance
and all amounts assumed from the Facility have been eliminated. The 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.
<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>
March 31, December 31,
FINANCIAL CONDITION 1999 1998
---- ----
<S> <C> <C>
Total cash and investments $ 66,538 $ 64,250
Total assets 296,957 295,563
Total liabilities 257,275 257,275
Special stock 2,700 2,700
Shareholders' equity 36,982 35,588
Per share 4.76 4.58
</TABLE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998 (1)
---- --------
<S> <C> <C>
Commission & service income $ 12,425 $ 11,820
Premiums earned 10,530 2,705
Net investment income 745 716
Other interest income 343 232
Realized gains -- (25)
Other income 1,183 429
-------- --------
Total revenue 25,226 15,877
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Income (loss) from operations, before provision for
income taxes and effect of change in accounting principle 1,976 (537)
Provision for income taxes (61) 0
-------- --------
Income (loss) before effect of change in accounting principle 1,915 (537)
Effect of change in accounting principle -- (601)
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Net income (loss) $ 1,915 $ (1,138)
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Weighted average shares outstanding 7,773 7,746
</TABLE>
(1) Reclassified. See Note 1 of the Notes to Consolidated Financial Statements
OVERVIEW
(Dollars shown in thousands)
Total revenues for the three-month period increased 58.9% over the same period
last year. This increase is primarily due to increased premium volume and fee
income contributed by recent acquisitions. The income of $1,976 for the three
months ended March 31, 1999, before provision for income taxes and before change
in accounting principle, represents a $2,513 increase over the corresponding
period in 1998. Included in the current quarter is income of $659 related to
ceding commissions on the portfolio transfer of unearned premiums under a 90%
Quota Share Reinsurance Agreement effective March 31, 1999 on the Company's
commercial book of business.
<PAGE>
RESULTS OF OPERATIONS
(Dollars shown in thousands)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
COMMISSION & SERVICE INCOME
Commission and service income increased $605 or 5.1%, to $12,425 for the three
months ended March 31, 1999 from $11,820 for the three months ended March 31,
1998. The 1998 acquisitions, AFS and Graward, caused an increase in commission
and service income. These companies added $697 and $1,091, respectively for the
three months ended March 31, 1999. The Company also added a second tier
nonstandard automobile program in North Carolina in the second half of 1998. It
generated $574 in commission and service income in the first three months of
1999. The increase in commission and service income from the second tier
program, AFS and Graward was offset by decreased activity in the South Carolina
Reinsurance Facility ("SC 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.
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 somewhat below the SCAAIP
rates.
PREMIUMS EARNED
Net premiums earned increased $7,825 or 289.3%, to $10,530 for the three months
ended March 31, 1999 from $2,705 for the three months ended March 31, 1998. The
South Carolina automobile business unit contributed $3,321 or 31.5% of the 1999
earned premium. This is an increase of $2,969, or 843.5 %, over the $352 earned
in the first quarter of 1998. Universal Insurance Company contributed $2,526 or
24.0% of the 1999 earned premiums, an increase of $526, or 26.3%, above the
$2,000 earned in the first three months of 1998. Business written through
Graward, which was acquired on May 1, 1998, generated $1,825 or 17.3% of the
earned premium. The Company's North Carolina second tier program provided $595,
or 5.7% of 1999 earned premium.
The commercial business unit, which began to retain risk in February 1998
contributed $2,176 or 20.7% of the 1999 earned premium. This is an increase of
$2,063, or 1,825.7%, over the $113 earned in the first quarter of 1998.
Effective March 31, 1999, the Company entered into a 90% Quota Share Reinsurance
arrangement to reinsure its commercial book of business. Earned premiums in
succeeding quarters will be approximately 10% of those realized in the first
quarter of 1999. 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 0.8% of 1999 earned premium came from all other operations.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income increased $140 or 14.8%, to $1,088 for
the three months ended March 31, 1999 from $948 for the three months ended March
31, 1998. Effective January 1, 1999, the Company entered into an arrangement
with an asset manager to handle the Company's investment portfolio. The Company
believes that it will realize more efficient portfolio management and greater
income potential through this arrangement.
REALIZED GAINS ON INVESTMENTS
There were no realized gains on investments for the three months ended March 31,
1999 compared to a loss of $25 for the three months ended March 31, 1998.
<PAGE>
OTHER INCOME
Other income was $1,183 and $429 for the three months ended March 31, 1999 and
1998, respectively. The increase is due to policy fee revenue generated by
Graward.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses increased $3,948 or 109.6% to $7,549 for the
three months ended March 31, 1999 from $3,601 for the three months ended March
31, 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.
The Company's exposure on any commercial loss occurring on or after April 1,
1999 will be limited to 10% of incurred loss and expense up to a maximum of $100
per claim. The commercial business unit generated $454 in incurred losses and
expenses for the first quarter of 1999 compared to $112 for the first quarter of
1998.
POLICY ACQUISITION COSTS
During the three months ended March 31, 1999, $2,966 of policy acquisition costs
were expensed and $859 were deferred while during the same period in 1998,
$2,767 were expensed and $805 were deferred. Of the $2,966 policy acquisition
costs expensed in the first quarter 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 $276 and $106 for the three months ended March 31, 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 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 $2,573, or 23.9%, to $13,318 for
the three months ended March 31, 1999 from $10,745 for the three months ended
March 31, 1998. Salaries and fringe benefits for the Company included in other
operating costs and expenses including the acquisitions were $4,528 and $3,149
for the three months ended March 31, 1999 and 1998, respectively. Bad debt
expense included in other operating costs and expenses increased to $960 from
$412 for the three months ended March 31, 1999 compared to the three months
ended March 31, 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 $983 from $605 due to an increase in
premiums written for the three months ended March 31, 1999 compared to the same
period in 1998. Agent commissions included in other operating costs and expenses
were $2,495 and $3,225 for the three months ended March 31, 1999 and 1998,
respectively. The reduction in agents' commissions is due to the fact that the
Company is now writing retained risk business and a greater portion of the
agents' commission expense is now also allocated to policy acquisition costs.
The remainder of the increase is spread across several expense classifications
and is due to expenses generated by the acquisitions.
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 provided by operating activities totaled $3,907. Net change in assets
and liabilities provided $1,423 of cash in operating activities. The net change
in assets and liabilities is impacted by changes of $1,848 in unearned
<PAGE>
premiums on retained business, $3,689 in an increase in balances due other
insurance companies, and a $3,078 decrease in premium and agents' balances
receivable which are related to the Company's continued growth in the retained
risk business, the Company's new 90% Quota Share Agreement and increased
collections of premium and agents' balances.
Investing activities used cash in the amount of $4,939 primarily due to the cost
of investments acquired relating primarily to the new SCAAIP contract and the
purchase of processing and office equipment previously leased. Net cash used in
financing activities totaled $358 and related primarily to repayment of debt
principal.
YEAR 2000 COMPLIANCE
In 1997, The Seibels Bruce Group, Inc. 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. All other
internal systems processing policies with expiration dates of shorter terms of
one year and of six months are currently on target for completion to process all
policy contract obligations. 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 is currently in the
testing phase. The Company has until May 15, 1999 to complete the process before
it would have an impact on its operations. The Company believes that it will
meet this date.
With regard to the third party vendor, which processes the Company's flood
policies, 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 is scheduled to run through the end of
the second quarter 1999 and the remediated software is scheduled to move 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 phone system by August 1, 1999. This date is two months later
than originally planned due to the Company's decision to put the
<PAGE>
equipment contract out for competitive bid and the subsequent scheduling of the
contractor. 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 $850,000 and $1,100,000 on Year 2000
compliance covering both external and internal costs through out the remediation
process, of which a significant portion, approximately $650,000, was allocated
as an expense in 1998. This is an increase in the estimate from year-end of
approximately $100,000. The increase is related to lease expenses the Company
will incur related to telephone equipment in its Winston-Salem, North Carolina
location. Of the 1998 portion of such expenses, approximately $520,000 was paid
to outside providers. The Company also spent approximately $25,000 in 1997. All
charges in 1998 were to modify software; all 1997 charges were paid to
consultants to identify Year 2000 issues.
Even though the Company has had much success with the remediation process to
date, it has developed a contingency plan should the Winston-Salem, North
Carolina processing system not be compliant in time. The Company has the
capability and capacity to use its Columbia processing system, which has already
been remediated, to process those policies currently processed on the
Winston-Salem system. 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 monthly as to
the status of the Company's readiness. In addition, the Company's Vice President
of Audit and Planning 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
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>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was served with a complaint dated November 19, 1997 by Norwest
Financial Resources, Inc. ("Norwest") that claimed indemnification against the
Company pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by and
among Premium Service Corporation of Columbia ("Premium"), the Company and
Norwest. The indemnification claim relates to certain loans, which later were
discovered to be incorrectly recorded as realizable assets. Management believes
the Company has no liability in the case.
Catawba 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.
On May 1, 1998, the Company completed its acquisition of Graward. In completing
the Final Balance Sheet in accordance with the stock purchase agreement for the
Graward acquisition, the Company identified certain purchase price adjustments
which it believes were know to certain of the sellers, but were not disclosed to
the Company during its due diligence process. The stock 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 appropropriately under the purchase agreement.
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.
None.
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: MAY 17, 1999 /s/R. THOMAS SAVAGE, JR.
--------------- --------------------------
R. Thomas Savage, Jr.
Acting President and Chief Executive Officer
Date: MAY 17, 1999 /s/MATTHEW P. MCCLURE
--------------- --------------------------
Matthew P. McClure
General Counsel and Corporate Secretary
Date: MAY 17, 1999 /s/ELIZABETH R. MONTS
--------------- --------------------------
Elizabeth R. Monts
Controller (Principal Accounting Officer)
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<PAGE>
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